Regulatory Revenues and the Choice of the CAPM: Australia Versus New Zealand

Abstract

This paper compares the revenues resulting from the Officer model, which is generally used by Australian regulatory bodies, the simplified Brennan-Lally model, which is used by the New Zealand regulatory body, the Sharpe-Lintner-Mossin model, which is widely used in other regulatory regimes, and a comprehensive model that is free of simplifying assumptions concerning the tax environment and the extent to which firms attach imputation credits to dividends. The question of which of the three simplified models is best depends upon the proportion of a firm's company tax that is passed through as imputation credits, the utilisation rate on imputation credits, the extent to which ordinary income is taxed more heavily than capital gains, and the issue of whether revenue underestimates are considered to be more important than revenue overestimates. If the utilisation rate is considered to be close to 1, ordinary income is considered to be more heavily taxed than capital gains, and revenue underestimates are considered to be more serious than overestimates, then the Officer model will be inferior to the other two simplified models regardless of the proportion of a firm's company taxes that are passed through as imputation credits. By contrast, if revenue underestimates and overestimates are considered equally significant, then the Officer model will be superior to the other two simplified models, in so far as at least 75% of a firm's company taxes are passed through as imputation credits.