A 5% NZX dividend and a 5% US dividend are not the same thing after tax. Here is how imputation credits change the picture, and what dividend reinvestment plans quietly do to your FIF cost basis.
Scan a dividend yield table across NZX and overseas shares and it is tempting to treat the percentage as the whole story. A 5% yield from a NZX power company and a 5% yield from a US stock look identical on the page. After tax, they are usually not close. The difference comes down to one word most readers have heard but few really understand: imputation.
Add dividend reinvestment plans into the mix and there is a second surprise waiting - one that has nothing to do with your tax rate and everything to do with a filing threshold most investors do not check often enough.
New Zealand companies pay 28% tax on their profits before any dividend is declared. When they pay that dividend, they are allowed to attach a credit showing tax has already been paid on it - up to a maximum ratio of 28:72. That means for every $72 of cash dividend, a company can attach up to $28 of imputation credit, making a "fully imputed" dividend worth $100 gross for every $72 you actually receive.
Here is the part that matters for your tax return. You declare the full $100, not the $72. But you also get to use the $28 credit against your personal income tax bill. If your marginal rate is 33%, your tax on the $100 gross dividend is $33. The $28 credit covers most of it - you only top up $5 from your own pocket. If your marginal rate is 28% or below, the credit covers your entire obligation and you may even get a refund of the excess.
This is why a fully imputed NZX dividend is worth meaningfully more than the same headline yield from an overseas share. The imputation credit system is New Zealand's version of dividend franking - Australia has the same system, which is one reason ASX shares with franking credits are also attractive to NZ investors on an after-tax basis.
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Not all NZX dividends are fully imputed. Companies that have offshore income, significant tax losses, or have paid less tax than the maximum rate cannot always fully impute their dividends. You will see this disclosed in the dividend announcement - typically as an imputation credit per share figure.
A partially imputed dividend is still better than an unimputed one, but the benefit is proportional. If a company can only attach $14 of credit per $72 of cash dividend (50% imputed), you still declare $86 gross, get a $14 credit, and pay the remainder at your marginal rate.
For investors building a NZX-focused dividend portfolio, the degree of imputation matters and is worth checking before comparing yields between companies.
Australia's dividend imputation system works similarly to New Zealand's, but at the Australian company tax rate of 30%. Australian companies can attach franking credits at a 30:70 ratio.
For NZ investors, Australian franking credits can be used to offset NZ income tax on the dividend - but only up to the NZ tax rate of 28%, not the full 30%. The excess franking credit (the 2% above 28%) is not refundable. This makes fully franked Australian dividends very competitive on an after-tax basis for NZ investors, particularly for those in the 28% PIR bracket.
One important structural note: the Australian share exemption from FIF rules covered in Issue 1 applies to individual shares in Australian-resident companies listed on the ASX All Ordinaries index. Those shares are taxed on actual dividends only - not under FDR or CV. The franking credit treatment applies in this context.
A dividend reinvestment plan (DRP) lets you take your dividend as additional shares instead of cash. Most major NZX companies offer them, and they look attractive on the surface - no brokerage, often a slight discount to market price, automatic compounding.
There is a catch for investors who also hold overseas shares and are tracking their FIF cost basis.
When you take a DRP dividend as shares instead of cash, IRD treats it as if you received the cash dividend and then used that cash to buy new shares. That means the "reinvested" amount adds to your cost basis in the company - it is a new purchase of shares at the market price on the DRP date.
For NZX shares, this is primarily a record-keeping issue. Keep track of each DRP allotment, the date, and the price per share, because this becomes your cost base for any future capital gain calculation if you sell.
For overseas shares with DRP facilities, the issue is more acute. Each DRP allotment adds to your total cost basis in that overseas holding. If you are close to the $50,000 FIF threshold, a series of DRP allotments could push you over it without any deliberate decision to invest more. Check your cost basis after each DRP allotment, not just when you make deliberate purchases.
You hold US ETFs with a total cost basis of $48,500 - just under the $50,000 FIF threshold. Your ETF pays a quarterly dividend with a DRP option. You take the DRP. The allotment adds $800 to your cost basis, bringing it to $49,300. Next quarter, another $700 DRP allotment takes you to $50,000 and crosses the threshold. FIF rules now apply for the full year. Not a disaster - but it catches people off guard who thought they were managing their threshold carefully.
If you invest in NZX equities through a PIE fund rather than directly, the fund passes through imputation credits to reduce the tax it pays on your behalf. You do not see this directly - the PIE just pays less tax internally, which improves the after-tax return of the fund. This is part of why NZ-equity PIE funds can be more tax-efficient than holding the same shares directly, depending on your individual tax rate.
Three practical points.
When comparing NZX dividend yields to overseas yields, adjust for imputation. A fully imputed 5% NZX yield is worth significantly more than a 5% US dividend yield after tax. The headline yield comparison understates the NZ advantage.
If you hold Australian shares directly and benefit from franking credits, make sure you are declaring the gross dividend (including the franking credit) and claiming the credit in your tax return. Some investors only declare the cash received and miss the credit entirely.
If you participate in DRP schemes on overseas shares, track each allotment as a new purchase and add it to your cost basis. If you are near the $50,000 FIF threshold, check whether DRP allotments will push you over before the end of the tax year.
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