Skip to main content


Active income. Income of a controlled foreign company which is not passive income. It could include, for example, income from the sale of goods manufactured or purchased by the company.

Benchmark dividend. The first dividend paid by a company required to maintain an imputation credit account the imputation year (defined below). All subsequent dividends paid during the imputation year must carry imputation credits at the same ratio (unless the Commissioner of Inland Revenue is furnished with a ratio change declaration).

Classical system. The classical tax system levies income tax on company profits as they are earned and on dividends distributed to shareholders from those profits without providing any relief for what is essentially double taxation. This is the system that existed in New Zealand immediately prior to the introduction of imputation in 1988.

Controlled foreign company (CFC). A foreign company controlled by a small number of resident shareholders.

Double tax agreement. A bilateral treaty between countries designed to avoid, or provide relief from, double taxation and to prevent fiscal evasion.

Exempting credit rules. Australian anti-avoidance measures designed to prevent imputation “streaming” by targeting companies that are effectively owned by non-residents or exempt entities. Discussed in the Appendix.

Fair dividend rate. The method of calculating income from international share investments applying from 1 April 2007.

Foreign investor tax credit. The foreign investor tax credit rules reduce the combined income tax and non-resident withholding tax imposed on foreign investors with interests in a New Zealand company to 30%. A company is entitled to a foreign investor tax credit when it pays a supplementary dividend (also defined) of the same amount to its non-resident shareholders. The foreign investor tax credit can then be offset against the company's income tax liability.

Franking. The Australian equivalent of New Zealand’s imputation system. The terms “franking” and “imputation” are often used interchangeably.

Holding period rules. Australian anti-avoidance rules to prevent the short-term transfer of shares over dividend payment dates. Discussed in the Appendix.

Hybrid instrument. Securities that combine elements of both equity and debt.

Imputation. A tax system whereby credit for all or part of the income tax paid at the company level is passed through to shareholders when dividends are paid.

Imputation year. The period 1 April to 31 March, irrespective of the company’s balance date.

Imputation credit shopping. Describes an arrangement in which imputation credits earned by one group of companies are sold to the shareholders of a different group of companies.

Imputation streaming. When companies direct imputation credits to shareholders who can use them, while providing some other benefit to shareholders, such as non-residents, exempt or tax loss shareholders, who cannot fully use the credits.

Integration principle. The principle that income earned at the company level is attributed to the shareholder and taxed at the shareholder’s personal tax rate.

Mutual recognition. A system under which Australia and New Zealand each provide tax credits to their resident individuals who receive company distributions from across the Tasman, to compensate for tax paid in the other country.

Non-resident withholding tax (NRWT). An amount withheld by the party making payment to a non-resident (payee) of non-resident withholding income and paid to Inland Revenue. Non-resident withholding income comprises income derived from New Zealand consisting of dividends (other than investment society dividends and, from 1 October 2007, dividends from portfolio listed companies), royalties derived by a non-resident, or interest and investment society dividends derived by a non-resident (except those carrying on business through a fixed establishment). The NRWT rate for dividends is ordinarily 30% of the non-imputed amount, though this can be reduced to 15 percent under an applicable double tax agreement.

Passive income. Income of a controlled foreign company that, in general, is very mobile and may easily be shifted between jurisdictions.

Redeemable preference shares. Shares which, on a stated date, the issuing company will buy back for face value plus dividend. Being preference shares, they rank ahead of ordinary shares, but behind debentures, in any claim on the assets of the company. They usually also give their holder priority in relation to the payment of dividends and often carry the right to a fixed dividend each year. Finally, they may be non-voting, or may only have the right to vote if the payment of their preference dividend is in arrears or in relation to certain key issues which may affect the preference shares.

Share lending. An agreement under which securities are lent in consideration for the return of equivalent securities at a later date (plus payment of a fee). New rules were enacted to ensure that imputation credits remain with the economic owner of the shares were enacted in 2006.

Source-basis taxation. The principle that all income which originates in a country is subject to tax in that country, whether the person or entity to which the income accrues is resident or non-resident.

Special purpose vehicle. A body corporate (usually a limited company or, sometimes, a limited partnership) created to fulfil narrow, specific or temporary objectives, primarily to isolate financial risk.

Stapled stock. A security which is comprised of two parts that cannot be separated from one another – for example, a unit of a unit trust and a share of a company. The resulting security is influenced by both parts and must be treated as one unit at all times for tax purposes.

Supplementary dividend. A dividend paid to non-resident portfolio investors during the year which is in addition to another dividend paid in the same income year. The amount of the supplementary dividend is calculated on the basis of the imputation credits (net of the non-resident portfolio investor tax credit) allocated to the first dividend.