KEY POINTS:
You've probably seen it: The spoof on New Zealand's "100 per cent pure" international advertising campaign sports slogans signalling our "0 per cent" defence capability (along with the usual sheep and landscapes) as Aussie jets scream over the horizon to claim a country which is "100 per cent there for the taking".
The richly entertaining Aussie television advertisement - Let's invade New Zealand - is a major talking point which will no doubt give rise to a few jibes when Finance Minister Michael Cullen and Australian Treasurer Wayne Swan have dinner in Wellington tomorrow night.
Unfortunately the spoof contains more than an element of truth for influential Kiwi capital markets players who want the New Zealand Government to act more defensively when it comes to the Australian buy-up here.
At issue is whether the NZ Government should keep waiting for the Australian Government to agree to "mutual recognition of dividend or franking credits" or just "unilaterally" change the rules to stymie the steady mop-up of NZ companies into "100 per cent" Australian ownership.
Right now it's more economic for an Australian corporate which buys a majority slice of a New Zealand listed company to proceed to 100 per cent control, rather than leave a substantial portion of the firm's shares listed on the NZX.
A combination of tax rules - particularly the longstanding failure to implement mutual recognition of dividend (NZ) or franking (Australia) imputation credits - has tipped the balance against Kiwi shareholders.
The upshot is that if an Australian corporate cannot access imputation credits on its majority investments here, the rational strategy is to move to 100 per cent ownership, load debt on to the subsidiary to the maximum level allowed under the thin capitalisation rules, and thus minimise tax paid in New Zealand.
This results in Kiwi investors having reduced equity investment options as foreign companies have little incentive to offer quality opportunities to the New Zealand public. With the huge flow of banks, food and beverage firms and media companies into Australian ownership in recent years this has led to a diminished New Zealand equity market, skewed industry representation on the NZX and a shortage of quality stock to balance investors' portfolios.
The New Zealand tax base also comes under pressure as the nifty tax-planning results in diminished corporate tax paid by the previously majority-NZ owned companies - an issue which is of increasing concern to Inland Revenue.
Mutual recognition of imputation or franking credits will be a major agenda item at tomorrow's formal bilateral meeting between Cullen and Swan.
Swan's predecessor, Peter Costello, point blank refused to allow any serious engagement on mutual recognition despite considerable lobbying by Australian corporates who wanted to ensure continued opportunities for their New Zealand shareholders.
Both Cullen and Swan will come under renewed business pressure this week if no positive announcements flow from their meeting.
But there is now real doubt among New Zealand capital markets participants that even if mutual recognition does go on the transtasman single market agenda, anything concrete will result.
Market participants and policymakers have joined at seminars in Auckland and Wellington in the past fortnight to explore alternative options for "unilateral disarmament".
PricewaterhouseCoopers' John Shewan - a longtime proponent of mutual recognition - presented on the optimum option. But Shewan acknowledges New Zealand has been waiting for a very long time for Australia to act.
Owen Chew Lee (Westpac's director group treasury) makes the point that under current law where Australian companies (like Westpac) derive significant profits here, New Zealand shareholders are not able to receive the same after-tax return as their Australian counterparts where the Australian company pays a fully franked (imputed) dividend. This effective double taxation occurs even where significant NZ tax has been paid by the NZ entity or group.
Lee has proposed "limited form" dividend streaming to enable NZ shareholders to derive the full value of imputation credits. There's an element of conditionality: Companies have to maintain full listings on both the NZ and Australian exchanges. Dividends paid to holders of ordinary shares on the NZ branch of the share register can have imputation credits attached. The extent of imputation credits will be circumscribed by the amount of tax paid by the NZ group on the profits.
Westpac argues that limited form dividend streaming will not necessarily preclude mutual recognition proceeding over time.
Mark Weldon believes New Zealand is just conning itself if it thinks Australia will move to mutual recognition. He thinks New Zealand policymakers have spent too much time on an issue that is of dubious long-term benefit instead of addressing the real competitive issues.
The NZX chief believes if the Government does not tilt the playing field in NZ's favour there will be negative tax base outcomes over time, few local capital market and savings instruments available, a barrier to partial floats and a sub-optimal mix of foreign direct investment.
The NZX is proposing a "partial" imputation credit to 50 per cent plus overseas owners only based on the extent of NZ ownership of the rest of the company. In effect this means a 50 per cent plus non-resident owner would be eligible to receive imputation credits to the level of 50 per cent of the imputation credits distributed to NZ residents in the locally listed company. There are some drawbacks, but the NZX believes it will encourage a greater number of floats and partial selldowns, result in fewer 100 per cent takeovers and still prevent the many overseas-owned companies from disappearing from the NZ ownership and capital market landscape.
This is a bare-bones outline of potential policy options.
There is a concern that NZ will simply play into Australia's hands if it proceeds to "unilateral" measures while ministers are still considering whether or not to put mutual recognition of dividend imputation or franking credits on the single market agenda.
But the groundswell from these meetings is that NZ cannot continue to be "fobbed off" by Australia.
The ministers will also look at:
* Proposals for the portability of superannuation schemes. A policy announcement is expected soon - possibly at tomorrow's press conference.
* The Australian Government's stalled push for an investment protocol to be added to the Closer Economic Relations agreement.
* Emissions trading. Cullen wants a briefing on the Australian Government's Green Paper (to be released today).
One thing is for sure, the market wants the "100 per cent too easy" sign to come down.
