Taxation (Annual Rates of Income Tax 2007-08) Bill, Taxation (Business Taxation and Remedial Matters) Bill, Taxation (KiwiSaver) Bill

I move, That the Taxation (Annual Rates of Income Tax 2007-08) Bill, the Taxation (Business Taxation and Remedial Matters) Bill, and the Taxation (KiwiSaver) Bill be now read a third time. The Taxation (Annual Rates of Income Tax 2007-08) Bill is the annual bill that sets out the income tax rates to apply, in this case, for the 2007-08 tax year.

The Taxation (Business Taxation and Remedial Matters) Bill introduces a wide range of important measures. It introduces the new 15 percent research and development tax credit—a measure that is intended to help raise the amount of private sector research and development in New Zealand. The bill also introduces amendments resulting from the recent reduction in the company tax rate to 30 percent. I should point out that both sets of changes are a direct result of the recent business tax review that was carried out as part of the confidence and supply agreement between United Future and Labour.

The bill also relaxes a whole range of tax penalties, such as that for taking an unacceptable tax position, so that those penalties now reflect the seriousness of the offence and distinguish between people who try to do the right thing and fail, and those who have no intention of doing the right thing. The idea behind these changes is to further promote voluntary compliance.

The bill also increases tax incentives for making donations to charitable organisations—again, a particular consequence of the confidence and supply agreement between United Future and Labour, and arising out of the discussion document on charitable tax changes that we issued last October. The changes include removing the current rebate thresholds on donations made by individuals, and removing the deduction limit on charitable donations made by companies and Māori authorities. So from 1 April next year all charitable donations will be tax deductible. That is a significant and dramatic step forward.

On the savings front, the bill allows policyholders in unit-linked life insurance products to access some of the benefits of the new portfolio investment entity rules. It also allows certain contributions to retirement schemes to be subject to withholding tax rather than income tax, which means that contributions to those schemes will not be taken into account for social assistance purposes. I might observe in passing that earlier I made a call for an objective of tax policy to be an alignment of personal, company, and trust tax rates at 30c in the dollar. The combination of the business tax changes and the changes related to the tax treatment of certain savings vehicles contained in this bill gets us just over halfway along that path.

The bill also allows for the introduction of data matching between the Inland Revenue Department and the New Zealand Customs Service. That change will enable the Inland Revenue Department to identify when people with outstanding child support debt enter and leave New Zealand, so that it can take steps to recover that debt before they leave the country. I acknowledge that that provision of the legislation received pretty much universal support from the House. There is no tolerance for those who shirk their child support responsibilities. The change that is contained here will make enforcement of the existing regime that much more effective, and it comes on top of changes that we made last year to introduce further incentives for people to meet their obligations.

Supplementary Order Paper 167, which was released yesterday, added two further important policy measures to the legislation. The first was the introduction of a new tax rebate for redundancy payments, to make the taxation of redundancy payments fairer for people who find themselves in a higher tax bracket as a result of receiving a lump-sum payment. The second change was to reintroduce legislation intended to shut down tax schemes relating to leases on overseas assets that result in a loss to the New Zealand revenue. The amendments had been introduced at an earlier stage, but were later withdrawn to allow the Government more time to consider transitional concerns that had been raised in submissions made to the Finance and Expenditure Committee. As a result, the proposals have been modified to allow a less disruptive transition to the new rules for parties that were involved in leases that existed before 20 June this year.

These are the main policy changes to which the bill gives effect. It also contains a number of remedial changes designed to ensure that the tax law is as effective as possible and always works as intended. Supplementary Order Paper 168, which was also released yesterday, takes amendments made by each of these bills to the Income Tax Act 2004 and inserts them into the Income Tax Act 2007, which was enacted while this legislation has been before Parliament. This lengthy process involved restructuring the legislation proposed in these bills, and using the new terminology developed as part of the overall process of rewriting the Income Tax Act, and it contributed to the substantial size of that particular Supplementary Order Paper.

The third bill is the Taxation (KiwiSaver) Bill, which gives effect to Budget announcements relating to employer contributions to KiwiSaver and to complying superannuation schemes. The main changes, of course, are the introduction of compulsory contributions on the part of employers to match their employees’ contributions, and the introduction of an employer tax credit to help offset the costs to employers. These changes are part of the package of KiwiSaver changes that were introduced in the Budget this year with the primary objective of increasing the incentives for people to save for their retirement. The fact that over 316,000 people have joined KiwiSaver in the first 5 months of its operation shows not only that this savings scheme is meeting a need but also that people do want to save for their retirement. It is particularly encouraging—and this was a point noted during the Committee stage debate—that many of these savers are younger New Zealanders who are being introduced to a savings habit that will, hopefully, stay with them for their life. That has to be good for the country in the long term.

It was also observed that the Government does run huge financial risks here. The biggest risk is the popularity of the scheme. The fact that after 5 months we have exceeded the year 1 target for uptake shows that most New Zealanders were ready for a scheme of this type, applauded its introduction, and are pleased to be part of it. This Government and successive Governments will have to cope with the consequences of the popularity and the vitality of KiwiSaver.

These three bills, which emerged from legislation that, until divided by the Committee, was one piece of legislation, have required a huge effort on the part of a number of people. I acknowledge, in no particular order, the contribution of members of the Finance and Expenditure Committee, who worked through this legislation over some months; the drafters; the policy officials in the Inland Revenue Department, Treasury, and my own office; and the people who made submissions. I acknowledge the members of this House who participated in the debates for their lengthy and complex consideration of this matter. Very detailed issues are contained in these bills, and I think that, as they arrive for their third readings, the legislation is in good shape. This marks another significant achievement in the process of tax reform in New Zealand. I want to record my thanks to all of those people for the contribution they made, at whatever stage, to make this legislation possible. Therefore, I commend these bills to the House.

This legislation that we read for a third time today reveals the full sham of this Labour Government’s new-found interest in personal income tax cuts. The Government members tell us now that Treasury has finally told them that the Government can afford personal income tax cuts. Well, this was the first test. This Taxation (Annual Rates of Income Tax 2007-08) Bill was the test. Labour could have reduced personal income tax rates. It was the first test. And what does Labour do? It fails, because it does not reduce the rates at all. We know why. The reason is that there is no election this year. There is no election this year, and this Labour Party is so dumb it thinks the people of New Zealand can be fooled into believing that Labour supports tax cuts when the only time it talks about them and promises them is in election years, and then it does not do it.

So, what have Government members done with this bill? What they have done is so extraordinary it would find a perfectly good place in a Monty Python show. They have suddenly decided: “Redundancy payments! We’ll reduce the tax on all redundancy payments by 6c!”. Has anyone had a chance to make any submissions on that policy? No. Has the policy been through the generic tax policy process, which is an important part of trying to make sure our tax legislation in this country makes sense? [Interruption] Paul Swain knows about it. The young Darren Hughes would not know anything about it, but Mr Swain knows about the generic tax policy process. It is an important process. Did this 6c rebate in redundancy payments go through that process? No.

Let me share just a couple of things that show what is so stupid about this provision. The Minister Peter Dunne has just said that the reason for it is that a redundancy payment can put a taxpayer into a higher tax bracket, and therefore that taxpayer pays more tax than he or she should on that redundancy payment. I have no problem with that argument. But the Minister should think about it a bit. Let me give him an example. Let us say for argument’s sake that a salary earner on $40,000 loses his or her job. This person has been in this job for a few years, so he or she gets a $40,000 redundancy payment. Under this legislation, this person will get a 6c rebate on that $40,000 redundancy payment. But I want the Minister to reflect on this. If this person genuinely was getting a reduction for the tax that the higher tax bracket would impose on him or her, he or she would not get a 6c rebate on all of that $40,000.

💬 Hon Paul Swain: Yes, they do.

Dr the Hon LOCKWOOD SMITH: No, that person would not. That person would not, if, in fact, he or she was being compensated for being taken into the higher tax bracket. You see, at $40,000 of salary, this person’s marginal rate is 33c. It does not change to 39c until he or she hits $60,000. So the first $20,000 of the redundancy package would be taxed at only 33c, and only the last $20,000 would face the 6c higher marginal rate. But by giving the full 6c rebate on the entire $40,000, on the bit from $40,000 to $60,000, this person is paying a 27c tax rate on that bit of income. Where is the logic in all of that? I see the Minister frowning. I can tell him that I am right. My figures are absolutely right. I am correct. Where is the logic in saying that the person getting this payment should pay only 27c on the bit between $40,000 and $60,000? Where is the logic in that?

What makes it more stupid is that the person we are talking about is, sadly, now put out of work and gets a redundancy payment—and of course we should be concerned about excessive tax on that payment—but what about the same person on the same salary who is injured at work, sadly so injured that the person will not be able to work again for the rest of his or her life? At least someone who gets redundancy has the chance to get another job. Someone who will not be able to work again for the rest of his or her life will get a lump-sum payment from the Accident Compensation Corporation, say for argument’s sake for the same amount of $40,000. But that poor person who perhaps can never work again gets the full tax—the full 39c—on their lump-sum compensation.

Why does Labour hate injured workers? Why does Labour hate so much these poor people who get put out of work and cannot work again because of a tragic injury that may not even be their fault but have to pay the full tax rate, and someone who is made redundant, whose prospects are nowhere near as serious because he or she can at least work again and get another job, gets this really special tax treatment whereby over a certain range of income the tax rate is below the tax rate that ordinary people earning that kind of money would pay? Had this policy been through the generic tax policy process, all these silly anomalies would have been sorted out.

What we see with this legislation we are debating in the third reading today is really a reversion back to the bad old days. When I came into this Parliament in 1984 we had ridiculous tax law. I think something like 70 pages of tax deductibilities were available to taxpayers in New Zealand. I give the Labour Government of those days some credit—the Labour Government post-1984—and Michael Cullen was part of that Government. It is a shame Michael Cullen has forgotten some of the good things he did back in those days. It is a shame he resiles from some of the good things Labour did in those days. Labour simplified the tax system. It accepted that the policy of a lower, broader base actually brings in more tax revenue. But what we see with this legislation now is that, today, this modern, Helen Clark - Cullen Labour Government is turning its back on that sound tax policy. What we get is a whole lot of adhockery, such as the 6c rebate on redundancy payments and the tax credits for working families or for all kinds of New Zealand families. This bill also changes the names of the various family tax credits.

What is so bizarre about this bill is that a family that Dr Cullen considers is so rich it should pay the top personal tax rate is on $60,000. Dr Cullen considers that someone on $60,000 is so well off he or she should pay the top personal tax rate.

💬 Hon Dr Michael Cullen: The top.

Dr the Hon LOCKWOOD SMITH: Michael is right—the top. But if they have five children then the Government considers that they are so poor they should pay no income tax. So on the one hand the Government is saying those people are so wealthy they should pay the top rate, yet on the other hand if they have five dependent children they are so poor they should pay no income tax at all. Those are the facts. If a family has an income of $60,000 and five dependent children, their net tax position is zero. So we can see this stupid adhockery. Why do we maintain these ridiculous high tax rates on ordinary working New Zealanders, then say: “Hang on! After we have collected all this tax, we have to give it all back to them.”?

That is not the only adhockery in this legislation. It now brings in the tax credits for research and development. What we will see with those—and we are already seeing it—is accountants up and down this country, working on how much of most businesses’ current expenditure can be brought in to qualify for the research and development tax credits. We know that Shane Jones, the Labour member and chair of the Finance and Expenditure Committee, asked officials whether there was any evidence at all from Australia that these tax credits work. The officials had to say that there is not. We have all these bits of adhockery that this legislation brings into our law.

The final one I want to mention is this: in the final stages of major tax law we had five Supplementary Order Papers—three major ones and two minor ones—just dumped on this Committee yesterday. That is not very good tax legislation. One of them brought in a new provision for cross-border operational leases whereby one-sixth of the depreciation write-off available for these leases will now no longer be available. What is objectionable about that is that the Government tried to sneak in a Supplementary Order Paper on that a while back. The select committee examined it, found that it would be unacceptably repressive on certain business deals done in New Zealand through its retrospectivity, and threw it out. But the Government then brought in this Supplementary Order Paper and dumped it on the Table yesterday.

The commercial interests involved now have to work through how they will actually live under this new provision. Time will tell whether serious litigation follows this measure. Again, it is ad hoc. Again, it has no rational basis behind it. That is the problem with this legislation. It ignores a rational reduction in tax rates for all New Zealanders and brings in a whole rash of ad hoc provisions. That is why National is opposed to the bill.

We have just heard from a member of the tax-cutting National Party. It is the party that has run for years that the only thing that matters in life—the only maiden’s dream that is worth having—is having a tax cut in one’s Christmas stocking, or somewhere or another. We heard from Lockwood Smith, first of all, that the tax cut for redundancy is too big and has to be opposed. It is not fair; it is too big.

Secondly, we heard that the Government is providing tax credits for families, so that people with five children will get, and are getting, a tax reduction compared with somebody with no children—somebody who shall remain nameless in this House. I gather from recent rulings that we are allowed to refer to childlessness now; but I will not mention the member in that regard. People with five children will pay less than somebody who does not have any children. The member may not know this, because his specialisation in life is dairy herds or something of that sort, but I tell Dr Lockwood Smith that bringing up children is expensive. He should try it some day. It is still not too late. It is still not too late, by the look of those photos we have seen of him. He could still be the father of some children, and he will find that they cost money.

In most countries—in almost every Western country that I know of—the tax system recognises the cost of raising children. That might be a rort to an accountant—though how I do not know—but to the rest of us it is regarded as some form of social justice and social equity. If the member wants to think about why we have a simple 6c in the dollar rebate on redundancy, he should think about the accountants he was just referring to. What he is proposing in terms of the marginal rate approach provides a huge opportunity for a tax rort. It means that after working 1 month somebody on, for example, $150,000 a year could collect that month’s salary, and the remaining 11 months’ salary as a redundancy payment, and be taxed at 15c in the dollar. The member has gone quiet now.

Then we come to the issue of the top tax rate, which for some reason obsesses the National Party. Of course, the level it cuts in at depends on what the rate is. When the National Government left office, the top tax rate was 33c and it cut in at 1.1 times the average wage. Actually, I am wrong in that; it cut in at below the average wage in 1999—$35,000, and the threshold was $38,000. Now it cuts in at well above the average wage, and it is slightly higher. Is it huge by international standards? The famous low tax rate country, Ireland, taxes at 40c in the dollar—and has no imputation credit for dividends—and it cuts in at 1.2 times the average wage. The National Party—I hate to tell members this, because they might not have learnt this—in living memory, has never ever cut the top tax rate when in Government. It has never ever, in living memory, cut the corporate tax rate when in Government. It has never ever, in living memory, cut the tax rate on savings when in Government. So where is that tax-cutting National Government?

What has this Government done? We have cut the tax rate on savings, and this legislation carries that forward somewhat further. We are cutting—and this legislation will carry out the completion of the process—the tax rate on business for the first time since the time of the last Labour Government in the 1980s. National did put up the top tax rate, and it was National that left the 66c in the dollar tax rate in 1981 that the member referred to. I tell Mr Foss that there is no point in apologising now; he was probably not even born then. But the fact is that it was a National Government that put up the top tax rate, and it never lowered it. So let us try to work out which Government actually delivers in these areas, and which Government just talks about it. National puffs up its chest in Opposition and says that it will cut taxes, but it gets into Government and puts them up.

What is the other feature of this legislation? We have heard practically nothing about this. This legislation has important considerations in respect of KiwiSaver. Have we heard anything about KiwiSaver from the Opposition in this debate? Those members do not want to talk about it. We have well over 300,000 people enrolled in KiwiSaver, and the number is growing by thousands every week—every week. The National Party does not want to say now what its position is on KiwiSaver.

💬 Hon Member: What is it?

Oh well, at some point it used to be that it was terrible, it was a rort, it was unfair, it was indecent, and it would do nothing. Now National is saying: “Oh my gosh, there is well over 300,000; it will be well over half a million by the time of the election. What is our position going to be on KiwiSaver?”.

Then we heard from Dr the Hon Lockwood Smith PhD and bar about research and development tax credits. He is opposed to them, but he did not hear his deputy leader’s speech in an earlier stage of this legislation, where Bill English gave them reasoned support. Why? I have to tell the member that life has moved on since the 1990s. The evidence is now very clear that limited tax credits do work—

Dr the Hon Lockwood Smith: Oh yeah—

Oh yes! And the reason for that is that the return to society from investment in research and development is not the 20 percent or so that is the return to the business; it is more like 90 to 100 percent. How come New Zealand firms—including Fonterra—have been doing research in Australia since Australia introduced research and development tax credits? And how come Australian businesses are looking to move research and development to New Zealand, now that we are talking about research and development tax credits within New Zealand?

The point is that we can be so pure that all we do is drink pure water, and wonder why people are enjoying champagne in other countries. Well, it is time for us to get just a little bit more intelligent about, firstly, how we support savings in this country. If anybody thinks we do not have a savings problem, that person should just go and look at the data, at the weakness of our capital markets, and at the price we pay for interest in this country compared with our competitors. We should look at the cost to business that that creates and realise that we have to act on this challenge. Cutting the top tax rate, compared with lifting the performance of our capital markets, is a matter of utter, utter insignificance.

When members opposite finally get around to the point of announcing what their tax policy will be, they will have to explain what will happen to those who are earning modest incomes. Will they receive anything? Will they follow Dr Lockwood Smith’s prescription today, which is to cut assistance to families in order to give money to people like Dr Lockwood Smith? He said that people on $60,000 a year with five kids—five children—should not receive any tax credits—

Dr the Hon Lockwood Smith: I didn’t say that, at all.

Oh yes, he did. He said that it was wrong; it was wrong that people on $60,000 a year with five children received tax credits in relation to the cost of raising those children. Well, we on this side of the House are very proud that with Working for Families we are helping a broad range of lower and middle income New Zealanders to meet the cost of raising a family. Nothing is more important than that in New Zealand.

We are proud that we are introducing a research and development tax credit that will help to lift our performance. We are proud that we have a KiwiSaver scheme that is already a stunning success, and that will lift the savings rate within New Zealand. We are proud that we are lowering the corporate tax rate, and in next year’s Budget we will announce personal tax cuts that will not go to all of National’s friends, but will go, in significant amount, to people on low and modest incomes, because it is about all Kiwis sharing in the economic success that this Government has created.

Unlike Mr Hide, who said in the Committee stage that people who earned more than $60,000 were the only people who worked hard in this country, we believe that all New Zealanders contribute to the success of this country—[Interruption] And at that they jeer. Well, if they want to jeer at that, they should go out door-knocking in the average Kiwi suburb and tell people that they do not contribute to New Zealand. We will follow and collect their names, because they will be voting Labour on election day.

Debate interrupted.