Taxation (Income Tax Rate and Other Amendments) Bill

Members, we come now to the debate on Part 2, clauses 32 to 38, Other amendments.

Thank you, Mr Chair. I’m looking forward to getting into the debate on Part 2 and examining the motives for some quite extraordinary changes to the Tax Administration Act, which we touched on at first and second readings.

We have an extraordinary situation where a tax bill has been slammed by the Attorney-General, a particular clause on the powers of the Commissioner of Inland Revenue to just go and get whatever information she deems relevant for the purposes of developing policy, as if the Inland Revenue Department didn’t have enough policy staff. They’re great people, but it’s not as if there’s a shortage of them. So now the Minister of Revenue is giving the commissioner the power to go in and compel any relevant information for the purposes of developing a policy, and the Attorney-General, quite rightly, slams this by saying in his conclusion that it is a breach of the right to freedom of an expression and, most concerning, even for a tax bill, the breach of a right against unreasonable search and seizure that are affirmed by the New Zealand Bill of Rights Act. The Minister of Revenue was clearly quite rebuked by the Attorney-General and decided, before the bill had even hit the table, to prepare a Supplementary Order Paper, which says, in essence, that the commissioner must not use, as evidence in proceedings against a person, information provided by the person in response to a notice that’s been issued under that section.

But that protection doesn’t apply to any information subsequently obtained by the commissioner under another section of the Act. I’d like the Minister to just clarify whether I have got this right. Subsection (2) of the amendment to clause 33 is saying there’s an immunity against proceedings unless the Inland Revenue subsequently obtains information under another part of the Act, and I described what that meant in my second reading speech. I’m genuinely interested in the Minister’s view, or the Attorney-General’s view, for that matter, about whether or not that addresses the issues raised by the Attorney-General, whether or not this is a blanket prohibition on proceedings of the information gathered by the commissioner under the new power, or whether it is technically legally possible for the commissioner to then go and get subsequently obtained information under another part of the Act and then commence proceedings. I wonder if the Minister could first address that point, please.

I will do so, but it will take me a little while to put this in context. Members may have read recent press articles about an ongoing dispute between Owen Glenn and Eric Watson. The financial affairs of Eric Watson are so complex—crossing international jurisdiction lines with many different investment vehicles—that it has taken Owen Glenn $100 million of expenditure to get to the bottom of it. I think that illustrates how complex the tax affairs are of some wealthy taxpayer groups.

The problem that is encountered by the Commissioner of Inland Revenue is that although the commissioner believes that she already has the power to gather information for policy purposes, sometimes tax intermediaries deny it, and I’m going to explain why. Section 17B(1)(b) of the Tax Administration Act 1994 provides that “A person must, when notified by the Commissioner in an information demand, provide any information that the Commissioner considers necessary or relevant for any purpose relating to—(b) the administration or enforcement of any matter arising from or connected with a function lawfully conferred on the Commissioner.”

Now, the New Zealand commissioner has a policy role. So the commissioner believes that already she has the right to collect information for policy purposes, not just for enforcement purposes. There are tax professionals who act as intermediaries for wealthy individuals who say that that is not a correct interpretation of that section and that the proper interpretation of that section is that the information has to be for administration or enforcement, which gives it an enforcement frame rather than a policy frame.

So rather than have that battle, which we could take up through the courts, but it would take years, we’ve chosen to clarify, as is clear in jurisdictions like the United Kingdom, that information that the commissioner needs for policy purposes can be collected by the commissioner. That’s why clause 33 of the bill is present now, because the commissioner and the collection of information by the commissioner under section 17B(1)(b) already carries with it the ability to use that information, in her view, for enforcement processes. So when the provision was drafted to make this clear in clause 33, nothing untoward was thought of the fact that criminal processes could follow from information-gathering, because, from the point of view of the commissioner, that’s already the case.

Having drafted the clause in that way, the mechanisms of Government had a look at it. I concluded as Attorney-General that that’s going too far in respect of information gathered for information purposes. That’s why I, with my Attorney-General hat on, put the Bill of Rights report on the floor of the House. That’s why the amendment, which is the tabled amendment in my name to clause 33, provides that the commissioner cannot use information collected under the proposed new section as evidence in court against the person who provided it.

However, that restriction does not apply, and should not apply, to information obtained by the commissioner under any other provision in the Tax Administration Act 1994, such as her main information-gathering power in section 17B.

It’s recognised that the proposed new section 17GB is primarily focused on obtaining information on tax policy purposes while ensuring that the Government’s other information-gathering powers are maintained and not diminished.

Well, thank you, Mr Chair, and I thank the Minister in the chair, David Parker, for engaging and recognising the sensitivity of the issue, particularly given the dual roles that he plays as, I guess, poacher, in the form of the Minister of Revenue, and gamekeeper as the Attorney-General, responsible for the section 7 report.

It does raise a question about whether or not it is necessary to make this change with urgency. I mean, we can have a debate about whether the Part 1 provisions raising the income tax rate really necessitated urgency when the only reason that the Leader of the House has given is “Well, we made a political promise and we’d like to do it quickly.” Now, I made the argument that that’s not a legitimate reason for the use of urgency in this Parliament. But quite separate from that is the question of what justifies the urgency behind section 33. I haven’t heard anything from anybody on the other side of the House of why it is necessary to urgently expand the powers of the commissioner to request information from people. What I’ve heard from the Minister just now is “Well, we have to do it because the commissioner thinks she can do it, so we should let her.” Well, I don’t think that it’s doing our duty as parliamentarians to make laws for the convenience of the Crown. Actually, a Parliament is supposed to be restraint on the Crown, on behalf of the people, standing up for their rights, such as the rights that the representatives in this House have put down in the New Zealand Bill of Rights Act and that have been embedded into our constitutional framework over the past 30 years.

When a piece of legislation rubs up against the Bill of Rights, when it challenges important precepts on which this whole country and society and culture is built—freedom of expression; the right to be secure from search and seizure—these are important rights, and I guess the question is: why does the Minister feel it’s necessary to do this part of the legislation under urgency? He’s already had to amend it on the fly with what appears to be a fairly hastily drafted and formatted amendment that he’s got on the Table. People might ask the question: if only we had, you know, more than 24 hours to pass this legislation, what other considerations might come up? What might be discovered if, for example, this legislation went before a select committee for six months and experts in tax law were allowed to submit on it, if experts in privacy and human rights—I mean, dare I say it, maybe the Human Rights Commission could make a helpful submission; unlikely, but I think it’s worth giving them the chance. You know, we should actually allow people—

💬 Greg O’Connor: Oh, the irony.

—to submit. Well, you know, this is such an important cause, Greg O’Connor, that I’m prepared to consider the possibility that the Human Rights Commission might do something useful in this context. Based on their track record, it seems unlikely, but that’s how seriously we’re taking this.

I think it would be proper for the Minister to not only have an amendment that, you know, is welcome and restricts the use of information gathered under section 33, so that it can’t be taken for policy reasons and used for prosecution, but actually say, “Look, this is a step too far. Yep, we’ve got to raise the top tax rate for political reasons, but we’re not going to mess with really critical stuff that rubs up against the Bill of Rights under urgency.” There is at least one tax bill every year. As a long-suffering member of the Finance and Expenditure Committee, I can tell you they are robust, they are debated, and they attract high-quality submissions. The next tax bill that goes through the Finance and Expenditure Committee would be the place to consider expanding the powers with which the commissioner of the IRD can request information. That would be the right way to do it. But if the Minister can get up on his hind legs and tell us why it is necessary to urgently expand the powers of the IRD commissioner, then I think the committee will be all ears. If he doesn’t have a good reason, can I just suggest to him that maybe he should put up another amendment to strike out that particular part of the legislation.

Thank you, Mr Chair. Just on the matter of the Privacy Commissioner’s involvement in the collection of information for tax purposes, the departmental disclosure statement does reference that. So for Mr Seymour’s benefit, I’ll just quote: “Due to the insufficient information available on the specific use cases associated with the proposal to collect information for tax [privacy] purposes, the Privacy Commissioner is unable to assess the associated privacy risks.” So not only do we have the Attorney-General saying that this is an invasion on the right to protection from unwarranted search and seizure, and a breach of freedom of expression, the Privacy Commissioner is saying that we’re not even sure if the privacy issues that he is responsible for maintaining will be complied with. Certainly, the vast majority of the Minister’s answer and the contextualising of the reasons for this clause were certainly spoken to as the Minister of Revenue, not the Attorney-General—and I’m not sure that the Attorney-General would have been entirely satisfied with that explanation.

Now, I’m not over the details of the Owen Glenn and Eric Watson spat—and there has been a considerable amount spent in that dispute—but Inland Revenue, it seems to me, is on the sidelines of that dispute and now seeks to inject itself with what can only be described as a “stalking-horse clause.” We’re going to gather the information for policy purposes, but according to the new amended subsection (3), actually if we gather information subsequently obtained by the commissioner under another section of the Act, then that’s going to be OK for potentially investigation prosecutorial purposes.

Now, I don’t want to misunderstand what the Minister said in his answer, because the primary purpose of that intervention was the context, which was helpful, albeit just as concerning, I interpreted the answer as saying, “Yes, it is technically possible for the commissioner having identified evidence potentially for proceedings but prevented from being able to do it by subsection (2) can nevertheless regather that information, subsequently obtain it under another section of the Act, and use that for potential prosecution.” So I don’t want to misunderstand it. If I’ve got that wrong, if the Minister could explain why I got that wrong, that would be helpful; otherwise that’s the way I’m going to interpret the amended clause 33.

The other information that I would like is, actually, who asked for what, and I would like an explanation from the Minister about the broader context from a policy perspective and the conversations that have gone on between the Inland Revenue Department policy team and the Minister of Revenue since he took on the warrant. Did the Minister of Revenue receive submissions from the Inland Revenue Department saying, “We think there is a need to clarify the law around trusts and the gathering of information.”, or did he go to the Inland Revenue Department and say, “I think we’ve got a problem, I want to give the commissioner a new power.”? I’d like to know the answer to the question of that in the committee of the whole House, but, rest assured, whatever the Minister says, we will be seeking that information under the Official Information Act so that we can best understand the genesis of the need for this, because we’re hearing that “Oh well, this is just a tidy-up.” In fact, in the Minister’s own submission it says it’s a clarifying amendment to clarify that the commissioner’s information-gathering powers include being able to require persons to provide information solely for the purpose of tax policy and development. That suggests to me that they’re already getting that information and they want to use it for a different purpose. That’s not what the Minister just described in the Glenn v Watson issue. That’s like “Well, we’re on the sidelines of a spat, we want to inject ourselves into that; we may not use it for prosecutorial purposes but we’re going to take it and have a good look at it, see if it highlights a loophole in existing tax law, and then close that loophole. But if it also provides evidence or prima facie evidence of breaches of the Income Tax Act, we’re going to go and gather it under a different section of the Act and take proceedings against it.”

That’s my interpretation of this clause. If I’ve got any of that wrong, I’d appreciate the Minister just explaining how I’ve got that wrong. But definitely I’d like to know what the genesis of the discussion between him and the IRD was about why this was necessary.

In respect to the question as to whether these provisions in respect of trusts, which was the member’s question, were raised as a matter of concern by the revenue department or by me, the revenue department, as is very clear from the information that’s already been released, have been concerned about avoidance risks in respect of trusts, which is the genesis of the trust provisions.

The comments that the member made in respect of Eric Watson, I’m not aware of whether Eric Watson is under investigation by the revenue department; I would not ask—and even if I asked, I would not be told. So the assertion that the revenue department is inserting themselves into that dispute is mere speculation, and I know nothing about that. The point I was making is that the complex affairs of wealthy people who want to avoid responsibilities for things can be very, very convoluted.

I would also make the point that I think the Opposition has to be very, very careful here that they don’t position themselves as being on the side of tax avoidance. [Interruption] Well, those were the arguments that I heard from them last night on the trust issues, which I thought erred on the wrong side of that argument. In respect—

💬 David Seymour: What’s the difference between privacy and tax avoidance?

“What’s the difference between privacy and tax avoidance?”, the member for Epsom says; there is a difference.

💬 David Seymour: Well, tell us.

What’s that?

💬 David Seymour: Tell us.

There’s a difference. If the member—

💬 David Seymour: Describe the difference.

Well, if the member doesn’t know the difference between right and wrong, I’m not sure I can teach him.

In respect of another point, I would say to David Seymour—David Seymour was saying last night that in his view we should have a broad based - low rate income tax system. Avoidance by people who don’t pay a broad, low rate threatens that principle.

💬 David Seymour: Yeah, that’s right.

Thank you for agreeing with that.

E te Māngai, tēnā koe. Tēnā koutou e te Whare. I didn’t intend to actually take a call during this part of the debate, but the reason that I have is because of the type of debate that we’re presently having around taxation and around tax loopholes, and particularly with regard to trusts. So I have a direct question for the Minister here, and here I think it is really important to refer to what we are talking about in Part 2, which is what has, effectively, as alluded to by the National Party Opposition, been a part of this legislation that’s been flagged by the Minister with a different hat on as potentially in breach of the New Zealand Bill of Rights Act. Notably, the Privacy Commissioner has said that he’s not all too concerned about it because it is manageable, but none the less.

So here we have, in Part 2, effectively, a piece of the puzzle which enables greater transparency of trusts in Aotearoa New Zealand. That’s something that the Green Party welcomes. It’s something that is long overdue. The reason for that, as I alluded to just last night, is that the kind of situation that we ended up with in 2000, when then Minister of Finance Sir Michael Cullen brought in higher income tax rates without amending anything around capital gains or wealth tax or otherwise, is that eventually wealthy people—as, actually, interestingly, was just alluded to by the Minister in the chair—through convoluted means, were shifting their wealth into trusts and then purchasing property, which in turn resulted in a 17 percent inflation in the price of property in this country, which, I may add, is the major driver of inequality.

So I just want to ask, when the Minister has advice—which all of us now have access to, because it’s been tabled—for a preference for option five, as noted in this advice from officials—and I’ll quote it for those who don’t have the privilege of access immediately to this: “Option five is for the 39 percent personal rate to be implemented alongside a corresponding increase in the trustee income tax rate, the trustee rate, and with consideration of integrity measures. This is the Inland Revenue’s preferred option.” Why did the Minister take the track of attempting to make trusts all the more transparent—noting, as well, that he’s recently been in the media saying that this is potentially an avenue for tax avoidance and that he may potentially look at, further down the track, implementing that 39 percent rate on trusts themselves. If he already had this advice, why did he not pursue that to begin with?

Finally, I think it’s also really important to note that with the way that this is currently formulated, again—again—it must be emphasised that the bill is not going to achieve the Government’s own intended objectives: that of raising revenue. Here I would speak again to the point around trusts, where it has stated in this document from officials that the options which reduce the scope for behaviour—that is, of tax avoidance—will increase the benefits—the proposal as shown in table two. Raising the trustee rate at the same time as the top personal tax rate is expected to raise $3.7 billion in total over the forecast period. That’s $3.7 billion over the next five years, as opposed to the $2.2 billion. We’ve also been speaking about tax avoidance and we’re also here speaking about how trusts can be used as a part of that picture.

So I’m just really imploring the Minister to answer why he didn’t go for the simplest option, for what was already being recommended by officials. Was it simply a matter of what was the easiest thing to progress politically? Because, ultimately, there is a massive opportunity here, as outlined in his own documents, as recommended by officials, which would simplify the tax system, and it would not be necessary to actually engage in these transparency measures, although they are welcomed.

I’ll just conclude by referring to the Law Commission’s review and report of trusts. Here I quote: “One reason for the popularity of trusts is that there is favourable tax treatment of trusts in New Zealand compared with other jurisdictions … New Zealand now does not have any estate duty, gift duty, stamp duty or capital gains tax.” This is why we have these problems, and I look forward to hearing the responses and the answers from the Minister, who I know is a big fan of Thomas Piketty and understands why we have the massive wealth disparity that we do in this country today, which will not be resolved by this legislation.

One of the main reasons why we have chosen to gather more information about what is happening with trusts rather than jumping to the conclusion that we should increase the trust rate to 39c in the dollar was that that was the promise that we made to the electorate during the election. We knew that if we were to not follow through in what we promised to the electorate, we would be criticised for doing so, and that some people would have felt that we had not honoured our promises to the electorate. We like to honour our promises to the electorate, so that’s the main reason.

There is another reason. At the moment, there are legitimate reasons for trusts. A thing that I think most members understand and feel sorry for the circumstance of is where you have a disadvantaged child, often through physical or intellectual disability. Trusts are used to protect the future interests of those children by putting aside money for them in the future when they need it, perhaps when their parents have passed on. At the moment, where that income, for reasons of the child not being entitled to that money until a later date, cannot be treated as beneficiary income, that child, despite their terrible circumstance, is already, effectively, in respect of the earnings to that trust, paying 33c in the dollar. If we were to have moved on that to move the trust rate to 39c in the dollar, we would have been making that problem worse.

So these things are complex. Those are some of the reasons why we’ve reached that.

I just want to pick up on that last point, because he raised that same example last night, so it gives rise to what is a legitimate trust. I’m glad he’s acknowledged that trusts are a legal structure and there are a lot of them and for legitimate purposes. So can I just put some scenarios to the Minister.

What happens if I’m Mr O’Flaherty and I own a farm on the West Coast, I’ve got family involved in it and I’ve got children involved in it, and I am not working at that farm, I have another job elsewhere and I put the farm in a trust because I don’t know which of the children I want to give that farm to, because I don’t know which one will be interested because they’re too young. Is that a type of trust structure that the Minister would be concerned about? That’s the first example—the farm.

The second example is that I’m a young man. I’ve done an engineering degree, and I’m very smart. I’ve worked in Government and overseas in a couple of places. I’ve come back and I’m freshly married, and I say to my new wife—we’ve just bought a house and we’ve got a mortgage—“Hey, guess what, honey, I’d like to set up a brand new business.”, and the wife says, “Well, actually, I don’t want you borrowing any money against the house. Therefore I’d like you to put it into a trust—the house—and you can go and borrow money from the bank separately for the business, because you’ve never worked in the private sector before.” So is that a legitimate purpose for a trust, Minister?

The third example is that I owned a house and my marriage broke up. Let’s say the house is in Dunedin. I’ve now got a new girlfriend in a different place and I want to protect my house structure because I don’t know whether I’m going to marry this person—I don’t know what the situation is. I’ve got a daughter who is living in the house, I’ve got a tenant, and I’ve decided to put it into a trust. Is that a legitimate purpose for a trust and is that something that the Minister is worried about?

So those are three examples. Each of those examples of trusts and how they are used—does he believe that they are an inappropriate use of those trusts?

Without going into the detail of those, broadly no, they’re not. In respect of the last two examples, they would be excluded from the obligation to even have an annual return for a trust. New section 59BA(3)(a), inserted by clause 35, says that a trustee is excluded from the requirement to make a return if it’s a non-active trust. The trusts that he described which weren’t being used for tax avoidance purpose were being used for different purposes which I accept are proper.

In respect of the relationship property issues that the member referred to, the third issue, that’s not really within the ambit of this; that’s with property relationship legislation rather than tax legislation.

First, Mr Chair, congratulations on your appointment as Deputy Speaker. I think your work in the last Parliament gives us all great confidence in the job that you’re about to do for this Parliament. So congratulations, sir, for that.

Look, the discussion that’s currently being had is sort of interesting insomuch as there are valid points being made by Opposition speakers and there are valid points in return being offered by the Minister. It does, I think, simply indicate that the Minister’s statement that this is a complex area of tax law is correct. But what sits over the top of us is the Minister’s position that the trust rate may, in fact, be lifted at some future time—not too far off, we would assume—to capture all of the benefit of the 39c tax rate.

So we know that if there is full compliance with the 39c rate, the income over the four years to the Government will be something like $2.2 billion. We know also that if you add in the 39c tax that would come off trusts as currently assessed by the IRD, you would add another considerable amount, taking it to around about $3.7 billion a year. So the question that sits out there is: what would be the threshold for the Minister considering that there is a need to have a look at that trust rate?

At the moment, there is an acceptance that that gap between $2.2 billion and $3.7 billion—so about $1.5 billion—is kind of accepted, it would seem. But if that $2.2 billion was to perhaps come in at $1 billion or $1.5 billion, what would be the threshold trigger that would make the Minister say, “OK, we’re going to have to have a look at this. We’re going to have to go for the doctor here. We’re going to have to increase the trust rate to make this truly effective.”?

Of course, I use that term “truly effective” somewhat euphemistically because we know that the value of this, even on a good day, is somewhere between 2 and 3 percent of the total debt loading that the Government is taking on as a result of COVID-19. So no answer to that problem, or that challenge you would say, in this bill, but our real question that I would like the Minister to perhaps give an indication of is where is the trigger point: if the $2.2 billion’s not coming in and you’ve given away the $3.7 billion, what’s the trigger point to go to that full 39 percent?

No decision has been made by Cabinet in respect of that, nor asked for of Cabinet, and no advice has been provided to me by the Inland Revenue Department as to what that threshold might be.

Whilst I’m on my feet, if I may respond to an earlier issue that Michael Woodhouse raised. The Revenue officials passed me a note in respect of why, in their view, subsection (3) of section 17GB, which is referred to in the tabled amendment, is necessary, and I read out their note: “The Commissioner and her legal advisers considered that subsection (3) in the tabled amendment is critical to the existing administration of the tax Act.”

I call Chris Penk.

💬 Hon Gerry Brownlee: Point of order. I thought we were able to have an exchange where there was a response and otherwise. The Minister went on to answer another question, but I did get an answer to a question that I asked, and I didn’t take the five minutes to get to that point—it was salient to where I was heading. I’d ask you to consider whether I could have the balance of my time, perhaps, just to take that next step.

The problem is that I already awarded the call to Mr Penk. But if your colleague decides to sit down now, I would actually give it to the honourable member.

Thank you, Mr Chair. If it’s acceptable to you, I would yield the floor back to my colleague Gerry Brownlee to take another call.

Thank you Mr Chair—thank you for resolving that. Thank you to my colleague too for that yield. Look, the Minister’s answer was interesting insomuch as it clearly hasn’t been considered at this point what that threshold point might be, but it does go to the heart of the reason why the bill is allowing the IRD to gather information about this particular level of compliance.

So one would expect that the IRD does know what tax is being paid by trusts—that shouldn’t be hard for them to assess. They would also know what individual trusts are paying. What the new bit will be is whether or not they now start digging into where does the income come from. And that’s quite a different area for the IRD to be going into. They might, at the moment, investigate someone, for example, if they are selling a whole lot of properties and they’re a trader, and claiming capital gains when they should be paying trading tax—that would be quite legitimate. There would be lots of other things that they will do around that. But in this case, they’re going to a trust, which might have an increased income for whatever reason, to assess whether or not there is some kind of a dodging of the 39c tax rate. That is a bit of a worry, and I think that is why we’ve seen the Privacy Commissioner reluctant to make any commitments around the validity of this particular piece of new law. It’s also why the Attorney-General himself has expressed concern about the way in which that information might be sought and might be used.

What I heard earlier this morning was that the IRD may be able to look at information through this particular provision but not use it for prosecution, but then use another provision in the Income Tax Act to affect that prosecution. Well, doesn’t that make this particular provision just another aspect of collecting evidence?

Thank you very much, Mr Chair. May I begin by congratulating you and your fellow presiding officers on your role, as this is the first opportunity that I’ve had to speak in Parliament other than briefly a moment ago, and I thank you for that. I also acknowledge the Minister in the chair and his colleagues, following the general election.

I do want to talk a little bit, and indeed ask a question of the Minister, in relation to clause 33 within the bill that we have in front of us. Others on this side of the House have already spoken, I think, really clearly about the absurdity that we have whereby the same natural person, the Hon David Parker, is on two sides of the argument—indeed, the poacher and gamekeeper roles that he is playing as the Attorney-General and as the Minister receiving advice, effectively, from himself about the inappropriateness of the legislation and its inconsistency with the New Zealand Bill of Rights Act. So I just did want to place that on the record, and particularly in the context of legislation that is somewhat incoherent, even in the terms of that particular clause that’s in front of us.

So we see that the Minister has justified the change, which others on this side have pointed out is surely not an urgent aspect of tax reform in relation to a particular case or a particular matter between two gentlemen. He’s based that on a view that he says is out there in relation to the matter on the part of some tax professionals. I take the Minister at his word that he’s heard such advice from at least some professionals, but there must surely be others out there who have a different view, or it is at least possible. This is exactly the kind of thing that should be thrashed out in a select committee process.

Others, too, on this side have spoken about the desirability of the Privacy Commissioner weighing in on the subject. The Hon Michael Woodhouse has clearly stated that the Privacy Commissioner, quite understandably, has not had a chance to reflect and form a considered view on this. But even just in terms of the Attorney-General’s advice, we have no assurance that the changes that are proposed in the tabled amendment by the Minister are going to do the things that the Minister believes they’re going to do and actually rectify the inconsistency with the New Zealand Bill of Rights Act. So even the terms of the bill are problematic.

We’ve got a person who has information demanded of him or her in an information demand. Well, that’s a self-licking ice cream, of course. And helpfully, I suppose in terms of the amendment, we’ve got the “information demand” phrase being removed. Well, that’s fine, but it just goes to the shoddy nature of the last minute, rushed process that we’re engaging in without the proper scrutiny.

We’ve got the development of policy for the improvement or reform of the tax system. Well, I’m intrigued to know what kind of reforms the Minister might be planning that don’t represent an improvement, in his view. We’ve also got information that the commissioner considers relevant through a purpose relating to the development of tax policy. Why are we one step removed? Why would it not be for the purpose of developing tax policy? Why would it be a purpose merely relating to the development? It seems to me that this is a much wider ambit than is safe in constitutional terms, indeed a fishing expedition in terms of the powers being given as well as the effect in any individual case for specific taxpayers or groups of taxpayers.

We’ve heard about particular cases that the Minister is concerned about. This is dangerous territory for us to be considering lawmaking in respect of specific cases, not the general principles involved. The rule of law is such that laws should be made in a way that is very general. And the confused nature of this is not only, as I’ve said, in the realm of tax and revenue, but also in terms of the way that the law has been put together. I, for one, would have welcomed the opportunity of the New Zealand Law Society—as well as the Privacy Commissioner and other tax experts who might have had competing ideas about the desirability of this policy—to be brought forward. It’s a real shame we’re not going to have that opportunity. So I’ll be listening very carefully, for what it’s worth, to the remainder of the commentary by the Minister in this time. It’s all we’re going to have to go on.

In respect of the ability to gather information, I would make the comparison that I made in the second reading—and the member may not have heard me say it then—that under the Statistics Act there is a power of compulsion to gather information that’s needed for public policy purposes. In effect, the public policy work that is done in respect of taxation is done in large part by the Commissioner of Inland Revenue and her staff through information that they collect. So in some ways you can see them as being a comparator to the statistics department in respect of the income tax system where those powers exist.

In respect of whether this is some overreach, I would note that the UK legislation, and I have their Finance Act 2011 before me, has information-gathering powers. Over there, in Schedule 23, “1(1) An officer of Revenue and Customs may by notice in writing require a relevant data-holder to provide relevant data.” And clause 2(1), says “The power in paragraph 1(1) is exercisable to assist with the efficient and effective discharge of HMRC’s tax functions.” Then it says, “(a) whether a particular function or more generally, and (b) whether involving a particular taxpayer or taxpayers generally.” I think it’s absolutely clear that Inland Revenue needs information-gathering powers like this.

Isn’t it extraordinary to be debating this under urgency, given the significance of the implications that are being raised in this committee, because what we have in Part 2 of this bill—and I’m very pleased to be debating this part—is what in hip hop terms would be called a series of Easter eggs. Of course what Easter eggs normally are, are the little bits you find in a great song when you pay a lot of attention that recall earlier hip-hop classics. But, of course, in this case, the Easter eggs aren’t tasty; the Easter eggs are pretty vicious. And I want to turn to one of them and ask the Minister in the chair, the Hon David Parker, questions about his amendment in mitigation.

The first of those is new section 17GB of the Tax Administration Act set out in clause 33, which has been the subject of some discussion. Now, of course, what this piece does is it creates a massive new power for the Commissioner of Inland Revenue to require information or documents for an incredibly broad purpose, which is tax policy development. And I want to distinguish that from the UK example, which the Minister just raised, acknowledging I haven’t looked at the UK legislation in detail, but basing my comments on his description, which is different, because in the UK example, the reason the information is being collected is for the discharge of tax functions—that is, existing tax functions—whereas what’s happening here with new section 17GB is collecting information in order to dream up potentially new tax functions in order to dream up new policy. And, of course, it casts an extraordinarily wide net because the commissioner can make an information demand that they consider relevant for the purpose relating to the development of policy or the improvement of reform of the tax system.

This is a massive invasion into people’s private financial affairs. And it’s not just me saying that; it is the Attorney-General, who views that it is such an extraordinary expansion of power for the Inland Revenue commissioner that it amounts to taking away New Zealanders’ constitutional right—well, our New Zealand Bill of Rights Act (NZBORA) right to be free from search and surveillance, and, furthermore, to be free from having our freedom of expression impugned. Now, what the Minister is arguing with the amendment before the House is that he can tidy all of this up by saying, “Well, don’t worry. We won’t use the information to prosecute you for criminal purposes.” And he’s gone down this whole line, which I think is beneath him, of saying, “Oh, look, you know, this is about the Eric Watsons of this world who do criminal stuff.” Well, Minister, your logic doesn’t add up, because if it’s about Eric Watson - type people doing tax dodgy stuff, then how does excluding the information from being used for prosecution help? Well, that seems a bit of a problem.

But secondly, and most importantly, and this is where I’m leading to the question I want the Minister to address: how does having an amendment which simply excludes the information being used for criminal purposes actually correct the broader breach of our privacy rights that exists with this sort of trawling mechanism, because such an extensive trawling mechanism is very new to New Zealand, in which anyone can have their personal financial affairs investigated just because it might help the IRD create some new tax policy in the future? And I put to the Minister that given this is going through under urgency, and the Privacy Commissioner hasn’t even had a look—and, you know, this week we saw the new Privacy Act coming on with quite a few new requirements—does he really feel comfortable that his amendment goes far enough in ensuring that this bill isn’t going to continue to be a breach of NZBORA rights? That’s my first question.

Secondly, why does new section 17GB need to be progressed via this bill? If this is such a new, important power for the commissioner, why can’t it be subject to a separate bill that goes through a thorough select committee process so that people like the Privacy Commission, people like the Law Society, can comment on its implications and what it means? So I invite the Minister to address those questions.

I move, That the question be now put.

Thank you, Mr Chair. I just want to make a final intervention on clause 33. There’s quite a bit to say about clause 35 in this part, but I think we’re coming to the clarity that we need about what’s going on with clause 33. But it’s inconsistent, I have to say. The Minister’s response to my last question—which was quite some time ago now—about whether this was a tidying-up provision or whether it was a new stalking horse didn’t comfort me at all. He said the IRD has long been concerned about avoidance risks for some time—or words to that effect. But that’s directly in contradiction to the comments on page 21 of the commentary on the bill in his name, which, basically, says this is a clarifying provision—it simply clarifies what the existing law was intended to do.

If that’s the case, why on earth are we doing this under urgency? I know the tax policy team sometimes takes a very long time to work up the sorts of technical amendments that the Minister portrays this is, and there is no good reason, if that’s actually the reason for the amendment, to be doing it under urgency. But I, frankly, think it’s not. I think the Minister revealed in his answer to my last question that he was concerned about avoidance risk for some time.

Now, Mr Parker may well say, “Well, both of those things can exist simultaneously.”, except he really let the veil slip when he talked about wealthy individuals using complex vehicles which raise the risk of tax avoidance. That is not a policy question; that is an enforcement question. The Commissioner of Inland Revenue already has the powers, when there is prima facie evidence of tax avoidance in breach of the Income Tax Act, to take action. It cannot use information-gathering powers as a stalking horse to go behind the veil and find out what’s going on, and that’s exactly what the Attorney-General said.

So while the Minister’s amendment is going to provide some comfort, Mr Seymour, Ms Willis, Mr Bayly, myself, and Mr Brownlee have no such comfort, and we know from the feedback that we got in the last 22 hours from the tax advisory community—the tax experts right around the country that are normally engaged in this process—that they’re far from comforted at all, not only with the provision, the amendment, but also with the fact that they have been left out of the tent.

Supplementary Order Paper 3, in my name, seeks to address that by deleting this clause altogether and resetting and starting again in the manner that IRD has such a good reputation of doing, and that is going out and talking to the community that knows this stuff best. If we don’t do that, we are letting taxpayers down, who, as the Attorney-General said, have a right to the protection and freedom from unwanted interference—freedom of expression.

I make one last point on this. I have been given advice from the Clerk’s Office that if the Minister’s amendment, in his name, is upheld, then that may rule mine out. I don’t want to have that argument when we get to the point, so I’ll just make the point that I think we’ve got a situation where some members will say, “Well, we don’t much like the clause, but it’s improved by David Parker’s amendment.”, but we still should consider the question about whether the clause should be in there in the first place, and, therefore, it’s a bit like an amendment to a motion before the substantive motion is put. I think that there is value in actually considering both amendments and at least having a vote on it.

I do have more to say—and, in fact, another amendment, which I’ve just tabled—on clause 35, which is the retrospective information-gathering of trusts, but I’ll leave my intervention there so we can tidy up clause 33.

I’ve already dealt with Nicola Willis’ points earlier in my contributions so I’m not going to repeat those. In respect of the question from the Hon Michael Woodhouse as to whether the amendment proposed by me is sufficient, were it to go further it would undermine the administration of the tax Act. I believe it does go far enough, for the reasons that are set out in the Attorney-General report that I’ve tabled. If we don’t put in subsection (3), which is shown in my tabled amendment, I’m advised that some people—these are words that have been provided to me by officials—could aggressively argue that without subsection (3), the whole of the pool of IRD’s information could be tainted and therefore they would be seriously stymied in their tax administration. So subsection (2) puts a limit on the use of the information collected under new section 17GB, but then subsection (3) prevents the undermining of the whole of information that is held by the Revenue, either earlier information or later information.

In respect—[Interruption] Sorry, there was one other point.

CHAIRPERSON (Adrian Rurawhe): Can members wait till the Minister has sat—

💬 Hon Michael Woodhouse: He’s kind of bobbing up and down.

CHAIRPERSON (Adrian Rurawhe): Yeah, but that doesn’t constitute sitting, so wait.

💬 Hon Michael Woodhouse: Doing his deep knee bends.

Yeah, that’s right. I’m doing my pelvic floor exercises. In respect of clauses 35 and 38 and the amendments that Michael Woodhouse proposes in his most recently tabled Supplementary Order Paper, the Labour Party will be voting against that and his other one because it would render what we want to do less effective.

To the Minister, you’ve made it clear that the income tax rates will probably require the Government to look at the trust tax rates to even that out if the situation arises where they feel that there is abuse of the process or tax take. The necessary part of that, then, would be that you would also have to look at the company tax rates as well, because, effectively, trusts are used as an asset ownership and a company is used as a delivery vehicle in most tax planning cases. So if the Minister’s indicating to the House and to the public and to the tax community that he’s willing to look at the trust rate, then, effectively, he’s also going to have to look at the company tax rate—and the company tax rate will have to go up.

So once there is a move on the trust rate, the company rate will go up, and that then will create a situation where New Zealand will be well out of kilter with our nearest neighbour—for example—Australia, that has reduced its company tax rate in recent years. That will cause a major dilemma for the Minister, because if he just does the trust tax rate by itself, then people will have a discrepancy between trust and company tax rate, and they will adjust their affairs accordingly, which will create some more tax compliance issues where he will actually lose some tax from the trust regime. Then if he has to follow that through and go on to the company tax rate, he will put the New Zealand economy at a very competitive disadvantage from our nearest neighbour, and many companies that are dually domiciled in both countries will decide that Australia is the place to be domiciled, not New Zealand.

So what is his plan in regard to the company tax rate? Is he also putting that on the table, as he has put on the table the trust tax rate? Is he going to give us a commitment that the company tax rate will be treated separately and will not be increased if the trust tax rate is increased? Then what would his implications be for the movement between trusts to companies or companies to overseas to avoid, essentially, his tax system that is getting very complicated and very out of kilter as soon as he changes that tax rate on the trusts?

With respect, the member compares final taxes with provisional taxes. Income tax and trustee taxes are final taxes; company taxes are not. The final taxes paid by people are on the dividends they receive, not on company profits. We have no plan to change the company tax rate. We are not concerned about the differential between the company tax rate and the individual tax rate. The member already made the comparison with Australia. The Australian corporate tax rate has a much larger differential between their top income tax rate than ours does now and ours will in the future, because they, as the member has said, have a lower company tax rate and a higher income tax rate, their highest income tax rate being 45c in the dollar, not the 39c in the dollar that we propose here.

The final point I would make—and I feel this is getting repetitious, because this has been raised earlier—is that the National Party never seems to worry about increasing differentials when they drop the company tax rate, causing—

💬 Hon Michael Woodhouse: Yes, we do. That’s not true at all.

Well, they do it anyway.

Thank you, Madam Chair. I must admit I didn’t quite understand the logic of that answer to the Hon David Bennett’s question. But I suppose the other part of this is the portfolio investment entity (PIE) tax rate, which has a top tax rate of 28 percent. PIE is, as you know, Minister of Revenue, used for investment in a whole lot of different asset classes. So what I think my learned colleague is actually highlighting, we are now giving rise to the highest differential in 20 years of tax, where we’ve got a high marginal tax rate and we’ve got a low company tax rate and a low PIE tax rate. Actually, that high differential is what the advice that the Minister has received is saying—that that cuts at the integrity of the tax system. So my first question is: are you also going to address the issue of the PIE tax rate?

The second thing I just want to ask you is quite specific. I’m aware that the Attorney-General made his report and came to an opinion that there was an issue with the clause around disclosure. The Minister of Revenue himself—in his capacity as the Minister of Revenue—then put a Supplementary Order Paper (SOP) on the table after the bill was lodged, which is surprising, in a matter of, I think, about an hour, an hour and a half, later. Has the Attorney-General opined on the Minister of Revenue’s SOP? So could we have a response to that? Because I think it’s very important that, given the gravity of the Attorney-General’s initial concerns, the solution that’s being put forward actually is an appropriate one.

I actually want to return to this whole issue about disclosure. I think once people become aware of the disclosure requirements contained in this bill, there is going to be an uproar. There’s going to be an uproar because it will ripple across all trusts, every accountant, and we’ve got many hundreds of thousands, in fact, of trusts. We’ve got accountants. The disclosure requirements that are set out in here quite significantly—the first point is that, and I don’t think we’ve ever had a proper response to it, the Commissioner of Inland Revenue already has the power to request information that allows her to undertake the roles, and here we are. We’ve got a bill that’s giving her, basically, unfettered right, on the pretence of policy development, to go and get a whole lot of information. I’m going to talk about the nature of that information. Why doesn’t the Minister also require some information from companies and other business taxpayers? Because I think if you’re talking about policy and tax integrity, there’s an argument that should be there, and whether, in fact, she already has this power for enforcement, as my colleague, the Hon Michael Woodhouse was talking about, as opposed to the policy development, which has been the excuse for this.

The second thing is the nature of the disclosure. Now, normally the commissioner’s power relates to tax matters. One of the huge additions to the disclosure requirements—the search and destroy type arrangements set out in this bill—is the providing for the commissioner to actually get a whole lot of information relating to non-taxable and exempt distributions from trusts. So normally, as a matter of course, the Minister wouldn’t be concerned about that type of information because it’s clearly not a tax matter. But this requirement, this part of the bill, starts to go into a whole area around what would normally not be a matter for the commissioner. If she had had concerns, she would have raised it previously. But, obviously, non-taxable distributions can include a distribution of the capital of the trust, and, of course, with the power to go back seven years, it now opens up a whole cesspit of transactions that the commissioner is going to be able to go in and understand and request information on, which just gives rise to an issue about why the commissioner will need all this information.

This is going to impose incredible compliance costs. I think this is what’s going to be the outrage about this whole new clause, because when you look at the actual annual returns for trusts, there’s now a whole profit and loss statement, financial position, amount in nature of each settlement that is not the provision of the trustee. There’s stuff about the income tax. There’s a whole requirement now around beneficiaries. We’ve never had this level of disclosure around beneficiaries—the name, date of birth, jurisdiction, tax residence. So, presumably, Owen Glenn and Eric Watson, which he quoted as the test case for why we need this provision—

CHAIRPERSON (Hon Jacqui Dean): Order! The member will not bring the Chair into the debate.

Sorry, the Minister did. I presume they are not actually tax resident in New Zealand, neither case. But here we are. The commissioner is going to require—and this of course will have to be done annually—the name, date of birth, jurisdiction, tax residence, tax file number, taxpayer identification number. Each settlor makes a settlement on the trust in the income year, or whose details are not previously provided and presumably now have to go back seven years, and for each distribution, the amount of distribution, name, date, jurisdiction, etc., of the beneficiary. It just goes on. We’ve got this little rider in 59B, the other information required by the commissioner.

So where we’ve gone—this has gone beyond just policy, because if there was a real policy, it should be dealt with appropriately—

💬 Kieran McAnulty: Point of order. Thank you, Madam Chair. Madam Chair, earlier in the week you, quite rightly, reminded members that the purpose of the committee stage now, after recent changes in the Standing Orders, was to have a free-flowing conversational question and answer session between Ministers and members. We’re now 6½ minutes into this contribution and I’m not sure the committee is sure what the question is.

CHAIRPERSON (Hon Jacqui Dean): Look, thank you for that. I was aware of that at the time, and there was a pause at the point where the Minister could have answered questions. There were further questions coming so I allowed the speech to move on.

Just to help my colleague who just stood up there, I’ve already got two questions on the record, as he may recall, if he’s been listening carefully. So the third one is the extent of the disclosure—why the need for, particularly, distributions that are of a non-taxable or exempt nature? This bill has taken the commissioner into a whole new area of information requirements and it is extensive, Minister.

Thank you, Madam Chair. I’ve got a couple of comments and questions, too, along the same lines as my colleague Mr Bayly, particularly, firstly, the quantum of the information being required and from whom, then the retrospectivity issue, and then I’ll speak to my Supplementary Order Paper (SOP).

Now, the Minister of Revenue’s commentary on the bill talks about the proposed amendment as the commissioner being able to request information from certain trustees in relation to the prior seven years, but the clause itself—clause 35 inserting new section 59BAB—doesn’t appear to say what those certain trustees are. Now, I’d like to be clear what we’re talking about here, because it may be necessary—well, I don’t think it’s necessary, but if it’s appropriate to go back, for complex trust structures who have the mechanisms and the information, but the ma and pa trust for the disabled child that the Minister refers to earlier will have very little ability even to comply with new section 59BA, much less 59BAB. So I’d like to know what the definition of “certain trustees” is, because it doesn’t seem to be reflected in the specific clause that we are considering.

Now, this is an amendment, actually. It deletes current section—I think it’s—59(3). And all section 59(3) of the Act says is file a profit and loss statement, I think—something pretty straightforward. It’s a fairly rudimentary section. And then we’ve got this replacement which, frankly, looks like overkill to me. Mr Bayly pointed out the fact that, actually, the commissioner just says “the other information required”, which, for a section of this nature, is highly irregular. Usually the collection of tax information is very carefully prescribed because that’s why we have such a big Income Tax Act and a fairly sizable Tax Administration Act. So I’d just like to have those two questions answered.

Now I want to just talk about my SOP. My SOP is going to delete new section 59BAB. The Minister, as a lawyer and the Attorney-General, knows how retrospectivity is usually used. It’s usually used to fix an error. And as Minister I don’t think I had to do it, but Ministers have had to come to the House and go, “We got a piece of legislation wrong technically, and we’ve been charging a levy when we didn’t have the legal power to do so, and we have to retrospectively fix that.” Well, the Kaipara Harbour issues from some years ago required retrospective legislation. And certainly legal members of this House hold their noses and vote in favour of retrospective legislation. But the idea that we can dive back seven years from the point where a new requirement to report has been imposed on taxpayers, some of whom would not have collected the information in the way that they are now going to be required to going forward, provides a really, really onerous burden that I believe is unnecessary and should be deleted from this bill.

Now, in the Minister’s commentary again on page 19, he talks about this by saying, “The bill would allow the commissioner to collect information as part of the increased disclosures for prior years, where such information exists.” Now, assuming my SOP is defeated and this clause remains, what I’d like to know from the Minister is what the definition is of where such information exists, because it’s not clear in the clause whether or not the commissioner can accept or is able to accept or the taxpayer has the defence of not providing information retrospectively where a trustee may say, “Well, look, it’s just too hard for me to get that information. The information does not exist, so I cannot comply retrospectively.” Where in the bill does the commissioner have the power to go, “Oh, that’s all right.”? Or, more importantly, where do they have the power to prevent the commissioner from saying, “I don’t care. You have to find the information. It doesn’t matter what it costs. It doesn’t matter who you have to engage in terms of lawyers or accountants.”? Where the information does not exist, how does the Minister’s own commentary get reflected into new section 59BAB of the bill?

I move, That the question be now put.

The question is that the Minister’s tabled amendments to clause 33 be agreed to.

The Hon Michael Woodhouse’s amendments amending clause 32 and deleting clause 33, set out on Supplementary Order Paper 3, is out of order as being inconsistent with a previous decision of the committee.

The question is that the Hon Michael Woodhouse’s tabled amendments to clauses 35 and 38, to delete new section 59BAB, be agreed to.