Credits plan to save millions

By JIM EAGLES

The Australian and New Zealand Governments are moving part-way towards solving the problem of triangular taxation, which costs investors in both countries millions of dollars a year.

The recommendations of a joint discussion paper released by the two Finance Ministers yesterday - aimed at being implemented for the 2004 financial year - will save New Zealanders who invest in Australia-based transtasman companies an estimated $10 million in tax a year.

But the Governments have not agreed to proposals put forward by businesses in both countries that would have resulted in much bigger tax savings. Nor have they considered the possibility of recognising each other's tax credits, which would avoid transtasman double taxation altogether.

Nevertheless, the new approach has been welcomed as a step in the right direction, and one that will particularly make it easier for New Zealand companies moving into Australia to find capital across the Tasman.

Triangular taxation occurs because New Zealand shareholders in an Australian company cannot use any imputation credits acquired from profits made in New Zealand.

The reverse problem applies for Australian shareholders in New Zealand companies.

The result is that transtasman shareholders are double-taxed on any dividends even though the companies they invest in may have surplus New Zealand imputation credits or the equivalent Australian franking credits.

Businesses wanted streaming - a company to be able to pass all its franking credits to Australian shareholders and all imputation credits to New Zealand shareholders.

But the two Governments rejected that approach.

First, they were concerned at the fiscal impact of suddenly allowing companies to use up all their taxation credits.

Secondly, there were concerns about allowing the principle of streaming into taxation arrangements where it could have much wider application.

Instead they have opted for a pro rata approach: companies will be able to allocate their franking and imputation credits to all shareholders, Australian and New Zealand, in proportion to their holdings.

New Zealand investors in an Australian company will not be able to use any franking credits that come with their dividends - and vice versa - but at least they will have access to a share of the imputation credits in respect of New Zealand earnings.

Companies will decide whether to make use of the option because Inland Review has acknowledged there will be compliance costs.

Teresa Farac, head of international tax practice with PricewaterhouseCoopers in Auckland, welcomed the joint Government move.

"It's a measure that's been a long time coming and with a lot of false starts," she said.

"It's not what the business community was hoping for but at least it will provide some relief and that's definitely worthwhile."

Farac said the measure should improve transtasman investment flows.

New Zealand would probably gain more from the changes than Australia, she said.

"In particular I would expect it to make it easier for New Zealand companies moving into Australia to raise capital over there because they will no longer be at such a tax disadvantage."

The discussion paper has been circulated for submissions, which close on May 3.

Trans-Tasman triangular tax discussion document