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

This is debate on clauses 4 to 272, on the Minister’s amendments to Part 2 set out on Supplementary Order Paper 261, on Ron Mark’s amendment set out on Supplementary Order Paper 260 inserting new clause 37B, and, obviously, on the rest of the part. I call Peeni Henare.

Excellent. Tēnā koe, Mr Chair. Thank you very much for this opportunity. I rise to speak to Part 2, clause 262(48) and (56), with regard to grandparented Māori authorities. For fear of putting those in the gallery to sleep, I thought I had better ring some of my far more learned friends from university who are now accountants and tax specialists to ask for a little bit more detail about this particular bill and how it impacts on Māori authorities. What I got was a mixed response—a mixed response. Some see it as a good thing. Some see it as not quite a good thing, and probably have more questions around some of the issues I will raise in my contribution.

One of those things is, simply, the compliance costs. What we are saying is that somebody like Ngāti Whātua, who have been setting up their asset management structure since May 2016, can look forward to up to $1 million in compliance costs—$1 million in compliance costs—to make sure that they have the right mechanisms around limited liability structures. This is, I think, a gross injustice for the likes of Ngāti Whātua and their asset-holding arrangements, given that Māori authorities pre - May 2016 will have already been able to continue to operate under the old mechanisms.

One of the aspects I thought interesting in my discussions with my learned friend was around Māori authorities being considered as one share owner—the only and sole share owner—within those look-through companies. As a member who sits on quite a number of Māori trust boards, I say that is not the case. We know that Māori authorities that do actually sit in those look-through companies and hold the shares actually do not hold one share for everybody, but, in fact, hold multiple shares.

When I talk about compliance for the likes of Ngāti Whātua, I also think about Taranaki, who recently in this House had the third reading of their bill and had their settlement cross the line. In my discussion with them over this particular matter, they said that some of the compliance costs for them will range between $50,000 and $200,000. Is this fair on those types of organisations, which are trying to make good out of their settlements and their attempts at trying to share the wealth with their tribal members, that have worked hard over many years to get their settlements across the line?

Another question that the experts I spoke to also raised was that if they are set up under this new regime, which is the limited liability regime, for parts of a Māori authority, much of their particular operations under a limited liability scheme—although achieving what was required under the old regime—are yet to be tested in court. This was the advice given to me by a learned friend who contributed to a submission on this particular bill made by Ernst & Young on this matter. What they repeated to me was: “So then where does this leave all of those authorities since May 2016 that set up under a new limited liability regime? And what will it look like when they move into uncharted waters, where these particular regimes and structures have not been tested within a court?”.

These were some of the questions that actually described, probably, more negative responses towards this particular clause. Although they acknowledged that for some it is a good set-up because it will allow them to complete their time under the old regime—and hence the term they get is “grandparented Maori authority”, where there is a type of sunset clause—for those new—[Bell rung] Mr Chair.

The CHAIRPERSON (Hon Trevor Mallard): Peeni Henare.

For lack of choice, Mr Chair, I will continue. If I can just sort of sum up my contribution on this particular clause—how will it affect those who are not aware of the issue?

I mean that with respect. I spoke to several Māori authorities that are trying to set up their asset liability regimes now that actually were not even aware of what was happening. They looked at what I sent them as a question on these particular matters and said: “Peeni, what the hell are you talking about? What the hell are you talking about?”. That makes me concerned about where this might go, because these organisations—these Māori authorities setting up post-settlement governing entities and post-settlement asset management entities—are none the wiser as to what this means. I daresay when they look across to some of the other Māori authorities that are operating under the old regime, they will ask questions like whether this is fair, and what does this mean to them.

Just in conclusion, this particular clause, clause 262(48) and (56), works well for the Māori authorities that have been operating for a number of years now, but we know that there have been many more that have been coming online in the past year, and they will probably have more questions than they do answers. Thank you.

I would just like to carry on from the contribution from Mr Henare there, because I too went to a few of my local Māori authorities, and the trust and the iwi there, that operate using the Māori authority framework within the look-through company (LTC) mechanism. Just to be clear, what has been happening in the past is that because there have been so many multiple-ownership issues, and then the requirements around reporting and the obligations under the LTC around that, Māori have been able to use the look-through company mechanism as a way of meeting their obligations in terms of their tax requirements.

So I went and talked to the community in Rotorua there, and I would like to repeat, essentially, what Mr Henare said here. There was mixed feedback. First of all, several of the bigger operators said that it would not make much difference to them and they will probably carry on—I think I should acknowledge the Minister of Revenue here; I think with the grandparenting clause for our Māori authorities, we move into a position where there can be some certainty, but we will come back to the Supplementary Order Paper later—but then other Māori authorities were concerned about their tax liabilities literally changing under this new regulation. Essentially, they thought that they would be obliged to pay more taxes because of this change. So I do sincerely look to the Minister for guidance on that.

That was their interpretation of this legislation and the conversation was had around that, but then I would also add that many Māori authorities did not know what I was talking about, and they did not understand the implications on their tax requirements as they went away from that conversation. So what is the obligation on the Government to engage and have meaningful conversations with New Zealand stakeholders—taxpayers—around the obligations and changes thereof?

What I want to probably just finish on is that what the LTC issues focus on—and the Minister could answer the question here—is the way the beneficiaries were counted, determining whether the requirements that there be five or fewer counted owners, and whether the application of the Māori authorities and multiple ownership still applies in the new legislation. With the grandparenting clause, I also wonder about the Māori operations starting up businesses now. Everyone talks about the Māori economy and how gangbusters it is going. Well, you have changed the law on them, then you grandparented it so that some operations will continue to operate under an old system, and now we have got new ones coming on board and they will be obliged to operate differently. There is that collective knowledge that will not necessarily be able to effectively be passed on to new operations.

We have got a lot of issues there to be covered and a lot of concerns to be settled, Minister. So I put it to you that it is a great opportunity to address those in the Committee today.

Just a short call really, just to address some of the issues raised by the members who have resumed their seats. The question was raised—and then, really, answered—by Mr Tabuteau that the bill proposes that a look-through company (LTC) owned by a trust will lose its LTC status if the trust makes a distribution to a corporate beneficiary.

I am advised that “Charities and Māori authorities will be precluded from being LTC owners, directly or indirectly, under the proposed amendments. However”—and I will just be very technical here—“a trust that is a shareholder in a LTC will be able to make a distribution to a charity when the distribution is akin to a donation or is received by the charity as a residual beneficiary. [Charities and] Māori authorities that have ownership interests in LTCs immediately before the introduction of this Bill will be excluded from the prohibition.” So there is a grandparenting.

The bill also deals with annual amounts of foreign income earned by foreign-controlled LTCs. It says that they are limited to the greater of $10,000 or 20 percent of the LTC’s gross income in the relevant income year.

Mr Tabuteau is quite correct that it is changing the rules, but that is what Parliament does. There are many people who wonder why some businesses receive favourable—as they see it—tax treatment to other businesses, and some of the businesses that we are talking about are in direct competition with Kiwi-owned businesses that are actually not having that benefit. But, basically, I have answered the question that Mr Tabuteau posed, and I acknowledge that he has gone to the trouble of looking up the answer himself.

I just want to raise a couple of questions in relation to the Minister of Revenue’s Supplementary Order Paper (SOP) 261. In fact, I would just like to start by saying congratulations to the Minister on her appointment, because I do not believe I have had the opportunity to congratulate her on her new portfolios.

Just in relation to parts 1 and 2 in the explanatory note of that SOP, the Green Party really supports those, especially the pieces around the Kaikōura relief provisions—that is perfectly consistent with the previous legislation that we passed to help with the Kaikōura relief there—and also a number of the technical amendments that have come through in parts 1 and 2 of that. What we were confused about with part 3 of the SOP is that that does appear to be new policy that has been introduced at a late stage in the bill’s reading—in particular, the areas around new debt remission exceptions—and we could not see that that was terribly consistent with what had been introduced to the House earlier on in the process.

If the assessment that we have is correct, then we would say that that is quite poor process because, obviously, that has not been through any select committee process. There has been no regular regulatory impact statement that is attached to it and, as I said before, it is new policy. So it does seem to take the bill in a new direction. So I would like to get some input from the Minister as to why that has appeared at this point in the process, in this bill at this stage, because it does seem to be substantively different. If it is significant, then it would seem to make more sense to introduce that as a separate bill that could be debated properly, because in our view it does not necessarily match up fully with the other parts of the primary bill that we are debating.

So I would like to hear from the Minister a bit more about those provisions, especially around the new debt remission exceptions—why that has been introduced as an SOP rather than when the bill was first introduced in the House, or why it could not be introduced as a separate piece of legislation, if it is so significant. We would be quite keen to hear from the Minister on that. Thank you.

I rise to take a call on clause 2, particularly Supplementary Order Paper (SOP) 260 in my name. This is an issue that has been brought to my attention time and time again, not just by commercial property owners in rural, provincial New Zealand but by mayors and councillors—and local government in general—who are very worried about the implications of earthquake strengthening. We have tried on a couple of occasions in the House to get an SOP like this through in other pieces of the legislation. Once it was vetoed by the Government, using the financial veto, and we are hoping that this time, given the Minister of Revenue’s experience in taxation law, this Minister will be able to persuade the rest of her Cabinet to take a more business-friendly approach on this piece of legislation on this particular matter.

The SOP is very short and very simple. It makes a couple of amendments. One inserts subclause (30B) in clause 2, and the other one amends new clause 37B. Essentially, the guts of the legislation is in section DA 2(1) of the Income Tax Act, where we would insert in new clause 37B, after the words “of a capital nature”, the words “, unless they are seismic works where an EPB”—which is an earthquake-prone building notice—“has been issued for the building under section 133AK of the Building Act 2004”.

In our explanatory note, we talk about a couple of things. Firstly, this has been an issue that has been raised on occasion by major chartered accountants such as KPMG and others, and, in fact, the Property Council of New Zealand has noted this in an April 2014 submission. We agree with them that this amendment will redress and correct what we see, they see, and commercial property owners see as an anomaly in the inland revenue Act where the Inland Revenue Department (IRD) is required to classify earthquake strengthening as capital works.

The argument we put is that it is absolutely baffling that if a building in Wellington is ripped apart, the repair work to put that building back together is classed as repairs and maintenance, but if in doing that work the owner of the building has to strengthen other parts of the building to bring it up to code as well, then that work is not considered to be repairs and maintenance. It is considered to be capital works.

Our proposition is this. If a building sitting in the middle of Waipawa is declared through a letter from the council to be earthquake-prone and, therefore, has to undergo strengthening, and if that strengthening work does nothing more than strengthen the building—it does not alter its shape, does not alter its capacity, does not alter its utility; it simply makes the building the same as it was but makes it fit the new code—where is the capital gain? In fact, the moment that letter is issued, the value on that building plummets. Unfortunately, the insurance premiums skyrocket. Unfortunately, tenants, who are looking at the new occupational safety and health laws and at their commitment to their staff, exit, and the landlord is now left with a building that is seriously devalued and of questionable economic worth as an investment.

Undertaking the strengthening work simply restores the building back to its previous utility prior to it receiving a letter deeming it to be unsafe. We would say that that in itself is a strong argument for the Government accepting our view, KPMG’s view, and the Property Council’s view that this work should be tax deductible.

Here is the next point. We are looking throughout New Zealand right now, and there are a lot of commercial properties—in rural New Zealand, in particular—that run the serious risk of being left empty. Most of these owners are looking for an incentive or a bit of leverage to assist them in their ability to conduct this work. Being able to claim tax deductibility for that work and, in some cases, the remediation of their buildings—[Bell rung] Mr Chair.

The CHAIRPERSON (Hon Trevor Mallard): Ron Mark, but start narrowing it up now, please.

We will. In some cases, for these little buildings—wooden buildings—the work could be $65,000. It could lead to fire protection work, which under the new Building Act is required to be done when substantive work such as earthquake strengthening is done. It can blow those costs out to 100 grand. Being able to get a tax write-off legally, with assistance from the Government and assistance from the IRD, would incentivise and alleviate the pain that many of these commercial property owners are going through right now, and it would go some way to preventing the gutting out, or the creation of ghost towns in provincial New Zealand.

We implore the Government to look strongly and favourably at this SOP and give some alleviation to many, many commercial property owners throughout rural New Zealand—well, throughout the whole of New Zealand. But, of course—being one who lives in rural New Zealand—in New Zealand First, we are particularly worried about the possibility of us having ghost towns right throughout the country. That is something that would not be good for the economy as a whole.

I will just take a short call to answer a couple of the questions that have been raised by members. Mr Shaw asked about the debt remission rules. The amendments in Supplementary Order Paper (SOP) 261 actually clarify the provisions of the bill. They are only very technical, and there are no new policy changes.

Mr Mark’s SOP 260—well, Mr Mark, you will be thrilled to know that I raised these very same questions when I first became the Minister of Revenue. I raised them with the Inland Revenue Department, and it reminded me, of course, that in 2010 the policy settings around depreciation of buildings was changed so that, generally, the value of buildings is not considered to be something that is rightly depreciated these days. I think a lot of people probably supported that. It had been leading to some very unusual outcomes in terms of investment decisions. So I have also asked around the repairs and maintenance as opposed to a capital item. When the department explained it to me, I actually felt quite convinced by it. It said that, essentially, what you are doing in earthquake strengthening is you are creating not just the same building, not just repairing it—what you are really doing is actually creating a building to a different standard, a different code, and it is actually about creating almost a new building. So I know that you are not going to agree with that, but that is, essentially, the answer.

I think it is also decided that one of the best ways for Government—some people might feel that the Government has an obligation to help, in some way, people who own buildings, commercial properties, where there is earthquake strengthening to be done. There are also options around grants, and that is why there are some provisions, actually, particularly for heritage buildings. In fact, I can just give you the programme. It is the Heritage Earthquake Upgrade Incentive Programme fund, which will put $12 million over the next 4 years towards the cost of strengthening privately-owned commercial buildings. So I know it is not the answer that the member seeks, but it is something that I have raised. I understand the concept as to why it would not be available, particularly when we have a non-deductibility, generally, or non-depreciation of other commercial properties.

Ruth Dyson.

I was not quite sure I heard that right. Thank you very much, Mr Chairman. It comes as a big surprise that you chose to call me for a contribution in this debate.

The CHAIRPERSON (Hon Trevor Mallard): Well, I looked at the member, and the member is a senior member of the House, and lives in an earthquake area.

That is right. It just was not noticed earlier in the five attempts that I made to get a call. I guess that is why it came to me as a surprise.

Can I begin my contribution on Part 2 of this bill also, in the way that James Shaw did, by acknowledging the Minister on her elevation to this position, and by saying that I am particularly pleased that a woman is in one of these financial roles. It has not happened very often, with some of the predecessors that we might have looked to. You might not want to be compared to previous Ministers of Finance, but I like seeing women in the economic space rather than in just the social portfolios. This reminds me how disappointed I am that we do not seem to have any women represented on the Finance and Expenditure Committee that considered the submissions on this bill.

The CHAIRPERSON (Hon Trevor Mallard): Not relevant to this part, thank you.

Well, actually, it is relevant because those were the very members who considered the submissions on the part that I am going to speak to now.

Part 2 covers clauses 4 to 272, so a huge number of clauses. I want to make my initial contribution in relation to the tax rule changes in regard to look-through (LTC) companies, which are primarily around clause 262, but they do cover others. There is a package of amendments, and I guess rather than just make a contribution about their merits or not, I am really interested in asking for the Minister to continue what I think has been a very good practice of responding to the questions that are raised.

The reason that I want to ask them—and it often happens in tax legislation, particularly in areas like this where we are looking at changes that are recommended for closely held companies and look-through companies—is that we get people who are tax experts coming to the committee and making their submissions, and then the Government says no and it just completely disagrees and ignores them. I guess that is the question: what is the reason that some of these—what I think to be substantial—contributions that have been made have been turned down by the Government?

Firstly—and these are, as I said at the beginning, all in relation to clause 262—there were submissions from KPMG, from the Law Society, and from OliverShaw relating to the proposed restrictions on the amount of foreign income that an LTC can earn when controlled by foreign owners. They made substantial submissions—these are not fly-by-nighters; this is the New Zealand Law Society, which I think Minister Judith Collins is quite familiar with, and KPMG, and OliverShaw—and those were just rejected by the Government.

What I want to know is: does the Minister believe that their submissions were an error? Did they misunderstand the proposals in clause 262 in Part 2 of this legislation? Did they misunderstand them? Were they trying to get something that was not intended by the policy frame in which this bill was designed? Or did the Minister just disagree with their point, for whatever other reasons? I would like to ask that question about that specific proposal—the amount of foreign income that an LTC can earn when controlled by foreign owners.

Then, along a similar line—if I can just find the other one that I was really interested in. This is a proposed amendment to how trustees and beneficiaries are counted, and, again, it is that same clause—clause 262. Chartered Accountants Australia and New Zealand, and again KPMG, and again the New Zealand Law Society, and also PricewaterhouseCoopers made substantial submissions, again, on that narrow point—the proposed amendments to how trustees and beneficiaries are counted. Those submissions were heard by the members of the Finance and Expenditure Committee, and the Government just said no.

There are a few more that have different considerations, but the theme is quite strong and consistent throughout these submissions. It causes me, as a member of Parliament who was not on the Finance and Expenditure Committee, some concern that we have not had any explanation from the committee members either in the second reading or during this debate, to my recollection, so I am asking the Minister, on those two points—and I will go over some more as well—whether she can clarify why these substantial and considered submissions just got ruled out by the Government. I want to go on to a couple of others that are along a similar line, but all of them are in clause 262 and all of them were made to the select committee. Mr Chairman, the bell should have gone then. Should I wait?

The CHAIRPERSON (Hon Trevor Mallard): The Hon Ruth Dyson.

Thank you. I am still hanging out for that bell to be rung.

The CHAIRPERSON (Hon Trevor Mallard): Given the alternative.

I did not see the opposition. The one I just talked about was the trustees and beneficiaries. The next one that I want to ask about—exactly the same. Chartered Accountants Australia and New Zealand is a group of people whom we would have some trust in to understand tax law—their job is, in part, deciphering it, understanding it, explaining it to people, and, in their business, making sure that the tax rules are complied with. They put in a substantial submission about the simplification of the transitional role for trust fees. Again, the Finance and Expenditure Committee heard it—talking about the transitional roles for the phasing in of the new requirements: how long they are going to be backdated for and how many years it will take to implement it. I think, on the face of it—on reading their submission and looking at the issues that they raised—that they made some valid points, and, again, those were just absolutely declined.

The extension of the calculation period, people receiving LTC, and the beneficiaries receiving their LTC income being rotated—one solution would be to remove the 4-year time limit, so the beneficiary would be counted if they had a distribution of LTC as beneficiary income in any income year.

That was the point that was being made, again by PricewaterhouseCoopers. It is an organisation that does this work all the time. They made a submission on quite a detailed part of clause 262, and, again, it was just thrown out. I have been on the Finance and Expenditure Committee in the past and I understand that quite often in tax legislation—as it might be in these provisions in clause 262 that I have alluded to—it may be that the submitters misunderstood the point of the legislation; they might have got clause 262 wrong. They might be trying to develop a little loophole that could be to their clients’ advantage in the future—that would be a pretty cynical view. Or, it is possible that the officials and the Minister—I guess it was the previous Minister—made an error in their determination that these should be rejected.

But when you get organisations that are credible and do this work as part of their job—I want to understand why those submissions were declined. They are all under the loosely held companies review, all in relation to clause 262. But if you look at the analysis of the submissions and the report back from officials, this has been a piece of legislation that has had high quality and substantial input into it. I hope that we can feel, as we go through the Committee stage, that we can enhance the consideration that the select committee gave, but we cannot do this adequately unless there is an explanation to the Committee of the whole House of the questions, such as those I have raised, in relation to the submissions, the points they raised, and why they would not be accepted.

Likewise, in relation to Ron Mark’s Supplementary Order Paper (SOP) 260—I heard Mr Mark’s contribution to it and I thought it was a very good one, a very helpful one. I heard the Minister’s response and I thought it was a little bit short cut, in relation to the substance of the issues. So I hope we can have a further look at that SOP before the Committee stage is through.

I suppose the advantage of the Committee of the whole House is that this is the opportunity for us to have members of the select committee—in this case, the Finance and Expenditure Committee—share with us all the debate that they went through. We can share their knowledge, and get some better understanding of what they considered and how they did it. I hope that some of the Government members of that select committee are able to share their wisdom. It may not take all that long, but it would be really helpful, I think, to the quality of the debate.

We are doing weird things in this bill, as we did in the last part, which we have already moved on from—setting tax rates for a year that has nearly concluded. In this part that we are debating now, Part 2, we are making major changes to a wide range of current tax rules—268 clauses of amendments to tax rules, some of them as a result of a review; some of them as a result of concerns that the officials have, which have been accepted by the Minister. I hope that we have a better contribution from Government members and, again, I want to acknowledge the responses from the Minister.

Just before I call the next member, I do want to compliment the member Ruth Dyson on being relevant, but I make a request, which is that in future people look fairly carefully at the clauses and the subclauses. Rather than just say that it is in clause 262—when something has 117 subclauses, some of which themselves have subparagraphs, it would helpful, for both the Minister in the chair and me in making our judgments, if members could refer to the subclauses that they are referring to.

There are two areas of this bill that I would like to talk about. The first one is actually to back up Ron Mark of New Zealand First. Supplementary Order Paper (SOP) 260, set down by Ron Mark—thank you to the Minister in the chair, Judith Collins, for outlining the IRD’s response to this. But if you could indulge me the right to reply to that, the Minister did mention that in 2010 there was a change in rules around depreciation of buildings, and what the IRD has said is that buildings do not normally depreciate, and therefore it really does not make much sense. The thing is that that seems a very Auckland- or Wellington-centric view. There are a whole lot of small places in provincial New Zealand, like Eltham—

The CHAIRPERSON (Hon Trevor Mallard): I am going to interrupt now, and I am going to apologise to the member for interrupting him and not interrupting the Minister. But a discussion about depreciation changes that happened 5 or 7 years ago is actually not relevant to the bill. I mean, a vague passing reference would be fine, but we cannot—the member can debate either the part or Mr Mark’s SOP. Again, I want to reiterate my apology for not interrupting the Minister, but we just cannot let this debate go on, because we could have another hour on things that are not relevant now.

💬 Iain Lees-Galloway: I raise a point of order, Mr Chairperson. I just noticed that while you were ruling, the clock was running. I just want to ensure that Mr Nash gets his full time.

The CHAIRPERSON (Hon Trevor Mallard): That is my instruction. When I interrupt a member because they are not being relevant, then the clock will run. If there is another point of order, generally the clock will stop, but I will still make a judgment. A couple of members might have noticed that they were stopped early. Their speeches were not terminated; they just did not get credit for good behaviour.

The reason I did mention this is that the heart of Mr Marks’ SOP is: “to redress significant tax disadvantages faced by commercial, industrial, retail, and heritage property owners when looking to bring buildings above the earthquake-prone building threshold required by the Building Act.” What the Minister actually said is that the IRD believed that it was actually creating almost another building. I think those were the Minister’s words, and I think she meant to say that. I get that on one perspective. What we have done without changing the legislation, and it might have been an unintended purpose, is that we have taken a building that was within code—it was legal; there was nothing wrong with that building, and it was valued as such—and we have actually changed the law to move that building from being legal to now being illegal. I could mount a counterargument that, in fact, what the IRD has done by actually changing the law is take a building and, again, move it into another category. That is counter to what the Minister was saying.

What we actually may see here is something that Mr Mark alluded to, but it could be slightly worse than that. Mr Mark has said in his Supplementary Order Paper: “Without this amendment, many buildings may be demolished without replacement, especially in provincial New Zealand.” The reason that may happen is that the cost of actually rehabilitating that building, or getting it up to code, is more than the value of that building, but I see a scenario where it could actually be worse than that. Let me give you an example. A building in Waipawa has got a value—this is not a real-world example, just a hypothetical one, and I do know Waipawa, because it is a quaint little town with nice heritage buildings. It might have a commercial value of $200,000. The cost to remediate that building is $300,000. That building is held in a separate company, as these things tend to be these days. Instead of the building owner saying “I’m going to pull down that building.”, what that building owner may actually say is: “I’m going to walk away from this company. So not only am I not going to demolish this, I’m going to leave this.”

So at some point in time, the territorial authority will have a statutory requirement to either make that building safe or pull it down. The onus moves from the owner of that building to the ratepayers and the council. I can see a potential scenario where, in fact, that building is not pulled down by the owner but it is a cost incurred by the council as it has to pull the building down itself. If I am right in saying this—the Minister may correct me on this—I think the Government has given councils in provincial areas 10 years to remediate any building that does not come under the code. If I come to my home town of Napier, which, of course, was rebuilt after the 1931 earthquake, if a building was built before 1935, it automatically is discounted by 20 percent, I think, on what constitutes being in code.

There are two things I would say to the Minister’s response to this SOP. First, has the IRD a mandate to actually look at the social cost of not implementing a piece of legislation; if so, how does it quantify that? I think what Mr Mark—I do not want to put words in Mr Mark’s mouth, obviously—is talking about here is not only the fiscal cost but the social cost that a council or a town might incur if, in fact, this is not allowed to be expensed. This is a problem all over New Zealand. I visited a gentleman in Eltham, and he owned half a block. It is just not worth him spending the money getting that up to code.

The other thing I would like to say on this is that $12 million over 4 years put forward by the heritage fund is very generous, and I commend it for that, but I think $12 million—let us say it is roughly $3 million a year. [Interruption] Sure, but just answering the Minister’s—

The CHAIRPERSON (Hon Trevor Mallard): You cannot answer an irrelevancy with an irrelevancy.

Sure, but that is possibly about three or four buildings a year. It really does not address the problem in any way, shape, or form.

The other thing I would like to briefly allude to is clause 42 in this bill, which actually covers inserting new section DW5 and all the subsections on that, through to new section DW6. It is about aircraft operators, aircraft engines, and aircraft engine overhauls. We had a really interesting debate in the select committee. This was brought forward by David Seymour. I do not know whether Alan Gibbs said I had a problem with my airport maintenance, but I would not like to say that at all.

It is a sensible amendment; there is no doubt about that. But I suspect there are some unintended consequences. The reason I say it is a sensible amendment is that the engine of an aircraft needs a much higher level of maintenance than, say, the body of an aircraft or the wheels or any other part of an aircraft, and rightly so—rightly so. I do not want to disagree with that. But what this actually requires now is the purchaser of an aircraft to actually separate the value of the engine from the value of the aircraft itself. I am assuming there is a simple model that will allow the sellers of aircraft to do this, or insurance assessors who look at aircraft and say: “OK, what we can do is let’s have a model”—it is not in here, Mr Chairman, but I am making a hypothetical assumption—“that the engine of the aircraft is worth, let’s say, 50 percent of the whole aircraft itself. Therefore, if you are purchasing an aircraft for $10 million, the value of the engine is $5 million.”

I do not know whether it is as simple as that, and the Minister may well know. If it is as simple as that, then it makes this a little easier to implement. If it is not as simple as that, then I am really interested to know how the Commissioner of Inland Revenue is going to deal with this when someone comes and says: “I bought an aircraft for $10 million. It consists of a little bit of aluminium, some rivets, a little bit of leather and a really big engine, because without that engine, this thing doesn’t get off the ground. Therefore, I reckon it’s worth about 90 percent of the value of the aircraft.” If that occurs, then I believe the Commissioner of Inland Revenue is going to be forced to rule on some standardised model that will allow aircraft owners and aircraft engine maintainers to comply with, because it could be all over the place.

When we look at this, there are certain things you are not allowed to do. For example, if you buy an aircraft, like one of those old Harvards that I think the air force uses for its trip planes, and you just maintain the engine for standard use, that is fine, but if you want to modify the engine, then you cannot claim anything back, which sort of makes sense in a way, but it is sort of interesting as well. It does not include gliders, which is good to know; Richie will not be under any more tax obligations.

But the other thing also—it is interesting here, and I will read this. This is new section DW5(3), “Deduction for aircraft engine when acquired for price”. The wording is very interesting here. It says that if the person acquires—other than as an unpriced aircraft engine with the aircraft—an aircraft engine for use with the aircraft, the person has a deduction. The wording that is interesting is “other than as an unpriced aircraft engine with the aircraft”. I suspect what was happening is a whole lot of people were buying an aircraft and saying: “The engine’s just part of it; it’s not unpriced.” That is why I am saying that a new model is going to have to come into existence.

I move, That the question be now put.

Ah, no. I think we have had a bit of original stuff—Ron Mark.

I appreciate the opportunity just to once again address my Supplementary Order Paper (SOP) 260 and, in particular, some of the comments that the Minister has made in defence of the Government’s not accepting it. I think the one I want to pick up on—and I will probably leave it to my colleague Fletcher Tabuteau to talk about the depreciation argument—is the heritage buildings. We are not convinced that that argument stacks up, because what the Minister probably has not realised is that many of these buildings are not declared as being heritage. They are not listed as heritage buildings, but they are buildings that hold the character of the province and the district. So in that sense they have high aesthetic value and add high character value to those provincial towns. It does not matter whether you go to Twizel, Eltham, Stratford, or up to Waipukurau, there are buildings there that speak volumes to the history but have not been listed as heritage buildings.

The CHAIRPERSON (Hon Trevor Mallard): The time is very close to my leaving the Chair for the dinner break, but before I do that, I am going to give a warning that the member is now repeating things that he said earlier and others have said since. So after dinner there is going to be a requirement to be much tighter.

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

I just wanted to address that comment from IRD, and New Zealand First has to make this point. For IRD to argue that the Minister should reject our SOP 260, with one of the arguments being that there is heritage funding available for old buildings—whether it is $12 million or what; it does not really matter—is ridiculous, because the overwhelming majority of the affected buildings that we are discussing do not have heritage orders and, therefore, they are not eligible to apply for that funding assistance.

So we are back to square one, where we are facing an issue. We are being told this by such people as Ross McKinley, KPMG’s National Managing Partner for Taxation, who noted last year: “Many building owners may be considering demolishing or abandoning earthquake-prone buildings if an anomaly in tax treatment is not remedied.” That is what this SOP aims to do. Without it, Mr McKinley added: “IRD’s stance creates a contradiction. … In other words, … owners can claim a tax loss if a building collapses but no tax relief for trying to ensure it does not collapse in the first place.” Well, that is just nonsensical, and provides, perversely, a disincentive for those challenged property owners to undertake the work and not abandon the building.

I do not think people are possibly grasping the size and the magnitude of the problem. There are estimates out there saying that seismic works across New Zealand range from $4 billion—that is according to the Government’s own Ministry of Business, Innovation and Employment—to the figure estimated by Tailrisk Economics. It estimates the figure could be $5 billion to $7 billion worth of work. That is not to improve the quality of the building, the usability of the building, the functionality of the building, or the capability of the building, and I want to draw, actually, the Government’s attention to its own piece of legislation.

If you are going into clause 42, which inserts new sections DW 5 and DW 6 into the Income Tax Act, it is really interesting because there is a lot of stuff here, shaded, about aircraft maintenance engine overhaul. Just briefly perusing through that, I, as a former mechanical engineer in my earlier days, look at that clause with interest, and does it not strike one as strange that if one is carrying out repair and maintenance work on an aircraft engine that does not change the performance of the engine, but it simply returns it to the required aviation standards to permit it to be used in the air, it is tax deductible.

We could argue that many of these buildings that are affected were not even damaged in the last earthquake, which destroyed modern buildings in this city. They are functional, but because of a little sticker that is going to be put on the window, they will be deemed by legislation to be unsafe. It has nothing to do with the building and nothing to do with its design at all, actually, because it has withstood the 1854 earthquake.

Take the Thistle Inn, just down the road here. The Thistle has withstood every major earthquake and not popped a screw. But if that building is deemed by the council, under the new legislation, to require strengthening, that work will have to be done at a cost. It does not change the Thistle. It does not alter its characteristics or its usability. It does not add an extra—it will still have the same number of toilets, the same bar space, the same conference room space. It will just be brought up to meet the Government’s specifications and, therefore, will return its value to what it was before it got a letter saying it was non-compliant with the legislation.

We just ask what has often been touted as a Government that is pro-business and business smart, a Government that aims to reduce compliance costs, and a Government that wants to promote productive expenditure and not cause undue unnecessary costs to reflect on the IRD advice and challenge it, because we do not think that making this adjustment is going to be helpful to the economy and we do not think that it is going to be helpful to provincial New Zealand, or to anywhere in New Zealand, actually. For the IRD to tell the Minister “Oh, but they’ve got access to heritage funding.”, knowing full well that, overwhelmingly, most of the affected buildings—be they in Napier, Waipawa, Dipton, or on the West Coast—are not going to have heritage status is simply naughty. It is quite naughty, actually.

So we would say to the Minister, reject IRD’s advice. Tell it to go away and do its homework. Sit down and have a talk to KPMG, sit down with Ross McKinley, and talk to the Property Council and do a quick analysis of the costs of not doing this.

Let me just reiterate, finally—before I sit down—that the cost of not giving something of a tax break by recognising this work as repairs and maintenance will be that many buildings throughout New Zealand stand to be abandoned and left. And many buildings will stand to be demolished because it is going to be quicker and easier to knock an old building down, despite its character, and put up one of these new flat-roof things, which are dead boring and ugly, quite frankly.

I would like to look at the clauses that relate to the look-through company (LTC) entry tax, of which there are several in this Part 2 of the bill. Clauses 14, 106, 178, 239, and 262 all deal, in their own part, with the matter of look-through company entry tax. Look-through company entry tax, for those who are following along at home, is the tax adjustment that applies when a company becomes a look-through company. The purpose of that is to trigger a tax liability on unimputed retained earnings by deeming the company to have been liquidated immediately prior to conversion. This is to ensure that reserves that would generate taxable income for shareholders, if distributed before entering the LTC regime and that would be distributed tax-free once the company becomes an LTC, are taxed to the owners at the time of entry. So it is about fairness of taxation, essentially, and ensuring that shareholders are not able to use the conversion of a company to a look-through company as a method for minimising their tax liability.

What this bill does is it tightens up the formula to ensure that shareholders are neither overtaxed nor under-taxed, because the formula as it currently stands means that the tax rate applied is the company tax rate of 28 percent. This bill amends that to make the tax rate that would be applied the owner’s personal tax rate, and that is designed to ensure that the tax rate applied is appropriate—neither overtaxing nor under-taxing the shareholder.

It was not without opposition. The Whyte Group appeared before the select committee and it expressed some concerns that tightening up the look-through company entry tax rate would provide a disincentive to existing companies that may be considering entering the LTC scheme but might be put off by this new tax treatment, especially if that resulted in a higher tax rate for owners.

The committee, I understand, considered that and came to the conclusion that the application of the owner’s marginal tax rate is the appropriate course of action because the entry tax calculation is intended to ensure that retained earnings are appropriately attributed to shareholders at their personal tax rates, and currently upon entry taxpayers can be under-taxed when their marginal tax rate is greater than the 28 percent and overtaxed.

So I think on balance the position the committee got to was that it should not offer a disincentive, because it is just as possible that an owner’s tax rate would fall as a result of these changes—you know, the potential tax liability would fall as it would increase. So I think, overall, in the interests of having greater fairness in the way we apply tax rates—we talked earlier on about where the tax burden falls—I think it is important that when tax rates are applied, they are applied in a fashion that demonstrates as much fairness as possible. Taxing the owners at their marginal income tax rate, the rate that is appropriate for them given all their income combined, rather than an arbitrary 28 percent—that, I think, is the appropriate course of action. I think that any concerns that people might have that this might offer a disincentive to companies to become LTC companies through the LTC regime are unfounded. I think that the approach that has been taken by the select committee on this is the fair one, is the right one, and all in all the approach, particularly through clause 262, is appropriate and we can support that.

I will just take a call to address some of the questions that have been raised. Mr Mark has made some quite impassioned pleas in relation to his Supplementary Order Paper. One of the issues I think we need to consider is what the best use of the tax system is. We have in New Zealand a broad based, low rate system that has been in place now—and a commitment to that—actually over many different Governments for well over 20 years; really 25, 30 years. It has proven to be something that a lot of other countries and jurisdictions would like to have. So the question is, really, when we are looking at earthquake strengthening, whether it is right for Government to use the tax system to subsidise that or whether there are other methods apart from the heritage way.

I think one of the things you need to consider is that if you are a church, for instance, and you have a tax-free status, a tax break is not going to help you with the earthquake strengthening of your building. It is the same if you are a charity of any other sort. It is not going to help you; it is only going to help people who actually have a tax liability. It is not going to help companies or businesses that are not profitable; it will help only those who do have a tax liability. I do not think it is the panacea. As I said, I have certainly questioned IRD. As I say, I really enjoy our policy discussions. I really love being in the tax area again after years in Parliament and not actually practising tax any more. So it is something that we are keeping an eye on, but the question is that it is not actually the panacea, in my opinion.

There were some questions raised by the Hon Ruth Dyson around the submissions from the various tax experts in places like PricewaterhouseCoopers or CAANZ, the Chartered Accountants of Australia and New Zealand, and the New Zealand Law Society—and I must say I did appreciate the reference, thank you, Ms Dyson. I think it is important to understand that we also have a generic tax policy process in New Zealand, and, again, we are envied in this country for that. What that actually means is that a lot of the tax changes that happen in New Zealand—unless they are to do with rates, and they are part of a Budget process, generally—they are very much signalled to and consulted with interested tax professionals from both accounting and law firms, to such a degree that one of the big issues that many of the tax professionals wanted to ask me about was whether they would still be consulted in that way. I was able to assure them that, yes, they are whenever possible.

The Finance and Expenditure Committee took into account those submissions. They did make some changes based on those submissions, having heard from very experienced submitters. I would also say that Inland Revenue has its fair share of tax experts. I mean, this is what they do; they are some of the most highly qualified tax experts in the country. But this is not a competition about who has got the better experts. The tax professionals are, in my opinion, some of the most highly professional people, who provide the best advice that they can to the department and to the select committees. But, actually, they also want to promote positions on behalf of their clients. They do promote, I think, in many ways an extremely professional demeanour and integrity. They show a great deal of integrity in their relationship with Government and with the Inland Revenue Department. So I can assure the member that they have been taken into account—that some proposals were changed. I understand from those on the committee that they gave those submissions full consideration and were very respectful of them.

Tēnā koe e Te Heamana o Te Whare, oti noa, tēnā tātou katoa. I would like to speak to clause 262(48). First of all, I want to give some comments—my overview of clause 262. I take from the submissions from Chartered Accountants Australia and New Zealand, the New Zealand Law Society, and the Whyte Group that they said that this clause, overall, was unnecessarily complex and restrictive and that it would increase compliance costs. That grabbed my attention.

Later on in this sitting day—tomorrow morning, in extended time—there will be two bills. They are Treaty bills. I mention that because subclause (48) is around Māori authorities. My understanding is that the iwi concerned tomorrow will have less opportunity under these changes than iwi that have settled previously. I mention that because a key part of the settlement process is actually relativity to previous claims.

I mention that because this grandparented clause, although I agree with it in the context that has been explained—that is, that this bill protects those interests of those Māori authorities—in the instance of those iwi that have already settled, how do you address the issue of relativity for Treaty settlements that will pass tomorrow and into the future? That is a question that I would like to ask the Minister in the chair, Judith Collins, around the impact of this on all future claims—on all future settlements.

I think, when I read through the submissions from Chartered Accountants Australia and New Zealand and KPMG on this subclause—they write that “the current … grandparenting provision provides wider concessions than was intended.” As I understand it, the Māori authorities go back as far as 1939. There was a commission of inquiry in 1952, and then there were substantial changes made to this in 2004. There is a very good reason why you would have Māori authorities. When you think about the context of the Treaty claim settlement and the value of redress—and we are talking about redress, not compensation. If we were talking about compensation, there would probably be no need for Māori authorities having a different tax rate. My point is that we are not talking about compensation for these claims. The reason why, as I understand it, Māori authorities have concessions around the tax rates and around the conditions such as this in subclause (48) of clause 262 is in recognition of the fact that, No. 1, they are providing a service to all of the beneficiaries of the trusts and entities that they operate under, and, also, No. 2, it is a kind of recognition of the fact that they will receive redress, not compensation. My question is exactly that: why, then, are we changing this? Why not just leave it, and then we would not have to have the grandparented clause. It would just remain as it is.

Thank you for the opportunity to address that question. First off, let me apologise to Mr Rurawhe, because I clearly did not make myself properly—I did not make my meaning as well I should have. Actually, although there is a grandparenting clause in relation to the look-through companies that will apply to the Māori authorities, there is also an opportunity for the Māori authorities just to use the limited partnership structures, which have, actually, pretty much the same effect as a look-through company. The new ones coming through will not be, necessarily, taxed at different rates because of the fact that there will be the limited partnership provisions that they can still make use of. So I hope that that clarifies it for the member, and that he can now be satisfied that Māori authorities are not going to be suddenly faced with another issue that they were not aware of.

Tēnā koe, Mr Chair. It is a pleasure, actually, to take a call on this Committee stage debate of the Taxation (Annual Rates for 2016-17, Closely Held Companies, and Remedial Matters) Bill. I specifically want to talk to the Supplementary Order Paper of Ron Mark. We have had a few engagements tonight because I think at the heart of what he is concerned about is the fact that there are going to be some buildings that will not be restored to 34 percent of the current new building standard, which, actually, is the requirement to be classified for an earthquake-prone building (EPB) notice. He has some legitimate concerns. He could not answer my question, because I wanted to know what “n” is—like, how many buildings are in this particular category—but what I have been able to find out, Minister Collins, which I think is really fascinating, is that there are 868 in Christchurch. They have a register, and we know that there are 868 earthquake-prone buildings.

I know that people have been talking about the issue of repair deductibility around repair and maintenance expenditure, and I was really interested in the numbers because I was wondering how much we are talking about. For Christchurch, I have discerned from a couple of googles that I have managed to do tonight in the Chamber, the cost was $20 billion to repair all the buildings in Christchurch, of which the insurance sector seems to have picked up 80 percent of that. I am wondering whether $4 billion is about the estimate for those 868 Christchurch properties that have an EPB notice attached to them.

Just following through logically, because I am trying to make a constructive contribution to this debate tonight, under section DA 2 of the Income Tax Act, which Mr Mark is wanting to amend, “General limitations”, there is “Capital limitation”, and what it actually reads is: “A person is denied a deduction for an amount of expenditure or loss to the extent to which it is of a capital nature.” Then he has inserted “, unless they are seismic works where an EPB notice has been issued …”. I do not agree with his proposition—not generally. What I do agree with is in respect of those buildings that have actually sustained damage through an event—and we know what those events were; there have been two earthquakes in Christchurch, so we know what those events are. Should there be provision—because this is what this is all about—for deductions based on them being classified as repairs and maintenance?

I guess this is my question to the Minister, because from the information that I have managed to read—I found the Interpretation Statement IS 12/03, which is “Income Tax - Deductibility of Repairs and Maintenance Expenditure - General Principles”, what it says is that there is a general rule that costs for repair or maintenance or that restore an asset to its original condition without going so far as to reconstruct, replace, or renew, will qualify as repairs and maintenance.

I am interested in buildings that have, we know, been damaged because there has been an event—so I’m speaking specifically about Christchurch—and whether or not then they can be seen as not capital, because if they were seen as capital then they would not be deductible, but if they are revenue, whether or not they would not qualify. So I would limit the scope of what Mr Mark has tried to do, because he wants it for the whole of the country and areas of the country where we have not had an event. But I am now specifically focused on Christchurch and whether there is some merit to what he is proposing, but only for buildings in Christchurch where we have had an earthquake.

I just wondered whether the Minister, obviously, had an interest in this area. She asked her officials to make some recommendations to her. I would be interested in whether or not there has been some specific thought around providing support for business owners and qualifying buildings under this regime—whether or not there could be a look at the rules in respect of this particular cohort of qualifying EPB notice holders. Kia ora.

I move, That the question be now put.