Smith Lockwood: Income Tax Bill — Instruction to Committee In Committee Third Reading 
Smith Lockwood: Income Tax Bill — Instruction to Committee In Committee Third Reading 
[Volume:616;Page:12079] 
Dr the Hon LOCKWOOD SMITH (National—Rodney) 
: 
 The Committee stage of this bill is very very important for New Zealand. I am not 100 percent sure people will have gathered that yet. This bill is a complete rewrite of our Income Tax Act; some 2000 pages of it. This particular bill deals principally with Parts C D and E of our Income Tax Act. Part C of the Income Tax Act sets out what income is Part D of the Income Tax Act spells out the deductions that are allowed from income prior to payment of tax and Part E of the Income Tax Act spells out the rules in respect of timing of income because obviously decisions have to be made as to whether income relates to this year next year last year or whatever. So this is hugely important. 
This is a huge fundamental rewrite of our Income Tax Act and there have been many changes. I guess that hundreds of thousands of words have been changed in our Income Tax Act. If any of those changed words produce a different outcome in a court of law our taxpayers may be caught out. This rewrite of the Income Tax Act started under the previous National Government but Parts C D and E which are fundamental parts dealing with income deductions and timing have been dealt with by this Labour-led Government. If the thousands upon thousands of changed words change the Act’s meaning then there are serious consequences for New Zealand taxpayers. 
The Finance and Expenditure Committee heard from major submitters including the Institute of Chartered Accountants and the Law Society. The committee heard that both those major organisations were deeply concerned about unintended changes to our law. They explained it this way. Let me try to make sure that the Committee understands what I am getting at. Let us say a taxpayer relies on this new bill when it becomes an Act. If that produces a different result from the previous Act that this replaces and the Government enacts retrospective legislation to change it back—because the Government has said that it does not intend to change any of the meaning—what happens to that taxpayer? Will the taxpayer face penalties? Will the taxpayer face use-of-money interest requirements? What will happen to the taxpayer if he or she relies on this new Act as passed by this Parliament with all the hundreds of thousands of word changes in it and in fact it produces a different outcome from that which the old Act would have produced? The Government I understand has made a commitment that it will act retrospectively to change it back. But there is a further complication. This Parliament cannot bind a future Parliament. So who can give the taxpayers of this country an ironclad assurance that there will be retrospective legislation? If after the next election we have a different Parliament here how can— 
Hon David Carter 
: And we will have. 
Dr the Hon LOCKWOOD SMITH 
: I am sure there will be a very different Parliament here. Half the members opposite those Labour Progressive Green United Future and New Zealand First members will be gone. That is pretty clear. 
Let me come back to the very serious issue. I see Minister Duynhoven is now the Minister in the chair and I would like him to comment on this. It was the specific concern of the Institute of Chartered Accountants and of the Law Society and it is this: if taxpayers rely on the new law that will pass through Parliament—not tonight but once it receives its third reading—to establish their tax liability and if in fact it is different from the old law the Government has said that it will retrospectively make an enactment to change things back to the old law. A prudent taxpayer may therefore say: “Well hang on I’d better not use this new Act because if this new Act according to my lawyers changes things the Government has promised to change it back to what it was. If I use the new law I may face use-of-money interest charges. I may face penalties it if takes a couple of years to sort out the issue.” So the prudent taxpayer says to his lawyers: “We had better use the old law.” That does not solve the problem either because this Parliament cannot bind a future Parliament. So no matter what this Government has said about retrospective legislation to take things back to the old Act in fact we cannot bind this Parliament. 
I would like the Minister in the chair—I see that Minister Cunliffe is now back in the chair—to explain how a taxpayer should handle that dilemma. I will repeat it for him. The taxpayer is faced with using this new law and his lawyers say that in their view it changes the requirements from the old law that this replaces but in fact the lawyers say: “Hang on the Government has said that if it does change the outcome it will retrospectively legislate to change it back to the old law.” But then the wise lawyer says: “But hang on I can’t advise you that because obviously this Parliament cannot bind a future Parliament. So maybe the law won’t be changed back.” What law does a prudent taxpayer use? This new law or the old law? I would like the Minister to explain how the Government plans to overcome that dilemma. 
Secondly I would like the Minister in the chair to address this particular issue. According to my notes on 14 May last year in front of the select committee the Inland Revenue Department agreed to a schedule of intended changes. There are a limited number of changes that are intended that this bill should make to the tax law. According to the notes I took that day at the select committee the Inland Revenue Department agreed that it would establish a schedule of the intended changes. I accept that it may have been done and I have not been able to find it. I have looked through Supplementary Order Paper 195 but it might be buried somewhere in the final version of the bill before the Committee. I would like to see exactly where it is so we can clarify for taxpayers the schedule of intended changes under this law. 
The third point is that the major submitters—the Institute of Chartered Accountants and the Law Society—believe it would make sense to establish a formal committee to assess whether the law was changed; to try to establish with experience a consensus as to whether this bill that we are debating in Committee tonight has changed the law—because there are big changes. There were also last minute changes. 
 If we look at the bill as it was introduced and the way it treats income compared with the bill finally before us tonight we see there are big changes. The bill as introduced talked about counted income. We were told that counted income was a hugely important way of simplifying it all. Counted income is now gone out of this final version we have before us tonight. Now there is just income under subpart BD 1. There is just income—nothing to do with counted income. And now we have a whole extra range of steps in sorting out what income of a taxpayer will actually be taxed. All those changes were made at the select committee. 
The argument of both the Institute of Chartered Accountants and the Law Society that a formal committee should be established to examine unintended consequences I thought made a lot of sense. I think that no members of this Parliament intend that this bill should change the law beyond those specific changes that are intended—the limited number of specific changes. The dilemma for taxpayers is that they need to know exactly what those intended changes are. I want to know where the schedule of those intended changes is in the bill. I want to know what has been done to establish this committee that would be able to form a consensus of the unintended consequences of the complete rewrite of the Act. 
But I come back to the first point I made a moment ago and that is I believe the dilemma a prudent taxpayer is in for two reasons. I want to make sure that Minister Cunliffe can explain what should happen. The taxpayer is caught with the dilemma: does he or she use this new Act or the old Act? We are told the new Act is not intended to change anything yet it might and a court of law must presumably use the new Act. It was suggested that there should be a transitional provision. It was suggested for example that a simple transitional provision would state that as a matter of statutory construction the words and meaning of the 1994 Act can be used as an aid to interpreting the provisions of the new Act. This point I believe is very serious for taxpayers. If there is no such transitional provision as was suggested—I think it was KPMG who suggested to the select committee that wording I used a moment ago; that as a matter of statutory construction the words and meaning of the 1994 Act can be used as an aid to interpreting the provisions of the new Act—how do legal advisers advise their taxpayers in using this new Act? 
I want to be clear that this is understood. The dilemma is this: they have to use the new Act because that is the Act the courts will use in determining whether ultimately they are complying with the law. If in fact the new Act does change something the Government has said it will introduce retrospective legislation to change it back. So legal advisers may say: “Hang on if this looks like it’s changed things use the old Act because the Government is going to change it back anyhow. So we should base it all on the old Act because if you use the new Act and don’t pay enough tax you’ll face penalties or use-of-money interest.” But the dilemma is the lawyer might say that the Government may not change it back because this Parliament cannot bind a future Parliament. 
How can the Minister in the chair assure taxpayers that they are protected when this Parliament cannot bind a future Parliament? When these matters come into being next year most of this Labour Government may well be gone and this Parliament cannot bind a future Parliament. So taxpayers really must use this Act and they face that jeopardy of use-of-money interest penalties and that kind of thing. I see no way around that. I think the Minister is prepared to answer those serious queries because they are serious for taxpayers. I am very happy to sit down if the Minister is prepared to answer those serious concerns.