Tremain Chris: Taxation (Annual Rates Employee Allowances and Remedial Matters) Bill — First ReadingText is incorporated into the Bound VolumeTremain Chris: Taxation (Annual Rates Employee Allowances and Remedial Matters) Bill — First Reading[Sitting date: 10 December 2013. Volume:695;Page:15371. Text is incorporated into the Bound Volume.]Hon CHRIS TREMAIN (Minister of Internal Affairs) on behalf of theMinister of Revenue: I moveThat the Taxation (Annual Rates Employee Allowances and Remedial Matters) Bill be now read a first time. I nominate the Finance and Expenditure Committee to consider the bill. The Taxation (Annual Rates Employee Allowances and Remedial Matters) Bill is a bill that sets out to bring greater clarity to the tax rules and make them easier for businesses and other taxpayers to understand and comply with. The bill proposes clarifications to the tax treatment of employer-provided accommodation accommodation allowances and other payments provided by employers to employees to reimburse them for expenditure incurred. Where a person receives remuneration as part of their employment to cover expenses such asaccommodation meals and clothing it seems only fair that these items should be treated as the income of the employee because the employee benefits from them. However situations arise where the private benefit is minimal or hard to measure and the benefit is clearly not a substitute for salary or wages. The proposals in this bill therefore aim to provide practical rules to help determine where to draw the line between what is taxable and what is not.The main areas of concern addressed in the bill are employer-provided accommodation allowances and payments particularly when they are linked to business travel secondments and projects. There is a range of proposals dealing with accommodation and accommodation payments but in particular the bill proposes that accommodation and accommodation payments provided to employees who are required to work away from their normal workplace on secondment or on capital projects will be exempt from income tax under defined circumstances including an exemption for up to 5 years for people working on Canterbury earthquake recovery projects which is a very good initiative. In a similar vein an exemption is proposed for payments for meals on work-related travel for up to a 3-month period. A specific exemption is proposed for distinctive work clothing to match the outcome when clothing is provided directly by the employer. Associated with this an exemption is proposed for plain-clothes allowances when a person has been provided with a uniform as part of their employment but because of the nature of their current duties he or she is required to wear plain clothes instead. The proposal simply confirms current practice and the Government is keen to bring clarity to this issue.Turning to another matter the Government wants to ensure that innovation remains strong amongst New Zealand businesses. An obstacle to innovation is the business expenditure of a capital nature that is not immediately deductible for tax purposes and does not give rise to a depreciable asset so cannot be deducted as tax depreciation over time. Such expenditure is commonly referred to as black hole expenditure. Members might remember that this was first announced as part of Budget 2013 and it contributes to the Government’s aim of providing a more productive and competitive economy—Dr David Clark: Where’s the Minister of Revenue?Hon CHRIS TREMAIN: —that supports innovative businesses investment jobs and of course growth which I know that David Clark across the House is always interested in discussing in detail. The two broad areas of the black hole expenditure are focused on firstly certain company running costs and secondly the cost of applying for patents resource consents and plant variety rights.This bill also proposes changes to maintain the integrity of the tax system to ensure that everyone pays their fair share of tax. To that end amendments are proposed targeting taxpayers who have a disproportionately high level of debt funding in relation to their worldwide interest expenditure and taxpayers who can control relative levels of their debt funding and equity funding. These proposed amendments relate to the issue of base erosion and profit shifting by large multinationals and this is a priority matter. Different aspects of the rules relate to situations in which New Zealand residents have investments in non-resident entities which are called the outbound rules and situations in which non-residents have investments in New Zealand residents—namely the inbound rules. The rules also require taxpayers to determine which related entities are in their New Zealand group and in their worldwide group for the purpose of calculations. Changes are also proposed to the rules about New Zealand groups and worldwide groups following from the introduction of the concept of non-resident controlling groups.Also in the international tax area members may be aware of the United States legislation the Foreign Account Tax Compliance Act. This Act is due to take effect on 1July 2014 and it requires financial institutions in countries outside the US to report on certain US account holders directly to the US’s internal revenue service or face a 30 percent penalty tax on US-sourced income. The New Zealand Government is happy to contribute to the global effort to eradicate tax avoidance and evasion but it is also aware of the compliance cost of this requirement for New Zealand financial institutions. Negotiations are therefore under way to enter into an inter-Government agreement with the United States that would significantly reduce these costs. The provisions in this bill will provide the necessary laws allowing financial institutions to comply with the Foreign Account Tax Compliance Act and thereby avoid the 30 percent withholding tax on US-sourced payments.Dr David Clark: What will New Zealand be getting in return?Hon CHRIS TREMAIN: Well you can discuss that in your speech.The bill also addresses the tax treatment of agreements for the sale and purchase of property or services denominated in foreign currency—the foreign currency agreements—in order to reduce complexity minimise volatility and reflect economic reality. Amendments are therefore proposed that will require taxpayers using International Financial Reporting Standards to follow their accounting treatment for foreign currency arrangements. This means that the value of the property and the services and any interest included in foreign currency arrangements will follow their accounting treatment. Similar rules will apply to taxpayers not currently using these standards.Another matter of significance in this bill concerns tax law relating to leases and licences of land. It is necessary to ensure a consistent and coherent tax treatment of land-related lease payments and to remove distortions thereby improving business efficiency and fairness.Hon Maurice Williamson: How does the member know all this?Hon CHRIS TREMAIN: This is a comprehensive bill—there is no doubt. The main amendments include tax lease transfer payments that are substitutable for taxable lease surrender payments and lease premiums.This bill also includes proposed amendments that will help clarify the law so that charities that are removed from the register of charitable entities have a greater level of certainty about the tax consequences of deregistration—an important factor. The tax obligations for some of these entities have not always been so clear. It must be pointed out that the tax rules relating to deregistration have in the past been exploited by some in order to gain a tax advantage. The bill includes proposals to deal with this appropriately. One of the proposed amendments is intended to ensure that assets and income accumulated by charitable entities that are later deregistered are distributed for charitable purposes.The bill proposes rules to confer tax-exempt status on a small subset of community housing entities that provide housing assistance to low-income households. The amendments will promote homeownership for New Zealanders who would not otherwise be able to afford to buy a home. The new rules also set out that gifts of $5 or more that are made to one of these entities will qualify for donations tax relief. Clarifications are also proposed to the GST rules including the definitions of “dwelling” and “commercial dwelling” in the Goods and Services Tax Act of 1985. There is an amendment to the apportionment rules so that non-profit bodies can claim all of their GST input deductions other than on inputs that relate to the making of exempt supplies.Also a proposed amendment is included that “clarifies the policy relating to subsequent supplies of land or dwellings when input tax has been claimed requiring a wash-up calculation on the disposal.” There are amendments to clarify the tax treatmentof directors’ fees and the zero-rating of land and proposed amendments relating to residents and non-residents to the meaning of “outside New Zealand” to clarify “that for a natural person a minor presence in New Zealand that is not directly connected with the supply does not invalidate the rule.”As I said this is a comprehensive bill. It is proposed to give Every Home Global Concern Ltd and the Namibian Educational Trust donee status in schedule 32 of the Income Tax Act 2007. Monetary gifts to them may qualify for tax benefits. The remaining proposals in the bill set the annual rates for income tax for the 2014-15 tax year and make minor changes to the child support and Working for Families rules to ensure that they work as intended. The Minister of Revenue Todd McClay has no doubt been doing outstanding work with the bill. He has pulled this comprehensive bill together to ensure that our laws are routinely maintained in response to changing circumstances or good advice from the business sector and that efforts are taken to ensure that taxpayers understand exactly what their obligations are. This bill brings further clarity and certainty to our tax system and I am therefore pleased on behalf of Minister McClay to commend the Taxation (Annual Rates Employee Allowances and Remedial Matters) Bill to the House. Thank you.