A simple guide to imputation credits

Prior to the introduction of the imputation regime in 1988, when a unit trust distributed income it would have been exposed to double taxation, once in the hands of the fund and again in the hands of the unit holder.

A unit trust, with one unit holder for simplicity, that earned $100 will be taxed at the company rate of 33 per cent and pay $33 to the Inland Revenue Department. If the fund then decides to distribute the remaining $67 to the unit holder of the fund that $67 then becomes liable for income tax in the hands of the investor. If we assume that this unit holder has a marginal tax rate of 33 per cent then the dividend would be taxed $22 (33 per cent of $67) as income of the investor. Thus from the original $100 the unit holder finally receives about $45 which makes the effective tax rate 55 per cent.

Read More - Opens in a new window