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

Part 2 of the Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill basically consists of amendments to the Income Tax Act. This is, I suppose—I was going to say the substance of the bill. That is a little unfair. It is not, because everything is important. This bill, just to give a little bit of background, is one of three bills that were designed to put the Government’s 2-year brightline test into force. So what that is about is there was a feeling that overseas speculators were coming into this country, investing in houses for making a very quick capital gain, and onselling the houses within 2 years. The Inland Revenue Department (IRD)—we talked about this before—suggested a 5-year brightline. Treasury or the Minister of Revenue rejected that. We are not too sure why, because it was certainly recommended by the IRD. But once that was in place a whole lot of other legislation needed to fall in right behind it to ensure that there was no way that a 2-year brightline could be gained.

What we are talking about here is clauses 34 through to—I am not too sure where Part 2 ends; it is quite a substantial part of the bill. It is quite technical, and I must admit there was a lot of debate in the Finance and Expenditure Committee, trying to really tighten this up. I must admit that we were lucky in the fact that we had our tax adviser. Our tax adviser is an incredible person, who knows the tax law like the back of her hand, and she was very, very good in advising us on how we could actually make this better. She worked very closely with the IRD in terms of tightening this up. This is the residential land withholding tax.

Like all withholding taxes, it is a payment into an account. When a transaction has been undertaken and a full amount has been settled upon, then an amount is paid to the Government. But because we are talking about overseas owners here, or—well, the definition is quite wide, actually, and Mr Faafoi may like to have a look at the definition of an overseas owner. Let me talk about the objective. The objective of the residential land withholding tax is to act as a collection mechanism for the brightline test. I think the Government calls it the capital gains tax you have when you are not having a capital gains tax.

What it is designed to do is to address an anomaly in our system that we feel very strongly about, and that is overseas speculation. Let us make no bones about this. This is overseas buyers coming into New Zealand, buying houses, not living in them—in fact, not even moving to this country—and selling them, without contributing anything at all. I am sure there are a number of speakers on our side of the House who will be keen to elaborate on this. As mentioned, the residential land withholding tax would require, as mentioned, income tax to be paid on any gains from the disposal of residential land that is acquired and disposed of within 2 years, subject to some exceptions—and we did look at a number of exceptions.

With the introduction of the brightline test, we thought it was highly likely that overseas vendors who sell residential property within the 2 years will have a tax liability in relation to income from that property. However, we also acknowledge—and this is what this part of the bill does—that there is a general difficulty faced in collecting tax from foreign investors with no, or limited, presence in New Zealand. We think that this tax would optimise the effectiveness of the brightline test and support the integrity of the tax system. Of course, the integrity of the tax system is something that has been talked about since we started debating this bill at 3 o’clock, and I suspect it will still be talked about by the time we wrap this bill up, and probably even in the next tax bill on the Order Paper as well.

The proposed tax is payable from 1 July 2016, and what we see in these 2-year time frames is that it can allow some interesting behaviour. What we were really afraid of is that someone would buy a house and sell it in 2 years and 1 day, reap the gains, and pay no tax. The concern that we have here is that tax advisers in this country who are very, very adept at—what should I say—minimising tax, will provide advice that if you are an overseas speculator and you are looking to buy a house and you want to avoid the residential land withholding tax, then make sure you can hold on to this property for just over 2 years. As mentioned, this tax is payable from 1 July 2016, in the same circumstance as the Taxation (Bright-line Test for Residential Land) Act, except there is no main home exemption for this. The reason there is no main home exemption is that we think that this probably was not a main home that you are investing or speculating in.

The focus of the residential land withholding tax is on New Zealand residential land sold by offshore persons. Again, as mentioned, the definition of an “offshore person” is not necessarily what you may expect. New Zealanders are included in this definition, but that is something that I will elaborate on a little bit later. A main home exemption is a compliance cost of marginal use. There will be an exemption for the disposal of inherited property, as well as relief for relationship property. We see this a lot in tax law—if someone has to dispose of a property under urgency due to a marriage failure or something, then there has to be a provision in tax law that allows this. It is proposed to impose the residential land withholding tax at a point in time when New Zealand land is sold by an offshore vendor, so as to improve the collection of any annual income tax for the brightline residential income that the offshore person may have.

It was argued here that the conveyancing lawyer would probably be the collection agent, but what was acknowledged in the select committee is that that is not necessarily the case. Mr Scott may talk on this, because he had some very interesting points to make in the select committee. We need to ensure that the conveyancing agent—which is, as mentioned, normally a lawyer, and we can talk about a lawyer in this case, I suppose, but it is not always—is not held liable for information he or she might not have had at a time and point when the seller disposed of the property. The payment of the residential land withholding tax generates a tax credit that may be used to pay annual income tax liability for the brightline test of residential land income. If the tax credit for the residential land withholding tax is not needed to pay income tax liability, then that tax credit is actually refunded. Again, this goes to the principle of tax law: you take tax when there is tax payable; you refund tax when there is a loss. There is nothing unusual in that.

Let us talk about an offshore person, because an offshore person also includes a New Zealand citizen who is overseas—that is, if they have been overseas for the last 3 years. So, again, what we are looking at here is speculating in a market where, I suppose, you could say that person is not contributing in any way, shape, or form. At least in New Zealand, if you own speculative property you are paying tax and that tax is contributing to the upkeep of roads and schools and other core services. But if an investor is living overseas and they are investing in property, then I think it is very difficult to make an argument that they are contributing, even in another way through their taxes and their GST, etc. So this does include a New Zealander living offshore if they have been overseas for 3 years.

An individual who holds a New Zealand residence class visa may be an offshore person if they have been living overseas for the last 12 months. New Zealand trusts and companies may, therefore, be offshore persons if there is a significant offshore interest in them. And, again, we debated what constituted an offshore trust or an offshore company. At this point in time I cannot recall whether we looked at blind trusts. I suspect we did not. I suspect now if we were looking at this bill we would pay particular attention to trusts that are blind or are overseas trusts or that are holding assets in New Zealand. We might have looked at this in a slightly different way, given the whole integrity of the New Zealand tax system has been called into account with recent events, but that is a conversation for another day or another time or another reading.

The mechanism proposed for the collection of the residential land withholding tax, as mentioned, is the point in time when the land located in New Zealand is disposed of, which is, primarily, an obligation of the offshore person or vendor. It is proposed that the offshore vendor’s conveyancer, as mentioned—usually a lawyer—or, in absence of the vendor’s conveyancer, the purchaser’s conveyancer, is treated as the resident land withholding tax agent of the offshore vendor. In absence of the vendor’s conveyancer—

My colleague Stuart Nash was discussing the offshore persons aspects of this bill. I myself was not on the Finance and Expenditure Committee, so I will preface my comments with that, but I have identified, particularly in the notes around the bill—and I will search further, for future contributions into the actual clauses in the bill—the issues around anti - money-laundering identification in respect of offshore persons. There is a recommendation that comes back with this bill for amendments that will make gathering a bank account and understanding the bank account less onerous for those who are offshore persons. This, I think, is worrying, in light of the events of recent days. I invite members of the select committee to also contribute, because, as Mr Nash just noted, they might have looked at this in a different light in respect of blind trusts and other things had the events of the Panama Papers and so on, which have become public fodder in recent days, been in front of the committee at that stage.

I note that in the commentary on the bill it says: “Officials have undertaken to continue to work on solutions, whether legislative or operational, for some of the … practical difficulties and unintended consequences.” It says that in a paragraph that speaks specifically to anti - money-laundering identity verification. Officials are wanting to maintain the integrity of the system, to make sure that the people who are operating here are vetted and to ensure that those people are not involved in money-laundering, but they are wanting to do that without placing too much burden on those people. Where that balance falls is a legitimate question to be asking in tax law. I think that what we have seen in recent days is that burden may not be in the right place. So I encourage those officials to look into that, and I look forward to this debate as it continues and as it begins to open up those questions of whether the balance is struck right in this part of the bill.

The anti - money-laundering verification undertaken by New Zealand entities—somebody is exempt, I read, if they already have this verification. If they have achieved that verification once, it seems, they are exempt—in this bill—from having to achieve it again, to avoid duplication of process. Where are the checks and balances? Is that a once and for all thing? If somebody has been certified as being free of any kind of wrongdoing in respect of anti - money-laundering in one investigation, are they free forevermore? I wonder whether Mr Foss may be able to shed some light on that, as the person representing the bill to the Committee as the Minister in the chair, because these are questions that I think now demand answers.

We have, in this country, a reputation as a fair dealer when it comes to tax—historically, that is true—but what we have seen over the years and during the time of this Government is the gap between rich and poor growing. We had tax changes that meant the top 40 percent of the benefits of those changes went to the top 10 percent of earners and the bottom earners got a few percent, which was swallowed up in a GST change. We have got a tax system that has become less fair over time, and people are concerned. The public whom I have spoken to in recent days have questioned me on whether our tax system is really fair any more, and here we have, in this bill, exemptions for people who have previously been cleared of money-laundering allegations, as I read it. I would appreciate it if the Minister in the chair would clarify whether there is a once and for all stamp of approval if people have been through one set of investigations or whether there are likely to be more investigations, and whether the tests that are in place for money-laundering are sufficient in this bill, because I am not clear, having read the notes—as I said, I do want to go back and speak to the individual clauses and come back to this debate.

I might not carry my particular contribution much further at this stage, because I do want to dig in and do a little bit more research, having just stumbled across this particular matter of concern. But what I can say, in closing, is that I think we need to be assured that we have a fair tax system. I think we are right, as Kiwis, to be worried when we see non-resident people taking advantage of our growing status as a tax haven, and the damage that that does to New Zealand’s reputation. I think that the Panama Papers have cast a whole different light on the tax legislation that we pass through this House, and it will need to be more closely examined.

I rise to oppose this part of the legislation, and I just want to underscore and talk about where we have come from to get to this point. In my opinion, this is the third part of what is a broken attempt on the part of this Government to, basically, claim that it is fixing up the issue of overseas speculators buying up New Zealand homes. Of course, I am speaking specifically to Part 2 of the legislation and the amendments to the Income Tax Act.

What we do know is that Aucklanders are now paying record prices for their homes. In terms of context, it is from the previous two bits of legislation, which are supposedly the panacea to this problem, that we come to this third bit. But from the two pieces of legislation that have already been implemented—because this one only seeks to establish how those payments are to be calculated and paid on the part of those overseas speculators—we have already seen that the brightline legislation does not work. How do I know that? Because over the months leading up to Christmas and to the New Year we saw the legislation implemented and, actually, we saw a slight downturn in terms of purchases of Auckland homes from overseas speculators. We saw that. What we saw, though, was overseas speculators actually just trying to figure out what the legislation meant to them.

Basically, what they saw was that they only need to get an IRD number and that is it, and they can still carry on with that speculation and profit out of the Auckland housing market because the requirements on them are minimal and make no substantive changes to what they are trying to do, which is use Kiwis’ homes as a profit mechanism. That is the gist of it. Kiwi homes are being used by overseas speculators for them to make money. New Zealand First insists that it is not fair and it is not acceptable, and we have also consistently said that this legislation will not work.

Here, for example, is this bill, the Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill. We actually support two-thirds of this legislation, and we voted for the first part accordingly, but the reality is that the opportunity is here and now for the Committee and for Minister Woodhouse to perhaps break up this legislation—break it up, so that New Zealand First can vote for common-sense parts of the legislation. For instance, we acknowledge that we do need to hold student debtors accountable. I think that in contrast to topical issues around tax and trusts at the moment, it is harsh and heavy-handed—but here we are. It is a solution, and what we hold for one student we must hold for another; it does not matter where they are residing.

I turn specifically to the amendments to the Income Tax Act, which outline the grounds on which payment should be made. Generally speaking, even after all the law changes to supposedly slow speculation in Auckland, recent statistics—I say again—have proven that there has been a minimal effect, or actually no effect, on that speculation. What I want to point out at this stage—it is very general, I acknowledge, and I will come to the specifics of the legislation—in this opportunity to speak to the Committee, is that tax experts came back to the select committee, after the alterations and amendments, and basically said to the committee—well, not basically; they said it outright—that this part of the legislation, this residential land withholding tax, will not work. They said it to our faces, and, basically, they said it in several ways. They said that those who wish to speculate on New Zealand property and profit from it will adjust their behaviour ever so slightly—in that, they referred to the 2-year time period. They will just wait—they will wait, and they will make more money on it, if that is their wont, and they will adjust their behaviour.

The other part is that if you look at the statistics and the money generated from this legislation—and here is the rub—this tax revenue legislation bill will, in fact, according to KPMG and others, accrue a negative net revenue to the Government. It will be a negative tax take—that is what this tax legislation will achieve upon its implementation, once we establish who is liable and how they are going to pay. There are a whole lot of issues in how we determine who is liable and how they are going to pay, but we will come to those later.

The tax experts gave numbers in line with the Inland Revenue Department’s own analysis, which suggested anywhere between $1 million and $5 million in terms of revenue-gathering from this legislation. Five million dollars sounds like a lot, but we know that in terms of—I mean, that is one house in Auckland at the moment, is it not? It is next to nothing; it is ludicrous. Then they put the obvious to us and said that there is a cost in gathering this revenue. What you will find, when you juxtapose cost to revenue, as a good accountant is wont to do, is that the actual return to the Government coffers will be negative—for a piece of legislation that we have been told will not work because behaviour from speculators will change. New Zealand First cannot and will not support absolutely farcical measures—if you do not mind the language—in terms of a Government standing up and, essentially, saying it will do something about this and, in fact, it knows full well it will not achieve any of the stated objectives that it has set out before us today. Thank you.

There are a couple of things that I would like to elaborate on. Just to go back to a clause that I was talking about before—this is under the subheading “Liability of conveyancers: reasonable reliance”. We are talking about Part 2, clause 44, new section RL 2(6B): “A paying agent is not liable for a penalty under Part 9 of the Tax Administration Act 1994 for a failure described in subsection (6)(b) …”. What we are basically saying here is that even though the lawyer or the conveyancing agent is, in fact, responsible for paying the tax, they are not liable if their client has not given them the information required to make the payment of that tax.

I suppose what I am saying here is that what we are requiring overseas investors to do is to provide their conveyancing agent with the correct information that allows the collection of this tax. There was a little bit of concern in the select committee about how this would play out and what would happen if an overseas investor knowingly or negligently gave false information, because it is quite hard tracking down people who live overseas, who are not part of this jurisdiction, and who are often part of a jurisdiction that is completely foreign to the vast majority of New Zealanders—and some of them we do not even have tax agreements with. So we are relying, in fact, on the honesty of the overseas investor.

One thing that I would like to talk about is that we should actually, I suppose, understand when the residential land withholding tax will apply. It is quite an important part of the bill. It will apply when the property being sold is residential land. Again, we talked about what constitutes residential land, but the definitions are in the legislation, and it is defined for the purposes of the brightline test—and this is one of the bills we talked about earlier. This is the tax bill that gives effect to the brightline test. This is when the vendor, or the seller, acquired the property—now this is the important thing—on or after 1 October 2015. Any land bought before 1 October 2015 is actually not subject to this, so if an overseas speculator has bought something on 29 September 2015, they can hold that for a year, or they can hold it for any amount of time, and avoid paying this tax at all. And, of course, the vendor is an offshore person.

The other thing that is quite important, I suppose, is: how much does the person have to pay? Well, what will be required to be withheld—and there is a difference between what is withheld and what is paid—is 33 percent, or 28 percent if the vendor is a company, times the current purchase price minus the vendor’s acquisition cost. So a stock standard example is if an offshore person buys a house for $100,000 and they sell it a year later for $150,000, then that is a $50,000 profit. If they are a company, then they have to pay $14,000 in residential land withholding tax, but they still bank $36,000. There is still quite a lot of money there that is in the account, or I should say it is the lower of 33 percent, or 28 percent if it is a company, and 10 percent times the current purchase price. So there are two equations in there that need to be met to ensure that it is very difficult to avoid paying your full amount, but let us go back to the amount of money that speculators can still make here. If a speculator buys a house for $100,000 and sells it for $150,000 within that 2-year period, or if it is a company or a trust it pays $14,000 in tax, they still bank $36,000. If they are an individual on the top tax rate and then they withhold $16,500, they still bank $33,000.

It is still quite a lot of money, but the interesting thing is that there is a clause in the bill that says that the residential land withholding tax will be paid before other disbursements are made at the time of settlement. There was a concern by real estate agents that perhaps they would not get their commission. We assured them that, in fact, no, they would get their commission—that was sacrosanct—so the real estate agents were quite happy about that. But if the vendor’s conveyancing agent is required to pay the residential land withholding tax, this will be paid after the amount required to discharge the vendor’s New Zealand mortgage has been paid. But the interesting thing is that if this would result in insufficient funds being available to pay the mortgage, then the amount of residential land withholding tax would be restricted to the difference between the current purchase price and the amount required to discharge the New Zealand mortgage.

I appreciate the opportunity to answer a few of the points made by our colleagues on the other side of the Chamber. I just want to say at the outset that the Finance and Expenditure Committee worked pretty well together on this bill and we came to a few conclusions that were cross-party and, I think, were good for the overall legislation and the point that we landed in.

I do want to answer a few things that some of our colleagues have raised though. I always enjoy following Fletcher Tabuteau and being able to answer some of the points that he has raised. He basically said that (1) the brightline test is not working—well, it only came in late last year. And (2) this tax is not sensible, or practical—I think that might have been the word that he used. Well, apparently, not taxing people is what they would prefer; I do not know that that is really a position the New Zealand public would agree with. And (3) he spoke about the amount of money that it would bring in and he was saying that it was not going to be a high amount of money. Well, quite frankly, it does not matter how much money comes in; it is about ensuring that overseas purchasers of property and offshore persons are paying their tax appropriately.

That is what this is all about. It is not about making huge amounts of money for the Government; it is about ensuring that overseas purchasers of property are paying their fair share. The easiest way that we feel we can target those people who are offshore persons, and who could find it easier to avoid paying tax because they are offshore, is to tax them by way of a residential land withholding tax. That is what this is all about. It is not about making huge amounts of money. So a residential land withholding tax will ensure that there is greater compliance with the tax obligations that those offshore people have.

In terms of the brightline test, it was put in specifically to ensure that those who are speculating on property are taxed appropriately. There is already the intentions-based test that has always been there, and so I reject the claim that Mr Nash made, that if someone purchased a property prior to October 2015 they would not be subject to tax if they speculate on it and sell the property. That is not true because they will still be subject to tax if they have speculated and their intention was to make a capital gain on that property. The date used here is simply to ensure that we have a line in the sand. Whether that line in the sand was October 2015, 1 January 2015, or whatever date you put in there, there is always going to be a point at which you could say: “Well, if somebody purchased a property before that date, then they won’t be subject to x, y, z.” The reality is that the intentions-based test has always been there, is still there, still applies, and always will still apply, and that this is separate from that.

💬 Stuart Nash: But if it works, why are we doing this?

Well, if it works—the reality is that the Government took some action because there were claims by the media, claims by the public, and concern by the public that offshore people speculating on property were not being taxed appropriately. So we changed the law and put in place the brightline test to ensure greater compliance. But the intentions-based test has always been there, will still be there, and does still apply to a purchase made in September or prior to October—so Mr Nash’s claim is incorrect there.

Mr Tabuteau’s claims that the brightline test does not work—he had some interesting claims around that because he said that the number of offshore people buying property declined after the brightline test came in. I would have thought that actually means it had some impact and it actually was working. So, Mr Tabuteau, I do not think we can make that claim.

Finally, I just want to touch on the point that Mr Nash made around the liability of conveyancers and them having to rely on the information provided to them by the individuals whom they are tasked to work with and act on behalf of. I guess we always have to come to the point where we consider complexity and how difficult we made it in ensuring that there was compliance. We could have made the tax agents and the conveyancers liable for ensuring the information was correct, but that would have added a huge amount of complexity that, quite frankly, would be unnecessary for most of the people who are involved in this. By ensuring that the liability did not lie with the conveyancers and that they could rely on the information that they were given by their clients, it reduces some of the complexity, but those people are still subject to other aspects of the Income Tax Act around providing documents fraudulently. So if there was evidence of that happening, no, the conveyancers would not be liable, but the Inland Revenue Department would still have the ability to go after the people providing fraudulent information. I think the provisions that are in Part 2 that the committee arrived at, where we made some changes around the definition of “offshore person” and landed in that space where 25 percent meant an individual or a company or group of people were not considered offshore, but over—[Bell rung] Mr Chair.

The CHAIRPERSON (Hon Trevor Mallard): Jami-Lee Ross.

I just want to finish off this point: that we arrived at the 25:75 split, where 25 percent meant that they were not considered offshore, but 75 percent or over and above 25 percent meant they were considered offshore, which I think was a good space that the committee landed at. I think it has improved this bill considerably.

Thank you very much, Mr Chair—[Interruption] A silent colleague to my left there, but I am sure—[Interruption] Thank you. I am sure Jacinda Ardern will take a call shortly. I want to pick up Jami-Lee Ross’s observation about the purpose of Part 2 being about the tax obligations of offshore people and those people paying their fair share. It is a noble goal and one that the Finance and Expenditure Committee had in its mind as we worked our way through the Government’s policy to introduce a residential land withholding tax for offshore persons.

If only such noble goals were part of the Government’s overall tax policy and offshore people paid their fair share, for instance, through trusts. Then we would actually have a tax system that New Zealanders could look at and, as my colleague Jami-Lee has just said, see that everybody pays their fair share. But there was a complete failure by the Government to have that kind of consistency, as we have seen in the last few days, and it all gets murkier. We now see that the Prime Minister has got deposits in companies that specialise in offshore trusts.

💬 David Bennett: Oh, come on. Get on the bill.

It gets murkier by the moment, Mr Bennett. That is what happens when you do not front up and go to New Zealanders with information about your tax affairs. Mr Bennett might not care about that, but other New Zealanders do. They want to see fairness in the tax system—just as Jami-Lee Ross said he thought this part of the bill was aimed at.

It was disturbing in the select committee, as we worked through the residential land withholding tax issue, that we were correcting mistakes made in legislation passed only a matter of months earlier. We did that twice, once when covering Part 2 and once when covering Part 4. Essentially, that came down to the fact that the various new definitions that the Government had come up with to put in both the Income Tax Act and the Tax Administration Act did not fit when it came to a residential land withholding tax issue.

In this part of the bill we are looking at the definition of “offshore person”. I do support what Jami-Lee Ross said, which is that the committee did come to the conclusion that the definition was far too broad when it came to being able to implement a residential withholding tax in a meaningful and sensible way. The officials from the Inland Revenue Department came to the committee and said that if we kept the same definition for “offshore person” as we passed in the previous piece of legislation, we would find that almost impossible to implement. They gave us an example of a trust or a partnership where the partner with a 1 percent share could make the entire partnership into an offshore person, and that would then put in place a set of obligations that would have been difficult both for that entity and for the Inland Revenue Department to follow up.

So we on this side of the House accepted that change and agreed to it on the grounds that what we are trying to do is create a basis by which those who do invest in New Zealand from offshore have an understanding of what the requirements on them are. That should not be read as members on this side of the House believing that we do not think those who are offshore persons have obligations, because we do. They should have obligations that make them part of a globally transparent system.

Although in this particular aspect of the definition of “offshore person” we can see sense, the Minister in the chair might want to take a call here and talk about the consistency now of the obligations of offshore people across the Income Tax Act. What we are setting up, I believe, as a result of the changes that we are making here, is a system where we are putting certain obligations on offshore persons with regard to the residential land withholding tax and then completely ignoring making those obligations tighter, for instance, around foreign trusts. The Minister might want to stand up and let us know whether he thinks we are being consistent. Yes, we are changing and amending the legislation to make it different from the two previous pieces of legislation that we passed, but is that consistent across all of the tax legislation that we have?

The other point that I want to pick up here is whether or not we can use the term “offshore person” at all. That was an amendment that we made, again, in the committee. So we now have, in the Act, an “offshore person”, and, now, under clause 45(8), an “offshore RLWT person”. The Government has got itself in a position where it is trying so finely to define within this part exactly who will be covered by the new residential withholding tax that it has had to create a new class of person within the Act. [Bell rung] Mr Chair—

The CHAIRPERSON (Hon Trevor Mallard): Grant Robertson.

I will not take a full second call on this, but I just want to make the point that this level of complexity around what the Government thinks it is trying to achieve with the brightline test highlights to me the fact that it did not think through all of these particular policies together. This is the third bill in a series of three.

At each part of the select committee process the large accounting firms in New Zealand have come to the committee and said “The Government’s policy position is confusing us, because we have now had a series of changes”—I am using clause 45(8) to highlight this—“where we have different definitions and different meanings.” The accountancy profession, which, for various reasons, is getting a bit of a hauling over the coals at the moment, was telling the select committee and telling New Zealanders that it does not believe that the Government has consistent policy here or policy that is easy to follow.

My fear is that this will not be the last time, possibly even this year, that we end up amending legislation we have only just passed. That really comes down to poor work by the Minister, in my view, in not having a decent and consistent plan for how we are going to be able to do this. So we now have an offshore residential land withholding tax person alongside an offshore person, and a definition of “offshore person” that we have changed, as well. We are making those three changes all in one go because the Government, basically, could not get its act together.

I just wanted to make those points on Part 2. I am going to return shortly, in a later call, to the other change that we have made around bank account requirements for offshore persons. This is largely dealt with under the Tax Administration Act provisions that fall under Part 4, but it does bear mentioning that these clauses within Part 2 also indicate where the Government has not been able to get its act together and have a coherent policy.

I would like to base my contribution on Part 2 around some of the discussion contained in the regulatory impact statement because that canvasses the degree to which the Inland Revenue Department (IRD), under the direction of Ministers, explores alternatives to the tool that was eventually settled on to underpin the brightline test, which is the residential land withholding tax that is set out in Part 2. I think that what is interesting is in the setting out of the problem definition, before the officials went out and consulted on the options that are then contained in Part 2—the problem definition that we see the Government has used in that consultation document and in the subsequent regulatory impact statement is obviously quite broad. It says: “The Government is concerned with high house prices,”—something we can all agree is of major concern—“particularly in the Auckland area. … Other possible causes, both on the supply and demand sides, are being separately considered.”—we wait with bated breath, but—“Property speculation is seen as one of a number of causes of the current prices.”

So there is obviously, up front, some acknowledgment of the issues, but there are some limitations to our ability to use an evidence-based approach in dealing with some of those issues, and those limitations are included in the regulatory impact statement. It does set out that one of those limitations is, of course, the lack of information that we have on the exact breadth of the offshore speculator issue. We see that on page 1 of the regulatory impact statement it states: “The exact fiscal and compliance cost figures for the proposed bright-line test are not available because Inland Revenue does not currently have accurate data on the types and levels of land sales occurring or how much is collected under the current land sale rules.” So we have had to make some assumptions, but I think it is fair to assume—as Labour obviously has—that the issue of overseas-based foreign speculators is significant in terms of the impact it is having, which is, essentially, what Part 2 speaks to.

The other limitation is also set out in the regulatory impact statement. It states that “The analysis in this RIS needs to be considered in light of the additional constraint faced by Inland Revenue at the present time,”—which is not just a lack of data—“which is its inability to make significant systems changes in advance of the relevant stage of development of its Business Transformation programme.”

So I guess my question to Minister Michael Woodhouse is on the consideration of the various mechanisms in order to underpin the brightline test, which include: “Option 1: Relying on existing compliance measures … Option 2: Status quo, but provide more guidance on tax obligations;”—a bit of an education programme—“Option 3: Status quo, but review effectiveness of bright-line test in three to four years;”—so, have a punt and see whether or not it is working—“Option 4: Introduce a withholding tax on sales of residential property made within the two-year bright-line [test].” In amongst all of those options, what options were not canvassed as a result of the constraints that the IRD has articulated are as a result of the significant systems changes it is experiencing as part of its Business Transformation programme? Was there anything that was not considered because of those constraints? I am interested to know. There may not have been—we may have canvassed everything in the submission process that we are now debating in Part 2, but I doubt that would be the case because we have heard of instances before where the IRD has expressed concerns over those limitations and its ability to alter the rules under which it operates.

But I do want to come to the question of compliance, because the reason that we have fallen on the residential withholding tax option is that obviously the IRD has determined that other forms of compliance would be less effective. As I mentioned previously, option 1 is to rely on what is existing—so, the status quo—and having more guidance around obligations was dismissed. Why was that option dismissed?

Well, the reason that the withholding tax option in Part 2 was chosen is set out in the regulatory impact statement, which says: “7. New Zealand taxes its tax residents on their worldwide income. New Zealand also taxes foreign investors on income that is sourced in New Zealand. When a foreign investor has a branch or controls a subsidiary in New Zealand, tax can be imposed on the New Zealand-sourced income of that branch or subsidiary in the same way as it would be on New Zealanders. However, when the foreign investor does not have a New Zealand presence, it is more difficult for New Zealand to collect tax from them. 8. New Zealand’s tax system operates on the principle of voluntary compliance, which relies on taxpayers understanding their tax obligations and how the wider tax system works.”—keeping in mind that we do operate somewhat of a “don’t ask, don’t tell” operation here as well—“9. Foreign investors may not always have the same level of understanding as taxpayers based in New Zealand, and they do not have the same level of connection to New Zealand that would otherwise create an intrinsic incentive to voluntarily comply with their New Zealand tax obligations.”

I think that last statement is quite interesting—“they do not have the same level of connection to New Zealand that would otherwise create an intrinsic incentive to voluntarily comply with the New Zealand tax obligations.” I think you could apply the same rule of thumb, generally, where one who might use New Zealand, for instance, as a tax haven might also not have concern for perceptions and the reputational risk for New Zealand around their use of a New Zealand - based tax haven as well.

I guess that what the IRD is pointing out there is that unless you have a domestic connection to New Zealand, your sense of obligation to us—be it in your literal tax obligations, or even in the reputational risk you may pose by the way that you conduct your affairs—is not top of mind. It is a reason, perhaps, for us to be somewhat more concerned about compliance by those who should be covered not only by the brightline test but also probably more broadly within our tax system. I hope I am not being too subtle in drawing that comparison there.

I think it is a point well made in the regulatory impact statement. Actually, it is canvassed in option 2 of the regulatory impact statement, as well. Option 2, of course, was simply maintaining the status quo but providing more information and guidance on tax obligations in relation to residential property. I am glad that option 2 was not opted for. From my perspective, the idea that with a bit of a pamphlet we could assume that tax obligations would be fulfilled would, I think, be a bit naive. In fact, that is expanded on in paragraph 42 of the regulatory impact statement. It says that “the success of this option is dependent on another major assumption—that non-compliance with the proposed bright-line test will arise from a lack of information and knowledge about the tax implications of sales of residential land.” Saying “I’m sorry, I didn’t pay. I just didn’t know.”—if only that were a basis for not complying with one’s obligations, I am sure many will think.

It goes on to say “There will be instances where an improved understanding of the tax rules and one’s tax obligations in relation to a particular transaction may lead to higher levels of compliance.”—if only that were the case—“However, there will be taxpayers who, regardless of their level of knowledge, will not voluntarily comply with their tax obligations.” Sadly, the IRD is articulating here what many of us will know, which is that just because people know about their tax obligations, it will not mean that they will merrily skip to their IRD office in order to fulfil them forthwith.

So there are a lot of interesting issues playing out in this paper where the IRD is freely acknowledging that knowledge is not enough and that connection to a country is not enough; in fact, if anything, it probably undermines our system. It has built in assumptions in this case that non-compliance is often deliberate. I am glad that the officials have done that, because it is a realistic take on people’s approach to taxation in New Zealand, let alone the approach of those who do not have a connection to New Zealand. So, although I think that probably the option that officials opted for was the right one, we would do well to reflect on the rationale for why it is that we opted for something more proactive. But I would like to highlight again that I would be very interested in having the Minister expand on whether other options were canvassed.

I move, That the question be now put.

I would like to just finish elaborating on the example that I gave earlier. There is a clause in the bill that basically says that, first and foremost, resident withholding tax must be paid after the New Zealand mortgage is paid off. However, the commentary on the bill says: “If this would result in sufficient funds being available to pay [residential land withholding tax], the amount of [residential land withholding tax] payable will be restricted to the difference between the current purchase price and the amount required to discharge the … mortgage.” In the Finance and Expenditure Committee the thing that we talked about was how that sort of situation would arise.

Let me give you an example: an investor buys a property for $1 million, sells it 18 months later for $1.5 million—not unheard of in any way, shape, or form—so they have made a profit of $500,000. If it is a company, there is a $140,000 tax liability there. But the interesting thing about this is, for this clause to come into play, there would have to be a New Zealand mortgage above $1.36 million. I am not too sure how that could arise, unless there was some sort of negative gearing going on. Negative gearing in the property market—it could never happen, could it? I remember trying to buy a house in Auckland at one point in time, and I thought that I had put in a very good price. The house had a valuation of about $700,000—it was a long time ago—and I was told that the guy had a $1.5 million mortgage against it. It was a well-known property developer who had just geared this up. So we just have to be a little bit careful about the games that people play. I suppose, as Jacinda Ardern has just outlined, there are those who will seek to game the system no matter what.

I think it is probably worth looking at the definition of “residential land” in New Zealand, because we probably all have a reasonable person’s definition of “residential land”, but it is slightly more complicated than that. In the commentary on the bill, the definition of “residential land” is “land that has a dwelling on it;”—well, that makes sense; I suppose that is what we would automatically assume—but it is also “land for which the owner has an arrangement that relates to erecting a dwelling;”.

For instance, an investor has bought a bare piece of land upon which there are plans and consents to put a dwelling; the dwelling perhaps does not go up and the investor sells that bare piece of land within 18 months—well, that is still classed as residential land. The definition in the commentary on the bill continues: “bare land that may be used for erecting a dwelling under the rules and the relevant operative district plan;”—so again, this relates to a circumstance where perhaps an overseas investor has bought a chunk of land upon which they were planning to put six units. If that does not go ahead and the land is sold—the units are not erected—it is still classed as residential land and an investor still has to pay residential land withholding tax for that. The other thing is that residential land “does not include land that is farm land or used predominantly as business premises.” Again, we saw clarification around what business premises predominantly are, and I think we came to an elegant solution, but, by and large, those other three definitions will preclude farmland and commercial property.

One thing I note in the commentary is that “this reference to income under the bright-line test means that there will not need to be a land title transfer”. Ordinarily with the sale and purchase of a house there is a transfer and that triggers the sale, but “there will only need to be a residential land purchase amount.” There is a little bit of nuance there, but it is important, I suppose, that we understand this—and certainly conveyancers are undertaking this, if in fact they believe that it does not kick in because there has not been a land transfer—it still triggers. “This means that off-the-plan sales, for example, will still be subject to [residential land withholding tax] if other conditions are also met.”

The other thing, and it has been brought up before, is that the brightline test does contain an exception if the residential land that is being disposed of is the vendor’s main home. There is, of course, no main home exemption in this bill because we are talking about only overseas investors. By any definition, an overseas investor buying a New Zealand property could not claim that that is their main home, because they do not live in it. It makes sense.

The other thing in the commentary is that “there will be an exemption or rollover relief from [residential land withholding tax] for inherited property and for transfers of relationship property … under the brightline test.” Again, keep in mind that we are talking about only a 2-year window here—so I suppose that if someone dies within 2 years of buying a property and their estate or the beneficiaries of their will inherit that property, there is no liability triggered. However, there is still the 2-year—

The member has had four calls. He does not get any more.

You have had quite enough, Mr Nash. I want to come back to some of the comments that were made by Jami-Lee Ross earlier in the debate when he talked about the rationale for this bill and the argument that we have touched on today about whether, in fact, the associated legislation—the brightline test and the requirement for non-resident foreign buyers of residential property to register with the Inland Revenue Department, which Part 2 is enabling—has had any effect or not.

We have data right now, actually—a right-up-to-the-minute release by the Real Estate Institute of New Zealand—that shows that, in fact, in the last month the median house price in Auckland, which is the market most affected by the problems that this bill is purportedly trying to address, has gone up by $70,000. That is 1½ times the median income and I think it really undermines any kind of optimism that we have been hearing from members on the Government benches that the brightline test, the residential land withholding tax, and the requirement for non-resident foreign buyers to register with the Inland Revenue Department has had any kind of sustained impact on the speculative pressures that have been overheating the Auckland housing market.

Jami-Lee Ross mounted a great, spirited defence of the intention test, as if this was enough and as if this was working, but he is completely stymied by the fact that the Government introduced this legislation and these measures presumably to tackle some kind of real problem—or was it an imagined problem? It was not clear from what Jami-Lee Ross was saying. The residential land withholding tax is in place there in Part 2 of this bill to ensure that the brightline test applies to non-resident foreign buyers. As Jacinda Ardern pointed out, the Inland Revenue Department, in its advice on this bill, raised the point that we do not have the data—that we do not know what the scale of non-resident foreign buyers in the Auckland market is.

When the policy announcement was made that led to this bill and others, I think it was the Hon Steven Joyce who said that the Government would release the data that it would be gathering on non-resident foreign buyers by way of the requirement that they open a bank account and register with the Inland Revenue Department, and that it would make this data available by 16 April. We are getting very near to 16 April, and yet there has been nary a whimper from the Government on the question of this data and what it shows.

But, interestingly, Shamubeel Eaqub, the independent economist, said a couple of weeks ago in the media that—and it appeared that he has some kind of access to the data that has been gathered—330 properties per month, on average, have been bought by non-resident foreign buyers over the last 6 months. That is 330 properties per month since the law came into force requiring foreign buyers to register with the Inland Revenue Department. That volume of sales—330 on average per month over 6 months—would account for 5 percent of all house sales across New Zealand, which is significant, I think. But, as Shamubeel Eaqub said at the time, it is probably more likely to be 18 percent of all sales in the Auckland market because the presence of non-resident foreign buyers has been so heavily concentrated in Auckland. If it is anything like 18 percent of sales in the Auckland market, it is no wonder that the Government has not made any kind of move so far to release that data, and I would guess that it will not.

Colleen Milne of the Real Estate Institute also said recently that these new tax rules seem to be having limited impact, and she predicted that the decline in sales that has been seen—I think over November, December, and January, when there was no doubt that there had been a sort of softening in the Auckland market—would be transitory.

I move, That the question be now put.

I think my colleague Phil Twyford was making some very good points there. The Finance and Expenditure Committee was told when considering the bill that the quantum that the Inland Revenue Department thought it would be able to gain from the brightline test had not changed from what we had initially been told, which was the whopping sum of $5 million a year. It also concluded in its assessment to us that it was going to cost about $2 million to set the whole thing up, so things are not looking good in terms of the scale of income from such a weak instrument as this.

I want to return to the definitional issues around “offshore person”—or, in fact, an offshore residential land withholding tax person, or “offshore RLWT person”—as is now included in clause 45(8). There are two reasons why I want to do that. The first of those is that I am not sure that everybody listening to this debate will fully understand the definition and who is captured by this. Then, once we have clarified what that definition is, I want to raise a couple of questions for the Minister in the chair, the Hon Michael Woodhouse, around who is considered a person in terms of a trust.

The definition in clause 45(8) would tell you that for the purposes of this bill a residential land withholding tax offshore person is a person who “is a New Zealand citizen who is outside New Zealand and they have not been in New Zealand within the last 3 years:”, or “the person holds a residence class visa … and they are outside New Zealand and have not been in New Zealand within the last 12 months”. That is actually a very important point in the context of who is considered by the Inland Revenue Department, at any given moment, not to be a New Zealander for tax purposes—to be an “offshore person” for tax purposes. The idea that those who hold residence visas—and there are many New Zealanders who have lived here for a very long time but do not have citizenship—you have to have not been here for only 12 months. It is actually a very tight provision. I wonder whether the Minister wants to let us know whether that reflects other parts of tax law in terms of that. Then you have 3 years for a citizen, and the third class is a person who is obviously not a New Zealand citizen and does not have a residence class visa.

So we have set up there who the offshore person is—and, as I say, I think a lot of New Zealanders would perhaps be surprised to learn that if they have a residence class visa but they have been away for 12 months, they are no longer considered to be this, and they then fall under the provisions within the bill here. But then, if we go further into the definition we see that “a person that is a trustee of a trust, if—(i) more than 25% of the trustees of the trust are offshore RLWT persons:”—and then—“(ii) more than 25% of the people that have the power to appoint or remove a trustee of the trust, or to amend the trust deed, are offshore RLWT persons:”.

Here we get into the inconsistencies that are now emerging in our income tax law about exactly what is considered here to be an offshore trust. When we have got under the foreign trust rules that you can establish yourself and claim to be an offshore person, or be an offshore person and simply have a trustee who is set up to run the trust for you as a means of avoiding tax—Mr Bennett is poised because he wants to get up and talk about people who avoid tax—that is the danger in having a range of definitions about who an offshore person is across different parts of our legislation, and that is now, effectively, created here in the definition in clause 45(8).

But then we move further down in clause 45(8) and we get into what I think is perhaps an even murkier area, and one that the Minister in the chair might want to take a call on. We see that we are talking now about people who are offshore residential land withholding tax, or RLWT, persons. The select committee has inserted the words “the person is a partner in a limited partnership or an owner of an effective look-through interest in a look-through company (LTC), and more than 25% of the partnership’s partnership shares” are, effectively, held by offshore residential land withholding tax persons.

The rules around look-through companies were changed in this House in 2011. They were changed by the Government in such a way that those look-through companies could be zero-rated for tax purposes. That is the heart of the concern that a lot of New Zealanders now have about the massive growth in foreign trusts, because those look-through companies sitting alongside foreign trusts are part of the combo pack that Mossack Fonseca has been selling to its investors.

💬 David Bennett: He’s not even on the bill.

It is the great combo pack where you can get away without paying any tax whatsoever, and one of those parts, Mr Bennett, I say for your benefit, is a look-through company that is now zero-rated for tax purposes. In this clause, if more than 25 percent of the people who have an interest in one of those look-through companies is an offshore person for residential land withholding tax purposes, then that look-through company is considered to be a person under this bill. That is setting up yet another situation in which look-through companies could potentially be exploited.

Given what has been happening in terms of the release of the Panama Papers, and given what has been happening here, I think the Minister in the chair might want to get up and tell us whether he is confident that we have the arrangements around look-through companies and that he is confident in terms of putting them within this definition of who an offshore residential land withholding tax person is.

We did not discuss, I have to say, in the committee whether or not that was a sufficiently tight definition, or whether there are sufficient safeguards when it comes to look-through companies, but I do know that that change has been critical in the growth of foreign trusts that are being used for tax evasion purposes in New Zealand. There is absolutely no doubt, because when you put foreign trusts alongside look-through companies, which can be zero-rated in New Zealand for tax purposes, that we—I am sure, Mr Chair, the frown on your face might indicate that there is a point at which I am going a little beyond the bill here, but I think it is a relevant consideration because the rules around look-through companies are now the subject of international attention, and here we are making a change to how they will be used in terms of defining offshore persons for residential land withholding tax. I think it is a legitimate question to be asked. Clearly, the fact that property is owned in New Zealand by one of these look-through companies may mean that that is less of an issue, but that is something that the Minister might choose to have something to say about in a moment.

As I still have the call, the other point that I will make at the moment is around the question of the information requirements. This is clauses 44 and 45 again. It is important to note that when we considered these matters in the select committee there was a belief that the information requirements for New Zealand taxpayers were clearly stated and understood, but not necessarily by those who were offshore persons. A series of changes has now been made to ensure that we do have that level of information.

Again, this is an issue of consistency for the Government—consistency around whether or not information requirements across the Income Tax Act and the Tax Administration Act for offshore persons are consistent. It is quite clear to me that because the Government has relooked at these particular provisions around residential land withholding tax, it has created a series of information requirements in terms of what information must be provided to the Commissioner of Inland Revenue. There is now new section 54C in the Tax Administration Act, inserted by clause 72, and subsection (4) will require vendors to provide, at the very least, their full name, address, and IRD number, and to state whether or not they are an offshore person. If they are an offshore person, the vendor must also state whether they are associated with the purchaser and whether the disposal of the residential land is, or would be, considered income under the brightline test—ignoring the brightline test’s home exemption.

There, again, you have now a series of things that an offshore person must do under this piece of legislation that we are passing right now, tonight. But those offshore persons have a completely different set of requirements and disclosures under other parts of our tax law, particularly those around foreign trusts. So, once again, although this might be the right thing to do to enable the implementation of this residential land withholding tax, it sets up, in my mind, a series of inconsistencies in the law about disclosure and information that I think New Zealanders would want to see ironed out. As other colleagues have stated, the heart of our tax system is that it is fair, that it is easy and simple to understand, and that people are treated fairly. I think we run the risk, with clauses like this, that we highlight a particular type of offshore person—

I move, That the question be now put.