Fran O'Sullivan: Ducking the hard questions

Finance Minister Michael Cullen and Australian Treasurer Peter Costello were down to enjoy a private tete-a-tete over dinner in Melbourne last night before they tackled the next wave of single economic market reforms.

It's likely that the pair - Cullen (waspish) Costello (narcissistic) - would have enjoyed more than a bit of sport at their senior Cabinet colleagues' expense. Helen Clark has only recently become publicly keen on Cullen's drive to form a single Australasian market. Costello would rather he was the one persuading Clark - not his own PM - to come around.

But even before shaking hands, Cullen had wimped out on making urgent progress on the key policy issues that the single market's promoters want: An Australasian common border and the removal of taxation impediments.

Even his decision to put Australia on a "grey list of one", meaning only the dividends rather than capital gains that Kiwi shareholders receive from Australian portfolio investments will be taxed (unlike other offshore investments, which still attract a blatant capital gains tax) is a small nod to the imperatives of a neutral transtasman investing regime.

But, frankly, it remains a joke.

Cullen still plans to put more obstacles in the way of New Zealanders seeking to diversify their international risk away from this part of the world.

Early last year, 80 leaders and opinion formers from politics, business, bureaucracy and academia put a stake in the ground at the Australia New Zealand Leadership Forum, saying mutual recognition of dividend imputation credits would be the biggest unifying factor the two Governments could take to build support for the single market.

But the ball simply dropped.

Costello has shamelessly used public put-downs to intimidate accountancy professionals such as PriceWaterhouseCoopers John Shewan, who took him to task on Australia's refusal to consider mutually recognising dividends, let alone a full-on transtasman taxation agenda.

He has also privately dressed down players such as Reserve Bank Deputy Governor Adrian Orr, who ran a strong campaign against a Costello-backed proposal for a single Australasian banking regulator.

But Cullen cannot afford to let vital taxation issues die simply because he fears Costello might tip the entire chess board over rather than get the pieces moving, as he threatened when New Zealand baulked at the Australian banks' push for a single banking regulator (theirs). Last night, he planned to "update Peter" on where the Government was going with its review of business taxation.

Cullen and Revenue Minister Peter Dunne have previously signalled an intention for bold changes that will not just be "at the margins" of lowering the 33c company rate.

Cullen was relatively coy about his remit before talks.

But up for grabs in any sensible discussion over the transtasman tax regime would also be:

* Non-resident withholding taxes.

* The transtasman tax rules governing superannuation.

* Employee share purchase schemes.

* Dual residency of companies.

* GST on cross-border supplies.

* Aligning the approach for obtaining binding rulings.

The more crunchy issue is why a double taxation agreement - simply a common regime - is not likely to be a runner in the short term.

I hope Cullen did find it within himself to quietly chivvy his bigger transtasman "sibling" and at least get a commitment for this issue to be resolved by the time New Zealand implements its new business tax regime in April 2008.

In this world, where taxation is the currency for how Governments conduct global war, it is understandable that Costello wants to have his cake and eat it too. For instance, it would not be easy to unravel just where the tax flows would end up under mutual recognition of franking credits and dividends.

Nor will he want to forgo any lift his federal coffers get from the "profit-shipping" some Australian corporates allegedly indulge in by using transfer pricing to ensure kiwi-based profits are taxed at their home country's lower company tax rate, rather than in New Zealand.

If New Zealand slashed the company tax to, say, 20 per cent the tax warfare would get interesting. But that's at least two years away.

Despite clear support from business, the issue presents some complexities for the two Treasurers.

But in a relationship where it is taken as a given that most of the drive has to come from the smaller partner, it is incumbent on Cullen to ensure that the taxation redundancy does not continue to be at the expense of efficient capital flows in what aspires to be a single economic market.

When they embarked on their adventure to turn Australia and New Zealand into one "single economic market", just getting across to Melbourne for that first meeting in the Australian Treasurer's office at Parliament Square entailed the usual exercise in irritation for New Zealand businesspeople - waiting unbelievably long times in the "foreigners" queue before clearing Australian Customs.

Two years on - that irritation has gone. A joint Anzac lane now speeds up arrival for Kiwis entering Australian international airports.

It shows that even though Australian businesspeople had enjoyed the same advantage for years at our airports, there was huge official resistance in Canberra to this logical step. That's why the single economic market promoters hail the joint queue as proof positive that major difficulties in the transtasman environment can be overcome if "good policy process" is followed.

There has been a big buy-in from business on both sides of the Tasman. Corporate leaders such as Kerry McDonald, the Bank of New Zealand chairman who heads the New Zealand side of the Australia New Zealand Leadership Forum, and, his Australian counterpart, Qantas chairwoman Margaret Jackson, have provided strong business leadership.

The pair were invited to join a private lunch that Costello is hosting for Cullen at his ornate Treasurer's office today. Others on the invitation list include top representatives from the two stock exchanges, Westpac CEO David Morgan, Telecom CEO Theresa Gattung and Reserve Bank of Australia Governor John Macfarlane.

The feisty Jackson - who cannot attend - and the pragmatically focused McDonald are not likely to let either Cullen or Costello off lightly if they feel either Treasurer is deviating from the single market path.

Jackson, in particular, is concerned that the common border symbolism is not being underpinned quickly enough by policy changes she wants to bring the two countries within a virtual single market, even though they do not share a physical common border.

For his part, McDonald takes quiet pride that, at a practical business level, change is humming: Areas including securities laws, company registrations, mutual recognition of companies and accountancy rules are just the tip of a policy iceberg that officials from both sides are moving along.

But the big-picture issues, such as joint programmes to tackle third markets - which involve clear sibling rivalries - and the really difficult policy areas, such as a common telecommunications regime, have so far been ducked. This is the growing edge of change that Costello and Cullen must embrace if our two economies are to compete within the fast-moving regional economies we live alongside.