One of the major barriers to trans-Tasman investment, being the tax leakage that occurs on trans-Tasman dividend flows, is under review. That leakage arises from the inability to utilise Australian franking credits attached to Australian dividends in New Zealand (or to utilise New Zealand imputation credits attached to New Zealand dividends in Australia). The respective systems are designed to relieve double tax from occurring on income, once at the company level and then again at the shareholder level. This may be acceptable to revenue authorities where both company and shareholder are in the same country and the credit is given in respect of tax paid locally. However, where the shareholder is in a different country from the company, recognising the credit for tax paid in the company's home country is seen as eroding the tax base in the shareholder's home country. This historically has created resistance to addressing the issue.
Earlier this year, during talks between officials of each country, Australia indicated it would look at the issue. Further to this, in October 2008, the New Zealand Treasury made a submission on this issue as part of Australia's official tax review, recommending that Australia's review should support a mutual recognition regime for imputation and franking credits. The Australian review will be conducted in several stages. An initial discussion paper has been released. The review panel will provide a final report to the Australian Treasurer by the end of 2009.
The talks were part of the ongoing work programme between Australia and New Zealand under CER which has this year resulted in a scheme for the mutual recognition of trans-Tasman securities offerings, signing of a treaty on trans-Tasman Regulatory Enforcement and Court Proceedings, and is likely to soon include an arrangement on retirement savings portability between Australia and New Zealand.
Aside from the mutual recognition issue, the New Zealand Revenue is considering improvements to the current imputation system, and released a discussion paper in August on this. That paper considers the rules relating to streaming of imputation credits ('streaming' refers to the process of directing imputation credits to shareholders who are able to make use of them), and the ability to refund imputation credits (an issue of particular importance to charities). The discussion paper is the first step in a review of the imputation system. Submissions were required by October 2008 and are under consideration.
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