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

I present a legislative statement on the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill.

Legislative statement published under the authority of the House.

I move, That the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill be now read a second time.

This bill was first introduced in June 2020, which wasn’t long after the national COVID-19 level 4 lockdown. Although this contains measures that are helpful in the economic response to COVID, its main purpose is broader than that. It contains, for example, the annual setting of income tax rates. We, of course, have to do that every year in Parliament in order to authorise the expenditure that is funded through the tax that we collect through the tax legislation.

I’m going to explain some of the other measures but, before I do so, could I thank the Finance and Expenditure Committee for its careful consideration of the bill. There are a number of recommendations as to changes in the bill compared with that which was introduced, which we have adopted. Can I also thank the individuals and organisations who took the time to submit on the legislation. These are extraordinary times that we’re living through, but everyone is still trying to do their bit in society, and I think just about everyone accepts that we have to have a tax system that runs efficiently and fairly. So I appreciate the input from accountants, from businesses, from other organisations who helped the select committee come to the conclusions that they came to.

There are a number of integrity measures in this bill to close gaps. Every Government does this where there are gaps identified in the tax statutes. We endeavour to fill them where necessary. In the immediate response to the pandemic, of course, the Government was able to swiftly provide relief to keep New Zealanders in jobs and to help New Zealand businesses stay afloat. Of course, that support was only possible because we’ve got a strong tax system that was able to fund over time the cost of those measures.

A large part of this bill is about the important task of just carefully managing that tax system up top, holding its integrity, all of which is important to New Zealand’s economic recovery. There are measures in the bill which also support and encourage growth, and a good example of that is one named in the heading of the bill relating to feasibility expenditure. The Government’s objective is to grow the economy and encourage productive investment, and we had previously heard from businesses that the non-deductibility of feasibility expenditure for ventures that didn’t proceed was an impediment to that business investment. The changes to the tax treatment of feasibility expenditure aimed to remedy this aspect of our tax rules, which otherwise can deter productive investment. Businesses looking to innovate and grow might invest funds in determining the practicality of new projects and ideas, and, where that investment doesn’t proceed, at the moment in some cases that feasibility expenditure is not deductible—sometimes known as black hole expenditure.

This is one of a number of measures that this Government in the last three-year term has advanced to improve innovation and productive investment. The research and development tax credits are another example, as is the support that we’ve given to the venture capital investment to try and stimulate capital investment by the private sector in early-stage ventures.

In the case of this feasibility expenditure, this bill proposes to allow deductions for unsuccessful feasibility expenditure, which will in turn encourage business, innovation, and investment. We’re proposing that businesses can deduct unsuccessful feasibility expenditure over five years from when the project is abandoned. We think this is a good measure for business and good for our economy, and we weren’t surprised that there was broad support for this proposal in submissions.

A feature of the original proposal was to claw back past deductions for unsuccessful feasibility expenditure if an abandoned project was later reinstated. The committee recommended that that clawback period be limited to seven years. We agree that this is practical, because that aligns with the business records rule in the current law. So businesses will have records that go back that far and we agree with that recommendation. The clawback measure is an integrity measure necessary to protect the integrity of the tax system, but we don’t really need to go back any further than five years.

On purchase price allocation, the proposal in the bill is another significant integrity measure. The objective of these amendments is that for parties to major sale and purchase agreements to adopt the same sale or purchase price allocation on both sides of the transaction so that their respective tax accounts show the same allocation of price. This is because the purchase price that buyers and sellers attach to assets can have significant tax implications. The mischief that this amendment seeks to address is the incentive that there is sometimes for each side of the transaction to come up with a different allocation, in both cases to advantage their own tax position.

💬 Hon Michael Woodhouse: Oh really!

“Oh really!”, said the former Minister of Revenue.

💬 Hon Michael Woodhouse: Oh, they’re allowed to.

I’m surprised that particular loophole wasn’t filled earlier. But the proposal aims to encourage parties to major sale and purchase agreements to agree on the allocation of the sale price, and if they don’t, then it sets out rules that must be followed that determine who can allocate the sale price, which must then be followed by both sides.

The Finance and Expenditure Committee has recommended several improvements to simplify the rules. Significantly, they’ve recommended a delayed application date of 1 July 2021. We agree that more time is needed to allow businesses and their advisers to prepare for the new rules. The committee also recommended repealing the $100,000 threshold and a significant increase in the threshold that applies to residential property transactions. We agree that for simplicity and so as to remove unnecessary compliance costs, these recommendations are improvements, applying as they do where the scope for tax minimisation is low.

Another integrity measure relates to the taxation of land, and the bill proposes amendments in relation to investment property which we believe are necessary to ensure that the current tax ceilings are fair, balanced, and support productive investment, which will be relatively better off as a consequence of these amendments. 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. The bill proposes to make that clearer by extending the regular pattern restriction rules so that habitual buyers and sellers are taxed on their property sales. Again, the committee’s recommended a number of improvements to these amendments, clarifying in the legislation the meaning of “significant involvement or control”, and also that unoccupied property is within the scope of the Act.

The second to last issue I’ll mention relates to Australian retirement savings schemes where New Zealanders have got money invested in them. There’s a current gap in the trans-Tasman retirement savings portability settings which means that some New Zealanders’ savings in Australian retirement savings schemes that are held by the Australian Tax Office are unable to be transferred to a New Zealand KiwiSaver account. The proposed measure will remove this barrier to repatriation and, therefore, allow New Zealanders to access their Australian-based savings and bring them over to New Zealand. We know there are many New Zealanders who’ve lived and worked in Australia and are affected by this issue, and once normal travel resumes, no doubt there’ll be more people in that situation. So that’s a good thing to fix.

The final measure I want to mention relates to GST on outbound mobile roaming. There’s now guidance from the OECD on how we should do this, and this measure looks to modernise the GST rules. Under current rules, outbound roaming by New Zealanders are not taxed for New Zealand GST. Similarly, visitors to New Zealand are generally not subject to GST on roaming services consumed in New Zealand. Now, these rules have become out of step with the updated guidance from the OECD, which has recommended changes that have been adopted in a range of other countries and we’re now doing the same thing.

The guidance recommends taxing these services on the basis of a person’s residence rather than where they are—their residence—and it’s intended to avoid situations of double taxation and to avoid situations of double non-taxation of cross-border services. As I’ve said, this aligns our rules with OECD guidance and results in GST being charged on all mobile roaming services consumed by New Zealand residents whilst here or abroad.

I’ll conclude by saying that maintaining a coherent tax system is important for supporting our economic recovery and helping New Zealanders as the world recovers from impact from COVID-19. Accordingly, I’m pleased to commend this bill to the House.

Thank you, Madam Speaker. It’s a pleasure to be talking on the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill second reading. First of all, I’d just like to compliment that Minister. He’s a dynamic Minister. I’ve got to say that he is so much better than the Minister who introduced this bill into the House back in June last year, the Hon Stuart Nash, who stood there and read the most boring speech about this bill; at least you showed a bit of passion, Mr Parker—and that’s what we like to see from a revenue Minister. Just for the record, we will be opposing this bill, as we said at the first reading—and at least we are consistent. I will certainly be talking about why we will be opposing.

But I thought, because the National Party is an optimistic party and we are there for people to get ahead and also are worried about the vulnerable but we are about creating opportunities—so in that vein, I thought I’d just talk about some of the good stuff in this bill. I do just want to acknowledge the officials over here who have worked on this bill. There are some good aspects to this bill. The first one—and probably in reverse order: the issue around the Australian superannuation claim and dealing with that, funds are held under the Australian Taxation Office. That is a good measure and I’m sure that’s going to help many New Zealanders because when National gets back in, we will see lots of New Zealanders coming back from Australia and they will want to bring their funds back to New Zealand, because they know under a National Government this will be a thriving economy. That’s why they’ll be coming back. We’re glad that Mr Parker is forward-thinking about that, thinking about the future! So that is a good thing, and certainly we’ve all heard stories of people who’ve been affected by that—so that’s a very good thing, as I said.

The second thing, I think, is around habitual buying and selling of property. I thought your commentary on this, Mr Parker, just assumed people knew a lot about what we’re talking about. What we are talking about in this section is this situation where people buy and sell property, and they might do it in their personal name—Dr Duncan Webb is buying property in Christchurch, as he does, I’m sure—

💬 Hon Member: Yeah, big property magnate!

—property magnate, yes I know—so you buy it in your personal name. And then, Dr Duncan Webb suggests to his wife, “Maybe we should form a trust.” I’m not suggesting that the good doctor is doing this, but I know he’s a professor of laws and he would be the type of person who would have that intellect and that cunning desire to get around his proper tax obligations. So in that situation—and this is hypothetical, of course—Dr Webb might say to his wife, “Well, why don’t we form a trust and buy another piece of property?” So it’s a Dr Webb and associate, and then he sells that property and then they think, “Well, why don’t we buy it through a company?” This is what we’re talking about: people who habitually buy and sell property but do it through different structures, whether it’s personal name, corporate structure, trust, whatever—and, of course there are many people who have tried to do this. So this is a good measure in terms of how we address that issue.

The other one—and the Minister omitted to talk about this, I think—is the M. bovis situation. So many of our farmers around the country, unfortunately, have suffered from M. bovis infections of their pride and joy—their cows, particularly, because that’s their breeding stock—and that’s necessitated them, at the direction of the Ministry for Primary Industries, to have that stock slaughtered. I think it’s only fair that because you get a payment assessed by the Government in terms of what your stock are valued at, you get a lump payment. And, of course, for tax purposes that means that you’ve got big revenue in that year, and, therefore, consequently a big tax bill. As Madam Speaker will know, this is all about fairness and equity and, of course, helping our rural communities, which is vitally important. So what the bill caters for is to allow for that revenue and basically the tax obligation that underpins that to be spread over a number of years so that the farmer is not disadvantaged through the unfortunate introduction of M. bovis into New Zealand.

So I said we’re opposing it. I think the first thing I’ve got to say is this bill is another grab for another $50 million worth of tax—that’s what this bill is about. In the bill, there will be another $50 million going into the coffers of the Government. Most of that, $45 million, is related to tax, and there’s another element—about $6 million—relating to GST.

We are—I think I’ll just deal with the GST, and this is the deal with the roaming fees. This means that if you now are in New Zealand—and when we eventually get these borders open again—and you travel to Australia, you’re going to end up paying GST on your roaming costs when you’re reporting back to New Zealand. That means that for most New Zealand business people and also for people travelling on holiday it is now going to be a bill that’s imposed on them. Now, the revenue expectation out of that is about $6m; the cost, we understand—conservatively, I suggest—is about a million dollars for the telcos to put that system in place. It is such a small amount of money in the scheme of when we take in about $85 billion of tax a year, and $5 million is spent like chump change every day. Just to put it in context: this country borrows about $115 million every day, and here we are, we’ve got a piece of legislation saying that we’ve got to collect the GST on that and make about $5 million and put the inconvenience of every New Zealander, who, if they’re going to travel, the most likely place they’re going to go to is Australia—I think that is a pretty weird sort of imposition. It is one that has been delayed, and only this Government has sought to put it through.

The other $45 million comes from this, what we now call, purchase price allocation. Just technical words that basically mean: if you are buying and selling property, or property in the wider sense, you, as the vendor, and the purchaser now have to agree how you’re going to treat various aspects of that sale for tax purposes. Under the rules that have persisted for long periods of time, what that means is that the vendor works out what works for his or her situation and the purchaser does the same. Now, by making this all come together and requiring the purchaser and the vendor at the time of sale to agree what the basis is for how it’s going to be treated for tax purposes, it will generate about $45 million a year—that’s the current estimate.

But there are two stages to it. So if you’ve got residential property, it only kicks in at over $7.5 million, which, I think, is sort of a reasonable barrier; that’s pretty generous, actually. Where it’s, I think, pernicious and, I think, unworkable and where there was a number of submissions from people who know about this stuff, the tax advisers, is where it relates to transfers of other property, non-residential property. The threshold is basically a million dollars. That means that every sale and purchase agreement now has to go through this long, convoluted process of agreeing the tax. Now, most people will sit there and go, “Well, that’s pretty fine and dandy.” I’ve bought and sold, advised on buying and selling, business for 25 years. Whenever you have to get tax lawyers involved in the sale and purchase after the point where you think you’ve agreed all of the terms of the sale and what’s going to happen to the staff, what you’re going to do with brands, what you’re going to do with the hard assets, the intangible assets, the purchase price, the settlement terms, the last thing you want to be doing is having a big scrap around tax. This is what this requires now in a commercial setting, which is far more complicated, multiple times more complicated, than a straight residential sale: that you are going to have to get a tax adviser in, because no one else will know about it. Unless you’re Dr Duncan Webb, you will not know the tax treatment, and you will have to have a specialist tax adviser. Even for me, who has been around this for a long, long time, I wouldn’t have the competence to do it.

So what we’ve now done is imposed a big cost on companies. That is why we do not like this clause. We think it’s impractical and we’re opposed to it and we think that, in time, that limit will have to be increased.

Tēnā koe e te Mana Whakawā. First of all, to dismiss Mr Bayly’s assertions, I am not a property speculator, never have been, and don’t propose to be. But to talk about the property price allocations, it’s really—I mean, and to suggest that this is some tax grab is so utterly misconceived, because all that this is is to make sure that, as between vendor and purchaser, the assets are dealt with in a tax-consistent manner. It’s really very simple.

So if there’s a business being sold which is part building, part physical assets—vehicles and what have you—and perhaps some intellectual property—client lists and software—the tax treatment of all of those assets is going to be quite different. We know that people are very careful and plan carefully when they sit down and say to the Inland Revenue, “This is how much I paid for my building, which has depreciated at such and such a rate, and this is how much I paid for software, which has depreciated at a much higher rate, and this is what I paid for a fleet of vehicles”—that there are real tax advantages to be had there.

Now, the fact of the matter is that the way in which they appear on the vendor’s books is probably the best measure of their appropriate tax treatment. Having said that, if buyer and seller can agree between themselves what the fair and appropriate allocation of the price across the different asset classes is, then that is where it will sit. Now, we need a good incentive to make sure that the parties do in fact agree, so if they can’t reach agreement, then the vendor gets to dictate exactly what the purchase price allocation is and so on and so forth. There are a couple of other steps, and, ultimately, it can be decided by the Revenue itself. But at the end of the day, it’s about making sure that assets don’t go through some magical transformation from being intellectual property one day and then land and buildings the next, simply because of the tax treatment and the fact that it’s tax advantageous as between buyer and seller.

As regards the question of the $1 million threshold, I acknowledge—and I should actually just take a moment to say thank you to all of the submitters who came along to the Finance and Expenditure Committee and were very fulsome in their submissions and answered the probing questions of the committee—at least like to think they were—and also to advisers who assisted us in this work. This was one question that came up, as Mr Bayly noted. Residential properties, by and large, are not a taxable asset, and most people who own a residential property aren’t paying tax on them, so we can put the threshold very high. But in terms of businesses, small businesses even, whether it be a cafe in the mall or a mechanic shop, they may be being bought and sold for $700,000, $800,000, but once they hit that $1 million threshold, these rules will kick in, as they should, because the tax on those assets—the tax or the tax deductions claimed for depreciation and the like—can be very significant indeed. So it’s quite appropriate that there is a threshold there, and $1 million is entirely right. I must say, I would be surprised if people with businesses like that, who are buying and selling them at the $1 million threshold, were not getting professional advice already and were not already allocating purchase price in one way or another.

This isn’t a tax grab; this is tax consistency. As we know, these remedial matters bills—that’s really a large part of what goes on: ironing out the wrinkles to make sure that when assets change hands, the tax treatment remains appropriate; that there’s no undue tax planning going on—which, whilst not illegal, is really depriving the nation of the revenue it ought to be getting from those transactions.

So that’s just one small part of this bill, and I’m sure some of my colleagues on this side of the Chamber will explore some other parts of the bill. But a very good bill, a good committee process—I think it came out of the committee much better than it went in. This is another great addition to the revenue legislation of New Zealand. I commend it to the House.

Thank you, Madam Speaker. I want to join with previous speakers in thanking the submitters on this bill. I particularly want to acknowledge and thank the independent tax expert that the Finance and Expenditure Committee relied upon, Therese Turner. I’ve been on the Finance and Expenditure Committee on and off over the last few years, and she is as sharp an intellect as I think we have had the benefit of advice from, but also there is a candour about her contributions to the discussion that I think is refreshing, particularly on those issues that go against the prevailing preferences and wisdom of the Government. I want to acknowledge the officials. I won’t name them, because that would take the rest of the 10 minutes of my speech to do so.

If I can gently rebuke the Inland Revenue Department, about whom I have the highest regard as a former Minister of Revenue and as a lapsed accountant, I do think 27 officials for a taxation annual rates and remedial matters bill is rather excessive. I did comment to my colleague and friend Nicola Willis in one select committee meeting that the arrival of the tax officials looked like the last scene of a Benny Hill show comedy, where they were all coming in, and I wanted to add music to it. There is, I think, a risk that policy advisers and tax officials become a solution looking for a problem, and I think there are a couple of examples of that in this bill.

I want to start with the main principled opposition to this bill, and, in doing so, I’m going to quote Thomas Sowell, one of the world’s most renowned economists of the 20th and 21st centuries, when he said of tax—of inflation, actually—“It is a way to take people’s wealth from them without having to openly raise taxes. Inflation is the most universal tax of all.” We have this issue with what is commonly known as bracket creep. We have a Government that is determined to raise the wages of workers, particularly low-income workers, but the risk is that they are no better off, because the higher the income with inflation at the same time, the higher the tax that they pay, and therefore at best they are no better off and at worst they are worse off.

💬 Andrew Bayly: I think we’ve got members who don’t understand.

Yeah. Well, it is certainly the lived experience of those people who are moving from one tax bracket to the other through no fault of their own except that inflation is pushing them into those brackets and they pay a higher tax rate. Now, we have a progressive tax system within the broad based - low rate framework that both sides of the House will support, but we cannot support a bill that will have the impact of pushing people into higher tax brackets and to pay greater levels of income tax, through no fault of their own but to be the subject of inflation.

Now, we also have a situation where the Government has engaged in what is known in economic theory as pump-priming. We are in very straitened economic times because of COVID, and we are pushing huge amounts of money into the economy by different methods, mostly Government spending and Government support. Normally, that sort of strategy is associated not only with that kind of fiscal stimulus but with lowering of taxes in order to further stimulate the economy. Not only is this Government not lowering taxes but it has raised the top tax rate to 39 percent. Now, that rate is not the subject of this bill, but we will very shortly, when the 2021-22 annual rates and remedial matters bill is introduced, be debating that very point. So at a time when we should be raising tax thresholds and potentially lowering tax rates, we’re not raising tax thresholds and we’re raising tax rates, and for that reason the National Party certainly cannot support this bill.

Now, there are some good changes, and they were laid out by the Minister, and there are some changes to the bill as it was introduced that I think constitute an improvement. The purchase price allocation framework is problematic, and I think what we will see is tax planners and tax accountants doing pretty well out of this change as they work with their clients to make sure that the tax—not advantages, actually; that tax planning is such that they are not penalised by these changes. There are scenarios where it may well be quite appropriate for the vendor and the purchaser to treat those transactions differently for tax purposes. The vendor, particularly if the assets have been held for a long period of time, will have been subject to different, for example, depreciation rates.

Within my time in this House, the tax depreciation rates on fit-out within buildings have changed demonstrably, and the question is: will there be a scenario where the purchaser and vendor do necessarily have to treat the purchase price and the sale price differently for tax purposes? Probably. What I do say is an improvement—and I appreciate the Government responding to the submitters and the select committee’s call—is that in the bill when it was introduced, the disallowance of a deduction and the valuation of the purchase effectively at nil for all time has been amended by the bill so that where there is a dispute about what the appropriate purchase price allocation should be, then there isn’t a deduction until that dispute is settled. That will certainly motivate people to get a settlement either with the vendor or with IRD, but I think it is some improvement, albeit that I still have those concerns with purchase price allocation.

The area where I think there has been a solution looking for a problem, and the remedial matter that I most strongly object to, is the GST on roaming charges. It’s bad in principle and it’s bad in practice. Now, we’ve had the Goods and Services Tax Act in place for 35 years, and it is held up globally as the most efficient value-added tax framework in the world. Countries are envious of it, and a lot of my former tax accountant colleagues made a lot of money in Australia when the Howard Government introduced their GST some years ago, and in order to be able to placate support parties in the Parliament, they had to do some ridiculous things, which led to variations in things like raw chicken versus cooked chicken, and bread being GST-exempt but chips not—all sorts of crazy variations. We don’t have that. We have a GST on everything except exported goods, financial transactions, and residential rentals. There might be one or two others. I’m sure Ms Edmonds will be able to fill in the gaps.

Global roaming services is an overseas service by a New Zealander who is overseas and a service that is overseas. There is no way in principle that that should be subject to New Zealand’s GST regime. When we get off the plane in Australia—and eventually, I hope, we’ll be able to do that—we automatically hook into the domestic provider, TelstraClear or whoever it is in Australia. The bill may come through on our local service, but they are the pass-through agents for an overseas supplier to a New Zealander overseas, and there should be no GST applied to that. This is not a good change, and by the Minister’s own admission and as mentioned by Mr Bayly, it’s only going to generate about $6 million of revenue. What the telcos here in New Zealand told us was that that pales in comparison to the amount of money they need to invest in their own systems in order to apply a GST regime that, frankly, shouldn’t be there in the first place.

Now, when we think about a tax regime being broad based, low rate, and efficient, there’s very little efficiency. There’s no efficiency in a scheme that means the payers of the tax—or the tax agents, in this case—have to pay more to get those systems in place than the Crown will gain in revenue. For that reason, this part of the bill should not be there. When we get to the appropriate stage in the committee of the whole House, I will be introducing a Supplementary Order Paper that deletes those sections in their entirety. It’s punitive, it’s wrong in principle, and it won’t raise more than a jot of revenue for the Crown. That said, I look forward to the conversation continuing, but we cannot support this bill.

Fa‘afetai tele lava, Madam Speaker. I move to take a call on the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill. First of all, as part of my contribution, I’d like to thank the independent adviser Therese Turner for her sound and practical advice. Where there are 20-something officials working on a bill, there is only one Therese. So I am thankful for her diligence and, no doubt, the late nights she spent on this bill. But I do also want to acknowledge the 20-something officials who did work on this bill. Having come from a tax policy background, I understand they’ve got to do Cabinet papers, they’ve got to do commentary on the bills, they’ve got to do officials’ report, they’ve got to service the select committee at every point that we need advice. So I totally, absolutely support officials and I thank them for their responsiveness and the advice given on this bill.

To our submitters, thank you. To the many tax practitioners who have submitted on this bill, most of them would have submitted on this bill not because they were being billed to do so but because they understand the integrity, the cohesiveness, and the efficiency of the tax system means that they want to submit on this bill so that the tax system works practically. Again, I thank you so much for your time.

Specifically to the bill, one thing the Minister of Revenue said throughout his speech was “integrity”. It’s a really key word in our tax system, and what he said was, even though we’re in COVID times, we need to ensure the integrity of the tax system closes the gaps. And that’s why we continually review tax legislation. That’s why you normally would have two to three omnibus tax bills throughout a year, because as issues arise, you fix them. The purchase price allocation amendments speak to integrity; the amendments to subpart CB of the Income Tax Act, or the land rules, speak to the integrity of the system. Even the most taxpayer-friendly measure in this bill, which is the feasibility expenditure rules, has moments of integrity in it.

Now, speaking specifically to the feasibility expenditure rules, the genesis of these amendments is in the Supreme Court 2016 TrustPower case. The case limited the deductibility of costs incurred to evaluate the feasibility of a project. So under the normal tax rules, if you’re incurring revenue, you get an expense deduction. If you have a capital asset, you get a depreciation deduction. But actually, if you’re spending money, such as on resource consents to see whether actually a wind farm would be good or not, you don’t get those costs deducted. And so that’s what this bill speaks to. That’s why, since 2016, tax practitioners have been calling on Governments to bring these measures in. So I’m really proud that our Government, as part of our whole COVID response and to help increase productivity and innovation, is bringing in these rules.

The bill, in relation to feasibility expenditure, has a really key integrity measure, and that’s called the clawback. So I’m going to focus this next part of my contribution on that integrity measure. So our Finance and Expenditure Committee suggested that, based on the advice from Therese Turner, one of the points that was raised during the submissions was that the wording of the deduction provision appears to allow deduction for indirect costs. Therese suggested to the committee, “I agree with officials that not clawing back all of the expenditure would provide an incentive for businesses to temporarily abandon projects and thereby enable them to claim a deduction that will, in part, not be reversed when the project is re-started.” So she agreed with officials and her recommendation to the committee—which therefore we have approved and we are recommending to the House—is that we have that clawback provision.

Another really key change that was made by the select committee in relation to this integrity measure of a clawback provision is to limit that time to around seven years, that clawback deduction. The reason why we chose seven years is because currently, in the tax legislation and the Tax Administration Act, there is a seven-year period for holding your records. The committee believe that it was reasonable to make sure that those rules align with the seven-year clawback. So I stand proud here to be able to be part of a Government that has brought through those feasibility expenditure rules, rules that have been called for since 2016. So I commend this bill to the House.

Tēnā koe, Madam Speaker. Tēnā koutou e te Whare. The Green Party is supporting this bill. I didn’t have the privilege of seeing it through the select committee—that was my colleague Chlöe Swarbrick—but I don’t doubt what members have said about committee process being excellent and—oh, kia ora, Mr Temporary Speaker. I don’t doubt the process. It was good, and I congratulate the officials on all their work, the many officials who did all of the detailed work. This sort of bill comes up pretty much every year to confirm the annual rates and to undertake remedial matters. That’s pretty standard. The details of that are different in any given year.

I thought, before speaking to the detail of this bill, I did just want to briefly respond to some of the comments Mr Woodhouse made earlier in this debate about bracket creep. I think it is a legitimate concern, the bracket creep, but it is not mathematically possible that people will be worse off when they move up a bracket, because with the way progressive income tax works, when you move up into a higher bracket, you’re paying—let’s say you’ve moved into the over $70,000 bracket. You’re earning over $70,000 a year, but you’re only paying 33 percent on every dollar over $70,000. So there’s no way you could be worse off because of going up a bracket. You’re still earning more money than you would be otherwise.

There is a lot of focus, of course, from that side of the House on perceived injustices or difficulties with having to pay more tax. Personally, I think we need to reframe that quite considerably, because, ultimately, tax is what we do together, and what we can do together is so much greater than what we can do as individuals. When it comes to things like infrastructure, our public education system, and our public health system, none of us can buy that as individuals. But with our collective, shared wealth, we can provide that value to all citizens and residents in New Zealand, and we all benefit from that.

Those who focus on a personal loss are really encouraging a kind of individualism that actually misses out on the fact that the individuals in a society are better off—perfectly exemplified by the COVID-19 response. We couldn’t have done that if we didn’t have a Government, if we didn’t have a public health system, if we didn’t have customs, or if we didn’t have the ability to pull together resources and set up a managed isolation and quarantine system. We all benefit from the near-eradication of COVID-19 in Aotearoa New Zealand and, of course, none of us could have done that as individuals.

I guess that brings me to the other slight critique. Obviously, what this bill is not doing, which the Green Party would like to see, is bigger moves in the direction of making sure that our tax system is actually fair. I believe earlier in the debate, Andrew Bayly was speaking about the many different ways people can legally avoid tax. He was referring to some of those mechanisms, and it is true. There was a report recently that was released in public that I believe was either IRD or Treasury working together, reporting to Government Ministers on the different rates of tax paid, particularly by high-wealth individuals, and it showed that it was quite likely that 42 percent of high-wealth individuals—that is, millionaires—are paying less than 10 percent of their economic income in tax. Now, that’s legal. It’s legal that the very wealthiest people in New Zealand are paying a lower rate on their economic incomes than the lowest income earners—the cleaners, the front-line workers who helped us all during COVID—who are barely making ends meet. Now, that’s not right, that’s not just, that’s not fair, and that’s not efficient, and although people on the right, in their weird dream world, like to justify this and claim that millionaires shouldn’t pay their fair share of tax, in fact they should.

So one thing this bill is not doing, which the Green Party will continue to speak up about, is making the tax system fair. It’s just a mathematical thing. Constantly referring to things like punishing people for doing well—no. We’re just asking for fairness, and the mathematical reality is that when the rate of return on capital is greater than the growth rate of the economy, then wealth will become concentrated in a smaller and smaller number of people. That’s not about values; that’s just maths. I know the right struggle with maths, but it is the case.

So this isn’t any sort of moralising thing. If you believe in fairness and if you believe in justice, then there has to be redistribution, because it is a mathematical fact that a smaller and smaller number of people will become wealthier and wealthier, irrespective of what contribution they have made to society. It’s just maths—look it up. So the Green Party will be here talking about having an actual fair tax system, and to do that, we’re going to have to make structural changes which mean that the very wealthiest do contribute a fairer share to the group here in New Zealand—to the team of 5 million—that we all benefit from. We will all be better off when that happens.

I rise on behalf of the ACT Party to make our contribution. This taxation bill sets out the rates of income tax for the 2020-21 tax year and has a number of other proposals and remedial amendments that seek to ensure that the New Zealand tax system is fit for purpose. And so, Minister, in a positive contribution, to our thinking, we just wanted to explore some better public policy wraps around what is going on.

So is the system fit? Well, we certainly don’t think it’s modernised for the future challenges we now face. We don’t believe so in the ACT Party. Bad changes in taxation at this stage of the COVID-19 recovery are particularly harmful to the economy and to New Zealanders. We’re not in the business-as-usual period, and it’s harmful to future prosperity. The Government’s tax policies result in fewer skilled people coming to work here, more skilled people leaving, and therefore potentially an overall reduction in tax take. The attitude towards it is best summed up by the increase in the top tax bracket to 39 percent on incomes over $180,000. This is not only forecast to raise a small amount of revenue but it can’t even be estimated. It will also increase the likelihood of tax avoidance and distortions in the tax system when aligned to the 28 percent corporate tax rate. This will almost certainly reduce the amount of revenue this policy generates while encouraging unproductive behaviour. The policies deliver a blow to the integrity of the tax system and the Government as a whole.

The ACT Party believes that the tax system is sending a negative message both domestically and internationally to people wanting to get ahead and have a go in New Zealand. The Government’s tax system is the policy manifestation of a culture of “tall poppy syndrome”, and the antithesis of ACT’s firm belief—

💬 Dr Duncan Webb: Who wrote that?

—in backing New Zealanders to improve their own lives, Mr Webb. For too long, the tax system has been used for political vote-buying by parties opposite. The current tax system is one of the central reasons that productivity growth is weak and living standards are lower than they should be, and we should expect better. There are some positive steps, though, in this bill: the trans-Tasman retirement savings arrangement, the Mycoplasma bovis, and farmers bill, but we have also had some negative impacts, as mentioned earlier, around global warming.

One of the vital things about this piece of work has been the lost super in Australia. I don’t think people recognise this, but this is actually a $2 billion revenue problem. We must allow for greater portability of retirement savings from Australia. Treating the Australian Taxation Office (ATO) as a compliant Australian super scheme points in the right direction, and there are significant moneys being held by the ATO. Finally, we’ve made good with farmers—amendments to allow taxpayers to spread their taxable income over a six-year period when that income relates to the culling of livestock, to better match the cost of purchasing replacement livestock and the stock recalled, is a very positive and fair outcome for the farming community.

And just to touch on global warming, because I know everybody’s done that before, the Government’s main mistake here—the estimated $26 million in Budget 2019; then it’s down to $7 million. And with global travel not coming on board for another two to three years, the best thing for the bill is to take this out due to COVID—either get it treated later in a tax amendment after more industry conversation, or at the minimum we take a position that the date is delayed to 1 April 2024. There are some positive aspects around business and individual taxation at a technical level, and they’ve been touched on before.

Moreover, this bill does very little to remedy the flawed tax system. Productivity growth, in particular, has been one of the biggest shortfalls of successive Governments on both sides of the House, and our largest public policy failure. According to the draft report from the Productivity Commission on New Zealand firms, “New Zealand’s disappointing productivity performance has held back its standard of living for many years.”—and that’s a direct quote—and “New Zealand’s position among OECD countries would be even weaker if not for the relatively long hours … that people in New Zealand work.” The sad thing is that the Government would not even let the Productivity Commission address tax as a tool in their report to be released. How can you have a modernised tax system and not think about the relationship between taxation and productivity and growing the country? Productivity is around 30 percent less than the countries we should compare ourselves with, such as Australia, Canada, the United States, and the United Kingdom. That means it falls to ordinary Kiwis working longer and harder to make up the shortfall, all the while the Government takes more money out of their pockets. Higher taxes prevent innovation and investment in new technologies, and this will, in the future, be the biggest difference to the lives of all New Zealanders. We need to do better, much better, and we can do better.

If you look at this exercise, it’s clear now that a complete overhaul of the tax system needs to occur, with lower, flatter taxes, which drives growth and attracts overseas investments, and makes a tangible difference in the lives of Kiwis. This is a Government that wants to develop a higher wage economy but then disincentivises earnings and make it as hard as possible to get ahead. This Government is seeking to reintroduce the same unimaginative, punitive, divisive tax policy that Labour ushered in under then finance Minister Michael Cullen 21 years ago. New Zealand already has the highest tax to GDP ratio in the Asia-Pacific region and the fifth-highest corporate tax rate in the OECD.

💬 Dr Duncan Webb: What about State taxes?

Excuse me, Mr Webb?

💬 Dr Duncan Webb: State taxes.

No—compared to Australia, we collect less corporate tax revenue on a comparable like-for-like basis. Our corporate tax rate should be not set to buy votes and score political points but to make us more competitive, rather based on common-sense principles such as encouraging overseas investment in New Zealand, which this bill does not even touch on, and discouraging firms from employing methods to avoid paying the higher rates. This would attract overseas companies, create jobs, and create investment in New Zealand. Our closest partners around the world are cutting tax rates to stimulate their economies, and this Government is doing and has done the opposite. It’s an act of economic vandalism.

We must be doing better and not worse than our closest partners to have any hope of improving living standards for New Zealanders. We do agree with Labour on one crucial issue: that a capital gains tax, despite how much the Green Party try and tell them to do it, is a giant step backwards. The ACT Party will always support low taxes so we can back New Zealanders to create jobs, create opportunities, create a more dynamic, open, and prosperous New Zealand. Even as an example of today, of Working for Families—we believe that should be abolished in favour of giving people lower taxes for all the hard-working New Zealanders at the marginal rates. We’d like that considered.

ACT’s goal is to make New Zealand the most attractive place in the world to earn, to save, and to invest. We want economic growth and opportunity for all New Zealanders and believe that having lower income and corporate tax rates is a part of achieving that goal we all share. For these reasons, the ACT Party will be opposing this bill.

It gives me great pleasure to talk tonight about a particular area of the bill that I believe goes further than just being about good stuff. The Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill shows how the Labour Government is working with farmers. As a member of both the Finance and Expenditure Committee and also a member of the Primary Production Committee, to me it shows that we have a very positive working relationship, and building on those excellent relationships with farmers by engaging at a level with Federated Farmers in a way that I think shows the character of this Government and how we’re working with the primary sector. It is important to demonstrate that we are working at a level of listening in both rising to the challenges and responding when it’s needed.

Now, this bill came out before I joined Government, and so I had to go and have a look at some of the submissions that were made. And I’m pleased to read the submission on the tax bill from Federated Farmers, who talked in words like this: this proposal is one that we agree with. “Income equalisation will adequately address any extra income caused by the cull of livestock that are held for much shorter periods of time.” “The six-year period is appropriate … over the period of the higher purchase price”. It’s these types of things that are coming through from Federated Farmers, talking about a bill that Labour is putting forward.

Now, during the time when farmers were facing the M. bovis crisis, they asked for urgent relief. As the Minister of Revenue at the time, Stuart Nash, said, “The Government is offering tax relief to farmers affected by Mycoplasma bovis in light of the extra burden created by coronavirus. Farmers whose herds were culled will be eligible to spread their incomes over several years”. The Cabinet in this urgent time have agreed to the law change, but it had to go through Parliament, and this is what we are doing today.

In response to that, Federated Farmers’ national vice-president Andrew Hoggard said that he was grateful that the decision had been made quickly and in the nick of time for the end of the financial year. “Nash and agriculture Minister Damien O’Connor and their officials deserve a great deal of credit for acting in a timely manner”, Mr Hoggard said. “We thank them sincerely on behalf of some very worried farmers.” Federated Farmers general manager of policy and advocacy, Gavin Forrest, said the tax relief applied to farmers was a very good thing and “Anybody that ended up with a tax bill for the increase in the value of their cows on the books, book income that was not associated with the cash income, anybody in those circumstances should get relief from this”. He also said that this was a certainty of relief. These words coming from Federated Farmers to Labour showed, and I reiterate, a working relationship with the farming community that is going from strength to strength.

I would also like to refer to another part of the Federated Farmers submission, where they called on a bit of a suggestion. They asked, for the Mycoplasma bovis tax issue, that the proposal should be generic, and in considering this, I’m pleased to report to the House that that submission—that there was strong support for that spread of income as suggested for a more generic provision to cover future biosecurity events. Officials have added that suggestion to the tax policy work programme. It’s evidence like this that shows that we are listening and working with those people that need us at the time when they are facing uncertainty and enormous pressure. I’m proud of the relationship that Labour is building with the primary sector. I’m proud that we are actually working on something that is delivering—and I thought it was great that Mr Bayly called it good stuff like this in the tax bill that’s building on the integrity of what it means to be fair and equal in the tax system. Thank you, Madam Speaker.

This debate is interrupted and is set down for resumption next sitting day. The House stands adjourned until 2 p.m. tomorrow.

The House adjourned at 9.59 p.m.