Smith Lockwood: Taxation (Annual Rates Savings Investment and Miscellaneous Provisions) Bill — Second Reading In Committee 
Smith Lockwood: Taxation (Annual Rates Savings Investment and Miscellaneous Provisions) Bill — Second Reading In Committee 
[Volume:636;Page:7094] 
Dr the Hon LOCKWOOD SMITH (National—Rodney) 
: 
 This is very important tax legislation. It has the potential to impact severely on investment in this country. The Finance and Expenditure Committee was told for example that this legislation has the potential to divert even more investment into residential property in New Zealand—an area where New Zealand does not need more investment. So it is very important legislation. 
Quite contrary to what the Minister of Revenue has just said the process the Government has gone through I would argue is not how we develop sound legislation at all. One respected submitter to the select committee said that this was legislation through media statement. I want people listening to this debate to know that most people who are interested in taxation matters in New Zealand have had no opportunity to make submissions on this legislation that we are debating tonight. Sure they had the chance to make submissions on the legislation the Government introduced but that is totally different from what we are debating tonight. The Government introduced legislation that would shrink the number of “grey list” countries and introduce and impose a capital gains tax on 85 percent of the gain on foreign portfolio investments. When I say portfolio investments I mean where New Zealanders have investments and shares offshore and the ownership of the company is less than 10 percent. 
The legislation as introduced is what the public and those interested in taxation matters were able to make submissions on. Tonight we are debating something totally different. Tonight we are debating this 5 percent fair dividend tax that the Government has now come up with halfway through the process. What makes this a bad process is that most of the 2226 submitters on the original legislation—and of course 99 percent of them were against it—never had a chance to make submissions on the subject of our debate tonight. About 12 of those 2226 submitters on the original legislation were invited by the select committee to make submissions on this totally changed legislation. That is just unfair to the so many other people who made submissions on the new capital gains tax that the Government proposed to introduce. It is so unfair to them that they never had the opportunity at all to make submissions on this 5 percent fair dividend rate tax. Those who did make submissions pointed out that there is nothing fair about this 5 percent fair dividend rate and there is nothing about just taxing dividends in this 5 percent fair dividend rate. When we look at the international weighted dividend yield a 5 percent rate clearly taxes capital gains. 
This Labour - United Future - New Zealand First Government has to decide what it intends to do with this taxation of portfolio investments offshore. Does it intend to tax capital gains or not? This legislation that we are debating tonight does still tax capital gains. I will get into that detail. 
What makes it even worse is that today a Supplementary Order Paper was introduced. The Minister did not even refer to it in his speech. 
Hon Peter Dunne 
: Yes I did. 
Dr the Hon LOCKWOOD SMITH 
: I apologise if he did. Today a Supplementary Order Paper has been introduced that makes yet another last-minute change. This is the second time we have seen that. With the KiwiSaver legislation the Government made a last-minute change that no one in the public had the chance to make a submission on and again no one in the public has a chance to make a submission on this very significant last-minute change to this legislation—a change that will extend the exemption from specified superannuation contribution withholding tax from employer contributions to superannuation schemes other than KiwiSaver schemes. Although I accept that that move is something National would support it is still a matter of principle in New Zealand that the public should have the chance to make submissions on legislation to ensure that the quality of the legislation produced is acceptable. 
I want to look at some of the detail of the measures in this bill to impose this 5 percent fair dividend rate. The select committee’s commentary on the bill sets out the Government’s objective. It states: “The objective of these changes was to tax portfolio investments in offshore companies more consistently regardless of whether the investment was made through a managed fund or made directly and regardless of where the investment was located.” This legislation we are debating does not achieve that objective at all. 
 Managed funds and individuals’ portfolio investments in companies overseas are treated totally differently. For example if we invest through a managed fund we are taxed on a 5 percent return regardless. If we invest as individuals in portfolio investments offshore we will be taxed on the actual return from those investments in any one year on up to a 5 percent maximum return. It is totally different treatment. If the objective was to make managed funds and individuals’ taxation the same when investing offshore then it would have been quite simple to change that and to make the two policies consistent. 
The provisions to enable individuals to be taxed at a return below that 5 percent flat rate for managed funds are complex. I will mention this exchange although it is probably a bit unfair to one of our advisers. At the select committee we asked a very senior adviser who knows this legislation inside out whether he would bother to have his portfolio investments offshore taxed at an actual return rate. This very experienced adviser indicated to the select committee that he probably would not. He indicated that the provisions are so complex that it would not be worth the candle to do it and that he would probably just pay the tax on the 5 percent flat return. When a senior adviser who knows the legislation inside out suggests that it is too complex to bother trying to get the benefit of being taxed on less than that 5 percent return we clearly have very very complex legislation and I suggest totally unsatisfactory legislation. 
Another big difference is a $50000 de minimis for individual investors. In other words individual investors have a $50000 zone of investment offshore on which they are not taxed. If they invest through a fund they do not have that. Funds will be consistently taxed therefore more than the investments of private individuals. That $50000 de minimis means there will be no tax to pay on a $50000 investment. If $50001 is invested the full tax rate is paid on the lot. The effective marginal tax rate on those extra few dollars above $50000 is thousands of percent. The result is that wives children and pets will all be listed as having shares offshore because no one in his right mind would pay those kinds of marginal tax rates. 
The select committee was advised that managed funds in New Zealand will migrate to Australia because with the complexity of these rules it just will not be worth being involved in New Zealand. If we invest in private companies offshore then either those will have to be revalued every year or we will have to pay tax on an assumed 5 percent gain. We were told at the select committee that this legislation will make it hard to recruit highly skilled people internationally. It was pointed out to us that if the value of the New Zealand dollar drops people will be taxed just if the currency shifts. If people get a New Zealand return then they can be taxed just on a New Zealand dollar shift. The New Zealand dollar value of offshore investments may go up if the New Zealand dollar drops and people would be taxed just on that currency shift. If the value of people’s investments drop this year they will not be taxed. If next year the value returns to the same level it started at last year then people will be taxed on that gain yet their net position will be unchanged. They will be no better off but they will be taxed on that gain just by the value returning to where it started. 
But the most serious thing as so many experienced funds managers pointed out to the select committee is that this legislation will distort investment. It will provide a serious disincentive to invest offshore in a diversified portfolio. This legislation will provide an even greater incentive for New Zealanders to bring back their money from overseas and invest in residential property here in New Zealand. People get the capital gains free and the returns are far better so why would they not? This is bad legislation because of all those complexities and distortions.