Taxation (Business Tax Measures) Bill

Hon DAVID CUNLIFFE (Labour—New Lynn) Link to this

I wish to commend the Taxation (Business Tax Measures) Bill to the Committee and to reiterate the statement that Labour members made in the first and second readings, that we will be supporting the bill’s passage through the House. The bill comes to the Committee stage following a thorough and, I think, very helpful and bipartisan select committee process. The common ground that is reflected in the commentary on the bill is that many—indeed, most—of the provisions of the bill that are taxpayer-friendly have been in process for some time and date back to the previous Government. The commentary sets out that they include matters in “the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill; use-of-money interest rates; uplift thresholds; and instalment regimes.” We appreciate Government members acknowledging that point in the commentary.

There are a number of areas where we do not believe that the bill goes far enough. The bill incorporates measures that were under development or announced by the previous Government from around the middle of 2008. As we all know, the world economy has gone into serious decline since then. What was an aggregate world growth forecast of about 1.5 percent of real GDP growth has now turned into the first negative growth since World War II. Indeed, as recently as today we have seen predictions that world exports will fall by as much as 7 percent in the year to date. That is an unprecedented drop-off—the most alarming example of which is in Japan, where I understand that export volumes and value are down to the tune of around 45 percent, and in Taiwan the figure is nearly 50 percent. This is truly a crisis of a global magnitude.

Against that background, therefore, many New Zealand businesses, including small and medium sized enterprises, will be suffering. Businesses that were and are in the exporting game will find it considerably more difficult to make sales, and they will find it considerably more difficult, therefore, to meet their cash flow predictions. It is incumbent upon this House, working in a bipartisan way, to see whether more can be done to assist small business through measures such as these.

The Opposition will be recommending certain matters for the further consideration of the Government pertaining to the policy review processes, which, as the commentary sets out, are already in train. We had considered tabling certain amendments to the bill in the Committee stage today, but we have decided not to do that, in favour of a more bipartisan approach of working with the Government on matters that the Government can bring forward. At the end of the day, this is not about who claims credit; this is about getting the job done for small and medium sized enterprises.

Certain matters stand out, as indicated in the select committee’s report. Use-of-money interest deductibility is a matter of crucial interest to business. It must be said that this has not been resolved for some time, and we are gratified, across the Committee, that this has been noted for further work, and we support that being on the work programme. Secondly, use-of-money interest rates are still too high. The previous Government had indicated that it would drop use-of-money interest, preceding the previous election, and this bill takes into account only the measures that had been contemplated some 6 months ago. During that time the Reserve Bank has dropped the official cash rate by around 5 percent, and those reductions are not incorporated in action contemplated by the Government at this time.

It is important that at least some catch-up is made. Several options are available. One would be to have a reciprocal use-of-money interest rate that reflected the deposit interest rate—currently around 4.23 percent. There is some reasonable argument about whether that would provide the ideal incentives for prompt payment. Another and lesser suggestion that we commend to the Government would be to use the Reserve Bank’s 90-day bill rate as a mechanism for securing interest rate reductions. That could be done from the date of passage of this bill, and we are already moving in that direction. That would be a current rate somewhere above 8 percent and less than the 9.7 percent currently proposed by the Government. We commend that suggestion for the consideration of Government and the officials.

Submitters to the select committee raised the issue of the tax deductibility of patent costs, and across the committee we had considerable sympathy with those submitters. As a committee we would see merit in moving to align the New Zealand regime, which is currently a 20-year amortisation period for patent rights. It is clearly out of step with the OECD average, which is probably below 10 years, and certainly out of step with our drive to introduce more high technology into the New Zealand economy, for which even 10 years is clearly too long and therefore puts an unfair tax burden on companies engaged in those kinds of activities. Those are the kinds of further measures that we see as needing to be considered. Furthermore, we suggest that the Governments give further consideration to omitting the 105 percent uplift basis, as provided in new section RZ3(3)(a), inserted by clause 20, and replacing it with a straight 100 percent, which means that no penalty would be imposed on estimates calculations for preceding years.

This bill, good as it is, and perhaps insufficient as it is in its current form, subject to the ongoing work that we have drawn attention to, begs a far bigger and more important question: where is the Government’s plan that is proportionate to the magnitude of the crisis facing New Zealand business? Surely it cannot be the 9-day fortnight, for which a total of $20 million of Government subsidy has been earmarked? Surely it cannot be the Cape Reinga to Bluff cycle track, which even since the Job Summit has somehow melted into something of a lesser cycle network? Surely it cannot be simply the fact that the Prime Minister is phoning the Council of Trade Unions more regularly? Surely it cannot be the fact that we have speeches coming out about philanthropy?

No, I do not believe that is the strategy the Government has in mind, other than in the public relations sense of the word. As a number of commentators—most recently, John Armstrong in this weekend’s New Zealand Herald—have pointed out, the real agenda is becoming clearer. This Government, in the last few weeks, has increasingly demonstrated itself as a wolf in sheep’s clothing. The trumped-up—it must be said—overhaul of the Accident Compensation Corporation, public service spending cuts, the privatisation of prisons, the unsympathetic treatment of Television New Zealand, the Draconian review of the Overseas Investment Act, which is not known internationally as one of the most hard line of investment protection measures, the stop on contributions to the Cullen superannuation fund, and the hard line on the financial performance of State-owned enterprises are just some of the measures. It seems that every day one reads in the newspaper or hears in the media about something else that, although not being presented by the Prime Minister as front and centre while he is doing the happy, clappy stuff, is none the less hard line and part of the gathering right-wing momentum of this Government. Most recently, it was back to the old Holidays Act with the supposition that, by giving workers “the choice” to put their holidays up for sale, somehow that will not become an obligation.

To sum up, this bill is good as far as it goes. It represents a thorough and bipartisan select committee process. It does not go far enough because it was designed 1 year ago, before the recession deepened. The Opposition is willing to work in a bipartisan way with the Government to bring further relief to small and medium enterprise. But having said that, let us be under no illusions that this represents the real agenda of this Government that, by the day, is becoming darker and harder edged.

CRAIG FOSS (National—Tukituki) Link to this

I acknowledge the tenets of the previous speaker, and the bipartisan nature with which the Taxation (Business Tax Measures) Bill has been progressing through the House and the Finance and Expenditure Committee so far and, hopefully, as it progresses through the Committee stage and the third reading in the not too distant future. As chair of the Finance and Expenditure Committee, I would like to acknowledge and thank the previous—and current—Minister of Revenue for getting the bill to this stage, other parties for the cross-party support around Parliament, in this House, and at the select committee, and the officials, who have worked very, very hard to put the bill into this form at very short notice, when it became apparent that it was very urgent that it be put into place. Of course, my fellow members and colleagues on the select committee need to be acknowledged, because to get this bill to this point a lot of cooperation and goodwill has been shown by all parties to enable the processes to be moved through quickly. All parties recognised the urgency of the bill; I would like that to go on record. Thank you very much, Mr Chair.

As I noted—and the previous speaker talked about this a wee bit—it is urgent that this bill is passed as soon as possible. It is not under urgency, but it is urgent that it goes through the House as soon as possible. It has been reported back generally without any substantive amendments or changes, and I acknowledge again the previous speaker, who said that his party had ideas, thoughts, and policy that it may wish to progress. As a committee we discussed that, and I am sure there will be further discussion around that. Again, as that member noted, the commentary on the bill also addresses issues around the use-of-money interest spread, the tax deductibility of patent costs, and so on. But there was one point that I need to check my records on. Although New Zealand has a 20-year amortised write-off period, I think other options are available in New Zealand to write something off over the life of whatever a product or invention might be—but I stand to be corrected on that one.

This bill is actually quite short. Its origins are in the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill, which is still before the select committee. As the commentary notes, many of the measures have been taken from that bill and brought forward, or enhanced in some way. There are some new measures in this particular bill, but again I acknowledge its origins in previous work, policy, and discussion papers. I think it was in a small-business discussion paper in 2007 that a lot of these points started to be at least talked about.

The focus in this bill—and this is why, for example, the patent measures are not here—is on cash flow. It is about assisting businesses through the troubled times in front of us right now. Since this bill was introduced, and since the parent bill of this one was introduced, the global economy has deteriorated markedly—and again the previous speaker alluded to some of the facts and figures on that. The bill is urgent.

We had six submitters on the bill, all in favour of it, but they raised interesting points, most of which will be pursued further. I would like to acknowledge the Institute of Chartered Accountants of New Zealand, not only for the very progressive and positive way it submitted on the bill but also for the good policy work it does in general around all things regarding tax in New Zealand. The New Zealand Retailers Association submitted particularly on the compliance issue and how those measures would improve life for many of its members, not necessarily just in respect of cash but also in respect of compliance—for example, with regard to GST and PAYE thresholds. The New Zealand Manufacturers and Exporters Association was actually the group that raised the issue around patents and deductibility, and encouraged the committee to do further work on it. I appreciate that and acknowledge the association for that.

The New Zealand Chambers of Commerce and Industry made, as was to be expected, a very robust submission. Although it was generally very much in favour of the bill, the organisation suggested areas where things could be bigger, wider, or higher—where thresholds could be made more tax friendly, and so on. Of course, in these challenging budgetary times we have to balance all of that against the fiscal cost. The aim is admirable, but we have to try to balance the budget, or at least not let our debt blow out too much as we get through this current trough. I also acknowledge the New Zealand Council of Social Services. It was recommended and suggested as a submitter, and its submission was very useful for members of the committee. The council made a big effort. I will be brief, but I want to go on record as thanking the council. Its submission was very, very beneficial to our committee.

The bill is in two parts. The guts, if you like—excuse my French—are all in Part 1; Part 2 is about remedial matters and some other issues. All of the issues—the use of money and the provisional tax uplift changes—are in Part 1. As we go through the clauses, members will note that all the major points are in Part 1, from clause 3 to clause 27. Virtually all of those provisions are changes to the Income Tax Act, such as changing thresholds, changing application dates, and some minor wording changes to facilitate the main parts of the bill, which I am sure other members will speak on.

I will point to my favourite part of Part 1: the changes to the provisional tax uplift level. That may sound boring but, quite simply, I say it is a very good and very quick recognition of the state of play for New Zealand businesses. It was common knowledge from about December last year that to at least meet last year’s profits will be very, very challenging for businesses. So a quick reaction by the Crown, the Government, and the officials at the Inland Revenue Department, in terms of actually thinking about these measures—which is actually eminently sensible, when one looks at it in hindsight—I think is very, very good and acknowledges the key problem for businesses, which is a simple cash-flow issue. Yes, there is a fiscal cost to this measure, but over a few years it does start to level out. The cost of carrying it is the cost. I will make the point that the 2-year horizon of those provisional tax measures for this financial year and the next financial year actually lines up with a recognition of what the Reserve Bank said last week. It sees New Zealand as hopefully starting to come out of its recession in the middle of 2010. That is exactly when these measures start to change and come into play.

We will discuss later the use-of-money interest issue. The previous member talked about the spread of the two rates—debit and credit—but he made the point, which I am very much in favour of, that they now relate much more to the 90-day bank bill rate rather than to the official cash rate changes, which we have seen a large deduction in recently. The change reflects the working capital borrowing period of many small businesses. They do not borrow overnight; it is borrowing for some 30 or 90-day rolling cash.

I look forward to speaking on this bill a bit further. I once again acknowledge the cooperation of all members, and I look forward to this legislation being in place before 1 April 2009.

STUART NASH (Labour) Link to this

I rise in support of the Taxation (Business Tax Measures) Bill because I firmly believe that this country deserves a Parliament that works together to implement legislation that alleviates the pain this recession is beginning to visit upon the small to medium sized enterprises that form the backbone of our country. A small to medium sized enterprise is defined as a company that employs 19 or fewer employees, and small to medium sized enterprises employ about 60 percent of all Kiwis. I am not supporting this bill because I believe that it is as good as it could possibly be, or because it is part of a plan to drive economic growth and stimulate the economy, or even because I think it goes far enough to really make a significant difference—because I do not believe that; far from it. However, the Finance and Expenditure Committee has acted in a multipartisan manner—as has been mentioned by the previous speaker, and my colleague Mr Cunliffe—over the passage of this bill through to the Committee stage, because it is about New Zealand. It has to be about New Zealand in this sort of economic climate and with this recession looming.

I have spoken to friends who own or deal with small to medium sized enterprises, and they are grateful that members from both sides of the House are working together. However, they suggested other ideas that would make this a much more powerful bill. As my colleague the Hon David Cunliffe has alluded to, Labour has identified a number of issues that could easily be addressed by the Government through Order in Council or a Supplementary Order Paper. Those suggestions would help to better target the requirements and meet the needs of the small to medium sized enterprises sector as it continues to face tough times, meeting the challenges of the global recession.

Despite these words, in many respects this is actually a good bill, but probably because the bill largely implements ideas that the previous Labour Government had set in motion before last year’s election. Unfortunately for this country and for the small to medium sized enterprises sector—and as alluded to by the previous speaker—the state of the economy has worsened since the election, and these measures do not go far enough to alleviate the stress that many New Zealand companies now face. This bill—I say to my parliamentary colleagues and to the people of New Zealand—is a missed opportunity, in my view, to really exhibit a degree of leadership and foresight that the times now require. The people of New Zealand deserve better than this, so Labour will help out. It is simply not good enough just to lift policy from the Labour Party manifesto, cloak it up in National Party ideas, and call it a solution. This bill does not provide the solution for many who are looking to the Government for a plan.

I suppose the parts of the bill that I fully endorse are those that were introduced by Labour. The five measures that have been directly lifted from Labour Party policy are, first, the increase in low-value trading thresholds to apply from the 2009-10 income year; second, accounting for financial arrangements also to apply from the 2009-10 tax year; third, the extension of fringe benefit tax annual filing to include closely held businesses whose fringe benefit tax liabilities are restricted to one or two vehicles used by owner employees, regardless of their annual PAYE deduction; fourth, the increase in the provisional tax use-of-money “safe harbour” threshold from the 2009-10 tax year; and, fifth, an increase in the goods and services tax 6-monthly return filing threshold to apply from 1 April 2009.

I suppose in a way it is good we have continuity with the Minister of Revenue, because when he sat with the previous Labour Government he was the one who introduced these measures, and he can carry them through. It is a pity he did not actually take them a bit further, because these were simply Labour policies that we would have reviewed, and no doubt amended once we had understood the full extent of this recession on the business environment. The National Government could at least have revised these measures to better meet the updated and more urgent needs of the small to medium sized enterprises sector, but I suppose imitation is the greatest form of flattery. There are a couple of Labour measures that the Finance and Expenditure Committee did agree with that have been enhanced, but they are still Labour ideas, nevertheless.

Mr Cunliffe also mentioned a couple of potential changes, in terms of use-of-money interest rates, so as to better reflect the current interest rates in the market. Tax deductibility of interest, for example, is another area that Mr Cunliffe suggested as a measure that the Government might like to consider amending. Those are only two suggestions that would make this bill better by far.

In conclusion, I support this bill but with reservations. My support would be greatly enhanced if the National Government accepted that a bill designed to help 96 percent of New Zealand businesses that class themselves as small to medium sized enterprises would be a better bill if it were to include these suggestions.

KEVIN HAGUE (Green) Link to this

The Green Party continues to support the Taxation (Business Tax Measures) Bill, as we did during its first and second readings. It provides a modest level of support for a section of the small and medium business sector, with which I have considerable experience. The Government has also made some decisions that will provide support to other parts of the small and medium business sector. I referred in my second reading speech to the national cycleway project, which will provide a vital boost to many small and medium businesses in the contracting part of the small and medium business sector, particularly in rural and provincial areas, for which it is an extremely important development.

In continuing to support the bill the Green Party wishes to again make the point that we are deeply disappointed and frustrated by the lack of coherence in the Government’s response to the financial crisis we face. Several speakers have already referred to the growing magnitude of the crisis and to the scale of the response against that backdrop. I note, along with colleagues from Labour, that the Green Party had some amendments that we might have wished to make to this bill but we have chosen not to on this occasion and instead look to opportunities in the future to advance some further ideas. In particular, I will refer to a number of areas where the Government could have made a difference and has chosen not to.

The Government could have retained the research and development tax credit and has chosen not to, which is a slap in the face for all of those businesses that had already begun planning on the basis of that credit. Indeed, the whole business of investment in innovation is extraordinarily important to the way our country finds its way out of this recession. We have talked about a Green New Deal and the need to address not only the financial crisis but also the crises we face simultaneously in the environment and in energy. To do otherwise is doomed to failure. Indeed, that kind of approach requires as much innovation as we can possibly bring to the table. For example, Denmark launched its world-leading wind turbine technology on the basis of tax breaks over a 5-year period for innovation in new forms of energy generation. We respectfully suggest to the Government that this is an area it needs to be looking to, and we offer our assistance.

In relation to the 9-day fortnight policy measures, again, those measures may be of some use to some larger businesses, although early indications are that the uptake seems to be at the low end of the scale. Part of the reason for that low uptake may be the relatively unwieldy nature of large businesses. The impact of a job loss on someone who works in a small or medium sized business is no less. The Green Party believes that any relief offered to employees of a large business should also be offered to employees in small and medium sized businesses, yet that has not been offered. Where is the Government’s innovation? Where is its measure to support those employees in the small and medium sized businesses that are currently haemorrhaging from the very sector that, as Stuart Nash mentioned, employs most New Zealanders?

I referred previously, as the Minister of Finance did in earlier debates on the Taxation (Business Tax Measures) Bill, to the advice of the Small Business Advisory Group. Yet again I have to bring to members’ attention the fact that the Government has failed to move to implement the measures proposed by the Small Business Advisory Group. One of the measures that the group most recently brought to the attention of Parliament was its recommendation for advice on improving environmental performance by offering small and medium sized businesses the opportunity to derive business benefits from recognised or certified sustainability of products and services. The Government has completely failed to act on that.

CHRIS TREMAIN (National—Napier) Link to this

I rise in the Committee stage to follow previous speakers in supporting the Taxation (Business Tax Measures) Bill. Everyone has talked about how there has been a bipartisan approach to this bill tonight. We have seen the Greens supporting that, and certainly the two Labour speakers supported the bill. They supported it in the way that they have supported the majority of legislation that the National Government has brought to this House throughout the 4 or 5 months that we have been in Government. Members of the public will be interested to see that lots of legislation is being brought to the House, and that Labour members are standing up to say that really they do not support it, but then they vote for it. With this particular bill, it is good to see it go through the House in a bipartisan way.

The Labour speakers who spoke before the chair of the Finance and Expenditure Committee, Craig Foss, took time to say that many of the initiatives of the bill were fostered in processes prior to the National Government. A point I make is that there is a saying that goes something along the lines of “Between the idea and the action lies the shadow.”, which basically says that there are lots of people who have ideas in this world, but it is those who step up to the plate and deliver them who actually make a difference. I think that is what we are seeing with the National Government here. It is almost like the Jeffrey Archer story about Mallory conquering Mount Everest first. Actually, he did not. It was Sir Edmund Hillary who got to the top and down again, and who delivered on that particular conquest.

In this bill, we are stepping up and delivering a range of initiatives. Labour members go to lengths to say that it is not big enough, wide enough, or as big as it should be. The Greens said that it was a modest package of initiatives. In fact, it has been clearly noted that we are in the top five countries in terms of the fiscal stimulus that we are bringing to the table with a combination of packages brought through both by the previous Government and by our own. The reality is that we are in a good space. That was acknowledged in two recent pieces of literature. Firstly, in the Monetary Policy Statement by Alan Bollard that came out just 2 weeks ago, Dr Bollard acknowledged that our fiscal stimulus put us in a good position. He predicted that in the fourth quarter we will commence growth again. In just the last couple of days a report by the people from the International Monetary Fund who visited New Zealand acknowledged that, again, we are in a good space, and that there is not a huge need for the wild amount of other initiatives that members opposite are proposing.

It is good that we are here today delivering on a number of initiatives that will help small businesses out there. Those initiatives are in the Taxation (Business Tax Measures) Bill, which I have before me—a range of initiatives that get to the heart of what we are trying to do to blunt the edge of the recession for small and medium sized enterprises, and to put them in the best position to grow as we come out of this recession. In making these initiatives we need to acknowledge that those enterprises make up 95 percent of businesses in this country, and that they employ some 80 percent of employees. They are critical to the engine of this nation in terms of driving us forward. Let us look at the initiatives that we see throughout Part 1. In clause 4, the threshold where businesses with business-related legal expenditure can claim legal expenses through their tax return is increased to $10,000, reducing compliance costs around legal expenses for small businesses.

In clause 15 the PAYE once-a-month filing and payment threshold is raised from $100,000 to $500,000, again reducing those compliance costs for small and medium sized enterprises. Let us focus on the PAYE provisions. These small businesses are the heart of our economy. They are the businesses that employ the majority of our employees in this economy. If we are to get through this recession and out the other side we need to protect those jobs. We need to look after the engine that actually employs those people in the first place, and that is small businesses. This bill focuses on those small businesses and makes sure they will get through.

In fact, Craig Foss, the committee chairman, and I were with RCR Energy Systems, a Hastings company that employs about 78 people down in Dannevirke, and about 50-odd in Hastings. This is an innovative company that employs a range of fitters and turners and boiler-makers to produce high-end energy turbines and boilers for plants all around the country and throughout Australasia. It has a highly specialised workforce in Hawke’s Bay, and it is focused on getting through the recession and ensuring that its highly specialised workforce is maintained. If RCR is forced into a position where it has to lay off specialised designers and those sorts of people, the reality is that it will be very difficult to obtain those people when that firm is gearing up to come out of the recession afterwards, once it starts to get more orders on the book again. A couple of designers are from Indonesia, and a couple are from Australia. What we are trying to do with this bill is to blunt the edge of the recession for companies like RCR in Hawke’s Bay, and to make it easier for them to get through this recession. They will still be faced with challenges. I am not standing here and saying it will be easy. In fact, it is very hard. Orders have slowed significantly for them. But these small steps might just make it that little bit easier, putting them in a position to retain their workforces and to come out the other side.

I will touch on another couple of clauses. Clause 19 focuses on fringe benefit tax, lifting the threshold from $100,000 to $500,000. Again, this reduces compliance costs for businesses that are under that level, making it necessary to file fringe benefit tax returns above that $500,000 threshold, only on a quarterly basis, with businesses below that threshold allowed to file those returns on an annual basis.

There are other initiatives in clause 26, which raises the GST payment threshold from $1.3 million to $2 million. That is a really important point. It allows businesses to continue to pay GST on a cash basis, as opposed to an invoice basis. That is really important for small businesses, because if a business pays GST on an invoice basis, it often has to pay the GST to the Inland Revenue Department before it has collected the money through the debtor’s ledger. In terms of cash flow it is a huge impost on those small businesses. They do not have huge amounts of capital or big balance sheets that can afford to have that cash out in terms of GST before it is collected. Section 26 lists that threshold and is one of the key features of the bill.

The bill has a range of initiatives, and, once again, is looking to make things easier for small to medium sized enterprises and businesses to get through this recession, and to put them in the best possible position as we come out of the recession and begin growing as a nation again. I commend Part 1 to the Committee. Thank you.

RAYMOND HUO (Labour) Link to this

I rise to support the Taxation (Business Tax Measures) Bill and I wish to reiterate the following three points. First, the Labour Party supports small businesses, as we support all New Zealand businesses in a positive and proactive way. This bill is targeted at the 96 percent of New Zealand businesses that are classed as a small to medium sized business. As a matter of fact, Labour wrote this bill. This bill as it is today was largely written by the previous Labour Government. Secondly, we wrote this bill in about August 2008, before the global recession was felt in a tangible way and before we had the opportunity to draft the bill further. Therefore, we believe that further measures need to be taken, either by amendment or in some other form, to improve the bill. Thirdly, as I said, this bill is targeted at the 96 percent of Kiwi businesses that employ approximately 60 percent of the country’s workforce. Without any doubt, those small to medium sized enterprises are the backbone of our economy.

The Finance and Expenditure Committee, of which I am a member, had opportunities in the past weeks to listen to and digest submissions from relevant parties and advice from officials. Members of that committee all agreed on taking a bipartisan approach towards helping smaller Kiwi businesses deal with the current economic pressures. We have worked together to identify measures where the bill could be extended, and they are written in the committee’s report.

The Finance and Expenditure Committee recommended that the bill be passed with amendments. The report acknowledged that a number of initiatives in the bill reflect proposed changes in previous legislation, or in the Inland Revenue Department’s work streams and discussion documents, including the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill, use-of-money interest rates, the uplift of thresholds, and instalment regimes. The report makes a number of technical amendments to the bill, and it also addresses major issues that were considered by the select committee but did not result in any recommended amendments. However, in many respects this is a good bill as far as it goes, and it largely implements ideas that Labour had worked on earlier. It contains measures aimed at easing the impact of taxes on the cash flows of small to medium sized businesses and at reducing business tax compliance costs.

Sadly, as I said at the beginning, this bill was written sometime in August 2008, before the current recession deepened and worsened. The outlook for our economy has changed significantly and has worsened significantly. The official cash rate, for instance, has dropped since the measure was first drafted in response to recessionary conditions. It has been dropped to 3 percent, actually; one of its lowest levels for many years.

The currently proposed reduction in the use-of-money interest rate of 9.73 percent is based on December 2008 Reserve Bank 90-day bill rates. Updating this to January 2009 gives a rate of 8.88 percent. Proposing a January annual adjustment allows this to be updated for further changes. As to uplift basis, the bill currently proposes 100 percent of the previous year’s income or 105 percent of the income in the year before that as a basis for uplift. However, in times of recession, the 5 percent penalty on 2-year-old income is unnecessary and potentially punitive.

Questions must be asked about what the National Government has done in the 6 months since the bill was written, in light of the deepening and worsening recession, which will hit small businesses hard. Where is the National Government’s robust approach to tax legislation? Where is the National Government’s insight in pursuit of the nation’s economic health? Thank you.

Hon PETER DUNNE (Minister of Revenue) Link to this

I hesitate to take a call at this point, but a number of things have been said about the parentage and the history of this bill that I am in the unique position to comment on, and I thought I should put these comments on the record before the Committee this afternoon. At the outset, I acknowledge the work that the Finance and Expenditure Committee has done, and I acknowledge the generally cooperative and bipartisan way in which the Committee of the whole House is approaching this bill today.

The previous speaker, Raymond Huo, said that this bill was drafted in August last year. That is wrong; it was drafted in January this year. He may have been referring to the previous bill—the more substantive bill that was before the select committee. That bill had its origins in the Business Tax Reviewthat was undertaken in 2006-07. That bill was drafted around the time of the Budget last year, and was introduced into the House in July last year. So that bill has been before the select committee since that time.

The changes contained in this bill, in terms of their impact on revenue, are about a sixfold increase on the changes that were contained in the bill introduced in July last year. So this is quite a substantial measure in its own right.

I will make some comments about three of the issues that have been raised by a number of the speakers to date. The first issue is in respect of the use-of-money regime. I will break this discussion into two parts. Mr Cunliffe suggested that the previous Government had a plan in mind for a different use-of-money regime than the regime that was implemented in January and that is given effect to in this bill. I need to say to the Committee that what Mr Cunliffe was talking about was the Labour Party’s policy. No work had been done by officials prior to the change of Government on giving any effect to that proposal. So the changes that were agreed to by Cabinet earlier this year, and are reflected in this bill, arose as a result of work that was done after the change of Government to give effect to work that had been under way last year in respect of the formula. That is as far as things had got, at that point.

Let me make a couple of comments about the issue of deductibility. There has been an assumption, over time, about use-of-money interest being deductible, and a number of taxpayers have, from time to time, gone to the Inland Revenue Department to seek rulings on the issue. I have to say that there appears to be a measure of inconsistency about that provision. What is happening at the moment is that officials are working through this issue to determine where the balance should be, and I give an undertaking to the Committee that we will come back and may well make an amendment to the main bill that is currently before the select committee, or include measures in a subsequent bill to be introduced later this year, if the outcome of that consideration is that we need to make a legislative change. So I give the Committee that commitment.

The question was also raised about the deductibility of patent costs. This is an interesting and new issue, because it has not featured on the Inland Revenue Department’s work programme thus far. It is not actually on the programme at this point. However, there are some issues that I should put on the table about the tax deductibility of patent costs. A number of speakers have raised questions or made comments about it as we have gone through today. It is worth noting that although the maximum legal life of patent protection in New Zealand is 20 years, the initial period of protection is 4 years. There are certain renewals that occur after that time. Patents are generally depreciated over the full 20 years, but there is not sufficient knowledge at this point about what the average length of a patent is in New Zealand. So it is therefore likely that the length of time will vary depending on the industry type and the nature of the asset.

The question was also raised about comparability with other jurisdictions, and I will give the Committee four examples of what happens in other places. In Australia the patent protection period is 8 years for innovation patents and 20 years for a standard patent. The federal regime in Canada provides for 25 percent of useful life. The United Kingdom has an accounts write-off, or 25 percent of preferred. The United States at the federal level provides for a patent protection period of 15 years, as a general rule. The Committee will see that there is actually no uniform rate, and one of the difficulties we have in determining where we might pitch ourselves vis-à-vis another jurisdiction is trying to determine where that line might be.

The final question I will comment on very quickly relates to the issue of the change to the provisional tax regime. The real issue here is how much revenue we can afford to give up at this time. This whole measure, including the use-of-money interest proposals, is around a $450 million package. That is quite a substantial commitment, given the size of our economy. The issue as to what we are doing in the long term is that if we were to move to 100 percent, there would be no immediate revenue impact in the next couple of years, However, there are some issues regarding cash flow and some other implications for use-of-money interest that may make it not the attractive proposition that it has been suggested to be. That is something I am sure the officials and the Committee will give some further attention to.

I simply conclude at this stage by observing—and I do not want to use the analogy of a rolling maul, because that has been used elsewhere—that this is an evolving process.

Hon DAVID CUNLIFFE (Labour—New Lynn) Link to this

I raise a point of order, Mr Chairperson. I do not wish to detain the Committee, but I want to, under Standing Order 106, briefly avail myself of the opportunity to clarify a certain matter that the Minister may have misunderstood, or that I may not have expressed clearly.

JOHN BOSCAWEN (ACT) Link to this

I would like to start by thanking the Minister for his comments of clarification in his earlier speech. As a new member to this House, the whole process of select committee consideration was an eye-opener to me. I acknowledge the bipartisan nature of the Finance and Expenditure Committee’s deliberation. I also acknowledge the cooperation of Mr Cunliffe and his team, and the chairmanship of Mr Foss.

I was intending to draw members’ attention to a paragraph in the commentary on the bill in relation to use-of-money interest deductibility. It states: “We are concerned that the existing legislation is not clear about the circumstances in which use-of-money interest is deductible. This uncertainty may cause some taxpayers to incur penalties for mistakenly claiming a deduction for use-of-money interest where it is in fact non-deductible.” In the course of the consideration, as a new member of Parliament, it was an eye-opener to me that Parliament would have these laws. We acknowledge the law, and we acknowledge that the law was uncertain. Members of the public and taxpayers could mistakenly pay their tax and be penalised. It is incumbent on us as lawmakers to pass laws that are certain, so people going about their lawful business can comply with them without fear of penalty.

The provisions of this bill are designed to assist small to medium sized businesses to trade in the current environment. We all know how difficult it is. The small to medium sized sector is very important to New Zealand, in just the same way as businesses in Auckland are. The point I was trying to make this afternoon is that it is very important to have a very efficient transport system in Auckland. The deputy leader of the Labour Party seemed to think that I was from Hawke’s Bay. Although it is a very wonderful part of the country—I had a business in Hawke’s Bay—I have long been a resident of Auckland. I grew up in Auckland. I said in my maiden speech that I am an old boy of Otahuhu College, and I am very proud of it. I am very much aware of the transport problems in Auckland. The deputy leader of the Labour Party clearly did not listen to my speech, because I acknowledged the work that had been done by Labour in the latter years of its 9-year term.

This bill is designed to assist small to medium sized businesses, as I said. It will lift the thresholds for the payment of PAYE, fringe benefit tax, and GST. It will also reduce the provisional tax uplift for provisional taxpayers. It makes provisions for the deduction of legal expenditure in certain circumstances, and it reduces the rates of interest due for underpayment of provisional tax. However, it is interesting that Mr Cunliffe said that the bill did not go far enough. Mr Nash talked about supporting the bill despite the fact that it is not perfect.

I think the real issue is the one that Mr Dunne raised. It is all very well to talk about bills not going far enough and asking where the National Party’s plan is. Mr Dunne talked about the real issue of how much revenue we can give up. The reality is that this Government finds itself in a position where it cannot give up revenue.

Mr Foss generously talked about the submissions that have been received from the three submitters, and, in particular, the submission from the New Zealand Council of Social Services. Its spokesperson Ros Rice appeared before the committee. The interesting thing about that submission is that the council is very concerned about the economy that this country faces right now. In fact, it suggested that far from reducing the rate of provisional tax uplift, the Government should actually reduce it below 100 percent. The council said that in its best estimate the average profits accruing to small business in the years ahead during this recession will be at best 80 percent of last year’s income—80 percent!

The New Zealand Council of Social Services was suggesting that in the calculation of provisional tax, taxpayers should be required to base their tax payments on only 80 percent of the previous year’s tax. We all know that we have the ability to estimate down or up, but if we estimate down and we make a mistake, then we are subject to penalties. One of the reasons that the select committee ruled out the lowering of the rate of provisional tax uplift from 100 percent down to 80 percent was simply that the country could not afford it.

I believe that one of the reasons the country is not in a position to afford it is the expenditure that was carried out by the previous Government, which has not been efficient expenditure. There has been a huge amount of money wasted, and I note the Green Party member spoke earlier about a national cycleway. The previous Government, less than a year ago, spent $1 billion buying KiwiRail, and that business has been written down to virtually nil.

The New Zealand Council of Social Services came to our committee and told us that the country was in recession and that small to medium sized businesses are hurting by the Government’s insistence that people pay their tax based on 100 percent of their previous year’s income. It said that the Government is taxing people too much and asked us for relief, but we are not in a position to be able to grant that submission.

The ACT Party will be supporting the bill. The bill could go further, but the current Government finds itself not in the position to be able to do so. Thank you, Mr Chairman.

BRENDON BURNS (Labour—Christchurch Central) Link to this

I am pleased to rise and speak in this debate, the Committee stage of the Taxation (Business Tax Measures) Bill. I acknowledge the way in which the bill has proceeded through the Finance and Expenditure Committee, and I also note that my Labour colleague the Hon David Cunliffe has foreshadowed some proposed amendments that will assist with making more of the opportunities that this bill provides to small to medium sized enterprises. They are the lifeblood of our economy. Around 90 percent of the jobs are provided by them.

This bill will provide modest, amending legislation to assist, particularly, the small to medium sized business sector. It introduces some welcome changes to tax law initiated in large part by the previous Labour Government, since when we have had a world economic change of such magnitude that this bill deserves to be part of a much wider set of initiatives; perhaps—as Minister in the chair, the Hon Peter Dunne, has indicated—something more of a South Island rucking than a rolling maul.

This is a bill for business as usual, and what we see is what we get. There are welcome, if modest, changes to tax rates and regimes for small to medium sized enterprises, but the bill is a small cog that is not yet enmeshed in a much wider wheel. That said, some encouraging signals were made to the Finance and Expenditure Committee, I thought. For instance, the officials were asked to detail how the Inland Revenue Department is acting to do all it can to assist businesses through the obligations that they now meet, given that thousands of them started the business year last year, at a time when continued buoyant trading was predicted, and given that the world outlook has changed so dramatically since that time.

I am pleased to see that the department has acted and is now publicising some of the initiatives it plans to bring about to assist people in business who are having difficulties meeting instalment arrangements. With a range of options being available, the department is emphasising that it is now possible to establish instalment arrangements for taxpayers to pay off their debts. These can be renegotiated in some circumstances. There is scope for write-offs. We are also seeing a media programme being developed, so that businesses around the country know very clearly that the department will be there to try to assist them through these very, very difficult times. An 0800 number is being staffed by BIZinfo staff, and a contact centre team is being briefed to advise taxpayers on how best to meet their arrangements. I think those are good, promising initiatives from the department.

Unlike what was claimed by the member for Napier, the bill does not do much to blunt the edge of the recession. It could have done much more to do that.

DAVID BENNETT (National—Hamilton East) Link to this

As we talk about the Taxation (Business Tax Measures) Bill I think it is prudent to just reflect on the current circumstances that the country and world economies are in. It is probably important when we consider the respect with which both the major parties and the minor parties have shown towards the need for reform in this area and to the need for legislative change. I think that all small businesses throughout the country will be grateful to the National Government for bringing these changes forward so that they can become a reality and for providing the impetus for the changes.

AMY ADAMS (National—Selwyn) Link to this

I am very pleased to rise at this Committee stage to talk to the Taxation (Business Tax Measures) Bill. It is a bill that I have spoken about before in the House, and I have watched it with considerable interest as it passed through the Finance and Expenditure Committee. As we have already heard this afternoon, it has been very pleasing to hear the multipartisan support for the bill, and the way—now so more than ever—in which all parties have really come together to recognise the importance of enacting exactly these sorts of changes into New Zealand law.

I think that what everyone needs to be clear about is that the small to medium business sector is really at the engine room of our economy. These are the businesses that will see New Zealand through the recession and get us ready to be in a strong position to come out of that recession. As my colleagues on this side of the Chamber have already spoken about, we have to foster and protect these businesses as much as we can, because if we let them go, it is not a matter of flicking the switch and having them back when we are ready to go. If we do not do all we can to protect our small to medium enterprises, then New Zealand will not make the sort of recovery that it can and should make out of this recession in time to come.

Certainly in my area of Selwyn, the small to medium enterprise sector is the predominant one. Selwyn does not have a major metropolitan commercial sector; most of the business in my electorate is in the category that is affected by this bill. These businesses are calling for exactly these sorts of changes. So it is very pleasing to see the bill pass through the House, and it is very pleasing to see support for it.

We have heard a number of other speakers this afternoon talk about some of the issues that we looked at closely at the select committee. I think that everyone in this Chamber agrees that we want to do what we can for business in these difficult times. But we have heard from the Minister in the chair, the Hon Peter Dunne, and I completely endorse what he has to say—that we need to balance some of the ideas that are put before us, which may be very valid at face value, with our ability to forgo revenue. The Minister has made that point and I think he has made it completely correctly. For every advantage and piece of assistance that we can give to businesses we do have to look at the overall fiscal cost, and that is certainly something the select committee looked at very closely as we worked through the various submitters’ suggestions.

One thing I want to talk about that our committee looked at closely, is the work that the Inland Revenue Department is doing around instalment arrangements, and the help that can be given to taxpayers who find themselves in a situation where they are not able to pay their tax on time. This is an ongoing issue for the department and, certainly in the times ahead, it expects this to be an issue that becomes considerably more prevalent. We looked at what the department was doing around that—the instalment arrangements that it was talking about and how it was getting that information out there. I think those discussions were very fruitful and will certainly be taken away by the department to work on. But as we have seen in the bill, the changes that have been recommended by the select committee are largely technical in nature and address drafting errors. Fundamentally, what we see in the bill are the policy matters that we have already discussed through the first and second readings.

When one gets down into the detail of the bill, and unfortunately this is a bill that one needs to look at the details of in order to get the real flavour of it—it is not just a one-hit “this bill does x”—one sees that it does a number of small things, each making important contributions. Mr Foss has talked about his favourite provision being the uplift provision, and I am in some agreement with him on that. The change to the uplift rates will make a considerable difference. The interesting thing with tax bills, which I am certainly learning as a fellow new member on this committee, is that when one starts to drill down into what these benefits mean to a business community, they are quite real. In the first reading of the bill we heard that the provisional uplift rate change will put another half a billion dollars into the pockets of small to medium sized businesses—that is $500 million of extra cash flow that will pump through the arteries of the New Zealand business sector as a result of that one change. It is the sort of thing that rolls off the tongue easily, and it sounds like a relatively minor change, but it is a real, tangible, stimulating benefit to the economy and it cannot be overlooked. What it means is that in the 2008-09 and 2009-10 years, instead of having the 105 and 110 percent uplifts automatically applying, it will be the 100 and 105 percent increases. Of course, 30 percent of taxpayers are currently on a 95 and 100 percent basis, and 30 percent of taxpayers will now be entitled to lower uplift rates of 90 and 95 percent.

I want to touch quickly on two other matters. One relates to GST and it is a matter that is near and dear to my heart, and it is the raising of the payments basis qualification level and keeping it up to $2 million before a business has to go on to the invoice basis. Believe me, as a small-business owner, one could be talking about hundreds of thousands of dollars that suddenly have to be found when that invoice basis threshold is hit. Once again, by moving that amount to $2 million a lot of cash flow will be put into the heart of the New Zealand business sector. It will keep businesses viable, which at this time, when we are all working hard to protect jobs, is fundamental. So that is one provision that I am very, very pleased to see. Alongside that provision is the 6-monthly registration basis increase and lifting the threshold to elect to register up to $60,000, which are all matters that make a big difference.

The final matter that I want to mention briefly—and I do not think it has been talked about this afternoon—is a relatively small matter in relation to the deductibility of legal expenses of up to $10,000. As a previously practising lawyer, and knowing the machinations that are often worked through to categorise legal expenditure of reasonably minor amounts, I know that it involves a lot of consultant time—business time—being wasted on what is effectively pretty small bickies. To be able to say that up $10,000 legal costs are deductible is exactly the sort of simplicity we need to bring more of into our tax system. So that is a measure that I wholeheartedly endorse in application and in philosophy.

Does the bill go far enough? Well, it will not stop the recession but it will keep businesses functioning that might not otherwise function; it will protect jobs; and, as I said at the outset, it will mean that those businesses are there to help fuel the recovery when the time comes. The bill is being looked forward to in the community, and I know that is certainly so in my patch. It is very much needed and I am pleased to see that it is being delivered.

Hon DAVID CUNLIFFE (Labour—New Lynn) Link to this

In some brief concluding remarks for this part of the discussion from our side of the Chamber I will do something that is unusual around this place and particularly thank our opposite numbers on the Finance and Expenditure Committee. I think the chairman, Craig Foss, has chaired the consideration of this bill extremely well. I thank the officials, who have provided sound advice to us and responded quickly to our questions, and, indeed, I thank the Minister in the chair, the Hon Peter Dunne, for his undertaking today in the Chamber that he would follow up on some of the committee’s suggestions in the forward work programme, including the issue of the patent life deductibility.

I would like to chip in on one matter of fact and that is in respect of revenue forgone in regard to the use-of-money interest payments. The Minister has rightly pointed out that if all use-of-money interest was negated the fiscal cost would be about $400 million. That is true, but the particular measure that the Opposition has suggested today, which was a relatively minor realignment to the Reserve Bank’s 90-day bill rate, would on Inland Revenue Department advice cost only about $5.7 million. These are incremental steps but I think they are ones that would add positively to the measures that the member who has previously resumed her seat drew attention to.

In that regard it is worth reminding ourselves that this is not a trivial bill. The fiscal cost of these measures is close to $500 million, and I guess that is why there has been a little bit of discussion in the Committee today about the mixed parentage of this bill—the bipartisan parentage of the bill—and it is important to see that because the uplift measure on its own is worth around 20 times the stimulus of, say, the impact of the 9-day fortnight on jobs. That is a $20 million measure; this is a $450 million - odd measure. That gives us some order of magnitude about the power of tax changes that might sound reasonably boring, but if one is doing the books of a small business then, as Amy Adams said, they are real. So this bill does matter. It matters to real Kiwis, to real small businesses out there who are among the 99.5 percent of businesses that do not qualify for the 9-day fortnight under the rules that have been espoused.

The final point I want to make—and I hope the Government members will forgive me if this reiterates an earlier theme—is that we do have to hold in our minds the relative magnitude of the changes that have been proposed. By my count, the total value of the stimulus that is going through now is around $13 billion, of which $10.7 billion was from the Labour Government’s 2008 Budget. Of the new stimulus from the National Government around $500 million ostensibly was from the infrastructure package, and around $500 million was from this tax bill. That is why we are pointing out that of that $500 million, a good whack, probably a majority, are matters that, as the Minister and I have earlier discussed, were either in legislation prior to the election, or were on the officials’ work programme, or were announced by Labour as part of its intention for this term of Government.

But that does not matter as much as the fact that we are working together as a Parliament, right across parties, and right around this House to try to do something to take the pressure off ordinary Kiwi businesses during what we know will be a pretty rugged 2009. I have just been rereading the Governor of the Reserve Bank’s testimony around the quarterly Monetary Policy Statement—to the same committee that has deliberated on this bill. He reiterates that he thinks 2009 will be a pretty ugly year but that we will see an upswing in 2010. I hope he is right. I hope that New Zealanders can see their way through this, and the Opposition is committed to providing constructive suggestions, working with all parties to try to make that as good a reality as we can. Thank you, Mr Chairman.

PESETA SAM LOTU-IIGA (National—Maungakiekie) Link to this

I endorse much of what has been said this afternoon. I am glad that we have used the word “multi-partisanship”, because it is not just about Labour and the National Government. We have heard from a number of other parties that support this bill, that support the measures within this bill, and that certainly support the purpose behind this bill, which is to help our small to medium sized enterprises as they struggle through this world recession.

Much has been said about the global recession, but there was a report out yesterday that said that New Zealand was in good stead in terms of its financial institutions, and that those institutions have managed to not get tied up with a lot of the derivatives and the subprime mortgages that affect our friends in the US and the UK. But this is not about a bunch of politicians arguing in the House in Wellington. It is about mum and dad businesses—the small businesses that are out there trying to do good for their families, do good for their regions, and do good for this country.

I spoke at a business breakfast where there were over 50 business owners representing a wide range of business interests in my electorate in Ellerslie. The thrust of their opinions and their views was really around taxation, compliance relating to GST, provisional tax, and various papers that needed to be filed with the Inland Revenue Department. They also talked about the need for the Government to understand that the credit crunch is real in this country, and that working capital is one of the things that they are finding difficult to attain in order to drive their businesses forward.

As many speakers have intimated this afternoon, this bill is really about freeing up cash flow for small to medium sized enterprises. It is about reducing compliance around some of the filings. The one clause that no one has picked up on concerns the GST registration threshold being raised from $40,000 to $60,000 for GST turnover. I think that is a huge boost for small to medium sized enterprises, particularly sole traders who are going about their work and do not want to deal with this type of filing of papers on a regular basis.

The other point that has not already been mentioned is around a regulatory impact analysis and the adequacy statement that the regulatory impact analysis team has put forward and determined to be adequate. However, the consultation undertaken with regard to the provisional tax uplift rate was deemed to be a little bit on the light side. That is understandable given the time constraints in which we are trying to get this bill pushed through the House.

This bill—and many have talked about its other clauses—does not solve the whole crisis that this country faces. But it does add to the mix of initiatives that this Government has undertaken to reform the Resource Management Act as many developers and businesses out there are trying to improve their capital stock, their plant, and their machinery, and are having to deal with regulation and red tape, which does not complement what they are trying to achieve. So the changes to the Resource Management Act will certainly be positive.

The 90-day probationary period for small businesses is a huge boost. My colleagues on the other side of the Chamber may disagree, but the feedback I am getting from my electorate, from workers and employers who have taken on this type of arrangement, is positive. It gives those who would not otherwise have a chance to be employed the chance to prove themselves. Also, the KiwiSaver thresholds are being reduced, and that has been positive as well. Low-income workers can now afford to join the scheme. It will benefit low-income workers, who the Opposition says cannot afford to get on to the scheme.