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Tax relief - finally

New Zealand investors will be able to enjoy franking credits from Australian investments soon.

Thursday, February 20th 2003, 6:51AM

by Rob Hosking

"A good extension, but not a huge change," is how the government’s announcement of trans-Tasman triangular taxation changes was described yesterday.

The changes – which have been discussed between Australian and New Zealand governments for several years now – will remove the double taxation of some investments in Australian and New Zealand companies that operate in both countries.

The issue dates back to the late 1980s, when both countries adopted the approach that income derived through a company is effectively the income of the shareholders, and therefore should ultimately be taxed at the shareholders’ marginal tax rate.

Under this approach, the company tax is essentially a withholding tax, and –when the company’s income is distributed through dividends or other methods, any additional tax is payable if the shareholder’s marginal tax rate is higher – or a credit is given against other tax if it is lower.

That provides for a system of franking or imputation credits which are passed through the domestic company through to the individual shareholders.

However, under the current law the imputation credits do not apply if the company is not a domestic resident.

The changes announced yesterday Finance Minister Michael Cullen and Australian Treasurer Peter Costello mean the imputation credits will be extended to New Zealand shareholders in Australian companies and Australian shareholders in New Zealand firms. The new laws will be introduced in May.

The New Zealand government will lose about $10 million annually in revenue; the Australians about A$25 million.

The move is a good one, but only a start, says Minter Ellison Rudd Watts tax partner Casey Plunket.

"For most companies it's not going to make much difference – it may make it a little easier for New Zealand companies to raise capital from Australian shareholders and for Australian companies to get New Zealand investors on board. "But the big question is whether they can build on it, and get to the next step – reducing New Zealand taxes on account of Australian taxes paid by a corporate group, and vice verse."

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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