Taxation (Base Maintenance and Miscellaneous Provisions) Bill

, on behalf of the Minister of Revenue: I move, That the Taxation (Base Maintenance and Miscellaneous Provisions) Bill be now read a second time. The Finance and Expenditure Committee has considered the bill and recommended a number of amendments to the proposed legislation.

The main feature of the bill, of course, is legislation to ensure that foreign-owned banks operating in New Zealand pay sufficient tax on their New Zealand income. The legislation proposed in the bill is a response to the fact that foreign-owned banks operating here appear to be relying excessively on debt funding their New Zealand businesses and their offshore investments. They can therefore use interest deductions arising from this excessive level of debt to reduce the proportion of their income that is subject to tax in New Zealand. One way of doing this is to use cross-border financing arrangements, which are generally funded by debt, to generate income that is effectively not subject to tax in New Zealand.

Banks can also substitute debt for equity in financing their New Zealand business, which can result in a New Zealand business being thinly capitalised relative to the worldwide business. The bill therefore introduces thin capitalisation rules that ensure that the income of banks cannot be sheltered by interest deductions arising from excessive debt. Banks will not have access to interest deductions if they do not hold a level of equity equivalent to 4 percent of their New Zealand banking assets weighted for risk. They must also have enough capital in New Zealand, on which no interest is deductible, to fully fund their overseas investments. Supplementary Order Paper 337, which was released after the bill’s introduction, further strengthens the proposed legislation, and ensures that it operates as intended.

The committee has recommended several changes to ensure that the legislation, once enacted, is fully effective. A major group of recommended changes relates to the measurement of equity that supports a New Zealand banking business that has a foreign owner. In particular, the committee has recommended changes to make it clearer what should and should not be counted in the equity calculation, and which assets can and cannot be debt funded. The Supplementary Order Paper allows regulations to be made by Order in Council, should the definition of “equity” prove to be unclear at any point in the future. The committee has recommended that this power be narrowed and limited to situations where there is a need for clarity about whether a particular instrument is considered to be a debt or equity instrument. I am confident that the changes will improve the operation of the new thin capitalisation rules. The Government intends to monitor closely the operation of the new rules to ensure that they are well understood and operating as intended.

The bill also introduces statutory privilege, or a right not to disclose certain documents to confidential tax advice that is given by advisers, such as chartered accountants. That right is similar to legal professional privilege, although it is subject to a number of exclusions. The change has been welcomed by tax professionals. As introduced, the bill required tax advisers to provide a statutory declaration of information contained in a privileged document. However, the committee believes that such a requirement for all circumstances would impose unnecessary compliance costs on those seeking to claim privilege, and that a statutory declaration should be required only as a last resort. Therefore, it is recommended that a process is introduced that would see the Inland Revenue Department requesting a statutory declaration only when necessary to an investigation.

The other main change the committee has recommended to the privilege legislation is to widen the definition of “tax adviser” so that it is not limited just to advisers who have a significant function of giving tax advice, as long as they are members of an approved organisation, such as the Institute of Chartered Accountants of New Zealand, that does so. The committee has recommended a number of other technical amendments to the privilege legislation that will also help it to operate more effectively.

The bill introduces several business-friendly amendments. They include clarification of the income tax rules on transfers of assets and liabilities to beneficiaries when a taxpayer dies, which is a reform that is long overdue. They include a number of technical changes to the tax depreciation rules to ensure their operation and reduce compliance costs. The ambit of the changes extends from the treatment of patents in plant variety rights, through to deductibility for losses on buildings. They include expansion and clarification of the rules on tax deductibility for business environmental expenditure, such as the cost of preventing, remedying, or mitigating the discharge of contaminants. The changes allow environmental costs, like other business costs, to be taken into account for tax purposes. The changes include the introduction of a 6-year tax exemption on income from non-resident drilling rigs and seismic ships involved in the exploration of petroleum in New Zealand, as part of a package of measures to boost gas exploration. The committee has considered those and other amendments in the bill and has made a number of helpful recommendations to ensure the smooth operation and effectiveness of the proposed legislation.

At some point before the bill proceeds to the Committee of the whole House, I will release two Supplementary Order Papers: one to ensure that the draft legislation better reflects the recommendations of the Finance and Expenditure Committee in a number of areas, and the other to split the bill into two in anticipation of passage. I thank the committee for its thoughtful consideration of this highly technical bill and I recommend it to the House.

National supports the Taxation (Base Maintenance and Miscellaneous Provisions) Bill, but let us reflect on the raft of taxation legislation that has been coming before the House in the last 3 to 4 years. In 2004 the House passed the Income Tax Act 2004, which is over 1,000 pages long. That Act tried to tidy up and combine all the amendments. Since then, a lot of taxation legislation has come before the House. Last week, we saw another one, the Taxation (Depreciation, Payment Dates Alignment, FBT, and Miscellaneous Provisions) Bill, go to the Finance and Expenditure Committee for consideration. The issue that I want to bring up is the raft of taxation legislation that has come before the House. Some pieces of legislation are unavoidable; we have a lot of understanding for the ongoing tactics by some corporations to minimise taxation. But one can argue that others would be avoidable if we did not have such a complicated tax regime.

That tax regime is further compromised because the Labour Government is continuing to use it also for targeting activities or for influencing behaviour. Every time that is done, we find that tax legislation becomes even more complicated.

Let me demonstrate by saying that it is well known that Government MPs and Cabinet Ministers are always standing up and saying that Labour is intending to reduce compliance costs—which include taxation—in its legislation. But the truth is, if we look at the estimates, we see that the Inland Revenue Department is telling us it has put aside $3.25 million to set up a unit in order to familiarise small to medium sized enterprises with their tax obligations and educate them so that they understand them.

Tonight we are debating legislation that once again runs to 170 pages, which is why that special unit will have to be set up in order to familiarise and educate those small to medium sized enterprises; that, to me, is not simplifying compliance tax.

The other complication the Labour Government is introducing is an increase in the Inland Revenue Department’s workload in terms of delivering social welfare issues. For example, $66 million has been set aside for the Working for Families package, so the more the Inland Revenue Department’s workload has been diverted to purposes other than the collection of tax, the more complications we have in terms of debating taxation legislation.

To demonstrate that once again in the estimates of the Inland Revenue Department, we find that it has allocated $117 million for information dissemination, etc. The assessment of tax, on the other hand, is allocated $66 million, which in itself tells us that something is not going very right for the Inland Revenue Department, which is set up to collect tax, supposedly to finance necessary Government expenditure.

One of the most controversial or high-profile issues contained in this Taxation (Base Maintenance and Miscellaneous Provisions) Bill relates to what we call the thin capitalisation rules, which are meant to close the loophole of foreign-owned banks that claim excessive interest expenditure. We support that.

I also ask the House to reflect on the fact that on one hand our Inland Revenue Department says that it wants to close loopholes and that it does not want foreign-owned banks to take advantage of our taxation legislation—indeed, one of the Inland Revenue Department’s objectives is to enhance and promote compliance with our taxation law—but I cannot help reflecting, on the other hand, that our State-owned enterprise Transpower has apparently entered into a financial transaction, about which today the Hon Michael Cullen has not seen fit to share information with us in terms of whether that transaction really does not cost New Zealand taxpayers.

There is an ethical issue involved; we are passing legislation today to ensure that foreign-owned banks do not take advantage of loopholes in our tax legislation, so one has to ask what sort of example our State-owned enterprise is setting in its undertaking. I actually asked the Inland Revenue Department whether it conveyed the message of tax compliance to State-owned enterprises to ensure they do not enter deals that could be seen to be taking advantage of tax loopholes both here and internationally. Quite interestingly, the answer I got back from the Inland Revenue Department was that it treats State-owned enterprises in the same way it treats any other corporate taxpayer, and the department always tries to encourage self-compliance with legal requirements, and provides assistance to do so.

I asked about the types of deals, but the Inland Revenue Department, in talking about the types of investments State-owned enterprises would make, said that that was not a matter for the department—correctly so. Those enterprises are responsible to the guidance set by shareholding Ministers. But the Inland Revenue Department continued to say that any encouragement or guidance regarding tax compliance directed specifically at State-owned enterprises has to come from shareholding Ministers.

It is interesting that the Inland Revenue Department then went on to say that it was aware that such guidance had, in fact, been provided. So I am really looking forward to seeing during the Committee stage whether the Minister will disclose to us, so that we can see whether we are adopting one law for all, and whether all State-owned enterprises, in return, are also observing or complying with legislation in the spirit of paying their fair share of taxation. We are looking forward to asking those specific questions during the Committee stage.

As I mentioned, National is supportive of this bill and we welcome some specific provisions. But, in saying that, we also say that every time we look at the provisions, even the provisions we support, we find that the compliance for the tax provision is complicated. The National Party has promised ultimately that it will cut the company tax rate and also personal tax rates, because that is the only way to achieve more simplified taxation legislation.

When company and personal tax rates are set at high levels, there is so much incentive for tax advisers, individuals, and companies to spend a lot of their energy in engaging in tax arrangements. I remember, being an accountant myself, that in the late 1990s my accounting colleagues told me that they were actually spending more time in doing management consultancy and in helping companies to grow, but ever since the Labour Government put up the personal tax rate, a whole raft of tax advisers and consultants have come into play, and tax compliance has become complicated—[Interruption]—as the Labour member yelled out—which is why we have been constantly brought back into this House to debate tax legislation. I think that any Government that wants its private sector and others to concentrate on expanding their businesses should bring taxation down.

I am a little surprised to be invited to join in this debate, but it is actually one that is very important to the oil and gas exploration industry. It contains a very significant change, which is that the Finance and Expenditure Committee has agreed with a proposition in the bill to provide tax exemptions, applicable for 6 years, for income earned by non-resident rig operators from the drilling of wells in order to explore and develop offshore petroleum fields in New Zealand. It also provides an exemption for income earned by non-residents from ships providing seismic survey readings in order to identify petroleum in New Zealand.

Both of those initiatives are very important, particularly in my second portfolio as Associate Minister of Energy, where I am responsible for the Crown minerals section of the Ministry of Economic Development, which deals with mines and, of course, petroleum exploration. Those two measures contained in this bill will make, I believe, a not insignificant difference to the industry and will be very much welcomed. The bill certainly allows for the, shall we say, mobilisation costs in New Zealand, which are quite large because of our distance from the main oil drilling centres of the world, to be offset at least to a degree in the costs factored in by the companies, when deciding where to invest their money and where to send their seismic ships or offshore drilling rig equipment. Whether the drilling is submersible or semi-submersible, the mobilisation costs, drilling rigs, etc. are very expensive. So I think that is a not insignificant measure in this bill.

I want to take only a short call, but I do want to respond very briefly to my colleague on the Opposition side of the House who preceded me. I think New Zealanders are getting just a little tired of the tired old mantra from the right wing of New Zealand politics, which keeps talking about New Zealand’s high-tax regime. That is simply a nonsense. When we consider most of the countries that we like to compare ourselves with, we find the tax burden on the New Zealand taxpayer is lower than it is on taxpayers in virtually all of them. In fact, if we consider the entire OECD, I think it would be fair to say that if we take into account all the taxes, including such things as the health taxes, superannuation payments, and all the other things that people stack on top—even such simple things as the registration costs for one’s motor vehicle—we would find that there is one country in the OECD that has generally lower daily costs by way of tax than New Zealand. I think there may be a couple of countries in that situation, but Mexico is the one that springs to mind and, to be really honest, I do not hear a lot of New Zealanders talk about rushing to take their businesses off and establish them in Mexico.

What I do hear is that a lot of people are very keen to find out how we are so efficient in the running of some of our public institutions.

💬 Pansy Wong: Oh, ha, ha!

I tell the member—and she can laugh and jump up and down if she likes—to look at some of our public institutions. Recently I was talking to a new immigrant to New Zealand, a doctor who has been here for several years now. He has worked in the health systems in many of the countries that we like to consider to be more advanced than us, including the Netherlands, I have to say. He said to me that New Zealand’s health system is the best one he has worked in, and that it provides the best outcome for the money provided. That gentleman has worked in several countries at a very high level in the health system. Now, what does that have to do with taxation? It is taxation that provides for all those things, yet we have seen significant development in this country over the years. Ms Wong can jump up and down all she likes, but she is not providing me with the facts and figures that state other countries are doing significantly better than us.

I just wanted to take a short call on this bill, but I am sure the measures taken in it for the oil and gas industry will provide a very good dividend for New Zealand.

Like the member Harry Duynhoven, I was surprised to see another Labour MP apart from the Associate Minister of Revenue—and a Minister normally takes the initial call—get to speak on a bill such as this.

I want to make just one other point before I get specifically on to the bill. The National member Pansy Wong talked in her speech earlier about the small-company tax unit this Government is setting up. Well, that is not the only such unit this Government has started to set up. Obviously, in the last couple of weeks we have just seen the Government set up, after pressure from New Zealand First, a small Immigration Service unit, as well. The Government is into setting up small units.

💬 Pansy Wong: That’s not tax.

Obviously, as Pansy Wong has said, that is not exactly about tax.

💬 Pansy Wong: It is.

Well, it is, I guess.

💬 Pansy Wong: It’s funded by tax.

Yes, that is right—it is funded by tax. The commentary on the bill states: “The bill introduces new thin capitalisation rules to prevent foreign-owned registered banks operating in New Zealand from accessing interest deductions if their capital in New Zealand is insufficient to support their operations in this country and their offshore investments made through New Zealand.” It also states: “Banks also use cross-border financing arrangements, funded by debt, to generate income that is not subject to New Zealand tax.”, and that is a very worrying thing. It continues: “The banks then claim a deduction for the interest expenses on the resulting debt, which reduces their New Zealand tax liability.”

Last night the Hon Bill English, former leader of the National Party, former Minister of Finance, former Minister of Health, and National’s current spokesperson on education, made a very interesting admission. He said that National had taken the people for granted, and that Labour has, too. That is what that member said last night in the debate on the performance and current operations of Crown entities, public organisations, and State enterprises. I believe that that was a very honest admission. The member was being honest with us, and I think it is a very relevant comment in relation to this very bill that we are talking about tonight, the Taxation (Base Maintenance and Miscellaneous Provisions) Bill.

The reason why I believe that it is a very relevant comment is that for the last 7 or 8 years, or even longer than that, New Zealand First has been highlighting this issue to successive Labour and National Governments. Month in, month out, and year in, year out, in this Chamber and at the Finance and Expenditure Committee, our leader, the Rt Hon Winston Peters, and others in New Zealand First have highlighted this issue with the Government of the day. The question I ask is why nothing was done about this issue for such a long period of time. New Zealand First quite openly supports this bill, and I want to restate that support tonight, because the bill is a step in the right direction. It provides something that we have been highlighting for the last 7 or 8 years, or maybe even longer.

It is actually quite interesting that we are only 3 months out, I think, from an election—

💬 Hon Richard Prebble: Oh, I don’t know, we might be a month out.

We might be a month out—say, a maximum of 3 months—out from an election, and this Government feels, all of a sudden, the need to pass this bill under urgency. As I said, for years and years New Zealand First has highlighted and raised this issue with the Government. The Rt Hon Winston Peters started raising these kinds of issues right back at the time of the wine-box inquiry, and we have been constantly raising them ever since, and nothing has been done about it. We come to 2005, and a maximum of 3 months, or maybe a month or 2 months, out from the election, all of a sudden the Government feels the need to pass this bill through the House under urgency. I think it is quite telling and also very interesting that the Government is doing this at such a time.

I said earlier that this bill introduces new thin capitalisation rules and other measures to stop banks from avoiding tax, basically—if people want to interpret what I said earlier and make it pretty simple. To cut a long story short, this bill is introducing these rules to stop the banks from avoiding and wriggling out of their taxes. I think it is quite shameful, when we look at this bill and at what I was highlighting earlier on about National admitting that it had taken people for granted, and saying that Labour has, too. I think this is a very significant bill to highlight that fact. During Labour’s last reign in Government, back in the 1980s, it sold Postbank for $678 million—over 20 years ago—and sold the Rural Bank for $687 million, and in the 1990s National sold Housing Corporation mortgages for $2.4 billion. Then we had the shameful, shameful sale of the Bank of New Zealand, which we all know came back to bite this country badly, and the country had to bail the bank out.

I think it gets even more shameful and scary when one looks at how much banks have earned over the many years since the successive Labour and National Governments opened up the banking industry to foreign-owned enterprises in the way that they did, and when one considers the way that some of these foreign-owned banks have treated the public of New Zealand—the taxpayers of New Zealand. They have treated them with no respect whatsoever, by trying to wriggle out of the tax rules that are in place, and that is why we are speaking on this bill tonight. The ANZ National Bank had an after-tax profit of $680 million in 2004 and $713 million in 2003, and Westpac had an after-tax profit of $617 million in 2004 and $462 million in 2003—gone, straight out of New Zealand. The Bank of New Zealand, which is the saddest one of all, I think, considering its history, had an after-tax profit of $471 million in 2004 and $548 million in 2003. The ASB had an after-tax profit of $316 million in 2004 and $278 million in 2003. The combined profit for all 16 registered banks was up 8.8 percent to $2.6 billion. The most worrying thing out of all of this is that the total assets among the main banks have increased 5.4 percent to $188.3 billion, led by ASB’s $5.5 billion increase. Westpac’s was $2.6 billion, and the Bank of New Zealand’s was $1.7 billion, which, as I stated earlier, is one of the saddest stories, I believe, in our New Zealand economic history.

I just want to read to members the Dominion Post article of 12 May in the “BusinessDay” section: “Intense competition and a damaging shift by home owners into fixed-term loans have not stopped banks ramping up profits to a record $2.08 billion in 2004. Profits for the main banks were up $91 million or 4.6 per cent on 2003,”. Then, one hears all these stories of these banks making billions of dollars since they were sold to foreign-owned enterprises, and one sees other stories.

I rise on behalf of the ACT party to speak to the Taxation (Base Maintenance and Miscellaneous Provisions) Bill, which is a bill typical of tax bills that Governments have been introducing into the New Zealand Parliament, I guess, most years. It is full of very complicated technical amendments to meet what are seen as various anomalies and loopholes in the tax system.

Before I turn my attention to that, let me just immediately respond to what I think were some fairly ludicrous remarks from the New Zealand First Party. If one had listened to the New Zealand First member, one would have heard him say that what is appalling and a matter of great concern is that banks in New Zealand are profitable. So I guess New Zealand First’s position is that it would be wonderful if New Zealand banks were making no money, were unsound, and the value of their assets—the last speaker was concerned that it had gone up—were falling.

💬 Hon Harry Duynhoven: We were there once.

That appears to be the last speaker’s position. I just say to the honourable member that, as Mr Duynhoven has said, that situation has actually happened in New Zealand. What happened? When banks fail, the effects have been disastrous. I still remember the effect of DFC failing—a tiny bank and financial institution in this country. Did it have huge implications? Yes, it did, and innocent New Zealanders, whose only fault was that they were dealing with the DFC, found themselves wiped out. But New Zealand First would have us believe that that somehow is a better situation. Well, that is absurd.

It also needs to be said, because there have been certain remarks made about banks, although not so much by the honourable member—remarks generally about this legislation—that those banks in New Zealand that have taken advantage of some clever management of their assets, and have taken various steps, have actually done nothing illegal. Indeed, it became clear, and officials admitted it in front of the Finance and Expenditure Committee, that the banks had actually been to the Inland Revenue Department and received approval for those arrangements. It has never been regarded as in any way illegal or immoral for a taxpayer to seek to minimise the amount of tax that he or she pays. Although that New Zealand First member may be fairly silly and immature in his views on banking, I guarantee that he actually does not pay any more tax than he needs to—unless he is even sillier than I think. If he personally sees nothing wrong with his minimising his tax, there is actually nothing wrong with the banks in New Zealand doing that.

Indeed, I might even go further. One could argue that a strong banking sector is so important for a nation that we ought to be a little bit careful before we go pursuing it hard for income tax. When we actually look at what the banks have been doing in the last decade, we see they have been able to collect a large amount of money from overseas investors and lend it to New Zealanders because we have not been saving enough. Again, I hear people complain about that. Well, they should think about the alternative. Are they really saying they do not want our banks to lend on mortgages and the like in the way that they have done?

Having said that, let me now turn to the bill itself. The ACT party will not vote against the bill, and the reason is that most of these measures actually have been consulted on widely with the accounting profession, which sort of acts as the informal collector of tax for the Inland Revenue Department in New Zealand. They have been consulted on with the various organisations that are involved, and there is grudging support within the community for the measures, because they are needed for the integrity of the tax system.

Having said that, and having also said that, for that reason, ACT will not vote against the bill, I say we are actually opposed to this type of tax legislation, because some of the measures contained in this bill are police-State powers. The Inland Revenue Department is given huge powers under this bill, and it is given those powers because it is quite impossible to collect the amount of tax that the New Zealand Government demands, without these sorts of measures. If these measures were appearing in any other legislation except tax legislation, the whole House—even the Greens; well, maybe not; they tell me that they are so unworried about this sort of tax bill that they are not even going to debate it; perhaps I should not speak on behalf of the Greens—every other political party except the Greens, would be outraged. They would be outraged at measures being put before the House that stated that civil servants were entitled to go into one’s bank accounts, entitled to order one to produce documents, entitled to make declarations as to how much tax one has to pay—and unless one can prove to the contrary, one has to pay it—and also entitled to make arbitrary statements about how one’s income should be dealt with, when, in fact, that may not have been what one had intended.

One of the reasons that tax laws are getting more complicated is that we are in a global economy. Indeed, the banking system falls a bit into that—these debt deals were done internationally. So the New Zealand Inland Revenue Department, to try to protect the tax base, is finding itself having to pass very complicated laws in order to try to pursue people’s income around the world. I think that is an exercise in futility; that, in fact, the Government will fail. The Government will be able to collect the money from—if I can put it like this—the little people. It will be able to collect tax from those who pay wages and salaries, because the Inland Revenue Department can pursue such people. But if one has real money, then one has the ability to determine when one earned it. One of the problems the Inland Revenue Department has is that it is very difficult, when one talks about a large sum of money, to decide whether it is capital or income, and—if people have the ability to move the money around the world—when people actually earned it. The Government will never succeed, and what we will have is more and more legislation like this. This is 170 pages of tax legislation with police-State type of measures.

It is time that we actually looked at some alternatives. Mr Duynhoven mentioned a number of European nations and their tax systems, but what he failed to mention was the spectacular success that the Eastern European nations that have just joined the European Union have had by simplifying their tax systems and adopting what are very low, flat rates of tax—down to 16c. Of course, if we were to adopt a very low rate of flat tax down to 15c—[Interruption] The member, who claims to be an inland revenue Minister, should start reading some of the literature. He would discover that nations that have done that—and I went to a lecture in this city by a leading tax professor who was giving data on what had happened in those Eastern European nations—have maintained their tax revenue. It has worked spectacularly well. They do not need to have junior Ministers passing legislation of the kind that the Nazis used to pass—and I am not suggesting that the member is a Nazi.

This is a police State. These are police-State measures. People’s basic liberties are taken away in this measure. Our House, as one can tell by the numbers, will blindly pass the bill, when the real solution is to go to a low, flat rate of tax and restore our liberties.

That was an amazing speech, particularly the latter part, from a member of the House whose party has decided to vote for the bill. I just found the logic quite astonishing.

United Future will vote in favour of this bill. It does three major things. It sets in place new rules for the taxation of banks, as has been mentioned; it brings in a variety of tax-rule changes that have the effect of either reducing the quantum of tax paid by a business, or reducing the cost of tax compliance, and those are two things that United Future strongly supports; and lastly, it establishes tax adviser privilege to protect tax advice given by professional tax advisers, along similar lines to the privilege that has traditionally been extended to lawyers.

I am one of two members in this House who is a chartered accountant—the other one being Pansy Wong, who spoke earlier—and I am pleased, indeed, to see that these changes are being made. It is really, if one likes, a kind of injustice that lawyers on the one hand, and chartered accountants on the other hand, are probably giving equivalent tax advice to their clients, and the lawyers are being protected by privilege, but the chartered accountants have not been, and it is good to see a level playing field established in that regard.

I shall make a couple of comments on those matters, and the first one is to talk about the taxation of the banks. I agree entirely with the Hon Richard Prebble that profit is the lifeblood of businesses, and banks are no exception. Therefore, it is good and healthy that they make profits. That is how they become successful and provide good services to their customers.

I also agree with him that there is nothing immoral or illegal about any taxpayer taking action within the law to minimise his or her tax bill. Where I guess I probably differ from Mr Prebble, though, is in his conclusion, in saying that the banks had not used illegal means to avoid tax, because, as is well known through the media, there is a big dispute involving hundreds of millions of dollars between the Inland Revenue Department and the banks that is yet to be determined by the courts. It will be the courts, and they alone, when they have heard all the evidence, that will make a decision at the right time as to whether retrospective tax is owed. But these rules clearly set out the position for the future.

In my days as a chief financial officer for a large corporation I was also expected to minimise the tax paid by the company, and I did that—within the law, I might add. But in my role as a parliamentarian—now a gamekeeper, rather than a poacher—I do like to remind myself, when I am looking at these sorts of issues, that for example, a nurse working long hours in the intensive care ward in Wellington Hospital, or any other hospital in New Zealand, pays his or her fair whack of tax. They do that, as Richard Prebble has pointed out, because it is taken off them before they get it, through PAYE. Therefore, it is a matter of fundamental fairness that all New Zealand taxpayers should obey the law and pay their fair share of tax, and I do not think that that is asking too much of the banks.

That is essentially all this bill is doing. It is saying: “Look guys, sorry, you had a go at this, but we’re closing it off; we’re changing the law so that in future you will just pay your fair share.” We are not asking them to pay more than their fair share, or less than their fair share—but just the right amount. I think that that is a completely worthy goal.

The other thing I would like to touch on briefly is the part of the bill that deals with losses on buildings. This law change is designed to allow companies to deduct the residual book value of buildings on their books for tax purposes when buildings are destroyed through natural causes. But the committee received submissions, particularly from port companies, saying that that should also be extended to situations where buildings have come to the end of their useful economic life. In that situation also the building owner should be able to write off the residual amount and claim it for tax purposes. That is an entirely reasonable proposition. Therefore, the committee has recommended that the officials consider that issue as part of their ongoing depreciation review.

A similar matter came up in respect of dredging costs, also from the port companies. Under the current rules the initial costs of dredging are not permitted to be deducted for tax purposes. I believe that that is quite fundamentally wrong. As I mentioned, I am a chartered accountant and I happen to know that the idea of depreciation is to allocate the cost of an asset across the commercial life of that asset. When one thinks about a big hole being dredged to enable ships to go into the port, one is doing that to earn additional taxable income. Therefore, it seems to be fully consistent with general depreciation philosophy, if one likes, that those costs should be able to be capitalised and then depreciated in the usual way against the commercial, if one likes, stream of income that is arising from the asset that has been created: namely, the result of the dredging. I see no philosophical or tax principle why that should not be the case.

Therefore I led the committee to the recommendation, which Pansy Wong also supported, that we should also ask the Inland Revenue Department officials to re-examine that practice, to allow for the initial dredging cost to be capitalised and depreciated, but for subsequent dredging costs, as distinct from the first lot—and putting aside the question of betterment—to be allowed to be expensed. After all, when people dredge, the hole that they have made to get the ships in and to get greater depth and so on, gets filled in with sand and other stuff and they have to clean it out again, and that, to me, is no more than maintaining an existing asset and therefore should be expensed for tax purposes. I want to mention that we have asked officials to continue work on that issue, as well.

Those are the only remarks I wish to offer at the second reading stage, and, as I mentioned, United Future will vote in favour of the bill.

This is an interesting bill, which National will be supporting. But there are some points that I think are important and that I wish to bring to the House’s attention. The first one concerns the thin capitalisation rules for foreign-owned banks. Banks, in terms of their debt restructuring, have been able to claim the interest as a deduction, and, of course, foreign banks have not been contributing to the overall well-being and economy of this country. Page 3 of the commentary on the bill—and I do not intend to read it out—summarises, quite clearly, a position that has arisen over time. Just to highlight the point, the changes, as the Government announced in September, are expected to result in those banks paying around $360 million a year more in New Zealand tax. That is a significant amount, and it is one of the reasons—

💬 Pansy Wong: What’s Labour going to do with it?

My colleague Pansy Wong, who is a chartered accountant and understands these issues, has asked a very good question. What will the Government do with that $360 million of extra tax?

💬 Pansy Wong: Low-quality education.

Well, it will squander it on some scheme or other, as it is very good at doing.

💬 Pansy Wong: Hip-hop tours.

There will be hip-hop tours, and it will be giving money for twilight golf. That money will be squandered in a number of other areas, with absolutely no accountability. However, the provision is a very good one. We are actually supporting it, in terms of the capitalisation rules.

The other areas I wish to comment on are the company tax rates and the personal tax rates. When we have very high personal tax rates, those who are paying the higher tax look for a way to minimise the risk—to minimise the amount of tax they pay. That is human nature, and we see that happening with the personal tax rates up at 39 percent for those earning over $60,000. I remember Labour’s pledge in 1999, that only 5 percent of people would be paying the higher rates, and now, of course, about 20 percent of people are paying those higher rates. It is the same with company tax. Paying tax is a disincentive to invest. We put tax on tobacco and alcohol, because it is a disincentive. This Government has taken the line that it will tax people more, and that becomes for people a disincentive to invest, to grow their business, and to do the things they like to do. The National Party is a party that would rather see money going into people’s pockets—let them choose what they will do with it.

It really is interesting to note what sole traders whose taxable income is over the $60,000 figure are doing. Instead of paying tax at 39 percent, they are forming companies, because the company tax rate is 33 percent. So sole traders and partnerships, but mainly people on their own—sole traders, sole proprietors—are asking why they should pay 39 percent on their taxable income when, if they form a company, they can actually take out as personal drawings, wages, salaries, or whatever they want to call it, up to $60,000 of taxable income and pay tax at only 33 percent. And if the taxable income of their business is over $60,000, they will not actually pay it at 39 percent, because, as a company, they will have to pay only the company rate of 33 percent on the difference. That is common practice with small businesses. They are doing that as a means of having the money in their pockets and of beating the system, and it should not be that way. If we had a fair tax system across the country, then we would not find businesses trying to do exactly what I am saying is happening—and I know it is happening, because there are numerous examples of exactly that rationalisation and restructuring. The law allows it to happen. Financial planners and management consultants who deal with the restructuring of businesses are saying: “Why pay 39 percent when you can actually pay 33 percent if you form a company?”.

The point I am making here is that although National is supporting this bill, there are certainly areas that the Government should be very mindful of. The Government could make it a lot easier on itself if it had a fair and equitable system, where taxes are there for a purpose—not a system where money is taken with one hand and redistributed with the other. That is how socialist Governments work. They grab the money from one side, redistribute it on the other side, and make more people dependent. That is the welfare system. That is the socialist view. Well, we now see, as a result of the Budget the other day, that New Zealanders have seen through this. They want money in their pockets. They do not want a Government that thinks it knows best how to spend their money, that takes their money and redistributes it at a later stage.

💬 Pansy Wong: But Labour’s promising tax cuts.

Oh, yes, Labour will promise tax cuts, but we know how the Government has operated over the years. It has increased taxes, and in 3 years’ time it will give people a reduction amounting to a measly 67c per week. Well, what an absolute insult to hard-working New Zealanders! It is an absolute insult to think that hard-working New Zealanders will get only 67c per week. This is a Government that says it will look after people. The figures are quite astounding, actually. If we look at the extra taxes people will be paying between now and 2008, when there will be a reduction, we can see that they have more than contributed, and a measly 67c per week reduction is absolutely outrageous. There is no justification for it, and I tell members that the Government will pay for that, because New Zealanders are seeing through it. They do not have a tax structure that reflects investment. There is no incentive and no initiative for people. There is nothing to reward the hard-working and enterprising New Zealanders who are out there making a dollar and, of course, are having to pay it over to this Government. That is the second point I wanted to mention.

The third point is about the provision that states that accountants are to have the same status as lawyers. That is fine. We have two accountants—

💬 Pansy Wong: Only two?

Only two chartered accountants. There is Mr Gordon Copeland—he was a chartered accountant—and there is my colleague Pansy Wong, who has crystallised and articulated very well the argument about taxation. It is always good to have on our team a chartered accountant of her qualifications and experience. She said that accountants will have the same status as lawyers. It is in the provisions, and that is something we also welcome. This Government will have much to answer for in a very short time. New Zealand voters will see through the facade the Government keeps putting up. We will see that very, very shortly, and the Government will pay the price. In the meantime, the small changes that are reflected in this taxation bill—namely in the thin capitalisation rules for foreign-owned banks—are changes we are supporting, as well as the other provisions. We will be voting for those.

Debate interrupted.