Taxation (GST and Remedial Matters) Bill

Hon PETER DUNNE (Minister of Revenue) Link to this

I move, That the Taxation (GST and Remedial Matters) Bill be now read a second time. May I say by way of an aside at the beginning that a debate on arcane matters relating to aspects of the GST system may seem singularly out of place at a time when the nation will be grieving, along with the families of the West Coast, at today’s tragic developments. I am sure everyone’s hearts go out to those people in this hour of their tragedy.

Against that background, I will now make some comments about the Taxation (GST and Remedial Matters) Bill, which we are debating this afternoon. This bill aims to maintain the integrity and the fairness of the GST system by amending the Goods and Services Tax Act 1985 to strengthen the GST rules. The bill proposes significant changes to the GST system, seeking to remove tax-avoidance opportunities and reduce business compliance costs, while at the same time clarifying taxpayers’ obligations.

Specifically, the bill introduces new rules to prevent what have been called phoenix schemes—a fraud arrangement whose purpose is to create a GST refund when no corresponding GST payment has been made by the supplier of the transaction. Schemes of this nature exploit asymmetric aspects of the GST system, between the payment of tax and the entitlement to input tax refunds. The bill addresses this matter by requiring that GST-registered vendors charge GST at a zero rate on most transactions involving land or in which land is a component, if the purchaser is also GST-registered. So the capacity for one to claim the refund is reduced by the introduction of this provision. This provision was the subject of consultation last year, and an issues paper from the Inland Revenue Department called for submissions upon it.

In addition to this particular measure, the bill also aims to reduce compliance costs for businesses by clarifying certain parts of the GST rules to make it easier for taxpayers to understand their GST obligations. The areas that are being clarified include the current, technically complex change-in-use rules that apply when assets are used for both taxable and non-taxable purposes. The bill proposes to replace those rules with rules that will require businesses to apportion the input tax deductions according to the actual use of the goods and services in question. That will simplify the requirements for many GST-registered businesses. The GST boundary between residential accommodation, which is GST-exempt, and commercial accommodation, which is not, is also being clarified, as are the GST rules relating to transactions involving nominees where the purchaser has nominated another person to receive the goods and to settle the transaction.

In its consideration of the bill, the Finance and Expenditure Committee has recommended a number of changes of a technical nature. The select committee’s recommendations include expanding the definition of the term “land” to include shares in flat-owning or office-owning companies, and removing short-term leases from that definition. There are changes allowing the supplier to issue debit and credit notes to correct the GST treatment of the supply where the supply was incorrectly zero-rated or standard-rated, ensuring that the supplier is not responsible for tax if the supplier has chosen a tax treatment based on incorrect information provided by the recipient, and giving suppliers of financial services the option of using an alternative method of apportioning input tax for any non-taxable use when that method has been agreed on with the Commissioner of Inland Revenue.

The committee has also recommended changing the application date of the proposed amendment that clarifies the scope of the tax exemption for fringe benefits provided on the premises of the employer. Originally, this amendment was proposed to apply retrospectively. The select committee has recommended that it apply from the date of the introduction of this bill, which would clarify the effect of the provision going forward, while also allowing any existing disputes to run their course.

In addition, this bill proposes minor, largely remedial, changes in a number of other areas. These include allowing portfolio investment entities a deduction for credit impairment provisions, clarifying the tax treatment of superannuation funds under the National Provident Fund, clarifying the way that emissions units allocated by the Government under the emissions trading scheme are to be recognised for income tax purposes, and clarifying the fringe benefit on-premises exemptions.

Further to those changes, I advise the House that I will be putting forward a Supplementary Order Paper in due course to give effect to measures that were announced in Budget 2010. Chief amongst those measures are proposals to clarify the rules for depreciation of non-residential building fit-outs and the grandparenting of depreciation loading, to improve the fairness of access to social assistance programmes, to prevent loss-attributing qualifying companies from passing on losses to their shareholders, and to introduce new flow-through income tax rules for those closely held companies that choose to use them. All of these matters were announced in the Budget. They have been the subject of consultation subsequently, and they need to be legislated for in time for the provisions to take effect from 1 April next year.

In closing, I thank the members of the committee for their deliberations and for the constructive and cooperative way in which they have progressed this bill. I now have great pleasure in commending the bill to the House.

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

I rise on behalf of the Labour Opposition to take a call in support of the Taxation (GST and Remedial Matters) Bill and to commend the work of the Finance and Expenditure Committee, and to note a number of associated matters. Firstly, on the substance of the bill, the Labour Opposition will support this bill through all three readings. Labour has participated fully in the scrutiny of the bill at the select committee. As the Minister of Revenue said, the select committee has made a number of amendments following its usual policy of examination of tax matters, and employing an independent tax adviser to assist it in its discussion with the Inland Revenue Department on technical aspects of the bill.

We should say, for the clarification of those listening or viewing, that this is not a major policy piece of legislation. This is a set of technical amendments to improve the operation of GST and other tax matters, to close down several potential loopholes, most notably in respect of phoenix schemes, and other issues surrounding land transaction, and thereby protect the tax base. I will, therefore, take my remarks in two sections—firstly, in regard to technical matters, and, secondly, in regard to some policy issues that arise out of them.

In respect of technical matters, I note that the bill does zero-rate certain land transactions. This is in an effort to prevent phoenix-type fraud schemes where GST is refunded to a registered purchaser with no corresponding GST payment made by the vendor. Zero-rating GST prevents that shadow transaction from taking place, and, thereby, although it may not sound like it, actually prevents an avoidance opportunity from materialising. So although it is a zero rating, it is actually zero-rating the loophole in the process.

The Finance and Expenditure Committee has recommended a number of technical amendments to aspects of the bill in respect of the zero rating of land transactions, and it was the area of the bill that the select committee spent most of its time and focus on. I am sure that the chairman of the committee, Craig Foss MP, will shortly detail that consideration further. There have been amendments to the definitions of dwellings and commercial buildings, which have gone into some detail to consider definitions around rest homes, student accommodation, and the like. The bill also deals with apportionment rules, seeking to replace existing change-in-use adjustments to deal with goods and services partly used for taxable purposes and partly used for exempt purposes, with a new approach that would apportion the related input tax deductions. That is important because they will, it is hoped, be easier to use and understand, and they will avoid certain unintended consequences in usage, such as in respect of joint bank accounts, where one person could draw on the account without the signature of the other.

These matters are of a technical nature. They go on to include matters in relation to the technical definition of fringe benefit tax, certain matters around the emissions trading scheme definitions, and technical matters in respect of portfolio investment entities. I think all members of the select committee would feel that it has been a good and proper process. The committee has done its job and has made a number of recommendations based on the work of our independent tax adviser and the scrutiny of members, under the chairmanship of Craig Foss MP.

However, in relation to the second half of my remarks, it would be remiss of me not to take the opportunity to say how important it is that bills such as this do protect the tax base. I think we live in interesting times. I certainly echo the words of the Minister—having just received news in recent hours of the second explosion at the Pike River mine—that we would want to join with other members of the House in expressing our sadness at the potential developments there. But these are interesting times for other reasons, too. This has been the most unusual year in respect of tax policy and tax flows that I can remember. It is only in the last few weeks that we have had the extraordinary news that even in relation to forecasts made earlier this year, corporate tax flows are running over 22 percent, nearly a quarter, below 2010 forecasts, and that GST flows are running at over 15 percent, nearly 16 percent, below 2010 forecasts.

The immediate impact of that has been that the Government is $1.1 billion short of its expected revenue in this year alone. Of course, that cascades on top of the billion-dollar tax hole that resulted from Budget 2010. No doubt that $2 billion of revenue loss is one of the factors that has resulted in Standard and Poor’s downgrading its outlook for New Zealand’s sovereign credit rating from neutral to negative earlier this week. It cited three factors, the first of which was a loss of fiscal flexibility. Essentially, in plain English that means that the Government has been irresponsible. It has given tax cuts that it could not afford, principally to people who did not need them and in a way that has not created significant economic stimulus. The Government has done that at the same time that this halting recovery has meant that the underlying tax flows have disappeared off the edge of a cliff.

We are 22 percent down on corporate tax flows from this year’s own forecasts. That is extraordinary. I can remember no other time like it. It just proves the folly of an ideological approach to tax cuts that is reminiscent of Ronald Reagan’s America, where if only the tax rates had been cut far enough, then tax flows would have gone up. Professor Laffer was wrong, President Reagan was wrong, and John Key’s National Government is wrong. Tax flows have collapsed. They have collapsed to the point where Standard and Poor’s has reacted and said that New Zealand’s sovereign credit rating needs to go on negative watch.

Of course, there are several other reasons cited by Standard and Poor’s. One is that our export profile is under-diversified. We are overly reliant on bulk agricultural commodities, principally dairy. Because of that, we stand to be more vulnerable on the price cycles of those commodities. The link between the two points is obvious: if the Government’s capacity to lead change in the economy is undermined because its fiscal flexibility has collapsed, then it is harder for New Zealand to get out of the cul-de-sac that it is in. So Standard and Poor’s, quite rightly, has said that the Government has compounded the problem of a reduced tax base by reducing its ability to make structural change in the economy.

There are certain exemptions in the bill in respect of GST, and it is timely to remind the House and the public that although Labour has long subscribed to the view that a broad-based tax base is efficient and that when GST rates were relatively low it was prudent that there be no exemptions, Labour has changed its mind since the Government has increased the GST rate to 15 percent. We have committed to a GST zero-rated exemption for fresh fruit and vegetables that will deliver a benefit of about $6 a week to the average household of four and encourage healthy eating. The fiscal impact of that is less than one-quarter of the drop-off in tax revenues this year, so it is prudent for us to recall that in relation to the GST aspects of this bill.

The other issue that one cannot gloss over is that this bill makes amendments to the KiwiSaver scheme’s operation, but they pale into insignificance when compared with the amendments previously made by this Government. It has sliced in half the incentives for the public to participate, thereby slowing down the rate of increase in savings in the scheme. That has fed into the third leg of the treble that Standard and Poor’s drew attention to this week, which is that New Zealand’s savings gap is getting wider, not closing up. How bad is it? Our total international indebtedness—that is, the result of us not saving enough is that we have to borrow from foreigners—has climbed to around 88 percent of GDP, and it is heading for 90 percent. That is a critical problem that the Government and the Opposition must work on together to solve. I come back to the substance of this bill. It is a technical bill.

CRAIG FOSS (National—Tukituki) Link to this

I acknowledge the points the previous two speakers have made, the Minister who led the second reading, and the first half of David Cunliffe’s speech on the Taxation (GST and Remedial Matters) Bill.

I endorse the comments about the Finance and Expenditure Committee, which dealt with this bill. It was quite early on in the piece that we identified two or three pertinent points that occupied a lot of the committee’s time. We see those points reflected in the bill’s commentary. I may, if time permits, address some of the matters that the previous speaker, David Cunliffe, brought up in the second half of his speech, but we will see how we go for time.

In this second reading speech I will make a quick commentary on what happened at the select committee and what we did. The bill is relatively unchanged from when it was sent to us, but there are a couple of areas with some quite serious changes. As the Minister noted, essentially it is a better bill than what was sent to the select committee.

I summarise by saying that after the bill was sent to our select committee and we opened consideration on it, we had 15 submissions on it. We enjoyed advice and assistance from officials around the table from the Inland Revenue Department, from drafting, and from our independent adviser, Therese Turner, who assists us greatly. I acknowledge them. I think all members acknowledge the assistance and the helpful pointers they give us when we deal with what seem to be many tax bills. They seem to go into one after a while. Even as I was looking through this one, I started to think about another bill.

Anyway, these are all good tax improvements. The select committee honed in on a couple of key points. We started to go down a particular road, but we took ourselves back to ask ourselves what the original intent, the main, primary intent, of this bill was. It was to address the so-called phoenix transactions and structures. As we were wondering about some of the burdens of proof on some of the issues of vendor or supplier of services, etc., and around bank accounts—I will touch on the access to joint bank accounts and things in a minute—the committee went back to the first principles.

If we look at the Minister’s first reading speech, we see that, from memory, it was all about phoenix schemes. Essentially, there has been the ability of two parties to have different GST invoice times. One could be cash and the other could be invoice-based or 6-monthly, or whatever. If in the midst of a transaction—a property transaction, involving land—one of those companies collapses, collapses itself, or is encouraged to collapse and liquidate, and if one entity is left in credit of GST but the entity owing the GST collapses, at the end of the day the taxpayer is at a loss. In these constrained times—in fact, even in the best of times—that is not a fair burden on the rest of the taxpayers. We spent a bit of time on that.

I acknowledge Sir Roger Douglas, in particular, who picked up a couple of points in and around which entity had the burden. I think the other speakers talked about nominee companies that may be involved in land transactions. We spent a lot of time learning about the definition of land. But if an innocent party enters a transaction, there comes a time when it, or its nominees, has to ask the right questions of the vendor or the entity responsible for organising the land—for example, whether or not they have the right paperwork regarding GST being registered, and whether they have gone through the correct hoops. We had quite a bit if discussion about that, and we came to the conclusion that we should put a few more parameters around it. Again, I acknowledge Sir Roger. He picked that up and made an issue of it to the point where members can see the changes in the bill under the supply of goods, the supply of land, in the commentary, and in the various definitions.

Another point that occupied our time a little bit was student accommodation. To cut to the chase, we spent a bit of time defining what student accommodation was. Could it be the hostels up the road, a boarder at home, or one’s own son or daughter boarding? One can see how complex that can get. Again, we went back to the first intent, which was to not add complexity to the situation. We can see what we considered reflected in the commentary of the bill. Very importantly, if members look at the last paragraph in the commentary, they can see that we received assurance—and it is in writing—from the Inland Revenue Department and Treasury that they are monitoring the practical application of the changes to the definitions to guard against inconsistent or unfair treatment of boarding houses and boarders.

STUART NASH (Labour) Link to this

I rise in support of the Taxation (GST and Remedial Matters) Bill in its second reading. I enjoyed the speech of Peter Dunne, the Minister of Revenue, and I look forward to hearing it again in a couple of years’ time. There are only three things that I wish to talk about tonight. The first point is that Labour will always support good legislation that promotes fairness and equity for all New Zealanders. The second point is that Labour will always support good legislation that clamps down on tax evasion. The third point is to say what a legislative necessity this bill is. I see that Mr Bennett is nodding. He was on the Finance and Expenditure Committee and he knows what important legislation this is.

Labour always supports good tax legislation. We have supported the vast majority of tax bills that have gone through the House in this session. But the types of bills that Labour does not support are the bills that give those 650 New Zealanders who are earning in excess of $1 million a year $1,000 a week in the hand, and that give the majority of New Zealanders who are earning the median wage less than $5 a week. Please be assured that we will never support tax legislation that does not promote fairness and equity.

This bill’s headline provision is amendments to the Goods and Services Tax Act 1985 in order to provide for tax to be charged on supplies of land and transactions between registered persons at the rate of zero, to simplify the method for making adjustments for changes in use, and to streamline transactions involving nominated persons. In essence, this is just another example of zero-rating a GST transaction. What I want to know is where the howls of derision and outrage are from members on that side of the House, similar to those heard when Labour proposed to zero-rate GST on fresh fruit and vegetables, when Labour proposed a tax policy to help New Zealanders lead a healthy lifestyle. Well, there were no howls of derision when policy involved a financial transaction, but there were when there was a healthy lifestyle transaction. It says something sad about priorities, does it not, I say to Sam Lotu-Iiga. There are a number of cases where there are zero-rated provisions in GST legislation. These include export goods, financial services, and duty-free goods. In fact, there are about 17 categories of goods that can be zero-rated in certain circumstances. So when Labour proposed a policy to zero-rate fresh fruit and vegetables, it was not a bastardisation of the Goods and Services Tax Act; it was a policy that promoted healthy choice, a policy that would be better for all New Zealanders.

Other policy and remedial amendments that this bill covers include amendments to the Income Tax 2007, the Income Tax Act 2004, the Tax Administration Act 1994, the Income Tax Act 1994, the KiwiSaver Act 2006, the Stamp and Cheque Duties Act 1971, the Gaming Duties Act 1971, the Local Government (Auckland Transitional Provisions) Act 2010, and other regulations that are also in this bill. It is wide ranging in its scope and reach. Its amendments are part of an ongoing process to improve legislative integrity, which is something that everyone in this House wishes to see and works towards.

One cannot go past a GST bill without bringing to this Parliament the views and feedback from constituents on the implementation of the increase in GST to 15 percent—you know, the increase that Mr Key said that he would not make. It is not good. I have had many unhappy constituents say that this is hurting New Zealanders. It is, quite frankly, a disgrace. It all started when the then Leader of the Opposition, one Mr John Key, stood up in front of the nation and laid our fears to rest by informing New Zealanders in their living rooms that, no, he would not be raising GST if he became the Prime Minister. In answer to a specific question from a reporter—and I quote—“Can you rule out National raising GST to 15 percent?”, Mr Key replied: “National is not going to be raising GST.” If members do not believe me, then they can go on YouTube and have a look. New Zealanders will remember. A large accountancy firm, Ernst and Young, in a press statement stated that “many are realising this is not a modest increase”. Mr Key did raise GST when he said that he would not. We will forget neither those words nor his actions.

My second point is that Labour will always support good legislation. This bill is a remedial matters bill. Remedial matters bills can play an important role in tidying up legislation and closing down the holes or gaps that people and taxpayers may be exploiting. This is certainly the case with this bill. As mentioned, the main provision of interest in the bill clamps down on tax evasion. We are a country that is founded on the principle of fairness and equity, and this certainly applies to tax. This bill promotes these principles. There is something called a phoenix fraud, where GST is refunded to a registered purchaser of land with no corresponding GST payment made by the vendor. As mentioned, this bill essentially zero-rates most transactions involving land if both the purchaser and the vendor are GST-registered. I doubt there will be many in this country who would speak out against closing down a tax loophole that has been taken advantage of by unscrupulous property developers.

This bill makes other changes. These changes will not affect many people, but they are just as important, and those whom they will affect need to understand that the law around these areas will tighten up. They include, for example, the sharing of KiwiSaver member information. This bill amends the KiwiSaver Act 2006—unfortunately, it does not reinstate the provisions that were cut by that Government—and the Tax Administration Act to allow a member’s address, date of birth, and IRD number to be shared between the member’s scheme provider and the Inland Revenue Department.

We debated the on-premises fringe benefit tax exemption at length at the Finance and Expenditure Committee, because the bill as it was presented to the committee wanted to make this provision retrospective. In the committee’s wisdom, we decided that retrospective tax legislation was to be used only in very, very rare circumstances, and this was not one of them. We decided that we would let the courts determine whether people had acted within the law or outside the law.

There are provisions on joint bank accounts, and we argued and debated them at length—for example, the application for overseas donee status. One can now donate money to the Mutima Charitable Trust and the Bougainville Library Trust. We talked about Auckland Council restructuring, the tax treatment of emissions trading units, and a number of other amendments to different bills.

To sum up, I have spoken about two key points. Labour will support any legislation, and especially any tax legislation, that is fair and equitable for all New Zealanders. It will certainly support legislation that closes down tax evasion opportunities, and this bill does that. The second point is that this bill is important, because it makes a series of changes that are necessary to preserve the integrity of the tax system. This is a good bill. The Finance and Expenditure Committee agreed on every aspect of the bill. We made some good changes. It is good law, which is why I am supporting it. Thank you very much.

RAHUI KATENE (Māori Party—Te Tai Tonga) Link to this

Before I start my speech I mihi to the whānau of the miners in Greymouth and say what a great tragedy it is. I pass on my aroha and, I am sure, the aroha of other members in the House. Mā te Atua koutou e manaaki, e tiaki.

[God will care for and protect you collectively.]

I am always pleased to speak to a bill, the Taxation (GST and Remedial Matters) Bill, whose purpose is described as to “maintain the integrity and fairness”. I am even more pleased to make the connection between integrity, fairness, and GST because, of course, it suggests to me that this bill may well be the opportunity to promote the groundswell of support that emerged out of my member’s bill, the Goods and Services Tax (Exemption of Healthy Foods) Amendment Bill, which proposes scrapping GST on healthy food. Healthy eating will save millions of dollars in costs associated with poor health. It is an investment in a healthy future and an investment in integrity and fairness if ever I heard one.

I will share with the House the finding from Professor Tony Blakely from Otago University’s public health department. He has been looking into whether price discounts change people’s eating habits. The study found, from a survey of 1,100 shoppers, that a 12.5 percent drop in price increased people’s consumption of healthy food by 11 percent. The exemption of healthy food from GST is therefore designed to give New Zealanders a fair chance to get off fast foods and on to healthy foods. I say sorry to Aaron, but he would have to come off those fast foods and start eating healthily. It would be a real encouragement for him. What better way to do that than to send a clear price signal? The study basically concluded that people ate more healthy food if they were sent the right price signal.

I could, with much pleasure, focus my entire contribution to this debate on the importance of removing GST from food. At this stage it appears that neither the Minister of Revenue nor the Government has seen the wisdom of such a great approach, but hope springs eternal.

The focus, then, of this bill is to create greater clarity around certain parts of the GST rules to make it easier for taxpayers to understand their GST obligations. We fully endorse this approach. We are all for accountability, transparency, and knowing what one’s obligations and responsibilities are. Although the intention of this approach is described as helping to reduce compliance costs for businesses, we also think it is about good government—assisting citizens to appreciate their entitlements and comply with their obligations.

An important initiative in this bill introduces measures by which to prevent so-called phoenix fraud schemes. In essence, this is when a registered purchaser receives a GST refund from the Inland Revenue Department when, in fact, no corresponding GST payment has been made by the supplier of the transaction. The Māori Party supports this measure as a way to close off a loophole to ensure fairness and integrity right across the taxation system.

We are concerned about the proposal to amend the definitions of “commercial dwelling” and “dwelling” within the Goods and Services Tax Act 1985. The definition of “commercial dwelling” is to be redefined to include homestays, farmstays, and serviced apartments. “Dwelling” will also be redefined so as to refer exclusively to a dwelling that is owned and occupied by its residents. In August 2009 Brian Fallow, the economics editor of the New Zealand Herald, suggested that it was time to add GST to rents and mortgages, as currently housing is perceived as a no-go zone for the taxman. This could all change with the bill’s redefining of the term “dwelling” to include only premises that are occupied by their owners. Rental properties will therefore be excluded from the definition of “dwelling”, which could in effect provide for GST to be added to the mortgage payments of New Zealand’s owner-occupier residents, without any effect to rental properties and their tenants.

Another new measure introduced by this bill responds to the unintended timing problem for non-profit bodies accounting for GST when they supply a large asset, such as a house, to a person in need. I commend the Government for continuing to take into account the unique needs of non-profit bodies by amending the Goods and Services Tax Act 1985 in order to reduce the negative impacts and timing problems created when accounting for GST. As a constituent MP representing a Māori electorate, I know that our non-profit bodies, our volunteers, and our voluntary groups are the unsung heroes of our community. In many ways they provide the essential fuel to keep our communities thriving—nowhere more so than Greymouth at this time. We see the Red Cross and civil defence volunteers out there helping as much as they can, the students from the polytech, and, of course, all the people behind the scenes who are providing all of the cups of tea and so on that are helping the families and others to get through this hard time. It is very helpful to see the Government trying to support these volunteers in their mahi.

Non-profit bodies can often be resource-rich but cash-poor—a bit like the Māori Party, actually. This can put real strain on their ability to plan and make good strategic decisions. These bodies work for a public good, and therefore it is important that the Government ease their financial pressure wherever it can.

There are already listed on an Order in Council some special rules for non-profit bodies when it comes to GST. They are eligible to use a payments basis, even if their turnover is over the normal threshold of $2 million. The proposed amendment adds another welcome exemption in this complex area of the law. The legislation normally requires organisations that account on a payments basis to switch to an invoice basis when both the amount payable for a supply of goods or services is $205,000 or more and payment is deferred. This amendment grants an exemption to non-profit bodies. It is a most welcome amendment.

The way the current system works, it is possible that in the case of a large asset, such as a house, the non-profit body would have to account for the GST on the entire purchase price at the outset, creating a significant cost to the non-profit body. Consequently, the operation of the rule may discourage non-profit bodies from providing goods and services over a certain value. The change proposed in this bill will provide a solution to this concern in situations where the tax-base risks are minimal.

Another detail of the bill relates to donee status. Keeping a donee list up to date is key to payroll-giving legislation, which came into effect earlier this year. Again, it is another important means by which communities can keep functioning.

The bill also introduces an interesting set of measures relating to the emissions trading scheme. It aims to clearly define the values of the emission units that will be traded through the scheme, as well as when these values will be applied to the units throughout the calendar year and income tax year time frames, so that these values can be made available for income tax purposes. I will be very interested to learn what consultation the Minister has had with the Iwi Leadership Group about this particular measure.

Brokering a relationship between the Treaty partners was a key feature in the Māori Party’s negotiations over the emissions trading scheme. The negotiations allowed us to bring together the two Treaty partners: iwi and the Government. So Māori values are taken into account not only in this scheme but in this country’s overall legislative approach to addressing climate change issues. It also provided the means by which the Crown would understand its obligation to consult. We look forward to seeing how this relationship will translate into a practical reality throughout the select committee.

The many varied aspects of this bill ensure we will continue to have an active interest in the evolution of the Taxation (GST and Remedial Matters) Bill. At this point in time we will support the bill at its second reading.

AMY ADAMS (National—Selwyn) Link to this

I rise tonight to take a call on the Taxation (GST and Remedial Matters) Bill. However, like the member who has just resumed her seat I could not in all good conscience speak about tax in the House tonight without taking a moment to reflect on the tragedy that has happened in the country today. I know it has been mentioned before, but having spent the last 3½ hours now, I guess, watching coverage as it came out of Greymouth, I think everyone in the country is focused on things that are far more important and immediate and real to us than the passing of taxation legislation. Like the member from the Māori Party, can I take just a moment to express my extreme sorrow and heartbreak for all the miners, their families, and the whole community. It is a devastating thing for them to be going through.

We are, however, continuing here in Parliament, and this evening we are in the second reading of the Taxation (GST and Remedial Matters) Bill. As a member of the Finance and Expenditure Committee, I have had a chance to get to know this bill and work on it as it progressed through the select committee. One of the things that has become more apparent to me as I have sat on the committee is that tax—however inherently dull, dry, and unappealing it is to those of us who do not live and breathe it as an occupation—is actually a dynamic, growing, and living organism. One of the things I think we can all say quite safely is that, leaving aside policy changes, we will never have the perfect tax system. I do not think we will ever be able to say “You know what? We have done it now, we have knocked it off, it is sorted, just don’t touch it, it will be fine.” Tax is something that is very biotic, almost. It is growing, it is breathing, and day by day we are learning ways to improve it, to make it better. This bill is a good, although small, example of the things that can happen in that space.

The GST system, which the majority of this bill focuses on—it is not all of it—is widely commented on internationally as being an excellent taxation system. Its simplicity, its ease, and the way it is applied is often the subject of a lot of positive commentary around the world, and that is something we should be very proud of. But, harking back to the comment I just made, that is not to say that we have a perfect system, by any stretch.

This bill sets out to do a couple of things that we should always be mindful of in the tax system. One of the things we must do is to identify and close down areas where people take advantage of tax law. We have heard both Mr Nash and Ms Katene speak of the phoenix transactions that this bill addresses. I have to say that they are not something that I have been aware of in my practice as a property lawyer. I am very pleased to say that I do not think any of my clients would partake in that. I certainly would not have been part of it if I had known it was going on. But clearly it is an issue, and it is one that the Inland Revenue Department has identified, and having identified that loophole it is incumbent on the department and on us to do what we can to shut it down. What we do know is that the vast majority of New Zealanders are working hard, paying their taxes, and contributing. There is not a person in this House who would not support jumping on any New Zealander who seeks to avoid paying taxes and who exploits the tax system for their own financial gain.

So this is a situation where these evasion schemes have been identified. They are nothing more than a way to rort the tax system, to take money from the Crown, from the consolidated account—the wealth that belongs to every New Zealander—that they are not entitled to. So there can be no other response than to support a way to crack down on those practices. Having said that, as a committee, we certainly did not want to say “Good as gold, you’ve got a problem, whatever you think is fine with us.” I think the committee can be righty proud of its work. We certainly worked on a multipartisan basis—there was no politics in this—to ensure that while we addressed what we needed to crack down on, we did not, to the best of our knowledge, and, certainly, the best of our intentions, do it in a way that would create further problems, or perhaps overreach. That has been an issue in the past.

In addition to closing loopholes, the other part of that continual process of evolution of this living, breathing thing that we call the tax system is working out ways to make it a bit simpler, and a bit easier to understand. I know that the Inland Revenue Department is working on the results of Making tax easier: A government discussion document,and I support it in that, because tax is not a simple thing, yet we need it to be simple—so there is a continual tension there. Some of the changes that the department, through the Minister of Revenue, has brought to this House will not set the world alight, but they are commendable, because they do that exact thing—they try to identify areas where there has been a lot of confusion or where it is hard for taxpayers to know what their obligations are. The department has tried to identify and address them and make them clearer.

We have issues around where assets are used for both taxable and non-taxable purposes. We have issues around the definition or a line between the use of residential accommodation and commercial accommodation. One issue that is a bit more meaningful to me in the property law game is around the GST rules, where properties are bought through nominees, and there is a subsequent nomination of an eventual purchaser. This bill makes it very clear from the outset how GST will apply in that situation. This stuff is not about massive policy changes of direction. It is just about making a very simple, clear, easy-to-understand set of rules so that people going into transactions can understand and know what their obligations are up front.

If there is a theme that I am always harping on about at the select committee, it is about the obligation of the department to make the rules as easy to understand, and as up front as it possibly can, rather than an ambulance at the bottom of the cliff approach. I am always very happy to see them working with supporting legislation, which encourages us to clarify areas where there is confusion. I want New Zealanders to get their tax right the first time. I do not want them spending a lot of money on lawyers and tax accountants and disputes with the Inland Revenue Department when they are not deliberately trying to rip off the system. The aspects of this bill that address that are certainly directed in that regard.

The other matter I want to touch on, reasonably briefly in this contribution, is a matter that the select committee spent a bit of time on. It is the issue of the powers of the Inland Revenue Department to take money from joint bank accounts. There is an inevitable tension here. We want the department to have the power to recover tax owed and to stop people from being able to deliberately avoid the payment of their taxes in their contribution to the running of this wonderful country. Equally, though, we have to be certain that we do not allow the department to operate in a way that has unfair consequences to other parties. At the select committee we were very concerned about safeguards and how they would work when we are allowing the Inland Revenue Department to help itself to money from joint bank accounts.

We spent a lot of time discussing that issue, and I acknowledge the Hon Roger Douglas, who was very concerned about this point and was the originator of the concern of the committee. How do we ensure that the department’s authority is appropriately exercised? One of the examples that did concern us was the situation, for example, of a business partnership. A joint bank account can be a lot more than a cheque account for a husband and wife, or for mum and dad. It could easily be, as it was in my case for many, many years, a case of legal partners operating in partnership through a bank account. It did not seem appropriate to us that money could be taken out of that account to satisfy the personal tax liability of one partner without the knowledge of the others, particularly where the extent of that partner’s share of the bank account could be considerably less than their amount of the debt. So they could be a 1 percent partner, yet the whole of the account could be subject to seizure. That was an issue that we put to officials on a number of occasions, and on more than one occasion we asked them to come back to us to make sure we got it right. I pay tribute to them. I think they worked very hard to recognise and satisfy the committee’s concerns in that regard.

As I said at the outset, who would want to be thinking about tax at a time like this, when the country is dealing with what it is dealing with. But, for all that, we do have to carry on in this House, and I think there has been widespread support across the House for the Taxation (GST and Remedial Matters) Bill. That is as I would expect, because it is, in essence, about ensuring that New Zealanders are not ripping off the tax system and ensuring that good New Zealanders find it as easy as possible to get their tax affairs right the first time every time. That is certainly something that we can all support. I commend the bill to the House.

BRENDON BURNS (Labour—Christchurch Central) Link to this

I will start tonight by joining with other members in the House in expressing my sympathy to the families of the 29 miners whose lives have been confirmed as lost at Pike River. In Christchurch over the last 3 months we have had our own share of heartbreak, but it is nothing like what those families must be going through tonight on the Coast, and in other parts of the country and other parts of the world. Mercifully and miraculously, no lives at all were lost in the 4 September earthquake in Canterbury, and that was in a city of about 400,000 people and a wider province. So when we have confirmed tonight the loss of those 29 lives in a population on the West Coast of, I would guess, fewer than 30,000 people, it brings it home to us that every Coaster will be touched by this tragedy in some way—in a personal way or in another way. I think that the hearts of all the members of this House will go out to that community tonight. It does, of course, make the job of considering a rather dry, technical tax bill a little harder, but that is the duty of this Parliament tonight.

The Taxation (GST and Remedial Matters) Bill, as has been mentioned, makes some rather technical changes to tax legislation. The timing of it is rather interesting. It came before the House and was referred to the Finance and Expenditure Committee while the Government was considering and then introducing the GST tax changes to take GST to 15 percent. Although this bill is quite a separate matter, it obviously reminds us of the other GST changes. I note the very recent public opinion poll that shows that no less than 53 percent of New Zealanders feel no better off after the tax changes that were at the heart of the increase of GST to 15 percent and allied cuts in personal tax. This bill deals more broadly with taxation.

We note that throughout the earlier part of this year both the Minister of Finance and Prime Minister were talking about how the tax system was a very powerful lever in the economy. In this year’s Budget we saw tax cuts for those on high incomes. The legacy of that Budget has been higher prices across the board, not the impact in terms of the recovery that was expected. The Prime Minister predicted that we would be growing aggressively out of the recession, but in fact the economy recovery has flattened off. In the words of the Reserve Bank, it is now a “tepid” if not “fragile” recovery. So the tax cuts introduced by the Budget are not making any particular impact in respect of the economic recovery.

Coming back to this bill and its amendments, there are a number of technical amendments to the KiwiSaver scheme. It is with some regret that we note the Government did not take the opportunity to use this bill to undo some of the damage that it did under urgency in this House 2 years ago, when it took apart the KiwiSaver regime. It is interesting to note that in the Finance and Expenditure Committee today we heard the Retirement Commissioner talk about the three pillars that are at the heart of how we approach superannuation in this country, with the first being private savings, the second being New Zealand superannuation, and the third leg of it being what KiwiSaver has introduced. Yet we note that KiwiSaver has been gutted under this Government.

KiwiSaver was, in fact, the first real attempt by us as a nation to lift private sector household savings in New Zealand to try to get somewhere close to Australia, where hundreds of billions of dollars in savings is generated through its savings scheme. Australia has a 9 percent employer contribution. It is a much wealthier nation, I acknowledge, and that is why KiwiSaver, as introduced by the previous Labour Government, had a graduated scheme, with a 1 percent employer contribution rising over 4 years to a 4 percent contribution. It was not compulsory; people were able to opt out if they chose to, but the scheme was designed to encourage people to come in. At the last count, I think nearly one and a half million New Zealanders had taken up the KiwiSaver scheme. So its popularity is certainly there, and it is with regret that we saw those cuts.

We thought this bill might be a chance for the Government to acknowledge that, because just as the bill was coming to the select committee, the Government acknowledged to the nation that we needed to do better in savings—we needed to do considerably better in savings. If we needed an underlining of that, it came in the last few days, with the decision of Standard and Poor’s to put this country on negative credit outlook. The reason it did that was our poor savings record as a nation. But there is nothing in this bill in respect of reversing those cuts to KiwiSaver; regrettably, the amendments are technical.

What KiwiSaver had done was to begin the process of turning round our savings problem as a nation. It was allied with the Cullen fund, the New Zealand Superannuation Fund, and also that other pillar—if you like—of our savings, which is our attempt to ensure that the baby boomers amongst us have some more security from New Zealand superannuation when retirement day comes. Of course that fund, like every other superannuation fund in the world, is starting to pick up in terms of the return it is making after it was affected by the vagaries of the world economic crisis in 2008-09.

The thing I note to the House tonight is that the changes this Government has made in respect of savings, both with regard to KiwiSaver and the Superannuation Fund, are, in my view, part of a pattern that goes back for more than 30 years. In 1974 Roger Douglas, who is now Sir Roger—and he is still a member of this House, and I acknowledge that—was working in the Kirk-Rowling Government. He was the architect of its superannuation scheme. It was a contributory scheme. If that scheme had still been in place today, I believe we would have been a wealthy nation.

We look at Australia, and often people point to the minerals of Australia as the basis of its wealth. Sure, that is a very, very good fundamental for the Australian economy. But, in fact, the Australian savings regime, which gave it the power and the clout to withstand some of the shocks that we have seen over the last couple of years, is a very important component of the fundamental strength of the Australian economy. It is a fundamental strength that we do not have, and, regrettably, we could have had it if that superannuation scheme had not been abolished in what was a blatant attempt to buy an election in 1975. It was a blatant attempt, and it did not stop there.

In 1990, after Labour had made some brave changes in office to national superannuation, Jim Bolger, the then National leader, campaigned on returning that scheme, with the “no ifs, no buts, no maybes” promise. He then reversed that promise and made some cuts to the national superannuation scheme.

We have come right up to this day, where we see the cuts to KiwiSaver and to the New Zealand Superannuation Fund. Obviously those—

DAVID BENNETT (National—Hamilton East) Link to this

Before I start on the Taxation (GST and Remedial Matters) Bill I would like to pay tribute to the many people of the West Coast, those in the mining community, their colleagues, and all those involved in that industry. I think at this time all New Zealanders realise what a small country we have, what sacrifices that the good people of this country make to build a strong country, and that whatever role we undertake in our lives in this country, we are all intertwined. It is a very sad day for New Zealanders. Our hearts are with those families involved and also with the people of that area and the wider mining community.

As has been said, taxation bills come before the House quite often. They are necessary as part of the continual upgrade of our taxation system to take into account any movements that taxpayers may be making to avoid or to reduce their taxation payments.

Basically, this bill closes a loophole in regard to phoenix fraud schemes that undermined the integrity of the GST rules. A very simple solution is being proposed in this bill. It is basically the zero rating of transactions involving the sale of land over a certain size. Basically, if both parties agree, then there can be a zero-rated transaction and no GST consequences.

That change will have a large impact on many transactions for land, especially in rural communities, and commercial transactions for land where the GST component has been paid for, and claimed, in the past. I think the Māori Party touched on the fact that some taxpayers have been structuring deals to be on invoice or other bases in order to take advantage of GST rules, and the member touched on the nature of phoenix fraud schemes, where people took one half of the deal but did not actually pay the GST. So the Government was left out of pocket by about $40 million. This bill is an attempt to cover that situation.

In all taxation areas things develop and change, and people try to take advantage of new rules, but that is how it works. This bill is very important and in the best interests of all New Zealanders, as it creates a fairer playing field in the taxation area around GST on these transactions. We support the second reading and look forward to the passage of the bill. Thank you.

RAYMOND HUO (Labour) Link to this

It is a pleasure to take a call on the second reading of the Taxation (GST and Remedial Matters) Bill. The bill seeks, in particular, to simplify and clarify GST issues in relation to commercial land. It will bring real advantages for the GST treatment of suppliers of commercial land. No longer will the parties have to determine whether the sale of land was the sale of a going concern. An overriding purpose of the bill is to stop fraudulent schemes known as phoenix schemes, as mentioned by my colleague Stuart Nash, where the Inland Revenue Department refunds GST to a registered purchaser but no corresponding GST payment is made by the vendor to the department, as the vendor is deliberately wound up before such payment is made.

The bill makes a number of tax-related amendments and introduces changes to the KiwiSaver legislation, emissions trading scheme units, portfolio investment entities, and the tax treatment of superannuation funds. Labour supports this bill as it introduces some sensible changes and a number of remedial amendments, but we do have concerns as well.

With regard to the new rules for the change-in-use adjustments option for certain financial service providers, a key concern was the potentially significant compliance costs for financial service organisations, such as banks and life insurers. An adjustment would be required for each asset used for both taxable and non-taxable suppliers. In response to submissions the Finance and Expenditure Committee has recommended a new provision to allow a person who is principally a supplier of financial services to use a different method from the new rules if the method meets certain criteria, including, for example, if the method is fair and reasonable. Some commentators and submitters, however, still remained concerned because it is not clear whether the proposed amendment will achieve reduced compliance costs.

With regard to the definition of land, the Finance and Expenditure Committee has recommended a carve-out for most commercial leases from that definition, following submissions by KPMG and others. This means that most commercial leases will not be subject to the zero rating provisions for land. It is sensible because the inclusion of commercial rentals would have caused an increase in compliance costs for landlords. As KPMG submitted, this was not warranted, given the very low risk of phoenix fraud in those circumstances.

In respect of the zero-rating of land sales, the select committee has recommended amendments to clarify that the test for zero-rating land transactions should be at the time of settlement. This is a departure from the previous principle of testing for zero-rating at the time of supply. However, according to some experts this approach does not appear to be particularly practicable. I look forward to more deliberation on this particular part.

This bill makes a number of amendments to the KiwiSaver scheme. It is regrettable that the Government did not use this bill to undo the damage it did to the scheme in cutting KiwiSaver. After 2 years and two Budgets, the only offer of a National Government savings plan, if any, has so far consisted of gutting the KiwiSaver scheme and cutting contributions to the New Zealand Superannuation Fund. Gutting and cutting, in combination, is representative of the National Government’s savings plan.

New Zealand’s savings history time line is straightforward. In 1974 the Kirk Labour Government introduced a compulsory contributory superannuation scheme. In 1975 the Muldoon Government closed the scheme. In 2001 the Clark Labour Government established the New Zealand Superannuation Fund. In 2007 Labour’s KiwiSaver came into force, and it was expanded in Budget 2007. But in 2008 National halved the effect of KiwiSaver in order to pay for the tax cuts. In 2009 National suspended contributions into the New Zealand Superannuation Fund until 2020 or until the Crown accounts are back in surplus. In 2010 National extended the suspension of contributions to the New Zealand Superannuation Fund until 2018, despite a forecast surplus in 2016. Brian Gaynor, in an article published in the New Zealand Herald on 21 August this year, stated very strongly that National Prime Minister Robert Muldoon’s termination of the superannuation scheme in 1975 was the worst economic decision by any New Zealand Government in the past 50 years.

Let us have a look at the Australian and New Zealand figures, on a per capita basis. Australians have A$56,000 of superannuation funds, whereas Kiwis have just NZ$5,500.

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

I rise to talk on the Taxation (GST and Remedial Matters) Bill, but, like my colleagues, my thoughts at this time are with the people in the South Island, particularly the families and friends of those who have been confirmed as deceased. It is a tragedy for the families and friends, it is a tragedy for the West Coast community, and it is a tragedy for all of New Zealand. As the representative for Maungakiekie in Auckland, I know that the people of Maungakiekie certainly grieve for them. We mourn with them, and we are sad for them in terms of the loss of life that has been confirmed today. Our thoughts, our prayers, and our hearts go out to the people who have been affected—not just New Zealanders but also the South African, British, and Australian families and friends of the miners lost today.

As has already been stated tonight, this bill is part of a reform package that the National-led Government has put forward to make the GST system fairer, more sustainable, and better for economic growth going forward. I applaud Mr Nash for supporting our Government by asking for a fairer system and supporting the system that we have put in place. So I thank Mr Nash for supporting the National Government.

This bill forms part of our tax reforms. It promotes fairness and integrity across the tax system. As has already been stated tonight, it is an important measure to counter what are called phoenix fraud schemes. These schemes, as has already been described by many speakers tonight, undermine the integrity of our GST rules. These schemes involve the Inland Revenue Department refunding GST to the registered buyer where no corresponding GST payment has been made by the supplier to a transaction. They deliberately wind up such entities in order to avoid paying that GST.

It has been of particular concern. It is an attack on the tax base, and for that reason we as a Government are intent on closing the loophole. We have already heard tonight from my colleagues that we have one of the most efficient and effective taxation systems in the world, and despite the protestations of colleagues across the aisle for exemptions from GST on food and other such items this system is as pure a system as we will get across the world. It is a system that has worked in the past and will continue to work in the future.

Other measures in the bill make it easier for taxpayers to understand their GST obligations and reduce compliance costs, because it is these costs and these obligations and the degree of uncertainty in entering into transactions that are a big handbrake on business and economic growth. The measures clarify parts of the GST rules where taxpayers have experienced difficulties in accounting for GST or interpreting the legislation. I give members an example. The current change-in-use rules that apply when assets are used for both taxable and non-taxable purposes is replaced with an approach that apportions the input tax deductions according to the actual use of those goods and services. This is a common-sense approach, it is a reasonable approach, and it supports the purpose of the bill—to maintain the integrity of our tax system.

One of the other measures is the GST boundary between residential accommodation, which is GST-exempt, and commercial accommodation, which is not. This distinction is clarified within the bill. There are GST rules around transactions involving nominees, where a purchaser has nominated another person to receive the goods and settle the transaction. These are also clarified.

The bill deals with an unintended timing problem for non-profit bodies accounting for GST when they supply large assets, such as a house for a person in need. There are other—as have been described—technical amendments, and the Finance and Expenditure Committee assessed them and made certain tweaks to them before bringing the bill back to the House. These include allowing portfolio investment entities a deduction for credit impairments, and clarifying the tax treatment of superannuation funds under the National Provident Fund. We heard six submissions at the select committee. These were received from a wide range of interest groups and individuals, and the changes that we made are pretty much accepted across the House. I recommend that this bill proceed through to the Committee of whole House.