Nash StuartTAXATION (ANNUAL RATES FOR 2016-17 CLOSELY HELD COMPANIES AND REMEDIAL MATTERS) BILLIn CommitteePart 1 Annual rates of income taxSTUART NASH (Labour—Napier): Part 1 of this bill is concerned solely with one thing and that is the annual tax rates for the 2016-17 tax year.Hon Ruth Dyson: Which year?STUART NASH: The 2016-17 tax year. The 2016 tax year started about 6 months ago so what we are doing is implementing retrospective legislation—Hon Ruth Dyson: I think 9 months ago.STUART NASH: Nine months ago. You are right Ruth. We are implementing retrospective taxation on the most important part of the tax system and that is how much money we actually pay as salary and wage earners.What we have seen with tax legislation—in the time that the Minister in the chair Michael Woodhouse was the revenue Minister and in the time the new Minister has been in place—is a whole lot of legislation come through the select committee in little bits and pieces. The fact that we are only doing this now just shows in my view that there is a real lack of policy intent here. I would have thought one of the first things that the Government would want to do after the Budget—when was the Budget delivered? May I think it was—May last year. So we are talking quite a long time ago. In fact what we are actually doing now is preparing for the next Budget which I think is only a couple of months away. The next Budget in a couple of months will be codified in legislation in a bill like this which will have a Part 1 and Part 1 will be talking about the annual rates of income tax for the 2017-18 tax year. But let us hope that they do not wait for 9 months to get here.What are these rates we are talking about? Well the surprising thing is that the vast majority of Kiwis who actually pay tax are wage and salary earners but if you went out onto the street and did a vox pop and said What are the tax rates?" I guarantee that the vast majority of Kiwis would not know. They might know that the top tax rate is 33 percent. They might know that that was dropped from 39 percent down to 33 percent in the middle of a financial crisis as GST was increased. But they will not know for example that on the first dollar earned you actually pay 10.5 percent. So the first tax rate from zero dollars to $14000 is 10.5 percent. That is unusual. The reason I say that that is unusual is that in a whole lot of countries actually there is a tax-free threshold. I think that in Australia it is about $18000 but it is certainly significant. Then between $14001 and $48000 the tax rate increases to 17.5 percent. So what the effective tax rate is between $14000 and $48000 is actually 10.5 percent to 15.5 percent depending where you are on that scale. Then for $48001 to $70000 I would be interested to know how many people know what the tax rate is. Does anyone here—Mr Scott do you know what the tax rate is? See that is a classic case. Does the ex-revenue Minister—Hon Michael Woodhouse: I'm sure the Minister knows.STUART NASH: —what would you say it is Mr Woodhouse? Hon Michael Woodhouse: 30.STUART NASH: Well done—he did know. It is 30 percent. My point here is that the vast majority of New Zealanders do not actually know what their tax rate is. The reason they do not know that is that they trust the Government to get it right and so they should—and so they should. The last thing we want to do is to erode confidence in the tax system. The annual tax rates are one of the fundamental pieces of tax legislation.Let us go a little bit further. Who knows what the rate is—well I talked about this. Over $70000 the tax rate is 33 percent. We know this and I am making a whole lot of assumptions here. I am making a whole lot of assumptions that for example someone is not paying secondary tax. The rate changes for secondary tax.Hon Michael Woodhouse: No it doesn't.STUART NASH: Yes it does Mr Woodhouse and you know that. You pay secondary tax at I think 45 percent. There is a reason for secondary tax because what happened before secondary tax was introduced was that people were working two jobs. Let us make an assumption: when someone works two jobs it is not because they love working 20 hours a week; it is out of economic necessity. So what was happening is they were paying these rates that I read out for this job and exactly the same rates I read out for this job over here. But how the tax system works is that you combine your total income and you pay tax on that total income.So what might have happened and in fact what did happen—I think they estimate that 200000 New Zealanders pay secondary tax. So what was happening was someone was earning let us say $30000 for one job and paying 17.5 percent top tax rate on that. Then for another job they were earning say $35000 and they were paying the same 17.5 percent on that. But when you combined that income at $65000 they should have been paying 30c on every dollar over that $48000. So it is about $17000 where they should have been paying 30 percent but they were only paying 17.5 percent. What happened was that often those who were the most disenfranchised ended up with a really big tax bill at the end of the year which was deemed to be unfair and I completely agree with that. You know if you are struggling to make ends meet and the IRD comes to you and says "For that last $17000 you have underpaid your tax by a few hundred dollars"—and it normally arrived at a really inconvenient time when the car had blown up or the kids were starting school or the donations had increased at your local primary school. People just were not paying it. There is nothing worse take it from me than having a tax bill that you cannot pay.What happens with that is that it accrues penalties and interest and what starts as actually a small amount—and the Minister in the chair knows this—can actually explode into a significant amount due to the penalties and interest. The interest payment on non-payment of tax—it used to be about 10 percent if not more. I am not too sure whether the Minister in the chair—was there any? I think there was some revision done around penalty tax interest rates because it was just so high that it was becoming extortionary.Hon Ruth Dyson: In this bill? STUART NASH: No no; in general. This bill still does cover the rate of secondary tax there is no doubt about that. We are entering a stage where technology needs to be able to address these issues and so what I am hoping is that when we are debating the 2017-18 tax-year rates there is no secondary tax rate in there. The reason I say that is that the IRD is spending $1.5 billion—let me say that again: $1.5 billion; that is a lot of money—on a whole new IT system. It is called the Business Transformation project. What we should be able to do with that is capture all the data from workers so they pay the right amount of tax at that point in time.What a lot of people also do not know is the IRD owes New Zealanders $700 million. [Interruption] That rolls over every 4 years—it is true Minister. Hon Michael Woodhouse: I know. I'm not denying it. STUART NASH: Yes. And that rolls over every 4 years. I am aware that a lot of that money—not all of it but a lot of that money—is actually little bits of rats and mice that are owed to people who have paid secondary tax but have not claimed it. There is a classic case: very good friends of mine employed an IT administrator. They convinced her to phone up WooHoo or one of those tax refund companies and see. She said: "I don't know. No there'd be nothing there." In the end she did anyway and she ended up with a refund of $300. The reason she had that is that she had paid secondary tax because she was working two jobs and I am just thinking that at that point in time although the $300 was fantastic in her back pocket I think she probably would have liked that $300 at the point in time at which she earned it. What we are really hoping for is that the next time we debate a Part 1 in the next tax bill there will be no secondary tax figure because the IRD's Business Transformation system will have sorted this out and addressed it.I am going back to the annual rates of income tax. When we are talking about 2016-17 year of course we are talking about the Government's fiscal year which goes from 31 June to 1 July. Again these tax rates have not changed since—oh when did the Government drop the tax rate? Was it 2009?Iain Lees-Galloway: I don't know. They dropped it and then they put it back up.STUART NASH: Yes they dropped it. That was the promise when Mr Key said: "Read my lips—I will not increase GST." And then he went ahead and said: "Oh well no. I was just kidding. Of course I'm going to increase GST." But he had to increase GST. It was not the fact that he broke a promise because you know he just liked breaking promises. He had to increase GST because they had lost so much—The CHAIRPERSON (Lindsay Tisch): Order! GST is not part of Part 1.STUART NASH: Oh sorry Mr Chair.The CHAIRPERSON (Lindsay Tisch): This is a very narrow debate. It is on clause 3 so it is a very narrow debate.STUART NASH: Clause 1 Mr Chair.The CHAIRPERSON (Lindsay Tisch): Part 1.STUART NASH: Part 1. Oh sorry you are right Mr Chair—clause 3. But the reason that these income tax rates drop to the level they are in clause 3 is that the Government needed to make up money from the rates that were dropped—the top rate from 39 percent down to 33 percent—which is where it is at the moment.There is not too much more I can say on this—and I am sure a couple of my colleagues will jump up and talk about the inequity in these but—"