By Pattrick Smellie
Dec. 13 (BusinessDesk) - The New Zealand and Australian governments should settle once and for all the long-running argument over the tax treatment of imputation credits, which currently penalises trans-Tasman investors, says a new report from the two country's productivity commissions.
The commissions suggest such a move could cost Australia as much as $1 billion a year in lost tax revenue and New Zealand as much as $220 million, while delivering a boost to economic growth that could be worth up to $US300 million a year.
The growth boost would disproportionately benefit New Zealand, which would gain around $196 million of new economic activity to an estimated $94 million for Australia.
The Australian government's objection to recognising trans-Tasman tax paid on company dividends, otherwise known as mutual recognition of imputation credits (MRIC), has always been that it delivers more to New Zealand than Australia.
That is because Australian investment in and income earned from New Zealand is far greater than the other way around. The system means Australian taxpayers face effective tax rates of 60.4 percent instead of the prevailing to personal tax rate of 45 percent, while New Zealanders with Australian investments face tax at 53.1 percent instead of the top personal tax rate of 33 percent.
MRIC emerges as one of the most carefully considered issues in a major new joint report issued today by the New Zealand and Australian Productivity Commissions on next steps in the Closer Economic Relations agreement, which will be 30 years old next year.
Prime Minister John Key and his Australian counterpart, Julia Gillard, are to meet next February and are seeking initiatives to advance the CER relationship vision of a trans-Tasman Single Economic Market.
On MRIC, the two commissions undertook economic modelling that "is more comprehensive than any undertaken in the 20 years that this issue has been debated."
"Nevertheless, uncertainty about the distribution of the welfare effects of MRIC for the two countries remains and is unlikely to be resolved by further economic analysis," they conclude, with New Zealand gaining more than Australia and investors in both countries benefiting at the expense of other taxpayers.
The New Zealand commission's modelling put the cost to the New Zealand tax base at between $135 million and $220 million, while the cost to Australia is projected at between $190 million and $750 million.
The Australian commission's research found a possible cost to New Zealand of $100 million to $160 million in tax revenue foregone, while Australia might lose between $275 million and $1 billion.
As well as the likelihood that New Zealand has substantially more to gain than Australia from such a move, both governments would end up with smaller tax takes, which would require either tax increases, spending cuts, or increased government debt.
Advances in CER are based on the principle of shared gains, and the commission's report concludes on MRIC that "in principle, each country could gain or one could gain while the other loses."
It also concludes MRIC would benefit smaller firms rather than large companies with access to global financial markets. Among the most vociferous supporters of the change was NZX-listed Contact Energy, which is majority-owned by Origin Energy of Australia.
"In the commissions' view, the long-standing debate about MRIC needs to be settled," the report says. "If governments conclude it is infeasible, they should announce MRIC will not go ahead rather than allow ongoing debate on an issue that cannot be resolved and could complicate progress on other business taxation improvements."
The report makes some 28 recommendations to continue the "direction of travel" towards creating a Single Economic Market between the two countries, many of them highly technical and relating to mutual recognition of qualifications so that goods and services can be supplied on the same terms in both countries.
At the highest level, the commissions conclude the two countries' biggest opportunities are not between them, but in looking outward together in negotiating new trade agreements such as the Trans-Pacific Partnership or building on the free trade agreement with the Association of South-East Asian Nations (ASEAN).
It identifies two regulatory barriers that would make the "already quite competitive" trans-Tasman aviation market more so, and discusses ways to deal with the fact New Zealanders who use their rights under CER to live and work long term in Australia are often disadvantaged by the way social security rules work.