Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill

Members, the committee is resumed. We are resuming the debate on Part 2. Part 2 is the debate on clauses 4 to 64B, “Amendments to Income Tax Act 2007”, Schedule 1, and also Schedules 1A and 1B, and Part A in the new Schedule 1C, as proposed by Amendment Paper 20.

Thank you, Mr Chair, for the opportunity to take a call on Part 2. Before the dinner break, there was some good discussion of this part, but I would, in my contribution now, move straight to the amendments that I have for this part, so that we can spend some time with the Minister considering those. But I also have questions, which I’ll come to later, about the effect of some of the more specific provisions.

I have four amendments here to Part 2. The first of those is around clause 8. What’s difficult about these amendments is that the Minister has presented a substantial Amendment Paper to the committee which would seek to amend a number of clauses, including clause 8, which I also seek to amend. But what’s difficult about this is that clause 8 as it is currently proposes to make quite a simple change to the definition of “settlor” of a trust, and makes another consequential amendment around the definition of a settlor of a trust, but the Minister’s very substantial amendment then introduces a number of new issues into clause 8, which members on this side of the Chamber disagree with, which would change the nature of the brightline test and would have big policy implications.

So what I am proposing in my amendments tonight is that—you know, it is the Government’s prerogative to make the sorts of changes in policy which are set out by the Minister in the amendment, but what members on this side would object to is it being done in this way, when we cannot use the select committee process and use the House’s time to consider the policy implications of those changes. So what I have done is propose to delete clause 8, which would, essentially, mean that no amendment proposed by the Minister to clause 8 would be possible, and the effect of that would be that there would be no clause 8 to amend, and so the new Amendment Paper proposed by the Minister could be dealt with in a new piece of legislation. That piece of legislation might be called the “Taxation (Change to the Brightline Test) Bill”, which would make it nice and easy for this House to engage with. I seek the Minister’s comment on that.

The two changes that I have proposed, then, are that if the Minister does want to press ahead with making the changes to the brightline policy in this way, it’s my position that an amendment to clause 8(2)—I’m referring here to page 14, after line 8—would appropriately be to section CB 6A in the Act that it’s amending, essentially, to clarify that the new rules that the Minister has proposed would still apply but that they would only apply in the case where it was a 10-year brightline test, because the Minister has made some useful updates to the way that the brightline test could be applied. He’s clarified some of the policy, which Inland Revenue Department already uses but is not empowered by legislation, but it would be appropriate, I think, for this House to treat such a big policy change in the ordinary way for a legislative process and to be able to step that through.

We’ve heard, I guess, on the campaign trail the difference between a two-year and a 10-year brightline test. Both parties have taken very political stances on the effect of that, but what hasn’t happened is a reasoned debate in this House or at a select committee level about the impact on individual homeowners of the difference between two and 10 years for the brightline test to apply. So this amendment would simply allow this House to do that through another piece of legislation in the future. The kind of difference I’m talking about is that, if someone has owned a home for only two years, it doesn’t avoid this ability, and certainly incentive, for homeowners to sell their homes over and over again in order to make money from what is an unrealised capital gain on those houses. The 10-year test—you know, there is a policy call to be made about the 10 years avoiding that, but it certainly does slow it down and make it harder for people to, primarily, make money on that sort of conduct of the market. We’d say that is the right balance for the policy, and it would be good for this House to be able to move through that in a systematic way. I have another amendment that I’ll speak to. I’m sorry I didn’t get to it in this call.

Thanks very much to the member Arena Williams for those questions in regards to the amendment that has been tabled. The purpose of what we’re doing in regards to clause 8 is to return the brightline test back to its original intent of two years, and that’s the position of the Government in regards to this. We don’t support and will not be supporting the member’s amendment in relation to what has been tabled, and our position has been pretty clear in regards to our intent around returning back.

Just one question before the dinner break from the Hon Dr Deborah Russell—I think it would be fair to say that there was a number of points that were brought up in terms of a number of the amendments that we were bringing as part of this legislation and touching on the commercial depreciation rates. Again, this was an adjustment made during COVID, and we’re looking to return this back to what was the case previously.

The gambling tax: well, quite simply, this is closing a loophole around overseas casinos that are able to operate without paying what domestic casinos pay in terms of their tax. I think that if you boil it down to quite a simple aspect, levelling the playing field around that is something that we believe is pretty sensible, and, actually, the broader industry’s feedback as well is to say that they are comfortable with that. Again, that’s something that was included as part of the tax policy work that we took to the election.

So there’s a number of themes that are coming through in some of the contributions from members in terms of why we’re not having a separate piece of legislation and why we’re putting this as part of an Amendment Paper. Our position is clear on that: we are putting through the Amendment Paper aspects of policy that we campaigned on as part of the election, and—as I’ve given a number of examples here—many are reverting back to our prior positions that were there in the past, and that also includes around interest deductibility.

Thank you, Mr Chair. Following on from the Minister’s contribution, I do have a couple of questions about that. Firstly, then, given that the Minister will not support the sensible amendment proposed by Opposition members, can I ask him what was the original intent of the brightline test? What advice has he had that the two-year element of the brightline test will fulfil that original intent? The third question is what advice—or can he talk about why he thinks a two-year test is more effective than the 10-year test when those policy outcomes which are reached by the two-year time frame would be reached by the 10-year time frame as well, and then slow down any other impact of property speculation in the market.

I also want to ask the Minister a fourth question, which is: under the Labour Government in the last three years the number of first-home buyers in the market, as a proportion of the market share, doubled. I think it went from about 17 percent to 30 percent. I want to ask the Minister: what will the effect of moving the two-year brightline test to a 10-year brightline test have on the proportion of new home buyers in the market? The next question is: has it impacted the Minister’s decision making that that is likely to have a downward pressure on the number of first-home buyers in the market?

Thank you, Mr Chair. I’m grateful to my colleague Arena Williams for pursuing some of the issues around the brightline test, but I want to pull back into some of the technical discussion as well. So here’s another issue that I would like to ask the Minister to speak to and it’s to do with the bill as has come back from select committee.

In particular, I want to look at clause 44. Now, clause 44 is to do with the global anti-base erosion rules. Of course, those are the incredibly important rules making sure that we look at some of the global anti-base erosion rules. So this is clause 44, which inserts new subpart HP into the Act. So in HP 1(3)—in fact in other places, in HP 1(1), we get the term “applied global anti-base erosion rules.”

Now, anytime you go and pop into the Income Tax Act and there’s a phrase like that, of course, the place to go and look for it is in the definition section, to find out exactly what it means. So going and looking at the—there’s another section, another clause, in this particular bill; it’s clause 59. It introduces a whole series of definitions into the Income Tax Act, and there it says, “Insert, in appropriate alphabetical order: applied global anti-base erosion rules”.

So, obviously, that’s where anyone would look for the definition of what that actually means, and it says, well, it “means the global anti-base erosion model rules as applied by section HP 3”. So it just bumps us straight back to section HP 3. Now, that’s new HP 3, as inserted by clause 44. So, going back to HP 3, we start to find out exactly what these rules are supposed to be—what are these global anti-base erosion model rules, as applied by section HP 3?

Then it’s where it gets interesting because we start to find out what these global anti-base erosion model rules are, and it turns out that it’s something that sits outside New Zealand law. So, we’re defining what the global anti-base erosion rules model rules are, not by writing it into our own law, but by having something sitting outside our law which we refer to. In particular, we refer to the—here we go, HP 3 (b)(i): “the most recent commentary to the global anti-base erosion model rules developed by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting.” Then “the most recent guidance on the interpretation or administration of the global anti-base erosion model rules.”

So that’s a complicated little set of rules, used in this new part—the global anti-base erosion model rules, defined elsewhere in the Act, so, in the definition section, then bumped back to HP 3 (3)(b)(i) and (ii). And what those two clauses direct us to is nothing within New Zealand law but something entirely without New Zealand law. Now, that’s quite an interesting constitutional move and it is something that the select committee agreed to but it is problematic, as well. I think this committee needs to understand from the Minister why he thought it was appropriate that the way we define some of our tax legislation is based on words that are put together by the OECD.

Now, you know, we’re members of the OECD. We generally work along with their rules; we want to be part of that global community. Nevertheless, we are resigning some of our legislative powers to a foreign body and I would like to hear the Minister’s justification for making that move, preferably—well, you know, tax can be quite complicated, so I would like to understand why it is a viable process to go to the OECD for defining our tax law instead of defining it ourselves.

Thank you, Mr Chair. And I too want to continue, actually, the line of questioning that the Hon Dr Deborah Russell has asked in relation to the global anti-base erosion (GloBE) rules. And to take the committee back to what exactly are the GloBE rules, we look to the OECD and, in particular, pillar 2, which applies a global minimum tax. And, actually, one of the questions is what happened to pillar 1? So we’re doing pillar 2, but when can we expect pillar 1 to have some form of agreement at the OECD? I wonder if the Minister can elucidate on that.

The problem that this particular piece of legislation is trying to solve is that a number of large multinational corporate groups are able to pay very little tax on a worldwide basis. They achieve this by, basically, carefully structuring and the use of tax havens. In particular, tax havens become very effective for what has become mobile income in the forms of interest, dividends, and royalties. So this is a global issue and a global solution has been proposed by the OECD to prevent that base erosion and profit shifting. And it’s had a long history through many different Ministers of Revenue. I think the first time BEPS—or base erosion and profit shifting—the actual proposals were first in were 2015 with Michael Woodhouse. And I might stand corrected, but I do remember the Hon Judith Collins actually signing off some of the multilateral instruments to allow for tax information exchange between countries that are signed up to this multilateral instrument.

So this bill proposes the solution, and it’s an OECD initiative whereby large multinational enterprises—or MNEs—can actually be subject to a requirement to file information returns and potentially be subject to the payment of a top-up tax. The question the committee considered was who will be affected by these rules? It is multinational enterprises with consolidated revenues of above €750 million in any two of the proceeding four years. So another question for the Minister is: how many taxpayers do we think in New Zealand will be subject to these particular amendments in this clause 44?

So the OECD proposal consisted of two main parts, and the committee had a really good look at this. And those two main parts are the income inclusion rule and an under-taxed profits regime, which is in some ways that sort of top-up. Together, they are what we call the applied GloBE rules. Again, multinational enterprises can have imposed upon them reporting obligations or an obligation to pay a top-up. And the potential impact of the regime from New Zealand’s perspective depends on whether the enterprise is actually headquartered here in New Zealand or if it’s headquartered out of New Zealand, they could be liable for that top-up tax if they have an intermediate parent located in New Zealand or if they have liability under the under-taxed profit rules.

So my third question to the Minister, other than how many large multinational enterprises do we think may be applicable to the applied GloBE rules in New Zealand, is: how are other countries in the OECD actually applying these rules within their jurisdictions? Because, as the Hon Dr Deborah Russell has said, in clause 44 we make reference to, basically, the commentary that agreed administrative guidelines would prevail over the model rules if inconsistent, I think. But basically saying that we will look to the OECD rules and the guidance that they provide and impart that obligation on to those multinational enterprises based in New Zealand that have over €750 million.

So just those quick questions to the Minister. How are the other OECD jurisdictions? Are they following similar to New Zealand, which is when it’s a reference to the OECD rules? Or are they putting in primary legislation which is their own rules? Secondly, how many multinational enterprises in New Zealand will be subject, do they think, to these rules? And probably, just throwing it in there, what about pillar 1? Thank you, Minister.

Yeah, thank you very much. For those that are tuning in at home, wondering what pillar 1 and pillar 2 are in regards to the Income Tax Act, you’ve joined at a good time.

So, in regard to the questions raised by the Hon Dr Deborah Russell, just in respect of why it has been decided to incorporate these changes by reference versus, I guess, the alternative would be through replicating that within our legislation. It’s simply just driven by an efficiency mechanism and the efficiency of referencing back to the overarching rules and commentary that has been agreed is the most simplistic manner in which we want to do that.

It’s important to recognise why we are doing this. This is because there are a number of countries that have agreed that in terms of the global base erosion risk that exists for multinationals, we should be looking to ensure that there is a minimum taxation rule applied. I think that’s pretty sensible. I think it’s important that New Zealand participates in that, and that’s under what they refer to as pillar 2.

Pillar 1 is another aspect where, again, a lot of this is through trying to get alignment across a number of countries. The reality is that hasn’t been reached in that regard. And in regards to pillar 2, we have the ability just to progress on that route, as are a number of other jurisdictions, and that is what we deem to be the most appropriate manner, and, actually, what I think prior Governments, in practice, would have no doubt supported in principle as well.

So I don’t think what we’re doing here is completely off-piste in terms of good taxation policy and procedure. I think what we’ve reflected and how we’ve done that just simply reflects an efficient way to do that.

Look, thank you to the Minister of Revenue for that explanation of why we’re incorporating the legislation by reference. As a departure, it is, I guess, a solution to try to amend our legislation ourselves all the time. If we tried to amend our legislation for every change in the OECD rules, we would be for ever grappling with, I think, weighty tomes—you know, who knows how fat the—

💬 Arena Williams: [Holds up a book] Like this one?

Oh, weightier than that, I think, Arena. It would take a fair amount of work.

But then that does create a problem for New Zealand taxpayers because we are asking them, instead of being able to go to our own income tax legislation—so anyone who wants to look up tax law can go right now to www.legislation.govt.nz, and pull up the Income Tax Act and some of the associated papers and work out what the law is right now and how they have to apply it. But as soon as we incorporate something by reference, then, even if it’s by reference to another set of New Zealand legislation, it takes at least two steps for someone to find their way through the particular piece of law. So we do try and keep our Income Tax Act fairly self-contained because that does mean that our taxpayers can find the information they need.

So the question, then, becomes: how is some poor, innocent, little, multinational enterprise in New Zealand going to be able to find out exactly what legislation applies to it? It needs to have a reasonably easy way to do that. We do try to minimise cost for taxpayers. Now, multinational enterprises can probably manage those costs, but, even so, it is a cost for taxpayers. So are those multinational enterprises going to have to go and hunt their way through the screeds of paper that come out of the OECD, or are they going to be able to refer to something here in New Zealand, as to what the tax law is at the date they are trying to apply it? So where can New Zealand taxpayers find the information that they need in order to comply with these global anti-base erosion rules? I can see the Minister is rearing to answer that, so I’ll just sit down now and let the Minister have a turn.

Let’s make the most of this interactive dialogue, eh? So I’m pleased to let the member know that the Inland Revenue Department will be providing the guidance and links to the OECD website, to the 25 entities that meet the criteria. I think if I quote—and I must say I haven’t heard this quote from a member on that side of the House for a long time—the “poor multinational organisations”, I mean, wow, a lot changes in a week in terms of that! But in terms of that, the 25 organisations that are headquartered in New Zealand that meet the definition of this are already case managed by Inland Revenue. So I can assure the member that they will be receiving, or have already received, no doubt, the guidance in terms of how they find this information. Again, this is driven—as I repeated before—by efficiency. I think we can talk around this as much as we like, but the reality is that this is a complex area of taxation, and simply by reference replication is the pragmatic way to deal with it.

Thank you, Mr Chair, because I do want to follow up on something that the Minister said right then. What the Minister referred to was that each of these—I think the phrase I used was “poor, innocent little multinational enterprises”, just for reference. But each of them has a case manager working with them, a case manager at IR—at Inland Revenue. So that’s kind of quite interesting because it’s interesting to know whether this case manager is assessing those organisations for their compliance with the law or giving advice to those organisations in terms of their compliance with the law. So they have a case manager. Now, is that case manager going to be the one telling them how to apply the law, actually finding the pieces of law for them? Now, that’s an interesting because that says that then, in fact, each of these 25 multinational enterprises (MNEs) has their own specialist tax advisor paid for by Inland Revenue. Or is that case manager actually working in the space of looking at their compliance with tax law, looking at the complexity of the arrangements, and so on?

So there’s an interesting number of questions in there, because if it’s looking at their compliance with the tax law, how, then, can the multinational enterprise sort of feel sure that they are being guided to the correct place of law? There’s a real conundrum here, actually. It’s only become apparent to me, as the Minister spoke that we have these case managers—are they assessing the organisation, or are they advising the organisation? From what the Minister was saying about having a case manager who would be able to direct these multinational enterprises to particular pieces of OECD law, that sounds like advising, and I’m not quite sure why Inland Revenue would be in the business of providing advisers to large multinational enterprises. On the other hand, if they are assessing these entities, then how can they be sitting there and providing them with the links to the law? It’s a bit of a puzzle, and I would like the Minister to clarify exactly how these case managers work and, in particular, how they are going to work with respect to this OECD legislation. We’ve got the model legislation; the MNEs need to know how to access it. They need to be guided to it. But at what point does that guidance turn someone who is assessing compliance with tax law to someone who is advising people on tax law? It’s a bit of a puzzle, and I’m a bit alarmed by it actually.

Thank you, Mr Chair. It’s interesting—just while I was listening to the member’s contribution, I did a quick Google search on significant enterprises, and it might come to the member’s attention that the IRD does have a team that manages what are called entities of significant enterprise. Actually, that team existed under the last Government as well. And, you know, actually, that team’s been around for a long time. So the fact that this is a surprise and that they do this is not necessarily part of this bill, but I can assure the member that this is not a new concept. This team exists, and it deals with significant enterprises, including State-owned enterprises, high-wealth individuals, subsidiaries, non-resident entertainers, etc, etc. So, again, when I stated that these companies are all case managed by IRD, that is not something that is a new concept.

Thank you, Mr Chair. I know that these case managers have been in place for a long time. But the difficulty here is that when the Minister first mentioned case managers, I can’t recall the exact words the Minister said, but the implication was that the case managers would be advising these MNEs—these large multinational enterprises—about where to find the law and how to apply it. Now, I don’t know, but I sort of feel as though every small enterprise, every small business, in this country would like to have some easy, on-hand advice from IRD, as well. Many medium-sized enterprises would quite like to be able to get hold of some easy advice from IRD too, and when we hear about the wait times on call lines—which, you know, happens; there are a lot of people who want to talk to IRD—it just seems to me that the way the Minister has described it and the way the Minister has described that these multinational enterprises will be informed about the OECD model rules does rather suggest that these large multinational enterprises are getting their own specialist tax adviser from Inland Revenue. So this is the little point of clarity I am really asking for.

Let’s take it from the top: we have a set of tax laws, and all New Zealanders—well, most people know where to go to access that tax law. But in this particular new clause that has been introduced to the bill—this new set of rules—instead of defining the tax law ourselves, it’s going to be defined by the OECD. So I asked the Minister where New Zealand’s enterprises could get that information from. He said that their website was linked and, in addition, these large, multinational enterprises have their own case adviser, and the implication was that that case manager would be advising them quite directly about how to apply the tax law, and that’s not a service that Inland Revenue provides to many of its clients; in fact, most people have to pay someone for specialist tax advice. So I am trying to find a little bit of clarity here on what these case managers actually do, and, in particular, I want to go back to the question I posed a couple of calls ago: are they assessing the multinational enterprise’s compliance with the law, or are they advising the MNE on applying the law?

Thank you very much, Mr Chair. I’m conscious of the repetition, but, again, just for context for the member, this team has existed since 1994—right? This is not a new concept—that was quite a long time ago—and the concept that IRD provides a range of taxpayers with advice and support in regards to their obligations around tax is not a new concept. That is the way in which Inland Revenue provides assistance to taxpayers at all levels, and, obviously, it takes into account the needs and the resources around that.

So I don’t think there’s much more to be said. Obviously, if the member wants to arrange a time when I could take her through the organisational structure of Inland Revenue, then I’m sure I’d welcome that, and I could make time. Likewise, the member could just google it and have a look online at the website.

Thank you, Mr Chair. Actually, I do want to continue that line of questioning, because, I think, I perhaps oversimplified for the committee how a multinational enterprise (MNE) actually enters into these rules. So it is a new regime. They are a multinational enterprise, not a significant enterprise. There’s a slight difference, but if I hear the Minister of Revenue rightly, he is saying that they will be treated by that same investigations audit unit, which is the significant enterprises unit. So the Minister can clarify that afterwards.

But I think what the Hon Dr Deborah Russell was trying to confirm is—because there’s actually a number of steps in order for a multinational enterprise to actually fall within these rules. So, as I’ve said, there are multinational enterprises with consolidated revenues above €750 million. But there are a couple of other tests that they need to meet. One is that that multinational enterprise could be headquartered in New Zealand or have a constituent entity, or even just a branch, located in New Zealand, so they need to take a couple of steps from that. One is that they need to determine whether or not they’re subject to the regime, so that’s the €750 million threshold. Then, once they’ve calculated that, they then need to ask themselves—well, they’ll next need to determine, for each country in which it operates, whether or not any de minimis or safe harbour applies.

Then, after excluding the countries for which the de minimis and safe harbour applies, the effective tax rate in each of the remaining countries in which that multinational enterprise operates needs to be calculated. Then, the next step is for that MNE to calculate its mobile income in each country. So this involves calculating its GloBE—global anti-base erosion—income and then deducting the amount of its substance-based income exclusion, which is a figure based on the tangible assets and payroll costs in that country. Then, the final step is to pay a top-up tax to Inland Revenue that will consist of either amounts payable for foreign operations under the income inclusion rule, and amounts payable under tax New Zealand operations under the domestic income inclusion rule.

So I can understand where the Hon Dr Deborah Russell was asking—because in terms of the significant enterprise case manager—that’s the unit that it’s coming out of—at what point in those different tests do they actually provide compliance advice or do they provide auditing or assessment advice? Those aren’t quite specific tests which are set out within the legislation.

Then, the next question, really, is: well, what about those MNEs who are actually headquartered out of New Zealand? Do they still have a case manager, even though they’re headquartered out of New Zealand? They could be liable to pay a top-up tax in New Zealand if they have an intermediate parent located in New Zealand or if they have a liability under the under-taxed profits rule. So is it that the significant enterprises case manager that they have—are they, basically, case managing the intermediate parent that’s located in New Zealand, or are they case managing a multinational enterprise that’s headquartered outside of New Zealand? If it is the latter, which is that they are outside of New Zealand, how does Inland Revenue, therefore, enforce that? So how does that case manager actually practically case manage, provide a right-from-the-start compliance angle, which I understand Inland Revenue use—how do they do that with a multinational who’s not actually headquartered in New Zealand?

So I understand where the Hon Dr Deborah Russell is going, because there are numerous tests, and I had simplified the entry test into these particular rules, but right throughout this particular bill, there are actually more tests that you have to go through, which then goes back to the earlier point that Dr Deborah Russell had raised around the reference to the OECD rules. It’s important that that clarity—and the Finance and Expenditure Committee did support it not being in the primary legislation but doing it in reference to those rules. The question then begs: OK, you’ve got your case manager that will do you the compliance or assessment—will need to clarify that bit; not too sure at what part of that test, or tests.

And then, if the rule changes in the OECD by reference, my question to the Minister is: I can understand why there are some benefits by reference, why you’d want it in the primary legislation, because taxpayers would have ease of access to the necessary materials, without having to locate them on the OECD website. I don’t know if anybody here has actually tried to go on the OECD website. It is, actually, not the easiest website to actually navigate. Once you make sure you turn it into English, then it’s even still difficult. The other reason why you could see why you’d want it in primary legislation is because they were able to have certainty when there are no other materials that they’ve had to take cognisance of, and then they would be alerted to changes in the rules, because those changes would be made by way of an amendment here in New Zealand, through an Act of Parliament, because there is no Order in Council ability. It’s not through regulation; it is through an Act of Parliament.

So my second part of this question for the Minister is: if there’s a case manager, when can, actually, the general public—anybody who is just wanting to be really involved and engaged in making sure these multinational enterprises pay their taxes under this new regime—expect, by reference, those changes to be alerted? Is there somewhere on the Inland Revenue website where that will be published; if so, how often will it be published? Obviously, I’m assuming in reference to the OECD, but what’s the time frame between the OECD changing the rules and then it, basically, being updated in New Zealand, so that taxpayers in New Zealand, whether they’re a multinational enterprise or they’re just a general member of the public, can be aware that these rules have changed? I’ve been in the tax profession for a long time, and you have a lot of engaged taxpayers. I’ve seen a lot of correspondence to different Ministers of Revenue, and people watch this stuff. So I’m just wanting to know, for a general member of the public, as well, where can they see it on the IRD website, how often, and what’s the time frame being changed from when OECD change it to when New Zealand change it? Thank you.

Just in regards to the member’s questions in regards to case management, the Inland Revenue only case manage entities that are New Zealand - headquartered entities. While there are some 800 foreign entities that operate in New Zealand, those are not within the guise, obviously, if they’re headquartered overseas in the relevant tax jurisdiction, and that relevant country will manage them in their own way. So IR is focused on the ones which are headquartered here in this country.

In regards to the conversations around the—I can’t help the member with the translation from French to English, but there is an icon at the top, for those watching at home. Hopefully, they haven’t tuned out, because it’s getting more exciting as the night goes on, this conversation! But you can click up the top between English and French.

CHAIRPERSON (Teanau Tuiono): Merci beaucoup, Minister!

We’re not going to get into that, but we could—that could be quite funny. But, yes, and IRD—you know, while these rules come in 1 January 2025, IRD are working on guidance around that and will be providing proactive and regular updates of communication in regards to guidance in regards to that.

There’s about a hundred pages of these rules, right? So it is a lot. We do acknowledge that these are complex, but most of these large entities that are headquartered in New Zealand do have—as the member will appreciate—quite comprehensive in-house tax capability, as well as using external support. So the relationship with the IRD is, in fact, that it is around relationship, ensuring that we work together, because the IRD wants to work with taxpayers, not against them, to support their needs in meeting the system.

Thank you, Mr Chair. Following on from my questions to the Minister about the brightline test, which I am confident that he is working on and will soon provide me with answers to so that I can ask him about the amendments in clause 9, I would like to add one question to that, which is does the Minister intend to reintroduce, either in legislation or into Inland Revenue Department policy, the use of the intentions test?

While the Minister’s considering that—and I hope he will engage with me in back-and-forth questions about the intentions test—I will explain to the committee what that is. Historically, tax legislation in New Zealand has treated gains from the sale of land or the sale of houses and real property as taxable income, where that land was acquired for the purposes of selling it. So we still do this. There is no change to that by the brightline test. That approach means that the capital gains made by property investors are taxed as income. So if you are engaged in a business where you buy and sell homes or buy and sell other land, that will be taxable income because it is business income.

However, the intentions test that IRD used before the brightline test has been very inefficient. That is why IRD sought to move away from it in the first place, because establishing someone’s intentions when they’re buying and selling property was, essentially, left up to the lawyers who were processing the transactions, processing the conveyancing. You had to make a declaration about what your intentions were and what kind of investor you were. Obviously, we’ve had some really good contributions from this side of the Chamber about the principles of tax fairness in this debate, and one of them is that you shouldn’t be able to easily avoid taxation or evade taxation.

So if we were to return to an intentions test, that would represent a step backwards in terms of the efficiency of our overall tax system and a return to a system which wasn’t working in the first place. Because this brightline test that the Minister is reverting to, a two-year test, was introduced by a National Government, and I’m interested in his views about whether he is returning to that policy.

I can assure the member that we still have the intention test and, in effect, that rule is in play—that is in regards to the way in which the taxpayer and their intent in terms of what they do. Obviously, we’ve got a two-year brightline rule in place now, but that rule has not gone away as a result of the changes that we’ve proposed in regards to this legislation.

Thank you very much, Mr Chair. I have a question specific to the proposed offshore gambling duty in clause 89G—a series of questions, quite a few actually, but I’ll ask three very quick questions now, and my subsequent contributions will be determined by what the answer is.

CHAIRPERSON (Teanau Tuiono): Apologies to the member; that’s not this part.

Then I’ll hold off—but I’m talking about the Amendment Paper, which refers to this part.

Thank you, Mr Chair. I would like to just pick up on where my colleague Arena Williams left off, to ask the Minister about, really, what are the policy objectives of the interest deductibility changes and the changes to the brightline test? There could be a number of policy objectives, depending on who the stakeholders are.

Perhaps it’s about warm, dry, and affordable homes. This is an issue that has plagued New Zealand for a really long time, and it was a perennial question over previous decades, and actually got to the point where the housing market was just so overcooked that, at one point, the Government and Opposition, when we were on different sides of the House, not the current sides, had agreed to come together to say this was a really wicked problem—it was something that was fundamental to all New Zealanders. It was around health, it was around housing—

💬 Hon Member: Is this to do with Part 2?

Yes, absolutely it’s around Part 2. And it’s great to see the member interjecting and participating in the debate, because I do have a number of questions, and so do my colleagues. But that could be one of the things: is it about warm, dry, affordable houses?

Is it about supporting sustainable house prices? And I say this in reference to the fact that the Reserve Bank’s mandate has had that stripped away. So, previously, that might have been something that was embedded in legislation; now, I don’t know if that’s in his thinking, and I’m really keen to know that, because having stable house prices is fundamental to economic stability. Is it about having a housing market that responds to these market pressures? Is it about giving tax breaks to landlords? And that is a genuine question, because I have heard in this House a statement from the leader of the Government, the Prime Minister, to say that this is actually about putting downward pressure on rents.

When we think about what is happening here, landlords will be able to claim 80 percent of the interest that they will be able to deduct off their tax bills by the year ending 2025. It will be 100 percent by the end of the year 2026. And, when I look at the regulatory impact statement (RIS)—the RIS that was produced by Treasury at the end of 2023—it actually said that we needed to look at options between the brightline test being five years, right up to 20 years. And it looked at what would happen if we reduced interest deductibility and the brightline test, and it said, actually, it could put upward pressure on rents.

So that flies directly against what the Prime Minister has been saying multiple times in question time in the House about what the reason for doing this is. And, if we look at our house prices in New Zealand relative to the OECD, they are very high. The Treasury RIS in 2023 said that tax settings are not the primary driver of housing affordability; current tax settings incentivise investment in housing. It also went on to say, in the context of constrained supply, lightly taxing housing relative to other forms of income would lead to higher property prices than would otherwise be expected.

So my question to the Minister is: when we look at what the purpose of this is, what is the policy objective? I want to know which stakeholders he has considered and which stakeholders he has consulted with. Those stakeholders could be people who own houses already. Perhaps they are mum and dad investors. But perhaps they are large multinational investors, which we’ve heard about from my colleagues. Perhaps they are renters, and so if they are renters, does he honestly think that the trickle-down theory of economics is going to put downward pressure on rent? Because, if so, I’d really like to hear his explanation of how that is going to work when all the evidence and all the commentary that is coming out through the media, through academia, through people who work in the market, is that this does not work.

When he’s looking at the stakeholders, is he thinking about financial stability? Is he thinking about regulators, like the banking sector, especially now that the dual mandate has been taken off the Reserve Bank? What thought has he given to economic stability and the kind of impact that this type of policy and this type of setting will have on them? Has he thought about the NGO sector, who are commentating on this market? These are all stakeholders, and so when I look at that—[Time expired]

Thank you very much, Mr Chair. Well, quite simply, the answer to the question in regards to what stakeholders were consulted in regards to this, is, in effect, the New Zealand public, because we actually campaigned on this as part of the election process. So I’m pretty confident that the New Zealand public are, and were, aware around this, and this was something that we spoke about a lot and for quite a long period of time.

The reality of what we’re doing here is returning the ability to claim a deduction in regards to interest paid, back to the rules where that was allowable. Obviously, the previous Government changed it, and that’s the discretion they had as a Government. This coalition Government has decided that that is not what we want to do. We want to, in effect, reduce the upward pressure on rents, and by making these changes, which we clearly signalled going into the election, the ability to deduct also ensures that we’ve got consistency in terms of the ability to take a deduction with other aspects of business and within the tax system. So there is a simplification, a consistency element to it—well consulted, well discussed, well signalled—and the reality is, in regards to the overall impact around the rents, it is our view that when we reduce cost burden out of the system, that will reduce upward pressure on rents.

Obviously, there are a number of factors that go into the rent aspect. Obviously, the supply of housing is another key component, and we have been clear to say that there isn’t a single lever or single correlation factor that is at play, but we do believe it is a factor that will reduce that pressure as part of the overall mix of initiatives that we’re undertaking as a coalition.

Thank you, Mr Chair. So we’ve just heard a really interesting argument there, laboured by the Minister of Revenue at successive points throughout this debate tonight and by the Prime Minister and other members of the Government, and that is that the reason that we are currently debating this is because of the fact that it was taken to the election and, therefore, it has been widely consulted, and the Government has the mandate to just do carte blanche what it wants.

So I feel like this is an argument that needs to be properly unpacked, because the question needs to be put to the Minister, particularly at this stage, while we are working through an Amendment Paper—formerly known as a Supplementary Order Paper—to the primary legislation, therefore meaning that we have not had the ability to have due scrutiny, as is usually applied to all legislation through that select committee process and the usual processes of first reading and otherwise, and we are seeing this introduced right now.

So my primary question to the Minister is: why is he introducing this inordinately expensive policy with regard to these changes, particularly for interest deductibility, but also those for the brightline test, at this stage, through an Amendment Paper, through formerly what is known as a Supplementary Order Paper, at the committee of the whole House stage, without the opportunity for us to have proper public input?

Is it genuinely the position of the Minister, is it genuinely the position of this Government, that they believe that their mandate from the election gives them carte blanche ability to shove things through without due public scrutiny and process? Or is it the case that perhaps he was a little bit concerned about some of the things that economic commentators and economists themselves might say were this to go before select committee, namely the trade-offs that this Government is making when it comes to paying for this $2.9 billion policy at the cost of many other things during what they themselves campaigned on—this cost of living crisis?

So, firstly, that question on this vehicle: why did the Government not wait and introduce this in a taxation (annual rates) bill subsequent to the May Budget of this year? Why did it need to be shoved in now through this Amendment Paper to this bill, which was introduced by the former Government and has already been through that select committee process? Are they afraid of the democratic process and input of people at that select committee and the feedback that they might have received?

Now, there are two other areas that I want to explore here, which I would really love some feedback from the Minister on, so I hope that he’s noting these down. The first: with regard to the brightline test changes, has the Minister seen any modelling on the uptake in potential property speculation as a result of this clause? That’s a key question to the Minister. Has there been any modelling whatsoever, either that he’s been provided with or that he’s asked for from his officials with regards to the impacts or potential impacts of property speculation?

My second question on the point of the brightline test for residential land changes: has the Minister seen advice from Treasury which, and I quote, “considers it unlikely that landlords will pass on the tax change through lower rents in the short run as the stock of housing is fixed”? And could he please share that with the committee—that is, what evidence is being used to support claims that this clause will put downward pressure on rents if the stock of housing remains fixed? Because, again, we’ve heard a lot of weight placed on this “could”.

To the second area of questioning that I’d like to get into, that of interest deductibility, some really important questions here. The first is that given that interest deductibility is already available for new builds under the changes that were made under the previous Government, has the Minister got any advice whatsoever or has he considered how making it deductible across the board will actually remove the relative incentive for investment in new supply—a really critical point there with regard to new builds.

Second question under the point of interest deductibility: has the Minister considered advice from Treasury when interest deductibility was first limited, including such advice as—and I quote—“In general, the Treasury supports limiting interest deductions for residential property primarily because it addresses the Government’s demand-side housing objective of moderating prices.”; if so, can he confirm or explain how clauses 21D(b) and 21D(c), set out on Amendment Paper 20, won’t then have the opposite effect and lead to an acceleration of house prices, in turn making housing more unaffordable?

Thank you, Mr Chair. It’s a pleasure to be able to take my first call on this particular bill before the committee. Apologies to everyone in the Chamber, really, that my desk is such a mess. The reason it is is because this is an incredibly complicated piece of legislation and fitting it all together has proved quite a bit of a challenge.

But I do want to talk to Part 2, and specifically to the Minister’s amendment to clause 9 in relation to the brightline test and the changes that the Minister wants to bring in on this. This is a really big change, and we know that this brightline test has previously been a shorter period of time when it was first brought in by the National Government. But what I wanted to ask the Minister is: why is he changing the brightline test back to two years? Did he consider the impact that constantly chopping and changing with periods of time under the brightline test has in the view of people’s understanding of how the housing market works and their obligations in relation to taxation? Because to me it just seems that there hasn’t been a lot of consideration for this particular policy.

I did look into the definition around main home exclusion, and it is actually quite complex. What I would like to just check with the Minister is: has he considered how this will be actually put in place, and whether there are, in fact, additional clauses that he should have perhaps looked at when changing this policy back to two years, because what is a main home? That is a question that I would pose to the Minister.

When I looked at the legislation to try and address this, I was unable to find the definition of a “main home” in the statutes which we have in the Chamber here. There is a slip which says that a definition has been inserted, but the definition is not there, so I couldn’t use that. I had to look up the main definition on the legislation website, which was cited before by my colleague the Hon Deborah Russell, and the main home is considered to be—the first definition, and it’s under, I think, Part Y of the Income Tax Act. Goodness me, this is a large Act, and certainly makes the deliberations that we are making today complex, especially because, as others have mentioned, we are not in an urgency process but we are in a position of being in extended hours and we are in a position of having this substantial change to the taxation regime in New Zealand being brought about through an amendment that the Minister has put forward at committee stage, so there isn’t a lot of time to look at the scrutiny of this.

But I have attempted to, and what I would like to go through with the Minister and have his thoughts on is: is the definition of “main home” in the primary piece of legislation fit for purpose? Obviously, this has a huge impact on how the amendment on the brightline test is put forward. Just to go over that main home test, because, as I said, it was extremely difficult for me to find that; I couldn’t find it in the principal legislation. But online, it is that it is used as a residence by the person, a home, and is the place which the person has the greatest connection to, if they have more than one home.

Well, that seems a not very specific definition to me. It does seem to be something that could be a little bit subjective in terms of which is the main home and which isn’t, and when it comes to the brightline test, of course, this is key in deciding whether there is taxation that is actually going to be due on this particular property. I would put it to the Minister that the period of change between 10 years and two years is exceptionally important when considering that, because a 10-year period, when looking at someone’s main home, is a much longer period of time in which to ascertain which is their main home or not.

An example that I just read in the Sunday paper is that the Minister himself only spends two nights a week in Auckland at what I would consider his family home. I use that by example to the Minister to say that a two-year period is actually a very short period of time to make that assessment. Ten years is, obviously, going to make it a lot easier to actually ascertain which is the main home. Did the Minister consider looking at that when he was putting this bill together?

I want to just briefly touch on the Treasury response to some of these brightline changes, because I do think that they’re incredibly important, and I’m aware that I don’t have a lot of time left in this call, but if you would indulge me to just briefly go over some of the changes that—[Time expired]

I’ll assist the member with some answers to some of those questions. The IRD guidance in regards to the definition of a “main home” has the same definition as was originally the case in the legislation, and the definition can be found on the IRD website and it provides some clarification around that. The same definition exists as it was originally.

💬 Camilla Belich: Yeah, did you think of changing it?

No, the decision to keep the definition the same was the decision that we stuck by.

In regards to the brightline test questions by the member, there are a number of aspects there. We’ve actually made some changes to this where, actually, there is now just one test. Previously there were more than that, and so that simplification aspect is now part of that.

The question that was being asked—and we covered this a little bit before around the intention test, and I think it is a fair question. The intention test still exists, and so, in effect, it’ll still catch those property developers that have an intent to develop properties. So those speculators that fit within that definition will still be covered under the intention test beyond the two-year period. So, in effect, that’s not going to allow them to get out of their obligations in regards to that.

The other questions were in respect of house price impacts. Yeah, look, the reality is there’s a huge degree of uncertainty in regards to the implications of this on house prices. I’m not going to make any other comments other than to acknowledge that there is a degree of uncertainty. However, there are a number of factors at play which drive that price, and we have embarked on a significant programme around increasing housing availability, and it’s a key priority for this coalition Government. So there is a number of factors, as the member will be aware, that implicate into the house price conversations. The other aspect around deductions around new builds versus non - new builds—in effect, you know, quite simply, we’re flattening the overall playing field, and there is a consistent rule in regards to those properties.

And interest deductions as well, which was asked. So the reintroduction of these deductions is from the 1 April 2024, and the questions I think that were raised before in regards to “Why aren’t we doing a separate bill?” and, you know, all of that stuff. The reality is we made a commitment around ensuring that they came into that effect, and, therefore, by virtue of the timing that we wanted to bring this law into play, it needed to be included as part of this current bill in this current legislation that we’re discussing.

I move, That debate on this question now close.

There’s a long way to go on this debate. I just want to run through the topics that are addressed in Part 2 of this bill. There are the global anti-base erosion (GloBE) rules, and we’ve had a bit of discussion about that, though I still have some questions on the GloBE rules. There are a whole set of changes to the trustee tax rate which are pretty important and we need to go through those as well.

There’s some really significant changes around the tax treatment of ACC lump-sum payments—we’ll want to have a good discussion about those. We haven’t had any questions on those yet or on the trust rates yet, and we do need to spend time on it. There’s some pretty significant rollover relief in respect of the North Island weather events. We do want to talk about that and why it’s important and make sure it’s covered. Then there is some other stuff on overseas donee status. There’s some changes around the extra pay on termination. There’s some changes around gift-exempt bodies. So that’s just all in the bill as it was presented, the original bill. And some of those topics are actually really important for us to keep on discussing.

I think we’re going to have to settle in for quite a long night, because that’s just in the bill, and that’s leaving aside the Amendment Paper. And we’ve had quite a bit of discussion—already some discussion on the brightline test and on interest deductibility. Now, I want to talk on both those topics as well in due course. I do just want to finish the questions I have on the GloBE rules. And there’s also some rules around building depreciation, which is sitting in that Amendment Paper, and some really interesting changes around trading stock disposals.

So those are pretty significant changes. So, by my count, that’s one, two, three, four, five, six, seven, eight, nine, 10, 11 pretty major topics that we will want to talk about. So I sympathise with the Minister, but tax bills are dense and complex, and they are incredibly important. This is where the Government asks people to make a contribution to New Zealand, to the way we build our society, to the way we fund the things we like to fund.

💬 Hon Erica Stanford: What’s the question?

They are not minor or trivial bills and we do actually need to discuss them in full. I notice the member over there interjecting. Perhaps she would like to take a call herself.

💬 Hon Erica Stanford: Get to your question. Stop fluffing around.

How very rude. So, having gone through the information about what we need to talk about, I do want to revert to the GloBE rules. And there is a particular question there. I just noticed as I was reading through this again. I want to direct the Minister’s attention to clause 44. I’m looking at the new section HP 5. If the Minister’s looking for it, it’s on page 57 to help him to find where he needs to go on that one. In particular, there is a term that is introduced there. It’s introduced by reference to the global anti-base erosion model rules, and it’s the term “a fiscal year”. Now, I’m familiar in our tax law with the term “tax year” and I am familiar, of course, with the term “income year”. But I’m unsure if I’ve seen the term “fiscal year” in our tax legislation. Now, I’ll have a quick look for myself, but I don’t think it sits in our legislation.

So what I would like the Minister to do is just to talk a little bit about what that fiscal year is. Now, I know it’s defined in the OECD model rules, but I would like to understand that term “fiscal year” and how it differs from the terms we commonly use: tax year and income year. They’re different concepts. I’m pretty sure it’s a pretty standard meaning, but here is a new term entering our legislation. I would like to understand what that term actually means. So I think that might be almost my last question on the GloBE rules before we move on to another tack, but we’ll see how we go.

Thank you, Mr Chair. I want to continue my questioning in relation to the global anti-base erosion (GloBE) rules, and, really, these are probably the last couple of questions I have in relation to that part of Part 2. Just for Part 2, for the GloBE rules—unless you want me to recount this again to the committee, because the members over there kept interjecting and they must have missed my first couple of speeches—

💬 Hon Member: No, we’re just waiting for some new material.

You want me to continue? So if I go to clause 71D, clause 71D, for that member over there, allows—there was a change that was made in an explicit reference to section 91C of the Tax Administration Act, giving the commissioner the power to make binding rulings on the applied GloBE rules. So this is quite an important change that was made, and I want to ask the Minister for the policy intention around the particular change around binding rulings. There are a number of different rulings that taxpayers can apply for, and the tax rulings, basically, are the commissioner’s view and they can provide certainty for that particular taxpayer, whether it’s a public ruling or whether it’s a binding ruling on one specific taxpayer. Basically, it’s certainty around the tax treatment of a particular arrangement or a particular treatment of a way that a taxpayer has basically said, “I’m going to treat X like Y. Is that all right?”, to the Commissioner of Inland Revenue.

So there is a new binding ruling power that has now been given to these multinational enterprises, and the thing that I wanted to ask the Minister is whether—and it’s something that we in the select committee probably should have picked up. Given the value in the threshold in which these multinational enterprises actually enter into this regime is quite expensive—basically, €750 million—has the Minister received any advice from officials or asked officials for any advice around the actual application fee if there is any form of binding ruling?

These are multinational enterprises who have significant amounts of money, and to, basically, do a binding ruling on—as the House would have heard earlier today—the different tests that a multinational enterprise has to step through, I would consider that that would take up a lot of resource for Inland Revenue, for that significant enterprises unit. I do understand that under the coalition agreement with one of their parties, they are going to increase audit and investigations and provide extra funding for them, but I would have thought that the binding rulings, which are actually held through another part of Inland Revenue—if I can remember rightly, it was just sort of like the office of the chief tax counsel. I don’t know if that’s the name of the title in law. Was there any consideration given to increasing the fees for that binding ruling, given the large amount of quantity and volume of money that is, basically, just the entry test to get into it? Obviously, these multinational enterprises will be earning a lot of money across the world, so has there been any advice that the Minister has asked for from officials as to whether the actual application fees for binding rulings should be increased?

I’ll ask the Minister that particular question, and then my second question actually goes to the discretionary penalties. So the discretionary penalties were, I think, around $100,000, and the select committee had, basically, debated around—you know, that seemed like a large amount of money. But, again, we fell on the aspect that the multinational enterprises are quite large multinational companies and entities. So, included as part of the bill, there was an empowering assessment provision for discretionary penalties in clauses 71B, 72C, and 72D. Again, I just wanted to just ask the Minister, because in select committee, yes, we do have access to officials, but it’s something that has probably come out just through this particular debate and in speaking about the difficulty of the test to get into this regime. Has the Minister actually looked at a different type of scaling, or a different type of—you know, if their enterprise revenue is like over $1 billion—

CHAIRPERSON (Teanau Tuiono): Could I invite the member to make the links through to Part 2, because parts of this are linking through to Part 3. But if there are links, it would be good for the committee to know.

So just the question for the Minister is whether he has looked at the scaling of those penalties, because the select committee did introduce—it was OK with $100,000. But I ask whether the Minister has received any advice from officials around the scaling of those penalties.

I’ll just answer a couple of those questions, as they were asked. The conversation from the Hon Dr Deborah Russell in regards to the definition of a “fiscal year”—the actual definition in regards to that, for the purposes of this legislation, is actually defined in the OECD rules, so that’s that location. The fiscal year is obviously the 12-month period that will differ depending on a company or Government’s structure. So, in a New Zealand context, for those people that are still staying with us and watching this at home, the New Zealand Government’s fiscal year is from 1 July to 30 June, and that’s what you refer to as a “fiscal year” versus, obviously, a calendar year, or other aspects like that. So, really, it depends on the relevant balance date for the entities.

In regards to the Hon Barbara Edmonds’ questions around the binding rulings regime, it’s the same binding rulings regime that applies in this case, as it does with other aspects. I know that the Finance and Expenditure Committee did consider this, and, obviously, that’s included in the select committee report, so I won’t repeat it.

Thank you, Mr Chair. I have a number of questions which the Minister of Revenue has not answered. I’m going to ask different questions. I need those answers for my amendments to Part 2, particularly to clause 8, the second amendment on my Amendment Paper in my name, and to clause 9, the first two of the amendments which I have not spoken to yet. The questions that I posed to the Minister was the original intent of the brightline test and whether he had taken advice on the difference in achieving that policy intent that was introduced by the National Government in, I believe, 2015; between the difference in two years and 10 years. But I’ll ask him these specific questions—and there are three—to help me clarify whether the amendments are still relevant.

The first is: has the Minister received advice that since the changes made in 2021 were made—being the extension of the brightline test to 10 years and interest deductibility—first-home buyers have significantly increased their share of the housing market at the expense of investors, and what was the effect of the Government’s support for rapid increase in housing supply in that period as compared to the effect of the rules change?

The second question I have for the Minister is: has he received advice about the Reserve Bank’s lending data showing that during the period between August 2014 and October 2017, first-home buyers’ share of total lending averaged 12 percent and investors’ share averaged 29 percent, and since the announcement of the brightline test extension and removal of interest deductibility in March 2021, the share of first-home buyers has averaged 20 percent, and, as of July 2023, that share was 25 percent? I ask that question because the share of total lending going to investors fell in that period to an average of 17 percent.

And the third question I have for the Minister is: CoreLogic data on the types of buyers in the housing market in New Zealand show that mortgaged multiple-property owners—so those are property owners who we might consider to be property investors, investors who are making money out of capital gain on property—the share for them of property purchases reached a peak of 29 percent in early 2021, before the two rules were introduced, and has fallen in June 2023 to 20 percent. Is the Minister aware of that? I ask him because when he is providing the House with his policy rationale for a change from 10 to two years, it’s important to understand whether the Minister took advice on the impact of the change for first-home buyers as a proportion of the market as compared to property investors.

Thank you, Mr Chair. I’m just going to ask about a couple of things. I actually do want to indicate that there’s more than that that worries me and that I’d like to ask some questions about. But the first is actually about the tax treatment of people affected by the North Island floods. I can see that there has been a decision to extend the deadline until April of this year, and I’d like to ask the Minister whether he’s considered whether that’s actually long enough in the circumstances. It’s quite complex going through that situation. It’s actually something I’m seeing on the ground, that people are very confused about what they are entitled to etc. So my understanding is that while there’s some relief here, which means that, for example, if you are bought out, the treatment of the money, if you are going to put it back into another property, will be spread over five years. I am concerned that that process is taking longer than anybody would like, and I’m concerned about that issue about how we arrived at that date. I know it was extended, but obviously it’s a moving feast.

I’d also like to know about the comment that I’ve seen that there’s future policy work recommended in this area and whether the Minister has any concern about that, because my understanding is that this waiting until one of these bills comes out every year when we have an event—and, basically, reinventing the wheel each time—is seen as a problem. And I would like to know whether it was possible for the Minister to, in this particular legislation, look at something that was more generic. How far are we along the pathway to something that would work in more than one circumstance? I’d also like to ask about something completely unrelated, which is—

💬 Hon Dr Deborah Russell: No, no, no. Don’t.

What?

💬 Hon Dr Deborah Russell: No, nothing.

I’d like to ask about de minimis tax, because—[Interruption] I thank you. I’ll sit down.

Thank you very much to the member Helen White for those questions. The member raises good points in regards to the implications and the uncertainty for those flood victims. The decision to extend to April was based on official advice, and we believe that that will provide the adequate amount of time for those matters to be dealt with. For those that know people that are impacted by that or for those that are watching that are impacted by that, I would encourage them to get in touch with Inland Revenue as soon as practical in order to ensure that the department is aware of their specific issues. But, as I said, the date extension is an extension and does recognise that that is a complex area.

I think the previous question in regards to the implications of the interest deduction rules in regards to investor activity and first-home buyers—the aspects that have been cited acknowledge that there is some evidence to suggest that investor activity actually reduced in the housing market, relative to the first-home buyers. I think some of the aspects that the member Arena Williams noted are correct. What is challenging, though—and I think the member would also acknowledge that this is a complex system and there isn’t simply just one aspect at play here. But the other aspects at play also included, at that point, the Reserve Bank changes around to loan-to-value, there was also the implications in the changes around the Credit Contracts and Consumer Finance Act legislation. So, while the member’s right to cite that there was some change in that, to definitively say that that’s the result of one aspect over another is hard to quantify.

Thank you, Mr Chair. Following on from the Minister’s answers, I have just some quick questions to follow up. The first is: what is a good proportion of first-home buyers in the market, and what are his aspirations for the number of first-home buyers who can secure a first property under the legislative settings that he seeks to introduce tonight?

My second question is: if it is, as he says, unclear whether the legislative changes in 2021 did not cause the number of property investors within the market to fall from the peak in 2021 down to 20 percent in 2019, then how will he continue on those factors in the legislative settings that provided for that slide in the proportion of property investors in the market?

Thank you, Mr Chair. First of all, I’d just like to thank the Minister for tracking down that definition of fiscal year. It sounds remarkably like an income year, but I can see why it needs to sit with the fiscal year definition.

We’ve sort of gone through about four of the 11 major topics that there are within this bill and the Amendment Paper. There’s still more to be said on interest deductibility and on all sorts of matters. So I’ll take the question I have on interest deductibility first, and then I do want to come back and start looking at the trustee tax rate changes. I guess it’s a somewhat theoretical question, maybe. The rule, of course, for getting a tax deduction is that in order to be able to claim a tax expense, it has to be incurred in the process of earning income or incurred in the process of running a business. But there’s a pretty clear nexus between: in order to get that tax deduction, you have to be doing something that gets taxed as well. And that’s a fairly straightforward point.

One of the problems around investment in residential rental properties is that a large part of the income that people earn from them is capital gains, and, in fact, untaxed capital gains. So when people claim interest deductions against residential rental property income, what they’re doing—well, they’re paying interest, sorry. Partly they’re paying it because they’re earning assessable income of rent, but partly they’re paying it and they’re earning untaxed income in the form of capital gains. Now, traditionally, people have been able to claim an interest deduction in full. And part of the reason is that it’s pretty hard to prise apart which part of the interest deduction relates to the rent and which part relates to the capital gains. So it’s always been hard to apportion between the taxed income and the untaxed income. So the rule has been to claim the full amount; basically, it was concessionary—it was a concessionary treatment.

It got flipped back the other way under the interest deductibility changes that were put in place by the previous Government. So it flipped the other way. There was a portion of those interest deductions that relate to untaxed income, so the entire amount was disallowed. Except the interesting thing is that if a person was caught by the brightline test—so they paid tax on the capital gains—then they could claim the interest deductions as part of that tax calculation. So there was a whole lot of consistency there around the treatment of interest deductions.

Now, by reverting to the old practice of allowing the full deduction—well, it’s going to be 80 percent in the next tax year and then a full deduction in the following tax year—in fact, the Government is reverting to the practice of giving a really concessionary treatment with respect to interest in comparison to other sort of regular expenses that people incur with respect to a residential rental property, such as insurance or rates and so on. So I just want to hear from the Minister whether they considered some form of apportionment, some way of trying to assess what part of the interest deduction was related to the untaxed capital gain and what part was related to the taxable rental income. It goes to the consistency of the treatment of other expenses, which always have to have that nexus with income. In particular, the rule is, really, no deduction unless you’re earning taxable income. So it’s a little hard to see the justification on a theoretical basis, as well as all the practical implications that my colleagues have talked about of allowing those interest deductions again.

I’d like to submit that, actually, the previous Government’s treatment of it by allowing the tax deductions when the person paid a tax on the capital gain was actually a rather more consistent treatment of interest; and, in fact, was the better treatment. So just from a tax theoretical point of view, the better treatment would be to disallow those interest deductions.

Thank you very much, Mr Chair. In regards to the member’s question around the capital gains aspect in regards to the interest deduction—I mean, in effect, what we’re doing here, in regards to allowing an interest deduction on residential property, is no different to what is allowed by someone that undertakes an interest deduction on a commercial property, which was allowed under the previous rules, or likewise for a farm, for example, that is a similar entity that may be funded proportionately by debt and equity. So, you know, what we are simply doing here is driving a degree of consistency in regards to the overall way the tax system is, so that allows that deduction to be taken. And I don’t think the point that the member’s noting, in terms of the inconsistency, is relevant. So I’ve given just two examples there of where the aspect is.

I think it is also important to note that in regards to the ability to take that interest deduction, under the prior Government’s rules, the deduction for interest in regards to residential property, even in circumstances where the property did not achieve or obtain a capital gain, was denied. So the inconsistency of that tax treatment is what this coalition Government are looking to resolve.

I just wanted to go back to the different member’s question—I think it was Helen White’s—in regards to the storm implications. The Finance and Expenditure Committee (FEC) did agree as part of its deliberations—the question was “Why”, about the date, and “Is the date adequate?” The FEC did deliberate and consider that date quite considerably. The position of 30 April 2024 was the position of the select committee, that they determined was an appropriate date—hence I think I’ve covered those points and now I’m starting to repeat.

Thank you very much, Mr Chair. I had some questions in regards to the proposal in here around the brightline test, and I note the Minister has touched on this a couple of times. But what is of concern is that I actually don’t think that it’s good enough for the Minister to simply say that we’re bringing it back to how things were originally.

Well, of course, a lot has happened since then, and we have a lot more information available to us. And my question is specifically around the advice that he’s receiving, given that even in their own documentation that’s provided here, Treasury not only suggests that doing what the Government’s proposing is the wrong idea; Treasury proposes that they push it out—they push it out to 20 years, because what they recognise is, as is intended with a brightline test, it discourages speculation in the market. And that is particularly the case when coupled with—as has been mentioned—interest deductibility. But, specifically, we’re talking here about affordability of homes, and in doing what the Government is proposing, it will do the reverse of what the justification was and the rationale behind bringing it in in the first place—even albeit for two years—right when the housing crisis was really getting going, to try and discourage speculation within the market. Then, as it continued, the rationale was to push it out.

So I want to know from the Minister, you know, a bit more detail, please, than what he has been giving up until now is—I get it. He said that he wants to bring it back to what was originally intended—we understand that—but I think the committee deserves a bit more. In light of the advice that’s here in the information that’s provided in front of us that says Treasury recommends a brightline test of 20 years and outlining the benefits not only for our house affordability but other reasons as well, why on earth is he not only going in the other direction but absolutely dismissing the advice that Treasury, their own department, who presumably played a massive role in the development of this bill, has put in this document?

Just responding to the member’s questions in regards to the Treasury advice, I mean, as the honourable member will know, there are circumstances where departments don’t always agree and they come from different perspectives in regards to the application and implementation of that policy. But as I’ve noted, I think on three occasions, in regards to questions on a similar matter in regards to this test, the intention rule will remain and does remain within the legislation. The point of the intention rule is to ensure that if it is the intent of the property speculator in order to develop that for the purposes of making a gain, then they will be captured, even if that period of time exceeds the two-year limit. So that hasn’t gone away. That remains in place and will be able to capture the aspects in regards to property speculators and that.

I think the other point to acknowledge, and a key focus of this coalition Government, is to reduce the compliance burden on taxpayers. We’re wanting to actually get a more productive economy. We want to get a more productive country, and one of the ways that you can derive a more productive country is by having a more efficient tax system. And with all these inconsistencies, a 10-year brightline test in itself derives significantly more compliance and cost on business than a two year. You don’t have to travel too far to get feedback from a number of experts within the tax field that acknowledge that a 10-year brightline versus a two-year derives significantly more compliance costs. And on this side of the House, we are focused on making life easier for people to be productive in our economy, to earn more income, to hire more people, and to ensure that that flows to those that need it most.

Look, at this stage, I’ll just indicate to speakers that there has been an indication of a lot of new material to come. We’re looking forward to hearing it, and a new speaker speaking about a topic that’s already been spoken about does not constitute new material.

Thank you, Mr Chair, and thank you for that direction. In that case—

CHAIRPERSON (Greg O’Connor): No, it’s not a direction; it’s just an observation.

An observation, Mr Chair. I do want to move on to one of the other really significant measures in this bill, and there’s quite a lot to talk about it, with respect to it, and that is the changes to the trust rate. Now, the trustee tax rate at the moment is 33 percent but in the bill as drafted, the trustee tax rate—applying from 1 April next year, provided the bill goes through in time—will change to 39 percent. That aligns the trustee tax rate with the top personal income tax rate.

But, of course, trusts are set up for many purposes and, in some cases, trusts are set up for people with disabilities. There were many submissions on it but one of the things that changed as the bill went through the select committee process was a change to enable a particular rate for beneficiaries of trusts for disabled people. Now, the trustee tax rate for a trust that is for a disabled person at the moment is set at 33 percent; it was thought that 39 percent was overreach. A lot of submissions came in on that and the select committee agreed with that, and the trustee rate for beneficiaries of a disability trust was set at 33 percent.

I want to direct the Minister’s attention to clause 39, inserting new section HC 39(2). It talks about who can be included in a beneficiary trust. It has to be one or more beneficiaries who are all disabled beneficiaries. What I want to ask in the first instance is: if we have a trust, why isn’t it possible to have non-disabled beneficiaries of that trust as well? So this trust has got a pretty tight definition; the beneficiaries have to be disabled persons. But why can we not have non-disabled people who are beneficiaries of that trust as well?

Related to that, of course, people with disabilities may be beneficiaries of other trusts. So we can imagine a situation where a person with a disability is the beneficiary of a disability trust, or a disabled beneficiary trust, but they might also be a beneficiary of another trust. Who knows what it might be; it might be a family trust, it might be a trust that owns a business and the business operates through the trust structure, and so on. There are many sorts of trusts or trusts used for many purposes. A disabled person could be the beneficiary of a disabled beneficiary trust but they could also be a beneficiary of other trusts.

So, in respect of the disabled beneficiary trust, they would have a tax rate of 33 percent, but if they’re a beneficiary of another trust, has consideration been given to allowing some of that trustee income to be taxed at that lower tax rate which is sitting in there for disabled beneficiary trusts? I hope the Minister can see the question I’m asking, and it is: if we’re trying to ensure that a person with disabilities is taxed at an appropriate rate—done through a disability beneficiary trust—then why not for other trusts of which they happen to be a beneficiary as well, just because they’re not disabled beneficiary trusts.

Yeah, no problem. I think I got a handle of what was being outlined there. It seemed like a quite a complex web of trustees and beneficiaries but, quite simply, the definition in regards to what is qualifying within a disabled beneficiary trust is that the person must be disabled and there is a definition in regards to that, within the fact they need to be in receipt of a child disability allowance, a supported living payment, disability allowance or a jobseeker health conditions and disabilities allowance for longer than six months.

The simple reason—to the member’s question around, in effect, the ability for someone who is not disabled and why they can and can’t be in that—is that the rules are set up to ensure that non-disabled persons don’t, in effect, benefit from the exemption that we have provided. I think that’s not unreasonable. The exemption that the select committee thought through and worked on pretty extensively—and I understand there was a reasonable number of submissions from stakeholders in this regard and the select committee landed with some modifications and amendments to the original bill—but I think they landed in a pretty sensible place and the tyres were kicked pretty hard in this area that, you know, the trade-off is that the ones that need to benefit from this exemption are those that are disabled, and those that are non-disabled should not be able to benefit.

I move, That debate on this question now close.

Thank you, Mr Chair; thank you for the opportunity to take a call on this bill. I want to pick up on a new line of questioning for the Minister of Revenue, which specifically looks at what the legislation and the Finance and Expenditure Committee report has called the North Island weather events “rollover relief”. The reason why I’m raising these questions with the Minister is partly in my capacity as chair of the Governance and Administration Committee—a very fine committee—this is an area of work that we have been exercised with since the Auckland floods, Minister, and I’m quite interested in finding out some more information about these particular changes.

Further to that, as the MP for Nelson, what I do want to just understand further is the advice that the Minister received from officials to take that application for landowners and property owners in the North Island and then apply that to the Nelson floods. We have had some property owners affected in a similar way through the Nelson floods, so I am interested in asking the Minister a couple of the questions that I have.

So the first is what I would quite like to understand in a bit more detail, because as the Minister and members of the House will know, I do enjoy my plain language, so I’m interested in what “rollover relief” actually means, because it does sound just a little bit jargon-esque. I think, for those who are listening in to the debate tonight, I would be interested in what that “rollover relief” actually means. And I’m particularly keen just to find out more around what the cost of this will be for Government, if Government has had the opportunity to assess what the cost will be to add further relief to homeowners. Because what it talks about in the select committee commentary is to look at both insurance payout components but also the brightline test and the implications of brightline test changes potentially not being applied to homeowners in the East Coast who were affected through the floods, but also to my constituents and Nelson.

I’m also interested in whether this has also been considered for property owners in Auckland. I think it’s important to note we had the two events. Sometimes there is a conflation of the two events that occurred last year, but we just want to be really clear that we’ve got the Auckland floods and then we’ve got Cyclone Gabrielle. So just looking at the commentary in the select committee report and just wanting to understand a little bit further from the Minister around the advice that he received, just to ensure that we’re covering off property owners both within that Auckland area, who had the Auckland flood event, but also those from the East Coast.

What it does seem to—you know, just my observation is it does seem that we have a range of ad hoc measures for each big event, both in terms of how the financial support component comes through—but, specifically tonight, we’re talking about tax and the tax treatment. So I’m interested in whether the Minister believes that we should be looking at a more robust framework that we can imply, in terms of the tax treatment, because there is a significant amount of change within this bill that is around the tax treatment—so things like the brightline test. I do note here that there’s a proposed new section CZ 26B of the Income Tax Act, which is to be inserted by new clause 18C, which would ensure that the brightline and other time-related tests don’t apply to properties that have been affected by one of the North Island adverse weather events, and I do just want to seek that certainty that that is both of those North Island events.

I see from the select committee commentary, with regards to Nelson, that it talks about 14 properties, but, as the local MP, I have been made aware there could be more than that. So, again, I’m just interested, from the Minister, about the advice that he’s received around the extent of that application to the Nelson floods event. But, furthermore, there will be a cost to the taxpayer in addressing this through this bill, so I’m interested if there has been some specific advice given to the Minister and what that advice may mean, in terms of the actual cost to the taxpayer, by including these components within this clause of the bill. So a number of questions there, for the Minister, that I’m looking forward to hearing from him on.

Thank you very much, Mr Chair. I appreciate the enthusiasm across the committee on this bill, to take another question. But in regards to the points raised by the member, there is no fiscal cost to the rollover relief, in the context that these aspects have already been considered as part of the broader baselines and therefore there’s no additional appropriation required. So that covers that.

I think there was a question also from the member, in regards to the definition of “rollover relief”. This was also covered quite extensively by the Finance and Expenditure Committee, but, in effect, it is the deferral, the recognition of the income—and this relates to where there are rebuilds, or replacements, of assets that have been destroyed. And I, obviously, acknowledge that the members within your community, and those members in other parts of New Zealand that are still dealing with the implications of those events that occurred in the past—but that’s what it is, the definition and effect of the rollover relief, in this context. Again, it was heavily canvassed by the select committee process and the commentary in the report as such.

Thank you, Mr Chair. I’m seeking to open a new line of questions on the effect of the bill, as amended, on the deceased estates. I would like to ask the Minister of Revenue a question. Given that 84 percent of estates have trustee income below $10,000, does this bill as amended reduce the administration costs of deceased estates, and then, if it does, does it do that over the three-year period discussed by the Finance and Expenditure Committee for the administration of those estates?

Thank you, Mr Chair. I just needed to be able to go through—and it’s a question around how the rollover relief provisions for the North Island severe weather events apply. When that Amendment Paper was introduced back in late 2023, it had the rollover relief because of the 10-year brightline. So, basically, it was to provide that if, for any reason, a person needed to be absent from their house because they needed to get it fixed, basically it allowed them to have some relief from the brightline test at 10 years. But then, with the new changes to the brightline test—and this is kind of why I had to pick up the commentary of the bill, from the Table, to try and understand—at what point does the new two-year brightline test apply, and how does it apply to the North Island rollover events, the relief that’s provided in the Amendment Paper that was introduced at the end of 2023?

I’d just like it if the Minister could clearly step it out, because the brightline test has, over the years, changed from two, to five, to 10, and it’s gone back to two. And this is, really, the opportunity, because we haven’t had a select committee process at all for that Amendment Paper. So it is all about—

💬 Dan Bidois: We didn’t know about the 10, did we?

And the member can interject as much as they like around the 10 years, but the member should know that, when you have to basically litigate this, if you are a lawyer for a taxpayer who has been possibly consequentially punished because of the change in the brightline, the test dates are really important around the start dates.

So I just want to ask the Minister: how does the rollover relief provisions which apply for a 10-year brightline, which are covered in the Amendment Paper that was introduced last year in 2023, which is now in the revised track version of the bill, align with the brightline test which is now in the Minister’s name in the Amendment Paper? And if he can clearly just step out the start dates for each of those different tests and whether the rollover relief provisions apply or don’t apply. And I think it’s important because if in future there’s litigation around this because we haven’t been able to debate it at select committee, the comments by the Minister today will provide really clear certainty for those future litigations by taxpayers.

I have some more questions on disability trusts—part of the extensive changes that were made to the trust rate rules, which we’re kind of working our way through, step by step. So I’ve got another question on the disability one before I move on to some of the other changes that are sitting around that trust rate rule, and that is around the definition of a disabled person or a disabled beneficiary. Now, it’s sitting in clause 39, which inserts new section HC 39, and, in particular, in section HC 39(3), “A ‘disabled beneficiary’, for an income year,” is a person who receives some various sorts of benefits under the Social Security Act.

They’re all defined in terms of the Social Security Act. I have looked through there for the definitions there, but, in particular, what I’m thinking of—and it’s a situation that is going to apply to at least some people. So the way that a disabled beneficiary is determined is by whether or not that person receives one of these social security allowances, payments, and so on. It seems like a reasonable way to do it. We don’t want arbitrary assessments as to who is a disabled beneficiary or not. But it has occurred to me that there are circumstances in which there are people who have disabilities who are the beneficiaries of trusts, but they are not people who are in receipt of one of these allowances.

Now, I have a particular example in mind, actually, of a friend’s son, who has autism, and so they have a trust set up for this young man and the trust has been in operation for a number of years. I believe he is in receipt of one of those allowances now as an adult, but as a child, he was disabled but he wasn’t receiving one of those benefits, but he was a beneficiary of a trust. So, obviously, we have to limit it in some regard, Minister, but I wonder if we’ve inadvertently left out a class of people to whom that rate of 33 percent should apply. It is worth thinking about.

Now, I was thinking it through with respect to this young man. As a child, he was in receipt of an ORS grant—an Ongoing Resourcing Scheme grant—but, of course, that’s an educational thing. It’s not something under the Social Security Act. So here we have what is actually a problem, and I’m not sure we can resolve it right now, but it is something we do need to have a think about. A clearly disabled child—actually, quite a remarkable young man who is doing well now, but clearly disabled—and a beneficiary of a trust set up very much for his benefit, but he wouldn’t have been able to get this concessionary rate. So it will be fine now because he falls under one of these categories, but he did not previously fall under one of those categories, and there must be other people with disabilities who are not receiving an allowance but who are, nevertheless, the beneficiaries of trusts set up for them.

It was only as we were sort of starting to go through this extensive committee stage that I realised that this might be an issue, and I’d just appreciate that it’s landing it on the Minister, not quite at the last minute, but I think there could be something in that which we might need to think about—

💬 Arena Williams: We’re not at the last minute yet.

Well, no, we’re not quite at the last minute yet, but we’re getting there. I can see that the Minister has an answer just leaping off the tip of his tongue, so I will sit down and let the Minister give his answer.

Thank you very much to the member for that question. The provisions that allow a trust to, in effect, distribute to a beneficiary of which they are taxed at their relevant marginal rate still exists. So, irrespective of the point that the member’s making, that would be the pathway in which we’d ensure that the recipient of that income is taxed at the lowest rate. So I can’t speak for the individual, in fact, but, as I said, the child disability allowance is the mechanism in which the Finance and Expenditure Committee assessed as the appropriate mechanism in order to deal with that.

In regards to the questions around the brightline test—I think Rachel Boyack was asking in regards to the timing and the date aspects—it is technically possible that there may be individuals that are in receipt of a buy-out before 1 July 2024, which is when, in effect, the two-year rule will come in. So in those scenarios, I think what the member was implying was saying “Will they be caught or still subject to the 10-year rule?” Technically they will be, hence why the rollover provisions are provided in that place, in order to provide a facility to ensure that people in those circumstances are not inadvertently captured and, therefore, not face the—or are able to get the benefits of the changes that we’ve made. So just covering off that aspect.

I move, That debate on this question now close.

Thank you, Mr Chair. I have my follow-up questions. Given that the Minister has not answered my first question on deceased estates, I will ask all of my questions on deceased estates now, and I hope we can deal with this swiftly.

So I’m speaking here about new section HC 8B, inserted by clause 33. For the Minister’s benefit, I’m on page 49 of the bill. I want to understand if the Minister believes that three years is the appropriate period and why, and whether he’s had advice on that period applying in the bill as it is now.

I also want to ask the Minister to explain the changes around the income year and, in practice, how many years a deceased estate could be treated at the rate in the particular income year before the higher rate kicks in.

The third question I have for the Minister in this contribution is whether a trust can be both a de minimis trust—and that is dealt with in the Finance and Expenditure Committee’s report—and a deceased estate. I’m asking that because, if so, the question is: could it continue to get the lower rate if the trustee income was below $10,000?

It’s important to understand that that’s not dealt with in the reporting by the select committee. We need to understand from the Minister now, and it’s our opportunity to debate now whether that is an appropriate tax treatment of a trust with that sort of income, and, is it, in the opinion of the Minister, sort of a double dipping or a reasonable consequence if that was the rule to apply?

Just in regards to the member’s questions in regards to deceased estates, and, again, this was covered as part of the consideration that was made, but, in effect, a deceased estate is taxed as a trust, and there are circumstances in which, under the old rules, that would be potentially increasing up to 39. The decision that has been made is that for those trusts, the amendments that we’ve tabled would provide that a deceased estate would be subject to a 33 percent tax rate on trustee income for the incoming year of death and the following three income years.

The de minimis rule around $10,000 would, obviously, still apply as well, but it is the changes that have been noted, based on the official advice and whether it’s three or longer or less, three years is deemed to be an appropriate period of time. But it is important to acknowledge that trustees of deceased estates might not necessarily know who the beneficiaries are, and it, obviously, takes time—you know, sensitive issues around management of deceased estates and the process in which that will be worked through. But the key issue that we need to mitigate is the over-taxation of those beneficiaries, in effect, and the changes that have been proposed will deal with it.

Thank you, Mr Chair. I hope that the Minister of Revenue might, please, explain why the Government is prioritising these late changes to Government tax cuts for landlords and other relatively minor amendments instead of addressing more ways that tax amendments could prioritise more productive investment. We have a very high level of investment in property, largely driven by untaxed capital gains, and there could be some more low-impact, job-rich aspects encouraged by a more imaginative tax regime. The Productivity Commission—or should I say the late Productivity Commission—did criticise the fact that such a high proportion of this country’s wealth, whether it’s investment funds, whether it’s private individuals, is hugely based on property and land. Thank you, Mr Chair.

I move, That debate on this question now close.

Thank you, Mr Chair. I’m so grateful to get this burning question off my chest. Actually, I’ve got two questions, but I am going to limit my contribution this time to a question about overseas donee status, but I also will have a question later on about gift exempt bodies as well. And the reason I raise this—and I’ll refer the Minister to clause 64 of the bill—is that this relates to creating a charity with overseas donee status, whereby they’re able to claim tax benefits such as a donation tax credit for their donation. Schedule 32 of the Income Tax Act lists organisations that have that status.

Now, I know from my previous role with the British Council, which was a registered charity, how difficult it is to get charitable status, let alone be able to get a tax exemption for an overseas donee. In some cases, it can take up to 18 months, I believe, but, in this case, it seems that this particular charity—the Emergency Alliance—has been granted overseas donee status very quickly; in fact, quite soon after the election on 26 October 2023. So I do have some questions for the Minister about this.

One of my reactions is that this seems like a good thing, because this relates to Gaza, and it relates to being able to get aid into Gaza at a time shortly before there were questions, I believe, about the only international organisation that was able to get humanitarian aid in, and there were questions internationally about whether they would be supported. So it’s really interesting to me that New Zealand has supported the Emergency Alliance. But there are also risks to this because there are other charitable organisations that would also like to get donee status, which is very relevant to this Act, because this is around what process was followed, what transparency is there, what risks were looked at, and why did the Government decide towards this particular donee status to the Emergency Alliance.

Now, I looked up online—I had not heard of this particular charity. It seems to be an amalgamation of eight different charities, and it has certain criteria that it says it must meet, including that it must be responding to international events that are of a very particular magnitude, and that there must be efficient ways of working and so on. So it looks like, on a quick Google search, this is a good thing to do. But we did hear in the House today a lot of speeches about what’s happening in Gaza, about the need for a ceasefire immediately. This is something that’s very much on the minds of New Zealanders. And I know that lots of New Zealanders have contributed to other charitable organisations. They will be wanting to understand why this particular charity, Emergency Alliance, has been able to get this donee status.

If we look at the recommendation from the select committee, which I did not sit on—and that’s why this has peaked my interest, because I don’t have the background to it— they recommended inserting clause 2(14C) into the bill so that the Emergency Alliance would be deemed to have had overseas donee status beginning on 26 October 2023. Now, that’s very soon after the election. So that’s a couple of weeks, perhaps. I’m very interested to know what advice did the Minister seek—that’s my first question. What assurances can the Minister give to other charitable organisations that they have been treated fairly? What criteria did the Minister use? What risk analysis did he apply so that we’re not in a situation where we find out later that there were risks around this charity? And does this set a precedent in his mind for other organisations to be able to apply for this status, and, if so, what are the criteria that they would need to fulfil in order to be able to get the same status?

It’s great to be able to respond quickly to these types of events, but we know that when there are a discretionary types of decisions and when due process is not followed, it can also lead to uncertainty and a sense of unfairness for other charities. So I’m really keen to hear from that and I will come back with another question later about gift-exempt bodies. But I can see the Minister is dying to answer my question.

Just quite quickly for the member, the Emergency Alliance is a group of existing charities, and, therefore, all of the individual members of that Emergency Alliance are already charities and, therefore, already have the status. So the simple fact, by virtue of that, deems them to be able to be captured and have benefits that have been analysed.

I move, That debate on this question now close.

Thank you, Mr Chair. I have a couple more questions on trusts—probably about three, actually, quite detailed ones. I know that my colleague Rachel Boyack has some questions on the ACC lump-sum issue, which hasn’t been covered yet.

💬 Tom Rutherford: I’ve got a question!

I just want to go—and I would have welcomed the members to take a call—

💬 Tom Rutherford: Yeah, well, give me the chance and we’ll see.

I’ll just carry on, Mr Chair—or try to carry on.

Look, I want to go back to something that the Minister of Revenue said in terms of trusts for disabled persons. In particular, the suggestion was from the Minister—I gave an example of a trust for a person who was disabled who nevertheless was not receiving one of the benefits that are listed here. The Minister suggested that the way to deal with it would be for the trust to allocate the income, so that it was taxed in the beneficiary’s hands at the beneficiary’s rate, rather than taxed in the trustee’s hands at the trustee’s rates. Now, of course, that would deal with the problem. The problem is that when this person was a child, that person would also have been subject to the minor beneficiary rule. So there would have been quite a complicated interaction between the minor beneficiary rule, and now this disabled person’s trust.

I noticed that the member over there wanted to say something about it. I just wonder if the Minister could comment, then—you know, the suggestion was proposed that the way for that potential overtaxing of a person who was a disabled person that was not in receipt of one of these particular social security allowances, was to allocate the trust income so it was taxed at the beneficiary’s own rate, but, of course, for a child, that does, then, fall foul of the minor beneficiaries’ rule. So I’d just like the Minister to sort of think as to whether or not that really is a solution, or perhaps maybe this is an issue that we’re going to have to come back to, possibly not in the context of this debate, but maybe as an issue that we need to follow up on, or—of course, it would be up to the Minister to that—perhaps we might be able to do it by way of a member’s bill or something like that. But I do think there is a genuine issue there.

Now, I do have some more questions about the de minimis trust, which are—but I’ll leave that one with the Minister for a moment, and perhaps his officials might have an answer as well.

I move, That debate on this question now close.

The question is that the Minister’s tabled amendment to new clause 9(1E) in Amendment Paper 20 be agreed to.

The question is that the Minister’s amendments to Part 2, set out on Amendment Paper 20, as amended, and the Minister’s tabled amendments to clauses 9(2) and 18B be agreed to.

Arena Williams’ tabled amendments to clauses 8 and 9 are out of order as being inconsistent with a previous decision of the committee.