Hon PETER DUNNE (Minister of Revenue) : I move, That the Income Tax Bill be now read a first time. Later I shall recommend to the House that the bill be referred to the Finance and Expenditure Committee for consideration.

This bill marks the final chapter in a massive project that began with the recommendations made by the Valabh committee way back in 1992. I acknowledge the work that Arthur Valabh has done for various Governments through a number of consultative tax committees over the years. The recommendations of his 1992 committee were to refine the structure of the Income Tax Act and to progressively rewrite it, in plain language, part by part. This bill completes that task.

The purpose of the rewrite of the Act is to make the legislation easier to understand and apply, which in turn will make it easier for users to comply with their own tax obligations. For that reason, the drafting of the new legislation has been done in a new, plain-language style. Where possible, the bill avoids unnecessary legal or archaic terms and repetition between various parts of the Act. When referring to the Act, readers should be able to understand the way the tax rules have been written and apply them without confusion. Sentences have been shortened where possible, and the language used is more concise. Legal terms and phrases such as “hitherto” and “hereinafter” have been culled or replaced with more modern language. In addition, some areas of the legislation have been consolidated for greater clarity, while other changes in this bill aim to improve the overall structure of the Act. In the matter of style, the changes in this bill are significant, although the overall intention of the Act and its meaning remain the same.

As a result of the sheer size and complexity involved in this project, it has been completed in four stages. The first stage was the rewriting of the Income Tax Act 1976, which resulted in the Income Tax Act 1994. The second stage focused on refining the structure of the Act and rewriting its core provisions, and was completed in 1996—something, as Minister at the time, that I remember well. The third stage, the rewrite of Parts C to E of the Act, was completed in 2004. As I mentioned, this bill represents the fourth and final stage of the project. It contains the redrafted Parts F to the end of the Act. It re-enacts and consolidates Parts A to E, and it renumbers various sections contained in those parts.

Several intended small policy changes to the legislation are also included in the bill, and they have been subject to the usual public consultation process. Once enacted, this new Act will apply to income derived from the 2008-09 income year.

At 2,704 pages and in four volumes, this bill is a massive achievement for everyone involved. It reflects the work of a small team of public and private sector drafters and tax policy analysts over a number of years, under the watchful eye of the Rewrite Advisory Panel and its chair, Sir Ivor Richardsdon. They have done a magnificent job, and I pay a particular tribute to Sir Ivor for his vigilance and conscientious dedication to this task over a long period of that time.

In that regard, I also refer to comments made as recently as August by the Rt Hon Sir Geoffrey Palmer in an address to the Law Commission. He said: “The most innovative accomplishment in New Zealand tax law has been the re-writing of the tax legislation in user-friendly language and an easy to use format. This sounds a simple enough process, but it was so difficult that Australia gave up on it. … This whole process has been accomplished in New Zealand without much fuss and with modest expense. It is a considerable achievement.” I agree entirely with that sentiment, and add my congratulations to all of those who are involved in the rewrite project.

I underscore Sir Geoffrey’s point that we have now, with this legislation, completed the project. Our Australian counterparts failed to do so. The British have looked at rewrite legislation, and have also not managed to achieve that. Sir Ivor and his advisory panel, the rewrite team, and everyone who has been involved in this process can be very proud of the achievement that this bill represents today. So it is with much pleasure that I commend the Income Tax Bill to the House.

Dr the Hon LOCKWOOD SMITH (National—Rodney) : In rising to speak to the first reading of this quite momentous Income Tax Bill, I would like to make it very clear that National will be supporting this bill. After all, we started the process in the 1990s, and the House has heard the Minister of Revenue refer to some of the history. This work does go back a long way, with the passage of the Income Tax Act 1994 being really the first part of the process. As a former deputy finance Minister, like the Minister of Revenue I well remember some of the process along the way with the rewrite of the core provisions that were completed in 1996; so it went on.

In fact, although the work is an extraordinary piece of work, one has to recognise that for most people the more than 2,000 pages involved in this tax bill would really be viewed as good bedtime reading for insomniacs because, despite the simplification and the use of plain language, it is still quite heavy going. Having said that, I must say though that I also support what the Minister of Revenue has just said about the extraordinary contribution of Sir Ivor Richardson. Sir Ivor has a knowledge of and an ability to handle tax law that is certainly unique in New Zealand and possibly unique in the world. His contribution to this process has unquestionably been quite extraordinary.

As the Minister has just pointed out to us, the key aim of this rewrite is to reduce compliance costs by making income tax legislation more clear through the use of plain language. In fact, if one refers to the Government’s explanatory note of the bill, it is interesting that it believes the rewrite of this bill will improve voluntary compliance with our tax laws because taxpayers can more easily identify and observe their income tax obligations. National agrees with that objective and accepts that that argument, spelt out in the first paragraph of the explanatory note, makes a lot of sense.

But I have to say this Government tends to take one step forward and two backwards, because although this bill simplifies the structure and wording of the Income Tax Act, at the very same time that the Government is doing this, it is proposing new complexities that will add a whole additional layer of complexity to our income tax legislation. I refer to the proposals of the Government to change the taxation of international investment income, which will be part of this income tax legislation eventually. It will add quite massive complexity to this legislation, where so much effort has gone into simplifying it.

Also, the Government is discussing at the moment a number of issues around tax credits—namely, for research and development, export market development, and skills development. They are relevant to this bill, because Parts L to O of this rewrite cover our law around tax credits. Yet at the very time this bill tries to simplify and clarify our tax credit legislation, we have the Government proposing a whole raft of new tax credits.

National accepts that research and development, export market development, and skills development are worthy causes; there is no argument about that. But we think that some thought ought to be given to how best to make sure our businesses in New Zealand can pursue effective research and development, export market development, and skills development.

But it is interesting to note that back in 2000, after this Labour Government announced increased spending for research and development in the 2000 Budget, it wrote, in an official research and development document: “We opted for a grants approach because we considered that it was better, safer, and fairer than tax concessions.” Having considered the whole issue of the need to do more around research and development back in 2000, the Government said it would not go down the tax concessions path because grants are more effective and fairer. Here today, just a few years later, for some reason this Government has now done a big flip-flop and is saying: “How about we now bring in tax concessions for research and development?”.

Even the Government’s recent business tax discussion document stated: “It is generally undesirable to favour some business activities over others.”, yet here we have the Government saying that it will pick winners and will favour businesses that put more into research and development and into export market development. Businesses that put more into skills development will be favoured, compared with other businesses, regardless of how much they contribute to economic well-being, to economic growth, and to productivity improvement. There may be other businesses that can prove they have actually achieved greater productivity contributions, which is what this country desperately needs, yet they will not get the favoured tax treatment by this Government if it pursues these proposals. It is relevant to this bill, because Parts L to O cover all those issues of tax credits.

I say to this Government that it is worth reflecting on what John Shewan raised just the other day. Back in 1981, just before I came into this Parliament—just before Annette King came into this Parliament; I see she is actually listening to this—we had, and I want to get the facts right, 90 tax concessions listed in the 1981 tax info pack. People like Annette King would remember the chaos that caused the New Zealand economy and the way that it stifled New Zealand’s economic growth. Our economy lost direction, as businesses, including farmers, would pursue tax concessions, like supplementary minimum prices, instead of focusing on the market and on how to extract the greatest value out of the market. Instead of focusing on how to respond most effectively to the market, people ran their businesses to maximise the tax benefits available under various Government policies.

I make this point. In my 22 years in this Parliament I do not believe that any member of Parliament, any Minister in a Cabinet, has sat there and thought: “How can I dream up some tax concession that will screw this economy really effectively and will really produce a weird, perverse outcome that will result in the economy growing more slowly?”. I do not believe that any member of Parliament has set out to put in place tax concessions with the intent that they would do that kind of damage. Yet our history is littered with the perverse outcomes and consequences of politicians thinking that this little bit of tax remedy here, this bit of tax credit there, and this bit of tax help here will produce a good outcome. Our history is littered with those kinds of tax policies producing perverse outcomes and interfering with the way our economy responds to the market, reducing the effectiveness of our productivity improvements, reducing this country’s economic growth, and reducing the well-being that our economy can deliver to the people of this country.

The other area where the Government is now looking to add layers of complexity, at the very time it is simplifying tax with this bill, is the taxation of international investment income. Again, it is part of our Income Tax Act. The Government had set out—for some ungodly reason—to impose a capital gains tax on investments in former “grey list” countries. Of course, the Government ran into a wall of opposition from New Zealand taxpayers. It has now done a big U-turn and has brought back a proposal for Parliament to consider a 5 percent fair dividend rate. What a misnomer!

Clearly it still has an element of capital gains tax in it, because it is above the international dividend rate, averaged over any time period one wants to look at. It treats funds and individuals differently. It has a de minimus for individuals. It will see wives and children, even pets, treated as shareholders. It leads to exemptions for certain companies, like Guinness Peat Group. It leads to a complexity of policy that even one of the Government’s key policy advisers has said he would probably not attempt to comply with it; he would just pay 5 percent across all investments, because it is too complex to try to comply with. Less honest people will avoid it, because it is so complex. They will avoid it and not pay their taxes.

Although we support this bill, which seeks to simplify and clarify our tax law, it troubles me that this Government takes that one step forward, while it takes two steps backwards with the way it is looking at the moment to introduce a plethora of tax credits and a very complex system for the taxation of international investment income.

Hon PAUL SWAIN (Labour—Rimutaka) : I rise to speak in favour of the bill. A number of good comments have been made to date, so I will not prolong the debate, but will just say that this bill is non-controversial, even though the previous speaker took us into some controversial matters not related to the bill. This is essentially a technical rewrite of our Income Tax Act, and as a result there are no policy changes in it. The strange thing, I suppose, for the select committee is that it is the one time that a select committee has to make sure that no policy has changed. This will be an interesting perspective for a select committee, given that most select committees are looking to ensure that the policy changes that have been taken to the select committee by legislation are implemented.

The purpose of the rewrite has been to clarify the tax code by redrafting the Act into modern plain language, while retaining the original meaning and intent of the provisions. I remember always that great quote from John Shewan, a tax consultant, who said on radio: “Explaining tax law to people is like trying to explain television to a goldfish.” I hope that as a result of this rewrite, the goldfish will finally get it.

As Peter Dunne, the Minister of Revenue, has said, this has been a project over four stages, begun by the previous National Government in the 1990s and today heading towards completion under a Labour-led Government and under the guidance of Peter Dunne. As has been said, the bill we are debating today is really a rewrite of the remaining parts of the Act, and this represents the fourth and final stage of the project. The changes contained in the bill are of two kinds: changes made in the interests of simplicity and clarity, and changes approved by the rewrite advisory panel in consultation with professional tax groups.

So this is a major piece of work, and a number of people have been involved in this project for a very long period of time: Ivor Richardson, who has been mentioned; Arthur Valabh; and others. This is world-leading legislation and I commend it to the House.

R DOUG WOOLERTON (NZ First) : Likewise, New Zealand First supports the Income Tax Bill. As previous speakers have mentioned, the only thing small about this bill is the title. I think these things come in inverse proportion. Often we have bills that are only a few pages long, with huge titles; this bill reaches to four volumes and 2704 pages—if I heard the Minister right—and has a very, very short title. I do not personally know Sir Ivor Richardson, but if he was able to shepherd this thing through, to make sense of our tax law and bring it into modern-day language, he must be a mighty man indeed and I commend him for the work he has done.

It is important that tax law in New Zealand is in simple, plain language that is reasonably easy to understand. We pride ourselves in this country on the high proportion of tax compliance and the fact that it is voluntary tax compliance. I think most people in New Zealand understand that tax is fair. They can see where the money goes; it goes into our roads, our education system, our health system, and many other things that at some point in our lives—and that is the important thing—we participate in to quite a heavy degree. When we are younger we participate in the education system, and we know that in the last years of our lives it will be the health system that we draw down on quite heavily.

It makes me annoyed sometimes when such an emphasis is put on avoiding tax. I think people should not exactly rejoice in the fact that they pay tax, but they should recognise that in a fair and moderated society that wants to see a reasonable amount of egalitarianism we will have to pay our fair share of tax. If one person does not pay tax, another will have to make up the difference. So it is very important that the taxation system is understood and that people have a will to comply with it. Otherwise it becomes a hugely expensive burden on people.

In saying that, I commend Mr David Butler, a man who has come to our shores and run the Inland Revenue Department for a number of years and is now heading off to Paris. As a member of the Finance and Expenditure Committee—and I am sure Dr Lockwood Smith would agree with me—I have felt that Mr Butler understands more than anything else the nature of taxation in New Zealand and that we should, in all circumstances, resort to such things as law courts only at the last hurdle. I am sure that Mr Butler would have some sympathy with Dr Lockwood Smith in his desire for such things as simple tax; we have talked to Mr Butler about these issues. But, at the end of the day we do want other things in society, as well. Taxation must be a part of our lives, because in this country we are not prepared to see such things as beggars in the streets. We take care of this through a far more caring society than perhaps is the case in other countries that do not pay so much.

New Zealand First also makes no bones about the fact that we agree with the policy of incentives in the tax system. I know that runs against some other parties. But I worry when we talk about extremes. It is true that previous regimes went to extraordinary lengths and that we had an overly complicated system of carrot and stick, shall we say. In the reforms of the 1980s, post these extremes, in my opinion we went far too far the other way. This has cost the taxpayers in various ways. I can think of Air New Zealand, the railways, and many other things where we reacted too strongly and the reforms went too far and too fast—certainly in my opinion, and, I suggest, in the opinion of New Zealand First.

So New Zealand First is in favour of tax incentives. We welcome them because we believe that if they are used moderately and they are modest in what they want to achieve, they provide very, very good signals to the population of New Zealand. We believe that the signals in the taxation system can be read more readily and reacted to faster than almost any other signal that is put into the system. In this society we cannot get into the business of paying people to act in a certain way, but we can certainly incentivise their behaviour through the tax system. New Zealand First believes that it is right that we do, and the current Government of the day is moving in that direction. Like I said before—and to agree with Dr Lockwood Smith to some degree—we do not believe that tax incentives should be as extreme as those of the past.

But to mention one extreme behaviour as far as finances are concerned and not to mention the other extreme is, I think, putting a wrong picture on it. Certainly with MMP, as we have it today, we have less opportunity to go to extremes because consultation with a number of parties is always required to get legislation to this House, let alone through the House. To us, the fact that many parties must be involved is one of the safety valves of the MMP system,.

I was explaining to somebody the other day that if the Government needs to pass legislation—and we all know this, of course—obviously it will consult the biggest Opposition party first. If it gets the numbers there, that is great, it can just move ahead with confidence and that is the case in this bill. If the Government has to involve other parties—if the main Opposition party is not keen to comply—then it has to go further and so on and so forth. It is that very important process that makes it far harder for extreme Government behaviour that may have manifested itself in past years or decades to occur today. Thank heaven for that.

Dr PITA SHARPLES (Co-Leader—Māori Party) : The Income Tax Bill is the final instalment of an income tax legislation tidy-up project. It is a mammoth bill with, indeed, volumes of parts and clauses, transitional provisions, binding rulings, and accrual determinations. Let me say from the outset that the Māori Party places great emphasis on policy advancements in the area of income tax. Our motivation is clear: we want to raise the standard of living of all individuals in this country, especially those on lower incomes.

We know that 1.9 million taxpayers in the 2004-05 financial year earned $25,000 or less. It is evident that the fruits of economic growth so frequently lauded in this House have not resulted in the equitable distribution of wealth. We question the fairness of tax rules that allow the wealthy to receive income free of tax while those on low incomes pay tax on every dollar they get. We believe that tax reductions should be driven by improved efficiencies and savings in the public sector. Our long-term aspiration is to review all Government systems and expenditures, including outgoings for, and on behalf of, the Māori partner to the Treaty for efficiencies and savings that can be identified. These are the goals and indicators that the Māori Party would look to a healthy income tax infrastructure to provide.

Yet what do we have here? The bill is merely a redraft of existing policy. In effect, the re-write project illustrates the futility of concentrating on the somewhat trivial details when the wider tax context and the thinking that drives it is in crisis. It is an opportunity lost. The explanation for the changes is that the rewrite project will be completed by re-enacting Parts A to E, consolidating amendments made to those parts since the commencement of the Income Tax Act 2004, and then rewriting parts F to O in the same style as Parts A to E. Well, I suppose that means something to Mr Dunne and this Labour-led Government, but what does the bill actually do? The Māori Party, of course, supports the move to make the legislation clear. If taxpayers can understand their obligations, by those obligations being set out in plain language and within a consistent structure, it is much more likely that they will be income-tax compliant. But the basic problem is that the touch-up job that is being applied today will happen without any changes to the essential policy content.

Where are the proposals to raise the maximum level of income that a person may earn before tax kicks in, thereby ensuring that beneficiaries and low-income earners do not pay tax? They are not in this bill. Where are the strategies to reduce personal tax rates across the board? They are not in this bill. Admittedly, some minor changes have been made. They are changes made in the interests of clarity or simplicity and changes approved by the re-write advisory panel in consultation with tax professional groups. There is also a rather bizarre bit of legalese, which is included as a cautionary note in this bill. It states that if in the initial years of the Act’s operation it is found that the Act produces a different result from that which would have been produced under the current Act, the Government will promote a remedial amendment to correct the position from the date of the commencement of the new legislation. Now, I am trying to work that out. Is that a guarantor’s clause for the Government so that if it all turns to custard, then the Government can write it off as a United Future mistake and claw back some brownie points with the voters?

The Māori Party will not be supporting this bill. We have been looking at the policy context around income tax in quite a different way to a simple cosmetic exercise to dot the i’s and to cross the t’s. We have been asking questions around the very myth of the benefits of growth. In current philosophies, the tax argument appears to be confined, on the one hand, to cut taxes for more investment and therefore more growth or, on the other hand, to maintain taxes for social services. But the key question is the very basic relationship between tax and who gets rich and who stays poor. In whose interest does the current tax policy really work? Where does the money come from for the growth and who really benefits from it? If we look at tax with quite a different set of eyes—say, under the framework of a genuine progress index—we may find that those who are being rewarded by tax incentives are actually those who are exploiting natural resources. Is that really progress? How does the bill fit with the Government’s newly acquired concern for the environment and its new green image if those tax incentives for environmental exploitation remain? As I have already said, an opportunity for change has been lost.

As this House should be aware by now, the policy framework for the Māori Party is informed by our commitment to the awareness of genealogy of whakapapa of origin. We believe that everything has a whakapapa, and everything has a genealogical base. This tax bill has a whakapapa, and perhaps we should consider its parentage and its origins, which are the crossing of welfare State tax collection to fund particular policy objectives with the enterprise State tax reductions and the introduction of user-pays. But what has been the result? The result has been significantly lower tax for high-income earners, but actual tax increases for “Joe Average” and the poor. By 1992 the changes made to tax policies meant that high-income earners paid 17 percent less tax and middle-income tax earners paid 8 percent more, while those with the lowest incomes paid a staggering 35 percent more tax. Jumping forward to the present day, those who have a student loan to pay off will likely pay in excess of 40 percent of their income in some form of tax: income tax; GST; student loan repayments; and, now, KiwiSaver contributions for their retirement. This partnering has not been fruitful for a great number of people.

We have also scrutinised the bill to see whether this framework will produce the desired results of a creative community where the benefits, including financial wealth creation potential through technological creativity, are retained in the ownership of our citizens. We are thinking of the long-term vision, not the tidy-up of today. We see tax incentives that will encourage entrepreneurship and make more surplus finance available for new business formation and for reinvestment. The Māori Party is motivated by the desire of tangata whenua to attain growth and sustainable prosperity measured by a genuine progress index. We are looking for long-term, visionary approaches that maximise the wealth evident in our cultural capital, our enterprise, our entrepreneurship, and our greatest resource, our people. This Income Tax Bill does nothing to shift our sights forward, and because of that the Māori Party will not be voting in its favour.