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

I am calling Dr David Clark—5 minutes.

It is a pleasure to rise and speak on the Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill. As we confirm the annual rates it is important to remember from the outset that the confirmation of tax rates includes the confirmation of the tax cuts that National brought in previously for the wealthiest New Zealanders. That tax package early on that brought 40 percent of the benefits to the wealthiest 10 percent of New Zealanders—over 40 percent, actually—and the bottom 20 percent of earners got just 2 percent, most of which was followed up immediately in a GST increase, which went against the Prime Minister’s promise. New Zealanders today are still paying as taxpayers, in terms of service cuts and so on, for those tax changes that the Government brought in. We are being asked here today to confirm those in the House. So it is with some reservation that we support this bill to the select committee.

We, on this side of the House, are a party that wants all New Zealanders to get ahead, not just the very few at the top. We note that median wages have been stubborn and that New Zealanders have not had real increases in their wages under this Government, only a few at the top. In fact, many are worse off. Many of those small businesses that struggle day to day, where people risk their shirts, have gone under, under this Government. There are fewer small businesses than there were under Labour. We also know that with the ACC overcharging, $350 million more of ACC burden is being borne by the business people of New Zealand than is strictly necessary. So we have reservations.

We also have reservations, of course, because this bill is seeking to implement a range of new tax changes that will require IT adjustments, and we know that the Inland Revenue Department has struggled consistently and over time to implement tax changes. In fact, there was of course a very embarrassing situation Mr McClay found himself in as a new Minister at Christmas 2013, announcing when he had hoped the press gallery had gone home to their Christmas turkey that there was going to be a postponement of the child support changes. That will have been long after many families made adjustments to their personal circumstances—took on extra debt, maybe celebrated the fact that they had slightly smaller payments to make and bought their children some Christmas presents or took on some laybys—and then they were told by Mr McClay that the Inland Revenue Department was not going to be able to implement the policy. Parliament was then forced to spend hundreds of thousands of dollars putting another bill through this House just to reverse out the changes for 1 year, to give the Inland Revenue Department time to try to implement the changes. So we have some reservations about the Inland Revenue Department’s ability to implement the changes in this bill.

In 2013, in fact, we had that change, but before that, in 2012—Valentine’s Day, in fact—John Key made a promise, perhaps in the romantic rush of the day. He promised to get on to fixing that computer system. In 2012 John Key said on Valentine’s Day that we cannot be held hostage to old technology and we cannot have the case where we cannot implement new policy. Well, 3 years on—the Valentine’s Days are flying by—and John Key has broken that promise, it seems. And just recently we have learnt of more IT cost blowouts at the Inland Revenue Department. The implementation of the child support legislation has gone from the $30 million initially budgeted to now $163 million to implement the child support changes.

This is a Government that is playing fast and loose with taxpayers’ cash. It is asking ordinary New Zealanders to tighten their belts. It is asking those small-business people to pay more ACC levies and to cope with more red tape, and all the while it is funding the tax cuts for the very wealthiest New Zealanders while middle New Zealand is slipping behind and struggling. We want this Government to focus on the issues that matter to ordinary New Zealanders, on jobs that could be created if it was not overcharging for ACC, and on making sure that it does fair deals, not the Novopay debacle and not the corporate welfare handouts to Skycity to preserve its bottom line, but to actually look after small businesses in New Zealand and ordinary New Zealanders and help them to get ahead and to get good jobs and decent wages.

It gives me great pleasure to speak on the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Bill. First of all, I would like to say that this bill is one that continues a theme—a theme of making it easier for small businesses to conduct their business. It allows a continuation of a theme whereby bureaucracy is removed so that people can get on and create employment amongst their communities and so that families can get on and aspire to better and more prosperous times ahead. As we have heard already, we have already created 80,000 new jobs in the last 12 months, and part of that is to do with the removing of bureaucracy as we have it.

In the Finance and Expenditure Committee today an example of that was given. The Inland Revenue Department has gone out and has been consulting with communities. It has got good feedback and new ideas of ways to further reduce bureaucracy. A simple example is the GST double click with a nil return, and you are done. The Rules Reduction Taskforce is out and about. That is focused more on compliance issues and red tape relating to councils. Again, the National Party is leading the way.

Grant Robertson suggested that this amendment bill is actually quite complicated and is adding further to the complication and to the compliance regime that is out there. I can tell him that it is not. It actually encourages research and development. It removes a bit of an impediment, if you like, for small businesses to conduct research and development. By way of research and development, this Government is investing $750 million in the Primary Growth Partnership, alongside industry. That research, that investment, into 20 projects relating to meat, wool, dairy, fishing, bees, forestry, viticulture, and horticulture is targeting an increase in GDP of between $5 billion and $10 billion. That is the sort of outcome we want to achieve from increased and improved research and development.

I will give you a little example of what this bill can achieve. The first part of this bill is about the cashing-out of research and development tax losses. That relates to, and supports, small businesses in the following way. In the current situation, you have got large businesses that are making revenue streams, and they go out and conduct some research. They can earn, say, $100 of taxable income, and then they decide to invest $100 in research and development. The current law says that their taxable income nets out and there is no tax to pay, no refund to receive. But if you can split those two $100 amounts into a positive, into two separate businesses, you will note that if it was only $100 revenue, that company would pay away $28 in tax. If, then, on the other side of the income statement there is a $100 loss, effectively that large business has been able to get that $28 back into the business, creating a nil taxable cash flow. That is what happens today with large businesses that are earning income streams.

For a small guy, it is not the case. He does not have any income streams. He has just got an idea. He has got a dream to be able to create something new, something that is going to earn him an income, something that he can create to export, sell off, whatever it might be. But, of course, that is going to be a negative cash flow for a day, a week, a month, or several years. He or she is going to get cash from their own pocket, and they will go to their family and friends, and then will go to the wider community. As an aside, this Government has now introduced peer-to-peer lending as a way of that person accessing the capital markets, and also crowd-funding legislation, which, again, gives that individual, that small-business man, access to capital markets. Then, of course, we have the secondary and primary stock exchanges in New Zealand.

So already the small-business man is better off under this Government because of the legislation we have passed that gives him access to that capital market, which is really important because we know that capital is a must, is essential, to growing our businesses, to growing our economy. That is why I find it really odd that the Opposition, or any party, would propose a capital gains tax. A capital gains tax does exactly the opposite. It discourages people from investing capital. The proposal from the Opposition only encourages people to buy Auckland houses, which is, of course, an exemption under its capital gains policy. So there is an inconsistency on the other side of the House, which sort of goes without saying. I mean, Labour is not sure whether it is supporting its candidate in Northland or Winston Peters. It is still quite confused, and I really do not believe that most of those people across the House support a capital gains tax. I really do not believe they can support a capital gains tax.

Let me get back to the small-business man, who is still at a disadvantage in the case where he takes $100 from his own pocket—

I am sorry to interrupt the honourable member, but the time has come for me to leave the Chair.

Sitting suspended from 6 p.m. to 7.30 p.m.

💬 ALASTAIR SCOTT: I was at the point of explaining the change in the deductibility, or the timing of the deductibility, relating to the cashing-out of research and development tax losses. I had explained the situation under the current legislation whereby large businesses are able to offset research and development costs against their income streams. I was beginning to explain the current situation with regard to small businesses. A small business is able to create a hell of a lot of losses in their research and development costs, taking cash from their own pockets, their families, and any other supporters that they have, but paying the full cost—that full $100 in my example earlier.

So a full $100 goes out of that developer’s pocket. In the current situation he can carry those losses forward from year to year to year, until such time that income is generated and he can use those losses against that taxable, or assessable, income to eventually, hopefully, and possibly, create a positive cash flow, a positive profit situation in the future. That is obviously a disadvantage compared with the larger business, which has positive cash flows from day one. So this legislation enables the investor or the researcher and developer to take those $100 losses in our example and collect that $28 as a rebate, as a tax credit. In other words, the investor is equalised and is in the same situation and is not penalised for being a small researcher and developer. He is in the same situation as a larger cash flow - positive business.

That is important because we need to make sure that we do have an even playing field, a fair system, and that size does not matter, so that the small business guys who have a great idea, who want to create an opportunity, and who want to get ahead are treated on the same basis as any large corporate that does have a positive cash-flow situation. Once we get those guys up and running, once we get those guys humming and creating revenue, or at least being able to break even, and perhaps even to sell that intellectual property or that patent that they have created, it obviously generates a taxable situation, so the Government can spend that money. It can spend that tax on targeted assistance where the investment matters.

This Government is focusing on that liability—the liability side of our balance sheet. We know where the costs are going to be coming from. We know that the sole parent support benefit is important, and we know that every sole mum or dad who comes off the benefit saves us hundreds and hundreds of thousands of dollars. In my electorate I am pleased to say that from December 2013 to December 2014 we have had a reduction of more than 10 percent in those numbers.

I am rising to speak in support of the Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill. First of all, I would just like to address a couple of the points made by previous speakers on the Government side. I think a couple of them actually need correcting. The first one is one of the members who held up LanzaTech as a great example of a New Zealand company that had received a whole lot of grants from the Government, and said was not this company and the technology it had created wonderful. Well, yes, it was a very good story, up to a point. That point, however, was crossed when it realised that there was not the business environment within this country that allowed it to stay here. LanzaTech is a great example of a New Zealand company that came up with a fantastic, innovative idea and then went to the United States of America. It has an American chief executive officer. Its head office is based in the United States and it is doing all its work out of America. The reason for that is because this Government did not create the sort of environment that allows these companies to stay here, employ Kiwis, earn export dollars, and thrive and grow into big companies. They felt as if they had to go to the United States. This is where the current business regime is wrong.

The thing about these research and development tax credits, which are a great idea—they have been Labour’s policy for the last two elections—is that perhaps if these had existed 6 years ago, then perhaps companies or organisations like LanzaTech would be able to stay in New Zealand. I do not know the exact reasons why it left, even though I have talked to some of the people who work there. It just did not feel as if New Zealand was supportive enough. This is the amazing thing. We often hear that National is the party of business, but when you look at the policies, it is actually Labour that creates the environment that allows businesses to thrive. I remember talking to one of my very good friends in business and he said to me: “I have got a real dilemma. I am a businessman. Mum and Dad were National, but my business always does better under Labour.” I think that is the feeling across a lot of the business sector because there is more money in the economy, there are a lot more incentives for business to grow, and we support them a lot more as opposed to being hands-off.

The research and development tax credit in this bill is not a bad idea. Anything that gives small businesses a chance has got to be good. But I suspect that when we come back for the second reading, Committee stage, and third reading, this bill will look quite different. The reason I say this—and let us not get caught up in the fact that this is about small businesses—is, first of all, that the business has got to be able to make a loss. So if they are making a loss after 5 years, it gets really expensive and they can claim only up to a maximum of $2 million after 5 years. How this bill defines “sufficient intensity of activity in R and D”—that is, the definition of whether a company is going to be allowed to claim this research and development tax back—is where a “… proportion of expenditure on labour that is engaged in R and D is used as a proxy to measure this intensity.” Well, good luck with that.

The reason I say that is we often hear that New Zealand has one of the lowest research and development spends in the OECD. In fact, Andrew Bayly talked before about how the Government has an aspiration of 1 percent of GDP spent on research and development. Goodness me! If that is aspirational, then heaven help us. It is generally accepted that to get the really high end of research and development spend, you need about 14 to 20 percent of your revenue spent on research and development. So 1 percent is about what Fonterra spends, and that is why we are a huge commodity economy based on exchange rates and international variables that we have no control over. If we really want to get to a highly specialised, non-commodity economy, then 1 percent spent on research and development? Goodness me!

Part of the problem at the moment is that for the vast majority of research and development, you have got to capitalise it so you cannot expense it. I suspect that if you actually went out to companies and said “OK, you can expense all your research and development no matter if you are big or small or whatever size.”, suddenly you would find that the research and development spend in this country would be significantly higher than it is at the moment. But what people do at this point in time is they do not call it research and development; they call it an operational expense, or “whatever it is” expense. I suspect that that might happen with this bill. As someone on the Finance and Expenditure Committee, I know that I and my colleagues will be looking very hard at this to make sure it cannot be gamed. The classic case is to say: “Oh well, we have got to have a portion of expenditure on labour that is engaged in research and development to be able to claim this back.”, and then to say to Joe, who is sweeping the floors, “That is a very innovative broom, mate. You are doing a lot of good work. You are engaged in research and development.”

The thing about a tax system is that it has got to have a high level of integrity. One of the speakers before talked about the fact that our tax system is very simple and it is fair. Well, that is true by and large, but if we put processes or taxes or tax rebates in place that are easily gamed, then that erodes the integrity of the tax system. However, one of the speakers—and I must admit we have got to be a little bit careful here, as he has a lot to gain—talked about the evils of a capital gains tax. Mr Scott has done very well, and we applaud that. We accept his success. But I suspect that if he had to sell some of his assets, he would be up for a mighty big capital gains tax bill. If he did it now, under National, he would be fine. I would not want to say there is a conflict of interest at all, but the thing about a capital gains tax is it makes the system fair. What it actually does—and I am just responding to a query that was put forward over here—is it says that if you are earning revenue, then you should pay tax on it. I think that is a fundamental principle of any tax system. Tax avoidance through not paying capital gains tax is really ripping off the whole country, and I do not think that is right at all, in any way, shape, or form.

The interesting thing is we hear from the Government benches that this bill is designed to help small companies reduce their tax compliance, etc. Well, the interesting fact is that people in one or two-person companies—so we are talking about the tradesman, the tradeswoman—are very good at what they do, and then they go out and employ one or two people to help the business grow. They are never going to be a Fletcher’s or a Carter Holt Harvey, but they serve the community well. These are the companies that are the backbone of our economy. They spend about 15 percent of revenue on tax compliance. I do not know whether they would say that the tax system is fair and simple. I suspect that they would argue that it could be a lot simpler and, perhaps, could be a lot fairer, but that is the nature of business. I think the great thing about Labour is that we signalled at the last election, and we will certainly take it into 2017, a much fairer tax system for all businesses but especially for small businesses. Spending 15 percent of your revenue on tax compliance, I think any member would agree, is simply too much of a burden.

The other thing about this bill is child support. I think everyone, every MP who has sat in an MP’s office and heard constituents, would agree that a simple, effective child support system that makes it easier for children is an absolute must. There is no doubt about this at all. But I will tell you that already, this last week, I have had two constituents whom I met with in my office say: “This is ridiculous. I’m a hell of a lot worse off. I don’t know how I’m going to cope.” I have no doubt at all that this bill will go through—we are supporting it—but the child support legislation will be back in this House again and again, because we have not got it right. We simply have not got it right. The thing that concerns me is that when we talked about child support there was an initial budget of $30 million. To you and me $30 million spent on a system sounds like a lot of money. But, no, then it went up to $130 million. You would think we were in the wrong game. It was $130 million for a system that is a tack-on to the current system. But, no, wait, there is more. Now they are talking about $200 million for child support.

One thing we do know is that at the moment in New Zealand about 25 percent of children live in poverty. That is not a Labour or a National measure; that is a measure put forward by the Children’s Commissioner. I suspect $200 million would have made a whole lot of children really happy. But, no, it is going to be spent on the child support system. It started at $30 million; it is now $200 million. How much further is this going to go? This has turned what was a reasonably simple process, but it needed tweaking, into quite a complicated one.

The last point I will make, Mr Deputy Speaker, before you tell me to stand down, is that I remember Peter Dunne saying, promising, in 2008 that he was going to revise the child support regime and it would be done in a year. I, as our revenue spokesperson, asked him about five times when it was coming. It is a little bit like déjà vu. I am back. I might as well not have taken 3 years off. We are still dealing with it now. I do not think that is fair to the mothers and the fathers of New Zealand, but especially to the children of New Zealand. Thank you very much.

It is a pleasure to speak on the Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill. Tax does matter. A good tax system is essential in a modern democracy. There are certainly tax systems in less-than-desirable political systems, but it really matters that we get a tax system that delivers to the Government enough money to provide the goods and services that it needs to enable it to support the people who cannot support themselves, whilst not putting an impediment on business and investment. A great example of good tax support is the income support payments that households receive. Those households that earn a combined income of less than $60,000 and get income support do not, effectively, pay tax, because of the support they get back. That is as it should be. People who cannot look after themselves or are in a position of disadvantage are benefited by income support. But from time to time tax systems need to be tweaked and brought up to speed, and that is what this bill does.

I want to focus on the research and development side of the bill. I think that is a fantastic initiative and something that we need, to ensure businesses grow. I am going to give a few examples this evening. Regional economies are what drive New Zealand’s economy, despite what many people might think. Certainly, 80 percent of New Zealand’s aquaculture and 80 percent of New Zealand’s wine production come from the Kaikōura electorate, my electorate.

💬 Simon O’Connor: How much?

It is 80 percent.

💬 Simon O’Connor: That’s huge.

It is massive. In addition to that, of course, we have very strong agricultural, forestry, fishing, manufacturing, and tourism industries, and a bit of aviation thrown in for good measure. But amongst some of those businesses—and I will go back to aquaculture. One person who is well known nowadays, whose name everyone should know if they drink a bottle wine now and again, is Peter Yealands. He started out in the aquaculture industry. He had an idea. He wanted to go mussel farming and he tried to design his own mussel floats. He started out with concrete floats—and concrete does float, if you do it right. But it was not all that successful, so he decided he would develop plastic mussel floats. It took a number of tries until he got an idea and a bit of a design in his mind. He developed this on his own and then bought the machinery to make the floats. If anyone has seen a mussel farm today, those floats were developed by Peter Yealands. But that took a lot of investment and it took time. He put all of that money in himself. There were a number of iterations before he got something that worked properly. But that is a big cost on a small business, and it was a small business.

My colleague Alastair Scott was talking before about the example of a small business that is not making any revenue but putting up a whole lot of costs to develop things. Peter, of course, has gone into the wine industry now, and it is a very innovative wine industry. Peter has now got the largest solar panel array in private hands on the roof of his winery. In addition to that, he has developed other innovative ways to generate energy. He bales up grapevine prunings into a round bale, puts them into a large circular boiler, and uses the heat gathered from that to heat the water and run his winery. That is another innovation that came from Peter. Again, that is a lot of innovation, driven by money and investment, by a relatively small company, although it is a lot bigger now.

The wine industry is a hotbed of innovation, as indeed a lot of agricultural industries are. In the wine industry, stripping the grapevines when they have been pruned—that is, taking all the canes out that are not required—is the most physically demanding job in the vineyard. What individuals have done is develop machines to do this, rather than having to do the work manually, and leaving all the skilled workers—as it was often the skilled ones who were doing the cuts—having to strip the grapevines out. So it is much more productive. It was Walter Langlois who designed a stripping machine with two counter-rotating car tyres. The machine is driven along, above the trellis, it strips all the vine trimmings out, and they go through a mulcher. So that was a good innovation. He developed that in his backyard, after having a small vineyard and deciding there had to be a better way. Once again, he invested the time and the energy, and had a number of trials before he got the right thing. But the KLIMA company has developed a far more sophisticated machine now, which does a fantastic job. It has developed it over a number of years, and now sells it in all the winegrowing regions around the world. It is a fantastic piece of machinery. It takes quite a bit to explain how it works, so I will not go into that tonight, but that is another great thing.

The pruning of grapevines, we might think, is something that will never be anything but manual work, but, in fact, there is quite a lot of work going on through—I think it is—Canterbury University’s engineering department in designing a robotic pruner. One of the big problems that it had in designing this pruner was getting a viable 3-D image of the grapevine so that it could make a decision as to which canes to cut, and the problem with it was shadow in the canopy. So the university has designed a shroud that goes over the trellis to keep the daylight out, and the 3-D cameras—[Interruption] Yes, I am pulling it in. This is all tax credits.

💬 Stuart Nash: I raise a point of order, Mr Speaker.

💬 Mr DEPUTY SPEAKER: I anticipate what the member’s point of order is. I have indicated to the speaker that he should—sit down, please—bring his contribution back to—[Interruption] Sit down—sit down. As interesting as it was and as entertaining as it was, and as much fun as it was to see other members get upset, the member must pull in his contribution to the provisions of the bill, please. Continue.

Well, a number of my colleagues enjoy a glass of wine and I rather thought that they might like to know what went into it. The point is that innovation is driven by people making an investment. That investment costs money, it costs time, and it is often the small businesses that are doing it, and that is why these tax credits are so important.

There are so many aspects of this bill that I could talk on, but I actually think that research and development is the most important part of it, and it is one thing that a National Government will support. We have heard a lot of talk this evening about a tax that we do not even have—a capital gains tax—so I thought that that was quite broad. But, Mr Deputy Speaker, can I broaden my argument out to why we should not have a capital gains tax. A capital gains tax would be all very well if it covered every aspect like the family home, but, of course, the people who are advocating for having a capital gains tax do not want that to be a part of the system. And why is that? Well, the simple taxes are the best, and a capital gains tax has a major problem. It is very lumpy. You gain the tax only when the property is being sold.

💬 Carmel Sepuloni: The biggest problem is it affects that Government and all of their mates. That’s the biggest problem with it.

Oh, well, if people are concerned about mates, I guess that would be why they do not want the family home involved. I think that is a good demonstration of why a good, simple tax system should not include a capital gains tax.

💬 Stuart Nash: It’s OK, all is forgiven—talk about wine again.

Yes, well, actually, I know quite a bit about CarbonScape, which is another industry in Marlborough that is still in the innovation stage, and that company has yet to make a dollar from selling anything. It has developed a system where, through microwave technology, it can make coke to go into high-grade steel-making. That company has spent a lot of time and money developing that technology without getting a dollar from income, but under the new innovations in this taxation bill, that company can get a rebate on that. That is fantastic for business.

💬 Brett Hudson: Pragmatic support.

It is pragmatic—absolutely. This is a Government that understands business, it understands the difficulties that businesses have to go through, and this company will have great products other than that. There is graphene, which is a very fascinating material. It is likely to be the new plastic. There will be wearable carbon film that is one atom thick, and that will be what will drive our new mobile phones and wearable technology. So that company has come a long way.

Thank you, Mr Deputy Speaker, for allowing me to inform the House on a number of matters. I am sure that people who enjoy a glass of wine will be in a much better situation to understand how it got there. Thank you. I commend the bill to the House.

Bill read a first time.

Bill referred to the Finance and Expenditure Committee.