Australia cut corporate tax rate slowly; imputation credits unchanged

Sunday 2nd May 2010

Finance Minister Bill English's options for corporate tax reform in the May 20 Budget are clearer following tonight's Australian Government announcement that it will cut its company tax rate to 28% from 30% over the next five years, and keep the dividend imputation system.

Both are important decisions that will inevitably guide the New Zealand government's desire to lower the 30% corporate tax rate and become more competitive with Australia. The imputation decision is particularly significant, because the Labor government of Australian Prime Minister Kevin Rudd has explicitly ruled out changes to the imputation regime that its Henry Review of the Australian tax system said should be considered in the medium to long term.

That commitment will remain in place as long as Rudd wins the general election scheduled for later this year. However, there is also no sign of an Australian change of heart on the trans-Tasman cross-recognition of imputation credits, sought by Wellington ever since the regime was created in the late 1980's, and resisted as a drain on the Australian exchequer by Canberra. The announcements today include lowering the Australian corporate tax rate to 29% in 2013/14 for small to medium-sized businesses, and to 28% from the current 30% from 2014/15.

That timing appears to take the pressure off English for a corporate tax rate cut in this month's Budget, which will include personal tax cuts to offset an anticipated rise in GST to 15% and a clampdown on generous investment property tax treatment.

English has previously touted the possibility of an earlier corporate tax cut in New Zealand than Australia. In a section on policies the federal government "will not implement…at any stage" is included: "remove the benefits of dividend imputation."

The review itself says Australia and New Zealand are the only countries operating dividend imputation, but that it "continues to provide benefits such as neutrality around financing and entity choices."

"It also enhances the integrity of the tax system by reducing the benefits of minimising company income tax. These benefits mean that dividend imputation should be maintained in the short to medium term, the Henry review says.

However, the benefits of dividend imputation have declined as the Australian economy has become more open, and if the trend of increased international openness and integration with international capital markets continues, "alternatives to dividend imputation should be considered."

These could include switching double tax relief from the shareholder to the company; a partial integration system, with the company income tax rate reduced at the same time as more limited relief is provided to dividends; or moving to a company or business level expenditure tax. "While imputation is maintained, imputation credits should continue to be provided only for Australian company income tax paid," the review said.

On economic integration with New Zealand, the review panel says "consideration could be given to the appropriate degree of harmonisation of business income tax arrangements between the two countries, with bilateral mutual recognition only one element of this broad consideration."

Businesswire.co.nz

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