Regime seen as form of tariff on investment flow across the Ditch leading to inefficient allocation of resources.

The conversation went something like this: "We, Fran, are a continent. You are an island."

It was a typical Alexander Downer put-down in response to some mild chivvying by me as to when Australia would agree to some of the key elements on New Zealand's lobbying list for the Australasian single economic market.

Australia's former Liberal foreign minister was using that slight touch of lordly condescension that he was famous for (hilariously funny when it was a politician - cue Winston Peters here - who was the subject of Downer's outrageous cracks).

But grating when it was used to signify Australia's (at times) diffident response to calls to seriously engage on some issues that are important to this smaller country.


Downer's words resonated when I tuned in to Julia Gillard at the weekend underscoring to journalists why Australia was unlikely to alleviate any New Zealand concerns about its citizens being treated as second class in Australia when it comes to access to social welfare benefits.

"First and foremost, New Zealanders can come to Australia and access our labour market without restrictions; we don't confer that benefit on any other nation," Gillard said.

Variously, she stressed that because of "our special relationship" Australia has arrangements for New Zealanders that have a "generosity associated with them" that is not given to any other nationals from any other country.

New Zealanders living in Australia were entitled to a range of benefits such as the family tax benefit, baby bonuses, access to Medicare and the pharmaceutical benefits scheme.

Journalist: So the status quo will remain though?

Gillard: Well, I'm just going through in relation to the terminology of your question ... so it is a relationship we don't accord to any other nationals from any other part of the world.

The Gillard Government has not spelled it out formally. But at officials level Australia has been considering a pathway to allowing New Zealanders living in Australia to gain residency after eight years or more.

Nothing is likely to move on this score ahead of the September election.

Nothing is likely to move either without concerted persuasion from New Zealand's political leaders and elites.

The transtasman relationship is riddled with cliches: the two countries have "spilled blood together"; are "family" (a term Gillard uses a lot); and enjoy a "big brother, little brother" relationship (a description by one commentator at the start of the Australasian single economic market process nearly a decade ago).

It's understandable that Australian powerbrokers enjoy a "continental" outlook towards New Zealand and that in their bones they still consider New Zealanders as a skilled labour pool that their companies and institutions can draw on to fill gaps in a faster-moving economy without having to take the fiscal risk of supporting such labour migrants if times turn tough.

And that New Zealand appreciates that Australia can soak up excess labour. That's called realpolitik.

But in truth you don't have to scratch too far below the surface to find such attitudes in New Zealand - for instance towards Pacific labour migrants.

The fundamental difference is that Australia and New Zealand are supposed to be well on the way towards forming a single economic market.

The former Liberal government deliberately invited skilled New Zealanders to cross the Tasman.

If successive governments are not prepared to make good on the social contract that income tax implies, surely they should move to implementing a two-tier tax system (as Singapore does) where the skilled migrant does not pay social security charges (unlike Singaporeans), simply a very low income tax.

The Gillard agenda was straightforward: Challenges and issues that Australia and New Zealand face in our world, including the challenge of people-smuggling in our region, the future outlook for Fiji, the work that we are doing in Afghanistan, the challenges and opportunities we face in this Asian century and also the work that lies beyond the Ramsi drawdown in the Solomon Islands.

There was some progress on reducing mobile roaming charges, installing SmartGates for departures as well as arrivals at airports and finally implementing the Investment Protocol for CER on March 1.

But the big issue for New Zealand and Australian business - engaging seriously on mutual recognition of imputation or franking credits - has still to be examined at government-to-government level.

Again, officials are doing some work on this after the Productivity Commission's report. But does it really make sense to further free up transtasman investment without finalising work on transtasman mutual recognition of imputation credits?

There are differing views as to who the winners and losers are under this scenario.

The problem is the commissions did not make a firm recommendation on the issue of double taxation.

As the Australia New Zealand Leadership Forum points out, companies operating in both countries have their profits taxed twice, since neither recognises the other's systems for offsetting tax credits.

Australia New Zealand Leadership Forum co-chairman Jonathan Ling says the report basically passes the issue on to both governments.

Last year Ling implored the two Governments to make a favourable decision.

A report commissioned by the forum showed that about $7.4 billion of transtasman equity investment dividends could potentially be taxed twice - first via company tax in the destination country and secondly via personal tax regimes in the investor's country.

Australian equity investors in New Zealand face an effective tax rate of some 60 per cent, and New Zealand investors in Australia face an effective tax rate of 53 per cent.

The existing regime is seen as a form of tariff on transtasman investment flow leading to inefficient allocation of resources.

The upshot is that transtasman investment decisions are being made at least in part to minimise tax payments, rather than for purely economic reasons.

The forum will meet in Sydney this year. The issue needs to be put to bed. Finally.

If Australia cannot be persuaded, then New Zealand should consider unilateral action to shore up its own business growth agenda.

Families understand that.

What was agreed

*Joint action under CER to address the high cost of mobile roaming rates between the two countries through new powers for Australian and New Zealand regulators.
*Further investments for streamlining the travel experience between the two countries, including an Australian Government trial of fast-track automated technology for departures from Australian airports and New Zealand's trial of next generation "SmartGate Plus" technology for departures.
*Entry into force of the CER Investment Protocol from March 1 to encourage and drive further transtasman investment.
*Commencement of new retirement savings portability arrangements from July 1 to facilitate greater labour mobility.