Kirk Hope: Tax rules block road to single Anzac market

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The New Zealand and Australian Governments should put long-term gain ahead of short-term loss.

The lack of mutual recognition of imputation and franking credits is a barrier to the free flow of capital. Photo / Simon Baker
The lack of mutual recognition of imputation and franking credits is a barrier to the free flow of capital. Photo / Simon Baker

For nearly 30 years New Zealand and Australia have been moving closer together.

This isn't just about Kiwis living on the Gold Coast. It's about greater economic integration and the move towards a single economic market. So where's all this going and how will we get there?

The Closer Economic Relations agreement between New Zealand and Australia has been in place since 1983.

In recent moves to accelerate the creation of a single economic market between the two countries, the New Zealand and Australian Productivity Commissions released their discussion draft, which set out preliminary recommendations for strengthening transtasman economic relations.

The point of this is to drive higher productivity and improved living standards through a bigger market and increased competition. Possible areas of further integration include the trade in goods and services, labour movements, and capital flows.

Their final report is due in December this year.

Does all this mean we're moving towards a single Anzac currency? Not so fast. The Productivity Commissions' discussion draft concluded that monetary union would not produce a net benefit for both New Zealand and Australia.

A single currency has both costs and benefits, which has become very clear from the recent eurozone experience.

While it can lead to increases in investment and trade, it also impacts on the autonomy of individual states to use macro-economic tools, such as monetary policy and exchange rate flexibility, as a means of managing instability.

Adjustments to prices, wages, and employment would have to be used in the event that the economy becomes distressed, which would likely result in a slower and more volatile recovery.

In the meantime, there are other things that could be done to bring us closer to a single economic market, which is what the Productivity Commissions have been looking at.

While the flow of goods and labour has been largely freed up between both countries, there remain issues with the flow of capital.

One significant concern is the lack of mutual recognition of imputation credits and franking credits. This means that shareholders are effectively double taxed on their dividend returns from investments in the other country.

This is more than a technical tax issue. It is a barrier to the free flow of capital across the Tasman, which distorts investment decisions.

Mutual recognition of imputation and franking credits would increase post-tax dividend returns by up to 38 per cent for Australian investment in New Zealand and up to 49 per cent for New Zealand investment in Australia.

This would expand the number of transtasman investors from which to source capital, and increase the efficiency and flexibility of transtasman investment.

The difficulty with achieving mutual recognition is essentially political. The issue lies in the fiscal costs for both the New Zealand and Australian Governments.

It would reduce the tax take from shareholders on their dividend returns.

To make it work, both Governments need to overcome the short-term fiscal loss in favour of the long-term economic benefits to both countries which would be achieved through a single economic market.

The private sector has a role in assisting in the mutual recognition of imputation and franking credits.

Businesses on both sides of the Tasman can assist in discussions with their respective Governments to break down this barrier.

It is unlikely to succeed without the support of businesses on both sides of the Tasman.

Another area for improvement is the development of more co-ordinated regulatory policy.

It would be great if policy agencies in both countries considered the impact of their regulatory initiatives in the context of what is happening in the other country.

This doesn't mean having exactly the same policy, but it's important to take into account a wider view. An example of this would be the mutual recognition of securities offerings.

There is also an opportunity to specifically improve co-ordination of prudential regulation. For example, it would be beneficial for New Zealand and Australian definitions of capital to be better aligned under the Basel III international framework for capital reforms.

Here's to 30 years of New Zealand and Australia moving closer together economically.

We've come a long way in that time.

Interestingly, both countries have each staked out a more strongly independent place in the world and developed a greater sense of national identity over that period.

So, while there is little prospect of full political union, we are more closely integrated economically, which brings increased mutual benefits.

There are still barriers to overcome.

However, the work of the Productivity Commissions should bring us that much closer to a single economic market.

Kirk Hope is chief executive of the New Zealand Bankers' Association.

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