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

Thank you, Madam Chair. It’s a pleasure to take a call on this, the Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters) Bill. I also join in the trepidation of the previous speaker, Greg O’Connor, about speaking on this bill. I have to say that taxation is not something I’m hugely familiar with or that is a definite strength of mine. I want to thank the Finance and Expenditure Committee for the work on this bill. I can imagine that it would have been fairly time-consuming, but I think that the bill is fit for purpose.

The purpose of this bill is to simplify and improve taxpayers’ experience of tax administration in New Zealand, and, let’s face it, anything that simplifies and improves individuals’ or businesses’ taxation situations has got to be a good thing, right? I know for myself as a business owner that I’d welcome any legislation that makes life easier and, in particular, the part that has just been passed, Part 3, will definitely have some benefits.

Part 4 covers amendments to other enactments and is a big chunk of the remedial matters mentioned in the bill’s title. Part 4 includes necessary updates by amending 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. The amendments found in Part 4 of this bill are important to ensure maintenance of our broad based - low rate tax system, and this is part of the reason that the bill was reinstated by Minister Nash.

I’d like to speak about clauses 308 and 310 of this bill, that amend the Goods and Services Tax Act 1985. It is widely noted that the best feature of our GST system in New Zealand is its simplicity. It catches virtually all goods and services in New Zealand, ensuring that the tax system doesn’t introduce distortions caused by unequal taxation. It is important that this House continues ensuring that we have a taxation system that doesn’t increase compliance costs, and this is what clauses 308 and 310 do.

Currently, associated rebates paid by suppliers to Pharmac under an agreement for listing on the pharmaceutical schedule have a different GST treatment depending on whether the pharmaceuticals are purchased in the community setting or in the hospital setting. Pharmac buys drugs and then onsells them to pharmacies and district health boards, and sometimes suppliers give Pharmac big discounts due to the volume of drugs that Pharmac is buying and Pharmac passes these discounts on by way of rebates. There are GST consequences for this, but it differs between rebates paid to hospitals and rebates paid to pharmacies. But the basis transaction is the same; it’s just that they get defined by the Goods and Services Tax Act that makes a difference. So the result is that Pharmac and the drug suppliers face a lot of uncertainty in working out whether or not GST applies to a particular set of rebates, and they spend a lot of time and effort sorting it out. So it is a big issue with compliance costs, and we always want to reduce compliance costs where possible, especially if there are no actual tax consequences.

Compliance costs make it easier and less expensive for people to comply with the law in general and, in this case, with tax law. It’s always an issue with tax law, given its complexity. What we need is we need for Pharmac to be spending its money and hours of labour on ensuring that New Zealanders get the medical access to the pharmaceuticals that they need, not wasting time on tax compliance and having to differentiate between community and hospital rebates. It’s about creating a fair and equal system with regard to paying GST.

I’m just sort of intrigued by some of what my colleague Jo Luxton has been saying about compliance costs and convenience to taxpayers. I think one of the difficult things about tax law—and we see it in this bill—is that it is extraordinarily complex, and that changes in one part of the Income Tax Act, or whatever, will presage changes in other Acts as well. This particular one that my colleague Jo has picked up on has been the amendments to the Goods and Services Tax Act, and it is to do with the way that rebates are paid to Pharmac. Now it’s a little bit hard to get your head around this, but there are some GST consequences when rebates are paid. What it can do in some circumstances is it can, in effect, change the price of the original negotiated contract, so it has a backwards effect on the original contract, and that means you need to do some thinking around how the rebate is actually paid and how much the contract is going to be valued at.

But even more complicated than that is that because of the nature of district health boards (DHBs) as opposed to the nature of community suppliers of pharmaceuticals—so that’s your average family chemist—the rebates could be different. The GST consequences of those rebates could be different, depending on whether Pharmac was paying that rebate through to the DHB or paying it through to the community pharmacist. That’s problematic for this reason. Now often Pharmac actually calculates those rebates—it’s because it manages to negotiate a discount with the supplier—and that, of course, can be a commercial and confidence matter. So there’s a really extraordinary flow-on of effects from what was going on with the GST Act and the payment of these rebates, right back through to the suppliers of drugs and a whole set of stuff that sort of interacted together and created some real difficulties for DHBs. Now it happened to be something that really had no fiscal effects. It didn’t actually change the amount of tax revenue collected. It didn’t really change anything significant there. But what it did do, and it does do, is it creates quite significant compliance costs, in particular for Pharmac. It gives rise to a whole set of uncertainty and compliance costs for Pharmac.

Now going back to my friend, I should say—the person I admire greatly when it comes to tax, Adam Smith—one of the things that he says about a good tax is that a good tax must be certain. That is, the person who is paying the tax must be able to calculate it, must know how much it is—there must be a whole lot of certainty around tax law. There’s good reason for that. It is so that people can actually calculate their tax obligations, so that people can understand the consequences of any transactions they enter into. So we do aim for certainty in tax law. Now because of this sort of confusion over what was going on with pharmaceuticals and with the rebates paid by Pharmac, the amount of certainty was decreased. There was a whole lot of uncertainty in the Goods and Services Tax Act, and this particular amendment sets out to change that. It’s going to apply to rebates paid by Pharmac on or after 1 July 2018, so provided that this bill goes through in time, we’ll get that particular little wrinkle sorted out.

Now, interestingly, the Finance and Expenditure Committee had no changes to make to the recommendations made by the officials as to how we should structure the law. Our colleagues on the other side of the Chamber haven’t made any particular objection as yet—though I see Mr Bayly scribbling—as to the way this particular law is structured. What it is is one of those simple measures that we actually all want to work on together, to make sure that we get the law right. In fact, if we look through Part 4 of the bill, that is largely what Part 4 is about. It’s about clarifying and tidying up the law. It’s about making it more certain, and, of course, as soon as you make the law more certain, you also make it easier for people to comply with. You reduce their compliance costs.

So that is why I support this particular amendment that both Jo Luxton and I have talked about, but it’s also why I support the intent of Part 4 of the bill, which really is to tidy stuff up to make it more convenient and more certain for taxpayers, and to make our tax law the best law we can possibly have within the constraints of the sheer complexity of it all. Madam Chair, I recommend this part to the committee.

Thank you, Madam Chair. Life is sometimes delightful, and it’s particularly pertinent that the good Minister for Climate Change is sitting in the chair at the moment, because one of the important aspects that the Finance and Expenditure Committee turned its mind to was, of course, the tax treatment for petroleum mining companies. The bill sets out how we might make it more advantageous so that offshore mining companies—and, of course, New Zealand companies—want to take advantage of our geological conditions in New Zealand to mine for these resources, and what the bill promotes is to improve the tax situation for these particular companies. Of course, I find that intriguing today, given that the Minister for Climate Change was asked twice, no less—twice—as to whether, in fact, he thought we should be continuing to explore for gas as a transitional fuel, and of course we couldn’t get a straight answer on it. Of course, we’ve had the Prime Minister also confusing the situation, saying, “Of course we’re not going to allow any future mining of this petroleum resource.” So I thought it was very appropriate to talk about this.

So, as you may know, Madam Chair—and I’m sure you do, because you’re very knowledgable on these things—the current tax treatment for petroleum companies is based on a spread-back process, which allows prior income tax periods to be reopened to include losses arising through expenses such as decommissioning or other such expenses. So what the bill does do—and it applies from 2018-19 and later income years—is that it confirms that use of money won’t be applied when companies go back to a prior period of losses or profits and use the more current costs as a way to offset either some of those losses or some of those profits.

Of course, the main impact of the bill is to replace the existing spread-back process for petroleum mining companies, and under these new rules, a petroleum miner will be eligible for a refund for any development expenditure that has not been deducted at the time commercial production ceases or a decommissioning cost. But these clauses not only relate to that but they also relate to the relinquishment of a permit, decommissioning, ceasing commercial production, restarting commercial production, and farm-out arrangements, which, of course, are very common in the petroleum sector.

So I just find it slightly intriguing that here we are. As a committee, we’ve been beavering away, doing these things, and working out a more effective way to promote the petroleum industry in New Zealand because, of course, it’s one of our major export earners. Here we have had, in the last couple of days, the Government on another hand saying, “Oh, we don’t want to do that. We shouldn’t be doing any new such development.”, and yet we’ve got a bill before the House which is actually contrary to that. So I think—now that the Minister of Revenue has reassumed the chair, and I’m looking forward to his response—why should these improvements that are designed to assist with the exploration of oil and gas in New Zealand actually be in the bill? I’d love to hear the response, given we’ve got contrary views across all the three partners of the coalition Government. Hopefully, we’re going to get some clarity at some stage, because I am really looking forward to it.

Well, the member may well be, but, unfortunately, he missed his opportunity, because that’s Part 3. Those clauses are in Part 3. I’m having a look at clause 265—

I raise a point of order, Madam Chairperson. The clauses actually refer—I do take it from actually 17 bar 21, 33, 38—it goes right through to 172(3), as you’ve said, but also 265 and 266.

Yes, I agree. But we’re on Part 4, which is clauses 285 to 320—OK.

💬 Andrew Bayly: Yeah—there must be another one.

CHAIRPERSON (Hon Anne Tolley): Ha, ha! But it was a very entertaining speech.

Thank you, Madam Chair. Well, what was that? Look, I did ask for his colleague Simeon Brown to educate the member from Hunua about what part we were on. So thank you for wasting 4½ minutes on Part 3 when we’re actually on Part 4. But it is complex, so he’s forgiven. He’s forgiven because it’s a complex bill, and I’m thankful that I’m only concentrating on Part 4.

In fact, I will remind the member what Part 4 has in it.

💬 Andrew Bayly: Oh, looking forward to this clarification!

No, no, I will. I will. Don’t try and stop me. If we go to the bill’s list of contents, there’s actually 10 Acts, and let’s have a look at these closely: 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, the Income Tax Act 2004, the Taxation (Annual Rates for 2016-17, Closely Held Companies, and Remedial Matters) Act 2017, the Health and Safety at Work Act 2015, and the Compensation for Live Organ Donors Act 2016. Nothing about petroleum decommissioning—nothing, nothing, nothing, nothing, nothing.

So let’s go through Part 4 and have a closer look, and I want to just reiterate and support some of the comments that have been made by my colleagues when they talk about this being, really, a clean-up, a tidy-up. We heard that from the Minister, who talked about some of these Acts being in place for a long time, and for this particular part, there are many Acts which, after being in there for so long, could do with a bit of a clean-up. They’re small, but they make a big difference to Kiwis and everyday New Zealanders.

I want to just focus on the KiwiSaver Act of 2006, because when that was introduced nearly a decade ago, we were told that that was about retirement savings made easy. So let’s get some legislation and let’s change the bits, after a good decade of being in use, to make retirement savings easier for Kiwis and to make sure that the little things in there, the practical things—so, when you get an application form or you want to opt out or you want to give information across from employees to employers, you can do that easily. The legislation here and what’s been proposed will enable employers to do that. It also ensures that employees are treated with good customer care and are able to opt out, change things, and talk to the Inland Revenue Department about those changes, and it can be done really easily.

If we have a look at the Act too, we know—I want to just point out a few things. We know that the changes in many cases have been difficult, and I know that when we look through the parts of this particular part, it will make things far more simpler. I also want to point out in clauses 285 to 301 just some of those simple things, and it’s as simple as a word such as “notify”. When you’re having to notify someone, that act is far more different than what’s in the law at the moment. I also want to look at some of the other changes around—

💬 Matt Doocey: 40 seconds.

—40 seconds—section 97, where the commissioner must give notice if employer contributions are not remitted, and you’ll see a change there.

These are simple changes that reflect the current environment. I’m really supportive—as are my colleagues, as is this party—that we bring a suite of changes to these 10 Acts in this part that ensure that everyday lives are made much more easy under this Government.