Taxation (Budget Measures) Bill (No 2)

Members, the House is in committee on the Taxation (Budget Measures) Bill (No 2). Members, we start with Part 1, the debate on clauses 3 to 16, “Amendments to Income Tax Act 2007”.

Thank you very much, Mr Chair. A very good evening, members. I’m looking forward to a good committee of the whole House stage of this Budget bill. I just want to provide some context in regards to Part 1, clauses 3 to 16, “Amendments to Income Tax Act 2007”. Primarily, the policy background in this context, and as part of this Part 1, relates to Investment Boost, which is a partial expensing regime and has similarities to other forms of accelerated depreciation. It would allow a deduction of 20 percent of the cost of new investment assets in the income year the assets are acquired. This deduction wouldn’t lower a business’ taxable income, and, therefore, the amount of tax that that business pays.

Investment Boost would provide a business with a timing advantage, allowing it to make earlier returns on its capital investment that could be used to further invest in its business. The deduction would eventually be recovered in the form of a lower depreciation, or depreciation-like deduction, in subsequent periods. The objective of Investment Boost is to encourage capital investment in New Zealand, and greater capital investment would increase New Zealand’s capital intensity, which, in turn, increases labour productivity and wage growth. There are a number of other aspects in the context of Part 1, and I’m happy to take questions.

Mr Chair, thank you for the call. I want to spend a little bit of time just setting out how the Opposition intends to focus on this bill and then to move to questions on a particular clause. Now, this bill is part of the Budget tax measures. We’ve had it in our hands since about, oh, sometime earlier today, sometime this afternoon, which is fine—very considerately, we actually got the bill itself during the afternoon, but we only were able to access the regulatory impact statement, the departmental disclosure statement, and so on, at about 4.45 p.m.

Now, of course, this is all going through under urgency. It’s not actually clear to me exactly why this particular bill needs to go through in urgency. The Minister of Revenue has said it’s so that there weren’t people delaying investment decisions in order to take advantage of a tax credit, but he could’ve just set the tax credit date to start from today, but we could still have debated the legislation through to tidy up some of the details and things like that. It wasn’t strictly necessary to have that going through in urgency. However, that’s the Minister’s decision.

What it does mean is that we haven’t had a select committee process and we haven’t had the opportunity to examine this bill in depth. We have some very real concerns with the bill, concerns that could have been debated in select committee. I have some concerns even with some of the drafting, some of the stuff that likewise would’ve been picked up in select committee and perhaps dealt with.

What we intend to do is to go through it clause by clause. Now, rather conveniently, just on a pretty straightforward clause by clause basis, it does divide quite conveniently into three clear topics. Even just going clause by clause, it divides quite clearly, first of all, into talking about the accelerated depreciation that the Government is putting in place through this, and they’ve referred to that as an investment boost. It’s interesting, because the regulatory impact statement refers to it as partial expensing. So I’m going to talk about the partial expensing, because that seems to be the words which the experts would use—yep. So I want to talk through those partial expensing rules. That’ll be the first topic we concentrate on as the Opposition, taking our first opportunity to examine this.

Then we intend to move on to the clauses that deal with the changes to Working for Families. There are some very serious questions to be asked there, especially around the 61,000 families who are worse off as a result of those changes.

Then, finally, we want to move on to discussing the changes to KiwiSaver, which have some pretty significant changes in them around eligibility and around removing the tax credit for people earning over a certain amount of income. So a lot to talk about, some of it very technical, and, of course, we do want to discuss the policy detail.

Now, as it turns out, when we look, just going on a clause by clause basis, in terms of the partial expensing, the way that we very much want to do it—I think we do want to discuss the policy, and I think actually the best place to discuss the policy in general is going to be when we get to clause 5. Now, clause 5 inserts a whole new subpart into the bill to deal with this partial expensing. So that’s where we do want to have the general policy discussion, and I imagine that that will go on for a little bit of time, because this is a very significant policy.

Before we discuss clause 5, as it turns out, there is another clause, clause 4, and it’s new section CC 15 that is inserted into the Income Tax Act. Now, this takes a little bit of explanation, and I will be seeking an extra call just to get to the question on this one. So you can see we clearly—

Carl Bates: Well, you could’ve done it in the first minute.

Hon Dr DEBORAH RUSSELL: We haven’t had a select committee; shush over there. So, having set out quite clearly—quite clearly—how the Opposition intends to deal with this bill, and I’ve given us a really clear road map so everyone knows what to expect, I want to turn to CC 15. Before I was interrupted, I was going to explain to the members over there, who’ll probably need this explanation, that Part C of the Income Tax Act is where there are rules around income and how we measure income. That seems odd, because, of course, this is all about getting an extra tax deduction.

The point of this partial expensing is to give an extra tax deduction, but then, immediately, the very first clause sitting in here inserts a new section into CC—[Bell rung] Mr Chair, I would like to carry on. Thank you, Mr Chair. I want to understand: first of all, there’s this new section CC 15, and what it is doing is, if a new investment asset—so there’s a whole new entity of assets, our investment assets, and there’s obviously a case, when people buy assets for a business, often there’s a split between using the asset for a business and using the asset for personal use. The obvious instance in that, Mr Bates, would be a car or something like that that is used for, you know, a business use and for personal use. But, of course, an entity can buy an asset and have the split between business and personal use, but then they need to change it, all right? So there’s a change that goes on. So maybe after a year or so, instead of it being a 50/50 split, it’s a 30/70 split or something like that, or maybe it’s a 40/60. So you need a change-of-use formula.

Now, there’s a couple of questions I have here, and the first one, having got into it, is CC 15(1)(b), “The change results in a 25 or more percent reduction in the amount of the deduction if the asset were treated as acquired by the person on the original terms and conditions immediately after the change of use.” I think that maybe there’s a comma missing, maybe the phrases are in an odd order, but just reading that, just as an ordinary reading of it, we’re trying to adjust and we have to have a reduction in the amount of the deduction that would be allowed if the asset were treated as acquired by the person on the original terms and conditions immediately after the terms of use.

What I don’t get is—I guess I almost want a plain English explanation of that, because I can’t quite read the phrases through, I feel as though—“acquired by the person on the original”. This is where I’m losing it. You know, I read tax law, and I can’t quite read this particular clause through. The original terms and conditions—acquired by the business, acquired by the person for personal use. What do we mean on the original terms and conditions? I’m just finding it really hard to parse that particular phrase. I wonder if the Minister could actually just explain it to me a little. So—

CHAIRPERSON (Greg O’Connor): Sorry, could you just tell us where you are?

Hon Dr DEBORAH RUSSELL: CC 15(1)(b); it’s in clause 4 of the bill, and it’s the phrase that says, “if the asset were treated as acquired by the person on the original terms and conditions immediately after the change of use.” I don’t know whether that means we treat it as the person as they originally acquired it, but they originally acquired it and then split it between business and personal use. Or is it the split between business and personal use on the day after the change of use? This is genuine. I’ve tried to understand what the officials were trying to get at here, and I think there’s an odd phrasing. Maybe it just takes a comma, maybe a phrase needs to be flipped around in a different way; maybe a drafter could fix this one up.

Again, it’s one of those things we could’ve kind of worked our way through in select committee. I get the reason for urgency, but I do want to get the explanation here. If I’m getting confused by it, I’m going to suggest that other people could get confused by it, too. This could end up in a court if we don’t get the phrasing right, so I’m going to invite the Minister to allay that concern.

I’ll keep my contribution short because it really does pick up on the point made by my colleague the Hon Dr Deborah Russell in “New investment assets: change of use”, new section CC 15, subsection (1)(b). Again, when we’re looking, it would result in a 25 percent or more reduction. I’m interested to know why the Minister of Revenue has landed on that particular threshold. It feels unusual: often they will have 20 percent. It feels like it has a granularity to it or specificity that means that it has to be a very precise amount. Often, in tax law, we would expect it to be a more proximate amount.

My second question is just around if the asset were treated—again, supplementary to Dr Russell’s questions—treated by whom? As treated by the purchaser, treated by the user, or treated by IRD? That’s not clear.

We also talk about the person on the original terms and conditions immediately after the change of use. Change of use: does that refer to the change of use from personal to business—which I suspect it does but is not clear from the phrasing—or does it mean that there could be a different use? For example, if there was a vehicle and it was originally used on a farm for a particular purpose—might have been a business purpose—and then it is used for a different business purpose, does that qualify? What about if it was a personal use and then changed to a business use, but, actually, the functions were the same? So the vehicle might be doing exactly the same rotation around the farm or doing exactly the same action, but one action is for personal use and one is for business. Then what is the methodology that the Minister is using to assess that? Is it to do with the time frame in which it is used? Is it to do with the output of the activity? Is it to do with who is using the equipment? How is that recorded?

Again, going back—given it’s all one phrasing to the specificity of 25 percent—how confident is he that this is going to be something that can actually be accountable and that we’re not just relying on returns and the goodwill of people to do this because they are going to get, effectively, a tax break and we do want to incentivise productivity. But it would be very easy, if this is not clear and if there’s not a way of accounting for it, for people to game the system. So I’m really keen to hear those answers.

Thank you very much, Mr Chair. I just want to, if I may, just in the context of back and forth, clarify the clause, because the member quoted 15(1)(b). We can see 15(1), but not a (b). Can we just clarify, that is what you said? Sorry, I just want to make sure we’re answering your question.

Hon Dr Deborah Russell: I’m happy to bring this to you.

Hon SIMON WATTS: From the bill?

Hon Dr Deborah Russell: Yeah.

Hon SIMON WATTS: Page 2?

Hon Dr Deborah Russell: Oh, so it’s clause—oh. Mr Chair?

CHAIRPERSON (Greg O’Connor): Happy to have a back and forth, of course—back and forth call.

Hon SIMON WATTS: Back and forth. Yeah, I want to answer your question.

It’s clause 4 of the bill, and it inserts new section CC 15. So it’s new section CC 15(1)(b), OK? I’m sorry, it’s because I’ve got notes on it.

No, that’s no problem. Thank you, member, for clarifying that. We’ll come back, just in the context of that.

To the question just asked in regards to the change in the use of the asset, as the member is assumed, she has assumed correctly that in the context of a personal asset, then that asset use can change and, therefore, it is subject to no longer being a personal asset, and, likewise, it can go the other way from a business asset to a personal asset. So I’m just confirming the member’s point around that.

Thank you, Mr Chair. I know that we are all currently still focusing on clause 4, inserting new section CC 15, but I think if you’re looking at a broader question now, the other side asks us, “Read the regulatory impact statement (RIS).”, which is what we’re doing. I think, if you go past the first page, there are some questions that I have that do raise concerns, particularly around the fact that, yes, I think, on balance, based on the regulatory impact statement, the partial expensing may show as a simple way or an easier way of dealing with it. I guess the first question is: why, then, were large structural reforms potentially not considered as an option? Because that seems to be coming through, apparently, in the RIS.

The main thing about this is actually on page 4 of the regulatory impact statement, where it does say that there is significant uncertainty about the magnitude of effect and how benefits would be distributed across the economy. I guess, on a broader scale—again, we’re doing this under urgency—how would the Minister foresee the mitigation or potentially the lower variability in terms of the magnitude of effect? As in, how do we know that this is genuinely going to do what the Government wants it to do? Also, how would you then ensure that there is equal distribution across the economy, and not disproportionate distribution across the economy, depending on industry? So that’s one of my broader, policy-based questions.

I guess the other question is—here, it says Treasury, IRD, and the Ministry of Business, Innovation and Employment are the only three that have not been consulted. So I’m just confirming that these are indeed the only three that have not been consulted, and no other agencies were consulted?

In terms of the risk questions: lastly, again on page 4, it does say that the practical risks potentially are mitigated, but a number of other countries have implemented similar regimes. Would the Minister be able to list some of the countries that have implemented similar regimes? So that way we are able to at least know, on balance, whether the broader tax ecosystems in these countries are actually comparable, as opposed to siloing the partial expensing specifically in this context. Now, those are three of my questions in terms of the regulatory impact statement.

Moving on to the bill itself, we’ve heard our colleagues—the Hon Dr Deborah Russell as well as Ingrid Leary—asking a number of questions around CC 15(1). I actually have a question around new subsection (2), in terms of the calculation for less than 25 percent change in deductible use, and on whether—I’m using the example that is on the bottom of page 4—25 percent is the right balance there. So I wanted to check with the Minister if anything other than 25 percent was considered when looking at the formula for deductible use between new use and previous use? Then there are a number of questions around the definition of “new use” and “previous use” as well.

My final question when it comes to—at this stage—CC 15, is new subsection (4), and new subsections (4)(a) and (4)(b). This is the thing that I think is a little bit confusing and potentially could cause confusion, which is at the end of new subsections(4)(a) and (4)(b), on the “new use” and “previous use”, it talks about “expressed as a decimal”, whereas I was interpreting it not as a decimal but as a percentage. I assume the meaning over here is expressed as a single decimal as opposed to a number of decimal places. So, if that was the case, I wondered if the Minister would consider my amendment on this just to clarify that it is a single decimal place rather than decimal as a concept or as a mathematical concept, as opposed to a percentage. So those are my two questions at this stage on new section CC 15.

Thank you very much, Mr Chair. I’ll just acknowledge that, actually, this tax bill is 15 pages in total length, including all parts, and, as we know, most tax bills are in the hundreds of pages. So it’s a very succinct and tight bill.

In regards to questions around what other countries use partial expensing, Canada and the US are two examples that come to mind. There is a large number of other countries that also consider using those jurisdictions.

In regards to the amendment regarding clause 4 inserting new section CC 15(4)(a) and (b), no, I won’t be taking up the amendment by the member in regards to restricting it to one decimal place.

In the spirit of responding to what the Minister of Revenue has said, the bill might only be—how many pages? Did you say 15 pages? It may be small, but it is of great significance. It is a major Budget measure in there. We actually need to discuss it thoroughly and I believe we certainly need to discuss this very, very new piece of legislation on tax measures.

I, too, have a question, and it follows on from my colleague Mr Xu-Nan’s question—and I have an amendment, which will be on the Table at some stage, being prepared—around new clause CC 15(2), inserted by clause 4, with the 25 percent or more deduction in terms of a change of use. Now, I get you have to choose some kind of threshold, but why 25 percent? Why not 50 percent? Why not 10 percent? Why 25 percent? How does that relate to other change-of-use thresholds? In the Income Tax Act, for example, when you have various mixed-use assets which are used sometimes for personal use, sometimes for business use and if there’s a change in use there—I’m thinking of holiday homes and things like that. What is the kind of point of flex? I’m just trying to seek a little bit of assurance around the flex on that as to why 25 percent rather than 33 percent or 10 percent or whatever.

Someone a little bit more familiar with the new way of doing mathematics and doing the operating order in mathematics—

Hon Dr Megan Woods: BODMAS.

Hon Dr DEBORAH RUSSELL: —might be able to—modern maths?

Hon Dr Megan Woods: BODMAS.

Hon Dr DEBORAH RUSSELL: Oh, right. OK—

Carl Bates: Back to basics. One hour of reading, writing, and arithmetic.

Hon Dr DEBORAH RUSSELL: I have to say I don’t need the back to basics; I did get bursary maths. So in new section CC 15(3) we’ve got a formula there: “DI 5 deduction − (new use ÷ previous use × DI 5 deduction).” I’m old-school mathematics; I need the braces and the brackets and the operands and things like that. I’ve just couldn’t quite make that formula work. If the Minister is able to explain it—I sort of do it—

Hon David Seymour: Is this about the bill or the member?

Hon Dr DEBORAH RUSSELL: The way I do it is typically the divide and multiply done before deduction. So I’m just checking that I’ve got that sort of thing right. So those are just a couple of quite technical questions on that. If the Minister is able to answer that, that’s great.

I think what might be very important—and I think we’re going to need to spend a little bit of time on this—is to move on to a discussion of the policy here. It’s an interesting policy. To be honest, having some form of accelerated depreciation is something that of course has been done in many cases. We used to have accelerated depreciation on new assets, then that was taken away. So I think we do need to start talking about the general policy here.

In particular, I think I want to move us on to clause 5. Now, this is the clause that actually does the work, that does the work of getting that extra deduction. The previous one is just kind of quite technical. It’s a clawback type of thing. Clause 5 inserts an entirely new subpart DI and, helpfully, it has a purpose—so new section DI 1 “New investment assets”, and it’s got a purpose clause. So this, I think, is the ideal place to discuss this policy.

I think the first question I want to ask the Minister on this is: why partial expensing now as opposed to accelerated depreciation, which we’ve done before, and which might have been simpler to bring back in, just a range of accelerated depreciation rates? Why this chunky partial expensing instead of accelerated depreciation? Why not something just as simple as if we want to give business a boost along, it could have been done just as simply by reverting to the $5,000 thresholds for the low-value asset write-off threshold? Now, that could have been done just as well as well. Now, people in the House will recall that measure was brought in during COVID. The low-value asset write-off threshold had been $500 for a very long time—certainly needed to be fixed during—[Time expired]

Thank you, Mr Chair. I still just want to get to the bottom of some of the questions that the Minister didn’t answer. I appreciate his previous answer, but around the 25 percent, we have not heard a response on why that number was chosen. I’m really interested, given what Dr Deborah Russell has raised, why it goes to deduction of 20 percent in clause 5. The second question is around the calculation in the definition of items in the formula in subsection (3) of new section CC 15, inserted by clause 4. There is an example, and it’s interesting that the example is actually placed in the bill and, therefore, will be used for interpretation. There’s a really important sentence in there when it says since it has a 90 percent nexus with his business, and then it’s got new sections DI 5(3) and DI 1, inserted by clause 5.

I’m wondering if the Minister can explain to us the calculation in relation to nexus and the significance of that when it comes to how apportionment is done between personal and business use, because that will need some clarifying, and this will be a chance to get on the Hansard. Currently, it’s not clear. Then the second part of that is the burden to prove that. Obviously, audits could show it, but there will be a requirement for—I’m assuming—the person who is claiming the nexus and claiming the deduction to do it. What kind of evidence will they need in order to be able to make that case?

I would also like to know whether the Minister considered a different formula, a carve-out, or the equity in this presentation in relation to second-hand goods, particularly when somebody has purchased something from personal use and apportioning it to business or, probably more so, the converse, and whether there should have been a different formula to be able to make that fit with that section.

Finally, yeah, just really trying to understand the deduction of 20 percent versus 25 percent in the previous section. Why those two figures were shown, is the first question, and what is the difference between them? Why were they not the same number?

Well, thank you very much, Mr Chair. I’d like to provide a response to questions in regards to clause 4, inserting new section CC 15(2), in the context of why 25 percent was selected. Just in terms of the context and the background, if a taxpayer acquired an asset fully or partially for the purpose of deriving income and then subsequently significantly adjusted how they use that asset, they would have recovery of the income proportionate to the proportion of the asset’s use that is no longer being used for business purposes. The percentage range of 25 percent was considered as an appropriate bright line as a threshold for what would be considered as reasonable change, and that is the view of officials in the context of why the 25 percent number is there. There is important consideration in terms of integrity here, and it is the view of officials that set and recommended that that it is an appropriate right to use, to ensure that the integrity of people not unfairly or unjustifiably using that mechanism is not going to be taken advantage of.

There was a question also in regards to other considerations of other types of depreciation. Inland Revenue extensively analysed a range of measures to increase investment, including loading and partial expensing. It was actually undertaken in the long-term briefing insight in 2022, and officials subsequently recommended partial expensing as the preferable measure and this Government has followed through on that. The context in the question around second-hand goods: these are excluded, clearly, in the legislation.

Before I take the next call, I just want to, optimistically, ask members—if they wish to do short questions and answers and we can get it going, we’ll try to do that. But otherwise—it’s up to the members, but if they start doing longer calls, it will move the calls around more quickly.

Thank you, Mr Chair. I largely want to focus my questions to the Minister in the chair, the Hon Simon Watts, on clause 5. Now, obviously, clause 5 is a very large clause in the bill—“New subpart DI inserted”—and goes through many aspects of it.

Just before I do that, one of the things that I want to ask the Minister about in terms of clause 4 is that the regulatory impact statement has quite a large section about the new capital investments and being restricted to New Zealand. Obviously, the policy intent is that you couldn’t have one business use the partial expensing, then on-sell that asset, and another business then again partially expenses it as well, accruing that benefit twice. This is covered off in paragraph 31 of the regulatory impact statement. I just want to know from the Minister whether that is picked up with the provisions in clause 4 of the bill. So that is my first question.

Mr Chair, I’m not going to adhere strictly to the guidance you just gave the committee, because I do have a couple of tabled amendments in my name to clause 5 of the bill which I would like to speak to. One of those goes into clause 5, new section DI 5(1). DI 5(1) is the deduction “For the income year in which an asset becomes a new investment asset, a person is allowed a deduction equal to the amount calculated by the following formula: 0.2 × (expenditure − contribution).” Putting aside BODMAS on there—brackets, order, division, multiplication, addition, and subtraction—my amendment is to put 0.27 as one amendment to change the formula there, and another is 0.3 outside of the brackets.

Now, the reason why these amendments have been put up is that we really want to understand the formula and how it intersects with the policy intent of the legislation we’re seeing here. We’ve seen at various parts in the regulatory impact statement that the advice that was offered basically says that the 20 percent formula arrived at was largely driven by the fiscal envelope which policymakers were presented with. So what we would like to understand, given we don’t have the chance in select committee, is the shape of the curve of benefits of such a policy. Does what was arrived at in terms of the fiscal envelope and the decision that drove it to be 20 percent, mean that only an incremental change may see a whole lot more benefit would accrue? And we might see more than that 1 percent over 20 years in terms of GDP growth, or 1.5 percent increase in wages. So I’m just really wanting to understand the—[Sneezes] Excuse me, Mr Chair.

Hon Members: Bless you.

Hon Dr MEGAN WOODS: Thank you. It’s so nice to have such affirmation from all sides of the Chamber.

So I’m really wanting to understand those intersections in terms of policy intent. Thank you, Mr Chair.

Thank you very much. In the context of what you’ve asked, let’s do a little bit of back and forth. For the amendment in regards to clause 5, inserting new section DI 5(1), the member is asking whether the Government is going to be willing to accept an amendment that increases the deduction from 20 percent which we have made and put in the legislation to 27 percent or 30 percent. The short answer is no. The Government is being very prudent in the context of balancing a number of policies in this Budget, as has been outlined today, and that it’s not an amendment that we will be considering. Obviously, we did consider a range of scenarios, which is outlined in terms of the context of the regulatory impact statement, and there’s a range of cost implications in regards to that, alongside economic growth. But the decision in the legislation states that we’ve landed at 20 percent, and that’s where we are.

Thank you, Mr Chairman. I thank the Minister of Revenue for the answer to that, but what I would like to understand a little more is that I understand—and the regulatory impact statement makes that clear—that it is the fiscal envelope that was available that really did set the 20 percent rate. But one of the things, given we don’t have the chance to explore this in select committee, is to understand whether changes a little bit above or a little bit below around that 20 percent formula means a difference in the accrual of the benefits that we might see.

I understand and accept that the Minister’s not going to accept those amendments. But for the purposes of thoroughly scrutinising this bill, this committee does need to understand what the trade-offs—in terms of a change in that rate—would be, and I invite the Minister to elucidate the committee.

Thank you very much, Mr Chair. I’m also speaking to new section DI 4, inserted by clause 5, “Meaning of new investment asset”. The new investment assets are those subject to the 20 percent of the cost of the asset deduction and the amount of the usual depreciation deduction or depreciation-like deduction that would otherwise apply, but calculated as if the cost of the asset were reduced by 20 percent.

I’m speaking to new section DI 4(a)(vi), “an asset that is acquired with petroleum development expenditure:” and new section DI 4(a)(vii), “an asset that is acquired with mining development expenditure:” Now, this is the bit of the bill that looks very much like it’s got the hands of Minister Shane Jones all over it. I did see that the Minister was here earlier in this evening’s session in his blue suit, and it struck me that the blue suit is as retrograde and tasteless as the extractive mind-set of this Government. It had to be said—it had to be said.

CHAIRPERSON (Greg O’Connor): Was that necessary, Mr Abel?

STEVE ABEL: Well, I’m sure Mr Jones would appreciate me noticing his blue suit.

I have a couple of amendments in regard to those particular clauses. But speaking to the point, it reminds me of a cartoon where there are a couple of gentlemen standing under the baking sun and the sweat is dripping from their brows and they’re both digging and they’re digging. One of them stops and he wipes the sweat from his brow and he says, “There must be a source of energy down here somewhere.” The Minister spoke earlier: “Don’t talk to me about the sun and the wind.” There are a trillion terabytes of sun energy that hit the Earth every instance; it’s an obvious source of solutions.

My proposal is that we amend new section DI 4(vi) and DI 4(vii), that they be removed, because they explicitly act, Minister, as a fossil fuel subsidy. My question is whether, in your consideration of inclusion of this, you took into account—and it’s convenient that you also happen to be the Minister of Climate Change—the fossil fuel subsidy reform group that New Zealand is part of. New Zealand is a leading advocate for the reduction and, ultimately, elimination of fossil fuel subsidies internationally, according to the Ministry of Foreign Affairs and Trade (MFAT). What was the advice from the Ministry of Foreign Affairs and Trade on including these effective subsidies to the petroleum industry and the mining industry?

May I outline what is on the MFAT website right now. It says, “What’s wrong with fossil fuel subsidies? Subsidies for fossil fuel consumption and production create trade and investment distortions. Making greenhouse gas emitting fuels cheaper to produce or buy is an incentive to use more and discourages investment in renewable energy. Subsidising fossil fuels also uses money that governments could spend on health, education, development, and climate adaptation.” That is the New Zealand Ministry of Foreign Affairs and Trade on exactly why New Zealand does not traditionally support fossil fuel subsidies.

What advice did the Minister get, or the Government get, on this effective significant changing of New Zealand’s position on being opposed, in the international community, to fossil fuel subsidies? Because these clauses clearly are a means, through the 20 percent of cost asset deductions, to support increased petroleum and mining development. Thank you.

Thank you very much, Mr Chair. It’s not a pleasure to speak on a tax bill, especially this one. I’m going to talk about clause 5 here and the very issue, of course, of incentives and new investment. In principle, I support this. It’s not a new concept. In fact, I can remember in the 1970s studying a little bit of accountancy where, in agriculture, the initial depreciation, I think, was up to about 50 percent. The equivalent here is 20 percent.

The questions I have for the Minister, as was put by my colleague: why not 25 percent or why not 50 percent? If the objective, indeed, was to lift productivity, Minister, and I can see that, in principle, this is fine, but the definition of the asset as in the bill here doesn’t require any new or additional technology. So it could very well be a new asset replacing an old asset. So the question for the Minister is: did he consider that there should be a requirement around new technology linked to that new asset?

Thank you very much, Mr Chair. I’ll keep the cadence of the questions a bit. Just in regards to the questions raised by the member in the context of allegations that the member felt that this was a subsidy—well, it’s not a subsidy. The depreciation is, obviously, an accounting principle. This is non-bias to any specific type of assets. It applies to all assets, and, obviously, a subsidy is generally preferential in its context and the way in which it’s applied, so we are not biased in any types of assets—all assets are in scope, and any value of assets are also in scope. So we won’t be seeking or supporting the amendment, as raised by the member, in regards to clause 5, inserting new sections DI 4(a)(vi) and (vii).

In regards to the point again raised that I answered before, but I’ll give a little bit more clarity in the context of the percentage range of why the Government landed on 20 percent versus any other range. I can, for context, note that if you applied 100 percent loading in this, the fiscal cost would be in the region of $34 billion, so you can pretty much draw the curve in the context of the range of that. As I said, the Government made a policy decision in the context of the fiscal constraints we’re operating under, and we believe that 20 percent is the appropriate level that balances out the costs and benefits consideration, particularly around economic growth.

In regards to the last question around new assets replacing old assets, and whether technology should have been a factor: again, we have not constrained the manner in which this accelerated or partial depreciation regime will apply. It will be the case that, generally—and I would hate to assume—new assets are probably more technologically advanced than old assets, just by their very nature. So, again, we’re not biasing that. Any asset is going to be in scope, unless it’s specifically excluded under the legislation.

Look, I just wanted to speak to the Minister in the chair. I had a bit of confusion earlier on about clause 4, new section CC 15—whatever it was—(1)(b). I’ve worked it out. The Minister earlier on today—or his officials—circulated a version of the bill as a courtesy, so that we were given it as a courtesy before it was tabled. But, as it turns out, I think, Minister, an old version of the bill might have been circulated. So what seemed like a courtesy was perhaps not quite so much of a courtesy as it might have been.

However, I have checked through and I have looked at the newer version of the table. So I do thank the Minister for that courtesy, because we do appreciate it. Indeed, the new way that clause 4, new section CC 15 is drafted is actually much clearer. Ha, ha! I could see that your officials were confused as well as to what on earth I was talking about. Well, there we are.

CHAIRPERSON (Greg O’Connor): Shared across the front row here, it was.

Hon Dr DEBORAH RUSSELL: Cleared up that confusion, so I appreciate it.

Look, so I do want to talk—I see that many of the Minister’s colleagues are rather bored, so off they go then. So I do want to talk policy on this bill. It is actually quite important. Going to the regulatory impact statement and the economic analysis, this is quite an important point. I referenced it in my second reading speech on this bill, and that is just the level of uncertainty around this. So the justification for this is economic growth. Now—

Hon Dr Megan Woods: 1 percent over 20 years.

Hon Dr DEBORAH RUSSELL: Yeah. Well, the justification is economic growth. So we want to be sure, but with this level of expenditure, a lot of money is going into this particular measure. And let’s not forget that that money came from some pretty sad sources, so it has to be worth it.

Hon David Seymour: The Government doesn’t own all the money to start with.

Hon Dr DEBORAH RUSSELL: But sitting in here, for the benefit of Mr Seymour, in paragraph 62, it says, “There is, however, a high level of uncertainty as to the precise magnitude of impacts”. So we think it will be positive, but what I am interested in knowing is the range of the impact that it might be thought to have been. Did his officials present him with advice saying, “Well, look, the impact might be between 0.2 percent and 1.9 percent or 3 percent or whatever”?

I know there’s been talk in the Budget documents that we’re thinking it’s going to be about 1 percent growth. Was that an average of the various possible growth rates that were projected as a result of this change in policy? Or was it—I don’t want to call it an educated guess, because that’s unfair to our Treasury officials, but was it sort of the assessment of their knowledge, based on the bits of research they’d been able to rely on and so on? I’m trying to get at just how that 1 percent was come up with, given that the regulatory impact statement itself says that it is highly uncertain. How uncertain? What was the range? Can we be sure that it is worth going through all this, worth the cost to women, worth the cost to KiwiSavers, worth the cost to a whole lot of people to get this economic growth?

The Treasury operates comprehensive models in which it uses to make estimates in regards to the correlation between changes in tax rates and economic growth numbers in which we have used here based upon that modelling. We are the view that they are comprehensive and appropriate.

Just before I take the next call, just a matter of House management. I wonder if members would be aware that when someone is speaking, if they’re coming to get papers off the Table, feel free to go around the other side so we can see who’s speaking. You won’t be accused of crossing the floor.

Look, thank you very much. I realise that where I’m sitting here, your lateral vision may be limited, and you may start to develop some tunnel vision. I’d hate to think that, Mr Chair.

If I can follow on from the questions that the Minister of Revenue attempted to ask and use the scenario, for example, of a farm. Some assets can be replaced but, indeed, not add to productivity at all. You can buy new tractors, you can buy new mowers, you can buy new harrows, you can replace every bit of machinery on your farm and have very little progress and productivity, because, ultimately, it comes from the cows and the grass and the system that you run.

I go back to the Minister and the assumption that this is going to drive economic growth—and we accept that there’s a potential to do this, but the absence of any qualifying statement around the assets in particular does not give any guarantee at all. Given that the fiscal cost of this has been the constraint of whether you go beyond the 20 percent—and that there are going to be hundreds of thousands of women in this country who will be paying for this—then we need to ensure that there is progress from this change in depreciation.

The question is still not really answered. It’s 20 percent because of the fiscal constraints. How does that affect productivity? Indeed, will we have a whole lot of depreciable assets that don’t deliver any increase in productivity, particularly given the example I use, which is quite feasible in a farming operation where you can replace the tractors, you can replace the trucks, all the harrows, the whole lot? Ultimately, if you’ve got the same number of cows, the chances are you may or may not get increase in productivity. That means that the Crown has just lost the revenue for no significant gain in growth. So, actually, this is a waste of time. If this is the one big issue that the Government’s got, then we haven’t made much progress.

As I said, this is a 15-page bill and we’re getting outside of any specific clauses. But I can assure the member the Hon Damien O’Connor that when I grew up and we had a David Brown 885—which was a 1975 model—that the new 250-horsepower John Deere is much more fuel-efficient today and that has a real impact on farmers’ bottom line.

Thank you, Mr Chair. I appreciate what the Minister in the chair, the Hon Simon Watts, is saying and that the Minister has answered a number of our questions. But, again, a lot of these questions are being teased out because, you know, we could have asked this of officials at select committee. But here we are, under urgency.

The question that I have, first of all, is just going back to the response the Minister gave me earlier, which is around what other countries this model was taken from in terms of partial expensing, and the Minister specifically mentioned Canada and the US. Now, noting that Canada, for example, has both a capital gains tax as well as a form of windfall tax, and that the US has a form of short-term capital gains tax, there is a need for some elements of incentivising through partial expensing, which potentially is what they would have used. This is what I mean: when we’re looking at something like this, or a policy like this, it can’t operate in isolation; we need to look at the bigger picture of the tax ecosystem of those other places. In that case, what is the specific New Zealand context we’re looking at here that can reassure this committee that there isn’t going to be that significant uncertainty as named in the regulatory impact statement? So that’s my first question in response to what the Minister said before.

In terms of the bill, let’s look at clause 5. I thank the Minister for answering two of my questions around clause 4. But when we’re looking at clause 5, which inserts new subpart DI, new section DI 3, which is “Meaning of new asset transferee”, one of the questions I have is: when we are looking at a transfer of asset, what happens when the transfer of asset is applied to multiple ownership? In which case, how would this particular model be applicable when multiple ownership is in question? That’s one of my first questions.

My second question is on new section DI 4, inserted by clause 5, which is “Meaning of new investment asset”. Now, my colleague Steve Abel has mentioned that when we’re looking at the inclusion of petroleum and mining development expenditure, that is, in some ways, a form of subsidy, to be honest. The Minister didn’t quite answer my question around the Ministry of Foreign Affairs and Trade (MFAT)—whether MFAT was consulted. Now, the reason I asked this is, again, when we are looking at this—which potentially people may interpret as a form of subsidy for petroleum mining—how would this work in terms of our international obligations as well, particularly to the New Zealand - European Union Free Trade Agreement? If MFAT isn’t consulted, what risk and liability are we opening ourselves up to by allowing—you can call it whatever you want; you can call it partial expensing, you can call it Investment Boost. The point is that mining and petroleum are included here. So I would like to know the risk assessment that has been done. But that is to do with new sections DI 4(a)(vi) and (vii).

My next question is actually on new section DI 4(a)(i) in terms of depreciable property, which then has included “(for example, some commercial buildings):”. There is a slight risk here. I would like to hear from the Minister on what risk assessment has been done—that we’re not going to get people who come here, investing in commercial buildings but simply land banking because, in some ways, those commercial buildings would not depreciate. We have seen a number of cases in Auckland where international or overseas landowners of commercial buildings will hold on to that land. It doesn’t really matter to them whether they have tenants or not, so it doesn’t matter to them whether they improve the local economy—particularly when we have small and medium enterprises, and small-business owners that have business where everything else around them is empty. We have heard this from business owners, or small-business owners, both in Epsom and also in Auckland Central, when it comes to international investors.

So, I guess, the question to the Minister is: what risk assessment has been done to show that this isn’t going to be increasing or exacerbating the already problematic situation we have in certain parts of Auckland? So those are my questions.

The legislation does not apply to land. It does apply to new commercial building construction, and it would be fair to say that that would derive economic value and benefit for the broader economy.

I’ve already answered the questions in regards to the other countries and jurisdictions that used it. There are a number of other countries that have comparative regimes in place that are also being put in place for the same purpose, which is to derive economic growth.

The other points that have been raised, I’ve already covered.

Again, before I just make another call: just bearing in mind, members, when you stand up and talk about another member having asked the same question, you are giving yourself up a little bit about repetition. What I’ll just go back to, we’ve had an indication that we’re going to move through this, but we are now getting a little bogged down. Bearing in mind I know there is some more material here.

Hon Members: Mr Chair!

CHAIRPERSON (Greg O’Connor): If that is a closure motion to my right, I suggest that it not be. It may be an abuse of process for it to be. There is a long way to go in this, and I think if members are getting anxious on the other side, they should actually follow the bill, and you’ll see there’s still quite a wee way to go. But, of course, I will take a motion if anyone did want one.

Thank you, Mr Chairman. I thank the Minister of Revenue for his explanation around some of the different asset classes. I take the Minister’s point that this is, in terms of relativity with other tax bills, a relatively slim piece of legislation. But I would also make the point to the committee, as we understand, that, really, the bulk of the policy is in this clause 5—this is the clause of the bill that does insert the new investment assets, and that cuts to the heart of this part of the change that we’re seeing. So this really is the clause where that broad range of policy can be discussed.

My first question for the Minister—and I appreciate I’m clarifying that, of course, land isn’t an asset that is defined within this, but new commercial buildings can be. I wondered if the Minister could tell the committee whether or not build-to-rent developments, new commercial buildings, will be included in here as well, because, of course, build-to-rent developments have their own bespoke legislation where there are bespoke tax arrangements that are set out for them. So what is the intersection in terms of this legislation?

The other question in terms of this policy, in this broader scope of clause 5, is really that what we’ve seen in the regulatory impact statement is that it’s really put up against changes to the corporate tax rate—is the comparative policy throughout the regulatory impact statement for assessment. My question to the Minister is: although the final regulatory impact statement only compared this partial expensing with changes to the corporate tax rate, were there other forms of increasing productivity that were considered in the development of this?

Further to that, even within that partial expensing, were there other forms and more targeting of partial expensing? What we’ve seen from some of the questions is a very broad range of activities and assets that could be brought in.

The committee is still waiting for an answer on whether or not the supply to oil and gas assets would bring us into contradiction with some of our free-trade agreements that we have in place. Was there any thought of targeting this to particular areas of the economy? We can see that it’s very broad-based. But was any consideration given to targeting this policy?

My final question for the Minister, in this contribution, is around the table that appears within the regulatory impact statement. It is on page 12 of the regulatory impact statement. It lays out the different options. Obviously, status quo, then partial expensing, and then the company tax reduction. One of the things that the officials have identified in this table is that the partial expensing, the chosen policy does create some integrity risks. I just wonder if the Minister could elucidate the committee on what those integrity risks are. What are the mitigations? What are the ways in which we’re going to be able to track whether or not we are mitigating those integrity risks, and how will the transparency around that come into play?

In terms of the coherence of the policy—it is identified in the regulatory impact statement that the investment incentive creates risks around capture by interest groups. What interest groups? Was that discussed in terms of which interest groups may be at risk of capturing this policy? And, again, what mitigation is being put into place to ensure that we don’t have capture by specific interest groups? How is that going to be reported on and monitored? And what are the transparency arrangements around that? The advice says that it is minimised for the broad-based regime, but whether or not there are further mitigations that are being put into place.

I thank the member for the question. In regards to new section DI 4(b)(i), the question in regards to the build-to-rent, that clause of the bill, of which I’ve just referenced, notes that dwellings are excluded as an asset, in the context of this legislation, and that will clarify that point.

In regards to other forms considered, I think the member answered their own question in the context of the fourth question she asked in regards to that, but we did consider a corporate tax rate change; however, the view of the fiscal cost, and the fact that it was untargeted, meant that that wasn’t carried forward. Again, we reinforce that this is not a subsidy, it’s an accounting depreciation adjustment; it is unbiased to any particular asset, it is untargeted, and, therefore, by not biasing any particular asset, we don’t have any concerns in the context of what is being noted.

The last question, in regards to integrity risk, examples of that may be where assets are used for unintended purposes or, potentially, where one of the asset classifications is excluded, and there can be potential integrity issues of people trying to push the limits in that regard. The way in which we’ve mitigated that risk is we’ve just put around $35 million of additional funding into IRD to increase compliance activities, and we believe that will be satisfactory.

Thank you, Mr Chair. I’ve been wondering about the interaction of this new measure with the low-value asset write-off threshold, and so I’ve just worked some pretty simple numbers through—I just want to take the Minister through them, and it’s simple enough math to do in your head, I hope—well, I had to write it down. Think of an asset: purchasing costs $1,200. The low-value asset threshold which you can write off is $1,000. Now, under this new policy—so the asset costs $1,200 and the business owner can get an immediate write-off of 20 percent; that’s $240. All right. So asset cost: $1,200, then you deduct the $240, and that gives a remaining depreciable asset amount of $960.

Now, that’s interesting, because under this policy, as it’s written, that $960 would have to be written off over the life of the asset. Imagine it’s an asset that is going to last 10 years. If you did it Straight Line—I know most people do Diminishing Value rather than Straight Line—but it would be $960 a year and gone. The thing is, that $960 is now below the low-value asset threshold. So could the business owner then say, “Hey, I’ve got this asset. I bought it for $1,200, I applied the new partial expensing, and that takes its value below the low-value asset threshold.” Could that business owner then use that to write off the whole amount in that first year? Now, I’m assuming not, but I wonder if the Minister could just talk me through that and talk me through how the legislation either enables or prevents that. Thresholds are always interesting—and we’ve got more to talk about as we go through this bill—but that’s just a neat little puzzle there. I’m quite pleased that the $1,200 minus $240 gives $960. Does that then get written off as though it were a low-value asset?

Thank you, Mr Chair. I want to just begin my contribution by reminding the committee that this is, effectively, the select committee phase, and normally in a select committee, we would see various iterations of the bill. As Dr Deborah Russell has alluded to, there was an earlier copy of the bill that was circulated today, and when I looked at the formula in new section CC 15, inserted by clause 4, in particular, there are quite big variations. I would like this to be the opportunity for the Minister of Revenue to explain some of the thinking around the changes in words, because they are quite significant, and, in fact, the example that has been given is completely different and this is in the space of a few hours.

My supposition is that there have been very, very hard-working officials doing a lot of work very quickly, but I want to understand, in the formulas, in particular, in subsection (3) of the original one, it talked about change of use, and then in the formula in subsection (4), as it now is in the later iteration—the current one of the bill—it says “new use”, and it also includes the phrase “permissions and limitations applicable”, which has not been referred to in the previous iteration, but I note it is referred to in the beginning of that section. So what are the permissions and limitations?

If I may, Mr Chair, I’d be happy to sit down and have an answer and jump up, because there are a number of these quite quick questions.

CHAIRPERSON (Greg O’Connor): Yeah, carry on with your questions.

INGRID LEARY: OK, my second question—thank you very much—talks about original use. The term “original use” was originally used and now it’s “previous use”, and I’m just wondering what the change of wording is there. Then, again in new subsection (4)(c)(ii), it talks about “the amount given by the terms in the round brackets”, and it’s a much more complicated scenario than we had originally, which talked about depreciable property. I’m wondering if there was an issue, because it seems to me that the fact that the words “depreciable property” were taken out means that there was a taxation definition in there that was problematic.

I would also like to ask the Minister why the two examples have changed so significantly. On example 1 in the earlier iteration, just a few hours ago, we had Adam purchasing a new investment asset for $10,000. In example 2 in the current bill, we’ve got Thomas buying a new yacht for $100,000, and we don’t have any reference to the nexus, and the nexus seemed to be a really important part of the formula as it was explained in the previous iteration.

The other question I have is that the Minister himself talked about partial expensing and said that the rationale for that was out of previous research that had been done and that there were a number of scenarios looked at. But he did not give us an explanation as to why partial expensing was landed on, and so it would be good to understand why that was the preferred option, given there were a number of other ways of doing it.

Finally, picking up on the point from the Hon Damien O’Connor around the level of the 25 percent—and the Minister himself used the words, saying that from a policy and cost-benefit status, it seemed to be about the right weighting, or otherwise it was going to be too significantly expensive. I just want to know: did the Minister do a cost-benefit analysis—a formal one—and, if so, can we please see the cost-benefit analysis? Or is this something that the Government or Treasury officials felt from a sort of intuitive level, or based on some other analogue scenarios—is that where they landed?

Was there actually a formal cost-benefit analysis done, because it does seem it’s been pretty rushed, particularly the significant number of changes on this fundamental formula, by which everybody is going to be making these deductions, and which has significantly changed in language over the course of about three or four hours. Minister, I’d really appreciate your answers.

I have quite a specific question for the Minister of Revenue, and it is around clause 5 and inserted new section DI 4(vi)—“asset that is acquired with petroleum development expenditure:”—and I just want an understanding of how this change fits with other announcements that have come in the Budget today. We’ve seen the establishment of the $200 million fund where the Government will take equity shares in new oil and gas developments.

What I want to know from the Minister is: is it correct that someone could invest a billion dollars in a new rig here, get $200 million from the Government in terms of the provisions under this pledge, and not have to give up an equity stake to the Government?

Thank you, Mr Chair. Just one final question, on the purpose—so that’s in clause 5, inserting new section DI 1, where we do have a purpose clause—and it refers back to the regulatory impact statement (RIS). I refer, in particular, around this significant policy—I want to refer to paragraphs 72 through to 76 of the distributional analysis. It’s sitting in the partial expensing (Investment Boost) regulatory impact statement, and it says here, in part of the justification of this policy, that it is expected that this partial expensing regime will reflect an improvement of economic outcomes in terms of “wages and NNI”—I’m not quite sure what NNI is—for New Zealanders. It suggests wage growth and an increase to productivity. So the thought is that there will be an increase in the national income, an increase in business earnings, and so on.

It says here, “Our view is that the majority of the increase in national income will flow to workers in the long run as a result of increased capital intensity and labour productivity.” Now, that’s in paragraph 74. But that’s kind of a curious thing to say in light of the work that has been done by Thomas Piketty, which has shown that since the war, really, increases in income and in wealth have largely flowed to capital rather than to labour. That kind of contradicts that thesis, which has been quite widely celebrated.

I’m going to point to paragraph 75 in the regulatory impact statement, which says, “International evidence provides mixed results on how the specific benefits of investment-targeted tax measures are shared between workers and capital owners. This makes it difficult to better assess the distributional impacts.” But part of the justification for this policy—this policy that is built off the backs of working women—has been that it was going to increase wages for workers. But the international evidence contradicts that. The evidence of, you know, the economies in the 20th century contradicts that. The evidence from the major study that was done by Inland Revenue under the former Minister of Revenue contradicts that. So I wonder how it is possible to say, in this regulatory impact statement, as part of a justification for this policy, that it will increase the wages of workers.

Now, don’t get me wrong, I do think that this policy will result in economic growth, even though we’re uncertain about how much it’s going to be. It is something that I think will actually have a positive impact on economic growth. That is a really straightforward conclusion there. But the question is: how much of that economic growth will actually go to the benefit of workers, especially when this economic wealth has been created by cutting the future wages of women? It’s a really important question and it goes to the heart of the policy around this Budget and it goes to whether or not this is a policy that ought to be pursued. On its own, in isolation, probably. But to justify it by saying it’s going to increase workers’ wages? I think that’s a pretty brave thing to be saying. I’d like to understand from the Minister whether he agrees with the analysis and the regulatory impact statement. Possibly he does; he possibly doesn’t. But given that analysis in the RIS saying that this is very uncertain that it might actually go to workers, why then has this Budget justified this off the backs of workers?

Yeah, well, thank you very much, Mr Chair. Just in answer to a number of questions: there is no cap to the value of assets in regards to deductions, so it’s as simple as that in the context of the example given before.

The question in regards to wage growth in the context of the regulatory impact statement, paragraphs 72 to 74. For the member’s benefit, the key way in which this policy will work will be to drive greater capital intensity, and the follow-through of that is higher wages. So I am confident in the context of the way in which this benefit will flow through and lead to increased economic growth and higher wages for working New Zealanders.

Just before I leave the Chair, I will be indicating to the incoming Chair tomorrow that the three parts of Part 1, indicated by Ms Russell at the beginning, that we’re coming very close to the end of the first of those three parts, come the morning. So I would expect, come the morning, after a good night’s sleep, there’ll be probably an indication to move through Part 1 a little bit quicker.

The time has come for me to leave the Chair, and the House is suspended until 9 a.m. tomorrow. Have a good evening.

Sitting suspended from 9.58 p.m. to 9 a.m. (Friday)