Hon PETER DUNNE (Minister of Revenue) Link to this
I move, That the Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Matters) Bill be now read a second time. This wide-ranging taxation bill introduces several of the reforms that were announced in Budget 2007. These include measures that emanate from the business tax review—namely, the new 15 percent research and development tax credit—and changes resulting from the reduction in the company tax rate to 30 percent. They also include changes to KiwiSaver legislation to require employers to match employee contributions up to a certain amount, and to provide an employer tax credit of up to $20 a week to reimburse employers for those contributions. Increased tax incentives to promote charitable giving by individuals and companies were also announced in the Budget and are a feature of this bill. The bill also introduces a number of other important tax changes, chief of which is the proposed liberalisation of tax penalties to promote voluntary compliance. The bill also sets out the tax rates to apply for the 2007-08 year.
The Finance and Expenditure Committee has considered the bill and has recommended a number of amendments to the proposed legislation to ensure that it operates as intended and as well as possible. The committee’s main recommendations apply to the research and development tax credit and to the KiwiSaver proposals. The aim of the proposed research and development tax credit is to help raise the amount of private sector research and development investment in New Zealand, which at present is only a third of the OECD average. That, in turn, is expected to have wider benefits for the economy and will help to increase productivity and our international competitiveness.
Introducing the tax credit will bring us into line with the many other countries that offer tax concessions of some form or another for research and development. Sustainability of the tax credit will be a critical factor in its success, and is of obvious concern to the Government. It is essential, therefore, that the credit rewards research and development, not routine business activity or expenditure that may be dressed up as research and development. If the credit is not fiscally sustainable it will be reduced in scope, and business confidence in it will be eroded. That is confirmed by overseas experience. For this reason the proposal comes with built-in safeguards in the form of detailed eligibility criteria and detailed definitions to ensure that the credit is as effective as possible.
The committee’s main recommendations focus on generally tightening the rules to ensure that the credit will be sustainable. The committee has, for example, recommended tightening the eligibility test for support activities to ensure that routine business activities will not be eligible for the tax credit. Likewise, the committee has recommended changes to make the proposed $2 million cap on internal software development more difficult to circumvent. That would include, for example, making absolutely clear to businesses what constitutes internal software so as to prevent them seeking to make questionable sales of that software in order to make its development appear eligible for the research and development tax credit.
At the same time, however, the committee has recommended raising the internal software development cap to $3 million of eligible expenditure in order to reflect the fact that a wider range of activities will now be subject to the cap. The committee has also recommended clarifying the proposed rules on when eligible capital expenditure on prototypes will attract the credit. The committee has recommended changes in order to better reflect commercial practice when research and development is undertaken in collaboration with others. Parties undertaking research and development through joint ventures will be able to apply the tests that determine who gets the credit at the joint-venture level. Those undertaking research and development in partnership with others can apply those tests at the partnership level, when all the partners are eligible for the credit.
In some areas the committee has recommended changes that add greater flexibility to the rules, as has happened with the proposed rules on research and development that is conducted overseas as part of a New Zealand – based project. The committee has recommended allowing excess overseas research and development expenditure to be carried forward so that it could become eligible for a credit in subsequent years. The committee has also recommended that there be a regulation-making power to exclude expenditure on overheads that is not sufficiently linked to the research and development. Those exclusions will be broadly the same as they are in Australia.
Those are some of the main recommendations in relation to the research and development tax credit. Other features of the proposal remain largely unchanged; for example, the rule remains that Crown Research Institutes, tertiary institutions, and district health boards, and their associates and entities controlled by them, will not be eligible for the credit, although the committee has recommended strengthening these rules to also exclude partnerships with these entities. However, New Zealand businesses that commission research and development from these institutions may well be eligible for the credit, depending on the circumstances.
The rationale for the exclusion of these Crown entities is that the tax credit is intended to encourage private sector investment in research and development, and is therefore targeted at firms controlled by the private sector. As I have pointed out on other occasions, the research and development tax credit is completely new to us all in New Zealand—to business, to the Government, and to the tax administration alike. It is therefore inevitable that the tax credit will need finessing as time goes by, given the complexity and the scope of the rules that govern it.
We will evaluate the success of the tax credit in 3 years’ time, once the credit has had time to bed in and it has become clear what the country is getting for its investment. But, in the meantime, once the legislation has been enacted, the Inland Revenue Department will seek public feedback on a set of draft guidelines on the details of how the new credit will be administered. That feedback will be used in the development of administrative guidelines, which should go some way towards dealing with the concerns of those who have stressed the importance of clear legislation and clear guidelines, the development of which has involved wide consultation.
The other major focus of the committee’s consideration was the proposed legislation relating to employers’ contributions and to the employer tax credit, which were part of the package of changes to KiwiSaver announced in the Budget. The changes in this bill complement the Budget legislation that was enacted in May to introduce tax credits to match savers’ contributions of up to $20 a week. All these changes are aimed at promoting personal retirement savings by making it easier and more rewarding to save through KiwiSaver.
In examining this bill, the committee’s stated concern was to ensure that the changes were practicable, and that compliance costs for employers, employees, and providers were minimised. Many of the committee’s main recommendations in this area are aimed at fine-tuning the proposed law on the treatment of contributions that employers make to schemes other than KiwiSaver, and at superannuation scheme arrangements that were entered into before the Budget announcements. In a similar vein, the committee has recommended a staged transition to the minimum 4 percent contribution on the part of employees. In another area, the committee has recommended changes in order to make it easier for complying superannuation funds to calculate employee deductions and to match employer contributions.
These, then, are the committee’s main recommendations for changing the proposed legislation, and I have to say I think that they will make a big difference as to its effectiveness. I want to acknowledge the work of the committee in dealing with a number of very technical and complicated measures associated with this bill. The committee has given these matters careful consideration, the consequence of which has been a much better piece of legislation. I welcome that, and I am more than happy to recommend both the bill as amended and the select committee’s report to the House.
Hon BILL ENGLISH (Deputy Leader—National) Link to this
I welcome the Minister of Revenue’s outlining of the major issues with the Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Matters) Bill for the benefit of the House. National will not be supporting this bill; it is part of a Budget we did not support on a confidence motion. We did not support the Budget, because we believe that it did not reflect the opportunities the Government should have taken to make broader changes to personal income tax, which is something we believe the Government has had the capacity to do for 4 or 5 years now and has neglected to do.
In that context, we in the Finance and Expenditure Committee took a pretty constructive approach to the issues raised in the bill, and particularly raised by submitters. I just want to go through a few of those issues. We have taken a pretty constructive approach to the bill because the changes in the bill are significant and likely to be part of the landscape for some time. We have an interest in ensuring—as the Minister has said—that compliance costs are minimised and that there is as much certainty as there can be with the types of measures outlined in the bill.
I will start with the research and development tax credit. This is pioneering territory in the New Zealand tax system. I note that by international standards our research and development tax credit is at a higher rate, more broadly applied, and available to a wider range of taxpayers than in Australia, for instance. The Government has made an effort, in this bill, to ensure that there are boundaries on that credit so that it will end up focused on what the taxpayer is paying for—that is, an increase in private sector research and development. By the sound of it, from the submissions and other discussions we have had, the development part of the credit will incur the most fiscal cost and grow fastest as a result of this tax credit being available.
I welcome the 3-year review the Minister has put in place, because I think it is vital that the business sector sees that the tax authorities are going to keep a close eye on how this credit is used. I get a bit concerned when I hear about the amount of resources that large accounting firms are giving to ensure their clients know all about this tax credit. It is vital that they see that the tax authorities are keeping an eye on it.
Some critical definitional issues are going to arise, and they came up regularly during the submissions—for instance, the importance of the experimental aspect of the definition of “development”. To use an agricultural example, it is the difference between a farmer saying he or she has put another sort of fertiliser on the paddock and therefore it should be eligible for the tax credit because it is development, on the one hand, but, on the other hand, real experimental activity, which would consist of laying out plots, applying different rates of fertiliser on those plots, and making sure they were fenced off or grazed in particular experimental ways, and may well count as development. The experimental aspect is absolutely vital.
One area in which I am pleased the committee made some changes was in respect of the eligibility of research conducted overseas by New Zealand taxed entities. In this interconnected world, it does seem quite a constraint that a New Zealand entity has to have its research conducted in New Zealand. We are a biological economy. It makes sense, for instance, to be conducting research all year round, depending on seasonal variations, because we—maybe literally—may be able to move twice as fast.
The committee has gone some way, without opening the gate too far, to providing a bit of flexibility. The reality is that many New Zealand businesses that want to do research are not going to find all the skills they need in what is quite a small scientific establishment. I am sure this is an aspect of the bill that will be discussed as part of the 3-year review.
I want to move briefly to KiwiSaver, on which there was a lot of discussion. I am particularly concerned about the complexity of how existing schemes interact with KiwiSaver. I will not pretend to be able to outline for the House the detail of all those discussions, but the issue looked a lot more problematic than I think the MPs expected as the submissioners went through the details.
Probably the main focus of our interest in the KiwiSaver structure was the concern that so many people will not be able to access KiwiSaver because they cannot afford to. In the initial stages of the scheme, that does not make too much difference. Members should imagine two workers in a workplace, one of whom has three children and a substantial mortgage, and another who is carrying out exactly the same job on the same pay with no responsibilities whatsoever. The second worker can opt into KiwiSaver maybe at 4 percent; the first worker cannot opt in at all.
As time goes on, those two workers will benefit in quite significantly different ways from KiwiSaver. The worker who does not opt in will miss out on the start-up grant, ongoing tax credits, and benefits to the employer of the employer tax credit, which may be passed through to the worker in his or her remuneration. So the differences will grow. I am quite sure that in workplaces this will become more of an issue if the contribution rates go up at the rate set out in the bill.
We had some combined submissions from the New Zealand Council of Trade Unions and Business New Zealand that highlighted both of the issues I mentioned: one being the affordability of the specified rates of contribution of 4 percent and 8 percent, and the other being the industrial relations problems that will arise out of the differences between employees who opt in to the KiwiSaver scheme and employees who do not.
The committee made some attempt to give clarity to that issue in clause 101. Clearly, there are polarised views about the impact of the compulsory employer contribution. Some people think it should be taken out of the remuneration of the employee, at one end of the spectrum; at the other end of the spectrum, the unions certainly believe that any employer contribution should be in addition to existing remuneration.
It is an unresolvable problem in a legislative sense, but the committee made some attempt to get a solution that respects existing contracts and also leaves room for employers and employees to negotiate as much as possible on that issue between themselves. I would not say that the committee has found the right answer; again, I am sure that it is something that will come through in the 3-year review.
These are significant shifts in our tax base. They are significant changes in the functions of the Inland Revenue Department as they take on KiwiSaver. I can say to the House that the committee did a reasonably good job with what is very complex and lengthy legislation. It will be discussed further, of course, at the Committee stage, but getting the research and development tax credit right and getting access to KiwiSaver right are issues the House should focus on in the next stage of the debate.
Hon SHANE JONES (Minister for Building and Construction) Link to this
Tēnā tātou katoa. I make this speech as the person who chaired the Finance and Expenditure Committee for the majority of the process of the Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Matters) Bill. The chairmanship of the committee has been taken over by my colleague Mr Chauvel. I wish him luck and hope that he strikes a degree of camaraderie with all members of the committee. As is usually the case we must acknowledge the work that Mr Robin Oliver and the hard-working team of tax officials put into the construction of the bill. All tax legislation is a mixture of technical improvements and turning policy into programme, and it falls on me, as chair at that time, to acknowledge the work that they did.
There are three themes that I want to accentuate following on from Mr Dunne and an uncharacteristically temperate contribution from Mr English. Firstly, this bill builds on the major changes that relate to announcements we provided for through the Budget. Mr English and Mr Dunne have outlined the changes in respect of the research and development tax credits. A most important development has been the actual provision of this type of assistance to emerging and growing businesses. An area that caused the committee some angst was the extent to which the programme could be monitored and managed without opening up the tax base unwisely to unsavoury practices from either tax advisers or businesses hoping to gain access to the research and development credits by putting in proposals or expense claims relating to stuff they would be doing ordinarily.
I have no doubt that the programme, like all systems, will be improved as we go along, but it is an important step. It is an important step if we are to maintain productivity and if we are to allow our companies to not only put capital at risk but also do it in such a way that their forays overseas are well funded, in terms of good ideas that have been well researched. As Mr English said, a number of the innovations are not confined to New Zealand, and our companies need to link up with those centres around the world where they are already well known for their resourcefulness and their deep pockets to drive technology improvements and productivity changes through research and development. I dare say we will see a great deal of that in the dairy industry, and our other export industries, which really need to move us from out of the commodity trap through using research and development initiatives to move us into a higher level of return.
In respect of savings, we in the Government have recited at great length that we believe savings will actually address macroeconomic problems and create a pool of resource in our own country. Sure, parts of these savings will be handled by a host of managers dedicating them to overseas investments, but a growing amount will be available for our own Kiwi projects—our own people. We will create a greater sense of security through a savings scheme where the State takes a very proactive role.
An area that caused a number of us some concern, which was amplified by various submitters, was the pace at which we will introduce savings changes, and how this will affect people who are currently involved in KiwiSaver and those who are about to be involved through the current KiwiSaver model. We were concerned, No. 1, that people actually make a contribution that is meaningful, and, No. 2, as we step away from the 2×2 method with the contribution from employers and the contribution from the State, that they get up to a 4:4 ratio. We have extended the transition process so that people can remain on a 2 percent contribution for a bit longer. Initially the period of time at which that cut off was 2008, but now it will be extended. For those extremely diligent and delighted listeners who are celebrating the fact that they are hearing this speech of mine, the contents page for the details is page 11 of this rather large tax bill.
The KiwiSaver scheme is being taken up by growing numbers of people—Dr Cullen will outline more of that information very shortly—and it is proving to be a highly popular scheme up and down ngā hau e whā.
I think we know that the National Party will strip away the Government’s contributions to the scheme. Ordinary, garden variety Kiwis, many of whom are our supporters, from time to time find themselves in “Struggler’s Gully”, but we will look after them. We know what it is like in “Struggler’s Gully”—not just in the rarefied air of elevated heights. We go low, we go high—we find our supporters everywhere! A lot of people were concerned when they came before the committee about whether KiwiSaver will have a future. With this bill and the improvements that are made, not a single person following the debate of KiwiSaver or studying the law should have any doubts that for as long as Dr Cullen and our team are driving forward with the leadership of the Prime Minister, KiwiSaver will be a permanent feature of our macroeconomic infrastructure. And the reality is, I suspect, that that will be the nature of the change from the other side of the House.
Referring to the business tax reforms, I think it remains to be said that those people who doubt the Government’s credentials in relation to lessening the tax burden need simply to read this legislation. Tax for companies has come down. It is important to bear in mind that the direct cost of moving from 33 percent to 30 percent is about $2 billion. There will probably be an additional $130 million or $140 million, if my figures are not incorrect—and I am sure they are very accurate—over the next 4 years in terms of transitional packages.
But it is important to remind everyone that, as a consequence of this bill, it is not only company tax rates that will be cut. People who save through KiwiSaver, for example, will enjoy a maximum tax rate of 30 percent. As the value grows and compounds year by year, that 3 percent will be an invaluable wedge. The other thing we need to bear in mind is that 19.5 percent will be the lowest rate, depending on the actual status of the income earner.
The skills base is an area that, not surprisingly, was referred to in respect of how sophisticated the savings industry is. My senior colleague Mr Swain, drawing on vast levels of experience, posed this question to the savings scheme providers who came promising the committee that once we get the savings regime bedded down we will see growth take place. We were very keen to know from them that the growth would not be in their personal fee structure, and that there would be transparency and competitiveness in terms of the services they are selling. So, to that end, we have ended up providing a $53 million fund for industry training initiatives. I relate that to KiwiSaver, because we need to be damn sure that the people who are supplying these products, the people who are advising Kiwi employers and employees, raise their levels of performance, are transparent, and give a clear and lucid account as to what their services are costing. If there is one thing that unravels trust and confidence, it is people feeling they are not getting value for money. That is something we have learnt from experience in Australia.
In summation, the savings story has been a good one, through the passage of this legislation, which will pass very shortly. Secondly, there are contributions to research and development, which will grow the capital base and technology of our enterprises. Kia ora tātou.
CHRIS TREMAIN (National—Napier) Link to this
That was the Minister the Hon Shane Jones, an esteemed member of the parliamentary rugby team whose jacket he is wearing in the House today. His legendary feats on the playing fields of France helped this Parliament to bring the Parliamentary Rugby World Cup back to this fine nation of New Zealand. I understand that it sits with pride of place on the Speaker’s mantelpiece. I join with the former chairman of the Finance and Expenditure Committee in acknowledging the work of Mr Robin Oliver and his cohorts in bringing this taxation bill through. I also acknowledge the work of the chair and the committee. We heard a lot of submissions on this bill as it came to the House.
I want to start my speech today by acknowledging the work of Mr Pete Hodgson. He rose in this House just yesterday to say that 1 year ago John Key became the leader of the National Party. Mr Hodgson received rapturous applause from this side of the House. I might add that there were a few smiles from members on the other side of the House, as well. John Key has set a new aspirational tone of leadership for this country—one that we have not seen for many years. It was an absolute honour to acknowledge his leadership in the year that has passed in this House, and I thank Mr Hodgson for that possibility.
Today I rise to debate the Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Matters) Bill, which has been presented before the House this evening. There are absolutely no precedents from either side of the House for parties ever to vote for an opposition party’s tax bill, and, regardless of the proposals in this bill, there is nothing surer tonight than the fact that we will be voting against this particular tax bill, as well. And there are good reasons for voting against the bill.
A number of initiatives are a step in the right direction—
Hon Darren HughesI will give the member one: the complete replication of National’s policy on charitable donations, launched by John Key at the Wellington City Mission on 27 February 2007. That was well before this year’s Budget, and well before this legislation saw the light of day in this House. That is one such example. Incentives in the research and development area have some merit, and amendments that liberalise a range of tax penalties also have some merit. However, it is the Government’s tax legislation such as this bill that sets the scope of its economic vision for our nation. To vote for the bill would be to agree with the general direction that this Government is setting, and there is no way that National will be doing that.
Although there are some creditable features in the bill, this legislation, quite simply, is too little, too late. To vote for it would be to agree with the general direction in which this Government is heading, and there is about as much chance of our doing that as there is of Michael Cullen deciding to stand in the seat of Napier against me at the next election. It is just not going to happen.
Sometimes it comes true. Well, I have wished for it; I have challenged him on a number of occasions, and my wish has not come true yet. So I am still waiting for that. To vote for this legislation would be to affirm the direction of the Government and where it has taken us over the last 8 years. But this Government is a disaster; this Government is in its death throes, and we simply cannot support a Government in a terminal death spin. Putting aside the multitude of current disasters before us—the Electoral Finance Bill, the David Benson-Pope demise, the jobs for the girls, the climate emission issues—we just cannot vote for this bill.
The issue I want to focus on, bearing in mind the key reason why we cannot vote for the direction this Government is taking us, is typified by the headline in the paper just 2 days ago: “Record 40,000 off to be Aussies”. The figures show that 40,000 Kiwis have crossed the Tasman in the last year to live and work in Australia, which is a whopping 6,200 additional Kiwis compared with the figure of the year before—almost the population of my new electorate suburb of Wairoa. The town of Wairoa has 8,200 people. An extra 6,200 Kiwis are heading off overseas. The Deputy Prime Minister stood in this House 2 days ago and tried to explain that people were leaving for reasons other than just tax cuts. His reason was that they were leaving for lifestyle choices. Well, guess what? They are leaving for lifestyle choices. Lifestyle is a key factor. But let us examine what “lifestyle” is. Is it because we lack mountains, rivers, and beaches in this fine country? No way! We have those in abundance. The difference is that an Australian lifestyle benefits from average wages that are 30 percent higher than here in Aotearoa—30 percent - plus, higher. That creates a lifestyle that is somewhat better than the lifestyle here in New Zealand. And tax policy over time, such as this taxation bill, makes a huge impact on the lifestyle of Kiwis.
I put this Labour Government’s record on tax policy directly at the Government’s feet as the reason why an additional 6,200 Kiwis have crossed the Ditch this year. The Government’s record on tax policy has been one of “collect more, collect more; build the kitty, build the kitty”. My colleague Lindsay Tisch has released a paper that shows a whopping growth in tax and levies, a paper from 18 September this year. We see the example of some 60-odd tax increases across all manner of jurisdictions, from gambling to export education fees, building levies and fees, passenger clearance service costs, levies on participants in the gas industry, increases in passport charges, marine safety charges, the costs of the microchipping of dogs, a levy to cover the cost of a dog control information database, and fees for retirement villages. It just goes on and on. These increases have come from the “tax and build the kitty” policy of the Government over its last 8 years in office—a policy continued with this legislation today.
The tax-and-spend philosophy is highlighted by this year’s tax take and surplus. For the tax year ended 30 June 2007, the Government had a tax take of some $56.5 billion. In the tax year ended 30 June 2000, it had a tax take of $34.4 billion. Ladies and gentlemen, that is an increase in tax take of $22.1 billion. Even in the eyes of Mr Woolerton, that is a big increase in tax. That is a whopping $5,525 additional tax per man, woman, and child—whether or not it is put through a hidden trust, I say to Mr Woolerton. That is a 64 percent increase in direct taxation. Under this Government there is unlikely to be any change soon to Kiwis’ lifestyles to stop them flying the coop; and this bill will not make much difference, either.
This Government, as I have said previously, is intent on building the kitty for next year’s election spend-up. And here is the proof. It is in clause 23 of a Cabinet paper by Michael Cullen, dated 19 April 2007.
I will give the member some credit, in that he was not a Minister at this time, so it is unlikely that his signature is on this particular Cabinet document. So I will let him off. But I want to read out what is stated in that Cabinet document—and it is important to close my debate. It states: “To maintain our commitment to the long-term fiscal objectives”—which is Cullen-speak for building the kitty—“I may need to make some adjustments to future Budgets. These are likely to be that we do not adjust tax thresholds in the medium term thereby retaining fiscal drag and potentially allowing tax to GDP ratios to rise slightly.” Oh, that is bad luck for the New Zealand taxpayer. It goes on: “Accordingly, this paper seeks Cabinet’s agreement to rescind our previous decision to adjust income tax thresholds … Within the projection period (i.e., from 2011-12 onwards) we will adjust tax thresholds for inflation, but some portion of fiscal drag might need to be retained to finance our decisions.” That is what this Government is doing. It has rescinded on any sort of opportunity to improve the lifestyle for Kiwis here in New Zealand, to stop those 40,000 people from going forward. That is why, as a party, we are refusing to vote for this legislation. We are not following in the tracks of this Government; we will set out our own agenda and take this nation forward.
R DOUG WOOLERTON (NZ First) Link to this
New Zealand First supports the Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Matters) Bill. Unlike the National Party, New Zealand First votes for tax reductions wherever and whenever we can find them, because we believe in sensible tax reductions and we are in favour of them. We are also in favour of savings, and we vote in favour of savings wherever and whenever we find them. We have long spoken about giving tax breaks—as we call them—or tax credits for research. That is in this bill as well, so that is a third reason to vote for this legislation, and we will certainly be doing that.
I just have time to tell a story illustrating what we have to guard against when it comes to research and development tax credits. We had an instance of the tax officials telling us about a gentleman in Australia—and I think it is worthy, coming from the City of Sails, as you do yourself, Mr Deputy Speaker, although I do not intend to bring you into the debate—who was claiming a tax deduction on a pleasure boat worth something like $2 million, because he was experimenting with a plastic gizmo, shall we say, measuring about 25 centimetres, which was to assist with the hands-off steering of the boat. That is the very sort of thing that we cannot afford to have in New Zealand.
Lynne PillayThat is absolutely a rort, as my colleague Lynne Pillay says, and we cannot have it. This bill has made sure, to the extent it can, that that sort of thing does not happen in New Zealand. It has happened in Australia, and thank heavens we can sometimes avoid the pitfalls by watching that close and friendly neighbour of ours. New Zealand First is in favour of this bill, and we intend to vote for it.