Deal gives some relief from double taxation

By BRIAN FALLOW

A long-awaited agreement finalised yesterday between Australia and New Zealand has removed one of the thorns from the paw of CER.

The two Governments took the opportunity of a visit by Australian Treasurer Peter Costello to announce a deal on "triangular" tax, 12 years in gestation, which partially removes the double taxation of profits of companies with operations and shareholders on both sides of the Tasman.

At present if an Australia company pays company tax in New Zealand the imputation credits that would normally generate are wasted. Its New Zealand shareholders cannot claim them because it is an Australian company and its Australian shareholders cannot claim them because it is New Zealand tax.

The new agreement removes the first of those problems. A New Zealand shareholder will be able to claim his or her share of the New Zealand tax paid, to offset the tax payable on the dividends he or she receives.

Conversely the Australian shareholders in a New Zealand company making profits and paying tax in Australia will be able to claim franking credits pro rata.

But the double tax will still apply where New Zealanders own shares in an Australian company with no New Zealand operations, and vice versa.

The limited nature of the relief is evident from the fact that the revenue cost to the New Zealand Government will be about $10 million a year and to the Australian Government about $A25 million.

To put that in context, as at March last year there was $17.6 billion of Australian foreign direct investment in New Zealand and $8.6 billion of New Zealand FDI in Australia.

However, PricewaterhouseCoopers tax partner John Shewan said the benefits were wider than the $10 million figure might suggest.

It removed one incentive for a New Zealand corporates to move to Australia, he said. It would lower the cost of capital for New Zealand companies raising capital in Australia.

And it would bolster the New Zealand tax base by reducing the incentive Australian companies have to finance their New Zealand subsidiaries largely through debt.

It would be of particular benefit to companies like Tower, Telecom, Fisher & Paykel and Carter Holt Harvey which had operations and shareholders on both sides of the Tasman, Shewan said.

The measure allows, but does not require, companies to make the imputation or franking credits available.

They will still have to decide whether the compliance costs are worth it.

Kerry McDonald, a director of several companies with trans-tasman businesses, said the triangular tax move was a useful step forward but pretty small in the overall scheme of things.

The Australia New Zealand Business Council has long called for a commitment to a single investment market in which investors from one country would be treated as domestic investors in the other.

But that would require a degree of integration between the two countries' tax systems, McDonald said, and realistically New Zealand as the smaller partner would have to make most of the adjustments.

"I think the decision [to tax harmonisation] would not be done on a fine calculation of the costs and benefits but done in terms of a big strategic judgment about New Zealand's future," McDonald said, "like the judgment which led to the original CER agreement 20 years ago."

Tax was not a major impediment to investment, Shewan said. "I would describe it more as a frustration. What it does is delay investment and alter the form it takes."