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

Part 1 of this bill is concerned solely with one thing and that is the annual tax rates for the 2016-17 tax year.

💬 Hon Ruth Dyson: Which year?

The 2016-17 tax year. The 2016 tax year started about 6 months ago, so what we are doing is implementing retrospective legislation—

💬 Hon Ruth Dyson: I think 9 months ago.

Nine months ago. You are right, Ruth. We are implementing retrospective taxation on the most important part of the tax system, and that is how much money we actually pay as salary and wage earners.

What we have seen with tax legislation—in the time that the Minister in the chair, Michael Woodhouse, was the revenue Minister and in the time the new Minister has been in place—is a whole lot of legislation come through the select committee in little bits and pieces. The fact that we are only doing this now just shows, in my view, that there is a real lack of policy intent here. I would have thought one of the first things that the Government would want to do after the Budget—when was the Budget delivered? May, I think it was—May last year. So we are talking quite a long time ago. In fact, what we are actually doing now is preparing for the next Budget, which I think is only a couple of months away. The next Budget, in a couple of months, will be codified in legislation in a bill like this, which will have a Part 1, and Part 1 will be talking about the annual rates of income tax for the 2017-18 tax year. But let us hope that they do not wait for 9 months to get here.

What are these rates we are talking about? Well, the surprising thing is that the vast majority of Kiwis who actually pay tax are wage and salary earners, but if you went out onto the street and did a vox pop and said “What are the tax rates?”, I guarantee that the vast majority of Kiwis would not know. They might know that the top tax rate is 33 percent. They might know that that was dropped from 39 percent down to 33 percent in the middle of a financial crisis, as GST was increased. But they will not know, for example, that on the first dollar earned you actually pay 10.5 percent.

So the first tax rate, from zero dollars to $14,000, is 10.5 percent. That is unusual. The reason I say that that is unusual is that in a whole lot of countries, actually, there is a tax-free threshold. I think that in Australia it is about $18,000, but it is certainly significant. Then, between $14,001 and $48,000 the tax rate increases to 17.5 percent. So what the effective tax rate is between $14,000 and $48,000 is actually 10.5 percent to 15.5 percent, depending where you are on that scale. Then, for $48,001 to $70,000, I would be interested to know how many people know what the tax rate is. Does anyone here—Mr Scott, do you know what the tax rate is? See, that is a classic case. Does the ex-revenue Minister—

💬 Hon Michael Woodhouse: I’m sure the Minister knows.

—what would you say it is, Mr Woodhouse?

💬 Hon Michael Woodhouse: 30.

Well done—he did know. It is 30 percent. My point here is that the vast majority of New Zealanders do not actually know what their tax rate is. The reason they do not know that is that they trust the Government to get it right, and so they should—and so they should. The last thing we want to do is to erode confidence in the tax system. The annual tax rates are one of the fundamental pieces of tax legislation.

Let us go a little bit further. Who knows what the rate is—well, I talked about this. Over $70,000, the tax rate is 33 percent. We know this, and I am making a whole lot of assumptions here. I am making a whole lot of assumptions, that, for example, someone is not paying secondary tax. The rate changes for secondary tax.

💬 Hon Michael Woodhouse: No it doesn’t.

Yes it does, Mr Woodhouse, and you know that. You pay secondary tax at, I think, 45 percent. There is a reason for secondary tax, because what happened before secondary tax was introduced was that people were working two jobs. Let us make an assumption: when someone works two jobs, it is not because they love working 20 hours a week; it is out of economic necessity. So what was happening is they were paying these rates that I read out for this job, and exactly the same rates I read out for this job over here. But how the tax system works is that you combine your total income and you pay tax on that total income.

So what might have happened, and, in fact, what did happen—I think they estimate that 200,000 New Zealanders pay secondary tax. So what was happening was someone was earning, let us say, $30,000 for one job and paying 17.5 percent, top tax rate, on that. Then, for another job, they were earning, say, $35,000, and they were paying the same 17.5 percent on that. But when you combined that income, at $65,000, they should have been paying 30c on every dollar over that $48,000. So it is about $17,000 where they should have been paying 30 percent but they were only paying 17.5 percent. What happened was that often those who were the most disenfranchised ended up with a really big tax bill at the end of the year, which was deemed to be unfair and I completely agree with that. You know, if you are struggling to make ends meet, and the IRD comes to you and says “For that last $17,000 you have underpaid your tax by a few hundred dollars”—and it normally arrived at a really inconvenient time, when the car had blown up, or the kids were starting school, or the donations had increased at your local primary school. People just were not paying it. There is nothing worse, take it from me, than having a tax bill that you cannot pay.

What happens with that is that it accrues penalties and interest, and what starts as, actually, a small amount—and the Minister in the chair knows this—can actually explode into a significant amount due to the penalties and interest. The interest payment on non-payment of tax—it used to be about 10 percent, if not more. I am not too sure whether the Minister in the chair—was there any? I think there was some revision done around penalty tax interest rates, because it was just so high that it was becoming extortionary.

💬 Hon Ruth Dyson: In this bill?

No, no; in general. This bill still does cover the rate of secondary tax, there is no doubt about that. We are entering a stage where technology needs to be able to address these issues, and so what I am hoping is that when we are debating the 2017-18 tax-year rates there is no secondary tax rate in there. The reason I say that is that the IRD is spending $1.5 billion—let me say that again: $1.5 billion; that is a lot of money—on a whole new IT system. It is called the Business Transformation project. What we should be able to do with that is capture all the data from workers so they pay the right amount of tax at that point in time.

What a lot of people also do not know is the IRD owes New Zealanders $700 million. [Interruption] That rolls over every 4 years—it is true, Minister.

💬 Hon Michael Woodhouse: I know. I’m not denying it.

Yes. And that rolls over every 4 years. I am aware that a lot of that money—not all of it, but a lot of that money—is actually little bits of rats and mice that are owed to people who have paid secondary tax but have not claimed it. There is a classic case: very good friends of mine employed an IT administrator. They convinced her to phone up WooHoo, or one of those tax refund companies, and see. She said: “I don’t know. No, there’d be nothing there.” In the end, she did anyway, and she ended up with a refund of $300. The reason she had that is that she had paid secondary tax because she was working two jobs, and I am just thinking that at that point in time, although the $300 was fantastic in her back pocket, I think she probably would have liked that $300 at the point in time at which she earned it. What we are really hoping for is that the next time we debate a Part 1 in the next tax bill there will be no secondary tax figure, because the IRD’s Business Transformation system will have sorted this out and addressed it.

I am going back to the annual rates of income tax. When we are talking about 2016-17 year, of course, we are talking about the Government’s fiscal year, which goes from 31 June to 1 July. Again, these tax rates have not changed since—oh, when did the Government drop the tax rate? Was it 2009?

💬 Iain Lees-Galloway: I don’t know. They dropped it and then they put it back up.

Yes, they dropped it. That was the promise when Mr Key said: “Read my lips—I will not increase GST.” And then he went ahead and said: “Oh, well, no. I was just kidding. Of course I’m going to increase GST.” But he had to increase GST. It was not the fact that he broke a promise because, you know, he just liked breaking promises. He had to increase GST, because they had lost so much—

The CHAIRPERSON (Lindsay Tisch): Order! GST is not part of Part 1.

Oh, sorry, Mr Chair.

The CHAIRPERSON (Lindsay Tisch): This is a very narrow debate. It is on clause 3, so it is a very narrow debate.

Clause 1, Mr Chair.

The CHAIRPERSON (Lindsay Tisch): Part 1.

Part 1. Oh, sorry, you are right, Mr Chair—clause 3. But the reason that these income tax rates drop to the level they are in clause 3 is that the Government needed to make up money from the rates that were dropped—the top rate from 39 percent down to 33 percent—which is where it is at the moment.

There is not too much more I can say on this—and I am sure a couple of my colleagues will jump up and talk about the inequity in these, but—

I would like to pick up where my colleague Stuart Nash left off. Part 1 of this bill, of course, relates to the annual rates of income tax for the 2016-17 tax year. Those who are observant will notice that we are getting close to the end of the 2016-17 tax year, which demonstrates the shambles that this Government finds itself in, that it is retrospectively legislating for the tax year that is just about finished.

I was interested to look at what proportion of the overall tax take income tax actually makes up, because, as Stuart Nash was pointing out, there was that tax shift between income tax rates. There was the lowering of the top personal tax rate, which, of course, is 33c in the dollar—that was brought down from 36c to 33c in the dollar—and that was offset by an increase to the rates of GST. The most recent data that I could find goes back to 2013-14, and if this is inaccurate because times have moved on—if things have changed since then, it would be helpful if the Minister could respond to this. But back in 2013-14, income tax, which this Part 1 sets and is setting retrospectively, made up 41 percent of the overall tax take, and it is the largest proportion of the overall tax take, which means, you know, we rely very, very heavily on salary and wage earners—working people—to pay the largest chunk of the overall tax take.

Of course, we have no wealth taxes in New Zealand. We have personal income taxes, and we have corporate taxes, withholding taxes, GST, and indirect taxes and levies such as ACC, fuel excise taxes, etc. We have no wealth tax, and that means that we demand an awful lot of working people—people who are on those moderate incomes, paying maybe the 30 percent rate—to make up 41 percent of the overall tax take. And, of course, 33 percent of the overall tax take comes from GST, which is, again, predominantly paid by ordinary working people when they go to the supermarket and buy their groceries.

So when this Part 1—clause 3 here, in Part 1 of this bill—reaffirms the personal tax take, it reaffirms this Government’s demand of working people to pay the vast majority of taxes. Corporate taxes make up only 13 percent of the overall tax take. So when this Government reduces the top tax rate and increases the GST rate, what it is actually doing is increasing the burden of the tax take on ordinary families. They are those who are struggling just to make ends meet, those who used to be able to afford to buy a house but for whom that is becoming an unrealistic dream, and those who just want to be able to put food on the table for the kids, who just want to be able to pay the rent, and who want to be able to pay the power bill, the gas bill, etc. Those are the people who are paying the bulk of taxes in New Zealand, because the rates of personal income tax, as set by clause 3 of this bill back in 2013-14—it may be more or it may be less now, but I do not know; the Minister would probably be able to enlighten us on that—make up 41 percent of the overall tax take, alongside 33 percent of GST.

And, of course, a sizable proportion of that is made up from secondary tax. Secondary tax had its place when people were predominantly working in one job. But these days we do see more and more people working multiple jobs, working part-time, being on contract work and what have you, or maybe receiving a benefit and working a few hours a week, and that attracts secondary tax, often for people who have the least and who struggle from week to week to be able to pay the bills and make ends meet. That is why secondary tax really has become a thing of the past, and a Government that was progressive and forward-thinking would have its eyes firmly fixed on removing that secondary tax take. I think I will conclude my contribution at that point.

As a member of the Finance and Expenditure Committee (FEC), I will say firstly something positive about this bill, given we have dispatched a number of tax bills—and, in fact, I have almost lost count of how many tax bills the committee has dispatched over the life of this Parliament. I will say that this is a better-quality bill, in terms of how it is put together, than bills we have dealt with in the past. I recollect—just as a brief sidebar—the brightline test, which was a complete shambles of legislation. I had never seen a tax bill where every accounting firm in New Zealand—the “big five” and the rest—came in and said: “This won’t work.” I recall other tax bills that we have dealt with through the FEC, such as the former Minister of Revenue’s bill around car-parks and computers, and all that sort of thing.

I just say in passing that the thing that has always worried me about these particular bills, speaking from my 18 years in this place and having been on the FEC a few times for a few of those years, is the way Ministers’ offices are dealing with these bills and some of the quirky, colourful, bizarre, and sometimes idiotic ideas that emanate from the bowels of the bureaucracy. In the past they would never have hit a Minister’s desk. They would never have hit a Minister’s desk, or, if they had hit a Minister’s desk, they would have had a lot of robust thinking and policy work around them. I mean no disrespect as such, particularly to the IRD, but when you lose people like former Deputy Commissioner of Inland Revenue Robin Oliver, whom I had the pleasure to hear submissions from when I was chair of the FEC—the advice that one received around these bills, the process, and the quality of the legislation was extremely high. But I say that this bill is an improvement on some of the legislation that has been rushed through in an ad hoc way, where, as I said, even the “big five” accounting firms have in the past been derisory in their views of it.

Clause 3 is self-evident. I do not think the ratings for the show this afternoon in terms of parliamentary listening will go through the roof as we progress through the Committee stage of this bill, but I will pick up on a couple of things that other colleagues have said. There is a principle around when you are setting tax rates. When you have a tax system, the tax system has to be simple and transparent—simple so that people can deal with it, and transparent so that it is easy to understand, you can work within the system, and, hopefully, the system can work for you and is accountable. But, as other colleagues have said, when the Government chose to reduce tax rates, one of the things that I think it forgot was this issue of equity.

There was an opportunity in terms of equity and fairness, as this bill was put together, to examine and look at the whole of the tax pie—to look at who is paying what and, as my colleague Iain Lees-Galloway said, where the major burden of tax lies. He pointed out that 13 percent of our tax take is corporate. Some would argue that that is particularly low. The Government has made much of cracking down—or attempting or at least talking about it, or blowing a lot of hot air in respect of cracking down. I notice these multinational companies that, in the Government’s view, do not pay their fair share of tax. You know, we wait with bated breath to see those proposals. I would have thought I might have seen them with the previous Minister of Revenue, Peter Dunne, who I think holds the record, as I had said before, as the longest-serving revenue Minister in the Commonwealth.

The CHAIRPERSON (Lindsay Tisch): Order! Back to clause 3.

We may have seen some of those—well, it is quite germane, and I will tell you why it is germane, Mr Chair. It is germane because when you put it together in Part 1, clause 3, you are confirming a set of tax rates, and the question is: are those tax rates fair? It is germane when the Government has purported, as I say, to make much of its so-called attempts to see whether multinational companies should pay their share of tax. That is not contained in this piece of legislation, nor in this clause.

Those who pay the tax—the middle class, those working people, and even those at the top and the corporates—do expect some accountability for the tax that they pay. For ordinary working folk, or for every New Zealander, they expect that that tax is utilised in such a way that they can, for instance, line up at a doctor’s or line up at a hospital and have their injuries or their illnesses dealt with. We have debated day after day and week after week in the life of this Parliament that we see degradation of the health system, and those people will be asking today, as we confirm these rates: “Well, am I getting the best bang for my buck? If I’ve been on a waiting list for 6 or 12 months, where are my tax dollars going?”.

The same argument may be made in respect of our police force. In terms of those people who have been impacted on, either through burglary or through assault or other crime, they may be listening to this debate today—or, as their local police may say to them: “Well, we’re under pressure”—

The CHAIRPERSON (Lindsay Tisch): Order!

—“of resources.” Those people, Mr Chair, are listening to this debate—

The CHAIRPERSON (Lindsay Tisch): Back to the annual rates.

—but it is germane—about clause 3. It has to be germane, if I am sitting at home today and listening to a debate about clause 3, in which this Committee is confirming a set of tax rates that, within that financial year, will raise revenue, and that revenue will be deployed amongst a variety of portfolios. It is germane for those listeners sitting at home to ask the simple question: are they getting the best bang for their buck out of these tax rates, which we confirm today? I do not quite see how it can be anything but germane to the debate—whether it be in respect of health, or the ACC, or people who are impacted on in respect of law and order. All those portfolios are funded, ultimately, out of the revenue.

The Minister sort of shakes her head. She is the Minister of Revenue, and she must at least know that clause 3 sets a rate of tax that will then generate income for the Government, and that that will be deployed in other portfolios. If she shakes her head, then there is something really wrong, and maybe we should sort of suspend the debate and maybe her officials should go and have a wee chat to her to explain the basis of raising taxes.

It would be interesting and it would have been interesting, as I think other colleagues have said, if the Government, in proposing clause 3, had put out there in a transparent way the total tax pie, so that we could have a clear debate as to who pays what. I say that, in confirming these rates, it will be interesting whether the Minister or her officials are prepared to stand up and answer some of the questions that we have put to them in terms of whether they think these tax rates are fair; whether there is a fair distribution across the board; whether they think that, in the case of, say, corporates on the 13 percent rate, they believe they are paying their fair share; or even—as a germane but side issue, as the debate continues—what their practical plans may be for eliciting further taxation from multinational companies, which they themselves, as members of the Government, say are not paying their fair share.

If they are not paying their fair share—OK, I think we could get a reasonable amount of consensus across Parliament on that. The question for the Government, as we move through this narrow clause 3, is what is it actually going to do about it? Presumably, it could make an alteration to these rates. If it was gaining more taxation out of, say, multinational companies, which it believes are not paying their fair share, then that may provide some equity, some fairness.

So it will be interesting to see whether the Minister will take a call. If she disagrees with my analysis that setting annual rates then allows you to tax people, and that tax is then raised by the Government and then deployed into portfolios like health, education, welfare, etc., etc., then I am prepared to take a lesson from her. I know she is extremely exquisite—

💬 Hon Member: Erudite.

—and erudite—I was talking about her arguments—in providing lectures for people. She has made an art form of it, in this place—the lectures, that is. Some of those lectures have sort of been her downfall, but, hey, she is here now. She has got back on the black leather in the Cabinet room, so we should celebrate that fact. But I will be interested if the Minister is prepared to respond.

Thank you for the opportunity to speak on clause 3 in Part 1, “Annual rates of income tax for 2016-17 tax year”. I just want to say that it is very much indicative of the Government’s focus on tax and revenue at the moment, in that it does not seem to have any focus at all, whatsoever. Essentially, we are looking today at retrospective legislation to bring those annual rates into line. It speaks to me of a lack of discipline and perhaps too much revenue legislation in other areas that have been—I am going to say “slammed”. The tax industry was a bit more polite, in saying that perhaps there was a bit too much and it was getting a bit too confused, and they themselves were not able to keep up.

The CHAIRPERSON (Hon Trevor Mallard): Order! I am going to remind members, as I have heard the previous Chair remind members, that this is a very narrow part. We have accepted the principle of the part already, as part of the second reading, and all debate on this has to be very narrowly focused. So, general discussions about tax policy, speediness, and focus are not relevant.

Thanks, Mr Chair. If that is the case, then I will come to the question around fiscal drag. We are dealing with clause 3, which speaks to annual tax rates. The question I put to the Minister in the chair, the Minister of Revenue, and to the Government is that you have not changed these rates since 2011, I think it was, and so in all that time, essentially, New Zealanders’ tax rates have been going up.

The question, Minister, is that considering that is 41 percent of the Government’s overall revenue base—coming from tax, that is—what is the Government’s position now? Is the Government prepared to make a stand and say that, actually, it is timely for us to talk about annual rates? Here is our opportunity now to say to low-income earners that “Actually, we’ve been taxing you too much, using these annual rates, and we need to adjust that. It is just not fair that you have been paying more tax because the Government has done nothing to address the rates as outlined in clause 3 in this legislation.”

Fiscal drag has become quite a popular conversation with New Zealanders and other members of the House. It is timely. It is pertinent. I personally think that low-income earners are missing out because of the lack of changes or lack of reflection on these annual rates. I put it to you that here is an opportunity to make a position statement for the Government on how it thinks it should be treating New Zealanders. I do not think the Government is treating them well at all. Thank you.

Stuart Nash.

Thank you, Mr Chair—

The CHAIRPERSON (Hon Trevor Mallard): I was looking for an alternative, Mr Nash.

I was not too sure whether you had forgotten my name, or you were looking for someone else.

There are a couple of points I would like to make about clause 3. First of all, we are talking about the annual rates of income tax for the 2016-17 tax year. That is the year that starts on 1 April 2016—

💬 Hon Member: 1 April, or July?

—sorry, 1 July 2016—and finishes on 30 June 2017. In my first contribution I talked about this being retrospective, but I do not know whether this is, because I am having a look at when the commencement date for this part of the bill is and, actually, I cannot find it anywhere in here as being retrospective. It does not make sense to me, because these are the tax rates for a financial year that actually started about 6 months ago, or 9 months ago. So by its very nature it must be retrospective, and yet I cannot find anywhere in the commencement clause—and I know we are debating clause 3, but it would be good to know when this clause actually does commence because, you know, in tax legislation we just cannot make an assumption that, because it is at the beginning of the 2016 tax year, we just assume that that is when it is going to be.

Tax legislation, by its very nature, must be very, very tight and very, very specific, because we know the consequences if it is not. The consequences of that are that men and women with huge brains who spend an inordinate amount of time trying to find loopholes will make a substantial amount of money advising clients on how to get around these massive big bits of paper. I doubt that there is any consequence—

The CHAIRPERSON (Hon Trevor Mallard): OK, I have had time to look very carefully at the bill, and the very large clause 2 in the bill. If the member wants to discuss the commencement, he can do it during that clause. Now, going back to clause 3 in Part 1.

Thank you, Mr Chair, but I do think it is important to know just when clause 3 actually does commence.

The other thing I would like to talk about is there is a quite a big regulatory impact statement and disclosure statement for this whole bill, but the interesting thing is there is one whole part that is missing from this regulatory impact statement, and that is Part 1. What it says on Part 1 is that “Although New Zealand has relatively strong tax settings, [etc.] … Changes in the economic environment, [etc.] … can mean that the tax system becomes unfair, inefficient, complex or uncertain.”

I would have thought that clause 3 in this bill at least deserves some form of commentary on whether it is still seen as fair, as efficient, and as fit for the environment, because there have been changes in the economic environment. I think that if we are talking about one whole part of a substantial piece of legislation, then the officials can at least do us the respect of letting us know whether they believe that Part 1 is fair in the changing conditions, because when clause 3 was implemented the economic environment was different from what it is now. When these tax rates were implemented, as outlined in Part 1, the environment was different, and I think that the officials should have outlined the arguments on whether Part 1 still fitted the economic environment—whether it still maintained the integrity of the tax system.

I am not saying that these rates outlined in Part 1 are right or wrong. I am not saying whether they should be higher or lower. I am not saying whether they should have taken account of fiscal drag, or anything along those lines. What I am saying is that as members of Parliament, we deserve commentary on whether they are still fit for purpose, and what we do not see anywhere in any commentary on this bill is any sort of analysis of Part 1—of the annual tax rates for the income year that we are in at the moment.

I do not think that is right, because this is a very important part of the bill, which affects nearly every single New Zealander who is paying taxes—in fact, not nearly every single New Zealander. It affects every single New Zealander, because when we are talking about annual tax rates, we are not just talking about income tax; we are talking about company tax rates, we are talking about trust tax rates, and we are talking about charity tax rates.

I move, That the question be now put.