Taxation (Base Maintenance and Miscellaneous Provisions) Bill

I move, That the Taxation (Base Maintenance and Miscellaneous Provisions) Bill be now read a first time. I shall be recommending to the House later that the bill be referred to the Finance and Expenditure Committee for consideration.

This omnibus taxation bill is the second to be introduced this year. Like its March predecessor, the bill reflects the priorities of the Government’s tax policy work programme. That includes promoting growth and innovation, making the tax system easier for businesses to work with, reducing compliance costs, and protecting the revenue base. Protecting the revenue base is the single most important theme of the present bill.

The centrepiece of the bill is the introduction of new rules to ensure that foreign-owned banks, which constitute most of the banking business in New Zealand, pay sufficient tax on their New Zealand income. A notable trend has emerged recently that the growth in the profits of foreign-owned banks operating here is not reflected in their payments of New Zealand tax. The reported profits of the financial sector have been going up, but the proportion of the tax paid by the sector has been going down. At the Government’s request, tax policy officials reviewed the tax laws relating to banks to see whether they needed to be more robust. It has emerged that the banks can use certain features of our international tax laws, such as the conduit rules, to reduce the amount of tax they pay in New Zealand.

Under present law, banks can use interest deductions arising from an excessive level of debt to reduce the portion of their income that is subject to tax in New Zealand. That works in two ways. First, the cross-border financing arrangements for outbound investments, which have generally been funded by debt, have generated income that effectively is not subject to New Zealand tax under current law. Second, under the current law there is potential for banks to substitute debt for equity in financing their New Zealand businesses for the use of holding companies and bank branches. That results in their New Zealand business being thinly capitalised for tax purposes.

The changes introduced in this bill will provide robust thin-capitalisation rules that ensure that the income of banks cannot be sheltered by interest deductions arising from excessive debt. Under the proposed rules, foreign-owned banks will be denied interest deductions if they do not hold a level of capital or equity equivalent to 4 percent of their New Zealand banking assets, weighted for risk. They will also be required to have enough capital in New Zealand on which no interest is deductible to fully fund their offshore investments. That means that banks will be prevented from using the expenses associated with this income as a deduction against their New Zealand income. As I announced in September, the proposed changes could result in foreign-owned banks paying as much as $360 million a year more in New Zealand tax, assuming current levels of bank profitability—which is probably, I think it is fair to say, about the biggest free hit any Government has ever got out of taxation with no impact upon the New Zealand economy.

Members will have seen media reference to the Inland Revenue Department’s audit activity that has resulted in some banks being reported as disputing their contingent tax liability. Obviously, that is an issue between banks and the Inland Revenue Department and is separate from the legislation proposed in this bill. Under the law, I, as Minister of Revenue, have no part in such investigations of specific taxpayers.

As another measure to protect the tax base, the bill amends the dividend imputation rules to ensure that in certain circumstances when a company is sold, the benefits of any prepaid tax will stay with the original group that paid the tax and cannot be transferred to the shareholders of another group. The amendments are aimed at companies that have no immediate expectation of being liable for income tax but that prepay tax to impute dividends to shareholders and then engage in transactions to have the prepaid tax refunded to them. Once enacted, that revenue protection measure will apply from today.

The bill also introduces a number of changes that improve the operation and effectiveness of tax law in other areas. It introduces several changes to the tax depreciation rules to improve their operation and reduce associated compliance costs to business taxpayers. Included are changes to the tax depreciation treatment of patents and the special tax depreciation rate rules, additions to the list of the depreciable intangible property, and extended deductibility for losses on buildings.

The bill also clarifies and explains the rules on tax deductibility for business environmental expenditure, such as the cost of preventing, remedying, or mitigating the discharge of contaminants. The current rules are rife with uncertainty about the existing scope of tax deductions that are available for environmental expenditure, and I am told that some environmental costs may not, indeed, be deductible for tax purposes. Allowing environmental costs to be taken into account for tax purposes, as other business costs are, will ensure the correct calculation of taxation on income from business activities. The changes will also remove disincentives for undertaking environmental expenditure and encourage businesses to be more environmentally responsible.

Another part of the bill simply clarifies the income tax rules on transfer of assets and liabilities to beneficiaries when someone dies. I emphasise that those changes affect only assets and liabilities that are already in the tax base, such as buildings on which depreciation is being claimed and land on which the gain is taxable. It is not some attempt to back-door smuggle in some new death duties. The current law in that area is unclear, and over the years there have been repeated calls from the taxation industry for reform of the rules. Uncertainty also surrounds the tax treatment of in-kind distributions of assets from trusts, estates, and companies, as well as gifts of all kinds. To add greater certainty and consistency, the bill introduces comprehensive rules that provide a uniform income tax treatment of these asset transfers, both for those who transfer assets and for recipients. Those policy announcements have already been warmly welcomed by taxation professionals.

The bill also introduces statutory privilege, or a right not to disclose certain documents relating to tax advice provided by tax advisers such as chartered accountants. Although it will be subject to a number of exclusions, it will place the status of communications from non-legal tax advisers, such as accountants, closer to that of the tax advice provided by lawyers, who do not have to disclose their advice to the Inland Revenue Department. Advisers such as accountants should also be able to give candid and independent advice to their clients without having to disclose it to the Inland Revenue Department. The benefit of enabling this to occur is that legal and accounting advice will be treated in a similar way. In both cases such advice can promote voluntary compliance with the tax system and thus help to reduce compliance and administrative costs.

The bill introduces a temporary 6-year tax exemption on income earned from non-resident drilling rigs and seismic ships involved in exploration for petroleum in New Zealand. The measure removes a tax obstacle to gas exploration in New Zealand and is part of a package of measures announced in June to boost gas exploration here.

Those are the main features of this wide-ranging taxation bill. They and other changes proposed in the bill are described in detail in the separate 74-page commentary that has been distributed to all members of the House, and which I recommend they read. I commend the bill to the House.

I agree with the Minister that this legislation is extremely significant to New Zealand, and some of the implications the Minister has talked about and are referred to in the commentary will be far-reaching.

The bill is divided into three significant areas, which I want to address. The first deals with the thin-capitalisation rules for foreign-owned banks. As the Minister pointed out—maybe not in as much detail as I would have liked—this is the method, or deception, of loading excessive debt to hide the amount of equity to support assets, and that has significant tax implications. As much as it pains me to say it, having worked for Westpac Banking Corporation for some time and seeing that it is now in the sights of the Minister of Revenue in relation to this, I do believe that the bank may have a case to answer. The practice of debt loading to disguise the true equity position goes back 15-odd years. As I was reminded yesterday when I met some Westpac executive and board members, some very fine people are engaged in that institution right now who had no part in what has transpired.

I want to be on the record as making it very clear that that bank and some of the other foreign-owned banks have not been involved, as has been alleged by the Minister, in anything illegal. Essentially they used the law as it was drafted, and thus were able to enhance profitability to their shareholders on the other side of the Tasman. I agree with the Minister that the loophole needs to be closed. Hundreds of millions of dollars have run out of New Zealand into the Australian economy and to Australian banks and shareholders, and New Zealand shareholders, to some degree, have been left exposed.

The issue at hand is one that will reap the Government an extra $300-odd million, and some of it will be retrospective—some of the legislation will apply retrospectively. I have two issues of concern on this. The first is that the Minister and his Government will now have an extra $300 million to put into their coffers—money they never expected to have—and I expect the Minister to rebate that by way of tax deduction to the hard-working Kiwis who have contributed to the $6.5 billion surplus the Minister is so pleased to talk about, ad infinitum.

The second issue that concerns me is the retrospective nature of some of the legislation. Legislation that applies retrospectively—[Interruption] The member should sober up and listen. The National Party is strongly opposed in principle to legislation that applies retrospectively. It should not be happening. When the bill goes to the select committee, we will run a very clear rule of thumb over that. I look to some of the other members of the House for support on this, because it is a very, very dangerous principle. This Minister has an insatiable appetite for taxation, and that is something that bothers me. He is very good at spending other people’s money, and now that he will get a windfall of an extra $300 million, he will be put on notice by the National Party that it is time to cut taxation for the productive sector that has contributed to the surplus I talked about.

Another issue I want to talk about is the amendments to introduce temporary exemptions. I see from the commentary that that relates to 6 years of income earned by foreign companies for offshore surveys for possible petroleum fields. That type of tax incentive, to support our natural resources and infrastructure development—a foreign concept for this Minister—is a very good initiative. That New Zealand is exposed in terms of its petroleum resources and its inability, as it were, to attract foreign capital into a very capital intensive and capital hungry area around petroleum development is not in doubt. We need to think a little bit more laterally than is suggested here. I would like the select committee to look at the wider application of this suggested amendment, because I believe that any infrastructure development for which we need to attract large amounts of capital is something that could have application to what is being suggested.

New Zealand is in a dire position in terms of infrastructure and development. In particular, I am thinking about our ability to generate energy or electricity. Our energy resources are running out, and our ability to generate electricity is hurting our ability to attract foreign investment to our country. As National’s spokesperson on forestry, amongst other things, I am confronted with this issue nearly every day from organisations that are looking at opportunities to invest here. They have the same mantra when they talk to me—that New Zealand is a good place to grow trees, that we need to get involved in the processing market, and that the two things that concern them deeply are the Resource Management Act and the uncertainty of electricity supply. Anything this bill can do, and any wider application of what it suggests, will get the National Party’s support.

The third area I want to speak about relates to the amendments that will allow deductions for expenditure incurred by business in avoiding, remedying, or mitigating detrimental effects on the environment from the discharge of contaminants. I find I also agree with that. We have a pristine environment in this country that we as New Zealanders are all very proud of. But it is not something we should take for granted. Anything we can do to maintain that environment will get National Party support, provided the cost does not outweigh the benefits. That is an issue the select committee will look at, and I will ask it to reflect on whether the medicine is worse than the illness itself. Conceptually, what is being suggested in this legislation is very sound, constructive, and sensible. I think that all large organisations—and most of the organisations in this country are responsible corporate citizens—will look at their ability to mitigate any environmental effects, and if they can work in partnership with the Government to achieve that, then I think we will find they are very responsive to that.

In conclusion, the three major initiatives suggested in this bill go to the select committee with the National Party’s endorsement, but on the very clear proviso that we will look to see what devil is in the detail. A practice of this Government has been to put in place solutions that are not cost effective, and we need to be very mindful of that.

There are many important parts to this omnibus bill, but some in particular will appeal to my constituents. One of those—

Brian Connell: Name one—the only one!

JILL PETTIS: I tell the member to settle down, it is late. One issue in the bill that will appeal to my constituents is the introduction of new regulations to ensure that foreign-owned banks pay their proper share of tax on their New Zealand income. I think that everybody in this House would see that as a good thing. Even Mr Connell’s constituents would see that as a good thing. This is part of the Government’s commitment to a fair and just taxation system, and I look forward to seeing this bill when it is reported back from the select committee.

In speaking to this first reading of the Taxation (Base Maintenance and Miscellaneous Provisions) Bill, I start off by referring to the amendments to the Income Tax Act 1994 regarding foreign-owned banks. We have been told tonight that foreign-owned banks have not paid around $360 million in tax that should have been paid to this Government, or to the Government of the day. I find that sad, for a couple of reasons. It is incredibly sad not only that have we sold off these banks to foreign-owned enterprises but that, for quite some time, not even the Government of the day—whatever Government it is—has been able to collect the appropriate amount of tax the banks are supposed to be paying. I think everyone in this House agrees—I do not think anybody would disagree—that everybody, whether a company, an individual, or a small business, should, no matter what the tax rate is, pay the appropriate amount of tax stipulated by law. It is very sad that for some time now banks have not been paying the appropriate amount of tax because of some loopholes they have been able to find in the law.

I listened to the tax officials some time ago now. From memory, they said that this situation has been going on for about 3 to 5 years, but the Minister can correct me if I am wrong on that. When we calculate it up, that is a lot of money—money that could be going back into the pockets of our small-business owners, exporters, and small export businesses through tax concessions, tax abatement schemes, and things like that. Whatever we call it, and in whatever way we could have done it, that money could have been channelled back into taxpayers’ pockets. I find it incredibly sad that the banks not only were not paying the appropriate amount of tax but were—

The ASSISTANT SPEAKER (H V Ross Robertson): I am sorry to interrupt the honourable member, but the time has come for me to leave the Chair.

Debate interrupted.

Sitting suspended from 12 midnight to 9 a.m. (Friday)