Prime Minister John Key says in his "heart of hearts" he believes the campaign for mutual recognition of imputation credits with Australia will be won, but warned business leaders not to hold their breath.
During the joint Cabinet meeting between the New Zealand and Australian governments in Sydney last week, Australian Prime Minister Tony Abbott agreed to send the issue to Australia's tax review group.
Imputation and franking credits are used to offset tax that companies have already paid on their profits. This offsets the amount of tax that shareholders have to pay on dividends.
However, because of a lack of mutual recognition of tax credits between New Zealand and Australia, when shareholders are on the other side of the Tasman, the profits are effectively taxed twice, making shares less attractive.
Key said today that while the issue would be one of affordability - in the short term such a move would lead to a fall in tax revenue - he believed that philosophically, Abbott supported the idea.
"Tony Abbott's view is that this is two countries, one economy, and he sees the economy bit as a very important part of the CER [Closer Economic Relations] plan, so in the end, if he could afford to get there, then actually, he'd push it along," Key said at his weekly post-Cabinet press conference.
"So that's really good news," Key said.
"The bad news part of the story is, I think at the moment it's just not his No 1 priority. So he's sent it off to the tax review. We'll see where that goes," Key said.
"I know it's been a longstanding issue, but I kind of think in my heart of hearts, eventually we're going to get there. You just have to play the waiting game."
Key acknowledged that mutual recognition of imputation credits would have a cost to New Zealand, as Kiwi shareholders in Aussie companies gained tax credits. But New Zealand had made it clear that it was prepared to take this cost because the Government believed that most of the lost revenue would simply be reinvested and would eventually come back as tax elsewhere.