Policy #3: Dividends and Imputation Credits

Date Approved: July 2018
Effective From: July 2018

Future Review Date: tbd

Application: This policy applies to all NZX listed companies.

Purpose: NZSA maintains a range of policies to positively influence the behaviour of all participants in the NZX listed company sector. These policies should be read in the context of the NZSA Policy Framework Statement.


This policy document dates from July 2018.


1.0    Policy: Dividends and Imputation Credits

1.1   Shareholders are entitled to a full and satisfactory explanation of the reasons for retention of profits. 

1.2   Material fluctuations in dividend rates, due to abnormal variations in profits or other causes, should be explained. 

1.3   Imputation credits should be transmitted to shareholders promptly, either via imputed dividends or through share buyback schemes to which all shareholders have equal access. 

1.4   The NZSA opposes dividend payments greater than 100% of profit. An exception can be made in the case of special dividends which involve a capital distribution or other windfall profit. 


2.0    Commentary

2.1   Directors have a legal responsibility to ensure the solvency of their company and protection of the rights of its creditors.  At the same time, directors are also accountable to shareholders for their decisions in relation to dividends. 

2.2   The degree to which profits are distributed annually lies with the board. Depending on circumstances, dividend payments may range from 100% of profits to no distribution at all.  

2.3   Directors of new or restructured companies might justify retention of profits until they recoup establishment costs or past losses. Investors in such companies must recognise their dependence on capital growth for their shorter-term returns. Companies growing aggressively will have increasing working capital and capex requirements which can also justify significant retention of profits. More mature companies may have less need to retain earnings. 

2.4   As a general policy, the NZSA is against normal dividend payments that are greater than 100% of profit. It makes no sense to borrow to maintain payouts as these only transfer the shortfall into the future. 

2.5   In all cases, companies should fully explain their rationale regarding profit retention and how they have arrived at an appropriate dividend rate. For example, directors seeking to re-invest in the company’s existing business must be able to demonstrate that the re-investment will increase value for shareholders by maintaining or increasing return on equity or growth in earnings per share. They should explain why a dividend reinvestment plan, or other methods of financing, will not provide adequately for this organic growth. 

2.6   Retained earnings should not be seen as simply another source of capital, cheaper than debt and other fixed-rate funding, or even cost-free. That mind-set can lead to uneconomic diversion of funds into projects or ventures that are not core to the companies stated strategic direction. Such a process may well compromise the basis on which shareholders initially invested. It would be unreasonable of boards to expect shareholders to uncritically acquiesce in such situations. 

2.7   Superficially valid justifications offered for retention of profits often fail to survive rigorous scrutiny. For example, some companies have long followed a policy of smoothing dividends. This has some advantages in reducing share price volatility. However often it is set at a rate well below what could be justified based on average profits, even allowing for minor tweaking of the dividend rate to adjust for inflation. This may soften the impact of variations in profit, but it reinforces the false notion of shareholders’ funds as quasi debt. It can also lead to uneconomic investment of funds without reference to shareholders, and to retention of imputation credits (and thereby depriving shareholders of credits for tax paid on their behalf). 

2.8   The imputation credit system in New Zealand was established as a way of avoiding the double taxing of profits, once in the hands of the company and again when what was left of the profits were received as dividends by shareholders. Imputation credits arising from tax paid on New Zealand-sourced profits are advance payments of tax that can be set by shareholders against their other tax liabilities or be reimbursed to them. Failure to distribute taxed profits therefore has the effect of blocking the entitlement of shareholders to these tax credits, causing them to pay more tax, or to pay it sooner, than if the profits were distributed in full. In its reviews of annual reports, the NZSA will monitor imputation accounts to identify situations of hoarding of imputation credits. 

2.9   The NZSA expects that where New Zealand domiciled companies operate in numerous jurisdictions, directors will endeavour to ensure that local operations do not carry a disproportionate share of corporate expenses, thereby reducing local profits and associated imputation credits. 

2.10 Diversion of imputation credits to another group of investors through the issue of preference shares that carry imputed dividends is a device sometimes used to circumvent full distribution of taxed profits. Where the device is used, directors must demonstrate that the coupon rate of the preference dividend is no greater than debt raised on equivalent terms, and that the funds are invested in activities that will generate profits and imputation credits sufficient to service the dividend. 








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