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

I move, That the Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill be now read a second time. This omnibus tax bill continues the Government’s work in supporting New Zealand’s businesses by delivering the initiatives and policy reforms necessary to create a more productive and competitive economy. At the same time, it continues the Government’s focus on maintaining the tax system over time so that it remains fit for purpose.

With these principles in mind, the first set of proposals are aimed at encouraging business innovation by removing some of the obstacles that the current tax rules can impose on small start-up businesses. Under the current rules, these businesses are often unable to use their tax losses in a timely way, or at all, because the tax rules require them to carry their tax losses forward to deduct against future income. This can be a barrier to undertaking research and development for innovative start-up companies, compared with large firms, which can usually offset losses against existing income streams.

The bill addresses the problem by proposing to allow eligible research and development start-up firms to claim up to 28 percent of their losses for eligible research and development expenditure in any given year. Twenty-eight percent reflects the current company tax rate, and the Finance and Expenditure Committee has recommended futureproofing these provisions so that any change to the company rate in the future automatically flows through to what can be claimed in research and development losses. This cash-out will be delivered in a form of a refund, and the losses cashed out will be capped at $500,000 for the first year, increasing by $300,000 over each of the next 5 years to $2 million. The proposed changes are intended to provide a temporary timing benefit only. When the business makes a return on its research and development it will be required to repay some or all of the amounts cashed out, by either income tax payed by the business or from any gains on a sale.

The second suite of research and development proposals is designed to relieve the problem known as black-hole expenditure, where some development expenditure is never able to be deducted for income tax purposes. To deal with this problem, the bill proposes to allow capitalised development expenditure to be either deducted over time as depreciation, or, if no depreciable intangible asset is created—including where research and development projects turn out to be unsuccessful—then taken as a one-off deduction upon a write-off for accounting purposes. These proposed changes to the tax rules for research and development will be welcome news for our innovative start-up firms.

A third set of changes proposed in the bill clarify the GST rules for New Zealand’s 13,800 bodies corporate. These proposals will give them assurance on their GST position by confirming that services provided are supplies for GST purposes, and give them the option to register for GST. There are also several special rules to protect the tax base from adverse consequences of giving bodies corporate this choice. It is important that in going forward with GST, bodies corporate are not able to shock the GST system when it comes to a period of time where they may have a larger deduction than an ongoing GST case would have where they are registered for a longer period.

The bill also includes measures to reduce the penalty burden on liable parents with child support debt. These measures are aimed at reducing long-term child support debt and encouraging liable parents in debt to better manage their child support repayments. The intention is to encourage liable parents to re-engage with their child support obligations and to strengthen the Inland Revenue Department’s ability to work with parents to regain control of their child support debt and enter repayments. Ultimately, it is about getting child support debt paid so that the money goes directly to the children who need it. This Budget 2015 initiative was referred to the select committee for consideration and now forms part of this bill.

I want to thank the Finance and Expenditure Committee for its measured consideration of the bill and for its recommendations to improve the workability and fairness of several positions. For these same reasons, I wish to advise that I intend to introduce a Supplementary Order Paper to the Committee of the whole House, which will contain a small number of technical amendments. The principal proposal will allow greater flexibility to more quickly align the tax exemption criteria for community housing entities with the Government’s HomeStart threshold. The remaining proposals in the Supplementary Order Paper will further refine and update certain measures already in the bill. I have great pleasure in commending the Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill to the House.

Labour will continue to support the bill, but I want to digress slightly—and I do this with a lot of good will for the Minister, Todd McClay—because it has been brought to my notice that there does appear to be a problem. He may wish to address this with his officials in another Supplementary Order Paper. In respect of bodies corporate, the bill includes reforms to GST and bodies corporate—that is, clauses 248 to 254. A large number of small businesses could face unfair, unjustified, and unexpected retrospective liabilities and potential penalties if the bill proceeds in its current form. I have to say that the Finance and Expenditure Committee was not informed of this. I am advised that no submissions on the point were made because the private sector was not aware of the issues. I am not trying to make a political point here tonight; I am trying to be of assistance.

The issue concerns GST on those small businesses that own premises in a building by way of a unit title interest in a body corporate. GST is based on the idea that it is a tax on consumers of goods and services, not the business that supplies them. It is also designed so that the GST is paid once, and once only, through the supply chain. That is self-evident. The problem has arisen where instead of the registered business directly incurring business expenses, those costs are incurred by a separate body corporate that is funded by the owner—that is, the business.

The Inland Revenue Department’s old view was that bodies corporate are just conduits for owners—that a body corporate in itself cannot register and claim GST input credits on expenses. The practice was that owners claimed the input credits themselves on the basis that they funded the body corporate through levies, so, ultimately, owners paid the bills incurred by that body corporate. The Inland Revenue Department’s view was that bodies corporate could not register for GST—that was its view because the body corporate was merely a conduit through which owners operated their businesses but was a firm of one, if you like. In some cases, the Inland Revenue Department actually forced, I am advised, registered bodies corporate to deregister.

In May 2013 the Inland Revenue Department changed its view of the GST law. Instead of being of the view that bodies corporate were unable to register for GST, it concluded that the law actually required them to be registered for GST. However, the Commissioner of Inland Revenue issued a statement saying that, in effect, the issue was being considered and, despite the law, unregistered bodies corporate and owners could carry on as before. That was a definitive statement—the Minister is nodding.

Then we go to June 2014. The Minister of Revenue, who has just spoken, announced the Government’s intention to change the law so as to disallow bodies corporate from registering for GST, and to deregister all existing registered bodies corporate as of that date. To deal with the issue the Government, in effect, proposed a look-through rule. The difficulty is that the Government announced that these rules would apply from the date of the press release—6 June. Then you fast-forward to February 2015. The Minister introduced the bill. However, instead of disallowing bodies corporate from registering for GST, the bill proposes that the registration be generally elective. Right? No look-through rule was provided. As I recall, the select committee looked at it and said: “OK, because it is elective, it seems to be more reasonable than forcing bodies corporate that want to be registered to deregister.” OK?

I am now advised that the Inland Revenue Department says it will apply its new view of the GST law, which is consistent with the clarification made in the latest bill. Importantly, it reverses the position for those who followed the Inland Revenue Department’s old view and the Minister’s 6 June 2014 statement relating to the conduit look-through rule. Unit holders are now disallowed GST input credits for legitimate business expenses incurred on behalf of owners by unregistered bodies corporate. The Inland Revenue Department has now, I am told, reached the view that all those businesses that followed the Inland Revenue Department’s old policy, the ministerial commitment, and the commissioner’s assurance, and kept their bodies corporate unregistered for GST but continued to claim input credits for legitimate business expenses on the basis that these were indirectly incurred for business purposes will be denied input credits. Instead of the expected GST refund, such businesses can be liable for GST.

I am advised that the Inland Revenue Department’s view also means that the Inland Revenue Department can, and should by law, go back 4 years and demand repayment of previous GST input credits of this nature claimed in the past. Essentially, what this means is that small businesses that have followed past Inland Revenue Department views, ministerial statements, and the commissioner’s statement face the prospect of additional GST bills going back 4 years, and the prospect of penalties. I say to the Minister that I think there is a simple solution to this, and I would invite him in a non-partisan way to check with his officials that the way through this is as proposed by him on 6 June—he had an effective date, which is re-instating, if you like, the look-through rule.

I have got some amendments and some proposals that could be of assistance to the Minister, but I say that this is simple: it is the look-through rule as proposed by him—he had an effective date—and perhaps looking at some amendments around this might be appropriate. I think it may well be an oversight. It may be that somebody has got it wrong somewhere, but I have got to say that ministerial commitments and the fact that the Commissioner of Inland Revenue said she was going to look at it but said they could effectively carry on, as I understand it, means that businesses have acted in good faith but could be up the river for substantial costs. So we will raise that in the Committee stage of the bill, and I am happy to liaise with the Minister in respect of possible solutions; there may be others.

I will say, on another issue, that this bill deals with a whole host of issues. It deals, of course—and we have had very little explanation—with child support issues. It deals with those issues but it fails to front up and tell explain the blowout in expenses in respect of this policy. The cost has blown out from what Peter Dunne, I think, said was a $30 million budget under his watch, to up to $120 million under his watch. It then bounced out to $210 million under the Minister’s watch, and we now have ratcheted it back to $163 million. However, we know that is only temporary because the other stages of this policy have yet to go through.

So in the Committee stage, as we go through, we would appreciate some sort of explanation as to why that occurred. I understand—and I have expressed my sympathy for the relatively new Minister in the portfolio; he is the guy with the shovel walking behind the elephant—that Mr Dunne is the longest-serving revenue Minister in any Commonwealth Parliament in the world. The issue is the fact that Mr Dunne freely admits in some of his quotes that he does not quite know why that cost blew out. He does not have the answers—and it is a bit like a hospital pass, as we say in rugby: pass the ball as the forwards come over to coathanger the new Minister, because he does not seem to know why it happened at all.

Without digressing, I note that the information and communications technology transformation project is supposed to be the basis for more efficient tax processing. It is supposed to help along the child support policy. Again, money is being spent like water. We had the Commissioner of Inland Revenue in and she said it is on budget, it is on target. I did ask her at the Finance and Expenditure Committee whether she was around when INCIS was being promoted. She is Irish, and I do not think she was in the this country—I think she was the revenue commissioner in Ireland—when INCIS, the integrated national crime information system, another great project promoted and managed by a National Government, blew out to, I think, $600 million. The infamous integrated national crime information police computer system was subsequently canned.

I am grateful that the Minister has indicated that he will look at clauses 248 to 254. I appreciate that. But I would also like some sort of explanation—and I think this House and the taxpayer deserves it—as to why that money has been used, why the money flows like water, and why there is the blow out on operational side of the child support policy, as well as some assurances as to cost control over the life of the Business Transformation project. I am happy to work the Minister on those clauses 248 to 254, and I look forward to the debate.

It gives me pleasure to speak on the Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill in its second reading. Just following on from the previous speaker, the Hon Clayton Cosgrove, we have Inland Revenue officials here, so I am sure that they will look into the matters that have been raised by the previous speaker. The issues around the corporate entities that he raised are quite complex, and I know that that member read the instructions he received very well, but there certainly will be a further degree of looking at it by the officials to make sure that those rules are actually what is intended and, therefore, achieve their purpose. With GST and bodies corporate, it is a difficult area, especially when it comes to property transactions and look-through companies—something that, of course, the Minister and the Inland Revenue Department will take a great interest in to make sure that they have it right. That was one of the three big issues in this bill.

One of them is that of GST and bodies corporate, which we have just touched on. Another one—the big one—is the research and development cash-out tax credits. Essentially, that was something that was mentioned in the Budget, as previously mentioned by the Minister. Basically, it enables a cash-out rate of 28 percent of losses from research and development expenditure in any given year, up to certain thresholds, with a $500,000 limit for the first year. That will increase by $300,000 over the next 5 years to $2 million. You can cash-out at a lower rate, of course, if that is the amount that has been spent. There are certain tests around that: around the loss by the company, its total expenditure, and also its labour costs as a proportion. It is to help start-up firms that are engaging in intensive research and development, and it is a mechanism by which they would be able to claim, through a cash-out tax credit, any losses that may have been justified under research and development in certain circumstances.

The second area that was looked at was in regard to GST in bodies corporate—that was just to address some of the uncertainty in the rules around bodies corporate. The previous speaker has raised another issue that he feels has a further degree of uncertainty, and we will certainly be looking at that to make sure that that does not actually eventuate in the manner in which that speaker has said. This bill would look at resolving some of the problems around property transfers in this area. It can be a difficult area with bodies corporate and the nature of the different transactions, so there would always be an element of ongoing legislation to make sure that the legislation keeps up with the market progress in this area as well. It is just that bodies corporate are primarily tax neutral for GST purposes, so it is not really a question of whether they are registered or not. So the proposed amendments look at the tax base in that area.

The third area is the child support reforms. The last speaker mentioned that as well, in regard to the system issues around creating the new computer system, which is part of the Business Transformation project, and also some of the costs that may be involved. That is a huge project for New Zealand and for the Inland Revenue Department, and so it is important that we get it right. I think we need to congratulate the Minister on the way that he has had a very open process with the select committee so that the Opposition parties are well aware of how that project is going. There are the child support reforms—again, mentioned in the Budget—and the large intent of those is to try to make sure that the New Zealand taxpayer recovers the child support payments that are due. We are trying to simplify the administration of the scheme to try to reduce the debt that may be held, and reduce some of the administration and compliance costs involved.

Those are the three big areas of the bill. There are other subsidiary areas of the bill as well, which cover off some more technical tax matters. We look forward to this bill progressing through the House. I think most parties will be in support of it, but we will certainly look into the issues raised by the previous member to make sure that they are also covered by the legislation. Thank you.

As Mr Bennett has outlined, there are a number of things in this bill—some are important, some are not, some are slightly contentious; mostly we got through without any major debates at all. The main one I suppose is the cash-out of research and development tax losses, which every speaker has spoken about—

The ASSISTANT SPEAKER (Lindsay Tisch): I am sorry to interrupt the honourable member. The time has come for me to leave the Chair for the dinner break.

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

Kia ora mai tātou, tēnā tātou katoa. When the House broke for the dinner break, we were debating the Taxation (Annual Rates for 2015/16, Research and Development, and Remedial Matters) Bill. Stuart Nash was speaking and he has 9 minutes and 40 squandered seconds remaining.

I am happy to follow Mr Nash’s very long contribution on this bill. It was a well-thought-out contribution, and I am sure it will go down in parliamentary history as one of the better speeches that he has given in this House.

We are discussing the Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill. There are some very good proposals in here that will enable companies to gain greater access to funds to enable them to conduct greater research and development, and that is something that I think this Government feels quite passionately about. Ensuring that we get greater research out of our companies will mean that we can continue to be a country of innovation, a country that sees great opportunities on the horizon, and it will enable our businesses and our individuals in this country to tackle them head-on and do very well in doing so. I am sure during this debate we will hear much more about it.

But I just want to talk a little bit about one of the clauses in this bill. It is clause 65. It is actually the annual rates of income tax for 2015-16. Often when we talk about the annual rates bills, we do not always talk about the actual annual rates, because they are usually just glossed over a little bit. But I think it is important to put on the record again in this House that this is a Government that believes in leaving money in people’s pockets, because we believe they are best to do with their money as they see fit. We are not the big-tax Government like Labour used to be. We are not the Government that would have seen huge spending increases based on the 2008 Budget that the Labour Government put in place. We are the Government that has got Government spending under control. We are the Government that has posted a surplus for the first time in many years. Despite the fact that the global financial crisis has hit the country, despite the fact that the world has seen difficulties, we have been able to steer this country through some difficult economic times, and New Zealanders appreciate that.

The annual tax rates that we see in this bill go towards funding Government expenditure, so it is quite appropriate that we discuss this in this bill. The annual rates that we see through this bill go towards, for example, the extra funding for those in hardship through the $25-a-week extra payment through the two welfare benefits. The extra funding we see coming through in this tax bill goes towards extra funding for education. The extra—the half a billion dollars, actually, that was put into extra early childhood education funding. The extra funding that we are putting into the health system—that is going towards, for example, the programmes announced this week for tackling obesity. We are a Government—

💬 Tracey Martin: You cut the funding. You cut the funding in 2009.

—that is getting on with the job. We are a Government that is delivering good economic policies for New Zealand. And I know those members do not like to hear it, because they are interjecting on me, but—

💬 Mr DEPUTY SPEAKER: So back to the bill.

—every dollar collected through the tax rates that clause 65 in this bill talks about goes towards good quality Government spending, and I am happy to support that.

The Green Party is supporting the Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill. I will speak to the part that we are particularly excited about, because it really does pick up a key plank of Green Party policy and reverses what has been the Government’s policy up until now.

When the Government first came into office it cancelled the tax credits for research and development that had been instituted by the previous Government, even though there was every sign that they were working quite well. In New Zealand we have a lot of research that says we are under-invested in research and development. Our companies tend not to spend as much money on research and development as companies do in other comparable countries that we would aspire to be more like, and that is one of the things that is holding back our economic prosperity, if you will, in the world.

There is a great book, actually, which I highly recommend to anyone watching this speech tonight, called Get Off the Grass. It was co-authored by Sir Paul Callaghan and Shaun Hendy, who is a professor at the University of Auckland, and it is all about how to kick-start New Zealand’s innovation economy. It starts out by identifying a number of myths about what it is that creates the conditions for sustainable economic prosperity. In New Zealand we have a lot of myths that are perpetuated by the current Government—that New Zealand is terribly overburdened and overtaxed and we have got too much regulatory burden, and that what we really need to do is cut regulations and cut taxes and then we are going to get richer. But if we look at the comparable countries in the world that have higher incomes per capita than New Zealand, they actually do not have lower tax rates and they do not have a less regulatory regime. It is not easier to start up businesses in those countries.

We have one of the most liberalised economies in the world, and yet we have still lagged behind on incomes per capita. The question is, why is that? Is it possible that those myths around the barriers to New Zealand’s economic prosperity are actually wrong, and that what we do need to do is build on our competitive advantage, which is our “clean, green” brand? Although the current Government thinks that we have to choose between the economy and the environment, the truth is that we cannot choose between those two. We cannot get richer by mining, polluting, and using up more of our natural resources. In the long term, we will be poorer for doing that. The Green Party has an evidence-based economic strategy that builds on protecting our natural resources and protecting our environment, not only because it is going to be good for us in the medium and long term and because it is going to mean New Zealanders can live better lives but also just because we do love our environment and we know most New Zealanders love our environment.

What is the evidence base? The evidence base—and I am going to cite Sir Paul Callaghan and Shaun Hendy on this—is that we need to create the conditions for more innovation in New Zealand, and one of the most simple ways to do that is through having something like a research and development tax credit. But when this Government came in it cancelled the research and development tax credits, and then it set up Callaghan Innovation to try to direct money to incentivise research and development. But the problem is that with the way Callaghan Innovation is working, it is not the most simple system. It does not reward all businesses equally for investing in research and development. It has a huge bureaucratic burden, which makes it easier for the big players to apply for and get grants but makes it very, very difficult for small companies and start-ups to get the benefit of investing in research and development, because they have to have this incredible infrastructure in place to be able to apply.

Of course, there is another problem, which is that Callaghan Innovation has been a little bit—I would say—politically influenced, or at least that has been the criticism from a lot of researchers working here in New Zealand. For example, a Crown research institute GNS Science applied for a grant to—sorry, it was through Trans-Tasman Resources, which is a majority foreign-owned company with a former Prime Minister as a board member. It received a big grant from Callaghan Innovation to attempt to mine the ironsands in the habitats and feeding grounds of Māui’s dolphins and blue whales. So not only are we not using Callaghan Innovation to pick winners that might have some positive externalities; it seems that the current Government is using Callaghan Innovation to pick winners that do the exact opposite, which is to increase environmental degradation and, basically, incentivise an extractive approach. We should know, from looking at comparable countries overseas, that taking an extractive approach can never build long-term prosperity.

But if we take another country that is very similar to New Zealand in size, Denmark—it is, admittedly, located in the centre of Europe, but it has a similar-sized population. Similarly to us, it had an economy that was almost entirely reliant on simple commodity exports—primarily agriculture. What Denmark did over a period of a couple of decades was apply a whole set of policies that incentivised local value-added economic development. Denmark now has much higher incomes per capita than New Zealand. It is also reducing its greenhouse gas emissions, and it also has much lower levels of child poverty than New Zealand. It is able to do all of this. When you look at a graph of its exports it is really fascinating, because you can see that agriculture remains a very large portion of its exports. The overall size and value of its agricultural exports have not changed much over that period. They have slightly declined, but Denmark has added all of these value-added sectors: high-value IT, clothing manufacturing, pharmaceuticals—a whole lot of other layers on top of agriculture, and Denmark has almost doubled its exports and its GDP.

When the Green Party says we cannot have an economic strategy that relies on doubling our production of dairy because our environment is simply not going to cope with that, and also it is not going to make us better off—the profitability is not going to increase at the same rate; you get diminishing marginal returns—we are not saying that we should abandon agriculture completely. We are saying we can add all of these other areas, and in order to do that we need to have a comprehensive policy.

Right before the last election the Green Party announced a suite of policies that were aimed at incentivising a transition to a clean, green economy, one that is going to enable all New Zealanders to be better off and enable us to reduce our carbon pollution and reduce our greenhouse gas emissions, which is going to be a winning economic strategy in the long term—and a winning survival strategy, which is also good. One of the planks of that suite was a huge research and development package that included tax credits for research and development such as are contained in this bill.

Also, it is incredibly important not only to provide the carrot but also to ensure that the ground rules are in place, because regulations are one of the biggest drivers of innovation. Our climate tax cut, for example, would put a price on carbon pollution at a manageable level. We would be indicating that there would be an independent climate commission that would be overseeing setting the price in future years, but businesses would have the clear price signal that they need to invest for the long term in clean, green, low-carbon technology. By putting that price on carbon we are sending a signal to the market. Yes, it might be true that it costs some jobs in highly polluting industries, but what the Government never talks about is that that incentive—that regulation, that price signal—actually creates jobs in clean, green industries, and that is exactly what we want here in New Zealand.

So you have got the carrot, if you will—the research and development tax credits; the direct investment in research and development; setting up a green investment bank, which would be a low-cost way of setting up a fully commercial bank that would specialise and have expertise in clean tech, which would facilitate private sector investments in those areas—and then you have got the carbon price, which is not kept by the Government but actually recycled back to households and businesses in the form of a tax cut from the bottom, so that all people benefit equally from it. That is the kind of evidence-based, practical policy that the Green Party is proposing so that we can have a long-term, sustainable future for all New Zealanders.

We are happy to see that the Government has picked up one small part of that in this bill, and that is why we will be supporting it. We look forward to it picking up more of our policy in the future.

I would just like to take this opportunity to start off by pointing out the irony of Mr Ross’ statement in his contribution earlier. He talked about the necessity of enabling businesses through tax breaks, despite the very fact that only several weeks ago it was this National Government that cut funding to one of our biggest research institutions in New Zealand and was told by those very people that it will compromise the outcomes for research in this country for the next couple of decades. So the irony is not lost on most New Zealanders. The Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill is a large and unwieldy piece of legislation that needs much consideration and certainly more discussion than we have the time available for today. So I would like to note that New Zealand First stands in support of this bill, but would take this earnest opportunity to highlight some of the concerns we have around it.

New Zealand First has said repeatedly that these types of bills used to be uncontroversial. They were remedial. They were fixing up small mistakes, and we acknowledge on this side of the House that that happens and you do need to take the opportunity to fix them up. But what we are seeing here now—and, case in point, evidenced in the very House tonight, and I acknowledge the Hon Mr Cosgrove and his contribution earlier—is that there are mistakes being made. There are mistakes in this legislation, and, more to our point, there are a whole lot of unintended consequences of getting the wording slightly wrong, or putting it in the wrong place, or referencing the wrong paragraph or even other pieces of legislation. So this is not what it used to be in that we used to say it was uncontroversial. Actually, this is quite a big issue, and this House needs to get it right. More important, the National Government needs to come much better prepared.

Just speaking to that, one of the submissions to the Finance and Expenditure Committee was the suggestion that this Government provide drafting of these changes to the public prior to this stage of the process. What submitters were saying—and we are talking about the likes of KPMG and Ernst and Young—was that, actually, this is so complex and so broad in nature that to ask our accounting experts and tax experts to consult in the time frame provided was an arduous and perhaps even unrealistic expectation. They want to contribute. They want to be able to highlight the issues to the Government so that as we move forward—and this is essential for tax legislation—it is not complex and it is transparent and it is fair and it is not contradictory. That is what they were asking for, and New Zealand First says: “What a great idea. Let us focus on opportunities like this.” I encourage the Minister of Revenue to take this advice from submitters on board.

With regard to Supplementary Order Paper 77, which was attached to this bill with regard to child support payment, New Zealand First supports the intent of extending the powers of the Commissioner to write off certain penalties. There is a lot of debate that I believe still needs to go into that and that New Zealand First believes needs to go into that, but at this stage we also support allowing the Commissioner to write off certain penalties if it is fair and reasonable to do so. That came through in the submissions also: what is it that is fair and what is it that is reasonable? Providing a purview—even “Here is a list; here is what is not in it.”—that kind of thing is a practical solution moving forward.

Of concern is what the Minister of Revenue mentioned in his opening address to the House. He said this legislation allows for those who have not been paying their child support payments to come forward and work out a solution and try to make it work. To a great extent we agree with the Minister, but it does not actually address the issue. It is an ambulance at the bottom of the cliff, as it were, but having dealt with several cases, and being able to talk to the Minister about those cases, I acknowledge that he and this Government are genuine in trying to find solutions for child support payment problems. It is big; 7 percent of the total debt owed, for example, is in penalties alone, so a strategy needs to come about, but this bill is certainly not the solution to that.

Deloitte highlighted that the policy intent around research and development is a positive one when it comes to the intent of the bill, but, as noted during select committee hearings, it restricts high-growth companies, it restricts start-ups, and it restricts those companies doing business offshore. The eligibility criteria with regard to these exemptions have been questioned by several submitters, so New Zealand First would say and impress upon the National Government that what we would like to see from these research and development tax exemptions is the actual encouragement of research and development for good Kiwi business. So we say around the issues at the moment, especially around small start-ups, that there are solutions presented in this legislation, but it needs to go further and we need some clarity because the more we can do to encourage research and development with our small businesses, the better it is for the New Zealand economy. The more they can do that—come up with the great ideas that Kiwis are renowned for around the world—and take them around the world, the better it is for our New Zealand economy.

The other issue that we would raise, alongside submitters, is the level of guidance, and I mentioned that briefly just a moment ago, or the commentary necessary for businesses to use in order to report and claim that tax break on research and development. I picked on the wage intensity percentage issue. The process for the percentage to be apportioned is confused, and New Zealand First would add that the calculations for start-ups should be made at the market value. Research and development tax credits are supposed to be incentivising research and development. I got from the Minister of Revenue’s address earlier today that his approach was one about administration, but this is a real opportunity and the whole key point, I would like to think, of this part of the legislation is around actually incentivising research and development to ensure it becomes part of New Zealand business culture.

I just want to conclude by saying that tax should not be complex; rather, it should be as simple as possible and transparent so that New Zealand businesses can comply as easily as possible. This would, ideally, include specific compliance and non-compliance examples. Again, businesses are more likely to comply if they know what the rules are. That part of the issue is not addressed in the legislation. So it is just a suggestion to this Government that if it wants compliance and it wants people taking advantage of this, then there are some practical solutions that could be included in the implementation. I will have to conclude my contribution for this evening. Thank you.

It is a pleasure to be talking on the second reading of the Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill. Before I start talking about the bill, I just want to acknowledge some of the wonderful contributions to this debate tonight. I am particularly impressed with my colleague Mr Jami-Lee Ross, who, like a laser, took us to clause 65, which, of course, is an exceptionally important clause of the bill, and also the very pithy and succinct contribution from Mr Stuart Nash, which I thought was valuable.

In terms of this bill, obviously it is a continuation of the Budget and it really covers four parts. The first part is about encouraging innovation in the New Zealand economy. Of course, this Government has a very ambitious target to see our research and development spend in New Zealand increase significantly, not only through what the Government itself spends but also through what the private sector is contributing. So the first part is really about dealing with those entities that undertake research and development but, under current tax laws, they can only carry forward their tax losses relating to those research and development activities.

For large firms that obviously does not matter because they have got other research and development activities they can write expenditure off against, but this is a real barrier to our small to medium sized enterprises and the importance that they have in the New Zealand economy. So what this bill does is allows those firms to access those tax losses at 28 percent, i.e., the current tax rate, and, of course, there is an increasing scale—the first year $500,000 and by year 5 they will be able to draw down or claim a maximum of $2 million a year. I think that is a very valuable cash-out clause. Of course, if those entities do make a subsequent profit they will have to remit those tax losses against those future profits.

The second thing this deals with in terms of research and development is the issue of black-hole expenditure. For those who do not understand the concept, that is where expenditure cannot be deducted—i.e., it must be capitalised on the profit and loss statement or through the balance sheet. So this bill introduces two provisions. First of all, it allows this capitalised development expenditure either to be depreciated, which previously it could not be, or to be taken as a one-off write-off. And, again, this is good stuff for New Zealand and good stuff for New Zealand businesses in terms of promoting research and development.

The fourth issue this bill deals with is the issue around bodies corporate. This is a Government that has listened to submissions on this issue. Of course, bodies corporate at the moment, unless they are registered for some purpose for GST, cannot actually claim back their GST. So this bill makes it explicit, first of all, that the services it provides as a body corporate are deemed to be services and therefore are rateable for GST, and, secondly, if the body corporate wants to register as a GST entity then, of course, it can then take the wins from both the GST that they receive and pay.

Finally, this bill deals with penalties relating to the liabilities around child support. As many people know, there is a significant liability that is built up—roughly about $3 billion. As the previous speaker, Mr Fletcher Tabuteau, acknowledged, about 77 percent of that is encompassing penalties. What this bill is about—and this is the bit I really like about this bill—is that it is enabling the Inland Revenue Department to take a much more pragmatic approach so we can actually address this issue. We want parents who are not paying their child support to be involved in paying, and it is good for families. So I look forward to supporting this bill and working our way through it. I commend the bill. Thank you very much.

I call Jan Logie—a 5-minute call.

I rise to take a call on this, the Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill, which deals substantially with child support—although you certainly would not know it from the title. The Green Party is supporting this bill for many of the reasons that have been outlined by my colleague Julie Anne Genter in her previous contribution, so I would like to restrict my contribution to talking about child support and, possibly, a couple of other points if I have time and do not talk too much.

When we look at the number of changes to the child support system in this bill, I think that it is important to realise that only 2 years ago this Parliament considered legislation for the amendment of child support. That piece of legislation went to the Social Services Committee, and there was a very, very thorough consideration of child support issues. Yet here we are about 2 years later with quite significant amendments before we have even had the opportunity to see those changes truly bed in. It needs to be restated that while that legislation was being considered, the Opposition did raise concerns about the ability of the Inland Revenue Department to deliver a very complex formula and the system that may be required to implement that, and, as a result of that legislation passing, we have seen the overrun for the implementation of that new formula being estimated to cost $180 million. That is the overrun for that project—around $180 million. We are seeing significant amendments coming back to this House less than 2 years later.

To some of the substance of those amendments that are being put in front of us—they are extending the requirement for the Commissioner of the Inland Revenue Department to write off certain penalties, and they are providing also for an opt-out option for parents if they both agree to treat payments as a private matter rather than as a liability through the Inland Revenue Department. I would like to speak about each of those points separately, and I notice that in the submissions to the select committee—although I did not sit on it—there were no submissions from the social sector, from people who, on a social level, may be dealing with families that are experiencing a break up and are needing to use this child support system.

I thought there was a useful contribution from Baucher Consulting, which has quite a few clients who are using that system. It noted that the outstanding debts around child support were $3.2 billion as of December 2014, which is a phenomenal amount of money. I think that we would have benefited from this bill, rather than it going to the Finance and Expenditure Committee, being considered again by the Social Services Committee in the context of 1996 research: a safety survey that showed that 70 percent—70 percent—of separated women had experienced some form of domestic violence. If the assumption is that the lack of payment is purely because people are struggling to get the administrative things in place, I would tell this House that that is not the experience of most organisations and most women who are struggling to get their child support payments.

We know that child support is used as a weapon in violent relationships, and that factor needs to be considered when we are making changes to the legislation. I have not seen any evidence that that has been properly considered in this piece of legislation, and that is a real shame because it should have been. I totally understand that the penalties may have been disproportionate and not working as an incentive, and I would love to see that recognition applied by this Government in other areas. I believe it is unfair that those penalties accrue to the Inland Revenue Department and not to the family and the children themselves, to get the benefit of that extra money. In summary—because I am being told to wind up—there is a lot to say about this bill, and I do not think that all of these different policy points should be in one piece of legislation, but we are, on balance, supporting this legislation.

The Hon David Cunliffe, a 5 minute call.

It is a pleasure to take a brief call to re-register Labour’s support for this bill. I think the appropriate place to start, given that it is an annual rates bill, is to reflect upon the rate structure, which is unchanged from last year but does, however, reflect the tax switch that this Government brought in soon after assuming office.

That was one of the most major contributors to inequality in this country over many years. It resulted in the top 10 percent of income earners getting 40 percent of the net tax remission—that is, 10 percent of income earners got 40 percent of the tax back—and that went to the top end. That tax switch, which results in the rates that are reconfirmed in this bill, was a major step backwards for an egalitarian society that believes that every New Zealander ought to have the opportunity to prosper, not just those at the top who get extra help to prosper even more.

You will remember that the tax switch was not, as had been heralded, fiscally neutral. There was a net fiscal cost of a billion dollars. Does it matter? Yes, because that is more than twice the amount of the paper-thin surplus that is currently being touted by the Government, which is more than offset by the change to the Earthquake Commission balance sheet. That is, if you took away the Earthquake Commission change, the Government would not be running a surplus at all, and the surplus would be swamped more than twice by the earlier tax loss when that inequitable tax switch happened.

So what is in this bill? Others have mentioned the child support reforms. I will not spend a lot of time on that other than to say it is acknowledged on both sides of the House that the system is capable of further improvement.

The issue here is that the cost of implementing the change to the Inland Revenue Department computer system is $163 million, and, apparently, that has been brought down from $200 million. How much is that? That is one quarter of all of the child support paid in this country for a whole year—for a computer change. One quarter of all of the child support payments is going to the computer programmers and none of it is going to children. That has got to be out of kilter. That is an implementation issue that goes to the Government’s ability to be savvy with taxpayers’ funds. It is not a legislative issue other than that it is provided for in this bill.

The heart of this bill, the stuff that is new, is the treatment of research and development tax losses, a subject that is dear to my heart and to the Labour Opposition’s, recalling that we went into the last election and the one before it promising an across-the-board tax reduction of 112 percent for qualifying research and development expenditure and a change to depreciation rates so that short-life assets like high-tech assets could be written down over a period that was commensurate with their actual life, typically 2 to 3 years, not their on-paper life, typically 5 years. That would have been a tremendous help to the ICT sector.

Instead of that, we have a hodgepodge of non-discretionary grants through Callaghan Innovation, on the one hand, and this sort of retrofitted research and development tax change, which has got KPMG complaining that it does not suit medium or large businesses in its report to the Finance and Expenditure Committee, but, in fact, does not really help small businesses either. The threshold starts at half a million dollars of research and development expenditure, and you have got to be a reasonable sized business to make full use of that.

What is interesting is that in the select committee report there are pages and pages and pages of fine-print consequential changes because this is a dabbling form of research and tax remission rather than a clean, across-the-board research and development tax credit like Labour had proposed. The Government is creating a rod for its own back and, in fact, for every taxpayer’s back who seeks to qualify, because the fine print is onerous—onerous.

None the less, based on the law that it is a step in the right direction and it is going in the direction of trying to support the high-tech economy, we will support the bill, but we are underlining today our reservations that it is clumsy, that it is partial, that it does not do the job properly, and that is exactly what KPMG said about the black-hole expenditure tax changes as well.

It would have been much better to do it properly and across the board. Tinkering sector by sector does not work. Thank you.

I take issue with what Mr Cunliffe just spoke about when he talked about small businesses. This bill does exactly that—supports small businesses and supports the start-ups that are spending research and development money in their chosen field, often software development, where the business can invest for years and years and years without seeing any revenue, let alone profit. So those small businesses have been at a disadvantage because they have been unable to deduct the expenditure against income like a large business would, because simply they do not have that income.

To make the playing field a level one—I am only talking about this one issue regarding the bill—the small business that invests in this research and development will be able to claim it and receive a refund so that at the end of the day its out-of-tax investment in that project is the same as if it was part of a large business that was able to offset its losses against the revenue. So this bill is very supportive of small businesses, one of a number of bills and legislation that we pass through this House in support of small business every day, and, therefore, I commend it to the House.

This is a bill that confirms the 2010 tax changes that this Government made, which have been driving inequality in our country ever since. We are seeing a situation where the very wealthiest New Zealanders are protected and becoming more privileged and more wealthy, and the middle class is being squeezed. The middle class, which once used to prosper and used to think that it could work hard and get ahead, now is being squeezed by the changes that we are confirming here again in this annual bill.

There is a very innocuous—on the surface—little clause in here, clause 65, at the beginning of Part 2, “Annual rates of income tax for 2015–16 tax year”, that reads: “Income tax imposed by section BB 1 of the Income Tax Act 2007 must, for the 2015–16 tax year, be paid at the basic rates specified in schedule 1 of that Act.” If people did not know what that meant, they could just glaze over it because it is a big, fat bill. But that is where we confirm that the changes this Government drove through—to grow that wedge between the very wealthiest and the rest of us—will continue. So that is something we need to observe, something we need to acknowledge that we are doing in this House here today.

Over there, those members want this to continue. They are talking already about driving that wedge deeper, in another set of tax packages, another set of tax changes, that no doubt will be driven towards supporting the interests of the 1 percent, and the 99 percent of ordinary, hard-working Kiwis will miss out once again. Those tax changes in 2010 saw 40 percent of the value go to the top 10 percent of earners in New Zealand, and just 2 percent of the value went to the bottom 20 percent of earners in this country. That little gain for those at the bottom was swallowed up in a GST increase. The Prime Minister, we will all remember, said “There will be no increase in GST. There will be no increase in GST.”, and then, in that 2010 tax package—we are not allowed to call it a lie in this House—he changed his mind. He changed his mind and suddenly lifted GST to 15 percent.

💬 Sue Moroney: He broke a promise.

He certainly broke a promise. I think we can say that. The Prime Minister of New Zealand changed his mind and swallowed up what little benefit that those who were struggling, who were working hard, could get out of that tax package.

And to afford that tax package, this Government has borrowed ever since. This Government has continued to borrow billions of dollars. There is now $100 billion in debt that this Government owes, and that is debt that we as taxpayers carry with us. That is debt that will affect our children and grandchildren. This is the Government, here in this House, that has borrowed more than any other Government in New Zealand’s history. That is because it is borrowing to fund the tax changes that are in this bill that we are confirming yet again in this House. That is a reckless Government—that is a reckless Government.

Instead, the Government could have invested in research and development. It could have supported small business. There have been fewer small businesses created under this Government than under the previous Labour Government. Year on year this Government opposite has failed to create small businesses. It panders to the interests of the very wealthiest New Zealanders, and that is costing New Zealand. In many regions in New Zealand the real median wage is lower than when the Government took office. Six years after the global financial crisis has ended many regions in New Zealand have lower real wages than when this Government took office. That is shameful—that is shameful. It is all because the Government has failed to grow value in this economy. The Government has focused on borrowing, borrowing, borrowing, to afford big, fat tax breaks for the wealthiest New Zealanders, for the very wealthiest New Zealanders.

Let us make no mistake. That is part of what we are doing here today. That is a bitter pill to swallow, because there are some other changes in this bill that need to be made for the security of our tax system. We will be forced, on this side of the House, to support them because we support the robustness of the tax system. But let us not forget that we are swallowing that bitter pill here today because the Government wants to borrow, and it wants to continue to borrow, and to sink New Zealand into a mire of debt to fund the wealthy tax breaks for that 1 percent of New Zealanders at the very top.

We all know that inequality is bad for us. It is a bit of a no-brainer. When kids go to school hungry in this country they do not learn well. They are not going to grow up to be as productive as they would be in this society, to pay the taxes that support the schools and hospitals and roads that we need to get us ahead as a country. When people are making decisions based on desperation, if they have grown up in desperate circumstances, they are much more likely to go and be a money trader in New York, even if they are passionate about becoming a neurosurgeon. They are worried about looking after their own interests because they know how tough it can be when inequality prevails.

You find that when inequality grows, so does infrastructure fail to get invested in. So that is when we see the cutting back in funding for hospitals. We see them pushing out forever the hospital rebuild that so desperately needs to happen in Dunedin. It is on the never-never under this Government because it does not support public health like the previous Government did. The Government does not support it at the real rate of health inflation. It is slowly making cuts to the system, real cuts, that are affecting ordinary New Zealanders’ ability to access health services. And the Government is cutting funding to education. The Government cuts and it cuts and it cuts, to afford those tax cuts for the very, very wealthiest New Zealanders. That is what we see over there.

The Government has failed to grow a high-value economy. Instead it is content to manage decline, and content to see low-value jobs and no jobs at all. We have a stubborn unemployment rate, and that is because employment is simply not a priority. The Government is too busy confirming tax rates that shovel money towards the very wealthiest New Zealanders, at the expense of us all and at the expense of future generations of New Zealanders. We can see around New Zealand that there is plenty of evidence of this struggling. We look at the Government’s own Regional Economic Activity Report that it has just put out. We see that citizens in so many regions of New Zealand are earning below the median wage. I think just about everyone in the South Island is earning below the median wage. There are districts like Otago that would be a billion dollars better off if the citizens there were merely earning the median wage. It is the same with the Bay of Plenty and Waikato. There would probably be a billion dollars more in their economies—certainly a hundred bucks more in people’s pockets per week if they were earning the median wage in those regions of New Zealand.

But the Government does not care—it just does not seem to care. It is focused on shovelling money into pet projects, and into preserving the status quo and preserving entrenched interests. We need a vibrant economy. On this side of the House we believe in things like research and development tax credits that everyone can access, not just the Minister’s favourite few projects, not just those few that he would want to be seen with in a photo opportunity. No, we believe that all New Zealand businesses should be able to access research and development tax credits. We believe that there should be incentives for innovation in this country. We need a high-value, high-wage economy. We on this side of the House are not content to see that situation continue. We are not content to see the lowest homeownership rates in about 60 years, I think it is, because the Government is mismanaging the economy by making decisions like this. The Government continues to make it more difficult for hard-working, middle-class New Zealanders in order to fund the privilege of the very wealthiest 1 percent.

Labour will support the changes in the rest of the bill because we see that the tax system needs to be robust. We need to get rid of the loopholes that emerge. Tax systems need pruning and mending, and on this side of the House we are always happy to be supportive of those kinds of things, of making sure that there is a functional tax system.

We may have our concerns about whether the Government will be able to implement it. Government members have been back to this House many times—many times—to withdraw legislation. They put through child support legislation previously, which would have seen a big a shift in the way things were done, and then they had to come back to the House, at the cost of hundreds of thousands of dollars, to put through legislation because they simply could not deliver on it. The Government has not fixed up the Inland Revenue Department computer system, which should have been fixed up years ago. Several years ago John Key made a Valentine’s Day promise that he would fix it up. He said: “We do not want to be held to ransom by an out-of-date tax system and not be able to make policy changes.” Well, we are there—we are there—because of the Government’s lack of activity. Our country is suffering because the Government has not fixed the tax system. We may be back, fixing things that we are passing in this legislation today, because the Government cannot deliver on them.

The Government is neglecting our economy in the interests of a privileged few. We will support the good changes in this bill, but we will note that there are changes in here that continue to support the privileged at the expense of the 99 percent of New Zealanders who work hard and pay their taxes, as they should.

It is a great thrill to be able to rise and take a very short call on the Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill and to return to the debate from that verbosity back to the bill itself, and in particular to the research and development section, which I know is going to be of huge interest to the hundreds of information and communications technology businesses that are moving to Tauranga as we speak. In fact, Tauranga was quoted by Diane Foreman as being the silicon valley of New Zealand.

These new research and development tax initiatives will be incredibly welcome—particularly by the loss-making start-up companies being able to cash out all or part of their tax losses from research and development expenditure. That is going to be hugely welcome. These companies will be pouring in and having an opportunity to be able to invest in research and development with this comfort, knowing that they will be able to have appropriate tax losses applied in their case. It is good for research and development, and, aligned with our broader investment in Callaghan Innovation and others, it points to this Government backing business, and backing business where it counts. I very much commend this bill to the House.

Bill read a second time.