Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill

I move, That the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill be now read a first time. I nominate the Finance and Expenditure Committee to consider the bill.

In recent months, as New Zealand has confronted the threat of coronavirus, the tax system has played a huge role in minimising the economic fallout from the pandemic, and it will continue to play a big role in supporting the recovery of the economy. So a well-functioning tax system is a crucial asset as it will help position us well for economic recovery. This bill is about continuing to do sensible things to support business while maintaining the integrity of the tax system. I will now provide an overview of the proposals in the bill.

Feasibility expenditure: the Government’s objective is to grow the economy and encourage productive investment. Generally, the tax system provides support for business investment by making expenditure whose economic value is expected to decline in value either immediately deductible or deductible over a time as appropriate. Businesses tell us that the big bugbear for businesses looking to innovate and grow is the tax treatment of feasibility expenditure. This is expenditure that is undertaken to determine the practicability of a new proposal. If deductions are denied for this expenditure, it can deter a firm from investing in that proposal. The tax treatment should not be a deciding factor. That’s not what promotes growth.

The bill therefore proposes to provide greater deductibility of feasibility and other currently non-deductible expenditure to encourage business innovation and investment. We are proposing that taxpayers can deduct, spread over five years, expenditure incurred to investigate whether to invest in a new asset that is subsequently abandoned. The Government is mindful of the need to minimise complexity, especially for smaller businesses; so to keep things simple, taxpayers will be allowed an immediate deduction of feasibility expenditure if, in a year, that expenditure amounts to $10,000 or less in total. This is a change that is good for business and good for our economy. When the tax system does not allow a deduction for feasibility expenditure, an economic distortion is created, and that weakens the economy and the system.

Purchase price allocation: the second major proposal in this bill aims to prevent tax mismatches arising on the sale of a business or commercial property. The bill proposes amendments to the rules governing how parties to a sale allocate the total purchase price between the various assets for tax purposes. The objective of the amendments is to ensure that buyers and sellers make the same allocation. This will prevent an overall revenue loss when sellers and buyers adopt different price allocations that minimise their own tax liability. The sales in question are usually mixed supplies, which means they include assets with different tax treatments. For example, trading stock is taxable and immediately deductible, while plant and expenditure are taxable but depreciable. And land and goodwill are generally not taxable at all.

The law will require the buyer and seller in these mixed supplies to allocate the purchase price amongst the various assets to determine how much tax the seller will pay and what deductions the buyer will be able to claim. The issue here is how the prices allocated can make a big difference to these outcomes. Often the parties agree on an allocation which is based on market values, and this is to be encouraged. But sometimes parties adopt different allocations, which are either not based on market value or based on differing views of market value to minimise their own tax liabilities. These practices damage the tax base and are a longstanding issue, as they’re difficult for Inland Revenue to deal with under current provisions.

Therefore, the bill proposes that the buyer and seller be required to use the same purchase price allocation. We don’t want to be unduly onerous, but we do need to provide clarity and practical rules for businesses to follow so that both parties’ allocations are consistent. The amendments will apply to sale agreements entered into on or after 1 April 2021 and should prevent the revenue losses we’re currently seeing from improper allocations. This is a measure aimed at preserving the integrity of the tax system.

💬 Land: ensuring integrity also extends to the taxation of land. The bill proposes amendments in relation to investment property and speculators to improve the efficient use of land and ensure that current tax settings are fair, balanced, and support productive investment. Currently, there are exemptions from land sales tax rules for taxpayers who sell their home or business premises. These exemptions are not meant to apply to people with a regular pattern of buying and selling their home or business premises, but the current regular pattern restrictions are now too narrow, resulting in some habitual buyers and sellers structuring their way around these restrictions to escape their tax liabilities. The bill proposes extending the regular pattern restriction rules. To prevent any unintended overreach, the rules will also be amended so they only apply to land acquired with the purpose or intention of disposal. The proposals also clarify that the cost of purchasing and improving taxable land are deductible, even if it was not clear, when the costs were incurred, that the sale of the land would be taxable. The policy is that these costs should be deductible in full when taxable land is sold.

Mycoplasma bovis: the bill proposes tax relief for some dairy and beef cattle farmers that receive compensation for stock culled as part of the plan to eradicate Mycoplasma bovis. Dairy and beef cattle farmers with breeding stock valued under a cost scheme that have derived unexpected taxable income as a result of those stock being culled will be allowed to evenly spread that income forward over six years. This spread will neutralise the tax implications that would otherwise arise from the culling and replacement of that stock. This amendment supports a core principle of the Biosecurity Act 1993 that no person should be better or worse off because of the Crown’s use of its powers under that Act to eradicate an organism. The bill proposes the amendment will apply retrospectively from the 2017-18 income year, as the first culls began in 2017.

Annual rates for income tax: an important job for any tax bill that this House considers is to set the income tax rates each year. The annual rates of the income tax for the 2020-21 tax year are to be set at the same rates currently specified in the Income Tax Act 2007 for the 2019-20 tax year. That is, current rates remain unchanged.

New Zealanders’ Australian retirement savings: a current gap in trans-Tasman retirement savings portability settings means that New Zealanders’ Australian retirement savings sitting with the Australian Tax Office are unable to be transferred to KiwiSaver accounts. Given the ease of movement between Australia and New Zealand, this is an issue likely to affect many New Zealanders. Amendments in this bill would progress a 2019 commitment by our Prime Minister and the Australian Prime Minister to seeing New Zealanders access their lost Australian retirement savings. The amendments in the bill are a first step, then changes to Australian law will need to be made and diplomatic procedures completed before retirement savings can be transferred from the Australian Tax Office to KiwiSaver accounts.

Other matters: the bill also proposes granting overseas donee status to three New Zealand charities. Donors to these charities will be eligible for tax benefits on their donations and money. In addition, the bill proposes a range of smaller policy items, including applying GST to outward bound roaming services at the standard rate of 15 percent. This will be in keeping with the OECD’s VAT/GST guidelines. And the bill also contains a number of minor remedial, and maintenance items.

In summary, I consider the measures in this bill will help support New Zealand’s economic recovery while also improving the fairness of the tax system. I commend the bill to the House.

Thank you, Madam Speaker, and I’d like to congratulate the Minister of Revenue for a beautifully read-out speech. He obviously has taken a lot of time to study this bill and present a comprehensive analysis of what is in the bill. I also want to join him in just congratulating the IRD for its work during the COVID-19 lockdown and administering a number of the schemes. The IRD ended up being a key organisation in terms of delivering some of the benefits to New Zealanders and businesses across New Zealand during a very difficult time. So I just want to publicly acknowledge that.

As the Minister has pointed out, this is another in a series of tax bills that regularly go through Parliament, as we seek to continuously upgrade and improve New Zealand’s tax system. And as I’ve said on many occasions before, New Zealand’s tax system is the envy of the world. It’s simple, it’s clear, it’s easily administered, but that doesn’t necessarily mean we don’t continuously need to make changes, because smart people always look at different options, and, essentially, that’s what a large part of this bill is about.

I just want to be clear that whilst the tax rates remain unchanged, we will not be supporting this bill. The principal reason for that is that we do not support any proposition where taxes are increased, whether they be in the form of a direct tax, such as changing personal and company tax rates, or in the form of indirect taxes. We are concerned that this Government has already demonstrated a history of making a whole lot of indirect tax changes and increases, and probably the most pernicious of those is the Auckland fuel tax, but also ring-fencing of losses, Amazon tax, GST on overseas roaming, extended the brightline tax, increased WorkSafe levies, and cancelled tax relief. So that is one of the reasons we are opposing this bill.

But the second reason is that one of the worst impacts on the amount of tax that people pay in New Zealand is actually the impact of inflation. The National Party has put forward a very good policy, in my personal view—but I know many New Zealand businesses and people support it—whereby we wish to put in place a scheme that effectively deals with the issue of inflation. So as people’s wages and salaries increase naturally as a result of inflation, then they inevitably end up going into a higher tax bracket, and our $660 million scheme that we’ve announced earlier this year is one way of dealing with it. Without addressing the issue of inflation, effectively, New Zealanders end up paying more tax. That’s why we believe it is important, and it should have been incorporated in a tax bill such as this, to see that New Zealanders pay their fair share and no more. That is the principal reason why we won’t be supporting that.

But the other thing is it gives rise to the whole issue about where we’re going with taxes. Yesterday, we had the advantage of having the Minister of Finance before the Finance and Expenditure Committee, and we were talking about tax. Most people will be aware that the debt has probably already gone from about $60 billion to about $110 billion over the last few months, a staggering increase in debt, and the amount of interest that will attract was an interesting figure. When I asked the Minister actually how much interest was going to be on that debt, he wasn’t that certain. But I’m going to be more certain because I know the figure. It’s projected to be $3.5 billion. So to put that in context, we’ve just had a firearms debate and the cost to run the police is about $3.5 billion. That will be the equivalent cost that we’re going to be increasingly bearing in this country. And as the debt increases to $200 billion, it will double; it will be nearly $7.5 billion—a massive amount.

That gives rise to the issue of how New Zealand is going to pay for it. How are we going to pay for this staggering increase of debt? We’re going to be running deficits at a Crown level, a Government level, for the next four years, totalling just over $100 billion. It is unbelievable. And the big question is: how does the Government pay that money back? That is why we’re very concerned about making sure New Zealand is in a position where it can pay that and not necessarily revert to higher taxes and certainly not to a capital gains tax.

Anyway, with that background, I do acknowledge that this bill includes a whole raft of areas that I think will lead to some improvement, and, of course, that is for the Finance and Expenditure Committee to work its way through. The Minister covered those pretty comprehensively.

I’m just slightly conscious of the time, as we’re coming up to 6 o’clock, but I think the issue around feasibility and other expenditure is a crucial one. Again, this came as a result of a court case between Trustpower and the Commissioner of IRD. The key example for this was many entities, and power companies are a classic example of this, where they undertake a lot of work—they look at maybe they’re going to set up a wind farm, whatever it might be—incur a lot of expenditure, and they need to be able to offset that expenditure because that was reasonably incurred in the ordinary course of their business. And at the moment, we want to make some of that expenditure much more—well, more available to be written off by those entities provided it is bona fide expenditure.

Debate interrupted.

The House adjourned at 6 p.m.