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Trans-Tasman triangular tax - Chapter 2 |
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Distinction between direct and triangular investment into Australia and New Zealand
2.1 This chapter discusses the existing rules for the taxation of triangular income and identifies their possible deficiencies.
Distinction between direct and triangular investment into Australia and New Zealand
2.2 Imputation systems are designed to impose only one layer of tax on resident companies' income earned in their home jurisdiction and distributed to resident shareholders. The rationale is that because the resident company is merely an intermediary for its shareholders, taxation should be on the basis of economic equivalence rather than legal identity, to eliminate distortions in investment behaviour. The equivalent in economic terms is that resident individuals investing in their home jurisdiction would face only one level of taxation by their government. Without a system of imputation, the equivalent investment in economic substance would face taxation at the company level when the income was earned, and then again when it was distributed to shareholders.
2.3 Both countries' imputation systems, however, mirror the taxation of an economically equivalent investment only when residents make investments directly through a resident intermediary company rather than indirectly, and possibly incidentally, through a company resident in the other jurisdiction. Indirect or "triangular" investment by residents in their home country through a company resident in the other jurisdiction is taxed on the basis of legal identity rather than economic equivalence.
2.4 The outcome is illustrated by the calculations set out in tables 2 and 3. Table 2 shows the difference in tax treatment for an Australian resident, at the top marginal tax rate of 48.5%, investing in Australia through an Australian company or indirectly through a New Zealand company. It is only when Australian investment is made through an Australian company that the income is taxed at the investor's marginal rate.
2.5 Table 3 shows the difference in tax treatment for a New Zealand resident, at the top marginal tax rate of 39%, investing in New Zealand through a New Zealand or Australian company. As shown in the table, it is only when New Zealand investment is made through a New Zealand company that the income is taxed at the investor's marginal rate.
TAX TREATMENT OF AN AUSTRALIAN RESIDENT INVESTING IN AUSTRALIA THROUGH AN AUSTRALIAN OR A NEW ZEALAND COMPANY
| Australian company | New Zealand company[4] | |
| Income earned in Australia | 100 | 100 |
| Tax paid in Australia | 30 | 30 |
| Tax paid in New Zealand | 3[5] | |
| Australian income after tax | 70 | 67 |
| Less New Zealand NRWT[6] | (10) | |
| Cash dividend to shareholder | 70 | 57 |
| Imputation credit[7] | 30 | |
| Foreign tax credit | 10 | |
| Assessable income | 100 | 67 |
| Tax on assessable income | 48.50 | 32 |
| Less franking rebate | (30) | |
| Less foreign tax credit | (10) | |
| Tax payable | 18.50 | 22 |
| Net dividend received | 51.50 | 35 |
| Effective tax rate | 48.5% | 65% |
2.6 Trans-Tasman companies may sometimes overcome such distortions by transferring investments in the other jurisdiction[8] into a separate structure and seeking shareholders from that country. Although shareholding would be open to all investors, the benefit of being able to offer imputation credits to residents of the other country is a key marketing advantage. In practice, such structuring is an option only for large companies with significant operations in both countries, as it involves significant implementation costs.
2.7 The proposed reform will diminish the incentive to restructure by allowing trans-Tasman companies to attach Australian imputation credits if source taxation has been paid in Australia, and New Zealand imputation credits if source taxation has been paid in New Zealand.
TAX TREATMENT OF A NEW ZEALAND RESIDENT INVESTING IN NEW ZEALAND THROUGH A NEW ZEALAND OR AN AUSTRALIAN COMPANY
| New Zealand company | Australian company[9] | |
| Income earned in New Zealand | 100 | 100 |
| Tax paid in New Zealand | 33 | 33[10] |
| New Zealand income after tax | 67 | 67 |
| Less Australian DWT[11] | (10) | |
| Cash dividend to shareholder | 67 | 57 |
| Imputation credit | 33 | |
| Foreign tax credit | 10 | |
| Gross income | 100 | 67 |
| Tax on gross income | 39 | 26 |
| Less imputation credits | (33) | |
| Less foreign tax credit | (10) | |
| Tax payable | 6 | 16 |
| Net dividend received | 61 | 41 |
| Effective tax rate | 39% | 59% |
[4] This table assumes that no New Zealand imputation credits have been attached and thus New Zealand's foreign investor tax credit rules do not apply. These rules are further discussed in chapter 4.
[5] Tax in New Zealand: ($100 x 33%) $33 less tax paid in Australia of $30, giving net tax payable of $3.
[6] Non-resident withholding tax levied at 15%.
[7] Section 160AQT amount, Income Tax Assessment Act 1936.
[8] For a company in one jurisdiction looking to raise capital to make further investment in the other jurisdiction, a structure that could pass on imputation credits to shareholders is an option to be considered.
[9] As in table 2, this example assumes no franking credits have been attached to the dividend, and so it is liable to dividend withholding tax.
[10] No further tax due in Australia.
[11] Dividend withholding tax.