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

Hon PETER DUNNE (Minister of Revenue) Link to this

I move, That the Taxation (Annual Rates, Savings Investment, and Miscellaneous Provisions) Bill be now read a second time. The main feature of this bill is a comprehensive reform of the taxation of income from share investments, whether those investments are made through intermediaries such as managed funds or made directly by individuals. It is a long overdue reform that will put the tax treatment of different types of share investment on a similar footing. That means not only greater fairness for investors but also reducing the distortions in investment decisions so that tax is not the deciding factor in people’s decisions about how to save or invest.

It is generally acknowledged that our tax rules on share investment operate very unevenly and create a number of biases. They overtax lower-income people who invest through managed funds, they favour direct investment over investment through intermediaries, and they favour investment in some countries over investment in others. To remedy this longstanding problem the bill introduces a whole new set of tax rules for managed funds, now to be known as portfolio investment entities, and another for offshore portfolio investment in shares.

The first set of new rules puts investment through managed funds on a similar tax footing to that of direct investment in New Zealand and Australian companies. It is particularly important to get the tax treatment of managed funds right because they are the first investment choice for many ordinary investors, whose numbers will increase from July next year when KiwiSaver begins. The proposed portfolio investment entity rules achieve parity of tax treatment of managed funds in two ways: one, by not taxing them on their Australasian share gains, and, two, by taxing income earned at investors’ personal tax rates if lower than 33 percent.

The Finance and Expenditure Committee reports that the main concerns expressed in submissions on the proposed portfolio investment entity rules were that they were too prescriptive, particularly as regards the criteria for eligibility, and too complex. Taking into account those concerns, the committee has recommended several changes to the draft legislation. They include streamlining the eligibility criteria and allowing portfolio investment entities greater flexibility in the way they operate. The committee has also recommended deferring the application date of the new rules to 1 October 2007 to align it with the date that KiwiSaver providers start to receive contributions. That will give funds more time to prepare for what will be a major changeover for them.

Comprehensive changes to the tax rules on offshore share portfolios are the second limb of the reform of the taxation of income from share investments. This is the area that has overshadowed all else in the bill, and the area that has elicited the greatest number of submissions. The main problem of the current offshore tax rules is that they provide incentives for New Zealanders to invest directly in companies resident in eight “grey list” countries, all of which are considered to have tax systems similar to New Zealand’s. The “grey list” countries are Australia, Canada, Germany, Japan, Norway, Spain, the United States, and the United Kingdom. The tax problem arises because, under our tax law, income from share investments is generally taxable only on dividends, and companies in “grey list” countries do not generally pay high dividends. Therefore, investment in them attracts little or no New Zealand tax. Meanwhile New Zealand investors in companies resident in other countries—for example, Singapore and India, to name two growing investment destinations—have a much higher tax burden. They must pay tax in New Zealand on 100 percent of the increase in the value of their shares each year. That is a major inconsistency in our tax law, and it creates a disincentive to investing in many of the world’s most dynamic economies.

The fundamental principle of the reform proposed in this bill is that New Zealanders should pay tax on their investment income regardless of where it is earned. Geography should not come into it. As introduced, the bill proposed removing the “grey list” distinction and taxing up to 5 percent of the value of offshore share investments each year. Gains in excess of the 5 percent cap were to be carried forward to be taxed in later years, with losses being deductible in a similar way. The many submissions on this part of the reform were critical of that proposed method, which was seen as too complex and as taxing unrealised capital gains.

In response to those concerns as well as to suggestions in a number of submissions that a deemed rate of return method would be preferable, the Minister of Finance and I suggested to the committee that it consider replacing the original proposal with a fair dividend rate method—a form of deemed rate of return. That method would tax investors on 5 percent of the opening market value of shares held at the start of a year. However, individuals investing directly and through family trusts would be able to pay tax on their actual returns if they were lower than 5 percent, with no tax payable when returns were negative. That would deal with the concerns of some people that their offshore investments would be taxed, even if they made a loss in a particular year.

We saw the fair-dividend rate as a sensible replacement, both on grounds of simplicity and of fairness, because it would tax something close to a reasonable dividend yield rather than target capital gains. In a second round of consultation, the committee found general agreement that the fair-dividend method was preferable to that originally proposed. Nevertheless, many of those who were consulted preferred a lower fixed rate of between 3 and 4 percent, on the grounds that it was more representative of average offshore dividend yields. The counter argument was that a 5 percent dividend rate would be more suitable because it would approximate the dividend yield of Australasian equities. One should remember here that many other countries have tax rules that discourage dividend payments, which creates many of the inconsistencies that have made this reform necessary in the first place.

Having listened to all sides in what was an extraordinarily technical debate, the committee has recommended adoption of the 5 percent fair-dividend rate method. Consistent with the idea put forward by Ministers, it would not tax individuals in family trusts in years when they made a loss. Under this approach, managed funds will pay tax on a flat 5 percent of the value of offshore investments, even in years when the return is less. Although some may argue that this creates a disadvantage for managed funds relative to direct investors, the reality is more complex. Under the new rules, managed funds have a number of tax advantages that direct investors do not enjoy, including a tax rate that is capped at 33 percent and Australasian capital gains exemption. It is also very important to remember the major tax disadvantages that the managed funds currently face. At the moment they pay tax on virtually all their capital gains from onshore and offshore shares, and they face a flat 33 percent tax rate, even though many of their investors are on a tax rate of 19.5 percent. These reforms sweep away virtually all those disadvantages.

The significant net improvement in the tax position of the New Zealand managed funds sector, under the reforms, is supported by recent analysis by the savings industry. That analysis shows that under a fair-dividend rate method most investors in New Zealand managed funds will enjoy a reduction in the tax they pay on their offshore investments.

I think the committee has done a magnificent job of forging a consensus where there was none midway through the process. Whether the fixed rate is 5 percent or 3.5 percent is actually almost a detail. The important thing is that the committee has come up with a big picture solution that most can accept. That is a considerable achievement, and I congratulate the committee members on that. The committee has also recommended a number of changes to other matters in the bill, which I fully support but which I do not have the time to go into in detail here. Those are set out in far more detail in the committee’s report, which members will be familiar with.

In addition, a Supplementary Order Paper that I released today extends the tax exemption from employer contributions to KiwiSaver to other registered superannuation schemes. This is a further measure to help New Zealanders save for their future. The exemption will apply to schemes and sections within schemes where the benefits paid depend on contributions made and on their returns.

I conclude by thanking the Finance and Expenditure Committee for its hard work on this very complex bill, and I commend its report and the bill to the House.

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

This is very important tax legislation. It has the potential to impact severely on investment in this country. The Finance and Expenditure Committee was told, for example, that this legislation has the potential to divert even more investment into residential property in New Zealand—an area where New Zealand does not need more investment. So it is very important legislation.

Quite contrary to what the Minister of Revenue has just said, the process the Government has gone through, I would argue, is not how we develop sound legislation, at all. One respected submitter to the select committee said that this was legislation through media statement. I want people listening to this debate to know that most people who are interested in taxation matters in New Zealand have had no opportunity to make submissions on this legislation that we are debating tonight. Sure, they had the chance to make submissions on the legislation the Government introduced, but that is totally different from what we are debating tonight. The Government introduced legislation that would shrink the number of “grey list” countries and introduce and impose a capital gains tax on 85 percent of the gain on foreign portfolio investments. When I say portfolio investments I mean where New Zealanders have investments and shares offshore and the ownership of the company is less than 10 percent.

The legislation as introduced is what the public and those interested in taxation matters were able to make submissions on. Tonight we are debating something totally different. Tonight we are debating this 5 percent fair dividend tax that the Government has now come up with, halfway through the process. What makes this a bad process is that most of the 2,226 submitters on the original legislation—and, of course, 99 percent of them were against it—never had a chance to make submissions on the subject of our debate tonight. About 12 of those 2,226 submitters on the original legislation were invited by the select committee to make submissions on this totally changed legislation. That is just unfair to the so many other people who made submissions on the new capital gains tax that the Government proposed to introduce. It is so unfair to them that they never had the opportunity at all to make submissions on this 5 percent fair dividend rate tax. Those who did make submissions pointed out that there is nothing fair about this 5 percent fair dividend rate, and there is nothing about just taxing dividends in this 5 percent fair dividend rate. When we look at the international weighted dividend yield, a 5 percent rate clearly taxes capital gains.

This Labour - United Future - New Zealand First Government has to decide what it intends to do with this taxation of portfolio investments offshore. Does it intend to tax capital gains, or not? This legislation that we are debating tonight does still tax capital gains. I will get into that detail.

What makes it even worse is that today a Supplementary Order Paper was introduced. The Minister did not even refer to it in his speech.

R DOUG WOOLERTON (NZ First) Link to this

New Zealand First supports the Taxation (Annual Rates, Savings Investment, and Miscellaneous Provisions) Bill, and we do so because it is a genuine attempt to make investment fairer across the board. Members will know that we have not had complete agreement in our caucus. I think members can take from that that we in New Zealand First have had a very, very robust debate on this issue, have not come to our conclusions lightly, and have not given the bill just a once-over-lightly. We have gone into it in depth.

It has always been iniquitous that what I like to call managed funds in New Zealand have been taxed at a rate of 33 percent, whereas other investments have been taxed at the taxation level of the investor. Under this bill there will be a flow-through effect for those people who are on a lower tax rate and who invest largely in managed funds because they either do not have the expertise to invest for themselves or do not want to be bothered with it. I have said in earlier speeches that when the current leader of the National Party, John Key, was on our Finance and Expenditure Committee, he seemed to come from the angle—and I do not blame him for it, because this is his area of expertise—that every person who invests is an expert, every person who invests comes from a background of expertise, but that is way beyond the actual case in New Zealand. This bill, for the first time, makes an attempt to look after the mum and dad investors. We have to do that, because there is a flow-through effect for KiwiSaver. The bill recognises, even then, that there are some small differences, and, at the end of the day, we have had to accept a few compromises in this bill, which we knew we would have to do—that was always recognised.

It is pretty rich for Dr Lockwood Smith—who has been a valuable member of the select committee, I might say—to say that there was an unprecedented number of submitters on the original bill, and that not much diligence was shown in producing the modified bill as set out by the Minister of Revenue at the beginning of this debate. I would suggest most strongly that that is the proper response of a proper, democratic select committee. If there is a whole bunch of submitters—and on this bill there were close to 3,000—and there is significant opposition to a bill, surely the right thing to do is to change that bill, and to change it substantially in line with what the submitters require. That is exactly and precisely what has been done in this case, yet Dr Lockwood Smith criticises that.

We know that National members are not absolutely staunch in their criticism of this bill, because they too recognise that, although it is in some ways a compromise, it is a huge step forward. We know that, because those members have said that if they were to come to power some years hence, they would not change it, they would not kick this bill out, and that is politics-speak for saying that they actually agree with it.

Rather than criticise the select committee and the Government for changing the bill, I applaud the select committee, of which I am a proud member. I applaud the chairman of that select committee, the officials, and the Minister for listening to submitters. It would be a very barren Parliament, I suggest, that did not listen to close to 3,000 people on an issue such as this one.

Something that I, certainly, can take away from the select committee process is an insight into the issues that surround financial investment. I was impressed by the level of investment that people in this country make, and the level of care and foresight that they put into looking after themselves in their old age, looking after their families, and, in fact, looking after their grandchildren, by way of investment. It was quite touching, actually, to see people come to talk to the select committee not only on their own behalf—although most did that, I must say—but also on behalf of others.

Hon BILL ENGLISH (National—Clutha-Southland) Link to this

I think the previous speaker, Doug Woolerton, just showed how bereft the Government’s general approach to tax policy is becoming when he set forth, for the benefit of the House, the rather radical idea that this legislation is good because it is too complicated for people to get fair taxation, so they will go for the simple version, which means they will pay more than they should. Well, that is a bad principle of tax policy. It should be the case that any taxpayer is able to understand their liability—that being a fairly calculated liability. Instead, New Zealand First have decided—maybe it was intentional—to make the alternative so complicated that all direct investors will end up paying the higher rate when they could have got a lower one. This is actually a bad principle, and it raises the issue of just what tax principles the Government now adheres to.

We know this is a difficult area. I can recall giving speeches on tax measures related to exactly this problem almost 10 years ago—1986, or 1987, I think; maybe it was 1998—when the whole thing fell over, partly because of the complexity that is now built into this law. In that case, the member Doug Woolerton may be interested to know, it was his party that pulled the plug, for exactly the reason that he said that he supports this bill. Last time it pulled the plug because it was too complicated for an individual taxpayer to be taxed at the right rate. Today he said that he supports the legislation because it is too complicated for an individual taxpayer to be taxed at the right rate. Well, I guess that is just politics and the passage of time. So I acknowledge that this is a difficult area, and National does to.

Actually, a significant number of taxpayers will be better off. The Government has given up what looks like about $150 million of revenue by taxing people in the managed funds at the right rate—that being their own rate—and it will stop taxing capital gains. Those are good things. But the Government’s tax principles are getting harder and harder to divine. Certainly, this process has been a mess, just like the KiwiSaver process was. The only saving grace is that this result is better than what would have happened if Government members had not changed their minds, and completely bypassed the generic tax policy process to get a result.

Just when I thought maybe it was worth the effort, today the Government announced a major change directly relevant to this regime, saying it will extend exemption from the specified superannuation contributions withholding tax to superannuation funds that meet the criteria. The generic tax policy process stood the test of time, and it is a real pity the Government has abandoned it—a real shame—because in the long run it will undermine the confidence of tax practitioners and taxpayers in the policy-making process. It might suit the Government in the short term—and we are seeing this fading Government take more and more short-term measures—but in the long term it will lead to greater complexity, less compliance, and less certainty about our tax system. Any Government needs consistent reminding by taxpayers about the impact of tax measures on them, and those taxpayers need real and active opportunities to help shape the policy, because that is what buys them into it. I would like to hear from the Government tonight as to whether it intends all its tax measures to now bypass the process.

We are seeing an accumulation of multiplying complexity in our tax system. From the day the Government decided to put the top tax rate up to 39c, we have seen a whole industry redevelop—one that I thought we had got rid of. It used to be the bad old days when people spent as much time working out their tax liability as they did creating wealth. Well, particularly when it comes to anything to do with international taxes, and anything to do with savings and superannuation, people are now back into that business. There is more and more complexity for no obvious or well-specified benefit.

I cannot help thinking Dr Cullen has fallen into the trap of his own cleverness. He has now moved away from the basic, sound tax principles of broad bases, low rates, and no holes. He has now decided that he is the tax magician. He is sitting there in his office, pulling a credit here, an exemption there, a deduction there, a concession over there—and New Zealanders are the rats in the laboratory, who are all meant to follow around according to the particular incentives and signals that Dr Cullen is trying to send.

The abandonment of the generic tax policy process is a symptom of the fact that the Government is losing its rationale for how it is operating the tax system. It has become totally focused on ad hoc decisions driven by political forces, and on trying to square up revenue, when it knows it could actually afford to give it away. So that is the problem with the Government’s principles.

To return to the Taxation (Annual Rates, Savings Investment, and Miscellaneous Provisions) Bill itself, is it not fascinating to see how our perception of different policy measures can change. When the McLeod Tax Review first came up with the idea of taxing deemed returns, it was regarded—by probably most people—as quite radical. It is quite a logical idea, but at the time that report came out, back in 2001, there was really no political interest in it. Yet, here we are where the same kind of measure—not exactly the same, but similar—has turned out to be the one way of rescuing one of the long-running tax problems that the Government has had to deal with. I give the Finance and Expenditure Committee some credit for coming up with a better solution, because if they had not, this, of course, would have been a disaster.

It is also clear from the select committee process that the Government vastly underestimated how many Kiwis were behaving in a rational way and directly investing savings overseas. I do not think the Government actually believed anyone was doing it; or it believed that if they did it then they were rich fat cats and deserved to get slugged. But, of course, the select committee was overwhelmed with several thousand submissions. Is it not ironic that Dr Cullen lectured us endlessly about not investing in housing and about the need to diversify and to get into financial investments, but remained completely unaware of the fact that thousands of Kiwis were already doing it? That is a serious question. How did the Government ever conceive that its original measures would be acceptable? It could only be because Government members were either ignorant or stupid: ignorant in that they did not know the scale of direct investment by New Zealanders, or stupid in that they knew and thought people were going to wear the original proposals—and, of course, those people did not.

I am particularly concerned about the Supplementary Order Paper that the Government has put down that extends the exemption to employers’ superannuation schemes. Dr Cullen is now put in a position where he looks like he never thought of it. He came up with this measure, did not think about the implications of it, then, at the last minute, realised that he was going to skew investment patterns if he did not have the same exemptions for employers’ superannuation schemes as he had for KiwiSaver. Now, is that not sloppy policy? One would have thought that in any regime in which the Government was looking at changing the regime on taxes on savings, the connections from one bit to another would have been thoroughly examined and understood, and built into the original proposals.

Some of this legislation does represent progress. But I would have to say that the environment in which it has been pushed forward gives me real concern—both because the Government has abandoned good principles of tax policy, and also because it is clear from its very significant last-minute manoeuvre to extend the exemption to employers’ superannuation schemes that it had not thought through the policy. It just had not thought about the connections, which are pretty obvious. There is a whole Inland Revenue Department full of officials over there, and Treasury, and, apparently, the smartest Minister of Finance the world has ever seen, yet they had never thought of it until yesterday.

JEANETTE FITZSIMONS (Green) Link to this

There are certain principles that a good tax system ought to try to observe. They would include having a broad-based system with a wide range of tax sources so that none of them needed to be taxed at too high a rate. They would include having a system that was fair in two senses: first, that people in the same situation were treated the same and, second, that people were taxed according to ability to pay. A good tax system should be easy for the taxpayer to understand and comply with, and it should be easy for the Government to administer.

The present tax system does not meet those tests, and neither does the tax system set out by the Taxation (Annual Rates, Savings Investment, and Miscellaneous Provisions) Bill. The bill does address some anomalies, but in doing so it creates others. Overall, it replaces a dog’s breakfast with a different kind of dog’s breakfast. The Greens would like to vote for the annual rates and for the pass-through rules for managed funds, which we strongly support. But we would like to vote against the overseas investment rules, which are, overall, no more fair or simple than the present system. We will therefore abstain at this reading and at the third reading.

The current system of tax has some major faults. We currently tax all those activities we want most to encourage: work and enterprise. We currently leave untaxed those activities we most wish to discourage: waste, pollution, use of scarce resources, and speculation. However, this bill does not address those issues at all—they are not on the Government’s radar, despite our efforts. So I will turn to those matters that are addressed by the bill.

The current situation does not treat taxpayers who are in like situations in a like manner, so the system already breaches that principle. Overseas investors are treated differently depending on whether they are in countries on the “grey list” or in some other overseas country. Investors on a low tax rate pay more if they invest in managed funds than if they invest directly. Investors who are on a 39c tax rate pay less tax if they invest through a managed fund than if they invest directly. Investment in property is treated quite differently from investments in the sharemarket, and, I believe, strongly biases investment towards property, which has a lot of other side effects. Some investments pay no tax at all because they pay no dividend and all of the gains are paid out as capital gains, which are untaxed. So looking at that particular dog’s breakfast, we can see that the bill solves a few of those problems.

The look-through rule for the portfolio investment entities is a very good move, and we support it, but if people’s tax rate is 19c in the dollar, then that is all they should be paying, regardless of whether they invest directly or through a managed fund. However, the bill does not address the fact that people on a 39c tax rate are still advantaged if they invest through a managed fund.

The bill tries to deal with those UK entities that pay no or little dividend and that provide all the benefit through a capital gain, but it does not deal with them very well. In the process of trying to solve those problems, the bill creates more anomalies. As the bill was introduced, it removed capital gains tax on New Zealand and Australian investments and put it on investments in countries on the “grey list”—those eight countries that have previously been exempt. That created far more howls of protest and outrage than the revenue effect actually justified. The bill provided an exemption, after negotiation, for one company that had particularly skilled lobbyists. It also provided exemptions for people with investments of less than $50,000—but many KiwiSavers will find that as their savings accumulate they will shoot through that ceiling of $50,000 and become liable for tax on those investments.

There were a huge number of submissions. The Finance and Expenditure Committee sat for weeks and weeks to hear them, and they were very similar. As a result of those submissions we suddenly got a Supplementary Order Paper. After all those weeks of getting our heads around the incredible complications of the capital gains tax regime, we then found overnight that the capital gains tax regime had gone—

SHANE JONES (Labour) Link to this

Kia ora anōtātou. Firstly, I acknowledge the efforts of my committee members on this marathon task of dealing with the Taxation (Annual Rates, Savings Investment, and Miscellaneous Provisions) Bill. However, I must say that when we prepared to break into a subcommittee and hear from the four winds what the various submitters had to say, no one was more vocal than John Key about insisting that we spend the time and give concentration and effort to the people from Auckland, particularly the submitters, because they are high-quality, very influential, and likely to offer very coherent views that might influence the Government’s policy. It came as a great disappointment, but not as a surprise, to Doug Woolerton and others that the very person who never showed up to any of the hearings was John Key.

I give full marks to the deputy chairperson of the Finance and Expenditure Committee—my fellow Northlander—who, when we became bored of talking about tax, compared notes about bulls. Before I talk about anyone else in the committee, I pay a vote of thanks to Robin Oliver and his team. We were served up an array of problems, and the committee went through a series of permutations, but I must say to Mr Oliver and his team that they attended to our every need, answered all of the questions, and followed us from Auckland, Wellington, and down to Christchurch. So I pay a vote of thanks to them. Irrespective of who the Minister might be, or, perish the thought, who the party might be, we are well served by Robin Oliver and his team.

Let us move to the lame, very vacuous assertions that have been made by Mr English and others that we abandoned process. Let us get a few facts on the table. Fact number one is that no one less than Sir Roger Douglas recently commented to me, when I saw him at a social occasion, that this problem has bedevilled many Governments. It caused him some consternation and it defeated Ruth Richardson. Indeed, we have employed and seen a host of experts come through the process and offer us their views, such as my good friend Rob McLeod and Mr Stobo, and it fell to this committee to craft a suitable and reasonable solution to a longstanding problem.

In crafting this solution, I remind everyone that there have been about eight policy documents over the last year, or slightly longer, so anyone who is suggesting to the public—who, no doubt, are riveted, listening to these speeches at the end of the year—that due process was destroyed is not dealing with the facts. At the end of our process we provided an opportunity for nigh on 15 to 20 of New Zealand’s experts to give us their view about the fair dividend rate model. Of course, there are a host of other aspects to this bill, but the fair dividend rate model worked most people into a lather, and it was all based on misinformation.

I cannot say with any authority that that misinformation was fed by the Opposition, but there was gross misinformation that was no doubt aided by the accountants whose capacity to add value is inversely related to the costs they charge. However, absolute opportunity was created for the experts throughout the commercial community. Prior to that, we heard from all members of the submitter community who wanted an opportunity to put forward their submissions or to speak to their submissions.

It became apparent to the long-serving, highly productive, and industrious committee members, aided by Mr Woolerton and our friends from the minority parties, that this bill, in the context of MMP politics, aided with great advice from the officials, could be improved upon. That is the essence of parliamentary democracy. One is served up legislation on a select committee, and nothing is incapable of being improved upon. We heard from the submitters that the model we dubbed the 85 percent model was certainly capable of being enhanced. We had the opportunity to hear from Mr John Shewan from PricewaterhouseCoopers. He promoted the model of a deemed rate. Initially, that model gained some favour. However, he himself lost his enthusiasm to advocate for it, presumably because some of his own clients did not like the idea—they wanted to pay zero tax.

From out of the atmosphere that comprises parliamentary democracy we received a letter from the Minister of Finance, the Minister of Revenue, who invited us to study the fair dividend rate model. This particular part of the bill generated most of the submissions, and we concentrated on it—some might say disproportionately, but we gave it a suitable amount of effort and time—and we have delivered what, I think, is a reasonable compromise at this point in time.

There have been earlier references to the importance of simplicity. The 5 percent model for the funds industry is a paragon of simplicity. To take into consideration the anxieties of the direct investors, we have maintained the de minimis. We have also given them the opportunity to pay on that which they actually earn.

Throughout the entire process, Mr Woolerton, myself, and—indeed—Mr Copeland, asked individual submitters what they were actually earning when they put their dough into international equities, and why were they content to continue leaving their investments marooned at a 1.5 percent to 2 percent return. Of course, we never got a satisfactory answer. In many cases we were led to believe that the full return on that investment was actually wrapped up in a capital receipt, rammed back home to escape the tax net. How, if we let that happen, are we going to meet the cost of hospitals, roads, and a whole variety of other public-good investments?

There has been some loose and very ill-informed language about this being a capital gains tax. Nothing—nothing—in this legislation suggests to me that it is a capital gains tax. It is a tax on the dividend and on that portion of the dividend that sits in the growing equity, and it takes an approximation of what a reasonable person is going to earn. Who on earth is putting millions of dollars overseas for anything less than 5 percent? As no one less august than Winston Peters has said, people may as well leave their money in the Kiwibank. Those are words that obviously reflect many years of wisdom as a long-term parliamentarian.

However, I would like to say, in wrapping up, that the select committee worked together well. We had our differences, and part of the bill is supported, and part is not supported, by our friends from National. But we were there as legislators and agreed to park the adversarialism in the House and endeavour to do the best that we could with the hordes of submitters writing to us and wanting to speak to us. In levels of interest—some I hope as a parliamentarian never to see again—Bruce Sheppard looms very large on that list. No doubt, in what passes for my career, we will see a lot more of him. But we have a great deal of support out there amongst the professional advisers and the investment industry, especially those coming from the funds industry, because they have certainty, they have simplicity, and I think, in time, they will come to love what they have been served up.

TE URUROA FLAVELL (Māori Party—Waiariki) Link to this

Tēnātātou katoa. Amidst all of the fanfare that came with the 2006 census figures last week, there were a couple of facts that are relevant to the debate today. Fact No. 1 is that for Māori aged 15 years and over, the median income is $20,900. For all New Zealanders the median income is $24,400. That is a tangible difference between Māori and everyone else of $3,500. Fact No. 2 is that 10.2 percent of Māori have an annual income of more than $50,000 compared with 18 percent of all New Zealanders.

Some members may be familiar with a gentleman by the name of Henry Ward Beecher, a Presbyterian minister who, like his sister Harriet, advocated for the abolition of slavery and for the right to social justice. One of his sayings was: “In this world it is not what we take up, but what we give up, that makes us rich.” Looking at the situation described in those census statistics, and being mindful of the ever-increasing gaps between rich and poor in this land, the Māori Party comes to the Taxation (Annual Rates, Savings Investment and Miscellaneous Provisions) Bill wondering what this Government will give up in order to make all New Zealanders rich.

The Māori Party taxation policy is driven by two key forces: manaakitanga and rangatiratanga. The application of manaakitanga would be evident in acknowledging the mana of others as having importance that is equal to or greater than one’s own, through the expression of aroha, hospitality, generosity and mutual respect. In practising rangatiratanga, there is an emphasis on following through on commitments made, and integrity and honesty are demonstrated. So it is that manaakitanga and rangatiratanga lead us to address the 1.9 million taxpayers in this nation who are on an income of less than $25,000. Those people are paying a massive $3.5 billion in tax while at the same time the Government accumulates surpluses that, in the last financial year, have totalled an amount of $11 billion. So we look to those people in any initiative that is seemingly designed to enhance the economic position of New Zealanders.

The central feature of this bill is meant to be a reform of the taxation of income from share investments—New Zealand - based managed funds or direct investment—with the clear purpose of removing inconsistencies. The Māori Party is certainly supportive of any initiative that can act in a way to enhance fairness and consistency in savings policies. We know that the current taxation rules on share investment have needed an overhaul for quite some time. The treatment of individuals and companies has been, at best, uneven. Direct investment by individuals appears to have been favoured over investment through managed funds. Some investors are overtaxed. So this bill was intended to place the taxation treatment of different types of share investment on an equal footing. The bill is branded as introducing greater fairness into the rules and reducing the distortions that are evident in current taxation policy. Well, that is all well and good. But does it do that?

In order to understand the reform, we need to take the widest possible view. To look at only part of the picture will inevitably short-change those New Zealanders who are looking for greater fairness in the way their investment income is taxed. Despite the stated purpose of reducing the taxation distortions on investments, the bill introduces an ad hoc capital gains tax regime rather than one that has consistency. The bill also attempts harmonisation between Australia and Aotearoa, allowing equity between investors operating in both countries. In effect, that means New Zealanders can invest in Australia instead of New Zealand without a taxation penalty. We need to ask what benefit it will be to the nation if people invest elsewhere. The bill suggests that from next year, people who invest in New Zealand - based managed funds will see greater fairness in the way their investment income is taxed. The new rules will remove several taxation disadvantages for people who invest through managed funds, many of whom are described as ordinary, middle-income savers.

Into that mix, let us throw the humble New Zealand pie. We are not talking about the mince and cheese variety. The pie introduced in this bill is a portfolio investment entity, which comprises any savings vehicle that elects to go into the regime. The bill removes the current major taxation disadvantages from New Zealand managed funds: the full tax on capital gains and overtaxation of low-rate investors. By treating those funds in a similar way to direct investment by individuals, the disadvantages are removed. Investors in actively managed funds who invest offshore would be significantly better off under the fair dividend rate than under the current rules. Alongside that, the Finance and Expenditure Committee reported that investors in actively managed funds who invest offshore would be significantly better off under the fair dividend rate that it has recommended than under the current tax rules. We note, too, that for individual investors and family trusts, if the return on investment is less than 5 percent of the opening market value, individual investors and family trusts will not be taxed at the fair dividend rate—5 percent—but at a lower rate, or they will pay no tax. So we are in the same situation, again, of some people paying tax and others not.

We are also concerned about the tax increase on superannuation contributions that faces lower-income earners, who are being made to offset the risk of “salary sacrifice” by higher-income earners. It is those people who form the “not” category that we speak of today. Although we support the removal of the different taxation rates from those who invest directly and those who invest through managed funds, our primary concern is about those New Zealanders who struggle to put kai on their tables, let alone to contribute to a savings culture. Every dollar of a poor person is taxed, including the dollars of those persons on benefits. However, this bill determines that those on high incomes have the means to benefit from asset value increases, which are non-taxable. We have to ask whether that is fair.

Our other key concern around the whole concept of a savings culture is associated with our concerns around the concept of the genuine progress index. That is the argument that says we need to broaden the tax base, so that taxation is also used as a valid means of demonstrating the real costs of pollution and environmental damage. In the context of the capital gains tax, for example, we know that investors are receiving taxation concessions even though it is not known whether any actual income is being made. If income were calculated on the full cost basis, the actual capital gain might be negative, but investors have no idea of how much depletion of, or damage to, the environment is occurring. There is a good chance that capital gains are overstated, and a good possibility that there is no capital gain. Thus, although a company may be able to claim a positive and growing wealth, it is a false claim, a false measure of wealth, because it has failed to take account of all the costs involved. The notion of gain and wealth masks potential, because that is not really accounted for. The market response to that argument is that the market knows, and that it takes all of that into account. The genuine reply to that is to ask how the market knows, because it is not being measured.

Finally, it is appropriate to refer to the recent study, released last week, by the World Institute for Development Economics Research. The Helsinki-based institute has estimated that the richest 2 percent of adults own more than half of global wealth, while the bottom half of the population own a mere 1 percent. If 2 percent of adults have more than half of the world’s wealth, including property and financial assets, in their hands, I ask whether that is fair. Is it just that in Aotearoa the proportion of all children who are in severe or significant hardship has increased from 18 percent to 26 percent since 2000? Is it socially desirable that the people who suffer the greatest poverty in New Zealand are our children, with 38 percent of them in the hardship categories? I remind the House of the statement I made earlier: in this world it is not what we take up, but what we give up, that makes us rich. What are we prepared to give up in order to enhance wealth creation for all citizens of Aotearoa?

I advise the Minister that the Māori Party is a little ambivalent with regard to this bill. Our concerns regarding poverty and the big picture lead us to vote against it at this point in time, but we are prepared to consider other views further on. Kia ora tātou.

GORDON COPELAND (United Future) Link to this

In my maiden speech to Parliament on 29 August 2002, I stated that one of my goals in coming into Parliament was to overhaul a discriminatory tax system that skews New Zealand investment in the direction of housing while starving business of much-needed capital growth. That was something identified for us by Sir Ivor Richardson, one of New Zealand’s tax experts, in the 1988 Royal Commission on Social Policy. The United States, for example, has 34 percent of total household assets in housing, and 66 percent in other investment assets such as stocks and bonds. New Zealand is diametrically the opposite, with 61 percent in housing and just 39 percent in growth-orientated assets. So immediately I came into Parliament, I began working on this issue.

Prior to coming into Parliament, it was obvious to me that saving through interest-yielding bonds, stocks, and shares, etc., through superannuation funds and other managed funds were greatly disadvantaged in New Zealand when compared with the alternative of investing in the rental housing market. I was well aware of those realities, because during the 1980s when hundreds of New Zealand corporates were busy winding up their staff superannuation schemes, I was busy setting one up for the Catholic Archdiocese of Wellington. I well remember the disappointment of staff members over the next few years that the returns achieved through the fund, which was managed by a large financial service organisation, were below their expectations.

Disadvantage, of course, is a relative thing, but I am here referring to the high degree of overtaxation on investment through superannuation and other portfolio investment funds, when compared with the alternative of investment in the residential rental housing market. I will briefly outline the three major disadvantages, because when this taxation bill becomes law this week, they will all have been overcome.

The first was in relation to the taxation rate on employers’ contributions on behalf of their staff superannuation funds. Those contributions, when I came into Parliament, were taxed at a flat rate of 33c in the dollar, which of course greatly disadvantaged the many staff saving through those funds, whose marginal tax rate was just 19.5 percent. Still, to this day, 75 percent of all New Zealand taxpayers pay tax at 19.5 percent or less. However, the top tax rates on such contributions had remained capped at 33c. Early on in the last Parliament I took that point up with Dr Michael Cullen, and the tax on such contributions was adjusted to the marginal tax rate of the saver, in the 2003 Budget. The first disadvantage had been removed.

The second problem was that savers’ earnings in portfolio investment funds were also taxed at a flat rate of 33c in the dollar. Others have mentioned that Roger Douglas grappled with that problem. Various Ministers of Finance during the 1990s grappled with that problem, but when I came into Parliament such funds were still taxed at a flat rate of 33c in the dollar. That, of course, also greatly disadvantages the vast majority of New Zealanders, who have a marginal tax rate of 19.5 percent. On this issue, early in 2003 I worked very constructively with both Dr Michael Cullen and Vance Arkinstall of the Investment Savings and Insurance Association. We looked at how we could practically ensure that those savers were taxed at their correct marginal tax rate—again, leaving in place the 33c cap. The issue is fairly technical, and previous attempts to resolve it during the 1980s and the 1990s had not managed to crack this difficult nut.

United Future, therefore, advanced the matter with the Government in its Budget bids for both 2004 and 2005, and I am therefore truly delighted that the problem is resolved through the portfolio investment entity and see-through provisions contained in this bill. Henceforth, savers will be taxed at their correct marginal rates. Disadvantage No. 2 has been successfully overcome after a span of 20 or so years.

Disadvantage No. 3 was the fact that investors, through superannuation funds and other portfolio investment funds, were subject to capital gains tax on share investments. That reality is completely skewed, and was the principal tax distortion I mentioned in my maiden speech. It has now, for some two decades, been tilting New Zealand investment away from company equities and towards residential rental properties. We like to think that New Zealand does not have a capital gains tax, but that has not—at least, for the last two decades—been true of share investments through managed funds. We have had a capital gains tax on such investments for that period of time. Craig Stobo was one of those who, early on after my coming to Parliament, was a passionate advocate of seeing that distortion removed. I strongly picked up on the theme and, again, it was included in United Future’s Budget bid for both 2004 and 2005. That anomaly is also removed in this tax bill, so problem No. 3 is resolved.

The net result of those three disadvantages being overcome is that for the first time in a couple of decades we can now say that we will have something of a level playing field between investment in stocks and shares on the one hand, and investment in the residential rental housing market on the other. This is a great step forward for New Zealand and for New Zealand savers. In addition, this bill pretty much irons out any differences between individual investors—that is, people who invest their own funds using their own skill and expertise—and the much larger number of New Zealanders who save through portfolio investment entities.

These measures, combined with the KiwiSaver initiative, which will kick in from 1 July 2007, should see New Zealand at long last begin to build a far more balanced savings portfolio. That, in turn, will give new momentum and strength to both the New Zealand economy and to the financial security of New Zealanders and their families. It will give financial security to people in their retirement years and to families during a person’s working life as he or she prepares for retirement, as these two things come together.

Therefore, the second reading of this bill tonight is actually a moment to savour. It successfully, and at last, delivers on what various Governments of all shades—starting with Labour in the 1980s, moving on to National in the 1990s, and reverting back to Labour again in 1999—have failed to solve. At long last we have some real solutions to take New Zealand forward.

I want to talk a little bit about residential housing investment and emphasise that a lot of myths have circulated in New Zealand over, probably, the last 20 years in relation to this issue. I am talking here about books that have been written encouraging Kiwis to dump their funds into residential housing investment, some of which perpetuate myths about the tax system that are factually incorrect. For example, there is a myth abroad that there is no capital gains tax on investment in residential housing. Well, that is not true. It is true that when people invest in that area they can deduct the interest on the money they borrow for the house, then deduct depreciation on it and, therefore, gain a timing tax advantage as compared with some other forms of investment.

However, I emphasise that in recent times action by the Inland Revenue Department, with strong support from United Future and from Dr Alan Bollard of the Reserve Bank, has ensured that gains made through capital growth, and assessment of depreciation recovered when a house is sold, are taxed when a rental property is sold in circumstances where the owner, in the first instance, purchased the property with the intent of resale in mind. That has actually been the law of New Zealand for many, many years. Some of the myths that have been perpetrated in that regard have been singularly unhelpful in terms of the design of New Zealand’s overall macro savings situation. Undoubtedly, the great driver of the great majority of rental property owners is that they do buy those houses with the intent of reselling them at an appropriate time and making what they think will be a tax-free capital gain.

I want to encourage the Inland Revenue Department to remain vigilant in ensuring that the law is upheld in that way. Over the last 3 years the department has assessed literally millions of dollars extra in tax by looking into those arrangements in a little more depth. It is very, very important that it keeps that up so New Zealand can at last approach the situation I would like to see—that is, about 50 percent of assets are in housing and 50 percent are in other forms of investment shares, bonds, commercial property, and fixed interest investments.

RODNEY HIDE (Leader—ACT) Link to this

First, let me acknowledge Mr Robin Oliver from the Inland Revenue Department. I do not think anyone in the civil service has a tougher job than the man whose responsibility it is to keep his head right across our tax system and to keep up with those who would try to manoeuvre their way through the loopholes that inevitably exist. Mr Oliver and his team do an extraordinary job.

I think too that we politicians should recognise the point that we are not experts, obviously, in the technical detail of tax policy and legislation or its impact, and that the expectation of us in the process is really to set the broad principles and the philosophy within which Mr Oliver and his team can work. I feel that that is where we have been letting the tax system down. As I look back over the past few years at the changes that have been made, I feel that, in the main, they have been of a retrograde nature. Our tax system has become more complicated and has moved away from good principles of taxation.

I have to say that I always enjoy listening to Mr Copeland’s contributions, because he is a politician who does understand the tax system. Although I was unable to make a full contribution to the Finance and Expenditure Committee this time around, I can tell that Mr Shane Jones has grown in the role of handling legislation such as this and the changes it makes.

But let me cover some of the principles. The first one—and we heard this from Jeanette Fitzsimons—is that the tax be broad-based. By that we mean it should cover the entire range of what it is we are taxing, because to the extent that it does not we create an automatic loophole, and to the extent that we have a loophole we create a distortion. It will also mean we have a higher tax rate to raise the same amount of revenue we would otherwise have.

Broadly, we have in New Zealand two tax systems. One is a tax on consumption that is called the goods and services tax, which, in a sense, is a good tax—if there is such a thing—because it does not double tax investments. It taxes only consumption. On top of that we have an additional tax system that is a tax on income, which automatically is a double tax on investment, because when we earn a dollar we get taxed, then we get taxed again if we invest it. That is why tax economists favour a consumption tax over an income tax. Then we have a variety of sin taxes for people who smoke, gamble, drink, and do other things that we deem society not to want.

TIM GROSER (National) Link to this

First of all, like Mr Hide, I would also like to thank Robin Oliver for his great contribution and advice over the years. My past career has not much run into his, although I have talked to him from time to time. But I have certainly been aware of his considerable influence and of the respect in which his advice is held in a number of important quarters in this country. I am not sure that I want to follow Mr Hide in congratulating Mr Jones on his chairmanship of the Finance and Expenditure Committee. That is not because I have any particular reason to doubt the judgment; I attended my first meeting of his committee only 2 working days ago. It is just that Mr Jones may have a significant role to play in the Labour Party’s political future, and whether receiving high praise from the leader of the ACT party is of great benefit to him is something on which I would pass no particular judgment.

I have been watching the political progress of this bill with a mixture of bemusement, amusement, and sometimes, I would have to say, amazement. The first question was—and I am really addressing here the question of the differing treatment of overseas investment income—whether there was a problem. Oh, yes, we have known for a long time there were a number of problems—a number of distortions. But the first-order question that would arise, because it really is an implied quantitative question, is about the extent of the problem and whether the problem was of such a dimension that attempting to fix it would not raise larger costs than those resulting from the problem in the first place. The second order, in any logical sequence of thought, would have been to ask about the optimal ways through to address that problem.

The deluge of submitters against the bill has really meant that this bill—a bill of extraordinary complexity—has undergone the equivalent of genetic modification: political manipulation. It reminds one very much of that clichéd joke about the camel having been composed or designed by a committee. In some parts, the bill looks as though it bears only a casual resemblance to its original life form, its original structure, and its original ideas. It has been pushed and pulled to assuage this or that submitter, this or that party in support of the bill, this or that opinion, and this or that new fact that emerged in the process of examining the bill.

That reminds me of something that is often said about ideas that run into trouble. They are said to go through five stages. The first stage is the first-mover stage. Somebody in Mr Cullen’s office—maybe Dr Cullen himself; I do not know whether it was him or an adviser in his private office—or someone from Treasury or the Inland Revenue Department would have drawn attention to this distortion and made the argument that something needed to be done about this problem. Stage two is, of course, growing interest in the proposal. Stage three is that the proposal is the new consensus; everyone around Dr Cullen’s office agrees that now is the time to move to reduce or remove the distortion. Everyone is on board. Technicians, perhaps in the Inland Revenue Department, who are aware of the vast technical complexity actually involved in implementing such a policy recommendation are very wise to stay quiet.

I think we are now at stage four of the idea, with one further stage to come. Stage four is the stage when an idea goes a little sour. Growing doubts appear about the wisdom of having embarked on the course of action in the first place. So now that the submitters have come in, we see water is pouring into the ship, and instructions have gone out to put out the political lifeboats and get ready to jettison some of the ballast that is not required. We have the extraordinary vision of Sir Ron Brierley, who has now, through the political process that I am describing, gone beyond the status of being a living legend amongst New Zealand investors to become, effectively, at least for some years to come, a de facto head of State in terms of taxation treatment.

We have not quite got to stage five. Stage five is, of course, the stage where the pernicious unintended effects of legislation like this come fully home to roost. Those who were not involved are rewarded, and those who were involved and were responsible for the idea are punished. Well, fortunately, we have a thing called the democratic process, and the people responsible for that are the New Zealand electorate. I took particular note of the point that Bill English made earlier in this discussion about the Government almost certainly being unaware of the huge numbers of New Zealanders—not just a few rich folk out there—who are affected by this bill, and I am sure Mr English was absolutely right. The Government had quite a shock when it found out the dimension of the problem that it had raised by stirring the swamp up on this particular issue.

The bigger picture here, frankly, is the need for serious tax reform rather than fiddling with something that could well have been left alone. We now see that we are in a position in this country where we have the fatal combination of bracket creep, in terms of taxation jargon, and unadjusted taxation rates. This bill, of course, does not want to go anywhere near that issue. We understand that, because we know there is a subsequent stage to come in the process of so-called taxation reform. It will come sometime before the next election, when an adjustment to the brackets is made in order to take account of the fact that in the last 6 years there has been a 50 percent growth in the number of taxpayers who fall into the $38,000 to $60,000 a year income bracket, where they move, because of the discontinuity in the tax break, from paying 19.5 percent of their income to paying 33 percent. So the argument will be made later on, the adjustment will be made, and then the New Zealand public, in a rather larger political debate than even this debate, will have to make up its mind as to whether, in the course of a 3-term Government, that amounts to a credible and continuing commitment to taxation reform.

The second bigger picture here is the need to do something about this country’s savings position. Like others, I am sure, in this House, I am aware of quite a complicated debate in economic circles—well, at some levels people say there is not necessarily a problem, and others define it in terms of the way that one measures savings flows. That often comes down to a question about whether a dollar invested in housing equity is equal to a dollar invested in a Government surplus is equal to a dollar invested in managed funds, and about the complicated economic effects that arise from those different forms of savings. Although I accept that there are differences of view amongst commentators on that, I do not think there is any serious question that a couple of things in that overall picture are of great importance to New Zealand.

First of all, if we look at the narrower definition of savings in financial assets, we see we do not look very flash. As time goes by, particularly in comparison with Australia, the situation looks increasingly less attractive from our point of view. That is factor No. 1. Factor No. 2, which I do not think there is a great deal of disagreement on, is the dismal picture on investment flows, which are—at the present moment, with our current account deficit being around 9.7 percent of GDP—the second-highest in the developed world, behind Iceland’s. That is a very serious problem for this country. Part of the problem, of course, is the huge imbalance in investment income. That is not an argument to put controls on inward investment. No, no, we should be very thankful that foreigners are prepared to fund a high level of consumption with their own savings.

But, of course, there is a problem here. In 2005 some $13 billion went out of the country in terms of investment outflows. That represents a return from investment in New Zealand assets. So it is a matter of some importance that we actually implement policy structures that are designed to encourage an outward flow of investment from New Zealand taxpayers, which will actually start to ensure that we have some reverse flows, to balance off that rather dismal picture overall.

Does this bill address that issue? Does it provide the greater certainty required for New Zealanders to invest increasingly more of their assets in overseas investments? I think not; I think decidedly not.