Taxation (Consequential Rate Alignment and Remedial Matters) Bill

Hon PETER DUNNE (Minister of Revenue) Link to this

I move, That the Taxation (Consequential Rate Alignment and Remedial Matters) Bill be now read a second time. This omnibus bill consists of a good deal of catch-up legislation that makes changes to the law that flow on from earlier tax changes that have been made. It also generally updates the law in a number of areas to give taxpayers greater certainty.

The main feature of this bill is the alignment of resident withholding tax rates on interest and portfolio investment entity tax rates with the recent changes to personal tax rates, and the 30 percent company tax rate that was introduced last year. This alignment was considered at the time of the October 2008 personal tax cuts, but was postponed until this year to allow time for consultation with the financial institutions that must make the necessary changes to their systems. The new resident withholding tax rates on interest, as introduced in the bill, are 12.5 percent, 21 percent, 30 percent, 33 percent, or 38 percent, depending on income levels. As introduced, the bill proposed a new default rate of 38 percent for people who do not choose a rate with their bank. The idea of using the highest personal tax rate as the new default rate was simply meant to motivate individuals to choose a resident withholding tax rate for their personal income that correctly reflected their personal tax rate and then to communicate this to their bank. The thinking was that if they failed to do so, their interest would automatically attract the highest resident withholding tax rate, which would be a powerful incentive for taxpayers to communicate the right rate to their banks and not repeat the painful experience.

The main recommendation from the Finance and Expenditure Committee on these proposed changes is that the default rate for existing bank accounts should not automatically rise from 21 percent to 38 percent from 1 April 2011, as was originally proposed. The committee reported its concern that if the default rate for existing bank accounts was raised to 38 percent, many taxpayers who had lower marginal tax rates might be overtaxed. They would not know that they would be entitled to resident withholding tax rates lower than 38 percent. In turn, that would mean low-income earners would be taxed at the same resident withholding tax rate as those in the highest tax bracket, which the committee reported would not be fair.

The committee also thought that shifting the rate for existing bank accounts would impose significant administrative cost on the banks and on the Inland Revenue Department, since banks would have to notify their customers of the new default rate and the department would have to issue extra personal tax summaries. So, instead, the committee argued that the Inland Revenue Department should instruct banks to change individuals’ resident withholding tax rate when it determines that they are using a rate that is not consistent with their marginal tax rates. This new proposal should result in the 38 percent rate generally applying only to those people for whom it is appropriate, therefore reducing compliance costs for banks and other interest payers. However, the committee recommended that the default resident withholding tax rate should remain at 38 percent for individuals who open new bank accounts from 1 April 2010, in order to encourage those individuals to select a resident withholding tax rate that is consistent with their marginal tax rate. Having considered the changes recommended by the committee, I am satisfied that they will help make for better, more effective tax law.

As a complementary measure, the bill also aligns the portfolio investment entity tax rates with the new personal tax rates, so that portfolio investment entity rates will now be 12.5 percent, 21 percent, and 30 percent. The bill also raises the income thresholds at which those portfolio investment entity rates apply. These changes will ensure that people who invest in portfolio investment entities are not disadvantaged relative to direct investors. The bill also proposes a number of other measures, including the introduction of a new 12.5 percent secondary tax code and a new withholding tax rate for extra pays that brings the withholding rates on employment income into line with new personal tax rates, and will thus help ensure that low-income workers do not have too much tax withheld. Further proposed changes in the bill will allow the Inland Revenue Department to accept corrections of minor errors in subsequent returns in order to reduce costs for taxpayers. Another measure ensures that the Inland Revenue Department does not need to issue a personal tax summary automatically if a taxpayer is likely to have paid the correct amount of tax. This is intended to reduce compliance costs for taxpayers and administrative costs for the Inland Revenue Department. The bill also proposes changes to allow tax agents more time if they need it to allocate beneficiary income.

Together, the changes proposed in this bill will give effect to some necessary catching up on earlier tax changes. They will give greater taxpayer certainty and help the tax system to operate more effectively. Finally, as part of a long-term project, the bill contains an amendment to ensure that the Inland Revenue Department can issue notices and other information by email, while making the tax administration rules for sending information electronically more consistent with the rules for sending information by post.

I advise the House that before the Committee of the whole House stage I will be introducing a Supplementary Order Paper that adds further measures to this bill. A number of them are minor remedial amendments, but all of them need to be legislated for as soon as possible. One group of substantive amendments contained in the Supplementary Order Paper will clarify the tax treatment of the facilitation fees charged by inbound tour operators. The Prime Minister and I announced earlier this year that such a law change would be made, and I subsequently instructed officials to consult with the industry on the draft legislation to ensure that it achieves its objective. That consultation was completed very recently, and, given the lengthy history of this issue and the uncertainty it has engendered, it is very important that the lack of legislative clarity on the matter be resolved soon. That is why these amendments are being included in this bill, which is the first available legislative opportunity.

The second set of substantive amendments relates to recently signed tax treaties with Australia, Singapore, and the United States, and deals mainly with the taxation of outbound dividends. The new treaties reduce the rate of withholding tax on non-portfolio dividends paid to non-residents from 15 percent to either 5 percent or 0 percent, depending on circumstances. These reductions affect the supplementary dividend rules in the Income Tax Act, and they need to be amended before the reduced treaty rates can take effect. To prevent delays to the coming into force of these important tax treaties, the necessary amendments are being added to this bill.

The third set of substantive amendments arise from recent changes to portability arrangements for New Zealand superannuation and veterans pensions, which the House dealt with just a little while ago. These changes will ensure the correct taxation of recipients of New Zealand superannuation and the veterans pension so that the tax-free status of the pension is retained when recipients decide to live overseas. However, if recipients are simply travelling overseas, the pensions will remain subject to New Zealand tax.

I thank the select committee for its careful consideration of this technical tax bill. I know it had a lot of things on its mind at the time that this bill was before it. I am grateful for the work it has done. I commend the select committee’s report, and I commend the bill to the House.

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

I thank the Minister of Revenue for his remarks and confirm to the House that Labour will be supporting the Taxation (Consequential Rate Alignment and Remedial Matters) Bill, much of which transcends the election and carries on work streams of a remedial nature that were in place under the previous Government.

The Finance and Expenditure Committee spent considerable time on a number of aspects of this bill, and both I and our tax and revenue spokesperson, Stuart Nash MP, will mention those in some detail. I will also take the opportunity to address some contextual matters in relation to other aspects of tax reform to which this legislation bears.

Let me first touch upon some of the core issues that were the substance of the select committee’s debate. Principal amongst those was the default rate of resident withholding tax. The issue is quite simple. The default rate is currently set at the 19.5 percent tax rate. That tax rate is going out of business. It will be replaced by a new low tax rate of 12.5 percent. Government members’ position, going into the select committee reflection, was that it would not be appropriate to use that rate as a default rate, so they wanted to go to the other end of the spectrum and set it at 38 percent, the highest tax rate, on the grounds that that would maximise the incentives for people to specify what their actual rate was, rather than face such a punitive marginal rate if they did not need to.

That was an assumption of position that the select committee questioned very heavily. We received advice from officials that had that rate been implemented, many hundreds of thousands of New Zealanders would have been knowingly forced into the position of paying too much tax. I think that offended members of the select committee right around the table, and I commend the chair, Craig Foss MP, and other Government members who worked constructively with the Opposition, with officials, and with submitters to find an alternative to what we felt would have been a prejudicial and unjust default position.

The Bankers’ Association made a proposal, which was taken up by the select committee and worked around the table, to set the new default rate in the middle of the bell curve, at 21 percent, which was the modal rate where most taxpayers were likely to sit and the rate that would minimise the numbers who were positioned either too high or too low. That was the basis of the select committee’s consideration, and it is reflected in the amendments to the bill; we support that. However, we have a reservation that the default rate has still been set at 38 percent for new accounts. We are relying on the good offices and undertaking of the officials that they will work rapidly and decisively with the banks to inform individual customers who may be in the wrong position, and to ensure that they are advised of their options and how to correct their personal resident withholding tax rate.

On that basis we are prepared to support the bill, but we do caution against any future moves that build in the same assumption that it is somehow OK for a Government to knowingly pass law that puts hundreds and thousands of hard-working Kiwi families on a tax rate that is obviously and deliberately higher than the one that they are bound to pay. That is not a proper precedent, and it is one that we objected strongly to.

I will touch on another substantive amendment in the bill, which is in relation to the Permanent Forest Sink Initiative. This amendment concerns the provisions for the climate change initiative under which a person who owns land that has been reforested, or that he or she intends to reforest, can enter into a covenant with the Government and receive emissions units.

It is timely that we are debating this bill today. I do not know whether, by design, the Government has put this before us because it wants an opportunity to showcase the deal that it has been doing with the Māori Party in order to desperately save the Government’s deeply flawed emissions trading legislation, but the Permanent Forest Sink Initiative contained in this bill is just one aspect of what has now been shown to be a much bigger deal. The Māori Party campaigned on some of the highest ideals of Māoridom, including the idea that Māori people should aspire not only to tino rangatiratanga, but to every commercial advantage available to other New Zealanders. Those are ideals with which we broadly agree and for which Labour’s Māori MPs have long and tirelessly worked. But the Māori Party has sold out. It has sold out to do a deal that will simply cut an advantage to certain iwi-based owners of forests and fisheries. It is different from that which is available to other New Zealanders, and makes a mockery of the Māori Party’s commitment to Māoridom, and more broadly so because, for example, a group of Māori doctors came to Parliament today with evidence that Māori people—ordinary, flaxroots Māori people—would be amongst some of the worst affected by climate change if this bill goes through. They called climate change the No. 1 health problem facing Māori New Zealanders today.

I hold that the Māori Party has not honoured those people’s interests in doing a shabby deal for certain members of the “Browntable” to benefit from the pollution subsidies that this Government is handing out. The sooner that the Climate Change Response (Moderated Emissions Trading) Bill, which looms large above Parliament’s proceedings next week, is stopped in its tracks, the better. We are talking about tax, and that bill will put a $110 billion tax liability, equal to 17 percent of GDP, on to young New Zealanders cumulatively by 2050. I say “Shame!”.

CRAIG FOSS (National—Tukituki) Link to this

It is an absolute pleasure to rise and speak on this day, the anniversary of the swearing-in of the new National Government, which happened 1 year ago today—the National-led Government; I acknowledge our coalition partners. We never agree on absolutely everything, but, goodness gracious, we agree on an awful lot more amongst ourselves than the previous administration did.

I am quite astounded by the new-found concern for the hard-working taxpayer that the previous speaker, the Hon David Cunliffe, was trying to allude to. He talked about overtaxation, and he was all concerned. He made some points that are raised in the Taxation (Consequential Rate Alignment and Remedial Matters) Bill—that is quite right. But from the Government whose first job in taxation was to go from 33c to 39c in the dollar for the highest marginal rate, and who overtaxed New Zealand to the tune of $20 billion per annum while at the same time raising spending by about $30 billion per annum, I do not quite understand where this road to Damascus change has come from other than perhaps a glance at the consistently bad polls, be they rogue polls or not. But it is a pleasure to speak on that.

There is just one other point I will make, and then I will move on to the bill proper. The previous member was also talking about concern for children whose parents are locked out of the housing market. In the previous administration the housing affordability index and ratios for New Zealanders got as high as they ever have, to, I think, 7½ times average annual earnings, when we normally run at about 4 times average earnings after tax. So I do not know where that logic from members over there is coming from; it is probably from the same bucket as their throwing out the monetary policy framework agreement. Apparently there was a ground-breaking speech on that today. I bring members’ attention to the fact that members opposite all agreed to the framework. Dr Cullen initiated an inquiry into the monetary policy framework, which was reported back on 8 September 2008. Page 1 listed all the major points, and the majority of the committee—in fact all of the committee, on which the previous administration had a majority—fully and totally endorsed the current monetary policy framework.

I wish to thank members of the Finance and Expenditure Committee as we progress this bill. It was not a contentious bill, unlike other legislation that we have been dealing with recently, and I appreciate the contributions of all members. I acknowledge the thanks from the previous speaker, the Hon David Cunliffe. Politics aside, I think we had a pretty good outcome on this bill. I also acknowledge one of the best things—there were not many—that we inherited from the previous administration: the Minister of Revenue. Peter Dunne is doing a great job in furthering, modernising, and aligning our legislation. I also wish to acknowledge the officials, who did a great job—particularly our advisers.

If members look at the commentary on this bill, particularly towards the end, they will see that the Minister and the Hon David Cunliffe also alluded to the large issue that the committee spent a lot of time on—the fairness or otherwise of the default rate for resident withholding tax. In fact the solution, which came out of consultation with the private sector, with affected parties such as the Bankers’ Association, which are mentioned in here—remember that it will apply to all financial institutions later on—is a pretty good outcome and the Minister acknowledged that. As I noted, it was the key plank. The initial bill, as introduced, took the default rate up to 38c—the highest marginal tax rate. I note that when we crunch the numbers, yes, there is a fairness argument, which I will put aside for a moment, with my earlier comments about the previous member’s concern about taxpayers, but the concern was that those who should be on a very low, or virtually a positive, tax rate were being overtaxed because of the default rate—the wrong application of the 38c rate to their interest income. But if we crunch the numbers, it is probably a fair assumption that not many of that demographic have large financial assets that would attract large interest income and therefore a tax obligation, be it 38c, 21c, 19.5c, or whatever. It is probably a fair assumption that they do not have large financial assets that therefore make them too aggressively overtaxed. But I acknowledge the fairness argument, and we spoke about that in the commentary. Once we crunch the numbers it is not a big deal. In fact, members will see in the commentary that the actual fiscal impact, if there is overtaxation, is about $4 million per annum.

That brings me to a very, very important point. This bill is not about—and I used the term myself—overtaxation; this bill is about correct taxation, about putting PAYE or resident withholding tax payers on the correct rate, given all the knowledge that their financial institution, which is their bank, and the Inland Revenue Department have. Everyone has the option—and it is getting easier by the day—with online banking, to point and click to make sure that the correct rate is known. Of course, the only information that the Inland Revenue Department may have may be about the interest on some investment asset at the bank; it may or may not have knowledge of other sources of income that a particular taxpayer may have. The bank is, of course, blind to that, and one never knows quite what is going on. It is a very fair outcome, and I think other speakers will probably acknowledge the same point. Pretty much what was in the bill as introduced gets pushed out a year, because all new accounts that are opened will default to 38c in the dollar unless the correct rate is applied. So there is only that window. It sounds horrible that hundreds and thousands of people may be going to be on the wrong tax rate, but when we crunch it down the number will be an awful lot less than that.

I have just a couple of other quick points on the bill that the Minister alluded to. There is the modernisation of communications. Some other member might like to remind us, when speaking, of how many communications the Inland Revenue Department does a day by snail mail. It is absolutely astounding. I guess the only upside is that we are all shareholders in New Zealand Post. The figure is hundreds of thousands of communications a day; it is just astounding. So the more communication it can do by email the better it will be for the taxpayer. The Minister alluded to a couple of Supplementary Order Papers that are coming, and, in particular, the one about inbound tour operators. That is here because this is the first tax bill before the House within that window, and it would be very good to have that issue sorted out before the Rugby World Cup, to let everyone have some certainty and to apply a solution to a longstanding issue. Finally there is the portability Supplementary Order Paper, which sits off the Social Assistance (Payment of New Zealand Superannuation and Veteran’s Pension Overseas) Amendment Bill, which we debated the other day, giving New Zealand superannuation to people in the Pacific and those travelling. It corrects any anomalies there. Those people, as far as their New Zealand tax residency is concerned, will be on the correct tax rate and, hopefully, not the incorrect rate.

This is all about the efficiency of the tax system and of the tax structure, and of the obligation to make it easier in this electronic age for taxpayers to fulfil their obligations to the Crown as much as possible and with good intent. Again, I appreciate and acknowledge the officials and members of the Finance and Expenditure Committee who worked on this bill. I look forward to further speeches in the House. National will, obviously, be supporting this Government bill. Thank you.

STUART NASH (Labour) Link to this

I rise to support the Taxation (Consequential Rate Alignment and Remedial Matters) Bill in its second reading. It is basically a technical bill in nature, but a necessary bill. As has already been mentioned by other speakers, the main issue that the bill addresses and rectifies is the alignment of resident withholding tax on interest paid to individual taxpayers with the new marginal tax rates.

Now, please do not get me wrong—I certainly do not agree with the National Government’s new marginal tax rates. They were rushed through under urgency and they ended up giving, believe it or not, 30 percent of tax cuts to the top 3 percent of taxpayers. That is simply not fair. Nor did National’s tax cuts address, at all, the rising cost of living that those earning under $40,000 are now facing under the current Government. But I tell New Zealand not to worry because Phil Goff, as Prime Minister is less than 2 years’ time, will work very hard to address that dreadful unfairness and inequity. The bill deals with a number of technical issues, but resident withholding tax is the issue that has by far the greatest impact on ordinary, hard-working Kiwis. I do have a slight reservation, which I will address soon.

I have said before and I reiterate today that every new and amended tax must be judged across six categories. The first and foremost category is economic efficiency. Tax legislation should not hinder the growth of the economy. It should, in some way, improve the efficiency of the tax system and therefore the whole economy. The second category is revenue adequacy—how much tax will it gather for the effort required to gather the tax? The third is revenue integrity, which is the effectiveness in raising revenue and the ease of avoidance.

The fourth category is simplicity of administration and compliance, which means that the costs to the Government of administering the tax system and the costs to the taxpayer of complying with the tax system are kept as low as possible. The fifth is coherence, which means that a particular tax makes sense in the context of the entire tax system. The sixth category is equity and fairness—that is, who bears the burden of tax?

I would like to expand on the sixth point. It is the one that the Labour members on the Finance and Expenditure Committee fought hard for. It is to the credit of the Inland Revenue Department that it understood our argument and concerns and amended its recommendations accordingly. What I am referring to is the rate at which the default resident withholding tax is set for individuals with bank accounts that earn interest. At the risk of losing the attention of some members opposite, I will provide a couple of figures that put that important point in context.

As we know, there are four tax brackets within which all income falls: 12.5 percent, 21 percent, 33 percent, and 38 percent. The tax that individual taxpayers pay on the interest earned from money sitting in a bank account should be the marginal tax rate—or their tax bracket—that their wages or salaries are taxed at.

So those who earn close to the average wage of around $38,000 per year, and thus received no tax break whatsoever from the National Government in its Scrooge McDuck Christmas package, will have a top marginal tax rate of 21 percent. If they earn as much as the chief executive officer of Telecom, who, I think, ended up with a Christmas bonus in the form of a tax cut of around $400 per week—because he really needed it—then their top marginal tax rate is 38 percent. Their income tax rate is the rate at which the interest in their bank account should legally be taxed. If the bank does not know people’s tax rate, then the interest they earn will be taxed at the default rate.

Initially, the Inland Revenue Department recommended to the Finance and Expenditure Committee that the default rate on all bank accounts be taxed, on 1 April 2011, at the top tax rate of 38 percent, the rationale for this being that the largest tranche of resident withholding tax is collected from this group, at about $392 million per year.

There are, however, only around 267,000 taxpayers on that 38 percent top marginal tax rate, and a further 3.3 million Kiwi taxpayers are on marginal rates lower than that. Now, a total of 3.6 million sounds like a lot, but members need to be aware that this figure includes interest on bank accounts opened and maintained, for example, by parents on behalf of their children.

The Inland Revenue Department believed that if taxpayers were on the lower top marginal tax rate, they would contact their bank proactively and get their default resident withholding tax rate lowered to the correct rate, and I am sure that many would have done so. The department’s rationale was also based on three of the six categories, which I outlined initially, that constitute a sound tax. The department said that the top tax rate being the default would promote economic efficiency, revenue integrity, revenue adequacy, and revenue simplicity.

I agree to a large extent—the default tax rate being the top marginal tax rate does, by and large, meet those tests. However, in the view of the Labour team on the committee, it did not meet the test of equity and fairness. That is what the Labour Party and Phil Goff stand for—equity and fairness for all hard-working Kiwis. In fact, every member of the Finance and Expenditure Committee agreed on that point.

So we asked the Inland Revenue Department to do a scenario analysis around setting the default rate at 12.5 percent and 21 percent. The analysis confirmed that the fiscal risk of setting the default rate at 12.5 percent was simply too high. The department then concluded that a 21 percent default rate was more likely to ensure that the highest portion of individuals is taxed at the correct rate, but the risk is that that might not encourage those on the top marginal rate to proactively change their resident withholding tax rate upwards.

The department determined that the fiscal risk of setting the default rate at 21 percent instead of 38 percent was possible under-reporting of around $47 million. In the end, the department agreed with our rationale around equity and fairness, and did agree to the select committee’s recommendation of a 21 percent default rate. The department also agreed that it would proactively engage with banks and those taxpayers on higher marginal rates of 33 percent and 38 percent to ensure that the fiscal risk of under-reporting the correct rate for resident withholding tax was mitigated, and to ensure that the number of Kiwis who are either knowingly or unwittingly avoiding their full tax responsibility is kept to a minimum.

At the beginning of my speech, I noted that I had one slight reservation about the important issue of amendments to the resident withholding tax, and it is this. Even with the default rate now set at 21 percent there are still some 1.453 million Kiwis on the 12.5 percent tax rate. As I said before, a lot of them may well be children for whom their parents have set up and maintain a bank account. But that is still 1.453 million Kiwis who are on the 12.5 percent tax rate—that is, earning between $1,000 and $14,000 a year—and who have a combined interest income of $1.13 billion dollars.

The previous speaker, Mr Foss, said that that demographic did not have significant assets. I would have thought that $1.13 billion in interest income is reasonably significant, but those 1.453 million Kiwis will be overtaxed if they do not proactively contact their bank and ask for their resident withholding tax rate to be lowered to the correct, appropriate marginal tax rate. So all the members of the Finance and Expenditure Committee sought and received assurances from the Inland Revenue Department that it would do its utmost to guarantee that all New Zealanders are given as much information as possible, through public education and advertising campaigns, to ensure that those being under-taxed and those being overtaxed are well informed of their rights and the processes required to change their resident withholding tax to the correct rate that matches their marginal tax rate. As mentioned, unlike a lot of other taxes, this one requires New Zealanders to be proactive to ensure that they are taxed fairly.

That aside, I do support this bill, and I commend it to the House. Thank you.

AMY ADAMS (National—Selwyn) Link to this

I am very happy to take a call in the second reading debate on the Taxation (Consequential Rate Alignment and Remedial Matters) Bill. After listening to the speaker who just resumed his seat, Stuart Nash, I have to say that it is rather unsettling to hear a Labour member use the phrase “growth of the economy”. For a moment I thought I was in the twilight zone, but then I realised that I should not be put off by it, at all. Labour members talk a great game about the economy, but we know that for 9 years they did not do a thing to help the economy. That is the party that put the productive sector—

BRENDON BURNS (Labour—Christchurch Central) Link to this

I am very pleased, as a member of the Finance and Expenditure Committee, to take a call on the Taxation (Consequential Rate Alignment and Remedial Matters) Bill, which is a good bill that has come through the select committee. It is sensible legislation, with some amendments that I will comment on in a moment.

I will pick up on some of the comments from members preceding me, particularly the chair of the committee, Craig Foss, who did a good job at the select committee. But today in the House he commented on the speech given by the Leader of the Opposition on monetary policy, and criticised the notion that we should be considering the future of our economy and some of the levers that are used to affect the economic situation. I would like him to go back to his electorate and say to his farmers and his exporters that monetary policy is working at the moment. He should tell them that as they struggle with a currency currently at about US73c, up from US50c earlier in the year. He should tell that to farmers and exporters who are trying to go into the British market at the moment, when our currency is 44 pence to the dollar, and it was around 30 pence at the start of the year. He should tell that to those trying to buy a house in a re-inflating housing market, which is being fed by monetary policy, by banks pumping capital back into the housing market because it is a nice, safe investment for them. I commend Phil Goff’s comments today.

Amy Adams, the member for Selwyn, went on about hard-working New Zealanders. My goodness, we hear that. Let us also recall that 71 percent of National’s tax cuts last December, which were rushed through under urgency, went to just 3 percent of those hard-working New Zealanders. Therefore, the vast majority of New Zealanders missed out. Let us also recall that if those same hard-working New Zealanders had had the tax cuts that National had promised—

AARON GILMORE (National) Link to this

I rise to add to the conversation on the Taxation (Consequential Rate Alignment and Remedial Matters) Bill. It represents another example—as prior speakers on our Government benches have talked about—of more tidying up and loosening up a bit of the tax burden on mums and dads around New Zealand. But as previous speakers have mentioned, the big issue of particular interest is resident withholding tax, and the default tax rate on interest, particularly for those who open new bank accounts. There was constructive conversation around resolving that issue with the officials and some of the submitters, and some quite innovative solutions were put forward. It represented a good step towards solving that problem.

It is interesting that for those people setting up new bank accounts—like the one for my new nephew, who was born yesterday—a default mechanism will be put in place, from 1 April 2010. It is a good thing in many ways. The Inland Revenue Department can liaise with the financial institutions, particularly the trading banks, to ensure that those mums and dads who open new bank accounts have a bit more information to know what their rates should be. That way there will not be an ability to be overtaxed. That being said, there are still a whole lot of requirements on taxpayers to pay a fair and equitable share of tax and to provide the Inland Revenue Department with the appropriate tax rate for their income levels, so that people know what they will be paying.

This is one of those bills about which I think in the future people will ask why we did this. We have had a lot of rhetoric from the other side of the House about tax cuts and changes, and the Government doing all sorts of things. At the end of the day, this bill will reduce the tax burden for a number of people. It will reduce the information that they have to provide, because of the way that we are aligning these tax rates. I think that must be a good thing.

I want to focus most of my effort on two aspects of this bill that have not been talked about. One is the issue of the non-disputable requirement to pay tax. There have been a number of issues in New Zealand with individuals or corporates arguing over whether they should pay tax, and refusing to pay tax under dispute. Under current law, there is no requirement for a person to front up and pay tax, even if that person is refunded subsequently and proven right in arguing with the Inland Revenue Department. We have had a couple of high-profile cases in Christchurch where phoenix companies or high-profile individuals refused to pay the amount of tax under dispute and then took their companies or organisations down with them. I do not think that is a good thing. This bill fixes that by making it a requirement that people pay tax—it is a non-disputable requirement to pay—but it retains the right for people to dispute the amount of tax that may be payable. That is a good aspect, and one that other speakers have not touched on. It is a good, positive thing in this bill, which will help reduce some of the tax evasion and tax avoidance that exists in the New Zealand system.

We are very lucky to have quite a low level of avoidance in our system, as pointed out yesterday in a report that talked about the low level of corruption in New Zealand. Making tax payment non-disputable is an important step to try to reduce that small amount of behaviour from certain individuals and organisations arguing about paying tax. In fact, I have had one individual in my office who thought it was his right not to pay tax at all, and he had spent his entire time in dispute with the authority. To me, that is revenue forgone that could have been used to provide mums and dads with the services they want the Government to provide through the tax revenue. I think that move is a good step forward.

The other aspect that I will touch on a bit more, which was mentioned by some earlier speakers, is the issue of electronic communications. It has been a problem for the authority, and it was mentioned in much of the advice that we received in the Finance and Expenditure Committee. The authority could not be sure that electronic communications to interest payers had been received by them, so the authority was required to send written bits of information. This bill makes a change that means that where the authority has good reason to believe that an electronic communication like email has been received, then it can carry on as if it was received. That will be another good step in reducing a little bit of extra administrative cost and burden for both taxpayers and the authority. That is an extra saving of administrative cost, and our Government is all about saving money on those bits of regulation and red tape.

We have heard some discussion from members on the other side of the House about what the Inland Revenue Department might do to resolve the issue around the change in resident withholding tax rates. I have utmost confidence in the officials, and they have pointed out to us their plan to resolve that particular issue. They will put in a good education programme, so that new mums and dads—like my brother and his wife, who had a new baby yesterday—will be able to get good information so that they can set up a new bank account for their new baby. In fact, most new accounts are set up for newborn children, and 64,000 or so children have been born in this country this year so far.

We had a number of other discussions on this bill, and one of the other issues that has not been picked up on is the alignment of the portfolio investment entity rates. Portfolio investment entity rates allow a bit of extra tax deduction for those investing in certain types of vehicles, which is a good thing. This bill aligns not just the resident withholding tax rates but also the portfolio investment entity rates, and that is a good thing. We obviously still have a bit of work to do on trying to get some of those rates down further. We would love to be able to get our tax rates down further and maintain our service level in some way.

I think that this is a really good bill, as it resolves some of those niggling little issues that exist around taxpayers and non-disputable tax. It resolves some issues for the Inland Revenue Department in terms of electronic communications. It resolves the issue that exists around resident withholding taxes and the ability to get the right tax rate for taxpayers, and it helps the department to engage with financial institutions to help people get the right tax rate so that they pay a fair and equitable amount of tax.

There are a number of other changes in this bill, but I do not think I will bother the House with those at this stage. There has basically been agreement across our select committee and across the House today on those changes, and I commend the rest of the bill to the House.

RAYMOND HUO (Labour) Link to this

Taxation is a magical word. If someone has the required power to offer lip service plus a certain form of testimony, such as a personal guarantee, etc., he or she will in all likelihood get the required and expected result. The National Party’s promise of tax cuts, which was personally guaranteed by its leader before the election, is a typical example.

This Taxation (Consequential Rate Alignment and Remedial Matters) Bill is a technical bill that continues one of Labour’s work streams and makes some necessary changes. The bill introduces, among other things, new rates of resident withholding tax, or RWT, on interest income in order to align them with the new tax rates. Among the issues that were discussed at length at the Finance and Expenditure Committee, as my colleagues who spoke before me have pointed out, was the new default rate of resident withholding tax. The default rate that applies when an individual does not choose a resident withholding tax rate with his or her financial institution will be changed from 19.5 percent to 38 percent. The reason for changing the default resident withholding tax rate to the highest income tax rate, according to the commentary of the Minister of Revenue on the bill, is to encourage individuals to select the rate that is consistent with their marginal tax rate.

In the bill’s first reading I cited a news story published in the Otago Daily Times on 23 July this year. The headline reads “Tax change could catch investors off guard”. A tax expert, Mr Peter Truman, stated: “Tax changes being proposed by the Government will catch investors unaware and may see them paying more tax on their investment income,”. That is one of the reasons why we spent a considerable amount of time deliberating on this issue in the Finance and Expenditure Committee. The Inland Revenue Department listed a number of bullet points to support its analysis and underlying assumptions as to why the 38 percent default rate is desirable. Generally speaking, in setting the default rate at 38 percent rather than at 21 percent the objectives were to promote the integrity of the tax system, to reduce fiscal risk, to minimise compliance costs, and to encourage individuals to elect the rate that is consistent with their personal tax rate. I thank the departmental officials for their great work, and I thank our independent specialist advisers for their great work, too.

Basically, the proposed clauses are saying that any person who has resident withholding tax deducted at the 21 percent rate, and who has not confirmed that rate, will be automatically moved to the 38 percent rate. We received valuable submissions from concerned individuals and organisations. In general, the submitters were not supportive of a default rate of 38 percent. The main reason was that it would not be an appropriate rate for the vast majority of taxpayers who would be affected. It would result in the over-deduction of tax in respect of those individuals.

However, in respect of those individuals, the officials have suggested an alternative approach, but it would still have at least two impacts. The first impact is that a large number of interest earners would find themselves having resident withholding tax deducted at a rate that is higher than it should be. This impact would, in all likelihood, fall disproportionately on lower-income earners. The second impact is that the proposal does not appear to include a requirement that the Inland Revenue Department advise banks to move an account holder to a lower rate.

Advisers correctly commented that some of those impacts would be minimised if taxpayers were in a better position to elect the correct rate. Conversely—and this is my own take on it—some of the impacts would be maximised if taxpayers were in a worse position to elect the correct rate. One possible solution to that problem would be a major public education campaign. Other suggestions included measures such as the Inland Revenue Department setting up a toll-free phone number so that its advice is available in a timely manner. No doubt those are good suggestions and they would help to remedy the situation. It is important for us to make sure that any problems or consequences, either unintended or otherwise, are properly attended to.

I agree with Peter Truman when he said 4 months ago that many Kiwis did not get around to notifying their financial institutions of their correct tax rate. Therefore, we have the Government increasing its tax take from those who are not motivated or organised enough to advise their financial institutions of their appropriate and correct tax rate. Further, another catch in the proposed legislation, as identified by Mr Truman at that time, was the failure to alter the resident withholding tax rate on individuals, which placed an administrative burden on companies.

As I said at the beginning, this bill is a technical bill and Labour supports it. However, it is a good reminder that the National Government has failed to deliver where it matters. This Government came into office with grand promises of a tax cut programme benefiting everyone. As soon as it got in, it passed a tax cut package that gave a third of the tax cuts to the top 3 percent of taxpayers. Then in the Budget National broke its No. 1 election promise and cancelled the next two rounds of tax cuts. As a nation, the Chinese idiom suggests that civilians, or, in modern language, citizens or voters, are like water: water can float a boat and can sink one. New Zealand is not the Dead Sea, where one can float easily no matter how one performs. Too many broken promises would eventually haunt the responsible individuals or parties. There are holes in the boat and they will only help to sink it. Thank you.

DAVID BENNETT (National—Hamilton East) Link to this

I will take just a short call to finish the debate on the Taxation (Consequential Rate Alignment and Remedial Matters) Bill. The bill has been through the Finance and Expenditure Committee. It was a very good bill for the committee, following the very long taxation bill that had preceded it. Committee members were taxed completely after considering the preceding bill, but felt they were in a better position at the end of considering this bill.

Essentially, the argument in the select committee was around whether one has a high or low withholding tax rate, and then the question related to how much revenue is at stake, and, therefore, how many taxpayers would be subject to a higher tax rate than potentially they should have had to pay. That was debated at length within the committee and we came to a good solution that enables the State to achieve its goals of capturing tax that potentially was lost under the previous system, and, with education and other programmes, enabling taxpayers to be fairly treated. In all, a good balance has been achieved through this legislation.

I congratulate all members of the Finance and Expenditure Committee who worked hard to achieve that outcome. I think the National and Labour members worked well together on this committee. The officials who were present did a great job of providing us with the detail and also with some practical solutions that were necessary to get us to this point today.

This bill is part of the tidying-up of the New Zealand tax system. It is also about making sure that the Government attains the revenue that it should through resident withholding tax. In the end it is the best solution to achieve that goal, while taking into account the needs of our taxpayers. We support this bill and look forward to passing it through the House. Thank you.