Adams Amy: Taxation (International Taxation Life Insurance and Remedial Matters) Bill — Second Reading 
Adams Amy: Taxation (International Taxation Life Insurance and Remedial Matters) Bill — Second Reading 
[Volume:656;Page:5434] 
AMY ADAMS (National—Selwyn) 
: 
 It is my pleasure tonight to take a call on the Taxation (International Taxation Life Insurance and Remedial Matters) Bill. It is not a small piece of work by anyone’s suggestion. One of the reasons that I am so pleased to take a call on the second reading of the bill is that as a member of the Finance and Expenditure Committee it means that it has finished its progress through the committee. Some of us were starting to wonder whether that would ever happen. 
The bill is an important and very complex piece of work. There is a reason that it is 800-odd pages now and I understand that it will grow a little more before it finishes its progress through the House with the Minister of Revenue having signalled a number of Supplementary Order Papers. The issues contained in the bill—and I thought I would depart from the last speaker and spend some time talking about the bill—touch on a broad number of sector areas and some quite complex issues. For the committee it was not a case of our simply getting our heads round one area of law and dealing with the submissions on it; we had to run through a number of very complex and very different taxation issues within the bill. 
 It has been mentioned already this evening but I too want to add my thanks to Craig Foss for his chairmanship of the select committee; to the other committee members; to our specialist advisers Therese Turner and David McLay who did a fantastic job and certainly made the process much easier for me and the other members of the committee; and to our advisers from the Inland Revenue Department who came in week after week—we became quite used to seeing them. As Mr Foss has already referred to given the breadth of the bill often a group the size of a rugby team would arrive. They were always very willing to respond to concerns that the committee had. For myself I can say that I certainly challenged them once or twice on a few points and I was very impressed with their willingness to work with the committee and our advisers to make sure we got the work as good as we could. Similarly the submitters put a lot of time and effort into talking to us on these issues and I think that only added to the quality of the bill. 
The bill although it deals with a number of important and quite separate issues works very hard to contribute to the overall goals of taxation law of certainty clarity consistency and fairness. We worked very hard to ensure that those overriding principles were met. On a number of occasions we raised with officials our concern at the lack of certainty about how certain phrases and new tests would be applied and I think the officials reached a fairly good compromise. The bill is now structured in terms of what information is immediately available and what can be made available through tax information bulletins and the like as processes develop. Obviously with the passage of time that will become even more certain. 
It has already been mentioned tonight that the key policy driver in the bill—given the name it is no surprise—is the reform of international tax law. Most of us would acknowledge that it has been long overdue. The principal component of the reform—to put it in my simple terms—is that we are getting rid of the old system of eight “grey-list” countries. If companies operated in those countries we basically said they were the same as us so we will treat them as tax-neutral. We have got rid of that system which was a blunt instrument. We have reduced the “grey list” down to one country Australia which is our nearest neighbour and our closest trading partner and has special status. What we look at now rather than the structure of the company is an active/passive test. We look at the business income of any controlled foreign company and we look at the nature of that income. If it is active income from genuine business operations in a domestic jurisdiction then it is exempt from New Zealand tax law. If it is passive—royalties dividends and the like—then it will be taxed here in the normal way. The exception is that there is a 5 percent threshold. If a controlled foreign company’s income is predominantly active but a small portion 5 percent or less is inactive then that inactive income can be chucked in the bucket and treated as exempt income. 
To follow on from the discussion that Mr Boscawen had in respect of Dr Norman’s comments I say quite the opposite from what Dr Norman said. Instead of the bill driving business offshore I think the officials have worked very hard to ensure that the framing of these laws will encourage New Zealand parent companies to stay onshore—that they will not be driven offshore because our tax laws give them a competitive disadvantage. I would argue that we worked to ensure that the bill would be conducive to business investment and conducive to our retaining companies in New Zealand. Certainly that was one of the touchstone principles we came back to in our consideration of the bill. The other was obviously to address maintenance of the revenue base because in these difficult times of falling revenue we had to be conscious of the bill’s impact on the revenue base. The officials and the Minister worked very hard on that. 
The other point of policy detail that I will talk about—because it is one of particular interest to me—is the associated persons tests within the bill. This is a complex area of law at any time and it is applied differently in different circumstances depending on the type of test that is being applied. There is no one-size-fits-all associated persons test within the Income Tax Act. In working through this issue with the help of particularly Therese Turner we were able to identify that although the advisers’ policy in the first draft of the bill was sound there were some areas of what we perceived to be unintended overreach. 
One example we had was of a son whose father had been living away from the family for some time. When that son grew up and had a company of his own he found that for tax purposes he was associated with his absent father’s new wife’s company which he had no knowledge of no awareness of and nothing to do with. This grown son found himself removed from for example the ability to claim the low-turnover trader provisions because the association with the wife’s company lumped him in with all sorts of companies. As soon as that was pointed out to us it became apparent to all that that certainly was not intended by those provisions. We had to work through that and as a result we made some very good changes to the associated persons rules. In particular we limited natural person associations to people whom one would reasonably be expected to know the existence of to ensure that children are not associated with their parents’ companies and the like. The rules of association between natural persons have been brought down considerably. 
We also spent quite a number of meetings looking at the tripartite test of association. This effectively sets up a provision whereby if one person is associated with another and a third person is also associated with that other then the first and the third persons are associated with each other. It is quite complex there are rules around it and I do not want to traverse all of those but once again although we understood the principle and the situations that the provision was intended to catch we had concerns. We spent a lot of time testing the provisions of that test to make sure that there were not situations where unintended consequences would arise. 
Similarly and Mr Foss referred to it in his speech a compelling submission pointed out that beneficiaries of a trust could have no idea that they had been made beneficiaries of that trust yet through no fault of their own they could be tainted by association with it. Not only had they no involvement with the trust they had absolutely no knowledge of it. In fact that issue had nothing to do with this bill; that was the case under existing tax law but this bill gave us the opportunity to address it. The work we have done here has actually improved the wider associated persons test beyond the scope of this bill and I am certainly very proud of the work we have done in that regard. 
I will also pick up on the point that Rahui Katene made in some depth about voluntary payroll giving. Ms Katene detailed it very well and I do not want to repeat what she said. But even in respect of those provisions we spent quite some time exploring the consequences. What if the employer company has gone into liquidation and those funds are still in trust—who owns them? What if the company has not passed them on? What if it has passed them on to the wrong entity? The committee tested those parameters as far as we were able given the limited time—which has already been talked about—to ensure that the legislation would hit the taxpayers in the best form we could get it. 
 I shall run through some of the other areas that the bill deals with. Life insurance has been significantly remodelled. That was overdue. The life insurance sector has changed significantly and this bill now brings it much more in line with the current realities of life insurance. Tax pooling which is something that I had not been familiar with before now is addressed in the bill. There are provisions relating to KiwiSaver on death GST on loyalty points and petroleum mining. The list is long and extensive. 
The point is that this bill tidies up a number of important areas of tax law that need to be tidied up. I believe that it is conducive to business in New Zealand and I believe that it is conducive to investment in New Zealand. In these difficult times New Zealand needs nothing more than that. I commend the bill to the House.