Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill

This is a reasonably complex bill. It deals with a number of issues that the Labour Party feels quite strongly about. In Part 1 we are talking about the Student Loan Scheme Act 2011, but we are also going to be debating, in other parts, Income Tax Act changes, Goods and Services Tax Act changes, Tax Administration Act changes, as well as the title and commencement clauses. As mentioned, there are a number of Labour speakers who, I know, will take calls on this technical bill because there are quite a lot of clauses and quite a lot of concepts that do need explaining. The reason for this is there is quite a lot of relevance in this bill that impacts upon others outside the stock-standard tax practitioner bracket.

What I would like to talk about, first and foremost, is charities. The issue we are trying to solve here in Part 1 is that often what happens with students is they head off on an OE. They have finished their studies, they have a student loan, but under the Student Loan Scheme Act if a student with a student loan heads overseas, they must pay interest on that student loan. But what is allowed to happen is if a student is working for a registered charity for a maximum time of 24 months, then they are classed as still being domiciled in New Zealand. So even though they may head off, they do not have to pay interest on their student loan.

The problem we are trying to solve is that under the current law charitable organisations must be approved by Cabinet for the purpose of the student loan scheme interest write-off and listed in regulations. What can happen with this is by the time that goes through the approval process, the student is overseas, they have already accrued a whole lot of interest on their loan, and they do not get full benefit. So what this bill does is it basically removes the need for Cabinet to approve a charity. What I will say, which is quite interesting, is that the level of disclosure required under this bill by the commissioner for charities is quite unusual compared with other pieces of legislation on the statute book when it comes to tax law.

💬 Grant Robertson: Oh, well done.

I know. For example, when I compare new sections 27A, 27B, 27C, 27D, and 27E, inserted by clause 7—this basically relates to what the commissioner’s responsibilities are with regard to listing charities, what qualifies as a charity, whether the commissioner can delist a charity, etc., etc. The regulations are quite prescriptive, and the level of disclosure is quite onerous. In fact, I suspect that if we were to compare this bill with other pieces of tax legislation, like, for example, the legislation governing overseas trusts—

The CHAIRPERSON (Hon Chester Borrows): Do not go there—stick to Part 1.

Absolutely, Mr Chair, but what I am saying is that I think this is very good, because what this is doing is requiring a level of disclosure that meets the expectations of the general public of New Zealand. We like to know, with our tax law, that there is a level of transparency that cannot be overridden or abused in any way, shape, or form. This is what this does. Like I said, what it does is it takes the onus from Cabinet and gives it to the commissioner. For example, new section 27B prescribes the primary matters in which the commissioner must be satisfied for listing a charity, and that goes into quite a level of depth around charity law, etc., etc. There are a whole lot of requirements that must be met before an entity is listed as a charity.

New section 27C is about an application by an entity to be listed as a charity, so there is a process that every entity must go through before it seeks the listing, which, again, is very transparent. It is out there so that organisations are left in no doubt as to what they must do. But having said that, there is also, in clause 7, new section 27D, which says the commissioner may list a charity for tax purposes even if no application has been made or if, in fact, the commissioner requires more information. What this means is that a student traveling overseas to work for a charitable organisation will not be disadvantaged if that organisation has, at the point of registration or application, met all the requirements. There are a number of clauses in here that I will talk on at a much greater level of depth, but I thought that this is important first and foremost, because I know—

Thank you, Mr Chair. Thank you for this opportunity to stand up on behalf of New Zealand First in relation to this taxation legislation. I wanted to touch on just a few things that, coincidentally, have already been raised, and just reaffirm some of the words that have been spoken already in the Chamber. This is a highly complex bill, and a number of the pieces of legislation that are being altered are significant and quite varied. It is important that we get this opportunity to come back and touch on each and every one of them.

I first of all want to add New Zealand First’s voice to the charity discussion. The intent there is to ensure that a student is recognised as still being domiciled in New Zealand for the purposes of repayments, in terms of their student loan. We acknowledge that this is the right and fair thing to do, but in reference to new section 27A, inserted by clause 7, “(1) The Commissioner must keep a list of entities that are charities for the purposes of section 25(1)(b). (2) The list must specify”—I will not go and read all of that out, because I think there seems to be a consensus already that the specificity is quite detailed. In fact, there should be greater debate, and perhaps a question for the Minister in the chair, Michael Woodhouse, about the level of obligation for charities in terms of declaring of information, because, I would suggest, we may have gone too far in terms of the charity’s obligations.

Also, new section 27E—are there currently entities—oh yes, I have a question to the Minister. New section 27E, inserted by clause 7, is quite specific. It says that entities listed under the Act as charities do not meet the criteria set out section 27B. The question is, are there entities listed under this charities component of the legislation that do not actually meet the current criteria? If that is the case, then does the commissioner now have an arbitrary right to delist them from that charities list? It is a fair question, a reasonable question, and something that we would like clarity on.

Then, if you actually move on to new section 176A, inserted by clause 23, the level of disclosure goes quite far. What the question is, in new section 176A, is a question around the charity being able to contest the decision of the commissioner around the charity listing in the legislation. It says the entity can contest the decision if it believes it “is not fair and reasonable;”. My question to the Minister is—new section 27B sets out a very clear and straightforward list of the definitions in terms of requirements for defining what a charity is, so what is the opportunity there for entities to say what is not fair and reasonable about the decision? It is legislative—it is a tick in the box. There is no debate involved in it; they are either a charity under the Act, or they are not. It is just a matter of confusing the issue there.

If I could take the Committee’s attention to new section 209A, inserted by clause 26, “Disclosure of information to Australian Taxation Office in relation to borrowers who are, or may be, overseas-based”. New Zealand First looked at this part of the legislation and said that, actually, that is quite reasonable. We are very clear on our expectations for New Zealanders in terms of paying back their debts and their obligations in terms of borrowed money. When we looked at the legislation, we said: “Well, it makes sense that New Zealanders overseas should be required to do the same thing.”, and so we ran into the issue about information sharing. The solution in new section 209A(1) is to “(a) obtain or verify contact details of borrowers who are, or may be, overseas-based; and (b) administer the student loan scheme in relation to those borrowers. (2) For those purposes, the Commissioner may provide the information set out …”.

Again, the level of detail there is quite high, but I just want to take this opportunity to make a contrast, because we have current issues in front of the House at the moment where we look at the clear ability for two Governments to come together, talk very clearly with one another on information sharing, data sharing, contacting individuals—

Thank you, Mr Chair, for the call—that is terrific. I also want to talk about clause 26 within Part 1, which relates to the new provisions on disclosure of information, in this case to the Australian Taxation Office. By way of background, what is happening here is that, effectively, New Zealand has a new arrangement for the exchange of information regarding student loans, which was signed between the Australian Commissioner of Taxation and the New Zealand Commissioner of Inland Revenue in March 2015.

This sits alongside a range of provisions in New Zealand law to exchange information with other taxation jurisdictions; for instance, double taxation agreements that we have with Australia and with around, I think, 40 other countries; and also what is called—as this is—a taxation information exchange agreement, which we currently hold with 11 countries. It is not 12 countries. Malta is not on the list of countries with which we have a tax information exchange agreement, despite what the Prime Minister told the House last week when he stood up and said that we did have a tax information exchange agreement with Malta—we do not. He has not come to—

The CHAIRPERSON (Hon Chester Borrows): We are talking student loans here.

I raise a point of order, Mr Chairperson. We are indeed, and what we are specifically talking about, if I refer to the commentary on the bill provided to us by the Minister, is an “Arrangement for the Exchange of Information”—those words all have capital letters on them. I am currently working through the arrangements for information exchange that are in the call.

The CHAIRPERSON (Hon Chester Borrows): Taking the member’s point of order, what we are talking about—and I refer specifically to the clause that he is talking about—is the disclosure of information with the Australia Taxation Office. If he wants to make some side reference, then he has done that, and he should move on.

Thank you, Mr Chair. So, as I was saying, it says in new section 209A(1): “The purpose of this section is to facilitate the exchange of information between the Inland Revenue Department and the Australian Taxation Office”. What I was pointing out was that we have a double taxation agreement with Australia. This taxation information exchange agreement is an additional agreement. I was just making the point that we do not have one of those with Malta and I am waiting for the Prime Minister to correct that.

The reason that we have this clause in here is to enable a much clearer line of communication between our Inland Revenue Department and the Australian Taxation Office. There are certain details that are now required to be exchanged. Those details in new section 209A(3) include: “(a) a borrower’s name or any other name by which a borrower is known: (b) a borrower’s date of birth: (c) a borrower’s tax file number: (d) a borrower’s last known address and contact details: (e) any other information that the Commissioner considers relevant for the purposes referred to in subsection (1)(a) and (b).” That is quite a comprehensive set of details about student loan borrowers.

💬 Dr David Clark: And we know who the beneficiary is.

Indeed. In fact, the first one is well worth going into a little further—“a borrower’s name or any other name by which a borrower is known”. That is actually a comprehensive way of identifying who a student loan borrower is.

If we compare that with other disclosure arrangements that the Inland Revenue Department has—in fact, I will put the question to the Minister of Revenue as to whether he would like to compare that and see whether he thinks there is fairness here for student loans borrowers, versus, for instance, those who run a foreign trust in New Zealand who actually can get away without even saying what the name of the trust is, because if you do not know what the name of the trust is, you do not even have to put it in the form. No. You have just got to describe it; you do not actually have to put the name in it. So a question for the Minister is whether he thinks it is fair that student loans borrowers have this obligation but those people who want to avoid paying their tax elsewhere in the world do not even have to put the name of their trust down.

We can say the same thing here about the extent of these disclosure arrangements, because there is no doubt in this—there is no “might” or “if”. Information has to be collected and available and shared. It is that sharing that is the essence of this clause. It is not just about making sure that a student loan borrower keeps that information, because if we were comparing this with other disclosure arrangements in tax law, the person who is a settlor of a foreign trust in New Zealand just has to keep the information. They do not have to share it with anybody; they do not actually have to make it available; they just have to keep it. I wonder whether the Minister would like to tell us whether that is fair. If student loan borrowers have to meet their repayment obligations—and I think everybody in this Chamber acknowledges they should, because that is an important part of having taken out a loan—why are those sorts of obligations not on other types of people who interact with the Inland Revenue Department? I would like to hear the Minister justify some of those concerns.

It is a great pleasure to talk on the Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill. We are talking about the student loan scheme portion of the bill, which is actually the smaller part of the bill. The bigger parts, which we will come back to, will be around other areas of the bill—the residential withholding tax and also the GST amendments—which probably will be more helpful for that last speaker, Grant Robertson, because he will actually be able to speak on the bill, rather than to wander off and try to make political statements that are completely irrelevant to the actual bill that he is talking about.

💬 Dr David Clark: Don’t question the Speaker’s judgment.

Oh, the Speaker made no judgment, Mr Clark—the only judgment is your judgment in your leadership, so I would not be yelling out too much.

The CHAIRPERSON (Hon Chester Borrows): Back to the bill.

When we look at the student loan scheme amendments section of the bill—this is the important part of it; not as important as the other two parts but still important. Most student loan borrowers do the right thing and they repay the amounts on their student loans.

💬 Hon Clayton Cosgrove: Did you pay yours back?

What is that, Mr Cosgrove? Well, he will be paying back his soon—when he has to go and get a real job and do some real work other than working for the Labour Party. Most student loan borrowers repay their loans, but when we have borrowers overseas we have a lower rate of compliance and so there is a lower rate of return to the New Zealand Government from overseas-domiciled New Zealand borrowers of student loans.

Basically, over the last few years you have seen some legislation in this area to try to claw back some of that student loan from borrowers who are overseas and to make sure that we get a better repayment from New Zealanders who have taken advantage of our education system and got a good education, have gone overseas and got a good job, and have not paid back their student loan to the extent that those who have been living in New Zealand have.

This bill contains further amendments in that area, notably around the arrangement of exchange of information regarding New Zealand student loans with our Australian counterparts—that is, the Commissioner of Taxation in Australia and the Commissioner of Inland Revenue in New Zealand. Basically, there will be a greater exchange of information. Many New Zealanders who study and then go overseas do go to Australia to work, so that is one thing: there is a higher preponderance of people who have not paid back their student loans who are in Australia, compared with other countries. This exchange of information will allow the Inland Revenue Department to receive up-to-date contact details for New Zealand student loan borrowers living in Australia through matching borrower details against the Australian Taxation Office records of Australian taxpayers. It is important for New Zealand’s tax base that we have that information and, therefore, we can go further in seeking repayment of those loans.

The bill also has a few smaller things in it around delegation of authority for charitable purposes, to acknowledge that some organisations that borrowers may be working for are charitable. Basically, there are situations where borrowers may volunteer and go to work overseas. They are treated as if they were physically present in New Zealand so they do not have to pay interest on their student loans, whereas if they had been treated as being overseas working for a voluntary organisation, they could have then been seen as having to pay interest on their student loans. So, taking into account those New Zealanders who make a contribution to the world through the volunteer work that they do, we are making it easier for the student loan legislation to be more efficient in how it impacts on those members of our community. The student loan scheme changes will apply from enactment of this bill, so that will enable us to have that sharing of information with the Australian Taxation Office immediately.

This is not the most complicated part of the bill, or the most debated part of the bill—you will see that more around the residential land withholding tax; I am sure that there will be more opinions on that area, and also in regard to the GST on online services—but it is part of this bill, it is part of that work around student loans to enable New Zealand to get the best return that we can for those people who have borrowed and have gone overseas, and are getting the benefit of the student loan, especially in the Australian context. Thank you very much.

Who needs John Shewan when we have that member, David Bennett? The Government could have saved a lot of money by having a special inquiry appointing that member as an absolute expert on all things in respect of taxation. But I will move on from his fiscal prowess.

There is an old adage in respect of tax that for a tax system to be credible with users it has to be simple, it has to be transparent, and it has to be consistent—consistent. Looking at new section 209A, inserted by clause 26 of the bill, and the other provisions around student loans, I want to ask the Minister in the chair, Michael Woodhouse, a question in a comparable sense. We have taxation agreements with Australia in respect of liable-parent contributions. I do not want to track into that too much, but I want to ask him a question around the inquiries that he may well have made of our Australian counterparts in respect of their robustness in doing their part of the deal in terms of the collection of student loans.

In my experience, having represented some constituents over the years, when it comes to liable-parent contributions there is always an argument that is made that when you go to the Australian side of the coin—the Australian inland revenue service, the Australian Taxation Office—they have got a bit of an attitude that says “We’ll get to that when we can”, whereas our Inland Revenue Department, in terms of policing, on our side of the fence in respect of Australians, tends to be a little more vigorous in terms of meeting our obligations with our Australian cousins. But it has been said by many a constituent that when they are trying to deal with their liable-parent contributions, and representations are made to the Australian Taxation Office, it does not prioritise this in a great way—it gets to it when it can, as per its other work. I am being colloquial, but that is the feedback that comes through from people.

I suppose my question to the Minister is: have there been any representations made to the Australian Taxation Office in terms of what priority it will give, in the collection of student loans and information sharing, to doing its half of the work, if you like, in its jurisdiction? I think that is a fair question to ask, and I look forward to an answer.

As I said—and I know the previous speaker, David Bennett, did not touch on these issues—fundamentally, there needs to be consistency within a tax framework. Simplicity and transparency: they are the fundamental tenets for the tax system to gain credibility with those who use it. It is worth making the comparison, as Mr Robertson did, with the level of detail that is required to be disclosed to the Australian Taxation Office in respect of new section 209A(1), (2), and (3), where we are talking about the borrower’s name—or any other name they may have been known by—date of birth, tax file number, and last known address and contact details. You are almost asking for the borrower’s shoe size, with the length and depth of information that is required to be disclosed and passed on.

Many would argue that that is fair enough. Like many members of this House, many moons ago, before I came in here, I had a student loan. I was lucky enough to get a decent job and pay it back, and I think most students, just like most taxpayers, would argue that they should meet their obligations. Many struggle because of the nature of the income—or lack of it—that they get, but I think most fair-minded Kiwis would say that they will meet their obligations. However, if you compare the depth and detail in the requirements under new section 209A with other parts of the tax system—the policing of foreign trusts, for instance, but I know that is a quarantined subject. It has had razor wire put around it in this House; we are not allowed to talk about it. Somehow it is like some disease that has come in here that has infected the place, but we have got to pretend that it does not exist. What is it? Suspension of disbelief, I think is the technical term that people use from time to time. If you compare the requirements on a student with the requirements on those who use foreign trusts within a jurisdiction, you have got to ask: does this bill and does that matter, though it is secondary to this discussion, meet the test of a consistent, transparent, simply-put-together tax system and tax framework? I ask the Minister whether he could provide us with some information on that.

There seems to be a gross inconsistency. No one is arguing that the requirements in new section 209A, inserted by clause 26, are not required or are onerous or are too tough. What people are asking the Minister of Revenue is whether he still agrees with the tenet that a tax system should be transparent and consistent.

I want to pick up where my colleague Grant Robertson—

The CHAIRPERSON (Hon Chester Borrows): As opposed to repeat it, you are just going to pick it up, are you?

Yes, pick it up, Mr Chairperson. The clause 26 references that my colleague referred to, and I trust he may speak further on this, lead into other important aspects of the student loans aspect of this bill. As we have canvassed, we are required, under this part of the bill, to record a borrower’s name or any other name by which the borrower is known, a borrower’s date of birth, a borrower’s tax file number, a borrower’s last known address and contact details, and any other relevant information.

The CHAIRPERSON (Hon Chester Borrows): You are the third speaker to debate this issue.

That is not the end of the matter; that is the precursor. That information then goes on, through to other parts of the bill, and is required as background for a number of other calculations that we find in subsequent clauses. That very information is used as background to inform calculations that say that the borrower must pay tax equal to the larger of two amounts, and those two amounts are calculated using various formulae. In clause 30, to do with shareholders in close companies, we have a calculation of the amount of earnings they might have, as compared with ordinary earnings.

That is a level of detail into which the bill delves. In new clause 11 of schedule 3, inserted by clause 30, there are requirements for borrowers who are settlors of trusts. We read that “This clause applies for the purpose of determining the amount that is included in the adjusted net income of a borrower for an income year when the borrower is the settlor of a trust (the borrower’s trust) …”. That amount is calculated, again using a calculation in subclause (4) of new clause 11: “(a + b) ÷ c”. Again, it is of the nature of where the income is either greater than zero or, calculated by this trust, greater again—so we have there calculations that build upon the information collected earlier, in order to ensure that the borrowers pay their fair share. That is what it boils down to, in plain language. It is about making sure the borrowers have complete transparency in the calculations that are made, and that it is then calculated in terms of their fair share, built upon what they earn via their various means or where their income sources come from.

That is sensible. Nobody here, I think, will dispute that. But until we had these Panama Papers, there was a saying that there are two things in life that are certain: death and something else that they seem to have forgotten on that side of the Chamber. It was about collecting taxes. Now we have a debate in this Committee about exactly whether these clauses should apply and how. We delve into the detail, and we see that the principle underlying it is about making sure people pay their fair share according to the various interests they have. These interests are disclosed and known to the tax department, because there is a high burden of proof on the taxpayer to declare all of their information, including things such as other names and other relevant information, which is a catch-all clause.

That feeds through, in fact, into all of these subsequent clauses in the pages that follow. Those calculations add up to, in many cases, a greater amount than were the borrower simply a borrower simple, with no other business interests, with no trusts that they were the settlor for, with no close companies that they were responsible for, and so on. That is how the calculation is made. Were it the case that these people had foreign trusts, where their interests were not disclosed, that would not be captured in these clauses unless it was captured under “other relevant information”.

That is why, in this bill, I commend the fact—and I am sure my colleagues will too—that we are collecting this wider set of information. It is a good principle of tax law to collect all relevant information, to ensure that people pay back their fair share. I have been a student loan borrower, as many others in this House will have been, and I have not resented the fact that I had to pay that loan back. That is something that, in my time, was the expectation that I went in with. I do think that over time—

I rise to speak on Part 1 of the bill. I note that this part of the bill is the most problematic for the Green Party. This is what I raised during my second reading speech. On the one hand, we support the changes that mean that student loan borrowers who are working overseas for approved charitable organisations and for approved aid activities as volunteers are entitled to be treated as if they were physically present in New Zealand, and as such they are not charged interest on their student loans for a maximum of 2 years. We thought that that makes sense, and it is good that we are making it easier for borrowers who are working for charitable organisations to have that recognised so that they receive the benefit that they are entitled to—an interest holiday, if you will. But overall the Green Party has great concerns about the student loan scheme generally.

I suppose it goes to the overall priority about whether or not it is important to prioritise the opportunity for education for people, without loading them up with a whole lot of debt. For the Green Party, it would be a priority for us, in order to create a knowledge-based economy, a clean, green economy, all of that, to ensure that we are investing in our people and giving them opportunities. We are not really giving them opportunities when, at the same time, we are offering them an education but loading them up with debt. But I would say that—as many of my colleagues have referred to in Part 1 of this bill—in terms of the aspects, the changes, to the student loan scheme, on the one hand although overall we would question whether or not it should be a priority for the Government to ensure that students are paying for their education as opposed to the wider society, which is going to benefit from that, the principle of information sharing for the purposes of ensuring that, say, taxes are paid when they should be is really important.

So I can understand this principle of information sharing, and we thought it was a good thing in the bill that in clause 26 there is this full disclosure of information to the Australian Taxation Office and that a whole lot of information is provided so that people who have taken on student loans under the scheme—even though the Green Party does not fully agree with that scheme, we want to ensure that the borrowers are paying it back. It might be $600 million or $800 million that is owing in student loans according to the regulatory impact statement, which estimated it was something in the order of $600 million to $800 million for people living overseas who have not been paying back their student loans.

One of the ways that we resolve this is through information sharing and understanding exactly who the borrower is, what their name is, their date of birth—all this information. That seems perfectly reasonable. But in the context of things, the amount that is owing is quite small relative to the amount that we might be missing out on tax that is not being paid by multinationals, for example, that are avoiding paying tax in New Zealand. The amount that we are missing out on there—between $500 million to $1 billion, possibly more—is considerable.

So we have the resources of the Government being put to chasing down people with student loans rather than focusing on much greater amounts of money that we are missing out on, on tax from multinational corporations that are not paying their fair share here. At the same time we are going through this process to do this information sharing with Australia and to gather all of this information about the borrowers and yet when it comes to foreign trusts in New Zealand we do not request any of that information.

We do not make it possible for our partners in the world—other countries that are partners in double tax agreements. Even they cannot request information about very, very wealthy people who might be using New Zealand foreign trusts to avoid paying tax in their home country. Virtually the only country that could request that sort of information is Australia, and that is only because it complained to the New Zealand Government in 2006 because it knew that wealthy Australians were using New Zealand as a tax haven to avoid paying tax. Since we do not have that sort of agreement with other countries, they are not able to request this information.

Strangely, when we proposed in the House last week to the Prime Minister that it might be good to have a register with more information about the settlors of these trusts, so that other countries could request information from us and ensure that New Zealand foreign trusts were not being used to dodge tax—

Thank you very much, Mr Chair, for the opportunity to speak to Part 1, which amends the Student Loans Scheme Act 2011. I want to concentrate my contribution, in the first instance, to clause 17, which replaces section 114 of the principal Act. The original section was titled “Notification of worldwide income by New Zealand-based non-resident borrowers”. It sounds technical, but I will get to the point soon.

The CHAIRPERSON (Hon Chester Borrows): Good.

Thank you, Mr Chair. There has been an argument made on this side of the Committee around the principles around a fair taxation system and around the obligations that people who have taken out student loans and have potentially moved overseas have to meet in order to pay their fair share—to repay their student loans back. We want to make sure there is consistency within this piece of legislation and with the taxation system as a whole.

Clause 17, which replaces section 144, talks about worldwide income by New Zealand - based non-residents. New section 114(1) states: “This section applies to a New Zealand-based borrower who is a non-resident and who has Schedule 3 adjustments.” I have gone to schedule 3 of the principal Act to see what it might entail if there was a schedule 3 adjustment. In clause 30 of the bill, clause 11 of the replacement schedule 3 talks about borrowers who are settlors of trusts. It goes on to say, in clause 11(2), that schedule 3 does not apply if a trustee of the borrower’s trust is registered to a charitable entity. I think that many speakers have spoken about that—that the borrower’s trust is solely for the benefit of the local authority. I can understand that.

But clause 11(3) of schedule 3 goes on to a very complicated—well, not too complicated—formula to ascertain the adjustment within schedule 3 to the New Zealand - based non-resident’s payments in a specific year. The rough calculation is (a + b) ÷ c—I do not want to bore people at home with the detail, but I have to because this is the Committee stage—“… where—a is the net income of the trustee of the borrower’s trust for the income year reduced, to not less than zero, by the amount of the trustee’s income that vests or is paid by the trustee as beneficiary income for the income year”; and b is “the greater of zero and the total of amounts calculated in accordance with subclause (4) for each company in which the trustee of the borrower’s trust and associated persons hold voting interests of 50% or more on the last day of the company’s income year”; and c is “the number of settlors of the borrower’s trust who are alive at any time in the income year, including the borrower, to which this clause applies.”

My point is that that is a hang of a lot of information. I do not entirely understand it all, but it is a lot of information to disclose, for a New Zealander who has got their interests in a trust, who has obligations back to the New Zealand people to pay back money that they have borrowed in order to study. It is a lot of information. We have been talking about the principle of consistency around the obligation to make sure you pay your fair share of income tax, and I think there is an inconsistency here about the information that is demanded from someone who is a New Zealander resident overseas who has a trust and has an obligation to pay back to the State their student loan, based on what they are earning, and, let us say, a foreign trust where these people have come from overseas, set up a trust, and all we demand from them is a name.

There may be a theme developing here but I think this is one instance, in clause 17, where we must take a principled approach to taxation. If we are demanding information of the complicated nature that we have within schedule 3, under new section 114, which is in clause 17 and within this bill, why have we not got that same consistency in terms of demanding information from those who hold foreign trusts in New Zealand? That is a question that I would like to pose to the Minister in the chair, the Hon Craig Foss. Why is the Government not taking that move for consistency? Why is there not the consistency? I know that it might be a bit complicated for the Government. It might be too complicated for the Government.

It is opportune, because I also want to pick up and develop the ideas that the previous speaker, Kris Faafoi, was working on, in particular looking at—I can see how pleased you are about that, Mr Chair; it is great to have your endorsement—the amendments to schedule 3. I am looking here at clause 11—

💬 Dr David Clark: I want to hear from the Minister.

Oh no, I am coming to that. Clause 11 of schedule 3, inserted by clause 30 of the bill, is titled “Borrowers who are settlors of trusts”. It is very important to go back and recognise that all of the amendments in Part 1 of the bill relate to borrowers—or the vast majority of them—who are offshore. So this is when you are in Australia and you still owe the money but you—

The CHAIRPERSON (Hon Chester Borrows): Student loan.

Student loans—that is right; student loan borrowers offshore. But in this case we are talking about borrowers who are the settlors of trusts. That is the heading in clause 11—

The CHAIRPERSON (Hon Chester Borrows): Student loan borrowers.

This is an interesting conversation we are having here, but, yes, I think we are on the same page metaphorically and literally. So, as my colleague has mentioned, there is an expectation inherent in this clause that we know the income that the borrower is getting from the trust. That is actually what the clause is based on, and the formula that my colleague mentioned, in clause 11(4) and (5) of schedule 3, are generated by knowing the income of the trust. That is, essentially, what lies at the heart of this clause.

That would be right if you were a New Zealand resident borrower, because if you are a New Zealand resident borrower and you have a trust, you have income tax obligations, but not if you are not in New Zealand—not if you are not a New Zealander. Changes that have been made in recent years mean that if it is a trust where those who set it up are not New Zealand residents they have no income tax obligations.

💬 Dr David Clark: None.

Whatsoever. So here we are with student loan borrowers who are the settlors of trusts and have a string of obligations put upon them, which we can enforce—which the Inland Revenue Department can enforce—because it knows the income that that trust is generating. A tax return is returned, and then we can judge from that how much the borrower—the student loan borrower, Mr Chair—would be paying back. That is a fair system.

Contrast that with the information that we have about other types of trusts: foreign trusts, where there is no information like that that could even be used to work out whether or not somebody owes money. Once again we have our concern on this side of the Chamber about the absence of the critical element of a taxation system: fair treatment. New Zealanders should be proud, in general, of our tax system. It actually is robust, and it does work well. But where deliberate decisions are made, as they were in a tax bill that went through this Committee in 2010, to create loopholes through which we could, for instance, zero-rate a managed fund, we then create the opportunity for that to be exploited—

The CHAIRPERSON (Hon Chester Borrows): Come back to the bill.

—and unfairness to join in our system.

My question for the Minister in this regard is somewhat technical, but it is relevant: at what point does somebody become a non-resident for tax purposes? If the issue that we know of, in terms of the setting up of trusts, is that if you are not a resident that is where you can exploit the loophole, how long would a borrower who is the settlor of a trust need to be away from New Zealand to no longer be considered a resident? This is a serious question, because we are dealing within clause 11 of schedule 3 here with exactly that kind of person: a person who has been in New Zealand—

The CHAIRPERSON (Hon Chester Borrows): Who is a student loan borrower.

That is correct, but in this case, it is a student loan borrower who is the settlor of a trust. I am pretty sure we are still on the same page. At what point after they have been away is that student loan borrower no longer considered a resident for tax purposes? This matters when it comes to the question of their obligations as a settlor of a trust, because we know those obligations are, in fact, different depending on whether or not you are a resident or a non-resident in New Zealand.

Again, it is a question of basic fairness, and the reason I am raising it with the Minister is that we do now know that a lot of young New Zealanders are spending longer away, having graduated from university with a student loan. Should they have structured their affairs in such a way that they are the settlor of a trust, can the identity of that trust change over time so that it, effectively, becomes a non-resident’s trust and therefore no longer subject to these obligations?

I would like to talk about clauses 26 and 73. This is about the disclosure of information to the Australian Tax Office about borrowers who are, or may be, overseas-based. The issue this is trying to solve is one of the key problems in collecting overseas student loan payments: holding up-to-date contact information for defaulters. You know, if you cannot get hold of them, then how can you liaise with them or correspond with them? Many of them are believed to live in Australia, and what this will allow is the exchange of information, as has been talked about, between the Inland Revenue Department (IRD) and the Australian Taxation Office to receive up-to-date contact details of New Zealand student loan borrowers residing in Australia through matching details against the Australian Taxation Office’s database of Australian taxpayers.

What this will allow the IRD to do is to contact those individuals and keep them engaged with their student loan obligations and, where appropriate, recover outstanding student loan repayment amounts. The thing we cannot forget when we are talking about student loan borrowers and, even more, about student loan defaulters is that when a New Zealander has signed a contract with the Government to undertake a student loan it is a legally binding agreement and they must abide by the terms. I think it is just incorrigible that someone may head across to Australia to avoid paying off their student loan after, arguably, drawing the benefits of that loan in order to get educated or do whatever people do with student loans.

The thing about this, and this is where it is quite clear, is that an amendment to the Tax Administration Act 1994 creates an exception to the taxation secrecy provisions. The one thing that the IRD values more than anything—what its whole integrity is based upon—is, in fact, maintaining the secrecy of individual taxpayers, so no one knows what anyone else is doing. My personal view is that the IRD does act with complete integrity in this instance. It has a number of clauses and terms and conditions and individual employment contracts that ensure that all staff members know that they have to maintain the integrity and the secrecy of each taxpayer.

So the interesting thing about clause 26 is that it limits who in the Australian Taxation Office is authorised to receive the information from the Commissioner of Inland Revenue. Again, this just maintains the integrity of the tax system. But it also prescribes the information that may be provided by the commissioner and says that the information must be relevant for the purpose. What I mean by this is that the IRD cannot go on a proverbial fishing exercise. So it cannot say to the Australian Taxation Office: “We want everyone between the ages of 21 and 28, between A and Z, who holds a New Zealand passport that is registered with these names.”

This is the interesting thing: it can go after only those people who it knows have a student loan and who it suspects may be living in Australia. When I say “suspects may be living in Australia”, the bill is actually quite clear. The IRD does not have to prove they are living in Australia; it just has to suspect they are living in Australia. This is, again, where we come back to a common theme, which is that it has to actually know what it is looking for. If you do not know what you are looking for in tax law, then you will never ask the important question to get the information. We have talked about overseas trusts and this sort of thing, and I do not want to bring that up again, but it is a great example—when someone says “we have a transparent system” how do we know it is transparent? Those who are seeking transparency will never seek answers for questions they do not know whether to ask or not.

It actually would be good for the Minister in the chair, Craig Foss, to speak about this, and the reason I say this is that I have a suspicion that Mr Foss is an expert in this. I know he is a financial whiz. He has worked overseas in financial markets—I say this as a positive, not a negative—and I would like to hear his views on how this legislation compares with other pieces of tax legislation and whether he thinks this is consistent with other pieces of legislation.

The other clauses I would like to talk about are clauses 8 and 9. This is about the treatment for over-recovered additional deductions. I will just give a bit of background on this. The Commissioner of Inland Revenue is able to require a New Zealand - based student loan borrower’s employer—i.e., the boss of a student loan borrower—to make additional deductions from that borrower’s wages and salary to meet previous shortfalls in repayment obligations. The commissioner is allowed to do this by law without actually seeking the permission of the student loan borrower.

What the IRD does is it writes to an employer—it must be in writing—and the commissioner advises the employer of the total additional amount to be deducted, and by law the employer must deduct this money from the employee’s account. But it is also recognised that there may be circumstances in which the commissioner might have got it wrong, or the employer has deducted too much, or something, so what it does is it ends up creating an inherently unfair situation for that employee—that student loan borrower. There is one thing that I think one of my colleagues talked about, and that is the inherent fairness of the tax system. One of the guiding principles of any tax system, but certainly the New Zealand tax system, is fairness.

What clauses 8 and 9 do is allow a student loan borrower who feels aggrieved by the commissioner requiring an employer to take money without their knowledge to apply to the commissioner and say: “Hey, I think you’ve made a mistake.” It has to be done in writing, and there is a whole set of processes that a student loan borrower must follow, but what it does allow, at least, is a sense of redress, which, again, is important, and I think just adds weight to the Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill.

There is just one other thing that I would like to mention, and it is a point of clarification, I suppose. A number of speakers have talked about deposits in income equalisation accounts and shareholders of close companies. Income equalisation is an interesting topic. What this is intended to do is allow persons to carry on—initially, actually, it was agricultural, fishing, and forestry businesses—and smooth their incomes over years when they may have massive highs and massive lows. So this is where clause 30, “Schedule 3 amended”, talks about deposits in main income equalisation accounts. Again, it brings with it that notion of fairness.

What it does allow, I believe, is the avoidance of the aggressive sort of tax planning that some individuals may feel they want to enter into, in terms of avoiding their obligations, which, again, is most important. But, basically, clause 30 inserts into schedule 3 new clause 7, which says: “The borrower’s adjusted net income is increased by the amount of a main income equalisation deposit the borrower makes for the income year.” So if the student loan borrower whacks $50,000 into this equalisation account, then his or her income increases by that amount. Again, this is used as a smoothing tactic, which is fair, and it makes a lot of sense, to be honest. But this just ensures that no one is avoiding paying their fair share.

We have talked about borrowers in trusts, but there are also borrowers who are major shareholders in close companies. Again, what the legislation does is list the different entities a borrower may be engaged in, in terms of just the normal, I would have thought, process of doing business—companies, equalisation accounts, trusts etc., etc. What it does do—and this is why we are supporting this part of the bill—is introduce that level of fairness. But it also ensures, as mentioned, that people cannot—well, in my view—undertake the sort of aggressive tax planning that we want to avoid in our tax system.

But that is probably all I am going to talk about for now. There still are some other issues that need to be clarified within Part 1, but let us see where we get to with the next speaker.

I move, That the question be now put.

Motion agreed to.

Part 1 agreed to.

Part 2 Amendments to Income Tax Act 2007