SpeechTAXATION (ANNUAL RATES FOR 2021-22 GST AND REMEDIAL MATTERS) BILLSecond ReadingHon Dr DAVID CLARK (Minister of Commerce and Consumer Affairs) on behalf of the Minister of Revenue: I present a legislative statement on the Taxation (Annual Rates for 2021-22 GST and Remedial Matters) Bill.SPEAKER: That legislative statement is published under the authority of the House and can be found on the Parliament website.Hon Dr DAVID CLARK: I move That the Taxation (Annual Rates for 2021-22 GST and Remedial Matters) Bill be now read a second time.The bill covers a wide territory. Half of it is focused on ensuring the tax system can continue to function efficiently. To that end the bill contains a number of remedial items. In addition the proposals introduced by Supplementary Order Paper (SOP) 64 address the issue of interest deductions as a business expense for residential investment properties and I will come back to that proposed amendment later on.Remedial work is important to ensure that the tax rules remain fit for purpose. The bill also contains measures designed to ensure that the tax system keeps pace with business practice and minimises compliance costs. As a sign of the times the bill therefore contains proposals relating to e-invoicing and the GST treatment of cryptoassets amongst other things.The Finance and Expenditure Committee has made welcome recommendations on the bill and I do want to briefly outline those changes and thank the committee for its work. Now these changes include a recommendation on the proposal to extend the relief of use of money interest which is charged for late payment of taxes for those affected by COVID-19. The committee has recommended extending it to the 2021/2022 year.The bill also proposes to introduce measures to modernise GST information requirements. One objective of this is to reduce the compliance costs but where businesses might face costs for some proposals the committee has recommended that the application date be deferred to 1 April 2023 to give businesses time to adapt. The bill proposes a new pooled alternative rate option for calculating fringe benefit tax on attributed benefits to support changes resulting from the new top personal tax rate. The committee has suggested a simplified threshold of $160000 salary and $13400 attributed benefits to make it easier for employers to work out whether employees should be on the highest or second-highest fringe benefit tax rate. Another recommendation from the committee relates to the local authorities measures in the bill. The committee recommends extending the dividend exemption to partly owned council-controlled organisations (CCOs) and holding company CCOs with 100 percent public ownership.I'd like to thank the committee for their work on this bill. Their recommendations have added value. As part of their consideration of the bill the committee also considered measures that originated from Supplementary Order Paper 64 which I would like to outline for the benefit of members. The SOP is a significant one as it contains measures to curb residential property investors' appetite for existing residential stock. It's the Government's goal to level the playing field for existing homes in order for first-home buyers and those moving into a new home to have a level playing field compared to those investing in residential property. Investors can generally outbid first-home buyers so we want to make residential properties less attractive for investors while stimulating investment in new housing. The proposals introduced by Supplementary Order Paper 64 will help to achieve that goal.We're proposing the removal of interest deductions as a business expense for residential investment properties but allowing deductions for property developers or people purchasing a newly built residential investment property. The proposal will not affect the main home. That proposal has attracted a fair bit of attention from media and commentators. Yes it is a principle of our tax system that expenses incurred in earning income by a business should be tax deductible. However investing in property to reap a capital gain doesn't seem like the way to grow the economy and it means people trying to purchase a home to live in have a harder time buying. Tax is not the cause of the problem but it does contribute.It seems that massive residential property investment in New Zealand has been fuelled in part by the tax treatment of residential investment property which frequently involves no taxation of gains on sale. That in combination with full deductibility for interest on what is often high levels of debt makes residential property investment a very attractive investment option currently. That demand drives prices up making it difficult for first-home buyers to compete with investors. That's why last year we extended the brightline test to ensure that more of the gains on sale are taxed. Now we are addressing the interest expense deductions. Deductions for interest expenses on residential properties will be restricted from 1 October 2021. I'm interested to see that commentators are predicting an end to the housing boom in New Zealand. They point to mortgage affordability as a prime reason. I believe the interest deductibility policy plays a part in that. The policy will be phased in so that interest deductions on a mortgage on a residential investment property acquired before 27 March 2021 will be progressively reduced between 1 October 2021 and 31 March 2025. Interest incurred in relation to a property purchased after 27 March ceases to be deductible from 1 October 2021.The proposals in this bill aim to dampen investor demand for existing residential properties but also minimise obstacles to supply. To that end the bill contains some exclusions which will allow deductions to continue to be available for some taxpayers. By allowing interest deductibility for property developers but removing it from other investors we will continue to encourage supply.We're also proposing some key exemptions to support the supply of new housing. We're proposing that property development and new builds will not be subject to the new rule. This should help boost supply by channelling investment towards expanding the housing stock and away from direct competition with first-home buyers and owner-occupiers for existing housing stock. In addition new builds would be subject to a five-year brightline test rather than the 10-year test.Non-residential properties for example commercial or industrial properties would not be subject to the new rules. Also excluded are employee accommodation; farm land; care facilities such as hospitals convalescent homes nursing homes and hospices; commercial accommodation such as motels hotels and boarding establishments; retirement villages; and rest homes. The main home would not be affected by the new rules.Interest related to any income earning use of an owner-occupier's main home such as a flatting situation would continue to be deductible. Community housing providers will not be affected by the interest limitation rules if they are charities or otherwise tax exempt. We also propose to exempt Kāinga Ora and its wholly owned subsidiaries from the interest limitation rules.As I mentioned before these proposals have been considered by the Finance and Expenditure Committee and I thank them for their work. They have made some valuable improvements to the bill particularly in the exemptions area. For instance the committee's recommendations align with the Government's intention of adding to housing stock and include ensuring that new-build land should include certain dwellings on the earthquake-prone building register or former leaky buildings that are at least 75 percent re-clad also clarifying that commercial-to-residential conversions can qualify as a new build. In addition the committee has recommended that the main home exclusion from the brightline test should apply to a new main home while it is being constructed unless the time taken is unreasonable. It clarifies that if part of a property is sold the brightline period only resets for that part not the whole property.The housing issue is a serious problem that has been decades in the making but it is not just a problem for first-home buyers but for the wider economy. The International Monetary Fund has warned that New Zealand's ballooning housing market could trigger a pronounced correction. Acting on this now helps to protect our economy. I commend this bill to the House.