New Zealand tax: Update on dividend imputation rules

New Zealand's imputation system allows companies to attach credits for company tax paid on dividends paid to shareholders, which shareholders can then use to offset their own tax liability, which reduces the double tax that would otherwise arise. The rate at which credits can be attached ("imputation ratio") generally matches the company tax rate.

With the drop in the company tax rate from 33% to 30% from the beginning of the 2009 income year, the maximum imputation ratio dropped from 33/67 (old ratio) to 30/70 (new ratio). Because the new ratio reduces the credits attached to a dividend, had it not been for transitional rules, credits might be "trapped" where the underlying company income had been taxed at 33%. To alleviate this issue, transitional rules allow companies to still pay dividends imputed at the old ratio until 31 March 2010. After that date, only the new ratio can be used.

Companies that elect to impute at the old ratio during the transitional period need to be mindful that they do not "overimpute" or attach more 33/67 credits than the company has. This requires contemplation of likely refunds of tax to be received that are related to the 2008 and earlier income years and any other debit-creating transactions that may occur subsequent to a dividend being paid. If a company's 33% imputation debits exceed its 33% imputation credits at 31 March 2010, the company may be subject to a special one-time transitional penalty tax of 10%, even where the overall imputation account is in credit.

Recent amendments clarify the balance on which the penalty is calculated, but importantly have relaxed the transitional penalty rule to provide that a company will not be penalized for over-imputing a dividend where the dividend was paid before the earlier of the date on which the company's 2008 income tax return was filed or 25 March 2009.

This is a relief for some companies that have found themselves inadvertently caught by this penalty. In short, the window to take advantage of the old imputation ratio is closing. However, it is critical that the imputation credit account is managed carefully to ensure that a debit balance of the 33% tax credits will not arise on 31 March 2010.