Taxation (Bright-line Test for Residential Land) Bill

Members, we come now to Part 2. As I indicated earlier, this debate is very narrow. It involves clause 16A and clause 16. Members will speak tightly to the matter before the Committee—

💬 Hon David Cunliffe: I raise a point of order, Mr Chairperson. As you rightly acknowledged in Part 1, Part 1 did contain the majority of operative clauses in the bill. The Labour Opposition signalled early in the debate on Part 1 that we would be commencing with a number of general contributions and then working through the clauses of that bill in a clause by clause manner. Unfortunately, you took a closure motion before it was possible for us to do that. Of course, it is going to be difficult to generalise beyond the tight provisions relating to trusts in Part 2, and we will not do so, but as we approach clauses 1 and 2, I would ask for your consideration in respect of the scope and duration of that part of the debate, because it may be necessary to sweep up some of the technical points that would otherwise have been made in Part 1.

The CHAIRPERSON (Hon Chester Borrows): I thank the member for his point of order. I acknowledge that clauses 1 and 2 are generally wide ranging. I do not necessarily accept that there has not been time to fully debate Part 1. I note that the Labour Party has had 16 calls. The member himself has had 15 minutes on this particular piece, and at 100 words a minute, that is pretty broad-brush. Other Opposition parties took five calls. So there has been substantial debate around Part 1. However, I am glad the member accepts that this next part will be narrow, and he can let rip on clauses 1 and 2.

I am going to speak on Part 2 of this bill. This is about non-active trusts. We need to be very careful when we are looking at this, because trusts have been used and abused to hide income from property investments for far too long. Whenever I see in legislation, as I see in new section 43B in clause 16, where it says “Non-active trusts may be excused from filing returns”, I do not think there should be a point in time when anyone is excused from filing a return, even if that return has a nil return in it—nil income or costs, etc., etc.—because the law around trusts has been tightened up a lot recently, and the reason for that is provisions around gift duty and the recognition that trusts have been abused.

Let me give you one example. I think it was in 2009 when the Inland Revenue Department determined that about 10,000 New Zealand families were claiming Working for Families because the income derived from a trust was not counted as income for purposes of Working for Families calculations. We did tidy that up and, in fact, those 10,000 people who were deliberately rorting the law were brought back into the tax system. Whenever I see something around trusts that says “may be excused from filing returns”, I do not think that is appropriate, even though we are supporting this bill.

The bill does list what a non-active trust is, but by the definition it provides here, I do not think that is enough to actually say you are not required to file a return. The last thing we want to do, in my view, is lose sight of actually how many trusts are holding properties or are holding assets or are, in fact, being used to hide various forms of income in any way, shape, or form.

Let me give you an example here. New section 43B says that “(1) A trustee of a trust is not required to furnish a return of income for the trust … if—(a) throughout that tax year, the trust is—(i) a non-active trust; and … (b) a trustee of the trust has made and furnished to the Commissioner, in a form approved by the Commissioner,—(i) a declaration that the trust is … non-active …”. But we need to understand what a non-active trust is, and that, it says in subsection (2), is one that “(a) has not derived or been deemed to have derived any income; and (b) has no deductions;”. That does not mean that the trust is inactive. All it means is that it has not derived income.

We all know that among trustees or those that have trusts there is a lot of activity that goes on around this without necessarily deriving income, and I do not think that that means that we should not be filing returns because, as mentioned, the risk around this, as I see it, is that the Inland Revenue Department loses track of how many trusts are actually out there, the assets that are held in trust, and what the trustees are actually doing. A simple filing saying there is no activity means that at least there is some compliance that has to be undertaken. So I just think that this stuff should be tightened up; that is all I am going to say on this.

Mr Chairman, thank you for the opportunity, and I thank my colleague Stuart Nash for his insights there. I wish to dig down into the drafting of new section 43B(1) in clause 16: “A trustee of a trust is not required to furnish a return of income for the trust for a tax year if—(a) throughout that tax year, the trust is—(i) a non-active trust; and (ii) a complying trust … and (b) a trustee of the trust has made and furnished to the Commissioner, in a form approved by the Commissioner,—(i) a declaration that the trust is a non-active trust, and that it will notify the Commissioner if it stops being a non-active trust; and (ii) a statement of such other matters …” that the commissioner may from time to time require.

The issues here are quite interesting. The fact that the trustees need to seek permission in advance from the commissioner rather diminishes the purported saving in overhead that the supposed simplification was seeking to achieve. In other words, it is no less work for the accountant to write to the commissioner with a declaration that the trust is a non-active, complying trust than it is to write and say that it is a nil return, so I guess we question whether the construction of section 43B(1) assists in achieving the stated aim of the section, which is to reduce a compliance burden.

In subsection (2) the plot, as they say, thickens, because there are a number of criteria that need to be met, apparently simultaneously, for a trust to be deemed to be a non-active trust in section 43B(2). It says “For the purposes of this section, a trust is a non-active trust for a tax year if, throughout that tax year,”—so that is the first point; it must be true throughout the whole of the tax year, and any exception to that must be notified, again implying probably more compliance than would have been required if it had simply filed a nil return—“the trustee of the trust—(a) has not derived or been deemed to have derived any income;”.

So there are two parts to that subsection (2)(a): “derived” and “deemed to have derived”. “Derived” means the trust has produced income and the trustee has self-declared it. “Deemed” means that that has been inferred. I would imagine—and I ask the Minister in the chair, the Hon Paula Bennett, to clarify if I am wrong—some other party has inferred or deemed the trustee to have had income. So there is a grey area there about what the deeming process is, who is able to deem, whether they can deem for themselves, whether any third parties can deem them—I think that is probably something akin to deeming with faint praise.

The definition of income is not specified in the subsection, which is, you know, the first thing one would think would need to be done. Presumably income is defined elsewhere in the Tax Administration Act, but there is a very special importance of the word “income” here, because the whole brightline test turns on the benefit of capital gain being defined as income if that accrues to a property that is not a farm and not a business, that has been sold within 2 years, and that is not lived in by the owner—or, in the event that the owner has more than one property, their wairua, or their vibe, or their feeling is that it is not the one to which they are the most attached. You can see the hornets’ nest of subjectivity that is opened up through that word “income”, especially in subsection (2)(a), if the deeming provisions allow that subjective interpretation to be inferred by a third party. So I think that third party issue is something the Minister really needs to address.

In subsection (2)(b)—this is an “and” provision—it must also have no deductions. In the first pass, again, deductions are not defined in this clause; the clause is reliant upon the general definition and case law of the word “deduction”, but it does impinge on the definition of costs, because any costs of sale or costs of the land that is being disposed of and thus taxed could be construed as a deduction. The tax test elsewhere is a net test in the sense that the costs, for example, of real estate fees, of interest, of any other activity—you know, painting the house before it is sold, rehousing the family pets, you name it—are all costs against the sale, and they can be deducted from the sale price in order to reach the net taxable amount. Yet here in subsection (2)(b) there is a “has no deductions” clause, and I think that is confusing.

The fact that something is a trust rather than a natural person or a different form of legal entity should not, obviously, determine the definition of deduction, so it would be very helpful for the Minister to take a call and specify to the Committee whether the definition of deduction here is the same as the definition in those other parts.

In subsection (2)(c), a non-active trust “has not disposed of or been deemed to”—there is that word “deemed” again—“have disposed of any assets of the trust;”. So we are talking trust assets here, and the law here is requiring the trustees to certify that there have been no disposals. That should be self-evident; again, there is case law around the definition of disposal. In subsection (2)(d) the trust “has not been a party to or perpetuated”—there is a lovely word—“or continued with any transactions with assets of the trust which, during the tax year, (i) give rise to income in any person’s hands; or (ii) give rise to fringe benefits to any employee or to any former employee.”

I am just literally giving a plain English reading of the subsections of the section inserted by that operative clause, clause 16, the most important operative clause in this part, partly because it is almost the only clause in this part. What is clear already from this cursory romp through the jurisprudence of this one clause is that it would have been a bally sight easier for the poor old trustee to do an email to the commissioner saying “nil income” than to wade through this veritable thicket of definitional quagmire, to mix a metaphor.

This ain’t simple. There are any number of deemings that could trip a trustee, and often trustees are working pro bono, especially in family trusts. I know that there has been a great stack-up of liabilities for trustees of late in trust law, and that is discouraging people from taking on trustee roles, particularly family trustees.

Let us turn now to subsection (3)—so we are talking new section 43B(3). In determining whether a trust complies with the requirements of subsection (2), the one we have previously exegeted, we turn to paragraph (a), which says “reasonable fees paid to professional trustees to administer the trust;”, which goes to the point I have just made. Sometimes trustees are, in fact, pro bono friends and family who administer a family trust for others. Paragraph (b) says “bank charges or other minimal administration costs totalling not more than $50 in the tax year;”. When are we going to get over the habit of writing numbers like $50 in legislation? Ten years from now $50 will be worth only $40 or at the rate of inflation with the current Government, probably $35. Is the Government going to put this bill through the House to adjust for inflation?

Why on earth has it put a manual amount as trivial as $50 in the legislation? Surely that is further evidence that this has been rushed through the Finance and Expenditure Committee in an inappropriate manner, and that kink was not ironed out at source. It does go to the point that this whole bill is a sham. As we said in the debate on Part 1, if you were really wanting to do something about the Auckland property bubble you would not do a 2-year brightline test that people can avoid by doing it in 2 years and 1 day, with more exceptions than I have had hot dinners.

Subclause (3)(c) states: “interest earned on trust assets in any bank account during the tax year, to the extent to which the total interest does not exceed the total of any charges or costs incurred by the trust to which paragraph (b) applies.” I do not know about you, Mr Chairperson, but I have got a headache reading through this subclause, putting myself in the shoes of “Joe Average” who takes on the role for a friend of being a trustee of their family trust because they are given the ability to state that they have no income, and so they should not have to file a tax return. But the mere process of making that statement is so much more complex than filing the tax return as a nil return would have been in the first place, so why are we here? Why are we here, making complexity, when there was no need for any? The answer is that the bill is a shambles.

I just want to raise a couple of very quick questions. They may seem simple on the face of it, in regard to clause 16 inserting new section 43B et al, but could the Minister in the chair, or officials, advise us as to whether any of these provisions, in terms of non-active trusts being excused from filing returns, differ from the status quo? Because as I understand it, a non-active trust—that is, a trust that is not making income—would simply advise the Inland Revenue Department commissioner in writing that, for instance, it owned a property that perhaps the beneficiary or settlor lived in, and that there was no rent being charged, there was no money changing hands. It just simply owned an asset on behalf of the beneficiary. Therefore, there was no income being made, nothing being charged, no expenses—zero. It was non-active by definition, and it would advise the Inland Revenue Department in writing, and that would be it. It would not have to file a return until it did become active. If I am wrong, please feel free to correct me, but that is my limited understanding.

My question simply is: are there any deviations from either my interpretation of what the status quo is, or, if the status quo is different, is there any difference from that? Because, as we have pointed out, without labouring the point, in Part 1 there are substantial differences in definitions that do not exist or are not consistent or coherent with other tax Acts—the Income Tax Act and the Land Act. My question simply is: do these differ from the status quo? Because on the face of it—and my colleagues have raised some valid points—there is an advantage, as we have tried to communicate, in some sort of consistency between the Income Tax Act and this piece of legislation. It would give some comfort if the Minister could advise whether the same scheme of arrangement that has existed outside this piece of legislation in terms of non-active trusts exists within it. If it does, I suppose that at least it is consistent with the case law and it is consistent with other pieces of legislation. I mean that in good faith. I think it would be helpful to get it on the record of the House.

Likewise, in respect of the other matters here in terms of deductions and other bits and pieces, are they consistent with existing law, other than, obviously, dollar amounts? My colleague David Cunliffe raises an interesting point about the 50 bucks. I note that in the report to the Finance and Expenditure Committee from submitters—KPMG submitted on the net filing income threshold for individuals and said that the $200 non-filing income threshold for individuals had been unchanged for over 15 years. It made the same point, I think, as my colleague did. Therefore, it is timely, it said, that the threshold increased to take inflation into account. It proposed a net income threshold of $500. Again, in respect of trusts, is there any movement in that? What is the justification for the $50, or has it just been plucked out of thin air, or is it consistent with any other pieces of legislation? In essence, those are the basic questions.

As I say, I do note Trevor Mallard’s ruling from the Chair that debates continued—maybe it was a ground-breaking ruling; I do not know. Last week he made it very clear that if Ministers were prepared to answer questions, then that may aid in the efficiency of debate and its conclusion. But where Ministers did not, then—these are very serious questions—that did not aid the debate or contract its longevity. So, as I said, the simple question is: are these provisions for non-active trusts consistent with the status quo? It is very simple.

I think it would be helpful to actually get that on the record of the House—that these issues are in Hansard. Hansard is quoted in case law and is quoted in the courts. If it is not consistent, then what would be helpful is to outline what the changes are and why, and what the justification for those changes is.

I think that is a reasonable request to make, given that there is a plethora of family trusts around the country. Many folks have them. Again, one or two people pull the wool, but family trusts are normally set up for very, very good reasons, in respect of protection of family assets, protection against being sued, or whatever—risk management. It is very difficult now, I would argue—not wholly, not totally difficult, but it is reasonably difficult—to pull the wool if the Inland Revenue Department is actively looking at these trusts. On that point, it would be helpful to know whether, if these rules differ from the status quo, the Inland Revenue Department going to embark on any special policing, any special auditing, or any special, legitimate interrogation of trust arrangements to ensure, especially under this piece of legislation, that if they are non-active they really are non-active.

You can make an argument and say well, if you put it in writing to the Inland Revenue Department that it is non-active, you are not making income, and you are just like any other taxpayer you are committing fraud and you are lying if you say “no income” and there is income. That is true, but I would have thought, given that this is a new piece of legislation, that the Inland Revenue Department—if, again, it is very serious about cutting down on speculative investment—would be running the ruler over many of these entities, not in a nefarious way but to ensure that people are complying with their obligations.

So I simply raise those questions, and I would hope that the Minister may be able to give us some sort of answer to them.