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:7114] 
Dr the Hon LOCKWOOD SMITH (National—Rodney) 
:  
Part 2 is obviously the really significant major part of this bill. I would like to take two or three calls on it at various stages this evening because I would like to deal with two or three issues. Let me first though just revert back to an earlier comment. Do I see Mr Shane Jones anywhere in the Chamber? He talked a moment ago about how sensible this bill and the new regime in Part 2 on taxing foreign portfolio investments are. I want to contrast that with what Mr Jones said publicly when he thought his comments would not be recorded in Napier only 2 or 3 weeks ago. That was after the Finance and Expenditure Committee had done most of its work on this bill. 
What did Shane Jones the Labour chair of the Finance and Expenditure Committee have to say about this taxation regime? He said: “Why bother investing in shares when you know you’re going to get taxed potentially on gains”—so there was Shane Jones acknowledging there would be a tax on capital gains—“you’ve not even received now called the fair dividend rate …”. So he acknowledged the fair dividend rate would be a tax on capital gains that someone had not even received. He went on to say: “… when you have all the incentives possible to go out and buy another house as a rental?”. That is what Shane Jones the Labour chair of the Finance and Expenditure Committee really thought about this legislation when he thought that his audience would not report back to this Parliament what he had said. I think it is very informative that the chair of the select committee actually said that kind of thing in a public gathering in Napier and did not expect it to get back to this Parliament. 
The first issue that I want to focus on in Part 2 is the establishment of the portfolio investment entities. In principle we have no problem with that proposal. We support the concept of establishing for managed funds the principle that they should not be taxed on their capital gains here in New Zealand on investments in New Zealand. I think it was Gordon Copeland who emphasised that point; having their taxation arrangements the same as those on individuals’ investments in New Zealand makes perfectly fine sense. 
But the issue becomes more complex when we introduce the look-through procedures as Part 2 does to try to tax individuals’ investments in managed funds at their personal marginal rate. What makes it more complex is that the returns to investors are not being taxed in the investors’ hands at their marginal rate. That would be a much more simple process. The problem for Labour members was that if they approached it in that simple way that would affect the Government’s family tax credit arrangements particularly its big icon policy of Working for Families. Obviously if it were to be done in that sensible way—the investment return is received in the hands of the investor to be taxed at his or her marginal rate—of course it could make a significant difference to the amount of income that a family received through Working for Families. So what the Government decided it had to do and what this Part 2 does is to force the new portfolio investment entity established in Part 2 to calculate the tax and pay it on behalf of the individual investor so that it does not count against the individual investor’s entitlements to family tax credits and Working for Families tax credits. 
But that introduces massive complexities. I want the Minister in the chair Peter Dunne to answer quite an important question on this. The select committee heard from a group of very significant researchers at Auckland University. I thought Michael Littlewood and Susan St John made an important submission to the select committee on this issue. They made the point that it is simple to say we should tax the returns at an individual’s own rate in a managed fund investment but giving effect to that is anything other than simple. They say that if we take a modern superannuation scheme with an investment choice—one where investors have some choice—in order for a big scheme with 100000 members to become portfolio investment entity - compliant it would involve up to 15 billion extra data points. I will repeat that figure. The evidence to the select committee was that for a major fund to become portfolio investment entity - compliant calculating out the tax on the basis of an individual investor’s individual tax rate would involve up to 15 billion extra data points of information that would have to be kept by that superannuation scheme. That is a massive increase in extra data handling by a managed fund. 
That was not put to us by some person off on a wild daydream; the people who made that submission to the select committee were Michael Littlewood and Susan St John who are two very respected researchers in this area. They put it to the committee that this measure would impose a huge compliance cost and that many employer superannuation schemes simply would not be able to become portfolio investment entity - compliant because they would not be able to pass on those costs. 
Maybe the Government today with its latest Supplementary Order Paper enabling superannuation schemes to be exempt from specified superannuation contribution withholding tax without becoming portfolio investment entity - compliant will solve this compliance problem for many superannuation schemes. Maybe that last-minute move could help with this issue. But I would like the Minister in the chair Peter Dunne to respond to the very serious submission made by those researchers. I ask whether the Government has looked seriously at the issue of the massive increase in the number of data points of information required by a significantly sized superannuation scheme in order to become portfolio investment entity - compliant. Where that fund is an employer superannuation scheme obviously it cannot pass on those costs. 
So I think that there are significant issues around the design of this proposal to tax individuals’ investment in managed funds at their own marginal tax rates. It is complex because the returns from the investment are not being taxed in the individuals’ hands; the tax is being calculated by the fund—by the portfolio investment entity—which adds significant complexity. For example given that the portfolio investment entity pays the tax on behalf of the investor what happens when the investor pulls out? There are a number of overs and unders here. If the investor pulls out of the portfolio investment entity presumably that entity has to pay the tax. 
I would appreciate the Minister in the chair telling members how often the portfolio investment entity recalculates investor ownership of investment in the fund to make sure that the averaging throughout the year delivers an average tax rate because we must not forget that the tax rate that the portfolio investment entity pays is the average of the individual tax rates of all the investors in that fund. In order to get that exactly right the portfolio investment entity would have to attribute income on a daily basis. Does the Government intend that portfolio investment entities should attribute income on a daily basis a quarterly basis or a 6-monthly basis? I think that the Minister should explain that to the Committee because I am sure that many members would not have much of a grip on that issue. It does affect the fairness of the tax rate paid because depending on the balance of investors on a daily basis in a particular portfolio investment entity fund it influences the average tax rate owed on the income received by the fund on any given day. 
So I really would appreciate the Minister responding to a number of significant issues in relation to the establishment of portfolio investment entities. Later on I will come to a number of other issues relating to the investment of income in offshore portfolio investments. However with regard to the portfolio investment entity issue we support the concept of taxing people’s investments in managed funds at their own marginal rate. But because the Government does not want to affect their Working for Families income it means that portfolio investment entities have to do all the tax calculations and pay the tax on behalf of investors and that causes huge complexity. 
I would appreciate it if the Minister could respond to those specific concerns.