Taxation (Base Maintenance and Miscellaneous Provisions) Bill

Last night, before being interrupted, I was talking about foreign-owned banks and the sad, sad situation that we have in this country whereby, all of a sudden and all because of past Labour and National administrations, different State-owned enterprises were flogged off to foreign-owned enterprises. One example of that is our banks.

R Doug Woolerton: Disgusting!

As my colleague seated behind me said, it was disgusting—nothing more and nothing less than that. But the sad thing about it was that successive Labour and National Governments not only sold the banks to foreign-owned enterprises but the banks then did not even pay the appropriate amount of tax that they should have paid. I say that that is a disgrace.

💬 Darren Hughes: Is the member a Kiwibank customer?

I remind members that there is actually another New Zealand - owned bank in this country, as well as Kiwibank. With the sad loss of our now foreign-owned banks, which the then Deputy Prime Minister sold off back in the mid-1980s and the National Government sold off in the 1990s, we then had that situation. I remember speaking to taxation advisers a few months ago and they said that the situation has been going on for 5 years or so, and that a taxation shortfall of something like $360 million has been occurring. I say that that is very, very sad. It is a tragedy for our nation.

This Government would have us believe we have an economic boom in this country, when it is taxing individuals at up to 39c in the dollar in income tax if they are the so-called rich people on about $60,000 a year. The tax is 33c in the dollar for companies, and there are no taxation incentives or concessions for exporters, especially when the exchange rate of the New Zealand dollar is at 70c against the US dollar. There is no economic boom, I believe, like the one that this Government would have us believe is occurring. The Minister of Finance and other Ministers in this House jump up and down and tell us how great everything is, when they know that that is a load of hogwash in many ways. Our dollar is worth 70c against the US dollar, and we have houses that young couples cannot get into or buy because the prices are too far beyond their reach. First home buyers—

💬 Hon Dr Michael Cullen: What’s that got to do with the bill?

Oh, it has a lot to do with this bill—[Interruption] That is right. It is just unbelievable how relevant it is to this bill. When we talk about taxation and the amount of taxation that people are paying, and when we look at the banks I have just talked about that have not been paying a sum that the Minister of Finance has said is about $360 million a year for a few years now, we know that it has every relevance to this bill. It is very, very relevant, and that is a fact.

Do members know why I want to talk about this bill? I want to talk about something that is very important regarding the vision of this Government. It all comes back to this kind of legislation that come through the House—the taxation bills. We are continually sliding down the OECD rankings. Australia is way ahead of us in those rankings, and the Minister knows it. The average Australian earns about $120 a week more than the average Kiwi. That has every relevance to this bill, because if the average New Zealander earns $120 a week less than the average Australian, then the Government and individuals here in New Zealand are both worse off than their Australian counterparts. That Minister, with all his intellect and wit, still knows that that is right. He knows that.

I thank the Hon Richard Prebble for again deferring to me his place in the speaking order. In fact, in honour of Richard Prebble I decided today to wear my Fraser Institute tie from Canada. I was privileged to speak to the Fraser Institute last year on taxation and other matters, and particularly on MMP. I paid homage to Richard Prebble and Roger Douglas, because both of their portraits were on the wall of honour of august gentlemen at that institute.

💬 Mr SPEAKER: Now could we come to the point?

I am just about to narrow the debate, but this is a valedictory to Richard Prebble. I ask you, Mr Speaker, to allow me one more sentence. I paid honour to Richard Prebble and Roger Douglas, because I said that without them New Zealand would not have MMP, and without MMP I would not have been there to speak to the institute about the excellent policies that the Greens promote in Parliament.

In speaking of excellent policies, I would like to say that the Green Party will be supporting the Taxation (Base Maintenance and Miscellaneous Provisions) Bill, because there are some very good features in it. We do have some disappointments with it, but I will come to those in a moment. The very good features are, of course, the ones around the thin capitalisation rules for foreign-owned banks, because for too long those banks have got away with not paying their fair share of tax in New Zealand. I am all in favour of Dr Cullen having a bigger money bag with which to invest in sustainable infrastructure and to be able to invest more in human capital, particularly in our young people through taxpayer-funded tertiary education. So if Dr Cullen is able to rake in, I think, $360 million from foreign-owned banks that they have not, but should have, been paying, that is a very good thing and something that we look forward to supporting as this bill progresses.

It is also worth noting, when talking about banks, that I am pleased to see that the Reserve Bank has finally told Westpac that it needs to set up a proper bank in New Zealand, instead of running its New Zealand operation like some sort of branch operation out of Australia. Too many of New Zealand’s business enterprises are run like branches out of Australia, and we have to reverse that trend. In the same way, we have to make sure that our Government does not become the equivalent of an Australian state operation, as happens under Food Standards Australia New Zealand and some of the other bodies set up in recent times.

The other particularly good measure in this bill relates to business environmental expenditure. The Greens are very pleased to see that the Government will be addressing concerns raised with regard to the tax deductions available for that expenditure. Anything that is done to remedy or mitigate the detrimental effects of the discharge of contaminants is something that should be encouraged, and that is a step forward with regard to this bill.

Our concern focuses on the Government’s “drill and hope” strategy. Yet again the Government is trying to encourage more drilling—in this case by offering tax exemptions for a period of 6 years.

💬 Gordon Copeland: What’s wrong with that?

What is wrong with that is the opportunity cost. We would much prefer any tax incentives for energy generation to be focused on renewable energy, so that we can do more to encourage wind generation. I know that the Minister has already done his bit to enable Mr Hodgson to spend a considerable sum of money via carbon credits on encouraging the development of wind energy in New Zealand, and that is a good thing. We can see the result of the Government’s excellent commitment to the Kyoto Protocol come through in terms of all the new wind farms that are being announced. There seems to be one new wind farm a week at the moment, which just shows that the Government does have a commitment to renewable energy. But that is not enough. We would like more effort to be put into renewables.

So instead of the Government offering tax incentives for a “drill and hope” strategy to try to find more oil and gas, it should be putting more in the way of tax incentives and direct investment into solar energy, and into energy efficiency and conservation. The gains are guaranteed in those areas. We know that we could save between 20 percent and 30 percent of our electricity generation through conservation and efficiency measures. That is not a case of hoping we will discover some oil or gas; it is a case of knowing there is energy that can be saved if only we make the capital investment. That is something that the Government could do directly, as well as encouraging the private sector through tax incentives to invest capital in the efficiency measures that will have pay-offs not just for those companies but for the country as a whole. That is an area that we will debate strongly at the select committee.

However, overall, as I said at the beginning of my speech, this bill is a positive one. It does not go as far as we would like it to go. We think this is the sort of bill that should have been called the “Taxation (Carbon Tax, Base Maintenance and Miscellaneous Provisions) Bill”. This bill would have been the opportunity for the Government to bring forward the carbon tax that it says it will introduce in 2007. Why should we wait until 2007? Let us have a carbon tax in 2005, and let us move towards a more sustainable infrastructure. Let us bring in a tax that is vitally necessary to send the right signals to the marketplace about the need to move away from a fossil fuel economy and towards a sustainable economy, particularly in relation to transport infrastructure. If the carbon tax had been introduced in this bill, it would have given the Government more revenue, which it could have then used to implement other Green polices, such as reducing the taxation on work and enterprise. We are very keen to see that, because we want the taxation base to shift towards encouraging good behaviour and discouraging bad behaviour. I look forward to hearing submissions on this bill at the select committee.

I rise on behalf of the ACT party to speak to the Taxation (Base Maintenance and Miscellaneous Provisions) Bill. I do not think the Minister of Finance will mind my saying that he did suggest to me that the ACT party would find it difficult to criticise this bill. I suggested that we would have no difficulty in doing so, and I will show members why that is the case.

💬 Hon Dr Michael Cullen: It wouldn’t be under 2 percent, would it?

The truth of a proposition does not depend on a party’s poll rating, and it never has. So let me make statements that may not be populist but that make a number of criticisms. Firstly, let me explain what the bill is about. The bill has been introduced fundamentally because the trading banks have been quite legally able to reduce their income. The reason they can do that is that trading banks actually borrow large sums of money, and they are able to put up for taxation purposes the interest they pay on it. Now we are going to do away with that, which is interesting, because it means that the tax on banks will be different from that on other organisations. Fundamentally, from a taxation point of view, that is a bad principle.

I understand the problem the Minister has, but there is actually a very, very simple answer to that problem. Banks are no different from individuals.

John Key Lower the company rate.

I thank the member. If we lower the company rate—

💬 John Key: I didn’t mean to spoil the punch.

No, no, it is good to see that Mr Key is right on the job, and I am sure he has make this point already to the Minister—[Interruption] Well, let me put this to the Minister of Finance. I have heard him get up in this House and say that New Zealand does not have a higher taxation rate than Australia’s. If that were so, then all the Australian banks would be falling over themselves to pay tax in this country, rather than in Australia. But they are not, and that is another reason that this bill is wrong—it does not actually fix the problem.

But let me go to another dilemma with regard to the bill. I will make a criticism of our taxation system generally, and it is this. An extra 115 pages are to be added to the—what is it—thousands of pages now—

💬 Gordon Copeland: Over 2,000.

I thank the member; Mr Copland is an accountant. There are over 2,000 pages of taxation law. Why is that? The reason for that is—

💬 Hon Dr Michael Cullen: How much is there in Australia? Over 10,000 pages.

The Minister interjects to say there are 10,000 pages in Australia. If he had not anticipated what I was going to say, he would have heard me explain to him what the problem is—and it does exist right around the Western World. There is an attempt to artificially define income, so then one needs artificial laws. Then, when countries take as much in tax as they are taking, they need to have a huge tax code, and people cannot find their way around it. If we had a simple, flat rate of taxation, I say to the Minister we would then have a simple tax code. That is true in New Zealand and it would be true in Australia, as well.

I want to make another criticism, and it is this. We find that those who are interested in civil liberties have set out what good principles are for the law, but, when it comes to taxation law, they completely ignore all civil liberties. One of the provisions of the bill, which is actually put forward as though it were a more liberalising measure, states that the amendments to the Tax Administration Act limit the right of the Commissioner of Inland Revenue to require taxpayers and their tax advisers to provide documents that give instructions to the tax adviser or give tax advice to the taxpayer. Well, in a sense that is true, because the Commissioner of Inland Revenue, with his police State powers—and they are police State powers—has been able to force people to actually talk about private conversations they have had with New Zealanders who were trying to organise their affairs. If one is a civil libertarian, and if one does believe that citizens are entitled to organise their affairs, why is the State able to reach in with the sorts of powers that Nazi Germany would have been pleased to have? They are actually called Danzig laws, and they run right through our tax code, giving enormous power to the State.

It is true that in this particular bill, in some ways that power is further limited. But I just invite members to look at what the Government now claims it has the right to do. A person must disclose tax-contextual information from a tax advice document. So if people have documents—private documents—about their private affairs that no one has the right to look at, the Government is now saying that they must give those documents to the Government, even if they do not want to. Even if a document has nothing to do with tax, a person still has to tell the Government why he or she wanted to obtain tax advice. A person may want to have tax advice because his wife is leaving him. He does not want to tell everybody that that is happening, but he must tell the Government. A person may want to get tax advice for personal reasons to do with a partnership he or she is in. That person has to tell the Government, and then has to trust it. Well, the Inland Revenue Department has a pretty good record of holding confidential information, but that still does not remove the personal embarrassment that people feel about having to disclose that sort of information. Why are we passing what we would regard in any other part of the law as an outrage and a violation of our rights as citizens? How can we call ourselves a free country, when we have a code that states that people must hand over personal, private documents that have nothing to do with tax, just in order to convince the tax department—so that it can see the context in which a person was getting tax advice?

I say to the House that that is the inevitable result of the Government having an escalating taxation rate. If there is an escalating taxation rate we have to have police State powers. If the Government takes 40 percent—[Interruption] I say to the Minister that they are police State powers.

💬 Hon Dr Michael Cullen: The Russians had police State powers with a flat taxation rate.

Well, that is true, but it does not—[Interruption] The Minister says that the Russians had police State powers with a flat taxation rate. I am not saying that the only reason—

💬 Hon Dr Michael Cullen: The Russian tax police.

The Minister is capable of better logic than that. I am not saying that if we had a flat rate of taxation, it follows that we would not have police State powers. What I am saying is that in this country there are only two areas where we have—

💬 Hon Dr Michael Cullen: Sub-machine guns.

Police State powers have nothing to do with sub-machine guns. Police State powers exist when a citizen is deemed to be guilty and has to prove himself or herself to be innocent. That is the situation right through the tax code. The State has the right to take information from a person when that person has broken no law, has been perfectly law-abiding, and has been going about his or her own personal, private affairs. Despite that, the Government can say it requires a person to disclose information, and if he or she does not do so there will be very, very heavy penalties. That is a police State.

If we look at our tax code as a whole, we see it is a violation of all the proper principles of civil liberty. There are another 113 pages of that in this bill, and the solution, I say to the Minister, is to have a low, flat rate of taxation. We would then not need all these measures—we would not need to have special laws for banks. One of the advantages of a low, flat rate of taxation, independent of the economic advantages that I believe are there—the Minister does not believe that, although he cannot dispute this—is that if we had a low, flat rate of taxation, New Zealand would be a freer country. We would have more civil liberties. We would have the sorts of things that I heard him and his colleagues talk about when they spoke so eloquently in favour of the Civil Union Bill. They talked about how people should be able to make their own choices, but when we come to 40 percent of the economy, which is the amount that the Government takes in tax, then all their concern about civil liberties goes out the window and the Government assumes that everyone in New Zealand is a criminal. That is why the ACT party will oppose this bill.

Outside of the somewhat artificial arrangements we have in this House, today’s date is 17 December. Therefore, it is the 17th anniversary of 17 December 1987, on which date it was announced, rather breathlessly, to the nation that we would be adopting a flat tax rate. One of the other messages that was conveyed on that very notable occasion in the Beehive was that charities would start paying tax. Charities had not paid tax since 1601. It was notable from the point of view that suddenly an established position that had gone on for hundreds of years was to be overturned. I am very delighted to report today that the Charities Bill is being reported back to the House and it will confirm, going forward, the tax-exempt status of charities.

It is also a very notable date for me personally, because the day after those announcements were made on 17 December 1987 I became involved in a rearguard action to try to prevent charities from having to pay tax in New Zealand. I am very, very pleased indeed that we won that battle. It has taken a long time. I hope we will see, as a result of today’s events, the taxation benefits for charities improved. [Interruption] I say to Mr Prebble that I look forward to seeing another bill come to the House—sometime next year, hopefully—that will create better tax conditions for that very, very important part of our society.

The principal thing that strikes me about this bill is the new rules on thin capitalisation for registered banks. I must say straight away that I was very disappointed indeed to discover that overseas-owned banks operating in New Zealand were not paying their fair whack of income tax. I always look at these positions from the point of view of, say, nurses who are working long hours in, say, the intensive care ward at Wellington Hospital to save people’s lives and to improve the quality of people’s health, and so on, and who pay their fair whack of tax in accordance with our tax laws. Quite frankly, I believe that on this occasion the overseas-owned banks working in New Zealand have displayed very, very poor citizenship.

Mr Prebble made the point yesterday that we welcome overseas investment in this country, and I do, as well. He then went on to say that there was no problem with overseas investors investing in New Zealand because they are the people who abide by the law. Generally speaking, I think that is probably true, but this is a significant exception to that rule. I am very, very surprised indeed—[Interruption] I say to Mr Prebble that I have had the advantage of going through what has happened with the banks in this country in the last few years, and the way in which they have avoided paying their fair whack of income tax. It is a deliberate attempt to defraud the revenue. It is as simple as that. It has no moral or ethical justification, and I am not prepared to come to this House and pretend that it has.

I congratulate the Government and the Inland Revenue Department on getting hold of this beast, which had got right out of control—and it is simply intolerable to have that happening while nurses, schoolteachers, and others pay their full whack of tax. By the way, they have no opportunity to do otherwise—because of the PAYE system, they do not get to see the money in the first place. Nevertheless, they have earned it. Yet at the same time we have what I would call rather clever, but somewhat—I am searching for a polite word to describe them—misguided people in an industry as big as the banking industry in New Zealand deliberately setting out to arrange their affairs in such a way that they do not pay their full rate of tax in New Zealand. So I am delighted that this bill will bring that situation to an end.

I also want to wish the Inland Revenue Department all the best in recovering the situation that has occurred over the previous years, because, as we know from various snippets in the press, there are also back taxes that are owed by the banks. I understand that negotiations are continuing between the banks and the Inland Revenue Department to address those problems, and to see some more—

💬 Rod Donald: What a very soporific speech!

Thank you. I appreciate the compliment. I say to Rod Donald that on this issue we are in probably in agreement for once, which is rather rare. On the other hand, I completely disagree with the Green Party when it comes to tax breaks to encourage people to undertake seismic work in New Zealand to find more oil and gas. I thoroughly applaud those moves. I think it is extremely simplistic to come to the House and say: “Why should we bother to encourage people to find oil and gas in New Zealand? After all, we have plenty of wind.” It is possible, in a logical universe, to have wind, gas, oil, hydro, and coal as part of the energy mix that drives our economy. To think that we can just somehow sit back and let wind power drive our cars—I mean, it blows a lot in Wellington but I have never had my car blown anywhere, so there is no chance whatever in Nelson or some other calmer spot in the country. So I think that is extremely simplistic.

I want to say, though, that I do agree with one important point that the Hon Richard Prebble made. He is quite right when he says that truth is not determined by popular vote. We need to remind ourselves from time to time—

💬 Rod Donald: That applies to civil unions, my friend. That’s why we should not have had a referendum.

Exactly! I was not going to bring that up, but the member is exactly right. Just because something has been passed by Parliament does not mean that it reflects truth, in the absolute sense of that word. I believe that such truth does exist. Whether we vote for it or against it, it does not alter the fact that it is the truth.

We need to move on in terms of what the bill does. I think that the deductions for expenditure incurred by businesses in avoiding, remedying, and mitigating detrimental effects to the environment from the discharge of contaminants is likewise a good move forward. An unfortunate situation has arisen in Māpua, where I used to swim at Grosee’s Point right alongside that piece of land. I knew the people who worked there. A situation has arisen there where it is not clear who should be paying for the remedying of such sites and what the tax situation is. Obviously, we need to ensure that sites of that sort are cleaned up for the sake of our environment.

I also took some interest in what Richard Prebble said about the new non-disclosure rules in respect of tax advisers other than lawyers. I think it is very fair and good that the situation that has applied historically to lawyers in this country concerning non-disclosure of information given to clients on their tax affairs will now be extended out to chartered accountants, as well. That is a very, very fair outcome. I do not know what the mix is, but I imagine that the majority of tax advice in this country is probably given by chartered accountants rather than by lawyers. These days there are an awful lot of people who have a BCom/LLB combination, so both professions are involved in giving tax advice. I think the new rules concerning privileged information are good. I find it surprising that the ACT party finds some fault with that provision, because it actually reduces the police State; it does not increase it, which is the claim that was made. Those brief comments are probably enough at this stage. It is a signal that United Future will be voting for the bill.

It is probably obvious to anybody who has managed to listen to the speeches this morning that it is Friday, in the week before Christmas, and some strange speeches have been made as a result.

We are dealing with a bill that seeks to make the taxation system fair and just and recognises the fact when that the profits of foreign-owned banks go up, their tax should not come down. But New Zealand First is utterly opposed to that. The party that says it is here for all New Zealanders says that the tax paid by foreign-owned banks should come down when their profits go up. We do not happen to agree with that, and that is why we have brought in this bill. We have included in the bill measures that place restrictions on the Inland Revenue Department, but the ACT party says that is terrible. I am not quite sure how that fits in with its liberal policies. Maybe it is just too early in the morning for those members to have read the bill.

I think that most New Zealanders will be pleased that this Government is reducing compliance costs to business and protecting the revenue base. I note that John Key is fully supportive of this bill, but David Carter has not talked to him this morning to find out what the line is. I can tell him that on 16 November John Key said that National was going to support this bill because it is a sensible measure. It is just too late in the year for the Opposition to be thinking at all, let alone thinking straight. I utterly support the bill, as every right-thinking New Zealander would.

As I rise to speak on the Taxation (Base Maintenance and Miscellaneous Provisions) Bill, I am struck by the gall of Dr Michael Cullen, which appears to know no bounds. Last night at a quarter to 12—just about on midnight—he dropped in, unannounced, and surreptitiously tabled yet another tax bill in the House. When will we ever satisfy the insatiable demand from the Minister of Finance for more tax revenue? Dr Cullen is sitting on a massive surplus of $7.4 billion, but it is not enough for him. He has been busy with his officials, beavering away to see whether there is any more tax revenue he can get out of anybody who operates in this country. The question that needs to be asked is why we need these massive tax surpluses. It is all about next year, when Dr Cullen and Helen Clark need the ability to get out there and buy every vote that is around. That is what this tax bill is all about—more money into the tax coffers, which is more money then available to Labour to spend with reckless abandonment next year as it attempts to salvage another term in Government.

The bill certainly deals with the issues of banks operating in New Zealand and whether they are paying the correct amount of tax. Dr Cullen is on record as saying that banks are dodging their legitimate tax burden. I am not in a position to know whether that is true or false. I would have thought it was a matter entirely between the banks and the Inland Revenue Department. I question whether it is appropriate for Dr Cullen, during question time, even to raise the issue of whether one specific bank is in breach of its own tax arrangements, but that is for Dr Cullen to sort out. I certainly acknowledge that the issue is complex. Banks have the ability to structure their affairs so that the amount of money they borrow from their overseas owners creates an interest liability to the bank operation in New Zealand, and that can be structured in such a way that may minimise tax. But I am simply not in a position to say whether that is a legitimate dodge.

The issue is highly complex. I recall, regarding talks with both banks and significant overseas companies like, for example, Microsoft, that it was suggested that those large international conglomerates are in a position, regardless of the rules established, to structure their affairs to be then paying what they see as a reasonable rate of tax. I say to Dr Cullen today that if he puts yet another tax bill to a select committee, then those banks and companies like Microsoft will still have their best legal brains poring over any legislation that is finally passed, and that they will do their level best to make sure they minimise the tax burden to this country. The issue, then, is for the select committee to work through what will, inevitably, be detailed legislation, and I wish it well in those deliberations.

The next issue I raise is the surprising move by Dr Cullen in this legislation to give away some tax revenue. Dr Cullen is adopting the Jim Anderton attitude to tax exemptions and is starting to favour one industry as opposed to another. This bill proposes to exempt overseas-owned companies involved in seismic surveys and offshore drilling. Clearly, the Government has finally acknowledged that there are significant oil reserves offshore from New Zealand and that we are not achieving significant investigation from overseas companies in both locating those reserves and then extracting them. We need more oil exploration, and I fully accept that. But I question today whether it is appropriate for the Government now to try to signal its desire to see more exploration by, in effect, giving a tax break. That is what this legislation proposes to do. In that regard, we are seeing Dr Cullen, who to date has been reasonably prudent fiscally, adopting a far more reckless attitude. It is an attitude that we see from his colleague Jim Anderton, whereby a Government picks winners in its mind and goes out there with legislation that then gives a tax advantage to that particular commercial activity over and above another. That is a further role that I implore the select committee to look at very closely.

I move to the third and final point that worries me with this legislation. In two cases that I can see from reading it, there is an element of retrospectivity. Dr Cullen has just taken a gasp, because he had been hoping that I had not noticed that. But I was sitting in the House till 12 o’clock last night, after he had surreptitiously tabled this tax legislation, so I had an opportunity to read it carefully. Dr Cullen is proposing to make the significant tax break with regard to overseas seismic exploration and investigation companies retrospective to the beginning of this year—to 1 January 2004.

💬 Rod Donald: That’s terrible.

I am not quite so sure of that, but Rod Donald, as a member of the Finance and Expenditure Committee, should watch that matter carefully. If Rod Donald is particularly concerned about the retrospectivity of that particular aspect of the bill—it goes back to 1 January 2004—let me take this opportunity to tell him that there is a bigger concern he needs to put his mind to. I am talking about the Cook Islands National Superannuation Fund. For a reason that is completely unclear to me, that particular fund may now be liable to pay New Zealand tax on its worldwide income. Dr Cullen is equally surprised by that, obviously. He is preparing to change the legislation presented to the House today to provide an exemption for the Cook Islands National Superannuation Fund so that it will not have to pay New Zealand income tax on its worldwide income.

It is surprising—and I implore Rod Donald to listen to this—that if that provision successfully goes through the select committee process, it will not be retrospective to 1 January 2004. It will not even be retrospective to 1 January 2003. What Dr Cullen is doing for the Cook Islands National Superannuation Fund is making the legislation retrospective right back to 1 July 2001. We have seen a lot of retrospective legislation brought into this House, but I do not recall any legislation being so retrospective as to propose to pass so large a tax break to any particular entity to go as far back as 1 July 2001.

So the select committee will be busy in the new year. It has a lot of work to sort out. If it needs further assistance, I will be only too happy to volunteer to help. But I ask the select committee to look carefully at the significant amount of retrospectivity that Dr Cullen slipped into this legislation, in the dead of night, at quarter to 12 last evening.

This is very interesting. Here we are at quarter to 10 on a Friday morning, arguing down to the wire with the National Party about something Labour and National both agree on. That is quite an interesting tactic being employed by the National Party.

I want, firstly, to congratulate the Minister of Finance. Of course, I am not the only one to do this. I understand that on 95bFM recently John Key, when asked who his politician of the year was, said it was the Hon Dr Michael Cullen. We all agree on that. I say to John Key that the Labour Party membership fee is only $11, and all is forgiven. He would be a good Labour Party member.

💬 Hon Dr Michael Cullen: Good State house boy.

Yes, he is a good State house boy, so he would understand Labour’s very good housing policy.

💬 Hon Dr Michael Cullen: Income-related rents.

Yes, of course he understands income-related rents.

💬 Hon Dr Michael Cullen: That’s how he got here.

That is, indeed, how he got here. We share John Key’s enthusiasm for the work the Hon Dr Michael Cullen has done in the finance portfolio, and we support John Key in his support for the Hon Dr Michael Cullen.

This is a good measure in a good bill. It is kind of understandable that the ACT party opposes it, because it just does not like tax, full stop. It is hard to understand New Zealand First, because sometimes those members do like tax and sometimes they do not.

💬 Darren Hughes: They’re not even members of the Kiwibank.

That is right. It is sometimes hard to understand what their position on tax is. They are very enthusiastic about having a lot of tax go into things like inquiries. They call for inquiries virtually every day of the week. They call for inquiries on this, royal commissions on that, and investigations into the other—taxpayers’ money going into those kinds of things—but they have a strange and odd view when it comes to other matters.

This is really an important measure as part of the Government’s tax policy work programme. As members will know, part of that programme—it is not just about tax—is about promoting growth and innovation. I hear a bell; I think it is a message from Auckland that my time may be up. There are lots of things I would like to talk about on the fabulous work that this Government and this Minister of Finance have done, but I think it is sufficient to say that this is a thoroughly good bill. It is well supported from outside, and I look forward to its speedy progression through the House, through the select committee, and ultimately through Parliament.

Mr Speaker, I start by saying that I may have been a little presumptive in wishing you a merry Christmas last night. If this urgency keeps going the way it is, I may well be wishing you a happy New Year from the same seat. National will be supporting the progress of this bill to the select committee. The bill raises some pretty interesting issues. It will be interesting to see the work of the select committee in this area. I do not think it takes very much for people to understand, in one sense, why the Government has chosen, with this bill, to look at a major policy shift around thin capitalisation and conduit rules. I think it is worth looking back just for a moment at the history of why thin capitalisation rules were put in place in New Zealand. My understanding is that they came about because of entities like, I think, Carter Holt Harvey that were owned by a foreign parent but had offshore investments—the rules around investments held by the New Zealand entity but owned off shore. The real question that arises in relation to New Zealand banks owned by a foreign parent is whether they have been undertaking transactions related to their thin capitalisation and undertaking structured finance conduit deals for legitimate reasons, or whether they have been doing so for some other reason, to reduce their tax base. That is ultimately the question.

There are a number of views one could take. The first is that it may be a mixture of both—that, in fact, some of the deals have indeed been totally legitimate deals that the banks have looked to undertake and to house in New Zealand because of the nature of New Zealand tax rules. But I think it is also worth noting that some of the deals may well have had a structured component. It is interesting that the Minister of Finance has made it clear that he thinks the revenue impact, post the passing of this legislation—assuming it goes through the House—will be of the order of $360 million. He has indicated to the public that that $360 million is likely to be poured back into growing his tax base, which would allow him to fund more spending initiatives, which we know this Government loves to undertake.

On a number of fronts, I think he is wrong on that count. I do not think the Minister will get $360 million of additional revenue. I say that for a number of reasons. Nor do I believe that the Inland Revenue Department is likely to be successful in its claims against the banks to the extent it is arguing. I say that because, from what I can see, every bank in New Zealand has a different accounting firm and a different legal firm advising it in relation to these conduit deals, and, despite the fact that they all have different legal opinions and different accounting advisers, not one bank in New Zealand has chosen to put a provision in place for the relationship around these conduit deals. To put it in simple terms, the Inland Revenue Department is telling the Minister that it will win and that it will deliver $360 million of revenue, which the Minister of Finance is very gleefully happy to accept, bank, and spend. Not only has he banked the future revenue he thinks he will get; he has banked the post revenue he thinks he will claw back from the banks.

I make this statement in the House today: he will not be successful to anywhere near the extent that he thinks he will. I think he knows that, because many of those banks are sitting on rulings from the Inland Revenue Department that say that the deals they undertook in New Zealand were legally correct. If the banks have a ruling that say that the deals are legally correct, and the department is telling them that they are somehow not correct and that it will get that money off them, then that will be an interesting legal tussle.

If it was one of the banks in New Zealand, with one set of accountants and one set of lawyers, then I might have a bit more confidence that the department and the Minister might be successful. But it is not. It is every bank in New Zealand, from what I can see, or all the major offshore-owned banks. They all have different legal opinions and different accounting treatments. The first recommendation I would make is that the Minister stops banking the money that he thinks he will get from the department, because he is very unlikely to get it.

Secondly, I think he needs to take a very close look at these rules. The thin capitalisation rules will essentially look, in very simple terms, at the way outward-bound and inward-bound investment can be deducted, and at what the base level of registered equity needs to be for a New Zealand bank. That will be determined to be 4 percent. In effect, a large number of the conduit deals that had outward bound investment were used to effectively reduce the banks’ equity in New Zealand, and therefore their registered New Zealand income.

The interesting question is whether these rules will work. The answer, in some part, is that they will. But it was equally the case when the thin capitalisation rules were brought into New Zealand on Carter Holt Harvey’s request. They were never deemed to be used for things that ultimately the registered banks may have done. I think the select committee should have a very good look at this. No one is arguing that if the New Zealand banks are not paying their fair share of tax, they should be. The banks have been well consulted on this issue and have been engaged in the process. They understand the issue. I am just very sceptical about what it is likely to achieve.

I will make some comments about why I think it is very unlikely that the $360 million that the Minister has argued for, banked, and pre-spent is likely to arrive. I do not think that it has dawned on the Inland Revenue Department that a number of the transactions that were undertaken in New Zealand were in relation to the conduit deals here. But quite a number of transactions were done because, with the New Zealand tax rules, it made sense to park those transactions in New Zealand. The moment that those thin capitalisation rules change under this bill, some of those transactions will simply not take place here. One cannot do a linear calculation and say that just because the rules have changed one can now apply this income tax treatment to every deal that took place in New Zealand, because they will not be here. The reality is that a lot of them will not be here.

So the banks will pay more tax. The banks will change their activity around thin capitalisation. Whether or not it was legitimate, they will change their treatment and pay more tax as a result of this bill, I have no doubt. But I make the comment that it is very unlikely that it will be anywhere near the level that the Minister thinks it will.

I will move on to the relationship to the 6-year income exemption for offshore systemic surveying undertaken. We welcome that move—

💬 Rod Donald: Yes.

—unlike the Greens, who do not think it is a good idea to try to recognise that New Zealand has a major energy issue. New Zealand is running out of energy. The Green Party thinks that a really good idea is to get pensioners to turn off their heated towel rails. That will not fix New Zealand’s problem. We have a growing economy that is using more energy. Our No. 1 gasfield is running out of gas. This Government has not done nearly enough to get out there and make sure that New Zealand does not run out of energy. The Minister of Finance knows there are two major reasons that foreign companies state that they do not want to come to New Zealand in a hurry, and No. 1 on that list is energy. They are worried about running out of energy in New Zealand. This move, if it does anything to encourage more drillers into New Zealand, is welcome.

I will make a final comment, which is not about the issue that Mr Carter raised in relation to Cook Islands superannuation. I will leave that to the experts. But it is in relation to the statutory privilege around tax advisers. That is a welcome move. It makes sense for that information to be privileged, as it has been for some time. I will make this comment. The rules are incredibly technical, with many caveats. They require the advisers to sign away their life in blood, and that seems to be a function of much of the legislation being passed under urgency by this Government.

I rise on the first reading of this bill to support its referral to the Finance and Expenditure Committee. It has been a very interesting debate. We had a 10-minute contribution from Mr McNair of New Zealand First who railed against foreign-owned banks, only for us to find that New Zealand First members do not belong to the New Zealand - owned bank—Kiwibank—that a number of New Zealand’s members of Parliament are members of. So for all the criticism that New Zealand First had about foreign-owned banks, we could not get a clear answer from the member about what bank he belonged to.

We had a 10-minute contribution from John Key who, as is always the case when it comes to National Party tax policy, flip-flopped. He could not work out where National stood on it or what it was doing about it, because when it comes to tax his party cannot make up its mind. Don Brash is still rolling him in the caucus room.

I raise a point of order, Mr Speaker. Under Standing Order 106 I raise an issue regarding the speech given by the member who has just spoken. He said that I said that no New Zealand First members were members of Kiwibank. I never said that, and that is not true.

💬 Mr SPEAKER: The member has made his point.