Dividend imputation credits were back in the headlines in Australia this week in response to the recently released white paper on tax.

From a New Zealand perspective the headlines were rather strange because Australian business leaders, rather than left-wing unions, are calling for reforms of the country’s imputation system.

Imputation credits allow domestic investors to claim credits for any tax paid by companies on distributable earnings. Dividends are normally subject to tax as far as recipients are concerned but imputation credits eliminate double taxation on company profits.

If a company pays full or partial tax then investors receive full or partial imputations. If a company pays no tax then dividends are fully taxed in the hands of investors. Individual investors are taxed on dividends at their marginal tax rate and they receive a tax credit if the company’s tax rate is higher than their own.

These imputation credits are only available to domestic investors and on tax paid in their home country. For example, imputations are not available to Australian and New Zealand resident shareholders on any tax paid in the United States or other foreign countries.

Dividend imputation was introduced in Australia by a Labour Government in 1987. Imputation was introduced in New Zealand in 1989, also by a Labour Government.

The recently released Australian tax white paper stated; “The objective of Australia’s imputation system is to integrate the Australian corporate tax system with the taxation of resident shareholders. This is achieved by ensuring that distributed company profits (dividends) face only one layer of tax”.

Australian companies pay approximately A$65 billion of tax per annum. This $65 billion is available as follows;

  • $19 billion as imputation credits to individuals, superannuation funds and charities in Australia
  • $10 billion as imputation credits to other Australian companies
  • $12 billion as unusable imputation credits to offshore shareholders, including New Zealanders
  • $24 billion is retained and not distributed as dividends.

Nearly $5 billion of the $65 billion of corporate tax is rebated to shareholders as cash through the imputation system.

The tax white paper believes that imputations have a number of positive features including the removal of double taxation on company earnings and are also a disincentive for Australian companies to develop tax avoidance schemes.

However, the white paper believed that imputations have a number of negative features including;  

  • Australian investors have a bias towards investing in domestic companies, rather than overseas companies, because imputations credits are only available on tax paid in Australia by Australian companies
  • Imputation credits discourage Australian companies from investing offshore because imputation credits are not available on tax paid to foreign governments
  • Overseas companies are discouraged from investing in Australia because they cannot utilise imputation credits on tax paid in Australia
  • Companies with just one or two shareholders may delay dividend distributions until these owners have retired and are on a lower tax rate. This enables these investors to receive a higher tax credit/refund on these dividends.

But the main argument against the tax scheme is that “the benefits of dividend imputation have declined as the Australian economy has become more integrated into the global economy. In particular, benefits in relation to financing neutrality between debt and equity financing have fallen, while the bias for householders to over-invest in certain domestic shares has increased”.

In addition the imputation system has also increased the complexity of the Australian tax system. Complex rules have been introduced to address integrity concerns arising from the imputation system. This integrity issue includes franking credit trading, which involves franking credits being transferred to other entities that have not borne the economic risk associated with these credits.

The white paper posed the question “Is the dividend imputation system continuing to serve Australia well as our economy becomes increasingly open? Could the taxation of dividends be improved?”

Australian business leaders were quick to support the tax review’s criticisms of imputed dividends, which are called franking credits in Australia.

Carolyn Hewson, a director of BHP and Stockland, was quoted in The Australian as saying that the dividend imputation tax credit system had outlived its usefulness as foreign capital had poured into the Australian economy over the past two and a half decades.

She said that “dividend imputation acts as a subsidy to domestic equity holders and is another source of pressure for the Government budget deficit. It also leads to a bias for Australian super funds to invest in equity over debt”.

Hewson said that removing imputation credits could also address the concentration of the Australian sharemarket on the mining and banking sectors, where the majority of companies distribute fully franked dividends.

New Zealand is one of only three other countries that have a similar dividend imputation scheme, the others are Chile and Mexico.

The accompanying table shows the gross and net yields of the ten largest NZX companies by market capitalisation. Xero is the only company in this group that doesn’t pay a dividend and Ryman Healthcare is the only dividend paying company that doesn’t have imputation credits.

The median net dividend yield of these ten companies, based on their last two six monthly dividends, is 4.4 per cent and the median gross (pre-tax) yield is 6.1 per cent. This 6.1 per cent yield is directly comparable – on a pre-tax basis – to one year term bank deposit rates of between 4.0 per cent and 4.5 per cent at present.

Many investors are willing to take equity risk in order to receive fully imputed dividends.

There are a number of reasons why there is little talk of reforming New Zealand’s imputation system. These include;

  • The Crown collects only $9 billion in corporate tax, compared with A$65 billion in Australia, and a high percentage of New Zealand corporate tax is paid by overseas owned companies that cannot utilise imputation credits. The Australian owned banks are a good example of this. Thus, imputation credits are less of a drag on the New Zealand Government’s budget deficit than they are across the Tasman
  • New Zealanders have a strong bias towards investing offshore and their personal balance sheets are not over exposed to NZX listed companies
  • New Zealand companies do not have a strong bias against offshore investments because of the imputation scheme, they are generally reluctant to invest offshore because their success rate in other countries has not been great.

There are a number of different dividend tax regimes around the world. For example there are no taxes on dividends in Estonia and the Slovak Republic while other countries, including the United States, tax dividends at a preferential rate to interest income. In the United Kingdom dividend tax credits are provided to shareholders at a lower rate than the corporate tax rate.

The problem in Australia is that dividends are either imputed or taxed at an individual’s marginal tax rate, which is 45 per cent for a person in the top tax bracket.

The Australian white paper and Carolyn Hewson seem to be suggesting that a preferential tax rate for all dividends would be more desirable than the current imputation scheme.

A preferential rate for all dividends would reduce the bias towards investing in Australian banks and the mining sector, remove the disincentive for Australian companies to invest offshore and encourage Australian investors to diversify their portfolios offshore.

Dividends; Imputations are attractive



value ($b)

Share price

Dividends (c)






Fletcher Building














Auckland Airport







Contact Energy







Mighty River Power







Ryman Healthcare






F&P Healthcare

















Air New Zealand











Figures are based on the last two dividends paid, excluding special dividends 

Brian Gaynor

Portfolio Manager

Disclosure of interest: Milford Asset Management holds shares in the companies included in the table on behalf of clients.