Taxation (Annual Rates, Savings Investment, and Miscellaneous Provisions) Bill

Dr the Hon LOCKWOOD SMITH (National—Rodney) Link to this

Part 1 of this Taxation (Annual Rates, Savings Investment, and Miscellaneous Provisions) Bill has actually been largely ignored because of the very controversial issues contained in Part 2, in particular. But Part 1 is a very important part of this bill because it confirms the current income tax rates for the 2006-07 year. There are a number of questions that, I think, should be rightly posed about this to the Minister in the chair, the Hon Peter Dunne, because when the current tax rates—including the 39 percent tax rate—were introduced by this Labour Government back in 2002, I clearly remember Dr Cullen speaking in this Parliament and telling New Zealanders that this higher tax rate of 39c in the dollar would be imposed on only 5 percent of New Zealand income earners. It would be only the highest income earners who would be paying this high tax rate. So the question I now have for the Minister in the chair is what percentage of New Zealand income earners, when we confirm these same tax rates—including the 39 percent tax rate above $60,000 income—will be paying that 39 percent marginal tax rate.

I think it is a relevant issue. Dr Cullen promised that only 5 percent of New Zealanders would pay this rate. It is relevant to the Minister in the chair because we all know he is of the view, and has pushed the policy quite strongly, that the tax thresholds should be indexed. Now I have two questions on that matter to the Minister. The first question is when will the tax thresholds be indexed. The second question, in relation to that, is at what point they will be indexed.

Let me explain what I mean. Will they be indexed at a point where only 5 percent of New Zealand income earners pay that top tax rate? In other words, will the threshold be raised until only 5 percent of New Zealand income earners pay the top rate as Dr Cullen promised, or will they be indexed at the status quo where—what is the figure—10 percent or 15 percent of New Zealand income earners now pay that top tax rate? So I think there are two issues there that I would be particularly interested in. The first issue is what is the percentage of New Zealand income earners paying that top tax rate. The second issue is when indexation will start and what proportion of New Zealand income earners will lock into that top tax rate.

There is no question that by confirming these tax rates this Parliament is locking in a very high level of revenue collection—a very high level. Revenue collection by this Labour Government has gone up since it came into office in 1999, I think, something like 60-odd percent—a massive increase in tax collection by this Labour Government. Clearly this Labour Government is currently carrying very large fiscal surpluses. So I think the Minister in the chair should tell us exactly when the indexation of the thresholds will start, and whether it will lock in the status quo where a very much higher number of New Zealanders will be paying that top tax rate.

I think New Zealanders deserve to know whether this Government will seriously address the possibility of a reduction in personal income tax rates for New Zealanders. We are becoming a very highly taxed country. The proportion of our GDP being taken as tax is climbing now. It has declined for many years, and it is now climbing again. We all know that that is a negative for our economy. For the percentage of our GDP taken in tax to be climbing again is a negative for economic growth. Given the overall tax policy he is pursuing as Minister of Revenue, I would like to hear as well from the Minister what the prospects are not only for indexing thresholds but of us seeing these actual tax rates that Part 1 confirms are the current arrangements—15 percent up to $9,500, 21 percent up to $38,000, 33 percent from $38,000 to $60,000, and 39 percent from $60,000 and above—being reduced. These are very specific questions to the Minister.

Hon PETER DUNNE (Minister of Revenue) Link to this

Let me respond to the points the member has raised. The first point he asked was what is the percentage of taxpayers now in the 39 percent bracket, bearing in mind the claim in 2000 that only 5 percent of taxpayers would be affected. If he cares to look at Treasury’s estimates that were produced at the time of this year’s Budget, he will see that that figure has now risen to 12 percent. He will note also from the comments made to my right that that has to be taken into account alongside income growth in the period since the year 2000. [ Interruption]

The second question that the member raised—and by way of interjection now he makes a reference to bracket creep—was to ask when indexation might occur. Let me say this in response to him. The Budget last year made provision for the start of an indexation programme along the lines that my own party had advocated for. The agreement that we have between the two parties at this stage relates to a business tax review. That work is ongoing and will be completed in time for decisions next year. We have indicated that the consequence of any shift in corporate tax rates or corporate tax arrangements will have implications for the personal tax system, and they will be considered at that time.

So in response to his question, I would expect decisions on all of these matters to be made in the first half of next year—announcements around the time of next year’s Budget—and legislation to be in the House shortly thereafter to give effect to changes, in time for 1 April 2008. All of that information has been available since the business tax review document was released in July.

Dr the Hon LOCKWOOD SMITH (National—Rodney) Link to this

Part 2 is obviously the really significant, major part of this bill. I would like to take two or three calls on it at various stages this evening, because I would like to deal with two or three issues. Let me first, though, just revert back to an earlier comment. Do I see Mr Shane Jones anywhere in the Chamber? He talked a moment ago about how sensible this bill and the new regime in Part 2 on taxing foreign portfolio investments are. I want to contrast that with what Mr Jones said publicly, when he thought his comments would not be recorded, in Napier only 2 or 3 weeks ago. That was after the Finance and Expenditure Committee had done most of its work on this bill.

What did Shane Jones, the Labour chair of the Finance and Expenditure Committee, have to say about this taxation regime? He said: “Why bother investing in shares when you know you’re going to get taxed potentially on gains”—so there was Shane Jones acknowledging there would be a tax on capital gains—“you’ve not even received, now called the fair dividend rate …”. So he acknowledged the fair dividend rate would be a tax on capital gains that someone had not even received. He went on to say: “… when you have all the incentives possible to go out and buy another house as a rental?”. That is what Shane Jones, the Labour chair of the Finance and Expenditure Committee, really thought about this legislation, when he thought that his audience would not report back to this Parliament what he had said. I think it is very informative that the chair of the select committee actually said that kind of thing in a public gathering in Napier, and did not expect it to get back to this Parliament.

The first issue that I want to focus on in Part 2 is the establishment of the portfolio investment entities. In principle, we have no problem with that proposal. We support the concept of establishing for managed funds the principle that they should not be taxed on their capital gains here in New Zealand, on investments in New Zealand. I think it was Gordon Copeland who emphasised that point; having their taxation arrangements the same as those on individuals’ investments in New Zealand makes perfectly fine sense.

But the issue becomes more complex when we introduce the look-through procedures, as Part 2 does, to try to tax individuals’ investments in managed funds at their personal marginal rate. What makes it more complex is that the returns to investors are not being taxed in the investors’ hands at their marginal rate. That would be a much more simple process. The problem for Labour members was that if they approached it in that simple way, that would affect the Government’s family tax credit arrangements, particularly its big icon policy of Working for Families. Obviously, if it were to be done in that sensible way—the investment return is received in the hands of the investor, to be taxed at his or her marginal rate—of course it could make a significant difference to the amount of income that a family received through Working for Families. So what the Government decided it had to do, and what this Part 2 does, is to force the new portfolio investment entity established in Part 2 to calculate the tax and pay it on behalf of the individual investor, so that it does not count against the individual investor’s entitlements to family tax credits and Working for Families tax credits.

But that introduces massive complexities. I want the Minister in the chair, Peter Dunne, to answer quite an important question on this. The select committee heard from a group of very significant researchers at Auckland University. I thought Michael Littlewood and Susan St John made an important submission to the select committee on this issue. They made the point that it is simple to say we should tax the returns at an individual’s own rate in a managed fund investment, but giving effect to that is anything other than simple. They say that if we take a modern superannuation scheme with an investment choice—one where investors have some choice—in order for a big scheme with 100,000 members to become portfolio investment entity - compliant, it would involve up to 15 billion extra data points. I will repeat that figure. The evidence to the select committee was that for a major fund to become portfolio investment entity - compliant, calculating out the tax on the basis of an individual investor’s individual tax rate would involve up to 15 billion extra data points of information that would have to be kept by that superannuation scheme. That is a massive increase in extra data handling by a managed fund.

That was not put to us by some person off on a wild daydream; the people who made that submission to the select committee were Michael Littlewood and Susan St John, who are two very respected researchers in this area. They put it to the committee that this measure would impose a huge compliance cost, and that many employer superannuation schemes simply would not be able to become portfolio investment entity - compliant because they would not be able to pass on those costs.

Maybe the Government today, with its latest Supplementary Order Paper enabling superannuation schemes to be exempt from specified superannuation contribution withholding tax without becoming portfolio investment entity - compliant, will solve this compliance problem for many superannuation schemes. Maybe that last-minute move could help with this issue. But I would like the Minister in the chair, Peter Dunne, to respond to the very serious submission made by those researchers. I ask whether the Government has looked seriously at the issue of the massive increase in the number of data points of information required by a significantly sized superannuation scheme in order to become portfolio investment entity - compliant. Where that fund is an employer superannuation scheme, obviously it cannot pass on those costs.

So I think that there are significant issues around the design of this proposal to tax individuals’ investment in managed funds at their own marginal tax rates. It is complex, because the returns from the investment are not being taxed in the individuals’ hands; the tax is being calculated by the fund—by the portfolio investment entity—which adds significant complexity. For example, given that the portfolio investment entity pays the tax on behalf of the investor, what happens when the investor pulls out? There are a number of overs and unders here. If the investor pulls out of the portfolio investment entity, presumably that entity has to pay the tax.

I would appreciate the Minister in the chair telling members how often the portfolio investment entity recalculates investor ownership of investment in the fund, to make sure that the averaging throughout the year delivers an average tax rate, because we must not forget that the tax rate that the portfolio investment entity pays is the average of the individual tax rates of all the investors in that fund. In order to get that exactly right, the portfolio investment entity would have to attribute income on a daily basis. Does the Government intend that portfolio investment entities should attribute income on a daily basis, a quarterly basis, or a 6-monthly basis? I think that the Minister should explain that to the Committee, because I am sure that many members would not have much of a grip on that issue. It does affect the fairness of the tax rate paid because, depending on the balance of investors on a daily basis in a particular portfolio investment entity fund, it influences the average tax rate owed on the income received by the fund on any given day.

So I really would appreciate the Minister responding to a number of significant issues in relation to the establishment of portfolio investment entities. Later on I will come to a number of other issues relating to the investment of income in offshore portfolio investments. However, with regard to the portfolio investment entity issue, we support the concept of taxing people’s investments in managed funds at their own marginal rate. But because the Government does not want to affect their Working for Families income, it means that portfolio investment entities have to do all the tax calculations and pay the tax on behalf of investors, and that causes huge complexity.

I would appreciate it if the Minister could respond to those specific concerns.

GORDON COPELAND (United Future) Link to this

I would like to take a call on the 5 percent fair dividend rate, which is contained in Part 2 of this bill. I think I have earned the right to speak on this, because I listened to many, many hours’ worth of submissions on the fair dividend rate, and I must say that some of them were a mixture of ignorance, wisdom, and everything in between. I think that it is very important to at last put a few facts on the table with regard to the process that has led to the 5 percent rate and, if you like, its “embeddedness” into the reality of what it means to invest in the stock exchange. When we buy shares in a company, we become a part-proprietor of that company. We may be only one-millionth proprietor, because there might be almost a million other shareholders, but we, nevertheless, are proprietors of that company. After that company has earned an income and has paid its due tax on that income—in whatever jurisdiction in whatever country in the world it belongs to—the after-tax income belongs to the shareholders of that company. Therefore, as investors, we have a share of that income.

What this bill attempts to do is to say that the Government will tax us a fair amount and a fair rate, based on the fact that we have just gained an income. After all, this is an income tax bill. The evidence placed before the Finance and Expenditure Committee, which is very well known, was that over time if we invest on the international stock exchange around the world—and we could look at various periods, but if we take the period from about the 1980s through to today, which is about 26 years—on average, the income yield, or the return yield, to an investor is 9 percent. This bill says that the Government will tax investors on 5 percent out of that 9 percent. Why not the whole 9 percent? The reason is that some part of that 9 percent, in addition to the income that investors receive from the company, is the market’s evaluation of the future income stream of the company, which we call capital gains. It is an estimate of what the ongoing earnings might be, capitalised today. The whole theoretical basis underlying that is called the internal rate of return, or the net present value, of future income streams, which comes into today’s valuation on the stock exchange of those particular shares.

This bill does not, in any shape or form, tax genuine capital gains from the stock exchange. It is a tax on, if you like, a fair dividend yield—and I will put this fairly and squarely on the record: if a company earns an income after tax, regardless of whether it distributes that income by way of dividends or retains it, the investors, as shareholders, have still gained an income from that company. That is the essential point of the fair dividend rate method. We are saying that if people are shareholders, they have earned some income and, because we have an income tax system on every other form of income in New Zealand—whether the income is gained here or from overseas—those people need to pay their fair whack of tax on that income.

I have mentioned that the average return is 9 percent and that we are taxing at a rate of 5 percent. Is there anything magic about that? The answer is no, but the rate is about right. It is as right as any other rate that anybody who came before the select committee could otherwise argue for. Some people who came before the select committee—many people, actually—said that investors should pay tax only on the actual dividend they receive. That is pure nonsense, and anybody who has ever had any dealings at all or who has ever invested in the stock exchange knows that that is nonsense. I, for one, was very disappointed to sit there and hear members of my own profession come along and make that ridiculous argument. As I said before, it does not matter whether one receives a dividend; one receives an income. And if a shareholder does not receive an income, everybody knows that the value of that person’s shares on the stock exchange goes up. Immediately, when a company declares its profit, the value normally goes up. It comes down, of course, if the company declares a loss.

TIM GROSER (National) Link to this

I will take just a brief call on Part 2. I will focus on a couple of aspects of interest to us in the National Party.

First of all, the key point, I think, is the one made by my colleague Dr the Hon Lockwood Smith. The changes to portfolio investment entity compliance are something that, in principle, we welcome, but Dr Smith has asked a number of, admittedly, highly technical questions that are extremely important in terms of whether we can realise, through the policy implementation, the reasons for our moving in this direction in the first place. We look forward to the Minister of Revenue responding to Dr Smith’s invitation for him to take the call.

The key point from our perspective is that these positive changes to portfolio investment entities could have been introduced with the Government staying away from the whole issue of the “grey list”. The Government lurched away from its initial proposal, a crude but unrealised capital gains tax, as submitters poured into the Finance and Expenditure Committee with their problems with this issue. Thank goodness the Government moved away from its initial proposal—we should be thankful for small mercies—but although the fix of the fair dividend rate that we have before us is certainly superior to the original proposal, we can see all manner of unintended consequences that will have to be addressed in due course.

We know what some of these consequences will be, as the submitters have already drawn attention to some of the major policy issues that we will have to confront as this bill is implemented. There are issues to do with the huge portions of our workforce that are employed by multinationals, and the fact they are locked into employee stock ownership options, often for a number of years. These employees will not be in a position, unless they want to leave the company, to get out of the company and pay the tax bill. This is one of many problems that submitters have identified.

Then there is the question about currency shift. This is, at one level, just a question of equity, but, at another level, there will be some long-term effects from the way that the Government has approached this. If we are taxed on foreign investment earned, obviously, by definition, we need to convert our earnings into New Zealand dollars to arrive at the assessable income required. This will involve an exchange rate, and if the currency has fallen, the assessable income will rise. Is that fair? And what are the economic implications?

This raises—in my mind, at least—some quite interesting questions about how we actually address tax policies and residency policies in the era of globalisation. This is something that we have had to look at in almost all aspects of policy making, whether we are talking about trade or employment, because we are operating in this country, for all intents and purposes, with global competition for skilled and semi-skilled labour. It is also necessary to look at the implications of this in terms of the legislation before the House tonight.

So many of our policy models, including tax models, are based on the dominant model. That model is that, let us say, Mr John Smith and Ms Mary Smith live their lives in New Zealand, earn their incomes in New Zealand, travel to Fiji for their holidays—when it is not having a coup—and are New Zealanders in every sense. That is still by far the dominant policy model to which our policy structures have to accommodate. But it is being eaten away at the edges by a number of other issues that people have to have uppermost in their minds if New Zealand is going to survive and really place itself well in the forefront of small, developed countries.

Let me convert the John Smith analogy to Mr and Mrs Chen Wang. I am sure that the Minister, being an aficionado of Taiwan, knows that that is a common family name in Taiwan. Or I could use a Korean example, Dr Che, who is living amongst the, I think, 30,000 Korean families that we talked to the Korean President about on Sunday during Mr Key’s courtesy call on him. How would those people sitting in Auckland react? Perhaps a large number of them still have very substantial assets deriving from their opportunities in Pusan or Seoul. Those assets will be converted into New Zealand dollar terms when the currency falls. Do members think that when the implications of this come home to roost, those people will lift their glasses of soju and thank the Labour-led Government? I doubt it very much.

R DOUG WOOLERTON (NZ First) Link to this

If anybody except the dedicated financial investor is still listening, I will be surprised, but if they are, I suggest to them that they are now understanding the complexity of the issues that this bill addresses, and they are starting to see the issues that we had to deal with and the sorts of things that happen in the investment world.

Following on from Mr Copeland, I think that if people in other countries, for whatever reason, will pay out dividends, incorporate that into capital, and pay out on what they call the capital account, then it is totally acceptable for us to work towards some sort of regime that will, in part, capture a fair amount of that. That is what is called the fair dividend rate, that is what is encompassed in Part 2, and that is what we are doing. All over the world there are different tax regimes. People talk about our wonderful neighbour Australia, which taxes the heck out of people who invest in overseas countries—to a far, far greater degree than we do here in New Zealand—yet I hear it lauded as a wonderful bastion of free enterprise, go-go business, and all of the rest of it. It is absolutely acceptable that something like this is done, because of the situation this bill faces as far as the investment areas are concerned.

To have a fair dividend rate of 5 percent is absolutely fair. All of these things are a compromise, and I think it is as good as we will get into the foreseeable future. Likewise, with the portfolio investment entities, it is no secret that some of us would have liked to have seen some newer, more innovative players come into the market in this area. I know that the Minister Peter Dunne’s Supplementary Order Paper is trying to address some of that.

But it is no surprise, because of the things that Dr Lockwood Smith has mentioned, that those who have become default providers in the first instance in this area are, in the main, some of New Zealand’s biggest investment companies. They are the ones with the computer horsepower, and all of the sorts of things that enable them to look after the individual mum and dad investors who—what shall I say without being mean to them—do not have the expertise to look after their own taxation, or the time, I might add, to go through all of the calculations that that entails. The portfolio investment entity will do it for them. It is right that that happens. There is no hidden agenda here. Most New Zealanders will be thankful that those companies actually have the computer horsepower, and those sorts of things, to do all of these calculations.

People are talking about the hidden misdeeds of this Government, and saying that it is heading in directions that may be secretive, and that it has other agendas. The Government is simply understanding and accepting that people who invest through a managed fund will not, by and large, run off to the accountant to do all of these things themselves. These people are not, with due respect, sophisticated investors.

Part 2 takes care of a lot of these things. I think the fair dividend rate is the proper way to go. Although it is a compromise, it is something that will do the job admirably. In respect of the portfolio investment entities, although we would like to have seen some more innovative companies involved, it is no surprise that they have ended up being the bigger companies in New Zealand.

Dr the Hon LOCKWOOD SMITH (National—Rodney) Link to this

Having raised a few issues, just a moment ago, over the establishment of the portfolio investment entities, I will now raise some issues around the shrinking of the “grey list” and the establishment of the 5 percent fair-dividend rate. I cannot help but note that Gordon Copeland from United Future, in speaking a moment ago, said it is foolish to argue that this 5 percent fair-dividend rate new tax is in any way a tax on capital gains. Of course the Ministers, in writing to the Finance and Expenditure Committee when the Government did the big U-turn on the original 85 percent capital gains tax, said to the select committee that this fair-dividend rate was a method “which would also not target capital gains, but rather something approximating a reasonable dividend yield.” The Ministers even said they did not want it to be a capital gains tax.

I put this example to Gordon Copeland. One has $100,000 in a portfolio investment offshore—less than 10 percent shareholding in any company. If in New Zealand one has a zero dividend payout for the year, and, let us say, the investments are mainly in America, the UK, Canada, or whatever—they have to be in “grey list” countries—and the exchange rate between New Zealand and those countries was to decline by 10 percent, then those investments in New Zealand dollar terms have gone up for the year. One has had no income from them, yet, under this 5 percent fair-dividend new taxation that the Taxation (Annual Rates, Savings Investment, and Miscellaneous Provisions) Bill would bring in, one would be taxed on those—even though one has had no income. All that has happened is that the capital value in New Zealand dollars of those investments has gone up, because the New Zealand currency has declined against those foreign currencies.

So the capital value of that investment in New Zealand dollar terms has gone up. One has had no dividend, and the value of one’s investments in the currencies of investment has not gone up. But the New Zealand dollar value has gone up. That can be nothing other than an apparent capital gains tax, because in New Zealand dollars one has had an apparent increase in the New Zealand dollar value of the capital of one’s investment, and one is going to be taxed on it.

I say to Gordon Copeland that this tax does tax capital gains. I would appreciate hearing the Minister’s comment on that—whether the Government has really thought through that issue and it is happy that New Zealanders will face taxation when the currency goes down. When the currency goes up, of course, they are not necessarily in a better position, because, although they may not owe tax, or may owe less tax when the currency goes up, they do not recover the tax they have paid when the currency goes down.

Also, I point out to Gordon Copeland, the weighted international average dividend yield at the moment is 2.2 percent—the committee heard that repeatedly from experienced international fund managers. Those fund managers said the weighted average dividend yield internationally is currently 2.2 percent. That means if one is assuming a 5 percent return for managed funds here in New Zealand, one is taxing way beyond the dividend yield. I do not care what fancy way Mr Copeland wants to define “income”. Income is only what one receives. Income is always defined by what one receives. That is why we refer to things as capital gains; they are gains because they are not income. They are only income when the capital is realised. If one is in a trading position, then one is taxed on that realised capital here in New Zealand—as Mr Copeland pointed out.

I come back to the point that with this 5 percent fair-dividend rate—which is supposedly fair, and which National is seriously opposed to—because of a number of these issues, such as currency shifts, one faces a tax bill. If one’s investment goes down in value this year, returns to the same value next year, and no dividend is paid, then one is taxed on the return to the same value as one started at. I would appreciate the Minister telling me whether I am wrong there, but I believe I am right. Over a 2-year period, if the value of one’s investment offshore goes down this year one is not taxed—I accept that. But if it returns to the start value next year, one is, in terms of wealth, no better off, because one is only back to where one started, yet one faces a tax bill and has had no income. The investor is only back to what the investment was valued at last year—and Mr Copeland is saying that that is income. He is saying that this new tax is taxing only income. I put it to you, Mr Chairman, that it is not credible to make that argument. I would appreciate the Minister’s comment on that.

So National is very opposed to this new 5 percent fair-dividend rate tax. It is a new tax that does have an element of capital gains in it, and it is unfair.

GORDON COPELAND (United Future) Link to this

I will not get an opportunity to speak on the third reading of the Taxation (Annual Rates, Savings Investment, and Miscellaneous Provisions) Bill, so I will take another brief call to reinforce that the Minister the Hon Peter Dunne has actually got it right when the Government has chosen to tax income on international share investments at a rate of 5 percent. Just following on from the remarks I made earlier, let us take a real-life illustration of the principle at work here. It is well known that for many, many years Microsoft paid no dividends—no dividends whatever. It would be patently absurd to argue, however, that the shareholders in Microsoft were not getting an income, because each and every year Microsoft declared massive earnings after tax. The whole reason that its price zoomed up many, many percentages every year on the stock exchange was the income the company was producing.

And that illustrates the point. Where one has zero dividend in spite of the fact that one has a huge income, then quite obviously the amount of dividend distributed has actually no meaning whatever, in terms of what is the right amount of income to tax. That is why the average dividend yield internationally is 2.2 percent. Some companies do not actually pay dividends. Unilever in Britain is another example of a company that does not pay dividends. The tax systems there do not encourage companies to pay dividends, so they simply capitalise that income and move on.

The other point Dr the Hon Lockwood Smith raised was in relation to foreign exchange movements. Well, that is a different transaction. A profit on a foreign exchange movement is also a profit and is taxable in New Zealand dollar terms. If one has a loss on foreign exchange because of that, then obviously that loss also offsets one’s tax here in New Zealand, because, simply speaking, one pays tax in New Zealand on New Zealand dollars. But there are two elements happening. One is the income one gets from the company, which will be taxed at 5 percent. The other thing is the loss or gain one makes on the currency movements that have occurred between New Zealand and whatever country one has invested in during that period of time. They are two quite separate things, and we should not confuse them.

Hon PETER DUNNE (Minister of Revenue) Link to this

I thank firstly my colleague Gordon Copeland, and, also, Doug Woolerton, for their comments on Part 2 and the contributions they have made. I also say to Dr Smith that I am going to attempt to respond to a number of the points he raised. I go back to the first point he raised concerning the portfolio investment entity rules as they affect superannuation funds. He will be aware that the Finance and Expenditure Committee has made a number of changes in that area. For example, there is now a simplified method of allocation available for entities such as superannuation funds to allow them the benefits of being a portfolio investment entity with few compliance costs. That method will require the fund to continue to pay provisional tax. The fund will be required to calculate the portfolio investment entity tax accurately on behalf of its members at the end of each year, rather than on a quarterly basis, and would make an annual investor interest adjustment within 3 months of the end of the tax year in order to ensure that 19.5 percent taxpayers receive an additional entitlement to reflect their lower tax rate. The fund will also be liable for the tax on the share of the current year’s income that is paid out to investors that exit the fund during the year. The select committee has recommended some other changes as well.

I should just say to Dr Smith that the complexity issue has been substantially modified, and the proposals that the bill now contains are largely supported by the industry as being a vast improvement on what was in the bill in the first instance. The claim that was made based on the St John and Littlewood evidence has been substantially addressed in the amendments recommended by the committee.

I turn to the question that Mr Groser raised regarding share ownership schemes, which has been acknowledged as a problem. Again, the Finance and Expenditure Committee has made some amendments that seek to address that issue; for instance, no tax will now be payable for the period when an employee is unable to sell out of the ownership scheme. So some improvements have been made there.

I will talk on a point that both Dr Smith and Mr Groser also made about unrealised gains, currency shifts, and all of the impacts that they might have on the value of an individual investment. The key point to make here is what the key difference is between the respective arguments in this whole bill. The bill says that the fair dividend rate is deemed to be 5 percent or the actual value of the dividend paid in years where a profit accrues—in other words, where a gain takes place. Where a loss occurs, no tax is payable. The position taken by the National Party has been a 3 percent flat rate, payable in years when there is a gain but also payable in years when there is a loss. So the difference is essentially between 5 percent, which will actually average out at around 3.4 percent over a period of time, versus a situation that says it is 3 percent regardless of whether the value of one’s investment has increased or decreased. That is the essential difference between the two broad positions on this bill.

The members say it is complicated. Frankly, I think there is an issue of fairness here. Taxpayers will feel that it is reasonable to pay a tax in years when they have something positive to show for it. They will resent the idea of being taxed in years when there is a loss, and that is the nature of the debate that has taken place.

The one other issue is the debate that has been ongoing about whether this is a capital gains tax. The whole notion of the changes that the Minister of Finance and I recommended to the select committee was around dividend yield, and to get away from the notion that was implied in the original proposal—the 5 percent of the 85 percent, and all of that—of that being a capital gains tax. We wanted to make it absolutely clear that that was not our intention; we were seeking to get a reasonable tax payable on an investment. That is why we called it as such—the notion of a fair dividend rate became available. I note that again the difference between the parties is not great: a deemed rate of return on the one hand versus a fair dividend rate on the other, 3 percent flat on the one hand versus 5 percent—or zero in loss years—on the other. It is a very small point of difference.

Having heard a lot of the arguments—and I am sure the member will appreciate my saying this—having received several thousand letters and countless delegations, and having talked to lots of meetings up and down the country, we believe that the mechanisms contained in this part of the bill are a step forward. These things will always be difficult to some degree or other, but we sought to try to address the major issues, and come up with a regime that is fair and equitable and that recognises a couple of key points.

The member touched earlier on the question of the “grey list”. I thought I referred in my second reading speech to one of the anomalies, which is that the emerging economies of Singapore, China, and India are not on the “grey list”, so we immediately have a disadvantage for investment that goes into those economies as opposed to those on the “grey list”. We have been trying to create a regime where it is attractive for New Zealanders to invest offshore. We recognise that most people invest through their own efforts, and most of that investment goes into Australasia. Around 70 percent of investment from New Zealand goes into Australasia, around 15 percent into the “grey list”, and around 15 percent into non - “grey list” countries. Part of the emphasis on Australasia was simply a recognition of what is the status quo.

We have attempted, therefore, with the remaining 30 percent, to draw rules that are clear and unambiguous and that are essentially fair and do not discourage people. That is the real point in essence here, but I come back to the point that I began on. The essential difference between the two sides in this arguments is 5 percent for the funds and a floating rate, if you like, for individual investment, versus a flat 3 percent, win or lose. I think it is a very small point of difference.