Second Reading
Hon PETER DUNNE (Minister of Revenue)
: I move,
That the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill be now read a second time. I do so with a great deal of feeling, because I am delighted that this very large, omnibus taxation bill has at last progressed to its second reading. It has taken a great deal of time and a huge amount of hard work to bring the bill to this point. It was originally introduced in July of last year and referred in August of the same year to the previous Finance and Expenditure Committee for consideration. It was one of nearly 80 bills that were before Parliament and lapsed when the House rose for the general election. It was then reinstated by the present Parliament and resumed its place before a new Finance and Expenditure Committee. A major factor in the slow progress of the bill, which introduces a number of important, highly technical reforms, has been its sheer size, complexity, and scope.
The bill attracted a large number of submissions, many of which were equally very long and extremely technical in nature. The resulting officials report to the committee had to be spread over several volumes in order to deal fully with the points made in the submissions. The bill as reported back to the House is now over 800 pages long. In its report the committee commented that the bill’s size, as well as the depth and breadth of the material it covered, made its consideration “more difficult than it might have been otherwise”—a very euphemistic statement, I think—and it placed the committee and its processes of consideration under considerable pressure. The committee also expressed its preference for future taxation bills to be of a more manageable size, with major reforms divided into separate bills. I concur with that view, and it is my very sincere hope that in future we can keep our taxation bills to a more manageable size and scope.
I note in passing, as a start, that the Taxation (Consequential Rate Alignment and Remedial Matters) Bill that I introduced on 21 July consists primarily of consequential and remedial legislation, and at about 50 pages in length it is one of the smaller taxation bills I have introduced in recent years. Many of the committee’s recommendations relate to the application dates of specific measures, which needed changing as a result of the time that has passed since the bill was introduced. Other recommendations fine-tune the proposed legislation so that it achieves the desired policy outcome.
The central feature of the bill is the first stage of the reform of New Zealand’s international tax rules. This reform is intended to help New Zealand - based companies compete more effectively overseas, and to encourage New Zealand businesses with international operations to keep their head offices in this country. The reform represents a complete change in the way we tax the offshore income of our controlled foreign companies, and by that I mean foreign companies that are controlled by New Zealand residents. In doing that we are better aligning our international tax rules with those of our main trading partners.
The bill exempts the active income of controlled foreign companies from domestic income tax. Active income is income derived from activities such as manufacturing and agriculture, in contrast to passive income, which is income from things such as rent and interest. To reduce compliance costs where there is limited risk to the tax base, the bill proposes some exceptions to the rule that passive income will be subject to New Zealand income tax. For instance, controlled foreign companies operating in Australia, which is usually the first destination of New Zealand businesses that decide to expand overseas, will generally not be subject to income tax in New Zealand, whether their income is active or passive. Likewise there will be an exemption for controlled foreign companies that pass the active business test set out in the draft legislation. They will not be required to attribute their passive income if it is less than 5 percent of their total income.
The committee has recommended some changes to the reform’s application date as originally proposed in the bill. It will now apply to income years beginning on or after 1 July 2007. One of the most important changes recommended by the committee is that the 5 percent active business test, which is based on accounting information, be simplified. These changes will make it possible for businesses to place greater reliance on their accounting information, and will require fewer adjustments on their part.
The committee has also recommended a number of other technical changes to the proposed reform. They include relaxing the carve-outs for small and medium sized enterprises in the interest allocation rules, and taxing deductible and fixed-rate foreign dividends as non-exempt dividends instead of interest. I am satisfied that these and other changes recommended by the committee will help to reduce compliance costs associated with the new legislation, while maintaining its fundamental design, structure, and policy intent.
The bill also modernises the tax rules relating to the life insurance business, which relate to 1990. Then, term insurance was less than 10 percent of the life insurance business, so it was not a major consideration in the development of the present tax rules, although today it constitutes over 50 percent of the business. Under the current rules, life insurers are effectively not being taxed on the profit they make on term insurance business, a tax benefit that is not enjoyed by other businesses. So the bill introduces an integrated framework of changes to deal with these problems. It extends the tax benefits of the portfolio investment entity rules to all savers in life products, and taxes term insurance business on actual profits, as other businesses are taxed. The committee has recommended deferring the application date from 1 April 2009 to 1 July 2010, with term insurance products sold before that date subject to concessionary transitional rules. However, life insurers will be able to operate under the new rules earlier than that if they wish to do so.
The bill also introduces changes intended to strengthen and rationalise the definition of associated persons in the Income Tax Act. These definitions are used mainly to counter tax practices that could undermine the intent of the law because of the closeness of the relationships of those involved, whether they are relatives, trusts, partnerships, or entities. The definition relating to land sales is in particular need of strengthening to
prevent developers and the like from circumventing the land sale tax rules by operating through closely connected persons. The committee has recommended a number of amendments aimed at reducing uncertainty in the proposed legislation and narrowing the scope of some of the proposed tests of association to ensure that they do not apply more widely than originally envisaged. It has also recommended that the general application date for the changes, except for those pertaining to land, be deferred to the 2010-11 income year. It has further recommended that the changes to the land provisions generally, apply to land acquired from the date of enactment.
The bill also introduces a voluntary payroll giving system for charitable donations that will operate through the tax PAYE system, a measure that has been warmly welcomed by the charitable sector. The committee has recommended that the application date for the introduction of the payroll giving scheme be deferred to 3 months following enactment of the bill. That will give employers and the Inland Revenue Department alike more time to roll out the systems that are needed to implement payroll giving.
The bill also introduces a change to the KiwiSaver legislation to resolve the problem that was highlighted on the
Close Up programme last week about KiwiSavers who die without leaving a will, and the difficulties surviving families have in accessing their contributions. The bill resolves that problem, and the relevant provisions are backdated to the introduction of KiwiSaver in 2007, so that no family should continue to have to suffer in this way.
These are but some of the many changes the committee has recommended to this very large and technically complex bill. I give notice that at the Committee stage I will release a Supplementary Order Paper that adds a further five measures to the bill. Although they will add to the bulk of the bill, the additions are taxpayer-friendly amendments that generally apply to a small number of taxpayers for the already completed 2008-09 year. They are being added to this bill because they need to be legislated for as soon as practicable. Three of the measures amend the financial arrangement rules to reduce tax volatility and the timing of recognition of income and expenditure. We announced one of those in December last year as law changes to prevent unanticipated tax liabilities from arising for troubled finance companies and certain other debtors that enter into work-out agreements with their creditors.
There will be other measures relating to the range of circumstances under which the Inland Revenue Department can offer relief from use-of-money interest when taxpayers are physically impeded by an emergency, such as a flood, from paying their tax on time, and we are extending that to include pandemics, which is completely relevant at the moment. There will also be some amendments to clarify the policy intent of the current provisions allowing life insurance companies to access tax refunds in particular circumstances.
I put on record my thanks to the Finance and Expenditure Committee for bringing this bill through to its second reading, for a considerable piece of work it has done. It was a challenging task. I also acknowledge the work of my officials, and the drafters who have worked tirelessly on this bill for a very long period of time now, often to near-impossible deadlines, and who I dare say are beginning to twiddle their thumbs at what might lie ahead. I commend the committee’s report and the bill as amended to the House for consideration.
Hon DAVID CUNLIFFE (Labour—New Lynn)
: We have just heard from the Minister of Revenue, who gets a lifetime achievement award for bringing the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill to the House in his capacity as Minister of Revenue—indeed, the same capacity in which he launched the bill in the previous Government. That is extraordinary. We have the same Minister,
despite a change of Government, giving birth, as it were, to the bill and seeing it now through the legislative process. Perhaps it should be called the “Charles Chauvel Lifetime Achievement Award”, because he is here to ensure that this is probably the last time the Minister has this august opportunity.
I would like to echo the Minister’s words thanking the officials, who have worked tirelessly on this bill. It is a huge bill—the second-largest tax bill that I have seen in my time in this House. It would not have been possible without the dedication and the deep and broad expertise of a very expert team of officials from the Inland Revenue Department’s policy team, some of whom are represented in the Chamber. I acknowledge also the good work of the Finance and Expenditure Committee chairman, Craig Foss, and the other members of the committee, who did a good job of bringing together a range of expert advice on some 60 very complex submissions on this bill.
But there the compliments, for the moment, shall cease, because it remains a fact that this was a very imperfect legislative process, as we went down to the wire to report back on this bill. It was imperfect because of the breadth and depth of the provisions of this omnibus bill, some of which we will mention shortly. The pressure of time on the select committee meant that in my heart of hearts I questioned whether the members were able to fully discharge their duty to this House and to the public as they worked their way through the detail of the bill. As a consequence, they became reliant to a high degree on the esteemed professional advice from our independent tax and drafting advisers and from officials. It was not an improper process but it was a process under the pressure of time, which I would not want to see repeated any time soon.
This bill makes important changes to taxation law. It provides for the fundamental reform of one of the most complex areas of tax law, the international tax regime. For years now we have had a “grey list” of countries that have a broad range of exemptions from the controlled foreign company rules. That area has been substantially reformed in this bill, as we move to a more systematic set of rules, which provide for a range of exemptions so that New Zealand is not an uncompetitive domicile for capital that is internationally mobile. We will talk some more about that.
This bill aligns life insurance taxation rules. The accounting treatment of life insurance profits will follow more closely the life insurers’ savings products. The bill provides for payroll giving, which is, of course, a boon to our charitable sector at a particularly important time of pressure on that sector. We around the House commend that change. It provides for the taxation of emissions units, both Kyoto and non-Kyoto units. That distinction remains important, although both will be treated the same. It relaxes somewhat the definition of associated persons, a matter that the select committee spent considerable time on. Topically today of all days, the tax treatment of relocation payments has changed. I see some raised eyebrows on the Government benches when I mention relocation payments; perhaps relocating from Southland to Wellington might come to mind?
Hon Dr Jonathan Coleman: What about Ponsonby to New Lynn?
Hon DAVID CUNLIFFE: That is absolutely fine, I say to Mr Coleman. The tax treatment of relocation payments is covered in this bill, and so are the rules around petroleum mining. The bill includes changes to the Screen Production Incentive Fund and a number of other changes.
This bill focuses on several of the reforms to reduce tax costs that were brought in by the previous Labour Government. The bill, as we mentioned, transcended the change of Government. It was brought to this House by the incoming Government because the content is largely apolitical; it is either technical or taxpayer-friendly. It is designed to update our tax law for a more modern environment. But, in some regards, where the bill raises certain tax thresholds it is not immune from controversy. Although the particular
tax thresholds have been deleted from the bill now, as they were rendered redundant by the passage of the Taxation (Business Tax Measures) Bill, it is also true that that bill ensured that 3 percent of taxpayers benefited from a third of the tax cuts, and that 71 percent of taxpayers missed out, because one had to be earning over $40,000 to qualify. That is nobody’s definition of either good equity or, indeed, good stimulus at a time when both are sorely needed in our economy.
With that nod to another debate, I will return to the substance of what is in this bill. Let me say, again, that in respect of associated persons there was considerable soul-searching by the committee. All members got their heads around the detail of it. I commend officials for showing us various charts of various tax structures, which helped us understand what was at issue. The amendments were designed to avoid the unintended consequence that relatives, or other formally defined associated persons, are penalised for their association with others, the contents of whose tax affairs they could not possibly, or need not possibly, know. The bill avoids those unintended consequences by reducing the stringency of the tripartite test. The select committee wrestled with an equal and opposite risk: that in relaxing those rules it was possible to become too relaxed and thus not catch people who should be caught by an associated persons rule. We all acknowledge that the implementation of this provision will be very important, and that the ongoing supervision and monitoring by our officials will be important. We will need in future to get further reports on how the provision is travelling.
Let me return to the other area that the committee spent the most time on, the international tax rules. Those really are key provisions related to controlled foreign companies. They are set out in one place in the legislation, to make them more accessible—this, of course, being a question of degree. The select committee recommended some technical amendments to the accounting-based active business test for controlled foreign companies to reduce the cost of applying the test. It talked about currency conversion rates; royalty payments as active incomes; and allowing an active controlled foreign company to pay royalties, interest, and rent to an associated controlled foreign company without the associated controlled foreign company having to recognise any passive income. The bill allows a full deduction for interest paid by a controlled foreign company for a loan that is on-lent to associated controlled foreign companies.
We quite quickly get to layers of complexity that reflect the ongoing game of poacher and gamekeeper. Many private entities, of course, hire the very, very best tax advisers to ensure that their tax is minimised and their so-called tax efficiency is maximised. The Crown’s officials are required to stay one jump ahead. This bill strikes a reasonable balance between the need to remain internationally competitive and the need to provide clear rules that will allow the tax base to be preserved.
As we mentioned, the bill talks about life insurance business, general insurance, and risk margins. It covers matters such as the tax treatment of petroleum mining, and tax pooling rules, which further facilitate the efficiency enhancing measure. It covers the GST treatment of transactions relating to emissions units. The bill covers both Kyoto-based and non - Kyoto-based units. Both units, for reasons of simplicity and coverage, are the subject of the provisions of this bill. But it is important to note that not all emissions units are created equal. We do not want the public in the future to be in any doubt that the select committee had its head round the idea that there are different levels of risk attached to different layers of emissions units. But we did not, on balance, believe that was such as to require a difference of tax treatment in that regard.
To sum up, this bill is large and hideously complex. It has had a long gestation. The Minister has brought it to the House, after having been present when it was first
launched. We owe a great deal of debt to our officials and our advisers, but we do not want a repeat of the time pressure of the process that the legislative process was put through to have this bill reported back to the House today.
CRAIG FOSS (National—Tukituki)
: In speaking on the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill, I acknowledge the two earlier speakers, and particularly the Minister for finally getting this bill to the House for its second reading tonight. That is a relief. There are 824 pages in this bill. I am not quite sure, but I think the bill was about 700 pages long when it had its first reading. The Minister, in his speech, has just announced that a Supplementary Order Paper will be tabled during the Committee stage. So what are another few pages to add to the 824? I reinforce and continue the earlier speakers’ thanks to and acknowledgment of the Minister, and of the Labour Party spokesperson on finance, the Hon David Cunliffe, for their hard work.
I also thank the Finance and Expenditure Committee, of which I am the chair, for its hard work. I am only as good as the rest of my team from across the parties on that committee, and I fully, freely, and openly acknowledge their cooperation. This bill was introduced by the previous Government, but we did have to stress our own time frames. We paid strong attention to making sure process was followed, although we tried to get things through as quickly as possible while also having regard to the complexity of the legislation before us. As previous speakers have noted, this bill was carried over from the last Parliament. It was introduced in July 2008, and in between times we had an election and a change of Government. We had a lot of stress and strains late last year and early this year before getting to the point where the select committee opened the submissions process in December, I think, of last year and extended it to—just from memory—the end of February 2009. There were numerous submitters—60-odd—to the committee, and many written submissions.
I also acknowledge the many officials who have worked on the bill. There were times when the room was overflowing with officials whose areas of expertise were the various areas that this bill covers.
I would like to read a bit of the commentary on the bill. I know we will touch on this issue during the Committee stage, but the commentary reflects very well the feelings of the committee as we did our best to move through this bill and get it back to the House. I do acknowledge that the Minister also acknowledged and generally agreed with this point, but if members will excuse me for a moment I do want to put it on the record. The select committee in its report back on the bill notes: “The proposals contained in the bill are significant and complex, and cover a wide range of taxation issues. The size of the bill, and the depth and breadth of the material it covers, have made our consideration more difficult than it might have been otherwise. In trying to meet the report due date for the bill,”—which was very tight, given the complexity and size of this bill—“we and our committee consideration processes have been put under considerable pressure. We do not consider it desirable to put a number of very distinct and significant proposals into one bill simply because they relate to one area of law. In future, we would prefer to see such proposals introduced to the House as separate, more manageable bills. If such proposals are not divided sensibly, the House might wish to accord significantly more that the usual consideration time to committees charged with considering such bills. Ministers should remain mindful that if departmental advisers are appointed to advise committees on such bills, they will need to meet committee deadlines and information needs under pressure.”
I do take that point and note it, and I put it on record in
Hansard. I know that it is stated in the commentary on the bill, but it does reflect the sentiments of all committee members. We took that on board. We got the bill back into this House, and, yes, there
are some quite significant changes compared with the bill as it arrived at the committee during the last Parliament. But—and I acknowledge that the Minister did tend to agree with this; famous last words—I do reiterate the points the committee made on page 3 of the commentary on the bill. That was a unanimous view from the committee.
I also note that because of the complexity of the bill, when we tried to deal with some of the changes we did something unusual—at least, unusual in my memory in this House, which is of only the last 4 years. As well as our normal, independent adviser for taxation issues we appointed an independent drafting adviser, because as members can imagine, with 800-odd pages of legislation, once we nailed it down to maybe the second or third level, we needed to be sure, as much as possible, that the drafting followed the committee’s intent and was robust. Having said that, there is a Supplementary Order Paper coming, I understand. But I do acknowledge our independent drafting adviser. We will follow that process with other taxation bills as they arrive at the committee.
There are significant changes to the bill originally sent to us. As the previous speaker noted, the tax changes for small business have all been taken out of this particular bill. They were made part of the Taxation (Business Tax Measures) Bill, which was put forward in February of this year, and those measures were passed in March 2009. They were given some urgency because of the need for fiscal stimulus and measures to assist New Zealand as we move through the recession. Those measures have all been taken out of this bill as they have been dealt with in other legislation.
One of the key changes to the bill is simply to the application dates. When this bill first came into the House, the application dates were 1 April 2009, mostly. It became patently obvious as the time for submissions was extended that such dates would make life very difficult for the areas, businesses, and sectors that this bill affected—and, of course, there were many of them, including the Inland Revenue Department, as it tried to manage with what would have turned out to be retrospective application dates if they had not been changed or if the committee had not considered it necessary to alter them. I acknowledge that on 24 March we received a letter from the Minister. He made some wise suggestions as to how we might deal with the application dates for various sectors. I acknowledge industry officials, who were constrained in their lobbying, if you like, when bringing to the attention of various MPs, Ministers, and the press the need to change some of the application dates. I acknowledge their professionalism, because there was a fair bit of tension, not only in the fiscal sense and revenue sense but also in a technology sense, as various areas, particularly those in and around the insurance industry, had to start to redo their accounting or start to use a different accounting methodology.
Previous speakers have gone into a bit more detail than I will in this short speech. Although the bill is very complex and very wide-ranging, there was constant reference to the need to try to make it as taxpayer-friendly as possible. The question we asked was always whether this bill was better than the existing legislation, given the policy direction the Minister was trying to put in place. We will have to see whether this legislation stands the test of time, but given the expertise of the officials, the depth of their work, and the time spent on it, I am confident that we may well get there. I certainly hope so.
The Minister outlined the principles in and around this legislation. I want to quickly touch on them before I sit down. When the select committee was looking at the dates, it kept in mind that the key principles of the legislation were, firstly, providing taxpayers with as much certainty as possible, given the processes and time frames of Parliament; secondly, providing benefit for taxpayers as soon as possible—this bill is taxpayer-friendly—and, thirdly, protecting the tax base by providing anti-avoidance measures.
This Parliament, and this Government particularly, must keep a careful watch on the fiscal situation, and particularly on the deteriorating revenue situation.
I have one more point. The “associated persons” part of this bill got a lot of press coverage all of last year and in the lead-up to this one. It was quite interesting that one particular submitter made a very strong submission and tried to turn every MP into a trustee of a trust, arguing that therefore we were all associated persons in relation to, I think, his wife’s—or someone’s wife’s—property. Actually, the absurdity of that brought attention to that point, which was noted. It was a very strong submission, but in fact officials and advisers acknowledged later that that absurd situation already existed, and that this particular bill improves on the current law.
STUART NASH (Labour)
: It is with pleasure that I rise to speak in support of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill. What a mouthful! One needed a dump truck to carry this tome from one’s office to the Finance and Expenditure Committee. In his speech on the bill during the previous Parliament the Hon Lockwood Smith—now our esteemed Speaker—stated: “The select committee is in for a lot of work on this bill.” Dr Smith was not wrong.
I especially thank all the Inland Revenue Department officials. I acknowledge Robin Oliver and his team here tonight for the dedication and hard work they put into the bill. I also acknowledge our own advisers for their help and for the work they put into the bill. It started out as 700-odd pages and turned into 824-odd pages. The work the officials put in was directly inverse to the amount of sleep I think I missed every Tuesday night and Wednesday morning for many a week. But I assume it probably went both ways, considering the amount of work the officials put in and the amount of papers they gave us to read, which were of excellent quality. I thank them very much for that.
Mr Foss is now the chair of the Finance and Expenditure Committee. I will admit and give credit where credit is due that he did a great job of chairing the committee on the bill. But at the first reading he was an Opposition member of the Finance and Expenditure Committee. He stated that he would need to sit down over a couple of bottles of good Hawke’s Bay wine in order to digest the contents of the bill. I have no doubt, considering the size of the bill, that the honourable member now residing in the Bay is a committed alcoholic or the owner of a winery.
John Hayes: Mr Fairbrother?
STUART NASH: Mr Who? The bill is the largest tax bill ever to be considered, apart from a rewrite of tax legislation into plain English, which I know seems like a little bit of an oxymoron. One of our officials suggested that it be split into a number of bills—at least two bills—due to its size and complexity. Unfortunately, it was too late to do so, but I hope that advice will be heeded in the future.
The bill is a Labour bill. Like everything the Labour Party does it is aspirational, transformational, forward-looking, and bold. It is bringing us into the 21st century. As we all now know, Labour is the party of tax reform, and certainly of business tax reform. After all, we are the only party in a generation to have lowered the corporate tax rate. We did it twice. Do members know that one party voted against it? Which party was it? I think it might have been National that voted against lowering the corporate tax rate. Labour is the party of business tax reform.
But let us get back to the bill. It is interesting to note that during the bill’s first reading both Mr Tremain from Napier and Mr Foss from Tukituki were very lukewarm on the merits of the bill. In fact, they were quite negative towards the bill. Yet Dr Cullen, another MP residing in the Bay at the time, understood its value for New Zealand as an important player on the international stage. Dr Cullen brought his characteristic vision, knowledge, and understanding of international tax and the regulatory environment to the legislation, in so far as he recognised that if we did not
overhaul our international tax legislation and take a global perspective, we would be left behind. Neither Messrs Tremain nor Foss understood that fact. They now seem to have come to their senses and are supporting this aspirational Labour bill.
As a Napier-based MP I am happy to pick up on the promotion of the bill on behalf of Hawke’s Bay Labour from where Dr Cullen left off. I understand its value to the people and businesses of the Bay, even if Tremain and Foss did not. Then again, Tremain and Foss both voted for personal tax cuts—
Craig Foss: I raise a point of order, Mr Speaker.
Mr DEPUTY SPEAKER: You must use the members’ full names when you are referring to them.
STUART NASH: Mr Chris Tremain and Mr Craig Foss voted for personal tax cuts that 75 percent of taxpayers in Hawke’s Bay will not be able to access because they earn under $40,000. That 75 percent of taxpayers in Hawke’s Bay will get no benefit from the National Government’s personal tax cuts is just not right.
Hon David Cunliffe: It’s typical, though.
STUART NASH: It is typical but it is not right. Dr Michael Cullen, however, understood the demographics of Hawke’s Bay and of New Zealand, and that is why he introduced packages like Working for Families, one of the greatest pieces of income distribution legislation this House has ever seen.
Brendon Burns: They kept it.
STUART NASH: Thank goodness the National Government kept it. National members stand up and say “Aren’t we wonderful; we’re keeping Working for Families.” Labour was the party that had the vision to introduce it.
Dr Cullen also instigated personal tax cuts for those who most need the help in these tough economic times. But do members know what happened? The National Government repealed the tax cuts in favour of tax cuts for those who earn the most. The price of the National Government’s tax cuts was cuts to KiwiSaver and the axing of the research and development tax credit—two schemes designed to address our savings issue and our lack of overall investment in innovation. The National Government cut those two innovative initiatives in order to fund tax cuts for those who need them least. I would say that some of the $700 million put aside for the Fast Forward Fund, which has also been cut, was also used to fund the tax cuts. It is just not right and it is just not fair. Thanks to Mr Key for nothing.
John Hayes: We remember your grandfather’s Black Budget. Oh yes, we do. We know what your grandfather did.
STUART NASH: Absolutely. Do members know what he did? He knew what was right for the people of New Zealand. There is no way that that man, who delivered nine Budgets, ever did wrong for the people of New Zealand. He took them out of poverty and brought them back to the road of prosperity. At least we now know the National Government’s vision for this wonderful country. The Government is blind, and the only dog in sight is barking up the wrong tree.
When Labour was in Government we had to fix one hell of a mess inherited from the National Government Minister of Finance in 1999. Who was that? It was Bill English. Last century he totally mismanaged the last recession, and the Labour Government fixed it up to the point where we could finally start investing in tax cuts and innovation spending. It took 8 years to repair the damage done by the raping and pillaging of our public services. We were in a position to start investing, but, true to form, the Nats have torn it all down. There are cuts to education, cuts to health, and cuts to superannuation. It is so true to form.
John Hayes: Your granddaddy did it all in his Black Budget.
STUART NASH: Absolutely. Do you know what Sir Walter Nash did? He built the social welfare system, and you guys have torn it down. You are a disgrace.
Mr DEPUTY SPEAKER: The member cannot bring me into the debate. I know what the member is trying to say, but I remind the member not to bring the Chair into the debate. Thank you.
STUART NASH: A great quote is that the first thing we learn from history is that we do not learn from history. The National Government cut adult and community education.
I come back to the bill. The bill introduces changes to many areas in current tax law. It reforms our international tax rules by, amongst other things, introducing tax exemption for foreign active income of controlled foreign companies and exempting most foreign dividends received by New Zealand companies from tax. The bill will “allow New Zealand residents with active businesses in overseas markets to compete on an equal footing with their competitors.” It will “align life insurance taxation rules more closely with the actual profits of term life insurance business, and extend portfolio investment entity”—that is, PIEs. I noted that the honourable member for the Wairarapa’s eyes suddenly lit up when I started talking about pies, but these are portfolio investments, and the bill extends the rules on those investments to life insurers’ savings products.
The bill is wide ranging. It will introduce a voluntary payroll giving scheme. It will amend the Goods and Services Tax Act 1985. It includes remedial amendments to the tax pooling rules in the Income Tax Act 2007. Numerous other changes are proposed, but I think everyone gets the message. The bill is visionary and wide reaching. As mentioned, many people have put significant developments into the bill. The bill mirrors the type of person Dr Cullen is, and the type of politician he was: visionary, aspirational, intelligent, and always working for the people of New Zealand. Dr Cullen always asked what was right for the people of New Zealand, and he always knew that what was right for them was right for Labour. That is why he sponsored the bill. Thank you very much.
Dr RUSSEL NORMAN (Co-Leader—Green)
: I stand to speak on the second reading of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill. It was introduced by the previous Government and followed through on by the current one.
There are some good things in this bill. Payroll giving, tax exemption for honoraria, some of the changes being proposed in the associated persons test in order to try to catch more tax avoidance, and some of the changes to life insurance are not bad ideas at all—in fact, they are good ideas. Some of the good things that are found in this bill are undermined by the changes to the taxes for controlled foreign companies—that is, companies owned by New Zealanders that are operating overseas. I will focus on this issue in my speech tonight.
These changes mean that New Zealand companies that manufacture goods overseas will not pay New Zealand tax on the income derived from these activities, while New Zealand companies that manufacture goods in New Zealand will pay New Zealand tax on that income. Go figure. It means that New Zealand companies that create jobs in New Zealand will pay tax on their income, while New Zealand companies that create low-paying jobs in China will not pay tax on those overseas operations. Go figure. It means that New Zealand companies that create demand for goods and services from New Zealand suppliers will pay tax on their income, while New Zealand companies operating overseas that create demand for goods and services from overseas suppliers in the countries where those companies are operating will not pay tax on their income derived from the overseas operations. Go figure. It means that New Zealand companies
that meet basic human rights and environmental standards in New Zealand will pay tax, while New Zealand companies that meet lower human rights and environmental standards—if any at all—while producing goods and services in other countries, such as China, will not pay New Zealand tax. In fact, they will be exempt from New Zealand tax. Go figure.
This bill creates a tax disadvantage for New Zealand companies that remain in New Zealand. Conversely, it creates a tax advantage for New Zealand companies that relocate overseas—that is, it encourages New Zealand companies to relocate overseas. So New Zealand firms that manufacture in New Zealand will find themselves competing with foreign-based manufacturers that have a significant tax advantage over them. Surprise, surprise. As has been said in the
Independent and in many other places, this bill will drive production overseas, and will help to drive New Zealand - based producers of goods and services out of business.
Why would any New Zealand Government make it harder to manufacture in New Zealand? It is already hard enough. We probably need to reflect on some of the ideology that has been embraced by the mainstream Labour and National parties since the 1980s and 1990s. Part of it relates to the comparative advantage ideology, which they have embraced for quite some time. It is part of a broader, neo-liberal globalisation ideology that was trendy for a while, but is not so trendy since the global financial collapse. This ideology says that it does not matter whether we manufacture in New Zealand. It just does not matter. Manufacturing is so last century. We do not need to manufacture; we will simply import all of our manufactures, everything we need, and we will export goods and services to pay for them. The basic idea behind the comparative advantage ideology, taken to its illogical extreme—something David Ricardo would never have imagined any one would do with his theory—is that it does not matter whether we manufacture in New Zealand. This was also very fashionable for a while because manufacturing was seen as kind of dirty. It was the kind of dirty thing that people who get their hands dirty do. It was not very trendy. We have had a systematic policy from Labour and National over 25 years now to try to get rid of manufacturing—that rather dirty, old-fashioned industry. Systematically throughout the 1980s and 1990s and into this century we have seen policies designed to grind the manufacturing sector into the ground. This current bill contributes to that even further.
The small glitch in the comparative advantage theory taken to an illogical extreme is that if domestic manufacturing stops, then it needs to be replaced with the export of a huge array of goods and services, because manufactured goods are a very large part of consumption. A lot of other stuff is needed to pay for all the manufactures we now import. As we change the tax incentives with this bill, and drive more of our manufacturing overseas, we will have to export more and more. Of course, in spite of the theory the outlook has not been quite so rosy in terms of our trade deficit and our current account deficits. We have replaced the manufacturing base that we have systematically destroyed with three other sources of income: dairy, tourism, and debt. Instead of making things through manufacturing, we now make milk and export milk solids—lots of it. It is not necessarily a bad thing, except that there are ecological limits to how much dairy can be exported. It might be great that we have a comparative advantage in making milk and milk products, but there are real ecological limits to replacing the entire manufacturing sector with the export of milk products so that we can buy all the manufactures we no longer make. One of the downsides is that most of our lowland rivers are now so polluted that our children cannot swim in them.
Instead of making things and manufacturing things, we now invite tourists to come and look at so-called “100% Pure New Zealand”. Unfortunately, although the tourism sector is a significant contributor, it is a low-wage sector compared with manufacturing.
This bill adds more incentives to undermine our manufacturing sector and to replace it with tourism. Tourism is a very important part of our export sector, but it is a low-wage sector.
The third and perhaps most important thing that we have done to replace the manufacturing sector is to borrow. We have the second-highest net debt after Iceland as a proportion of GDP. We are now approaching about 100 percent net debt as a proportion of GDP. Manufacturing produces jobs, yet we have destroyed manufacturing and have low unemployment. Why is that? Because we have borrowed and consumed our way to employment. There is, and was, a debt-fuelled, consumption-led boom in the non-tradable sector. Bill English is absolutely right on that point. We borrowed money to buy goods and services from other countries—goods and services that we had systematically stopped making in New Zealand because of a bizarre neo-liberal ideology that said manufacturing is bad and we do not want it here. These days we borrow money in order to pay the interest on the money we have already borrowed. But I will get on to that.
As a result of this long-term position of destroying the productive sector, to which this bill contributes by making it harder for manufacturers based in New Zealand, our net international investment position has rapidly deteriorated. Our overseas assets minus our liabilities currently stand at about $176 billion or $177 billion, or about 98 percent of GDP. Just 12 months ago—that is, as of 31 March 2008—we owed only about $154 billion, or about 86.4 percent of GDP. So it is rapidly escalating. This is, in part, the result of 5 years of deficits in goods and services. We are looking at returning to a balance in goods and services, but after 5 years of deficits in goods and services, we are adding to our overseas debt, repeatedly.
The interest paid on our overseas debt in the year ended March 2009 was about $5 billion. We needed to come up with about $5 billion just to pay the interest on the debt, excluding the return that overseas investors get on their equity. We needed to come up with $5 billion just to pay the interest on the debt. Of course, on top of that, we needed more. So we borrowed to pay for all the goods and services we imported, and we also borrowed to pay the interest on the debt we already owe. Of course, because of our destruction of the productive sector—something this bill further contributes to—we are borrowing in order to pay the interest on previous borrowing. This is not a sustainable economic strategy. The world will not continue to fund our lifestyle with borrowings forever. The sooner we realise that we cannot destroy the manufacturing sector and the productive sector, and that the country needs to produce things, not to just borrow money to pay the interest on the money we have already borrowed, the sooner we will deal with this reality.
When this bill comes before us, yet another bill that will make things harder for New Zealand manufacturers, I say that it is not a very clever strategy. It will make our trade deficit worse. It will exacerbate the trade problems we already have. We have had 25 years of the New Zealand experiment—this crazy new-right experiment—but it has not worked. Why would we add another nail in the coffin of New Zealand manufacturing? It is not clever, it is ideological, and the Green Party will not vote for it.
RAHUI KATENE (Māori Party—Te Tai Tonga)
: I am really pleased, as a member of the Finance and Expenditure Committee, to speak to this bill. We have come to know this bill in quite some detail, as we came to grips with, at last count, 824 pages of amendments and adjustments. I am delighted that it has left the committee and is before the House. Like previous speakers, I add my thanks to the officials and to the independent specialists for the help they gave to us and for their patience shown towards all of the amendments they had to make and explanations they had to give throughout. I have to be honest and say that the thorough and detailed analysis of
taxation legislation would probably not register as the most exciting of challenges that have come before me as a member of Parliament but there is one issue that has really stood out in the process, which I want to focus on in this second reading.
The focus of my interest is the payroll giving scheme, as I believe it reflects what we in the Māori Party attribute great significance to—the concept of manaakitanga. Manaakitanga plays an important role in Māori society. Within its purest sense it refers to the relationships between people. In essence, the expression of manaakitanga is seen in the demonstration of generosity and hospitality towards another. Over recent weeks some concern has been raised over the concept of giving to charities and community organisations. The involvement of a professional telemarketing company cast a shadow of doubt about the direct transfer of donations through to the charities concerned. The Charities Commission and the Minister for the Community and Voluntary Sector both came forward and encouraged donors to look critically at the actual percentage of funding that goes through to the charity. My colleague the Hon Tariana Turia was, however, only too clear in her response to the situation. In essence, her words are summed up in the proverb inherited from Ngāti Raukawa : “He iti pou kapua, ka ngaro, ka huna tini whetū te rangi.” Though a cloud may be small, it is sufficient to obscure the many stars at night. It is important that the recent cloud of doubt cast on a couple of charities does not obscure the vital issue of encouraging the goodwill of New Zealanders to invest in our communities through gifts of money, time, and in kind. In light of these recent events, and of course the impacts of the economic downturn, the fact that this bill is back before the House is extremely timely. This bill contains two initiatives to support and grow giving in Aotearoa—the giving of time and the giving of money. These gifts of the heart contribute to improved social cohesion and stronger, more resilient communities.
The other aspect of the timeliness of this legislation that I want to draw on is the fact that this bill follows the release of a groundbreaking report from Statistics New Zealand called
Measuring New Zealand’s Progress Using a Sustainable Development Approach. We are very interested in this publication, as it resonated with the key policy direction that we in the Māori Party have promoted—that is, the concept of a genuine progress index. In essence, it means that in order to achieve any assessment of our society as a whole we need to consider environmental, economic, social, and cultural dimensions as a true measure of progress. In this report therefore the concept of voluntary contributions by people to society is seen as a measure of social connection and governance. Seventy-five percent of New Zealanders support the community and voluntary sector in some way, be it through volunteering, donations of money and goods, or other types of support. The Māori Party believes that the Government needs to support and foster this kind of generosity across every sphere of influence that it can. This bill does this through referring to voluntary contributions in the focus on donations.
The two new initiatives contained in the bill build on the earlier work to remove tax benefit thresholds for donations. Pre-tax payroll giving will make it easier to give money and to use the existing tax incentive mechanisms. I think this is an important development in the legislation that warrants our support. Pre-tax payroll giving offers a simple mechanism for individuals to give, through work-based payroll deductions, while simultaneously receiving the tax benefit for their gifts. It eliminates all the extra paperwork, leaving the emphasis on the giving. The payroll giving scheme will be voluntary for employers to set up and offer to their staff. We would, however, expect that businesses that already practise some form of corporate social responsibility will be the ones that will take advantage of this opportunity—the first to lead the rush. It is heartening to see more and more businesses realising that what is good for their
communities is also good for their employees and their own companies. Pre-tax payroll giving will demonstrate how Government, employers and employees can all work together to build strong, resilient communities.
These are really important issues that the Māori Party is pleased to support. For tangata whenua, as for Pasifika peoples and many ethnic groups, gifts of time, money, and even in kind form part of our cultural obligations and are essential for the maintenance of our cultures and languages. We know, too, that across Government the concept of promoting generosity is one that is gaining more and more credibility. The Hon Tariana Turia, as Minister for the Community and Voluntary Sector, has been proudly supporting the Promoting Generosity project that explores ways to encourage individuals and businesses to participate in their communities and local community organisations by giving time, money, or in-kind donations. For many of us, the traditions and values of looking after others have been part and parcel of the way we were brought up. Yet sadly in recent years we know that many community and voluntary organisations suggest that a lack of resources and volunteers is dramatically impacting on their ability to achieve their goals. The Promoting Generosity project is being advanced by Philanthropy New Zealand, Volunteering New Zealand, and the Office of the Community and Voluntary Sector to put the spark back into giving. This bill, then, is another step towards making that happen.
In the select committee report we noted that the Inland Revenue Department website did not appear to have the information readily available or easily accessible to the public. We therefore made the recommendation to encourage the department to complete the work as soon as possible and to communicate the changes to employers and employees. We also encouraged the department to include the information in the
Tax Information Bulletin that will accompany the bill. The bill also removes the confusion around the tax law for volunteer expense reimbursement and honoraria. It is about time! Back in 2001, the International Year of Volunteers, our communities first identified this as a problem. It has taken 8 years for change to be brought about. I have concentrated on this one aspect in some detail because I believe it is an important development that the Māori Party fully endorses. We therefore declare our support for this bill.
JOHN BOSCAWEN (ACT)
: It is also my pleasure to speak this evening on the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill. Like the speakers before me, I would like first of all to acknowledge my colleagues on the Finance and Expenditure Committee, the chairmanship of Craig Foss, and the officials. Earlier this evening Robin Oliver was present. Robin and his colleagues marched many times into the select committee room, during the months I was sitting on the committee—February, March, April, May, and June—along with our own advisers, who were recruited directly to the committee.
I also acknowledge the many submitters. Reference has been made this evening to the fact that there were 60 submitters on this bill. I acknowledge the philanthropic work that so many of these submitters do. I can recall sitting in on the submission of Minter Ellison, which was 150 pages long, and was presented by David Patterson. It was followed soon after by the submission of Bell Gully, which was also 150-odd pages long. I was impressed with the professionalism that went into preparing those submissions.
As the Minister of Revenue said, this bill is a very large and technically complicated bill. As speakers have said, the bill is over 800 pages long, and it makes many amendments to various tax Acts. It makes extensive amendments to the Income Tax Act 2004, the Goods and Services Tax Act 1985, and the KiwiSaver Act 2006.
In listening to this debate this evening, the speech that most attracted my attention was the speech by Mr Nash. He talked about the reforming nature of the previous Labour Government. He talked about the Labour Government being a party of reform, a party of tax reform. Mr Nash told us that the Labour Government had been aspirational, transformational, and bold. I find that very interesting. I would like to remind Mr Nash of recent Labour history and to reflect on the Labour Government of 1984-90. At that time, there was a Labour Government that was indeed aspirational, transformational, and bold. It is quite interesting that one of the tax Acts that we are amending with this document—this tome—is the Goods and Services Tax Act. It would be interesting to explain to Mr Nash that when GST was introduced to New Zealand, we halved the top rate of tax. In this country we used to have—in my lifetime, 25-odd years ago—a punitive top tax rate of 66c.
With the introduction of GST—Mr Deputy Speaker, I can see you nodding—the tax rate was halved from 66c to 33c. At that time my father was the principal of Otahuhu College. I did his tax returns for him and two-thirds of the marginal dollars he earned as a school principal was paid to the Government—two-thirds! With the introduction of GST, we halved that top rate of tax. We said to people like my father, and hundreds of thousands of other New Zealanders, that if they worked hard, sought promotion, and contributed to this country, they would not be penalised. What happened when we dropped the top rate of tax from 66c to 33c and made other consequential adjustments to the tax rates? Did our tax take halve? No, it did not; it stayed the same. This country earned as much from tax and income tax when the top rate was 33c as it did when it was 66c. Why was that? Because people who were paying 66c were not motivated to work. They were motivated to hide their income, to suppress their income; they paid no tax if they were able to hide it. By applying a top tax rate of 33c, the bold, transformational, aspirational Labour Government of the 1980s provided an incentive for people to work, to earn income, and not to cheat on their taxes.
What did the previous Labour Government do? What did it do when it got into power? What did the aspirational, transformational, fifth Labour Government, which Mr Nash referred to, do? It increased the marginal rate of tax. It increased the top rate of 33c to 39c. It said to people that they would be punished. It was the “envy tax”. I find it very interesting that Mr Nash talked about the fact that when National came to power at the end of last year, one of the first things it did was reduce that top rate of tax. I should add that it was reduced from 39c to 38c, not to 33c or 34c—from 39c to a miserable 38c.
Mr Nash talked about only the top third of taxpayers benefiting from those tax cuts. I think he talked about 70 percent of New Zealanders being on an income of below $40,000, and he criticised the fact that a large proportion of people were earning less than $40,000. Well, I say that Mr Nash needs to look no further than his own party. Why do I say that? When I see Mr Nash next, I intend to give him a copy of the book
No Second Class Citizens,
which has been recently published by my colleague Sir Roger Douglas. If Mr Nash turns to page 70, he will see average Government spending per person, and how those statistics have changed over the last 50 years.
In 1984, when the fourth Labour Government came to power, average Government spending per individual New Zealander was $12,000. In 1996 average Government spending per person was $12,000. It had not changed in those years between 1984 and 1996. Government expenditure per person held firm at $12,000. Twelve years later—after 3 years of a Bolger administration and 9 years of a Dr Michael Cullen administration—Government spending has gone from $12,000 per person to $18,000, which is a 50 percent increase in real terms. That is $6,000 per person, and $15,000 per
household. The reason that 70 percent of New Zealanders are on incomes of less than $40,000—
Hon Darren Hughes: What book is that in?
JOHN BOSCAWEN: I will give that member a copy. We have a second copy. We have one for Mr Nash, and I am happy to give him one, too.
The reason that 70 percent of our population is earning less than $40,000 is the massive increase in Government expenditure per person from $12,000 to $18,000—$15,000 for an average household—in the space of 13 years.
I come to Mr Norman’s comments. Mr Norman criticised this bill. He said we are debasing our own manufacturing industry, and we are encouraging New Zealand manufacturers to move overseas. He said that we are incentivising New Zealand companies to set up and do business in China rather than manufacture in New Zealand. He talked about ideology. That is interesting, because Mr Norman and the Green Party are proposing that we should set a Kyoto target of a 40 percent reduction in emissions from the 1990 level—a 40 percent reduction from the 1990 level—by 2020. That would be something like a two-thirds reduction from the current level. It has been calculated that that would add $3,000 per household per annum to living costs. If anything would drive New Zealand manufacturers overseas to China, that would be it. Do we hear the Chinese manufacturers offering to tax their industry? We do not. The Green Party and, sadly, a lot of other political parties in this Parliament would tax New Zealanders at a time when the scientific evidence shows that the world has actually cooled over the last 9 years.
I say to Mr Nash and his aspirational, transformational, and bold Labour Party that he should go back to the roots of the 1984 Labour Government and promote tax cuts. He proudly talked about the two reductions in the corporate tax rate during the course of the previous Labour Government. It is a pity he did not refer to the fact that the top marginal tax rate for individuals went from 33c to 39c. I have to say that the response so far from National is a rather pathetic tax reduction of 1c.
If we want to provide incentives for New Zealanders to work, to get ahead, and to be aspirational, we need significant reform of our tax structure and of our tax rates. Thank you, Mr Deputy Speaker.
AMY ADAMS (National—Selwyn)
: It is my pleasure tonight to take a call on the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill. It is not a small piece of work by anyone’s suggestion. One of the reasons that I am so pleased to take a call on the second reading of the bill is that, as a member of the Finance and Expenditure Committee, it means that it has finished its progress through the committee. Some of us were starting to wonder whether that would ever happen.
The bill is an important and very complex piece of work. There is a reason that it is 800-odd pages now, and I understand that it will grow a little more before it finishes its progress through the House, with the Minister of Revenue having signalled a number of Supplementary Order Papers. The issues contained in the bill—and I thought I would depart from the last speaker and spend some time talking about the bill—touch on a broad number of sector areas and some quite complex issues. For the committee it was not a case of our simply getting our heads round one area of law and dealing with the submissions on it; we had to run through a number of very complex and very different taxation issues within the bill.
It has been mentioned already this evening, but I too want to add my thanks to Craig Foss for his chairmanship of the select committee; to the other committee members; to our specialist advisers, Therese Turner and David McLay, who did a fantastic job and certainly made the process much easier for me and the other members of the committee; and to our advisers from the Inland Revenue Department, who came in week after
week—we became quite used to seeing them. As Mr Foss has already referred to, given the breadth of the bill often a group the size of a rugby team would arrive. They were always very willing to respond to concerns that the committee had. For myself, I can say that I certainly challenged them once or twice on a few points, and I was very impressed with their willingness to work with the committee and our advisers to make sure we got the work as good as we could. Similarly, the submitters put a lot of time and effort into talking to us on these issues, and I think that only added to the quality of the bill.
The bill, although it deals with a number of important and quite separate issues, works very hard to contribute to the overall goals of taxation law of certainty, clarity, consistency, and fairness. We worked very hard to ensure that those overriding principles were met. On a number of occasions we raised with officials our concern at the lack of certainty about how certain phrases and new tests would be applied, and I think the officials reached a fairly good compromise. The bill is now structured in terms of what information is immediately available, and what can be made available through tax information bulletins and the like as processes develop. Obviously, with the passage of time that will become even more certain.
It has already been mentioned tonight that the key policy driver in the bill—given the name, it is no surprise—is the reform of international tax law. Most of us would acknowledge that it has been long overdue. The principal component of the reform—to put it in my simple terms—is that we are getting rid of the old system of eight “grey-list” countries. If companies operated in those countries, we basically said they were the same as us so we will treat them as tax-neutral. We have got rid of that system, which was a blunt instrument. We have reduced the “grey list” down to one country, Australia, which is our nearest neighbour and our closest trading partner, and has special status. What we look at now, rather than the structure of the company, is an active/passive test. We look at the business income of any controlled foreign company and we look at the nature of that income. If it is active income from genuine business operations in a domestic jurisdiction, then it is exempt from New Zealand tax law. If it is passive—royalties, dividends, and the like—then it will be taxed here in the normal way. The exception is that there is a 5 percent threshold. If a controlled foreign company’s income is predominantly active, but a small portion, 5 percent or less, is inactive, then that inactive income can be chucked in the bucket and treated as exempt income.
To follow on from the discussion that Mr Boscawen had in respect of Dr Norman’s comments, I say quite the opposite from what Dr Norman said. Instead of the bill driving business offshore, I think the officials have worked very hard to ensure that the framing of these laws will encourage New Zealand parent companies to stay onshore—that they will not be driven offshore because our tax laws give them a competitive disadvantage. I would argue that we worked to ensure that the bill would be conducive to business investment and conducive to our retaining companies in New Zealand. Certainly, that was one of the touchstone principles we came back to in our consideration of the bill. The other was, obviously, to address maintenance of the revenue base, because in these difficult times of falling revenue we had to be conscious of the bill’s impact on the revenue base. The officials and the Minister worked very hard on that.
The other point of policy detail that I will talk about—because it is one of particular interest to me—is the associated persons tests within the bill. This is a complex area of law at any time, and it is applied differently in different circumstances depending on the type of test that is being applied. There is no one-size-fits-all associated persons test within the Income Tax Act. In working through this issue, with the help of, particularly, Therese Turner, we were able to identify that although the advisers’ policy in the first
draft of the bill was sound, there were some areas of what we perceived to be unintended overreach.
One example we had was of a son whose father had been living away from the family for some time. When that son grew up and had a company of his own, he found that for tax purposes he was associated with his absent father’s new wife’s company, which he had no knowledge of, no awareness of, and nothing to do with. This grown son found himself removed from, for example, the ability to claim the low-turnover trader provisions, because the association with the wife’s company lumped him in with all sorts of companies. As soon as that was pointed out to us, it became apparent to all that that certainly was not intended by those provisions. We had to work through that, and as a result we made some very good changes to the associated persons rules. In particular, we limited natural person associations to people whom one would reasonably be expected to know the existence of, to ensure that children are not associated with their parents’ companies and the like. The rules of association between natural persons have been brought down considerably.
We also spent quite a number of meetings looking at the tripartite test of association. This effectively sets up a provision whereby if one person is associated with another, and a third person is also associated with that other, then the first and the third persons are associated with each other. It is quite complex, there are rules around it, and I do not want to traverse all of those, but, once again, although we understood the principle and the situations that the provision was intended to catch, we had concerns. We spent a lot of time testing the provisions of that test to make sure that there were not situations where unintended consequences would arise.
Similarly, and Mr Foss referred to it in his speech, a compelling submission pointed out that beneficiaries of a trust could have no idea that they had been made beneficiaries of that trust, yet, through no fault of their own, they could be tainted by association with it. Not only had they no involvement with the trust, they had absolutely no knowledge of it. In fact, that issue had nothing to do with this bill; that was the case under existing tax law, but this bill gave us the opportunity to address it. The work we have done here has actually improved the wider associated persons test beyond the scope of this bill, and I am certainly very proud of the work we have done in that regard.
I will also pick up on the point that Rahui Katene made in some depth about voluntary payroll giving. Ms Katene detailed it very well, and I do not want to repeat what she said. But, even in respect of those provisions, we spent quite some time exploring the consequences. What if the employer company has gone into liquidation, and those funds are still in trust—who owns them? What if the company has not passed them on? What if it has passed them on to the wrong entity? The committee tested those parameters as far as we were able, given the limited time—which has already been talked about—to ensure that the legislation would hit the taxpayers in the best form we could get it.
I shall run through some of the other areas that the bill deals with. Life insurance has been significantly remodelled. That was overdue. The life insurance sector has changed significantly, and this bill now brings it much more in line with the current realities of life insurance. Tax pooling, which is something that I had not been familiar with before now, is addressed in the bill. There are provisions relating to KiwiSaver on death, GST on loyalty points, and petroleum mining. The list is long and extensive.
The point is that this bill tidies up a number of important areas of tax law that need to be tidied up. I believe that it is conducive to business in New Zealand, and I believe that it is conducive to investment in New Zealand. In these difficult times New Zealand needs nothing more than that. I commend the bill to the House.
BRENDON BURNS (Labour—Christchurch Central)
: I am pleased to rise in support of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill this evening as a member of the Finance and Expenditure Committee. I note the comments in opening from the Minister of Revenue, Mr Dunne, about the need in the future to keep tax bills more manageable, and I endorse and applaud his comments on that. I also note, in response to the comments of Mr Boscawen, who has handed me a copy of Sir Roger’s latest tome—
John Boscawen: A bloody good book!
BRENDON BURNS: It is wonderful. It is 112 pages, and I compare it with the tax bill we are considering: 824 pages to deal with some tax issues. Would it not be wonderful if life was so simple that we could solve it all in 112 pages? But here is the reality: the mother of all tax bills. That is what life is about. It is complex, it is difficult, it is hard, and we have to have legislation like this to make sure that life can be lived in the 21st century. I am afraid that it is not possible for a 112-page book to summarise everything in life. Also on that point, his answer is cutting tax to nothing and deregulating everything. Let us look at the recession we are in and at what has happened in the world. Greedy people who did not want to pay a cent in tax mismanaged the world’s economy, and we are all paying the price for that today.
I acknowledge the role of the chair of the Finance and Expenditure Committee, Craig Foss, in steering this mother of all tax bills through, and colleagues on the Finance and Expenditure Committee. I also acknowledge the work of the Inland Revenue Department—Robin Oliver and others—and also our independent adviser, Therese Turner. They gave us good advice. It was a big, difficult, complex piece of legislation, and it is very pleasing to see it back in Parliament beyond the province of the Finance and Expenditure Committee.
This bill began its life with its first reading in Parliament a year ago this week. Labour supported the bill. It was a Labour bill at the start. We supported it through the select committee process and back to Parliament tonight. The focus of the bill was on reform and on reducing tax costs for businesses. In fact, it represented the first stage of the Labour Government’s review of our international tax rules. We were greatly advised throughout the process by consultation with business and its advisers. Most of the reforms were signalled in a series of consultative papers. That was a good process to follow. A lot of further detailed work was carried out.
The bill is also a reminder to us of the Government’s failure in cutting the research and development tax credit and rolling back KiwiSaver incentives. The connection is that in the last few weeks the Minister of Finance has announced some changes to foreign investment law. Unfortunately, those changes did not come before Parliament for scrutiny, but it is his right to do that. I am no xenophobe, and I do understand what foreign investment brings to an economy, but I also have fears about what it can do to an economy. We as a nation at the moment have a current account deficit of $16 billion. That keeps us poor as a nation. Unfortunately, about $13 billion of that current account deficit is due to the repatriation of foreign profits and other similar money flows. Our high dependence on foreign investment already is seeing our dollar stay high, at about US65c, and it is seeing our interest rates stay high by international comparison. What are we as New Zealanders to gain if we make it even easier for foreign investment to flow in to buy New Zealand assets and land?
We should have kept the KiwiSaver scheme, which was a start towards generating more savings. We are a nation of poor savers. We needed to keep that scheme in place, but instead it went to fund the tax cuts that took effect on 1 April, but 70 percent of New Zealanders were excluded from them. Seventy percent of New Zealanders failed to get a single dollar from those tax cuts, because they were on low and moderate incomes, and
$1 in $3 of those tax cuts went to the super-wealthy. That is inappropriate. It is an appalling consequence of the National Government’s decision to abolish the research and development tax credit, which would have assisted us in growing our economy and would have funded the balance of the tax cuts resulting from the abolition of the 2 percent employer contribution to the KiwiSaver scheme.
I return to the bill before us now. The select committee does indeed consider it vital that tax law be clear and accessible for taxpayers. One has to ask the question, when we are still left with an 824-page bill, how clear and transparent our tax laws will actually be, but that is the complexity of international tax requirements. That is the complexity of matters relating to life insurance and of other matters that this bill tackles.
I wanted to comment most particularly on a couple of aspects of the bill in relation to the treatment of reimbursements and honoraria paid to volunteers; I am very pleased to see that those came through. I am especially pleased to see the introduction through this bill of a voluntary payroll giving system. I think that is imperative, especially in these times. Charities, more than most organisations, are feeling the pinch of the recession. Enabling people to give from their wages, from their salaries, on a weekly, fortnightly, or monthly basis makes eminent sense. The bill will improve the cash flow of charities, it will make it easier for people to give, because they will not feel the pinch so much, and the tax concession for that is available right away, rather than people having to wait till they file a return at the end of the year. I think it is a commendable part of this bill.
I also want to comment that this bill addresses changes in many areas right across the current tax law. It reforms our international tax rules by, amongst other things, introducing a tax exemption for foreign active income with controlled foreign companies, and exempting most foreign dividends received by New Zealand companies from tax. This will allow New Zealand residents with active businesses in overseas markets to compete on an equal footing with their competitors. These are welcome moves.
The bill also aligns life insurance taxation rules more closely with the actual profits of term life insurance business. It extends portfolio investment entity rules to life insurers’ savings products. It includes changes to the income tax rules for petroleum mining, such as ring-fencing deductions for petroleum mining undertaken in a foreign country through a branch. It removes the distinction between onshore and offshore development, and introduces a reserved depletion method for deductions.
The bill is wide ranging. It will amend the Goods and Services Tax Act 1985, which has been referred to previously, so that certain loyalty-programme operators can defer the imposition of GST until loyalty points are actually redeemed. The amendments to the Goods and Services Tax Act will allow certain exported foreign second-hand goods, most notably metals, which were not to be re-imported into New Zealand, to be zero-rated if the exporter had claimed a second-hand goods deduction. The bill includes a whole host of remedial amendments. There are numerous changes proposed throughout it. I commend it to the House.
DAVID BENNETT (National—Hamilton East)
: I will take just a short call on the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill. Most of the points of this bill have been canvassed in depth by other speakers. There were some big issues that we had to face in regard to the active versus passive business tests and the definitions of associated persons, and those issues took a lot of time in the meetings of the Finance and Expenditure Committee.
I thank those officials who gave very detailed advice and worked through the examples with us. I also thank members of the committee from both sides who worked constructively to get a solution in regard to many of those issues. The bill has been a long time coming, and taxation in this area is a work in progress. It needed to happen,
and this is another point in continuing the process that we are going through at the moment in regard to taxation reform.
RAYMOND HUO (Labour)
: Samuel Johnson once said that great works are performed not by strength, but by perseverance. My colleagues from the Finance and Expenditure Committee will agree with me that the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill, which is undoubtedly a great work, is being performed with both strength and perseverance.
The bill was originally introduced on 2 July 2008 by the Labour-led Government. The proposals contained in the bill are significant and complex, and they cover a wide range of taxation issues. Although the bill mainly addresses business tax issues, it does cover a wider spectrum than that. As stated in the Finance and Expenditure Committee’s report, the size of the bill, and the depth and breadth of the material it covers, have made our consideration of it more difficult than it might have been otherwise. I agree with what my colleagues said in our report. In future we would prefer to see such proposals introduced to the House as separate, more manageable bills. I wish to join my colleagues in thanking the officials and independent specialist advisers for the significant role they played in our consideration of the bill.
The bill provides for the reform of the international tax rules, amongst other measures introducing a tax exemption for the foreign active income of controlled foreign companies, and exempting most foreign dividends received by New Zealand companies from tax. This reform aims to allow New Zealand residents with active business in overseas markets to compete on an equal footing with their competitors. In other words, to quote the previous Minister of Finance, the Hon Dr Michael Cullen, and the Minister of Revenue, the Hon Peter Dunne, when introducing this bill in July 2008, international tax rules for New Zealand - controlled foreign companies are being relaxed so that the active offshore income of such companies is exempt from New Zealand tax. The international tax reforms aim to make New Zealand companies more competitive by taxing them under a regime similar to that of overseas jurisdictions.
The bill would align life insurance taxation rules more closely with the actual profits of term life insurance business, and extend portfolio investment entity rules to life insurance savings products. It includes changes to the income tax rules for petroleum mining, such as ring-fencing deductions for petroleum mining undertaken in a foreign country through a branch, removing the distinction between onshore and offshore development. It also introduces a voluntary payroll giving scheme, which would allow employees to make regular payroll donations from their pay and enjoy the relevant tax benefit immediately, rather than at the end of the tax year.
Other main issues and key amendments introduced in the bill include measures relating to application dates, the definitions of associated persons, general insurance and risk margins, tax pooling rules, and the GST treatment of transactions relating to emissions units, etc.
What also interests me is the underlying philosophy behind the bill, which replaces the current legislation that was put in place in 1991-92. To some extent, the important part of the active-passive distinction, to quote the Hon Dr Michael Cullen, is whether this country will have an outward-looking taxation system or an inward-looking one. Therefore the real issue is, firstly, whether we want New Zealand companies to internationalise or whether we believe we can make our living just by taking in each other’s washing for the foreseeable future. Secondly, if companies succeed in either having some manufacturing capacity or investment offshore, or having very substantial parts of their business dependent upon exporting so that the majority of their income comes from offshore activity, then our current taxation system, with its lack of an active exemption, encourages those companies to move all their capacity offshore.
What follows is a natural choice for us to make: a choice between an inward-looking mentality, where we play a defensive role, trying to keep what little we have, and an outward-looking mentality, where we would try to expand and develop our international influence, connections, and markets, and retain the highest-quality and highest-value parts of our production and service within New Zealand. If we opt for the inward-looking “little New Zealand” policy, we will eventually defeat ourselves. If we opt for an outward-looking “greater New Zealand” approach, which, as far as this bill is concerned, requires an active exemption, then there is a real prospect for us to build up an expanding economy and avoid the economy declining.
On this particular point it is worth reiterating that as we are a small country with a small economy, if we are to develop the outward-looking approach and expand our New Zealand economy we will need to be more diligent and smarter. Therefore, innovations by way of research and development are one of the key factors. International evidence shows that well-designed research and development tax credits can have a positive impact on productivity growth. It is a concern that the main disparity between New Zealand and other OECD countries is in the low research and development spending from businesses, which is the very area that was targeted by the research and development tax credits. To worsen the situation, it is regrettable to say, as my colleague Brendon Burns has just said, that the research and development tax credits have been scrapped by the National-led Government.
When this bill was introduced, by sheer coincidence it came into the House for its first reading on the same day as the Committee stage of the New Zealand-China Free Trade Agreement Bill. As acknowledged by the then Minister of Trade, the Hon Phil Goff, who signed the historic free-trade agreement with China, the international market place today is significantly different from that in the past, and presents us with new challenges. Governments and businesses have to operate in a more complex, competitive, and uncertain global environment. The two bills, in fact, have a great deal of interrelationship in terms of their underlying philosophy of having an outward-looking, growing New Zealand economy, as opposed to an inward-looking, gradually retreating, and declining New Zealand. In similar vein, countries are recognising that in a world where commercial trade and financial flows are globalised, they cannot afford to become isolated. That is evidenced by the trend towards more bilateral and regional free-trade agreements. Countries in our region are becoming increasingly connected by a complex web of trading arrangements.
This bill, when first introduced, represented the first stage of the previous Labour Government’s review of our international tax rules, and it has been greatly influenced by extensive consultation with businesses and professionals. I commend the bill to the House. Thank you.
PESETA SAM LOTU-IIGA (National—Maungakiekie)
: I speak to the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill, which is a rather long and complex bill. I also acknowledge the work that our chairperson, Craig Foss, did in chairing this bill through the Finance and Expenditure Committee. He did a great job, and the parties came together well in putting together the various amendments to the original bill. A very good job was done of working through some very complex issues along the way.
I also acknowledge our friends from the Inland Revenue Department, our independent advisers and tax specialists, and the various people who came together to provide advice on the bill. I think they did a great job, and they did so under very trying circumstances and often under very strict time restrictions between the weeks that we met. So I salute those people and thank them for their advice.
In summary, I stand to support this bill because it will provide for the improvement of the tax legislation in this country. Thank you very much, Mr Deputy Speaker.
A party vote was called for on the question,
That the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill be now read a second time.
| Ayes
112 |
New Zealand National 58; New Zealand Labour 43; ACT New Zealand 5; Māori Party 4; Progressive 1; United Future 1. |
| Noes
9 |
Green Party 9. |
| Bill read a second time. |
