Equity tax differences remain real transtasman sticking point

John Key. Photo / Brett Phibbs

The double taxation of transtasman equity investments remains a sore point as both countries progress the Single Economic Market agenda.

The annual Australia New Zealand Leadership Forum in Auckland on Friday and Saturday heard renewed calls for mutual recognition of imputation and franking credits.

Both countries' tax laws allow a dividend to come accompanied by a tax credit for the shareholder's share of the company tax paid. This reduces or eliminates further taxation of the dividend in the shareholder's hands.

But that relief is available only to New Zealand shareholders in New Zealand companies and Australian shareholder in Australian companies, not to New Zealand shareholders in Australian companies or Australian shareholders in New Zealand companies.

It is therefore seen as an impediment to the free flow of investment capital between the two countries and entirely out of keeping the idea of a single economic market.

Allowing shareholders to use imputation or franking credits arising from investment in the other country would come at a cost to the tax revenue of both countries, and the fiscal cost is much larger to Canberra because of the large imbalance in the flow of investment between the two countries.

The relative fiscal cost is widened further by the fact that the status quo increases the cost of equity capital for subsidiaries in the other country, at least at the margin, strengthening the incentive to gear them up as far as thin capitalisation rules allow.

So even though Australian shareholders would be the main beneficiaries of mutual recognition, the potential fiscal cost to the Australian Government has so far proven an insuperable obstacle.

Mutual recognition of imputation credits is a longstanding bone of contention.

But hopes of progress were raised by a joint statement by Prime Ministers John Key and Kevin Rudd 18 months ago outlining principles to guide progress towards an SEM.

They include the principle that outcome should "optimise net transtasman benefit".

The challenge posed by the forum on the imputation credits issue amounts to this: Were those just empty words?