Transtasman tax loophole could cost dear

By MAREE KEMPTHORNE and MAURITS VAN DEN BERG

If you own a large family business and are thinking about opening a wholly owned subsidiary in Australia, make sure you clearly establish the tax implications of the business structure you choose.

If you don't, you could be the victim of a tax anomaly that will cost you thousands - even hundreds of thousands. You might even find you're better off moving to Australia and closing your New Zealand parent company.

Profits sent back to New Zealand can be taxed at up to 60 cents in the dollar - despite a tax treaty.

The treaty does not provide relief to New Zealand-based shareholders when Australian tax has been paid by the company.

Companies with profits taxed in Australia have their repatriated profits taxed again in New Zealand when they are distributed as dividends.

The situation has been widely known among multinationals and public companies for years. But privately held businesses are often ignorant of the issue.

The good news is that privately held businesses have more options available than public listed companies. These break down into two main types, tax-efficient transactions and tax-efficient business structures.

Tax-efficient transactions include debt-funding overseas operations. This allows the profit of the overseas operation to be reduced by interest charges. As well, profits can be repatriated from overseas by way of debt reduction.

Transfer pricing transactions involve charging the overseas operation the maximum tax legal price for goods and services.

But businesses need to be well advised by a tax professional to ensure they do not overstep the mark.

The second type of transaction particularly involves business structures that allow the tax credits to flow through the business entity to the owners in New Zealand.

One example is the trading trust. In some circumstances, the total taxation applying to the trading trust can be kept at about 47 per cent.

Other options can reduce the total tax take to 33 per cent. What is critical is that action is taken before any operational structures are set up.

* Maree Kempthorne is a director, and Maurits van den Berg is an associate director, of Staples Rodway, Taxation Services.