Taxation (Annual Rates for 2016-17, Closely Held Companies, and Remedial Matters) Bill

I move, That the Taxation (Annual Rates for 2016-17, Closely Held Companies, and Remedial Matters) Bill be now read a second time. This technical tax bill continues the Government’s focus on improving, strengthening, and updating our tax rules so that they continue to work well for taxpayers and for the Government. This is a large and challenging tax bill. Many of the measures it proposes are complex and address the more technical parts of our tax rules, and have, in the main, been welcomed by the private sector. The private sector is generally supportive because it recognises that we need to ensure that the tax rules continue to be fit for purpose. Tax rules must be responsive to change, they must work well in practice, and compliance costs must be minimised. The Government believes that these principles are vital for the health of our tax system by promoting voluntary compliance and, ultimately, contributing to a stronger economy.

There are four main groups of changes in this bill. To recap briefly, the first group of proposals are intended to simplify the look-through company rules and the dividend rules as they apply to closely held companies in order to reduce compliance costs for these taxpayers. Although closely held companies typically have just a few shareholders, they are a significant proportion of the total number of companies in New Zealand. Look-through companies are, in the same way as a partnership of individuals, looked through for tax purposes. Income and expenditure is attributed back to owners and taxed at their personal tax rates rather than at the company tax rate. It is important that the tax rules apply as intended and that tax, as far as possible, has little impact on a business owner’s decision making. Therefore, the proposals in this bill aim to ensure that the decision to convert a small business to a company is not driven by tax considerations.

The proposed measures aim to simplify the current rules to reduce compliance costs and ensure that the rules remain robust and true to their intended purpose. They include addressing a number of complexities raised through consultation with the private sector, as well as proposals to tighten the eligibility rules for an entity electing to become a look-through company. The result will be a much more workable set of rules, and the removal of some areas of overreach will make the outcomes fairer for taxpayers.

In its consideration of the bill, the Finance and Expenditure Committee made an important recommendation to include a transitional rule for look-through companies. This rule allows those companies that will lose their look-through status as a result of the changes to the eligibility criteria to be able to transition to ordinary companies without immediate tax consequences. This change will further improve the fairness of the rules.

The second group of measures aims to bolster the rules around the tax treatment of interest earned in New Zealand by foreign lenders. Changes are therefore proposed to the non-resident withholding tax and approved issuer levy rules. They ensure these taxes apply consistently to transactions that are similar in economic substance. They include changes to the non-resident withholding tax rules to ensure they apply as intended to related-party debt, or arrangements that are equivalent to related-party debt, and correcting anomalies relating to branch structures, which can be used to remove the requirement to withhold non-resident withholding tax or pay the approved issuer levy.

The third group of measures proposes various amendments to fine-tune the GST rules and ensure they continue to work as intended. They include taxpayer-friendly changes, such as enabling businesses to deduct GST associated with the costs of raising capital, and allowing partially exempt businesses to use an alternative apportionment method. There are also changes to fine-tune the rules around the zero-rating of services provided in connection with land in New Zealand.

Finally, the fourth group of changes proposes a large number of mainly technical amendments. Although mostly remedial in nature, these measures are considered by the private sector to be of major importance to make sure the tax rules work well in practice. They form part of the Government’s ongoing work to ensure that the tax rules are clear and apply as intended, and that they do not impose unnecessary compliance costs on taxpayers.

The bill also includes a number of taxpayer-friendly measures to promote greater fairness and certainty in the tax rules. Proposed changes to the debt remission rules, for example, address a problem that can arise under the current rules when a debt is remitted between associated parties. Debt remission refers to the extinguishing of a borrower’s or debtor’s liability by a creditor. The reduction of the liability is treated as taxable income because it increases the wealth of the debtor. But when the creditor is associated with the debtor, the creditor is denied a bad debt deduction, resulting in income to the borrower but no deduction to the creditor. The bill proposes to correct this asymmetric result by treating the debt as being fully repaid when a debt is remitted between related or associated parties. The proposed changes follow consultation with the private sector in February last year and are part of the Government’s efforts to ensure fairness across the tax system.

I would like to thank the Finance and Expenditure Committee for simplifying and clarifying the legislation that codifies these rules. This will be welcome news for group companies in corporate New Zealand as well as smaller mum and dad partnerships or businesses.

Other changes proposed in the bill include amendments to improve the consistency of income tax legislation with insolvency law, correct an overreach of the current land tainting rules affecting council-controlled organisations, ensure that the tax pooling and life insurance business rules work as intended, and ensure that the Working for Families tax credit rules work correctly.

Fourteen charities are to be added to the list of donee organisations with overseas purposes in schedule 32 of the Income Tax Act 2007, which means donors to those charities will be eligible for tax benefits on their donations from 1 April 2016.

Finally, the bill sets the annual rate of income tax for the 2016-17 tax year. Many of the measures proposed in this bill have been developed through open consultation with the general public and private sector groups. This is a particular strength of our tax system and helps to ensure that tax and social policy changes are well thought through and that they will work well in practice. Further amendments have been recommended by the Finance and Expenditure Committee, and for these I acknowledge and thank the committee members for their close attention to the technical detail of this complex bill. Briefly, those recommendations include amendments to simplify or clarify the original purposes, where this is possible. The result will be greater coherence across proposed changes and reduced compliance costs for taxpayers where possible.

I would like to thank submitters whose feedback was considered by the Finance and Expenditure Committee. The bill has been improved by that feedback. In addition, I wish to advise that I shall introduce Supplementary Order Paper (SOP) 261 at the Committee of the whole House stage. This SOP will introduce practical measures that will provide relief for people affected by the recent Kaikōura earthquake and subsequent aftershocks. It will ensure that businesses are not faced with an unexpected tax liability as a result of receiving replacement insurance proceeds on destroyed capital assets. This rollover relief, in effect, replicates a measure that the Government provided for Canterbury businesses. The SOP will also contain a number of changes of a consequential remedial nature to ensure the legislation operates as it is intended.

I think it is fair to say that we live in a very dynamic period of technology-driven change. Every day there are constant challenges and opportunities to manage our affairs and do business differently. It is important that our tax system remains current and in tune with these changes. At the same time the tax system must be, and be perceived by New Zealanders to be, fair and coherent. The proposals in this bill have been developed with those very important objectives in mind. I commend the Taxation (Annual Rates for 2016-17, Closely Held Companies, and Remedial Matters) Bill to the House.

I rise to speak to the Taxation (Annual Rates for 2016-17, Closely Held Companies, and Remedial Matters) Bill, and I rise to confirm Labour’s support for the bill to progress. We acknowledge the work that the Minister of Revenue has done on it. I think the Minister could have pepped up her speech, actually. It is a good bill, but I have heard more passion in old episodes of George & Mildred than in that speech.

I am a relatively new member and I was not present for the select committee hearings on this bill, but I have consulted colleagues, read submissions, and read through some of Hansard’s most gripping pages ever to get to grips with the intent of this bill and its delivery mechanisms and, as I say, the Labour Party supports it. Before going into detail, though, I do want to comment on the sheer volume of tax bills that the House, the tax community, and the broader public are having to consider at the moment. Often these bills are very weighty. As the Minister commented, this is a big bill, something like 400 pages, and there is a lot of technical detail. This is a matter that has been commented on by submitters to the Finance and Expenditure Committee, and on this side of the House we would like some serious consideration to be given to better process for tax legislation to be compiled and to make its way through the legislative process. We benefit from the input of the tax community and the public. Let us not wear them out.

On the process front, it is also appropriate to point out that one of the most important aspects of this bill, not commented on by the Minister, is the setting of income tax rates for the coming year. We are running perilously close to the cut-off date for being able to implement those rates in the new financial year. Colleagues more experienced than me have commented that this is the latest that they recall the annual rates being set. In this case there will not be a crisis—the Government will not be shut down—but running the process this late does create real risks for the smooth running of government, and we should ensure that it is done in a more organised fashion in future years.

Befitting of its size, and despite the fact that it is a very detailed and technical bill in some ways, this is also an important bill. Aside from setting those annual tax rates, it provides for some important changes to ensure the ongoing integrity of our tax system. It has something for everyone. There is stuff about the aircraft overhaul expenses, which I think have been a singular achievement of Mr David Seymour and something he can take back to the people of Epsom. Horse racing, gold, and silver are all covered by this bill, and what that speaks to is the way that the tax system touches on every aspect of our economic lives.

That is what makes it extra important that our tax system has integrity, that it is clear, that it is not open to abuse, and that it does not get caught and bogged down in litigation. As one of the overviews of the bill says, it aims for the tax treatment of alternative forms of income and expenditure to be as even as possible. That is something that we on this side of the House support, and, in fact, we want that principle to be extended in the future to ensure that across our whole tax system we achieve balance.

Having affirmed the importance of tax rates being set for the new financial year, I do want to reflect that we on this side of the House view it as a missed opportunity to ensure that our tax system is fair, progressive, and driving the kind of productive economy that we would all like to see in New Zealand. This bill simply rolls over existing rates when what we actually need is a more fundamental review of our tax system to ensure that it is modern, fit for purpose, and balanced. While we wait with trepidation for possible Government announcements about tax changes in the Budget, and while there is a degree of political interest in whether the former Prime Minister’s north of $3 billion of tax cuts are still on the agenda or whether it is the new Prime Minister’s less cloud-bouncy approach that prevails, it is Labour’s belief that we need a proper review of the system to ensure that tax is applied fairly across taxpayers and our economy and that everyone pays their fair share.

💬 Chris Bishop: What does that mean?

Just rolling over the rates or changing a few thresholds does not achieve that. It means doing better than we are doing now, Mr Bishop.

In considering the existing rates, we might also reflect on the fact that these rates came in as a result of the 2010 tax switch overseen by Mr English, which resulted in 40 percent of the net benefit of that package going to the top 10 percent of earners. That was not an equitable outcome, and any future changes to tax rates need to do a much better job of ensuring that New Zealanders who really need an income boost receive one. Our tax system is important to how we incentivise growth and investment in our economy, and it is also important in ensuring fair distributional outcomes. That is what Labour will push for as we review those tax rates in the future.

I now want to move on to some of the other changes proposed in the bill. I am going to focus particularly on the aspects relating to closely held companies, and I am sure my colleagues will cover others. In doing so, I do want to acknowledge the work of the Finance and Expenditure Committee in smoothing out some of the changes that were originally proposed in this area and dealing with the sensible submissions of submitters.

Probably the most substantial area of change does relate to look-through companies (LTCs), which the Minister referenced. Look-through companies are a legitimate form of business partnership, but it is also clear that they have been the target of some sharp and aggressive tax practice. So it is appropriate that we examine the structure to ensure that it is meeting its intended objectives and not those of people and organisations who would simply use them to minimise legitimate tax obligations. Look-through companies comprise a large number of active companies in New Zealand. They are companies whose shareholders elect—as the name would suggest—to be looked through for tax purposes. The expenditure, income, and resultant tax obligations flow through to shareholders, who are then taxed at their marginal rate, and, of course, on the other side, losses can also be offset. Particularly for sole traders looking to expand without more convoluted company structures, they can be a useful vehicle for bringing in additional business partners.

Essentially, the bill tightens the criteria for companies electing to become LTCs with measures including a stronger set of rules around the five counted owners test to ensure that those benefiting from distributions are actually captured within that test instead of various financial mechanisms meaning that there are potentially far more beneficiaries than might otherwise be seen to be the case.

Amongst this and other changes, which will have the likely effect of reducing the number of LTCs, the Finance and Expenditure Committee has worked hard to ensure that there is a fair transition regime for those whose circumstances may be affected by the passage of the bill. For those LTCs who lose their status in the ensuing tax year, a new transitional rule is proposed that enables tax book values to be rolled over to the new ordinary company to ensure that there is no unintended tax impact from that changeover. That is a sensible change proposed by the committee, which we support.

The committee was also very keen to ensure that charities and Māori authorities that have used LTCs are not unfairly disadvantaged by the proposed changes, which, to most intents and purposes, do remove the right of charities and Māori authorities to use LTCs. A grandparenting arrangement was originally proposed for Māori authorities. However, the select committee determined that that wording needed to be tightened so that only interests acquired before the 3 May 2016 grandparenting date are allowed, whereas the original wording of the bill captured only the need for an LTC to be established before that date and not interests that might come into it afterwards. This is a tidy-up that I believe meets the original intent of the bill and Labour supports.

There have also been some concerns from charities that have to some small degree legitimately used LTCs for certain activities and would be disadvantaged by the original proposal to simply end the right of charities to own LTCs. The committee has suggested—very pragmatically, in my view—that a grandparenting provision aligned to that of Māori authorities should apply.

Finally, I want to turn to Supplementary Order Paper (SOP) 261 tabled by the Minister about depreciation roll-over relief for quake victims. Clearly, those in the upper South Island and the greater Wellington region with destroyed assets who receive the small solace of some depreciation recovery should not then face a tax disadvantage. So it is only fair and sensible as proposed by the SOP, that this obligation can be deferred while people and business owners move their way through that rebuild process.

As I say, Labour, through its work on the select committee, is satisfied that this bill is moving us in the right direction. We have a fundamental belief that further work is needed on the integrity of our tax system to make sure that everyone is paying their fair share and to make sure that the system is balanced across our whole economy. But we have no hesitation in supporting the positive changes that are included in this tax bill and we look forward to further stages of this debate. Thank you.

It is a pleasure to take a call on this bill. The Minister of Revenue has outlined in quite some detail for the House the various technical measures that the bill does—and it is a good bill—and I just want to, in my remarks, address four points to add to what the Minister has said.

The first is just to respond to what has just come before from Michael Wood about the volume of tax legislation that the House is considering. This has been, I have got to say, a puzzling theme of Labour members’ remarks on tax bills recently, because the New Zealand Parliament does not actually sit that much, as Sir Geoffrey Palmer has pointed out most recently. The New Zealand Parliament does not sit that much, our select committees do not sit that much, and, actually, the job of the Finance and Expenditure Committee, which I have the great privilege to chair, is to examine bills put before the Parliament by the Government. Actually, there is nothing more constitutionally important than the proper scrutiny by Parliament of the appropriations that the Government wishes to raise, and, obviously, raise through revenue and through the taxation system.

So I find the complaints about the volume of legislation a bit strange, because the Labour Party called for the Shewan inquiry into the taxation system after the Mossack Fonseca issue was raised. We had the inquiry, and then the Government very quickly legislated, so it cannot be complaining about that piece of legislation.

The Labour Party and the Green Party have spent a lot of time talking about so-called multinational company tax evasion, profit shifting, and things like that, and, actually, there is a reasonable amount of agreement on that across the House. The Government is acting, and there has been legislation, or parts of legislation, to do with that. So we have legislated in relation to that, or at least started the process of it. Then another piece of legislation that has come before the House recently is to do with making it easier for small businesses to pay provisional tax. Actually, the Labour Party likes to stand up all the time and claim that that is its policy, so when the Government introduced a bill to give effect to that, you know, it cannot really complain about that. So I am just left puzzling: what is the Labour Party’s complaint about the volume of tax legislation, other than the fact that it does not want to do any work? So that is the first point—that is the first point. That was my crescendo to that point.

The second point is to praise the Minister’s Supplementary Order Paper 261 about the effect of the Kaikōura earthquakes, making sure that we do not confer any unexpected tax liability on businesses affected by that. So I just want to say that that is a strong move.

💬 Stuart Smith: Excellent—it’s excellent.

That is right. My good colleague Stuart Smith, the MP for Kaikōura, says to me that it is an excellent move, and if he takes a call I am sure he will praise it to the ends as well.

The third point I want to make is, again, to just respond to Michael Wood about the idea that this bill is a missed opportunity. The Labour Party members like to say this quite a bit about tax legislation, as well. It has been a constant theme running through their speeches most recently. They always say we need a fundamental review of the tax system—OK, I do not really agree, but fair enough—and it needs to be fairer, more progressive, and modern. Well, we are modernising the tax system, and I think there is actually a degree of cross-party consensus on that, and we are putting through the Business Transformation programme through the IRD.

So what does fair and more progressive mean? Actually, what they mean by that is higher taxes and new taxes. That is what they mean—they just do not want to say so. That is what you do when you are in Opposition. When you do not want to promise something that you know will not be popular, you do a review—or, at least, you promise a review—and you say the right things in order to give effect, in order to give the indication that you are tilting one way or another. It cannot be capital gains taxes, because Grant Robertson and Andrew Little ruled that out, and they keep ruling it out, so we know that it will mean higher taxes. Actually, the Labour Party should be upfront with New Zealanders about its policy. Rather than just saying: “We want to do a review to make it fairer and more progressive—

The ASSISTANT SPEAKER (Lindsay Tisch): Order! We are on this bill.

Very good, thank you. I acknowledge that.

The fourth point I want to make is—

💬 Grant Robertson: What was the third?

The third point was about the missed opportunity that you claim this bill is. The fourth point is about the bill’s addition to the schedule of the Income Tax Act in relation to giving charities tax relief. I have got to say—I do have to say—that it is ridiculous that we have to legislate in order to confer tax benefits on a particular subset of charities. I have said this before in the Parliament: I think there has got to be a simpler way of adding charities that are subject to income tax relief to the list and giving them tax relief, and there has got to be an easier way of removing the charities that are not subject to it any more.

For example, in reading the background to the bill, there is a particular trust—I think it is some trust in Auckland—that has been wound up and, therefore, is no longer eligible to be classed as a charity for the purposes of tax. There has got to be a better way for Parliament to deal with these organisations than the IRD having to, every year, collate through the system all the charities that should be added to the list and all the charities that should be removed from the list. There has got to be a simpler way, whether it is by ministerial fiat or whether it is by the officials doing it, or something. I just make that point again, that I think we have got to get a better way of doing that. I just think it is silly that we have to keep turning up in Parliament every year to do this. So, with those four remarks on this very important piece of legislation, I commend it to the House.

I am a little bit disappointed after that contribution from Chris Bishop, because colleagues on this side of the House will know that when the National Government was rejigging its Cabinet, I was on “team Bishop”. I was saying that Chris Bishop deserves to be in Cabinet well ahead of David Bennett—well ahead of David Bennett. I was there backing Chris Bishop, and then he gets up tonight and does a speech like that—he does a speech like that. I have got to say, David Bennett would have probably been able to do that better, and that must be a crushing blow to hear those words said. In fact, I never thought I would say those words in this House.

But I do want to respond to one of Mr Bishop’s points, which was his short constitutional law lecture that he delivered us on behalf of Geoffrey Palmer, when he was wondering why the Labour Party and Michael Wood had expressed concern about the conveyer belt of tax legislation that we have been witnessing in the House in the last couple of years. I just want to make the point to Mr Bishop that this bill is in fact the bill where we had the moment of confusion when submitters were coming into the Finance and Expenditure Committee not sure which of the two tax bills that were in front of the committee they were there to submit on. That is the situation we found ourselves in in the committee. That is why Michael Wood has raised this issue, and the Labour Party will continue to raise the issue that we believe there can be a much more streamlined approach to the way that taxation amendment bills come up.

We have had the example in the last bill—which I know you will allow me to speak about just briefly, Mr Assistant Speaker—where the bill itself was amending a piece of legislation we had passed in the House only a few months earlier. That is not a good way to make tax law—and it is not the fault of the officials, necessarily. They have a work programme, which the Minister of Revenue approves, that they work to and that comes forward. It is, however, the responsibility of those who manage the House to make sure that this comes up in a way that is sensible and that allows members of the public to make the kinds of submissions that we want them to make.

I am going to speak—and I imagine I will get interrupted in the middle of the speech, so I want to save some of the really exciting stuff around closely held companies and aircraft overhaul expenses, which I know is one of Mr Bayly’s life passions and which he will no doubt speak about when he gets up. But I want to cover a couple of matters this evening, if I can, and one I do want to get out is my support, also, for the Minister’s Supplementary Order Paper (SOP) 261, around the depreciation rollover for businesses affected by the quakes, as Mr Bishop said, to avoid them having any unnecessary tax obligations. This is important. A number of businesses and business owners have been affected in this way, both in Kaikōura and here in Wellington.

But I also want to throw my support behind Ron Mark’s SOP 260, which actually takes the Minister’s SOP a step forward and says: let us actually do something now to enable those people who know they need to strengthen their buildings and who want to strengthen their buildings but are finding it financially difficult to do so. Mr Mark has proposed tax deductibility measures, and that will work for some people. But, personally, I would go further and say we actually also need to look at how we help those people who are owners of apartments in residential buildings who have been affected in the same way, either through the tax system or through some kind of low-interest or no-interest loan facility.

Right across New Zealand but especially in places like Wellington, we have people who live in buildings who are not rich or wealthy. They happen to own an apartment or a flat in a building that is earthquake-prone. They want to do the strengthening. Their bodies corporate cannot borrow money as a group—they themselves are struggling. We need to do the right thing by those people. They are not asking for a handout; they are just asking for some assistance to get the work done and get it done now. I implore the Government to take on the very good things that it has done here in terms of businesses affected by the quake, and to take on Mr Mark’s SOP. Let us have a package that gets the earthquake-strengthening work done as soon as possible.

The other matter I want to just cover tonight is the question of rates. Again, to help Mr Bishop out a little here, this is the time when we set the annual rates. It is a bit late in the day, it would be fair to say, for the 2016-17 year. You know, taxpayers right across New Zealand have actually been paying their tax, presumably, hoping the Government would actually pass the rates, but it has left it pretty late, and it has left it very late to the point where we might have some other announcements that might change the tax rates coming our way.

I challenge the Government speakers opposite to be up front with us. If David Bennett was here, he might know already what those tax rates are. But I want to know from the Government what is actually going to happen in terms of tax rates. These will be one of the shortest-term sets of tax rates ever passed in this House, I venture to suggest, because when it comes to Budget time, we know the Government is not going to be able to resist the old tax cut dance in election year. Throw something out there—despite the fact it has created a massive deficit in infrastructure and social spending, throw out the tax cuts. Make sure that the public think that there is a chance here that they will get something from it.

I endorse what my colleague Michael Wood has said. What the tax system needs in New Zealand is a thorough, far-reaching review. We have reached the point now where we have huge inequalities in our country, particularly in terms of wealth. The owners of assets—that is where inequality is now residing, and in our tax system we need to take another look at that to make sure that we actually achieve the Minister’s goal of fairness, which she said was the bedrock of the tax system. Right now, today, as we set—

I am sorry to interrupt the honourable member. The time has come for me to leave the Chair.

Debate interrupted.

The House adjourned at 10 p.m.