Lees-Galloway IainIAIN LEES-GALLOWAY (Labour—Palmerston North): I would like to look at the clauses that relate to the look-through company (LTC) entry tax of which there are several in this Part 2 of the bill. Clauses 14 106 178 239 and 262 all deal in their own part with the matter of look-through company entry tax. Look-through company entry tax for those who are following along at home is the tax adjustment that applies when a company becomes a look-through company. The purpose of that is to trigger a tax liability on unimputed retained earnings by deeming the company to have been liquidated immediately prior to conversion. This is to ensure that reserves that would generate taxable income for shareholders if distributed before entering the LTC regime and that would be distributed tax-free once the company becomes an LTC are taxed to the owners at the time of entry. So it is about fairness of taxation essentially and ensuring that shareholders are not able to use the conversion of a company to a look-through company as a method for minimising their tax liability.What this bill does is it tightens up the formula to ensure that shareholders are neither overtaxed nor under-taxed because the formula as it currently stands means that the tax rate applied is the company tax rate of 28 percent. This bill amends that to make the tax rate that would be applied the owner's personal tax rate and that is designed to ensure that the tax rate applied is appropriate—neither overtaxing nor under-taxing the shareholder.It was not without opposition. The Whyte Group appeared before the select committee and it expressed some concerns that tightening up the look-through company entry tax rate would provide a disincentive to existing companies that may be considering entering the LTC scheme but might be put off by this new tax treatment especially if that resulted in a higher tax rate for owners.The committee I understand considered that and came to the conclusion that the application of the owner's marginal tax rate is the appropriate course of action because the entry tax calculation is intended to ensure that retained earnings are appropriately attributed to shareholders at their personal tax rates and currently upon entry taxpayers can be under-taxed when their marginal tax rate is greater than the 28 percent and overtaxed.So I think on balance the position the committee got to was that it should not offer a disincentive because it is just as possible that an owner's tax rate would fall as a result of these changes—you know the potential tax liability would fall as it would increase. So I think overall in the interests of having greater fairness in the way we apply tax rates—we talked earlier on about where the tax burden falls—I think it is important that when tax rates are applied they are applied in a fashion that demonstrates as much fairness as possible. Taxing the owners at their marginal income tax rate the rate that is appropriate for them given all their income combined rather than an arbitrary 28 percent—that I think is the appropriate course of action. I think that any concerns that people might have that this might offer a disincentive to companies to become LTC companies through the LTC regime are unfounded. I think that the approach that has been taken by the select committee on this is the fair one is the right one and all in all the approach particularly through clause 262 is appropriate and we can support that.