Nash Stuart: Taxation (GST and Remedial Matters) Bill — In Committee Speaker Recalled In Committee Procedure Third Reading 
Nash Stuart: Taxation (GST and Remedial Matters) Bill — In Committee Speaker Recalled In Committee Procedure Third Reading 
[Volume:669;Page:16141] 
STUART NASH (Labour) 
: 
 I am delighted to say that I think this is the only part of this tax bill that is not subject to any amendments through Supplementary Order Paper 187 which was tabled on Wednesday or was it Tuesday—it was tabled this week. Part 4 involves amendments to the Income Tax Act 2004 and I must admit that I think every member knows that the Income Tax Act has taken a bit of a hammering in this term. What this part does not do is give a $1000 tax cut to someone who is earning $1 million and give very little to those on the medium wage but what it does do for example is talk about the portfolio investment entity impairment provisions which have been talked about before but are also covered by this bill. This bill adds new section HM 35B to the Income Tax Act and also new section HL 19B which is the one I will talk a little bit about. The reason these changes are being made is that they will clarify that multi-rate portfolio investment entities can claim deductions for expenses and pay tax for income at the point that they are reflected in the portfolio investment entity’s unit price or its financial statements even if this is before the portfolio investment entity has legally incurred or derived any expenditure or income. The purpose of this timing rule is to maintain investor equity over the timing by ensuring that investors who are exiting a portfolio investment entity are attributed their local share of the portfolio investment entity’s tax.  
The changes in the Income Tax Act with regard to portfolio investment entities were debated in the Finance and Expenditure Committee and that is one of the advantages of taking these sorts of bills to a select committee. It gives us the ability to question officials to question our tax advisers and to question submitters on the changes and on how these changes may impact upon their business. Quite a number of submitters wanted to make representations to the committee about the portfolio investment entity provisions. I must admit our technical adviser our tax expert Ms Turner did a very good job in providing the committee with a non-technical layman’s or layperson’s—can we say “layman’s” these days without— 
Hon Trevor Mallard 
: If I were you I wouldn’t use the word “layman”. 
STUART NASH 
: —layperson’s perspective and view of what the portfolio investment entity changes involved under the new timing rule. I will outline these a little bit because they are important and they make up by far the largest section of Part 4 of the amendments to the Income Tax Act in this bill. Under the new timing rule any future change expense or income that has already been deducted or taxed will also be picked up for tax purposes at the point when the change is reflected in the portfolio investment entity unit price or financial statements. There is quite a chunk here in the legislation that determines future amounts. New section HL 19B(2) in clause 91(1) states: “For the purposes of determining an amount for a portfolio allocation period under section HL 19(3) a portfolio tax rate entity may take account of an amount of future income or future expenditure or loss that is—(a) for future income an amount that when derived would be class assessable income under section HL 19(4)(a):”.  
This provides a high degree of equity across investment classes so that is the sort of thing we want to see. As mentioned Labour cannot go with this bill because there are so many changes that have not gone before a select committee and it makes it very very difficult to have a good robust debate on the changes when ordinary New Zealanders have not been consulted.  
The new sections in the Income Tax Act ensure that multi-rate portfolio investment entities are able to claim deductions for credit-impairment provisions when they are reflected in the portfolio investment entity’s unit price or its financial statements. Credit-impairment provisions are created to reflect the decline in the financial assets due to past events. The reason this is necessary is reasonably obvious; it is because a lot of portfolio investment entities have suffered substantial losses due to the current financial crisis that the world has been experiencing for a couple of years. As a consequence there needs to be a way to reflect this in legislation as there is in other parts of legislation and that is why—in relation to clause 91—these amendments are necessary. I think members would agree that investor equity is an admirable goal for any tax legislation.  
Under this legislation a portfolio investment entity will be able to claim deductions for credit-impairment provisions only if it has objective evidence of a loss of an asset’s value because of the events that have already occurred. I am not too sure what objective evidence is. I assume that the managers of the portfolio investment entity can go out and look at stock markets analyse data and talk to a whole range of people on the NZX and overseas depending on where they have invested and they can gather quantitative and qualitative evidence that there has in fact been a loss.  
These amendments apply retrospectively from 1 October 2007. As members will be well aware it is very rare that tax legislation is allowed to apply retrospectively. I would like to digress ever so slightly. There were retrospective provisions in this bill and as a committee we discussed at great length whether this bill should contain retrospective provisions. We had much debate which Sir Roger Douglas had a very active part in. For those who do not believe that Sir Roger is still alive he took an active part in this debate as did my colleagues Mr Burns and Mr Cunliffe. The Taxation (GST and Remedial Matters) Bill is contentious legislation and in the end we decided that it would be in the best interests of all taxpayers if the courts made a ruling around the one clause of retrospective legislation that was contentious in the bill which we think was probably the right outcome. As a consequence of that—as a consequence of going through the select committee process—the retrospective provision was withdrawn.  
This part in regard to portfolio investment entities is retrospective but it includes transitional measures to confirm the tax positions already taken by multi-rate portfolio investment entities on the timing of income and expenses as well as credit-impairment provisions. These transitional measures prevent portfolio investment entities from making retrospective adjustments to their tax returns following these clarifications. By that I mean that we do not want to have portfolio investment entities or any sort of legal entities that have already made representations to the Inland Revenue Department had a ruling and provided a tax return then coming back and saying: “Oh goodness me with this new legislation we can claw back a whole lot of money.” It actually works both ways. The portfolio investment entities themselves would not want to be taxed at a greater rate which they would not do if we are talking about losses anyway. But it is good piece of legislation. It is just a pity that the Supplementary Order Paper has not gone to a select committee because we could have amended it as we amended the legislation through expert advice and liaising with the Inland Revenue Department officials.  
What do we mean when we talk about reasonable estimation? New section HL 19B(3) in clause 91(1) talks about reasonable estimation. It states: “For the purposes of subsection (2) the entity must make a reasonable estimate of the amount and must be able to demonstrate if required the reasonableness of the estimation by—(a) explaining why and when the income is likely to be derived or the expense is likely to be incurred as applicable; and (b) providing the calculation method and actual calculations used to determine the amount with details showing why the method is appropriate.” Again that is saying that a portfolio investment entity manager or whoever is looking after the entity cannot just turn up to the Inland Revenue Department and say: “We believe that we have incurred losses outside of this and we would like to make a representation.” They have to have the evidence in front of them. It is very transparent which all tax legislation should be.  
I come back to the point that this is why we are so against this legislation. There is no transparency. Labour members have not been able to interrogate this legislation and talk to our officials or the Inland Revenue Department officials about it. But this does provide a level of transparency which is most important and it is welcome. I am pleased it is in here. There is something right in this.  
We can also talk about credit-impairment provisions. We are debating Part 4 “Amendments to Income Tax Act 2004” and clause 91(4) which deals with credit-impairment provisions states: “A portfolio tax entity may take account of a credit impairment provision under this section but only if the provision is counted as a credit impairment provision under NZIAS 39.” However a time limit is set in place.