NO.007

TRANS-TASMAN TAX BREAK-THROUGH

The Australian and New Zealand governments announced today that a new

tax arrangement which could boost trans-Tasman investment will come into force

soon.

“Both countries expect to introduce legislation in May to relieve the

double taxation of certain investments in Australian and New Zealand companies

that operate in both countries,” said Australian Treasurer Peter Costello

and New Zealand Finance and Revenue Minister Michael Cullen.

“These long awaited reforms reflect the commitment of both governments

to the continued strengthening of the Closer Economic Relations agreement between

Australia and New Zealand and to promoting trans-Tasman business,” Mr Costello

and Dr Cullen said.

“The reforms are aimed at what is known as the `triangular tax’ problem,

where Australian and New Zealand shareholders investing through a company

resident in the other country that earns income and pays taxes in their own

jurisdiction are unable to get imputation credits arising from the payment of

such taxes.”

“To resolve this problem, Australia and New Zealand will extend their

imputation systems to include companies resident in the other country.”

“Under this reform, Australian and New Zealand shareholders of trans-Tasman

companies that choose to take up these reforms will be allocated imputation

credits, representing New Zealand tax paid, and franking credits, representing

Australian tax paid, in proportion to their ownership of the company. However,

each country’s credits will be able to be claimed only by its residents.”

“These changes will remove an impediment to trans-Tasman business. Therefore

we are especially pleased to be able to announce them in this year of the twentieth

anniversary of the signing of CER,” Mr Costello and Dr Cullen said.

The expected date of effect of the new legislation is 1 April 2003

for New Zealand companies maintaining a franking account and Australian

companies maintaining an imputation credit account, although franked or imputed

dividends cannot be paid out until 1 October 2003.

For more information see Technical Appendix.

19 February 2003

Contact: Niki Savva

(02) 6277 7340

Technical Appendix

Details of trans-Tasman imputation (triangular) reform as

proposed by the Australian and New Zealand governments

General

New Zealand companies will be able to elect to maintain an Australian franking

account, subject to full compliance with the Australian provisions relating

to franking accounts.

Australian companies will be able to elect to maintain a New Zealand imputation

credit account, subject to full compliance with the New Zealand provisions

relating to imputation credit accounts.

Australian shareholders of New Zealand companies that have elected to

maintain a franking account and earn Australian income will be able to access

franking benefits on a pro rata basis (in proportion to their shareholding in

the New Zealand company) arising from the payment of Australian tax on

that income.

New Zealand shareholders of Australian companies that have elected to

maintain an imputation credit account and earn New Zealand income will

be able to access imputation benefits on a pro rata basis (in proportion to

their shareholding in the Australian company) arising from the payment of New Zealand

tax on that income.

Franking credits will arise in New Zealand companies’ franking accounts

for dividend, interest and royalty withholding taxes deducted in Australia.

They will arise in addition to credits for Australian income tax and franking

credits attached to dividends received.

Imputation credits will arise in Australian companies’ imputation credit accounts

for New Zealand taxes deducted from or paid by the Australian company.

Such taxes include non-resident withholding taxes on interest, royalties and

dividends and

non-resident contractors’ withholding tax.

DATE OF EFFECT

The application date is 1 April 2003 for New Zealand companies maintaining

Australian franking accounts and Australian companies maintaining New Zealand

imputation credit accounts. Companies will not be able to distribute the credits

until 1 October 2003.

The Australian exempting company rules

The `look-through’ approach that currently applies in relation to Australian

companies under the Australian exempting company rules will be extended to include

New Zealand companies so that they are `looked through’ to find the ultimate

effective owners. Companies that satisfy the extended rules will be able to

pass on the benefits of the reform to their Australian shareholders.

The exempting company rules will also be amended to:

• give Australian resident shareholders in a New Zealand listed company

  that is an exempting company franking benefits for franking credits attached

  to dividends paid by the entity; and

• allow the 100 per cent owned Australian subsidiary of a New Zealand

  listed company that fails the amended exempting company rules to nevertheless

  pass franking credits to its parent.

Existing credits

Franking credits accumulated by an Australian subsidiary of a New Zealand

company before 1 April 2003 will be available to frank distributions if the

subsidiary would not have been treated as an exempting company under the proposed

changes, had they applied before that date.

A company that is an exempting company immediately before 1 April 2003 will

have access to franking credits accumulated before that date, provided that,

during the period 13 May 1997 (when the exempting company rules came

into effect) to 1 April 2003, either:

• effective Australian ownership of the company, determined using the look-through

  approach, was always greater than 5 per cent; or

• the company was a 100 per cent owned subsidiary of a New Zealand listed

  company.

Imputation credits accumulated by a New Zealand subsidiary of an Australian

company before 1 April 2003 will be available to impute distributions

made by Australian companies after 1 October 2003.

JOINT AND SEVERAL LIABILITY

In Australia, all companies in a wholly owned trans-Tasman group will be jointly

and severally liable for the payment of additional tax and penalties when a

New Zealand company runs its Australian franking account into deficit and

defaults on the franking deficit tax payable.

In New Zealand, all companies in a wholly owned trans-Tasman group will

be jointly and severally liable for the payment of further income tax, penalties,

and interest when an Australian company has a debit balance in its New Zealand

imputation credit account at the end of the imputation year and defaults on

these liabilities.

In both countries, sectors such as banking, funds management and insurance,

where regulations prohibit such entities from assuming the liabilities of others

in the group, will be excluded from the joint and several liability.

Reducing the franking rebate for Australian shareholders

The franking rebate received by an Australian shareholder of a New Zealand

company who is eligible to receive credits for foreign tax (for example, an

investor with less than a 10 per cent shareholding) will be reduced to the extent

of the supplementary dividend paid by the New Zealand company.

Trans-Tasman group structures

Both countries will generally allow Australian and New Zealand group structures,

regardless of the percentage of ownership, to pass credits through to their

underlying shareholders.

Trans-Tasman group structures involving a third country/Consolidation

for imputation purposes only

In Australia, wholly owned trans-Tasman groups involving an entity not resident

in Australia or New Zealand will be able to pass through franking credits

to the Australian shareholders of a New Zealand company.

New Zealand will allow a consolidation election for imputation purposes, based

on the existing consolidation provisions. Such an election will also be available

to Australian companies within wholly owned trans-Tasman groups.

Commissioner’s discretion

The Commissioner of Taxation in Australia will be given discretion to revoke

an election to maintain an Australian franking account in certain circumstances

where a New Zealand company does not comply with Australia’s imputation

rules. The Commissioner of Inland Revenue in New Zealand will be given

a similar discretion.

Further details

Further issues may arise in the development of the legislation and will be

dealt with at that time.