Australian Prime Minister Tony Abbott has agreed to include the issue of mutual recognition of franking credits with New Zealand in his Government's forthcoming Tax Reform White Paper. Australian bank investors could save up to A$900 million in tax credits if Australia were to recognise franking credits on earnings from the New Zealand arms of the Big Four banks.New Zealand Prime Minister John Key announced the move after he met Abbott in Sydney on Friday, and after their two Cabinets met jointly to discuss common economic, taxation, trade and welfare issues.Key said soon after Abbott's election last year that mutual recognition of tax credits was high on the New Zealand Government's agenda, given New Zealand saw significant benefits for Australian investors in New Zealand and the potential for higher Trans-Tasman investment.Investors in Australia's Big Four banks have the most to gain of any Australian investors if Australia were to recognise tax paid in New Zealand. The New Zealand units of ANZ, CBA, NAB and Westpac paid a combined NZ$1.330 billion in tax in the last financial year, and they sent back a total of NZ$1.269 billion worth of dividends to their Australian parents. The four New Zealand banks made over NZ$4.3 billion in pre-tax profits in the last financial year.Currently, the dividends streamed from the New Zealand arms of Australian companies are not eligible for franking credits for their Australian investors and vice versa. The Australian government has much more to lose from mutual recognition than the New Zealand government, given Australian investors have much more invested in New Zealand than the other way around.A 2012 study, by the New Zealand Institute of Economic Research and Australia's Centre for International Economics, found mutual recognition of tax credits would boost trans-Tasman GDP by a net NZ$5.3 billion by 2030, through increased investment, although most of these benefits would accrue in New Zealand.The study found that the current double taxation of earnings meant Australian equity investors in New Zealand faced an effective tax rate of 60 per cent, while New Zealand investors in Australia faced an effective tax rate of 53 per cent.Abbott's agreement to include franking credits in the White Paper was not expected, given previous Australian governments have baulked at changing the policy, which has been forecast to reduce Australian and New Zealand tax receipts by as much NZ$1.3 billion a year, with Australian losses making up 75 per cent of the total.Key acknowledged in a joint news conference with Abbott that any change may not be quick, given the pressures on Australia's forthcoming Budget."We're also very pleased that the decision has been made to send to the tax review the issue of imputation credits, and the prime minister made it quite clear, actually, that Australia is interested in that issue," Key said."Today may not be the day, from a financial point of view, to complete that, but it's very much an alive issue if we want to truly have an Australasian capital market which is the desire of both