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

on behalf of the Minister of Revenue: I move, That the Taxation (Annual Rates for 2016-17, Closely Held Companies, and Remedial Matters) Bill be now read a third time. It has been the Government’s ongoing focus to steadily reduce inconsistencies in our tax system, to improve and strengthen and also update our tax rules. Ensuring that our tax rules work well in practice helps to keep compliance costs to a minimum, which in turn helps our economy to grow and prosper. The bill continues that overall focus.

A number of items in the bill are business-friendly and were favourably received by the private sector during the consultation phase of the proposals. Chief amongst the business-friendly measures proposed is the change to the look-through company rules and the dividend rules as they apply to closely held companies. Closely held companies are a significant proportion of the total number of companies in New Zealand, so reviewing their tax treatment is very important. The proposals aim to simplify the current rules by addressing a number of complexities raised by the private sector. We must always aim to uphold the integrity of the tax system, so there are always proposals to tighten the eligibility rules for an entity electing to become a look-through company. A decision by a small business to convert to a company must be made for sound business reasons and not simply to gain a tax advantage.

Following on from the Government’s recently released package of base erosion and profit shifting proposals, this bill continues the Government’s focus on international taxation matters. Changes are proposed to the non-resident withholding tax and approved issuer levy rules to ensure the rules for the tax treatment of interest earned in New Zealand by foreign lenders remain robust. Briefly, they aim to ensure that the non-resident withholding tax rules apply as intended to related party debt or equivalent arrangements; also, that non-resident withholding tax is paid on related party debt rather than the approved issuer levy and to ensure that anomalies are corrected, which currently can be used to circumvent non-resident withholding tax or the approved issuer levy.

The bill also contains a number of measures to ensure that the tax rules continue to work as intended and do not impose unnecessary compliance costs on taxpayers. These range from refinements to the GST rules through to mainly technical amendments that aim to ensure that the tax rules are clear and apply as intended. The proposed changes to the debt remission rules, for example, address a problem that can arise under the current debt remission rules when a debt is remitted between associated parties.

The bill also adds 14 charities to the list of donee organisations with overseas purposes, in schedule 32 of the Income Tax Act of 2007. Donors to those charities will be eligible for tax benefits on their donations, effective from 1 April 2016. Finally, the bill sets the annual rates of income tax for the 2016-17 tax year.

These are the main features of this bill. It is a good bill. I would like to thank everyone involved, and I acknowledge the officials for their contribution in developing the policy and drafting the detail of this legislation. I would also like to thank the organisations and individuals who made submissions on the proposed legislation, and, of course, the Finance and Expenditure Committee for its consideration and good work. I commend this bill to the House.

I am very happy to rise to speak to the Taxation (Annual Rates for 2016-17, Closely Held Companies, and Remedial Matters) Bill. Following on from that Churchillian speech, can I open up by noting, first of all, the value of passing this bill with a week to go to ensure that the Government’s appropriations over the last year have, in fact, been lawful. That is running it pretty close, but we are pleased that we are there.

This bill is a very important bill. There is one important—very important—aspect of it, in fact, that Minister Nathan Guy did not spend one second of his speech talking about. That is the setting of the income tax rates for the previous year and the rates that will take us through for the next period. What I want to touch on, in respect of those rates, is a comment made by my colleague Mr Robertson in a previous debate on this bill. This is what Mr Robertson had to say: he said that here the bill “would have been an opportunity for the Government to say: ‘It’s time for some fairness. It’s time to have another look and make sure that we’ve got the rates set in a way that’s fair, instead of just automatically rolling them over.’ ” And “fairness” has to be the central word in any debate about tax policy in this House. It cuts straight to the heart of the purpose of our tax system.

Why do we need a fair tax system, and why do we need a fair set of tax rates? Well, it goes to the kind of country that we want to live in. It goes to the kind of incentives that we want our people to have. It goes to the notion of fairness in our economy. It goes to the kind of productive economy that we want to have. And it goes to overall confidence in our tax system, because our tax system, at its core, relies on trust. When we set these tax rates, we are saying to 2 million New Zealand salary and wage earners: “This is the amount of money that you will hand over to the Government every year to fund public services.” Most New Zealanders accept that. Most New Zealanders think that is a good thing. But we do it on the basis of the fact that it is a fair system and that everyone will pay their fair share.

If we have a system in which those 2 million New Zealand salary and wage earners—and, next to that, every single small business operating in New Zealand—are having to pay their fair share, and are having to pay these rates that we are setting in this bill, which the Minister did not mention once, but we have other entities operating in our country that do not pay their fair share, then that cuts straight to the integrity of the tax system. And, of course, it opens up questions for people who do pay their fair share: “Why should I do that when others do not?”. That is when the house of cards starts to fall down, and we simply cannot have that. Across this House I believe that it is maybe not unanimous support, but there is broad support for there being a progressive tax system in this country that funds our public services, that taxes people at a fair rate, and that distributes income fairly within our country to create the kind of society that we would all want to live in. But what have we got from this Government? We have got a set of rates that have simply been rolled over here—rolled over as they have been for 6 years.

And what about those people who are not paying tax? Of course, we have had the news this week about Apple—a multibillion-dollar corporation operating in this country, with billions of dollars of revenue over the past 10 years. How much tax has it paid? If we look at the income tax rates that we are talking about here tonight—let us have a look at them. Let us have a look at them. The lowest-paid New Zealanders in our country, from the first dollar of income that they earn, pay 10.5 percent income tax. What is Apple paying? What has it paid over the last 10 years? Did it pay the 10.5 percent that the lowest-paid New Zealanders pay? It paid zero. It paid zero. It did not pay 30 percent, as people earning between $48,000 and $70,000 pay. It did not pay 33 percent, as people earning over $70,000 pay. It did not pay 17.5 percent, as people earning between $14,000 and $48,000 pay. It did not pay 28 percent, as every struggling or successful small business in New Zealand pays. It paid nothing. So in this debate about the income tax rates that we are affirming for this year and taking forward in our country, it cannot go without saying that there are some in this country who are paying, and there are some who benefit from this country who are not paying. This Government, so far, has done absolutely nothing about that.

What about the people, often low paid, who are paying secondary tax at 45 percent? Have we heard a whisper about that today? We have heard plenty about it from the Government benches over the years. We have heard that it might come someday. We have heard that we need to get a new computer system. But we have heard very little in terms of a commitment to actually helping those New Zealanders who could really do with it. This is a Government that does talk a big game on tax, but actually delivers very, very little indeed. We have had 6 years of bracket creep under this Government, as well. We on this side of the House say that we do need a fair and progressive tax system, but this Government actually does not address the fundamentals at any point at all.

There are some good things in this bill, if we set aside the setting of income tax rates for the year for the moment. There are a range of helpful technical measures. In the area of tainted capital gains we have got some sensible technical changes to ensure that we are not casting the net more widely, in respect of tainted capital gains, than we really want to. In respect of look-through companies, we have got some sensible changes as well, and these have been worked through constructively by members across the House in the Finance and Expenditure Committee. We know that look-through companies are a useful structure within our economy, but we do not want them to be abused. So we have got to make sure that they are being applied to the right kinds of organisations. I also, just in these comments, as I did in my previous speech, want to commend the select committee for the work that it did in transitional measures around look-through companies, particularly as they might apply to charities and to Māori organisations that have previously used that mechanism but are affected by the changes in this bill. That was sensible, collegial work in this House.

But really those things are useful but “small beer” adjustments to our tax system, and they really go to the world view of this Government. We have had this described to us from the Prime Minister himself this year. This is a Prime Minister and a Government that says they have reached their limits. This is a Prime Minister and a Government that says that when the issues are difficult, it is just too hard. It is a bit like that with this tax bill—those small but useful adjustments, but nothing about those fundamental issues.

If we return to that issue of multinational tax, on the Minister’s own estimates, since the Government was warned about multinational tax rorting 5 years ago, we have lost about $1.5 billion in revenue—$1.5 billion in revenue, based on a $300 million loss every year. That is the Minister’s own figure. But what did we hear in question time earlier today? We heard that there was absolutely no commitment to actually passing legislation to deal with the rorting of multinational tax in this country in the term of this Parliament. Yet we are, of course, setting the rates for every single New Zealander to pay their income tax.

Do you know what the thing is? What happens if an ordinary New Zealand wage or salary earner tries to avoid their tax? We know exactly what happens in that event. There is a knock at the door and there is a phone call from IRD, and you are on the leash. Yet what we had last week was credible information that one of the world’s biggest companies has been avoiding $300 million of tax, and the Minister would not say boo to a goose about it. That speaks to the lack of fairness in our tax system under this Government, and that is something that needs to change.

There was one other good thing that has come through the passage of this legislation, and that was the depreciation rollover relief, through the Supplementary Order Paper put forward by Minister Judith Collins, for victims of the Kaikōura and greater Wellington earthquake. That was a measure that was strongly supported by this side of the House. It was only right and just that we provided that relief, to provide some fairness to the victims of that earthquake. But we should not restrict fairness to people who have gone through a natural disaster. Every New Zealand taxpayer should be able to expect fairness out of our tax system. That is what we call for on this side of the House. That is what is so patently lacking in the current tax system, and that is what the Labour Party looks forward to changing when we next debate this bill from the Treasury benches next year. Thank you.

It is a pleasure to be talking—

💬 Hon Member: It was better when you didn’t have a voice.

—in this third reading of the Taxation (Annual Rates for 2016-17, Closely Held Companies, and Remedial Matters) Bill. Yes, I have got my voice back. Last time, I was talking about the fact that Opposition members were saying about this bill that we were doing too much too fast—things we should not be doing—and that we should be slowing it down. And, of course, that is not what we are going to do; we are going to push through stuff.

I just heard that previous speaker, Michael Wood, talking about making our tax system fairer. Well, this is what this bill is about. It is precisely about making the tax system fairer. This is a continuation. And everyone knows that New Zealand has one of the best tax systems in the whole of the world—the whole of the world. So I am just going to talk for a couple of minutes, or perhaps for just a minute, about a couple of the examples in this thing.

One of them is about closely held companies. Not many people know about closely held companies, but these are all about look-through companies. What this bill does is it looks at the dividend rules and how those are paid out. One of the things that this hard-working Finance and Expenditure Committee actually did—and I am just looking across at the other side there, at a couple of the members over there—was we actually changed and made an amendment there about reducing the overreach of one of those provisions. So this is the good work that this committee has done. I commend it. I think it is a great bill.

Of course that member loves this tax system, because he makes a whole lot of money out of capital gains and he does not pay a cent. If you are making a lot of money out of capital gains, you love the system because you are not part of it. You are not part of it if you are making money out of capital gains.

The ASSISTANT SPEAKER (Hon Trevor Mallard): Order!

That is why that member loves our tax system.

The ASSISTANT SPEAKER (Hon Trevor Mallard): Order!

Sorry, Mr Assistant Speaker.

The ASSISTANT SPEAKER (Hon Trevor Mallard): That is right. I think you should address me but not talk about me.

Oh, sorry. I did not mean to talk about you, Mr Assistant Speaker; I meant to talk about that member over there.

The ASSISTANT SPEAKER (Hon Trevor Mallard): I accept the member did not know what he was doing.

Anyway, it was quite a naive speech, but not in a bad way, because the member is not a bad person; he is just naive. To say that we have one of the best tax systems in the world just bears no relation to reality. It is quite sad, actually.

This was a wide-ranging debate. In the Committee stage it went for a number of hours. We talked about a whole lot of different measures: some good, some interesting, and some a little quizzical. For example, section 306(2) of this bill, wait for it, “comes into force on 1 October 1986.” Todd Barclay was not even born then, and I guess he was not even born now. I can inform the House that if, between now and 1986, the “transfer of ownership of the asset would be a financial service, the subsection deems the person to make a supply of the asset by a transfer of ownership.”

So, in 1991, if you got away with not providing transfer of ownership papers or a contract, you are about to be caught out. You were waiting for this day, were you not; not you, Mr Assistant Speaker—people who thought they had got away with this. Well, we caught up with them in 2017. This is what this Government has been doing. From 1986 to 2017—what has it been doing? We never asked this Government to slow down. We have never said to the Government: “Stop implementing things that are important to the people of New Zealand.” What we have said is at least come up with a policy framework, not throw a whole lot of bills at the Committee where it is Arthur one day and Martha the next, and no one knows what the hell is going on—none more so than the people who have to submit. These are the experts. These are the nation’s experts who have said to the Government: “Hold fire. We haven’t got time for this whole lot of stuff we’re supposed to be submitting on.”

The thing about tax legislation is that it has got to go through a very robust process if it is going to be good legislation and if there are not going to be loopholes that you can drive a bus through. This is the criticism—not that the Government has been going too fast but the fact that it has left it to 2 minutes to midnight.

There is some good stuff in here. We are supporting the bill—there is no doubt about that. The closely held company changes will drive efficiency, and we support that. But this structure, this legal company structure, has been around for a long, long time. There has been plenty of time for the Government to have actually put in place a measured framework to get the efficiency through a hell of a lot sooner than after 8½ years in office. It is a tired Government that really has not done much until now, and it is too late. But it is also muddled, and the experts are saying there is no policy direction, there is no framework—that is why they are getting frustrated, Mr Bayly.

One of the things that this bill does is it separates out the cost of maintaining aircraft engines—fantastic. Well, if you are in the business of aircraft engines, that is really good. But there are some fundamental problems with our tax system, like the fact that the IRD owes Kiwis $700 million, and it is not giving it back unless you proactively go towards it. Yet if you owe it money, if anyone owes it money, then, by God, it comes after you with a huge big stick, which is not a bad thing, because another thing that happened in this bill is that the Committee changed the GST rules.

So when I mentioned the fact that the IRD owes Kiwis about $700 million, what happens with that money is that after 4 years, if it has not been claimed, it falls off a cliff—so it is no longer yours. The IRD does not give it back. It would probably account for it, so if it rolls over—let us make an assumption that there is about $200 million or $175 million a year that just does not get paid back to Kiwis. The IRD is pretty quiet about it, not in a dishonest way but just in a “You know, let’s not give it back. Here’s $175 million we can use ourselves.”

But if you owe the IRD money then it will chase you to the ends of the earth. There is a good provision in this: if it has been deemed that there has been an honest mistake around the overpayment of GST, instead of having to wait only 4 years they have actually extended it. What the IRD is saying—what this bill says—is that we will now allow you to have not only that 4-year window but another 4-year window, if it has been proven it is a genuine mistake. That is not a bad thing.

But what I would have loved to see this bill say is it is not just for companies and GST but for individuals, because a lot of the time the people who are actually overpaying tax are those who can least afford to overpay tax, and it is usually people paying secondary tax. How secondary tax works is a person has one job—let us say they earn $30,000—and they pay the tax rates for $0 to $30,000. Then what they do is they go home, they change, and they go to another job. Let us say they earn $35,000 in that, so they pay the tax rates for $1 to $35,000. That is what happened in the past. What happened then was that at the end of the year they had to pay tax on $65,000, and they ended up with a big tax bill.

So we brought in secondary tax, and, to be fair, it is not a bad regime, because it meant that those who could least afford it were not presented with a big bill at the end of the year. But what it did mean was that these people often overpaid tax. There was a classic case of a very good friend of mine who runs a company. They had a woman working for them 20 hours a week, and they convinced her to phone one of those tax refund lines. She did not want to—she was a little bit scared, to be honest, of interacting with the IRD—but in the end she did. It took her, literally, 10 minutes. They had her IRD number, she put it in, and she ended up with a refund of, I think, about $450. This was actually, quite coincidentally, at a time when one of her children was starting school and there were the expenses of the uniform, etc.—$450 was fantastic.

But my point is that it would actually be really good if that $450 did not come as a lump sum 3 years after she had actually overpaid it, but if it had been in her back pocket the day she earned it. It is like this: if that person had not phoned the IRD and got their $450 back, after 4 years it would have disappeared.

We have said that if you have overpaid your GST, there is a provision here—we will look at this. Good. But it needs to go further, because there are a hell of a lot of Kiwis who actually just need to be prompted a little bit to check their IRD numbers; either phone the IRD—that is easier actually: go on to the website and check it on the IRD site; it is pretty easy to do—or, if that is a little scary, interacting with the IRD, then at least go to one of these tax refund companies, and you could end up with a lot of money back. So that is another good thing in this bill.

Michael Wood talked about accelerated depreciation for damage in the Kaikōura and greater Wellington earthquake—that is a good thing. By and large, we are not saying that these bills are not good legislation, and we are not saying that they are not necessary legislation, because the vast majority of the time they are. I sort of question the wisdom of having a clause in the bill that comes in 30 years previous, but, you know, that is the way it is. What I am saying is that my criticism over the last year—because we have been speaking on a lot of tax legislation over the last year—has been that it has done some good stuff, but it is just too late.

This is the Government that says “We are the party of business.”, and yet, by and large—and Mr Bayly knows this—it has taken it 7 years to put tax legislation in place that actually would have helped business. If this had come in 4 years ago then the regime would be well bedded in, efficiency would have been driven through the IRD, people with look-through companies or aircraft engines or GST, etc., etc., would have got the benefit of this. But to just leave it until after 8 years in Government is, I think, too long. To be honest, it sort of treats the taxpayer with a lack of respect—which I think is unnecessary—and I am not too sure why. Anyone who is a constituent MP, and even a lot of the list MPs—you know, we get hit up about this stuff quite a lot.

So, just to sum up, we are supporting this legislation, the Taxation (Annual Rates for 2016-17, Closely Held Companies, and Remedial Matters) Bill. There is a lot in this tax bill, and there is a lot for the tax experts and business owners to digest. But my worry is that before they even get an opportunity to get halfway through it, we are going to have another piece of tax legislation that is going to have a similar impact or is going to amend tax legislation, or the Tax Administration Act, or the Companies Act even more. The burden on the people who are required to implement this is becoming too much, and that is the feedback we are getting from the industry itself. That is the feedback we are getting from the industry. So we support this, of course, but with reservations. Thank you very much.

I rise in support of this bill, a bill that makes technical changes to improve, strengthen, and update our tax rules so that they continue—continue—to work well for taxpayers and the Government. Let us take note of something that Mr Wood remarked upon earlier, when he talked about multinationals and tax, and he specifically used the example of Apple. Well, in actual fact, Apple does pay tax in New Zealand, but it so happens that the tax it pays in New Zealand is remitted to the Australians. Why is it remitted to the Australians?

Order! The member will resume his seat. The time has come for me to leave the Chair. This debate is interrupted and set down for further consideration next sitting day. The House stands adjourned until 2 p.m. tomorrow.

Debate interrupted.

The House adjourned at 10 p.m.