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

I stand to talk to Part 4. It is largely technical in nature. It is the amendments to the Tax Administration Act 1994. Whenever we have a tax bill through the Finance and Expenditure Committee and it passes through the House, there are always amendments to the Tax Administration Act because, as the title suggests, it is the Act that governs the administration of the tax system. It just makes sense that when the tax system changes, then so does the administration of that system.

There was not that much that was contentious under this part. I suppose that one clause there was a number of submissions on was clause 71, “Section 24B amended (Offshore persons’ bank accounts and tax file numbers)”. There were a number of submitters, including Chartered Accountants Australia and New Zealand, New Zealand Racing Board, PwC—

💬 Dr David Clark: PwC?

Well, good point. I wonder why it submitted. We could take a deeper look at that one.

In a similar vein, in clause 71, is the requirement for an offshore person to have a New Zealand bank account number in order to apply for an IRD number. Again, there were submissions from Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, KPMG, and OliverShaw Ltd. I must admit—and I do not mean to curry favour with anyone—whenever I see a submission from OliverShaw, it tends to be the first one that I read because those two gentlemen who are the partners in OliverShaw know a little bit about the tax system. I think Robin Oliver is—is there such a thing as a master taxation expert? If there is, then Robin is one of those people. He is that rare individual who takes absolute joy in poring through tax bills in minute detail and finding the errors and places where things can be changed, and all power to him. Without someone like Robin, I think a lot of things that are not that pragmatic would disappear, but he is very much a pragmatist as well, and he understands the role of tax legislation.

What this clause is about is that from 1 October 2015, which is when the brightline test came in, a person who is an offshore person, or a resident withholding tax person, must have a functioning New Zealand bank account in order to apply for an IRD number. The requirement to have a New Zealand bank account is part of our anti - money-laundering identification verification requirements that apply only to offshore persons, and it was introduced in Budget 2015 in the suite of changes to tighten up our anti - money-laundering rules. Unfortunately, in that Budget it did not have anything about offshore trusts or anything like that. I suspect we know the reason why, but that is beside the point.

💬 Hon Michael Woodhouse: Why is that, Stuart?

Well, because it was unknown, Minister, and the interesting thing is—now that the Minister has asked that question, I feel bound to respond, because the Minister actually said in the media that New Zealand does not have a problem with multinational companies not paying tax. The interesting thing about that is the Obama administration, the Cameron Government, and nearly every single OECD country has identified the fact that there actually is a problem; it is the solution they are grappling with. We know the problem, but apparently our Minister of Revenue believes that we are the only country in the OECD without a problem.

💬 Dr David Clark: It doesn’t mean the Government doesn’t have a problem; it means the National Party doesn’t have a problem.

Oh, maybe that is what it is, Mr Clark. But we do have a problem, and, unfortunately, what has been shown in recent days is that our tax system has come under increasing pressure—

The CHAIRPERSON (Lindsay Tisch): Order! Come back to the bill.

Sorry, Mr Chair, I was just responding to the Minister—

The CHAIRPERSON (Lindsay Tisch): No, no.

Oh, OK.

The CHAIRPERSON (Lindsay Tisch): Come back to the bill.

Yes, sure. What I was saying is that this comes into—any more comments, Minister, you would like me to answer on? An offshore person—this is basically for anti - money-laundering rules, which are incredibly important for the integrity of our tax system. We talked about the fact that an individual will be an offshore person for the purposes of a bank account requirement if they are not a New Zealand citizen and they do not have a residence class visa. We talked quite a bit about this because there are certain residents like Recognised Seasonal Employer scheme workers, who come into the country and are here for about 3 months. They earn very little in the scheme of things, to be honest, and we asked whether they needed to have a bank account. I think, in the end, we did not require that they had to have a bank account.

💬 Hon Michael Woodhouse: No, they do.

They do?

💬 Hon Michael Woodhouse: Of course they do.

Well, hmm. We talked long and hard about this, and there was a very good discussion between the expert advisers. But, anyway, a New Zealand citizen will be considered an offshore person—we have discussed this—if they are not present in New Zealand and have not visited in the past 3 years. But, as has been out outlined in another part of the bill, all a New Zealand resident has to do is enter the country on holiday, show their passport, and out they go again, and that is scrubbed. It is very easy to get around this if you are a New Zealand passport holder.

I have been waiting for a while, so I appreciate getting the call. This part of the bill, of course, tidies things up, as my colleague Stuart Nash has pointed to, and I want to speak specifically to new section 24BA(1C) in clause 71, which relates to when there is no requirement for the normal procedures to apply in respect of due diligence in terms of anti - money-laundering. I will read it out for those who are following this outside the House: “Subsection (1) does not apply to a person for whom a reporting entity under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 has conducted the customer due diligence procedures required for customer due diligence under that Act and regulations made under that Act.”

So this is an exemption we are talking about in the law for people who have already complied with anti - money-laundering and countering of financing of terrorism procedures. We would understand that often these kinds of exemptions are in place to avoid duplication. That is why these kinds of exemptions are in the law. But I raised this in an earlier stage of the bill, and I want to raise it here again, because again we have a similar instance where we have a piece of law in place designed to make sure that there is not duplication of a service, and I would like to ask the Minister what checks and balances are in place.

On the one hand, there is the juggling of the intention to make sure that we have people paying their fair share of tax, so we want to make sure that the rules are fair and persistent and catch out those who would wish to do wrong. On the other hand, there is the balancing act where we do not put undue compliance burdens on people who would want to trade and do business with New Zealand. The question that is raised here, as in the previous part of the bill, is whether we have got that balance right. That is all drawn into particularly sharp focus today, as we have just learnt that the Prime Minister has some tax interests that we previously did not know he had, or that he uses a vehicle—and I am only just catching up on the detail of what was declared in his—

💬 Kris Faafoi: So is he.

—register of pecuniary interests, and so is he, by the sound of it. His tax affairs seem to be more complicated than even he realises, and I am sure we will hear more to come on that. But over recent days, and probably more pertinently, we have seen the Panama Papers come out, and they raise serious questions about New Zealand’s integrity and the integrity of our tax system, and our reputation, more than anything else. We heard the Prime Minister, of course, say immediately that $24 million—

The CHAIRPERSON (Lindsay Tisch): Order!

—was raised. I will come to the point—

The CHAIRPERSON (Lindsay Tisch): Yes, back to the bill.

—which is about whether we have the correct measures in place in new subsection (1C) of section 24BA, whether the tests in place are stringent enough, whether they are avoiding unnecessary duplication, or whether they in fact too lax, because we are finding that New Zealand’s reputation is under threat. If New Zealand’s laws are too lax, we risk having people come through New Zealand’s system who are participating in money-laundering and the financing of terrorism, and that is terrible for our reputation. We have heard that in these Panama Papers there are 60,000 instances—

The CHAIRPERSON (Lindsay Tisch): Order!

—where New Zealand is mentioned.

The CHAIRPERSON (Lindsay Tisch): No, no.

In this bill here—

The CHAIRPERSON (Lindsay Tisch): Order! I have ruled previously. I ask the member to come back and focus on what the bill is about. You can mention those things in passing, but do not spend the whole speech on examples that are outside the scope of the bill.

I will bring it back, because the point of those references is to ask whether, here in this bill, we are creating more loopholes. If people have complied with the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 requirements once, are they exempt for ever? For how long are they exempt? If somebody has proven themselves in one jurisdiction, or in New Zealand, to have complied with the law in that respect, are they for ever protected? If they have arranged their affairs in such a way that it is not detected on the first time through, are they protected for ever?

If the Prime Minister—to use a hypothetical—denies having any of this kind of involvement in one instance and it later transpires that he has arranged his affairs differently and he is captured by this, does that have an effect? Is that something that is protected by this bill? Does it have tests that can be applied again and again, or are we saying here—and the Minister will, I am sure, be able to direct us—in new subsection (1C) that this is a once-and-for-all test? Is this a test that applies for ever, into the future, or is this test is a one-off? I think that burden of proof is something we need to look at again.

I want to look specifically at clause 71, which contains, as I foreshadowed in an earlier contribution, the amendments that have been included to look again at offshore persons’ bank accounts, in so far as that requirement was put in place in the Tax Administration Amendment Act 2015, which, for those who have been following closely, was an earlier piece of legislation as part of the suite of legislation that the Government has put in place to establish its new rules around resident—

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

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

I will try to make it as interesting and stimulating for the Chair as I possibly can. Part 4 of this bill, however, is about the Tax Administration Act, so we have got only limited material to work with here. But the contribution I was making before the break was around the fact that this is the clause—I am referring here to clause 71 of the bill—where, again, we are amending a piece of legislation that the House passed only months ago, and that was the Tax Administration Amendment Act 2015.

What that Act did was create a requirement for offshore persons to have a New Zealand bank account in order to apply for an IRD number. In part, this was to ensure that the anti - money-laundering identity verification requirements that New Zealand has signed up to apply to offshore persons. I am sure everyone in the Committee would agree that New Zealand’s being party to all of the anti - money-laundering requirements that have been internationally agreed is important, because we do not want to see New Zealand out there as an outlier in the world in terms of providing good standards of probity in our taxation and financial arrangements. That would be a terrible thing, and one that we on this side do not think should have any place whatsoever in the way that New Zealand presents itself to the world.

However, after that piece of legislation was passed, it became clear that some of the compliance costs involved in everybody getting a bank account in order to get an IRD number were a little high. Officials went away and came up with some solutions. Some of them are non-legislative and are not covered in here, but they were described to the select committee in some detail. However, some of them are legislative, and they are the ones contained in clause 71. In particular, there was one that was a pretty obvious one, which was around seasonal workers employed under the Recognised Seasonal Employer scheme. Clearly, it would be quite difficult in some instances to immediately get bank accounts—things like identification and all of those sorts of things are a little hard at times to get—so non-resident seasonal workers under the Recognised Seasonal Employer scheme are going to be allowed a grace period of 1 month after arriving to get a New Zealand bank account and inform the Inland Revenue Department before the higher withholding tax would apply. All members of the select committee supported this as being a practical way of dealing with that.

The other category of person is a person who has already had anti - money-laundering verification undertaken by a New Zealand reporting entity and would not need to obtain a bank account, to avoid duplication of that process. So, in law, what that equates to is “a person for whom a reporting entity under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 has conducted the customer due diligence procedures required for customer due diligence under that Act”. There were some questions asked at the committee as to whether that would provide exactly the same level of assurance as somebody who had a bank account, but apparently it is a consideration within all of the provisions of that 2009 Act I mentioned, and, therefore, those people are exempt as well. Then the bill already exempts non-resident suppliers of remote services from the requirement to have a bank account, and the committee has recommended that other non-resident suppliers also be exempt as long as the IRD number was being supplied solely because they were a non-resident supplier of services.

So this all came about because the Government—

💬 Hon Ruth Dyson: How do you know that?

Well, it is amazing that I know all of that, is it not?

💬 Hon Ruth Dyson: No, but how do you know why they supplied it?

No, well the thing is they supplied it—the only reason a non-resident supplier would supply that would be because they were a supplier of remote services to New Zealand, because otherwise they will not have a New Zealand bank account. There is no reason for them to have a New Zealand bank account. They are not an entity operating in New Zealand.

💬 Alastair Scott: But you are amazing to know all that.

I know. It is—well, exactly. Alastair Scott could potentially have taken a very similar call to mine, had he chosen to do so. He has not, and I am sure he is grateful that we have now traversed that material. [Bell rung]

The CHAIRPERSON (Hon Chester Borrows): Grant Robertson.

It will be only a brief addition—

The CHAIRPERSON (Hon Chester Borrows): Do not apologise. Just get on with it.

—to that statement, which is really just to sum up my contribution here.

So I think this clause 71 is useful, but it does highlight the shortcomings with the way the Government has gone about this. We are nearly at the end of the Committee stage of the third bill of three. It is a pretty poor trifecta, if you ask me, because in those three bills the Government has set up the brightline test that has not really worked, it has created a series of obligations that it has had to come back to the House and correct, and, in the end, I do not think New Zealanders are particularly better off for these changes. We are supporting them because they are minute steps in the right direction, but, actually, the Government, when it looks back on how it has gone about these three pieces of legislation, will probably want to have a pretty serious rethink about whether it has got it right. We do not think it has, in terms of the issues that are meant to be being managed by the brightline test, but on top of that, if you are making law and then correcting it months later, there is a problem with how that law is being made, and we need to do better than that.

Just talking to Part 4, I am going to have a look at clause 72 here. This is talking about residential land withholding tax certificates of exemption. Again, this was an area where we discussed in some detail at the Finance and Expenditure Committee why people would get certificates and what the reasons and the rationale would be, and, basically, there are three of them. What I am talking about, of course, is residential land withholding tax. This is, by and large, covered in Part 2 of the bill, but because this is amendments to the Tax Administration Act it this falls just under the purview of this part.

So there are three requirements for people who may apply for an exemption to residential withholding tax under this Act, and this includes, in new section 54E(3) in clause 72, “a person who carries on a business of developing land or dividing land into lots or erecting buildings;”. The reason we did this is that we did not want to, how should I say it, dissuade anyone—an overseas investor—from coming over here and erecting residential dwellings, especially in a place like Auckland, where there is a need for residential dwellings. Perhaps we will reach a stage where it is hard to get domestic funding and, therefore, overseas funding will be a requirement to allow any sort of development to occur, and under this sort of circumstance, we thought that the odds of them—well, it would be easy for the Inland Revenue Department (IRD) to track them down and have them pay their required amount of tax anyway. As we talked about in the purpose of this, we thought that the residential withholding tax is really there to stop people from avoiding their tax obligations, so this would make it—well, we think it would be very hard to avoid your tax obligations if you were undertaking this sort of work.

The second area is where they have already “had tax obligations under the Inland Revenue Acts before when applying for a certificate;”—i.e., this is an overseas investor of good character, they have a track record with the IRD, and there is no reason whatsoever for the IRD to suspect that they might skip the country or not honour their tax obligations. So it is the good track record—it is the good character test, in essence. The good character test is around in a lot of legislation, so we thought that that was appropriate.

The third one is “has complied with all tax obligations for the 2 years before they apply for the certificate, and the Commissioner is satisfied that the person will continue to so comply.” Again, this goes back to what I was talking about—the good character test. There is no reasonable belief to think that this person or this investor—whether that be a person, a company, a trust, or whatever sort of entity—will welsh on their New Zealand tax obligations.

We did think that those three categories were deserving of the ability to apply for an exemption to the residential land withholding tax. Of course, it is not guaranteed. There is a process that has to be gone through, but if an investor fits one of those categories, then the odds are pretty good that they will get one.

There is clause 73, “Section 81 amended (Officers to maintain secrecy)”, as well. Actually, secrecy was talked about a lot in the select committee, in a number of instances, and we have alluded to this before in a speech today. It is my understanding, and it was certainly reinforced by the IRD, that there are a number of checks and balances in place in the contracts of IRD employees to make it very, very clear that they do operate under—well, I was going to say “a veil of secrecy”. What I mean is that the integrity of the tax system and the integrity of the IRD is completely reliant on the fact that an individual’s tax business will be kept absolutely secret. I have absolutely no reason to suspect that that is ever going to be compromised.

In fact, I was talking to a very long-serving, and just recently retired, senior IRD employee. I asked him whether he thought this was an issue in the IRD at all, and whether we needed to be a little bit tougher on this, to be a bit more transparent, or to put better rules in place, and he said: “No. Everyone knows that if they break the secrecy clause in their contract, then they are gone before lunchtime.” So there is a pretty good culture in the IRD for this.

The rest of Part 4—as Mr Robertson and, I think, every speaker has alluded to—is administration. It is the nuts and the bolts. It is pretty boring, to be fair. Not that tax is boring—how could I even suggest that. What I mean is that compared with the student loan stuff or the land withholding tax—

Part 4 agreed to.

Clauses 1 and 2