We've all probably heard dividends being referred to as "fully imputed" or "partially imputed" but what does this actually mean? It's important that investors in managed funds understand what imputation credits are and their implications.
Tuesday, October 12th 2004, 8:32AM
by The Landlord
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.
