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

Members, we come now to the debate on clauses 1 and 2, the title clause and commencement clause.

Thank you, Madam Chair. Well, I think this title should change, and I’d be keen to put forward a motion. I think it should read “Taxation (Annual Rates For 2020-21, Feasibility Expenditure, and Remedial Matters) Bill and Let’s Smack Mum and Dad Investors Who Happened to Own a Rental Property around the Head”, because this is what this bill is about. There is some good stuff in this bill that went through the Finance and Expenditure Committee, and we discussed it and debated it, and in the main we are supportive of most of the elements in the bill that deal with improving tax arrangements.

Obviously, we have a deep concern about the tax rates and other aspects as we traverse, such as GST on roaming services, but the issue around this is this bill went through a select committee process. It was focused on the matters which are taxation, and principally the annual rates, which is a key bit, were debated and required to be debated separately. It looked at feasibility expenditure, and there were quite significant changes around that and how they can be carried forward and, if they are removed, how they can be taken back into account if a business subsequently reinitiates a business where some feasibility expenditure was deducted. There’s a whole stack of remedial matters that were dealt with, which in mind were highlighted by Ms Barbara Edmonds, which are all good—all good—to the extent that we dealt with those in a good manner, and I think the commentary to the bill sets out our different views.

We have a minority view which specifically deals with our concerns around aspects in this bill. I’m just looking for it here, but it’s clear, and we wrote that minority view at a time when we thought this bill was going to pass through the House and we were going to discuss the matters raised in it. However, we were presented today with Supplementary Order Paper (SOP) 23 that runs to, I think, 60 pages. I haven’t checked the exact amount, but it’s a fair stack of pages here, with no advance warning. The press, as I understand it, were given an advance copy at 8 o’clock. The announcement was made at nine. We weren’t given an advance copy at 8 o’clock, of course, because it’s all politics. So here we are. We have the media who are given preferential access to this very, very substantial SOP about imposing a significant increase in the brightline test from five to 10 years, in which, of course, now makes it a gain on capital asset, which is a capital gains tax; and of course, deducts the issue, disallows the deduction of interest expenditure on rental properties.

Now, I understand there’s about $82 billion worth of debt relating to rental properties. If that figure is right, this is a very, very significant aspect. There will be many people worried tonight about what this means for them, and most of those, by far the greatest number, will be mum and dad investors who own one rental property. There are very, very few people who own three or more rental properties.

So that’s why, I think, given what we’ve had today with this dreadful SOP that’s going to reverberate around the market and affect the households and families of many New Zealanders, I think to continue to call this bill the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill is actually a misnomer, because when you consider what the SOP includes in it, it is by far the most significant thing we’re debating today, which is how we’re going to smack around mum and dad investors who own one rental property and will tonight be worrying about it, going to bed, thinking about what will they do when in many cases, most of the cases, they are great landlords providing great rental properties for good New Zealanders in a market which is perfectly adequate, and people are enjoying the relationship in terms of living in a good, secure house.

I’m not normally one who would play around with titles of bills, but this is definitely an example of where the legislation we are passing—what’s on the tin is not what’s inside, because this bill is called the “Taxation (Annual Rates for 2020-21,”—OK, we’ve done that—“Feasibility Expenditure,”—OK, we’ve done that—“and Remedial [Measures]) Bill”. And so in order for the title to match what we are about to do, passing into law a massive extension to the brightline test, one would need to consider that remedial matter, something that needed to be remedied. It’s not something that needs to be remedied. So I think this bill needs an addition to those three strands. Put a fourth leg on the stool, and let’s call it what it is, “Remedial Matters and a Capital Gains Tax by Stealth Bill”, because there is no doubt that the Government having promised—the Prime Minister having stood up in the Beehive Theatrette and saying, “While I am Prime Minister, a capital gains tax will not be introduced.” and the Minister of Finance saying publicly, I think on 9 September 2020, “Will there be changes to the brightline test? A one-word answer, ‘No.’ ”

💬 Andrew Bayly: But you forgot the laugh.

Oh, and a “Ha, ha!” Yes, that’s right—a nervous laugh, “Ha, ha”—something like that. I’m not very good at mimicry, especially not with the Minister of Finance. But let’s be very clear. This bill is not describing what we are doing now.

I referred to Ms Turner’s very excellent advice to the committee, the select committee, and I want to turn to that again. In respect of purchase price allocation, it’s relevant to an amendment, a tabled amendment that I’m about to put on the Table, and I appreciate the Clerk’s assistance with the drafting, because I hadn’t noticed that the Minister had already amended the commencement date for section 40 of the Act, and that’s in relation to purchase price allocation. Bear in mind, Ms Turner’s comments that she made, which I quoted in Part 2, to the significant changes and the risk of unintended consequences, is “it is impossible to identify and deal [with] every practical situation to which … changes may apply. … For these reasons, I concur with the cautious approach recommended by officials.” Well, that rings a bit hollow right now.

In respect of that purchase price allocation, she made a very interesting point at 4.4 of her report: “The proposed rules are detailed and complex and the consequences of not knowing of their existence, misunderstanding them, or ignoring them are not pleasant, particularly for purchasers.” And then she goes on to talk about the time frame: “That timeframe”—the stated application date is 1 April, bear in mind—“is physically impossible.” So what she recommended to the committee was that the application date of 1 April would apply to commercial land and buildings, including fit-out, and that the application date of 1 April 2022 apply to the other asset classes and that the intervening period be used for two purposes, being education and fine tuning of the proposals.

Now, the Minister has in his Supplementary Order Paper 23, as I understand it, delayed the implementation of section 40 until 1 July 2021 as a partial nod, I think, to those concerns. I don’t think that goes far enough. I think Therese Turner’s advice to the committee was very sage. These are complex changes to the manner in which purchase price allocation goes, and I think it behoves this committee of the whole House to give tax agents and stakeholders every opportunity to educate their clients, because the consequences of getting that wrong are extreme, and they could have whole purchase prices disallowed because of their failure to comply with these new provisions, at least until those things are sorted out. I think it would be only fair because, remember, IRD used to have as its strapline, “It’s our job to be fair.” Well, it’s only fair to give those clients of tax agents every opportunity to understand their obligations so that they can avoid the pitfalls that are being introduced potentially by section 40. So just to summarise, this is the “Capital Gains Tax by Stealth Bill” and the purchase price allocation commencement date, in my view, should be 1 April 2022.

I thank the member, the Hon Michael Woodhouse, for his contribution. He is correct that the Supplementary Order Paper changes the commencement date for the purchase price allocation provisions to 1 July this year, which would leave three—and thereafter it applies to transactions entered into after that date. So from 1 July onwards, those provisions kick in and vendors and purchasers have to agree on a purchase price allocation in accordance with the new rules. The advice that we have received and accepted on the Government side is three months is enough for people to get their head around that. It does have significant financial consequences of many millions of dollars every month, actually. The revenue gain or the reduced revenue loss, I perhaps should describe it as, is predicted to be $170 million over three years. So three years being 36 months, you can see that it’s more than a million dollars a month, and therefore we’ll be voting against the member’s proposal to change that commencement date for purchase price allocation to 1 April next year, and we’ll be sticking with the proposal that’s in the Supplementary Order Paper of 1 July this year.

Thank you, Madam Chair. I appreciate the Minister’s clarification that indeed my reading of the amendment was correct. I would make two comments about his case for haste, because I still believe that even a three-month delay is a very short period of time. One is that by his own admission, if the costs of the delay are so high, we’ve had no provision like this in terms of the framework for the punitive aspects of failure to agree a purchase price allocation methodology for years. So what’s another nine months?

The second point I would make is that the very transactions that would be caught by this provision, even if it were delayed until 1 July, are being negotiated right now. So the sale and purchase of businesses is not something that we do like the sale and purchase of a house. They are often very complex and they involve the calculation of after-tax rates of returns for the potential buyer that would be significantly affected by the failure to agree a purchase price allocation methodology. And if they were to be agreed even, say, in the next four or six weeks, the settlement on the sale and purchase of these taxable assets by 1 July means effectively they are caught then as if it was 1 April.

Now, there will be some people that were negotiating some months ago that may not be caught in that net—I accept that—but I don’t think that’s a compelling enough reason to say three months’ notice is sufficient. And I appreciate that the Minister will ask his members to vote the Supplementary Order Paper down, but I think careful consideration should be given to it.

If I could just correct my last intervention, I said that it was being done by the Supplementary Order Paper—officials, correct me—it is actually being done in the version as reported back by select committee on page 9 in section 22BA, in clause 2(22). Section 22BA lists section 40 in the middle of that list of sections that come into force on 1 July 2021. So the—

💬 Hon Michael Woodhouse: So why is it in the SOP then?

Well, I’m advised by officials that it’s not. So if the member sees otherwise, feel free to raise that again and I’ll check that.

This is the issue that I’ve been discussing with the Clerks. Their suggested tabled amendment of mine is a proposed amendment to Supplementary Order Paper (SOP) 23, because on page 2 of that SOP, in the second paragraph, it says “Replace clause 2(22BA) (page 9, lines 8 and 9) with: (22BA) Sections 40 and 58(6) and (13B) come into force on 1 July 2021.” So whether clause 40 was already covered by the amended bill that we considered at second reading, it’s certainly in the SOP.

I think the easiest way through that, because I see the—it looks like it’s been done twice, actually. Belts and braces! How I’m going to propose to—

💬 Hon Michael Woodhouse: Yeah, pretty much. Will I put two SOPs in then?

Well, the later one would take effect. Subject to advice from the Clerks, assuming it’s in order the way it’s currently done, it seems to me you end up with clause 2(22BA) in the Supplementary Order Paper (SOP) saying that clause 40 of the bill comes into force on 1 July 2021, in which case the member’s Supplementary Order Paper is in order and doesn’t infringe the 24-hour rule, because it’s an amendment to the SOP rather than to the primary bill. We will none the less be voting against it and you’ll get to the same answer.

Thank you, Madam Chair. I appreciate the Minister’s clarification. In the amended bill that we considered at second reading, clause 2(22BA) actually had a number of other sections—17, 20, 27—as well, which are not mentioned in Supplementary Order Paper 23, which suggests that, whereas the intention was for them to come into force on 1 July 2021, they are now not mentioned at all, but there doesn’t appear to be an amendment deleting those, which, I take it, then means that those sections are covered by the catch-all commencement provision saying that they’ll come into force on the day on which it receives Royal assent. I’m not even sure what those sections are, but, if there was an intention to delay by three months, it’s now being removed. I’d be interested in knowing why.

This is a really clear case where the title of this bill misleads he or she who goes to look in the statute as to what it actually does. The Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill sounds like your typical annual tax bill that simply resets the tax rates and has some other minor adjustments. In fact, what we know is that following the inclusion of Supplementary Order Paper (SOP) No 23, what this actually is is the “Taxation (Introduction of a Capital Gains Tax for New Zealand Properties) Bill”. What the Government has done is it’s snuck in a very significant change to our tax system in the form of an SOP, jammed it into an existing bill under urgency without reference to select committee. If you were to look in the statute book to the future, and you were to look for, OK, when was it that the New Zealand Parliament determined that it would include a new capital gains tax, that it would have this extension, this 10-year capital gains tax, you’d expect to find that somewhere in the title. You’d expect something like the “Taxation (Capital Gains Tax) Bill”, but in fact you would have to go and look for the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill. Quite clearly, the title of this bill should be amended to better reflect its contents.

The most far-ranging aspect of this bill, that will have an impact on thousands of New Zealanders who own a second property, is the fact that it includes an extension, a new capital gains tax. This is specifically something that the Government had previously said it would not do. It’s not something that was foreshadowed in the earlier version of this bill, but it is now absolutely a primary part of what this legislation will do. It should be included in the title, and I would ask the Minister to address whether he has considered tweaking the title to reflect the contents of his legislation.

Thank you. I was waiting for the Minister, actually. We were being generous with the Minister, so, hopefully, the Minister is going to respond to Michael Woodhouse’s question.

Look, want to talk about the issue of the commencement date, because I think what we just observed here, with the inquiring mind of the forensic Hon Michael Woodhouse, is we have started to highlight some of the issues.

Whether he is correct or not—and the Minister’s obviously deep in discussions with officials—this just goes to show why this bill, which has such a magnitude around it, should’ve gone through a proper process of evaluation and consideration, not only from a select committee process, where we have people like Hon Michael Woodhouse making very valuable contributions to making sure that this bill is the best we can get, but I think it also raises a wider issue, around this is not an insignificant issue that this new Supplementary Order Paper (SOP) 23 will have on mum and dad investors. It is a major imposition. It has financial consequences that many people will be wondering about tonight and worrying about tonight, and I think this is a real prime example why the Minister should have been much more judicious—in fact, I say the Government should’ve been much more judicious in the way that they brought the SOP to the House.

Now, the Minister of Finance wrote to the Reserve Bank Governor way back in November. There was a response in early December. The Minister’s written back. We’re still waiting for the Reserve Bank’s response. That is one side of the coin, and I heard the Minister saying before “You know they’re thrashing this around. We’re only worried about supply.” Well, actually, it is a comprehensive solution that’s required. This is not the one that’s going to actually achieve that outcome.

But putting this bill through proper scrutiny and allowing New Zealanders who are going to be affected by it—the many hundreds of thousands of New Zealanders who are going to be affected by it—to have a say, to be able to present their arguments, and to make sure that we get this bill in the best possible way would mean that the commencement date actually shouldn’t be what it is, which is on Royal assent, particularly in respect to the SOP. I put it to the Minister that the SOP should be delayed before it has any commencement date, and we know that it takes effect, basically, at the close of business on Friday, which is 24 working hours from now—three days’ time. That is an issue that really is significant because it affects people’s property rights and all that sort of stuff, which are fundamental principles about New Zealand—that we do not cut across people’s property rights without giving them the opportunity to have their say, and we haven’t achieved that at all.

But also, during the course of the night, I probed the Minister on why the urgency. It’s a simple argument around the fact that, well, if we don’t push it through, we think there’s going to be an avalanche of investors who are going to go and buy a property overnight or in the next few days to take advantage of the rules. Well, I think that is a misguided perception, because if you look at what’s taken place, if you buy a property, you will now be locked into a 10-year rule with the brightline test.

Secondly, you know going into it that, knowingly, you will not be able to deduct the interest that you incur in respect to that building that you buy. So why on earth are many people going to be sitting there going, “Gee, this is a fantastic opportunity.”? I think the bigger risk and the real risk is that people will want to exit the market and exit pretty quickly, and what we want to make sure is that we allow that to take place in an ordered fashion. That’s why I think the commencement date needs to change. I think the Minister needs to reflect on that. I know he doesn’t have long, but I think that in respect to the SOP, it is injudicious, it’s unwise, to actually impose this with such a brutal start date. I think the Government’s going to rue the fact that it chose to go down this path that many New Zealanders will not like.

I heard the member Andrew Bayly, but we disagree. I won’t convince him to the contrary.

In respect of the point raised by the Hon Michael Woodhouse, I think the answer, at least in respect of clauses 17 and 20 where they’re no longer listed in the commencement date clause—that’s because if you look at page 15 of Supplementary Order Paper 23, clauses 17 and 20 are deleted. I’ve got it before me here on page 15. Therefore, they no longer need a commencement date. But in respect of the member’s amendment to one of the remaining clauses, 40, we will be not agreeing to his amendment.

I thank the Minister in the chair, the Hon David Parker, for that. Actually, I was diving deeply into the documents to look for a reason, as well—and, actually, I draw his attention and officials’ attention back to the substantive bill that we discussed at second reading—clauses 17, 20, and 27 were amended to apply to agreements that were entered into on or after 1 July 2021; whereas, the bill as introduced had that effective 1 April 2021. So the change that we made at second reading actually had the same effect as what the Supplementary Order Paper (SOP) is doing to clause 40.

So the reason it was deleted from SOP 23, as the Minister has just said, was that it was unnecessary. It was unnecessary because it was actually changed before in the bill. What I am not sure that I understand—and the central point that Mr Bayly was making, I think, very much applies in this case—is why the change was made to clauses 17, 20, and, 27, but not clause 40, because the same principle would have applied. Even if clause 40 came in on 1 April, if we had amended the bill to say that it only applied to agreements entered into on or after 1 July, it would have had the same effect. So it does perplex me why we treated three clauses one way and the fourth clause the other. But I now understand that the effect of it is the same: all of the clauses will be amended from 1 July, assuming the Minister is right and we don’t accept my SOP. I’m just not sure why we did it that way.

It’s important that any bill that passes through Parliament does have a name that reflects its effect. And I think what we’ve heard tonight is that there is no way in which the current title of the bill reflects the effect that is going to be eventually, by a majority, passed through this committee tonight. It’s currently called the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill. It makes no reference at all to the brightline test. It makes no reference at all to the GST being applied to roaming phones. And it might be easy to say they’re just remedial matters. Well, the brightline test doubling in its length is not a remedial matter. It is a major decision by a Government, with tax implications.

I think the bill would be better named the “Taxation (Annual Rates for 2020-2021, Feasibility Expenditure, Brightline Extension, Property Price Escalation, Rent Escalation Assurance, and Remedial Matters) Bill”, because that’s what the effect of this is going to be; there’s nothing surer. If it was a bill that was perhaps having the brightline test attached to provisions that increased supply of housing, it might be a little more acceptable. But in this case, just stand alone, it’s a bit like saying, “We’re going to take the 52 weeks of the year and turn them into 100. We’re going to take, you know, any number of things here, and do some kind of loaves and fishes exercise to make scarcity go far.” It can’t be done, and tax will not achieve it.

We’ve already had very little response from the Minister to the suggestion that the $250,000, on average, capital increase in an average home in New Zealand in the last three years would attract a tax under the current regime of around about $70,000, but still leaving anybody with that property $180,000 in their pockets: $60,000-odd a year for three years for doing nothing, on average. Now, my point is not to increase the tax, not to go after those people harder, but to ask the question: how’s that happened? How’s that happened? It’s simply because there is a lack of supply. Price of property doesn’t just escalate because people want to pay more for it. And any suggestion that “Oh, it’s all to do with the low interest rates.” is complete rubbish, because if there was a massive supply, then you wouldn’t see these price escalations.

You can think of anything you like that’s out there, that’s in common supply. It’s like at the moment, you look at seasonal fruit or vegetables. In the right season, with plentiful supply, they’re cheap. So the same applies quite simply to housing. There isn’t a plentiful supply. And this is, I think, a smoke and mirrors exercise saying, “We’re going to extend it for 10 years.” It won’t matter to someone who decides that they’re going to invest in this and take those capital gains. They are not going to stop because of this.

I don’t believe in capital gains. I think they’re wrong. I think they are a way of incentivising people to use private finance to provide public good. So I don’t in any way want my speech to be construed as making a case for increasing or bringing in a capital gain. But we’ve got to call this what it is, and it’s sort of like a lame duck attempt. No one can be very comfortable about the fact that that massive amount of capital increase is going to continue regardless of what happens. You can make it 20 years and it wouldn’t make any difference until there is that supply problem sorted out.

So I won’t move it because it’d be a waste of time, but the bill title should have the words “Brightline Extension”, and it should have the words “Property Price Escalation and Rent Rise Assurance” in it. And it should mention the miserly GST raid on roaming charges for, largely, in the next few years, businesses who send people overseas in pursuit of larger exports for this country. If I don’t have a question for the Minister, because my last question—I have at least one question from the committee stage that hangs out there answered. But I hope that they do think about some of these things and come to a conclusion that—

💬 Hon Member: Madam Chair?

There’s one speaker on their feet, only one speaker on their feet at a time—only one speaker on their feet at a time.

CHAIRPERSON (Hon Jenny Salesa): You didn’t call “Madam Chair”.

Oh sorry. My apologies then.

Thank you, Madam Chair. Look, I thank the Hon Gerry Brownlee, who is one of the elder statesmen of this House, because he knows what procedural matters need to take place and the importance of what we’re talking about here. And I think we are at risk of being misleading to the public. When Mr Brownlee is saying that this bill’s title should actually reflect the reality of what it is, we need to consider that carefully. I think, you know, you’ve spoken, Mr Brownlee, very clearly about the brightline aspect. Interest deductibility is the other crucial bit in this bill.

So, from that perspective, the title is, in my view, very deeply misleading, and I think we need to enable people who will not have heard about this bill, will not have heard about these changes—because, after all, they were only announced at 9 o’clock this morning, unless you’re the media, who got it at eight. They will not have heard. Not everyone is there. What happens if you’re away on a hunting trip, or a tramping trip, or whatever? You’re on holiday; you’re out of cell phone coverage. So, even though your accountant is ringing you desperately today, tomorrow, you cannot be contacted. In that situation, you cannot sign the forms, whatever, and so therefore you’re in a position where, as the Minister said earlier tonight, in some cases, you do have to make an election. I think those sorts of situations mean that, if we’re in a situation where people are going to be disadvantaged like that, they need to have that clarity around that. We need to have the rules. We should have provided more time. That’s one issue.

But I think, also, in time, people will want to look for the bill, and they’ll go looking for the bill—the few who actually know how to navigate their way around Parliament and Parliament’s website—and they’ll be looking for a bill that talks about “capital gains tax” or “brightline test”, or whatever. It simply won’t be there. And I think, Minister, you’ve had time—you’ve obviously been working on this Supplementary Order Paper for some time. This is a long document; it’s had a lot of forethought put into it. To slap it down on the day of this and to put this through urgency, I think, doesn’t do you any justice as a Minister, and I think we do need to reflect on the title—and certainly the commencement period, as we’ve noted before—but there is just a sense of injustice with this bill, which I think, as I’ve said before, many New Zealanders are going to feel very, very angry about it.

I move, That the question be now put.

The question is that clause 1 stand part. All those in favour, say Aye.

Tim van de Molen: Hang on—point of order. The question has to be put that he’s seeking the closure.

CHAIRPERSON (Hon Jenny Salesa): The question is that the question be now put. The question is that clause 1 stand part.

💬 Hon Members: No.

💬 Hon Gerry Brownlee: We’ve got to vote on it.

The question is that the Hon Michael Woodhouse’s tabled amendments to the amendments set out on Supplementary Order Paper 23, amending clause 2(22BA) and inserting new clause 2(22BAA), be agreed to.

The question is that the Minister’s amendments to clause 2 set out on Supplementary Order Paper 23 be agreed to.

Hon Michael Woodhouse’s tabled amendments to clause 2, deleting subclause (10) and amending subclause (23), are out of order, as 24 hours’ notice was not given for an amendment that may have impact on the Government’s fiscal aggregates.

Mr Speaker, the committee has considered the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill and reports it with amendment. I move, That the report be adopted.

Motion agreed to.

Report adopted.

As we have reached the five-minute discretion that the presiding officer has, the House is suspended until 9 a.m. tomorrow.

Sitting suspended from 9.56 p.m. to 9 a.m. (Wednesday)