Mutual recognition of imputation credits would enhance economic efficiency in Australia and New Zealand as well as advancing the common goal of a single economic market, the Treasury and Inland Revenue argue in their submission to the Henry tax review.
Both countries have a regime where shareholders canreceive with their dividends tax credits which represent their share of the tax the company has paid. But except in limited circumstances the credits are of no use to investors on the other side of the Tasman.
The result is double taxation of distributed profits which New Zealand officials argue distorts investment between, and retards competition within, the two economies.
When Finance Minister Michael Cullen raised the issue at the Australia New Zealand Leadership Forum in June the response from Australian Finance Minister Lindsay Tanner was non-committal and guarded but nevertheless a marked contrast to the peremptory dismissal of the idea from the former Treasurer Peter Costello.
Tanner encouraged New Zealand to make a submission to the review of the Australian tax system being headed by Treasury Secretary Ken Henry.
The case New Zealand officials make for mutual recognition cannot get around the fact that Canberra has more revenue to lose than Wellington.
As at March this year Australian direct and portfolio investment in New Zealand at $59 billion was 2.7 times larger than New Zealand investment in Australia.
The Treasury and IRD argue that the status quo creates incentives for Australian parent companies to "stream" taxable profits from their New Zealand subsidiaries to the parent company so as to maximise the franking (imputation) credits available to Australian shareholders.
The same applies the other way to New Zealand companies with Australian subsidiaries.
Such tax planning imposed deadweight costs and distorts the allocation of investment capital to the detriment of Australasia Inc's overall productivity and international competitiveness, they say. The submission will feed into a consultation document the Henry review is to release by the end of the year. Its final report is due by the end of next year.
