Double taxation of companies - Part One

Did you know that before 1988, if a company in New Zealand made a profit, that money was taxed twice. First, the company paid tax on its profits, and then when the company gave some of those profits to its owners (called shareholders) as dividends, the owners had to pay tax on that money again. Back then, this could add up to a very high total tax — sometimes over 80% of the profit!

To fix this, New Zealand introduced a system in 1988 called imputation credits. This system keeps track of the tax the company has already paid, so the owners don’t have to pay tax twice on the same money. Instead, when dividends are paid out, shareholders get a credit for the company tax that’s already been paid. This means the total tax paid on profits is much fairer and is capped at the highest personal tax rate, which is currently 39%.

Usually this is comprised of 28% tax paid by the company and up to 11% tax paid by the shareholders separately when a dividend is declared.

Accurate tracking of imputation credits is essential. This responsibility falls on the taxpayer and is typically managed by their accountant. If a company tax payment is mistakenly omitted from the imputation credit account submitted to the IRD, it can lead to double taxation when the company is sold or wound up. Any part of your hard-earned profits not covered by imputation credits due to such an error will be taxed twice.

With today’s tax rates, this mistake could mean paying over 56% tax on some of your profits.

How does a good accountant ensure that all company tax is accounted for?

Each year, the profits your company earns are added to an account called retained earnings in your company’s financial records. This account goes up when your company makes more profit and goes down if the company has losses or pays dividends to shareholders. A good accountant will carefully check that the company tax paid - tracked through imputation credits - cover the profit shown in your retained earnings. This helps make sure no tax payments are missed, so when you eventually pay out all your retained earnings as dividends, you won’t be taxed twice.

However, it is important to note that your hard-earned company profits could unintentionally be taxed twice in other ways as well. See Part II - link below.

At Cook and Partners we have the experience and processes in place to ensure your hard-earned company profits are not taxed twice.

Find out more about:

• Double taxation of companies - Part Two

• Why am I paying tax on my company dividend, haven't I already paid?

Written by Simon Cook - Chartered Accountant