What is it?
Subpart OB of ITA 2007 defines the rules related to Imputation credit accounts (ICA). Every company in New Zealand need to maintain an ICA account, basically if you are paying income tax then it is advisable to maintain this correctly as when you start distributing dividend you can also distribute imputation credits to the shareholders.
Imputation credit account is a memorandum account (section OA2), and section OA3 defines an ICA account must record all credits and all debits that arise in the account as at their credit date or debit date.
Credit balances
The credit balance recorded in a memorandum account during a tax year or income year, as applicable, is the excess of credits over debits.
Debit balances
The debit balance recorded in a memorandum account during a tax year or income year, as applicable, is the excess of debits over credits.
Why companies need it?
Companies need to maintain a proper record of how much tax is paid and how much refund is received. When company distribute retained earnings to its shareholders in a form of dividend it also issues imputation credits with the dividend to avoid double taxation. A credit balance shows company has imputation credits to distribute and a debit balance means company has issued excess imputations than it has in its account. A debit balance may incur penalty.
What are the filing requirements?
Every year the return must be filed regardless of accounting year, the ICA account must be maintained from 01 April to 31 March. Annual imputation return is also a part of IR4 return which must be filed by all NZ resident companies unless its constitution permits nil distribution.
What are the examples of credits (Section O1)?
Opening balance
Income & provisional tax paid
Deposit into tax pooling account
Transfer from tax pooling account
Payment of further income tax (not interest and penalties)
Payment of qualifying company election tax
Tax withheld for resident passive income
Imputation credit attached to dividend derived
Attributed PIE income with imputation credit
What are examples of debits (Section O2)?
Opening debit balance
Imputation credit attached to dividend paid
Refund of income tax
Refund from tax pooling account
Debit for loss of shareholder continuity
Debit for breach of imputation ratio
Final balance when ICA status ends
What is loss of shareholder continuity?
It is a test to check has there been any major change in shareholding during the year. If there is a substantial change in shareholding (more than 49%) then loss can not be carried forward to the next year. That means combined lowest voting/economic interest in the company must not change more than 49% otherwise losses will be forfeited.
Section OB 41 (1)An ICA company has an imputation debit for the amount equal to the amount of an imputation credit retained in the imputation credit account and unused at the time at which shareholder continuity is lost.
What is a breach of imputation ratio?
This may not occur with substantial number of businesses/companies in NZ.
Section OB 43 ICA breach of imputation ratio
An ICA company has an imputation debit for a breach of the benchmark dividend rules in section OB 61(5) for an amount calculated using the formula—
(Net dividends × imputation ratio) – attached credits.
Net dividends are the total amount of all dividends paid by the company during the tax year, excluding the amount of imputation credits and FDP credits attached to the dividends:
Imputation ratio is the maximum permitted ratio calculated under section OA 18(2) , currently it is 38.88 % (28/72)
Attached credits are the total amount of all imputation credits attached to dividends paid by the company for the tax year.
Benchmark dividends
The first dividend paid in the tax year sets benchmark ratio (imputation ratio) subsequent dividend payouts in the same year must not exceed that ratio.
When a company declares and pays dividend they need to decide on how much imputation credits will be attached with dividends.
For example if a company benchmark ratio is 30% (first dividend pay out in the year), and second payout is on 32% imputation ratio. A breach of this ratio may incur debit entry to ICA (imputation credit account)
What is excess imputation credits converted to loss?
This simply means that your income tax credits are more than tax paid during the year.
Imputation credits are created when NZ dividend and imputation credits are received. If there is no sufficient income tax paid during the year, excess imputation credits will be converted into loss carried forward to the next year.
What are continuity rules for imputation credits?
Should pass the test of shareholder continuity, means lowest voting/economic interest during the year is greater than 49%
NB- All sections are referred to Income Tax Act (ITA) 2007
About the author:
Saurav Wadhwa is an Auckland based chartered accountant and a director of IBBZ Accounting Limited. Saurav is a tax specialist with Masters in Tax with Distinction (Auckland) and have 10 years of experience in the industry. He is very passionate about helping small business owners. His easy going personality and a friendly nature makes him easily approachable. For all your tax problems including overdue tax returns, management of tax debt, tax consultancy, and IRD audits & disputes you can contact him at This email address is being protected from spambots. You need JavaScript enabled to view it.">
Legal stuff:
Information above is provided by IBBZ Accounting Limited for general use only, if you are intending to rely on any of the information above please consult with us or seek a professional advice. If information provided above result in any kind of loss to you we can not be held responsible.