Fairfax and CBA breathing easier over tax changes

Australia's John Fairfax Holdings and Commonwealth Bank of Australia (CBA) are now breathing easier over tax rule changes they feared would be applied retrospectively to more than $500m recently issued bonds.

Both companies suspended trading of their more than $500m of redeemable preference shares (RPS) on the NZDX debt market yesterday morning, after reportedly being "outraged" that new tax rules might be applied to the bonds, potentially forcing thousands of investors to hand them back.

Later, Finance Minister Michael Cullen announced he was moving to close a loophole to prevent Australasian companies from allocating imputation credits to dividends paid to New Zealand investors if the payment of the dividends results in tax deductions in Australia.

Dr Cullen said legislation would be tabled in Parliament this week to amend income tax law to effect the changes.

The trans-Tasman imputation rules, which came into effect two years ago, came out of a joint Australia-New Zealand reform to reduce the double taxation of trans-Tasman investments.

Dr Cullen said the aim was for New Zealand imputation credits be available to Australian companies for their New Zealand investors and, correspondingly, Australian franking credits available to New Zealand companies for their Australian investors.

Dr Cullen said: "Some companies appear to be taking advantage of an unforeseen loophole in the rules.

"They are setting up schemes whereby imputation credits are directed away from foreign shareholders, who generally cannot use the imputation credits, and streamed towards a special group of New Zealand investors, who can. At the same time, the payment is deductible as interest in Australia.

"That is a form of imputation credit streaming and is unacceptable. The government is therefore acting to prevent this activity, which ultimately results in a loss to the New Zealand tax base."

Dr Cullen said the law change would apply to shares issued from yesterday.

The new rules would apply to dividends paid after April 1, 2006, from shares already issued within the same group of companies. Other existing non-group company issues (the public issues) would be allowed to run through to their maturity.

That let Fairfax and CBA off the hook, and late yesterday afternoon both companies issued statements to NZX that they understood the proposed changes would not apply to their RPSs and they lifted the trading halts.

Deloitte tax partner Thomas Pippos told NZPA that while Fairfax and CBA's use of the loophole wasn't "perverse" or "immoral", "it's not something that government or officials wanted people to do".

"As a consequence officials have closed down this potential opportunity and that's clearly their prerogative."

However he said the issue was how the Government chose to close off the loophole.

He said the decision to let the existing issues run their course, was "the totally logical thing to do".

"The fact that the Government has chosen to go down this path will probably mean that there's very little tension on both sides of the Tasman in terms of the announcement."

- NZPA