Taxation (Base Maintenance and Miscellaneous Provisions) Bill, Privacy Amendment Bill (No 3)

, on behalf of the Minister of Revenue: I move, That the Taxation (Base Maintenance and Miscellaneous Provisions) Bill and the Privacy Amendment Bill (No 3) be now read a third time.

The central feature of the Taxation (Base Maintenance and Miscellaneous Provisions Bill is the introduction of important reforms designed to ensure that foreign-owned banks operating in New Zealand pay sufficient tax on their New Zealand incomes. Specifically, the bill strengthens the thin capitalisation rules to ensure that the income of banks cannot be sheltered by interest deductions arising from excessive debt. Banks must have enough capital in New Zealand on which no interest is deductible, to fully fund their overseas investments. The new measures will result in the more efficient operation of thin capitalisation rules in New Zealand, while giving greater protection to the New Zealand revenue base. This bill is around 170 pages long. Every year from foreign banks alone it will therefore protect about $2 million of revenue per page.

In keeping with the Government’s commitment to the business sector, the bill also introduces a number of business-friendly measures, including a number of technical changes to the tax depreciation rules to improve their operation and reduce compliance costs. These include broadening the rules on tax deductibility for business environmental expenditure, such as the costs of preventing, remedying, or mitigating the discharge of contaminants. The bill will allow those costs, like other business costs, to be taken into account for business purposes. The other measures in the bill aim to improve the operation of tax law. Of interest to tax professionals, and in particular, chartered accountants, is the introduction of new measures to give greater clarity to the operation of a statutory privilege for those in the business of providing tax advice.

Finally, as a result of this legislation, a consequential amendment makes a change in a cross reference contained in the Privacy Act.

Having reached the third reading, this legislation is the result of a long process involving the work and input of many. It includes the submissions on the proposed legislation made by interested parties, the dedicated work of officials who supported the bill during its development and passage, and the detailed analysis carried out by the Finance and Expenditure Committee. I am grateful to all of those involved in bringing the bills to their third reading, and I now commend the bills to the House.

What a sad speech that was from a dejected Minister. When the public is listening to this debate, they will contrast that with the passionate debates that were championed by my National colleagues. My colleagues are very confident and happy, because they are speaking on behalf of the New Zealand public. They know that this legislation is the last technical, complicated legislation that will be brought in front of the House by this minority Labour Government. This will be the last time, because when National takes the Treasury benches we will make sure that both the company tax and the personal tax rates will be lower.

That will negate the need for the countless pieces of complex tax legislation that this House has to debate.

I was reflecting on some of the Labour members who actually bothered to take calls during the second reading debate and the Committee stage. The Hon Harry Duynhoven actually tried to convince New Zealanders that they have not paid enough tax. So I hate to think what else this Labour Government has in mind for hard-working New Zealanders, in terms of taking money off them. As United Future has rightly observed, Labour is the only party left in this House that does not believe in lowering taxation. The problem with regard to Labour refusing to register the importance of lower tax, a complication caused by the different rates for personal tax and company tax, and by high taxation, is that that leads to tax compliance costs for individuals. As an accountant, I can imagine my colleagues, the chartered accountants and the tax lawyers. They are the ones who benefit from that situation. I wonder whether the Minister has looked at the number of tax consultants from large accounting firms who come in front of the Finance and Expenditure Committee, month in and month out, to debate and to make submissions on behalf of their clients. My accounting colleagues have told me they do not actually enjoy tax minimisation work. They would rather expand their management work in their consultancy companies. It is a lot more satisfying than tax consultancy, because they can actually assist their clients to expand their businesses rather spending so much time on investigating means to minimise taxation.

One of the most high-profile issues contained in this legislation is to do with the thin capitalisation rule. I understand that the Inland Revenue Department has carried out separate consultation with the foreign-owned banks, and we accept the measures that will be introduced to counteract the very innovative way in which those banks try to minimise their tax payments. But the Minister has refused my invitation to take a call and explain why on the one hand the Labour Government has introduced the thin capitalisation rule to ensure that foreign-owned banks will pay their share of tax, while on the other hand nobody is prepared to share with the New Zealand public information on the sort of arrangement Transpower has entered into. Is it an arrangement to minimise tax in New Zealand or to minimise tax overseas? Where is the ethic of a Government that introduces legislation to ensure that foreign banks pay their tax, but that will not tell the New Zealand public whether Transpower’s deal disadvantages New Zealand taxpayers? The Minister of Finance, the Hon Michael Cullen, says the public will simply have to take his word for it. Well, I am afraid that the public no longer takes the word of Labour Ministers seriously, because we have learnt from past experiences that they sometimes stretch the truth rather far. I think Labour members still have calls available, and I hope that one of them will stand up and share with the public the truth behind the Transpower deal.

I also want to share with the public a piece of information I obtained from the Inland Revenue Department. All my fellow National MPs have raised the issue that even a Labour Minister believes that the New Zealand public is entitled to some tax relief, and that the Hon Michael Cullen has proposed a tax cut of 67c a week in 3 years’ time. I have asked the Inland Revenue Department how much work is involved in changing the tax thresholds. The department told the Finance and Expenditure Committee that to adjust the tax thresholds takes only 3 months, but that to cater for changes in relation to provisional taxpayers takes about 10 months. So if this Labour Government is serious, it should at least show some remorse for overtaxing New Zealanders for the last 6 years by bringing forward the date of that very miniscule tax relief for the majority of New Zealanders. But I imagine that could be too much to hope for.

My colleague Dr Nick Smith has raised another excellent point about the legislation we are debating tonight. He was asking why people who have applied for resource consent, and whose applications either fail or are withdrawn, should be grateful for a tax deduction at all. Most individuals who engage in activities would rather that their projects get the green light to go ahead. To have a tax deduction for a very lengthy and drawn-out resource consent process is no consolation prize for them.

It was because of the refusal of the Labour Government to acknowledge that New Zealanders deserve to pay less tax that we have had the Inland Revenue Department admit it has to set aside $3.2 million to set up a small-business unit, to explain to small and medium sized businesses what their tax obligations are. How does that action square off with the continued promises and claims made by Labour members that they are serious about reducing compliance costs for small and medium sized businesses? All that such businesses want to do is to get on and expand. Why should they be grateful for a so-called subsidy to prepare their PAYE and all sorts of other source deductions? The Government has long used businesses as its tax agents, and I think that most small and medium sized businesses would prefer this Labour Government to simply lower the whole range of tax, to avoid them having to apply for subsidies to fulfil the tax compliance procedures.

During the Committee stage of the original Taxation (Base Maintenance and Miscellaneous Provisions) Bill the Minister in the chair, David Cunliffe, took the call and challenged, with some determination, the statement he claimed I had made that the Labour Government had not reduced taxes. I say to the Minister—and I conceded this in my second reading speech—that there are some aspects to this legislation that will reduce the quantum of tax for some taxpayers, but I put squarely to him that the net effect of this legislation is several hundred million dollars more of tax for the Government. The net effect of this legislation is not any reduction at all in tax for New Zealanders. We are to collect $360 million more, under this legislation, from the banks alone.

When I think of the figure of $360 million, it has a kind of familiar ring to it. One of the other members recognised straight away that 360 million bucks is exactly the amount of revenue the Government intends to return to New Zealand taxpayers on 1 April 2008, by adjusting the tax brackets by 6.12 percent—an adjustment that Dr Cullen says we could not afford until then. But in the legislation that we are to pass into law tonight we will collect 360 million bucks from the banks themselves. So where is the problem? Why is the Minister of Finance about the only person in New Zealand who does not realise that it is time for tax cuts and that we can afford them? It reminds me of the famous grandmother who watched all the troops marching past, and said: “Isn’t it a shame? The only person marching in step is my grandson.” It is that kind of myopic vision.

Also, when the Minister, David Cunliffe, tried to claim that somehow or other this legislation was going to reduce taxes, my mind went to an instance in this House a little while ago, when the newest member of the House, ACT member Kenneth Wang, in his first question to the Minister of Finance, asked him how many increases in tax he had undertaken since he had become the Minister in late 1999. The Minister responded that the figure was nine. The honourable Phil Heatley told the House tonight that it was actually somewhere between 24 and 32; as Phil Heatley is an honourable member, I accept his word in that regard. Then, in a supplementary question to the Minister, Kenneth Wang asked how many rates of tax he had reduced since he had become Minister, and there was a deafening silence from the Minister. I think that all of us in the House were just amazed that Kenneth Wang, whether by luck or by skill, had actually caught the Minister on the hop completely. That is the memory that New Zealanders will take into this year’s elections.

Let us unbundle the logic of another comment that the Minister in the chair tried to make in the Committee stage. He said that if we reduced the company tax rate, a considerable benefit arising from that would go to overseas investors in New Zealand companies. That is exactly the point. If we want to attract new investment into this country, then we need to have a competitive corporate tax rate. We heard from the Hon Richard Prebble that in some Eastern European countries those rates are down to 16 percent.

💬 Hon Richard Prebble: Russia’s down to 12.

Russia’s is down to 12 percent. Ireland has had a very, very low rate; I am not sure where it is now—I think it may have gone up a bit—but it was down to about 12 percent at one stage, too. That is the whole point.

There is a kind of—and I hate to use the word—inconsistency, a logical inconsistency, in that two bills down from this legislation, in the urgency motion, is the Overseas Investment Bill. With that bill the Government wants to encourage overseas investment in New Zealand. How does that square with it wanting to do exactly the opposite when it comes to the corporate tax rate?

I want to reinforce also a point made by, again, Kenneth Wang—that is, the great majority of companies in this country actually employ five or fewer people. As he said, about 97 percent of them employ fewer than 20 people. We are talking about tax relief for all those companies, so why do we get fixated about a little bit of leakage going offshore, when the money potentially coming back the other way would be far greater? Even the leader of the Progressive Party recognises that reality. Even his party is saying that the corporate tax rate should come down to 30c in the dollar. In a way, I think we relish taking this issue into this year’s election.

I want to add just one other piece of information. Pansy Wong said she had a new piece of information. I have a new piece of information for the House, as well. Today, at the Finance and Expenditure Committee meeting, John Key asked Dr Cullen whether he might have second thoughts about waiting until 2008 for the 6.12 percent adjustment to the tax brackets. I thought I knew where John Key was coming from—that he was thinking to himself that a couple of weeks from the election date Dr Cullen might suddenly say to the nation: “Hey, guys, I got it wrong, and, yep, we’ll do it after all, and we’ll do it from, maybe, 1 April 2006.” But, no, he got a categorical response from Dr Michael Cullen: “No, I am not going to change. You’re going to have to wait until 2008.” So there it is. It is on the record. It is straight. It is clear. If nothing else, New Zealand voters will have some pretty clear choices to make in this year’s election.

I rise to speak to the third reading of the Taxation (Base Maintenance and Miscellaneous Provisions) Bill. It was agreed that we would take the legislation as one question. The Associate Minister of Revenue, Mr Cunliffe, was rash enough to decide to get up and make—I guess I have to say, in fairness—a vigorous defence of the Budget and the decision of the Government not to grant tax relief. That resulted in a wide-ranging debate—which actually had been agreed to. Mr Cunliffe must have realised the position, from the reception he got. For example, I have just listened to the speech made by Mr Copeland, whose party normally supports Labour. Mr Copeland, in his gentlemanlike way, completely lacerated the Government’s position.

Mr Cunliffe wants us to believe that the Government does not have a $7 billion surplus. Of course, to believe that, one has to believe that the Auditor-General, who signed off the Government’s accounts, got it wrong; that Treasury, which is required by law to state whether the Government’s accounts are correct, actually got it all wrong; and that there is no $7 billion surplus. I just say to the Government that it has no chance at all of putting across that line. It is nonsense. The $7 billion surplus most certainly does exist, and there is the ability to have tax cuts.

The reason the Government is in trouble is that even someone such as the President of the Labour Party, Mike Williams, could not believe that the Government would not adjust the tax rates. The whole country expected adjustments, because inflation has happened, and because one of the promises that Labour was elected to Government on—I have a copy of the promise somewhere, if it has forgotten it—was that no more than 5 percent of the population would have an increase in income tax, but, of course, 20 percent of people in the workforce are now paying the 39c tax rate. The answers Dr Cullen gave in the House—apparently, Mr Cunliffe was not listening, because he denied that those answers were given—show that people in New Zealand on average incomes, after tax, are no better off today than they were 6 years ago.

Of course, that does not apply to the Government. The Government is much better off. It has been collecting revenue. As Kenneth Wang, speaking on behalf of the ACT party, pointed out, this tax revenue has not come from a few overseas companies, because although those overseas companies may pay some tax, the vast bulk of tax in New Zealand is paid by average New Zealanders.

In the case of New Zealand companies, 97 percent employ fewer than 20 people, and I think about 97 percent of them are New Zealand - owned. The Associate Minister got up and said that the Government could not give a tax cut, because it would help overseas companies and the banks, but that argument just will not wash with the average small-business man. The reason why someone like Kenneth Wang is so upset about it is that he is a small-business man. He knows that it is companies like his that are paying the extra tax, just as the average New Zealander knows how much money he or she has left.

I believe that tax is going to be the big election issue. I have no difficulty in believing Mr Carter, who told members that when he was at the Fieldays today the issue that people wanted to talk about was tax. That has been my experience.

I know what has happened to the Labour Government. It has looked at the polls and found that the polls say—and they still say—that 66 percent of people would pay more tax in return for a better health system. Well, I come from the ACT party, I believe in low tax, but even I would pay more tax to have a better health system. But I just know that if I paid more tax, I would not get a better health system. If we relook at those polls, we also see that the other 30 percent of people, who do not say they would be prepared to vote for more tax, know that they would be the people who would pay it. Most of the people who answer yes to that question do not think they personally would have to pay the increase. When we put the question a different way, as the National Business Review did—which, again, Kenneth Wang pointed out—before the Budget, and I do not know why Dr Cullen did not notice it, we see that two-thirds of all New Zealanders now think they are paying too much tax.

I suspect that that figure has now gone up further. The result of the silly decision made by the Government to give the price of a packet of chewing gum in 3 years’ time in tax relief has caused everyone in New Zealand to look at the question, and to realise that there has been inflation over the last 6 years and that the Government has not adjusted the tax rates. We also know that the Government across the Tasman, both before the election and, now, after the election, has dramatically adjusted tax thresholds for inflation. As we live in a global world, we are aware of that fact.

Of course, we then have to ask why the Government is not prepared to adjust the tax rates. There are two reasons. The first is an ideological one. Dr Cullen firmly believes that he can spend our money better than we can. That is his view. So he is in favour of higher tax. If it were up to him, I think he would lift it even further. That is the arrogance of a socialist.

But the second reason is that we all know that Treasury has told him that the effect of the Labour Government employing 38,000 extra bureaucrats over the last 5 years will blow out even the massive $7 billion surplus. That is because—and it is a well-established fact—when any one employs an extra person there are also extra costs in overheads, but when an extra civil servant is employed, his or her costs go up every year. The reason is that civil servants generate more costs. They produce new ideas, and the Government then has to go out and hire consultants to find out whether those ideas are any good.

I will use a parliamentary example, which we all would have seen. We now have the Parliamentary Service Commission. The position I am in is that I find that about every 3 years somebody from the commission comes into my office and tells me that my desk, which I thought was perfectly adequate, has to go because a new Occupational Safety and Health Service study says it is not ergonomically efficient. The whole civil service is like that. It is always coming up with these things. When we pass these regulations, most small businesses ignore them, but not the civil service—it applies them! There is a huge cost in putting in new furniture, putting in no-smoking areas, training people to use non-sexist language, training people how to be sensitive to Māori, or whatever the latest cause is, and the cost goes up every year. Imagine that there are 38,000 new civil servants, all of whom have to be taught about non-sexist language, about bicultural New Zealand, or about whatever the latest thing the civil service is into! Of course it is going to cost $7 billion! That is why Dr Cullen and a socialist Government cannot reduce tax. But, of course, an ACT party in Government could, because we are not politically correct, for a start.

I point out a further reason. Let us take the Ministry of Health: with all its extra bureaucrats, there are no extra operations—not one. If we asked the public whether they wanted more Ministry of Health bureaucrats, all well trained in biculturalism and non-sexist language, or whether they wanted granny to have her hip operation, the answer would be that they wanted granny to have her hip operation.

So if a Government were prepared to put a control on Government expenditure, we could have very substantial tax cuts. The ACT party says we could go immediately to a low flat rate of tax. Where is the relevance of that to this legislation? The original bill was 170 pages long. With a low flat tax, it would not be necessary.

That was an interesting contribution from Richard Prebble. I am not sure whether I could decipher what was true and what was a figment of his imagination. I take it that the 38,000 new bureaucrats is a reasonably accurate figure. I think that illustrates the concerns New Zealand First has with this Labour-led Government, propped up by the “Poodle Party” of United Future.

I want to take this opportunity to again make New Zealand First’s position clear when it comes to tax. We support a fresh look at—

💬 Dr Richard Worth: Do you support National?

I will come to National in very short order. I think that when I get to it, the member will be hanging his head in shame.

New Zealand First would like to see taxation eased for New Zealanders, but we do recognise that most law-abiding New Zealanders want greater resources given to the police. That will cost money. Most New Zealanders, so they tell us, want students to have a universal living allowance, and we support that. Most New Zealanders—

💬 Dr Richard Worth: Very expensive.

It is an expensive exercise. The member is clearly thinking. Most New Zealanders, with the exception of members of the Green Party, want more investment into roading—far more than that Government is doing at the moment. Most New Zealanders, by a significant majority, want an improved health system. We have an ageing population, and New Zealanders want and need greater financial investment in that sector. I take issue with the Hon Richard Prebble, who said that if we put more money into the health system, it would not improve. That is far from the truth. Other countries have invested in the health system to a greater degree in proportion to GDP. This Government puts about 6.1 percent of GDP into our health system, but that is too low. We believe that it should be increased, on a gradual basis, to something like 9.5 or 10 percent, including the investment from the private health sector, which is in the vicinity of about 1.9 percent.

We would like to see incentives for new exporters. We believe that we have to add to our export base by encouraging exporters to get involved, and a tax incentive would go a long way to achieving that.

In this volatile world, we believe we have to put more investment into our defence forces. We have to put more investment into our railway, and more, I suggest, into our shipping—not by direct investment but by way of creating a favourable tax regime for encouraging our ship owners and ship operators to get more involved in the industry. Currently there is not one single ship running overseas and that, for an island nation tucked down at the bottom of the world, is a disgrace.

Labour spoke about, rather than introduced, its new tax thresholds—it did not introduce anything in this Budget in terms of thresholds. I think it created more enemies than it made friends. I met a number of people who were, prior to Budget day, absolutely devoted Labourites—that is the only way I can explain them—and they felt insulted to know that they will wait for 3 years, until 2008, when they will get the grand total of 67c a week extra, even though the Minister of Finance will pay each and every one of us in Parliament something in excess of $10 extra per week.

I want to touch on the banking industry for a moment. I take up what Gordon Copeland said, because I agreed with him when he said that all we want in this country is for banks to pay their fair share of tax. We want nothing more and nothing less. Currently, as I understand it, a court action is being taken because it is deemed that they are paying a good deal less.

Nobody in New Zealand First has said anything about not wanting banks to make a profit. We would like them to be owned by New Zealanders or by New Zealand companies. They are not, and we see that as a sad fact of life. We want them to make a profit and we want them to pay their fair share of tax. I make that quite clear.

New Zealand First believes in tax cuts. This legislation does not deliver on that, but it changes the structure in a way that is encouraging, and for that reason New Zealand First supports it. We see tax cuts as something at the end of the line, after we have delivered on the social good. We believe that the Government’s Working for Families package is a tax cut. It is a targeted tax cut for the low or relatively low paid. It might well spread higher up the chain, but basically it is a targeted tax cut for the low paid. New Zealand First supported the legislation when it went through the House just after last year’s Budget, and we are pleased with the feedback we are hearing on how it has been delivered thus far.

One of the urgent things we believe should be done is to put more money into roading. I am pleased that the National Party has taken our suggestion on board of diverting the petrol tax into the roading account. There was a time when that party was totally opposed to it. We started a process in 1998 of diverting 2.1c per litre of petrol into the roading account, which, if my memory serves me correctly, was about $70 million. Had that continued every year, with no growth in petrol sales, and fuel consumption remaining about the same—in other words, 2.1c equalling the same value—at this point in time there would have been something like $2.7 billion put into roading.

The National Party, when New Zealand First and National had a parting of the ways, which is putting it politely, stopped all that, although that is not so according to Don Brash. He blamed Labour in his speech to the Automobile Association convention. He said Labour came in and stopped it. It actually stopped in the 1999 Budget, which was delivered by Bill Birch. At the same time, behind the scenes in 1998 when we implemented it, Bill Birch was telling Winston Peters in particular, but it was well known to the rest of us in the New Zealand First caucus that he would not have a bar of transferring that money across. “Over his dead body” I think was the term. So it was definitely a New Zealand First initiative.

I ask the National Party, now it has taken the idea on board and, indeed, is promoting it, how many lives have been lost because that money has not been injected into roading. How much better off would the country be economically and socially if that money had been diverted across, as New Zealand First advocated? I know that this legislation has nothing to do with roading, or petrol tax, or anything like that. But since this Government has come into power, it has upped the price of petrol on at least two, possibly three, occasions by way of taxation increases. All of them, to our mind, have been unnecessary, and they have all been an additional cost to the average New Zealander, which was totally unwarranted.

New Zealand First supports this legislation, but we believe that taxation in this country has to be looked at freshly and reviewed positively. We believe, in essence, that tax should be fair, reasonable, and encouraging. This legislation is a move in that direction.

National speakers have crystallised and articulated the argument about taxation. Taxation will be an election issue. What the Budget did was an absolute insult to hard-working New Zealanders. We support the Taxation (Base Maintenance and Miscellaneous Provisions) Bill because there are some issues in it that are of merit, but the hard-working New Zealanders who expected some tax relief, when the country is running a $7.4 billion surplus, feel cheated. They feel cheated because they are the ones who have earned the money. They are the ones who toil away. There is no reward for hard work, enterprise, or initiative. This Government just takes and takes. That is why the Labour Government is on notice that taxation will be an issue at the election.

My colleague Phil Heatley mentioned that 30-odd new taxes have been introduced. The compliance costs associated with those are immense. I want to clarify again from my speech in the second reading debate one tax that has not yet been introduced but has been mooted. It is the proposed carbon tax. That tax, valued at $15 per tonne of carbon dioxide emissions, will put about $250 on every household in New Zealand. What does that mean for someone on a fixed income? Where will those people recoup the costs of the extra $250 of tax? That boils down to 4c per litre on fuel—on petrol at the pump. Members will bear in mind that we have just had a tax increase at the pumps of 5.6c per litre. It also means that there will be about a 10 percent increase in electricity charges.

💬 Peter Brown: How much on petrol?

It is 4c per litre on petrol. That is when carbon dioxide emissions are valued at $15 per tonne. The Government could put a $25 per tonne value on that charge, and then the costs that I have just mentioned will escalate. The value at the moment of trading carbon credits on the secondary market is around £19 per tonne. So in New Zealand dollars the figures I have mentioned are very conservative, when the outcomes could be a lot higher.

It has often been said that taxation is theft. Well, that is what this Government has been into for the last 6 years. It has taken more money off people—socialist Governments do that, and then they want to redistribute the money and say how great they are. I wonder why 700 New Zealanders per week decide to go to Australia. What is the attraction? Seven hundred New Zealanders per week are finding it more attractive to shift offshore. They have more opportunities to make a living for themselves in Australia. Australia just had a Budget the other day, and it was bad news for New Zealand. Australians will get A$6 per week, and when will they get it? They are actually getting it now—not, as this Government is providing for, in 3 years’ time. This Government is saying that on 1 April 2008 it will give us 67c a week.

The credibility of this Government is in tatters. Any integrity it might have had years ago has gone. Hard-working New Zealanders will not stomach this. Everywhere I and my colleagues go, we find the big issue is taxation. I put the Government on notice that that will be an issue. Hard-working New Zealanders feel cheated by this Government, which had an opportunity to give tax cuts through running a $7.4 billion surplus. They feel cheated, and they will acknowledge that and record their protest at the polls in a very short time. Members must watch this space, because taxation is a key issue.

Bills read a third time.