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

I am happy to stand and talk on the Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill. It is a bill with quite a long name—there is no doubt about that—and Part 3 is quite a long part. In Part 3 there are a whole lot of remedial clauses that change a number of Acts, mainly the Income Tax Act, but there are several sections that I would like to concentrate on and perhaps get a couple of answers for. There seems to be a level of inconsistency in the legislation and I cannot quite get my head around it, just being a simple man from Hawke’s Bay, of course.

I will look at Part 3, clause 75C, which amends section CW 42 of the Income Tax Act, and we are talking about business income here. What this clause has added is this. The old law said “no person with some control over the business is able to direct or divert, to their own benefit or advantage, an amount derived from a business.” What this is basically saying is that a person is not allowed to divert money away from a charity for their own gain. But what this law has added is “other than the trustee or trustees, the society, or the institution,” and I am not too sure why they have exempted the trustee or trustees, the society, or the institution from the ability to transfer money away from the business. It would seem to me that there are, in fact, a lot of charities that are actually governed by trustees or societies or institutions, and what this is actually doing is exempting a decent chunk of those who are involved in the governance of charities from the condition that allows them to divert money. I am not too sure why that is there, and there is a whole lot of inconsistency with that.

If I move down that same clause, to section CW 42(5)—we are talking about clause 75C(2) here—they have deleted the words “to their own benefit or advantage”. So what this section is about in the Income Tax Act is that it talks about the control of a company. The Income Tax Act says that the control of a company is basically defined around someone’s ability to direct or divert amounts from the business, but they are deleting the words “to their own benefit or advantage”, and yet those words feature significantly throughout the Income Tax Act. There seems to be a level of inconsistency where that term is used. I am not too sure why that is the case, but I just cannot get my head around the inconsistencies with regard to that.

I go down to clause 75D, which amends section CW 42B, and again what it does is this. Clause 75D(1) says “words before the paragraphs, replace ‘a trust and its trustees, or a company … whose activities are predominantly’ with”—this is talking about social housing—“ ‘a trustee or company … whose activities involve’ ”. So what it is actually doing is it is redefining in law who can actually take advantage of community housing trusts and companies. So what, in the past, income tax law said was that to be defined as a community housing trust or company, your activity has got to be predominantly in the area of managing community housing trusts and companies. Now what the law says is that the company or the trust only has to be involved in that business, and I am not 100 percent sure what the definition of “involvement” is.

This is where we get into sticky legal situations because we know that the Government is selling down a lot of the State houses into social housing organisations, and we could have a large trust or a large company that says “We’re just going to take three or four of the houses here and that will mean that we can take advantage of tax benefits in the Income Tax Act.”, because the company itself can say “We are involved in social housing benefits.” So the definition between “involved in social and community housing” versus “predominantly in the business of social and community housing” is substantial, and I perhaps see some unintended consequences here.

But the other thing that is slightly strange is that, as mentioned, it removes the words “trust and its trustees, or a company” and replaces them with the term “a trustee or company”. I was always of the view that a trustee was a person who actually administered a trust, so what it is saying here is it is removing the word “trust” and putting in the word “trustee”. So by definition this is not applicable to a trust; it is applicable only to a trustee.

Maybe I am getting my legal technicalities mixed up here, but I would have thought that if you put in a trust or a trustee, which, again, is a term that is used throughout the Act, it would cover everything and it would make sure that there was no confusion. After all, one of the major tests of tax legislation is that it avoids confusion—that it is clear.

I go down to clause 75D(2), and this is another clause to do with charities and business income. It has added some words, that is “no person with some control over the activities, other than the entity, is able to direct or divert,”—now, these are new words—“to their own benefit or advantage, an amount derived from the activities.” The reason I highlight this is that I think I mentioned before that we deleted the words “to their own benefit or advantage”. Again, it just appears to be a real inconsistency, within the space of about three or four clauses. The reason why, I am unsure. There is probably a good reason. Perhaps the Minister in his infinite wisdom could let me know when it is applicable to use “to their own benefit or advantage” or when it is irrelevant and therefore why it has been removed from some clauses and why it has been added to other clauses. Again, it seems to me that there must be a good reason for it, but I am unsure of that reason.

I would also like to talk about clause 76. This amends section CW 55BA of the Income Tax Act, and this is about the tax treatment of tertiary institutions and their subsidiaries. What this actually says, under the subheading “Exempt income”, is that “An amount of income derived by a tertiary education institution”—let us say, for example, a university—“or a tertiary education subsidiary is exempt income.” So what this is basically saying is that, for example, a business incubator, which a lot of the universities have, is exempt income—i.e. it does not have to pay tax. But the interesting thing about this is that to be exempt income it has to be 100 percent owned by a tertiary institution or a group of tertiary institutions.

The interesting thing about this is that it actually says, in new section CW 55BA(2)(a)(ii) “market value interests”—so this is exempt income—“in the company adding up to 100%, when a market value circumstance exists;”. The interesting thing about this is I wonder whether in fact this may have the unintended consequence that when a university incubator or a university seeks to commercialise intellectual property that some of its staff have developed, what this will actually do is it will delay or stop a university from going out to the market to seek equity in order to raise capital. Once it drops down below that 100 percent ownership, then it is not exempt income any more.

One thing that we really want to encourage our universities to do is commercialise a lot of the intellectual property that is resident within our institutions, and there are a number of exceptionally talented academics across the whole university scheme, even though, I must admit, this is not just about universities. It is about polytechs or any tertiary education institutions. But what we do not want to do is have an unintended consequence where the university does not go out to the market to seek capital in any way, shape, or form because it knows that it will move from exempt income into income that is taxable. I think that may be a little bit of a problem going forward, and I would like to understand why—well, part of me understands why. Tertiary education institutions are exempt from income tax because it is a bit like robbing Paul to pay Peter. You take income tax off a tertiary institution and then you give it back in terms of other income that the Government gives to universities, polytechs, etc., but I think this may well end up with unintended consequences.

But the other interesting thing about this is that it talks about the control of a company, and it says: “(b) where no person … with some control over the company is able to direct or divert, to their own benefit or advantage, an amount derived from the company.”

I am sure my colleague Dr Clark will join us shortly in this discussion on the Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill. I want to talk mainly, in this first contribution, around the quite large set of clauses and amendments relating to the cashing out of research and development tax losses. But before I do that I actually want to pick up where my colleague Stuart Nash just left off and talk about clause 76.

I have to say that at the Finance and Expenditure Committee we did not have a long discussion about clause 76. It did come up and there were a couple of amendments made to the clause as a result of the brief discussion we had. But I do think it is important to put on the record the concern that the Labour Party has that in making a change that is, as Mr Nash noted, primarily about ensuring that there is consistency in the way that tertiary institutions are treated in terms of tax: be it in their role as a tertiary institution educating people, be it a polytech or a university undertaking lectures and providing the normal kind of degree qualifications if it was a university that we would expect, the income they derive is regarded as being exempt. What this clause does is put in place a regime for the subsidiaries of tertiary education institutions. Again, as Mr Nash has noted, these now come in many forms. They run all the way from start-up companies based upon the research of a particular researcher at a university all the way through to small limited companies set up by polytechnics to provide a particular kind of educational service that might be a bit outside the norm. So it could be the provision of a particular service to international students that is regarded as more of a company-based arrangement than the traditional polytech structure.

In trying to create a mechanism that encompasses all of those different new subsidiaries of tertiary institutions, something is missing in this clause. There is an attempt to deal with the breadth of these institutions in the amendment that is now in new section CW 55BA(2), where a tertiary education subsidiary is a company “(a) in which the tertiary education institution, alone or together with other tertiary education institutions, holds—(i) voting interests in the company adding up to 100%; or (ii) market value interests in the company adding up to 100%, when a market value circumstance exists;”. That deals with the issue of universities or polytechs cooperating with one another. What it does not deal with is what is becoming more commonplace in the tertiary settings, particularly in the university settings, which is different styles of ownership. These include where individual academics are now starting to take some sense of ownership of these companies, so they have their own identity separate from the tertiary institution that they work for. It is also the situation now that private investment does come in from quite an early point. Another kind of investment comes in. We have large research programmes in our tertiary institutions at the moment that are funded by research funding organisations from other countries.

If we take the example of the terrific longitudinal study run down at the University of Otago, that study has been largely funded in recent times by the American National Institutes of Health, by the UK research foundations. How are they going to be treated under this kind of situation? How will a company that spins out from the genetic research that has arisen out of that longitudinal study be treated in a tax sense? We do not want a free ride here for companies that should legitimately be paying tax, but where they are genuinely research organisations developed out of a tertiary institution that has a slightly different ownership or share arrangement than 100 percent, what do we do? Perhaps the Minister in the chair, the Hon Paul Goldsmith, might want to take a call to say whether or not there is a different set of structures for those sorts of companies to be considered. But certainly on this side of the Chamber we want to put on the record that we want to see an encouragement of the development and commercialisation of the research that happens inside our tertiary institutions, and any tax treatment that discourages that, as could be possible under this clause, provides us with some concern.

I note, in terms of this clause, that there is a section around who controls the company and there is an important change that was made by the Finance and Expenditure Committee to delete—[Bell rung]

The CHAIRPERSON (Hon Chester Borrows): This is your fourth call.

My fourth call on this part?

The CHAIRPERSON (Hon Chester Borrows): I just thought I would let you know.

Gracious, it has been so long since those first two calls that I was not aware that it was my fourth call. I will briefly, then, complete the comment that I was making there that there was a change made removing the question of whether an individual was going to benefit or be advantaged from the work of a company. That will help in the situation that I mentioned before where specific academics might have taken a share within a company, separate from the university they work for. So I do recognise that matter has been dealt with, but I would ask that we get some clarification around making sure we are not setting up a regime that provides a disincentive to universities commercialising their research.

In the brief period that I have remaining to me to speak on this part, I did want to come back to the question of the cashing out of research and development tax losses, and largely because this is an area where the committee did make a large number of changes. The purpose of this is supported by members on this side of the Chamber. The idea is that we can provide, at the early stage of a company’s establishment, the ability to cash out the losses from research and development. We want to see those companies investing in research and development from day one, and if this is one way that we can do that, then we can support that. I would say that the Government’s reluctance to go down the path of a comprehensive research and development tax credit leads it to have to put in pages and pages of definitions and difficult-to-understand processes, which people will have to go through in order to work out whether or not they are actually eligible for this.

It is worth noting the changes that the committee made. So we are clear that under the proposals, research and development start-up companies can claim up to 28 percent. That is the current company tax rate and it helps to be clear and simple about that. The main eligibility requirement is that the company must be a loss-making company, resident in New Zealand, with a sufficient proportion of expenditure on research and development. That was one of the areas that, again, presented some difficulty for us, because of the potential for a range of ownership arrangements that would make a company primarily a New Zealand one, clearly being resident in New Zealand.

And then there is that question of what is a sufficient proportion of expenditure on research and development. The amount of losses that can be cashed out has been capped at $500,000 for the 2015-16 year, increasing by $300,000 over the next 5 years to $2 million. When we were discussing this in the committee, the issue that I wanted to raise was how research and development was defined and who would make up their mind as to whether or not this genuinely was research and development. And in the end what we drew out, as the discussion went on, was that that role was, effectively, being outsourced to Callaghan Innovation.

Callaghan Innovation is a relatively new organisation—a good organisation, in my view, doing some good things in our community. But there are still some issues for us on this side of the Chamber as to whether or not Callaghan Innovation is the right organisation to be doing that checking and whether it has the scope of expertise to always know whether a particular or given company actually is undertaking research and development in its sphere. And for me this highlights the concern we have that by creating a system where we do not have a broad-based research and development tax credit we create a large number of hoops and we create a new role—a bureaucratic role, essentially—for Callaghan Innovation, whose job should be to be out there in the community supporting researchers to do research, not acting as some kind of judge in a sort of Dragons’ Den contest about whether something is or is not research and development. So, again, we could have come up with something simpler, something that did not involve so much hoop jumping. We understand that Callaghan Innovation is going to be paid for its work, which is fair enough—it is a Crown research institute that has to make sure that it pays its own way. But we think there is the potential for this to be a fairly substantial distraction from the kind of work that it is going to do.

Just briefly, the other clauses in here—and I would urge the Minister in the chair, the Hon Nathan Guy, or another member of the Government who was on the select committee to actually work through—

💬 Hon Clayton Cosgrove: David Bennett.

No, no, not David Bennett. Not David Bennett. I urge another member of the committee, except for David Bennett, to stand up and work our way through the eligibility criteria, the wage intensity criteria, why $500,000 was listed as the amount to be cashed out, and then, particularly of interest to me, are the excluded activities. I would like to know about those.

I am very sorry to see Mr Robertson cut short, given he is limited to only four speeches in this part of the bill. He was cut down in his prime, but I am sure there will be another opportunity, maybe in the title and commencement debate, to finish the argument that he was developing. I did not have the privilege of sitting through the select committee process on this particular bill, although the questions I will bring up relate to previous editions of a very similar bill, because a very similar bill gets put through this Parliament every year tidying up a number of these same issues, and that is a good thing.

I want to say something very positive from the Opposition benches about this bill. This is a necessary and important thing, and I hope that those listening at home or watching on the TV can also see that there is a very constructive thing going on here, where Opposition members are drawing attention to concerns about the bill, which is designed to patch up where there are loopholes. This, Part 3 of the bill, is tidying up the Income Tax Act to make sure it achieves the purpose that it is set down to achieve. So when my colleagues pick some holes in it, they are actually doing the Government a favour, because there is an opportunity for Supplementary Order Papers to amend the bill to tidy up any little things that come to light through this part of the debate. So my questions are in a similar vein. The Minister in the chair, Nathan Guy, I am sure, can get himself briefed if the answers are not immediately to mind.

Firstly, I want to just talk about clause 69B, which talks about the exceptions for overseas accommodation. I am wondering what level of discussion was had that settled on the paragraph (a) and (b) definitions in new section CE 1C(1B) of what should be included in this aspect of the Act around the cost of accommodation. Paragraph (a) says, for the purposes of subsection (1): “the actual cost to the employee for the accommodation; or (b) a reasonable estimate of the expenditure that is likely to be incurred by the employee, or group of employees, for whom the amount is payable.” When this debate has been had in the past, there has been a debate around what constitutes accommodation for the purposes of work and what constitutes accommodation that goes above and beyond that—so the nature of the accommodation.

If someone is going to do a simple job fixing a factory line and they are put up in a five-star hotel with swimming pools for a period of a week when the job takes 1 day, even though it is “at or near an overseas work location”—those are the words that are found in the Act—is that a legitimate form of accommodation to take and to be included for the purposes of tax exemption? It seems in the spirit of the law that that would not be the case, but how you draw those lines is a very difficult thing to do, and I wonder—the Minister may know the answer to that—about what debate was had this time in the select committee and why these words were chosen, which seem very broad to me. This seems a very broad definition. It is simply “at or near an overseas work location”, full stop. The cost to the employee for the accommodation—there is no specified time limit around it or the reasonable estimate, and there is no specification of what type of accommodation. So that is my first question that I would appreciate a response from the Minister on.

The second question relates to clause 75D, which some colleagues have already referred to, the community housing trusts and companies aspect of the bill, and the shift from the words—in clause 75D(1) it says to replace “a trust and its trustees, or a company (as applicable, the ‘entity’) whose activities are predominantly” with “a trustee or company (the ‘entity’) whose activities involve”. This is the shift from a trust being defined as something that predominantly does something, to something “whose activities involve”. I am trying to understand what the purpose of that shift was because, again, if this shift means that, say, for a charitable purpose, trusts want to house medical people in a community where they cannot attract medical people because the accommodation is too expensive—this is a debate that has been had before—is that achieved, and is there an unintended consequence where trusts are also doing other activities that are not really in the spirit of a trust for that purpose? Why has this been changed? There will have been a live debate—[Bell rung]. Mr Chair?

The CHAIRPERSON (Hon Chester Borrows): Dr David Clark, fourth call.

Thank you, Mr Chair. There will have been a live debate, I suspect, about that, if I am not mistaken. What are the checks and balances, and how has the select committee assured itself that that purpose will be achieved?

The next area that I am interested in—and perhaps I should declare a personal conflict—is the accommodation provided to ministers of religion. This old chestnut—it comes up every time in these remedial matters bills in recent years. Let us remind ourselves that the purpose of this is to ensure—excuse my voice is going; I have a cold—

💬 Grant Robertson: He’s really emotional.

It is not an emotional response. It is to ensure—as I understand it, and the Minister can correct me if I am wrong—that those small communities, often in hard-up places that have very few professionals left in the community, want to retain their minister of religion. This is because often in some small communities in remote places the minister of religion will be the only person with a tertiary education who has training in counselling and conflict resolution, and who can witness documents and so forth. For isolated communities it is very beneficial to have that kind of person available, aside from the usual stuff that ministers of religion do in those communities: the “hatch, match, and dispatch”, as it is called in the trade. Aside from the hatch, match, and dispatch, having people in town who can perform those other more secular functions of witnessing documents, negotiating their way through disputes, and so on is what is being protected here.

But the definition is the bit that I want to ask about because it seems very broad. I know that my colleague the Hon Clayton Cosgrove may delve further into this, but on the surface—he was talking about it earlier, I certainly hope he will; I will be disappointed otherwise—it leaves it largely up to the religion itself to define who is in and who is out: somebody whose duties are related mainly to the practice, study, teaching, or advancement of religious beliefs. What constitutes “religious beliefs” is, I guess, the fundamental question, and how broad is this category? We know in human rights legislation that we have a real issue again and again and again when we have some kinds of discrimination where there are exemptions for people who fall under a religious category. So the Catholic Church, for example, quite openly says that it will not ordain women to the priesthood at this stage, and that does not sit neatly with our wider human rights legislation, and it creates problems.

At some level, in our society, a conflict occurs that is challenging to resolve. Actually, in this House, we are often not willing to go near it. Here, in this particular clause of the bill, we have the advancement of religion generally defined. I am wondering whether there is going to be guidance provided as to what constitutes a religion that is inside and what is outside the scope when we are talking about this accommodation exception in clause 81 on pages 48 and 49 of the bill. I would be very interested in what the Minister in the chair, the Hon Nathan Guy, has to say about the definition of that exception. I can see he is studiously studying his papers, and I look forward to his contribution shortly. Thank you very much for the opportunity.

I move, That the question be now put.

I will hear from Fletcher Tabuteau on his fourth call.

I just wanted to touch on one of the issues raised in clause 76, “Section CW 55BA Tertiary education institutions and subsidiaries”. It talks specifically about those who have control over an institution.

This is where it gets confusing, and this is where the Labour Party had a lot to say. The clause kind of contradicts itself, and I would just raise this with the Minister: “where no person, other than a tertiary education institution, with some control over the company is able to direct or divert,”. So it has only got some control, but then it is able to direct or divert, which raises some of the questions around the eligibility of a controller of an institution, and about what they are entitled to do in terms of accessing those funds, diverting those funds, and that particular issue.

Unfortunately, my primary purpose of this first call for the evening was on clause 71, “Section CF3 amended (Withdrawals from foreign superannuation scheme)”. You can imagine that New Zealand First gets many questions from constituents on superannuation—

💬 Hon David Cunliffe: No, they don’t. No you don’t.

And it is obviously no surprise to my friends around me in the Chamber. But, actually, I have to admit that the clause goes on for four pages of the bill, and so my call at this point of the evening is to actually ask for some explanation from the Minister.

I have to admit that I was not on the Finance and Expenditure Committee and was not part of the debrief, but I think, when you look at some of the terminology and some of the wording used, you will find that you will get these unintended consequences that New Zealand First speaks so often about when we are referring to remedial matters from the National Government.

I will use just a few examples. Clause 189 corrects an oversight around the omission of the phrase “an educational bursary” within MB 13(2)(f) in the Income Tax Act 2007. The reality there is that it was always intended to be both an educational scholarship, and the educational bursaries were supposed to be included in that calculation. And yet here we are, nearly 10 years later, amending the legislation.

The other one that has just been spoken to eloquently and with great knowledge was in clause 81 around the commencement date—

💬 Hon Clayton Cosgrove: Very piously, I thought.

—piously?—for accommodation provisions applying to ministers of religion. So I think when you look at the legislation, we have to acknowledge that the reason it is in there is that the incorrect date was inadvertently changed in the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014. These provisions would apply from 1 July 2013 and not 15 April, as is currently written in the Act. So here we are now fixing it up.

I will come to it later on in the piece because it is not the appropriate part of the debate tonight to talk to it, but Supplementary Order Paper 129, I think it was, is an example of just what it is that the public needs to be wary of. We have so much to work through here, and mistakes are already being made. I acknowledge that the Government is trying to rectify them at the moment, but the reality is that this is a large piece of work, and the debate needs to be extensive. I think, when I come to that Supplementary Order Paper, we need to acknowledge that the work has not been done, and we are going to need to look at it again.

Just to finish off in the time that I have, back to clause 71(3)(a): “A foreign superannuation withdrawal is not income of the person, under subsection (2)(d) if—(a) the benefit is an interest of the person in the scheme that is withdrawn on the death of the person or under a relationship agreement arising from an event”—

I move, That the question be now put.

There are a couple of matters that I would like to draw the Minister’s attention to. The first is clause 76 appearing on page 47 of the bill, and in particular the insertion of new subsections CW 55BA(2)(a) and (b). This relates to tertiary institutions and the definition of an eligible tertiary institution for the tax deduction around exempt income. The principle set out in the clause is that the tertiary education institution or subsidiary must be 100 percent wholly owned in order to qualify. New subsection 2(b) says that one of the circumstances is that “where no person, other than the tertiary institution, with some control over the company is able to direct or divert, to their own benefit”. That, in the light of recent history, will be a problematic clause for a number of institutions currently in the market place. I would like to note some in particular, and why that clause is likely to catch them out.

Without going into unfortunate personal details, and I will not, it is well documented that the Taratahi Agricultural Training Centre has had a very mixed period of its history over the last 5 years, which has included the enrolment of some 70—70—staff as students, inappropriately—

The CHAIRPERSON (Lindsay Tisch): Order! That is not part of this.

Well, Mr Chairman—

The CHAIRPERSON (Lindsay Tisch): Come back to Part 3.

Clause 76, inserting new section CW 55BA(2)(b) goes to the issue of whether a person “with some control over the company”—I am quoting from the bill—“is able to direct or divert, to their own benefit”. I am making the point that that has actually occurred in the case of the Taratahi Agricultural Training Centre.

The CHAIRPERSON (Lindsay Tisch): That is making assumptions; you cannot do that. It is hypothetical. Come back to Part 3.

The Tertiary Education Commission employed Deloitte, and Deloitte concluded that funds had been diverted by the institution inappropriately. That is why the Government clawed back $6.47 million of inappropriately appropriated funds from the institution, on the basis of the Tertiary Education Commission’s review. That is not the only institution that would be caught by new subsection (2)(b).

The second one, of course, is the Western Institute of Technology, based in Taranaki. That institution had a habit of inflating its student numbers. It too, finally, after a whistleblower, was caught out—

The CHAIRPERSON (Lindsay Tisch): No. Come back. [Interruption] I have just stood up. The member is making a lot of comments that are not directly related to the bill. Come back to the bill. We are on Part 3 now, and I will not warn the member again—Part 3.

I raise a point of order, Mr Chairperson.

The CHAIRPERSON (Lindsay Tisch): No, look—I have ruled. Part 3—that is what we are on.

I raise a point of order, Mr Chairperson. I would like to seek your clarification on—

The CHAIRPERSON (Lindsay Tisch): No, I have asked the member twice now. Come back to Part 3—that is what we are on—and just focus on the content of what Part 3 is about.

I raise a point of order, Mr Chairperson. I am reading from Part 3.

The CHAIRPERSON (Lindsay Tisch): You are using a lot of examples that are not relevant. Just keep on Part 3.

I am going to read, without reference to those individual institutions, the language of clause 76 of Part 3 one more time. New subsection (2)(b) says: “where no person, other than a tertiary institution, with some control over the company is able to direct or divert, to their own benefit or advantage, an amount derived from the company.” Without naming a single example, I can say that over $50 million of taxpayers’ funds have been so diverted in the last 12 months, and caught out by the Tertiary Education Commission, and repaid. And those would fall afoul of Part 3 of this bill, as written.

I commend the Government, firstly, for the drafting of this clause, and, secondly, I commend the Government for the fact that, finally, after whistleblowers raised the alarm, those miscreants were caught. But they might not have been, and that is why we need to be extremely careful about the implications of Part 3 of the bill.

Let me turn to a different clause of the bill that relates to black hole expenditure for research and development—[Bell rung] Thank you, Mr Chairperson—enough on tertiary institutions. The key part of this bill, which is represented in its title—the title of the bill, the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Bill, turns on this part of Part 3, which is based upon the cashing out of losses for research and development expenditure. For the Committee to consider that, we need to compare the provisions of this clause against the current, pre-legislation status quo and the prior status quo. What this bill does is it allows certain loss-making companies to cash out losses of research and development expenditure, rather than carry them forward, up to a limit of $500,000 in the first year and $300,000 in subsequent years. Cash will need to be repaid—will need to be repaid—and losses reinstated once the company makes a return on the research and development investment. So, essentially, what this clause provides for is a tax deferral or, in effect, a loan from the taxpayer to the company, by deferring the period in which it has to pay its tax through a carry-forward.

That, in principle, is one possible means of sharing with the taxpayer the risk from innovation. There are two things that the literature makes really clear about innovation. The first is that the innovator never captures all the benefits on their own balance sheet, because there are spillover benefits that go beyond the company. Therefore, the public has an interest in encouraging innovation, including through the tax system—fair enough. Here is where the design question comes: is a cashing out of losses preferable to a research and development tax credit, or preferable to a grants system? Let us examine both of those options.

The research and development tax credit is the predominant policy instrument used around the OECD. It was also in the current Labour Opposition’s previous two manifestos at a 12.5 percent discount rate. It is a little higher—I think, 24 percent—in the Australian economy. That is a very simple, low-overhead way of achieving that objective.

The alternative approach that has been used up to now is the use of a grant system, as my colleague Grant Robertson mentioned, through Callaghan Innovation as the predominant provider. The problem with that is it is either discretionary, which has a high overhead, or non-discretionary subject to automatic criteria, as it currently is, which has led to a series of phenomenal botch-ups. The New Zealand taxpayer funded through Callaghan Innovation the Oracle America’s Cup bid against Team New Zealand. We gave it a research and development tax write-off through Callaghan Innovation—unbelievable. It funded a subsidy to the German multinational buyer to, effectively, develop and, arguably, expropriate New Zealand intellectual property through a subsidiary in New Zealand. It funded a company that was going to mine seabed sand resources and another one mining phosphate before either of them had a resource consent and which neither of them ever got, and they had to repay the money. You see, this is the problem with this so-called grant system. The research and development tax credit is a much simpler, cleaner, and, actually, more market-based system, which most Western Governments have found preferable.

So here in this bill is the Government’s fig leaf. It knows that the current system does not really work very well. It does not work for small start-ups, the quality control problems are enormous, and the bureaucratic overhead is skyrocketing. It needs the appearance of having a market-friendly instrument. Here it is: cashing out losses and paying them back later. But, as the regulatory impact statement makes clear, the impact of this instrument is so small, so limited, that any rational policy maker, irrespective of political stripe, would go back to the tax credit system that this Government turned down in the first place. That, based on the criteria set out in the regulatory impact statement, would be the rational thing to do, rather than this hodgepodge—this policy framework is more like a fruitcake; you never know quite what raisin you are going to find in it—of a baseline of a non-discretionary grant system and this overlay, which is kind of like the icing, of a tax loss, cash-out, payback system. It does not work, it is high-overhead, and it is confusing. Business is saying to us that it wants a simple research and development tax credit system, like it was promised in 2011 and 2014, but which it is still waiting for from this Government.

I move, That the question be now put.

I am going to hear from Jan Logie. She has an amendment.

It is with pleasure that I rise to speak to an amendment that we have added to introduce an income tax fringe benefit tax exemption for electric vehicles and public transport. I think this is very, very timely, considering the talks that are happening in Paris at the moment around the—[Interruption]—this is exactly on topic, Mr Chair.

The CHAIRPERSON (Lindsay Tisch): Do not talk about climate change.

The point of the fringe benefit tax exemptions is to incentivise the use of electric vehicles and the use of public transport within our businesses, to be able to help us transition as a country to a carbon-neutral economy, which is going to be better for the health of everyone—

The CHAIRPERSON (Lindsay Tisch): I hear where the member is coming from. Just concentrate on what the bill is about. You can use that as an example, but concentrate on what the bill has in it about the fringe benefit tax that your amendment is about.

Sorry, could I seek some clarification on that, Mr Chair?

The CHAIRPERSON (Lindsay Tisch): No, no. Do not talk about electric cars and things like that. Your amendment is fine.

Yes, which is about electric cars.

The CHAIRPERSON (Lindsay Tisch): Yes, and use that as an example, but do not concentrate on it. Yes, carry on—carry on.

I am sorry, Mr Chair. This is possibly me being obtuse, but the amendment is specifically about electric cars and public transport, so I am not sure how I can make that an example, because that is what it is about. So I will try to speak to this.

In New Zealand 20 percent of our greenhouse gas emissions come from pollution from transport, and we really need to get active and come up with some solutions to help us transition as a country. This amendment would help us do that. Currently, road transport accounts for 90 percent of that transport emission, and we are spending over $6 billion every year on importing petrol and diesel. These are things we could change if we incentivised businesses to use electric cars and to encourage their staff members to use public transport.

This is at the heart of what this bill is about: for very, very little cost to our tax system, we can encourage businesses to start buying electric cars and help change our car fleet in the country as a consequence. This amendment puts the fringe benefit tax exemption into place for 7 years for electric cars to give businesses the incentive to start changing their fleets.

In turn, one of the great flow-on benefits of that, I think, will be that when those businesses turn over their cars, they will be introducing electric cars into our secondhand-car market in New Zealand, enabling more New Zealanders to be able to go electric to clean up our emissions and to improve the health of New Zealand. That, surely, is a win-win.

The fringe benefit tax exemption for public transport does not have a time limit on it in this amendment, because that has no time limit, and we would hope that businesses would take that opportunity to encourage their staff to use public transport into perpetuity. Sadly, at the moment very few of them do that, so there is not likely to be a huge cost to it.

I would say, just bringing it back to that wider point around the absolute importance of this, that as we have heard in the media recently, there has been some discussion that there is very little New Zealand can do about reducing our emissions below one of the lowest targets in the world. This bill proves that there is a lot we can do, because one example—two small amendments to this bill to put in a fringe benefit tax exemption for electric cars and public transport would, potentially, shift our culture and business practices to put us on that road to a low-carbon future.

That is about protecting the well-being of our communities right now, business bottom lines, and the future of our country and this planet, and I really hope members in this Committee will look at this amendment.

I move the motion be now put.

💬 Hon Member: No, that’s hopeless. Try again.

The question is that we are moving to the vote on Part 3.

The question was put that the amendments set out on Supplementary Order Paper 129 in the name of the Hon Todd McClay to Part 3 be agreed to.