Dividend Treatment in Zato
This outlines how Zato treats NZ dividends within its workpapers, including the two ways dividends can be recorded in Xero (net or gross of imputation credits) and the steps required in each case so that the Investment Income, Imputation Credit Account, and Taxation Due workpapers reconcile correctly.
Overview
Zato is built on the assumption that NZ dividends are recorded in Xero net of imputation credits. The gross-up to include imputation credits is handled inside the Investment Income (IIC) workpaper through an auto-triggered journal, it does not need to be posted manually in Xero.
Where a client has already posted a manual journal in Xero to record dividends gross of imputation credits, the workpapers can still be used, but a different set of steps is required to prevent the imputation credits being double-counted.
How Zato Treats Dividends
Default assumption - Zato assumes dividends in the Xero General Ledger are net of imputation credits. The gross-up is handled in the Investment Income (IIC) workpaper, not the Tax Calculation (TCP) workpaper.
Investment Income (IIC) workpaper - When the NZ Dividends Received section is completed, Zato auto-triggers a Gross up Dividend journal. That journal brings the dividend income up to gross and recognises the imputation credit.
Flow to Imputation Credit Account (ICA) - The imputation credit recognised in IIC flows through to the ICA workpaper, where it forms part of the imputation credit movement for the year.
Flow to Taxation Due (ITD) - The imputation credit also flows to the ITD workpaper, where it reduces tax payable. Reconciliation against imputation credits and provisional tax happens here not in the Tax Calculation Workpaper TCP.
Tax Calculation (TCP) - The TCP calculates tax on taxable profit. It does not contain an 'Imputation Credits Utilised’ line, because that movement is tracked in ICA and ITD.
Scenario A - Dividends Recorded Net in Xero (Standard)
This is the standard scenario and matches Zato's default assumption. The dividend is posted to the Xero General Ledger net of imputation credits. The client does not need to post any additional journal in Xero to gross up the dividend.
Steps
1. Confirm Xero entry - Verify the dividend has been recorded in Xero net of imputation credits (i.e. excluding the imputation credit amount).
2. Open the Investment Income (IIC) workpaper - Navigate to the IIC workpaper for the engagement.
3. Complete the NZ Dividends Received section - Enter the dividend details (company name, gross dividend received, imputation credits, RWT, etc.) in the yellow input section.
4. Auto-triggered Gross up Dividend journal - Saving the section triggers Zato to post a Gross up Dividend journal. The journal brings the dividend income to gross and recognises the imputation credit
5. Verify ICA workpaper - Confirm the imputation credit has flowed through to the Imputation Credit Account (ICA) workpaper
6. Verify Taxation Due (ITD) workpaper - Confirm the imputation credit reduces tax payable in the ITD workpaper.
Optional - Keeping Dividends Net in the Profit & Loss
Where the practice does not want the published financial statements to show dividends inclusive of imputation credits, the gross-up journal can be limited so that only DWT (Dividend Withholding Tax) is grossed up - imputation credits are then added manually within the Tax workpaper instead.
1. Gross up the dividend by DWT (Dividend Withholding Tax) only - imputation credits should not be included in the gross-up journal.
2. Add the imputation credits manually within the Tax workpaper, as per usual practice.
Scenario B - Dividends Recorded Gross in Xero (Manual Journal Posted in Xero)
Where the client has already posted a manual journal in Xero to record dividends gross of imputation credits, the Xero General Ledger already includes the imputation credit. Zato's auto gross-up still runs against the IIC inputs, so without adjustment the imputation credit would be double-counted in the Balance per Workpaper and the Taxation Due workpaper would add back imputation credits that are already in the GL.
The steps below tell Zato that the gross-up journal has already been recorded in Xero, so the workpapers reconcile correctly.
1. Gross Up Dividend Income (Investment Income workpaper - IIC)
Steps
1. Confirm Xero entry - Verify the manual journal recording the dividend gross of imputation credits has been posted to Xero.
2. Edit the Investment Income workpaper.
3. Insert a new row in 'NZ Dividends Received' by pressing the '+' button.
4. Enter 'Imputation Credits' under the 'Name of Company' column, and enter the total imputation credits amount under 'Gross Dividend Received'.
5. Save the workpaper.
2. Reflect Imputation Credits in the Taxation Due Workpaper
1. Edit the Taxation Due workpaper.
2. Change the answer from 'N' to 'Y' for the question: “Have you posted the tax journal to the General Ledger? (Y or N)”.
3. Delete the yellow highlighted line from 'Less refunds not received'.
4. Save the workpaper.
Result
After completing the steps above, the Balance per Workpaper, ICA, and Taxation Due workpapers will reconcile correctly with the gross dividend balance in Xero, without double-counting the imputation credits.
Quick Comparison
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Key Notes
• Dividends are auto-grossed up inside Zato from the IIC workpaper - there is no need to gross up dividends manually in Xero.
• Imputation credits do not appear as an 'imputation credits utilised' line in the TCP. They are tracked in ICA and reduce tax payable in ITD.
• Where dividends are recorded gross in Xero, do not let Zato gross up again — use the Scenario B steps so the workpapers do not double-count imputation credits.
• Where the practice does not want imputation credits to appear in the published P&L, gross up only by DWT in Zato and add imputation credits manually in the Tax workpaper.