On May 26th the IMF released The Potential Contribution of Fiscal Policy to Rebalancing and Growth in New Zealand and Potential Growth of Australia and New Zealand in the Aftermath of the Global Crisis, two separate working papers concerning aspects of the New Zealand and Australian economies, in the face of the receding effects of the global economic crisis.

The Potential Contribution of Fiscal Policy to Rebalancing and Growth in New Zealand, advises the New Zealand Government to rebalance its taxation policy to reduce the reliance on labor and capital taxation. Projections indicate that if appropriate alterations are made to shift fiscal focus to consumption taxes, New Zealand’s long-term growth potential will rise 1 percent above baseline. Although, the benefits will be negligible if the consumption tax revenues are redistributed via public transfers, such as benefits and welfare programs. The paper also suggests that Government spending be heavily reduced. As an example, the paper suggested that if Government expenditure be capped at 1 percent of GDP long-term economic growth could increase by 2 percent.

Potential Growth of Australia and New Zealand in the Aftermath of the Global Crisis discusses the impact of the financial crisis on New Zealand and Australia. According to the paper, New Zealand and Australia can be expected to undergo medium-term potential growth levels of 2.33 percent and 3 percent respectively. The Governments of both countries are warned to expect economic hurdles in the form of higher costs of capital. Although the difficulties could be offset by increased demand for commodities, especially from quickly recovering Asian economies.

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In the recently released April 2010 MYOB Business Monitor report Australian and New Zealand business owners were surveyed for their opinions on the current economic situation in both nations. The report showed that 39 percent of surveyed businesses reported a fall in revenue during the twelve months to July 2009, while only 35 percent of New Zealand firms provided the same response. Commenting on the difference, Tim Reed, MYOB’s Sydney-based Chief Executive, said that the survey shows that New Zealand business showed a great sense of resilience throughout the economic downturn.

The report revealed that 50 percent of New Zealand business owners expected the economy to improve over the course of the next 12 months. Of the 1000 individuals surveyed, 45 percent expected to see improved revenues throughout the year, while 37 percent are not actively looking for advice on how to improve their business’s performance. An encouraging 52 percent of survey takers reported the economic situation making it “easy” to run their business, an only 14 percent claimed it to be “difficult”.

In a negative aspect, New Zealand business owners expected fuel prices to exert the most significant pressure on their operations. Cash flows, interest rates and exchange rates were listed as the next most prominent concerns.

The New Zealand Government has begun to incorporate the DTA into the country’s law system through a signing of an Order in Council on February 17th, according to Peter Dunne, New Zealand Revenue Minister. Once the legal incorporation is complete for both nations the DTA will come into full effect. Australia is yet to commence their respective ratification process. Changes within the DTA are expected to begin in late 2010, two months after the expected conclusion of both countries’ ratification process.

The DTA which was a product of more than a year’s worth of negotiations was signed on June 29th 2009. The main features of the agreement are superannuation portability and several lowered withholding tax rates. On royalties the withholding rate levy will be cut by half to a level of 5 percent. The rate on interest will be lowered to 0 percent for all financial institutions, and remain at 10 percent for all other firms. Dividend payments will be categorized into one of three rates, ranging from 0 percent to the current 15 percent, differentiated by shareholding levels. Further, tax-exempt pension payments from either country will be regarded as tax-free in the corresponding nation.

At the Order of Council announcement, Peter Dunne described the DTA as a recognition and update of the already close business relationship between New Zealand and Australia. He continued on and said, “I expect the new DTA to bring significant benefits to New Zealand and improve certainty for trans-Tasman business.”

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At the quarterly Reserve Bank OCR Review, on January 28th, it was announced that the rate would remain at its current level of 2.5 percent. Alan Bollard, Reserve Bank Governor, said that the decision comes as a result of the economy remaining consistent with projections made in the December Monetary Policy Statement. He continued on to say that the annual CPI inflation is situated squarely in the target band and is expected to remain within the area over the medium term.

The New Zealand OCR has remained at 2.5 percent since April 30th, 2009. It has been unchanged through six OCR review announcements. Economists predict that the rate will be raised in mid-2010 if evidence surfaces regarding the sustainability of New Zealand’s current economic recovery.

Expanding on his decision, Alan Bollard explained that rising economic conditions across the world are driving the price of New Zealand commodities higher, aiding in the country’s recovery. Though the Governor expressed concern regarding the ability of Australia and Asian nations to maintain their economic upturns. Further, he claimed that the New Zealand Government’s fiscal and monetary stimulus policies have aided the country’s recover, but could be withdrawn in mid-2010, as the need for them declines.

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New Zealand Finance Minister Bill English and New Zealand Finance Minister Bill English singed a Memorandum of Understanding on the 16th of July, indicating that both governments formally acknowledge their intent to implement into law provisions for superannuation portability.

Legislative changes are still required before the superannuation portability can become a reality, this is expected to occur mid-2010. Conditions upon the portability are still to also fully be determined, although some have already been determined in regards withdrawal ages and the matter of Kiwisaver member benefits and kick-start amounts.

At the New Zealand Herald’s Moods of the Boardroom meeting, on the 14th of July, Finance Minister Bill English commented on potential repercussions of the Australian Government’s taxation system review. In light of the need to stay internationally competitive in regards to personal taxation and investment, any significant change in Australia’s policies could see changes in New Zealand.

Bill English made further comment about the need to stay competitive internationally because of the ease with which business and investment can be switched between Australia and New Zealand. He added further that while many countries like the U.K. or the United States have increased their taxes, this would be something that New Zealand would avoid.

An agreement in these talks could see a complete set of portability rules in regards to the superannuation of residents of either country permanently moving to the other. Bill English has stated that the envisaged set of rules will allow for the movement of Kiwisaver funds an appropriate compatible Australian counterparts. As the details have yet to be discussed between appropriate parties, future solutions are purely speculation, but it is thought that portability will work both ways with no strong restrictions, and serve to aid the Single Economic Market Programme between Australia and New Zealand.

The Australian Tax Office currently over A$13 billion in “lost accounts” in the superannuation system of Australia. It is believed that a significant part of this must belong to New Zealanders who have since transfered back to New Zealand. These talks could lead to these people being able to transfer their money across.

On the 29th of June New Zealand Trade Minister Tim Groser signed the new agreement on behalf of New Zealand in a Paris based ceremony. There is no date set yet to its enforcement as in it needs to be legally enacted in both countries. In New Zealand this will happen by the Order of the Council, which is expected to occur later in 2009.

The key changes in the new DTA, according to Tim Groser, are lower withholding taxes on dividend and royalty payments between Australia and New Zealand, changes to pension payments, and overall reduced compliance costs.

In the new DTA the standard withholding tax rate on dividends will be 15%, but, 5% for an investing company has at least a 10% shareholding in the company paying the dividend. This rate will be reduced to 0% if the investing company holds 80% or even more shares in the other company.

Pensions are also addressed, with pensions that are tax free in one country now being tax free in the other.

The way alcoholic beverages are taxed in Australia is currently under review by the Australian Treasury’s Secretary Ken Henry. The primary goal of the review is to investigate the possibility of simplifying and streamlining the way alcohol is taxed. As it stands, various types of alcohol all experience different taxes and rebates, a system that is claimed to be complex.

One aspect of the current situation is the Wine Equalization Tax (WET) which, since its introduction in 2004, has given small and medium sized winemakers a tax rebate of 29%. Some claim this system to be unfair and biased towards wine.

The abolition of the WET system will undoubtedly result in a marked decline of wine production and subsequently, higher prices for Australian wine both within Australia and its export partners, like New Zealand.

The SMFS schemes have claimed to allow early access to superannuation funds, deemed illegal. According to the ATO the schemes have been targeted at those perceived to be of lower English speaking capacity or in difficult communication situations. This allows the organisers to mislead the victim as to the legality and implications of early super-annuation access.

Tax Commissioner Michael D’Ascenzo voiced his concern to the plight of the victims, as both them and the organisers could be regarded as guilty and faces legal and taxation ramifications.

Self managed superannuation funds are in essence a trust fund which has elected to be a regulated fund with an investment strategy, acting as a superannuation scheme provider. While this is perfectly legal and in some cases beneficial, it allows access to all superannuation funds to the trustee. In this case invested money has been used on either personal spending or fraudulent investments.