Prior to April 1998 company dividends were subject to double taxation. Firstly the company was taxed on its profits at the corporate tax rate and secondly tax was also taken from individual shareholders, on dividends received, based on their personal tax rates.

From 1 April 1998 an imputation credit tax regime was introduced to eliminate this double tax. The imputation system allowed New Zealand companies to pass on to its shareholders the benefit of income tax it had already paid by attaching tax credits, known as imputation credits, to shareholders’ dividends.

Companies are required, with some exceptions, to maintain an Imputation Credit Account (ICA) to ensure accurate records are kept regarding amounts of tax paid by the company and any refunds or distributions, for example dividends. It is vital that distributions of imputation credits never exceed the available balance as at 31 March otherwise further income tax equal to the amount of the debit together with a 10% imputation penalty tax will be payable. 31 March is the balance date for ICA purposes for all taxpayers regardless of a taxpayer’s balance date.

With the reduction of the Company Tax Rate from 33% to 30% for the 2008/2009 year additional requirements in terms of maintaining accurate records of tax payments, refunds and distributions exist. Two separate accounts will be required to trace payments made at either the 33% or 30% rates, and the expiry date on which imputation credits, resulting from tax payments made at 33%, can be attributed to dividends at 33 cents in the dollar, is 31 March 2010.

An important issue in maintaining ICA balances is shareholder continuity. For the majority of Companies to continue to carry forward imputation credits it must satisfy shareholder continuity rules. A simplified explanation of this rule is that at least 66% of the minimum voting / market value must be held be the same shareholders throughout the financial year. The main purpose of this rule is to prevent the trading of imputation credits so that the benefit of imputation credits remains with substantially the same group of shareholders that bore the Companies tax liability.

Therefore should more than 34% of shares change hands during a financial year this may result in all imputation credits being written off. Any planned shareholder change should be discussed with your Accountant to ensure available imputation credits are used for their maximum benefits – this also applies to the sale of shares to a Family Trust !

Note: The payment of dividends is subject to a number of important considerations and rules other than the availability of imputation credits. You should discuss the benefits and availability of declaring dividends with your accountant to ensure it is advantageous, for both the company and shareholders, as this may change from year to year.

The above information has been a simplified explanation of the imputation regime and in no way covers all aspects or elements and your Accountant should be consulted before planning any dividend, shareholding change or major restructure.