Taxation (Annual Rates, GST, Trans-Tasman Imputation and Miscellaneous Provisions) Bill

I am delighted to be able to take a call on the Taxation (Annual Rates, GST, Trans-Tasman Imputation and Miscellaneous Provisions) Bill. If we factor in time, I suppose there are compliance costs in all those matters. I have not had the opportunity to take part in the debate on this bill, but I would like to say, for other than Part 1, that I commend the people who worked on the bill. I think that they have put together something that is very worthwhile and well considered, so I am sending out bouquets to those people.

I would like to concentrate in Part 2 on trans-Tasman imputation and credits, and, for the sake of accuracy, I would like to read a bit of the commentary on the bill, which states: “The bill changes the imputation laws to address the problem of triangular tax, which involves the double-taxation of certain trans-Tasman investments. It allows Australian companies to allocate imputation credits (for New Zealand tax paid) to their shareholders in proportion to their ownership of the company. This arrangement is reciprocal and requires both countries to pass the relevant legislation.” It goes on to state that the amendments permit a new form of grouping for imputation purposes only, which Australian companies can also join. That attempts to mitigate the problem that imputation credits cannot be passed through intermediate companies that are not resident in New Zealand or Australia. I say that that is sensible and closes that loophole. As I said, the Finance and Expenditure Committee has worked on something that is rather complex, and has come up with what I believe is a first-class solution. I have to say that attracting investment to this country is something that is desperately needed. I do not say this legislation in itself will do everything that is required, but I think it is a step in the right direction.

Yesterday I met with the executives of a multinational company called Weyerhaeuser. It is an international forestry organisation with a turnover of something like US$22 billion. They were out here looking at some of their investments in Nelson, and the conversation that I had with them was very constructive. One of the things that the executives of that company were doing here was looking for opportunities to invest further, but one of their concerns was the compliance regime that New Zealand is working under. They cited—the Minister may be interested in this—the Resource Management Act as the biggest turn-off to business investment in this country. Now, in a constructive way, I said that is something that everyone in this Committee has to get their heads around and try to do something about, because it is clear that those executives are sending signals to us, as are other international investors, that we just have to address the compliance regime.

I believe the Government has started down the right track with this legislation. I have been on record as saying that I think some of the work that the Government has done in some of its recent legislation is anti-business, but I think this bill is a step in the right direction. It is critical that one of the things that we look at addressing beyond the Resource Management Act is our occupational safety and health legislation. Before anyone jumps on me, I say I am the first person to accept that we need to do something about our safety record, but I do not want that to go to the point where it distracts businesses from their core business. I think we have to look at our accident compensation legislation, particularly as it relates to small business, and what I sincerely believe to be just nonsense around the issue of 4 weeks’ holiday is something that we also should look at.

So, having tabled those views, I would like to conclude by saying that this part is a step in the right direction. I think the select committee has worked well together to bring something to the Committee that is sensible. That demonstrates that when we put our collective will together to do something that is constructive, we can come out with something that is to the betterment of this country. I commend the work that has been done thus far.

I am delighted to speak to this part of the bill, because this is the good-news part of the bill. I can see from Dr Cullen’s smile that he agrees with me on that. This is the part of the bill where the Government has finally succumbed to pressure from the Greens and others to end the taxation penalties on low and middle income workers who are saving for their retirement. I think all parties in the House would applaud that, because it is totally unfair that anyone earning less than $38,000 a year who is a member of an employer-subsidised superannuation fund should be faced with the employer component of that fund being taxed at a higher rate than the marginal tax rate of the employee. So I give a big tick to the Government for removing the tax penalties, and also an acknowledgement and a note of gratitude to the Government for supporting the further Green Party initiative to include a 15 percent rate for those earning less than $9,500 a year. I know that not many people are affected by that, that it will cost the Minister only $1 million a year, and that he is very cash-rich at the moment. But it does make this a genuinely progressive specified superannuation contribution withholding tax, and that is a good thing.

I would also like to acknowledge that the Government is prepared to back something that was, I think, originally a United Future initiative to ensure that the taxation rate on superannuation is set at the level of a person’s salary, rather than his or her salary plus superannuation. That measure helps those people earning just under $38,000 who are currently receiving superannuation or who may be eligible for it. Those are very important steps in the right direction, and I would like to hear from the Minister to make sure that he is in planning to take a lead by ensuring that the superannuation contributions to Government employees will be taxed at the lower rate. He may be able to clarify whether that will apply to anyone in GSF New Zealand, given its defined benefit scheme. Certainly for anyone in the National Provident Fund, I hope the Government will opt to make sure that those employees are taxed at the lower rate. I hope that the Government will provide a lead to all employers to opt to pass on the tax savings to their staff. What is in this bill is optional; it is not compulsory. So I hope that employers will take that option, will be generous, and will give their staff an early Christmas present, even though that measure does not kick in until some time in the future.

That is end of the good news. The bad news is that Dr Cullen is keeping the taxation penalty in place. My amendment in Supplementary Order Paper 171 addresses that issue, and it is unfortunate that the Minister has invoked the financial veto provision in order to stop my amendment proceeding. All that it would have done was to simply extend the current 6 percent specified superannuation contribution withholding tax rate concession enjoyed by employees earning over $60,000 to low and middle income earners. In practice, that would have reduced the 15 percent rate to 9 percent, the 21 percent rate to 15 percent, and, for those earning between $38,000 and $60,000, the 33 percent rate to 27 percent. It would have cost the Minister and this Government only $77 million a year—a fraction of the $1.88 billion that the Minister wants to put into the Superannuation Fund, which in turn will be gambled on the overseas sharemarket.

I would like to thank the officials at this point for their drafting assistance with regard to my amendment. They did a sterling job, and I am grateful for that. I would like to thank National members for supporting my amendment at the Finance and Expenditure Committee and I would have hoped that they could support me here in the Committee, had the Minister not vetoed my amendment. I was disappointed that ACT, United Future, and New Zealand First did not support me at the select committee. I thought they were all family-friendly parties, but never mind that.

I do challenge Dr Cullen, having vetoed my amendment, to propose an alternative, because New Zealand is in the grip of a savings crisis at the moment. The number of Kiwi workers in employer-subsidised superannuation schemes has plummeted from just over 310,000 in 1990 to a mere 246,946 as at 30 June this year. That is an indictment on employers, but it is also an indictment on the Government for not providing an incentive to employers to provide subsidised superannuation to their staff. I believe my proposal was a serious solution to that problem, and it was a solution that should have been adopted.

I would like to speak briefly about three items in Part 2 of this bill. The first one concerns the large-budget screen production grants, which are set out in Supplementary Order Paper 170 in the name of the Hon Dr Michael Cullen. United Future has signalled its support for those grants to proceed, but we do so with a number of reservations. Although that particular scheme seems to have been well-thought-through and well costed, and I am assured by the officials that it will result in net gains for the New Zealand economy, instinctively, in a way, I think I still feel uneasy about the fact that it does involve a process of picking winners. We do open ourselves up to the criticism that if grants should be made for movies, then why not for building luxury yachts, for example? If the idea is to attract movie business to New Zealand through those grants, then why not say that we can also bid into New Zealand the construction, for example, of luxury yachts that might otherwise be built somewhere else? So I think that we will get on to a slippery slope.

The point I would like to make is that United Future, for that reason, would support a general decrease in the corporate tax rate itself. In that regard, we are all square with the National Party in saying that we believe the corporate rate should be reduced from 33c to 30c in the dollar. However, some of my reasoning is a little different from that advanced by John Key. He simply mentioned that that would bring the headline rate between Australia and New Zealand to a comparable level, and that is a very valid point. But I think there are some more important issues than that.

The first issue I would like to mention is that lowering the taxation rate would actually reduce the cost of capital for New Zealand companies. All companies assess the cost of capital after taxation, and if the taxation rate is lowered to 30c in the dollar, New Zealand would be brought back into a much more competitive situation with regard to the cost of capital, if for nothing else than because normally we run a higher interest rate than virtually anyone else in the world. So I see that as very much a business-friendly thing that would reduce the cost of capital and encourage investment in this country. That is the first point I wanted to make.

The second point is that by reducing the company tax rate to 30c in the dollar—when the personal tax rate remains at 39c in the dollar and the trustee rate stays at 33c in the dollar—we would increase the incentive for people to leave money in their businesses and capitalise them, because if they withdrew money from their businesses then their tax would go up. If they went through a trust, then they would go from a rate of 30c to one of 33c in the dollar. At the moment, a lot of people go through a trust in order to avoid the 39c in the dollar rate. The gap becomes bigger if the company rate is reduced to 30c in the dollar, and we create an incentive for people to leave money in their businesses. That would be good for business and good for saving, and I believe it would unleash a dynamic scoring effect in our economy, in the sense that the flow-on would be an increase in job creation and in wealth for all New Zealanders. Those are United Future’s reasons for supporting the bill, but in our view not doing so at the cost of continuing to examine the possibility of lowering the corporate tax rate.

The second matter I will mention, in brief, is Subpart S, “Arrangements involving money not at risk”, which is to be inserted in Part E of the Act by clause 14. I am delighted this action has been taken to sew up the blatant tax avoidance schemes that have been going on. In particular, I congratulate the Inland Revenue Department on its recent success in the Advanced Communication Technologies of New Zealand case, which involved hundreds of millions of dollars. When I look at tax avoidance arrangements, I always keep something very simple in my mind. We have nurses, for example, who work very hard in the intensive care ward at Wellington Hospital and do fantastic work, paying tax on every single cent they earn. I do not think it is acceptable that when some clever dick comes up with a so-called “smart” scheme for avoiding tax, we should let him or her get away with it. Anybody who walks into an office and says that if we put $1,000 into a scheme, that will save us $2,000 or $3,000 against our tax bill—”

💬 John Key: Where do I sign?

I say to John Key that if he buys into that and wants to sign up for it, then he has succumbed to—[Interruption] I was going to say avarice, one of the seven deadly sins. It is avaricious to enter into schemes like that, because at the end of the day all the other people of New Zealand pay the bill.

I rise in support of my colleague Mr Copeland. He has absolutely hit the nail on the head, because in New Zealand the more capital we have in our country, the more productive we are. The more productive we are the more we produce, and the higher our income. I see the Minister of Finance is shaking his head in disbelief.

💬 Hon Dr Michael Cullen: It’s crude, but it’s roughly true.

It is roughly true. Perfect! One of the things we can influence in New Zealand is the cost of capital, and, as my new-found friend and colleague Mr Copeland pointed out, one of the things we can influence regarding the cost of capital in New Zealand is the tax rate on income. I know that Dr Cullen sat there and said: “If we lower the tax rate, what can people do? A third will work hard, and a third—well, it will all balance out.” That was what we heard before tea. But we should think about it in terms of capital, because people make decisions about where they invest their money.

💬 Hon Dr Michael Cullen: What has this got to do with Part 2?

I am commenting on Mr Copeland’s speech. I know that Dr Cullen does not like to hear this. He would rather get up and give a stage I history lecture, confuse the income effect with the price effect, and then say that when it comes to tax the income effect always overwhelms the price effect, because that is what he said before tea. He is certainly wrong on that in terms of the work-leisure trade-off, and he is absolutely wrong in terms of capital, because we live in a free world. I know that Dr Cullen would like to put an end to it, but people choose where they invest their money. They decide whether to invest in New Zealand, Hong Kong, Japan, the United States, South Korea, or Timbuctoo.

What do people look at when investing? They look at two things: expected return, and risk. After adjusting for risk, they look at the expected return. I ask Mr Copeland what that is. It is the expected return after tax. So when we try to raise capital in New Zealand—Mr John Key from the National Party knows this and Mr Rod Donald from the Green Party knows this—the tax on capital income in New Zealand grosses up the cost of capital. It has to. So, the higher the tax on income in New Zealand—including capital income—the higher the cost of capital in New Zealand, the less capital we have to work with, the less productive we are, and the smaller our income is, in consequence. I wish we had a Minister of Finance who understood that. Mr Copeland understands it, and John Key and the National Party understand it.

💬 Hon Lianne Dalziel: What about secret commissions?

I know that Lianne Dalziel, the Minister of Immigration, does not have a clue what we are talking about. I cannot help that—she is a member of the Labour Party. Labour members were too busy studying what was happening to the Sandinistas in Nicaragua to learn any basics about how to work or earn an income—basic economics. No, they were into world-saving theories. I wish Mr Copeland would say: “Actually, I am right”.

💬 David Benson-Pope: Taint. Smells, doesn’t it?

David Benson-Pope sits over there. Has anyone ever heard Mr Benson-Pope say anything positive in this Chamber, other than growl and grumble? What a miserable life he must have. I say to Mr Copeland that he is absolutely right, and that he should get rid of this rotten Government. He should not vote for this bill; he should vote for lower taxes, more capital, and a more productive and prosperous New Zealand. I ask him please to stop his support for this mad Labour Government, because we can have—

💬 Hon Lianne Dalziel: The ACT party stands for secret commissions, unpaid bills—

Do members not love Lianne Dalziel? Has anyone heard Lianne Dalziel being positive? This is the most negative Government I have ever seen in my short time in Parliament; it has nothing positive to say. It starts from the Prime Minister and goes all the way down to David Benson-Pope, who has never smiled in his life and never had a happy day in his life.

I will return to Part 2, if I may. As I said when I last spoke—

💬 Hon Dr Michael Cullen: That was Part 1 we were just discussing.

Yes, I know. I did not want to point that out to Mr Hide, because he might have delayed things even more. We are actually dealing with Part 2.

💬 Hon Dr Michael Cullen: Your responses slow down under certain conditions.

Far be it from me to comment. As I said when I last spoke on this part, employers deserve—I would say need—an incentive to provide subsidised superannuation to their employees. There are some good measures in the Business Law Reform Bill to reduce compliance costs, and I see that as an indirect incentive. Obviously, I see the good news in this part about eliminating the tax penalty as something of an incentive. But employers need a real incentive, which is what my amendment is all about. It says to employers that if they give their staff subsidised superannuation, the staff will get an extra 6 percent added to their savings, which they would not get if employers paid it in the form of salaries. Surely that is a good thing, because we need to shift money away from consumption and into saving.

I believe that that is one of the major problems the country is facing. It is confirmed when we look, for example, at net household wealth, which has declined 33 percent in the last decade in terms of personal, disposable income. So, while the value of our financial assets has gone up 39 percent in that period, our household financial liabilities have gone up 146 percent, and I think that points to a real problem.

It is a dramatic and disastrous trend that this Government, I believe, has the opportunity to reverse. Yes, the Government is shuffling in the right direction, but it should be taking positive steps by providing employers and employees with real tax incentives to encourage people to save for the future. I know that the Government is looking at the “t’s” and the “e’s” and where they should go, and I will wait for the Minister to make some announcements in that regard. But it certainly makes sense to me to defer some of the revenue the Government is currently making—at the point where people are making a contribution to their savings, and employers are making a contribution—and to pick that up at the point where people are drawing down on that contribution when they retire.

That would help solve two problems. It would reduce the embarrassingly large surplus the Minister is currently facing, and it would also lead to more Government revenue being available in 20, 30, or 40 years’ time when he is going to need it. Whatever the Minister does, it is time for the Government to face up to the savings crisis. It is time we tackled the problems I was outlining. The Government claims with one breath that it needs to put money into the New Zealand Superannuation Fund, but it is not doing enough to change the tax structure to encourage more second-tier saving. That is certainly what we want the Government to be doing. There are a lot of benefits in addition to that deferred income: the Government would help to facilitate households to get their net debt down; if more money is going into superannuation schemes there would be less need—hopefully no need—for foreign investment; and people would be more comfortable in their retirement. They are all good steps that I hope this Government will give serious consideration to, now that it has exercised—

💬 John Key: What is our savings rate compared with Australia?

I do not know, but perhaps we could ask the Minister to comment on that. Certainly our savings rate is not good, because if we look at the last Reserve Bank of New Zealand figures for the 2003 year we see that not only did we have negative savings of 4.5 percent, I think, but our household savings rate was minus 4.25 percent. But wait, the news only gets worse. The rate is projected to be minus 7 percent for 2004, minus 6 percent for 2005, and minus 5.5 percent for 2006. It is time for the Government to reverse those disastrous trends.

💬 John Key: Our debt levels are the same as every English-speaking country.

That may well be, but I would still say to the Government: let us not follow the sheep, let us plot our own path, let us shift from consumption to savings, and let us shift from speculative investment to productive investment.

I move, That the question be now put.

I would like to take a brief call concerning Dr Cullen’s amendments to the specified superannuation contribution withholding tax on Supplementary Order Paper 170, which is being considered with Part 2 of this bill.

I am delighted that the Minister of Finance has decided to introduce this important Supplementary Order Paper. I think it will give a very, very fair outcome to taxpayers. Over 70 percent of all New Zealand taxpayers pay tax at a marginal rate of 21c in the dollar, which is something that we frequently overlook. That is by far the overwhelming majority of taxpayers. For those people around the margin at the $38,000 threshold, it is important that this Supplementary Order Paper will determine that as long as their wages or salary in the previous year—or in the current year if that information is not available—are below $38,000, they will, in respect of the whole of the employer’s contribution, enjoy that 21 percent rate. As it was originally introduced, the bill provided that the whole of the amount in those circumstances was taxed at 33c in the dollar, which would have been a clear case of overtaxation.

Initially, Dr Michael Cullen looked at a truly progressive rate—part of that amount being taxed at 21c and the other part at 33c—and there is now a move to tax the whole amount at 21c in the dollar. That is a great step forward. For once we are giving the benefit, if one likes, of that threshold-bracket situation to the taxpayer instead of to the consolidated account. It is a big step forward, and I agree with Rod Donald that it sends a very important message to New Zealanders about the need for us to encourage private savings. Like Rod Donald, I call on the Minister of Finance, Dr Cullen, to continue to work in this area, because it is a step in the right direction. However, on its own it will not get the job done.

The next thing that needs to be tackled is the taxation rate on earnings derived from superannuation funds, where, again, we have a flat rate of 33c in the dollar. As I have mentioned, given that over 70 percent of taxpayers pay tax at 21c in the dollar, they are clearly overtaxed in that regard. I think the solution to that is not difficult. I have had extensive discussions with the Investment Savings and Insurance Association and others, who have expressed a willingness to undertake at their end—the investment end—the kind of compliance costs involved in allocating the earnings of the fund to each individual member and then deducting tax and sending a cheque to the Inland Revenue Department at the marginal tax rate of the employee. I would like to see that work move in that direction, and I would like to see it pursued within the next year, as well.

I must say, though, that even then—like Rod Donald—I harbour some doubts as to whether that will be enough. We have a “taxed/taxed/exempt” superannuation regime in place at present. I sometimes wonder whether the overriding solution, ultimately, will be to grandfather the present scheme—I think we are one of the very, very few nations in the world that has that approach—and go back to an “exempt/exempt/taxed” superannuation regime approach, like most other nations in the world. I very much encourage the Government to keep working in that area, because the stakes are high and we need to encourage more private savings in this country.

Finally, I say to Rod Donald that I am unable to support the amendments to Part 2 on his Supplementary Order Paper—which are now vetoed anyway—that would bring the rate back down by 6 percent to the lower tax bracket. The argument he put forward is actually based on a fallacy. He seems to think that the 33c rate for people on the 39c in the dollar rate is some sort of concession. The reality is simply that the Government increased the rate from 33c to 39c for people in the upper income bracket, but at the same time it said that if people decide to contribute or have their employers contribute some of that into long-term savings for superannuation, they would be taxed at only 33 percent. That is not really a concession in favour of high-income earners, because they are already paying so much more tax than the people further down the chain. I do not think it is logical to say that because we are not taxing the people who are paying most—even in real, dollar terms—of the tax in this country quite as much as we could be, we should therefore give some relief to people down the chain. To me, the logic of that does not stack up. Furthermore, the officials advised the Finance and Expenditure Committee that that sort of system has been tried elsewhere, notably in the USA, and it was not successful.

I move, That the question be now put.

Motion agreed to.

The question was put that the amendments set out on Supplementary Order Paper 170 in the name of the Hon Dr Michael Cullen to Part 2 be agreed to.

Amendments agreed to.

The amendments to Part 2 in the name of Rod Donald on Supplementary Order Paper 171 have been vetoed.

Part 2 as amended agreed to.

Part 3 Amendments to Tax Administration Act 1994