Hon LIANNE DALZIEL (Labour—Christchurch East) Link to this
I stand as somebody who was not on the Finance and Expenditure Committee, so I have a number of questions for the Minister in the chair, the Minister of Revenue, that perhaps can assist me to get a better understanding of the particular issues that are covered in Part 1 of the Taxation (Tax Administration and Remedial Matters) Bill. As I understand it, some of the main provisions in Part 1 relate to foreign investment portfolio investment entity (PIE) rules. That is such a complex area of work—and, as I understand it, it was actually introduced by way of Supplementary Order Paper, which was then referred to the Finance and Expenditure Committee after the bill had been referred—and the select committee, as I understand it, took on board the need for some of the changes to be made, and felt it was appropriate to call for submissions on the Supplementary Order Paper and to report the bill back to the House with the provisions of the Supplementary Order Paper included within the bill. This does seem to me to be a sensible way of approaching significant changes to legislation after it has already been introduced. It is a very good mechanism to ensure the public do still have the ability to have a say on matters of significance, even though they have been introduced after the legislation has been introduced.
I guess the question that I would like to know the answer to, personally, is whether this was because Supplementary Order Paper 220 was not ready for inclusion in the main bill, or whether it was something that came up subsequently to the bill being referred and, therefore, the bill was seen as a convenient vehicle upon which to attach these rule changes. If that was the case, then I am pleased that submissions were able to be called on it, because I think that approach is way more preferable to bringing a Supplementary Order Paper to the House in the Committee stage. If we had had this Supplementary Order Paper referred to the House at this stage, there would probably be an uproar and many expressions of outrage at things being tabled at the last minute and in the dead of night while we were under urgency. Of course it will not get that treatment today, because it has been through a good process and submissions were called on it. So I would appreciate an answer.
I cannot pretend to be an expert on the PIE rules. In fact, the one thing that I normally tell people, and which I am particularly grateful for, is that I have never managed to find myself on the Finance and Expenditure Committee for any period of time.
Hon Craig FossHon LIANNE DALZIEL Link to this
I understand that the new Minister, who formerly chaired the Finance and Expenditure Committee—and who was probably chairing the Finance and Expenditure Committee for a considerable part of this legislation, if not for all of the legislation—did a very fine job as chair of that committee. No doubt that is what has seen him promoted to the high ranks that he has already managed to achieve. But I am not an expert on the PIE rules and, for the sake of the record of the House, I would like the Minister to go through the different elements of the adjustments that have been made, the purpose of them, and how they are intended to be applied with the new legislation in place.
It does seem to me that the select committee took considerable time and effort not just to accept the Supplementary Order Paper in its entirety and insert it in the legislation but also to go through all the different elements of the Supplementary Order Paper and make some changes to it on the way through. I did note for the record that when the select committee reported back from its consideration, it referred to the types of PIE that now exist. It expressed some concern about “the way the PIE legislation is structured, with some over-arching rules applying to all PIES.” Therefore “Modifications for specific types of PIE explain how the rules applying to them differ from the general rules. It can be unclear whether certain provisions apply to certain PIES, and some provisions conflict. We believe that the diversity of PIEs has made the legislation complicated, almost inaccessible, and hard to understand.”
Well, I cannot say that I am excited to read that, because it worries me greatly that we may have made it inaccessible. I know that people will be making recommendations to people, and it is not your average person in the street who will be looking at these matters, but if we can avoid complexity, we should.
Hon PETER DUNNE (Minister of Revenue) Link to this
I am happy to respond to the points the member Lianne Dalziel has raised. I must say it is very rare in a debate of this type to get a detailed cross-examination on the application of the portfolio investment entity (PIE) rules, but as the member has bravely walked down that path, I am happy to respond in kind. I should go through just a few points here and then talk about the state of the Taxation (Tax Administration and Remedial Matters) Bill as it has emerged from the Finance and Expenditure Committee.
The amendments the member referred to introduce two new categories within the PIE regime: the foreign investment zero-rate PIE and the foreign investment variable-rate PIE. These aim to align the tax treatment of non-resident investors in a PIE with the tax treatment of direct investors. Resident investors in a foreign investment PIE will continue to be taxed as if they were in an ordinary PIE. These new rules will be optional. PIEs can continue to apply to existing rules, where non-residents are taxed at a flat 28 percent on their income. Foreign investment zero-rate PIEs will generally be able to invest only offshore. De minimis levels of New Zealand - sourced income will be allowed—for example, so such a PIE can finance its day-to-day operations with a New Zealand bank account. Non-resident investors in a foreign investment zero-rate PIE will be taxed at zero percent on all their PIE income.
Foreign investment variable-rate PIEs can invest in both New Zealand and offshore assets. Non-resident investors in a foreign investment variable-rate PIE will face a variety of different tax rates, depending on the type and the source of the income. Foreign investment variable-rate PIEs will have an option to withhold non-resident withholding tax from distributions made to investors out of unimputed dividends. This will be instead of the PIE paying PIE tax in the normal manner, and by withholding the non-resident withholding tax, non-resident investors should be able to claim a credit for the tax paid in their jurisdiction.
The key changes the committee has made include that for foreign investment variable-rate PIEs, non-resident investors should be taxed only on interest income from financial arrangements, and that matches the treatment of direct investors. Foreign investment zero-rate PIEs should be able to purchase New Zealand - sourced derivatives, such as foreign exchange hedges. This is justified, as these arrangements could be seen as part and parcel of the PIE’s offshore investments. In addition, a non-resident would normally not be taxed on any income earned under New Zealand - sourced derivatives, because derivatives do not pay interest. An investment in land investment companies should be allowed. The modifications to the exemptions in the foreign investment fund rules that were to apply if a foreign investment fund invested in a foreign investment PIE will be removed.
A provision has been inserted to allow a retail PIE to treat income from a wholesale PIE if the retail PIE earned the income directly. This will prevent income earned from foreign investments made by a wholesale PIE in New Zealand being reclassified as New Zealand - sourced income when it was allocated to the retail PIE, for example. The modifications to the source rules will be extended, so that income from a foreign investment PIE would not have a New Zealand source merely because a contract was made or performed in New Zealand, provided that the contract related to the PIE’s overseas investments.
I am very pleased the member raised those questions. I hope that the very clear and simple explanation I have given in response has clarified a number of her concerns.
IAIN LEES-GALLOWAY (Labour—Palmerston North) Link to this
I also must confess, like my colleague Lianne Dalziel, to not being a member of the Finance and Expenditure Committee, which considered the Taxation (Tax Administration and Remedial Matters) Bill, and also that this matters—
IAIN LEES-GALLOWAY Link to this
I do. I think, somewhere deep inside, we all aspire. In fact, Michael Woodhouse made the transition from the Health Committee to the Finance and Expenditure Committee, so maybe there is hope for all of us yet.
Maybe it was all that talk of portfolio investment entities (PIEs)—I do not know—but I was inspired to get to my feet and make a contribution to this debate. I do not want to talk about PIEs; I thought I might talk about clause 6, which refers to use-of-money interest. Again, not having followed this bill through the select committee process, on just a first reading of it I have a couple of questions for the Minister in the chair, the Minister of Revenue, as well. They are probably easily answered by any member of the select committee, actually.
New section DB 3B, which is to be inserted in the Income Tax Act 2007 by clause 6, states: “(1) A person is allowed a deduction for an amount of interest they are liable to pay under Part 7 of the Tax Administration Act 1994.” Part 7, put simply, states: “A taxpayer is liable to pay interest on unpaid tax to the Commissioner in accordance with this Part.” In other words, if we do not pay our tax on time, a use-of-money interest is applied to those unpaid taxes and we are liable to pay that tax. This new section DB 3B(1) says that a person is allowed a deduction. It is not clear to me, just from reading this at first glance, what the criteria are for that deduction—what makes someone able to apply for that deduction—so I wondered whether the Minister would address that issue.
In an earlier bill I was lamenting the fact that the Inland Revenue Department now owes me money. I wonder whether this works the other way, where the Inland Revenue Department has to pay interest on the use of money it has if one ends up overpaying tax, student loan fees, or anything like that.
Sue MoroneyHon Lianne Dalziel Link to this
They kept demanding my husband’s student allowance after he paid it all back.
IAIN LEES-GALLOWAY Link to this
Well, that is what happened to me, as well. It is atrocious. It is a terrible situation, and I hope that something is being done about that situation.
As someone who is coming to this for the first time, I ask the Minister what the criteria are for getting a deduction for interest that one is liable to pay if one has not paid all one’s taxes and use-of-money interest is being applied to it. I would appreciate the Minister answering that question. It looks like he is keen to get to his feet and give us an answer, and that would be fantastic.
The question was put that the following amendments in the name of the Hon Peter Dunne to the proposed amendments set out on Supplementary Order Paper 254 in his name to Part 1 be agreed to:
to omit from clause 7DB “EZ 23B(7) (Insurance or compensation for depreciable property replaced because affected by Canterbury earthquakes)” and substitute “EZ 23B(8)(Property acquired after depreciable property affected by Canterbury earthquakes)”;
to omit from section EE 44(2)(d) in clause 7DC “Insurance or compensation for depreciable property replaced because affected by Canterbury earthquakes” and substitute “Property acquired after depreciable property affected by Canterbury earthquakes”;
to omit the heading above section EE 47(4) and section EE 47(4) in clause 7DE and substitute the following heading and subsection:
“(a)the irreparable damage of an item or property that is not a building or grandparented structure; or
“(b)the damage of an item of property that is a building or grandparented structure, or of the neighbourhood of the building or grandparented structure, causing the building or grandparented structure to be—
“(a)the building or grandparented structure has been rendered useless for the purpose of deriving income, and demolished or abandoned for later demolition as a result of damage to the building or grandparented structure or of the neighbourhood of the building or grandparented structure; and”; and
“(1)This section applies for a person and an income year (the current year) before the 2016-17 income year when the person,—
“(a)in or before the current year, receives insurance or compensation for items of depreciable property (the affected property) each of which, as a result of a Canterbury earthquake as that term is defined in section 4 of the Canterbury Earthquake Recovery Act 2011,—
“(ii)if a building or grandparented structure, is rendered useless for the purpose of deriving income, and demolished or abandoned for later demolition, because of damage to the building or grandparented structure or to the neighbourhood of the building or grandparented structure; and
“(b)in the absence of this section, would have in or before the current year, from insurance or compensation for the items of affected property (the affected class) in 1 of the categories referred to in subsection (10)(b), total depreciation recovery income under section EE 48 (Effect of disposal or event) exceeding the total amount for the affected class of depreciation loss, treated as a positive amount, under section EE 48; and
“(c)plans in the current year to acquire depreciable property (the replacement property) meeting the requirements of subsection (7); and
“(ii)linking, for the purposes of this section, each item of acquired replacement property with an affected class.
“(2)The amount for the affected class of the excess referred to in subsection (1)(b) (the excess recovery) is not depreciation recovery income except to the extent of the amount that—
“ Effect of acquiring item of replacement property if suspended recovery income from affected property not in pool
“(3)If the person acquires an item of replacement property (the replacement item) and links the replacement item with affected property for which the person does not use the pool method, the amount given by subsection (4)—
“(a)is treated as not being included in the amount of the person’s expenditure on the replacement item, for the purposes of determining—
“(i)under section EE 16(4) (Amount resulting from standard calculation) the item value or cost for the replacement item, if the person uses the diminishing value method or straight-line method for the replacement item; or
“(ii)under section EE 22 (Cases affecting pool) the cost of the replacement item, if the person uses the pool method for the replacement item; and
“(4)The amount of the reduction under subsection (3)(a) or (b) for a replacement item and affected property for which the person does not use the pool method is—
“(a)zero, if the cost of the affected property equals or is less than the person’s total expenditure in acquiring, with or before the replacement item, other replacement property linked with the affected property; or
“(i)the amount by which the cost of the affected property exceeds the total expenditure in acquiring, with or before the replacement item, other replacement property linked with the affected property:
“Effect of acquiring item of replacement property if suspended recovery income from affected property in pool
“(6)If the person acquires an item of replacement property (the replacement item) and links the replacement item with affected property for which the person uses the pool method,—
“(a)the amount of the person’s expenditure on the replacement item is treated as being reduced, by the amount equal to the lesser of the amount of expenditure on the replacement item and the amount of suspended recovery income for the affected property after the acquisition of other replacement property with or before the replacement item, for the purposes of determining—
“(ii)the cost of the replacement item for the straight-line method, if that method is used to determine depreciation loss for the replacement item; and
“(iii)the adjusted tax value of the pool of the replacement item, if the person uses the pool method for the replacement item; and
“(b)the amount of the suspended recovery income for the affected property is reduced by the amount of the treated reduction under paragraph (a).
“(c)be included in the same category under subsection (10)(b) as the affected class with which the person links the item, if the affected class is described in subsection (10)(b)(i) or (ii); and
“(d)be located in greater Christchurch as that term is defined in section 4 of the Canterbury Earthquake Recovery Act 2011, if the item is a building, grandparented structure, or commercial fit-out.
“(8)The person has, in an income year for affected property, an amount of depreciation recovery income equal to the amount of suspended recovery income for the affected property—
“(a)at the end of the income year, if that year is the 2015-16 income year and neither of paragraphs (b) and (e) apply earlier; or
“(b)when in the income year the person decides not to acquire more replacement property, if neither of paragraphs (a) and (e) apply earlier; or
“(c)when in the income year the person goes into liquidation or becomes bankrupt, if neither of paragraphs (a) and (b) apply earlier.
“(9)A person choosing to rely on this section to suspend in a current year the recognition of suspended recovery income from the insurance or compensation for affected property must give written notice to the Commissioner—
“(a)for the earliest income year (the estimate year) in which the amount of the insurance or compensation for the affected property can be reasonably estimated, by the later of 31 January 2012 and the date on which the return of income is filed for the estimate year; and
“(i)for each income year between the estimate year and the current year, by the date on which the return of income is filed for that income year; and
“(c)give details of each item of replacement property acquired in the current year and the affected class to which the person is linking the item; and
“(d)give the amount of the expenditure on the replacement item and the reduction under subsection (3) or (6) of that expenditure for the purposes of determining adjusted tax value or depreciation loss; and
“(e)give the amount, for the affected class, of the suspended recovery income at the end of the current year.
“(11)For the purposes of section EE 48, the amount by which a person’s expenditure on a replacement item is treated as being reduced under subsection (3) or (6) is an amount of depreciation loss for the item for which the person has been allowed a deduction.
Defined in this Act: adjusted tax value, amount, assessable income, building, commercial building, commercial fit-out, depreciable intangible property, depreciable property, depreciation loss, depreciation recovery income, grandparented structure, income year, liquidation, notice, pool, pool method, return of income, straight-line method.
The question was put that the amendments as amended set out on Supplementary Order Paper 254 in the name of the Hon Peter Dunne to Part 1, and the amendments set out on Supplementary Order Paper 263 in his name to Part 1, be agreed to.
A party vote was called for on the question,
That Part 1 as amended be agreed to.
Ayes 110
- New Zealand National 57
- New Zealand Labour 42
- ACT New Zealand 5
- Māori Party 4
- Progressive 1
- United Future 1
Noes 10
- Green Party 9
- Independent 1 (Carter C)
Part 1 as amended agreed to.
The question was put that the amendments set out on Supplementary Order Papers 254 and 263 in the name of the Hon Peter Dunne to Part 2 be agreed to.
A party vote was called for on the question,
That Part 2 as amended be agreed to.
Ayes 110
- New Zealand National 57
- New Zealand Labour 42
- ACT New Zealand 5
- Māori Party 4
- Progressive 1
- United Future 1
Noes 10
- Green Party 9
- Independent 1 (Carter C)
Part 2 as amended agreed to.
Hon LIANNE DALZIEL (Labour—Christchurch East) Link to this
I will raise exactly the same issue that I raised before, but from a slightly different perspective. This issue was not done by way of Supplementary Order Paper but included in the provisions of the original bill—namely, the issue of gift duty abolition being included in something called the Taxation (Tax Administration and Remedial Matters) Bill. I say that the Labour Party will be voting against this part, and voting against the legislation as a whole, because it contains this offensive provision.
When we look at what a tax administration and remedial matters bill is for, we see that it is not for a matter of significant policy, such as the abolition of gift duty. That matter deserves to be part of a policy bill, not something called a tax administration and remedial matters bill. I believe that it is a fundamental issue in terms of how these things are portrayed to the public when submissions—
Hon Trevor MallardHon LIANNE DALZIEL Link to this
It is misleading advertising. When we think of the submissions being called for—the select committee puts a notice in the paper and says it is calling for submissions on the Taxation (Tax Administration and Remedial Matters) Bill—do members think that anyone on earth would know that that bill would include a policy matter? Would anyone think that? When I first arrived in Parliament some 21 years ago this year—
Hon LIANNE DALZIEL Link to this
I know; I was just a child at the time. When I came here all sorts of things used to be hidden behind names like this one. We had the Social Security Amendment Bill that contained benefit cuts. We had the Finance Amendment Bill (No 2)—or 3, 4, 5, or whatever—again hiding all of these things. The title did not disclose what the detail of the legislation was all about. Here we have the Taxation (Tax Administration and Remedial Matters) Bill, which is getting rid of gift duty, something that surely should be subject to quite a significant policy debate. I object to the use of a tax administration bill to deal with a matter of policy.
Let us turn to the matter of policy. When we hear from the Government over and over again that we in this country should not be dealing with matters that we cannot afford, when we are looking at changes to benefits, and when we are looking at all sorts of things as far as the Government expenditure side goes, why is the Government reducing our revenue on the other side of the ledger as part of this?
Aaron GilmoreHon LIANNE DALZIEL Link to this
I am sorry, that figure is nothing to the National Party. It is nothing to the National Party that $65 million per year is up for grabs as far as this provision is concerned.
We are actually talking about the Government saying it will do away with a form of revenue for the Government at a time when it is preaching hardship for every element of expenditure on the other side of the ledger. I think that is outrageous. I think it is important that as a country we deal with these issues, and we do it on a principled basis. The principle here is that we know that the removal of this particular duty will open up a significant range of tax-avoidance opportunities. We know that will be the case. The Minister in the chair, the Minister of Revenue, may well shake his head, but I expect him to take a call on this part, and to respond to this particular issue in order to tell us why no tax-avoidance opportunities—I presume that is what he is saying—are opened up by the removal of gift duty.
He has already been part of a Government decision to benefit—what percentage of income earners benefited from the tax cuts that we had last year? The top 10 percent of income earners. Now that same group of people is benefiting again from changes to our gift duty regime. Abolishing gift duty in the context of the massive, unaffordable tax cuts given to the top income earners in New Zealand last year by this Government strikes me as really just looking after the interests of those people at the very top, and not really caring about those who have to pay for an increased cost of living without having any commensurate decrease in their amount of taxation.
I think gift duty is part of a progressive tax system. Its abolition will favour those people at the top end of the scale. I believe it is important that Government members stand to take a call on this issue to ensure that proper analysis of it is undertaken.
I also understand that members of the Finance and Expenditure Committee were deeply concerned about the inexactitude of the regulatory impact analysis process. They felt that it failed to achieve the requirements of a robust process. I would like the Minister of Revenue to respond to that as well.
Hon PETER DUNNE (Minister of Revenue) Link to this
There are a number of things I should say by way of response. The first is to take up the member’s point about the timing of this legislation. My recollection is that the announcement that gift duty was to be abolished was made in June of last year, June 2010. We said at the time that the legislation would be introduced via the next available legislative vehicle, which happened to be this Taxation (Tax Administration and Remedial Matters) Bill. There is nothing unusual in policy changes being introduced in legislation of this type, because these are, in effect, umbrella bills. The bill then went to the Finance and Expenditure Committee, and submissions were called for on the provisions. The committee went through the bill and came back with a recommendation, which we are now implementing many months later.
Prior to the decision even being made, a substantial review had been undertaken across the Government about whether we should simply just increase the threshold or abolish gift duty altogether. It became clear during that review that agencies like the Ministry of Economic Development, Treasury, the Ministry of Justice, the Ministry of Health, the New Zealand Police, the Ministry of Social Development, and the Housing New Zealand Corporation all said that with regard to potential abuses of the system, which the member has referred to, existing powers in existing legislation were more than adequate to deal with those concerns, and that gift duty, our second-oldest tax after stamp duty, was therefore an anachronism and ought to be gone.
But the story gets more compelling. Each year several hundred thousand gift duty returns are made to the Inland Revenue Department. Over 98 percent of those are nil returns. We spend about $500,000—
Amy Adams[... plus a further 85 contributions not shown here]