The Australian and New Zealand Productivity Commissions have called on the two governments to settle, one way or another, the vexed issue of mutual recognition of imputation credits.

Both countries allow companies to attach imputation (in Australia "franking") credits to their dividends, representing a share of the company tax paid, which shareholders can use to offset, sometimes completely, the tax payable on the dividend income.

But the credits are useless on the other side of the Tasman, discouraging transtasman investment.

Mutual recognition would improve economic efficiency and result in a more integrated capital market between Australia and New Zealand, the commissions conclude in a report on strengthening transtasman economic relations. It would benefit New Zealand more than Australia.


The 20-year-old debate needs to be settled, the commissions say.

They call on the two governments to either initiate a process, preferably with a clear deadline, for determining whether there is an efficient, equitable and robust mechanism that would ensure a satisfactory distribution of the gains from mutual recognition or, if they consider such mechanisms are not feasible, to announce that mutual recognition is not going to happen.

The commissions argue that for large companies with access to international equity markets a change from the status quo would have no impact on their cost of capital.

But for smaller firms without access to global equity markets, additional equity from the other side of the Tasman would tend to drive down their cost of capital and thus encourage additional investment.

Some modelling commissioned by the Australian commission estimated the gains at up to $300 million a year.

Because there is much more Australian money invested in New Zealand than the other way around, the fiscal cost to Canberra would exceed that to Wellington several times over.

One approach would be for the two governments to share the fiscal cost. "This would acknowledge that the problem [mutual recognition] is trying to resolve is two governments each claiming taxing rights to what is a single pool of transtasman income."

In any case, they need to make up their minds, the commission concludes.

It is one of 28 recommendations in the final report, most of which are little changed, if at all, from the draft issued in September.

In some cases the language has been stiffened - they now call for the governments to consider "removing" remaining restrictions on transtasman foreign direct investment, where the draft talked of "lessening".

In other cases it has been softened - they still call for the few remaining tariffs that exceed 5 per cent to be brought down to that level, but not necessarily by 2015.