New Zealanders should be demanding the opportunity to buy shares in the Kiwi operations of Australian banks without having to invest also in the parent companies.
Given the Australian government’s reluctance to move on trans-Tasman tax reform, thus failing to allow New Zealand investors in Australian companies credit for tax paid in Australia, it’s not sufficient to tell these investors they should be satisfied with shareholdings in the Australian banking parents, as some commentators have done.
Because New Zealanders can’t use Australian franking credits, it is not tax-efficient for them to invest in Australian-owned banks, even those which are dual-listed in Australia and New Zealand.
This raises the old chestnut of mutual recognition – or lack of it – and some serious money is now involved.
Just how serious was made clear last week when three of New Zealand’s four largest banks reported annual profits, meaning the big four combined made nearly $3.5 billion in cash profit for the 2011/2012 year.
Westpac New Zealand outshone its Australian parent, pulling in NZ$707 million in after-tax profit for the year to September 30 – a 22% rise on the previous year. But Westpac Australia’s net profit was clipped by 15% to A$5.97 billion.
BNZ’s cash profit was NZ$741 million, up 21.5% on the previous year; ASB was up 21% to NZ$685 million and ANZ, New Zealand’s largest bank, reported an after-tax profit of NZ$1.27 billion, up 17% on the previous year.
The Australian-owned parent companies of these banks currently attach either no, or varying levels of, New Zealand imputation credits to their dividends but, at most, these have been imputed only up to 19%.
Put simply, it means Kiwi Mum and Dad investors have had to pay tax on the profits made by the bank in New Zealand when those profits have already had New Zealand tax of 28% paid on them. In tax-speak, that’s double taxation – one of the fundamental tenets our tax system seeks to prevent.
So why are we revisiting this now?
Something called Basel III – a proposal that has taken the banking and regulatory world by storm since the global financial crisis, though out own banks have come through the crisis relatively unscathed. It means banks will hold more regulatory capital (think cash from shares issued, in its purest form) to absorb losses in any future crisis, to keep our banking system running smoothly and to avoid bank bailouts at taxpayers’ expense.
The Reserve Bank, in its latest assessment of the impact of Basel III, estimates the New Zealand tax base will benefit to the tune of about NZ$25 million net, per annum, as more capital is held by the banks, and income is likely to be derived, in New Zealand. The bank estimates the NPV (net present value) of this to be NZ$500 million.
Over time, that amount is real New Zealand tax, generating real New Zealand imputation credits and it should, and must, generate real New Zealand investor and shareholder value in a form where those imputation credits can be used.
Otherwise that value is lost forever from New Zealand’s capital markets. It will ultimately flow back to the IRD as New Zealand investors are taxed on dividends a second time round.
The answer may be as simple as raising the new capital required by the Basel III rules, or replacing existing non-compliant or inefficient capital by partially floating New Zealand banking shares.
The Australian parents may have various issues with this, including regulatory, control, accounting and legal considerations – issues which may have been factors in the delisting of New Zealand share structure historically.
But the economics generated by the Basel III changes may make it impossible to continue denying New Zealand investors their slice of the tax credit cake.
We probably don’t need the complex structures we’ve seen in the past. A getting-back-to-basics formula could be the answer to Australian and New Zealand banking capital requirements through an Australian sell-down in their New Zealand banking subsidiaries to meet their capital buffers and a New Zealand capital-raising to fill the New Zealand regulatory capital coffers.
Giving away a minority stake in New Zealand should not be the end of the world.
The time has come to achieve tax efficiency for New Zealand investors along with the choice of investing in two different, but related, beasts.
*Brad Wheeler (pictured above right) is a partner at Ernst & Young. The views expressed in this article are his own, not those of Ernst & Young.