Relief in sight for triangular tax problem

By BRIAN FALLOW economics editor

Revenue Minister Michael Cullen yesterday reported some progress with Australia over the longstanding "triangular" tax issue.

It relates to cases where New Zealanders own shares in an Australian company that earns income and pays tax in New Zealand.

The imputation credits that would be generated by the tax paid in New Zealand cannot be used by the Kiwi shareholders (because it is not a NZ company) or by its Australian shareholders (because it is not Australian tax).

Effectively the New Zealand shareholder is taxed twice on the same income. The equivalent problem arises for Australian shareholders in NZ companies operating in Australia.

Dr Cullen told a Deloitte's tax seminar that he and his Australian counterpart, Peter Costello, had agreed that their officials would develop a plan to relieve affected taxpayers.

It would be based on allocating imputation credits pro rata - the New Zealand shareholders would be able to claim their share of the credits generated by the tax the company paid here.

Similarly, Australian shareholders in a NZ firm paying tax across the Tasman would be able to make use of their share of the associated franking credits, eliminating the double taxation.

A discussion paper on the proposals would be out by the end of the year.

"The final agreement of the two Governments to such a mechanism is subject, of course, to its benefits outweighing its costs," Dr Cullen said.

Tax accountant John Shewan, speaking for the Australia NZ Business Council, said it would have preferred a "pure streaming" model.

This would have allowed all NZ tax paid by an Australian company to be streamed to its NZ taxpayers, and all Australian tax streamed to its Australian taxpayers.

Mr Shewan said: "While this is the preferred end game, the pro rata option represents good progress, and is better than nothing."