Key John: Taxation (Annual Rates Venture Capital and Miscellaneous Provisions) Bill — Second Reading 
Key John: Taxation (Annual Rates Venture Capital and Miscellaneous Provisions) Bill — Second Reading 
[Volume:621;Page:16399] 
JOHN KEY (National—Helensville) 
: 
 It is somewhat ironic that we are discussing taxation and the payment of taxation in the very week when the House has been dominated by a member of Parliament who looks like he possibly has not paid taxation on his golden handshake. I have no doubt that in the taxation annual rates provision of the bill there is quite some discussion about the fact that tax should be paid on a golden handshake. It is also may I say it somewhat ironic that the Finance and Expenditure Committee spent some time considering the discussion document on small businesses headed: “Making Tax Easier for Small Businesses”. No doubt the Minister for Small Business Mr John Tamihere read that with eager interest and recognised the first part of the document which discussed that one should pay tax. 
National will be opposing the Taxation (Annual Rates Venture Capital and Miscellaneous Provisions) Bill for a number of reasons. The first is as I noted before that the bill seeks to reconfirm the annual rates of taxation. Immediately we are struck by the fact that the top rate of taxation at 39c will be confirmed in this bill; at a time when in the last 5 years the Labour Government has enjoyed an additional $34 billion worth of tax revenue—$34 billion collected from hard-working taxpayers in New Zealand and from businesses up and down the country; at a time when the Government is running the largest surplus in New Zealand’s history; and at a time when many New Zealanders could do with that tax because they surely could spend it better than any Government would. 
Just today I heard from someone who came to see me in my office just exactly how awash with cash Government departments are. They are so flush with cash they do not know how to spend it while hard-working New Zealanders are having to work an extra few hours and stay up a little bit later because the Government wants to keep the cash and does not want to give any of it to the hard-working people of New Zealand. They will enjoy too the economics lesson no doubt that Dr Cullen tried to give the Opposition in the last part of his speech. 
I want to turn for a moment if I may to the venture capital aspects of the bill. The Minister rightly pointed out that some progress has been made in this area. Venture capital of course is a very significant area in New Zealand and venture capital payments are growing. Venture capital is equity that is put into a small and fledgling business where it is often seen as relatively high risk. Nevertheless they are the seeds of commerce from which all around the world some tremendous operations have grown and flourished. So it is very important for New Zealand businesses to have access to that capital. We have as most people will be aware a relatively low savings rate so it has been quite difficult to get access to that capital in New Zealand. Despite the fact that there has been the emergence of a number of players in the venture capital area it has still been quite difficult to get those funds within New Zealand although I was pleased to note in yesterday’s  
Dominion Post 
 that direct capital 
was oversubscribed 
in an issue that they have just undertaken in the New Zealand market. Nevertheless the reliance on foreign capital in the area of venture capital is increasingly important. In one sense we welcome the steps to change the taxation laws in New Zealand in relation to venture capital and the way that taxation treatment will be issued on the ownership of those shares by non-resident investors. We make the point however that the bill fails to progress the issue where it is meaningful. 
A number of submitters came before the committee and they all made the main point which is that the bill will not work because it does not include two very important aspects of investment by non-residents in venture capital. The first was that it does not include funds that operate in a grey-list country. It includes the eight or 10 non - grey list countries but the others are excluded. The second issue was an issue around limited partnership structures which are not recognised by the Inland Revenue Department. That is quite a significant issue because again it is a vehicle that has been used and not recognised in New Zealand. It is extremely important if one wants to compete internationally for access to venture capital that one has to be able to put in place structures whereby the tax treatment of those structures will be recognised in the home country. Otherwise it simply becomes too difficult and too challenging to attract that capital. We welcome the fact that this provision is a step in the right direction but we really ask the Minister to do the job properly by reassessing the matter. 
I turn now to Australian unit trusts. Quite simply there was a capacity for investors to get around the intention of the legislation that previously related to these unit trusts. The way it worked was that New Zealand investors invested through an Australian unit trust that bought New Zealand Government stock. In normal circumstances if that New Zealand investor had directly bought New Zealand Government stock then he or she would have had a tax liability on the interest dividend that came off the Government stock. Instead the way it worked through Australian unit trusts was that special bonus issue shares were issued in lieu of the dividend payment that would have been received. They could then be sold by the investors and of course would be tax-free in New Zealand because there is no capital gains on them. So we in the Opposition would acknowledge that in one sense there was some mischief shall we say and that there was a need to close that down. But once again it seems as if the Minister is allowing this bill to go through in a very Mickey Mouse fashion quite frankly. There are quite a number of structures that are similar to Australian unit trusts and differentiate largely only because of country of domicile. If we look at the United Kingdom situation with open-ended investment companies—a relatively similar type of transaction vehicle—we see that our Inland Revenue Department has chosen not to close down that area at this point. 
I have no doubt that the department will come back to the House at some time in the future and seek to address that issue but it has failed to do so at this point. The industry talked to the Finance and Expenditure Committee about that situation and in my due diligence on this again we looked at it. We spoke to quite a number of industry players who said: “We don’t mind the rules but we do want them to be consistent.” This bill closes down one small area while a whole lot of others will continue to operate. That will lead to other members of the industry seeking to go out there and change into for instance United Kingdom - based unit trusts for want of another term. 
The second issue is that the Government has been undertaking quite a significant amount of work through a review undertaken by Craig Stobo. He is looking at advising the Government on the onshore and offshore tax treatment of collective managed funds. He is due to report back very soon I think by the end of October. Dr Cullen in his speech to the Institute of Chartered Accountants last week made reference to the fact that the Government is likely to accept Mr Stobo’s work in this area. I would argue quite strongly that the Government rather than forcing what is an inappropriate solution by means of this taxation legislation should have waited and done the job properly in totality. 
I want to mention the sale and leaseback of intangible assets. This was a structure put in place by investment banks to allow essentially what looks like a loan-type facility to take place or an asset to be stripped out. The most obvious example was when APN used this structure to buy the  
New Zealand Herald 
 amongst others here in New Zealand. What subsequently happened and the reason why this provision is in this taxation bill is that Fairfax indicated when it was going to buy the New Zealand operations which included the  
Dominion Post 
 that it was going to use the similar sale and leaseback of intangible assets. Of course the Minister said that was unacceptable that he was not happy with the structure and that he would therefore change the law. Again we respect his decision to do that even if we do not always agree with it. But what he has done is effectively retrospectively gone back and changed the position that was in place when APN bought the  
New Zealand Herald 
. We on this side of the House do not favour retrospective legislation in the tax area. It leads to a great deal of uncertainty and a great deal of concern among investors but particularly foreign investors. We do not like the fact that that is happening in this particular way. 
I want to comment about the incentive for early payment for tax for individuals starting a business. It is quite true that as the Minister said currently the situation with a new business is that that tax is payable in the second year for 2 years and that some new companies when they start up do not recognise that fact and therefore make no provision for it and when they come to make the tax payment 2 years on they obviously face financial difficulty. So the Minister has offered the 6.7 percent discount through this legislation. We welcome that change but what we would really welcome from the Minister is a complete reduction in tax rates in New Zealand. National will oppose this legislation.