Australian tax review - keeping its powder dry

Finance Minister Bill English last year warned the New Zealand government might have to move more quickly on tax cuts tax "if the Australians decide to do something clever."

In the event, the Australian government yesterday opted to keep quite a lot of its powder dry.

The big headlines were on the 40% resources levy and dropping the company tax rate to 28% between now and 2014 - much lower than the 25% the country's Tax Review, conducted by Secretary of the Treasury Ken Henry, recommended.

On the face of it, they do not suggest anything particularly brilliant.

But the company tax cut looks like the start of longer journey - whether that journey ends up being continued by the Kevin Rudd Labor government or a future Liberal government.

And other, less attention grabbing items are also significant.

The Henry review recommended keeping the imputation regime - for now - and also against mutual recognition of imputation credits.

The report notes that New Zealand and Australia are the only two OECD countries still with dividend imputation, and that the advantages of dividend imputation are not what they were.

The system does 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."

That means keeping it in the short term.

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

Changes could include switching the relief from double taxation to the company instead of - as now - the shareholder.

Another option is the more radical move to an expenditure tax on business.

The report firmly recommends against mutual recognition of imputation/franking credits on the grounds this would damage the integrity of the tax system.

However, it does suggest looking closer at the issue in the trans-Tasman context.

"As Australia's dividend imputation system affects the allocation of investment between Australia and other countries, mutual recognition of imputation credits between Australia and New Zealand has been raised in the context of developing closer economic relations.

"To further economic integration, 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."

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