KEY POINTS:
Finance Minister Michael Cullen has put the issue of the double taxation of dividends front and centre on the transtasman economic agenda.
Both countries have a regime where shareholders can receive with their dividends tax credits - called imputation credits here and franking credits in Australia - which represent their share of the company tax their firm has paid.
But, except in very limited circumstances, the credits are of no use to investors on the other side of the Tasman.
"Investment flows are distorted in a way that doesn't sit well with wider moves towards a Single Economic Market," Cullen told the Australia New Zealand Leadership Forum in Wellington on Friday.
He acknowledged Australian concerns that mutual recognition of imputation credits would create a precedent that would need to be extended to other countries.
"But I believe a way forward can be found by limiting mutual recognition to countries with essentially identical regimes."
For both Australia and New Zealand the other would be the only country that met such a test, he said.
The response from Australian Finance Minister Lindsay Tanner was non-committal, even guarded, but a marked contrast nonetheless to the peremptory rejection of the idea from former Treasurer Peter Costello.
"We will obviously look at it in more detail," Tanner said. "But don't expect anything to happen very quickly in this area."
After so many years out of office the new Labor Government has a crowded reform agenda, and mutual recognition of imputation credits is not front-of-mind.
"We have got a lot on our plate. We haven't had an opportunity to have a serious look at this."
A review of the Australian tax system headed by Treasury Secretary Ken Henry has terms of reference broad enough to include this issue, Tanner said.
"International tax is very complex and the Treasury is rightly concerned about the potential implications for revenue and precedent-setting."
Cullen said both governments would of course lose revenue as mutual recognition would remove or relieve one level of tax from the current double taxation.
As of March last year Australia had $55.8 billion of direct and portfolio equity investment in New Zealand and New Zealand $20.5 billion in Australia.
PricewaterhouseCoopers chairman John Shewan, a longstanding and ardent advocate of mutual recognition, said he was enormously heartened by the emphasis Cullen had put on the issue, and the indications that that would not change if there was a change of government.
"There is an inconsistency in arguing for a single economic market while leaving in place double taxation which has a severe distortionary impact on investment flows," he said.
It was partially a problem for medium-sized companies looking to expand through investment on the other side of the Tasman. They did not have the resources to move debt around in order to minimise the impediments the lack of mutual recognition created.
"Each year we celebrate the increase in investment flows between the two countries. But that only means that each year the problem gets worse," he said.
Australia had benefited enormously form foreign direct investment into New Zealand and that could be enhanced by mutual recognition.
"The precedent problem Australia has raised is very easily dealt with. The biggest potential obstacle is a loss of momentum on the Australia side, because they do have a lot on their plate."
Shewan would like to see a target date of two years set for dealing with it.
"We hear a lot about the need to add an investment protocol to the Closer Economic Relations agreement. Well, this would be a fundamental part of such such a thing," he said.
"It has been the elephant in the room for a long time."
TRANSTASMAN TALKFEST
* The Australia and New Zealand Leadership forum is an annual meeting of political, business, bureaucratic, academic, union and community leaders.
* It aims to cement a stronger bilateral relationship.
* It took place in Wellington on Friday and Saturday.
* It was established by former Foreign Ministers Phil Goff and Alexander Downer in 2004.
THE AUSTRALIAN CONTINGENT INCLUDED
Australian Deputy Prime Minister Julia Gillard, Trade Minister Simon Crean, Finance Minister Lindsay Tanner, Minister for Superannuation and Corporate Law Nick Sherry, Fairfax Media CEO David Kirk, Telstra chairman Donald McGauchie and Commonwealth Bank CEO Ralph Norris.
THE NZ SIDE INCLUDED
Trade Minister Phil Goff, Finance Minister Michael Cullen, Foreign Minister Winston Peters, National leader John Key, Reserve Bank Governor Alan Bollard, ANZ National CEO Graham Hodges, Ernst & Young partner Rob McLeod, TradeMe CEO Sam Morgan, Telecom CEO Paul Reynolds and Fonterra director Earl Rattray.
