Taxation (Savings Investment and Miscellaneous Provisions) Bill, Taxation (Annual Rates of Income Tax 2006-07) Bill

Hon PETER DUNNE (Minister of Revenue) Link to this

I move, That the Taxation (Savings Investment and Miscellaneous Provisions) Bill and the Taxation (Annual Rates of Income Tax 2006-07) Bill be now read a third time. I begin by acknowledging the contribution made by the members who took part in the Committee stage debate, and also that made by the members of the Finance and Expenditure Committee, who have worked so hard on this legislation over the last few months.

I also join with other members who during the earlier debates expressed their congratulations to, and admiration for the work of, Robin Oliver and the team at the policy advice division of the Inland Revenue Department. This year has been one of the busiest years on record in terms of tax policy, and I know better than most the stresses and strains that Robin and his team have been put under. I simply want to put on record this evening my appreciation for the admirable work they have done, and I am sure that most members of the House would join me in that.

These bills complete a long process of reform that had its genesis way back in the 1980s. Reference was made earlier to Sir Roger Douglas attempting in the 1980s to do what these bills do, and being unable to complete the exercise. The National Government in the 1990s attempted something similar—and I seem to recall being Minister of Revenue at that stage, as well—but was unable to complete the exercise. Finally tonight we complete the exercise of getting a fairer and more comprehensive regime for the taxation of both managed funds and offshore investments by individuals. This debate has been a long and arduous one at times. The proposals we originally released caused a great deal of controversy and a huge number of submissions. The select committee managed to work its way through them and it accepted some proposed amendments, and I think a pretty good regime is about to be put in place this evening.

I want to pick up on a couple of points made at earlier stages of the debate that I did not have a chance to respond to. Reference was made earlier on to the Government’s commitment to the generic tax policy process, and I want to reassure the House that the generic tax policy process remains one of the jewels in our policy formation crown. This Government and this Minister have absolutely no intention of tampering with that. In fact, it is worth noting that across a range of tax policy issues—and we have not finished yet; we have more to come tomorrow—around eight discussion papers, as part of that process, have been released on various topics this year alone.

It is also worth noting that the Taxation (Savings Investment and Miscellaneous Provisions) Bill, which gives effect to the offshore investment regime, had its genesis in some work done by Mr Craig Stobo a couple of years ago. A discussion paper was issued in 2005, and it attracted, from memory, around 800 submissions. Dr Cullen and I released proposals for change earlier this year. They then became the original bill, which attracted several thousand submissions. We have now modified those proposals, with the help of the select committee, the select committee has gone through a further round of consultation, and the legislation now stands on the verge of being passed into law this evening. So I say that the process of consultation has been honoured absolutely. There has been more discussion on this measure than on any other measure that I can recall in the last 20 years in this House.

Essentially, at the end of it, the differences between the parties come down to some relatively minor points. The position that the bill advances is that we will have a fair dividend regime, under which managed funds will be taxed at 5 percent, and, for individual offshore investors, the tax will be 5 percent of the opening value, unless they can demonstrate that their actual rate of return has been less than that. The position advanced by the Opposition—by National in its minority report and during the debate this evening—was that the 5 percent rate was too high. It wanted a flat rate of 3 percent—for, I think, the funds, but certainly for individuals. But the difference is that whereas under the proposals in the bill no tax is payable in years that individuals incur losses, under the proposal advanced by the Opposition they would pay the flat 3 percent rate regardless of whether they had losses or gains.

So I say that if, at the end of this process, we have a difference of that minimal nature, what we also have is broad acceptance around the House that it is correct that the concept of a fair dividend yield be the basis on which we tax these investments, that the process we have gone through to arrive at that has produced a law that in the circumstances is sufficiently robust to stand the test of time, and that we have completed an exercise that successive Governments over the last 20-odd years have embarked upon but failed to complete over. I think that, all round, in the circumstances that is a pretty satisfactory outcome, and I simply congratulate all of those who have been involved—be they submitters, technical advisers, members of the Finance and Expenditure Committee, officials, or members of the House who have taken an interest—and have had a hand in bringing the legislation to this point this evening.

Dr the Hon LOCKWOOD SMITH (National—Rodney) Link to this

I thank the Minister of Revenue for his response to the questions I posed during the Committee on this legislation. I appreciated that. But what he has just put to Parliament now I do not accept, and neither does National. He has just put to Parliament that there is not a lot of difference between these positions—that the 5 percent fair dividend rate is more fair because people will not pay tax in a year they do not make a 5 percent return. That is not what the officials told us. The officials told the Finance and Expenditure Committee that this legislation is so complex that people will pay the 5 percent because the cost of working out a lower possible rate for so many people is just too great. That is what officials told us.

If members look at the National Party’s minority view in the commentary on the legislation, they will see that it is not National saying that it supports a lower rate. We point out in our minority report that most submitters argued that a lower deemed rate of return would be a more appropriate policy, because it would remove any element of capital gains tax. So it is not National saying that; it is what most submitters put to us. I want to make that very clear to the Minister. Submission after submission to the select committee argued against the 5 percent fair dividend rate.

I focus on this, because it is the most controversial part of this legislation. The shrinking of the “grey list” and the Government proposing, initially, to impose a capital gains tax on 85 percent of gains, then doing a U-turn and proposing this 5 percent fair dividend rate, has been the most controversial part of this legislation. The people making the submissions—people like John Shewan—did not say that a 5 percent fair dividend rate was the best way to go, at all. People like John Shewan argued for a flat lower deemed rate on everything, because then one could make funds and individuals the same.

One of the goals the Government set out to achieve with this legislation was to treat managed funds and individuals’ portfolio investments offshore the same. And we accept the Minister’s explanation of the benefits that he gave during the Committee. We accept the logic of getting the “BRICK” countries—Brazil, Russia, India, China, and South Korea—into a more sensible tax regime. But to have gone for this complicated 5 percent fair dividend rate makes no sense. I can tell the Minister that his colleagues on the select committee were at times tearing at their hair, asking why on earth we were going through this. I have already read to Parliament what Shane Jones really believes, when he said at a meeting in Napier: “Why bother investing in shares when you know you’re going to get taxed, potentially on gains you’ve not even received”—now called the fair dividend rate—“when you have all the tax incentives possible to go out and buy another house as a rental.” That is what the chair of the Finance and Expenditure Committee, Shane Jones, is saying about the Government’s own legislation.

I say to Peter Dunne the Minister of Revenue that I do not accept the argument he put forward just now. I believe, having listened to the submissions carefully at the select committee—and the select committee did put a lot of work into this, questioning the officials closely at the select committee—that this is a revenue issue. Many of the Labour members could see the benefit of going for the Shewan model of a lower flat deemed rate where it was simple across the board—treat funds and individuals the same, no de minimis, no exemptions, just a flat low rate. Everyone could see the benefits of that. But the officials explained to us that it would give away more revenue—and we all know that Dr Michael Cullen, the Treasurer, is allergic to giving away revenue. We all know that, and sadly we end up with this complex 5 percent fair dividend rate that no one likes.

I will acknowledge that people do say that it is not as bad as the complicated 85 percent capital gains proposal that Labour initially put up. It is not as bad as that; but it is still not good tax law. Most people will find it so complex they will not comply with it, and that means those taxpayers of goodwill, the honest taxpayers, will simply pay a 5 percent flat tax rate. As one of the senior officials—I will not say which one—said to us, he would probably simply pay the 5 percent flat tax rate to avoid the costs of having to calculate what the actual rate of return on his portfolio was, because it is complicated. Taxpayers would have to get a lot of information to calculate the actual rate of return on their investments offshore. So many taxpayers will pay the 5 percent rate as if it were a flat rate, and others will simply ignore the tax law and not comply.

That is unfortunate, because the Government had the opportunity to get bipartisan agreement on a lower, simpler flat deemed rate that treated funds and individuals exactly the same, with no exemptions—a very simple system that everyone could have complied with. No one would have objected to it. I point out to the Minister of Revenue the example of Telecom shareholders this year. They will pay tax on their dividends, even though if they were investing in one of these offshore countries, they would not, because the capital value of their Telecom shares has come down so much. Even though they get a dividend return, their total value will have gone down. So under this tax proposal they would not pay a tax. But in New Zealand everyone accepts that we pay tax on our income. So if we get a dividend stream, we pay tax on it. That is why more people would have accepted the fairness of a low deemed rate based, essentially, on the weighted average international dividend yield.

I put to the House the fact that the reason we do not have it is that Dr Michael Cullen would not allow it. That is why Labour is proposing this legislation, because it brings in this complex, unworkable tax that is unfair, when in fact we had the opportunity to bring in a sensible tax that reformed the taxation of offshore portfolio investment sensibly.

Can I also add my thanks to the work of the officials. I have worked with Robin Oliver for many years, as a Minister in the previous Government as well as in recent years as Opposition spokesperson on revenue. I just marvel at the workload that guy and his team can carry. I feel sorry for them that they have to come up with legislative proposals to match this Labour Government’s dopey tax proposals, but they do it very well, given the foolish tax constraints that this Labour Government imposes on them. Sadly, the officials have done good work but I think this is Mickey Mouse legislation, because of the constraints that Dr Michael Cullen imposed on them. We could have had the kind of legislation that John Shewan was arguing should have been adopted. It would have been accepted far more widely across the investment industry. It would have got rid of so many of the differences between the taxation of funds and individuals. It would have been so much simpler and so much better.

It is sad that we have not got that, and National therefore opposes the bill. I do not often agree with Jeanette Fitzsimons. She called the bill a dog’s breakfast; it is. This is one of the few times I have ever agreed with the co-leader of the Green Party. But that is why National is opposing this legislation, because it is not good legislation.