Australia

The recent meeting between Finance Minister Michael Cullen and Australian Treasurer Wayne Swann raised the subject of mutual recognition for imputation and franking credits, again.

For some perverse reason this topic has been raised several times by New Zealand ministers and officials based on the quaint and frankly naive belief that the Australians are going to give New Zealand investors and companies an even break.

Give me a break There is more chance of an Aboriginal becoming Australian Prime Minister than there is of the Australian Government agreeing to mutual recognition. The fact is that mutual recognition would cost the Australian Tax Office billions in lost tax revenue – money it would rather spend on things like schools and health that would win votes.

How this works is beyond the scope of this column, but the brutal facts are that mutual recognition has far more going for it for New Zealand than it does for Australia, and in turn that means the idea getting the Australians to agree to it is a pipe dream.

A few weeks back I noted a recent paper by Casey Plunket from Bell Gully discussing potential reform to the imputation credit regime in New Zealand. Things have moved pretty fast since early June. In the past few weeks the Institute of Finance Professionals New Zealand has held forums in Auckland and Wellington to discuss a proposal to allow streaming of imputation credits generated by Australian companies to be given to New Zealand investors.

Separately, NZX has also come out with a proposal to adjust the imputation credit regime to make it more attractive for Australian companies to dual-list in New Zealand, via a tax credit. There is also a third proposal doing the rounds.

All this activity is happening because of a coming review of the imputation credit regime being conducted by the Treasury. From a purely domestic standpoint there is nothing wrong with the imputation credit regime; it is very efficient and ensures that New Zealand shareholders do not suffer the problem of double taxation on dividends paid by New Zealand firms. This would be fine if New Zealand were a "walled garden" and there were no foreign investment or New Zealand companies investing overseas. But New Zealand isn't a walled garden and cannot afford the luxury of being one.

AUSSIE INCENTIVES
As a country we are absolutely dependent on foreign investment to run our economy. The problem New Zealand faces is that there is a big incentive for Australian companies to make full takeovers of New Zealand companies and cut local shareholders out of the picture.

The strategy is for any Australian acquirer to load up on debt to the maximum amount allowed under the thin capitalisation rules and drive down the taxable profit of its New Zealand subsidiary to the lowest level possible. This maximises the profit earned in Australia (and the amount of franking credits to be paid to Australian investors) and minimises the imputation credits earned/tax paid in New Zealand.

If you look at the example of the ANZ Bank, which has many New Zealand shareholders, the dividend paid to an Australian tax resident is much higher than that received by a New Zealand tax resident because of the impost of double taxation.

The idea of change is to allow New Zealand investors access to the imputation credits generated from tax paid by ANZ in New Zealand. The NZX proposal is a variation on this idea and proposes a tax credit regime to offset some of the double tax hit for New Zealand shareholders of Australian firms.

Either proposal aims to achieve the same goal – a reduction in the grab for New Zealand companies by Australian-listed companies because the tax outcomes are so favourable to them. The hope is that imputation credit streaming or a tax credit will encourage Aussie firms to set up proper New Zealand listings and provide some much-needed depth to our capital markets. This is one idea among many being touted as solutions to the lack of growth in the New Zealand market.

Despite all the work on improving regulation, and efforts of NZX and the strong economy, the sharemarket is now smaller in relative terms than it was five years ago. As we move closer to an election the "hollowing out" of the sharemarket is being set as an election issue.

Whether it becomes one is hard to say, but with the advent of KiwiSaver and the PIE regime there is more focus on investment issues than previously. Fact is that what has been driving a lot of investment decisions both locally and in Australia has been New Zealand tax policy.

This is the big elephant in the room no one is really talking about. New Zealand's tax policy in respect of investment and wealth creation is still very flawed. We have seen some signs of improvement with changes to the rules for controlled foreign companies and the introduction of the PIE regime, but these are only first steps in what has to be a major overhaul of tax policy in this area.

SNATCHING DEFEAT
Improving the operation of the imputation credit regime as far as Australian companies goes is a step in the right direction, but it still feels like snatching defeat from the jaws of victory. Why? Because solving the issue of double taxation for one country still leaves many others where it is a problem.

What of New Zealand companies that earn income in Europe or North America? Much bigger markets than Australia but the impost of double tax on these dividends and income is not being addressed. The usual complaint of impact on tax revenue is given as a reason for not making changes to taxes on investments – but that is taking a short-term view when longer-term strategic decisions should be made.

Allowing streaming of imputation credits or having a tax credit seem like only half answers to a bigger problem. If that is all we want then that is all we are going to get. And is that really enough?

* Bruce McKay is an Auckland investment banker.

High food prices may be helping supermarket operators.

Australia's Woolworths, the second largest supermarket operator in New Zealand, today reported sales here increased by 10.6 percent in the June quarter, although only 2.2 percent when normalised and an extra week's trading is excluded.

Comparable sales rose 3.5 percent, which Woolworths said reflected tighter macroeconomic conditions and a decline in the growth of the overall market. The company reports profits next month.

Yesterday, Statistics New Zealand reported food prices in the year to June leapt 8.2 percent, the highest rise in 18 years.

Woolworths bought Progressive two years ago and runs the Foodtown, Countdown and Woolworths brands, whose combined sales rose 7.3 percent in the June year to $4.9 billion.

Chief executive Michael Luscombe said the New Zealand operations were off to a better start this new fiscal year despite his earlier comment that there is "no doubt that New Zealanders are doing it tough", as weak economic conditions persist.

Mr Luscombe said economic cycles come and go and he believes that New Zealand will recover. "We want to be ready for when that happens," he said.

Woolworths said its overall food inflation for the quarter in NZ was 4.6 percent, an increase from the 3 percent experienced in the third quarter, "reflecting increased price pressure on certain products in perishables and bakery and the ceasing of price deflation in produce". Sales growth has declined from 9.9 percent in the first quarter, 5.7 percent in the second and 6.2 percent in the third.

Australia's biggest retailer reported group sales worth nearly half of New Zealand's GDP. Sales including NZ, for the 53 weeks ended June 29, rose 10.7 percent to $A47 billion (NZ$60 billion). Mr Luscombe said fiscal 2008 earnings before interest and tax (EBIT) were expected to grow faster than sales while net profit is expected to grow in a range of 21 per cent to 25 percent. On a normalised basis, which removes the impact of the 53rd week, sales were up 8.7 percent.

Woolworths has been taking customers from rival Coles, which is undergoing a major facelift under new owner Wesfarmers, which has said it will take about five years to turn around Coles. Mr Luscombe said trading in fiscal 2008 has been extremely rewarding with the business performing well overall. "The significant re-investment in each of our businesses will continue to drive future growth," he said. "These key investment initiatives include the rollout of our 2010c format stores in supermarkets and our new format BIG W, which are both progressing well."

Woolworths is still awaiting a Court of Appeal decision on whether the Commerce Commission can both Woolworths and Foodstuffs from making takeover bids for The Warehouse. New Zealand-owned Foodstuffs and Australia's Woolworths each have 10 percent stakes in The Warehouse and successfully went to the High Court to overturn the commission's decision to block any potential takeover. The Commerce Commission appealed that decision and the court case was completed in early May. Interested parties expected a decision last month.

Group supermarket sales rose to $A40.313 billion in the year, to be up 8.3 percent on a normalised basis. Sales for the Australian food and liquor business climbed 9.9 percent to $A30.5 billion in the year, with comparable sales up by 6.3 percent. Woolworths opened 30 new Australian supermarkets during the year to bring its total to 780 Australian supermarkets, and 89 Dan Murphy's liquor stores.

Woolworths also owns the Dick Smith electronics chain. Fourth quarter sales in consumer electronics rose 16.3 percent, boosted by 5 new store openings in the quarter. Comparable-store sales rose 3.8 percent.

PEOPLE on Australian Workplace Agreements earn an average of $106 ($NZ123) a week less than their counterparts on collective agreements, the biggest study of the new workplace laws has found.

The study of 8343 people, half-funded by the Federal Government, shows workers on AWAs earned an average $1069.57 a week, compared with $1175.97 by workers on collective agreements, with both groups working an average 44 hours a week.

The Australia@Work report, by the University of Sydney's Workplace Research Centre, shows why the debate over wages and working conditions has been ranked by voters as a major election issue since the March 2006 Work Choices law began to take effect.

The most recent Bureau of Statistics figures suggest workers on AWAs are earning 9 per cent more than those on collective agreements. But the bureau only measured the first eight weeks of Work Choices, up to May 2006, while this new study is based on data gathered until July this year. The study found collective bargaining has been disappearing for many years and that the trend is accelerating, helped by Work Choices and AWAs.

Common law contracts are also growing in popularity. Employees on these contacts are overwhelmingly managers and executives, and their average salary is $1584.29 a week.

The report also reveals Australians have some of the longest working hours in the world. More than a fifth work 50 hours or more a week. Miners work an average 55-hour week, and 21 per cent of all workers wished they could work fewer hours.

The Howard Government introduced AWAs in 1996 to encourage employers and staff to directly negotiate pay and conditions, but the report finds that direct bargaining is increasingly uncommon. Forty-six per cent of all people on AWAs say they had no opportunity to negotiate their contents. Of 177,000 people who moved onto AWAs this year, 56 per cent said there was no negotiation. The authors suspect employers are using "non-negotiated AWAs" to move workers from award entitlements to the cheaper minimum legal standards.

As this trend emerged early this year, the Government introduced a fairness test in May to stop employees trading away entitlements like overtime and shift penalties without fair compensation. The report is the first instalment of a five-year study in which the same people will be interviewed each year. It was jointly funded by the NSW Labor Council and the Federal Government through the Australia Research Council. The report also found high-skill employees on
non-negotiated AWAs are working more paid and unpaid hours than those on individual contracts. Staff on these take-it-or leave-it AWAs "earn the lowest hourly rate regardless of skill level," the report says.

James Chessell, a spokesman for the Minister for the Minister for Workplace Relations, Joe Hockey, challenged the conclusions of the study. "We think the ABS figures are a more reliable guide than a study cooked up by [Research Centre director] John Buchanan and his cronies," Mr Chessell said.

MELBOURNE - Countries that refused to confront climate change and environmental sustainability could face trade barriers on global markets, Prime Minister Helen Clark told business leaders in Melbourne yesterday. Speaking in a country that has refused to ratify the Kyoto protocols on climate change and in which the environment is emerging as a critical issue in this year's federal election, she warned that governments could not afford to ignore the need for serious measures.

Early notice of potential trade action has emerged with pressure to penalise New Zealand food and wine exports for the energy required to transport produce to Northern Hemisphere markets.

"I do believe that those who do not take sustainability seriously are likely to face consumer resistance and even trade barriers in the future," Helen Clark told a Transtasman Business Circle lunch. We need to be able to confront credibly the challenge of campaigns like that around 'food miles', with its false and simplistic assumption that distance of itself implies unsustainability."

She also warned that environmental sustainability was an economic imperative of the 21st century: "There will be no prosperity without it." Her audience included executives from some of Australia's biggest corporations, now facing a growing political debate about climate change and sustainability that Prime Minister John Howard has warned will increase energy and other costs.

Canberra has declined to ratify the Kyoto protocols because of its heavy dependence on coal-fired energy and the potential impact that present targets for emissions of greenhouse gases could have on its economy, although Mr Howard is now looking at a carbon trading scheme. He has refused to set an emissions target until after the election. The Labor Opposition has said that if it won office it would ratify Kyoto and reduce greenhouse emissions by 60 per cent by 2050.

Although not entering the Australian debate, Helen Clark said New Zealand had realised that no one could sit out those issues and that "everybody has to get on board". "If you've ratified Kyoto, as we have, you don't have a choice," she said. If countries did not try to make a difference they risked being branded in key markets as dirty and non-caring. "Different countries will take different paths to a more sustainable economy because of different stages of development and of access to different local resources," Helen Clark said. "Naturally, Australia, with abundant coal reserves, will place more emphasis on the development of clean coal technologies than New Zealand, as hydro and geothermal power generation are more readily available options for us."

She said that sustainability was becoming part of the kiwi ethos and was being put into practice by the private sector in such initiatives as the Stock Exchange's proposed carbon trading platform, as well as the CarboNZero programme. Commercial benefits were emerging through participation in a credible programme to achieve carbon neutrality, illustrated by increased demand for New Zealand Wine Company products. And facing potential trade problems such as the "wine miles" debate, Helen Clark said New Zealand and Australia had a common interest in working to steer the debate into a more rational direction.

"We must work together to share ideas on tackling global warming," she said. There were opportunities to build partnerships.

Cabinet ministers reacted like headless chooks to news that major NZ exporters are upping sticks to Asia.  Instead of lashing out at political opponents ("Just take a cold shower please, Trevor Mallard"), they would have been better off calling a summit to find a common accord on how to avert a looming exchange-rate crisis.

There's no need to subject National to another round of wedge politicking, as Mallard is obviously attempting by focusing on his opponents instead of a rather serious problem. Ministers and their National counterparts tried to do just that at a secret meeting with the heads of the Reserve Bank and Treasury last year.

They got together to study a range of supplementary stabilisation instruments devised by Reserve Bank and Treasury officials. The secrecy was blown in February after some politicking from both sides.

On the agenda this time should be an investigation into non-politically correct options: These could include currency controls under study in much of Asia; Reserve Bank intervention in the dollar; pegging the NZ dollar to its Australian counterpart, and dropping interest rates to spark an outflow of hot money.

None of these are particularly palatable. They could all fail - and might attract another judgment from Bollard that they simply won't work.

What should go onto the agenda are the elements over which the politicians do have control. Primarily lavish government spending levels, which are increasing the pressure on monetary policy, as Bollard notes.

We are all paying for the 2005 electoral auction. Labour offered interest-free student loans and expanded its Working for Families tax credits. National countered with wide-ranging tax cuts.  Irrespective of the ideological differences between the respective policy stances, the impact is obvious.

The OECD suggests that, while supplementary stablisation instruments should be pursued, adjustments to fiscal settings provide an obvious alternative. It noted that the Treasury forecasts a significant fiscal impulse in the current and next two fiscal years, which is helping to underpin domestic demand. If the stance was neutral, the burden on monetary policy would be easier and interest rates could be lower.

It suggested there is limited ability to scale back spending plans. But there should be greater flexibility around 2008-09, which happens to be smack in the middle of the 2008 election bidding cycle.

The OECD doesn't say so outright, but if Labour and National could reach an accommodation for 2008-09 - or, better still, allow Labour to reduce committed spend in 2007-08 in return for a National ceasefire on opportunistic political attacks - much economic heartache may be avoided.

The outlook for exporters is not great. If the NZ dollar remains high, squeezed profits in the tradeables sector will spread via slower wage growth, job losses and postponed or forgone business investment.

The OECD notes three potential possibilities over where the burden of adjustment might fall:

* On exporters and import-competing producers;
* Through households deciding to cut back their consumption in response to the impact of higher interest rates; and
* The risk of a less benign scenario triggered by a sharp shift in foreign investor sentiment.

If investors decided to pull out of NZ dollar denominated assets, this could lead to a large, potentially disorderly fall in the exchange rate, which would restore the external balance and boost exporters' competitiveness.  This, in turn, would place households under renewed stress as the Reserve Bank would have to increase the interest rate premium to attract investors back into the currency.

Given the potential variables, we should not be surprised at the decisions by some of our leading exporters to shift production offshore.

Fisher & Paykel's plant move to Thailand had been widely telegraphed among the Auckland business community. But the forthcoming departure of this iconic company has touched many New Zealanders, as F&P had defied the odds by keeping its Auckland plant going for so long.

The decision to move closer to markets is a rational one. The alternative is to stay at home, be punished by crippling exchange and interest rates - and still be left without sufficient critical mass to achieve the economies of scale to stay competitive.

Other competitive pressures will emerge as we slip further behind Australia. The New Zealand Institute's number-crunchers released a graphic report at last week's Australia New Zealand Leadership Forum in Sydney.

Australia's GDP per capita (A$47,181) is about 30 per cent higher than New Zealand's (A$33,682), with NZ well below the OECD average. NZ's figure is now lower than all Australian states, including Tasmania.  Top performers are resource-rich Northern Territory (A$59,649) and Western Australia (A$58,688). The lowest is Tasmania at A$35,253 - but even that state heads off New Zealand on A$33,682.

Those low incomes are driven off the low wages are paid here, which have acted as an incentive to keep manufacturing exporters here.  But there's problems ahead. Each week, about 700 Kiwis join the exodus to Australia.

If companies want to stay here and develop high-growth technologically advanced industries to replace the departing manufacturing base, they will be hard-pressed to compete for highly-skilled labour.

Other figures presented to the forum suggest that a million New Zealanders now live offshore - roughly 20 per cent of our population.

Australia, with a population of 20 million, has just 800,000 offshore.  While Australia turns to our highly-skilled people to fill gaps, New Zealand's ethnic mix is changing as we turn to the rest of the world to cover shortages. The business implications from this are profound.

Mana Coach Services is being eyed by at least four transport operators, including three from Australia, keen to enter the Wellington bus market.

The High Court at Wellington stopped New Zealand Bus, which owns Stagecoach in New Zealand, from buying Mana last month because the deal would substantially lessen competition. Mana and New Zealand Bus had not competed for contracts in each other's patch.

Mana's owners, mainly associated with the Waddell family, told the court they would sell the company to another operator if the acquisition by New Zealand Bus was barred.

Mana operates a fleet of about 110 buses, including urban, and touring and charter buses. Stagecoach Wellington has about 370 buses under several brands.

Three Australian companies gave evidence during a two-week trial --Transdev-TSL, Veolia Transport and Swan Transit. All said they would look to enter the market by acquiring an existing operator. Bidding for individual contracts was too risky because of the small size of the contracts, and the lack of information about passenger numbers, revenue, costs, depot locations, and staff availability.

The director of Christchurch-based Ritchies Transport, Andrew Ritchie, told the court that the company had been in the Wellington market for a long time. However, the contracts for subsidised bus services, typically for between 10 and 15 buses, were too small to come in as a new operator.

Ritchies is New Zealand's largest privately owned bus operator, with a fleet of more than 600 buses. It operates urban bus services in Auckland, Timaru and Marlborough. It also has charter, tour and long distance services, including the Intercity brand. Mr Ritchie said Ritchies would not necessarily compete with New Zealand Bus if it bought Mana.

Transdev-TSL executive general manager, Ross Mackiggan said that, if it bought Mana, its strategy would be to compete with New Zealand Bus and take market share. French-owned Transdev operates trams in Melbourne, buses in Sydney and ferries in Brisbane. It unsuccessfully tendered to form a joint venture with the regional council to buy Wellington's urban rail service from Tranz Rail in 2002.

Veolia Transport director Peter Lodge told the court that it would look to buy an existing operation with about 150 buses to enter the New Zealand market. Mr Lodge said the New Zealand market was characterised by high entry barriers, but those became an advantage once the company was established. Veolia was Australia's largest private transport operator, including buses and trains in Australia's main centres.

It also operates the Auckland rail services in partnership with the Auckland Regional Transport Authority.

Swan Transit director Neil Smith said his company was interested in the New Zealand market, but it would require a contract substantially larger than the maximum existing contract size of 22 buses in Wellington. Swan Transit operates 283 buses in Perth, 560 buses in South Australia and ferries in Brisbane.