Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill

I was enjoying speaking the last time the House was considering this bill—last night, as it happens. I was enjoying the opportunity to speak on this bill because I was happy to outline for the members opposite how this Government is working hard to ensure that research and development investment in our country is encouraged. Research and development investment in our country is being encouraged by this Government through a number of measures, most important of which is the over half a billion dollars of research and development grants over the next 4 years that we are putting into our economy to assist organisations and assist businesses to invest in research and development. This bill follows on from that.

If I can just point out to the House again, this bill has two very important measures regarding research and development encouragement. There are the research and development, effectively cash-out, tax credits that this bill covers, and also the ability for businesses, through the changes that we are making around what you would call black hole research and development expenditure, to benefit from that. We went over the detail on that last night. I will not talk much further about it, but those are important parts of this bill.

I also want to touch on the more general aspects around tax and this Government’s ability to say that we have created a fairer tax system for New Zealanders. The fairer tax system that we have in this country, which is backed up again by this bill, through the annual rates of taxation that this bill outlines, is seen in the fact that two-thirds of the value of the 2010 income tax cuts went into reducing the bottom two tax rates. Those who need assistance in life the most and those who are struggling to make ends meet do benefit more from the tax changes that were made in 2010 than many others.

Households earning less than $60,000 a year are generally expected to pay proportionally less net income tax today than 5 years ago. When you take into account the income support payments that households are receiving, households earning less than $60,000 a year are expected to pay no net income tax at all. The $2.7 billion of income tax they pay this year will be offset by $8.1 billion in income support that those households receive. Whenever members in this House say that we are not doing enough to assist those who are on the lower income thresholds, I can point to the fact that our tax system, highlighted and boosted by this bill, is fairer and is supporting those people.

Finally, I want to just touch on the child support reforms this bill talks about. The child support reforms are talked about by the Labour Party when it is complaining about the changes being made by the Inland Revenue Department and its computer system. The reason why the computer system is being changed with the Inland Revenue Department is that we have not actually made substantive changes to child support payments, and the system in place there, since 1991. I know members opposite sometimes struggle to understand the need for these changes, but when a system has not been amended or changed since 1991, naturally there are going to be technological changes that need to follow through with it. Yes, there have been difficulties with that system. Yes, there have been changes that the Inland Revenue Department has needed to make, but as we heard in the Finance and Expenditure Committee today, the Minister of Revenue has worked hard to try to get those costs down and find savings. This bill backs up some good stuff the Government is doing. I support it.

Kia ora, Mr Assistant Speaker. Ngā mihi nui ki a koutou. Kia ora. I rise to speak on the Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill. As members are no doubt aware, this is a very large bill that deals with things such as black hole investment, tax pooling, Working for Families tax credits, and a grace period for deregistered charities—a great deal of matters that deal with tax. Members in this House and people across the country know the importance that tax plays in our economy, both for the provision of essential services but also as an economic signal.

I want to touch on a point raised by the last member, Jami-Lee Ross. Jami-Lee Ross talked about the role of innovation, research, and science. What the member did not raise was how woefully inadequate we are when it comes to supporting innovation, research, science, and technology in New Zealand. We are in the bottom half of the developed world for the amount that New Zealanders spend on innovation, on the practical science. When it comes to patents, we patent four times less than the average developed nation. There is a limit to how we can grow our economy. When it comes to cramming cows on paddocks with grass, there is a limit. We are seeing it in our paddocks and streams. But there is no limit to the amount of technology, intellectual property, services, and entrepreneurs starting up new companies. There is no limit to the amount of services we could be exporting around the world via internet cables or by selling intellectual property. That is the future for New Zealand: true innovation. I congratulate Callaghan Innovation on some of the work we have seen when it comes to tax credits, but it is still a drop in the bucket and is not competitive with our international peers. I want to see a country that supports innovation, that is near the top, that is producing more patents, that is getting richer off the back of it, because, ultimately, what the Green Party stands for is a richer New Zealand.

At the Education and Science Committee today—I just want to tell a brief anecdote with regard to GNS Science, geological and nuclear sciences. This is a company that invests a great deal of taxpayers’ money in finding oil, but it also has a lot of geothermal energy expertise. This is an amazing growth area around the world. It is a true success story that New Zealand is exporting some of the geothermal tax credit, based on the innovation developed in Waiariki in New Zealand in the 1950s. But guess how many patents this Crown research entity achieved last year? Two. It achieved two patents. We can do much better as a country, as Crown research institutes and businesses if we have the right tax incentives. This is why one of the big debates within the sector is whether we should be doing the growth grants, as Minister Joyce splashes his largesse across the country, or whether we should be supporting research and development tax credits.

Tax credits, you could argue, are fairer. You could argue that it takes out the politicisation of people, or a particular group of people, appointed by a Minister who picks who the winners are. Again, another anecdote from the select committee today was heard from Callaghan Innovation. It had given more than $670,000 to Trans-Tasman Resources, a majority foreign - owned company with a former Prime Minister as a board member. It was given $670,000 from Callaghan Innovation to attempt to mine the ironsands in the habitats and feeding grounds of Māui’s dolphins and blue whales—$670,000 of taxpayers’ money for a company that could not even get a consent under National’s Environmental Protection Authority.

While we are talking about tax research and development matters, let us make sure we are looking to the future in terms of the global trends, in terms of clean energy, IT, innovation, and science. It is not about looking to the past, when we talk about mining or cramming more cows on paddocks. We will never compete with Uruguay or China to cram more cows on our paddocks and trash our environment faster. We will not compete with Australia to dig more holes. We can compete on our strengths, which are our knowledge, our education, our “niches”, as Sir Paul Callaghan said, and our innovation. This is our future—one based on innovation. The Green Party members are proud to have produced many positive, pragmatic policy solutions, and we will continue to champion that as we debate tax, research and development, and other matters. Kia ora.

I am pleased to rise on behalf of New Zealand First and on behalf of my colleague Fletcher Tabuteau to take a call in this first reading of the Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill. New Zealand First will be supporting this bill at least to the select committee in the first instance. Bills of this type are generally—or, at least, we hope they are generally—of a largely non-controversial nature. This is an omnibus bill, which makes amendments to no fewer than 10 other Acts, with the intention that the current tax settings are improved within, as the general policy statement says, “a broad-base, low rate framework.” This is a commendable intention and we wholeheartedly support it.

The general policy statement speaks of fairness, of evenness, of minimising biases, and of the crucial nature of these things, in terms of encouraging voluntary compliance, which is, of course, the basis of any successful, long-term, ongoing taxation regime. We do have some questions and a few concerns, in part regarding the sheer number of technical amendments and drafting clarifications contained in the bill—or, more to the point, the fact that so many appear to have been necessary in what is a large number of Acts affected by this proposed legislation. The taxpaying public in the business community have an expectation—I would contend, a right—to expect that tax policy should be very thoroughly thought through and that all the bugs should be ironed out before it becomes law, especially given that the penalties for non-compliance are frequently very severe. That so many fixes appear to have been identified and will be addressed is a good thing, in the sense that we will gain a better tax system out of it, but, at the same time, it is concerning for New Zealand First that there were so many to begin with.

I want to focus on a relatively small number of the areas in which we do have concerns, and these are things that we look forward to having examined in greater depth at the select committee. Amongst these is the review of the child support scheme reform to amend the Child Support Amendment Act 2013. There are a number of inconsistencies within this review that we believe are worthy of closer investigation. Section 38, which would have introduced mandatory automatic deductions of child support from employment income, will be repealed. When non-compliance is already high, we have to ask why this provision is being repealed. Section 38 would also have allowed discretion to recognise other payments, such as the payment of school fees, and the direct payment of costs associated with additional extracurricular activities, such as camps, sporting activities, and so forth, as a percentage of child support payments, where these payments directly benefit the child. This is also to be repealed, and New Zealand First believes that this is not only counter-intuitive but also counter-productive in terms of delivering better outcomes for children living in circumstances where they are, to a large degree, estranged from at least one parent.

A new definition of “adjustable net income”, which includes income adjustments to taxable income such as income in trusts and companies, has also been repealed. Again, we ask why. The Inland Revenue Department states that changes to the child support scheme reforms enacted in 2013, but not yet enforced, are being made to firstly increase priority of reducing child support debt and also to reduce the administrative cost of implementing the reforms. The June 2014 regulatory impact statement prepared by the Inland Revenue Department notes that there has been limited consultation on the options within its statement, given the timing restraints on decision making and the sensitivity of the decisions being considered. The Inland Revenue Department’s regulatory impact statement considers whether other options might be cheaper but also just as effective.

The question to be asked is whether these chosen components of reform will effectively contribute to a reduction in child support debt. That debt now exceeds $3 billion, and some three-quarters of that amount is in the form of penalties, which, of course, do not benefit children directly. New Zealand First acknowledges that the 1991 scheme was in many cases out of date and out of line with social expectations as they have evolved. This undermines some parents’ incentives to meet their child support obligations. The main change in the 2013 reforms was to shift the focus of the child support formula to the level of support that is required from each parent for each qualifying child. With a greater range of shared care, the income of all parents of the child, including legal step-parents, and the average cost of raising a child were all considered by the 2013 reforms. These changes were in the original new amendments, amendments that were meant to be implemented on 1 April. But, now, 10 days after this 153-page bill, including its commentary, were tabled in the House, and with the original amendment having gone through three readings and passed for changes, this new bill changes key aspects of the child support system. They are not small tweaks; these are big flip-flops. We ask why.

If this is, as has been suggested by more than one commentator with regard to section 38, to stop common law from being broken in the form of legalised theft through the mandatory induction of contributions from taxable income, does this mean that the law has been broken up until now? Has this issue simply been overlooked, at all these preceding stages of the Act, which is going to be amended? Or is it because it has been decided that it would be too difficult and expensive to ensure the right process is taken, so the Minister has simply chosen to throw it out instead? Finally, why, with such big reversals and changes in some aspects of how child support is paid, does it appear to have been hidden in this great behemoth of a bill? If there were good reasons, New Zealand First would have been happy enough to have been apprised of them earlier than this, and probably would have supported them.

Almost lastly, there is the matter of the cash-out of research and development tax losses. Research and development is recognised as a key element in the business growth and innovation process. High upfront costs associated with research and development mean that the profit cycle for research and development projects can be more heavily skewed towards early losses. This, of course, can be a significant barrier for innovative start-up companies, and current tax settings can create cash-flow problems for small and medium sized businesses. These small to medium sized enterprises cannot offset research and development costs against existing streams of income in the way that larger firms are able to do; they do not have the same buffer. Current tax settings can also penalise businesses that engage in research and development that ultimately turns out to be unsuccessful. Current tax provisions state that losses from unsuccessful research and development can only be used going forward if there is a subsequent profitable business.

The proposed changes focus on start-up companies engaging in intensive research and development. The changes intend to reduce these companies’ exposure to market failures and tax distortions. Clauses 192 and 213 deal with proposed eligibility requirements and the amount of the cash-out. New Zealand First will be interested in the select committee’s recommendations around the other clauses that deal with the administration and the reinstatement of losses.

Finally, there are the reporting requirements for employers in the agriculture, horticulture, and viticulture industries. Clause 224 repeals section 24O of the Tax Administration Act 1994, a section that created a great deal of red tape and trapped employers in the agriculture, horticulture, and viticulture industries with a requirement to provide the Inland Revenue Department with information about employees covered by an exemption certificate or a special tax rates certificate. This section imposed unreasonable costs on employers, and, indeed, unreasonable inconvenience for the Inland Revenue Department itself, and was not effective at identifying non-compliant employees. We have to question whether there was ever much to be gained, in the grand scheme of things, by attempting to identify what is essentially a very low-end problem anyway.

In closing, I reiterate that New Zealand First will be supporting this bill, at least to the select committee. We do have some concerns. We look forward to examining the bill in greater detail there. Thank you.

It is a pleasure to be standing here in support of the Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill. This is an important bill, as it is part of an ongoing reform of our taxation system, aimed at making our tax system fairer and simpler. Let us be clear: New Zealand has a tax system that is the envy of the world. It is simple to understand, it is simple to implement, it is transparent, and it is not subject to a whole lot of exemptions and complexity. That is why we do not want our Opposition in power, as it would want to introduce a whole range of additional taxes—and I spoke about this earlier. These would complicate our efficient tax system. The difference with this bill is that it is about reducing tax on our families in need. It is about reducing tax on income from work and net savings. It is about raising the effective tax rate on property development. Fourthly, it is about providing additional funding for the Inland Revenue Department to target property speculators and tax avoiders. And, fifthly, it has brought in stricter rules to ensure multinational companies contribute their fair tax in New Zealand.

I want to concentrate on some of the elements of this bill. Firstly, it is quite simply about ensuring that those in need pay less tax, effectively. I am proud to be part of the Government that—these changes now mean that, after taking into account support payments, households earning less than $60,000 a year pay no net tax at all. To put this in context, those with a family of three children and earning $48,000 a year, after taking into account Working for Families support, earn, effectively, $73,000 per annum. That is fantastic, and when I look at some of the families living in my electorate, this is an important contribution to improving the lifestyle and standards for those families—in particular, their children. This is a Government that has a heart, a soul, and a desire to improve the well-being of all New Zealanders.

Secondly, part of this bill is about creating the right environment to encourage companies to invest in research and development. This Government has been very focused on growing the economy even faster than we have achieved in recent times, and I have already noted earlier tonight that we have achieved above-normal growth rates in the last year and projected over the next few years. Our objective is for the Government to reach a stage where it is contributing 1 percent of all GDP into research and development funding by 2018, and we are well on the way to meeting that target.

We have got some wonderful examples in this country of where companies have benefited from Government support to achieve very successful results. Picking up on the talk of the Greens member, Gareth Hughes, one of those examples is LanzaTech, a company with world-leading technology to process flue gases generated from the emissions from steel-making. They are now involved in a major pilot plant in China. This was very successful technology that is now being applied worldwide.

Another example is PowerbyProxi, a great Auckland-based company that had its genesis out of Auckland University. It is now a leader in developing a range of exciting new technologies and intellectual property. Interestingly, it measures success in terms of the number of new patents it files, which is a great measure to adopt. Again, I note what the earlier speaker said—here is a company actually focused explicitly on achieving patents and seeing how they can be deployed successfully into commercial applications. Another example is Serko, recently listed on the New Zealand Exchange. Again, it benefited from research and development funding to fast track the development of a number of its products. A fourth example is the very successful Xero, which also benefited from technology development grants to continue, help it exist, and expand its export growth.

This bill goes further to support businesses that are prepared to commit to investing in new technology and intellectual property for the benefit of all New Zealanders. Specifically, the bill amends the Income Tax Act 2007 to do two things. First of all, it allows tax loss - making research and development companies—normally they are start-up companies—to cash-out their tax losses from research and development expenditure. The amount is initially capped at $500,000, but this Government is increasing that by $300,000, so that eventually the cap will be $2 million. Secondly, it is going to reduce the distortions that occur from what is called black hole research and development expenditure. The proposed amendments seek to allow that expenditure either to be capitalised over an equivalent depreciation period or, if the intangible asset is written off, to be written off at that point in time.

I would just like to note that research and development expenditure sometimes results in success, and sometimes not. That is part of the normal rules of research and development. These rules seek to balance those interests to ensure our entrepreneurs continue to want to invest in New Zealand and in developing new products and services. I hear some Opposition members claiming: “This is not fair. This is not appropriate.” The reality is that these shareholders assume substantial risk and provide significant cash to finance these research and development activities, and it is only appropriate that we do what we can as a Government to support such activities. In fact, those who have read the book Get Off the Grass by Professor Paul Callaghan and Shaun Hendy were unequivocal in recommending that the Government continue to foster investment in research and development. There is a symbiotic relationship between the private sector and the public sector when it comes to research and development.

We as a Government have an overwhelming need to continue to invest in public-good research and development, because out of that comes many ideas that have commercial application. As a country we must continue to invest in adding value to our important industries as well as creating new industries, as this is how we are going to create new jobs—higher-paying jobs that all New Zealanders desire and deserve.

The third thing I want to turn my mind to is the child support reforms. This Government is focused on reducing the size and growth of child support debt. Along with the changes in this bill, the reforms should ensure greater compliance and a reduction in the $3.2 billion of outstanding child support debt. The bill clarifies some of the debt write-off provisions. It inserts a wider definition around adjusted net income to take into account income from trusts and companies. It also allows for the ability to offset current payments against past debts, and it introduces discretion to recognise other payments, such as the payment of school fees, as qualifying child support payments. In essence, this is about looking after the interests of the child and making sure that both partners pay their fair share towards the upbringing of their children. This is essentially an issue of equity.

Changes in respect of controlled foreign companies and foreign investment funds are also very important, as they really set about reducing some of the deductions available to people calculating income from controlled foreign companies where they involve prepayments. This is consistent with the current treatment for New Zealand resident companies. The bill also makes some changes around the grouping of foreign controlled company rules. These changes are good business. They protect children. They encourage investment in research and development, and they tighten up the rules relating to foreign controlled companies. I commend this bill to the House.

The next call is a split call. Jan Logie, 5 minutes.

I rise to offer the Green Party’s support for this bill. The reasons for our support have been quite well traversed by my colleague Gareth Hughes in the first speech, and I will focus my contribution primarily on the aspects of this bill that deal with child support, which we do indeed have concerns with. Actually, these aspects, I think, demonstrate what I have already referred to today as this Government’s masquerade of competence. It was less than 2 years ago that this House passed legislation that was presented as a comprehensive review of the child support laws. Yet, here we are again, fixing up prior mistakes, and the cost overrun for the implementation of those reforms has been projected to be as much as $180 million. So if anyone is still holding on to the myth of National Party competence, I hope this bill, this aspect of this bill, puts that to rest.

The reforms passed less than 2 years ago are just now starting to bed in. I must say I am certainly getting quite a few emails expressing concerns about those changes, none of which are addressed in the provisions in this bill. This bill is entitled the Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill—so do not look at child support. It is nothing to do with that, the Government would suggest, whereas there are some very significant provisions in this bill that are fixing up prior mistakes and that hold very real, potential risks for the safety and well-being of New Zealanders. So we are currently supporting this bill, but we will be closely scrutinising its child support provisions at the select committee.

Some of the aspects of concern for us are that this bill replaces the compulsory automatic deduction of child support from wages for liable parents with voluntary wage deduction processes, although compulsory deductions will remain for parents in default and for beneficiaries. Our concern is that we believe that this is likely to result in increasing defaults and the possibility of coercion by the liable parent to agree to child support not being automatically deducted from wages. This bill also creates an opt-out option for parents if they both agree to treat payments as a private matter rather than a liability through the Inland Revenue Department. So it creates more of a negotiation, more of an opt-out, and makes it more optional.

I need to again remind this House of the context that this legislation sits within, which is the situation where one in five women in this country right now are either being physically or psychologically abused in their relationships. In 1996 a safety survey found that 70 percent of separated women have experienced some form of domestic violence. Seventy percent—seven, zero—of women had experienced some form of domestic violence. So to introduce the concept of optionality, of negotiation, into a context where domestic violence is so present is, frankly, dangerous. Only 20 percent of domestic violence is picked up by our police. You cannot have negotiation in a context of abuse. That cannot be stressed enough. So this bill potentially puts the livelihood and well-being of children at risk.

The bill also introduces further changes around ending formula assessments that will not be able to be undone as they are at the moment, because the Government has decided that so many things are being reversed that it has become too costly. So the Government is removing the right to change some of these decisions. Again, I remind this House that in the context of domestic violence it is possible that some of the initial decisions are going to be wrong and harmful for families. And to remove the right of people to get the decision changed is just deeply worrying. Again, I do have to point out that I am not exaggerating when I say that child support is used as a weapon against women and children in this country, and these changes potentially give abusers more ammunition.

Debate interrupted.