Income Tax Bill

I move, That the Income Tax Bill be now read a second time. In so doing, I note with some relief on behalf of the Clerk that the practice for the Clerk to read the bill at that particular point has long since ceased—as the bill is some 2,154 pages long. As members will have noted, I have referred Supplementary Order Paper 195 to the Finance and Expenditure Committee for its consideration. The Supplementary Order Paper amends the bill to incorporate the changes made to the 1994 Act by the Taxation (GST, Trans-Tasman Imputation and Miscellaneous Provisions) Act 2003, and to enhance the consistency of the drafting. The purpose of referring the Supplementary Order Paper is so that the select committee can assure itself that there are no policy changes incorporated within that Supplementary Order Paper.

The bill represents a third stage in the progressive rewrite of the Income Tax Act, which has been going on for some considerable number of years. It introduces rewritten legislation contained in the first five parts of the Act, and re-enacts the remainder of the Act, leaving about half of the Act to be rewritten in future stages. The three most frequently consulted parts of the Act, those setting out the rules for calculating net income, are amongst the parts that have been rewritten for this bill. The purpose of the rewrite of this Act, which is one of the most consulted Acts in the country, is to produce tax law that is clear, plainly written, and structurally consistent. That will make it easier for users to find all the provisions they need and to understand what they read, which ultimately saves time and money.

Tax is, of course, a notoriously complex subject, so it is all the more important that the law governing it be as clear and easy to use as possible. A plain-language drafting style has been used to rewrite the legislation. It seeks to present ideas clearly, concisely, and directly, and to avoid legalese, archaic terms, and repetition. Throughout the redrafting process the paramount aim has been to make the rewritten legislation as clear as possible, without substantively changing the policy content of the current Act. To this end, the rewritten legislation has been the subject of constant consultation and review since drafting began several years ago. This has involved public and private sectors alike, professional associations, and a wide range of people and organisations.

Since 1995 an advisory panel, consisting of the Institute of Chartered Accountants, the Law Society, and tax policy officials has been overseeing the rewrite of the Act. It has ensured that procedures have been in place to identify policy issues arising in the course of the rewrite. As a further safeguard, the Government has assured the public that it will introduce remedial legislation to correct any problems arising from the new Act’s producing a different outcome from that intended under the present Act. Any amending legislation would apply from the date of effect of the new Act.

In its examination of the bill, the Finance and Expenditure Committee was also concerned to make certain that no unintended policy changes had arisen in the course of rewriting the law. It therefore sought further testing of several key parts of the rewritten legislation, and that was undertaken by eight leading tax professionals. This was a major exercise and extended the committee’s consideration of the bill by some 6 months. Perhaps I could say to the member who is collecting what I think he thinks is a copy of the bill, that that is only the first volume; there is a second one, as well. As a result of that lengthened consideration, the committee has recommended that the date of application of the new legislation be deferred by 1 year to the 2005-06 tax year. That will give interested parties, including tax practitioners and tax publishers, more time to prepare for the changeover to the new Act.

The committee has also recommended that new transitional provisions be included in the bill. These make it clear that no change in the effect of the law was intended and that the old law should be used as a guide for interpretation, should there emerge any ambiguity or absurdity. The new transitional provisions would not apply to those few relatively minor policy changes that we made intentionally and were subjected to public consultation well before the bill was introduced into Parliament. These are the two main changes the committee has recommended. As an extra safeguard it has also recommended that an independent committee be set up to consider any unintended changes for the meaning, application, and operation of the law as a result of the rewrite, and it sees the current advisory panel, given its background expertise and composition, as the right entity to undertake the task.

I thank the committee for its thorough consideration of this massive bill. I thank the Institute of Chartered Accountants, the Law Society, the committee’s tax advisers, and the many others who made significant contributions to the proposed legislation throughout its development. I recognise in particular two current members of the House, the Hon Peter Dunne and the Hon David Carter, who also played a role in this rewrite as previous Ministers of revenue. I finish by thanking all the parties in the House for their cooperation in the orderly management of the passage of this bill.

National will be supporting the rewrite of the tax bill. However, as the Minister pointed out, taxation law in New Zealand is growing ever more complex by the day. I say that because since the Labour Government took office in 1999, we have seen in the order of 17 increases in taxation to New Zealanders. Those 17 changes have led to an increased tax burden on average households of $2,600. It is no wonder that taxpayers around New Zealand are confused about why a Government that is running a $5.6 billion surplus, the largest surplus in 50 years—a surplus generated off hard-working New Zealanders and businesses, that, day after day, toil and graft to make this a greater country—has been unable, through the Income Tax Act, to deliver just a small portion of that back to hard-working New Zealanders.

Taxpayers are confused because this bill is so complex. They are confused, too, about the comments made by the Minister of Finance yesterday when National boldly took the step of wanting to reduce corporate taxation. National boldly took the step to a new frontier where it would, once again, put New Zealand corporates in a position of equal footing with those in Australia, and would seek, over time, to have a real advantage. The Minister of Finance completely dismissed that wonderful opportunity for New Zealand businesses to regain their strength and position. All he could do was scoff that it would not be terribly good because some of that benefit would go back to foreign companies. I am surprised that the Minister of Finance has taken such a shallow view of that position.

I shall outline to the House why, in the Income Tax Bill, the Minister of Finance could have taken an opportunity to put New Zealand on the front foot, and why he is so lacking in his knowledge base about this issue. Firstly, New Zealand relies on foreign investment. Foreign investment has flowed into our country and has built stronger and stronger businesses. Investors look at the nominal corporate tax rate as one of the very factors on which they base those decisions. They look at that tax rate, and currently today they see a tax rate that is 33 cents in the dollar for corporates. They look at the Australian corporate tax rate of 30 cents in the dollar, and very often, if not on many, many occasions, they then decide to put that investment in Australia.

Yesterday I was shocked, absolutely stunned, when the Minister of Finance was not telling the people of New Zealand that he would not be encouraging more investment from off shore, and more opportunities to build greater businesses for New Zealand. Only on Saturday the Minister of Finance told the people of New Zealand: “We’re going into harder times. We’re going into growth rates of less than 2 percent. Tighten your belt.” He knows he took $5.6 billion extra from people last year, and he is not going to give any of it back to them in the next Budget. He knows times are going to get harder. He knows that people are struggling with the proposed changes to the labour laws, and with the 17 tax increases he has put on them over the last 4 years. He knows that people are struggling with a mountain of compliance costs, and he knows they are struggling under a higher dollar, but he is not going to do anything for them to help build foreign investment. What a disgrace that was to the hard-working businesses of New Zealand! They are toiling away, working hard, and looking for the green light from the Minister of Finance. He is just putting up red lights and stop signs in front of them, and it is despicable.

Secondly, the Minister showed an amazing display of lack of knowledge when it came to the issue of multinational transfer pricing. Only a few months ago one of the world’s leading experts came to New Zealand and warned our country that we would be subject to a major deterioration in our corporate tax base if we did not recognise that issue. We need look only at the number of major law suits around the world that are taking place—Toyota in Australia and Glaxo in the United States, where a huge amount of corporate income is determined solely on the basis of the tax base. We need look only, for instance, at the position in Ireland, where so much revenue is booked because the corporate tax rate is low, and at where expenses are booked in the United States where corporate tax rates are higher—absolutely higher. That is the issue of transfer pricing.

I suggest to members of this House that they would be well served to read the Economist magazine. I know they probably do not read those kinds of comics during the weekend, but I suggest they pick up the Economist magazine and look at the corporate tax take in the United States of America. It is about 1 percent. It is very low and deteriorating. Why is that? Because it has been subject to transfer pricing from multinationals. I suggest that the Latvia curve effect would take place in New Zealand. That is the effect whereby if the corporate tax rate were lowered, the tax take of this country would go up. However, yesterday when the National Party boldly took the step of telling New Zealand it would reduce corporate tax rates, unfortunately, the Minister rejected it.

Finally, we know that when companies come to New Zealand they invest because they want to grow. They will pick up the income tax rewrite, and they will be shaking their heads in bewilderment at the various clauses. They will be looking to their tax accountants, and they will not find clarity in this position. The bill has failed in every extent other than the fact that it is a wonderful doorstop. It has failed to provide that great fillip that is required.

I do want to congratulate the Minister on just two things, if I may, as well as the select committee, the number of people who submitted to the committee, and the advisers. One was an understanding that a later date of implementation should take place—about 12 months longer than was originally intended—and because of the complexity of this bill, the unusual nature of it, and the extreme work that has to be done to understand it, I think that that was a very wise situation, indeed. I want to commend the officials for pointing out—and I congratulate the Minister on accepting it—that the situation related to unintended consequences should be taken into consideration so that if a taxpayer is in a position where his or her tax changes, not knowingly, and where it was an error in the bill and a non-intended consequence, the bill will be retrospectively changed to allow that.

One of the reasons that tax legislation is increasingly complex in our country is due to the divergence between the top rate and the company rate. That was brought about by one Government, and one Government alone. One of the very reasons why the Income Tax Bill is such a long and wordy piece of legislation is that when Labour came into office, despite running very large surpluses, despite the fact that it did not require the revenue, and despite the fact that it is now running a $5.6 billion dollar surplus, it chose to increase the top personal tax rate and cause a great deal of complexity that is now bound up in this bill.

💬 Darren Hughes: Is the member still whingeing about that?

What will happen in the Budget? Mr Hughes would be well advised to take an opportunity to look at what will happen. Mark my prediction: in the 2004 Budget that will be read by the Hon Dr Michael Cullen, the Future Directions package will enclose in it a great deal of revenue, a great deal of opportunity, and a great deal of resource for beneficiaries in this country. It will do very little for hard-working families, very little for the Kiwi battler, and very little for Kiwi companies. They will have to rely on the 2005 National Government to get some respite.

There is nothing quite like following a National Party spokesperson talking about battling New Zealand families. The National Party uses every opportunity in this House to whinge and whine about the top tax rate because it hates paying more tax. Poor old John Key is down to his last three Jaguars because he has had to put up with the personal top tax rate. The only battlers National members care about are themselves. When the “deputy spokesperson on voodoo economics” over there on the Opposition benches criticises the tax legislation introduced by this Government it is a little bit rich.

I have to confess that I have not read this bill. Members will see it sitting on the Table of the House. It is a huge two-volume document, running to 3,000 pages. However, I do know that it rewrites tax legislation, in the biggest way since 1916, into plain English. I know that only a few members of the House have read it—those who serve on the Finance and Expenditure Committee—and I congratulate them on that. They have made some good recommendations to the House. It makes our tax law easier to follow. This is a great Government doing great things for ordinary people, and I support the bill.

In speaking to the Income Tax Bill, I want to say, firstly, that I picked up volume 1 while the Minister of Finance was speaking, and he pointed out that I had only picked up half the bill. As I have stopped going to the gym as often these days, this is all I am able to pick up, because it is such a big bill. It is something like 2,000 pages long. We are talking about a bill that is supposed to simplify the tax law, and I would have to question whether a bill of 2,000 pages is really simplifying it. Tax law is hugely complex, and that is why we have to start the whole process over again and start the rewrite, as the Minister said. To expand a little on that, the bill represents the third stage in the process of rewriting the income tax legislation. It follows the reordering and renumbering of the Income Tax Act 1976 and its enactment as the Income Tax Act 1994, and the rewrite of the core provisions contained in Parts A and B of the Act.

In the Finance and Expenditure Committee we felt there were some submissions that would enhance the bill. I want to share with the House some of the submissions that were important to me, and that I am very happy to see accepted and taken on board. One of the submissions I want to talk about—and obviously there were a huge number of them—came from PricewaterhouseCoopers. They thought the date of application of the bill should be deferred for 1 year, to apply to the 2005-06 tax year or corresponding income year. Taxpayers with early balance dates will have insufficient notice of the new Act, and could be disadvantaged compared with taxpayers with standard or late balance dates. Officials did not oppose this submission for deferring the application date. However, deferring this date would mean there would be a longer period within which future amendments to the 1994 Act and the rewritten Act would use different styles and language. However, officials do not consider this concern outweighs the suggested benefits for readers of the Act of deferring the application date, and I am very happy that the submission was passed.

With regard to enhancing the entire tax system, some members—such as the associate finance spokesperson for the National Party, John Key—have talked about doing this and their solution is cutting tax rates. I want to encourage the Government to implement a tax abatement scheme and concessions for our exporters to ensure that viable exporting opportunities and innovation are not lost—for example, a 20 percent tax rate on new export net income. I heard the National Party spokesperson talking for most of his speech about tax cuts, and all one hears is tax cuts, tax cuts. Basically, the interpretation of that is “tax cuts for the wealthy”, and that is pretty much all one hears from that party and that spokesperson.

💬 John Key: Do you think you’re wealthy if you earn under $38,000, because that’s what we were talking about yesterday.

The point I am trying to get to is the fact that the National Party and that spokesperson do not think outside the square. They do not think outside the box. All one hears from them, day in and day out, is: “Tax cuts for the rich.”

As the only true centre party in this Parliament, New Zealand First wants to propose something new and different. We want to think outside the square and outside the box, and create tax incentives for exporters. I want to talk about this only briefly because I do understand we are talking about the Income Tax Bill, but briefly, our exports per capita clearly show New Zealand $3,000, Ireland $19,000, Singapore $34,000—and right there, that shows that we have to do something about this. This is not just about giving tax cuts to the rich, but saying: “Let’s think outside the square and start giving tax incentives to the engine room of this economy.”—our export sector.

I listened to the National Party spokesperson and he talked about doing something for the Kiwi battlers, the Kiwi farmers, and so on, who are being hurt by this high export dollar. I ask what did the National Party do for exporters back in 1996.

💬 Government Member: Nothing!

It did absolutely nothing. I remember that the exchange rate back in 1996-97 was at around US70c, and the National Government did absolutely nothing. It took New Zealand First to get into coalition and do something to start to bring the dollar down. This is the only party on this side of the Chamber that means what it says and says what it means.

💬 John Key: What did Winston Peters do when he was Treasurer?

We started to bring the dollar down.

💬 John Key: No, you didn’t.

Yes, we did. We set in place a policy targets agreement that would bring the New Zealand dollar down. What did it do? It brought it down. For somebody who has been in the foreign exchange market to not even understand that is absolutely crazy, and I cannot understand it. It must be hard for the old National Party Kiwi battlers, who—as Darren Hughes said—are down to their last three Jaguars. It must be hard, and I feel for them.

I want to get back to some of the intricate details of the bill, and I want to focus on a couple of other submissions that were made to our committee. Some of them were very interesting and very helpful. I want to bring to the Committee’s attention one of the submissions of the Institute of Chartered Accountants of New Zealand, on clause CB 1. The institute felt that the clause should be repealed to make it clear that an amount derived from a business does not include a capital amount. This submission codifies case law and makes explicit the treatment of capital gains derived by a business. This addresses the concern expressed in other submissions that this clause in the rewritten Act could be interpreted as including capital gains. That submission was accepted. So I wanted to raise a couple of submissions that were taken on board by the committee, which I believe has enhanced the bill.

With regard to tax law, I believe it will always be a never-ending, moving ship, and will have to be constantly looked at in that respect. I am glad I have been able to be part of a select committee representing the New Zealand First Party, along with my leader, the Rt Hon Winston Peters, in making sure we are able to simplify the tax law in this respect.

I rise on behalf of the ACT party to speak to the Income Tax Bill. As members have said, it is going to be the largest bill ever passed by our Parliament. It is not just the 2,307 pages in these two volumes, but there is already a Supplementary Order Paper that contains another 114 pages. The ACT party will be voting against the bill. The reason we are doing that is that we are opposed to the principles contained in this bill. Having said that, we do accept it is desirable that Parliament regularly rewrites tax laws into one law so that tax practitioners and, perhaps, members of the public, will be able to find the tax law. That is principally why we are doing this, and it has also been written in such a way as to try to make tax law more understandable. ACT supports that concept, and therefore we have not opposed the procedural measures that have been necessary to enable such a bill to go through.

Members will realise that if any one party had dug its toes in, the Government would not have enough time to pass a bill of this nature, and we have not procedurally prevented this bill from going through. But now that we are having the second reading, and we are talking about the principles of the Income Tax Bill, it is important that I set out the reasons why the ACT party does not support the legislation. The first one is that we would not need 2,400 pages of tax law unless the Government was doing something quite extraordinary. What is it doing that is extraordinary? The Government is taking 40 percent of everything that is produced in New Zealand. Would the public of New Zealand voluntarily hand over 40 percent? No, they would not. That is why the Government needs 2,400 pages of draconian measures to take the money—because it is a draconian measure. Would the member mind doing her telephone conversation a little—

💬 Metiria Turei: Ha, ha!

That is very funny. I raise a point of order, Madam Speaker. We do have telephones in the House, but the Green member, who I would have thought would be opposed to telephones and would be doing things by tom-tom—

💬 Hon Brian Donnelly: Smoke signals.

—or by smoke signals, should have her conversations in a somewhat less obvious fashion.

💬 Madam DEPUTY SPEAKER: Can we just show courtesy to members, certainly when they are speaking, and not be on the telephone?

I will say to the Green member in the House that we are not just taking 40 percent of gross domestic product (GDP). If we realise that a large number of the population are young, and we have those who are on welfare and those who are retired, it follows that working New Zealanders must be paying more than half their income to the Government. The ACT party says that is an outrage, and it is not something we support, so we do not support the tax laws that make that possible.

Can I then tell the Government why it is wrong that the Government takes 40 percent of GDP? Firstly, income tax is, if one likes, the penalty we all pay in order to work. If one wants to work in this country, the penalty is that one has to pay tax. If one wants to invest, the penalty is that one must pay tax. [Interruption] The member might have incredulity. She might never have invested. If she tries investing, the Government will penalise her for doing it. If the member was to try to be more productive, she would find that the penalty for that is income tax. It follows that if members want more productivity, if they want more wealth in New Zealand, if they want more investment—and I understand that all parties say that they do—we should be lowering the amount of tax rather than passing laws of this sort to increase it. So that is another reason we are opposed to this bill.

But there is a further reason why it is 2,400 pages long: this tax bill is not just to collect the amount of money the Government needs. If that is what it was going to do, we could probably do it with 1,000 pages of law.

💬 John Carter: What?

No, we would probably need 1,000 pages of law. But successive Governments have used the tax system to redistribute income, and that is the objective of all social engineers. This is a piece of social engineering, and I say to the House that it is unfair, but it will also continue to fail. That is another reason why the ACT party is opposed to it. One reason why we are saying to members that we do not think this sort of tax law is necessary is that we do not support the notion that just because one earns more money, the Government has the right to confiscate it. I can think of a very good example of that, given by the Leader of the Opposition before he was a member of Parliament. He pointed out that under the present tax law—this law we are passing here—a couple with two children, who earn $100,000 a year, pay a hundred times more tax than a couple earning $25,000 a year who qualify for family support. He also pointed out, quite rightly, that our tax laws are skewed in favour of those on low incomes. Indeed, many people on low incomes are net receivers of money from the Inland Revenue Department, via family support.

💬 John Carter: From us, the people.

From us, right. I am obliged to the member. They are net receivers of money from the people, and I want to draw to the attention of the House that the vast bulk of income tax is paid by just a third of the electorate, and that third of the electorate really pays very heavily. Then, when I hear people say—not just the Government, but now, apparently, the National Party—that $60,000 a year means one is rich, I just wonder what planet they are living on. Why is $60,000 important? It is because that is where the top 39c tax bracket cuts in.

We are now being told by the two major parties that the top 39c tax bracket should continue. The ACT party does not agree with that. We say we should give a tax cut to every worker, and there are a variety of reasons for that. One is that it is a question of fairness, but, secondly, there is a thing called “keeping your pledge”. I have a copy of these cards. I know that the Government is trying to gather them up, but this is the credit card promise that has that photograph of Helen Clark—apparently it is Helen Clark—stating that: “My commitment is to you, we will deliver.” This was pledge No. 7: “No rise in income tax for the 95 percent of taxpayers earning under $60,000 a year.”

This year, members know that 20 percent of all full-time workers are in the top tax bracket. That is unfair. Why should those workers wait as the two major parties compete for the social welfare vote? I say that we ought to give a tax cut to everyone. We could give a tax cut to every worker. We could give $100 per fortnight to every single worker in New Zealand, and that would cost $4 billion. The taxpayer surplus is $6.9 billion. I agree that we ought to cut the company rate, but cutting it just to the rate of Australia will not cut it. Why should someone come to New Zealand? We have to give a competitive advantage, and with a $6.9 billion surplus, we could go to a flat tax rate of 24c in the dollar. We would then need a tax code not of 2,400 pages, but of probably less than 20 pages. If we had a flat rate of tax whereby everybody pays the same amount on every dollar he or she earns, the person on $100,000 would be paying 4 times more than the person on $25,000, but that is a fair system. It would be easy to implement, and it would result in a huge increase in production, jobs, and wealth. All it needs is the two major parties to decide to adopt some sound economics and some fairness, and then we could retire a whole lot of tax planners, as well.

Before I get into the substance of the bill, I would like to pause and thank the member John Key for his ringing endorsement of the United Future policy to cut the corporate tax rate from 33c to 30c in the dollar. I guess that, in a way, imitation is the ultimate form of flattery.

In income tax history terms, the second reading of this bill is a historic occasion. As others have mentioned, this bill tips the scales at a massive 2,421 pages, undoubtedly an all-time record for any bill coming before this Parliament. The bill represents the culmination of many years of work by officials at the Inland Revenue Department, and I would like to begin today by thanking them for their dedication and professionalism over such a sustained period of time. I also thank them for the way in which they cooperated fully with the Finance and Expenditure Committee, for it must be said that we worked them virtually right through 2003, between the first reading of the bill and today. The officials responded with energy and good common sense, kept their heads down, and brought together a bill expressed in common English that is destined to form the tax law of New Zealand for another generation or more. I thank also Therese Turner and David Patterson, who were retained by the committee as specialist tax advisers.

A few people have asked me whether anyone has actually read right through the bill, from cover to cover. I have not, but I can tell members on good authority that Therese Turner has. Therefore, it needs to be acknowledged that those of us on the committee who have not read the entire bill relied enormously on the excellent advice and guidance given to us by Therese and David. Those advisers, together with the officials, also worked tirelessly with the Institute of Chartered Accountants of New Zealand, the New Zealand Law Society, and Treasury to give this bill its final shape and content. Since I am a chartered accountant myself—one, I believe, of only two in the House—I would also like to pay a special tribute to the institute, and to the enormous amount of time and energy that it put into this bill. Many institute members were involved, and put in extra hours in their own time, over and above, and in addition to, their normal work commitments. All of those who appeared before the committee displayed a dedicated professionalism and a deep interest in both the drafting of this bill and its practical application.

I am very conscious that the rewrite of the tax legislation will be regarded with a degree of both apprehension and anticipation by tax practitioners in both the accounting and legal professions. Many of the best tax advisers in this country have grown up using the original 1960 law and the 1976 Act, and could literally quote great hunks of it almost from memory. The partial rewrite of that Act in 1994 meant tax practitioners had to go back to school, and such relearning will be again necessary once this bill has been enacted.

The Finance and Expenditure Committee was mindful of those realities, and for that reason, has striven to ensure that the transition from the old to the new will, in practice, occur as smoothly as possible. With that in mind, we have done a number of things. Firstly, we have endeavoured, in conjunction with our advisers and practitioners, to road test seven key areas of the bill. This has been a most useful exercise, and has identified a number of drafting changes, and, in a number of instances, involved a complete rewrite where clarification or correction was seen to be necessary. The bill, when enacted, will have application for the 2005-06 tax year. We note that for some taxpayers that year will start on 2 October this year. Accordingly, we have encouraged the officials to continue their work with the Law Society and the Institute of Chartered Accountants in this interim period. We have also squarely faced up to the problems that may result from the unavoidable “going back to school” relearning phase, as practitioners swap from the old law to the new.

Overarching provisions have been included in Part Y—I wonder whether this is the only bill that has ever had a Part Y—to indicate that no change in the effect of the law is intended, and that the old law should be used as an interpretive guide in cases where the meaning of a provision in the new law is unclear, ambiguous, or even gives rise to an absurdity. Such cases will be able to be referred to a panel comprising representatives from the Law Society, the Institute of Chartered Accountants, Treasury, and the Inland Revenue Department, and the Government has given a commitment to consider amending the Act retrospectively in circumstances where the panel finds it necessary to amend or reword in order to clarify matters as they arise.

We have also given reassurance to tax advisers and taxpayers that where there are such accidental or unintended changes between the old law and the new, then taxpayers will not be penalised, provided they have taken reasonable care and a reasonable tax position under the old law. However, we are conscious, also, that the Government cannot bind its successors. To guard against the possibility that a new Government may decide to retain the rewritten law without retrospective amendment, taxpayers will not be subject to penalties or use-of-money charges. Even with those safeguards, we recognise that there will be a one-time disruption for both practitioners and taxpayers in preparing tax returns for the 2005-06 tax year. Diligent practitioners will want to double-check against the new legislation, and it seems inevitable to me that they will then want to pass some of the extra costs arising on to their tax clients. We have also encouraged the Inland Revenue Department to undertake an educational programme to inform practitioners of those realities and, in particular, to encourage them not just to rely on their memories or on their current understanding of the law, but to actively check the position against the provisions contained in the new legislation.

I said a moment ago that experienced practitioners can pretty much prepare tax returns on autopilot because of their long experience with the legislation. However, that does not in itself guarantee they will get matters right, so we encourage all taxpayers and their advisers to familiarise themselves with the new law as quickly as possible. It is my hope, for example, that come the 2006-07 tax year, all the initial kinks will have been ironed out and everybody will be able to return to plain sailing.

In case individuals should feel that this rewrite provides an opportunity for tax evasion, let us be quite clear that Parliament’s intention is that except for the small number of intended policy changes, which are set out in schedule 22A, it should not change the underlying policy of New Zealand tax law. The committee believes that these provisions will ensure as smooth a transition as is humanly possible from the old law to the new. I have enjoyed working with the committee and team of advisers on this major rewrite, and I signify United Future’s support for the bill.

The National Party will be supporting the passage of the Income Tax Bill. I want to make it very clear that this rewrite of the Income Tax Act has nothing to do with tax rates. This legislation does not mention what personal or corporate tax rates should be. That is the subject of other annual legislation, which Parliament will debate. So I do not agree with the ACT party, which gave that as the reason it will be voting against this bill.

The sole purpose of this bill is to bring together the income tax legislation, which has had so many amendments and binding rulings over the years. Many of my parliamentary colleagues have mentioned there are over 2,000 pages in this bill. I do not want people to overemphasise the fact that, because the bill is written in a simpler style of English, a lot of people will supposedly find it easier to interpret; I think that is an oversimplification. We are dealing with legislation and we need to accept that there are technicalities that this legislation will not overcome in terms of the definition. I will demonstrate that later on.

I want to comment that New Zealand First’s Craig McNair should at least be as honest as Labour’s Darren Hughes. We appreciate, from Darren Hughes’ speech, that he had not read the bill. I listened with a lot of intensity, but I could not really understand what Craig McNair was driving at. I want to acknowledge the hard work of the Finance and Expenditure Committee members. Myself and John Key joined the select committee only this year, so two of us participated only at the final stages of the examination of this legislation, which comprises over 2,000 pages. I would like to acknowledge the effort of the other select committee members, and also the former members of that committee, our National Party leader, Dr Don Brash, and Dr the Hon Lockwood Smith and the Hon David Carter. It must have been quite a daunting task. I also think it is to the select committee’s credit—as Gordon Copeland mentioned—that there was an initiative to do “road tests” and also to extend the transitional period of this legislation. It is such a massive piece of legislation, that all due care should be taken during the consultation process.

I also want to join my colleagues in acknowledging the efforts of Inland Revenue Department staff in trying to bring thousands of pages of legislation together. That cannot be an easy task. As one of the two members of the Institute of Chartered Accountants who are in Parliament, I want to join Gordon Copeland in acknowledging the efforts and contributions made by the members of that institute.

I want to re-emphasise a promise that was made by the Hon Michael Cullen, during his second reading speech. He promised that in this legislation he will try his best to maintain the tax policy, and try to maintain the stand that it does not aim to change any policy. But there are two exceptions. First of all, there are some changes made, I understand, in the interests of clarifying or simplifying the policy intention, and there are also changes approved under the generic tax policy process. I want to re-emphasise that because at the final stages of deliberations on this legislation, cases have already been raised by people disputing whether the rewrite has led to a change of the underlying tax policy. Some of those issues raised have already been referred to the panel for decisions.

I know that we can all be optimistic when standing in the safe atmosphere of the debating chamber and making promises that this legislation does not intend to change tax policy, so therefore taxpayers should be safe, that if queries are raised with the Inland Revenue Department or the Minister, they will be satisfactorily resolved. My experience is that those types of issues tend to be a lot more complicated, and for any taxpayer trying to take on a department in terms of changes to interpretation, whether intentionally or unintentionally, it is difficult. I raised that issue during our consideration, but I was told that the department has taken upon itself the responsibility to ensure that any taxpayers who believe they have been disadvantaged by the changes to interpretation in the rewrite of the Income Tax Bill will have the opportunity to take their concerns to the tax panel. So I think it is very important to reassure taxpayers and tax practitioners in New Zealand that the rewrite of the Income Tax Bill will still enable them to have a fair hearing if they believe unintentional changes are being brought in during this rewriting process. I am glad that the Minister of Finance, the Hon Michael Cullen, repeated that assurance. It is one that has to be honoured.

I mentioned previously—and I promised to share this with the public—that as parliamentarians we should not try to overpromise or oversimplify how user-friendly this rewrite of the income tax legislation will sound to them. Let me give a few examples. In Part A, “Purpose and interpretation”, clause AA2(2) tries to give us the definition of defined terms: “If a defined term is used in a section and is not included in the list of defined terms following the section, the term is nevertheless used in the section as defined.” I have to confess that I am none the less any clearer after reading the definition of the defined terms. I am just trying to warn people that, as parliamentarians, we should not overpromise how wonderful this piece of rewritten income tax legislation is. If anybody is in doubt, they should still seek the advice of experts.

To demonstrate how complicated the tax system has become, I point out that even the definition of income can be varied. Ordinary taxpayers might think that income is simple enough, but in subpart BD1 of Part B, income is defined as exempt income, excluded income, and counted income. So to me, it is not a matter of standing today in Parliament and telling the public to trust politicians because we have a trustworthy process of rewriting the Income Tax Bill and, from now on, it is a very simple issue. Legislation, by its nature, has technicalities and complications. The intention of the Income Tax Bill, no doubt, is to make sure people are paying their fair share of tax. If one derives income, one is supposed to be able to deduct the expenditure incurred in deriving of that income.

Ultimately, I agree with ACT and also with my own party in saying that a lower rate of income tax undoubtedly helps to simplify tax legislation. When people believe that their rate of income tax is reasonable, then they will try less to challenge the system or devise means to avoid paying tax. Ultimately, individuals anywhere will try to challenge income tax schemes, no matter how low the rates are.

The National Party supports the passage of the Income Tax Bill through its second reading, and looks forward to the Committee stage debate.

I want to start off by telling the House that I have not read the bill.

💬 Darren Hughes: Have, or haven’t?

I have not read it, for a couple of obvious reasons: for a start off, it is in two volumes and it is in English. That is a bit of a negative. Secondly, I do not in any way intend to pass myself off as a tax expert. Indeed, I think it is probably accepted that I am not known for my knowledge in financial matters. So I just get those two things out in the open to save anyone from trying to poke the finger at me.

There are a couple of fundamental issues I want to raise with regard to this rewrite. First, it is important that we do our best as a Parliament to bring together legislation that has been amended over a number of years for those who are significantly involved. Obviously, there are a lot of tax consultants and accountants who use this sort of legislation repeatedly, and who, from time to time, miss little bits that then cause them problems with the Inland Revenue Department.

I want to make some comments on some fundamental issues relating to legislation of this sort. The first thing I will put on the record is that I often hear people say: “Well, I haven’t paid any tax this year.”, or, “I don’t pay tax.” Anybody who thinks that he or she does not pay tax in one way or another is dreaming, because tax is a cost in our society and anything we do, where a tax is implied, means that tax somehow or other gets wound up in the goods we purchase or use. If people suggest they are the lucky ones and do not make some contribution to the taxation system in this country, then they are deluding themselves. The fact is that tax is a built-in cost in our society, and we all pay it in some form or another. When we buy goods or purchase services there will be a tax component in it that we contribute to. So the first fundamental point we need to understand is that tax is a cost in our society, and, quite honestly, every Government should be doing its best to ensure it reduces the cost and burden on our society.

The second thing that interests me with tax law is that people who are tax experts are always looking for ways in which they can gather revenue. I saw it more with local government, with which I am more familiar, than with central government finances, but the same principle applies. There are people who—if they happen to be the treasurers of local government, or whoever they may be—are always thinking about what they can do to gather more revenue. They think that by putting a certain rate across, or by applying a tax somewhere, more revenue will be brought in. That is fine, but we need to go back a step and ask why they need the revenue in the first place. That seems to me to be an absolute fundamental with regard to any system of revenue collection.

Quite honestly, I do not think that enough time is spent on asking ourselves the very fundamental question of why we need the revenue in the first place. If our system of delivering services to the people of this country were more efficient—and I am now talking about our bureaucracy in particular—the Government would not need the same level of income to provide them. After all, it is the people themselves who pay for and then receive those services. They are the people who not only pay but also are the recipients. We should constantly be looking to see why we need that level of income. Do we need to provide the services that we do provide?

That leads me to one other observation. I am becoming increasingly concerned about the mindset in our bureaucracy. Once upon a time we had an absolutely dedicated, loyal public service in this country. I am afraid to say that today it is not so, in my view. Things are happening in our public service that worry me. We have seen signs of corruption coming through in particular cases. Also, the public service used to be apolitical, but I am afraid we cannot say that today. As a consequence, because of those two aspects that never used to be there, the public service is not what it was.

💬 Pita Paraone: It started during the wine-box inquiry.

There are a whole number of instances where one could say that the attitude in the public service has changed, one of which my colleague has just pointed out. The price of that is extra cost. The price of that is the need for a volume of tax law, because more cost is added and we need to see whether we can attract more revenue.

One of the things we should be looking at with regard to law like this is how we can simplify the way we gather revenue. I will give an extreme example of what I mean, because I do not think there is anybody in New Zealand who would not say that legislation like this is hugely complicated. It is an example of extreme simplification, because I know there are people who believe that a flat tax system is a way in which we could attract revenue and that it would be a lot more efficient than the system we have now. Instead of having a system of income tax, of GST, of road tax, and of all the systems we have, what would happen if we had a system that taxed one good at source? An example would be if all Government revenue were gathered only from diesel and petrol. Believe it or not, I had the calculation made to do away with all other systems of income for the Government other than applying a levy on fuel. The problem is that it becomes a bit extreme, because the cost of the fuel is quite excessive. It is not so much the fuel itself, but the tax applied on it by the Government.

The last time I did the calculation I figured we would need to be paying about $18 a litre at the pump for petrol in order to gather enough revenue to replace all the other income that everybody else pays. Although, obviously, that would not work because it would cause a few distortions in the system we have, the point of collection would become so much easier: once a month the petrol companies would write out a cheque to the Government for whatever the revenue was, and we would not need this complicated law or a whole lot of people making tax calculations for other people. It would simplify the tax system overnight. The advantages to our country in getting rid of all that structure and bureaucracy would be huge. The problem would be in getting such a system implemented and accepted so that people understood that they would not be paying GST, or income tax, or any other form of tax. However, it would cause them some concern the first time they turned up at the petrol station to fill up their car and found that they had a bill of about $250. So, although it is probably not practical to implement such a system, the point I am making is that we should continue to endeavour to ask ourselves whether we need the income, and how we can simplify it.

I will finish my comments on one other point that I think is important. We have a system where we talk about tax changes, and all parties will have a different view. One of the things that disturbs me is that as we go through the debate and the discussion—and in the last 2 days the National Party leader Don Brash has given the National Party’s view on taxation as we go into the next election—we find that, unfortunately, comments from the Prime Minister tend to distort what she claims will be the impact. The fact is that this country has a huge surplus of $5.5 billion at the moment, and that will undoubtedly be used by the Minister of Finance in the next election to try to spread the load and encourage people to continue supporting the Government.

I heard the Prime Minister the other day say that if Don Brash’s policy were to be implemented, it would have a negative impact on health and mean that we would have to decrease funding in education and other areas. That is absolute garbage. It is rubbish. Quite honestly, it is irresponsible for the Prime Minister, or anyone else, to suggest that we do not have sufficient opportunity to look at our tax levels and at whether we can encourage further investment and involvement in employment through the private sector without the Government having to be so involved.

I come back to this legislation and I say that it is great that the Government is doing it. We have been supportive of it; nevertheless, there are some fundamental things that we should be looking at as we do these rewrites. We should be looking to see whether we can change the principles we work on, and have less complication in our tax laws.