Brian Gaynor: Investors miss out on tax benefits

COMMENT

A positive recent development has been the close co-operation between the Australian and New Zealand Governments on dividends and prospectuses.

These developments facilitate the payment of imputed dividends by Australian companies to their New Zealand shareholders, and will also make it easier for investors on this side of the Tasman to invest in Australian initial public offerings.

The co-operative agreements on dividends and prospectuses are far more sensible than the ill-conceived proposal to merge the Australian and New Zealand stock exchanges. Under that proposition, the New Zealand sharemarket would have been completely dominated by its larger partner and its future would have been far less attractive than it is today.

The Australian and New Zealand Governments have been working for a number of years to encourage greater transtasman investment. One of the barriers to this has been the rule that tax paid by Australian companies in New Zealand could not be passed on to their New Zealand shareholders in the form of imputation credits.

Likewise, tax paid by New Zealand companies in Australia could not be passed on to their Australian shareholders in the form of franking credits.

This has meant that Australian and New Zealand investors have been subject to double taxation on these dividends.

Last year, the two Governments passed legislation that allows imputation credits earned by Australian companies to be passed on to their New Zealand shareholders, and franking credits earned by New Zealand companies to be passed on to their Australian shareholders.

The new rules apply to distributions made since last October 1.

This should encourage transtasman investment, but it is difficult to find any companies that have taken advantage of the new tax agreement.

This is strange because the dividend tax agreement offers companies the opportunity to stimulate investor interest in the other country.

Under the new rules, an Australian company had until March 31 to choose whether to become an "Australian imputation credit account company" under New Zealand rules. This allows it to attach imputation credits received from its New Zealand subsidiaries to dividends paid to New Zealand shareholders.

It is difficult to find any Australian businesses that have made announcements regarding this decision.

A New Zealand company has until June 30 to choose to become a "New Zealand franking choice company" under Australian rules. It will then be in a position to attach franking credits earned by its Australian subsidiaries to dividends paid to Australian shareholders.


Nuplex told the stock exchange on April 23 that it had entered Australia's franking credits scheme.

The Australian Tax Office advised Nuplex that its New Zealand capital notes are equity under Australian tax law and the interest payable is deemed to be a dividend.

Nuplex is now applying franking credits to this interest payment, which makes the capital notes particularly attractive to Australian investors.

This could create a lucrative avenue for New Zealand companies to raise money.

But why haven't other transtasman companies made announcements regarding the new Australian/New Zealand tax agreement? Are they unaware of the tax changes, or have they put the issue in the too-hard basket?

A number of New Zealand shareholders have written to Australian companies with operations in New Zealand to inquire whether they have adopted the new scheme and will be passing on imputation credits.

Many of these companies have not replied or have supplied vague answers.

Lion Nathan, which moved to Australia in 2000, will pay an interim dividend of 14Ac (fully franked) on June 23. Its New Zealand operations contributed nearly 20 per cent of operating profits in the six months to March 31 and the company still has a large number of shareholders on this side of the Tasman.

Why isn't the company attaching imputation credits for its New Zealand shareholders?

Under the new tax rules Lion Nathan, and other Australian companies operating in New Zealand, have access to imputation credits accumulated in previous years. This suggests that Lion Nathan can distribute all imputation credits earned in New Zealand since it left the country in 2000.

There are material benefits to the company's New Zealand shareholders if these imputation credits are distributed, yet Lion Nathan doesn't seem to be in a rush to do so.

The response to the new tax regime has been disappointing and there is a clear need for shareholders to become more pro-active on the issue.

Stockbrokers and the New Zealand Shareholders Association should also become more vocal, because the early indications are that most companies won't take advantage of the new rules unless they are pressured by shareholders into doing so.

The Australian and New Zealand Governments are also trying to streamline the rules and regulations regarding prospectuses on both sides of the Tasman.

On May 19, the New Zealand Ministry of Economic Development released a discussion document called Transtasman Mutual Recognition of Offers of Securities and Managed Investment Scheme Interests.

According to the ministry, the main object of mutual recognition is to create a single transtasman market for goods, services and capital.

Under existing rules, Australian and New Zealand issuers cannot use their home jurisdiction offer documents when making a transtasman securities offer.

They must comply with the relevant requirements in the host jurisdiction, unless the issuer is operating under an exemption in the host jurisdiction.

An Australian promoter may not make an offer in New Zealand unless it is consistent with registered prospectus and investment statement requirements of the Securities Act 1978 (NZ).

A New Zealand issuer making an offer in Australia must comply with rules and regulations under the Corporations Act 2001 and the Australian Securities and Investments Commission, including the publication of the relevant disclosure statement.

The object of the new regime is to remove unnecessary regulatory barriers to transtasman securities offerings. This should facilitate investment between the two countries, reduce costs and increase the opportunities for investors.

The basic principle of the proposed law changes is that an offer of securities, which is a regulated offer in one country, can be lawfully made in the other country in the same manner and with the same offer documents. In other words, issuers will have to comply with only the rules and regulation of their home jurisdiction.

This will reduce the costs for issuers wishing to offer their securities or managed investment scheme interests in both jurisdictions.

The proposed regime is expected to reduce the cost of capital for issuers, as they will have access to a larger investor base. It will also benefit investors by increasing the range of investment choices and providing greater scope for risk diversification.

The ministry has asked for submissions on its discussion paper by July 16. Following that, it is hoped that an inter-Government agreement will be negotiated and legislation introduced in both countries to incorporate the new prospectus regime.

This development is encouraging, but the actual outcome from the dividend agreement has been disappointing to date.

The early indications are that shareholders, stockbrokers and the Australian and New Zealand shareholders associations will have to be far more pro-active if investors are to receive the fully benefits of the transtasman agreements on dividends and prospectuses.

* Email Brian Gaynor