Governments to review Aust-NZ tax treaty

Hopes of a better deal for transtasman investors have been raised by the news New Zealand and Australia are reviewing the increasingly antiquated tax treaty between the two countries.

The 10-year-old agreement looks outdated amid a global tide running towards lower withholding taxes on international flows of dividends, interest and royalties.

Finance Minister Michael Cullen said the two Governments would decide over coming months whether changes should be made by amending the agreement or as part of a comprehensive renegotiation.

"It will, in large part, depend on whether New Zealand wants to lower withholding rates."

The Government is proceeding gingerly, though, because the most favoured nation clauses in such agreements mean any concession on withholding tax rates (15 per cent on dividends and 10 per cent on interest and royalties) will have to be offered to the other 29 countries with which New Zealand has double tax treaties.

PricewaterhouseCoopers tax partner John Shewan said the global trend was for withholding taxes to come down.

"On interest payments 10 per cent is the prevailing rate for New Zealand treaties but Australia has now reduced it to zero in relation to non-related party borrowings and 5 per cent for associated party borrowings. On royalties, we still have a 10 per cent rate with most of our trading partners. Australia is going to five."

Shewan said the Government had to be careful, though.

"It collects $800 million a year from withholding taxes. A material reduction in rates would have a fiscal impact they would have to consider. As an importer of capital, we tend to be more reliant on withholding taxes than other countries."

Shewan said it was important there be a comprehensive renegotiation with not just withholding taxes on the table but also the vexed issue of the double taxation of dividends. That arises because the two countries do not recognise each other's imputation credits (or franking credits, as the Australians call them).

"It is not as simple as just saying get rid of withholding taxes. It's a matter of saying longer term what is the best set of arrangements transtasman if we are serious about a single economic market."

Another potential issue is that in the Budget, the Government said it would repeal in April 2007 the "grey list" of favoured nations for overseas portfolio investments (stakes of less than 10 per cent). Australia is on the list.

"In the absence of any special arrangement with Australia that would mean a potential sharp increase in the amount of tax by people who invest into Australia," Shewan said.

"At the moment, if we invest into Telstra or BHP we pay New Zealand tax on the dividends we receive and, after the abolition of the grey list, it seems likely we will also have to pay tax on any capital gain we derive from that investment as well, because that is what the grey list has protected us from."

Deloittes tax partner Thomas Pippos said without cuts to withholding tax rates, New Zealand would be seen as a high-tax country by international investors.

"Importantly, however, a reduction in such withholding rates also benefits New Zealand-owned business that will be able to repatriate funds from their international operations with a lesser tax cost."

While New Zealand collected a significant amount of non-resident withholding tax on dividends, it provided an equal credit against the paying company's tax liabilities.


Treaty review

New Zealand's tax treaty with Australia is under review.

Corporates would like lower withholding taxes and an end to the double taxation of dividends.

But such changes would be costly in revenue.