Dunne Peter: Taxation (Annual Rates Business Taxation KiwiSaver and Remedial Matters) Bill — First Reading 
Dunne Peter: Taxation (Annual Rates Business Taxation KiwiSaver and Remedial Matters) Bill — First Reading 
[Volume:639;Page:9402] 
Hon PETER DUNNE (Minister of Revenue) 
: 
 I move  
That the Taxation (Annual Rates Business Taxation KiwiSaver and Remedial Matters) Bill be now read a first time. 
 Later I shall be recommending that this bill be referred to the Finance and Expenditure Committee for consideration. 
This omnibus bill—the traditional May bill—introduces major changes related to the announcements in today’s Budget. These changes include the new research and development tax credit changes resulting from the reduction in the company tax rate provisions relating to employers’ obligations in the employer tax credit under the enhanced KiwiSaver scheme and increased tax incentives for people in companies to make charitable donations. The bill also introduces a number of other important tax changes several of which have been announced over recent months. The chief of these changes is the liberalisation of tax penalties to promote voluntary compliance—a reform that has met with widespread approval. 
The companion bill the Taxation (KiwiSaver and Company Tax Rate Amendments) Bill which was also tabled today and has just received its first reading deals with the member side of the announced KiwiSaver enhancements and reduces the company tax rate from 33 percent to 30 percent. That bill also includes the associated reduction in the tax rate for certain savings vehicles and other changes that need to be enacted with urgency. 
The legislation I am introducing now gives effect to business tax reforms that have resulted from the business tax review which itself was a direct result of policy stipulated in the confidence and supply agreement between United Future and Labour and between New Zealand First and Labour. Our requirement was for “a review of the current business taxation regimes with the view of ensuring the system works to give better incentives for productivity gains and improved competitiveness with Australia.” The resulting business tax review set out to do just that. 
The first step was the release of a discussion document that canvassed views on possible business tax initiatives to increase our productivity and make us more competitive internationally. Amongst the options were reducing the company tax rate from 33 percent to 30 percent and the introduction of targeted tax credits. The discussion document was followed by further extensive consultation and policy development the results of which appear in the two business tax reform measures that are featured in this bill. 
The reduction of the company tax rate from 33 percent to 30 percent—from the 2008-09 year—aligns it with Australia’s company tax rate. This reduction thus improves our competitiveness with our largest export market as well as making New Zealand a more attractive country from which to do business. 
This bill introduces a number of transitional and consequential amendments that result from the new company tax rate most of which concern imputation credit handling in the 2-year transitional period. Without this transitional period some companies may not be fully able to distribute the profits and associated tax credits they derive before the new tax rate comes into effect. 
The new research and development tax credit is a further measure to emerge from the business tax review. Introducing tax credits for other activities was also considered in the course of the review but in the end we concluded that tax credits there would be less cost-effective than the existing mechanisms for funding areas such as export market development and skills training. On the other hand there is a significant and growing body of evidence that tax incentives have been effective at boosting business research and development. So the tax credit for research and development will help to bring New Zealand more into line with what happens in other OECD countries three-quarters of which already offer research and development incentives. 
The aim of this new tax credit is to help raise the rate of private sector research and development investment in New Zealand which is currently only a third of the OECD average. Increased research and development investment in turn is expected to have wider benefits for the economy and to help boost productivity and international competitiveness. Under the provisions New Zealand businesses that conduct research and development in New Zealand will be eligible for a credit of 15 percent of allowable expenditure. The bill defines research and development relatively widely in line with the definition that Australia uses for its research and development initiatives. 
The research and development tax credit introduced in this bill has built-in safeguards to ensure that it is as effective as possible. For example the requirement for research and development to be undertaken predominantly in New Zealand by New Zealand businesses is there because the spillover benefits to other New Zealand firms are likely to be largest in those circumstances. 
The transformation of New Zealand’s savings culture is closely related to economic transformation both of which are major themes in today’s Budget. Over the past few years we have seen major reforms aimed at both making it easier for people to save and improving the tax treatment of savings through collective investment vehicles. Legislation that was enacted last year paved the way for the introduction of KiwiSaver in July of this year. 
Further legislation last year brought in new tax rules on investment income one of the results of which is the new portfolio investment entity rules and they come into effect in October. A key role of the new portfolio investment entity rules is to prevent the overtaxation of lower-income people who invest through managed funds which are the first investment choice of many ordinary New Zealanders. They and similar funds are the vehicles through which KiwiSaver will operate. 
In this Budget the tax reform of the current savings environment continues and it takes a giant step forward with the announcements contained both in the Budget today and followed up in this bill. What the bill does is to deal with the employer side of the enhancements to the KiwiSaver scheme. It requires employers to match their employees’ contribution to KiwiSaver and complying superannuation funds up to 4 percent of employees’ gross salary or wages phased in over 4 years. Under the provisions of the bill there will also be reimbursement for employers for the cost of matching contributions through a new tax credit of up to $20 per week per employee. Employer contributions will remain tax-free under legislation enacted last year. The tax credit complements that which is introduced for members in the companion bill which we have just been discussing. 
Other savings measures in this bill include changes allowing policyholders in unit-linked life insurance products to access some of the benefits of the new portfolio investment entity rules. We are also including changes to allow certain contributions to retirement schemes to be subject to a withholding tax rather than an income tax so that the contributions are not taken into account for social assistance delivered through the tax system. 
Another key plank in the United Future - Labour confidence and supply agreement was the development of a new tax rebate regime for charities and the direct results of this commitment are found in this bill. People companies and Maori authorities will be able to claim rebates and deductions for charitable donations up to the level of their annual net income and will no longer be restricted by the present caps. Furthermore the deduction claimable for donations made by companies will be extended to close companies that are not listed on a recognised stock exchange. These changes are designed to provide greater incentives for charitable giving which in turn will benefit charitable organisations and all the communities they serve. I am very pleased that it has been possible to make these changes which arise from the review that was undertaken last year. 
A further major reform introduced in this bill results in the relaxation of a whole range of tax penalties such as that for taking an unacceptable tax position so that penalties now reflect the seriousness of the offence. It is generally acknowledged that people comply more willingly with the law when they see that it is fair and reasonable. Our current system of tax penalties does not always distinguish between people who try to do the right thing and fail and people who have no intention of doing the right thing so reinstating that distinction is very important. There are also several other areas of the law where the rules are being clarified and I think that they will be widely welcomed. 
Once enacted the changes in these areas will take effect from today the date of the introduction of the bill. Related changes involve not penalising taxpayers who occasionally pay late and updating the definition of “tax agent”. 
The reform has been the subject of extensive consultation and widespread approval. We have also made changes relating to the introduction of data matching between the Inland Revenue Department and the Customs Service to enable us to better identify those with outstanding child support above a certain level who are seeking to enter or leave New Zealand. This is part of the consistent effort we are making to crack down on outstanding child support payments and to ensure that those people who have a responsibility are able to meet it. 
Finally the bill deals with the consequences of adopting international financial reporting standards. That is a very technical area but it is a very important one and I think that will be welcomed. The bill of course being an annual rates bill also includes the income tax rates to apply for the 2007-08 tax year. Those measures that I have not been able to deal with in much detail tonight are covered in the accompanying commentary a copy of which is being distributed to members. 
I commend the Taxation (Annual Rates Business Taxation KiwiSaver and Remedial Matters) Bill to the House.