Hon DAVID CUNLIFFE (Labour—New Lynn) : In a rare show of unity in the Chamber it is common ground that it is my turn. I forget who it was who said something like: “I would have written a short article if I’d had the time, but I didn’t so I wrote a long one.”

Hon Members: Winston Churchill.

Hon DAVID CUNLIFFE: Thank you. Someone had a better private school education than me, I fear.

This is it: the longest and no doubt densest legislation in the tax area since the rewrite. Yes, that excludes the rewrite—the Minister of Revenue is nodding. This legislation is the product of a process where we did not have time to write a short bill, so we wrote a long one. Every page of this bill is complex, technical tax legislation. But in my 10 years in this Parliament I regret to say that I have never seen a worse process for bringing a bill to this House—never, in 10 years. That is not to say that the substance is not in general worthwhile, and, with the exception of Supplementary Order Paper 34, Labour will be supporting this bill. We do so because the bill had its gestation in the previous Labour Government, and has been brought to fruition by the same officials under this Government.

There is broad consensus on the aims and purposes of the bill: to modernise our international taxation and our associated persons rule, and to put through some consequential amendments and clarifications. But we have been unduly reliant upon the professional advice to the Finance and Expenditure Committee, and I think it is a fair comment to say that all members of the select committee share a certain sense of consternation that in this “phone book” there lurk dangers of which we are not yet fully apprised. I have to say that the rush was compounded by the Government, in setting before this House an unduly fast report-back date for the select committee, and that put immense pressure on officials. It meant that on the day of a meeting the select committee was receiving reports that members had not had the opportunity to read the night before, which, frankly, is not good practice for this House, especially on a matter as technical as this.

To add insult to injury, we have come to two substantive Supplementary Order Papers, which have been tabled in this House since the bill was brought forward. We will be voting against Supplementary Order Paper 34, dated Tuesday, 4 August. There are a number of substantive matters in there, including in particular the use of mortgage-backed securities and their tax consequences, information about which the select committee never received. These things are not developed in a vacuum, nor are they developed in the few weeks between the deliberation on the main bill and the presentation of the Supplementary Order Paper. I warrant that officials had these matters under consideration while they were briefing the select committee on the rest of the bill, but no mention was made that a 52-page Supplementary Order Paper would be forthcoming. When the main bill is an incredibly truncated and complex process, that is simply inappropriate. We will be voting against this Supplementary Order Paper, not primarily because of its substance but because of this terrible, terrible process.

I would recommend that the Supplementary Order Paper be sent back to the Finance and Expenditure Committee for proper consideration in the normal way. Whether or not the Government will agree to that—and I invite the Minister to take a call—let me say that the risk that is borne from the detail in this “phone book” being wrong is risk that is borne by the National Government, because it is the National Government that is rushing the bill through the House. As the effective dates of this bill have been changed by recommendation of the select committee because it was already apparent that the bill could not possibly meet the start of the tax year deadline, I ask why we did not push the dates out far enough so that the select committee could give proper and due consideration to these matters. That is the key question. The point is that we are changing the effective implementation dates anyway.

My colleagues on the Finance and Expenditure Committee are going to be taking a number of calls on the substantive issues that are raised in the bill. I will mention just three very briefly. The first is the associated persons rule. It is a longstanding part of our tax law that parties associated with a company must be co-liable for certain aspects of its tax liability. That rule has, by consensus, been too broad, so this legislation, by consensus, narrows the associated persons rule. It does so having had detailed feedback from officials, and on that point the committee did spend sufficient time to reach a good point.

The second aspect I will mention concerns the international tax rules. For many years now the “grey list” has been an archaic convention based upon the idea that there were certain countries whose tax laws were similar to our own and could be treated in a much more equivalent way, and other countries for whom we needed different and specific provisions. This bill updates a great deal of the complex tax law around our international taxation and the use of the “grey list”, and within that a number of issues cropped up. I will mention one around the tax treatment of petroleum mining—an issue I understand that the Minister has given substantial thought to, and around which there was some discussion at the select committee table—which is the need to ensure that there are not any unintended consequences should it prove, in the fullness of time under the common law, that there are pre-existing contracts that predate 4 March 2008. I think it was a commonly held view of committee members that we would not want any established pre-existing contracts to be caught by that rule, to the detriment particularly of New Zealand companies. I invite the Minister of Revenue to confirm in his remarks whether indeed a contract that does exist before that date is a matter of common law and is not a matter for the particular deliberation of this House.

I say in summary that this bill is a “phone book” full of important detail. Upon the interpretation of this detail rests the age-old game of poacher and gamekeeper, where companies pay high-priced tax lawyers to find a way around what is written in this document, and we pay officials to ensure that the integrity of the tax base is maintained and that the equity of the treatment of taxpayers is maintained with it. The point is that it is unfortunate, at the least, to say that the largest tax bill in New Zealand history outside of the rewrite has been rushed through this House to the detriment of the quality of the consideration of the Finance and Expenditure Committee. This process has been a low point of legislative practice, and as a token thereof we will vote against Supplementary Order Paper 34, although we support the intent of the bill.

JOHN BOSCAWEN (ACT) : The Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill is a very big bill, and it took many months of consideration. When Mr Foss rose to speak on the bill last night, the first thing he did was acknowledge the work of the officials. I also acknowledge their work, in particular that of the deputy commissioner of policy advice of the Inland Revenue Department, Robin Oliver.

Mr Cunliffe referred to the taxation of petroleum companies and raised the concern that, in respect of petroleum companies in particular, some unintended consequences may arise out of pre-existing contracts. I put on record a circumstance relating to one particular taxpayer, which has been the subject of discussions of members of the Finance and Expenditure Committee over the last couple of weeks, and in particular the last 2 or 3 days.

A New Zealand taxpayer called Greymouth Petroleum had been looking to explore for oil for the benefit of its own shareholders and for New Zealanders generally. In October 2007 it lodged a bid with the Government of Chile. It bid for five petroleum exploration blocks and put up five bonds of US$100,000 each. Five weeks later, on 16 November, having lodged the tender on 10 October, Greymouth Petroleum was advised by the Chilean Government that it had been successful in respect of four of those blocks. At that time the Chilean Government released it from its tender in respect of the fifth block but retained the four bonds of US$100,000.

On the basis of those bonds, Greymouth Petroleum was obliged to complete the formal contract with the Chilean Government, which it did on 30 April 2008. The key thing is that as at 16 November there was an absolute commitment on behalf of Greymouth Petroleum to complete the contract. Had the company not done so, the most immediate consequences would have been that it would have forfeited those four US$100,000 bonds, it would have exposed itself to being sued for breach of contract, and, of course, it would have suffered a massive lost of reputation, both for itself and for New Zealand generally.

The concern amongst members of the select committee has been that between 16 November, when the company was advised that it had been successful in its tender, and 30 April, when the company formally signed the contract, the New Zealand Government announced on 4 March that the law was to change. Although the contract had not been officially signed, the key point is that, without doubt, there was a binding commitment from Greymouth Petroleum to enter into the contract. Members of the committee, and certainly members of the ACT Party, have been particularly concerned that if we were to pass the bill in its current form, an element of retrospective tax liability may have accrued to Greymouth Petroleum—as Mr Cunliffe said, there would be unintended consequences.

I have been working on a Supplementary Order Paper over the last 3 or 4 days. I discussed it with various members of the select committee, and it had been my intention to put forward that Supplementary Order Paper. I sought support from all members of the House, including the Minister of Revenue. But I understand that in recent days there have been discussions between representatives of Greymouth Petroleum and the officials of the Inland Revenue Department, and I understand that the department is now satisfied that there was a binding commitment from Greymouth Petroleum. Although the contract had not actually been signed when the law changed, without doubt there was a liability on Greymouth Petroleum, having been advised that its tender had been accepted, to complete the contract. Certainly, I know that the Inland Revenue Department is absolutely satisfied that had Greymouth Petroleum not done so, then it would have lost its US$400,000 in bonds. There would have been a huge cost to Greymouth Petroleum if it had not completed the contract it is bound to.

I understand, as I said, from Greymouth Petroleum officials that the Inland Revenue Department has given some comfort in this regard, so I do not intend now to put forward my Supplementary Order Paper. I am optimistic that the matter will be resolved to the satisfaction of both Greymouth Petroleum and the Inland Revenue Department. That is all I have to say at this stage. Thank you, Mr Chair.

DAVID BENNETT (National—Hamilton East) : In relation to the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill, I think that the first point that all members of this Committee would agree on is that we should acknowledge the hard work of the officials and thank them for the support they gave to the Finance and Expenditure Committee. It is a tremendously big bill on a very complex subject area, so we were very grateful for their advice and wisdom.

However, I disagree with Opposition members. They feel the bill is beyond the scope of Parliament and it has been rushed through. That is simply not the case. The reality is that with any kind of legislation dealing with taxation matters that are complex and engaging, parliamentarians find it difficult, because they do not have the experience that tax officials have. We had specialist tax officials, who basically spend their whole lives on this kind of legislation, trying to find holes in it and trying to understand it. Even they admitted that they do not understand everything about taxation legislation in this area, so heaven knows how politicians are supposed to know everything about anything.

It is a matter of concern when Labour members try to be detrimental about the nature of this legislation and say that it has not been through a thorough process, when it has. We had the best legal minds that we could engage to do that. With their help and the help of the Inland Revenue Department, we came to the conclusion of this bill. Taxation legislation in this area is not something that is easily maintained in a watertight container. There is always room for tax lawyers and accountants to try to take advantage of the legislation, and that perennial problem will go on for ever and a day. Probably the only way to avoid that is to have a huge rewrite and restructure of the way we do taxation law, and that was well beyond the scope of this bill and of the select committee at this stage.

However, some fundamental concepts were considered by the select committee. I will touch on just a few of them, because they are important for those who are looking at taxation law in this area going forward. One of them was the active business test for controlled foreign companies, commonly known as CFCs. The active business test is an important process in working out whether any income will be attributed to New Zealand residents.

Hon Maurice Williamson: Don’t CFCs make holes in the ozone?

DAVID BENNETT: No, they do not make holes in the ozone; they are controlled foreign companies. Another part of that important test is the definition of passive income. For the layperson out there, passive income is income, like interest and dividends, that one does not have to work to earn.

Hon Member: The Labour Party would know about it.

DAVID BENNETT: They know about being passive, but they do not know about income. That is probably why they could not understand the legislation. Some of the terminology resonated with them, but some of it did not. The definition of passive income for controlled foreign companies is an important concept that was looked at in this legislation.

Some of the other things in the legislation are interest allocation rules for outbound international investment, foreign dividend exemptions for certain companies, and other tax measures regarding conduit tax relief in “grey list” countries. David Cunliffe, one of the members opposite, mentioned the “grey list”. It has been a source of great favour for many law and taxation students for many years, and now it does not have the same ability to stress their minds as it had in previous generations. The taxation of life insurance business was another key component of the legislation. It is a very important business and it is very complex because many structures are engaged when it comes to people’s life insurance matters. There was also some subsidiary policy around reallocation payments and payroll giving.

One of the big things the select committee considered was changes around the definition of associated persons. Associated persons is an aspect where tax lawyers will engage themselves in trying to work out scenarios where they can get through the boundaries that this legislation now presents for them. Some innovative schemes will arise. It is just a matter of time before the Government and the Inland Revenue Department become aware of those schemes and will have to change them again, but that is life and taxation.

STUART NASH (Labour) : First of all, I acknowledge the presence of Emma and Jim, and Robin who was here before, from the Inland Revenue Department, as has been mentioned by, I think, everyone.

Simon Bridges: What about me?

STUART NASH: No, I say to Mr Bridges that he does not warrant a mention, I am afraid. But on behalf of everyone on the Finance and Expenditure Committee, I say that the officials did a fabulous job, as has been mentioned, and we thank them very much.

As a new member of Parliament, I found that this Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill was a brilliant bill to start select committee life on. That is a perverse sort of thing to say, but I mean that I believe that select committees ought to go to bed at 2 a.m., set the alarm for 5 a.m., and then get up; that is what it was about. To have this bill over but to now get reading lists of such a size makes me realise that that seems like nothing now. So I go to bed at 1 a.m. and get up at 5 a.m., and I am fine. As my colleague the Hon David Cunliffe mentioned, this is a very, very large piece of legislation.

I speak in support of the bill, but I will quickly outline the purpose and objectives of tax legislation, if I may. First and foremost, tax legislation has to be effective and it must not hinder growth. Secondly, there must be equity. By that, I mean we must look at who bears the burden of taxes. A bill of this size is slightly less relevant to the majority of ordinary income-earning New Zealanders, but it is still very important for those who are affected by the provisions in it. Thirdly, the bill has to have fiscal integrity. By this, I mean that tax legislation cannot provide incentives for people to restructure their affairs in order to perpetrate tax avoidance. Fourthly, there must be compliance in administration. Citizens must understand their rights, and must be able to access the information that allows them to be informed of their rights. Compliance costs should be kept to a minimum without compromising the integrity of the system. Finally, any tax legislation needs to take into account the fiscal implications, and by this I mean how much revenue the Government will gather, or how much it will miss out on by the implementation of any tax law.

When the Finance and Expenditure Committee approached its deliberations on this bill, we members had to take into account all of these points. I think that is what Mr Cunliffe was saying, in the sense that when we had a bill that was so large, so wide, and so varied, at times select committee members, certainly on the Labour side, felt there was not enough time to give proper and effective deliberation to many of the important clauses in the bill. I reiterate, however, that due to the size of the bill, its depth, and our time constraints, it was difficult to give each separate clause its due consideration. I do believe that. This is why we have some concerns over the Supplementary Order Papers, which were not put before the committee for consideration or for expert opinion. That is why we are reluctant to support those Supplementary Order Papers, as my friend David Cunliffe mentioned.

After having said that, I will talk about an area of international tax law. To read out the clauses in this bill that affect international tax law would take about 5 minutes, anyway. There are over 100 clauses there; members do not all know the legislation but they should believe me. The area is incredibly complex, and probably deserves more attention for the reasons given. We quite quickly get into layers of complexity that reflect the ongoing game of poacher and gamekeeper. Many private entities hire very, very expensive and the best tax advisers, to ensure that their tax is minimised so that their tax efficiency is maximised. The Crown’s officials are required to stay one jump ahead of that practice, which is why the advice from our expert consultants was so valuable in the deliberation of this bill. But the bill still strikes a reasonable balance between the need to remain internationally competitive, which is vital to the sustainable growth of the economy, and the need to provide clear rules that will allow the tax base to be preserved.

I will go through just a couple of things in the bill. The bill will ensure that key provisions relating to controlled foreign companies—CFCs, as Mr Bennett outlined—are set in one place in legislation. That will, hopefully, make the rules more accessible. The bill puts in place technical amendments to the accounting-based active business test for controlled foreign companies, to reduce the cost of applying the test. The bill also provides that for the purpose of the tax-based active business test, consolidation is permitted only when a taxpayer has income interest of more than 50 percent in each of the controlled foreign companies to be consolidated. These things are reasonably technical, but are in fact very important for controlled foreign companies. The bill provides that income from personal services that are not essential support for a product supplied by a controlled foreign company is attributed, but then is disregarded for the purposes of the active business test. We recommend that currency conversion rules also apply to the active business test.

Hon PETER DUNNE (Minister of Revenue) : I take a call at this stage just to highlight what a number of members have referred to already, which is the significant nature of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill. I will then comment on the matters that another speaker raised earlier on.

I cannot let the criticism that this bill was somehow rushed go unchallenged. The bill was introduced in July 2008; admittedly, a general election intervened. The submissions were all called for and received by the previous Finance and Expenditure Committee. The new select committee began work on the bill early this year. To have a bill reported back by August 2009, in that context, no matter its significant weight, is not, in my view, rushing legislation. It was not rushed for this reason as well: many of the issues that this bill contains have been the subject of a long period of gestation and public consultation. The international tax rules changes have been the subject of review, consultation, discussion, and debate since at least 2006, and by the time the proposals came to be incorporated in the bill and referred to the select committee, most of the major issues of principle had been resolved, and the committee’s work was, in essence, around the drafting and the detail. So I do not think it is fair to claim that the process was rushed. Similarly, the life insurance rules are long overdue for reform. Again, those changes had gone through a process that included a discussion paper, an issues paper, and technical consultations over a long period of time, before finding their way into this legislation. Even as that process was continuing, discussions with interested parties were ongoing. Issues such as payroll giving had been foreshadowed as early as 2006—also in a discussion document—and had been included and worked through.

In recognition of the fact that an election had intervened and a change of Government had taken place, I wrote to the select committee—I cannot remember precisely when, but some months ago—recommending that it give consideration to changing a number of the application dates, which originally were to be 1 April 2009. I am grateful for the committee’s acceptance of those recommendations, because I think they give taxpayers who will be affected by the changes a greater degree of comfort, and time to adjust to the significance of them.

I now turn to the points made by Mr Boscawen, in particular, relating to petroleum mining situations. I say at the beginning that I will not discuss the affairs of any particular company. I think it is extremely unwise in tax debates in this Chamber to start drawing the circumstances of individuals or of companies into public debate. Those matters are worked through with officials, and with the appropriate authorities. What I will say—and in this instance I have said this to the company involved on a number of occasions in the last few months—is that once this legislation is passed, I am more than happy for it to work through with the relevant tax policy officials, in its particular instance, precisely what their contractual obligations were, and the implications that arise from those obligations.

Hon David Cunliffe: On principle of retrospectivity.

Hon PETER DUNNE: I will come to that point in a moment, if I may. I am not prepared to say more than that at this stage, because that is then bringing that company’s affairs to the floor of this Chamber, which I think is grossly inappropriate.

The member interjects: “On principle of retrospectivity.” The position in the bill is quite straightforward. On 4 March 2008 we announced a change in the regime. My understanding is that everyone in the Chamber agrees with that particular change. We indicated when the bill came in, in the middle of 2008, that the change would be retrospective, if you like, to the date of the announcement—4 March 2008. As I understand it, everyone agrees with that position and the signal that was sent. The question that arises is with regard to that period of indeterminate length prior to 4 March 2008. I am saying in respect of this company in this particular instance that they need to start talking to officials about how they are affected contractually by the change in the law, and, as I said before, what the implications of that change might be for them. I am not prepared to discuss on the floor of the Chamber the ifs and buts that might arise from that, and the technical details of that case, because it is simply not appropriate for me to do that.

Hon David Cunliffe: What about at a principled level?

Hon PETER DUNNE: I think we need to be very careful about drawing that line too tightly, because of the nature of the rules that were in place prior to 4 March. I am saying that anyone who feels that they have been caught by this change should, once the law comes into effect, talk with the Inland Revenue Department to determine how they might be affected and what the implications for that company might be. I offer that advice in respect of the particular company Mr Boscawen referred to, and any other companies who may feel that they are in a similar situation. I am not prepared to go beyond that for reasons I think would be obvious to members.

These are always quite difficult areas to draw boundaries. In this instance, there is a considerable elapsing of time between the drawing of that boundary and the passage of this legislation. I would have thought that people who thought they might be affected would be talking about these issues far earlier than the last few weeks when the legislation comes before the House. I make that observation. I also make the point about the action I think is available to those who think they might be affected.

BRENDON BURNS (Labour—Christchurch Central) : I am very pleased to rise in the Committee stage of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill. I firstly acknowledge the huge contribution of officials to the bill in its passage to this point. If the Finance and Expenditure Committee and parliamentarians are pleased to see the bill in its latter stages, I can only believe that the Inland Revenue Department and other officials are delighted to see this mother of all bills start to make its way through the process.

I take a slight point of difference with the Minister in the chair, in respect of the issue of the size, scope, and rushed nature of this bill. I quote from our select committee report in respect of the bill: “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, 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.” I think that deserves some underlining. Particularly in a select committee where most of the members were new, getting to grips with a hugely complex bill in a matter of just a few months certainly presented its challenges. Unfortunately that situation will inevitably present itself again in this Parliament because of the process and the complexity. We will revisit some of these issues; that is already signalled by a significantly sized Supplementary Order Paper that the Minister has indicated, and I also propose to table a Supplementary Order Paper later on.

That said, the bill is important legislation, making changes to the area of taxation law. It provides for significant reforms in a number of areas including international tax rules. It aligns life insurance taxation rules closer to the accounting treatment of life insurance profits. It provides for payroll giving. I am particularly pleased to see this measure in the bill at a time when charities in this country are under considerable pressure. The capacity for good-natured people to be able to pay charities through their salary and payroll on a weekly, fortnightly, or monthly basis is good for them and certainly good for the charities they wish to support. The bill also tackles the complex area of associated persons; I will comment a little more on that area in a moment. It erases tax thresholds for compliance costs for small and medium businesses. It deals with the tax treatment of revocation payment and overtime meal allowances, clarifying it for employees.

Labour supports this bill, and has done all the way through. But again I note that when we have large and complex legislation, we compound problems for ourselves as a Parliament and a nation. The process was not perfect, because of the breadth and depth of the bill, at 800-odd pages. Even if this is how it had to be, it is a reality that the National-led coalition Government will bear the unintended consequences of the fact that some of these issues have not been given the scrutiny they truly deserve.

I turn now to the issue of associated persons. This aspect of the bill received considerable scrutiny from the select committee, as time provided. We wrestled with the risk that in relaxing the rules it would be possible for the resulting law to not catch people who should be caught by an associated persons rule. We all acknowledge that in the implementation of this provision that will be very important, and ongoing supervision and monitoring by officials will be vital. I guess the reality of tax law is that no matter how one writes or defines it—no matter how well one does that job—there is an army of people whose job it is to provide the loopholes and exploit them on behalf of clients. Certainly in this area they are already at work, no doubt. But we have proposed amendments to reduce uncertainty and to narrow the scope of the proposed test on associated persons to exclude truly arm’s-length transactions. Narrowing the scope of the tripartite test excludes relatives from that test, and creates an additional exception to the test relating to companies. We also recommend that the test not apply for the purposes of land provisions.

CHRIS HIPKINS (Labour—Rimutaka) : I am still reeling somewhat from the lecture given just before by the Minister in the chair, the Hon Peter Dunne, on correct parliamentary process. I note that in the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill there is no minority report, despite the fact that there appears to be some disagreement on aspects of the bill across the House. I wonder whether that is because the minority report was removed in between the committee deliberating on the bill and it being reported to the House.

Craig Foss: I raise a point of order, Mr Chairperson. We are in the Committee stage. We are talking on Part 1, not the commentary on the bill. I know there will be introductory remarks, but I wonder whether the member could move back to Part 1.

The CHAIRPERSON (Lindsay Tisch): No, the commentary is part of a general discussion.

CHRIS HIPKINS: For the member’s benefit, I say that the commentary is on the entire bill, including Part 1.

There is no mention of a minority report within the commentary, which covers Part 1, so I wonder whether a minority report was actually written. It could be that there was not a minority report, or it could now be part of the practice of this House for the minority report to be removed between when the committee deliberates on the report and when it is tabled in the House. That appears to be correct parliamentary practice for this National Government, as revealed in the House at question time this afternoon.

This bill makes amendments to the Income Tax Act 2007, and, as my colleague David Cunliffe pointed out earlier, the Labour members are very concerned at the rushed nature of this bill. As we know from past experience, rushed taxation bills in this House make for bad legislation, which we quite often have to come back to and correct later on. When was the last time Parliament rushed through significant changes to the Income Tax Act 2007? I believe we will find that it was in December of last year, when the National Government implemented its tax cuts promises, which was its core election promise. Yet we found ourselves back in the House under urgency, after having rushed those changes through in December, prior to Christmas. Fewer than 6 months later we are rushing through a repeal. This highlights the fact that when taxation matters are rushed, members end up with egg on their faces, such as some of the National members who had quite a lot to say on income tax prior to Christmas when they were rushing through another taxation bill under urgency. National was trying to build trust with New Zealanders by implementing its core election promise of personal income tax cuts. Did National deliver on that promise? No, it did not, because having rushed the tax cuts through under urgency, it then cancelled them 6 months later.

National has very little credibility when it comes to taxation matters. We know that it simply breaks all of its promises, and that is why it is all the more concerning that this bill is being rushed through the House. It has not been given proper consideration, and we are concerned about that. It is somewhat humiliating for National members opposite when they have to come back to the House and correct mistakes that they have made on taxation legislation. As David Bennett said, one cannot say yes to tax cuts before an election, and then say no to them after an election. Yet that is exactly what National did. It made tax cuts the core part of its election manifesto, and then it took them away again within 6 months. The National Government broke its promise because it does not believe in keeping its word to New Zealanders. Time after time we are seeing National breaking its promises. I think we are up to four out of 10 promises on the pledge card that have now been broken, and I am in no doubt that there is more to come.

It looks like the chairperson of the Finance and Expenditure Committee, Craig Foss, will take the next call on this bill, and I certainly hope he does so. I hope he canvasses for us whether there was a minority report, and, if there was one, whether it somehow fell out between the select committee’s deliberation and the bill being reported back to the House. I wonder whether the member has any observations on whether he thinks that would be appropriate. Other chairpeople of select committees seem to think that that is appropriate. I do not think that is appropriate, and the Labour members do not think that is appropriate. We think that after a committee has deliberated on a bill the chairperson of that committee should report the bill back to the House as it was deliberated on.

To come back to the intent of the bill, I say that it provides for the reform of international tax rules, it aligns life insurance taxation rules more closely with the accounting treatment of life insurance profits, and at the same time it extends portfolio investment entity rules—

JO GOODHEW (Junior Whip—National) : I move, That the question be now put.

RAYMOND HUO (Labour) : I rise to take a call on the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill. This bill is so complex that almost all involved got wee wee’d up. The phrase wee wee’d up was invented by the oratorically gifted US President Barack Obama, for when people get all nervous for no reason. I certainly got wee wee’d up for good reasons. The bill contains 824 pages. As the Hon David Cunliffe just pointed out, it was a huge bill, plus huge Supplementary Order Papers that had not even been sent to the Finance and Expenditure Committee at all. The size and the breadth of the bill combined with a tight report-back date put considerable pressure on the deliberation process. I appreciated what the Hon Peter Dunne just explained, but it is fair to say that to some extent this is a rushed bill.

Part 1 of the bill amends the Income Tax Act 2007. There are 431 clauses in Part 1. Some major issues are covered in this part, such as emissions units under the Climate Change Response Act 2002, life insurance regimes, rules for multi-rate portfolio investment entities, associate persons, etc. The committee recommends changing the application dates proposed in the bill to sufficiently allow for the progress of the bill through Parliament. Certain amendments were made in clauses 9, 31, and 48, and in seven other clauses, to provide for the tax treatment of emissions trading units. Most costs of emissions trading will be tax-deductible, and the Government subsidy of emissions costs will generally be assessable.

The specific taxation treatment depends on the emissions type. There are four such types, Speaking on that point, it is worth quoting what the chairman of the Environmental Defence Society, Mr Gary Taylor, said in the New Zealand Herald, that the recent announcement by the National-led Government of a target of 10 to 20 percent reduction in greenhouse emission by 2020 was a big disappointment and continues a disturbing recent trend of bad decisions for the environment.

More relevant to the various issues this bill aims to cover, scientists say that developed countries need to reduce emissions by 25 to 40 percent by 2020. New Zealand is not yet even at the lowest point of that range, with the offer announced by the Government. The overall costs to the economy of reaching the 2020 targets would be lower if we start now, rather being forced to make big cuts later. Thank you, Mr Chairperson.

CRAIG FOSS (National—Tukituki) : I move, That the question be now put.

STUART NASH (Labour) : I would also like to respectfully disagree with the Minister of Revenue, the Hon Peter Dunne. He said this bill was not rushed, but I think the feeling of those on the Labour team is that there was not enough time to give considered deliberation to very important parts of the bill. I would also like to elaborate a little further on something that Peter Dunne, David Cunliffe, and John Boscawen have spoken about, and that is do with petroleum mining rules. I would like to outline a bit about why we are implementing what we are implementing, or suggesting, in this bill.

The current petroleum mining legislation allows an upfront deduction for exploration expenditure that is of a capital nature. This is to encourage petroleum exploration and development in New Zealand. It is becoming a very important industry for this country, and these rules were put in place to encourage that. The primary reason, though, why we did not support limiting the scope of the proposed amendment is to ensure that New Zealand receives its proper share of benefit from New Zealand petroleum resources. Given the substantial increase in oil production in recent times, the Government considers it is critical to protect the New Zealand petroleum mining base. I stand to be corrected when I mention this, but I think a lot of this comes out of a very large multinational company that incurred significant expenses offshore, but claimed expenses against New Zealand income in the millions of dollars—

Hon David Cunliffe: Hundreds of millions of dollars.

STUART NASH: In the hundreds of millions of dollar—that is my understanding. That was a loophole that needed to be closed off, and that is why the matter was addressed in this bill.

Petroleum mining generally involves large amounts of expenditure incurred by companies that operate in a number of countries. Two or three, I think, of the 10 largest companies in the world are petroleum mining companies. The reality is that these companies, by their very nature, have considerable flexibility over what jurisdiction they structure expenditure through. The costs of a significant foreign exploration or development programme could eliminate, in New Zealand, a petroleum miner’s tax liability on its New Zealand income. This is what did occur, this is why we needed to address it reasonably quickly, and it is why it has been addressed in this bill.

This concern applies whether the company is owned by residents or non-residents. The current provision in the bill is in line with practice in a number of other countries, such as the United Kingdom, that do not allow foreign petroleum mining expenditure to be offset against domestic mining income. We are not leading in this; we are putting into place global best-practice tax legislation.

The current tax treatment of petroleum mining expenditure is arguably concessionary. The concern is that the concession is not working as intended because some New Zealand - resident companies are in effect gaining a significant subsidiary from the New Zealand tax base for overseas petroleum exploration. Officials were alerted to taxpayers using foreign branches to shelter significant amounts of New Zealand petroleum mining income in late 2007, and the proposed legislation merely ensures that the concession is available only for the exploration and development of New Zealand’s petroleum resources. Clauses 71, 74, 93, and 97 relate to these changes.

I would also like to talk about another area that the Minister mentioned, and that is the taxation of life insurance businesses. The words “life insurance” are actually in the title of the bill, so I think it is important that we discuss that as well. Minister Dunne has alluded to the fact that significant changes are being made to the life insurance business. Those changes result from work that began in July 2006. This has been an ongoing process, it has been a consultative process, and it is in response to submissions and comment received on two officials papers and one Government discussion document.

In terms of this part of the bill, wide industry consultation has been undertaken and the officials have released discussion documents and sought feedback. Life insurance companies carry on the business of life insurance and they are registered under their own Act, the Life Insurance Act 1908, to write life insurance policies.

JOHN BOSCAWEN (ACT) : I would like to comment on what Mr Nash has just talked about. He talked about the reason for the change to the taxation of mining by petroleum companies arising out of a loophole in the legislation. Let us be absolutely clear that the ACT Party supports the decision to close that loophole. The ACT Party supports that decision, and I believe that is the position of all parties in the House. As Mr Nash said, we understand there was an incident where many hundreds of millions of dollars of expenditure were deducted against New Zealand petroleum income, against the New Zealand tax base, and that that loophole needed to be closed. The ACT Party is absolutely clear on that issue. However, the ACT Party is also absolutely clear that there should be no retrospective tax legislation. A company should be able to plan its affairs based on the taxation legislation, and not have the law changed so its tax position subsequently changes.

I listened very carefully to the Minister’s comments when he said he certainly would not be commenting on individual taxpayers’ positions. He said it would be very unwise for him to do so. I think he also said it would be very unwise for other members of this House to do that. But I have previously alluded to Greymouth Petroleum, and I want to talk for a few more minutes about that situation. I do so because Greymouth Petroleum is a New Zealand company that we should celebrate. It is a small petroleum-mining company and I understand it employs around 100 people. A lot of its exploration is in the Taranaki region. That company has gone out to South America and lodged bids for petroleum-mining rights in Chile. It has been successful in doing that, against worldwide competition. That is the sort of thing that we should promote and support. I note that the then Minister for Economic Development in the previous Labour Government congratulated Greymouth Petroleum on winning and securing that tender and the right to explore for petroleum off the coast of Chile.

The current Minister has been helpful by saying he wants to see evidence of contractual commitments, and he talked about the need for Greymouth Petroleum to start talking. I think his words were that the company needed to start talking to officials. But the company has been talking to officials for close to 18 months. It was talking to officials about the taxation treatment of its mining exploration costs before 4 March 2008, when the law was changed. For example, it wrote to the Inland Revenue Department on 4 May this year to advise that it had lodged its tenders on 9 October 2007, and it recorded the fact that it had issued a press release on 17 November 2007 advising it had been successful with the tenders.

The ACT Party is concerned about a New Zealand company that has gone out on the worldwide stage, entered into tenders, posted what has since become a US$400,000 bond, then, under fear of forfeiting that bond, subsequently formally signed contracts. We should be in no doubt whatsoever that as of 16 November 2007, when the Government of Chile announced that the tenders had been accepted, first, the company was up for the loss of its US$400,000 of bonds if it did not complete the work, second, it could have been sued for non-performance and for damages, and, third, it suffered the loss of its reputation. One of the problems, I understand, that the Inland Revenue Department has had is that the contracts concerned are in Spanish, and I believe a letter was delivered to the department yesterday. It was certified by a senior associate of Minter Ellison, Silvana Schenone, who speaks Spanish. That person certified what those contracts said.

Let me finalise my speech by saying the ACT Party does not support retrospective taxation legislation. We are under no doubt whatsoever that there was a binding commitment on Greymouth Petroleum to proceed once those tenders were announced as having been accepted on 16 November 2007, which, of course, is some 4 months before the taxation change was alluded to. Thank you, Mr Chairman.

BRENDON BURNS (Labour—Christchurch Central) : I would like to comment, in a moment, about the amendments I have tabled, in respect of clauses in Part 1 of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill. But first, I make the observation that a tax bill is no more the appropriate place to start commenting upon the individual tax affairs of a given mining company than it would be for a bill that reviews the operation of finance houses to be used to single out in the Chamber a finance house for praise. The issue I want to comment on relates to clause 69, and clauses 89 to 92 in Part 1. Those relate to the tax regime that will apply to films made in New Zealand and that have benefited from the Screen Production Incentive Fund, which was established in the Budget last year.

I first acknowledge the discussions that the Minister has entertained in respect of that issue, and I appreciate that, and also his making available officials to discuss those matters for us. But the Labour Opposition believes that there is an issue here that deserves to be addressed, and we are attempting to do so through the amendments I mentioned. In essence, the Screen Production Incentive Fund provides a 40 percent grant to New Zealand films. In the treatment of those films in terms of tax, what is proposed by the bill in front of us is that any investor who invests in a film that receives what is known as a Screen Production Incentive Fund grant will not be able to claim any tax deductibility until after the film is made, and then over a 2-year period. I think the logic of the officials is that where the Government is making a 40 percent contribution to a film, then that effectively should be a sufficient contribution by the Crown. The issue that arises, however, is that the film industry is notoriously fickle; people either make a bundle or lose a bundle. They never really know what they are going to get; even Peter Jackson has been known to make a film or two that has not been a great hit. People who are prepared to be film investors, and there are not that many of them, are then having to wait 2 years to receive the deductions, and, most notably, if the film is a flop, which happens fairly regularly.

The amendments tabled this afternoon propose that the tax regime applicable under this bill will exclude grants made by the Screen Production Incentive Fund. That would mean that investors who support films made using one of those grants will be able to benefit, in the same way as investors who support other New Zealand films benefit, such as those that are made using Film Commission money. Admittedly, there is a difference between the two grant schemes. In one case it is a grant up front and in the other it is an investment by the Film Commission. In the latter case, if the film makes money the commission gets a return; if it is a flop the commission has to wear that loss. Again, I make the point that those who invest in the film industry are taking a punt; they often will lose money.

We want to encourage our film industry; it is a great way to promote New Zealand. If investors are engaged in various other activities, they are able to get the write-off for their investment in the year that the costs are incurred. So I encourage members opposite to consider these amendments. We were advised by officials that the amount of money is not large, it may just make seven figures, but it is something that the film industry believes will assist it in continuing to promote and expand the film industry. If people invest in the film industry and they have to borrow money to do so, because of the high risks involved they sometimes have to pay 17 percent on money borrowed for films because there is not a lot of asset that it can be based against. Therefore, the need for a tax write-off to offset those kinds of high interest rates is very high. I commend these amendments to the Committee.

Hon DAVID CUNLIFFE (Labour—New Lynn) : In taking another call on the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill I will firstly recap on two matters discussed earlier. The first is that I was at pains to stress the rushed nature of the process—and those comments still stand—but I omitted to acknowledge, which I should have done, the extensive and dedicated work of the officials, the cooperation across the Finance and Expenditure Committee, the excellent job the chair did under trying circumstances, and the sterling work of the independent tax adviser Therese Turner and the drafting adviser David McLay, both of whom did a very, very good job for us in difficult circumstances. I would like to get that on the record.

The second thing I will recap on briefly is the debate we have had about petroleum mining. I echo the statement made by my colleague Mr Burns that the Chamber is not the place for discussing the affairs of individual taxpayers, and that the Labour Party, like several other parties, has refrained from doing so. However, I also reiterate what we think are important principles that we hope, following the comments made by the Minister of Revenue, officials will take into account when considering the affairs of any taxpayer caught by this transitional provision.

A long-held principle that is particularly important with regard to tax legislation is that we do not have non-taxpayer-friendly retrospective effects. There is a clear agreement that the effect of the rules, as with all of the bill, goes back to 4 March 2008. It is therefore a common law question for resolution, if necessary, about whether any particular taxpayer had a contractual situation that predated that point. If that situation can be established, then my Labour colleagues and I take it—and I understand that this is the view of the Minister, and I see officials nodding—that therefore the presumption at least is that it follows that any company in that situation would not be caught by the provisions that follow. That is a good starting point. I think we have an effective consensus at the level of principle that is independent of any particular taxpayer, and that is all I will say on the matter in the Chamber.

So many aspects of the bill merit consideration by the Committee that I hope it will entertain further discussion on them. I mentioned in my earlier brief contribution the “grey list” rules and the foreign tax review. That is a particularly important area for New Zealand when our current account deficit is climbing as steeply as it is, and much of that deficit is made up of a financial deficit of about $8 billion out of $12 billion. It is therefore essential that we understand the impact of tax law on those financial flows.

With regard to the substance of Part 1, the bill provides an active business test for controlled foreign companies. Controlled foreign companies that pass the test will not be required to attribute any income to New Zealand residents. Controlled foreign companies pass the test if less than 5 percent of their gross income is deemed to be passive income. The bill defines passive income. In the legislation it is referred to as the attributable controlled foreign company amount, and it is central to the new controlled foreign company rules.

The definition may apply in the first instance if the active business test is to decide whether a controlled foreign company is active or passive, and thus whether it should be exempt from attribution. It is primarily used when the controlled foreign company fails the active business test, and if that occurs then the controlled foreign company has to attribute its passive income as defined in the legislation, unless the controlled foreign company is resident in Australia. It is an important principle underlying the redesigning of the rules that we need to reflect the special economic relationship with Australia, and that harmonisation, where practicable and in New Zealand’s national interest, is desirable.

I come now to the interest allocation rules for outbound international investment. Amendments are made to Subpart FE of the Income Act 2007 that extend the existing interest allocation rules to New Zealand residents. Interest allocation rules that have an income interest in a controlled foreign company have been extended unless the company has 90 percent or more of its assets in New Zealand, or less than $250,000 of interest deductions—that is in clauses 154 to 174 and clause 408.

There is a foreign dividend exemption for companies. The bill provides, in general, an exemption from tax when most foreign dividends are received from companies, and there are extensive clauses on that matter, ranging from clause 5 in Part 1 through to clause 515 of Part 1.

STUART NASH (Labour) : I first speak in favour of the Supplementary Order Paper in the name of my colleague Brendon Burns on the Screen Production Incentive Fund. It comes down to a matter of principle, and that principle is whether we believe that the film industry requires nurturing and growth as a special interest—that is, whether it is important to the inherent nature and belief of our country. The issue around this is the ability to claim back expenses in the year they were incurred. Peter Jackson is often held up as the film-making guru, but, as we all know, we have produced a lot of very competent and well-known film producers throughout the years. I suppose the question that has to be asked is whether these film producers would be where they are today if this industry had not been incentivised to the level it is. The film industry itself believes that they probably would not be.

This amendment is fiscally neutral. As my colleague Brendon Burns has done, I thank the Minister and Jim Gordon for conversations around this amendment. I think we all agree that this is a fiscally neutral position, and I say to Jim that I think I am right in saying that. Perhaps I should say that the fiscal implications are very, very small. So it really comes down to a matter of principle. Is this an industry that we want to nurture? I absolutely believe that it is. On that basis Labour certainly will be supporting Brendon Burns’ Supplementary Order Paper.

As I started to say before, I think it is important that we talk about the life insurance provisions in the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill, considering that “life insurance” is actually part of its name. Significant changes are being made to the taxation of life insurance business. As I mentioned, the changes are a result of work that began in July 2006 in response to submissions and comment received on two officials issues papers and one Government discussion document. So this issue has been out there a long time. The industry has had a lot of opportunity to comment on it—and they have done so through the select committee process—and it comes through a well-informed process.

Life insurance companies are companies that carry on a life insurance business—that makes common sense—and are registered to write life insurance policies under their own Act, which is the Life Insurance Act 1908. That is not quite as old as the Speaker’s ruling my colleague quoted before question time. When the current life insurance rules were enacted, most of the large insurance companies in New Zealand were actually mutual entities, meaning they were owned by their policyholders, and premium contributions, as well as retained investment income built up over the years, contributed to the capital base of the life insurer. All of the large life insurers are now limited liability companies, though some operate in New Zealand as branches of foreign companies, and most are owned by foreign companies. Some subsidiaries of banks are now involved in writing life insurance policies.

That is one of the main reasons why this law needed updating in respect of this part of the economy. Since the current life rules have been in operation, term insurance business has increased from being less than 10 percent of total industry premiums to being now over 50 percent. The nature of the business has changed significantly. Term insurance is a pure risk product, and pays out only on death. There is no savings component, which means that these policies have more in common with general insurance, such as motor vehicle insurance or home and contents insurance, than traditional savings-related policies. The net assets of a life insurer are owned by the shareholders. The rights of the policyholders are by way of contract with the life insurer, and do not extend to specific assets, at all. The economic policyholder ownership rights in the company are generally reflected in the unvested policyholder liabilities—very riveting!

The current rules tax life insurers on a two-tier basis. The first tier, the life office base, taxes the income earned for the benefit of both shareholders and policyholders of the life insurer as a whole. It consists of investment income less expenses, and underwriting income. Income accruing to policyholders is taxed to the life insurer on a proxy basis under the policyholder base. Income is calculated by a formula equal to the increase in reserves, plus benefits such as claims paid, plus underwriting income less premiums. Tax paid on the life office base generates imputation credits that can then be used to meet the policyholder base liability—thus avoiding double taxation—or as tax credits on dividends paid to shareholders. Individuals generally cannot claim a tax deduction or get a tax credit for life insurance premiums paid, as happens in some countries. On the other hand, they are not taxed on insurance proceeds.

There are two fundamental problems with these rules. The first is that they under-tax term life insurance profits. The second is that they overtax savings income. I think we would all agree that it is bad policy to under-tax, but it is also very bad policy to overtax.

Aaron Gilmore: Oh my gosh!

STUART NASH: I know that that is a revelation to some members on that side of the Chamber, because they want to overtax. It is what they want to see in some areas, but members on this side of the Chamber personally believe that under-taxing is bad policy. So we are right into this. The proposed new tax rules—[Interruption] If members on the other side listen, they may, in fact, learn something. They did not learn anything during the select committee process, so if they keep quiet they may learn something now. I will talk about the proposed new rules because they are very important. Members need to remember that these pay out only on death; some of those guys opposite may need to know that soon. [Interruption] It is not political death, which is what some members will experience in about 2 years, 3 months, 3 weeks, and 5 days’ time.

The proposed new rules tax life risk business on actual profits in a manner similar to the way that other businesses are taxed. If I remember rightly, I think the only party that has dropped corporate tax in the last two generations is the Labour Party. Of course, it also extends the tax benefits of portfolio investment entity rules to all savers in life products. Under the new rules, life insurers will be taxed on two bases: a shareholder base, which represents income derived for the benefit of shareholders; and a policyholder base, which represents income derived for the benefit of policyholders. That is a very important distinction. Detailed provisions apply to taxing participating policy income between the shareholder and the policyholder bases. Policyholder base income cannot be offset with losses or credits from either the shareholder base or any other company in a life insurer’s tax group. The amendments in this bill also extend the benefit of the portfolio investment entity rules to the policyholders in all life insurance saving products. Under the new rules, life insurers can also elect to attribute income in investment-linked products to policyholders at their individual portfolio investment entity rates.

The nature of life insurance gives rise to complexities in applying tax concepts. The long-term nature of most policies makes it difficult to match income and expenses appropriately, therefore complex legislative provisions are required to equitably bring to tax income and expenses to the correct period. As I mentioned before, the Labour Party is very clear—which is why we support Mr Burns’ Supplementary Order Paper—that tax legislation should be equitable. In addition, complexities in determining the relevant mix of savings return, savings and risk intermediation, and risk pooling inherent in some life policies also require detailed rules to appropriately allocate the tax burden between shareholders and policyholders. I think members on the other side of the Chamber would agree that is a very important legal distinction.

Moving from the current life tax rules to the proposed rules will affect life insurers’ businesses and accounting processes. We have taken this into account, and to mitigate the impact, detailed transitional rules will apply; I will not read those rules out—

Carmel Sepuloni: Perhaps you should.

STUART NASH: Does the member think I should?

Carmel Sepuloni: I think Chester wants you to.

STUART NASH: Would the member like me to read them out? OK. Those rules will apply for term insurance products sold before the application date. I think that was a very important point that Ms Adams brought up in the select committee. Policies cannot be subject to any fundamental change in their terms during the transition period, otherwise a new policy is created and it is fully subject to the new rules. The proposed portfolio investment entity benefits will apply immediately on the application date, which, again, I think is a very important point. Generally, subject to ordinary shareholder continuity and other specific rules, tax and credit balances, and losses from the life office base can be carried by the life insurer into the new rules. Thank you very much.

Hon DAVID CUNLIFFE (Labour—New Lynn) : I want firstly to comment on the tax treatment of Kyoto emissions units in Part 1. Of course, it is a salient day to be considering the emissions trading scheme, given the extensive discussion earlier around the Standing Orders and the presentation, or otherwise, of the special select committee report in that regard. I am sure I would express the hope also of members opposite that the report of the special select committee will be made available to members for consideration at the earliest possible opportunity. The chairman of the committee, the esteemed, “permanent” Minister of Revenue, the Hon Peter Dunne, is no doubt on the horns of a dilemma having had a minority report presented by the deadline and then withdrawn again. But let us get back to Part 1.

There was a question before the committee as to whether the tax treatment of Kyoto emissions units ought to be equivalent to that of non-Kyoto emissions units. That is a pretty important point, because all emissions units are not equal. For a start, the Kyoto regime codifies much more closely not only the tradability but also the verifiability of emissions units to a much higher degree than normal Kyoto units, and the quality variation in non-Kyoto units, like assigned amount units for example, is very high. So depending on the source country of origin—and some would say that perhaps Russia is one of the more dubious in terms of its accounting and verifiability—we question whether those units, equivalent to a climate junk bond, ought to receive the same tax treatment under this bill. There was extensive debate about that, because we do not want to see the emissions trading scheme sold short either by placing excessive reliance on unverifiable emission credits or, at worst—and here I think it is fair to say that the NZX has made a big push—by creating a secondary market of derivatives for those units that end up in a bubble of risk that could be akin, in 10 years’ time, to the bubble of risk that has imploded now around real estate bonds and collateralised debt obligations. We do not want the next recession to be caused by the implosion of emissions unit derivatives—and that is a really important matter that the committee considered. In the end, on balance, we felt that the complexities that would arise by differentiating between the two classes of units in tax law were a worse evil than the recognised variability and quality of the non-Kyoto units. So although we want to deal with the primary issue, we do not believe that this is the place. But I am sure that officials will keep that distinction in mind.

I will turn to the issue of portfolio investment entities, or PIEs—a cute name for a relatively simple concept, once we get our heads around it. A portfolio investment entity is a vehicle that is designed to allow savings to be taxed at the marginal rate of the saver rather than at the corporate rate of the savings vehicle. It is a walk-through provision, which is important because for a child without much income who is saving hard in his or her piggy or Kashin elephant bank—and we want to acknowledge the passing of Kashin this week, a much loved elephant in Auckland Zoo—

Craig Foss: Cash is king!

Hon DAVID CUNLIFFE: —cash in honour, the members opposite say—we need to recognise that portfolio investment entities in principle are a good idea. But besides the technical aspects of portfolio investment entities, which are related in this bill, there is one significant issue of policy that we believe merits the further consideration of the Committee—it is relevant to this bill and it comes up again in the tax bill currently before the select committee—that is, whether the top portfolio investment entity rate ought to be equivalent to the top company rate or the top personal income rate. It is our view, on reflection, that in fact the top portfolio investment entity rate should be equivalent to the top personal income rate, not to the company rate of 30 percent. The risk is that this well-intentioned set of vehicles could simply become a way of disguising tax liabilities for upper-income individuals who would otherwise be paying 38 percent. They could just channel income through a portfolio investment entity and, hey presto, the maximum rate would be 30 percent. Some people say that that does not matter because a high-wealth individual can already use a trust structure.

Hon PETER DUNNE (Minister of Revenue) : Can I just say that it is this Government’s long-term objective—or medium-term objective, actually—to bring down the top personal tax rate to 30c, so that it aligns with the portfolio investment entity rate.

Hon David Cunliffe: I think it was medium, now it’s long.

Hon PETER DUNNE: No, I can assure the member that it is a medium-term objective.

Just as we bring the debate on this part to a close, I will come back to Mr Burns’ speech and his proposed amendments regarding the Screen Production Incentive Fund. I need to advise the Committee at the outset that the Government will not be supporting the amendments. In fact, we do not think they are in order in terms of Standing Order 320. The amendments were not lodged within the prescribed period of time and they have an impact on the fiscal aggregates.

But beyond that I say to the member that the issue he raises is somewhat ironic, given that the policy being implemented here was the policy of the previous Minister for Arts, Culture and Heritage, the Rt Hon Helen Clark. I appreciate that some things have changed; we on this side of the Chamber are simply being the faithful adherents of her policy, and it is ironic that her own party wants to change it. Be that as it may, let me say to the member that the issues he raised with me and my officials in recent days do warrant consideration. I do not believe that his amendments address the points satisfactorily, and that is why, and for other reasons, we are not supporting them.

I am prepared to look at the issue in the context of the current tax bill that the Finance and Expenditure Committee has before it, and if we come to the conclusion that an amendment along the lines the member is proposing is desirable, then I am prepared to address it in the context of that bill. The point at this stage is that his objectives are not achieved by his amendments, in our view, and in any case they do not quite meet the parameters of the Standing Orders.

Beyond that I simply acknowledge the contribution of members to the debate on this part. There have been some useful contributions from members from both sides of the Chamber, and I concur wholeheartedly with their accolades towards the officials who serviced the committee, including the independent adviser, the independent drafting adviser, and the officials from the Inland Revenue Department, who have lived with this legislation far longer than any of us and who know its intricacies far better than any of us. They are a dedicated bunch of people. They work very, very hard, and they work without fear or favour to develop the best tax law for this country.

I must come back to one point, as I conclude. I cannot resist a final retort on the subject of rushed legislation. I am tempted to say that if members want to talk about rushed legislation, I can give them an example of it. I see my honourable friend Sir Roger Douglas at the back of the Chamber. I recall coming into this House on Budget night in 1984, when, at 7.30 p.m., I think, Sir Roger introduced his Budget. By the time the Budget-related urgency associated with passing the legislation on tax and other matters was over, it was some time on Saturday afternoon, and in those days we sat day and night. Members may like to draw some comparisons.

This taxation bill came in over a year ago. It has been before a select committee, this new select committee, for most of this year. The Government did not put a report-back date upon it. Members dealt with it at their own pace. They dealt with it efficiently and speedily. Yes, it is a big bill, and I have conceded at other times that we will not repeat the experience—we will not have a bill of this size in the future—but I do not think that any reasonable assessment can say that this process has been rushed.

Other members have referred to the fact that a number of the issues in the bill have been around for consultation since 2006, or earlier, in some cases. By my feeble mind, that is at least 3 years, if not 4 years. Most of the stakeholders have been well and truly consulted. In fact, the message I have been getting from people is not that this legislation is rushed, but they have been asking when on earth the Government will pass it. They want to know when its provisions will be put into effect. People in insurance, people who are affected by the international tax regime, and people who are affected by the charitable tax changes all want to see the benefit delivered. That is what we are about doing right now, and I acknowledge the contribution that members are making towards that, but I will not accept the allegation that this is rushed legislation.

The CHAIRPERSON (Lindsay Tisch): Amendments in the name of Brendon Burns have been tabled. These amendments are out of order as 24 hours’ notice has not been given. We now move to the Minister’s amendments—

Hon DAVID CUNLIFFE (Labour—New Lynn) : I raise a point of order, Mr Chairperson. We gave notice earlier that on procedural grounds the Labour Opposition would be voting against the amendments set out on Supplementary Order Paper 34 because it was not referred to the select committee. We accept that the Supplementary Order Paper 35 amendments are of a purely technical and drafting nature, and we do not wish to oppose those. I seek through you, Mr Chairman, the Minister’s concurrence to putting the amendments on Supplementary Order Paper 34 separately so that we may not find ourselves unintentionally voting against matters that we otherwise support.

The CHAIRPERSON (Lindsay Tisch): The Minister needs to give approval to that, and I will need to reshape the motion.

Hon PETER DUNNE (Minister of Revenue) : In response to the member’s request, I am happy to concede to the separation on the condition that the amendments in Supplementary Order Paper 34—and they transcend the parts—are in each case taken as one question, and that the amendments to Supplementary Order Paper 35 are taken similarly.

The CHAIRPERSON (Lindsay Tisch): This is at the Minister’s discretion, so I will just get the format in which to put the question.

CHRIS TREMAIN (Senior Whip—National) : Once the decision is made, can you be very clear so that I can understand how each amendment will be put. And is Supplementary Order Paper 35 still out of order?

The CHAIRPERSON (Lindsay Tisch): These amendments are not out of order. The only amendments ruled out of order were put forward by Brendon Burns. His amendments have been ruled out of order under Standing Order 320. We have dealt with that matter. We are dealing with the request from the Opposition, which was to split the Minister’s amendments. The Minister has agreed to that, and we are just waiting for the format.

• The question was put that the amendment set out on Supplementary Order Paper 35 in the name of the Hon Peter Dunne to proposed new clause 214BB set out on Supplementary Order Paper 34 in his name be agreed to.

Hon DAVID CUNLIFFE (Labour—New Lynn) : I raise a point of order, Mr Chairman. I apologise for interrupting the Committee, but would it be possible for you to re-specify the nature of that motion before we cast our vote?

The CHAIRPERSON (Lindsay Tisch): The motion that we are about to vote on is the Minister’s amendments as set out on Supplementary Order Paper 35.

AARON GILMORE (National) : I rise to talk about Part 2 of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill. This bill, as everyone who has spoken on Part 1 has said, is intimidating by its size more than anything else. As a new member, particularly one on the Finance and Expenditure Committee, I had the unfortunate experience in my first committee meeting of being given this bill and told that we were deliberating on it the very next day. It was entertaining to pick up certain parts of it and go through and read it the night before, and I must admit that it was an education in the realms of arcane tax law.

I will touch on one particular part of Part 2, where migrant workers are discussed. I will talk about four clauses: clauses 383, 408, 417, and 454. The interesting thing about the clauses that talk about the changes for migrant workers is that migrant workers are a very important part of the New Zealand economy. Migrant workers are defined as those who are here for a maximum of 7 months, or perhaps 9 months in special circumstances, within an 11-month period. Part 2 of this bill does a really neat thing for migrant workers, I think. Those workers play an important part in seasonal work in New Zealand. The changes that the committee made to this part include putting in a special tax rate for migrant workers, taking it from 19 percent to 15 percent. That is a 4 percent reduction, and what a neat thing that is to do. For the people and communities that rely heavily on migrant workers, that tax reduction will be a great thing. There are six ski fields in the Selwyn electorate of my good colleague here to my right, Amy Adams. Ski fields rely very heavily on migrant workers in the winter months.

This tax reduction will be a great thing for migrant workers. Equally, it will be a good thing for people in the electorate of my other good colleague Colin King, the MP for Kaikōura—he is the MP whom Paul Henry did not recognise—as vineyards rely very heavily on migrant workers. I know that Mr Burns, one of the members opposite, is a vineyard owner. He probably has a few migrant workers on his operation across the road. I enjoyed a bottle of that member’s vintage last week, I think, after taking part in a charity debate. It was not bad, I must say. For the migrant workers who come to New Zealand, for those thousands of people who come to the ski fields for the winter months or to the vineyards in the summer months, or perhaps even for the odd shearer who comes in to fill some gaps we have in looking after other parts of our rural sector, that 4 percent deduction in the special tax rate of 15 percent, down from 19 percent, will be a great measure.

That is particularly true for our friends from the Pacific who come here from Kiribati, Vanuatu, and places like that, where that little bit of extra income is incredibly important for them to be able to sustain their lifestyle back home. The remittance that they send back to the people in those Pacific countries is a really important part of the income that they use to provide not only for themselves while they are here in New Zealand but also for their families back home. I think, equally, for those ski field workers—obviously not many ski field workers come from the Pacific Islands; I am yet to hear any property developer come up with any ideas about that—who have that reduction from 19 percent to 15 percent, that is an extra 4 percent that they will have to put in their back pockets, or to spend on the good parts of the tourism industry in New Zealand, which helps a tiny little bit more to keep the economy growing in the way that we want to see. We are all about the economy growing.

I see that the member from Kaikōura is now in the Chamber—the member whom Paul Henry forgot, from the great electorate of Kaikōura. Anyway, I want to touch again on another part of this bill, and that is the other interesting bit in Part 2, which talks about the international tax rules for insurance companies. In particular, we have talked about the controlled foreign company regime. There are some changes in the insurance sector. There are some interesting examples where a growing number of New Zealand - owned companies are looking at expanding offshore, or have existing equity-based investments that they operate offshore. I can think of one mutual company in particular, in Christchurch, that is an iconic New Zealand insurance company. It has increasingly been looking at ways to expand outside of New Zealand. It is one of the dominant players in the New Zealand insurance industry. Part 2 of this bill—this behemoth of 900 pages—has some little things in it that will actually help that company expand, and just get a little bit extra for its members. It is a mutually owned company, so its members are its policyholders. Again, that is a good example of those people being able to reinvest a little bit more profit into their business to keep New Zealanders working in this time of recession and economic problems.

STUART NASH (Labour) : I think Aaron Gilmore was very, very unkind to his colleague Colin King. I know who Colin King is, and I knew who he was before he came to Parliament because he was a three-time winner of the Golden Shears contest. Paul Henry does not know who he is, but who cares what Paul Henry thinks? We certainly do not. No one listens to him.

The other thing is that Colin King put me to shame. We met in the changing rooms, both fully clothed, and he asked me whether I was going to play for the New Zealand Parliamentary Rugby Team this year. I said that I was getting a little old, and was thinking about it but was not too sure. Colin said to me that he was wondering whether he should this year, as he was turning 60. He said maybe he would have 1 more year. It just shows that life begins at 60. I tell Colin not to worry about what Paul Henry says; we do not, and no one else does. I think it is dreadful that Aaron Gilmore could question his commitment and who he was. But I come back to the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill.

Colin King: It’s a taxing subject.

STUART NASH: It is a very taxing subject, I agree, and I am very impressed that the member plays rugby at 60. I do not think Aaron Gilmore will be out there when he is 60. In fact, he will not be in Parliament when he is 60, so that is OK.

Anyway, I get back to the payroll giving provisions. This is a very important part of the bill. It is quite a nice part. Mr Gilmore waxed lyrical about the wonderful things this bill was doing; well, this is another thing. Eleven submissions were received on the proposed payroll giving scheme, and five confirmed their support for the concept of payroll giving and the tax credit mechanism of delivering tax relief on payroll donations. Even so, most submissions were concerned to ensure that compliance costs of the scheme for employers were kept to an absolute minimum. We agree with that. Earlier, I talked about the five basic objectives of tax legislation, and compliance was one of them. Otherwise, the benefits of the scheme might not be fully realised, and I think we all agree that this is very important legislation that allows people’s benevolent spirit to come out. I think the Prime Minister, John Key, said to people that if they did not like the tax cuts they could give them to charities. Well, this legislation allows that.

A common theme throughout the submissions, though, was the need to provide greater clarity in the legislation. We addressed this theme in the Finance and Expenditure Committee. The Inland Revenue Department officials came back and gave us great peace of mind that it had, in fact, been achieved. There was concern that the participation in payroll giving would be voluntary for employers and employees. KiwiSaver was voluntary; it is a shame that the Government cut that off at the knees. But this is voluntary, and it allows people to give money out of their pay to their favourite charity.

There was also concern about the roles and responsibilities of employers, employees, and donee organisations, and also sanctions for non-compliance. This quite important point was brought up and discussed in reasonable depth. This point is around what happens if a company goes broke and money is being contributed by an employee but it is not paid out. Again, the Inland Revenue Department officials came back and assured us that employees would not lose their tax deductibility—their tax credit—on this, which was fantastic. For the most part officials agreed with the submissions, and they ensured that the underlying policy intentions would be achieved, and this would provide overall integrity to the scheme, which is what I was talking about before. Again, tax integrity must be a fundamental part of any tax legislation.

A further prevailing theme in the submissions was a desire for the legislation to prescribe the details for payroll giving scheme arrangements. As proposed, the bill simply provides a tax mechanism to deliver tax relief for payroll donations on a pay period basis. It does not prescribe the nature of the arrangement of relationships between employers, employees, and donee organisations, or how the schemes should be set up. Matters that need to be decided upon between the relevant parties include, for example, the process for establishing a scheme that works best for all parties concerned, the use of intermediaries, the level of employee education around payroll giving—again, this comes back to the fundamental objective I talked about, which is the ability for the taxpayer to be able to access information on tax—and the process for selecting donee organisations to participate in the scheme. I think we said that they had to be registered charities, and all registered charities were to be put up on the Inland Revenue Department website so one could determine straight away if a charity was registered, which is fantastic. This is a very important part of the legislation, and it affects a lot of people.

I am hoping that once this legislation is put through, a lot of Kiwis will donate to these organisations, because I think probably all of us—well, all of the Labour MPs, anyway—have been around a lot of the social service agencies and the charities in our electorates and have found that these guys are suffering. Their workload has increased dramatically, as we find that legislation that the National Government has put through begins to erode the social fabric. These charities need the most help at this particular time, and this bill does that.

As I was saying, the matters that would need to be decided upon by relevant parties include the process for selecting donee organisations to participate in the scheme—as mentioned, they had to be registered charities—the number of donee organisations that can participate in the scheme, which came down to registered charity status, and that is fantastic; the level of engagement between the donee organisations and the employee donors, which refers to how an employee can interact and contribute to the charity itself; and any minimum payroll donation threshold. The non-prescriptive nature of the proposed scheme is intended to provide flexibility to allow relevant parties to work together to establish schemes that work best and to manage the associated costs. I think all members in the Chamber will agree that if someone is to donate money to a charity through his or her payroll, it must be done on a voluntary basis. It must be worked through, one on one. The vast majority of charities and the vast majority of employees want to know what is going on and how it works. The key policy outcome of payroll giving is that it has the potential to establish a genuine partnership between businesses and the community, while supporting employees’ community activities. As mentioned, this is becoming more and more relevant in these tough times.

The voluntary nature of the scheme also reflects the ethos of giving, which is very important. It sets up a system that facilitates, but does not mandate, giving. Anything that would be compulsory around payroll giving would not be acceptable to anyone, from employees to employers. That is why this provision was put in. It is not a mandate; it is voluntary.

Paul Quinn: Are you going to give it to my campaign?

STUART NASH: I am sure Mr Quinn gives a substantial part of his salary to a registered charity. This provision will help Mr Quinn to make that transition to giving a lot easier. He will be supporting this, I have no doubt.

The Inland Revenue Department has a very good way of getting information out to the general public. It does this through a Tax Information Bulletin. The Inland Revenue Department said that it would publish all this information that we are talking about at the moment in a Tax Information Bulletin so that taxpayers, employees, employers, and donee organisations could have access to all this information that allows them to optimise their processes. That is very important. The proposed scheme would deliver pay-day tax relief on payroll donations by way of a tax credit, which is most important. Employees will receive a tax credit on the amount of their donation made each pay day. Employers would offset the credit against the PAYE calculated on an employee’s gross salary. The tax credit would then be calculated to set a rate of 33.3 percent. Employees who make payroll donations would not have to keep receipts or wait until the end of the year to claim the tax benefits of their donations.

We all know how this works. We have all given money to registered charities, and they have given us a receipt. We have thought that in order to claim it back, we must put in a tax return, but that is too onerous, so we do not bother doing it. This legislation removes that and makes it a lot easier. The scheme would also operate in addition to the current end-of-year tax credits claim system. Therefore, employees who do not or are not able to give through payroll giving can still claim tax relief on their donations through the end-of-year process, as a consequence of this clause in Part 2.

I support Part 2 and I thank Mr Foss, who worked this through. I also thank Inland Revenue Department officials, who provided much-needed advice on Part 2. To our consultants and our drafting experts, I say thank you very much.

CRAIG FOSS (National—Tukituki) : I also want to speak on the payroll giving provisions of Part 2 of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill, particularly in respect of clauses 448 to 484. I want to speak about this matter because some good changes were made in this particular area at the Finance and Expenditure Committee, although it could be said that all the changes made to the bill by the committee were good. We made quite a few suggestions and had wide discussions about improvements to the original bill that arrived at the committee some time in late 2008. I will touch on some of those issues.

As we went through this particular part as originally drafted—and the previous speaker did pick this up—we learnt that only those people who file their PAYE returns electronically would be able to participate in the payroll giving provisions of this bill. We had a wide-ranging discussion about that. We erred on the side of keeping it simple, because we noted that a growing number of employers were submitting returns electronically. Although only 19 percent of them did file returns electronically, that figure constituted mostly the larger employers. Therefore, a large proportion of the working population of PAYE taxpayers was actually being picked up by that. We had some issues in and around that matter, and, as I said, the trade-off we made at the end of the day was to keep the electronic filing as in the original draft of the bill, but with some caveats added to it, which I will get to in a moment.

One of the things that concerned members about this particular measure in the original bill—and I acknowledge that the suggestions from various advisers have been picked up by officials and this issue is addressed in the amended bill—was that in good faith an employee may want to set payroll giving up with an employer who files returns electronically. But we were very concerned that if something untoward was to happen—if the business was to go under, if the charity itself turned out not to be a charity, or if all sorts of other mischief happened—the employee in that instance should not miss out. So we tried to work that issue through, and quite a few recommendations came from that, to the point where we recommended that donations be held in trust for an employee until such time as they were remitted to the donee organisation. Even though it is an electronic process, there are quite a few checks and balances to go through in the process before the monies get to the intended organisation. In the good faith that is payroll giving, in the context where it comes from, we wanted to make sure that employees had faith in the system and the ability to know that it would be working on their behalf.

There was a problem, however, arising from the fact that the charities concerned must have charitable status. But we learnt, as one submitter pointed out, that when we check with the Inland Revenue Department, we find, if members can believe this, there are actually 1,330 donee organisations with names beginning with the letter ‘A’. So, of course, quite complex issues could arise there. The question was where the burden should lie in terms of checking the status of organisations. We did a bit of a test on the Inland Revenue Department’s website, and it was found to be wanting. We did gain a commitment from Inland Revenue Department officials, and this is in the commentary on the bill also, that they would upgrade the ability for employers—in this instance—to go to the appropriate place on the Inland Revenue Department website and quickly look up an organisation without their systems going down, and to have transparent, timely, and robust information available at all times. That was an example of good committee action, good committee discussion, and the committee as a whole making the recommendation there—a fair balance, and I think a well-intentioned one. I think the previous speaker alluded to that.

Most members in this House, I am sure, would agree with the intent, at least, of payroll giving. I will be speaking to other parts of this bill later on.

Hon DAVID CUNLIFFE (Labour—New Lynn) : It is a pleasure to join the discussion in Committee of Part 2 of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill, and, in doing so, I will first reflect on the Minister’s closing comments in respect of Part 1 on the theme of the timetable for this bill, which apply equally to this part. It is absolutely true, as the Minister has described, that a number of substantive provisions of this bill, including issues such as payroll giving and tax pooling rules, which are the subject of this part, have been—transcending the change of Government—debated in the public domain over some considerable period of time. There have been discussion documents and the generic tax policy process has been in evidence. That is all a good thing. I would not want our earlier comments about the rushed nature of the bill to be misunderstood in that regard.

But having conceded that point, I hope that the Minister would also concede that, in hindsight, the deadline for the report back of the bill in this Parliament, once the change of implementation dates had been agreed, could have been extended. The pressure on officials, on the independent tax advisers, and on the committee itself was extreme. That is not to ask for sympathy for poor old politicians. We know how far we would get with that—

Amy Adams: Not very far!

Hon DAVID CUNLIFFE: Not very far, no, because as the public knows, we all get rather larger allowances than the chief executive of Telecom New Zealand, and work only 3 hours a day! That is a long 3 hours; there is nothing longer than tax legislation to measure time.

Hon Peter Dunne: Are you doing overtime?

Hon DAVID CUNLIFFE: We are doing overtime today, for which we are not paid time and a half.

Amy Adams: We’re not paid at all!

Hon DAVID CUNLIFFE: No. Members opposite have no doubt done the maths and worked out what their hourly rate is, but I digress.

The fact remains that there is—even in this part that amounts to about 30 percent of the text of this doorstop—an incredible amount of detail that politicians, because they live such exciting lives, find it within their responsibilities to have to scrutinise. As the public may know, select committees are the places where we join together in a relatively non-partisan kind of a way and work through the detail on the basis of advice. So, the long and the short of it is that I stand by the earlier comments that that process could have been better. We were under such time pressure that Part 2 could have benefited from further discussion.

Let us turn to some of the substantive provisions. There is general agreement—and Labour will be supporting the part—that the payroll giving provisions are meritorious in general and should be supported. Payroll giving is the idea that employees can nominate a set of charities for whom direct deductions can be made through their payroll process on an ongoing basis—that is only to be commended. New Zealanders are generous people. We care about our neighbours, broadly defined, we give a reasonable percentage of our incomes towards overseas aid, and New Zealanders come forward for everything from the Daffodil Day appeal, to telethon, and to a whole range of other charities. Payroll giving is a way of making it easy. New Zealanders can fit it once, forget it, and support the charity of their choice. This legislation is permissive, it is not compulsory, and we hope that the detail will stand the test of time.

Similarly, we support the concept of the tax pooling rules. Tax pooling is a system, as the public may know, that allows taxpayers to benefit from the aggregation of the unders and overs between different taxpayers who, through a tax pooling agent, can collect those flows into one pool and pay an aggregate on their behalf. The impact of that is that the unders and overs, to a certain extent, balance themselves out, thereby lowering the cost of the holding capital, and, perhaps, through timeliness, also reducing any penalties that might accrue for late payment. A professional manages the tax pool, there is general good notice of deadlines, and the system works well both in the interests of the taxpayer and of the department that benefits from the aggregation and timely provision of those flows.

Contained in this section of Part 2 are a bunch of rules that, in detail, facilitate and, indeed, extend the ability of taxpayers to pool their tax payments. The Finance and Expenditure Committee made a number of amendments—for example, new section RP 17B(1), inserted by clause 405, and the amendments in clause 406, and so forth. The committee gave reasonable attention to those matters. We turn then to the subset of those intermediary rules that affect PAYE, and I will pick that up in a further call.

Hon PETER DUNNE (Minister of Revenue) : I want to make a few comments about payroll giving, and I am grateful for the support for this that members from across the Chamber have indicated in their remarks this afternoon.

Payroll giving is an important step forward. It was first foreshadowed in the discussion document that was issued in 2006, which arose from the confidence and supply agreement that United Future had with the previous Government over a charitable tax regime.

Hon David Cunliffe: You’ve had one with every Government.

Hon PETER DUNNE: With every Government so far, yes. I am not sure whether the current agreement is the second leg of the double or the third leg of the quinella, but I remind members that the first part of the process was—

Amy Adams: A trifecta!

Hon PETER DUNNE: Never mind. I am not a racing person, as the members can see.

Hon David Cunliffe: Not a racist.

Hon PETER DUNNE: That neither.

The first part of the changes to the tax law was the changes to the rebates for charitable donations that came on 1 April last year. The change to bring in payroll giving was something we were very keen to see, for all of the reasons that members have enunciated. This scheme draws very heavily on the scheme that was implemented in Australia.

By nature of being a voluntary scheme, people will have a choice about going into it. We have resisted, and I think the committee was wise to resist, some of the submissions that tried to prescribe too narrowly the organisations that might be considered for this scheme. I think that is a choice for the taxpayer, and it is a matter of the employer having the systems to be able to deal with it.

Mr Foss made the point about the original limitation to electronic filing companies. The figures that I had originally—I think they have moved a little bit since—were that around 16 percent of businesses in New Zealand were filing electronically, but that covered about 70 percent of the workforce. I think those figures have moved upwards a little in the last couple of years. So this policy initiative will be available to most New Zealand taxpayers, should they choose to take advantage of it. For those of a certain age, it will be very similar to the old days when we made our National Provident Fund or Government Superannuation Fund contributions. The net figure was the one taken after those contributions had been deducted. That is when we got our rebate.

One thing that will be important, and I say this by way of observation, is that once this scheme takes effect—and with the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill passing at around this time, 1 December will be the effective date for the start of payroll giving—employers and those who have been associated with similar schemes elsewhere will need to be part of an advisory group of people drawing to both employees’ attention and employers’ attention how this scheme works, how simple it can be, and how it is a win-win for both. We will be working separately with appropriate people, to make that information available.

I hope that in time there is another raft of issues that we can deal with, with regard to charitable giving. We have work under way at the moment on the question of access to imputation credits for charities. That work is on hold to some extent, pending the outcome of the Australian Government’s tax review and any issues there that might be determined regarding the mutual recognition of imputation credits across both countries.

This scheme is part of a concerted suite of measures designed to promote a culture of giving in New Zealand, designed to make it easier for people who wish to give to charities to do so, designed to boost that support, and designed to recognise the large number of charitable organisations that there are in New Zealand—Mr Foss referred to 1,100-plus alone beginning with the letter “A.” There are many, many charities in this country, and the charitable registration process is part of that. I am currently reviewing the number of donee organisations that are eligible for tax deductibility, and that review will be completed a little later in the year.

I simply wanted to thank members for their support for this provision. It is an important one, it is a welcome one, and it is an extremely positive step forward.

BRENDON BURNS (Labour—Christchurch Central) : I am very pleased to speak on Part 2. I particularly want to focus on the move, through this bill, to make clear some of the issues around relocation and overtime meal allowances. This is quite a vexed issue, and it has been a concern to many people in the trade union movement for quite some considerable time. As I understand it, about 15 years ago changes were made to the tax treatment of allowances. In the past the commissioner had been required to determine whether an allowance was taxable or exempt. That requirement was taken away, and instead the onus was put back on the taxpayer to determine whether the allowance was taxable or exempt. Also, the test changed from whether the expenditure was incurred as a necessary part of the employee earning his or her income, to one based on whether the expenditure would have been deductible by the employee, were it not for the prohibition in the Income Tax Act whereby employees cannot claim expenses in relation to their employment. I think the way these things have been tackled is somewhat Kafkaesque in its logic.

In essence, I was pleased that the committee was able to clarify at least two areas. In respect of relocation expenses, where an employee is required, due to the nature of the change of his or her employment, to move town or even move across a city, the employee is able to claim and able to deduct some expenses in relation to the extra costs that are incurred, and also in relation to overtime meal allowances. For an employee who is in the situation where overtime is either a regular pattern or is an occasional imposition or request by his or her employer, obviously the employee is incurring expenses that he or she may not have been able to anticipate in the case of sudden overtime, if you like. In the case of what is built into overtime, clearly the employee is not able to return to his or her home and have meals with the family, and do this at the same price that an employee may pay on a worksite or near a worksite, if he or she needs to pop out from work to get some food.

I am very pleased that the committee was able to agree, at least in part, with the submission from the Council of Trade Unions. The council has been put in a most unlikely collegial relationship by the Institute of Chartered Accountants, which acted on its behalf. It was a seminal moment to see representatives of the accountancy profession aligning and agreeing with members of the trade union movement that there was an area that needed to be clarified in favour of employees in this respect. I am very pleased that the committee has been able to deal with that issue.

Hon DAVID CUNLIFFE (Labour—New Lynn) : I certainly look forward to my colleague Mr Nash’s contribution forthwith, because he has been a tremendous and very studious supporter of the process of the select committee, as has Mr Burns, reflecting very clearly the interests of the broadcasting industry and of course the Council of Trade Unions.

The relationship between the New Zealand Council of Trade Unions and the Institute of Chartered Accountants was so close during part of this bill that we conjectured we might witness the formation of a new body—the “CTUCA”; the “Council of Trade Unions and Chartered Accountants.” But, no, despite agreement on the substance of the bill, the merger did not quite occur, and we look forward to hearing more in that regard. Certainly, they had their eye on both the principle and the detail, and who in this House would not wish that to occur—because, of course, it would simplify our job. I am sure members opposite would be only too willing to support anything that the “CTUCA” could agree on.

Hon Trevor Mallard: I can think of a few things.

Hon DAVID CUNLIFFE: Our Labour spokesperson wishes to demur from some of that, and probably with good reason.

I would like to take us back to an issue that covers Part 2 and several other parts, which are the depth and breadth of the bill. I would like to read briefly from the commentary on the bill: “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.” That statement is, by the way, a unanimous statement of the committee. It is part of the covering language that applies to all of the parts of the bill, so it is not the view of only the Labour members of the committee; it includes the view of the Government members.

The commentary on the bill continues: “In trying to meet the report due date for the 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 than the usual consideration time to committees charged with considering such bills.” Mr Chairman, I hope that you will deem the Committee of the whole House such a committee and that we will be able to take more than the usual time to consider the important matters around payroll giving, around charitable donations, and around the tax treatment of meal breaks, which are important to employees nationwide.

The commentary on the bill goes on to state: “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.” That, I think, is both a compliment to the hard work of our officials and a polite warning to the powers that be that the pressure was, at times, excessive.

This part includes new section CW 62B, inserted by clause 39, which deals with the tax treatments of reimbursements and honoraria paid to volunteers. It is an opportunity for this Committee to once more recognise the importance of the work of volunteers. In that regard, it is pretty important that we accept the principle that in many of our non-governmental organisations there is a very strong volunteer component to the work that they do. Many of those organisations do not fully cost their overheads in terms of the volunteer time, and in what sector is that more apparent than the adult and community education sector?

These clauses give us further reason to remind ourselves that recent changes that saved only around $10 million in expenditure from that sector have the impact of undermining or de-leveraging from that sector the virtually unpaid contribution of the many thousands of volunteers nationwide who are supporting the night classes and community courses by providing expertise and by assisting on a voluntary or near-voluntary basis in running those courses.

We all know the phrase “penny wise and pound foolish”, and I wonder whether it is possible to be “pound wise and penny foolish”, because, really, those services cost only pennies but they have been the target of some of the first cuts the Budget. That is one of the things that worries Labour—the new funds allocated for Budget 2010 are only about half of the new funds in Budget 2009, and Part 2 really draws those issues high in our consideration.

AMY ADAMS (National—Selwyn) : I move, That the question be now put.

STUART NASH (Labour) : I must admit I am very thankful for Peter Dunne’s speech earlier about payroll giving. I have always had difficulty in reconciling that someone could jump from Labour to National, or change political philosophies, over the space of a fortnight. For me, the principles of social democracy run through my veins, and I could never ever compromise such principles. I am pleased that Mr Dunne had unfinished work from when he was Minister of Revenue for Labour, and became Minister of Revenue for National for the sole reason of getting this important legislation through. That is fantastic. As I mentioned, the principles of social democracy run through my veins, and I could never compromise such principles, and that is why I certainly back the payroll giving scheme, as outlined by Minister Dunne and spoken about by my colleague David Cunliffe and my Opposition colleagues.

I will elaborate on the tax pooling, which David Cunliffe talked about. It relates to section 15O to section 15T, in clause 435, and is quite an important part of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill. Provisional taxpayers do not always know how much their tax liability will be for the year, and, therefore, how much provisional tax they need to pay. If they get the calculation wrong, then they are subject to two-way use-of-money interest on the underpayment or overpayment of their tax liability. Provisional tax pooling was introduced in April 2003. It was great legislation and was implemented by the previous Labour Government—of course. It allows compliant taxpayers to reduce their exposure to use-of-money interest on underpayments as a result of uncertainty about their provisional tax payments, by purchasing funds from, or depositing funds with, a tax pooling intermediary. This is a very important facet in today’s economy, because there is a lot of uncertainty around the recession into which the National Government’s policies are driving us.

Tax pooling generally involves a taxpayer depositing money with a tax pooling intermediary. The deposit earns interest, which is good. The intermediary deposits that money in its pooling account with the Inland Revenue Department. The taxpayer may use his or her funds—the deposit—in the future to pay outstanding tax liabilities, or sell the funds to the tax pooling intermediary. If the taxpayer sells the funds to the intermediary, the intermediary can then sell the funds to another taxpayer for a fee. It may sound quite complicated, but, in fact, it is quite a simple process and quite an important process. It optimises the tax system. It is a very good process—of course it is; it was put into law in 2003 by the Labour Government.

Hon David Cunliffe: It was an excellent year for tax policy.

STUART NASH: It was a very good year. Was that the year we dropped the corporate tax rate?

Hon David Cunliffe: One of the years.

STUART NASH: As I have mentioned several times, Labour was the only Government in a generation to drop the corporate tax rate. We are the party of business and we are the party for farmers. But, anyway, let us talk about tax pooling. Many small to medium sized enterprises would say that tax pooling has made paying their provisional tax a lot easier. Labour is the party of the small to medium sized enterprise, and Phil Goff will be the next Prime Minister of this country—bring it on!

On the payment of a fee the intermediary transfers the funds to the other taxpayer’s income tax account as at the date the money was deposited with the intermediary. Usually, that will coincide with the provisional tax due date.

This is such a good bill because it was introduced by the Labour Government. Minister Dunne was a Minister in that Government. It is great that we have such a sense of conviviality around this bill. We all support it and we all love it because it was Labour tax legislation.

Hon David Cunliffe: We trained him and gave him to the National Party.

STUART NASH: We did, indeed. Tax pooling enables provisional taxpayers to access money at lower interest rates than if they failed to pay provisional tax on the due date and were subject to use-of-money interest. It also enables taxpayers who have overpaid their tax to get a higher return from selling their funds than they would receive from the Inland Revenue Department. Of course, we are not suggesting that the Inland Revenue Department would charge a hell of a lot more than a bank would on an overdraft facility, or that it would charge a lot less on a deposit than a bank would, but this legislation smoothes things out. I say to Mr Cunliffe that it is interesting, because I often hear that in 9 long years Labour did nothing, but we do not hear that from the Finance and Expenditure Committee.

CHRIS TREMAIN (Senior Whip—National) : I move, That the question be now put.

AMY ADAMS (National—Selwyn) : It is my great pleasure to take a call on Part 3 of this mammoth legislation. Part 3 deals with consequential amendments to the Goods and Services Tax Act made as a result of the policy changes brought about in the bill. It includes clause 518 to clause 528.

Essentially, three main parts of the Goods and Services Tax Act need to be amended as a consequence of this legislation. The first of those has already been discussed on a number of occasions during the course of this debate. As I mentioned in my contribution on Part 1, the parts of this bill are divided by the various Acts that are to be amended, so the same items of work come up in repeat parts.

The first item in Part 3 that I want to talk about is the tax consequences of the emissions units and how they would work in relation to the Climate Change Response Amendment Act. That earlier legislation set out quite clearly that the Kyoto emissions units were to be zero-rated, but the issue that arose and that needed clarification in this legislation—

Hon David Cunliffe: I raise a point of order, Mr Chairperson. It is with some reserve that I rise to question whether the member is focusing on Part 3 rather than Part 2. It is my understanding that the Kyoto matters fall under Part 2.

The CHAIRPERSON (Eric Roy): That is hardly a point of order.

AMY ADAMS: It is clear which members have read the bill and which have not. As I mentioned, Part 3 relates to amendments to the Goods and Services Tax Act. The point I was discussing was the GST treatment of emissions units. Clearly the Goods and Services Tax Act needs to be amended, which is why it is in clause—

Chris Tremain: 519(2)!

AMY ADAMS: That is why it is in clause 519(2), as my senior whip has just pointed out—if that is any use to the finance spokesperson from the other side of the Chamber, who clearly has not read the bill. I do hope that is helpful; we are here to help.

Craig Foss: Written apology.

AMY ADAMS: I will accept a written apology at any time. That would be fine.

As I was saying before I was interrupted, Part 3 clarifies the issue around the zero rating of the Kyoto emissions unit. It needed to be made clear that the zero rating did not apply to the transfer of emissions units by the Crown under earlier agreements—primarily, the Project to Reduce Emissions.

Interestingly enough, what started off as a reasonably small, technical part of this clause was one that the Finance and Expenditure Committee latched on to in some degree of detail as a response to the submissions we had received. It led us into an interesting debate about whether the zero rating of the Kyoto unit should be extended to the non-Kyoto units—sometimes called the grey market or unofficial units. This was discussed over a number of meetings of the Finance and Expenditure Committee, and as a result the committee recommended to the House that the zero rating should be extended to the non-Kyoto units as well as the Kyoto units, thereby tidying up an area of some potential confusion. That is one of the amendments we deal with in Part 3.

The second amendment that I will touch on is the GST treatment of exported second-hand goods. The changes here ensure that in appropriate circumstances exported second-hand goods that will not be brought back into New Zealand are treated the same way as exported new goods. That was just a matter of ensuring that appropriate parity was maintained. Once more, the work of the committee ensured that a number of important changes were made. Unlike the first example, in this instance the issue was about ensuring that any potential future confusion could be minimised, such as ensuring that words like “supplier” were switched for words like “registered person” to make clear that those provisions applied only when the supplier was a registered person. I think that part of the bill ensures there are quite clear rules around the treatment of GST on these exported second-hand goods.

The final amendment I will touch on is one—I have to confess—that before this bill had never crossed my mind. It is the whole issue of how GST applies to loyalty points—air miles, the Fly Buys scheme, and the like. I will confess to being an avid shopper. I do tend to rack up a few royalty points; my husband will certainly attest to that. I know that the loyalty point schemes have been something of a phenomenon in recent years amongst avid consumers such as me—I do my bit for the economy—and the GST treatment of those schemes is a matter of some confusion.

Hon DAVID CUNLIFFE (Labour—New Lynn) : The deputy chair of the Finance and Expenditure Committee is faster than a speeding bullet. It is wonderful to have her peroration on the subclauses about Kyoto emission units. But Part 3 is where the debate really starts to hot up. I felt in a bind because we really needed to debate Part 2 at greater length, but Mr Chairperson exercised his discretion and brought us right to the political heart of the matter.

The bill is Minister Dunne’s personal statement to the nation. It is part of his legacy. But he is not finished yet. He will no doubt be the Minister of Revenue for many more Governments, and he will not rest until he has raised GST. That is what this part applies to—GST—and it is a timely and sobering reminder to the Committee that the Government is bent on raising the rate of GST.

A little bit of a phenomenon is being observed around the country—that is, the ability of the Government to get itself elected on a programme that is so bland—

Chris Tremain: Very good question—who raised it from 0 to 10?

Hon DAVID CUNLIFFE: Yes, OK, I know. Who brought in GST? Coming back to the bill, it says right here in clause 518—the proof is here—“Goods and Services—”. [Interruption] Members opposite asked the question; they would be very well advised to hear the answer: “Goods and Services Tax Act 1985.”

When Peter Dunne was but middle-aged, GST was first introduced. He was a member of the Government then, and he is the Minister of Revenue now. He has come a long way, but he has a lot further to go—2.5 percent further, in fact, if the newspapers are to be believed.

We need to observe two things. The first thing is that when stuck with a politically unpalatable decision, the Prime Minister will identify a brave junior Minister, normally the leader of a minority party—say, Rodney Hide—and let that Minister off the leash. But when the Minister goes too far, out comes the scrub-cutter and takes the Minister off at the knees, which in Mr Hide’s case is particularly challenging. But there was no such problem with the venerable Mr Dunne, who on this matter has many more miles yet to travel.

The second phenomenon we observe is that the difficult decisions are not contained in the National Party manifesto. Oh, no—Steven Joyce has seen to that. All policy was stripped out of the manifesto on Mr Joyce’s instructions. The Crosby/Textor - Joyce manual states: “If you can say it, don’t write it down, particularly in an email, and if you can nod, don’t say it, particularly not in a manifesto.” That is the way with GST and the Tax Working Group. All the controversial ideas will be inured from politics. No way will they be part of the Government’s programme. They are the objective and conscientious product of the most learned doyennes of tax policy from out in the private sector.

The proposal will emerge to raise GST to 15 percent, and Minister Dunne will champion it, as per the harbingers in Part 3 of the bill. Out will go Minister Dunne, and Steven Joyce will blow the whistle. He will get above the trench, head into the machine gun fire of public opinion, take a few brave steps before collapsing in a hail of polls—

Chris Tremain: I raise a point of order, Mr Chairperson. This Shakespearean performance is very nice, but I would like the member to focus on the part of the bill at hand, which is about emissions units, GST-exported second-hand goods in clauses 522 and 523, and GST loyalty points. I would appreciate your indulgence in this point of order.

Hon DAVID CUNLIFFE: Speaking to the point of order, I was particularly referring to GST on the loyalty points of the Minister, who is earning loyalty points with Mr Joyce for his brave carriage of the GST issue emanating from the Tax Working Group.

The CHAIRPERSON (Eric Roy): There is a bit of tolerance around this area of debate, but I think all members know that, at the end of the day, if I think the discussion is not pertinent, then closure motions are accepted. I ask the member to continue.

Hon DAVID CUNLIFFE: I shall take a more detailed view for the next few minutes. What is really important, in fact, occurs in clause 521, which relates to the time of supply of GST. We ask ourselves how long it will take for the ruminations of the Tax Working Group to come as far as the public domain in respect of GST, which is the subject matter of this part, I say to Mr Tremain. How long will it take the Committee to deliberate on it? Again, we find ourselves inescapably drawn back to the main consensus provisions of the bill, which are that the process was too constrained.

If, in tax bills to come, Minister Dunne brings forward his brave attempt to raise GST, we put down two markers right now. First, the Labour Party does not support raising GST on New Zealand’s low-income earners, unless they are more than fully indemnified from the regressive nature of any such change. Second, if there is going to be any debate about GST at all, we need to have a full and proper process, unlike the discussion of GST contained in Part 3 of the bill.

BRENDON BURNS (Labour—Christchurch Central) : I am very pleased to speak on Part 3 of this bill, the Tax (International Taxation, Life Insurance, and Remedial Matters) Bill. I want to acknowledge a small victory for a small section of the community in this bill.

Hon David Cunliffe: United Future.

BRENDON BURNS: No, it was not United Future; it was not as small as that. It was the scrap metal industry. Three men—and they were men—appeared in front of the select committee. They were blokes.

Hon Trevor Mallard: They were real men!

BRENDON BURNS: They had lambs on their shoulders; they were real men. Their suits did not quite fit right, their ties looked a bit tight, and they had calloused hands. But they were the sorts of blokes who go out there, create jobs, and create exports. They were being hammered by the fact that under the existing regime when they get a load of scrap—copper or whatever—and send it off in a container to China or somewhere else, they have to pay GST on it. I thought it was great to see representatives of that industry.

• Progress reported.

• Report adopted.