Taxation (Depreciation, Payment Dates Alignment, FBT, and Miscellaneous Provisions) Bill

In debating Part 3, I hope the Minister will talk about at least part of his Supplementary Order Paper 19. When the Finance and Expenditure Committee was hearing submissions and considering this bill one of the clauses in Part 3 brought up an issue that at least the National members, and I must say Gordon Copeland also from United Future, became quite focused on. I think it was clause 180 in Part 3 that really gave rise to the issue, because that clause inserts new section 141EA.

Various bits of section 141 cover issues, as I understand it, relating to what is commonly called an unacceptable tax position. It sounds pretty weird to talk about an “unacceptable tax position” but let me explain what that means. Under current law if a taxpayer, let us say a GST-registered business, files a tax return but the business makes a mistake, but then finds it has made a mistake and corrects the mistake, and, in fact pays the correct amount of tax to the Inland Revenue Department by due date, that business, because it originally filed a return that contained an unacceptable tax position, can still be penalised.

The select committee’s commentary on the bill points out that the penalties can be quite severe—that is, the lesser of either 1 percent of the total tax figure or a quarter of a million dollars. So where there is a lot of tax involved this kind of unacceptable tax position could result in a penalty of up to a quarter of a million dollars, even though the business had told the department that the business got it wrong and paid the correct amount of tax by due date. Under current law the department does not have the power to say: “OK, we accept that you told us wrongly, but you fixed it up and paid the right amount of tax, so that’s the end of the matter.” Under current law the business involved is subject to “unacceptable tax position” shortfall penalties.

Certainly the National members of the Finance and Expenditure Committee believe that that was totally unacceptable. Our tax system depends on taxpayers of all kinds being honest with the Inland Revenue Department. Our tax system requires voluntary compliance. Sure, the law is there, but the department cannot go around checking that everyone has complied with the law. It requires goodwill and an acceptance by taxpayers that they will comply with our law. Where taxpayers come along and say: “Look, I got this wrong.”, and pay the correct amount of tax by the due date, we should not be penalising them because they are being upfront and honest. It is really important that we do not penalise them when that is the case.

I congratulate the Minister on bringing in the Supplementary Order Paper to alleviate this problem, but I want to be sure that businesses can be satisfied that the problem is dealt with. As I read the Minister’s amendment, it looks to me like it is the new clause 180B in Supplementary Order Paper 19, which inserts new section 141KB, “Discretion to cancel some shortfall penalties”, that is the appropriate provision. As I read the Supplementary Order Paper, it gives the commissioner a lot of discretion about whether a business will be excused a shortfall penalty for having taken what is technically an unacceptable tax position.

What I would like the Minister to make clear for us is, if a business acknowledges its mistake and pays the correct amount of tax by due date, whether the Minister would no longer have discretion in that case and the business would be absolutely assured of no tax penalty. I will continue for just a moment while the Minister in the chair, the Hon Peter Dunne, consults his officials. What I am trying to get clear is that although there may be some circumstances in which I can understand reference to the discretion of the commissioner is often a sensible way to draft the law, I want to ensure that the Supplementary Order Paper delivers for a business that advises of the mistake, corrects the mistake, and pays the correct amount of tax by due date, and that it will not be subject to a discretionary decision that it should still be penalised. I want to ensure that this Supplementary Order Paper gives businesses absolute certainty that if they go through those steps and pay the correct amount of tax by due date, there is no discretion whereby they might still be penalised—that they have absolute certainty that they will not be penalised if they do those things. There may still be a necessity for the commissioner to have discretion around circumstances that are not as clear-cut as that, but I want to be absolutely certain about the Supplementary Order Paper provisions because the select committee has not had a chance to hear submissions on them.

I appreciate the Minister’s acknowledging that, and I appreciate his bringing in the Supplementary Order Paper, because we argued strongly with his officials about this matter. I acknowledge that the Minister’s colleague, Gordon Copeland, was very supportive of this effort. We argued strongly with the officials that we want this provision to deliver certainty to businesses that if they acknowledge the mistake, correct the mistake, and pay their due tax there will be no discretion about whether they are free of penalty—they will be free of penalty in those circumstances. If the Minister could confirm that absolutely for us I think it would give us a degree of comfort in relation to Supplementary Order Paper 19, which we have not been able to hear submissions on.

I have a remarkable sense of déjà vu about this particular debate this evening because the original penalties provisions were brought in in legislation that I introduced 10 years ago when I was last Minister of Revenue. At that stage, as the member quite rightly observes, there was a very strong emphasis on voluntary compliance and on getting our system geared towards one whereby individuals and businesses would self-declare their liabilities and accept the consequences when they got it wrong. What I think has happened very clearly over the intervening decade is that the system, by and large, has worked well, but there have been instances when good-faith errors—if there be such a thing—have occurred and people have ended up incurring significant penalties. In fact, 20 percent is the penalty rate, and that can accumulate into a massive sum very quickly. I think it was never intended originally that the law be interpreted in that way as broadly as perhaps it has been of late, whereby people who are essentially making a judgment in good faith get it wrong, then bear the penalty.

Bearing in mind the agitation and the representations from a variety of people, the amendments in Supplementary Order Paper 19 are designed to give the commissioner the flexibility to be taxpayer-friendly. When an unacceptable tax position has clearly occurred in an erroneous position, the commissioner has the power to waive the penalties and impositions that might otherwise have occurred. That also means, if I hear the member’s point correctly, that in exercising that discretion it is not envisaged that the commissioner would exercise it negatively—in other words, that he or she would look at a case and say: “Oh, hang on, you are not paying the 20 percent penalty at the moment. You ought to be.” There is not the intention that this provision be exercised in a way that is contrary to the interests of the taxpayer. It is to be taxpayer-friendly, bearing in mind the range of circumstances.

I have indicated that this is essentially an interim measure. I am keen to look at the wider range of application for penalties regime and see what changes we might want to make moving forward—bearing in mind that it is now 10 years old—and whether it is still working in exactly the way it was intended. I think that is a good principle to be establishing. Today’s proposals are essentially a short-term measure designed to deal with what is a very real problem. I think it is a constructive way through. I am simply giving notice that a wider review is to be undertaken around this point. Although I would not envisage that the outcome of that would in any way be contrary to the provisions I am proposing this evening, I do see tonight’s move as but the first step. I think the member’s points are addressed by the discretion given to the commissioner here in all cases. I would not envisage, and frankly would not expect to see, a situation where that discretion was exercised against the interests of the taxpayer.

I rise to speak on Part 3 and to talk about further progress towards improving the position of business in New Zealand. I specifically want to talk about the provisional tax alignment dates with GST. Nothing is surer than the fact that we need legislation like this to take our businesses forward. Although our OECD rate still puts us at No. 21 out of 30 countries, we need a raft of legislation like this to take us up that ladder and put us into the top half of the OECD, if not higher. There is no silver bullet that will take us up that list, so it is fantastic to see bills like Wayne Mapp’s Employment Relations (Probationary Employment) Amendment Bill coming in and having a major impact. Those members in this Parliament who have employed people in their life will know that legislation such as that enabling a probationary period will have a major impact for employers and employees in this country. It is interesting to quote one example. Recently I was at the Wattie’s factory in Hawke’s Bay. It is the fourth-largest Heinz factory in the country. People there made significant compliments about that legislation, and said that the company closed a factory in Australia because employment legislation over there had got out of control. So I compliment the Minister on bringing in this bill.

I particularly want to talk about the provisional tax period and the alignment with GST. I want to focus on clause 161 because I think it is important. The aim of that clause is to reduce the tax impediments for businesses, and to make changes to the way that provisional tax and GST are paid and the way that provisional tax is calculated. It is a major step forward for business in New Zealand.

Perhaps I can use an example. It is a pity that the former member for Tauranga is unable to be here tonight, because I want to use the example of a company that has a turnover of around $200,000. Under the current situation it would be looking to pay provisional tax in July of $22,000, in November of $22,000, and in March of $22,000, adding up to the $66,000 that would be required for provisional tax. That does not allow the company to account for any unexpected major changes that may have occurred throughout the income year. For instance, let us say the company was involved in a court case that happened late in the year, in January, and it incurred a $40,000 fine. That is an expense that a company would be unable to predict. It would have had to pay provisional tax on the basis of its estimated income throughout the year, without understanding how that $40,000 would impact on the business. Right now, being able to pay on the GST basis would allow the company to take in that additional cost later in the year and account for it, so that the company would be far better able to predict its income tax liability throughout the year. I think that is a good step forward, and it would certainly help the former member for Tauranga with his case that is before the courts.

The other important provisions in Part 3 are sections 185C and 185D, inserted by clause 189. Again, I compliment the Minister on the subsidy for payroll agents. That is a step forward for small business. Many small businesses struggle with the compliance costs around meeting the ongoing issues of employing people, paying PAYE, and dealing with accident compensation. I think that this is indeed a step forward, and I would like to compliment the Minister.

The question was put that the amendments set out on Supplementary Order Paper 19 in the name of the Hon Peter Dunne to Part 3 be agreed to.

Amendments agreed to.