Accountants welcome new double tax agreement

Aaron Quintal

A new double tax agreement with Australia will reduce withholding taxes on dividends and royalties, but the vexed issue of mutual recognition of imputation credits remains outstanding.

The treaty updates one signed in 1995.

It creates a three-tier regime for withholding taxes and dividends, in line with New Zealand's amended tax treaty with the United States (still awaiting Senate ratification) and agreements Australia has made with other countries.

Dividends on portfolio holdings (up to 10 per cent of a company) will continue to attract non-resident withholding tax of 15 per cent, although a complex tax credit regime will continue to apply when dividends carry imputation or franking credits.

For holdings between 10 and 80 per cent the NRWT has been reduced from 15 to 5 per cent, and for holdings of 80 per cent or more it will be zero, provided the parent company is stock exchange-listed.

Withholding tax on royalties has been reduced from 10 to 5 per cent, but on interest remains at 10 per cent, except when the approved issuer levy of 2 per cent applies.

Revenue Minister Peter Dunne said the new agreement would also resolve the problem of pensions which are tax-free in one country but taxable in the other, which arises when pensioners move across the Tasman.

"Under the new agreement pensions that would be exempt in the home country will be exempt in the other."

This complemented work under way on the portability of retirement savings between the two countries, he said.

But the issue of mutual recognition of imputation credits awaits the outcome of a wide-ranging tax review headed by Australian Treasury Secretary Ken Henry.

There has been speculation the Henry review might recommend scrapping imputation altogether in exchange for a much lower corporate tax rate.

"No one knows at this stage" said PricewaterhouseCoopers tax partner Geof Nightingale.

"But they would not abandon imputation lightly."

Tax accountants welcomed the new DTA.

"It's good news," Ernst & Young tax partner Aaron Quintal said, but there might be fishhooks for some taxpayers in detailed changes to definitions and application rules, such as what constitutes a permanent establishment.

Deloitte's managing tax partner Thomas Pippos said the withholding tax reductions would help reduce barriers to trade and investment and improve certainty for transtasman businesses.