Taxation (Tax Administration and Remedial Matters) Bill

Hon PETER DUNNE (Minister of Revenue) Link to this

I move, That the Taxation (Tax Administration and Remedial Matters) Bill be now read a third time. The bill before us is about simplifying the tax system so that it works more efficiently and operates in a way that reduces compliance costs for New Zealanders, thereby providing an environment that supports growth. These are obviously matters of particular interest at a time of global economic uncertainty, and it is pleasing that a large number of the measures in the bill were welcomed by members on all sides of the Chamber during the Committee stage.

One prominent feature of this bill is the proposed abolition, from 1 October of this year, of gift duty. It is fair to say that that measure did not receive a universal welcome from all members of the Committee, and it was probably the cause of the most vigorous debate on this legislation during that stage. In my view, however, it is right that gift duty, which has long since ceased to fulfil its function and instead imposes unjustifiable compliance costs, should be relegated to history. It has been around since 1885 and has been largely ineffective in recent years, in that it raises barely more than the revenue it costs to operate the system, while imposing significant compliance costs on taxpayers. Concerns about the matter can easily be addressed by existing social and other legislation administered by other Government agencies. The review that preceded the decision to abolish gift duty was initially a review of the threshold at which it applied, and it became obvious during that review process that there was little point in adjusting the threshold, and that the tax was so ineffectual that we should remove it altogether, and so it has come to be.

Although much of the attention during the Committee stage focused on the abolition of gift duty, it is worth reminding members that there are a number of other important aspects of this legislation. One such significant proposal will help make our Public Service more efficient. Changes to the secrecy and information-sharing provisions in the tax administration rules will bring the Public Service more into line with today’s customer service expectations and help improve efficiency across the Public Service. The present secrecy rules are too restrictive and do not, for instance, allow a non-English speaker or someone who has hearing difficulties to have a relative or a friend helping them, even if they have the taxpayer’s permission. Clearly, a dose of common sense is required.

The information-sharing amendments in this bill will result in improvements in service provision and accuracy, efficiency—by eliminating duplication of effort—and the detection and prevention of fraud. These changes will result in a more efficient Public Service, providing services that are more tailored to the customer’s needs.

The bill also includes a number of proposed changes to the rules on the tax disputes process, which complement major changes made by the Inland Revenue Department to the way in which it currently administers the tax disputes process. Our tax system relies on voluntary compliance, and it is therefore appropriate that disputes, which inevitably arise, are resolved quickly and efficiently for both parties.

The bill also includes a number of matters relating to the recent Canterbury earthquakes. The most significant of these is the introduction of roll-over relief for depreciation recovery income. This will apply to cases where an asset is replaced and the insurance or compensation would otherwise have given rise to such income. The timing of income from the proceeds of business interruption insurance is also being changed, with effect from 4 September 2010. The bill also proposes to relieve interest charged on overdue tax for some overseas workers in New Zealand who came here to assist following the earthquakes. These workers have unexpected tax to pay as a result of their stays in New Zealand being longer than anticipated. The Government wants to encourage productive investment in Canterbury, and these measures will help to achieve that. Officials are still considering further earthquake-related tax issues, and they will be brought to the attention of the House as and when it is appropriate.

In addition, this bill reduces tax for non-residents investing in New Zealand through New Zealand portfolio investment entities. There was some rather technical discussion in the early part of the Committee stage about these particular provisions. I should point out that this is an important set of reforms, which is designed to assist New Zealand to potentially become a hub for the investment of international funds. By improving efficiency and removing undue compliance costs, this bill helps create an environment that supports growth, while maintaining the integrity of our tax system.

It is significant legislation, and substantial effort has been put into it by officials and drafters to get it to this point. I also acknowledge the Finance and Expenditure Committee for its thorough consideration of the bill, for its good work, and for the recommendations that it has brought forward, which have been adopted. I am very pleased to commend the Taxation (Tax Administration and Remedial Matters) Bill to the House.

STUART NASH (Labour) Link to this

As the Minister of Revenue said, there is some very good legislation in the Taxation (Tax Administration and Remedial Matters) Bill. The Finance and Expenditure Committee went through it with a fine-tooth comb, and on nearly every single point we came to agreement and consensus, and we agreed that this is fantastic legislation. This bill as it stands reaches to about 130 pages, and on about 129 ½ of these pages we were in full agreement, but there were two lines in this bill that we did not agree on, and those were lines at the very end of this bill, in clause 110 of 110 clauses. Those two lines read: “No gift duty is payable under the Estate and Gift Duties Act 1968 in relation to a gift made on or after 1 October 2011.”

That is the shame of this bill. Labour will not be supporting this bill, because of those two lines. We believe that the abolition of gift duty is not a good step for New Zealand or the New Zealand tax system. As the Minister mentioned, gift duty has been around since 1885. This measure was part of the Estate and Gift Duties Act. Estate duty was abolished about 30 years ago, but gift duty was left intact, for a very good reason, and that is because legislators understood that gift duties stopped avoidance behaviour, which we are very, very concerned about.

As we know, in the last few Budgets under Labour and National the Inland Revenue Department has been given significant amounts of money to chase those who avoid tax. I think in excess of $100 million has been provided to chase those who are avoiding tax. As officials of the Inland Revenue Department will know, this bill will in fact make it easier for certain sections of our society to avoid tax, and that $100 million will have to be spread a lot wider, as the department seeks to find a lot of avoidance activity that will take place.

Let me give members an example. There are 325 fraud cases being looked at by the Inland Revenue Department at the moment, and four of those cases total $420 million—just four of them. We have received advice that, in fact, if the House abolishes gift duty, there will be a lot more of this money-go-round, as it will make it incredibly easy. In fact, it will drop any barrier to the movement of money between legal entities, trusts, companies, and whatever. This just adds to the overall complexity that the Inland Revenue Department faces in terms of chasing those who defraud the tax system, or who engage in avoidance behaviour.

I would like—and I very rarely do this—to read out a good chunk of Labour’s minority report on this bill. It is not very long, but it is very important. We said: “New Zealand Labour … believe the analysis upon which the gift duty abolition proposal is based is fundamentally flawed because it does not adequately take into account the full range of potential tax avoidance opportunities.” We grilled the Inland Revenue Department on this issue. In my short, brief experience in this House and in the Finance and Expenditure Committee, Inland Revenue Department officials are very, very good at what they do. They answer questions brilliantly, but I got the very strong impression that they were operating under orders saying: “This is what the Minister wants, and this is what this Government wants; therefore, do it. Ram it through.” It was probably one of the very few times when I was not convinced that the Inland Revenue Department was happy with the legislation going through.

As mentioned, there are 130 pages in the legislation, and 129 pages were actually very good. We all agreed about it. It makes the tax system more efficient, as the Minister outlined. The Minister himself outlined some of the measures we all agreed on—they are great, but the abolition of gift duty is not one of those. We also said: “no sensitivity analysis has been provided. No options analysis has been provided. The policy process would not meet the standards expected under a thorough Regulatory Impact Statement.” This bill gets rid of a tax that has been there for well over 100 years. We expected a lot more. We said we were “concerned that the analysis does not address any of the social equity concerns raised by a number of submitters and Labour members on the committee. [We] believe, in the first instance, that any legislation proposing the abolition of gift duty should [at least] be delayed until the Law Commission’s review of trust law is complete.”

We made this clear; we asked the officials why they could not hold off. We asked them to just hold off, and then if the Law Commission came out with a ruling, a strong view, or a strong recommendation on trust law, they could bring it back to the Finance and Expenditure Committee and we would consider it. We would consider it; we understand the compliance costs related to administering this tax. But they would not hear of that. They would not hear of that, because the Minister Peter Dunne made a deal with National, and National accepted that deal as part of his support. It will be bad law.

AMY ADAMS (National—Selwyn) Link to this

I will take just a brief call tonight on the Taxation (Tax Administration and Remedial Matters) Bill third reading. Before I touch on gift duty, which is obviously a pretty contentious issue in this debate, I will reflect on some of the other things this bill does, because people listening to the debate this afternoon could be forgiven for thinking that that was pretty much all that was in the bill.

I acknowledge the comments of the previous speaker, Stuart Nash, who made the point that there are a lot of good tax changes in this bill, and I think they deserve to be put on record, although I know that the Minister of Revenue referred to them, of course. One of the key changes we looked at was the information-sharing powers that the Inland Revenue Department holds, and the restrictions on its ability to do that. The Finance and Expenditure Committee certainly came to the view that the law was overly restrictive the way it was. We have come up with what I think is a good framework going forward, to enable sensible sharing of information between the department and other Government agencies. As a member of the Finance and Expenditure Committee I certainly look forward to reviewing how that change operates in the years to come, if I am lucky enough to stay on that committee.

The bill improves the tax disputes process, tidies up tax pooling rules, and deals with some overtaxation of non-resident investors in portfolio investment entities, ensuring, effectively, that people are taxed in broadly the same manner that they would be taxed if they invested directly in those domestic assets. The Minister also mentioned tonight in his contribution the further Supplementary Order Papers we have seen that tidy up some other tax issues relating to insurance payouts and the rebuild in Canterbury. Of course, this House is always very supportive of any aid in that direction.

Just coming back to gift duty very briefly, I touch on the fact that although it has been well traversed that this is a tax that raises very little in revenue terms—$1 million gross; half a million dollars or less net, and something like 98 percent of all compliance that goes through the department in relation to this results in no tax payable—it is not unfair to say that there are issues that have to be looked at in relation to how people can divest themselves of assets, and ensure that that is not done in an inappropriate way and that it is not done to defeat creditors. But I think the point that has been missed in the debate so far is that this is tax legislation, and tax law is not the place to ensure that the legislation is correct around asset transfers and the protection of creditors. Those provisions do exist, and the contentions from Labour members that suggest that now it will be all on for man and beast, and everyone can pass assets off to anyone they like and avoid anything with impunity, are, frankly, wrong. There are significant powers already in the insolvency legislation and in wider legislation to ensure that gifts that are made solely with the purpose of defeating a creditor, or solely with the purpose of entitling oneself to more Government assistance, are able to be set aside.

If the ongoing monitoring of the position post the abolition of gift duty suggests that more work is needed, then certainly we will be very happy to look at that. But as a matter of tax law, this tax is defunct, it is obsolete, and all it does is create an industry of compliance with tax lawyers and accountants. It serves no net purpose to the Government’s fiscal books, and its time has come. I think the Minister was absolutely right when he said that there is no rational reason for keeping it as a tax law any more.

Can I also touch on the fact that under existing structures, assets can be divested instantaneously. A debt back is created and then that debt back goes through a process of forgiveness over a period of years, at $27,000 a year per person, or $54,000 a year per couple. The asset itself goes on day one, with or without gift duty. If there is concern about protection of specific assets, under current laws that asset—with gift duty, without any penalty or payment—can be divested immediately, with all capital gained from that date. The only asset that remains, as I say, is a financial one, which at day one is reduced usually by $54,000 across a couple, and that amount reduces in time.

To suggest that the picture will change significantly, as one might have thought from listening to this debate, I think is misleading. I think this is the right step as a matter of tax reform. We will continue to monitor it to see how it evolves, but my guess is that the change will not be anything like as significant in terms of asset divestment and avoidance as has been suggested in this debate. The biggest change that we will see is the people of New Zealand no longer having to pay out $70 million to lawyers and accountants to do something that has no public good. For that reason I am very happy to commend the bill.

Hon LIANNE DALZIEL (Labour—Christchurch East) Link to this

There are a number of features of the Taxation (Tax Administration and Remedial Matters) Bill that fully meet the intent of something that is described as a tax administration and remedial matters bill. What Amy Adams talked about was not one of them. The abolition of gift duty does not fit within the ordinary definition of tax administration and remedial matters. That has been the Opposition’s No. 1 objection to the use of this particular vehicle for the abolition of gift duty. It is a policy matter of some substance and deserves to be dealt with by a bill that actually addresses policy issues, rather than it simply being seen as a matter of tax administration. But there is a reason why this Government has chosen it as a matter of tax administration, and I will come to that shortly.

As members of this House will know, I am a great fan of something known as a regulatory impact statement. I sometimes feel like I am the only person who reads them, but on this occasion I know that is not the case, because every Labour member on the Finance and Expenditure Committee read the regulatory impact statement, and they were unimpressed. They were so unimpressed that they actually challenged the content of the regulatory impact statement in their report back to the House. I think that is a significant issue and something this House should take very seriously. If we cannot rely on the regulatory impact statement to provide us with the basis for quality decision-making, then heaven help us, because, actually, the people of New Zealand put us here to do something a little bit more than a once-over-lightly, and the regulatory impact statement is supposed to offer slightly better than the options offered in this case.

Let us look at the options, but first I should make this point to the House, because I think members just do not get what the regulatory impact statement is for. It is supposed to identify the mischief that is to be remedied by the particular proposal that the Government has adopted. It then should identify a range of options that the Government could adopt, choosing the least regulatory intervention all the way through to a major regulatory intervention. All of those options would be put on the table, and then there would be a cost-benefit analysis, a risk-opportunity analysis—all of that work would be done, and that is where the regulatory impact comes in. There would also be consultation with major players. Well, the consultation on this particular one has been rather an eye-opener for me, as well.

Let us look at the options that the regulatory impact statement put on the table. The first option was to narrow the scope of gift duty. It looked at the people whom the previous speaker was talking about—the family trusts, the individuals, and the closely held companies. It then looked at the concerns around income tax minimisation, social assistance targeting, and defeating creditors, which largely relate to gifts between those individuals, and, therefore, looked at limiting the rules around gift duty to those particular individuals.

The second option was to raise the threshold at which gift duty applies, noting, as the regulatory impact statement did, that the current threshold of $27,000 per annum for the gifting programme had been fixed in 1984 and had not been revised since then. There was a view that it had not kept up to date with inflation. The regulatory impact statement identified that if the threshold had been adjusted, it would be $78,291, but it said that that would “dilute gift duty’s protective effect against these forms of targeted gifting by speeding up the rate at which assets may be transferred.” But, actually, getting rid of gift duty does not just speed it up; it completes the process in one fell hit. So I do not know why that was a good argument, but I am sure that somebody in the bowels of whatever department wrote the paper will understand why that was the case.

Option three was to remove the need to file gift statements for non-liable gifts. I found this absolutely fascinating because we have heard a lot of people saying that about 200,000 gift statements have to be filed each year. Well, that is quite interesting, because the regulatory impact statement states that “The most significant part of compliance costs is not completion of gift statements—rather, it is the annual drawing up of deeds of forgiveness which require engagement with a legal practitioner.” That is it. So all of this talk we have heard about the huge cost to the Government of managing the compliance cost in relation to the completion of gift statements does not stack up against the Government’s own regulatory impact analysis.

Option four is to move to electronic systems. Well, I was gobsmacked to find out that in fact they cannot be filed by electronic means at the moment. I do not understand why. It is to do with the original deed having to be filed along with the gift duty statement—which is then photocopied and returned by post. I am sure we could do better than that. I do not know why it was ruled out. The regulatory impact statement says “The financial outlay required to upgrade systems is expected to cost within the range of $1-7 million.” Within the range of $1 million to $7 million? One would think Treasury could come up with something slightly better. It sounds like the good old days when Labour was in Government and we got quotes from the Ministry of Social Development as to how much it would cost to upgrade SWIFT for a minor technical adjustment to a benefit. It was always in the millions and millions of dollars. But $1 million to $7 million to make it possible for the Inland Revenue Department to have a document scanned as an original document and signed off by somebody who would give it the status that it required? I cannot believe it. This document says a lot.

The last option, of course—they have left us only one option, the one they wanted right from the start—is to repeal gift duty. The thing I find fascinating is something the previous speaker drew attention to. She said we are saving the private sector $70 million. Is that not wonderful? We are saving people $70 million by getting rid of gift duty. Well, do members know how they came up with that figure? It was on the basis that the average cost quoted by practitioners for drawing up an annual deed of forgiveness is $285 plus GST. So what she meant to say is we are saving 225,000 people $285 plus GST each, so that they can have the benefit of not paying tax on what they are gifting to somebody else in order to divest themselves of their assets. That is what this is about. The Government does not like hearing this, but this is about its priority. It is prioritising the same people it prioritised in the tax cuts. It said that 10 percent of New Zealanders would get the bulk of the benefit of the tax cuts, and that is exactly what it is doing with this measure.

That is what draws me to paragraph 57 in the regulatory impact statement: “The number one concern related to the repeal of gift duty from an income tax perspective has, until very recently, been the ability of individuals to reduce their taxable income by transferring their income-generating assets to a trust. High-earning individuals could transfer assets such as shares or interest-bearing savings to a trust so that the associated income accrues to the trustee. This would allow the income to be taxed at the trustee tax rate instead of at the top marginal personal tax rate.” Now, listen to this: “Up until 1 October 2010, this would offer a tax saving of 5%. However, alignment of the trustee and top personal tax rate from 1 October 2010 will remove this tax advantage.” But that is the whole point. The Government reduced the top tax rate for its mates, and now it is giving them the total benefit by removing the gift duty, as well. Those members are saying that it makes no odds because of a change they have made to the tax system favouring the highest-income earners in this country over and above those who struggle to make ends meet every single week because of the price of milk, because of the price of fuel, and because of the price of their groceries, which just go up and up and up.

This debate says a lot about this Government’s priorities, and we know exactly where this will take us as we enter election time, because the people of New Zealand will know perfectly well where that party’s priorities lie, and it certainly is not with average New Zealand, with every New Zealander who sees themselves disadvantaged once more by this Government.

Dr RUSSEL NORMAN (Co-Leader—Green) Link to this

I rise to speak on the Taxation (Tax Administration and Remedial Matters) Bill. Tax is the price we pay to live in a decent society. Tax is how we afford public hospitals so that when people get sick and have heart attacks they have a public health system that will look after them. That is why we pay our taxes. We pay our taxes so that we have a decent education system, so that our kids—and all kids, wherever they are from in our country—can access decent education. That is why it is important that we all pay our taxes and that we all pay them honestly and fairly. That is why the symbols around tax are very, very important. The Minister of Revenue earlier dismissed this. He said that this is merely a battle about symbols. Actually, it is not just a battle about symbols. But even if it was a battle about symbols, symbols in tax matter. The reason they matter is that if everyone thinks that everyone else is avoiding their tax, then they think it is OK to avoid paying their tax too. But if everyone thinks that pretty much everyone else is paying their fair share, then it is very likely that they will pay their fair share as well. That is what is important about the symbols around our tax system.

Unfortunately, since the new-right revolution of the 1980s and the embrace of the “greed is good” culture, we have now had the development of widespread tax avoidance and a culture of widespread tax avoidance in New Zealand. We find it from the very top all the way through, but particularly amongst higher-income earners. The reason why I say that we find tax avoidance at the very top is that the banks were caught avoiding paying around $2 billion of tax. The High Court found that the banks had been illegally and unlawfully avoiding paying tax, and then eventually the banks were forced to repay around $2 billion in tax that they owed to the rest of us because they had been unlawfully avoiding it. None of those people were prosecuted. We have created the problem whereby tax avoidance has become widespread. There was a case recently where someone was caught avoiding paying a very large amount of tax, and the punishment was simply home detention. The banks themselves did not receive any punishment whatsoever. No bank executives were put in jail or anything.

We have a problem with tax avoidance in our country, and we have a problem with the culture around tax avoidance. That is why the gift duty issue matters so much. Aside from the content of it, it is also about the symbolism of it and about whether everyone is paying their tax. Gift duty acts as a buttress to the tax system. That is one of its purposes. One of the key ways to avoid paying tax that has emerged in New Zealand is through the use of trusts. Income-generating assets have been moved into trusts so that they are taxed at the trustee rate, rather than taxed at the marginal tax rate. Gift duty has effectively acted as a dam against large amounts of assets being transferred into trusts. It means that the asset flow going into trusts has been slowed down, and that assets can be gifted into trusts at $27,000 per year, rather than being gifted all at once. The gift duty rules, although not appearing to do a huge amount in terms of generating tax, have been acting as a large dam, preventing an even greater amount of assets from flowing directly into trusts and being lost from view once and for all.

This has been of major benefit to the tax system. It has generated huge amounts of information about what is going on in terms of assets and attempts to hide income-generating assets and other assets in trusts, and that has been very useful. That is why from the beginning of this debate, from the first reading, the Green Party has opposed this bill. It has opposed it because of the abolition of gift duty. We are pleased that Labour has seen the light. We wish only that National had seen the light and understands the significance of what it is doing. I suspect, unfortunately, that maybe National does realise what it is doing, or maybe it does not. But one of the effects of this bill will be that the dam will be removed. The dam that is currently operating to hold back large amounts of assets and to control their flow into trusts will be removed. A huge flow of assets will go into trusts, and from there those assets will be lost from sight to most of us, including the Inland Revenue Department.

One of the arguments that the Government puts up as to why this no longer matters is the equalisation of income tax rates and the trustee rate. The only thing is that these rates will not stay the same for ever. The current Government has equalised these rates, but there is no guarantee that a future Government might not think that New Zealand having a tax system that is wildly out of skew with the tax system of most other Western countries and having a very low top marginal tax rate—and I remind the House that in the UK it is 50 percent—is how it should stay. New Zealand will not have a very low top marginal tax rate for ever. It has not been the case in the past, and I am sure that in the future we will have a higher marginal tax rate than we have today. At that point, once again, a gap will open up between the trustee rate and the top marginal tax rate. It is for this reason that wealthy individuals in New Zealand will be cheering with joy when this Parliament passes this bill, because they will be free to move all of their income-generating assets into trusts, in the full knowledge that were a future Government to increase the top marginal tax rate again, their assets will be safe. Their assets will be safe from their fair share of tax in New Zealand.

In the regulatory impact statement the Inland Revenue Department unfortunately did not talk about this option, because talking about future policy changes with a change in Government was not one of the options the department was given the responsibility to talk about. But the reality is that it is a very real possibility in New Zealand that in the future we will have a higher top marginal tax rate than the trustee rate. So this bill will give a lot of people who have very large assets the opportunity to hide them away in trusts so that they do not get caught in the future. It is a very sad day, because it fundamentally undermines fairness in our tax system. Once we undermine fairness in the tax system, everybody thinks it is OK to avoid paying their taxes. They see the banks avoid paying $2 billion in taxes, but nobody gets punished and nobody goes to court. If someone illegally stole $2 billion from the Reserve Bank, would it be the case that no one would be prosecuted or get caught? Instead, the banks’ executives and their advisers—and PricewaterhouseCoopers was in on this—unlawfully avoided paying their tax and nobody went to court. Nobody personally—none of the directors or the executives—ended up in court. They all got away with it. All they had to do was pay back some of the money.

The problem with laws like this is that they undermine the integrity of the tax system by reinforcing the idea that the tax system has one rule for the wealthy—as we are seeing tonight with a special rule for the wealthy so that they can hide their assets in trusts—and one rule for wage and salary earners. Wage and salary earners have to pay their taxes; it is very hard to avoid them. That is why we have opposed this bill from the beginning. We believe that the tax system needs to be fair, and it needs to appear to be fair. Although there are many good aspects about this bill—and I think there is probably cross-party support for the large majority of this bill—it is fundamentally undermining some of the essential fairness elements of the tax system with these changes around gift duty.

I say to the Minister that symbols do matter. This bill is about more than symbols, but symbols do matter. The Government is saying today that just as all its other tax changes have one single direction, which is to move money towards the wealthy, this bill we are debating tonight has exactly the same direction to it. When we look at each of the changes, whether it is the change to the top tax rate, to GST, or to gift duty, we see that each of them might be a relatively small amount—though the tax changes were not small, and 40 percent of it went to the top decile—but when we put them all together they all have the same direction of movement, which is to move wealth towards those at the top end.

I tell members that if we keep adding to inequality in our country through the tax system, through the wages system, and through every other mechanism, then we will end up with a society that we do not wish to live in. If members wonder why people might not be comfortable with what is going on in Aotearoa New Zealand, then they should look at inequality and look at what bills like this are doing to inequality. They are adding to inequality, which will only make it more expensive further down the track with regard to health, education, justice, the courts, the police, and crime, because inequality produces more costs on all of those things. Thank you.

Hon JOHN BOSCAWEN (Leader—ACT) Link to this

It is a pleasure to stand and take a call on the Taxation (Tax Administration and Remedial Matters) Bill. As we heard from Mr Nash earlier, most of the parts of this bill are not contentious. They are accepted by most parties in the House and by both sides of the House. Mr Nash used his speaking opportunity to focus on the abolition of gift duty. We have just heard an argument from Mr Norman that the abolition of gift duty is wrong. He said that one of the reasons we have gift duty is to restrict the transfer of assets into trusts, away from an individual taxpayer, and that it is done for the purpose of reducing one’s personal income tax. But interestingly, he acknowledged that simply setting the top marginal tax rate, which is currently 33c, at the same rate as the rate for trusts negated the benefit of shifting assets into trusts. He tried to argue that the setting of those two rates at the same level would be a temporary measure until such time as a future Labour Government increased the top marginal tax rate.

I suggest to Mr Norman that he is absolutely wrong. He talked about the reality as being that at some stage in the future that top tax rate will rise. My advice to the people of New Zealand is not to support any political party that would want to do that, because, as we have heard, when we have a difference between those two rates, it leads to tax planning and tax avoidance. If we actually wanted to grow the economy, reduce tax avoidance, and improve the incentives to work hard and save, we would do exactly the opposite. We would be lowering tax rates—we would actually lower the tax rates. If there is one thing that the ACT Party stands for, it is reducing wasteful Government expenditure and lowering taxes, and letting the people of New Zealand retain more of the income they earn.

It is interesting that Mr Norman talked about a top tax rate of 50 percent in the United Kingdom. It was only last week that Mr Norman was complaining about the social problems in the United Kingdom. We know that the United Kingdom is broke. We know that most of the major developed countries in Europe are broke. Why are they broke? Because they have huge amounts of wasteful Government expenditure, they have high marginal tax rates, and they provide a disincentive for people to work, to invest, and to get on. I suggest that Mr Norman look at countries in Asia—the countries in Asia that are growing—and look at the countries that are actually growing during this worldwide recession. What do we see in Asia? We see low rates of tax. I suggest that if the Green Party had the interests of this country at heart, it would be looking at how we reduce rates of tax, reduce wasteful Government expenditure, and provide an incentive for people to work hard and to keep more of what they earn.

Mr Norman talked about the inequality. He talked about the so-called rich and the wage and salary earners. If Mr Norman was really concerned about wage and salary earners, he would be looking at how we could reduce waste and reduce the top marginal tax rate. If we had a top marginal tax rate of no more than 20c in the dollar, we would actually have the right incentives.

The ACT Party will be supporting this bill, and we encourage New Zealanders to give further thought to how we can reduce wasteful Government expenditure and lower tax rates. Thank you.

DAVID BENNETT (National—Hamilton East) Link to this

I will just follow on from the last speaker, John Boscawen, who I think made some very good points about the nature of the Taxation (Tax Administration and Remedial Matters) Bill and what it means for New Zealand’s economic performance. This bill is good for the New Zealand economy. It is good for New Zealand taxpayers, it is good for the total tax take that New Zealand will get, and it is good for making New Zealand businesses more competitive on the world stage. It is sad that Labour and the Green Party, especially, have to come and say no to good law in this House just because they want to keep a façade going in the public eye of their attack on those who are successful, those who have something, or those who have worked hard to make something of their lives and for this country. It is really sad that they cannot support good law that is simple, that has all the bases ticked, and that is in the best interests of New Zealand as a country going forward. They cannot support it, because their ideology will not allow them to. That is very sad for New Zealand. The public out there sees through Labour and the Green Party, and it realises that those parties do not actually have the best interests of New Zealanders at heart. They have only their own self-interest and what they can do during election campaigns. They try to divide and conquer a country by putting one person against another. They tell people to look over the fence, be afraid of other people, have fear of them, and try to take what they have earned, just so Labour can be in control and try to govern. Those tactics do not work any more. The world has moved on. The New Zealand public has moved on. It is time that Labour got out there and supported things that are in the best interests of New Zealand, because there is no way that we can support an industry that costs $70 million in compliance costs. Why would one put $70 million worth of compliance costs on New Zealand businesses and individuals for no real benefit other than one’s political motives? It is a very sad day when Labour has to put politics above the people of New Zealand. Thank you.

TE URUROA FLAVELL (Māori Party—Waiariki) Link to this

Tēnā koe, Mr Deputy Speaker. Kia ora tātou katoa. In talking to the Taxation (Tax Administration and Remedial Matters) Bill, I think one of the components of candidate training that should be part of compulsory learning for all wannabe politicians should be to gain an understanding of the long list of acronyms that are sometimes bandied about in Parliament and in this Chamber. In this bill, for example, the SOP introduces new measures associated with RWT on trusts and beneficiaries, QC and LAQC transition measures, and ESCT in the context of employer superannuation contribution tax. I think members get the general gist by just reeling off some of those acronyms. Well, today’s new word is PIEs—P-I-E-s. They are not the mince and cheese pies that Todd McClay associates himself with, but are amendments relating to the treatment of non-resident investment in portfolio investment entities, à la PIEs.

Even the category “non-resident” is bizarre in a sense: it defines what people are not, rather than what they are. It is like “non-Māori”, which interprets a person’s identity as not being Māori but does not actually tell us anything about the unique identity of those non-Māori—of Irish, American, or French whakapapa.

Currently, if a foreign person invests directly in a foreign investment he or she pays no New Zealand tax. By making it more attractive for a foreign person to invest in managed funds, it will support the managed funds industry in Aotearoa, with the idea that it will lead to more jobs in providing back-office services for managed funds. Another benefit for other New Zealanders is that if we have a greater pool of funds under management, we will get economies of scale. This makes it more attractive to foreign investors, which ultimately makes it cheaper for investors in Aotearoa as well, and, for example, some of these fund managers include AMP and AXA New Zealand. It is a case of what will be good for the foreign investor will ultimately be good for Aotearoa New Zealand as a whole.

The Māori Party supports an economy of investment, which leads to greater productivity and enhances well-being, so in this sense we are pleased to support the Taxation (Tax Administration and Remedial Matters) Bill. I have to say pretty quickly that the Māori Party considers it necessary to carefully scrutinise and manage all foreign investments by non-residents in Aotearoa. That is about protecting and preserving what is ours—within our hands and within our land. It should go without saying that we support the majority of the amendments that concern further responses to the Canterbury earthquake, and the affected taxpayers in the 2010 and 2011 tax returns.

The major provisions allow for the roll-over of depreciation recovered to go into replacement assets. For example, suppose a building had a historical cost of $3 million, had been depreciated for tax purposes to $1 million, and was insured for replacement at $5 million. If this building was destroyed by the Canterbury earthquake, the owner would be up for a tax bill of about $600,000 on the depreciation recovered of $2 million, even though he or she would have no money with which to pay this tax. Such tax returns would represent a windfall gain for the Government from the earthquakes, which in anyone’s books is pretty crazy. Basically, the effect of the amendment means that people affected by the earthquake will not have to pay tax on depreciation, as one would usually. I understand there are also write-off rules. It is proposed that the write-off rules for buildings be extended, from those buildings written off by an event, say an earthquake, to include buildings that have been destroyed as a consequence of an event.

The Māori Party supports the effective recovery of Christchurch, and as such we support any changes to tax law that will help to facilitate this, as a part of manaakitanga. We also wish to lift the economy of Aotearoa and support whānau. The Māori Party is happy to support this bill at its third reading.

BRENDON BURNS (Labour—Christchurch Central) Link to this

It has been interesting to listen to the speeches of a couple of the preceding speakers in this debate on the third reading of the Taxation (Tax Administration and Remedial Matters) Bill, and to note comments from Mr Bennett about how this bill serves the best interests of New Zealand. I say to that member opposite that this bill serves the best interests of a tiny percentage of New Zealanders.

Mr Boscawen from the ACT Party said that we needed to look to Asia, where they have low tax rates. Well, I say to that member opposite that we sat next to each other at the State luncheon for our retiring Governor-General today, and I am happy to pay my taxes to help pay for that lunch. There are no free lunches. If we want to live in a responsible and decent society, then paying our taxes is the price we pay for things like that, and for a multitude of other things besides. If Mr Boscawen wants to swap the life that we have to go to work in a Chinese sweatshop, pay low tax rates, and earn $200 a month to produce Adidas T-shirts with All Blacks slogans on them, then I say good luck to him—go to Shanghai, or wherever.

If we want to take that thinking to its ultimate analogy we need look no further than at what happened in the United States Congress but a couple of weeks ago, where the Tea Party rump of the Republican Party forced a vote that said: “We will not support any tax increases on the billionaires of the United States, but, Mr President and those in Congress, we want you to cut Medicare, education spending, and pensions.” What does that mean? It means that America has been through a financial downgrade as a result of that decision. That is where countries get to when they get into the mantra that says they should cut the taxes to the wealthy and impose the costs on the rest of society.

We need only look at the comments in the paper only today from Warren Buffett, America’s wealthiest man, who said that he wants to pay more taxes and that he should pay more taxes. Or we can look at the commentary from Bernard Hickey last weekend. He said that we need a thriving middle class in New Zealand, not a situation that has seen the wealthiest 1 percent increase their share of the wealth from 7 percent to around 14 percent in the last 20 years. That is the sort of direction we are heading in with this bill, which does away with gift duty for the very wealthiest in our community.

Part of the explanation for this bill was that gift duty raised only about $1 million a year and cost half that amount to administer. I say again to the Minister of Revenue that that is disingenuous, because this policy was about stopping more avoidance and structuring. The very fact so much money is spent by people on gifting arrangements suggests that people are doing very well out of it. That is what the policy is about. That is why it is there. That is the reason it should stay in place.

I commend my colleague Lianne Dalziel for her reading of the regulatory impact statement, particularly paragraph 57, where the department noted that, in fact, until October last year there was a greater benefit from gift duty because the tax rates were a little higher. Of course, removing that top tax rate has removed the tax advantage, so, ipso facto, we should do away with gift duty. What a lovely, logical sequence that is—to set up it for the fall.

I will also point out to the House what the regulatory impact statement said in respect of some of the impacts—and Lianne Dalziel is right; members of the Labour Party do read the regulatory impact statements on bills like this one. The authors of the regulatory impact statement consulted all of the Government departments relevant to the repeal of gift duty. One of the commentaries came from the Ministry of Social Development, which stated that if the change were to happen, there could be some ramifications for some of the issues with residential care subsidies—that is, if gift duty is repealed, people will be able to transfer all their assets into a trust instantly. At the moment, people have to stage it. They have do it by transferring $27,000 a year. The ministry also notes that it has a provision where it can look at how people might make lump-sum payments. But, here we are, with the Ministry of Social Development needing to review its administration of financial means assessment if gift duty is repealed. So it is heralded in front of us that the Inland Revenue Department will save $400,000 and what a great saving that is, but there is one Government department stating that its cost structures are likely to rise as a result.

The Ministry of Social Development went on to state that staff training would therefore be required around the operational impacts of the changes. There would also need to be complete land-title searches for properties where applicants had lived for a significant amount of time, to determine whether the property has been gifted by the applicant. The ministry has noted that this will lead to increased operational costs, so there we are. We are saying that we will save some money at the Inland Revenue Department, but we are looking at the potential for extra costs at the Ministry of Social Development. And that was without any real analysis of what this change might mean in terms of what the State has to administer in respect of residential care, where we have a carefully managed regime to ensure that people pay a fair component of the cost of residential care. Obviously, these changes could impact upon that regime.

The Ministry of Social Development also commented about entitlements to Working for Families tax credits, an issue very dear to the Minister who introduced this bill and to the Government, which wants to crack down, we are told, on those who might be rorting Working for Families tax credits where it is not appropriate. The ministry said that there is the potential for applicants to transfer income-earning assets out of their names in order to remove income associated with the asset from their taxable income. Again, that is a consequence of this bill. It underlines the very premise that Labour has been talking about—this gift duty is there not for what it brings in but for what it prevents from happening in respect of further rorting of the tax base.

There was further commentary, from the Housing New Zealand Corporation. It was not seen as a big issue by the corporation because most of the people in State housing are not likely to be the beneficiaries of gifting arrangements, but none the less there was seen to be some risk around that issue. The corporation said that it would be on the alert for those kinds of outcomes. Child support is another area in which it is believed that the State will have to keep a watchful eye because of the fact that gift duty arrangements will be removed by this bill.

There are a number of consequences of this legislation, and Labour has said explicitly that it is not an appropriate measure to be introducing. We need an equitable tax base, most especially at this time. We need arrangements that underscore and underline that everybody pays their fair share. Gift duty has been an arrangement that simply said to people that it is there to try to ensure they do pay their fair share. It has not been a great revenue collector. It was actually pointed to after a former National Government removed estate duty in 1992 as part of a need for an ongoing protective mechanism, one that was weakened with last year’s move on top tax rates.

In summary, Labour is saying very clearly that there are good elements to this bill—sensible, progressive amendments to tax law that have come through the Finance and Expenditure Committee and that Labour has supported. But when it comes to gift duty we say that it is an important protective mechanism of the tax base, that it deserves to stay in place, and that it is there to ensure that equity prevails in the tax system. We need to ensure that equity is preserved not only to balance the amount of tax that people pay to ensure that the top end of town pays its share and that tax is paid not just by the lower end of town but also to provide a signal to people that we are all part of one community and one society. When we get signals being sent consistently—consistently—

AARON GILMORE (National) Link to this

It is a pleasure to stand and talk about some of the misinformation we have heard tonight on the Taxation (Tax Administration and Remedial Matters) Bill, and respond to some of the comments. We have heard about Labour’s conspiracy theory, its fear, its hate, and its envy. Its whole focus, in a 127-page bill, was on one page, and that was the page with the provisions about gift duty.

You see, gift duty does not work for anybody, but Labour is worried about it, because it has the fear and envy that some people out there are ripping off the system. Well, we have heard tonight that gift duty collects $400,000 net in tax each year, and we have heard some great conspiracy theories from the other side of the Chamber that the $70 million in compliance costs that is being paid to tax lawyers and accountants up and down the country each year may not be real. There are some fears about that. Well, let us assume the cost was half of that, or one-tenth of that. In any of those situations, reducing costs to consumers is what this Government is all about, and increasing efficiency for consumers is what this Government is about.

Opposition members over there do not care about that. They care about creating some ideas of fear and conspiracy—whether in respect of money-laundering or anything else like that—and they seem to think that the existing legislative framework will not work. I think that is a bit of a worry. Those members are success haters, and successful people do not like the Labour Party. I find that very strange indeed.

Most of the stuff in this 127-page bill we are finishing off tonight is about portfolio investment entities (PIEs). We have land PIEs, wholesale PIEs, retail PIEs, overseas foreign investment PIEs, variable-rate PIEs, and multi-rate PIEs. I have to say that we have not heard much about those tonight, but we have heard a lot about one page in the 127-page bill: the issue around gift duty. Maybe Labour members ate lots of pies during the dinner break, and that is why they are focused on one particular page.

This bill is good for New Zealand. It reduces costs to mums and dads up and down the country. They will save $70 million in fees for just one page in this legislation. They will have the ability through the changes in the PIE rates here, through their KiwiSaver accounts, to save significant money through investments. But the prior member pointed out, and believed, that this bill had no benefits for mums and dads. Well, I can tell Mr Burns that lots of mums and dads invest in PIEs, and they will benefit significantly out of the tax changes in this bill, despite the comments of that member.

Finally, the nature of the fear and envy that exists tells us a lot about what goes through the minds of the Labour members. They are worried about one paragraph in a 127-page bill. They are not worried about growth and reducing costs to taxpayers up and down the country; they are worried about one paragraph in a 127-page bill. That paragraph would probably put out of work a whole bunch of tax accountants and lawyers up and down the country. They make on average about $500,000 a year, and this bill will reduce compliance costs by $70 million a year. Those people could be gainfully employed doing something productive and enterprising in New Zealand, and that is what we want to see—not them running around, trying to cheat the taxpayers in relation to tax codes.

All the fear and envy that those members have put forward is covered by other legislation, and we heard from the Minister of Revenue earlier tonight that that is taken into account. So for the people listening out there who have heard those members, the people who are worrying about the transfer of assets, I say that it has all been taken into account—from money-laundering through to relationship property and everything in between. It is a shame and a misfortune that some of the comments from the Opposition tonight have been putting fear in the good people of New Zealand. I think that is a shame.

This is a good bill. It will reduce the cost to New Zealand, and it is another step in the right direction for a Government that is looking at reducing costs to mums and dads out there.

RAYMOND HUO (Labour) Link to this

I say to the National member Aaron Gilmore, who has just resumed his seat, that Labour believes in a fair tax regime that promotes social and fiscal equity. Gift duty is part of a progressive tax system that does not favour or disadvantage any member of society. In reply to Aaron Gilmore’s misinformed speech, let us look at the title of this bill, which is the Taxation (Tax Administration and Remedial Matters) Bill. Unfortunately I did not have the chance to take a call in the Committee stage on this particular clause, because my learned colleagues Lianne Dalziel and Iain Lees-Galloway got the calls before me. With respect, the title is rather misleading. It is wrong to use a bill that is supposedly for administration and remedial matters to push through the abolition of a tax. Legislation such as this should be reserved for technical changes and ought to be uncontroversial.

As I said in my second reading speech in July, apart from the provisions relating to gift duty Labour supports the contents of this bill and, in the normal course of events, would vote for it. However, due to those concerns we have to vote against the entire bill.

In the Committee stage Lianne Dalziel asked a very good question about portfolio investment entities (PIEs) and the Minister of Revenue gave a very good answer. I also had a question for the Minister but, again, I did not have an opportunity to ask it. The question was about the application dates. The rule applicable to category 2 PIEs is proposed to apply from the start of the 2012-13 income year, but those applicable to category 1 PIEs are to apply from the date of Royal assent. The application date for category 1 PIE rules has been brought forward in response to submissions and, according to the regulatory impact statement, it will allow some funds to launch prior to April 2012. No explanation was given as to why a similar starting date is not proposed for the category 2 PIE rules.

Much has been said about clause 110, namely, the abolition of gift duty. So far all explanations and rationale, shall I add, from the Minister and the National MPs are focused on one single issue—that is, gift duty imposes a high level of compliance costs on the private sector and no longer raises any significant revenue. I also said in the Committee stage that Minister Dunne got it wrong when he said that estate duties were abolished in 1992 but gift duties remained in place for revenue purposes. That statement actually begs the question. The Minister confirmed in his previous speeches that revenue from gift duty was about $1 million per annum, but the cost to the Inland Revenue Department to administer it was about half a million dollars. On the other hand, the Minister said the compliance costs on the private sector amounted to $70 million a year, plus the law was too old, and so on, so it must go. I say to the Minister that gift duty was originally implemented to prevent people from circumventing the estate duty. Estate duty was abolished in 1992, but gift duty remained in place to prevent people from giving away large assets in order to avoid paying creditors, obtaining access to Government benefits, or avoiding tax liability.

It has been argued that the abolition of gift duty will allow people to more easily hide assets in trusts to avoid creditors and tax, and use this opportunity to obtain access to rest home subsidies, for example. This was one of the major concerns in reviewing whether gift duty should be abolished. A number of lawyers and accountants made good quality submissions, and, to be fair, they made submissions in good faith—

Dr RAJEN PRASAD (Labour) Link to this

I also am pleased to take a call on the Taxation (Tax Administration and Remedial Matters) Bill. It has been interesting listening today to the Committee stage and the third reading of this bill. I want to reflect on some of the comments that have been made. I was interested in Trevor Mallard’s comments late in the afternoon, when he said that there are some provisions that come before the House that reflect the essential differences we have with members opposite, and this is certainly one of them. When we begin to look at fairness and equity, then we can see why we strongly oppose some of the provisions in this bill. Mr Gilmore argued that we have spent all of our time talking about what is effectively the last substantial clause in the bill—much of our time has been spent on that. He seemed to be saying that no matter the size of a bill, if there is an important clause in it that we do not agree with, we must still pass the bill. That was the kind of shallow thinking that Aaron Gilmore had, and he was advising this side of the House to take that view.

We heard also from Mr Bennett. I wonder whether he had read the bill fully or what point he was trying to make. He really did believe that this side of the House does not have the best interests of the community at heart. He actually believes that. That is the kind of amazing contribution that we heard on this bill.

Then we had a contribution from the ACT Party. The ACT member began to make a non-existent link between taxation in Britain, the unrest in the Middle East, and the development of the Asia-Pacific region. His argument went something along the lines that Britain’s troubles are caused by high taxation and the differences that creates. Then he referred to the Middle East, and talked about the unrest there. He talked about the kind of society there, and blamed it on the kinds of things we are debating here. Then he came, amazingly, to the two Asian giants, I guess he was referring to, that are producing amazing growth rates at the moment. That member should reflect on the fact that those two countries put together probably have a billion people in poverty. [Interruption] The member has been to those countries, and that is a fact. But when members on this side of the House talk in the New Zealand context about fairness and equity, then those things become important.

My colleague Su’a William Sio talked about a hospital pass—that the nature of this bill was a hospital pass. There is quite a lot of truth in that comment about what this legislation does, and how the last clause of this bill has introduced a major change, which is fundamental in a bill of this kind. Debates on remedial matters bills of this kind—and this point has also been made—generally are non-controversial, and generally there is broad agreement across the House. But this was not a bill like that. A major controversial element has been introduced in the bill. Minister Dunne tried to make light of that, but we cannot make light of that when it is a serious provision that needs to be debated fully. It is quite sad really, when this side of the House supports all of the other provisions in the bill—everything but one clause. Tax secrecy, the privacy framework, tax pooling, and changes to donee status: we support all of those things, but what we have been reduced to doing is to debate this particular provision.

It is interesting to follow the argument from the other side. The Government justifies the abolition of gift duty because of these elements: gift duty raises only $1.5 million a year, costs half that amount to administer, and has a $70 million compliance cost. The Government says that therefore it does not work; therefore, it has to go. But that is being deliberately disingenuous, because gift duty exists to prevent tax avoidance and structuring. That is what it is there for. Scrapping gift duty opens the way to tax avoidance and structuring. If we take those characteristics, the measure has been quite successful. It was never about how much tax was going to be taken, or how much it would cost to administer. It was an important pillar to avoid tax avoidance and structuring.

That point was made very strongly by the New Zealand Institute of Chartered Accountants. I know that Minister Williamson believes that of course it would say that, because of self-interest. Well, I give the institute quite a bit more credit than the Minister does. The Minister himself supports that group in terms of the quality of its submissions before select committees, so I take its submission seriously. The institute identifies major tax-avoidance opportunities that this provision will give. The House has heard them all, but the final statement is still worth repeating: “ability to split incomes with people on lower incomes”. That is very interesting, because Minister Dunne is interested in income splitting, although his National colleagues are not. Maybe this is a back-door way of bringing in income splitting, or maybe there is a lovely Freudian kind of explanation for why the Minister supports it. But “ability to transfer income to loss-making entities”—everyone has talked about that, but it still is a problem. Simply taking it away, in this way, does not solve those problems. The “ability to transfer assets in order to meet minimum thresholds for the financial arrangement rules and the foreign investment fund rules”, and “ability for someone with a tax liability to divest themselves of the means to pay and then to claim hardship”—those kinds of points have been well made.

I liken the measure to putting a fence at the top of a hill of unstable ground so that people will not play there and fall in, so that that fence does its work. But because nobody has fallen over and died, we think we should take that fence away. That is what I liken this provision in this bill to, and that is why we cannot support it.

Other important contributions were made. I was fascinated by Lianne Dalziel’s passionate interrogation—and she spent about four or five calls on this—concerning the regulatory impact statement. It told us a lot about those whose job it is to tell this House what those impacts are. She went through it in some detail and made an important contribution. But there is a question in my mind now. I know that Aaron Gilmore does not accept this, but the $70 million that is projected is probably a figment of somebody’s imagination. It is a very rough way of doing it, but it has become a driving force for this Government in bringing this clause into this bill at this time. Therefore, it stretches credibility—certainly mine—and it is in the regulatory impact statement.

In the end, one has to wonder why the Government is doing it. Is the Government now simply taking another step in advantaging those who are well off, and making sure they get another tax break? They have had several already, and this is another one that will make that ability available to them. I thought Stuart Nash was very astute in saying that one of the perverse effects of this could be seen in those who will now transfer huge sums of their resources into trusts, etc. It will heighten avoidance behaviour—behaviour of a type we have not seen.

It is a rushed decision, and for all of those kinds of reasons, despite the fact that we support every other clause in this bill, this has been the pivotal clause for us. The Government is not prepared to wait for the report on all of this to be ready so that a more considered decision can be made. I wish it would listen to what Warren Buffett said yesterday: “Do charge me tax fairly.” Members on that side might need to think about that. Thank you.