Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters) Bill

I move, That the Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters) Bill be now read a first time. I nominate the Finance and Exp enditure Committee to consider the bill. This bill serves two purposes that are important for the health of our tax system. A good tax system comprises good tax policy supported by good tax administration. This bill contains proposals to improve both sides of the equation. Along with setting the income tax rates for the 2017-18 year, as the name of the bill implies, the rates remain unchanged from the previous year. This bill contains proposals for modernising tax administration, and also contains proposals aimed at improving the current tax settings within a broad based - low rate framework.

The Government’s vision for the future is for most people to pay the correct amount of tax through the year, and if there is any refund or tax to pay, that will be calculated by IRD. To achieve that vision of a simple tax administration, the Inland Revenue Department needs good, timely information direct from income payers—for example, income information provided by employers and investment income payers. People will be able to check and confirm that information if they wish. Good, accurate information will mean greater accuracy of tax collected through the year, and help prevent individuals from getting into debt.

This bill therefore includes proposals for payers of dividends, interest, and tax for Māori authorities; distributions to provide detailed information to the Inland Revenue Department on a monthly basis, or for the months in which payments are made if the payment frequency is less than monthly. Currently, payers of these sorts of income provide only aggregate information at year-end to the Inland Revenue Department. The Government is conscious of compliance and administration costs for payers of investment income, so to reduce these costs the bill proposes that investment income payers be allowed to correct errors in previous withholding tax returns in their next return without incurring penalties or interest, subject to restrictions for errors being corrected in the following tax year. In addition, the bill proposes removing the requirement for interest payers to provide end-of-year withholding tax certificates to income recipients who have provided their IRD numbers. The investment income information changes will generally apply from 1 April 2020.

The second group of tax simplification proposals is aimed at employers. One of the objectives of the Government’s transformation of tax administration is for businesses to spend more of their time focusing on growing their businesses, rather than fulfilling tax requirements. Businesses using accounting software to prepare and send their GST returns to the Inland Revenue Department are experiencing a significant compliance cost reduction. The Government wants employers to benefit from this approach too, so the bill proposes changes that will enable employers to benefit from modern software, but does not require them to use it. The proposed changes are intended to reduce compliance for employers by integrating tax tasks, like providing PAYE information, into their normal business procedures. The bill proposes requiring employers to provide the Inland Revenue Department with information about their employees’ income and deductions on a pay-day basis, rather than on the current monthly basis.

In line with the theme of modernisation, this bill proposes abolishing a subsidy that has outlived its purpose. In the early days of electronic filing of PAYE information, the use of a payroll intermediary made compliance easier for small employers and helped to guarantee a better standard of information provided to the Inland Revenue Department. An incentive to use an approved intermediary was therefore provided. The range of payroll products and services has developed significantly in the intervening years, and an incentive is simply not appropriate any more. The bill therefore proposes to repeal it from 1 April 2018. These are some of the main proposals relating to modernising our tax administration.

I turn now to the second category of proposals: those aimed at maintaining our broad based - low rate tax system. To remain effective, the tax settings must constantly evolve to keep abreast of changes in the economic environment, interpretation of the law, and business practices. One such change is the growing popularity of employee share schemes. The tax laws relating to employee share schemes have been in place for many years, but since their establishment they have not been revisited. In the meantime, employee share schemes have become a more popular form of remuneration amongst employers. The bill therefore proposes a number of changes to modernise and improve the taxation of employee share schemes.

The main objective of the proposed reforms is to ensure that as far as possible the tax position of both the employer and the employee is the same whether remuneration for labour is paid for in cash or in shares. This means ensuring that the share scheme cannot be structured to give employees tax-free remuneration. For example, under current law an employee can be given what is economically a valuable share option without being taxed on that benefit, whereas the provision of an actual option is taxable when the option is exercised. The proposals in this bill remove this distortion.

The bill also proposes allowing employers a tax deduction for the amount of the employee’s share scheme income at the time the employee is taxable in order to align the tax treatment with other types of employment income. So it is a balanced package that benefits business.

In response to submissions, to minimise compliance costs it is proposed that the tax-exempt, widely offered employee share schemes are retained. The bill, however, proposes some amendments to modernise the rules and to close certain loopholes that are currently being used to obtain unintended deductions. Transitional rules are included in the bill, which will allow most companies 6 months after the enactment of the bill to amend the employee share schemes, if necessary, to take into account the new law.

The Government is keenly aware of the value of employee share schemes as a form of remuneration, particularly in innovative start-up companies, and, to remove some potential tax impediments faced by start-up companies in offering employee share schemes, officials are currently developing a public consultation document that defines a proposal contained in the 2016 issues paper. Public feedback is important to the development of sound tax rules, and therefore I would encourage interested parties to make submissions to the Finance and Expenditure Committee on the proposals contained in this bill.

The bill proposes making available a refundable tax credit to address the losses arising from decommission expenditure incurred by a petroleum miner. This is similar to other refundable tax credits already included in the Income Tax Act 2007, most relevantly the refundable tax credit for mineral mining rehabilitation expenditure. The existing rules addressing this situation involve significant compliance administration costs. An amendment is proposed to create an exclusion from the dividend rules for certain company demergers. The full value of the shares in a demerged company is currently treated as a taxable dividend for the shareholder. However, a genuine demerger is in substance the division of a corporate group rather than a distribution of income and should not, therefore, give rise to taxable income. In practice, the problem has arisen in relation to demergers by listed Australian companies, so the proposed solution focuses on these. This is a good example of tax policy being responsive to the valid concerns of the private sector.

A proposed amendment would provide the Inland Revenue Department with the discretion to issue IRD numbers to offshore persons without a New Zealand bank account if satisfied with their identity and background. This is intended to give the Inland Revenue Department sufficient flexibility to deal with a range of different cases in a timely basis and reduce undue compliance costs.

Five new charities are proposed to be added to the list of donee organisations in schedule 32. New Zealand charities that support overseas activities must be listed in schedule 32 in order for their donors to be eligible for tax benefits, in particular the donations tax credit. The proposed new additions to schedule 32 are Beyond Disaster Relief New Zealand, Flying for Life Charitable Trust, Médecins Sans Frontières New Zealand Charitable Trust, Tony McClean Nepal Trust, and Zimbabwe Rural Schools Library Trust.

Finally, the bill contains a range of remedial matters. These and other measures proposed in the bill have been developed to strengthen our tax system by modernising the administration to make it easier for people to get their tax right in the first place. I commend the bill to the House.

Thank you, Mr Assistant Speaker, for the opportunity to speak on the Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters) Bill. I rise to speak to the bill on behalf of the Labour Party, and it is the intention of Labour to support this bill to the select committee stage, at which point we think it is very appropriate for a number of the matters that have been flagged by the Minister of Revenue within the bill to be very, very closely examined—and I thank the Minister for her attention to the debate that is going on at the moment.

One of the things that is important to be aware of with this bill, and many of the other large tax bills that are coming the House’s way this year, is that they are sprawling beasts, and this bill—by my adding up here—amends at least six Acts in reasonably important ways: the Income Tax Act 2007, the Tax Administration Act 1994, the KiwiSaver Act 2006, the Student Loan Scheme Act 2011, the Goods and Services Tax Act 1985, the Child Support Act 1991, the Accident Compensation Act 2001, and the Income Tax Act 2004. So there are potentially a lot of impacts flowing from this bill, and a lot of the detail is very, very complex, so we think it is going to be extremely important that when this bill goes to select committee it receives a thorough examination—and, as I stand here, I notice the upstanding and hard-working chair of our committee, Mr Chris Bishop, coming into the House, with rapt attention to this debate, and I look forward to working on the bill with him in the committee.

There are four broad aspects to this bill. The first is that it sets the 2017-18 income tax rates. Secondly, there are a range of changes that focus on the business reporting of tax information—a lot of these are related to the business transformation process that the Minister spoke about in her speech. There are some very substantial changes to the treatment of employee share schemes, and I want to return to those a little bit later. Then there are various remedial matters, as we always get with these bills.

I want to start off with the rates, and they were really the unspoken story when we just heard from the Minister of Revenue, but they will be of some interest to the 3 million or so New Zealand taxpayers out there who want some clarity on what their income tax rates will be for the year ahead. Of course, it is a little bit interesting because it was not that long ago that we stood in this House—I think probably only about 5 or 6 weeks ago—to actually confirm the rates for the 2016-17 year. It was a bit of a last-minute dash. I think we ended up with about 2 or 3 days—

💬 Chris Bishop: Ha, ha!

—before the end of the financial year. Mr Bishop knows how concerned the Labour Party is about this. I know that he will be committed to having a more orderly process this year, and perhaps he can speak to the Leader of the House about ensuring that that unfolds over the coming months.

It is notable, of course, that the rates in this bill are simply a repeat, a rehash, of the current year’s rates, and they are being put to this House days before a Budget in which the Minister has been foreshadowing and really pumping up the expectation of some pretty significant changes in the income tax space. All I can say in that area is that I hope those members do a better job than they did the last time that they looked at New Zealand’s income tax rates, because the last time they did that, right at the beginning of this National Government, the changes that they made shifted income distribution in this country vastly to the advantage of the top 10 percent of wage and salary earners. I think that when you listen to people out in our communities at the moment, people are looking for a Budget that has fairness at its core, and if we see changes to income tax rates that again significantly weight those advantages and that additional income to the top 10 percent of income earners, as happened the last time the National Government changed income tax rates, there is going to be a huge backlash.

More broadly, though, in respect of tax rates, I guess the view of the Labour Party is that that ongoing tinkering with the tax system that we are getting from the National Government—that is what we expect to see in the coming week—simply is not good enough. Over a long period of time we have had a build-up of substantial imbalances in our tax system, and simply reconfirming the income tax rates for the year or looking at the thresholds, as we might hear about on Thursday, does not really resolve the big issues in our economy and our society that stem from those imbalances in our tax system.

I know many members in this House might have heard about the book Tax and Fairness, which has come out over the last week or two. Look, a very well-qualified, extremely intelligent author, Dr Deborah Russell, Labour’s candidate for the seat of New Lynn, is one of the authors, along with Terry Baucher, and it really is worth a read. I am only about halfway through it, but what it does is it really delves into the substantial issues in our tax system and points to this fact that just fiddling with thresholds is not going to be enough. It points to the fact, for example, that the tax treatment of people who put their wealth into productive investment and savings versus those who put their income into property speculation is vastly different—is vastly different. If the Government, when it is putting forward a tax bill like this, which deals with the tax treatment of certain kinds of investments, really wanted to invest in a productive economy, that is one of the things that it could look at, because what Deborah Russell says is that the tax burden on those people who put their wealth into productive investments is four times that of the tax burden of those people—and, who knows, there may even be some of them on the benches opposite—who put their wealth into property speculation.

That goes to the housing crisis that affects so many New Zealanders today, and it goes to the fundamental economic settings and incentives in our economy as well, and if we ever really want to climb up that mountain that we talk about year in, year out in this House about building a high-wage, high-skill economy with high rates of R & D, in which we have world-class living standards, we are going to have to effect that shift at some stage. If we keep ploughing our wealth into property and if we keep having a tax system that incentivises us to do that, we simply will never get there. Once again, we have a tax bill that a lot of work has gone into—a lot of institutional knowledge from IRD and a lot of research and a lot of time will be spent, a lot of submissions—and we are just tinkering around the edges. We are not dealing with those very, very fundamental issues.

So that is something that Labour wants to see, and what Labour will deliver is a shift—looking at the fundamental drivers of the tax system and rebalancing it to ensure that we are incentivising the right kinds of investments.

While we are on it, we wait with great interest, and, again, there is nothing in this tax bill to ensure that while Kiwi taxpayers, who are, of course, paying their tax diligently at the rates set down in this bill—we are seeing multinationals in New Zealand getting away with ripping off the Kiwi taxpayer to the tune of between $300 million, by the Government’s own estimates, and up to $1 billion per year by some other estimates. Once again, though, we have a tax bill that does not begin to touch on that, and we have absolutely no certainty that the Government has any intention whatsoever of progressing action in that area before this election. There is a lot of hui, not much doey.

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

Certainly, Mr Assistant Speaker. I know that the members opposite are eager to hear more information, and I am happy to provide it.

One of the concerns we have with the bill, and one of the aspects we seek to explore further in select committee, is the extent of the shift to pre-population that is set out in this bill, and it is mentioned many, many times in the commentary. Many people in the tax community really want to know where this is going, because, at first blush, IRD having better information earlier on in the piece sounds like a good idea. We can all agree that is a good idea, and we can all agree that it probably is a good idea for that information to be used to pre-populate people’s tax returns. But there are many people in the tax community who are asking whether this is taking us back in the direction of compulsory filing of tax returns. There are certain signals—bits of smoke that seem to come out of IRD—that seem to suggest that this might be the case, and that is something that we will want to explore further in the select committee process.

I want to turn now to the changes proposed to employee share schemes. Most of us in this House will agree that employee share schemes are a really valuable tool for recognising employees, for putting incentives in place, for giving people a stake in growing companies. We want to support not just their retention but their growth under the right circumstances. Probably the most significant changes proposed in this bill are the treatment of those employee share schemes. Effectively, the changes proposed are to further date when employees acquire the shares for tax purposes. It is a major, major change, and there is already a lot of chatter amongst businesses and amongst the tax community about how this may affect the attractiveness of employee share schemes. This is not the time and place to go into all of the detail there, but, once again, on behalf of the Labour Party, I would flag up that that is an area we want to spend some real time on at select committee. We cannot afford to get that wrong, or we are really going to rock the boat on an area that is quite important in terms of incentives in many of our businesses.

Once again, the Labour Party will be supporting this bill in its first reading, and we look forward to further discussion and good quality debate at select committee. Thank you.

I know that the member who has just resumed his seat, Michael Wood, is a new member—

💬 Grant Robertson: Ha! Listen to him!

—a relatively new member—but I think Mr Wood really needs to talk to the Opposition finance spokesperson. That was quite a good speech, but it was actually a speech largely not about the bill, as my colleagues have pointed out. It was largely a speech in favour of a capital gains tax. I know that the Labour Party and their activists—Mr Wood comes from that venerable tradition—are hankering for a capital gains tax. But, actually, the official Labour Party policy—

💬 Hon Michael Woodhouse: Is that the policy this week?

—well, this week, as my colleague Michael Woodhouse points out—is that we are not going to have a capital gains tax, but it will be subject to a comprehensive taxation review in the unlikely event they get into Government. So it was a good speech, but not really about the bill.

The other thing that Mr Wood mentioned in the speech was multinational tax avoidance, and, again, this is something that the Labour Party activists are very worked up about. But, actually, all New Zealanders—and I think there is a bit of cross-party unity in the House on this—want everyone to pay their fair share of tax. The Government is in no disagreement with that objective, and the member will have seen the Minister of Revenue Judith Collins’ discussion documents that came out recently. But the thing about multinational tax avoidance and base erosion and profit shifting—BEPS, which is the technical term for it—is that it is a multinational problem. It is in the name. It is not something that New Zealand could do unilaterally, even if we wanted to; it is something that requires concerted action on the international level. That is exactly what the Government is doing, and that is exactly what other countries, such as Australia, are doing and I think members will see that roll out in good time.

I want to mention a couple of points in relation to the bill. The first is about employee share schemes, and Mr Wood gave a good introduction into some of the changes that the bill makes around employee share schemes. I think this is an area that we are really going to have to have a good look at in the Finance and Expenditure Committee. I see the ranking Opposition member nodding—I was going to say furiously, but it is not quite furiously.

💬 Grant Robertson: I wouldn’t call that furious.

He is nodding away. And we are going to have to take a look at this—

💬 Grant Robertson: Sagely.

Sagely. OK—sure. This is an extremely complex area of the law and also we are dealing with individual taxpayers, and we have got to make sure we have got this right. I have had some commentary from people in the professions already that this is something that we are really going to have to take a good look at. So I am looking forward to doing that on the hard-working Finance and Expenditure Committee.

The other thing I want to make mention of is the changes it makes around, basically, employee income information. You could really summarise it by saying the Government is essentially going to collect more information from taxpayers and it is going to do it more quickly. That is all through the business transformation process that the Government is spending considerable sums of money on investing in.

For people listening out there, at 5 minutes to 10 on Tuesday night—they may be sitting there listening to the radio or watching a bit of Parliament TV, thinking why would the Government want more information about employee income information, such as monthly updates from employers to the IRD. There are a few reasons for this: one is actually an honourable aim, which is to help stop individuals incurring debt and also to reduce compliance costs for big companies. I think that is a laudable aim. And, also—and I know the Opposition will be very interested in this—it is to give the Government, essentially, greater flexibility around redesigning social policies. One of the problems we have with the current IRD system is that it is creaking. It is ancient. It is old. It is on its last legs, and that is why—

💬 Richard Prosser: Don’t be ageist.

—the Government is spending a lot of money on investing. Ha, ha! The Government is investing into this system to allow Governments of whatever political stripe, whether they be a blue, yellow, and mauve one, or a red, green stripe, to allow Governments of whatever persuasion to more quickly adapt the system to carry out social policies, tax policy, and also welfare policies. And that is going to be good in the future. Actually, that is probably, I think, the biggest benefit of the transformation programme, as it will allow Governments to be far more agile and innovative in their policy responses to particular situations than they are at the moment. It is a good bill. It needs some consideration, and I know we will be looking at it closely at the Finance and Expenditure Committee.

What a great pleasure to stand in the House at drive time, frankly—4 minutes to 10 p.m. I want to thank my colleague Chris Bishop for making sure that I managed to get my opportunity to start my contribution today. The first thing I would say is that I think the Minister of Revenue is probably setting a record for lack of enthusiasm for her role. I thought she should have been more positive tonight, because, as my colleague Michael Wood has alluded to, she did something that her predecessor—I need to be careful; there are a variety of former revenue Ministers around—her immediate predecessor, Michael Woodhouse, failed to do, which is actually get a bill in for the rates of income tax somewhere approximating when that year might begin, as opposed to the exercise we went through in the House most recently when we just scraped through with the 2016-17 rates.

The Minister should be a lot happier in her work, I think, given that she has actually managed to put a bill in front of us that contains the annual rates of income tax for the 2017-18 year. Of course, it all could go up in smoke on Thursday when the Minister of Finance comes to the House with a Budget that apparently—I read this evening—is going to deliver $50 a week to some working families.

It will be interesting, if the tax rates are used to do that, just who will get that benefit, because the truth is that if you are using the tax system to do that, be it thresholds or be it rates, the people who benefit the most are people like us who earn very substantial salaries. It does not matter whether you move the bottom thresholds, the people who benefit the most are the people who earn the most at the top. New Zealanders have to ask themselves: is that the priority they want from their tax system, or, actually, are we looking to create a fairer tax system right across—

💬 Alastair Scott: Which clause of the bill are you talking about?

What was that?

💬 Alastair Scott: Which clause of the bill are you talking about?

I am talking about the annual rates of income tax for 2017-18, provided for in the very first words of the title—the very first words. So Alastair Scott has woken from his—

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

Debate interrupted.

The House adjourned at 10 p.m.