Parker DavidTAXATION (ANNUAL RATES FOR 2021-22 GST AND REMEDIAL MATTERS) BILLThird ReadingHon DAVID PARKER (Minister of Revenue): I present a legislative statement on the Taxation (Annual Rates for 2021-22 GST and Remedial Matters) Bill.ASSISTANT SPEAKER (Hon Jacqui Dean): That legislative statement is published under the authority of the House and can be found on the Parliament website.Hon DAVID PARKER: I move That the Taxation (Annual Rates for 2021-22 GST and Remedial Matters) Bill be now read a third time. The role of tax in our society is a big and crucial one. It provides the funding for important Government services and functions that New Zealanders want need and value and it can help support citizens and businesses in difficult times such as those which we have been recently encountering. To achieve these things tax rules must be applied as fairly as possible and the integrity of the tax system must be protected. That's what this bill seeks to achieve. The most significant measure in the bill relates to the deductibility of interest on residential investment property. The bill limits the deductibility of interest expenses incurred by residential property investors and I want to start out by briefly covering the rationale behind these changes.Firstly New Zealand does not have a comprehensive capital gains tax on residential property despite capital gains making up a significant proportion of the income from residential property investment. Despite this our current tax law allows full deduction of interest costs. This leads to a situation where landlords aren't taxed on a large portion of their income from their investment but can deduct their interest costs on highly leveraged assets in a way that doesn't occur in other parts of the economy—or doesn't generally. Secondly interest deductions are based on nominal interest. Some of that interest cost is simply compensation to the lender for inflation. That is to say some of the interest is not a real cost but it has been tax deductible. For example if inflation's running at 3 percent and the mortgage interest paid by an investor is 6 percent then the real interest being paid by an investor is only the other half the other 3 percent. In real terms at the end of the year the investor only owed 97c adjusted for inflation. Yet investors have been getting a deduction for the full 6 percent interest charge. They get a deduction effectively for the inflationary component of their interest payment but normally don't pay tax on either the real or nominal increase in the value of their asset upon sale. Over time this is a huge tax break. If their debt is 60 percent of their property then the excessive deduction in this example is 1.8 percent per annum. Over 20 years that is a 36 percent tax deduction of the original purchase price. That amounts to a distortionary tax setting and it's one of the reasons why house prices have become so inflated in New Zealand and one of the reasons why residential rental owners have been able to outbid a first-home buyer because they have a tax advantage over their competitor for a house if that competitor is a first-home buyer or an owner-occupier. As the Finance and Expenditure Committee pointed out there have actually been times recently where real interest rates have been less than zero. Now all of this is complicated and it's very difficult to ever get the tax system to tax everything absolutely perfectly. But over a long time we've allowed significantly over-deduction of interest on residential investment property. This has caused investor demand to massively increase and squeezed out first-time buyers. So the Government's decided to act by removing the ability of investors to deduct their interest. For clarity that interest can still be deducted against profits under the brightline test because that's fair too. The objective is to reduce investor demand for existing residential property and thus make it easier for first-home buyers to successfully compete to purchase a home. However we also want to ensure there's no obstacle to new supply. So the bill proposes exemptions from the interest limitation rules for land businesses property development and for new builds. There are also proposed changes to the brightline test for the benefit of residential land. Also the bill makes owners of new builds subject to a five-year brightline period reducing that from the 10-year period before this bill passes. It proposes limited extensions to roll over relief from the brightline test for some common ownership change scenarios where the economic ownership has not changed or is materially the same as it was before. The bill contains other measures to ensure that the tax system continues to be applied as fairly as possible. It confirms rates of income tax including the 39c rate on incomes over $180000 and we believe that this is appropriate that higher-income earners pay what we think is a fair share. There are a number of amendments to the GST rules and they're aimed at making life easier for businesses and helping our economy. Chief amongst these are proposals to improve GST apportionment rules. These have the effect of helping ensure that the sale of an asset of mixed use some of which is taxable some of which is non-taxable which has appreciated—the profits on sale or the GST on sale is not an overtax. Proposals also reduce compliance costs for smaller GST-registered suppliers by allowing them to apply to the Inland Revenue for an improved alternative apportionment method. There's a proposal to zero rate the domestic leg of international transport services applied as part of international transport of goods. This addresses a current inequality where the domestic transport of goods within New Zealand is taxed differently where it's part of international transportation of goods. We propose to expand zero rating of accommodation to subcontracting arrangements.We're also keeping up to date with technological innovation and new business practices. The bill proposes to exclude crypto-assets from GST. This ensures that people are not disadvantaged when investing via crypto-assets or using them to raise capital and it enables the use of these new technologies. The bill also proposes that tax pooling be able to be used to satisfy a tax obligation but where there is no existing tax assessment or where the tax obligation has not been quantified. An important function of maintaining the tax system is to be vigilant against attempts to defeat the tax rules. We must continually work to uphold the integrity of the tax system so that everyone pays their fair share and they're not left carrying the burden or the share of others. Current tax laws allow tax authorities to transfer the benefit of their tax-exempt status to their taxable council-controlled organisations. This means that local authorities—or some of them; most of them haven't been doing that but some of them started—are able to shelter their controlled organisations from tax The integrity of the tax system is jeopardised if local authorities can effectively extract profits from the council-controlled organisations tax free. This also provides certain council-controlled organisations using this mechanism with an unfair competitive advantage against private sector competitors. The bill therefore improves the integrity of local government taxation.It introduces new penalties on the sale and acquisition of electronic sales suppression software—again to protect the tax base. Such software is explicitly designed and sold with the sole purpose of misrepresenting and under-reporting taxable income artificially and deceptively. Other measures in the bill include removing the time limit from COVID-19 information-sharing purposes thereby allowing it to remain in effect without need for repeated extensions through Order in Council. That though is linked to the COVID pandemic. This information-sharing has been very important to allow Government agencies to help respond swiftly and efficiently to the pandemic including with support for taxpayers.The bill proposes 11 New Zealand charities with overseas charitable purposes to be given overseas donee status which supports wider overseas development aid objectives in the Pacific and in other developing countries. In addition the bill contains a number of other minor technical and remedial changes to the legislation. The final point I will make relates to the committee stage of this where the Opposition proposed large tax cuts for those earning over $180000 a year. I won't say much about that other than to note that last week when the IMF was here as the Minister of Finance said in the House today they said—and I have the article here—that now is not the time for any reduction in the level of overall taxation. And as veteran political commentator Richard Harman noted Ironically the IMF statement comes only three months after National Leader Christopher Luxon himself also said now was not the time to decrease taxes." I agree with the IMF and the summer holiday version of Mr Luxon. Lastly can I think the select committee for its diligent work and also the policy officials and drafters for their work. I commend the bill to the House.ASSISTANT SPEAKER (Ian McKelvie): The question is that the motion be agreed to."