Taxation (Annual Rates for 2024-25, Emergency Response, and Remedial Measures) Bill

Members, we now come to Part 2. This is the debate on clauses 4 to 115, “Amendments to Income Tax Act 2007”. The question is that Part 2 stand part.

Mr Chair, thank you very much. There’s a lot in this part, and I think we’re going to spend a wee bit of time working through it. What I propose that we do is we work through it in a pretty methodical fashion, just clause by clause. Some of the clauses are pretty unexceptional—clause 7 introduces a cross-heading above section CB 23B, so I think we might forego discussion on that clause—but I do want to discuss quite a number of the clauses in this part of the bill.

Now, look, the most interesting set of proposals in here are the proposals for which this bill is also named: the emergency response measures. They’re sitting in this part of the bill and I do want to talk about them when we reach them, but just before we reach those, there are actually a series of amendments which are around land disposals in various ways. If I go to—I’ve just got to make sure I’ve got the one that we’re reporting from, so let me make sure I’m working with the correct copy of this bill.

I want to start with clause 5. Clause 5 amends section CB 6A, and it may ensure that a disposal by an executor, an administrator, or a beneficiary of an estate to a third party—so someone working in that space—is exempt from the brightline test. There’s probably a good reason for that. It does make sense in some ways. But exactly why should some disposals of assets be excluded from the brightline test? I’m not familiar with this part of the law. I assume that when something goes on with the brightline rules—the brightline is now set at two years, not 10 or five—when an estate, a property, is inherited or something like that, then that creates some sort of event. I’m just curious as to why, if an executor or beneficiary disposes of it, that doesn’t count within the brightline test.

I get that estates need to be wound up and people like it to be wound up in a prompt fashion. Obviously, you deal with any difficulties that might be there. If I could have from the Minister of Revenue, please, an explanation as to why that disposal by an executor, administrator, or beneficiary of an estate to a third party is actually exempt from the brightline test, it would be helpful to know that, just to make sure that we’ve actually got the right sort of rule in there.

I’m just going to note that we didn’t particularly discuss this at the Finance and Expenditure Committee, so I would like to hear what the Minister has to say about it now.

Just to provide the Minister of Revenue with some time, as he considers a response in relation to that previous question by the member the Hon Dr Deborah Russell, is to actually jog the committee’s memory back to when the brightline test actually came in. I think it was, what, 2015? It was under a John Key Government, and the purpose of the brightline was that, under section CB 6 of the Income Tax Act, there was already a provision whereby, basically, if a person acquired land with the purpose of disposal, any profit made on that would be taxable. Actually, that’s what section CB 6 acquired, but the issue with that section CB 6 is that it was a subjective test; it was an intention test. So the question you ask is: well, when did they acquire the land? The way that the courts had interpreted it was: when they acquired it, what was their intention at the time of acquisition?

As part of some reforms under a previous National Government, they decided to remove the obscurity by providing what is, effectively, called a brightline. Basically, from this date forward, from two years on, if you dispose of the land before that two years, then you will be taxable on the gain from the date of acquisition; or if it was after two years, you wouldn’t be subject to the brightline test.

It’s quite important to understand that there was that shift in the brightline—which, obviously, the Labour Government afterwards extended, from two to 10 years—and now it’s come back to the two years. That is why I have questions around that clause 5, and also, in particular, in relation to clause 16, which is slightly jumping ahead but still in relation to the similar question as to why, the policy intent of why an executor or administrator who acquired the land in the circumstances described in section FC, which is disposals to which that particular subpart applied—what was the intention behind that particular change?

Again, this was a really large bill and we didn’t get to scrutinise these particular land remedials as much as we intended to, because, actually, the bigger part of the bill—which we will cover a little bit later on as we get through those clauses—if I understand correctly, I mean, if you look at the way that it was initially drafted and then you compare it to what’s now in the bill, it looks like it may be to correct a particular drafting error. That’s my guess in relation to it.

The reason why we need just a little bit of clarity as to whether it was an actual drafting error back when the brightline test was removed down from 10 to two, or was it from a drafting error from before that particular period, is that when you have a disposal of a residential land that’s been acquired by an executor or an administrator or a beneficiary of an estate following the death of a person, generally there’s some roll-over relief, particularly when a person has died and it’s carried through to the estate. Usually, that’s excluded from the brightline test, and that was the original intention when the brightline test was introduced—I think it was 2014 or 2015; I am a slightly, a little bit, a year older, so I might have forgotten that. That was achieved through sections 6B, 6A, and I think it was 2B of the Income Tax Act, and that was the way it applied for the 10-year and then the five-year rule. Then there was another section, somewhere in section CZ, which applied for the five-year brightline test.

The question to the Minister is: what was the policy intention around this particular remedial? The second question is: was this because of the change from the 10-year to the two-year brightline test that was brought through this Government; or, actually, was it a drafting error that actually occurred before, when we increased it from two to 10?

Thank you very much to the members. We’re really getting into this, aren’t we? I think we do enjoy clause 5 in regards to that, so let’s get into it, because I know everyone’s getting excited. For those that have tuned in, we’re looking at the Taxation Act and we’re getting right in.

This actually is a remedial matter to correct a drafting error. The context of this is that obviously when someone inherits land, that’s not planned in that context, and hence why we’ve used the opportunity to ensure that there is an exclusion for transfers of inherited land. That means, in effect, that land that is inherited will not be subject to the brightline test.

That’s the background on what’s going on. This is a remedial matter—probably not the most exciting thing that’ll keep you up tonight—but for those for whom it is relevant, it is important.

I want to continue on. The drafting error getting fixed—that makes good sense, obviously. It does beg the question of what happened to the people who were affected by it while the drafting error was in place. Obviously, there were some people then who would have perhaps gotten taxed outside the rules. Well, it’s hard to know what I should think here, because, obviously, people should be taxed according to the letter of the law, but when a mistake is made in drafting, it seems that they weren’t taxed according to the intent of the policy.

If the Minister could clarify for the committee but also for, I think, the hundreds of people who, I’m sure, are watching at home, because they’ll be worried about this and they’ll go, “Oh my goodness. Am I going to get caught by the law?” Not even just this particular case, Minister, but also other cases where there’s a drafting error and it could have resulted in very unfair tax consequences for people.

I think the member is underestimating the audience that will be watching. It will be far in excess of 100 people, the Hon Dr Deborah Russell. It’s a retrospective change going back to 1 July 2024, which was when the two-year brightline test comes into effect, for those individuals that are watching this evening, because we did think about that and that’s why we’re doing a retrospective change.

Thank you for that clarification, Minister. I’m sure people will be relieved to know that they’re not going to have a sudden and surprising tax bill arrive; though that, of course, does happen from time to time for some people.

Minister, I want to move on to clause 6, seeing as we’ve just done clause 5—we’re making steady progress here. In particular, I want to understand what is going on here in this section, section CB 15E. Some of it is quite complicated in the way that it is written. It says to replace CB 15E(1)(a) with “the person derives income from the disposal” and then it just goes to sort of this, “(b) had the person disposed of their interest in the land that was partitioned or subdivided immediately before the partition or subdivision, section CB 15(1) would not have applied to the disposal.”

I mean, having worked in tax myself, I know that the income tax law, the way it is written, can be pretty complicated at times and it has to be written in a very curious way, but I wonder if the Minister could just unpack that a little so that we can understand it. It does seem to me it’s hard to understand exactly what that is trying to achieve. I think it is something to do to make sure that people who are developing land—I guess, people may not understand. Obviously we have the brightline test with respect to taxing the sale and acquisition of residential rental properties, but we also have sitting in the Income Tax Act, which a lot of people are not aware of, a whole series of rules around the acquisition and disposal of land, particularly where development activities have taken place. That’s a trigger for it.

I wonder if the Minister could just sort of unpack that clause a little to explain what the effect of the amendment to section CB 15E is and how it actually achieves a common-sense purpose. I’m not going to ask the Minister to explain every clause of the bill, because I’d rather talk to the policy intent, but if he could unpack that kind of quite complicated wording, that would be very helpful.

Thank you. I’m glad that the member doesn’t want to go through every clause, clause by clause, because we’d be here for a long time.

Hon Barbara Edmonds: Well, we could!

Hon Dr Deborah Russell: We could, but we won’t.

Hon SIMON WATTS: No, I don’t think we will. I think that those watching at home are wanting to see a substantive conversation, but I’ll answer this for the benefit of that, and then we’ll move on.

The amendment ensures that the brightline period does not restart where land is acquired as co-owners and is subsequently subdivided. I think you would get that it would make sense that the fact that the land is being subdivided subsequently shouldn’t automatically trigger the brightline test coming into play. It was never intended from the brightline test period that it should, in effect, restart in periods such as a subdivision, for example. Hence this amendment is making sure that it merely aligns with the original policy intent, which was that the brightline test should not apply in those circumstances.

Just a question to the Minister of Revenue, in relation to his response. There are particular rules within that—the land rules in the Income Tax Act—whereby if you are in the business of developing and subdividing land, then I would assume that the extension of this—the sale of subdivided land acquired from a co-owner—would actually be very different from that particular scenario where it’s a property developer. Can the Minister just clarify from his response: will this new extension of the scope—which, basically, as I understand it, is to assure that the rules applied when the land was acquired on a subdivision between co-owners and then subsequently disposed of are operating as intended—actually apply to actual property developers? I would have thought that that would be covered under a different set of rules. Could the Minister clarify that or get some advice on it?

The reason why I asked that—as the Minister gets some advice in relation to that—is that currently, under the brightline rules, if co-owners acquire a plot of land and then they decide to subdivide it, they then become owners of different plots of what was a whole land. I understood that the way the rules worked, under the land rules with the brightline test, is because there wasn’t a huge shift or a transactional change between owners. Effectively, they’ve just gone from a bigger parcel of land to a smaller parcel of land. They should be exempt—well, basically, the brightline test should be almost turned off. However, if they’re in the business of developing land, as opposed to just these co-owners, that should be treated differently. I just need to understand from the Minister: does this apply to property developers and to those where there has been a substantial change in ownership, or is this just for those where it’s the bigger plot of land that’s been subdivided into smaller plots but is actually not a significant shift in ownership?

The example that we’re referring to here is land that is co-owned. If the three of us at the top table here own a section of land and we’ve purchased it, what we are saying is that, if we subsequently then subdivide that land for our own purpose, the mere point of subdivision isn’t a trigger point for the brightline test having to reset again, OK? That’s the context which this specific point of tax detail is relevant to, and it’s not anything broader than that.

Thank you for that answer, Minister. I want to go to clause 8 and then, after that, in the next call, I think we need to start discussing some of the matters in the Minister of Revenue’s Amendment Paper.

Clause 8 inserts new sections CC 2B and CC 2C, and they’re really to do with insurance receipts—you know, it’s when people get compensated under insurance receipts in terms of damaged property or so on, so it counts as a disposal; you can earn some income out of it. Certainly it’s a fairly straightforward idea, but what it does, section CC 2B, is it actually refers to the new section FP—oh, what is it?

Hon Barbara Edmonds: FP 5(2).

Hon Dr DEBORAH RUSSELL: It’s 5(2)—it’s all good. That FP 5(2) is the bit that I do want to get towards discussing soon, because it really is the most interesting part, which is the emergency relief measures.

Under FP 5(2), when there is a property that’s been affected in what we are now going to call an “emergency event”, the way the rules work, you can basically suspend the recognition of the income. A person’s going to get some money in; ordinarily, it would be recognised as income under the emergency provisions because we’re trying to help businesses and people through an emergency period. The recognition of the income gets suspended, and then flipping back to sections CC 2B and CC 2C, it’s got a couple of provisions in there that make it really clear that this is actually income and it is going to get counted, at some stage, as income.

It strikes me as a little bit curious. I know—is it Part C?—of the Income Tax Act is all about income and it starts with the basic rules about what income it is and then goes on to talk about how a lot of various interesting items are actually counted as income, as sort of anything that kind of isn’t income under ordinary concepts gets counted as income because it gets caught in this way. This ordinarily would be counted as income. We don’t even need a special rule for this. This is just income according to ordinary accounting concepts and so on. Why the need to put sections into the Income Tax Act to say something is income, which according to ordinary accounting concepts—which I know the Minister is familiar with himself—would actually be counted as income anyway?

The Income Tax Act is a long and dense piece of legislation and this just seems to add to the complexity of it. I suppose it’s a belt and braces sort of approach, but if the Minister could just confirm that that is what’s going on, that would be helpful. [Bell rung] OK, Mr Chair, I do have another question I’d like to move on to.

CHAIRPERSON (Greg O’Connor): Yes.

Hon Dr DEBORAH RUSSELL: I just want to confirm the Minister has introduced an Amendment Paper to the committee—Amendment Paper 247—and that Amendment Paper amends whole lots of this bill and it applies to different parts of the bill. I just want to clarify: I should discuss the clauses in the Amendment Paper that relate to Part 2 in this discussion of Part 2? Thank you, I appreciate that, Mr Chair.

CHAIRPERSON (Greg O’Connor): Useful to sort of clarify, too. The member’s obviously got very good knowledge of the bill, so it’s useful to assist the Chair with that.

Hon Dr DEBORAH RUSSELL: Thank you, Mr Chair. Well—

Hon Barbara Edmonds: We’re still at the start.

Hon Dr DEBORAH RUSSELL: We’re still at the start; we’re working our way through.

CHAIRPERSON (Greg O’Connor): I’m sure the Minister’s very pleased he has two women who know tax inside out to be able to assist with this.

Hon Dr DEBORAH RUSSELL: He’s smiling, he’s a happy man there—he’s a happy man. Minister, you’ve introduced an Amendment Paper—and that’s, of course, a common enough procedure—but one of the difficulties here is we didn’t actually get to discuss this at the Finance and Expenditure Committee, this Amendment Paper, and some of it’s just fairly technical stuff, just tidying stuff up in the legislation. But there are actually some substantive clauses in here.

In the Amendment Paper, you’re going to introduce new clause 8B, and 8B is going to introduce new sections into the Income Tax Act, section CC 9B and CC 9C, and they are to do with resale royalties. Because we didn’t get to discuss this at select committee, I’d like to understand the policy intent behind these two clauses to understand how it fits with the other legislation around this. [Bell rung] Thank you, Mr Chair. If we could just get an explanation from the Minister—

CHAIRPERSON (Greg O’Connor): Deborah Russell.

Hon Dr DEBORAH RUSSELL: —about those two brand new clauses, in particular, that would be very helpful if someone could carry on with that. Thank you.

Thank you, Mr Chair. I actually have quite a simple question and it’s actually in relation to Part 2, clause 7B. It’s around the addition to section CB 36, “Disposal of emissions units”, inserted by clause 7B. There was a tracked-change version that was reported back from the Education and Workforce Committee, in particular in paragraph (ii) or—it’s quite late at night, Mr Chair; it’s paragraph (c) in new section CB 36(6)(2), and it’s around “for ceasing an activity in relation to post-1989 forest land”.

Now, Inland Revenue officials are very good. They are very good when they do tax bills—and this is probably a tip for any member of this House—if you ever want to know kind of what’s happening in the tax bill, Inland Revenue officials provide to the select committee a commentary on the bill. They’re actually one of the very few Government departments that do this, and that’s because generally this is what you get, quite a large bill.

The commentary on the bill generally sets out some of the reason for the changes. I couldn’t find in the commentary on the bill—and my apologies to the Minister of Revenue, and to Inland Revenue officials, if I have missed it. I’m just trying to understand what it is that new section CB 36(6)(c), inserted by clause 7B, is trying to do in relation to post-1989 forest land, in particular in relation to disposal of emission units? I just can’t seem to find the commentary that accompanies such changes to understand what the policy intent of that particular provision is.

Thank you very much, Chair, and I thank the members for the questions. The Hon Dr Deborah Russell’s point in regards to Part C of the principal Act in terms of new sections CC 2B and CC 2C, inserted by clause 8—they are primarily, I think as the member noted, about the need to include those aspects of income under Part C or under ordinary concepts in the Income Tax Act. Hence as a result of this new legislation that we’re putting in place to deal with emergency events and the response to that, the income, accordingly, needs to be put into Part C, and that’s what’s happening in that regard.

There was another question from the member in regards to the artist resale royalty tax implications, which is in the Amendment Paper. In effect, this is ensuring that there is no over- or under-taxation of parties involved in the artist resale royalty scheme. That obviously kicked in and started on 1 December 2024, so why was this not included in the bill itself or consulted on? Well, as I said, the scheme came into play on 1 December 2024. The tax implications of that scheme were not considered until shortly after it was implemented and the tax outcomes have now been subsequently put through as an Amendment Paper in this legislation. Those changes are retrospective and that coincides with the fact that the bill came in on 1 December 2024.

The question, I guess, is: does that retrospectivity disadvantage anyone? The short answer is: a very small number of people are involved as art market professionals in regards to the implications around GST, so our assessment is that that won’t have a significant implication, but, hopefully, that answers for the member what’s going on in regards to that adjustment.

Just carrying on from the Minister of Revenue’s commentary in relation to new section CC 9B, “Resale royalties”, in clause 8B on Amendment Paper 247, as the Minister has confirmed, it does go back to the start date of that particular Act when it came in, in 2023—or that’s actually the year of the Resale Right for Visual Artists Act. The question I have, therefore, is that the Minister has said that only a small amount of people will be affected by this. How much revenue does the Minister expect to collect from this particular new income tax—because it’s a new tax, or it actually just clarifies that royalties from artists’ resale rights are, basically, taxable. The question is: if it’s a small amount, do those taxpayers that now will have an assessment which is backdated—what is the impact of interest and penalties on those taxpayers?

The reason why I ask that is because it is still a small amount of people, which is what is happening in this particular case, where the Government is now saying, “Well, actually, the royalties that you got from that resale are now income and they are backdated to the application date of that Act.”. If the taxpayer fails to return the income, and now the law has changed and so they’re going to return that income because “Oh, OK, now it’s taxable.”, what’s the implication for them from interest and penalties? Will the Commissioner of Inland Revenue just use some of their discretion, which is very rare when it comes to interest and penalties? Is the return date—have we not even got through to that, and so it should be covered so that there should be no interest or penalties, or shortfall penalties?

I’m just wanting to understand, because this is a change by statute. It’s not a change due to the taxpayer just all of a sudden forgetting that they have to return this income, but, actually, it’s because the Government is changing the law.

I thank the member the Hon Barbara Edmonds for the question. I think, in the context of Estimates, it’s within a quantum of $150,000. It’s not a material amount of money. It impacts, I think, of latest stats, probably less than 100 individuals, or 100 sales of qualifying artwork have occurred since the scheme came into play, from 1 December 2024.

There’s plenty of stuff we could carry on and talk about, and I do want to get through it. There’s just one little bit that’s a little bit interesting in clause 11B, which amends section CE 5—it’s expenditure on account of an employee, is the particular.

Section CE 5 spends a lot of time defining payments or things that are spent on employees and saying what is expenditure on account of an employee. Of course, you know, if an employer gives something to an employee or refunds some money, it looks pretty much like a payment, pretty much like a salary, and could get taxed and so on. It just says here in this clause that it’s going to insert a section CW 17D, and so payments related to health or safety are going to be counted, as I understand it, as expenditure on account of an employee.

Actually, I’d probably have to look at the actual original section—it’s one of the difficulties with tax law. I’d just like to actually look at the section. Could the Minister of Revenue explain how that fits into the definition of that particular section—how it works? As you can understand, as the Labour Party we get quite concerned about health and safety, so I want to understand if this should be triggering any of our concerns for our employment specialists as to whether or not this is a particular piece of expenditure that should be subject to income tax or not subject to income tax. Just a little bit of clarity around that would be helpful.

Now, I can see that he will need to get some assistance there, perhaps, from his officials. I think it might be worth just starting to focus a little bit on what I have said is, I guess, the most interesting part of the bill. I’ve said it several times and it’s taken me an hour to get here—or, I don’t know, about half an hour to get here. I do really want to talk about the emergency provisions, and I’m going to invite some of my—so this is a wee way through. It’s a new, entirely new, subpart that is getting inserted into the Act.

That’s quite a big thing to do, to insert an entirely new subpart into the Act, and it’s the emergency response provisions. Just for context as to what happened, over the last few years, as a nation, we’ve had some pretty amazing emergency events, emergency events which have meant that we’ve actually needed to put in place some support for businesses—[Bell rung]—quite properly, because we knew if we just supported them—

CHAIRPERSON (Greg O’Connor): Is the member seeking a further call?

Hon Dr DEBORAH RUSSELL: Oh, yes, please, Mr Chair. We knew if we just supported—

CHAIRPERSON (Greg O’Connor): Deborah Russell.

Hon Dr DEBORAH RUSSELL: Thank you, Mr Chair. We knew that if we just supported them through that period of time, the business would be viable, whereas if they didn’t have that support, they might not. Those measures were put in a number of times, and eventually it was suggested that we really needed to have an off-the-shelf solution. That work was started under the previous Government and, obviously, has continued with the current Government.

What I’d like to understand from the Minister is just how much—it’s really saying, how much of the stuff that was already being done—the work was under way, so how much of the previous work done under the previous Government did he pick up and carry on with? How much of this is new under his Government—whether he introduced any novel aspects into this set of rules around the tax relief for emergencies, or whether in fact the particular tax relief measures that are available were all measures that were developed, one by one by one, as we went through those emergencies, so they’ve all been deployed at least once and now they’ve just been pulled into a package. If the Minister could just give us a little bit of background on the development of that and talk us through it there.

Thank you very much to the member the Hon Dr Deborah Russell for those questions. There was a question earlier around clause 11B, and I actually think this is quite a—well, it’s an innovative and a positive change in the tax legislation; this is in regards to employer-funded flu vaccinations. The amendment that’s being proposed here is to ensure that employers are no worse off if they reimburse an employee for the benefit relating to a specific workplace health and safety risk. Obviously, getting a flu vaccination is a positive thing, and, in effect, we’re ensuring that there is a fringe benefit tax exemption for the non-cash benefits for health and safety related to that. This makes sure that, in effect, the exemption is eligible for the employer. I think that’s pretty sensible because that’s going to apply a benefit through to employees for doing what they do in that regard.

The other question is, more broadly, as the member has highlighted, that there is a significant change in this bill, which relates to emergency events. Obviously, the process and protocol which, historically, until now, has meant that legislative change was required in order to effect those changes under an emergency event situation. What we’re doing is moving this so it can be done through an Order in Council. That obviously allows us to move much more rapidly and faster to implement the measures required in those emergency events—the aspects of which were heavily consulted upon and built upon. I’m sure the Finance and Expenditure Committee did very diligent work in regards to ensuring that those clauses were appropriate, and I thank them for that, but the reality is that we as a Government want to be implementing that and it is a priority for us to do so, hence why it’s in the legislation that we’re passing through today.

Thank you, Mr Chair. I find it interesting that there are going to be closure motions but we’re only on Part 2, page 20 of the bill, and just if anyone wanted to know, the bill is 174 pages. As we’ve indicated, we’re going to go through—we’re not going to cover every particular clause, but we are going to cover the parts that we do have questions on.

I’m looking now at clause 10 of the bill, which inserts amended section CD 44, and that’s around the available capital distribution amount. In the bill—and it’s a revised part that came through the select committee process—it talks about, in clause 10(1), “Replace section CD 44(7)(dc) with: (dc) an amount is derived by a company that is subject to section HC 38(3) (Beneficiary income of certain close companies), in which case the capital gain amount is [the] amount less than the tax paid by the trustee in respect of the amount under section HC 24 (Trustees’ obligations)”.

Now, as I understand it—and, again, unfortunately, during parts of the select committee, we weren’t able to scrutinise officials on everything, but, again, we were very grateful for officials’ advice during the time. My understanding of this amendment is that it would clarify when a company derives beneficiary income subject to the corporate beneficiary rule, and so the capital gain included in that calculation of the company’s available capital distribution amount, or the ACDA—we love acronyms in tax, don’t we?—is the after-tax amount.

Can I just check with the Minister of Revenue: we’re looking at the ACDA as the after-tax amount, but what was the alternative to the interpretation of that? When you think about this particular provision and where it sits in the Income Tax Act—like, generally how it works is that a transfer of a value from a company to its shareholders is taxable as a dividend; however, some amounts can be distributed to shareholders tax-free when a company is liquidated. That, basically, is almost a wash-up effect, but we know that when the trustee rate was changed, it was not clear, as I understand—which is why I think submissions had come through about this—whether that capital gain amount included in the company’s ACDA is the after-tax or the pre-tax amount.

I think what the Minister’s trying to do with this particular provision is clarify that it’s the after-tax amount, but I just want to make sure: what were the considerations about it being pre-tax, which is the amount of the beneficiary income? Why had officials advised him, or why did they not fall on the pre-tax amount rather than this, the after-tax amount? The Minister may need to get some advice on that.

Then I’d go back to just my earlier question which hasn’t yet been addressed, and that was in relation to clause 7B and that’s around the disposal of emissions units—still was trying to find within some of the bill advice that we got from officials or submissions, just again trying to understand the intention of that remedial change within clause 7B, and that’s, again, for “ceasing an activity in relation to post-1989 forest land.”

Two questions: one is just the repeat of 7B, understanding the policy intent behind that, because I couldn’t find the commentary in relation to that—and my apologies again to officials and to the Minister if I’ve missed that somewhere in the hundreds of papers that we have. Then, the second question is in relation to clause 10 and that’s in relation to the corporate beneficiary income in ACDA: why is it the after-tax amount rather than the pre-tax amount of beneficiary income?

Thank you to the Minister of Revenue for the explanation around getting refunds for getting a flu vaccination—excellent move. As is the introduced instruction of the emergency measures, also an excellent move.

A lot of the time, we do oppose stuff across the House, but as I’ve said in earlier speeches, by and large, we support the measures in this bill. We don’t support Part 1 and, for that reason, we can’t vote for the bill overall, but we do support the individual measures in this bill. I can see the Minister sighing there and, trust me, I’ve seen those sighs on the face of previous Ministers as well.

CHAIRPERSON (Greg O’Connor): Sometimes even colleagues, eh?

Hon Dr DEBORAH RUSSELL: Ha, ha! Goodness, I have to speak to you, to the Chair, about that matter.

I want to return to the Minister’s Amendment Paper that he tabled. I’m not sure when it was tabled, it certainly arrived in my hands today, so it hasn’t been through a select committee process. So, first of all, thank you for the explanations around the resale royalties and the further explanations around how many people would be affected.

I want to go to section CW 39B, because there are some rules there around income related to the Auckland Future Fund. Again, we know that the Auckland Future Fund—I don’t think it exists as yet, does it? I think the legislation for the Auckland Future Fund has been introduced to the House and is now, I think, going through a select committee process. But the Auckland Future Fund itself—

Arena Williams: Private trust.

Hon Dr DEBORAH RUSSELL: Yeah, it’s a member’s bill, isn’t it, that’s going through the House, so it’ll take a wee while to get through.

Here we have, sitting in the tax bill, a set of tax rules relating to the Auckland Future Fund which does not yet exist. I get that there’s a degree of coordination required in these activities, that we do like to line our ducks up in a row and kind of get them all sorted out, but it’s quite interesting that this would, as I said, set up rules for something that doesn’t exist yet.

The legislation here, the amendments here, they contemplate that there will be trustees of the Auckland Future Fund, and it says that “An amount of income derived by a trustee of the Auckland Future Fund is exempt income.” Well, that’s quite interesting, because, typically, the income that a trustee earns ought to be taxed. Now, I’m assuming that’s the amount of income derived by a trustee of the Auckland Future Fund in respect of their activities associated with the Auckland Future Fund, because otherwise, you could have someone who is a trustee of the Auckland Future Fund and they might earn a salary or they might be involved in a business, and just being a trustee of the Auckland Future Fund shouldn’t excuse them from being taxed on those amounts of incomes. I’m assuming, and I’m sure the officials can clarify: so in the Amendment Paper “CW 39B Auckland Future Fund”—so CW 39B (1) states “An amount of income derived by a trustee of the Auckland Future Fund is exempt income.”

I wonder if the Minister could clarify all that, as to how that is actually going to work. It says the “Auckland Future Fund” in the prior part of it. I know that the Auckland Council has resolved to set it up, but I also know there’s a member’s bill going through to set it up. If the Minister could just explain a little bit as to why we’re putting tax rules in place for an entity that does not really exist yet?

Thank you very much to the member the Hon Dr Deborah Russell for those two questions. First one, in regards to the question regarding clause 7B on the emissions unit: in effect, this is, I guess, what you’d define as the legislative clean-up clause; it simply covers the surrender of emissions units because of being no longer involved in forestry under the emissions trading scheme—i.e., the forestry exit—the ETS. That’s the purpose of that clause 7B.

The points raised by the member in regards to the Auckland Future Fund (AFF) income tax exemption: in effect, the proposed amendments that are in this—so it’s a local bill. The member’s right to note that this is ensuring that the amendments would provide that the Auckland Future Fund is subject to GST, and the proposed amendments would provide that the Auckland Future Fund is deemed to have a taxable activity for GST purposes, similar to other local authorities. That is the purpose of that clause.

Obviously, it’s a local bill with the purpose of fostering public confidence in the administration of the AFF, and that’s the purpose of what that clause is doing.

I’m sorry, I have found that explanation quite confusing because new section CW 39B is a section that will fit within Part C of the Income Tax Act. I’m not sure then how it relates to the GST, which is the Goods and Services Tax Act. That was just a little bit confusing. In fact, this new section CW 39B is talking around all the ordinary concepts of income. I appreciate that there will be some GST-type—I’ll have to look through. As I said, I only got this probably a few hours ago, really, so we haven’t really had a chance to have a look at it.

I can see where there are changes going through to the Goods and Services Tax Act, but the particular clause I was referring to—it’s new clause 21BA, which is going into Part 2 of the tax bill. That part of the tax bill deals with the Income Tax Act, so I don’t quite understand how an explanation which references GST and the need to clarify something with GST is clarified by this section CW 39B—the section inserted by that clause. To me, that relates to income.

I wonder if we could just get a bit more of an explanation. I appreciate it might take a moment to get that clarified, but I hope to have that clarified now, please.

Thank you, Mr Chair. I am going to bounce to the Minister of Revenue’s proposed amendments to this bill, set out on Amendment Paper 247, and actually just carry on from the questions that the Hon Dr Deborah Russell had.

If I understand and read this correctly—again, we haven’t had an opportunity to scrutinise this at the select committee process. New section CW 39B, which is about exempt income, says, “(1) An amount of income derived by a trustee of the Auckland Future Fund is exempt income.” My question is: if a trustee is sitting on the Auckland Future Fund—so they’ve been appointed as a trustee. They may have received distributions from the trust—for example, for their time, for payment for them, as some trustees do; professional trustees get paid for the time that they sit on a trust and for the work that they do. I just don’t understand why this is being treated differently from normal income basis, because it would appear to be regular, it would appear to be that it’s a payment from the same source, which is the Auckland Future Fund. I just would like to understand a bit more from the Minister: why is that exempt income, but yet, in other cases, trustee income or payments from a trust to a trustee is deemed income of the trustee and therefore has to be returned? I don’t understand why this has a particular exemption.

I look to subsection (2) of CW 39B, and it says that subsection (1) doesn’t apply to the amount of income that is derived by a trustee of the Auckland Future Fund from a council-controlled organisation of the council, or an organisation linked by ownership or control to the Auckland Council that is a port company, a subsidiary of a port company, or an energy company, etc., etc, and per paragraph (b): “is not—(i) rates; or (ii) a dividend.” Again, if you read those two sections together, I still don’t quite understand why it’s exempt income that’s for the trustee, given it’s derived in their professional role as a trustee of the Auckland Future Fund. My apologies to the Minister if I’ve misinterpreted it, but, again, as we haven’t had a chance to review it under the select committee, I am reading this as it has appeared on the Table today.

I’ll help with the context of where it is. The Auckland Future Fund does exist; it was established in September 2024.

With regard to the clause reference, if I heard it right, I think that the member said it was new section CW 39B, in new clause 21BA on Amendment Paper 247, and I’m pretty sure that’s what we’re looking at. You’re right that that is in the context of the income exemption only. In the context of the overview that I was providing, I was giving a more encompassing aspect in terms of including the GST elements.

The member is right to say that the GST components are part of the GST components of the bill, but I was providing a more rounded context. In addition to the income exemption under new section CW 39B, there are also the aspects that relate to GST as well within the bill.

I still don’t know the answer to this, as to why an amount of income derived by a trustee of the Auckland Future Fund is exempt income. I wonder if the confusion is arising because—it is a long time since I looked at the trust. If it’s derived by a trustee, is that—it’s actually the trust’s income rather than the trustee’s personal income? I’m sure one of the Minister of Revenue’s officials should be able to clarify this for us.

This is the sort of thing we could have teased out in select committee, or just—it’s a little, actually, faintly embarrassing to be asking this question, but I am struggling with this little bit of the law. I am hoping that one of the officials can give us the explanation. When we’re talking about the amount of income derived by a trustee, is that the actual income of the trust? Because it’s all sort of handled through the trustee, trustee tax is complicated at times. I could do with a clarification there, because I just want to understand this—what on the face of it looks like a good thing? I do want to understand exactly why this amount of income derived by a trustee of the Auckland Future Fund is exempt income.

No problem; that’s why we’re here, so let’s engage in a little bit more dialogue on what is a very important clause in this very important bill. The income of the trustee is the trust’s income, not the income of the person doing the role. The purpose of this legislative change is just simply recognising that point of detail and ensuring that the overarching trust is taxed appropriately.

Mr Chair, thank you. It took me a while to figure that out. I’m glad I was getting to the explanation myself, because I knew there was something weird going on which I wasn’t quite getting. We’ve got that clarified now.

The income that’s being earned, we use that term “derived” but the plain, ordinary language is that income earned by the trust is exempt income. Now, that’s curious. Again, it’s a good thing, from the point of view of the Auckland Future Fund, that amounts of income earned there are exempt from income. It does mean that the future fund will accumulate its funds a little faster, and as an Auckland resident myself, I’m pretty pleased about that, as I’m sure other Auckland residents are. I notice Mr Cameron Brewer nodding his head wisely over there.

It just begs the question here, and that’s the comparison with the New Zealand Superannuation Fund. The New Zealand Superannuation Fund pays tax. Basically, it’s a capital wealth fund. This Auckland Future Fund is a sovereign wealth fund for Auckland, just as the New Zealand Superannuation scheme is a sovereign wealth fund for New Zealand. Members on the opposite side of the House, the newer members there, will learn that the New Zealand Superannuation Fund often approaches Ministers and MPs on the Finance and Expenditure Committee, people involved in the tax space, to make the argument that it should be exempt from taxation. If I were the trustees of the New Zealand Superannuation Fund, I’d be looking at this exempt income for the Auckland Future Fund and asking, “Why have they got this exempt income and why has the New Zealand Superannuation Fund not?”

Now, that’s actually quite an important policy question, and, again, it’s one that we could have examined in the select committee, so I really would like to understand why—

Ryan Hamilton: You didn’t mention it at the time.

Hon Dr DEBORAH RUSSELL: —one fund—we didn’t get this in the select committee; we only got this today. It’s new. The Minister of Revenue’s Amendment Paper arrived today. Why is the Auckland Future Fund getting this, frankly, rather special treatment? If the Minister could answer that—no?

This is the interesting thing around tax bills and, as we’ve been traversing this, we’re still only up to page 21 of the actual substantial revised track version of the bill. We’ve gone through clauses 4, 5; we have looked at clause 6, 7B, 9, 10, 11B. I’m going to spare the Minister of Revenue and not go through restrictive covenants as part of clause 12.

We will get to clause 13 as part of the wider discussion on foreign superannuation schemes because it’s actually quite a big part of the bill, which I think we need to spend some more time on, so I’m going to avoid that. Also, in relation to clause 14, which is around some of the platform economy rules and the GST rules—we can talk about that a little bit more—but, actually, I am skipping a little bit to clause 16 of the bill.

It was clause 16 of the bill that, during the Finance and Expenditure Committee, we had made a number of changes to it, which you can see on page 23; it’s set out there. Clause 16 of the bill is, again, around certain partitions or subdivisions of land. Again, it goes back to an earlier question I had with the Minister around the impact of that because, effectively, it’s the same parcel of land, it’s been subdivided but the co-owners don’t change. Effectively, the way that the land rules in the tax Act—it treats it like it hasn’t actually been a disposal within the brightline test, which is fair because, actually, it’s still the same co-owners, it’s still the same parcel of land; it’s just been subdivided.

The question that I have in relation to clause 16 is that I just need to understand whether—because I understand when this came in or when the application date—I think the application for that will be effective for disposals of land as part of partitions or subdivision transactions on or after 27 March 2021. That’s the application date for this clause 16, which we just spent a bit of time fixing up the drafting of it because it was a little bit unclear and some of the submissions were coming through to say just to clarify it a little bit.

Again, if we go back to the history of it, I understand it’s to clarify that the brightline period should not restart when land is allocated to each of the co-owners as part of a partition or subdivision arrangement, but I just want to check with the application date of being 27 March for that particular clause: why is it to 27 March 2021? I’m assuming that must have been the date, 2021. That might have been the date that it was extended to 10 years. I just need to ask the Minister why this application date and also what is the impact of those disposals that were done before 2021 in relation to previous brightline periods, which is, again, back from 2015. What’s the treatment of that or are we just replacing it back to the original treatment, given these changes which are in the bill, because the brightline test has been reduced to two years?

Thank you very much. Just going back to the member Deborah Russell’s point around the Auckland Future Fund and the question of whether they’re receiving special treatment in the context of the New Zealand Superannuation Fund. Well, as the member will be aware, councils are exempt from most income tax. In the context, Auckland Council is exempt from income tax, and the Auckland Future Fund will also receive the same treatment as other councils. Just to give comfort to all those that are watching this evening, there isn’t special treatment being provided. There is no special treatment being provided. It’s simply consistent tax policy with the entity of which it’s part of.

I move, That debate on this question now close.

The main reason that you can get a closure is for repetition. If you’ve been following closely, there has been none. In fact, the fact that the member was nodding for any other reason on a tax bill shows that there’s still interest in this bill.

Hon Member: I might have been asleep!

CHAIRPERSON (Greg O’Connor): So carry on.

We are doing our best to ensure that at least some people in this Chamber might be sleeping!

I want to go back to this Auckland Future Fund, and I take the Minister of Revenue’s point that local bodies, councils are not by and large subject to taxation. That’s a very good point. Of course, this is assets that are going into the Future Fund—assets that have been owned by Auckland Council through various mechanisms going into this fund to create the equivalent of a sovereign wealth fund for the future. It’s not special treatment in comparison to other councils or, indeed, to the council itself, but it is still, I think, special treatment in relation to the New Zealand Superannuation Fund.

Now, I’m assuming the Minister has already been approached by the New Zealand Superannuation Fund CEO, chief executives, trying to argue for the New Zealand Superannuation Fund to be tax-free. I think the Minister hasn’t quite explained why the difference with the New Zealand Super Fund. I will just move on from that, I guess, because it’s not going to change, but I’m just going to leave that as a question for the Minister to consider as a policy point in the future rather than as something in relation to this particular Auckland Future Fund, and we’ll take it from there.

CHAIRPERSON (Greg O’Connor): Very wise.

Hon Dr DEBORAH RUSSELL: Ha, ha! Just moving on a little bit from here, I want to move on to new clause—again, in the Minister’s Amendment Paper. If we go on to page 4 of the Minister’s—well, mine is no longer bright and shiny; it’s getting a bit crumpled, but his bright and shiny new Amendment Paper, new clause 29B, about “Deemed payments for services”. It’s an amount of resale royalty retained by a collection agency—again, hasn’t been through the Finance and Expenditure Committee.

Again, I appreciate it’s only going to affect, as the Minister explained before, a very small number of people, but could the Minister please explain the policy intent behind this deemed payments for services relating to resale royalties, in particular the policy intent but also whether it has any noticeable tax impact—obviously, for the individuals concerned, but I’m assuming it doesn’t have a particular revenue impact from the Government’s point of view because of the small number of people involved in this activity. If the Minister could have an explanation for that, that would be very helpful. I’m looking forward to hearing just that last little bit on that.

I thank the members for their questions. Going back to clause 16B, which is referencing section CW 3C, the question was in regard to the date and the timing of that. In effect, what this remedial is doing is it’s applying from the date that the section was originally applied for—i.e., that the change came into effect on that date—and we’re making sure that the legislation is aligned and refers to the date on which it came into effect.

The second question, in regard to the points around royalties, is the section which I provided a context for earlier this evening, in the context of the number of individuals that are impacted and the quantum of impact. We’ve covered that.

I want to move a little further through on to clause 20—you see my colleague and I just taking different clauses of this. I’m looking at it and clause 20 inserts new section CW 19B, which is about amounts derived by employees during emergency events, and that it becomes exempt income.

This, again, seems like a pretty sensible thing to do, but mostly the way that we’ve worked with the tax measures that assist during emergency events has been around assisting businesses. We’ve assisted businesses to continue; we’ve helped them try to find ways that don’t necessarily mean they pay less tax but it gets deferred, it gets spread over a certain amount of time, it creates options, and so on, so that it just eases the immediate burden on businesses. But CW 19B is amounts derived by employees during emergency events.

I guess what I want to understand here is—and those amounts are treated as exempt income—if these are amounts that the employee receives because perhaps the employee’s doing something that helps the business to keep going or if it’s just kind of gratis payments to employees which end up as exempt income. I appreciate that employees, just like anyone else, are affected by an emergency event, but it seems that this might be—is it here so that, if an employer decides to help out her or his employees, that income just becomes exempt? Again, a good measure, but exactly what is the policy intent here? Is it to ensure that a business could provide accommodation for an employee in order that that would help the business get back going? Or is it just gratis assistance to the employee?

Similarly, it says an amount “equal to $5,000”. Is it to help out the employee so that the employee can work in the business, or is it just, again, gratis assistance to the employee? They’re slightly different things, so I’d just quite like to understand the policy intent behind that. It is a good thing—I’m glad to see it in the bill—but I wonder if the Minister of Revenue could explain the policy intent a little there.

Well, the member the Hon Dr Deborah Russell’s very right. It is as good thing. It’s a shame that that side of the Chamber aren’t supporting this bill—

Hon Dr Deborah Russell: No, we’re going to vote for this part.

Hon SIMON WATTS: —these clauses—because they are very, very important clauses.

The member’s right: new section CW 19B refers to the provision of funding relating to an emergency situation to an employee to the extent that it relates to both accommodation, which I think would be pretty reasonable and sensible. Also, in the context of non-accommodation funding, which is under a threshold set of $5,000, that means that, obviously, those individuals under those circumstances can do what they need to do. Obviously, it’s an emergency event, and we’re simply acknowledging that it’s sensible that, in that context, the amounts in question are exempt from tax.

Thank you, Mr Chair. Riveting stuff on a tax bill night. I now go back to clause 16B, which, as I previously noted, the Finance and Expenditure Committee had done some substantial changes. I just want to acknowledge the Minister of Revenue for answering my earlier question around the application date, which advised us of the date that change was originally made, which was on the 27 March 2021.

Again, if we look at the revision-tracked version of the bill—we’re looking specifically at clause 16B—that is actually a really significant drafting change from what was initially introduced in the bill, which you can see in clause 16, which is about—one, two, three, four—four subclauses that have been crossed out and now replaced with one, two, three, almost four pages of redrafted legislation. I just want to pick apart a number of elements of this amended clause which came through the select committee. Again, we remember that the purpose of, I understand, these particular remedials is just to clarify that the brightline period should not restart when land is allocated to the co-owners as part of a petition or a subdivision arrangement—again, because, economically, same land, same co-owners.

However, the question that I have in relation to this is that, if you actually step through the amendments to it, it actually becomes very complicated. If you look at clause 16B, which replaces and amends section CW 3C, it’s, effectively, rewritten that whole subsection. New section CW 3C: “Certain partitions or subdivisions of land: Exempt income when no more than minor economic disposal of land”—so it’s exempt if it’s no more than minor, which, again, whole land, same owners; partition land, same owners. The redrafted clause provides some proportionality tests in it, around 95 percent. It says in subsection (1): “An amount that a person who is a co-owner of land derives from disposing of land to another co-owner on a partition or subdivision is exempt income if the person’s end value proportion is no less than 95% of the acquisition proportion.” Rereading that again, it is no more than minor if the end value proportion is no less than 95 percent of their acquisition proportion.

Then the bill continues with “Partially exempt income when more than minor economic disposal of land”. It sets out that if it’s no less than 95 percent of their acquisition proportion, then that’s OK. Except it then qualifies that with “If subsection (1) does not apply, an amount that a person who is a co-owner of land derives from disposing of land to another co-owner on a partition or subdivision”—so, again, another co-owner, same block of land, but another co-owner because it’s been subdivided—“is exempt income to the extent given by the following formula:”. Very unusual. Again, like, there’s lots of different formulas in the Income Tax Act, but what was a very simple couple of provisions or sections has now become a formulated provision—so 95 percent in subsection (1). Then subsection (2) provides a new formula: “amount derived - (total land value × (acquisition proportion - end value proportion)).” That is really complicated stuff that a new tax practitioner would have to work through, particularly as it’s a brand-new redrafted section of CW 3C.

Then there’s another third qualifier in it, which is the “Acquisition date for land provisions when no more than minor acquisition of land”. I’m going to save the Minister some time, and rather than go through all the different qualifiers, because then it goes on to, I’ll just highlight the subheadings. “Acquisition date for land provisions when more than minor acquisition of land”—that’s subsection (4). Subsection (5): “Bright-line acquisition date when no more than minor acquisition of land”. Subsection (6): “Bright-line acquisition date when more than minor acquisition of land”. Then, in subsection (7): “Meaning of end-value proportion”. Then, in subsection (8): “Meaning of acquisition proportion”. Then, in subsection (9): “Meaning of co-owner”. Subsection (10): “Definition of items in formulas”. Then it goes through the formulas in those different subsections (2), (4), and (6), and then it provides the different definitions and then it provides an example.

The reason why I have briefly gone through all those new subsections is because you are replacing what was, effectively, one, two, three, four subsections with over two pages of new draft legislation.

Hon Member: Oh, detail.

Hon BARBARA EDMONDS: And again—yeah, “Details, details!” I love that saying by the Hon Shane Jones, because I am a details person and he knows that.

Hon Mark Patterson: He would’ve loved this bill.

Hon BARBARA EDMONDS: Yeah, he would’ve absolutely loved it. He would’ve been wide awake during this whole process, and he would’ve been encouraging me to keep looking at the details, because that’s how we balance, myself and Minister Jones, and we’ve had that discussion before. You can go ask him about how “Details, details!” went when we had a Budget debate.

Therefore, just my question to the Minister is: has he received advice from officials as part of this drafting process? Yes, I accept it had to be a recommendation through the Finance and Expenditure Committee because it is in the revised tracked version of the bill, but has the Minister received advice around simplifying that, because they were some very simple clauses. It was to clarify, because it was a remedial that clarifies that the brightline should not restart when land is allocated to each of the co-owners as part of a partition or subdivision arrangement, but now there are two, three, four pages of draft legislation.

My question to the Minister is: does he feel confident with the revised draft of this bill that it still meets the original intent to ensure that the brightline period does not restart when land is reallocated to the co-owners as part of a partition or subdivision, or do we need to go again through those clauses in a bit more detail? I’m just slightly concerned that the revision that’s been put through, again, is quite fulsome, and I just wanted to just get a reassurance from the Minister that he’s confident that this actually makes sense.

Well, it’s very important for me to ensure that people don’t leave this debate this evening before they go to bed and not have the reassurance there. I want everyone to sleep well tonight, because I’m sure they will after listening to this dialogue!

The general point I want to make is that this bill—like many tax bills that have come before it—includes a large number of remedial matters which are designed to ensure that the law aligns with the policy intent. Importantly, in the context of what the member is referring to, I am comfortable that the drafting is appropriate to ensure that taxpayers can interpret and apply the law as easily as possible. That’s always a fine balance in tax legislation, but, in this case, I feel like we’ve got the balance right.

I do need to take a second call on new section CW 19B. Now, that’s the one that means that amounts earned by employees during emergency events are exempt income—so not taxed. There’s two questions I want the Minister of Revenue to clarify on this. The first one is a fairly straightforward one. Does the employer get a tax deduction? If the employer pays for accommodation for the employee to the tune of whatever it is or pays an amount of up to $5,000, is that tax deductible for the employer? Normally, salary and wages, the expense is deductible for the employer, assessable for the employee. In this case, it’s exempt income, and typically with exempt income you’re normally not able to claim expenses in relation to it. I just want to understand—if I could understand that—the exempt income versus where the employer gets a deduction there.

Look, the other one is a little bit trickier, because that’s just a straightforward technical question. In terms of the slightly trickier issue, it’s just to do with whether or not this could be gamed. Now, I think it possibly could be. We know that emergency events affect a region but, if we think about the way that the Auckland Anniversary weekend floods affected Auckland and the way that Cyclone Gabrielle affected the East Cape and Hawke’s Bay, some people were very badly affected, but their neighbours a few—

To the great dismay of the committee, I’m sorry to interrupt the member but the time has come for me to report progress.

Progress to be reported.

House resumed.