KEY POINTS:
Finance Minister Michael Cullen plans to put a controversial $1 billion tax question on the table at a major gathering of Australasian business leaders this week.
The $1 billion potential cost to the Australian exchequer is the amount the Australian Treasury throws up (behind scenes) every time New Zealand politicians or Australasian businesspeople try to get mutual recognition of dividend imputation or franking credits on to the policy agenda for the Australasian single economic market.
There will be a probable net revenue loss on this side of the Tasman as well but figures are difficult to obtain.
Under the current pro rata rules, franking or imputation credits are allocated in proportion to the percentage of shareholders residing in either country - not where the tax is paid. This can result in double taxation when shareholders are not able to access sufficient credits, and, at company level, it can mean a waste of credits.
Companies say the way to resolve the problem is for full mutual recognition of imputation credits between the two markets.
But the critical issue is that right now shareholders are missing out.
Cullen is not likely to be quite so direct when he suggests it could be time to formally explore the impact of such a policy shift in his address to the Australia New Zealand Leadership Forum on Friday.
But he will be hoping the forum - which will be attended by a six-strong muster of Australian Cabinet ministers and high-ranking politicians led by Acting Prime Minister Julia Gillard - will listen carefully.
Cullen pushed the imputation credit issue several times behind scenes during his formal talks with former Australian Treasurer Peter Costello on the single economic market (SEM) agenda that the two politicians initiated in 2003.
But Costello was strongly opposed - to the point where he subjected PriceWaterhouseCoopers' John Shewan to a verbal dressing down for having the temerity to ask him a question on the score.
A bid by the leadership forum to get the issue on to the SEM agenda at their 2005 meeting basically failed.
The Finance Minister will be factoring in that with a new Labor Government in Australia - which shares fraternal links with New Zealand Labour - the new Australian ministers might at least be tempted to look at adding a genuinely transformational measure to the SEM agenda.
That might not be during the formal presentation Gillard and her panel will make on the new Australian Government's priorities, but it must be hoped it's possible afterwards.
With transtasman investment continuing to expand at exponential rates - particularly Australian investment into New Zealand - the logic for leaving a policy of the SEM agenda that would increase the efficiency of capital markets is fast eroding.
The Australian Treasury's opposition seems to be based on the view that if mutual recognition is cemented with New Zealand it will have to do something similar with other trading partners. The views are most cogently expressed in the Treasury's submission to a review of Australia-New Zealand closer economic relations agreement by the Australian Parliament's joint standing committee on foreign affairs, defence and trade.
"If you start recognising tax paid offshore and let that flow through to the shareholder level, then you lose that driver for companies to pay tax in Australia," noted Paul McBride then manager of the department's tax treaties unit.
"Our concern was that it would be very difficult to just offer it to New Zealand.
"New Zealand are an important investment partner, but they are not our strongest. If we offered it to New Zealand, what would stop the US, the UK and other key investment partners asking for the same?"
McBride cited colleagues' estimates that about $1 billion would be in contention in the New Zealand context. "If you start looking at our serious investment partners, then you start looking at enormous sums of money in terms of not just the tax you give up immediately but the restructuring that would result meaning there would be no longer be the incentive to base and pay tax in Australia. On that basis it was not given a favourable response in the review of international tax arrangements."
The Australia New Zealand Business Council had pushed for detailed costing of mutual recognition of franking and imputation credits to be done by both countries. The ANZBC had argued that the initial move allowing the imputation of franking credits to be passed out from both countries' tax systems back to shareholders on a pro rata basis in their own jurisdictions had had little impact on business.
But the parliamentary committee decided the issue should not be included on the CER work agenda, citing the Australian Treasury's objections.
Shewan contests the view that the Australian Government would have to match the policy with other investment partners. He points out very few countries have full dividend imputation or franking credit regimes and there should be ways to contain the policy. Australian reservations might also focus on the fact that New Zealand does not have capital gains taxes. But although the issues are complex they could be addressed.
Other taxation issues - like the need for a focus on withholding taxes on dividends, interest and royalties - are being addressed during the negotiations on a new double taxation agreement between the two countries.
If Cullen can persuade his Australian counterpart to at least explore the issue properly, he will have chalked up a major gain for New Zealand shareholders.
Gillard, Rudd's hard-nosed deputy, holds the education, employment and workplace relations portfolios.
She is running the show while Rudd visits Indonesia and Japan. The Australian Prime Minister will himself visit New Zealand in August to address a major climate-change business conference alongside PM Helen Clark at a time when the key elements of Australia's proposed emissions trading scheme should have emerged.
She will want to leave New Zealand with a commitment from the Clark Government to support Rudd's call for an Asia Pacific community by 2020.
* The Australia New Zealand Leadership forum is an annual meeting of political, business, bureaucratic, academic, union and community leaders. It was established by former Foreign Ministers Phil Goff (New Zealand) and Alexander Downer (Australia) to cement a stronger bilateral relationship.
WHO'S IN THE ROOM?
The Australia New Zealand Leadership Forum is on this week in Wellington.
Participants include:
(1) Politicians
* Acting Australian Prime Minister Julia Gillard will be accompanied by Trade Minister Simon Crean, Finance Minister Lindsay Tanner, Nick Sherry (Superannuation and Corporate Law), Duncan Kerr (Pacific Island Affairs), Anthony Albanese (Infrastructure, Transport, Regional Development and Local Government).
* On the NZ side, Trade Minister Phil Goff, Finance Minister Michael Cullen, Foreign Minister Winston Peters and Commerce Minister Lianne Dalziel will front. National leader John Key will be paired with MP Peter Dutton who is representing Liberal leader Brendan Nelson.
(2) Businesspeople
* Among the NZ side: Reserve Bank Governor Alan Bollard, Securities Commission chairwoman Jane Diplock, ANZ National CEO Graham Hodges, Ernst and Young partner Rob McLeod, Trade Me CEO Sam Morgan, Telecom CEO Paul Reynolds and Fonterra director Earl Rattray.
* Among the Australian side: Graeme Samuel (ACCC) Ian Buchanan (Booz Allen Hamilton), David Kirk (Fairfax Media), Donald McGauchie (Telstra) and Ralph Norris (Commonwealth Bank).
