Abstract:
In March 2002, the New Zealand and Australian governments released a joint
discussion document, Trans-Tasman Triangular Tax. The joint media statement
noted that:
Clearly, triangular tax reform requires a bilateral approach that
preserves the Australian and New Zealand tax bases and is acceptable to
business and government in both countries… The mechanism under
consideration is one that allocates both Australian franking credits and
New Zealand imputation credits to shareholders in proportion to their
ownership of a company.
This mechanism is known as the “pro rata allocation” model, and its adoption was
confirmed in February 2003.
The discussion document noted that the following alternative methods to relieve
triangular taxation had been considered by both governments, but were rejected:
apportionment, mutual recognition (including pro rata revenue sharing), streaming.
The Ministers invited interested parties to comment on the workability of the pro rata
revenue sharing proposal, and said that their advice would be taken into account in
deciding whether or not to proceed with this proposal.
This working paper examines the strengths and weaknesses of the pro rata allocation
mechanism and contrasts that solution with the streaming alternative. From the
perspective of a New Zealand individual shareholder, the analysis will demonstrate
the significant additional taxation advantages associated with streaming. Accordingly
it is possible that the latest initiative may not produce a feasible solution. Trans-
Tasman companies may continue to devise tax-driven strategies that provide their
individual shareholders with an after-tax rate of return which is comparable with what
they would have received under the streaming model.
Also examined, will be a range of debt, equity, and profit repatriation strategies which
are currently used to solve triangular taxation. These include floating special purpose
subsidiaries, the use of hybrid instruments, and techniques to minimise Australian
capital gains tax. The pro rata allocation model is unlikely to lead to any significant
decrease in Trans-Tasman tax-driven investment.
