Dividends – Imputation Credits & RWT 

 
Grange Associates Ltd - 15 October 2012

Generally, companies paying dividends to shareholders attach imputation credits and deduct withholding tax prior to payment.  There are several rules that need to be applied to ensure imputation credits are attached at the correct ratio and withholding tax is deducted, here are the most important ones to consider.

The imputation ratio of the dividend cannot exceed the resident company income tax rate 

The imputation ratio is determined as follows:

Amount of imputation credits attached to dividend
Dividend paid excluding imputation credits & RWT

If the imputation ratio exceeds the resident company income tax rate, the excess is not creditable for shareholders.

The maximum imputation ratio from the start of the 2012 income year is capped at 28:72.  This means a maximum of $28 of imputation credits can be attached to every $72 of dividends, or imputation credits can be up to 38.88% of a dividends cash value amount.  This is a decrease from the previous ratio of 30:70 up to the end of the 2011 income year. However, during the transitional period, companies can still allocate credits that relate to tax paid at 30% at the previous maximum ratio of 30:70.  The transitional period ends on 31 March 2013.  After this date all dividends must be imputed at the 28:72 ratio.

All dividends paid by a company during an imputation year must have the same imputation ratio unless a Ratio Change Declaration (IR407) form is completed

An exception to this is when a company tax rate change is the sole reason for dividends having different imputation ratios.

Resident Withholding Tax

Dividends received by shareholders are considered resident passive income, which means they are liable for RWT at 33%, unless the receiver holds an RWT exemption certificate.  Imputation credits attached to a dividend offset this RWT liability to the extent to which they are attached.  Shareholders receive the same cash dividend regardless of the make up of imputation credits and RWT on a dividend, but the combination of imputation credits attached and RWT paid must always equal 33% of the gross dividend for shareholders not exempt from RWT.

The change in company tax rate means that dividends will now generally have RWT payable of 5% on the gross dividend, this was previously 3%.

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