Double-taxing dividends costs millions

Streamlining transtasman investment tax rules is worth hundreds of millions of dollars a year to New Zealand, says a tax expert.

The first round of bilateral talks aimed at removing the double-taxing of some New Zealand and Australian company profits in the hands of their shareholders was held in Canberra last month.

Apart from encouraging Australian companies with New Zealand subsidiaries to pay tax in Australia and eroding New Zealand's tax base, the anomaly blocks investment and contributes to the exodus of company head offices to Australia.

This week, Tower Corporation confirmed it would soon announce a timetable for moving to Australia - at least partly because, under existing tax rules, it was unable to offer imputation credits on dividends paid to Australian shareholders.

PricewaterhouseCoopers tax division managing director John Shewan sees this as New Zealand's best opportunity, despite the collapse of earlier efforts in 1992 and 1996, to address what he sees as a longstanding problem needing urgent attention.

"There is no justice in taxing people twice," he said. "And this is pure, naked double taxation - no ifs, no buts."

At issue is what tax experts call "triangular" taxation.

This happens when New Zealand shareholders in an Australian company operating in New Zealand (for example, ANZ Bank, Telstra and AMP) cannot use New Zealand-sourced tax imputation credits on their dividends.

It means they are effectively taxed up to 60 per cent, compared with the top personal tax rate of 39 per cent.

The same double tax applies in reverse to Australian shareholders in New Zealand companies operating in Australia (such as Telecom, Tower, Air New Zealand and The Warehouse), which are taxed at up to 66 per cent, compared to Australia's top tax rate of 48 per cent.

The inability to transfer tax credits to dividends makes it more difficult for New Zealand companies to attract Australian shareholders, who prefer Australian companies offering tax-free dividends.

Mr Shewan said the problem would become more widespread as increasing numbers of New Zealand and Australian companies developed transtasman arms to their businesses.

And with Australia about to cut its company tax rate to 30 per cent - below New Zealand's 33 per cent - New Zealand's competitive disadvantage would become more marked.

Finance Minister Michael Cullen and Australian Treasurer Peter Costello have instructed their officials to explore ways of mutually recognising imputation credits in "triangular" tax cases.

They are to report by June 30.

Mr Shewan said the economic importance of getting agreement on triangular tax could not be understated.

The problem distorted the way companies structured debt and equity, resulting in New Zealand losing corporate tax estimated at hundreds of millions of dollars a year.

That did not account for the considerable investment and related benefits being blocked by existing rules.

Australian companies operating in New Zealand understandably sought to minimise the tax they paid in New Zealand because there was no value in holding imputation credits.

Previous attempts to resolve the problem failed, mainly because of Australian reservations.

But Mr Shewan said that with the CER relationship having expanded in other areas and with political support now apparent on both sides of the Tasman, he was more confident of a resolution this time. Furthermore, Australia's Ralph review of business tax recommended that triangular tax be examined.

Australia New Zealand Business Council executive director John Jenner said the double tax on transtasman investment was one of the most significant issues facing council members.

"Both countries have benefited from CER and we now have the best opportunity we've had for a number of years to extend it," he said. "And it would help solve the difficulties in raising money on the other side of the Tasman."

PricewaterhouseCoopers is working with the business council and New Zealand Government advisers in examining three main options:

Mutual recognition of imputation credits, which Mr Shewan describes as the ultimate solution. It would eliminate the tax barrier to transtasman investment, but it goes far beyond the tax problem and is regarded as politically unacceptable.

Streaming, which would allow Australian parent companies to stream dividends directly from New Zealand subsidiaries to New Zealand shareholders in the parent. Favoured by transtasman companies, it would give New Zealand shareholders access to imputation credits stemming from their company's New Zealand tax payments.

Pro-rata allocation, which is more restrictive than streaming but much better than existing rules. It would provide New Zealand shareholders in Australian companies with access to New Zealand imputation credits, but only in proportion to their overall shareholding in the group.

- NZPA