Smith Lockwood: Income Tax Bill — First Reading 
Smith Lockwood: Income Tax Bill — First Reading 
[Volume:635;Page:6796] 
Dr the Hon LOCKWOOD SMITH (National—Rodney) 
: 
 In rising to speak to the first reading of this quite momentous Income Tax Bill I would like to make it very clear that National will be supporting this bill. After all we started the process in the 1990s and the House has heard the Minister of Revenue refer to some of the history. This work does go back a long way with the passage of the Income Tax Act 1994 being really the first part of the process. As a former deputy finance Minister like the Minister of Revenue I well remember some of the process along the way with the rewrite of the core provisions that were completed in 1996; so it went on. 
In fact although the work is an extraordinary piece of work one has to recognise that for most people the more than 2000 pages involved in this tax bill would really be viewed as good bedtime reading for insomniacs because despite the simplification and the use of plain language it is still quite heavy going. Having said that I must say though that I also support what the Minister of Revenue has just said about the extraordinary contribution of Sir Ivor Richardson. Sir Ivor has a knowledge of and an ability to handle tax law that is certainly unique in New Zealand and possibly unique in the world. His contribution to this process has unquestionably been quite extraordinary. 
As the Minister has just pointed out to us the key aim of this rewrite is to reduce compliance costs by making income tax legislation more clear through the use of plain language. In fact if one refers to the Government’s explanatory note of the bill it is interesting that it believes the rewrite of this bill will improve voluntary compliance with our tax laws because taxpayers can more easily identify and observe their income tax obligations. National agrees with that objective and accepts that that argument spelt out in the first paragraph of the explanatory note makes a lot of sense. 
But I have to say this Government tends to take one step forward and two backwards because although this bill simplifies the structure and wording of the Income Tax Act at the very same time that the Government is doing this it is proposing new complexities that will add a whole additional layer of complexity to our income tax legislation. I refer to the proposals of the Government to change the taxation of international investment income which will be part of this income tax legislation eventually. It will add quite massive complexity to this legislation where so much effort has gone into simplifying it. 
Also the Government is discussing at the moment a number of issues around tax credits—namely for research and development export market development and skills development. They are relevant to this bill because Parts L to O of this rewrite cover our law around tax credits. Yet at the very time this bill tries to simplify and clarify our tax credit legislation we have the Government proposing a whole raft of new tax credits. 
National accepts that research and development export market development and skills development are worthy causes; there is no argument about that. But we think that some thought ought to be given to how best to make sure our businesses in New Zealand can pursue effective research and development export market development and skills development. 
 But it is interesting to note that back in 2000 after this Labour Government announced increased spending for research and development in the 2000 Budget it wrote in an official research and development document: “We opted for a grants approach because we considered that it was better safer and fairer than tax concessions.” Having considered the whole issue of the need to do more around research and development back in 2000 the Government said it would not go down the tax concessions path because grants are more effective and fairer. Here today just a few years later for some reason this Government has now done a big flip-flop and is saying: “How about we now bring in tax concessions for research and development?”. 
Even the Government’s recent business tax discussion document stated: “It is generally undesirable to favour some business activities over others.” yet here we have the Government saying that it will pick winners and will favour businesses that put more into research and development and into export market development. Businesses that put more into skills development will be favoured compared with other businesses regardless of how much they contribute to economic well-being to economic growth and to productivity improvement. There may be other businesses that can prove they have actually achieved greater productivity contributions which is what this country desperately needs yet they will not get the favoured tax treatment by this Government if it pursues these proposals. It is relevant to this bill because Parts L to O cover all those issues of tax credits. 
I say to this Government that it is worth reflecting on what John Shewan raised just the other day. Back in 1981 just before I came into this Parliament—just before Annette King came into this Parliament; I see she is actually listening to this—we had and I want to get the facts right 90 tax concessions listed in the 1981 tax info pack. People like Annette King would remember the chaos that caused the New Zealand economy and the way that it stifled New Zealand’s economic growth. Our economy lost direction as businesses including farmers would pursue tax concessions like supplementary minimum prices instead of focusing on the market and on how to extract the greatest value out of the market. Instead of focusing on how to respond most effectively to the market people ran their businesses to maximise the tax benefits available under various Government policies. 
I make this point. In my 22 years in this Parliament I do not believe that any member of Parliament any Minister in a Cabinet has sat there and thought: “How can I dream up some tax concession that will screw this economy really effectively and will really produce a weird perverse outcome that will result in the economy growing more slowly?”. I do not believe that any member of Parliament has set out to put in place tax concessions with the intent that they would do that kind of damage. Yet our history is littered with the perverse outcomes and consequences of politicians thinking that this little bit of tax remedy here this bit of tax credit there and this bit of tax help here will produce a good outcome. Our history is littered with those kinds of tax policies producing perverse outcomes and interfering with the way our economy responds to the market reducing the effectiveness of our productivity improvements reducing this country’s economic growth and reducing the well-being that our economy can deliver to the people of this country. 
The other area where the Government is now looking to add layers of complexity at the very time it is simplifying tax with this bill is the taxation of international investment income. Again it is part of our Income Tax Act. The Government had set out—for some ungodly reason—to impose a capital gains tax on investments in former “grey list” countries. Of course the Government ran into a wall of opposition from New Zealand taxpayers. It has now done a big U-turn and has brought back a proposal for Parliament to consider a 5 percent fair dividend rate. What a misnomer! 
Clearly it still has an element of capital gains tax in it because it is above the international dividend rate averaged over any time period one wants to look at. It treats funds and individuals differently. It has a de minimus for individuals. It will see wives and children even pets treated as shareholders. It leads to exemptions for certain companies like Guinness Peat Group. It leads to a complexity of policy that even one of the Government’s key policy advisers has said he would probably not attempt to comply with it; he would just pay 5 percent across all investments because it is too complex to try to comply with. Less honest people will avoid it because it is so complex. They will avoid it and not pay their taxes. 
Although we support this bill which seeks to simplify and clarify our tax law it troubles me that this Government takes that one step forward while it takes two steps backwards with the way it is looking at the moment to introduce a plethora of tax credits and a very complex system for the taxation of international investment income.