Taxation (Income Tax Rate and Other Amendments) Bill

on behalf of the Minister of Revenue: I present a legislative statement on the Taxation (Income Tax Rate and Other Amendments) Bill.

Legislative statement published under the authority of the House.

I move, That the Taxation (Income Tax Rate and Other Amendments Bill) be read a first time.

This bill, which signalled to the New Zealand public before the election and which has been advanced as a Government priority and signalled through the Speech from the Throne, is an important piece of legislation to ensure that New Zealand has a tax system which supports our recovery from COVID-19 and which makes sure that all New Zealanders are paying their fair share as a part of supporting our public services and supporting the recovery in the wake of COVID-19.

The bill has a number of significant provisions. The first one is the introduction of a new top personal tax rate. The bill introduces a new personal top tax rate of 39 percent on incomes in excess of $180,000. This will apply from the tax year in 2021/22, and for most taxpayers that means that the new rate kicks in from 1 April 2021. There are a number of consequential changes to ensure that the new rate applies consistently across the personal income tax system, most of which will also apply from 1 April 2020.

This change in the bill is probably the one that will attract the most debate in the House and in public debate, and it’s one that this Government stands firmly behind. As we rebuild and recover from COVID-19, this is a Government that is absolutely determined that as a part of that recovery and rebuild, we will ensure that all New Zealanders have access to strong public services and that we manage the Government’s books responsibly to ensure that we manage debt and pay it down as quickly as we can.

I think all members in all parties—although they might vary in degrees around this—will understand that the Government response to the global pandemic of COVID-19, and the serious economic impacts, is one that has required the Government to draw down on debt to ensure that we have a strong economic response. Key policies which were critical to New Zealand making it through this extremely challenging year of COVID-19 include measures such as the COVID relief scheme; include measures such as the wage subsidy scheme, which by itself required around about $14 billion of investment. I think there would be few people around the Chamber who would not recognise that those investments have been extremely important in terms of supporting New Zealand through this difficult year and keeping many people in jobs and keeping them connected with their employers.

The reality of that situation means that we need to now have a fiscal plan which enables us to manage that expenditure, which enables us to manage the debt and move to a situation where we’re paying it down as soon as we can. There have been Governments in the past who in response to difficult economic times, and particularly external economic crises, have used the opportunity to reduce public services; this Government will not do that. The imposition of a new top marginal tax rate of 39c in the dollar above $180 million is one of the core pieces of this legislation which will support our objectives in that space. It has the capacity to raise several hundred million dollars of additional revenue per year, which will support both of those Government objectives, continuing the public services that we need and paying down debt in the longer run.

I just want to make sure that it’s very clear and on the record, because there has been some misunderstanding around this—that we are talking about a marginal tax rate here. So, to be extremely explicit, that means that the new marginal tax rate of 39c in the dollar applies to income that is earned above $180,000 per year. There have been people, including members in this Chamber, who in their comments have incorrectly given the impression that this creates a tax impost that applies from the first dollar that is earned. It is extremely important to understand that this measure applies to income earned above $180,000. The best estimates that we hold tell us that this will affect between 2 and 3 percent of people who pay income tax in New Zealand.

So this helps us to create a marginal tax system in which we’re asking those who earn a little bit more—the top 2 to 3 percent of income earners—to just contribute a little bit more to ensure the maintenance of those public services and the responsible management of our debt situation. It’s my view that after a year in which so many New Zealanders have given so much, so many New Zealanders have made sacrifices to help New Zealand get through, that it is not unreasonable for New Zealanders on the very highest incomes—including, I note, members in this Chamber—to make a small, additional contribution to ensure that we meet those objectives.

The bill introduces a number of other changes to the taxation system. The first relates to secondary tax codes. The bill introduces a new tax code, tax code SA, for secondary employment earnings for an employee whose total income subject to PAYE is more than $180,000—and that, in effect, is one of the measures which brings in the additional marginal tax rate. In terms of fringe benefit tax (FBT), to account for the introduction of a new top personal tax rate of 39 percent, the bill introduces a new top FBT rate of 63.93 percent applying to all-inclusive pay exceeding $129,680. There are further consequential changes consistent with the change of the top tax rate to resident withholding tax and to employer superannuation contribution tax.

One of the other important parts of this bill is ensuring that we have appropriate measures in respect of information gathering from trustees. Trustee income is subject to a 33 percent final tax rate, and the bill proposes increased disclosure on trusts to help ensure that trusts aren’t being used to avoid paying income tax at the rate of 39 percent. This is an issue which is usually explored when there are changes to income tax rates, to ensure that we don’t create incentives for people to misrepresent sources of their income. Currently, trusts are required to file a return of income if they have taxable income. The changes in the bill specify certain information disclosures required as part of the trust’s annual return of income. The amendments in the bill require trusts to provide information on distributions and settlements made in the income year, and financial information such as profit and loss statements and balance sheets. Those rules will apply for returns from the 2021/22 income year.

The bill does also include the ability for the commissioner to request the information from trusts for prior income years back to 2013/2014. This will allow for comparable information to be gathered where appropriate.

Non-active trusts, which are trusts that don’t have income or deductions, are not currently required to file, and this won’t change under the rules introduced by this piece of legislation. Charitable trusts incorporated under the Charitable Trusts Act and Māori land trusts constituted under Te Ture Whenua Maori Act 1993 are also not affected by these changes. Foreign trusts are already subject to a robust registration and disclosure regime and are also not covered by these rules.

The Commissioner of Inland Revenue has the power to request information from taxpayers when the information is required under Inland Revenue Acts or the information is required for any other function lawfully conferred on the commissioner. This bill contains a clarifying amendment to ensure that the commissioner can require information to be provided solely to assist with the development of tax policy. This is an important measure in the bill to help ensure the integrity of our tax system and to ensure that in the ongoing development of policy, we do understand how income is being reported and the ways in which people and entities may respond to changes that are made through the passage of this bill.

In conclusion, I do commend this bill to the House. It is a piece of legislation that was well signalled by the Government as part of the Labour Party manifesto heading into the election. It is part of our commitment to ensure that we continue to support the public services that New Zealanders rely upon as we rebuild and recover from COVID-19. It is part of our long-term plan to responsibly manage debt, and the way in which we are doing that is by asking those 2 to 3 percent of New Zealand income earners who earn the highest incomes in our country to make a small additional contribution to make sure that we have a tax system that is able to support those objectives. I look forward to the debate and I commend this bill to the House.

Thank you, Mr Speaker. I rise to talk on the Taxation (Income Tax Rate and Other Amendments) Bill. I’ll just pick up on the first point, which is by the speaker who’s just sat down, the Minister Michael Wood. If this intent to put in place this tax change has been signalled so well, why is it that the papers and the actual legislation have only literally been tabled probably less than 45 minutes ago? I think it is absolutely outrageous that a major tax bill has not been tabled so the Opposition can have a proper review of it. It is a significant piece of legislation. I just think, in terms of procedure and in terms of good governance, especially as this piece of legislation is going to be rammed through by this Government under urgency, which means that it’s literally probably going to be passed by tonight—

💬 Chris Bishop: Tomorrow.

💬 Hon Michael Woodhouse: Tomorrow morning.

Or maybe tomorrow morning, right? But we’re going to have no input from any tax advisers, no consultation with the tax community or the business community. This is a piece of legislation that has been worked out by the Government in secret and tabled at the last moment so people cannot see what’s in it. If I went out to the tax community right now and said, “What’s in here?”, they would not know.

Just to raise the issue, it is a complicated bill, as set out in the legislative statement from the Minister. This tax bill will not only involve a new piece of legislation with that, but will have the impact on PAYE rules, fringe benefit tax, resident withholding tax, employer’s superannuation contribution tax, residential land withholding tax, retirement scheme contribution tax, taxable Māori authority distribution non-declaration rate. It is a complicated bill. This is how you end up with tax bills that create the opportunity for people to work their way around it, because it hasn’t been properly thought out, it hasn’t had the proper consultation, and it hasn’t gone through a proper select committee. I think it’s outrageous—absolutely outrageous.

But let’s just talk about the general intent of this bill. This bill seeks to raise $550 million—half a billion dollars. So just to put it in context. As a Government we raise roughly about $85 billion a year from tax revenue. So this is $550 million—it’s less than 1 percent. So here we are, we’ve got this piece of legislation, and we’ve got debt that’s gone from $60 billion to just under $100 billion over the last seven months, and which is forecast to double again to $200 billion—eye-watering amounts of money. In fact, the annual cost of the current debt is about $3.5 billion, projected. That is the same cost it takes to run the New Zealand Police force.

So $3.5 billion just to pay the interest costs. And, by the way, because we’re not making any money in the country, we’re borrowing to pay the interest, which is really bad. But here we are, we’ve got a bill we’re ramming through that’s going to raise $550 million. It’s a pittance in terms of the New Zealand Government’s tax revenue. But the issue about this is you cannot tax your way out of a recession. New Zealand is essentially in a recession. You cannot tax your way out, and raising half a billion bucks is not going to do it by any means. The issue about what this Government should be talking about today and what we should be debating is how we’re going to grow the economy of New Zealand.

I think the worst thing about this—because it’s going to be rushed through—is we’re going to, basically, create an environment where there are going to be unwelcome behaviours. There is such a thing as legitimate tax avoidance, and there’s a thing about evasion of tax. So there is an issue about minimising tax legitimately and when you do things illegally. And this piece of legislation has got the potential to lead people down a route of trying to minimise their tax—and they have a legitimate right to do that.

So the first question—even the half-billion dollars that they’re quoting that they’re going to raise out of it—is we have no indication whether, in fact, that $500 million is going to be achieved. I suspect that is going to be something we will be focusing on over the next three years, because the expectation that people are going to pay this tax and pay that amount of money, I think, will be maybe seen to be a bit of an issue.

But I think the other thing about this bill is the only beneficiaries out of it are, basically, going to be tax lawyers and tax accountants. We’re going to spawn another regeneration of those types of people, because they love it. The one thing about the New Zealand tax system at the moment is we are the envy of the world because it’s a very simple system. We have one GST rate, we have four personal tax rates, and we have one simple company tax rate. And here we are, we’re going back—this is back to the future, by the way, because we used to have a higher tax rate and, of course, that’s all been reduced over time. And here we are, we’re going to now go back to the future and raise the top tax rate. I think, as I keep saying, the complications around this are very, very significant.

So just to talk a little bit on it, I think the first thing is: what’s going to happen before the bill comes into play? So there is going to be a significant push to make sure those people in the situation will try to leapfrog before this legislation comes into play. So you’re going to see things like early payment of bonuses to employees, and you’re going to see early payment of dividends. So already in the tax system, there will be people sitting there and trying to work out how to minimise the tax, and they are legitimate queries and actions they can do. So we’re going to see behaviours even before the bill comes into play.

Once it comes into play, I think the biggest issue is we have now ended up with quite a complicated structure. We’re going to have a top tax rate of 39 percent, we are going to have a trust rate of 33 percent, we’re going to have a company tax rate of 28 percent, and we’re going to have a top portfolio investment entity (PIE) rate of 28 percent. And what we’ve done—and we are now going to end up with the biggest gap between a top personal tax rate and those other entity tax rates. That is the biggest mismatch in terms of having a high tax rate versus a low tax rate since, I think, the early 2000s. That is why there was a lot of effort put into simplifying the tax system. And what we’ve done here with this bill is we’re going to make it incredibly more complicated.

So the issue with trusts, which is an important issue—we’re going to have a rate of 33 percent versus 39 percent. So that will drive certain behaviours. And this bill has got some most Draconian aspects to it—particularly new section 17GB, where the Commissioner of Inland Revenue may require information or production of documents for tax policy. But, more specifically in relation to trusts, around new section 59BA there is a lot more information which is a way of the Government trying to deal with the issue of why the system will be at risk. So the simple raison d’être—the reason for bringing in this tax—is already compromising the tax system.

The other aspect to it is the large differential between the corporate and the new top personal rate. Just to highlight this—yes, this is the figure I’ve got: the biggest differential we have was 9 percent in 2009, and differential since the year ended 31 March 2012 was 5 percent. So we’ve got this very large differential of 11 percent now. That is really significant in terms of good tax policy.

The other thing is around family holding companies—what happens to them. The last thing is the PIE rates: how people are going to use those entities. So all we’re going to do is we’ve got a Government going to have to spend the next two-three years pushing through new changes and updating this legislation through the Finance and Expenditure Committee where, hopefully, we will start to get some experts turning up and telling the Government why they’ve done this wrong and why they should have actually paused and done it properly, and we’re going to spend a whole host of time actually fixing up a bad piece of legislation.

This is an excellent piece of legislation—an excellent piece of legislation—that fulfils a key campaign promise made by the Labour Party, and as the party that was elected by over half of New Zealanders, we have a New Zealand that has endorsed this legislation and has accepted it, and we are implementing our campaign promise. So it is straightforward legislation that implements a campaign promise.

I wish to take issue with a number of things that the immediately previous speaker, Andrew Bayly, said about this bill. First up, the immediately previous speaker said that it was a complicated piece of legislation—a complicated piece of legislation. To the contrary, it is actually a very simple piece of legislation. What is does—very straightforwardly—is implement a 39 percent tax rate on income over $180,000, and in order to do that properly, it entails making sure that that particular rate change goes through all the relevant sections of the Act. It affects not just the income tax paid on, say, salaries and wages and business income and so on, but it also affects the rate paid on fringe benefit tax. So the fringe benefit tax changes in here—the rate changes in here—simply reflect the 39 percent rate. It is a simple change, which happens regularly when tax rate changes go through.

The same thing applies with respect to the employer superannuation contribution tax, the ESCT. The changes there simply reflect the 39 percent rate being applied across all the relevant types of tax within the Income Tax Act. And so on it goes, with residential land withholding tax, with retirement scheme contribution tax, with the taxable Māori authority distributions—any place where the rate is determined by the Income Tax Act, any place in the Income Tax Act where that occurs, any particular type of tax it applies to, that rate is simply applied right through those changes. So that’s what we see in this Act: that 39 percent rate being implemented right through the relevant tax types in order to reflect the change in the income tax rate. So it is not a complicated piece of legislation. It is a set of simple technical changes that are made every time a rate change is made. It is straightforward. It has been done many times before. It is not difficult to do at all. So it is a simple bill.

It is also a very, very important bill—a very important bill—because at its heart lies the concept of fairness and vertical equity in taxation; the idea that the way we do fairness in taxation, and this has been proven again and again in New Zealand, is we do it by using a progressive income tax scale. And a progressive income tax scale means that those who earn more pay a little bit more tax. In particular, in this case, what we are saying is that people who earn over $180,000 should pay just 6c more in the dollar for income over $180,000—just 6c more. So, if someone earns $190,000, they are simply paying 6c more in the dollar for those first $10,000—for that $10,000. It’s a change of $600. That’s it. And so on it goes, up through. If someone earns $200,000, they pay $1,200 more tax. So someone who earns $20,000 more than $180,000—which is a high income in the first place—simply pays $1,200 more tax. It is a small change. And the interesting thing about that $180,000 threshold is that only 2 percent of New Zealanders earn income above $180,000. Many members of this House do not earn that much. The salaries of backbench MPs fall below that threshold. That is how high the threshold is set. So it applies to only a very small percentage of New Zealanders.

In terms of fairness, it’s really worth considering income tax rates that have applied in the past. We remember, those of us who are old enough, and I appreciate that some people in this House are not, when, under the National Government led by Robert Muldoon, the top tax rate was 66c in the dollar—66c in the dollar under a National Government. I certainly remember that rate, Mr Speaker; I imagine you do too.

💬 SPEAKER: I never paid it.

It was an extraordinarily high rate.

💬 SPEAKER: I was an MP at the time.

So I think it is not an outrageous rate. It is simply a rate that expresses our ideals of a fair tax system being a progressive tax system.

I wish to address the issue that Mr Bayly raised about tax avoidance. First of all, he said that tax avoidance was acceptable, which is actually not the case. If we look at section BG 1 of the Income Tax Act, it says that a tax avoidance arrangement may be struck down by the Commissioner of Inland Revenue. A tax avoidance arrangement is an arrangement whereby someone sets out to exploit the tax laws in such a way that they pay less tax than they otherwise would have. It’s when people enter into complicated arrangements the purpose of which is avoiding taxation, and it is against the Income Tax Act.

Mr Bayly did raise the point that the last time there was a differential rate between the highest income tax rate and the trustee income tax rate, we did see some tax avoidance behaviour, and indeed that tax avoidance behaviour was caught and penalised by the courts. They did their job. The tax avoidance arrangement was famously ruled out. So our courts and our laws do have the tools to deal with tax avoidance. Of course, there are many very, very smart and able tax accountants and tax lawyers, and no doubt some of them will find some way through these rules; that’s what they do, and then we respond. It’s the way that the tax law grows and evolves. But, in order to manage this, we will be collecting more information to see if there is a need to make further changes, to see if there is a need to make a change to the trustee rate as well. So that’s part of what this bill does. It enables the revenue to collect some more information so that they have better information against which to assess whether or not they should advise us to change that trustee rate. So that information will be collected and used in order to develop better policy in this space.

I do just wish to point out one other thing here: that Mr Bayly was very concerned about the differential between the income tax rate and the company tax rate. That differential has existed for quite some time, and it is already well managed; the tools are there to do it. Of course, we can improve those over time, but there is not a screaming need to do that right at present.

I wish to draw attention to one other matter that is sitting in this bill, and that is an increase to the minimum family tax credit. Now, that is a tax credit that exists in order to ensure that people who are in work do end up just having slightly more income than people who are on benefit. So it’s set through a series of calibrations to make sure that people who are able to work do actually earn a little bit more than they otherwise might, given their family situation, if they were on benefit. It’s part of the structure of our benefit system. That minimum family tax credit does need to be adjusted most years, and this bill achieves that as well.

So this is excellent legislation. It achieves what we set out to do as a campaign promise, in a campaign when the Labour Party was elected by over half of New Zealanders. It is a simple piece of legislation that propagates that particular tax rate through the Income Tax Act, as needs to be done in order to keep the system fair. It is a piece of legislation that expresses our values as a country, where we have a progressive income tax scale. It enables us to collect a little more information so that we can understand better what is going on out in the world of tax specialists and tax advisers and people who do use trusts for various purposes. And it increases the level of the minimum family tax credit in order to keep that basic promise we make to ensure that people have at least livable incomes when they are in work. So, Mr Speaker, an excellent piece of legislation, and I commend it to the House.

The Government has indicated to me that it’s not their intention to proceed further with urgency at this time. The House stands adjourned until 2 p.m. today.

The House adjourned at 1.02 p.m. (Wednesday)