Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Bill

We now come to the debate on Part 3: clauses 40 to 97 and Schedule 1.

Thank you, Mr Chair. Thank you for calling me back. I missed the opportunity in the last part to make a further contribution, so it’s nice to be able to be talking about this.

I think that this is a part of the bill that we really do have a problem with, because what this part does—one of the principal parts of this bill is about changing the arrangements around how losses on rental properties are treated for tax purposes and how they can be claimed. I think the context for this is that we’ve got a trillion dollars’ worth of housing stock in New Zealand, 40 percent of which is owned by mums and dads, ordinary New Zealanders, who choose, for differing reasons, not to put their money into the stock market because, for many, they do not understand it sufficiently. Some put their money into the bank, but for most people, putting their money into a house—and these are ordinary New Zealanders; these are not wealthy people. A lot of wealthy people don’t invest in residential property because it’s not actually a good investment, but for many people this is a legitimate way of investing their money.

Of course, in virtually all those cases, that 40 percent of the housing stock owned by ordinary New Zealanders, mums and dads, is actually available for rental purposes. Those people do a good service for New Zealand. In the main, most of these people are very diligent and look after their rental properties. It’s a major investment for them, apart from their own house. For them, to make sure that they protect their asset and maintain it in a way that retains its value as a consequence and also as part of that offering, they want to make sure that their tenants are well housed. I’m not saying for a moment that every rental property owned by mums and dads in Zealand is maintained up to absolute best practice, but in the main they are, and it would be wrong to vilify ordinary New Zealanders any other way—most of them are very conscientious towards the people that rent their property, their main investment asset.

So under the current New Zealand tax systems or settings, tax is applied against a person’s net income and deductions that relate to particular activities—

💬 Hon Ruth Dyson: This is really interesting.

Sorry?

💬 Kieran McAnulty: She’s being sarcastic—it’s not, really.

Thank you. I’m glad the two members on the other side are riveted by this, because in many cases not many people actually understand tax. With the tax system, under the current settings people can deduct losses against their personal income, and in many cases what we’re talking about is people where this is their only other source of income. They might have a KiwiSaver account, but, essentially, the rental income from their main investment is their only source of income.

Previously, what would happen is if you sold a property that you had an investment in, you could offset the losses of that against your personal income, and, of course, depending on your situation, you may have had to pay capital gains tax on that under that current setting, even before the changes were made, because if you were deemed to be a trader of any sort, then the tax requirement was that you would have to pay tax on the gain. So what this bill has done is actually limit the ability to offset those losses against your personal income, and you would have to ensure that that loss could only be used against future investments in rental properties.

Now, for people who continuously buy and sell rental properties, that’s a fair issue in terms of being able to offset those loans or those losses. But the reality is that in many cases people do not have that ability to offset against future profits because in many cases they invest in these houses for the long term. They might only have a few over their lifetime before they retire and then they sell, and what we’re now talking about is stranded losses that they cannot utilise until they continue to reinvest in the property market. That then is, perversely, a really strange thing.

As a result, my Supplementary Order Paper (SOP) 252 seeks to change a number of sections listed in clause 2(12)—sections 41, 46, right through to section 70—and to actually bring into place that these ring-fencing proposals should come into force not on 1 April 2019 but actually stretch for the year to 1 April 2020. The reason for that, first of all, is one of equity.

So normally what we don’t try to do with tax legislation is to retrospectively bring in a bill partway through a financial year and then claw back previous tax arrangements and say that “What you did back there in history is now captured by the new rules and you will now be commercially or financially disadvantaged.” This is what this bill does at the moment. It imposes a retrospective requirement that any tax losses are ring-fenced—basically, limited—to future investment in property by saying that from 1 April 2019, any transactions from that time forward are captured under this rule, and that is not right. That is not right. So we have taken a view, and this is what this SOP is about—it is saying “Look, give people time to understand what the requirements are, for all the arrangements to be put in place.”, because with any tax bill of this nature, normally there’s a whole lot of regulations, and for people listening in, that means that the Minister can go away and, basically, write a whole lot of regulations that support or underpin the bill. That all needs time to be completed.

That’s why we’re suggesting with this SOP in my name that the ring-fencing proposals should come into effect on 1 April 2020, and, of course, there are a lot of people who are very concerned about these provisions altogether. We heard very strong submissions from a whole range of submitters, including the property investors council, that act for a lot of private people who have investments of this nature right through to commercial operators. This is a very, very important thing because for many, this bill cuts to the core of their investment—their central investment that they’ve made, often as a couple—to support New Zealanders and provide these rental properties. That sense of inequity is just wrong, and I think it is poor practice and a poor precedent that we’re increasingly seeing in a number of these bills, where bills are coming in that apply retrospectively. There is no reason why this should be incorporated at this point in time. There is no overarching commercial reason why it should apply from 1 April 2019, rather than 1 April 2020.

The whole thing about this is that using the taxpayer ring-fencing deductions, taxpayers would be able to offset ring-fenced residential property deductions from one year against residential rental income in future years or against income from the sale of any residential land, and the bill proposes to allow the transfer of ring-fencing deductions between companies in the same wholly owned group, but these deductions would remain ring-fenced. So it actually deals not only with the personal situation but where you have the corporate structure or you have some entity that people legitimately put in place.

So it is a real curtailment of the rights of people who have gone about doing this—legitimate investments; something that is appropriate—and yet this bill has come in. I think that this whole issue is one that this Government has continued to slice away at and is increasingly making the rental market in New Zealand a place where New Zealanders do not want to invest.

I know the intention is to allow first-home buyers into the market, and we agree with that. We need to see more first-home buyers coming into the market, but that shouldn’t be at the expense of those who provide rental properties to ordinary New Zealanders, and often the most vulnerable New Zealanders. By driving them out of making investments of this type of nature, all we’re going to do is reduce the housing stock, and we’re increasingly seeing that now. All the anecdotal evidence is that a lot of people are selling their properties, and sometimes they’re being sold at a loss. They won’t be able to access that loss. They are making a real, substantial cut in their future earnings and investment that’s going to support them into the future.

I want to make three points in response to the member Andrew Bayly, and I thank him for his comments. The first is the underlying policy rationale that lies behind this ring-fencing of losses. [Interruption]

💬 Andrew Bayly: It’s very hard to hear.

CHAIRPERSON (Adrian Rurawhe): Order! Thank you.

Thank you, Mr Chair. The underlying policy rationale is that we want to direct more of the investment that there is in the housing market to new housing, rather than bidding up the price of existing houses. Secondly, we want to encourage investment in asset classes other than rental housing, in that we want more investment to be directed towards the productive economy rather than speculating in housing, which pushes up housing prices. We’re seeing some outcomes of that already in New Zealand. With the combination of this plus the extension to the brightline test plus some incentives to R & D tax credits, we are actually seeing, I think, a movement of investment towards the productive sector, and this is starting to flow through, I think, in exports, and particularly technology exports.

In respect of the issue as to retrospectivity, the main feature of the rules—and they would apply at the start of the 2019-20 income year—was announced and consulted on in an issues paper that was released in March 2018, which was 12 months before the start of the 2019-20 income year with those standard balance dates, and it’s not unusual for tax policy to take effect after the date of a consultation document but prior to the date of the passage of the legislation. In terms of the effect on people, the deadlines for filing income tax returns for the 2019-20 income year will be well after the enactment date. Taxpayers with an earlier or standard balance date will have until 7 July 2020 to file their tax return for the 2019-20 income year, and this is expected to be approximately 12 months after the bill is enacted.

Then, the third point I will make is a process point. Because all three Supplementary Order Papers (SOPs) from Andrew Bayly have significant fiscal implications and they were tabled with less than 24 hours’ notice, they’re out of order under Standing Order 330, and I suspect that the member Andrew Bayly knows that. The cost of these amendments that Andrew Bayly has—

💬 Andrew Bayly: How much?

Well, it’s a significant cost. But Andrew Bayly has provided no estimate at all, which is somewhat surprising, given that he wants the House to pass his amendments, and he hasn’t even put a finger in the air and said whether it’s $1 million, tens of millions, or hundreds of millions. I can advise the member that it’s more than tens of millions of dollars, but the reason that we have Standing Order 330 is to make sure that we don’t have reckless behaviour from members of Parliament tabling very expensive SOPs without even attempting to cost them.

Thank you, Madam Chair. There’s just a couple of points I want to make, particularly in relation to that contribution from the Hon David Parker, who’s now standing in for the Minister of Revenue.

The first point is that the ring-fencing of losses may well have an unintended consequence, and I’ll give him an example of that. On the news tonight, where Auckland house prices have come back something like 2 percent, the commentary on that particular article said that they’d come back for two reasons. One was the Government’s move to ban overseas buyers and, secondly, was the loss of confidence of mum and dad investors to provide rentals. Now, the Minister may say it’s a good thing that the prices are coming back in Auckland. The average price now is $900,000, and I remember at one stage, it touched over $1 million. But the point that the Minister may not realise yet is that ma and pa investors are no longer confident to buy and invest in rentals, and what that has is an immediate effect on rent costs.

What we’re seeing is that rent costs are increasing now by about $50 a week simply because there’s not the supply that there was. In other words, the demand for rental housing has now significantly increased in the supply of rental housing, and that’s what happens when people chase people out of a market. So this is a hit at landlords. They’re scared, and they’re pulling out of the market.

I remember a submission from Andrew King—who represents the property investors—at the select committee, and he said that the ability to match your losses on your rental property against your income is important for people as they get into the market. I think the Government believes that people deliberately buy into a rental property with the expectation that they’ll make losses for ever, and Andrew King pointed out that that’s just not rational thinking. People don’t go into a market to make losses for ever. They may take some time, having bought the property, establishing it, getting it into the market, and getting a stable tenancy involved before they make a profit, and the ability to write off those losses for the first three or four years is usually very important to them.

The other point I wanted to make is around the retrospectivity. This ring-fencing situation comes into effect on 1 April this year—2019—and, therefore, the legislation has a definite retrospective effect on ma and pa investors who have purchased with the intention of writing off losses.

The final point I want to make is on the way the Finance and Expenditure Committee, on occasions, works extremely diligently to tidy up legislation, and I’d refer any member who is interested to pick up a copy of the bill on the Table and look at the way clause 49, which covers one, two, three, four, five, six, seven, eight, nine, 10, 11, 12, and 13 pages of the bill, has been completely deleted. What we found at the select committee, by listening to the submissions, was the way this legislation had initially been written was simply too complex. So we worked with Parliamentary Counsel Office to see whether we could find a better way of writing these provisions. It goes to show the value of a constructive select committee process whereby we hear submissions, and Government and Opposition work constructively together to acknowledge the value of those submissions. In this particular case, substantial pages had to be written to get legislation, which inevitably is reasonably complex, but the way it was written initially was more complex than it needed to be. I’m pleased to have been part of a select committee that now has seen it written in a way that’s easier for taxpayers to understand. It’s easier for tax accountants to understand, as they advise their ma and pa investors in rental properties.

But I say to the Government that as rents continue to increase week after week, one of the reasons that is happening is because people who originally were quite happy to invest in a rental property, put it on the market, and provide it to those that want rents are now pulling out of it because they’re scared of the capricious, greedy nature of this Government. They were scared by the proposal around a capital gains tax. They’re scared now by this provision whereby they’ve no longer got the ability to mark off legitimate losses on that property against their income. That is why rents continue to increase.

Thank you, Madam Chair. I’d like to take a short call and cover two points. The second point will be a little more complex than the first, and that will relate to securitisation of New Zealand Units (NZUs).

But the first point I’d like to address is the ring-fencing. It seems an odd policy, given that one would expect a Labour Government to want to encourage investment in rental properties and rental accommodation, but this only discourages investment in rental properties. As David Carter just mentioned earlier, this is around cash flow. The ring-fencing disables the ability of a new investor to come into the market, to purchase a property, and to negatively gear it so that there is a negative cash flow or a loss on the investment property. You’re not going to see those new investors into the market, because they’re no longer able to offset that loss against their day job, their other income that they might earn elsewhere. Whether it’s personal income or trust income or company income, the property is going to be ring-fenced. So that’s just going to put another layer of cost on to the property investor, which will be reflected in the cost of the rent that the tenant must pay at the end of the day, because there’s no such thing as a free lunch. So it’s unfortunate, because they say they care about tenants, but when they put in policy like this, discouraging investment in exactly the sector that needs to be invested in, it’s disappointing, to say the least.

The second point—and I invite Deborah Russell to contribute to this point—

💬 Lawrence Yule: She’s an expert.

—because she’s an expert on tax, and I’m legitimate in my request for her to make comment. This involves the clause relating to the sale and compulsory buy-back of pre-1990 NZUs. So the carbon credits—we’re talking about carbon credits. When those units are sold, it’s the intention for them to be non-taxable, but any subsequent sale would be taxable to the vendor. This is a good amendment, from what I can see, because it allows the holders of those NZUs—just imagine them sitting in the bottom drawer and there’s value in them, but no value can be expressed from them because they’re, basically, dormant assets and if they were sold to a third party it would be taxable. So it sort of slows down the whole process.

This new amendment will allow the securitisation of those assets. They allow the owner to bring them out of the bottom drawer, if you like, to gather them together, and to securitise them, and to lend those units into the market place. Lending those units into the market place enables those owners to borrow money in return. So they’re going to be able to utilise those assets to borrow—what are they going to do? They’re going to give their units, they’re going to lend their units, and they’re going to borrow money on the back of it. So it enables them to get funding.

I think that’s a very good piece of legislation because under normal circumstances, prior to this amendment, that could have been seen to be a sale, when, in fact, all we’re doing is lending the units. The units are securitised and lent, and then they come back to the owner. So this is a good piece of legislation because it makes it very clear that that transaction is not a sale and purchase transaction for the purposes of tax. So that’s nice and tidy, isn’t it? Did I explain that nice and tidily?

💬 Matt Doocey: You did indeed.

I thought that was pretty clear—it’s clear as mud. So that’s why I was very pleased to see Deborah Russell in the Chamber, because she’ll be able to much more eloquently explain the tax implications because she is a tax expert, and we appreciate her genuine expertise in this area. So that’s a question as well—I think I’ve got that right. Dr Russell, if you could clarify that for me, I’d much appreciate that, and I’m sure the committee would benefit from your wisdom and your experience in this matter.

You won’t get quite the academic argument from me that you got from Alastair Scott, the last speaker. But, you know, it’s a funny thing in life that small things in life sometimes amuse small minds. In the course of this, I was interested in the title of the bill: Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Bill. When I was considering the ring-fencing of rental properties, I had a great deal of difficulty figuring out whether it entered into the annual rates—obviously, they’ll remit annual rates for rental, and as a result of the annual rates for the tax on this, there’s no doubt going to be a review of the annual rate of the rentals as well, as my colleague the Rt Hon David Carter pointed out—or whether it fitted into the remedial matters part of this bill, where I’m pretty sure that it will appear again next year as the Government realises the error of their ways and withdraws it, because I think that this piece of legislation, from my view, is flawed and it will cause distortions in the market.

It’s not designed to cause distortions in the market, but it will. The reason for that, in my view—and I think, again, it’s been touched on already tonight—is that there’s no question of if, for example, 40-odd percent of the rental properties are owned by what we might term family investors, or mum and dad—I don’t like that term much—investors, then they are going to be put off the market, but before they’re put off the market, they’re going to probably find a way of overcoming the shortfall in their income as a result of not being able to offset the tax, and they will put the rentals up. It’s a big enough block of the market to put the rental up, in my view. So they’ll put the rental up. The ironic thing is that the bigger property investors who follow along behind won’t be concerned about this piece of legislation because, effectively, they run self-contained businesses that can manage themselves, and they will then reap the benefit of those increased rentals. So it’s an anomaly, in my view. It’s an enigma, I suppose you’d call it—

💬 Andrew Bayly: Another one?

Another one, Mr Bayly—another one. They’re frequent tonight. It’s a word I’ve learnt, along with “rapacious” and “capricious”, which I don’t really know the meaning of, but it could apply to this as well. So I am learning quite a lot of things—

💬 Andrew Bayly: That means the Labour and New Zealand First Government.

Oh, is that what it means? Thank you—thank you for that bit of information.

I want to comment on a piece of information that Minister Parker gave us when he was in the chair—we’ve cleaned out a couple of Ministers already tonight; we’re up to our third. But he talked about diverting investment from the property market to other markets. This is an issue that I think is very interesting, because it’s a challenge for New Zealand. You see, we’re a small, comparatively well-off country, miles from the world market, with a very small alternative market ourselves. So our sharemarket is very small, and our secondary markets, on the whole, are extremely small, and if you go back to the global financial crisis and you look at the amount of money that New Zealanders—and, usually, I guess, the same type of investor we’re talking about here—had invested in the financial markets, and particularly in the finance companies, we saw the danger of this alternative investment. It chased people straight back to the property market because, frankly, they didn’t trust any other market. We saw it in 1987. I think someone commented the other day that not many of you were here in 1987, but we saw it in 1987 with the sharemarket, and we’ll see it again.

So because we’re such a small market in New Zealand, it’s very difficult for people to find suitable alternatives to invest their money in. That’s why, in my view, we see this unusual trait we have in New Zealand, where a very large percentage of our investors invest in the property market, because they can see it, they can touch it, and they know it’s there and they know it won’t go away unless they do something with it. That is the difference in this country.

The other thing that is intimidating for people in this country is that a large percentage of a balanced portfolio investment approach needs to be held offshore, just because, again, our market is so small in New Zealand and small changes can make a massive difference to people’s capacity to invest and the capacity to get a return on it. So that’s why we have this unusual property situation in New Zealand.

The criticism of this piece of legislation—or my criticism of it—is that it only attacks the people who use their income tax as an offset. In effect, they pay income tax, and they then have the ability to offset that against the piece of property that they buy. That is a massive bonus for people. It enables them to save money and get to their retirement, and they’ll often sell that. Fortunately, they don’t have a capital gains tax on that, because that would have got rid of the rest of the profit they’ve made out of it. So there’s some unusual circumstances in New Zealand which we need to consider differently, and I don’t support this piece of the bill. Thank you.

Thank you, Madam Chair. It’s nice to have the opportunity to talk on this part. It’s interesting. I was talking earlier about my Supplementary Order Paper (SOP) 252, which required the Government to look at delaying the start date for that dreadful provision around ring-fencing of tax losses on residential homes where private investors have made a loss, out to 1 April 2020, because I was arguing that, in fact, it shouldn’t apply from 1 April 2019 because that’s retrospective and poor legislation.

So it is with some interest that I now turn my mind to SOP 248 from the Minister of Revenue. I’ve got to say, I am outraged that we have been through a lengthy process in the Finance and Expenditure Committee—and I acknowledge all the members here tonight in the debating chamber. We have looked at this bill in detail. It has many, many components, some of which we agree with and a couple that we fundamentally disagree with. But, at the end of the day, all those provisions have been through a high level of scrutiny to make sure that what was proposed has been checked. There were a number of submissions that we listened to and, in fact, a number of changes to the bill that we are currently debating tonight.

So it’s with some disappointment that only a matter, I think, of three hours ago—and I may be generous at that—we saw this SOP slapped on the Table by the Minister. It’s already got two key parts about it, and I really want to deal with the substantive issue, which is amendments to the Land Transfer Act.

Just to put this in context, Madam Chair—and I know you’re an expert on this—the issue around when you sell a property, particularly if you’re an overseas purchaser or seller, is you have to provide a certain level of detail to the conveyancing office, and that would be through a lawyer or a property agent. That information is recorded, and quite rightly so, because that was part of making sure that if people from overseas were coming into New Zealand and buying lots of property, we wanted to understand who they were and what they were doing and what sorts of transactions they were doing. That was fine. But this piece of legislation extends that quite significantly. It now virtually requires all—and I’m going to ask a few questions on this—transactions to now have to go through the same rigor as if it’s an overseas transaction or sale of a property to an overseas person or by them, where all that information is recorded: IRD numbers and all that sort of stuff.

That is going to first of all impose a significant imposition on lawyers and conveyancing agents, and, of course, we didn’t have any access. Most would not even be aware of this because, given it came out late this afternoon, many of them would have gone home at the same time that the Minister was releasing this SOP. I think that’s wrong. I think that’s fundamentally wrong. That’s not good business and it’s not equitable, and it’s not something that any Government should be following.

This is part of this Labour - New Zealand First tightening of the screws on the property market. We’ve heard the Rt Hon David Carter talk about all the other changes that have been made that are slowly imposing on people who own property, and this is just going to be another reason why they don’t want to invest in these types of property.

But the first thing SOP 248 does is it says in the explanatory note that “Before a transfer of land can be registered, the seller and the purchaser must lodge a tax statement (except”—and this is the bit I don’t understand—“in some limited circumstances that are not affected by these amendments).” Now, I thought the intent was to do all of this. As I say, if I’m asking rather obvious questions, it is simply because not one person in this committee has had the opportunity to listen to any official, or even to listen to the Minister, explain this. All we’ve had is a press release from him.

Hopefully the Minister in the chair, Peeni Henare, might be able to enlighten us tonight. I know he has an interest in property, so he might be able to afford some time to stand up and take a call on this. So my first question is: what are the exemptions? What are the exemptions in this SOP? It says “some limited circumstances”, but what are they, and, in respect to those exemptions, why are they exempt? That would be the first question I’d have to ask.

The second thing is: what constitutes a tax statement? This is the wording used in the explanatory note of this SOP, and it goes on to say, “The department shares information with other countries for the purpose of preventing tax evasion. Requiring”—and, of course, we’re now talking domestic, residential New Zealanders buying and selling between New Zealanders; nothing to do with overseas people—“the provision of information relevant for … the transfer of a home [to] help ensure that data provided to treaty partners is easily able to be matched to the correct person.” But I am not sure what constitutes a tax statement, and I’ve been looking through this element of it, so what is it? Is it just literally the IRD number, the name, and, presumably, the address of the property? What other elements are in a tax statement that the lawyer, or the property or real estate agent will now have to capture?

Of course, I presume there’s going to be a certification by the purchaser and the vendor, and, again, that would probably be my third question: what is the certification process? My fourth question is: where and how do you file it within Land Information New Zealand (LINZ)? To date, all those foreign transactions I referred to before are all recorded by LINZ, which holds the database. That’s the one that proved that foreigners were buyers in only less than 3 percent of all sales of property in Auckland. So what are the requirements? How long do they have before they have to file that information? What happens if the information is incorrect? Where does the liability lie—does it lie with the property agent, or does the principal responsibility lie with the vendor and the purchaser? Again, this is all clarification we need.

Then it uses a term, Madam Chair—and I can see you showing a lot of interest in this. It uses the term “non-notifiable transfer”. I have to ask you, what does that mean in simple English?

CHAIRPERSON (Hon Anne Tolley): It’s him, not me.

A non-transferable—

💬 Hon Tracey Martin: A non-notifiable transfer.

—a non-notifiable transfer—very good, Tracey Martin. I’ll tell you what—this I find really fascinating—these double negatives are just not great English, in my view. I’m sure that the Hon Tracey Martin might be able to enlighten me, but, currently, a transfer is not a non-notifiable transfer in relation to a seller or purchaser who is an offshore person, regardless of whether it would otherwise qualify as a non-notifiable transfer.

💬 Hon Tracey Martin: Oh, that’s easy. That’s easy—come on. If they’re overseas, they don’t need to be notified. It’s simple.

I’ve got to say to you—look, I may be a little bit slow tonight, but I just find that very difficult. Maybe, Tracey Martin, you’d be the first one from the Government side to stand up on this bill and not seek to close it down, but, actually, tell me what that means. I want to hear from you what that means. I’ll just refer you to it: it’s on page five, and it’s the fourth paragraph. Maybe other members of the Finance and Expenditure Committee from the Government side might be able to enlighten us, because I find that gobbledygook, actually.

My next issue—I think that’s No. 5—and I’m looking at the officials and certainly looking at the Minister, hoping I’m going to get some contribution—

💬 Rt Hon David Carter: He ain’t looking at you.

Well, that’s a disappointment for him! Now, the next point, and this is item No. 6 on my wish-list—I’m conscious that I’ve got 28 seconds left. I’m getting worried that I’m going to run out of time. But here we are, the timing: the commencement date is 1 January—you guessed it—2020. Now, why didn’t you do that with the ring-fencing? Why do you have to be retrospective on the ring-fencing? Take it back to 2019. This is the right way to do it, so people have the ability to plan for it and know what’s going to happen.

I have only just become aware of this Supplementary Order Paper (SOP) 248 that has been tabled today by the Minister, and I’m going to tell the committee stage, today, that we’ll be back to correct this because it will not work. What proposed new section 79(5) does, I will guarantee, is an attempt a time to tidy up people who are finding a way of avoiding the brightline test, and they’re people who are selling a house and claiming it’s a residence.

I want people to think quite carefully about what this clause does, because I’ll give you an example for the Minister in the chair, Peeni Henare, where he will find he’s caught for tax in his own personal house under the brightline test as it’s worded here. Consider if he bought his own dwelling, his own home, a week before he became a Minister. He then works as a diligent, hard-working Minister, and spends probably three or four nights a week here in Wellington and perhaps one night a week somewhere else in New Zealand. Now, that’d be the typical diary for every hard-working Minister of the current Government. He then gets to the end of his tenure, when they lose the election in 2020, and he decides to sell that house. He has got to be able to say to IRD that he’s lived in that house 50 percent of the time. Now, if he’s a hard-working Minister, he will not be able to do that. He certainly will not be able to honestly do it—

💬 Hon Tracey Martin: His wife and children would have been there.

—and that’s why—the Hon Tracey Martin interjects—legislation like this requires the examination of a select committee. To table it today, I will guarantee it will not work as it’s been described. I’ve given a very clear example, a very practical example, where someone who has a personal dwelling that they use as a personal dwelling—it’s in his name in the example I’m giving, not in his wife’s name—will not be able to fulfil the requirements of this SOP: subclause (5) and the description of what is a “main home transfer”.

💬 Erica Stanford: There’s a lot of people in that position.

As Erica Stanford correctly says, there’s a lot of people in that position. That’s why tax legislation has to be done properly.

I will guarantee that this SOP 248 will not last the test of time and it won’t be long before we’re back correcting it. The Minister ought to stand to his feet and explain how it will work. He’s just got some advice from the officials, so there’ll be some interpretation that I’ve made incorrectly. That’s possible; I doubt it—I doubt it. But the Hon Peeni Henare, with the note that’s been given by his officials, can stand and satisfy me tonight before we vote on this SOP, because the way I read it, it will not work. That’s why I say to the Minister in charge of this SOP, the Hon Stuart Nash, to do it properly. As Minister of Revenue, put your SOPs before a select committee, let them be examined, and let them be teased out. That way we get workable tax legislation.

This is about trying to close a loophole that they’ve found with regards to the imposition of the brightline test. If it’s the way it’s described here and the way I’ve read it, it will not work, and before too much longer this Parliament will be back doing retrospective legislation to change an amendment that should have gone before a select committee, and that doesn’t need to be rushed if a Minister was on top of his portfolio.

Thank you, Madam Chair. I’ll just take a short contribution just to ask for some clarity for the committee from the Minister, if at all possible. I think the Rt Hon David Carter has raised a really interesting point. He’s provided a possible scenario of how the Opposition believes that there may be some unintended consequences of the Minister’s Supplementary Order Paper 248.

I just wonder if the Minister in the chair could perhaps highlight—I’m aware that, for example, in some areas that I do work in which is around citizenship, that there is the possibility to put in front of officials an explanation why an individual perhaps hasn’t met the number of days that they are required to meet due to work obligations, for example. So over a five-year period, there’s a certain number of days that a person needs to be in New Zealand to be able to be considered that they have met the criteria for citizenship, but if they show the Department of Internal Affairs that their work obligations require them to be outside of the country so that they are unable to meet those number of days, then it’s no problem at all, and, generally, that is proven through work records, testimonials from employers, and other things like that.

Obviously, in the scenario provided by the Rt Hon David Carter, I would imagine that there are diary entries that are being proactively released by those Ministers showing where they are around New Zealand on certain days. So I just wonder whether the Minister would be able to clarify that with circumstances such as those, the extreme concerns raised by the Rt Hon David Carter might be able to be addressed.

Thank you, Madam Chair. I just want to take a brief call because I said earlier this bill was an enigma. Well, I’ve now discovered an anomaly in it. It wasn’t the previous Minister’s comments on it but, ironically, I can answer the question probably that the Minister could have answered for the Rt Hon David Carter. If you look at Supplementary Order Paper (SOP) 193, it deals with the issues that are raised in SOP 248 because it allows the commissioner to fix the problems that are created in SOP 248. So, effectively, I think there’s a very unusual, by parliamentary standards, piece—

💬 Rt Hon David Carter: It’s quite clear and helpful.

—exactly—of legislation included in this where it enables the commissioner to make rulings on some legislation, or on bits of legislation that aren’t altogether clear.

It’s quite unusual because it’s, effectively, allowing the Commissioner of Inland Revenue to make very minor changes to legislation that are giving trouble at the time. Having said that, if the commissioner does make those changes, those changes then need to come back to the House for relitigation or legislation within three years. But it is kind of ironic that those issues raised by the Rt Hon David Carter in his contribution are also issues that are covered earlier in the bill, in that unusual situation where we are allowing the commissioner to make some changes or recommend temporary minor changes on how tax legislation applies.

It’s very unusual because I don’t think there’s any other case where this Parliament has ever enabled someone else to make rulings on the collection of cash, effectively. I think it is a pragmatic and sensible solution, oddly, because it does avoid the issue that we see a lot with tax legislation, where there are little bits tacked on, and I guess SOP 248 is one of those. We’ve had to tack bits on to tax legislation because of the vastly, very quickly changing environment we live in.

I want to comment on a couple of other things, one which is not really relevant to what is happening now but what may well happen, and that was the issue that Alastair Scott raised with respect to the carbon credits and the way they’re managed. It seems to me that this is a fraught area for us whatever happens, and I fully support the enabling of them to be used as security. But the problem with that is that if something goes wrong with that deal, then you’ve got a concertina effect, which impacts right the way through back to the landownership. Of course, that is a challenge that we’ve got in New Zealand with this legislation around the forestry—well, not legislation so much around the forestry stuff, but the legislation that has created the environment for forestry to be planted randomly all over the country.

I think the treatment of these carbon units has got to be very carefully managed by both the financial institutions and by those people that own them, because they will inevitably have some unforeseen circumstances. I think it is quite a dangerous situation for us, because you could get a rapidly escalating price for carbon, which then has a very different impact on the market place and on the original treatment of that land to the effect that you want to achieve. You could equally get a very quick drop in price of carbon units, which would have another adverse effect. We’re already seeing in this bill, interestingly, that in the life insurance sector, what was predicted to happen has not happened, and, consequently, some alterations to tax rates had to be made as a result of the lack of inflation in that area.

So these perverse outcomes happen all the time in this type of legislation, and I think it’s a difficult thing to deal with. Giving the commissioner the ability, I suppose, to propose amendments and to make small changes is a sensible one, and it’s sensible on the basis that those changes then come back to the House for ratification later on. But I think there are so many unknowns in this business—and it is a dangerous business—and you can easily see how we could pass legislation that could then be found wanting in six or eight months’ time; in fact, it often is.

I support the Rt Hon David Carter’s view on Supplementary Order Paper 248. It’s also dealing with a piece of legislation that’s probably fraught and, as inflation stops and house prices stop increasing, it will definitely be found to be wanting as well, because the reasons it was brought in are going to be very different when there’s no inflation in house prices. We’ve been in a market like that before. It’s not a nice place to be for house owners and not a nice place to be for financiers, and so you could easily see a time when house prices are static or dropping. Thank you, Madam Chair.

Thank you, Madam Chair. There was a flurry of activity from the Opposition with regard to the number of pieces of paper handed to me on the questions being asked, and all the papers say the same thing: we won’t lose the election in 2020. But I digress.

There are a couple of things I do want to touch on, and one of them is the contribution by Mr Scott around a P90 forest. As a former trustee of a P90 forest, the particular change proposed in the bill here is an important one. As a former trustee of a P90 forest, many of those forest trustees felt hamstrung by much of the carbon credits that were allotted to those particular forests, and the ability to securitise them and utilise them to grow and develop the forest is an important thing. So, with my experience as a former trustee of a P90 forest, I think that is an important move. One of the challenges, however, is that many of them, in the previous regime, reacted to a lack of movement in this space, and many had already sold plenty of those shares off, but we’ll deal with those issues as they come to hand. I think that as we look forward to the future of P90 forests and their management of carbon credits, we can look forward to a far more vibrant forestry sector, which is a significant plan of this Government.

There are a couple of questions that were asked, and there are some, I think, reasonable and sound answers here—one from Mr Bayly. The answer to one of his many questions is that buyers and sellers of main homes will be required to provide their IRD number and indicate that the transfer is of a main home. Now, these proposed requirements are relatively minor. For example, there is a box for providing the buyer and seller’s IRD number, and they currently don’t need to fill in this box if the transfer is of a main home. This simply now requires that the IRD number box be completed, and it helps with a heck of a lot of work around enforcing exactly what was the intention in the brightline test.

It’s easy to respond to many of the questions around the housing crisis and simply applying a brightline test, but to actually make sure that we collect the right data so that we can enforce it is an important step of that. So doing it properly is an important one. Supplementary Order Paper 248 doesn’t change the application of the brightline test; it only changes the information that is provided. This is an important step to make sure that we apply the law correctly, and this is evident by the change being made to the Land Transfer Act rather than to the Income Tax Act. I think that’s pretty sensible, to me.

Many of the proposals that are put forward in this particular bill are sensible. They are well in line with the work plan of the Government, and I look forward to the progression of this bill.

The question was put that the amendments set out on Supplementary Order Paper 248 in the name of the Hon Stuart Nash to Part 3 be agreed to.