'Fish hooks' in Tasman tax covenant

Kiwis are being warned to beware of "fish hooks" buried deep in the revised trans- Tasman tax treaty because they have the potential to significantly weaken offshore investment tax gains.

Viewed on face value, tax experts said the reciprocal tax agreement agreed last weekend between Australia and New Zealand had the potential to reduce trade barriers and fast- track moves toward a single economic market.

However Ernst & Young tax director Aaron Quintal said: "the problems lie in the subtlety of the detail."

Double tax agreements are bilateral treaties that remove tax obstacles to cross-border trade and investment and prevent businesses being taxed twice on the resulting income. They also give greater certainty about how cross-border investment income is to be taxed, reduce compliance costs and lower tax on some income

One of the main features of the new treaty will be lower withholding taxes on dividend and royalty payments between the two neighbours, costing the Crown about $10 million a year.

While the standard withholding tax rate on dividends will stay at 15 per cent, it will be reduced to 5 per cent for an investing company that has at least a 10 per cent shareholding in the company paying the dividend.

The rate reduces to 0 per cent if the investing company holds 80 per cent or more of the shares in the other company and meets other criteria.

"Although they don't seem to initially spell it out, there is limitation on the 0 per cent tax rate," said Deloitte tax managing partner Thomas Pippos.

"A clip-on to this is it applies only if you're a publicly listed company or a subsidiary of a publicly listed company. It's not as bright a line as people may think."

Mr Pippos said New Zealand companies could achieve the 0 per cent tax rate if they fully imputed their dividends, made possible through the existing Foreign Investor Tax Credit regime.

According to tax experts, the current agreement with Australia, which dates back to 1995, is the most important of all New Zealand tax treaties given the economic relationship and volume of investment between the two countries.

About half of all direct investment from New Zealand goes into Australia, as does about a quarter of all our outbound investment. Similarly, about half of all direct investment into New Zealand, and almost a third of all inbound investment, comes from Australia.

"The other big fish hook is concerned with what creates a permanent establishment in a country," said Mr Quintal. "This will likely catch some businesses out if they're not careful."

Up till now a New Zealand business was taxable on its Australian business profits only if it had a permanent establishment there, but that has been widened and now included "negotiate or sign" contracts.

Mr Quintal said that, before the revision, "if a New Zealand business just happened to sell some kiwifruit to Australia, it doesn't have to pay their tax. If the fruit is sold through an established branch it is taxable.

"That's all changed. Now negotiating a contract in Australia will be enough to drag you within the Australian tax net."

Other key changes included tax-free pensions and superannuation remaining free of tax when people moved between the two countries. Secondments of up to 90 days each year will not now be taxed.

With pension portability, DLA Phillips partner Sue Brown said people needed to consider advantages such as the preferential tax treatment Australian schemes received during the accumulation phase.

- © Fairfax NZ News