Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill

Hon PETER DUNNE (Minister of Revenue) Link to this

I seek leave for the remaining provisions of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill to be taken as one question.

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

It is a pleasure to take a call in the resumed Committee stage of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill. The Labour Opposition concurs with the Government’s motion to have the remaining parts taken as one question in order to facilitate a more coherent and general discussion. It is also perhaps appropriate to note that, in contrast with some of the other legislation that has been debated in the last few days, this bill genuinely needs urgency for the sake of clarity to taxpayers and proper tax planning.

This bill makes some important changes to taxation law, but in doing so has represented very poor legislative process. It provides for the reform of international tax rules, with the intention of making New Zealand residents with active businesses in overseas markets compete on an equal footing with their competitors. It aligns life insurance taxation rules closer to the accounting treatment of life insurance profits, and at the same time it extends portfolio investment entity rules to life insurers’ savings products. The bill provides for payroll giving to enable the establishment of a flexible system and manageable compliance costs. The taxation of emissions units is provided for—we might say thankfully in the light of recent decisions, given the loss of the cap from the “cap and trade” system.

The definition of “associated persons” is reformed. Tax thresholds are raised to reduce compliance costs for small and medium sized businesses. That was a particular priority of the outgoing Labour Government, which put this bill in place. The tax treatment of relocation claimants and overtime meal allowances for employees is clarified. The bill includes changes to the income tax rules for petroleum mining—a matter much discussed earlier in the Committee stage. It provides for the new film grant, the Screen Production Incentive Fund, and it makes a number of other changes.

This bill is being debated under urgency again today. Labour supports the bill, but it is very concerned about the rushed process for the bill. The major Supplementary Order Papers were delivered late, without sufficient time to properly consider them. It is a huge and complex bill; I am advised it is the largest tax bill ever, outside the rewrite legislation. The deadlines were rushed, denying members proper and sufficient time to consider its provisions, and there was a general lack of sufficient time to fully consider the immense levels of detail in the bill. For that reason, the Finance and Expenditure Committee was very reliant on professional tax advice.

The process was imperfect because of the breadth and depth of the provisions in the omnibus bill, and the select committee therefore had the following to say in its report: “The size of the bill, and the depth and breadth of the material it covers, have made our consideration more difficult than it might have been otherwise. In trying to meet the report due date for the bill, we and our committee consideration processes have been put under considerable pressure. We do not consider it desirable to put a number of very distinct and significant proposals into one bill simply because they relate to one area of law.” That is reasonably strong language in the formal context, particularly in the context of the Finance and Expenditure Committee’s commentary on tax legislation, which is a matter normally reserved for the driest of the dry, as the Minister in the chair, Peter Dunne, will no doubt attest.

There are several very important substantive areas in the bill. The first that I will mention in summary today is the definition of “associated persons”. There was extensive discussion of these provisions, and right around the select committee there was an agreement that we had a common aim: to ensure that genuinely associated persons were covered so that they could not evade tax, and that the rules be tightened to avoid unintended consequences for those whom the association was tenuous, or who could not have been expected to know about a particular investment or tax liability of a person deemed to be associated. We appreciate the Minister of Revenue’s willingness to discuss those changes through his officials with the committee. I think, and all members of the committee think, that good work was done in that area, and we thank officials for working in detail through those provisions with us all.

The main bulk of the bill is associated with the international tax rules. It is an incredibly important and complex area, particularly as the world is globalising. As we all know, the factors of production and therefore much of our tax base is becoming more mobile and effectively harder to tax. It is for that reason, amongst many others, that we await with interest the outcome of the Government’s Tax Working Group as we look forward to an ongoing discussion about the optimal balance between different forms of taxation in that regard. This tax legislation modernises the international tax rules, particularly in respect of controlled foreign companies—for example, to “ensure that key provisions relating to CFC rules … were set out clearly in one place in the legislation.” The select committee recommended “technical amendments to the accounting-based active business test for CFCs … to reduce the cost of applying the test.” It also recommended that “for the purpose of the tax-based active business test, consolidation be permitted only when the taxpayer has an income interest of more than 50 percent in each of the CFCs to be consolidated.” The amendments will “allow an active CFC to pay royalties, interest, and rent to an associated CFC … without the associated CFC having to recognise any passive income only if the CFC and the associated CFC were liable for tax in the same jurisdiction.” So there is some tightening there. There are a number of like rules around controlled foreign companies, which were important for the committee to get its head around and are important to modernise because they reflect the changing nature of business practice in this incredibly globalised environment.

There was discussion of the taxation of life insurance businesses, and the select committee recommended a number of amendments to make the proposed provisions clearer and more flexible. For example, “all direct and indirect expenditure incurred by a life insurer would be deductible in the shareholder base.”, and “in relation to non-life insurance policies life insurers are able to claim a deduction for movements in the outstanding claims reserve.” The amendments ensure that “where a life insurer has overpaid tax on the life office base under the existing rules, the overpayments would be carried into the new rules and could be used to satisfy tax liabilities arising on both”. It is fair to say that the committee in closed session also considered in some detail some particular aspects of the rules that applied to particular aspects of the sector. I will not go into the details of that, for obvious reasons, but I simply note that the committee spent considerable time with officials clarifying a matter that was of some interest to some in the industry.

There was an extended discussion, both in the select committee and on the floor of the Chamber, of the tax treatment of petroleum mining. Several members have raised this issue in terms of a taxpayer-specific matter, so I will not repeat the taxpayer-specific element. I will say that the committee wrestled with the need to avoid multinational oil companies ripping New Zealand’s tax base off by literally hundreds of millions of dollars by, for example, attributing to its New Zealand profits the cost of debt incurred in foreign jurisdictions. The Labour Party wants to go on record as supporting to the nth degree the Government’s moves to track this practice down and stop it. Not only is it totally unjustifiable, but it is literally robbing the New Zealand taxpayer and beneficiaries of much-needed revenue. We certainly encourage the Government to pursue the transfer pricing and transfer attribution of cost by multinationals in this regard.

A particular case of the reverse could potentially have been caught inadvertently: a New Zealand company that was investing offshore may have been caught by an unintended, potentially retrospective element if, indeed, it had entered into a contract before the effective date of the announcement of this provision. We are taking the Minister and officials at their word that we will be able to work through in good faith with that taxpayer, on the basis of the common law, a position that reflects the common view of the committee that this was not the primary issue that the provision was designed to solve, and that we were wary, as is longstanding parliamentary practice, of any retrospective element that operated to the detriment of New Zealand business.

There are many, many pages of detail that I could go through. I have touched upon the main areas of work. There are many others that other members will want to touch on. I will, however, refer to the fact that we got quite a lot of last minute Supplementary Order Papers. Perhaps because I am a former Minister, I always take a very dim view of officials not providing to the Minister in sufficient time material that then ends up having to come through the Minister to the floor of the Chamber as a Supplementary Order Paper.

Hon PETER DUNNE (Minister of Revenue) Link to this

At the outset of this debate on the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill I want to make a couple of points. Firstly, this is the resumption of a Committee stage debate, so a number of the measures that the previous speaker, David Cunliffe, referred to have already been disposed of in earlier parts of this debate. But I think he was simply reintroducing our memory to those matters. I want to comment on the point, though, about rushed legislation. I cannot accept his assertion in that respect. I want to place on the record, once more, a little bit of the history. This bill was introduced in July 2008, over a year ago. Because of the intervention of a general election it had not progressed far before the change of Government last November. It has been worked on pretty efficiently by the Finance and Expenditure Committee during the course of this year.

One of the issues I was conscience of as the bill was proceeding was that the implementation times for a number of the regimes that it contains—the international tax changes, the changes to life insurance, payroll giving, and there were one or two others as well—were much shorter than they are in the bill at the moment. So rather than the legislation being rushed, I wrote to the select committee recommending that it defer the implementation dates to, in some cases, next year. I did that simply because I wanted to make sure there was sufficient time. One of the reasons I am grateful for this bill being taken under urgency today is that I am getting many inquiries from a number of people seeking assurances that we will stick to this timetable, that the dates that we have amended in the bill will be honoured, and it will not be further delayed. I do not think we can draw a conclusion from that about rushed legislation. We can draw a conclusion about the size of the bill, and I am freely conceding—as I have done before—that this bill, in retrospect, did bite off too much territory. In future we will do things a little differently.

I want to pick up on the comment the member made about the associated persons changes, and I was grateful for his intervention on this point. I say to the Committee and to any of the public who are anxious about this provision, that from the outset we were seeking to simply ensure that the law as put in place—in this instance way back in 1973—worked as it was intended to at that time. We were not seeking to broaden the scope or to introduce new definitions or changes to definitions through that mechanism, but simply to ensure that what we thought we had been doing since 1973 was accurately reflected in the law as it stands today.

Mr Chairman, let me make a quick comment in response to the member about petroleum mining. Again, there are very substantial points of agreement. One of the things that could conceivably happen under this bill—and I am not being taxpayer specific when I make this observation, but certainly to illustrate the point that Mr Cunliffe was alluding to—is that it could well be possible in the future for a company to take advantage of the changes we are making to the international tax rules in terms of the active/passive test, and, therefore, be subject to taxation in the jurisdiction of their location only, and not double taxation in New Zealand. At the same time, have we not changed the petroleum mining law being able to write off the cost of exploration incurred on that offshore jurisdiction against the New Zealand tax base? So the New Zealand taxpayer in that hypothetical situation not only gets no tax but is paying out a tax deduction to that company. That clearly would be wrong under any reasonable assessment of the law, and that is the sort of situation we are trying to guard against.

With regard to some of the issues that are coming up in the remaining parts of this bill, I draw members’ attention to the amendments to the KiwiSaver Act that are contained in Part 4 of the bill. These relate particularly to the situation that has had some publicity of recent times where a contributor has died intestate, and the difficulty that the family have had in gaining access to the funds that have been deposited in KiwiSaver. This bill corrects that unfortunate situation and has been backdated to the time of the introduction of the KiwiSaver scheme in 2007 and will be a huge benefit to those families who have been suffering as a consequence of the loss of a family member in that situation and being unable to access the funds that they contributed to KiwiSaver while they were alive. I am grateful for the Committee considering and adopting that amendment in the bill. I am also keen, therefore, to see it pass so that those people who are in a state of anguish can have some relief.

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

Much has been said about the size of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill. I concur with the remarks of the honourable Minister of Revenue about the work done by the officials. We commend that work, as well as the work done by the Minister, who in a letter to the Finance and Expenditure Committee stated quite clearly that changes would be put in place in terms of the timing of the legislation.

The bill addresses a number of areas for change. It provides for the reform of international tax rules. Among other measures, it introduces a tax exemption for foreign active income of controlled foreign companies—the CFCs, as they have been referred to in this debate already. It also addresses aligning life insurance taxation rules more closely with the actual profits of term life insurance businesses. But the area that I would like to discuss is the introduction of the voluntary payroll giving scheme.

We all know that New Zealanders are generous with their money and their time. Nielsen Media Research found out that 75.4 percent of the New Zealanders surveyed supported the community and voluntary sector in 2007. They supported that sector either by making committed or ad hoc donations, volunteering, or through another form of support. The research also indicates that less than one in every five people who donated to charity filed a tax rebate for the donation. Payroll giving represents an opportunity for those who give to gain an immediate tax benefit, thus eliminating the need to file a rebate annually.

Following the introduction of similar legislation and a Government-initiated campaign to promote payroll giving, the level of participation in payroll giving in Australia doubled. An initial target that has been suggested is that New Zealand aim to achieve a level of participation comparable to that of Australia. I suggest that we aim to surpass the level of participation in Australia by 2011, the year of the Rugby World Cup, when we will also surpass Australia on the rugby field. From research conducted by the Tindall Foundation, it predicts that unless the Government and business put significant effort and resource into promoting and encouraging similar participation in this country, payroll giving is unlikely to gain traction.

Payroll giving is about enabling employees to receive the benefit of payroll donations each pay day in real time, and without the need to have donation receipts. People who make donations other than through payroll giving can continue to claim a charitable donation tax credit at the end of each tax year. A main concern raised by the Finance and Expenditure Committee was the risk that employers could default in transferring payroll donations to the chosen donee organisations, especially in insolvency situations. To address that concern, the committee recommended a number of changes to the bill. They included an amendment to schedule 7 of the Companies Act 1993 to confirm that when an employer goes into liquidation and has not passed on employees’ donations to donee organisations, the return of those donations to the employees will have the same priority as the payment of their unpaid wages.

That was a short cameo on payroll giving. We have made a number of other, more in-depth changes to our tax regime. The bill supports the emphasis this Government is putting on tax reform and tax policy. It is part of a series of tax reforms that will continue into the future of this term of Government.

STUART NASH (Labour) Link to this

I say to Mr Lotu-Iiga that I wish we could get one thing clarified. First and foremost, the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill was introduced by the previous Labour Government on 2 July 2008. It is not a National bill; it was not part of National’s agenda for tax reform. I think we need to get that clear once and for all.

The Minister in the chair, the Hon Peter Dunne, is right; this bill has had quite a long process. As I have mentioned, it was introduced on 2 July last year. The reason it has taken so long is perhaps that Parliament dissolved for the general election, and then we were back into it. But having said that, I also understand the need for urgency on the bill, because business tends to operate best in an environment of certainty. The sooner this bill is passed, the greater the level of certainty there will be for a whole range of businesses. So I support the urgency on this bill in the Chamber today.

As has been mentioned, we support this bill. We have already voiced our concern—I think every speaker has voiced his or her concern—not about the rushed process but about the size of the bill, coupled with the amount of time we had to spend on it. We are concerned about—and my colleague David Cunliffe talked about this—the late nature of the Supplementary Order Papers, which were tabled without sufficient time to properly consider them. Supplementary Order Papers 34 and 35 in the name of the Hon Peter Dunne were released on 4 August and 25 August respectively. This is a huge and complex bill—most tax legislation is complex—but at 825-odd pages that really made things very tight. There was a general lack of sufficient time to fully consider the whole immense detail of the bill, but we did our best. As has been mentioned, we relied on the officials and our consultants.

I will talk about the amendments to the Income Tax Act. In 2007 around 3,500 pages of New Zealand tax legislation were enacted. This legislation included the Income Tax Act of 2007. At 2,800-odd pages, that Act represents the fourth and final stage of a project begun in 1994 to rewrite income tax law in plain-language style. As the length of time taken to complete this task shows, this rewrite was an ambitious and aspirational, but absolutely necessary, task. I know that sometimes the words “tax legislation” and “plain English” in the same sentence are a bit of an oxymoron, but this is the way things work out in tax legislation. This task was a definite step forward in terms of New Zealand tax law. But as an inevitable consequence of the rewriting process, there was a temporary but large increase in the number of remedial amendments necessary in order to maintain the tax law in sound working order. This increase was in part because very few remedial amendments had been enacted since December 2007.

Of the remedial amendments proposed, approximately 115 are typically of a very minor nature. They are intended to correct matters such as incorrect numbering and cross-referencing, printing errors, the use of incorrect terminology, punctuation issues, and omitted words. Despite perceptions and beliefs to the contrary, even tax officials and drafters make the occasional mistake. I think we would agree that making 115 drafting errors in 3,500 pages of legislation, or in the 2,800-odd pages of the Income Tax Act 2007, is not a bad effort overall. Other amendments in this bill are of a less clerical nature, but arise from both rewrite issues, include submissions to the Rewrite Advisory Panel, and from clarification of policy in business as usual drafting. These 160-odd amendments affect provisions in the Income Tax Act 2007, the Income Tax Act 2004, the Tax Administration Act 1994, the KiwiSaver Act 2006, as the Minister has alluded to, and the Stamp and Cheque Duties Act, amongst other Acts. Of these amendments, 30 issues were referred to the Rewrite Advisory Panel for resolution.

In addition to the 119 remedial amendments included in the bill at its introduction, the officials recommended that the Finance and Expenditure Committee propose the inclusion of about 150 further remedial amendments, the need for which had been discovered since the introduction of this bill. As that shows, a lot of work went into this legislation, at the officials level, at the Finance and Expenditure Committee level, and at the consultant and advisory level.

Several Acts that amend tax Acts have been enacted since the bill was introduced to Parliament. They include the Climate Change Response (Emissions Trading) Amendment Act 2008, the Taxation (Urgent Measures and Annual Rates) Act 2008, and the Taxation (Business Tax Measures) Act 2009. A number of the cross-references in the bill need to be adjusted to take into account the changes made by those Acts. The officials recommended that the committee include such amendments.

CRAIG FOSS (National—Tukituki) Link to this

I rise to speak in the continuation of the Committee stage of the very large Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill. I acknowledge members giving leave to combine the debate on the remaining parts of this bill in order to facilitate its completion.

Much was said about the bill by speakers when we last addressed it, and I am sure we will hear some more points now and in the third reading. We are speaking about Parts 3 to 7, which include clauses 518 to 629, and the title. They cover about 140 pages, which points to the substantial nature and breadth of the bill. We must also note that a large part of the original bill is no longer in this bill, because it formed part of the small to medium sized enterprise tax recession assistance bill, the Taxation (Business Tax Measures) Bill, which we passed in March.

I would make the point that we have an additional Supplementary Order Paper—34. I understand that it consists of simple remedial drafting changes to the substantial legislation, and I would be interested to have an assurance that, in fact, that is the case. I fully accept that it has no policy change from what the select committee saw and what many, many submitters spent much time on at the select committee.

I should acknowledge, as this will probably be my final time speaking in the Committee stage, the assistance of the Minister of Revenue, officials, and members of the Finance and Expenditure Committee, both in the previous Parliament and in this Parliament, in facilitating this bill going through to at least this stage. Cooperation was extended in many, many areas. I acknowledge that other members have recorded that for Hansard, and I appreciate that. I also acknowledge that at times the select committee had to begin meetings early and finish late to facilitate the process.

When the Minister spoke earlier he spoke about the need, the commercial imperative, to provide some certainty for the many, many sectors of business affected by the bill, from insurance to payroll, to you name it—to the Inland Revenue Department itself—as to when certain parts of this wide-ranging bill would be implemented. I agree totally with what the Minister said. The commentary states that the Finance and Expenditure Committee was not particularly pleased with the breadth of the bill, with its wide-ranging nature, and all the commentators also picked up on that. But that does not mean that the bill did not go through the due process. I note that many of the discussion documents that led to this bill, particularly those about some matters that have already been raised in the debate, actually appeared under the previous administration—as far back as 2006 and even 2007. The legislation was introduced in July 2008, I think, it came to the Finance and Expenditure Committee in September or October 2008, and we picked it up with a vengeance early this year as Parliament got back to normal behaviour, if you like.

That was just a quick note to acknowledge all those who have assisted with the bill, to reiterate the points made in the commentary, and also to put on record for those who pay strict attention to the commentary of the bill not to misinterpret the commentary or to try to put words into it. The commentary speaks for itself and it is not meant to be anything other than the thoughts of the committee at that time. Other speakers have alluded to some of the issues in and around that. On that note, I look forward to the third reading.

RAYMOND HUO (Labour) Link to this

I rise to take a call on the bill and wish to affix my contribution on the provisions in relation to remedial amendments in the bill, in particular the clauses concerning KiwiSaver. The bill introduces a number of remedial amendments to the KiwiSaver scheme, and in the Finance and Expenditure Committee we spent a certain amount of time hearing submissions and deliberating on them. A number of submissions are no longer relevant, due to the removal of the employer tax credit. What is interesting are the issues surrounding the definition of member credit contribution in section YA 1 of the Income Tax Act 2007 and in section OB 1 of the Income Tax Act 2004. Officials are of the view that the definition should be amended to exclude the $1,000 kickstart payment and the member tax credit. This would have the effect of preventing members from double-dipping, which would occur if the Crown contributions were included in the calculation of the member tax credit.

A technical issue arose in relation to whether the amendment would be intended to be retrospective or prospective. If it should be retrospective, the recalculation of the member’s accounts would be required. As the independent specialist adviser Therese Turner pointed out in her report, recalculation of a member’s accounts would be required. Given that some members may have already withdrawn from the scheme, that would be problematic.

I cited this relatively small part as an example to show how important it is for us to work together to bring our tax law up to date, which is the main purpose of this bill in general, and to provide some certainty to make the relevant clauses operative. It is particularly so to the 1.1 million New Zealanders who have signed up to the KiwiSaver scheme. I congratulate the Hon David Cunliffe on taking the initiative for the multiparty banking inquiry by the Labour, Green, and Progressive parties. There are two major concerns; I cited this one because the savings concern is particularly relevant to what we are talking about now.

Two major concerns were expressed by submitters across the board. The first concern was that banks have grown faster than the surrounding economy, indicating that wealth has transferred from the trading economy to the non-trading economy, which has made it harder for us to grow a healthy, sustainable economy. The second concern, which is relevant to this bill, is our low savings rates and spending habits of New Zealanders. Unfortunately, the Government’s only response so far to the low savings rate is to cut KiwiSaver. The KiwiSaver scheme introduced by the Labour Government was designed to lift private sector household savings in New Zealand. By cutting the incentives for KiwiSaver the National-led Government is decreasing the amount that ordinary Kiwis will be able to save. The Government’s plan betrays the over 1.1 million New Zealanders who have already signed up, and the Government’s move has effectively taken away opportunities from future generations. Thank you.

Hon DAVID PARKER (Labour) Link to this

I rise to take a call in the Committee stage of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill, which Labour supports. I will deal with a couple of technical matters for a start. An important change has been made through this legislation to the treatment of petroleum mining revenue, and I endorse the steps that the Minister of Revenue started in the previous Government and has continued in this Government to clarify that the petroleum mining losses that are incurred by a foreign branch of a company cannot be offset against petroleum mining income earned from New Zealand.

To put that in perspective, New Zealand has become quite prospective for oil and gas. The price of oil and gas is a lot higher than it was a few years ago, and some of the traditional sources of oil either have become risky for development companies or have been depleted in their reserves. Although as a country and a world we need to transition away from fossil fuels for environmental reasons relating to climate change and also for energy security reasons, it is clear that for some time to come the world will use petroleum products and that they are valuable. It is clear that it is in New Zealand’s interests that where we have some of those reserves we use them, rather than import from Saudi Arabia or somewhere like that. That adds to our wealth as a country.

In New Zealand we do not have a Government-owned oil and gas sector. A lot of overseas countries do—for example, Saudi Arabia; most of Norway’s exploration and recovery of oil is done by a State-owned company. If a country does that, of course, the returns from the oil that go through that State-owned company benefit the country, and the tax rules are not so important because the profit is earned for the country through the State-owned company. But in New Zealand we do not approach oil and gas that way. We leave it to private enterprise companies—some of them are owned by State-owned companies from overseas, actually—to explore for, find, and extract petroleum products in New Zealand. Recently they have been successful. One of those successes has been the Tui Area oilfield off Taranaki. Many millions of barrels of oil have been extracted from it, and that has benefited the New Zealand economy.

The benefit to the New Zealand economy comes from two sources. One is the royalty that is charged on the recovered oil. That royalty is quite small. Indeed, I wonder whether there is any royalty on oil. I cannot recall.

AMY ADAMS (National—Selwyn) Link to this

I am very pleased to take another call in the Committee stage of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill. It has been some time since we last debated the bill’s Committee stage and since I last spoke. We have heard other speakers talk today about the comprehensive and extensive nature—perhaps too extensive—of the bill, and there certainly are a number of important elements within it. I hope my contribution is able to add more to the wisdom in this debate than the contribution of the member who has just resumed his seat, the Hon David Parker, who held up the bill and said there was a lot in is. I thank Mr Parker very much for that in-depth analysis of this 823-page bill. Yes, there is a lot in it; he got that quite right. I hope to talk in a little more detail about some of the matters in it.

International taxation and life insurance are two of the big component parts of this bill, but a number of smaller aspects have been a little overlooked in the debate, due to the comprehensive nature of the bill and the big elements in it. One that I will touch on, because I do not believe it has been mentioned in the debate thus far, is the provisions around stapled stock. Stapled stock is not something that is discussed widely outside tax and business circles, so I will take a moment to explain what I mean by that phrase. Stapled stock is a set-up that companies often use whereby debt securities—debt instruments—are attached to equity instruments sold by that company. We have seen that this structure can be used to enable companies to pay moneys to shareholders that would otherwise be classed as dividends, and to call it interest, thereby giving themselves quite a substantial tax advantage through the interest deductions that the company gets, although the money ends up in the same place.

The bill set out to say that for that sort of stapled stock arrangement issued after 25 February last year, all the payments were eligible to be treated as dividends, as if the entire payment related to the shares, as if the entire security was a share. That is an important part of ensuring that there is fair treatment of those moneys, and that companies cannot use that sort of structure to effectively avoid tax. The date of 25 February 2008 is important. As far as we know, at the time when this rule change was announced no major NZX companies had stapled stock in existence. We also know that a number were certainly looking at doing that, so it was a step that had to be taken.

As the bill proceeded through the Finance and Expenditure Committee, we looked at this matter in a little depth. We recommended some important changes to make sure that there was not excessive overreach in terms of these provisions. Among those we looked at was ensuring that debt stapled to a wide range of fixed-rate shares could still be treated this way as a valid instrument. We also thought it was important and appropriate that people with small, closely held companies—family companies and the like—where this sort of arrangement came about through a shareholders’ agreement, had the freedom and flexibility to enter into that arrangement. We were working to ensure that we protected the tax base against the inappropriate claiming of interest deduction as a way to avoid paying tax that would otherwise be payable, but without going into the realm of unnecessarily cutting down the flexibility and the options open to companies to arrange their affairs. As I said, what we will now have under these rules will enable all the payments to be treated as if they are shares, all the payments to be treated as dividends. But when we talk about company thin-capitalisation rules, with those stapled instruments the debt component can still be treated as debt.

In respect of that particular provision, it highlights that there is quite a lot in the bill beyond the title provisions of international tax and life insurance. Those are the leading ladies in the bill, but there are a number of quite important lesser issues that the select committee spent an awful lot of time working through.

At this stage I take a moment to thank Craig Foss for his chairmanship of the select committee. It was a difficult process to work through the bill but the committee worked very well. All the committee members should be acknowledged for their contribution to the work on the bill. Certainly, the officials spent a lot of time with us. I commend the Minister of Revenue for not only introducing the bill last year but also having the political tenacity—

STUART NASH (Labour) Link to this

First and foremost, even though we are debating the Committee stage—and are about to go into the third reading—in urgency, I think it is important to note that after the first reading of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill it went to the Finance and Expenditure Committee. Select committee examination is quite an important part of the legislative process. Some of the other bills before the House recently have not gone to a select committee. Therefore, the public does not have any right or ability to present submissions on them. In terms of process, this bill followed a very good process. The select committee received and considered 78 submissions and heard 51 oral submissions. As members can imagine, they were on some very complex areas of tax law. Reading those submissions and doing the background reading on the oral submissions was quite onerous, and that is what I think a lot of members mean when they say that there was quite a tight time constraint.

It seems a while since we mentioned one of big aspects of this bill, and that is associated persons, which I would like to talk about. Amy Adams is right; this bill is about more than international taxation, life insurance, and remedial matters. This bill covers a whole raft of provisions and a whole raft of changes to the actual tax system. It is the largest tax bill, apart from the rewrite, to come before the House. Let us talk about the definition of “associated persons”. This part of the bill received much consideration from all members, and resulted in many reams of paper spitting out a whole lot of judgments from officials, consultants, and advisers. We wrestled with the risk that by relaxing the rules the resulting law might not catch people who should be caught by an associated persons rule. We all acknowledge that the implementation of this provision will be very important, and the ongoing supervision and monitoring by officials will also be important. Because it is a complete rewrite, we may be back in this House considering amendments if it does not look good.

The committee proposed amendments that aimed to reduce uncertainty, which is what tax legislation should be about, and to narrow the scope of the proposed test to exclude truly arm’s-length transactions. The amendments included narrowing the scope of the tripartite test and excluding certain relatives from it. An example was given of parents who divorce, the father marries again, and the woman he marries has a son from another relationship; that relationship would have been caught before. We wanted to make sure that those quite tenuous relationships were excluded, and to create certainty. We created an additional exception test for relating companies, we recommended that the test apply not only for the purpose of land provisions, we excluded charitable organisations from the test, and we created an exception for certain employee trusts and an exception for partnerships. As I said, the associated persons section took up quite a lot of time.

I would also like to talk about international tax rules. I take the Minister of Revenue’s point that some of these provisions had been debated and discussed in the earlier Committee debate, but that was a while ago and I think it is worth reiterating them. This area was incredibly complex and deserved a lot of attention. Well, it received a lot of attention, but it probably deserved a little more attention. We quite quickly got down to layers of complexity that reflect the ongoing game of poacher versus gamekeeper. I think we all understood that in terms of the global economy and global competitiveness New Zealand’s international tax regime needed to be amended, and that was what the bill did, but many private entities, of course, hire very, very expensive—the best—tax lawyers and advisers to ensure their tax is minimised. I think it was Dr Michael Cullen who said that if as much time and energy went into creating wealth in this country as go into looking at ways to avoid tax, we would be a very wealthy country. The Crown’s officials are required to stay one jump ahead whilst also maintaining the integrity of the tax system, and making sure that New Zealand retains its global competitive advantages.

The bill strikes a reasonable balance between the need to remain internationally competitive and the need to provide clear rules that allow the integrity of the tax base to be preserved. The committee ensured that key provisions relating to controlled foreign company rules were set out in one place in the legislation, making the rules more accessible. We recommended that technical amendments to the accounting-based active business test for controlled foreign companies—