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

Members, we come now to the debate on Part 2. This is the debate on clauses 4 to 65 and Schedules 1 and 2 containing amendments to the Income Tax Act 2007. The question is that Part 2 stand part.

Thank you, Mr Chair. Well, this is quite a big part of the bill, and there’s a lot to be discussed in this. First of all, the rules around the main home exclusion for disposal within five years—it would be useful to have Minister Parker just help us work our way through what the exclusions are. As I understand it, there are three exclusions in respect of the brightline test, which no doubt we’re going to talk more about today through Supplementary Order Paper 23. But, in terms of the exclusions for the brightline test, one is if it’s your main home, and I see there are rule changes around that now it can be proportioned depending on how often you are in that home. Also, you can chop back and forth between specified homes and come back to it, but you’ve got a maximum of two over a certain period of time. The second aspect relates to if you inherit property from family—for instance, a parent, or whatever. If you’re inheriting property you are excluded, as well as if you have a marriage breakdown and therefore you may have received the matrimonial home as part of a settlement, and you may choose to sell that because you’re in a difficult financial situation.

I think that the second two are pretty easy concepts to understand. The definition around land, though, has been extended, from my reading of it. I’m just going a little bit from memory here, but it is land that currently has a dwelling on it; land where there’s a commitment to put a dwelling on it; and, thirdly, land that is permitted to have a dwelling able to be built on it, according to the local government rules—how it’s been zoned. So that third category is a fascinating category. That means if you own a piece of bare land and your current use is as a farm, or ranging livestock, or drystock, or whatever, if it’s been rezoned, not of your making but because the council’s passed a unitary plan change, or there’s been a specific requirement and the council’s passed a specific plan change for a certain area—even though you may have not been party to that—are you, in fact, now captured by this, and therefore vacant land becomes caught under these rules? That would then make many people very nervous in any outlying area of a city where the boundaries aren’t clear—there may even be a metropolitan urban limit put in place, but the council may choose to extend it beyond that, or maybe inside the fringe, so we’re all urban zoned. So I’m very keen to understand what exactly is that definition around land that is permitted, as a result of a plan change or whatever—and also that first definition around the home would be very good to get some clarification around.

As far as I understand the member’s description in respect of inherited properties and properties sold as a consequence of a relationship breakdown, it is as the member has described, and I’m sure officials will correct me if I’ve got that wrong. And in respect of the issue that the member refers to in respect of vacant land, I will take some advice from officials and respond a little later.

Thank you, Mr Chair. I’m also keen to dive deep in the weeds on Part 2 of the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill. But before I do, I think it is important that we set out, for the record, my party’s absolute surprise, disappointment, disgust, really, at the manner in which the amendments that are the subject of Supplementary Order Paper (SOP) 23 are coming to this House. The whole country found out about what is a significant change to the taxing of what the Government calls capital income. It’s a euphemism. It’s a capital gains tax. We know it’s a capital gains tax. We should just call it what it is and not dance on the head of a political pin just because of the commitments that the Prime Minister made to the public of New Zealand about two years ago and the commitments the Minister of Finance made during the election campaign about the brightline test. And I think he was reported in this morning’s media as saying something like he overextended. Well, that is—

💬 Andrew Bayly: No, over—

💬 Chris Penk: Overly definitive.

Overly definitive. Thank you, Messrs Bayly and Penk. That is the cute way to describe it. I could describe it in a far less complimentary fashion.

💬 Chris Penk: Within Standing Orders?

No, so I won’t. I want to stay for the rest of this debate. But it is what it is. It’s a capital gains tax on just about everything but the first home, and I have a couple of technical questions about the transitional period between now and 27 March. But I’m fascinated by the regulatory impact assessment and the advice that the Minister received, so I have a series of questions about the nature and timing of that advice.

So, firstly, one of the things that our tax framework is built on is a degree of openness and communication with the stakeholders who are affected by it. And as former Minister of Revenue, I’m well aware of the IRD’s previous commitment, at least, to make sure that tax agents, Chartered Accountants Australia and New Zealand, a number of other groups, the subcommittees that have been set up, the small business advisory groups, the Corporate Taxpayers Group, and so on know what’s coming down the pipeline, are able to feed into it, provide technical advice and support, and make the bill better as a consequence of that consultation when it comes to this House.

As far as I can tell, and I’d like the Minister to clarify this, it doesn’t appear as though there has been any of that. And so my first question is: to what degree were those required to implement this, provide advice to their clients, and make the bill better actually consulted before SOP 23 came to this House?

Secondly, the regulatory impact assessment makes a number of references to the deductibility of interest. Now, we know that the deductibility of interest is not part of the SOP. The Government has said that they want to take further advice on that. But my question is: why is it there at all? And did the Government actually intend to include in this SOP provisions that would rule out in part or in full the deductibility of interest on residential rental property investment?

Thirdly, I would like to know when that SOP was drafted and when the regulatory impact assessment was drafted, because I think that will go quite some way to understanding how rigorous the amendments that we are having to consider in committee are going to be.

Treasury’s advice on this was pretty unambiguous: “[It’s] been produced under extremely tight time frame”—that’s the regulatory impact statement—“constraints without consultation or the benefit of robust data, and accordingly there is a risk that the analysis is incomplete or may miss key interactions. It represents the Treasury’s best assessment of the options identified by the Government in the time available.” Well, that’s code for: “We didn’t have any time to get this together. We haven’t been able to consult; we’re not sure what the impacts are. They could be negative, but we can’t give the Government and Cabinet any advice on that.” I’d be interested in the Minister’s comments regarding that process.

I now have that point of advice in respect of Mr Bayly’s question. There is no change to the definition of “residential land” in relation to the brightline test. The exclusions that previously were in the law still apply for farmland and business premises. There is a change in the bill to ensure that vacant houses are not outside of the brightline rules—a relatively minor matter—otherwise it created an incentive, which is even worse, to have a vacant house so as to be outside the brightline rules. There’s also a change to the definition of “business premises” to exclude short-term accommodation provided in houses that are not a person’s main home, and that is in the Supplementary Order Paper. But, other than those two discrete changes, there is no change.

In respect of the “Why is it that we’re passing this under urgency?”, in respect of the Hon Michael Woodhouse’s question, since May 2020 there’s been a 26 percent increase in residential house prices in New Zealand. Various bank economists, as well as some of the international agencies, have been warning that we may be seeing a bubble and that, if the bubble popped, there could be financial consequences that were detrimental not just to the people that bought at the height of that bubble but could also have wider economic damage. Our view was that, if we were to have but a short transitional period, we would actually be encouraging people to get in ahead of the change and we would cause a flurry of activity that could have made the current situation even worse. So, for that reason, we’ve chosen to do this quickly.

We do have a three-day transitional period so that people aren’t caught unawares, and the Inland Revenue Department, as soon as we were making the announcement this morning, was advising real estate agents, accountants, and lawyers of the change, so that people who are about to make an offer in a few days’ time aren’t caught unawares by this. In respect of people who have already made an offer but their agreement is not yet unconditional, those agreements are also grandparented pursuant to the transitional provisions that are in the bill.

Thank you, Mr Chair. I thank the Minister in the chair, the Hon David Parker, for that. I think what I heard there is that the Government doesn’t trust the public. I’m having a flashback, actually, to 2008 when Annette King was transport Minister and passed changes to road-user charges under urgency and virtually overnight on the basis that truck drivers couldn’t be trusted not to go out and load up their road-user charge credits at a lower price. Actually, their lack of trust in people acting rationally led to some major protests in cities up and down the country, and it was a precipitating feature of the Labour Government’s demise. I think we could be seeing something analogous to that with this. But I didn’t hear the answer to the Minister’s question about: when actually did the Supplementary Order Paper (SOP) start being drafted? How long did Treasury have to provide advice on the regulatory impact statement?

I’ll add a few questions to that, particularly in respect of the transition now, but, firstly, one other thing I think is a fascinating summary of the brightline test exemption contained in page 60 of the regulatory impact assessment around the degree to which other options were considered—10 years is what we’re going for; 15 years was also considered. Indeed, Treasury’s preferred option was for a 20-year brightline test. Well, that walks, wobbles, and quacks like a duck, frankly; it’s called a capital gains tax, even at 10 years, but Treasury was talking about 15 and 20. My question to the Minister is: did he ask for that advice? It’s very unclear. Did Treasury just simply give him advice he didn’t ask for, or did Cabinet consider a raft of options, including a 15-year brightline test and a 20-year brightline test?

My question on the specific transitional provisions as set out on page 7 of the SOP, “Subsection (1) applies to a person’s disposal of residential land, if the person acquires an estate or interest in the land on or after 27 March 2021.”—now, I think it’s actually in the SOP that there are a series of scenarios—actually, it’s in the advice to the Minister, the commentary on the SOP, and it basically talks about a scenario where if the offer is made and it’s revocable, then the 10-year brightline test applies if the offer is not accepted before 25 March, I think it is. So we have this quite unusual scenario where somebody who wants to buy a house, perhaps made an offer on 21 March, has, effectively, their fate put into the hands of the vendor, who doesn’t have to—so there might not be a deadline, or the deadline might be after 25 March. The only recourse the purchaser has is to withdraw the offer, and I find that quite punitive.

💬 Andrew Bayly: They may not be able to.

No, it is a revocable offer, Mr Bayly. There are various scenarios, including when there is a non-revocable offer. But if the only way to respond to the tardiness of the vendor is to withdraw the offer on a property that somebody actually quite likes to buy, their fate is in the hands of the vendor, and if the vendor is tardy by as little as 48 hours in accepting the offer, the brightline test doubles from five years to 10 years, and the practical cost of that could run in to the tens of thousands of dollars. So I wonder if the Minister could explain why he didn’t or his officials didn’t recommend that even with revocable offers that then put the ball into the court of the vendor—why that’s the purchaser’s problem. I simply don’t understand why it would be that punitive.

In respect of the question about did Cabinet consider longer periods than the 10 for the brightline test that this bill legislates for, yes, we did. The member, the Hon Michael Woodhouse, is correct in his reading of the papers that have been released that Treasury recommended up to 20 years, but Cabinet chose not to accept that advice, preferring the 10-year period that is in the bill. Why was that advice being tendered by Treasury? Treasury, of course, has an advisory role to the Government, and I think, like quite a few of the bank economists and other parties who have expressed opinions on the New Zealand housing market, including some of the international agencies like the IMF and the OECD, they have been worried about the steep rise in prices and worried about whether there is a bubble developing and whether it would pop. In respect of the point that the member asks a question on in respect of transitional arrangements, I will seek advice from officials on that point and respond in a moment, but I would note that, of course, it doesn’t apply in any event to an owner-occupied home.

Thank you, Madam Chair. I just want to go back to the Hon Michael Woodhouse’s original question that gives rise to the reason why we’re having this urgency today, which the National Party is very, very concerned about. I’d just like the Minister to answer the question: if the purpose of the change—of introducing an extension to the brightline test and removing the deductibility of interest—is to stabilise the market, then why is there a need for urgency? Because if people had more time to contemplate these changes and actually be able to manage their affairs as they would have expected to up to 9 o’clock this morning, if they’d had a time to work through a process where these things would have been considered in a committee stage, we would have had a much better outcome. What it also would have done, if we’d delayed the introduction of this, is led to a point where if an investor was currently holding a property, they would have been caught under the five-year brightline test anyway, and they could have exited the market at that point.

In terms of the interest deductibility, people could have also taken a view on whether they wanted to buy a house, because it has significant ramifications for the economics of their buying the house. I heard the Prime Minister very damagingly talking about speculators today. In most cases, this is mum and dad investors who are trying to create a retirement fund and look at housing as a legitimate form of investment. As of 9 o’clock this morning, they were brutally told that they could no longer claim the interest. Of course, it’s a stage period and we’re not quite sure about the stage for it, but I cannot see the downside for the Government to have delayed this announcement, to have flagged it and delayed it. Because, effectively, what the Minister is doing by putting this through urgency is actually capturing everyone now under the 10-year rule, automatically, without letting people be informed about it. I’ve got a text, actually, someone wanted to read out to me, that I received since the announcement this morning. They’ve been buying a house, they’re in the process of buying a house, and if they’d known about these requirements they would have done something differently. If your intent was to slow the market down, then maybe those people could have taken a more educated or different view on it, but what you’ve done is basically captured and imposed new conditions on existing people who were happily going along until 9 o’clock this morning, until you Draconianly imposed this new regulation on them that will have a significant financial cost to all parties concerned.

Well we could have done it that way, but we think the outcome would have been worse.

💬 Andrew Bayly: Why?

Because we would have caused an incentive towards people to buy more properties in an already over-heated market taking the more beneficial tax arrangements that would have flowed from them into account. We could have caused even further pressure on the housing market.

💬 Andrew Bayly: You don’t think more would have sold?

In respect of whether there is a problem to remedy, I think recent reports from CoreLogic and Statistics NZ show that there are. In the last quarter, the period for which we have the latest statistics, there has been a sharp rise in the percentage of existing properties that are sold to investors rather than either existing homeowners or first-home buyers, to the point where they now—those investors—are relying on advantageous tax rules that apply when you can heavily leverage a property, which you can in this asset class if you have a portfolio of properties over which you can spread the borrowings. That’s now the largest segment in the purchases of existing property. The percentage according to the graph I have in front of me is 27 percent of all purchases in the most recent data were leveraged multiple-property owners, 12 percent were multiple-property owners with cash, and lower percentages lower than the 27 percent were perforce first-home buyers and for people selling one home and moving into another. So on that basis, we thought it was appropriate to move quickly.

In terms of whether we could have advised the public earlier than the announcement that we made today, I think most members, when they look at the papers that we’ve released today, will see that the Government has moved promptly with this policy and promptly to advise the public.

Here we are in Part 2, and this is the part of the income tax bill that highlights quite how extraordinary the debate in this House is today, because here, in one hand, I have the bill we thought we’d be debating this afternoon and here, in the other hand, I have Supplementary Order Paper (SOP) 23 which clashes with this bill, introduces an array of new changes, and primarily introduces a capital gains tax that New Zealanders were promised this Government would not introduce. In this contribution, I want to highlight a couple of matters that are very significant.

The first is for us to understand the circumstances in which advice has been given on how this part of the Act will operate. We have a regulatory impact statement that has been released in relation to the SOP affecting this part. Throughout that regulatory impact statement, officials are at pains to again and again highlight the urgency under which they are having to formulate advice. My question for the Minister about this part of the bill is: at what point did the Minister consider that the bill, as it sits before us in Part 2, required dramatic changes? And at what point did he seek advice on those changes? The reason I ask is because we do have some traditions in this House in terms of select committee and the way that things are advised on. And one of those is that actually we do properly examine things. In this case, it’s very clear that officials have had to give advice in challenging circumstances. Did they even get asked for advice before Christmas? Because it’s very clear that the Government was considering changes to this section before Christmas, but it’s not clear that officials were given any runway to properly analyse the impacts here.

What we can see is that there is massive concern about changing Part 2. Treasury were not even prepared to take a view on what the impact of a 10-year capital gains tax would be because they had so little evidence and so little ability for analysis. But what we do know is that there was specific concern about lock-in effects; that is that, because of the way that Part 2 will operate in interaction with SOP 23, people wouldn’t put their properties in the market, that there would be upward pressure on rents, and that the exemption for new builds would create all sorts of administrative problems. And I highlight that because Part 2 does really detail how tax matters are to be interpreted, how they are to be applied, and the specific rules that will apply. Again, I note, quote: “significant time constraints”, “no opportunity for consultation.”

There are in Part 2 two new provisions being proposed which clash that I want to highlight. And one is around the way the main home exclusion operates. In Part 2 as it is set out, the main home exclusion is that main homes aren’t subject to a capital gains tax, the brightline test of five years, as it was to be in Part 2, does not apply to them. But what we learnt today is now actually the SOP will interact with this to erode that exclusion. It’s my understanding that the changes being proposed by the Government today will mean that if, for example, a public servant who owns a home in Auckland decides to take a secondment at one of our public agencies in Wellington for three years, and during that time they wish to keep their family home in Auckland, then what will actually happen if they are renting in Wellington is that they will then be subject to the brightline test if they sell that home in Auckland at a subsequent date, because they haven’t been living in it. Now, the reason this is relevant is that Part 2 specifically details the way the main home exclusion is to operate. And we now understand that, as it’s set out in this part, it is to be amended by SOP 23, and I think it’s important that the Minister highlight why this change has been made, because it has been very significant to New Zealanders the way their main home is excluded from capital gains tax. It seems to me that this could be a capital gains tax by stealth on the family home.

The second area of amendment I will have to come to in another contribution, and that relates to the way that short-stay accommodation is treated. Again, something that in this part is detailed, but which there appears to have been a 180 reversal on in the SOPs we’re debating this evening.

I’d just like to challenge the Minister, Hon David Parker, on some of the facts he provided on underlying demand. Is he saying, so long as there’s strong underlying demand and a shortage of supply, that capital gains tax will not deter speculators because they will continue to buy and they’ll continue to pay a tax? So the logic—I don’t know if anybody at the IRD or Treasury’s thought about this, but if you can buy something for 60 percent equity and it’s as safe as houses, people are going to still do it, aren’t they?

And the second point is: has anybody at Treasury or at the IRD or in Government not been honest today and said “A lot of what’s happening is not about taxing housing, it’s because the fiscal and monitory policy settings of the country have led to these problems.”? Interest rates and the lack of land supply have also accelerated this problem, and taxation isn’t going to fix it. What’s going to happen—and I’d like the people who share our social values to understand as well that Grant’s broken a promise today and so has the Prime Minister. With rents going up $125 a week, I can guarantee you, because I’ve had 20 calls about it, that there’ll be another $100 on rents in this country, and this is a really dangerous game. In terms of supply and demand, the people that are actually purchasing these houses are providing rental property. So the unintended consequences of this extension is that landlords are going to hold and then rents are going to go up, and those people are going to get punished. And those people then are out earning their money and paying excessive taxes.

And the one other point I’d like to ask is: has anybody thought at Treasury or IRD that now every other business in New Zealand can still claim tax deductions but not landlords? So where’s the sense in that? So there’s a couple of fundamental aspects to this where I think today the Government’s created a bigger problem for itself with its tax and expenses rules than they could ever have even thought about, and, more importantly, the broken promises to the people of New Zealand. And I think less houses will be built, landlords won’t sell—they’re going to sit and hold—and the private sector will not get a chance to come to the party here. So I’d like to just see if anybody did address those questions within the thought process of rushing this through.

Thank you for those contributions. I agree that there are factors behind the escalation in house prices that go beyond taxation, including the unprecedentedly low interest rates in the world, which have had an effect on cap rates and therefore asset values. It is, though, having a detrimental effect on inequality and is making it very hard for younger people and other first-home buyers to get into the property market. It has also created the risk of a property bubble, and the Government as well as various agencies that advise the Government have been worried about that. We don’t control interest rates. We do have some influence on macro-prudential tools the Reserve Bank can implement, and the Minister of Finance answered questions about that. That said, this bill is only about the brightline test. It isn’t about interest deductibility and there’s nothing in this bill about it.

While I’m on my feet I will respond to the Hon Michael Woodhouse’s point in respect of irrevocable offers. If someone’s already in a contract—for example, a long-term agreement for sale and purchase of a section often has a long date by which the vendor has to perfect their subdivision beyond which the agreement can be called off. That sort of agreement is not affected by these changes and the old brightline rules will apply to it, not the new ones.

Thank you, Madam Chair, and I thank the Minister for that reply. I must apologise because my query was a little bit vague because at the time I couldn’t find the specific example that was used in the commentary on the proposed amendments, which I now have. I wonder if officials may have given him an answer to a different question, so I’ll point through the officials to the examples table on page 13. It’s the fourth row down, which talks about the purchaser submitting an offer as part of a tender process that closes on 16 March. The offer cannot be withdrawn until 22 March, which was yesterday, but the purchaser does not withdraw the offer and the seller does not accept the offer until 27 March. So the Minister’s answer referred to a slightly different scenario of the development of land, where they may have been inevitable delays and the offer is—I think he said—irrevocable. But, effectively, in the tendering scenario in that example, through no fault of the purchaser’s actions—in fact, the purchaser doesn’t even know that they’re successful, so they submit the envelope on 16 March and 11 days later, their tax liability has, effectively, doubled in its term: their liability to pay a capital gains tax goes from five years to 10 years. So there may be a little bit more on that. It was the specific one.

I want to touch on the issues that my colleague Mr Smith was talking about in respect of the impact of these changes on residential rentals. I think he’s right, although I think the biggest impact on residential rentals is going to be if the Government does carry out its plan to remove interest deductibility, which is not subject to this—although I note, similar to the 15-year and 20-year options, the regulatory impact statement does refer to what would happen. In fact, Treasury said, on page 60, “Treasury does not recommend progressing the interest deductibility proposal without further analysis.” So that begs the question of, similar to the 15-year and 20-year options—and I appreciate the Minister’s candour that Cabinet did consider longer terms: did it also consider in this basket of changes doing interest deductibility this week, and did it ask Treasury for advice, and did it decide, on balance, not to do them because there were risks and benefits that were not clearly understood?

My third point is around the impact of residential rental increases, potentially as a consequence of what we are changing. I draw the House’s attention to page 61 of the regulatory impact assessment. It goes to some detail to highlight what Treasury believes are serious risks on the rental market and the cost inflation potential for extending the brightline. In the third paragraph of the middle section, “Where do the costs fall?” it says, “To the extent that rents are higher than otherwise, the costs would fall on renters who do not purchase a home. This would disproportionately affect low-income households, younger people, Māori, and Pacific peoples. Extending the bright-line could decrease the supply of rentals over the long-term … This means the impact an extension will have on rents is difficult to quantify, but there is a risk that there could be upward pressure.”

I don’t believe there are risks—that while they might be difficult to quantify, there is no doubt that risk is real and I believe it will come to pass before even the interest deductibility issues are considered by this House. And it’s on the people who are most vulnerable: Māori, Pacific peoples, younger people, low-income households. So this impact—the impact of these changes—is going to lead to one or both of two things happening: either renters get out of the market, and so they sell their properties to first-home buyers—tick, that’s positive—but those first-home buyers aren’t necessarily in these categories. Therefore, there will be a lower supply of residential rental properties for the very people who are being subjected to dramatically increasing rentals, and that will be exacerbated. Or alternatively, landlords hold on to their properties for longer and therefore seek other means to gain the rates of return that they were seeking, in which case that could also have upward pressure on rentals. It’s basically the status quo continuing. I think the Government does want renters to sell to first-home buyers. That’s the reaction that Treasury warned is going to have the greatest risk of residential rental inflation.

I am responding to the specific question that the Hon Michael Woodhouse has made in respect of page 13 of the commentary on the Supplementary Order Paper. The member’s correct that in respect of an irrevocable offer, there are transitional provisions that mean whether the purchaser does nothing or—well, the purchaser can’t do anything—

💬 Hon Michael Woodhouse: Or doesn’t know whether the tender’s been accepted.

Well, if it’s an irrevocable offer, the purchaser can’t do anything to protect their own position, and, therefore, even if it was subsequently accepted after this three-day warning period, then they are only bound by the old brightline rules.

💬 Andrew Bayly: So you’re saying that’s specifically catered for?

Yeah, that’s specifically catered for. In respect of the person that has a revocable offer, then they have to make an election really quickly as to whether they’re going to proceed with the offer in the knowledge that if they do, they’ll be subject to the new brightline rule, and they of course have the choice of not proceeding by withdrawing their offer, because it’s not an irrevocable offer.

💬 Hon Michael Woodhouse: That’s harsh.

Well, that’s the position. They can protect themselves.

I just wanted to ask the Minister some questions about the advice that has been provided that had given the Government such confidence in this extension of the brightline test to actually move it so quickly through the House today. Going back, the brightline test was extended three years ago to five years, and the claims then were that this will, effectively, slow down the investor rate into houses, it will make more houses available for first-home buyers, and it will arrest the runaway prices of houses. Now, is there any similarity between what was said three years ago and what is being said now? I can’t distinguish one.

So we look at it and say, OK, well, if someone bought a house for the average price three years ago, they would have experienced a $250,000 capital gain in the meantime, and they’ll be subject to the brightline test. So you work it all through—and let’s assume they can’t deduct any expenses for sales or anything else that might go on—they would pay the 33 percent on the $250,000 and be left with $170,000 in their pocket. That equates to somewhere between $56,000 and $57,000 a year, which is not a bad sort of return. So the question is: will this make any difference? My suggestion is of course it won’t, because as long as there is constraint in supply, there will always be upward price pressure.

It gets a little bit worse when you dig into this bill, because the interest rate that has been deductible against other income at a rate of whatever their tax rate was—so let’s say it was the 33 percent rate—works out that over the term of a 25-year loan on that average house, it’s around about $156,000 worth of interest. So you break that down to the yearly figure, working on a rate of about 2.65 percent—which may not last longer; it could be more—and the deductible component of that interest is $40 a week. The cost is $120 a week, but the deductible part is $40. My point is that if the $40 part that’s not deductible is gone and the whole cost is $120, why won’t rents rise?

💬 Simon Court: They will.

Of course they will, and the Minister needs to tell us what advice was given to him by their officials that gave them any confidence that this set of moves will have a deflationary effect or a stabilising effect on rental costs in a very constrained market. Do we have an answer to that simple question? What advice did the Government get that gives them the confidence that a brightline test will work and that the removal of the interest deduction planned will in fact also see downward pressure or stabilising pressure on rents?

The answer to that is that officials aren’t sure. The experience in New Zealand has been that rents have not increased at the same rate as prices. We’ve had a massive increase in prices without a massive increase in rents and we’ve had a—

💬 Andrew Bayly: What? Rents have gone up $120 a week.

We have not had the same rate of increase in rents as we have had an increase in prices. There’s quite clear divergence between those two.

In respect of the Hon Gerry Brownlee’s point, on the one hand he says this won’t change buyer behaviour and it will have no effect on prices because it’s all about supply. Well, if that’s right, then why would it necessarily have an effect on rents? Those are the imponderables. I agree that the answers to the housing crisis do not lie in demand side measures alone; they also lie in supply measures, which are outside the provisions of this bill.

Madam Chair—

💬 Hon Gerry Brownlee: Point of order, Madam Chairperson. I asked a question, which you’re allowed to do now, inside my five minutes. I thought I’d be able to further respond to the Minister’s answer to that question.

CHAIRPERSON (Hon Jenny Salesa): I will come back to you, Hon Gerry Brownlee.

💬 Hon Gerry Brownlee: Thank you.

CHAIRPERSON (Hon Jenny Salesa): The member Chlöe Swarbrick has been trying to take a call probably about five times now, and I have been giving a lot of calls to the National Party.

CHLÖE SWARBRICK: E te Māngai, tēnā koe. Tēnā koutou e te Whare. I wish I could say that this Supplementary Order Paper (SOP) 23 and the changes announced today were as bold and as transformational and as sweeping as the property investors’ lobbyists say they are, but, unfortunately, I cannot. The tax loophole which has been alluded to by a number of other speakers actually isn’t included in this Supplementary Order Paper, but I would say that that is the thing the Greens are the most excited about. None the less, I digress.

We have had other speakers from the Opposition saying that this tax loophole change, however, would mean that housing, investment in housing and housing as a business was treated differently to every other business in Aotearoa. If I may make the point, housing is different because no other business or the commodity inherent in it is recognised by the United Nations as a literal human right. As any other business, are you able to remove somebody’s access to that human right because they are not able to afford it? I’d also just like to quickly make the point this morning, outside of this Chamber, on the steps of Parliament, we had the Hīkoi of Hope, and nowhere in that announcement today was the point around accessible housing for those with disabilities.

So this debate is not about tax deductibility when it comes to housing. It is, however, about the brightline test, as outlined in Part 2 of this bill. This is important because it will have some impact, albeit marginal, on the runaway housing prices that we are currently seeing, particularly in my home of Auckland. In Auckland alone, we saw house prices increase by $100,000 in February 2021 alone. Homes are making more money than the people who need to live in them at present.

I’d like to refer to the advice that the Minister received on drafting this SOP, from Treasury in particular, as other members have quoted—and here I quote—“on balance the Treasury’s preferred option is an extension of the bright-line period” longer than 10 years. It goes on to say that it may be relatively easy to avoid tax liability under a 10-year test by delaying the sale of the property. Treasury then went on to recommend a 20- or 30-year—I believe, off the top of my head—extension to that test. My question to the Minister is: is this extension to 10 years, a mere doubling of the five-year test, not kicking the can down the road? Is it not dealing with the substance of the issue, which inherently is wealth inequality in this country? Two-thirds of wealth in this country is held in property, I might add.

It makes a lot of sense to actually refer to the history of the brightline test in this country and in this law in particular. It appears as though there is some confusion by virtue of the contributions in the debate so far. So the brightline test as has been well elucidated by the Minister and others is something that was introduced by the former National Government in, I believe, 2015. Prior to that, inside of the Income Tax Act there was something known as an intention test, where if you intended to sell for capital gain, then you should be taxed on that income. The problem, as was identified by the IRD in multiple reports and annual reviews and otherwise, is that it was incredibly difficult to apply this intention test. That was the reason that that brightline test was first instituted by the former National Government. It obviously then was extended in the first term of this Labour-led Government, and now is seeking to be extended once again. But as I’ve already alluded to, the problem right now when it comes to housing, when it comes to wealth, when it comes to inequality in Aotearoa and how it is continuing to compound is that the housing crisis is no longer necessarily just one of people flipping properties; it’s of people hoarding properties. What we know is that this extension of the brightline test is not going to solve that problem, and Treasury’s advice says exactly that.

So when we have a situation where Business and Economic Research reports that the top 20 percent of New Zealanders own 70 percent of the wealth, when we have the household economic survey released at the end of 2020 saying that the wealthiest 10 percent hold 59 percent of all of the wealth in this country and the poorest half—the poorest half—hold 2 percent, how do we seek to address that? I ask the National Party—I dare them to tell me that those New Zealanders in the bottom half are not hard-working.

Madam Chair, thank you, and I just want to, before I talk about Minister Parker’s response to my question before, just make it very clear that the brightline test was brought in in 2015 for the very purpose of clarifying that intention, which had been in the law for a long time and never enforced. It was also in response to a growing concern throughout the country about what were, effectively, foreign buyers coming in, and the belief that foreign buyers were putting upward pressure on house price. Well, we’ve seen that largely decline. We’ve seen new laws come in that pretty much make that a no-goer, but it has not had anywhere near the dampening effect on house price in the last couple of years. The only thing that is driving house price at the moment is supply—nothing surer than that.

It’s worth noting that while the Government wants to say “Well, if you invest in a brand new house you won’t get caught by the 10 years, you’ll only get caught by the five years.” on the basis they want to encourage more new house building, I think more new house building’s obviously a good thing, but don’t forget that on the current new house price, the Government takes in GST alone around about $100,000 inside that price, paid by the end buyer. Of course, all the way along there’s a massive amount of tax paid by all the tradespeople who work on it, all the trades companies who provide services, and, of course, the developers and construction companies, as well. So there is a big factor of cost inside a new house price of which the Government is quite a significant beneficiary.

The Minister said in answer to my question, quite simply, that officials didn’t know whether this would make any difference to rents and didn’t know whether it would make any difference to rising house prices. Well, I would suggest that they simply have a look at this history of the last three years and see what’s happened, as I said earlier: a $250,000 average capital gain on an average house price in New Zealand in three years, and a brightline test that will only take $70,000 from them. I’m not making a case for more tax, by the way. All I’m saying is that you cannot use the tax system to solve a problem of supply, and the thing that is really very, very irritating, listening to speeches today from the Prime Minister, from Mr Robertson, and from others who have made comment in the media, is the complete denial of the supply problem. The idea that you can put up three hundred and something million for pipes and roads and goodness knows what else, and then that’s going to solve it all, is utter rubbish, because unless there is consented land, then there is no further supply, and where there is consented land, there is no shortage of capital for its development.

I heard today, interestingly—particularly after a conversation I recently had with her—the Hon Megan Woods talking about what was done in the 1950s and 1960s, when a lot of houses were built on parcels of land that were allocated well ahead of final survey, well ahead of any infrastructure that was put in, well ahead of, often, roads that were even put in. But it met a need and it met it fast and it delivered for people at a reasonable cost, because it took loads of costs out of the system. This bill puts loads of costs back into the system.

No one is going to look at their extra, on average, $120 a week costs that they can no longer put down as a deduction—effectively, the $40 a week deduction, or numbers around that, depending on the circumstance—and say, “Oh, well, I’ll just take it on the chin.” This is a recipe for rising rents at a rapid rate. We already know that there’s pressure in the rental market. Look here in Wellington, where people have to queue up for hours just to get a look at a rental property, and then they go through a process where we’re hearing stories all the time where they’ve got to answer different questions and all the rest of it. But one way to drop those queues is to put the price up, and there’ll still be someone there, in a tight market, a supply constrained market, to take up that property. So this is simply a recipe for increasing the price of rents and increasing the upward price on houses.

I’ll bet that before we’re here too much longer—maybe one more Budget cycle—the Government will be scratching its head and saying, “Oh, well, that didn’t work too well, did it?” Meantime, what’s that done for people in this country that have aspirations to own a house? Very, very little.

This bill puts no extra costs into a new build, because they are exempt. The member said that the key to supply is more houses; I agree.

💬 Hon Gerry Brownlee: No, I said land—I said land.

More land is part of more supply, and this bill does not increase the costs of that, because new builds are exempt.

Thank you, Madam Chair. This bill is flawed. Treasury has been reported on commenting that they have not formed a view on whether a 10-year brightline test is preferable to the status quo, and even rated it worse than the status quo in their advice. The Prime Minister made the point the package attempts to balance supply and demand issues. We’re debating the brightline test, of which this element is one part of the Government’s package.

The brightline test is an exercise in jealousy, in bitterness, in an intergenerational conflict between those who have assets and homes, and those, as we heard from other members, who wish for their generation to have access to homes at reasonable prices. But it will not solve that problem. It will only make it worse.

Underlying the issue, where I live in Auckland we understand that there is sufficient land zoned for 100,000 homes today, the constraint being infrastructure. We’ve heard today about a package which allocates $3.8 billion to infrastructure. We don’t know what that time is because we haven’t had a chance to have a look at that closely. But if that was over 10 years, that’s about $380 million a year. That’s what Auckland Council already spends on stormwater alone. It’s a drop in the bucket. In fact, it’s a drop in the ocean because the infrastructure deficit, as advised by officials to the Minister of Local Government and to the media, is $110 billion over 30 years, not $3.8 billion or whatever the number is that has been allocated today.

So a brightline test will not do anything to address the fundamental issue of availability of land, of supply, and therefore only serves to exacerbate the existing problems. When the brightline test was proposed under a previous Government, ACT did not support it. ACT’s leader, David Seymour, described it as a capital gains tax by stealth. What we’ve seen over the past few years, with the brightline test extended to five years and the incredible increase in property values since then, combined with other measures that the Government’s had a hand in, boosting the money supply and the availability of credit, is that these measures have not contributed to control prices or limit price growth in any way. The extension of the brightline test today through this bill to 10 years merely vindicates ACT’s original position that it’s a capital gains tax by stealth. It will have no effect whatsoever on house prices. It won’t help another Kiwi into a new home or a second-hand home or even a hut.

Now, on the weekend, I watched a movie with my son: Jack and the Beanstalk. While I was listening to some of the other speakers and to the Minister, and indeed to the Minister of Finance’s description of this brightline test today, it reminded me of a scene from Jack and the Beanstalk with a magic bean. It’s like a magic bean: you plant it and it will solve all your problems. I actually wonder if the Government believes that this is some kind of magic bean, this brightline test. Will it solve the housing crisis, this brightline test—this magic bean? Or will it simply blow up, just like when the giant swallowed the magic bean and it grew inside of him and took over everything, but, in the end, the giant didn’t succeed. This Government won’t succeed with the brightline test.

The fundamental issue with the reforms that we’ve heard announced today and this brightline test is that it doesn’t address the needs of people—those New Zealanders who might find at a certain stage of their life they want a smaller home, they want another home for growing families, or new families, families joining together. These are all things that require flexibility in ownership models, and they require flexibility in the regulation around these kind of things. What would be awful to see is as people grew older and reached the end of their working lives, feeling they were stuck in a home that they couldn’t leave for fear of incurring an awful tax imposition at the end of their working lives, when they simply seek to move to a smaller home and, potentially, even make better use of their land by subdividing, for example.

So there are many, many hooks and crooks in this bill which haven’t been explained, and I would like the Minister to explain exactly how the brightline test will avoid some of those pernicious risks, like trapping people in homes when they’re ready to move on. Thank you, Minister.

I always chuckle when we are lectured by that “Yoda of the House”, Chlöe Swarbrick—that font of all knowledge—

💬 Simon Court: Point of order, Madam Chairperson. I think that language was unparliamentary to my colleague Chlöe Swarbrick, who I do work closely with on Auckland issues.

CHAIRPERSON (Hon Jenny Salesa): Thank you, Simon Court. You can’t take offence on behalf of another member.

That font of all knowledge on matters relating to tax law or jurisprudence. I humbly suggest my 25 years as a chartered accountant and a couple as Minister of Revenue gives me perhaps a better long-term perspective on actually the definitional difference between taxable income and capital gains.

Now, the Government has introduced this new nomenclature called capital income, which actually doesn’t have, as far as I can tell—the Minister can correct me—actually a definition within the Income Tax Act. But one thing that Chlöe Swarbrick did say that I have to take issue with is that capital value growth from housing is somehow historically treated differently from other forms of capital income growth, and that’s not true. The Income Tax Act treats the accretion of assets for taxable purposes exactly the same, or at least it did until 2016-odd, when the previous Government bought in the brightline test. If one purchases shares with an intent to gain income from them, usually from dividends, and the share price happens to accrue in value, then that value increase is not taxable. If one buys a business and the goodwill value is in that business, it earns income for the owners and they pay tax on that income. But if the capital asset grows that is not currently taxable.

The purpose of the brightline test is because everybody needs—particularly, in residential rental property investment—to demonstrate that at the point that they purchased the property, their intention was not capital gain, it was income from rental. The purpose of the two-year brightline test was to say, “If you sell the property between one day and two years, we default to a point in the Income Tax Act where you are deemed to have purchased that asset for a capital gain.” Now, one can’t say that actually about a five-year test; one can’t say it about a 10-year test, let alone a 15- or 20-year test, that Treasury was advising on; and, quite simply, Treasury favour a capital gains tax. They realise the language can’t be used with this Government, but that’s essentially what they were saying. They wanted a capital gains tax on everything but the family home, and so there are differences.

Chlöe Swarbrick also sort of danced a little jig around the likelihood that the deductibility of interest will be removed at some time in the future, and, again, that is completely at odds with our tax framework. Our taxation framework requires businesses, firstly, to return all matters of taxable income, but then allows them to deduct from that income those legitimate business expenses incurred in the gaining of what then becomes taxable income. Interest is paid by property developers. It’s paid by the plumber who goes into debt to purchase her business. It’s paid by Rocket Lab if they have gone to the bank. Why on earth, from a philosophical perspective, we would not allow somebody to deduct the full cost of their business expenses simply because they are doing pretty well out of that business is fundamentally wrong.

Now, Mr Brownlee was modest—overly modest, in my view—in his description of the supply side issues related to house price inflation, because he knows more than any what increasing supply will do for house price inflation. He did it in Christchurch. He got rid of the urban limits after the earthquake. The only place in New Zealand where house price inflation is moderate is in Christchurch. Why—because we had such great supply.

Now, what worries me about this is, if by some miracle the Government achieves its goal of moderating house price inflation to something equating the Consumers Price Index, then the very fiscal drag and bracket creep that we were talking about in Part 1of this bill will come in, because inflation will erode the value gain, the capital gain, over 10 years, and therefore a person would have to pay tax even though they were not materially better off. So all of this is predicated on the Government not being able to control the house price tiger that it’s got by the tail.

Madam Chair, I’ll just have a little extra. I know my time’s up, but I’ve just got about 30 seconds more in this question.

CHAIRPERSON (Hon Jenny Salesa): I call the Hon Michael Woodhouse.

So there is a question to this and that is: did the Government get advice on whether or not inflation should be taken account of when it considers the marginal tax to pay on the sale of a property within 10 years? Forgetting the interest problems—and we’ll deal with that later in the year—the jurisdictions around the world deal with this by having a lower capital gains rate. Fifteen percent is usually used as a sort of a catch-all arbitrary rate that says that, well, there’s a time value of money. The longer one keeps the asset, inflation will erode the capital gain. There’s also expenses that can be incurred of a capital nature that aren’t included in the wash-up, so let’s just call it 15 percent rather than the top marginal rate, because this is punitive. If we succeed in getting house price inflation under control, this will be unnecessary, and actually it will work—it will have completely the opposite effect that the Government intends it to if it doesn’t allow for the time value of money.

Thank you, Madam Chair. In response to the member’s last question, I don’t recall advice from the Treasury on that point about—I don’t believe there was advice as to taking into account inflation, so I don’t think that was considered.

In respect of one of the points that the member made, referring also to the Hon Gerry Brownlee’s comments, there are some differences between the Canterbury earthquakes and the current circumstance, but there are also some similarities. I agree that land supply is important. The Government agrees that. It’s one of the reasons why outside of this bill the National Policy Statement on Urban Development requires a lot more land opportunities to be made available particularly in high growth areas both in respect of intensification but also land at the margins.

I would make the point that in Canterbury, of course, there were other things at play including the fact that some people left, so there was for a period a declining population and fewer people to house. There were billions of dollars of insurance moneys that were flowing into the city to make that an easier transition and, of course, there were significant Government contributions, which were wise, which contributed to infrastructure. Of course, there are comparisons to that in other parts of this package that have been announced today, but none of that’s in this bill.

Look, I would take issue with some of those generalities that the Minister in the chair, David Parker, just referenced with this current situation being different to what we faced in Christchurch. Yes, there was, for a very short time, a number of people who left the city, but the population was on the rise relatively quickly, within 12 months of those earthquake events, and that’s evidenced by the numbers of people who are registered with the Project Management Offices rather than any particular census data.

Leaving that aside, urban intensification is an important part of housing supply, and we’re going to have to see more and more of it as time goes on. So my question is this: if someone buys a property in an area that is earmarked for more intense housing and they demolish those properties, they then put forward a plan that’s consented for the building of a multiple number of dwellings on that property, how is that going to be treated in relation to the brightline? Will the whole purchase be exempt because of the new dwellings that are built on that land? Will it be apportioned? If the owner decides to hold it for a period of time, how long do they hold it for? What will the overall effect be on the transfer of focus on to the special housing areas that a lot of councils are now developing, as opposed to new subdivision, which is obviously going to be an important part, and the Government is staking somewhat of its future success of this policy on that by the announcement of that large infrastructure fund. I’d like to return to this in a minute if the Minister was able to answer that question.

I may have misunderstood the member’s question, in which case, if I have, he can restate it. But in respect of if there was a development on a piece of land building new houses, it wouldn’t be affected by these new rules because they are intended over time to be exempted. In respect of capital improvements to an existing property, they become part of the asset base and so would be counted in respect of the cost that is assessed against the eventual sale price.

So for a clarification on that then: if a developer, for example, buys a multiple number of residential properties, demolishes the buildings that are on it, and then develops those properties, they would be caught as a trader and they would, naturally, pay the appropriate tax in that circumstance. Are they, in that circumstance, not caught by any sort of brightline provisions?

That’s correct, because developers are actually not caught as traders; they’re caught as developers. They’re in the business of buying and selling houses, and, effectively, their houses are their stock in trade and it’s already on income account.

Thank you, Mr Chair. Just following on from the questions and the exemption that the Minister talked about there for new houses, I just want to know what sort of advice he received around that exemption, because the inference is that people that are in the business of—not in the business as in the sense that they would be taxable anyway. But somebody that may want to have a second or third rental property should now look at the new-housing market as their intent to buy rather than the existing-housing market, and I think that’s the inference that we’ve got from the policy decision we’ve seen today.

I’d like to see what kind of research the Minister has around that, because from my experience, looking at somewhere like Hamilton, which has got burgeoning new suburbs, they’re typically people that are in their second or third house. They go through a staged process to get to that new-house purchase, because a new house in the northern suburbs of Hamilton is over $1 million and a new house in the new suburbs of Cambridge is around about that price as well, and that takes into account that you’ve got land values of $550,000 to $600,000 for just the section and then you build on top of that. So it becomes a very high end of the market.

The people that are actually going in there and buying those homes have probably gone through two sales to get there over their lifetime. They’re not necessarily 25-year-olds straight out of university going in and buying those homes; they’re probably someone who bought a home in a cheaper suburb of Hamilton, maybe lived there for 10 or 15 years, raised their children there, paid off that house, and then was able to then purchase a new home and enjoy that in their later years. So it doesn’t make sense to me that you have the exemption there, thinking that property investors will go into there, because that’s not actually their market. The market for those properties is actually probably second or third purchases, that are actually then freeing up homes at the lower end of the market for new homebuyers to come in. So I don’t know if your exemption is actually going to provide as much comfort as you think, because you’re actually restricting a market that actually assists in getting new people into the market.

So any clarity that the Minister can give around what research they did to indicate that that was a sensible policy decision on his behalf would be great to hear, and also what the necessary effect will be, because the person that may be looking at that second or third home as a retirement-type investment, and that’s what this bill, effectively, captures. It doesn’t capture the people that are necessarily in the business; it just captures ordinary New Zealanders that may be looking at a second or third home as an investment. They typically would do that at the lower end of the market, therefore providing opportunities for people to have rental accommodation. They’re going to be very difficult to find, to be able to go into the top end of the market, which would then create a situation which would be difficult for them to invest and provide those opportunities. So I think you might find that the new-house exemption actually works against the policy direction that you’re wanting to achieve, Minister.

Thank you for that question from the Hon David Bennett. In respect of the example that you give, where someone throughout life has moved on from their old house and they’ve purchased another one, as people naturally do, as they save a bit more and can afford a more expensive house, they will be exempt from this because that would be an owner-occupied house.

That wasn’t the question. I understand they would be exempt, and I was using that as the example of who is the new-house purchaser. The new-house purchaser that you’re inferring should be under this policy should be the investor, and that is simply not the person in that market. The person in that market is the person that is exempt because they’re selling their property once or twice to get there. You’re expecting a person to go into that market, which they’re not in now, being the investor-type person with only one or two homes—you know, they’re not a full-blown businessperson in that regime—and you’re expecting them to go into the high end of the market, which is really not configured for them, because it’s configured for people that are exempt anyway and would go through a normal process of the life cycle of moving through suburbs, as you do in a community.

We’re not envisaging—have never envisaged—that the high end of new-house markets will be predominantly a rental market. Other parts of the new-house market are. There is some building for long-term rental, and we are encouraging that by exempting that sort of long-term rental investment by investors from the brightline test, which is under consideration here.

I move, That the question be now put.

💬 Hon David Bennett: He didn’t answer the—I’ve got a supplementary question.

No, I haven’t called you yet, Mr Bennett. Who wants the call?

Thank you very much. I just wanted to get specific with accruals and the impacts of this tax policy going forward. As we’re faced with a situation where it’s in urgency, there’s going to be no ability for public scrutiny. There’s going to be no ability to get this through a select committee to actually analyse it properly and provide some rationale to the people of New Zealand about why this is actually better than the status quo.

But I just have a couple of specific questions—it’ll be a short call. We know that house prices have risen rapidly over the first brightline test and risen even more rapidly in the last five years, and now it’s going to 10 years. So what’s actually going to be the accrual difference between five years and 10 years? What are we expecting from the tax take? What are we expecting in behaviour and what’s wrong with the status quo?

If that’s a question as to how many additional properties are likely to be caught with the change to the brightline test, we can’t be absolutely clear because investor behaviour may change as a consequence of the new tax rules, and, indeed, for some people, it will. But the proportion of properties that are generally sold within various time frames are set out, I think, in the documents that are already on the Table.

Thank you, Mr Chair. I just want to return to an earlier response I had from the Minister, the Hon David Parker, and I am appreciative he is answering the questions. The first one, I suggested to him that by passing this bill through in urgency without going through the proper consultation process is the wrong thing to do, for a number of reasons, but, principally, one is that people have already acquired property under a certain framework, a certain understanding, and here we have the Government effectively coming over the top of it and unilaterally changing the rules at the stroke of a pen within—whether we pass this bill tonight or tomorrow, but the Government will ram through this bill which will change the rights of ordinary New Zealanders who happen to own rental properties. One is that it gives rise to the issue of democracy, but it also gives rise to the issue of protection of existing rights. Of course, this bill, and passing it in urgency, just rules a steamroller straight through the middle of that and says, “We don’t care, we’re going to do it anyway.”

My view is that, actually, if there was some time taken to actually pass this bill and give it due consideration—and I’ve got a whole lot of technical issues that I haven’t even got to yet, on how this bill might operate. But, if there was the time taken to allow people to consider it and get some proper advice—and I know Treasury and the IRD have got differing views on certain aspects of it, which we haven’t even got to, but clearly they haven’t had time to do the full, proper analysis of it—then one of the things is I think actually it would lead to a better outcome, if you were seeking to stabilise house prices, which I think everyone is seeking to achieve. We don’t want to see a drop, but we do want to see a stabilisation of price inflation.

The Minister made the point that, by ramming it through, what it will do is stop people going out and buying investment properties. I actually think it’ll be the reverse. I think that if people had maybe three months, or maybe a year even, to have a look at the new rules, know that they’re going to be meeting a 10-year test, know that they’re going to be losing their interest deductibility, actually some investors—and when I say the word “investors” we’re talking about ordinary mums and dads who happen to have, and by far the majority have only one house and rental property; they might take a different view, and they would take a considered view, and we would see properties maybe being released that possibly could be bought by first-home buyers, whatever the case might be.

The Minister made the comment before that he thought by ramming this through, it will stop people, investors, jumping into the market. But by saying that, what you’re saying is investors are going to look at this piece of legislation, when it’s passed, and say, “Woo! Great thing. I am going to now have to hold the property for 10 years, because if I don’t, I’m going to have to pay capital gains tax on it. And secondly, I’ve just lost my interest deductibility. So the ongoing profit round my rental that I was looking at and factored into my equation, I’m going to lose it. And that’s a bad thing, but that’s going to make me want to buy this property.”

So I just think that it’s a pretty absurd proposition to say, “The reason we’re going to put this through in urgency is we’re going to stop new people getting into the market.” Actually, I think we should be trying to allow people to exit in an orderly way and manage their affairs. So my first question to the Minister is: has he got any evidence to back up this claim that it should be rammed through in urgency? That’s my first bit. Actually, I’m going to leave it there. I’ll come back on another matter shortly.

Mr Chair, we’ve traversed in great detail many of the issues around the brightline test, and there are number of other issues in the Supplementary Order Paper which I think it would be good to devote some attention to across the Chamber. I particularly would like to look at the loss continuity rules, which are of course of considerable benefit to businesses, and they do change loss continuity rules which have been quite substantially based around a very tight percentage of shareholding test, so it’s a very tight numerical rule. Of course, that is then quite easily controlled. So we’re moving from that very tight control on which entities may carry forward a loss and claim the tax benefit of it to a wider test on a continuity of business test. It’s a new test, it’s a different test, there has to be no major change in the company’s business. I would just like to invite the Minister to talk a little bit about what that major change might look like, the sort of business changes that would fall below and above the bar in order to effectively carry forward tax losses.

Thank you to Deborah Russell for that question. It is a significant change and, from memory, I think the cost to the Crown is $60 million of this change, because there will be more losses able to be carried forward that were previously forgone. The theory behind it is that, in order to protect tax losses, some companies are not accessing capital that they need to grow and to employ more people, even though the nature of their business is not changing. They’re caught currently by the numerical rules as to maintenance of a certain proportion of existing shareholders. If it’s disrupted by more than a set percentage, then you can’t carry the tax losses forward. If they haven’t got the capital themselves, and they’re reliant on new sources of capital from new shareholders, they’ve got to choose between losing their tax losses and taking that additional capital, even though they need the new capital. So we’re trying to encourage that and the development of the economy, and extra jobs and extra economic activity, by allowing a less numeric approach, which, as the member has properly identified, is assessing whether the nature of the business is changing rather than a numerical change in shareholding.

There is a risk that we could go back to the bad old days, where there were a lot of transactions which were motivated by people taking advantage of historic losses and changing the nature of the business to take advantage of the tax loss rather than to capitalise the business that was already going on, and Inland Revenue is alert to those risks and has already signalled to the taxpaying community, and the advisers of that tax community, if that proves to be a problem in practice and that we see a return to loss-trading which is not for the benefit of growing the existing business of the company, then they’ll look at tightening up the rules.

Thank you, Mr Chair, and I want to talk about two things in relation to this part. One is the question of broken promises, and the second is the consequences. That Minister, David Parker, who was just standing up of course is on the record wanting a capital gains tax. He’s always advocated for it and wanted it and thought it was the best thing for New Zealand. He was part of a party that lost two election campaigns on it. During the previous election campaign, his successor, Grant Robertson, promised black and blue there would be no further tax changes beyond the increase in income tax for people earning over $180,000 and some potential petrol tax increases. So what do we find here? We find here in this piece of legislation a significant extension of the brightline test. Yes, National introduced the brightline test for two years to deal with the specific issue of people flicking properties and wanting to clarify the law in that relation. This extension to 10 years is unquestionably a significant tax change, and an expansion into a capital gains tax, in effect. Then we have, also, a separate significant change in not allowing the deduction of interest payments for rental properties.

So it’s always been said that in the third term of a Government arrogance seeps in, and what we’re seeing in this Government is a quickening of that electoral cycle so that in only the first year of the second term this Government is showing overweening arrogance and breaking promises left, right, and centre. A couple of weeks ago we had that over the Māori wards, where there was a clear promise to give local people a say on matters affecting them, and then that was broken with the legislation that was rammed through in urgency. And now, two weeks later, we’re back in the committee, again under urgency, breaking another promise that was brought through in the election. So I suppose I have to ask the Minister how on earth he thinks that New Zealanders will be able to believe anything that this Government says if they’re in the habit of breaking promises.

The second thing I wanted to raise was the question of the outcome of this legislation, because it’s my experience that about 50 percent of the laws passed in this Parliament achieve the exact opposite of what they set out to achieve, and that is because the world is very complicated and it’s hard to predict what the consequences of the legislation are, particularly in matters relating to tax law. So that is why the general process is to spend a lot of time in a formulaic and laid out manner consulting with those people who deal with this day in, day out and understand the nuances of what’s going on, so as to reduce the odds of the legislation bringing the exact opposite effect to what we want. We’re not doing that. What we’re doing is we’re ramming this through under urgency.

So what will be the consequences of significantly reducing the returns to landlords for properties that they own? It’s quite possible, it seems to me, that, in conjunction with a whole lot of other things that have happened in the rental property space, this will lead to higher rents, and that will make it more difficult for New Zealanders to have access to affordable housing. It will make it more difficult for families and their children to be able to get by.

We’ve heard a lot about this Government’s intentions around reducing poverty, and they’re going backwards at a rate of knots in so many measures, primarily because of the cost of housing and primarily because of the cost of rental housing. This legislation, it seems to me, may well compound that problem—in fact, make it considerably worse—given the fact, and the Prime Minister has admitted, that the officials don’t really have a clear sense of what the consequences will be for rents. They don’t know, and so we’re going to take a bit of a plunge here, but we do know that there’s been about half a dozen things passed over the last couple of years adding costs to landlords, and they have flowed through to rents. We do know that it’s made it much more difficult for landlords to deal with unruly tenants, and that has quite naturally led to some people getting out of the industry, and that has compounded the shortage of supply. And we know that it’s difficult to magic up a whole lot of new houses, and so, in a period of constrained supply, the most natural thing is that the prices will go up. And so what we have here is broken promises and the risk of higher rents.

Yes, so I think the points raised by my honourable colleague Paul Goldsmith were very pertinent. I think the answer actually is in Treasury documents, Mr Goldsmith, which really talk about the impact on house prices and rentals. I know the Minister was shortly just about to jump up and highlight this, but it was pretty clear what Treasury’s advice was, wasn’t it? It talks about considerable uncertainty about the magnitude of the impact on rents. It talks about the disproportionate effect on low-income households, young people, Māori, and Pasifika peoples.

Of course, I’m also looking at the IRD view, and they were very clear about their advice. Inland Revenue recommended against both extending the brightline tests and denying interest deductibility. So I think Mr Goldsmith’s points are actually very valid. Minister, and I’d like to get your views on that and why you think both Treasury and the IRD are wrong in their assertion or their view around the impact this will have, particularly on rentals and rental prices, but also on the price of houses going forward, because both of those are covered.

I’m just conscious of the time up there, Mr Chair. I want to return to a comment and a line of questioning that the Hon Gerry Brownlee was raising before, which hopefully we can do quite briefly. This is the issue around new builds. I understand the answer that the Minister said, that if you’re in the business of building houses, if you’re a trader, you will pay capital gains tax on those returns—you will pay tax on the capital gain of those businesses.

After dinner, you and I, Minister, can have a lovely conversation about the difference between income tax and capital gains tax, I’m sure. But the issue is, I want to specifically ask about this exemption—because it’s unclear what it means—around if someone builds a house, they will only be subject to the five-year brightline test, as opposed to going into the new regime of 10-year brightline tests. So my question is (a), I don’t understand how that provision works, but, secondly, if you were really genuine about trying to get people to build new houses, then you would allow them to build the house and sell that property so it goes onto the open market, so we can get first-home buyers into that property investment, get them on the ladder. What we’ve done here is continued to put a barrier in terms of (a), whether people want to build a new house, because if they do, they know they will be captured still by the five-year brightline. Why didn’t you get rid of it? Why is it even at five years? Why didn’t you address that issue? If you’re really committed to seeing new builds, which, in the main—most new builds are undertaken by small building firms, individuals, and mum and dad investors thinking that they can do something and actually create homes for future people to live in.

I move, That the question be now put.

I am a bit surprised by that, and I should point out to the committee that we haven’t even started debating the substantive issues that are in Part 2 of the bill as they were introduced to the House and considered by the select committee. So if the Labour Party believe that this is a conversation that they want to vote on now, they might have to prepare for a long evening.

There is a considerable amount of information and changes in Part 2 of the bill on feasibility expenditure, on the GST on global roaming, and on the purchase price allocation methodology changes. We haven’t even got there yet, so we will have a raft of questions for the Minister on those technical changes and we’ve got a long way to go. I just want to point out that I have tabled an amendment in my name, amending the bill at Part 2 to delete the provisions that relate to global roaming—

Sorry to interrupt the member. Members, in accordance with the decision of the Business Committee, for Nicola Grigg and Simon Watts to make their maiden statements, I suspend the committee of the whole for the Speaker to resume the Chair.

House resumed.