Alex Malley: Key goes in to bat for imputation credits

The Government’s submission to the “Re:think” tax white paper process under way in Australia highlights the lack of mutual recognition of imputation credits as the most significant barrier to a seamless transtasman market and calls for visionary political leadership.

Prime Minister John Key displays the very leadership he’s calling for, firstly by making a submission to Australia’s tax reform process and secondly by putting this issue, in all its complexity, on the agenda.

With a pre-politics career in global banking and finance and a track record in office of tackling reform, including in the vexed area of taxation, Key is a regional leader of considerable clout.

Interestingly, the public debate in Australia about the income tax treatment of dividends has generally taken an all-or-nothing course – that is, if a government was to do away with our so-called full imputation system, then Australia would inevitably return to the classical system with double taxation on dividends.

The accepted orthodoxy is that this would inevitably lead to investors, whether they are individuals, corporates or super funds rethinking their investment strategies, as investment yields would be threatened.

Further, if dividend imputation was scrapped without some appropriate alternative, companies may be disinclined to pay as much income tax as they currently pay, thereby threatening future government company tax collections.

Even former Australian Prime Minister Paul Keating recently said the 28-year-old system had delivered a financial bounty to the nation – and Treasury were “nincompoops” for even considering its abolition.

It is true that, with Mexico and Chile, Australia and New Zealand are two of the last countries left with a full imputation system, but that’s not to say we have got the policy settings right.

As Key’s submission shows, there’s room for adjustment.

Key suggests that mutual recognition of imputation credits would be the “next leap forward in transtasman integration”.

In his submission he says: “The free flow of capital is the most economically significant outstanding issue for New Zealand’s and Australia’s shared vision for a seamless transtasman business environment.”

Visionary leadership is required because in the process of making the next leap forward, tax revenues for both governments would likely be eroded, a point highlighted by a 2012 Productivity Commission review.

Key is also pragmatic about Australia’s capacity to afford such a move, noting: “If Australia is not able to move now to mutual recognition, we seek at least an in-principle decision to implement mutual recognition when fiscal circumstances permit.”

Certainly the tax white paper should consider the mutual recognition issue.

It needs to explore, among other things, if there are better alternatives regarding the tax treatment of dividends that could be introduced to encourage investment and jobs here and across the Tasman.

For example, government modelling should explore different scenarios, such as where dividends were treated as exempt income for residents from both sides of the Tasman, or if dividend income should be subject to a savings income tax discount.

Until we have a clearer view on the answers to these questions, and whether or not Australia keeps its full imputation model, we cannot really begin to address the mutual recognition issue.

Our challenge is to create a tax system which promotes investment, encourages productivity, stimulates creation and enhances standards of living.