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Trans-Tasman imputation and the need for mutual recognition

17 March 2009

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Our thanks to Sabrina Muck for writing this article, first published in the New Zealand Journal of Taxation. 

This article examines the double taxation of foreign dividends received by natural person shareholders,both in the trans-Tasman context, and with reference to the European Union approach.

The existing trans-Tasman imputation regime does not fully eliminate the double taxation on dividends. This double taxation of trans-Tasman dividends distorts investment decisions and does not facilitate a free flow of capital between Australia and New Zealand (NZ), as required by the objectives of Closer Economic Relations and a Single Economic Market. In the European context by comparison, the European Community Treaty guarantees the free movement of capital. The jurisprudence of the European Court of Justice in respect of this freedom has given rise to the principle that European Union (EU) Member States providing tax relief for domestic dividends must provide the same relief for dividends paid by companies of other EU Member States. It is argued here that the double taxation of trans-Tasman dividends could be eliminated by the introduction of a mutual recognition regime between Australia and NZ in respect of imputation credits. A discussion of mutual recognition is a convenient vehicle for examining the advantages and disadvantages of such a regime to Australia and NZ, particularly in light of the NZ Treasury’s submission supporting a mutual recognition regime to the review Australia’s Future Tax System, made at the invitation of the Australian Treasurer in October 2008.

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