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Brownlee Gerry; Parker DavidHon GERRY BROWNLEE (National): But that's unlikely to be a large number of people in the next short while. Can I just say with regards to clause 88—where the Minister has said Well it came back from the select committee unamended."—that as everyone in this House knows the select committee process was ridiculously short. It was a very fast process hurried through and under a time frame that probably didn't allow the full extent of coverage or scrutiny on all of these passages. It's why we actually have a House committee session as well and of course interestingly the Government was in such a hurry to get this bill through that it failed to put in front of the select committee the 50-page Supplementary Order Paper that's been provided today. So it's not unreasonable to ask that simple question about what it is that makes or appears to make some of these provisions so retrospective. Damien Smith: Madam Chair. Hon GERRY BROWNLEE: Well I'm on my feet with a few minutes to go—no look I'll let someone else take a call while the answer's being provided by the Minister. Hon DAVID PARKER (Minister of Revenue): I now have an answer to the Hon Gerry Brownlee's earlier question. This I am advised is a taxpayer-friendly provision. It's got nothing to do with GST on roaming services. It's about the zero rating for commercial land leases and under New Zealand's GST system we zero-rate sales of land between GST-registered businesses. The zero rating also applies to the transfer of lease agreements on commercial land as these are types of interest in land and these remedial amendments are proposed to ensure that the compulsory zero rating rules that apply to leases of commercial land work as intended. In terms of the retrospectivity the proposed remedial amendments apply retrospectively as from 30 June 2014 as that's the date when the provisions that are being amended first took effect. So the fix goes back to that date. There is however a savings provision to preserve the tax positions of any taxpayers who took tax positions based on the provisions that existed prior to the proposed remedial amendments. So my understanding is that no one will be worse off and some people will be better off."
Parker DavidHon DAVID PARKER (Minister of Revenue): In relation to the compliance cost point that the Hon Michael Woodhouse has made I'm advised that the implementation cost which is a one-off cost is estimated to be $1 million but the annual revenue benefit—and that's an annual review benefit—is $7 million. In the context of GST where we generally require people to account for GST if they've got $60000 of annual turnover which represents only around $9000 of GST revenue I think members can see that the scale of this is worthy of the attention of the Inland Revenue Department and that the compliance costs relative to the long-term revenue gain are substantial. In respect of why we are doing this now it is to adopt an OECD recommendation because at the moment there is both double taxation and double non-taxation at times—so under-taxation. Given that in practice people increasingly when they travel overseas take their mobile device with them the OECD recommendation—which has been adopted by a lot of other OECD countries already—is that the country that is the source country if you like of the person going overseas collects GST on the service that is delivered to that person when they are overseas through their New Zealand providers and we don't collect GST which theoretically we could in respect of services that are consumed by overseas people with their devices on roaming when they come and roam in New Zealand. So that's the reason. Point of order Madam Chairperson. The final point I will make is a point of order and that is that this is an amendment which has revenue consequences and it has not been filed more than 24 hours in advance of the bill being considered. Therefore I submit that it's out of order and shouldn't be voted upon.
Smith Damien; Parker DavidDAMIEN SMITH (ACT): I would just like on that last answer a point of clarification. If a person's family home is owned for say nine years and for some reason they rented it out for the second year of ownership is the brightline test apportionment—i.e. the tax calculated based on the sale price at year nine or more fairly at the market value at the end of year two?Hon DAVID PARKER (Minister of Revenue): In respect of the apportionment point I think I've already made that on a number of occasions. In respect of the lease point officials have indeed confirmed since I made mention of it earlier that those leases are only leases of personal property not real property so it has no bearing at all on the brightline test.Damien Smith: Point of order. I'd just like to be really specific because this apportionment box has been opened and I'd like to get the answer.CHAIRPERSON (Adrian Rurawhe): That's not a point of order.Damien Smith: Well I'd like to get my question clarified and answered.CHAIRPERSON (Adrian Rurawhe): Well then you don't take a point of order; you take a call.
Willis Nicola; Parker DavidNICOLA WILLIS (National): I just want to clarify how the apportionment that Minister Parker referred to in his earlier reply would work in practice. In the case of a family who rent their family home out for 12 months while they rent another property how will you work out how much of the property's gain in value during the period of ownership would be attributable to that 12 months and therefore the rate of taxation that would apply? That is if you buy a house you sell it after nine years you've rented it out for 12 months how do you work out which part of the gain in value occurred during the 12 months you were renting and therefore on what basis is the additional tax apportioned? That's a specific practical question that I wish to understand.The second thing I just want to clarify is that of course what this Supplementary Order Paper 23 does is it makes the extension to the brightline test to 10 years but there is a quite separate amendment that makes these changes to the main home exclusion and that amendment is specifically removing the main home exclusion in these circumstances which we've discussed which is when a main home is rented out for a period of 12 months or more. It seems to be that this would apply to properties that have already been purchased and that would if they were not the family home be subject to the five-year brightline test. So I wish to clarify that this new change to clause 5 is not just about homes being subject to the 10-year brightline test but could also capture homes that are already subject to the five-year brightline test. So there's two separate questions there. The first is around apportionment and the second is to clarify that this may apply to homes that have already been purchased and that are subject to existing law around the five-year brightline test. If the Minister could address those that would be useful.Hon DAVID PARKER (Minister of Revenue): In respect of this last question raised by Nicola Willis it only applies to properties purchased going forward subject to the 10-year rule so it doesn't have any application to the five-year test. In respect of the apportionment it's a fraction of the rented period over a year as a proportion of the total period that the property has been held assuming it's less than 10 years.
Brownlee Gerry; Parker DavidHon GERRY BROWNLEE (National): Mr Chair under Part 2 you asked for useful argument if you like and Part 2 is very extensive—it has quite a lot in it. And I'm just interested for the Minister to perhaps better explain than the bill itself does under clause 8 New heading and section CC 14 inserted which deals with International Financial Reporting Standards (IFRS) leases particularly how they might be affected by the brightline test that comes into play and also potentially whether or not—in fact I think it'd be better for me to stop speculating on what it means and give the Minister an opportunity to tell us.Hon DAVID PARKER (Minister of Revenue): IFRS leases would be affected by the brightline test.Hon GERRY BROWNLEE (National): Well throughout this it talks about the property that might be subject to the lease. So for what reason then would that property become exempt from any brightline test?
Smith DamienDAMIEN SMITH (ACT): This must be the first time I've seen a tax law passed with no economic analysis or fiscal oversight. The question that hasn't been answered is: what's the difference between the status quo and 10 years and my point about stranded assets—Kieran McAnulty: Five years.DAMIEN SMITH: —hasn't been asked as a question. Let me finish please yeah? As long as you guys know you've put up rents and you haven't solved the housing affordability problem by this measure. The final question I have is: are there going to be any more taxes or capital gains taxes that we need to consider in the tax foundation of this country or is it just going to be made up and rushed through in urgency as we go along?
Russell DeborahDr DEBORAH RUSSELL (Labour—New Lynn): Just as a point of clarification I just wanted to look it up and it does seem that CB 4 deals with the disposal of personal property and CB 5 is to do with the business of disposing of—dealing in—personal property. So I'm not sure that it's relevant to this bill at the moment and particularly to the clauses we're discussing.
Woodhouse MichaelHon MICHAEL WOODHOUSE (National): One of the problems we have in considering such a large Supplementary Order Paper with such a short amount of time and when we're amending the Income Tax Act which is a dizzyingly complex piece of legislation is that it gets pretty hard to find the nugget that's buried deeply in the legislation. I was struggling but I found the relevant sections that I think reinforce the point. They are sections CB 3 and CB 4 of the Income Tax Act.Effectively what section CB 3 says is you have to intend to make money. It can't be a hobby. It can't be voluntary acts where small amounts of money might be granted for it. Section CB 4 basically talks about purpose and what I call intent. So the property has to be acquired for the purposes of disposing of it and that's the distinction that is made between income account and capital account. If one disposes their shares for a profit but that was not their intention if they didn't purchase them with that in mind then any profit on disposal is not taxable. I come back: what I described as deemed intent is that the two-year brightline effectively said that if you dispose of that property within two years it's considered to be personal property acquired for the purpose of disposing of it.Now a 10-year brightline—it cannot be said that people that are purchasing rental properties the mum and dad investors that comprise 90 percent of them should be considered to be doing that with a purpose of disposing of the property. It just can't apply. So we're breaking one of the fundamental principles of the Income Tax Act as set out in section CB 4.
Woodhouse MichaelHon MICHAEL WOODHOUSE (National): Thank you Mr Chair. I just want to go back to the comments that the Minister made about my nomenclature of deemed intent. He may be correct that those specific words are not mentioned but the general provisions as set out in sections DA 1 and DA 2 of the Income Tax Act make it very clear that deductions are only allowed if they are incurred in the generation of income—and conversely the income is only taxable in certain circumstances. So I just want to go back. Regardless of the nomenclature that we use is my description of intent on purchase of a business or an asset relevant to the question of assessable income on the disposal of the asset? Because I think that's fundamental. At least if we can clear up the rules of engagement and the degree to which we are deviating from both those principles and rules as set out in the Income Tax Act it would be much easier to have the conversation about what we're actually doing.
Bayly Andrew; Parker DavidANDREW BAYLY (National—Port Waikato): My only request Minister as you've got a great array of officials here to help you is that we would very much like to get advice as to whether in fact I am wrong. If I am wrong I'd like to know so in future—and I know of course that the Minister of Revenue would like to know whether he's right or wrong because heaven forbid we don't want a Minister of Revenue who doesn't know the difference between tax on profits and tax on capital gains. While we're waiting for that and I am dying to hear the answer can I just say to you Minister that during the course of the break I've just been informed—in fact I've had quite a few texts from different people today—about a large project worth many hundreds of millions not a small project to build a whole lot of new homes—a rent to buy proposition. So we're talking about creating new homes; we're not talking about homes that have been there for speculation or in the backyard or whatever. They want to create a new class of homes and build them and that project as a result of the 9 o'clock announcement this morning I've just been informed by a senior partner in a very large accounting firm has as of this afternoon been put on hold—Chris Bishop: Really? Why?ANDREW BAYLY: Because when they rang up the IRD to seek advice on whether a rent to buy property was in the rules or not the IRD could not be categorical in its advice—and I'm not surprised because they only heard about it today basically. The issue is that these people are going out to the market to seek investors and as the promoter as an officer of that entity they cannot be seen going out and doing this sort of stuff without reasonable cause and without confirmation and that project worth hundreds of millions of dollars has been put on hold this afternoon. I've had another text from a friend who just told me he'd entered into an agreement to buy a property. It's all now up in the air. As my good colleague talked about today you will now see an avalanche of projects going on hold. Anyway I'm sure you're not particularly worried about that or there'll be a reason.Can I turn to another technical issue. This is the issue around interest deductibility. Under the rules you will not be able to deduct any interest so there's a phase-in period and in the announcement he talked about the UK period for example. What is the phase-down period for the reduction on interest deductibility over the next few years? Is it 75 50 25 zero in each of the four years before it gets to a close? It would be quite useful to actually understand some of those concepts behind that and why you did it over a four-year period. And of course as we've all seen and heard—and we've talked about it a little bit earlier today—the advice from IRD particularly around this issue was not that comforting in terms of supporting the Government's proposition. So why did Cabinet come to a different view?Hon DAVID PARKER (Minister of Revenue): There's nothing in this bill about that so I don't propose to comment about it because it would be out of order.
Edmonds Barbara; Parker DavidBARBARA EDMONDS (Labour—Mana): Thank you very much Mr Chair. We've traversed a number of parts of the bill and one particular part which I think we haven't asked about which I'd like to seek some clarification from the Minister is around the donated trading stock. Now I understand this is an anti-avoidance rule. It's been put in around a business's particular stock. I understand that during COVID there were a number of businesses who were donating goods and I just want to understand the changes within the bill: what the mischief was that we were trying to solve throughout it and what was the policy underlying the Minister's thinking around the donations of trading stock.Hon DAVID PARKER (Minister of Revenue): Thank you for that question from Barbara Edmonds. COVID exposed something that probably should have been fixed anyway—an example would be that when COVID hit various businesses gave materials to food banks or may have given away materials for the manufacture of hand wash for example which was in short supply. Under the existing rules that gift was a deemed sale which created a tax liability on the part of the donor. We as a Government thought that that was wrong in these circumstances and so we are changing the law so that that in effect is not a deemed sale and therefore it doesn't create an income tax liability based on the additional income that currently is deemed to be earned on those gifts.
Smith DamienDAMIEN SMITH (ACT): Thank you. I've just been through the documentation because I did ask some very specific questions today and the supply side measures significant time constraints lack of empirical data and projected revenue—there's nothing there it's just a grid with noughts and crosses and that's no way to run a tax policy or make significant change of this magnitude. I just want to ask a couple of specific questions then because the advisers are here and we might get some work done this evening. The Waikato University economics professor Frank Scrimgeour is reported as saying that the extension of the brightline test could result in stranded assets. I feel very strongly about this. At the end of the day you want a dynamic housing market and there's lots of reasons why people's circumstances change—you can get older you can lose your job you can have a restructure of your family and you end up in a divorce. There's all sorts of elements there that have to be considered. So do we not want a tax policy that actually allows assets to move rather than be stranded because there's tax incentives to hold on to them and there might be a greater benefit for somebody else being a different owner? So if we can't get anything done because everything's being passed under urgency could we please look at that one aspect—providing some flexibility to the people of New Zealand to allow them to actually have some certainty around their lives? One of the other big problems is that we talked earlier about supply and housing—I don't think any of my questions were asked about accruals on the tax benefits of the status quo five years versus 10 years. It's not there and I'd like to put that on the record. So you know one question that I have is: is this it? Will the Government seek to pass any further tax changes this term under emergency or without scrutiny by the Finance and Expenditure Committee? The difference between this amendment and the income tax increases was that the Government did provide a limited signal that they were going to make changes. But in this case Grant Robertson explicitly ruled out changes to the brightline tests and is now ramming it home under urgency. So how is this accountable and transparent?So the Minister has received advice from his advisors about the brightline test. The Prime Minister's wrapped it up in a package surrounded by supply and demand. But if we get down to the specifics of this test can we actually give the people of New Zealand some flexibility in terms of passing this law—either tonight or tomorrow—and actually look at not only how these assets are being treated from a tax point of view but just from a life point of view and from a flexibility point of view.
Parker DavidHon DAVID PARKER (Minister of Revenue): In respect of the short-stay accommodation I did address that earlier—I'm not sure whether the member heard it—so I won't go through that again. In respect of the other issue I will seek advice from officials and get back to you. In respect of the Hon Michael Woodhouse's point neither I nor the officials quite understood what it was that you were driving at. So if you want to repeat that point I'll get you an answer.
Taxation (Annual Rates for 2020-21 Feasibility Expenditure and Remedial Matters) Bill — In Committee—Part 2
Woodhouse Michael; Rurawhe AdrianHon MICHAEL WOODHOUSE (National): I am a bit surprised by that and I should point out to the committee that we haven't even started debating the substantive issues that are in Part 2 of the bill as they were introduced to the House and considered by the select committee. So if the Labour Party believe that this is a conversation that they want to vote on now they might have to prepare for a long evening. There is a considerable amount of information and changes in Part 2 of the bill on feasibility expenditure on the GST on global roaming and on the purchase price allocation methodology changes. We haven't even got there yet so we will have a raft of questions for the Minister on those technical changes and we've got a long way to go. I just want to point out that I have tabled an amendment in my name amending the bill at Part 2 to delete the provisions that relate to global roaming—CHAIRPERSON (Adrian Rurawhe): Sorry to interrupt the member. Members in accordance with the decision of the Business Committee for Nicola Grigg and Simon Watts to make their maiden statements I suspend the committee of the whole for the Speaker to resume the Chair.House resumed.
Bayly AndrewANDREW BAYLY (National—Port Waikato): Yes so I think the points raised by my honourable colleague Paul Goldsmith were very pertinent. I think the answer actually is in Treasury documents Mr Goldsmith which really talk about the impact on house prices and rentals. I know the Minister was shortly just about to jump up and highlight this but it was pretty clear what Treasury's advice was wasn't it? It talks about considerable uncertainty about the magnitude of the impact on rents. It talks about the disproportionate effect on low-income households young people Māori and Pasifika peoples. Of course I'm also looking at the IRD view and they were very clear about their advice. Inland Revenue recommended against both extending the brightline tests and denying interest deductibility. So I think Mr Goldsmith's points are actually very valid. Minister and I'd like to get your views on that and why you think both Treasury and the IRD are wrong in their assertion or their view around the impact this will have particularly on rentals and rental prices but also on the price of houses going forward because both of those are covered.I'm just conscious of the time up there Mr Chair. I want to return to a comment and a line of questioning that the Hon Gerry Brownlee was raising before which hopefully we can do quite briefly. This is the issue around new builds. I understand the answer that the Minister said that if you're in the business of building houses if you're a trader you will pay capital gains tax on those returns—you will pay tax on the capital gain of those businesses. After dinner you and I Minister can have a lovely conversation about the difference between income tax and capital gains tax I'm sure. But the issue is I want to specifically ask about this exemption—because it's unclear what it means—around if someone builds a house they will only be subject to the five-year brightline test as opposed to going into the new regime of 10-year brightline tests. So my question is (a) I don't understand how that provision works but secondly if you were really genuine about trying to get people to build new houses then you would allow them to build the house and sell that property so it goes onto the open market so we can get first-home buyers into that property investment get them on the ladder. What we've done here is continued to put a barrier in terms of (a) whether people want to build a new house because if they do they know they will be captured still by the five-year brightline. Why didn't you get rid of it? Why is it even at five years? Why didn't you address that issue? If you're really committed to seeing new builds which in the main—most new builds are undertaken by small building firms individuals and mum and dad investors thinking that they can do something and actually create homes for future people to live in.
Russell Deborah; Parker DavidDr DEBORAH RUSSELL (Labour—New Lynn): Mr Chair we've traversed in great detail many of the issues around the brightline test and there are number of other issues in the Supplementary Order Paper which I think it would be good to devote some attention to across the Chamber. I particularly would like to look at the loss continuity rules which are of course of considerable benefit to businesses and they do change loss continuity rules which have been quite substantially based around a very tight percentage of shareholding test so it's a very tight numerical rule. Of course that is then quite easily controlled. So we're moving from that very tight control on which entities may carry forward a loss and claim the tax benefit of it to a wider test on a continuity of business test. It's a new test it's a different test there has to be no major change in the company's business. I would just like to invite the Minister to talk a little bit about what that major change might look like the sort of business changes that would fall below and above the bar in order to effectively carry forward tax losses.Hon DAVID PARKER (Minister of Revenue): Thank you to Deborah Russell for that question. It is a significant change and from memory I think the cost to the Crown is $60 million of this change because there will be more losses able to be carried forward that were previously forgone. The theory behind it is that in order to protect tax losses some companies are not accessing capital that they need to grow and to employ more people even though the nature of their business is not changing. They're caught currently by the numerical rules as to maintenance of a certain proportion of existing shareholders. If it's disrupted by more than a set percentage then you can't carry the tax losses forward. If they haven't got the capital themselves and they're reliant on new sources of capital from new shareholders they've got to choose between losing their tax losses and taking that additional capital even though they need the new capital. So we're trying to encourage that and the development of the economy and extra jobs and extra economic activity by allowing a less numeric approach which as the member has properly identified is assessing whether the nature of the business is changing rather than a numerical change in shareholding. There is a risk that we could go back to the bad old days where there were a lot of transactions which were motivated by people taking advantage of historic losses and changing the nature of the business to take advantage of the tax loss rather than to capitalise the business that was already going on and Inland Revenue is alert to those risks and has already signalled to the taxpaying community and the advisers of that tax community if that proves to be a problem in practice and that we see a return to loss-trading which is not for the benefit of growing the existing business of the company then they'll look at tightening up the rules.
Smith Damien; Parker DavidDAMIEN SMITH (ACT): Thank you very much. I just wanted to get specific with accruals and the impacts of this tax policy going forward. As we're faced with a situation where it's in urgency there's going to be no ability for public scrutiny. There's going to be no ability to get this through a select committee to actually analyse it properly and provide some rationale to the people of New Zealand about why this is actually better than the status quo. But I just have a couple of specific questions—it'll be a short call. We know that house prices have risen rapidly over the first brightline test and risen even more rapidly in the last five years and now it's going to 10 years. So what's actually going to be the accrual difference between five years and 10 years? What are we expecting from the tax take? What are we expecting in behaviour and what's wrong with the status quo? Hon DAVID PARKER (Minister of Revenue): If that's a question as to how many additional properties are likely to be caught with the change to the brightline test we can't be absolutely clear because investor behaviour may change as a consequence of the new tax rules and indeed for some people it will. But the proportion of properties that are generally sold within various time frames are set out I think in the documents that are already on the Table.
Edmonds Barbara; Rurawhe AdrianBARBARA EDMONDS (Associate Whip—Labour): I move That the question be now put.Hon David Bennett: He didn't answer the—I've got a supplementary question.CHAIRPERSON (Adrian Rurawhe): No I haven't called you yet Mr Bennett. Who wants the call?
Brownlee Gerry; Parker DavidHon GERRY BROWNLEE (National): So for a clarification on that then: if a developer for example buys a multiple number of residential properties demolishes the buildings that are on it and then develops those properties they would be caught as a trader and they would naturally pay the appropriate tax in that circumstance. Are they in that circumstance not caught by any sort of brightline provisions? Hon DAVID PARKER (Minister of Revenue): That's correct because developers are actually not caught as traders; they're caught as developers. They're in the business of buying and selling houses and effectively their houses are their stock in trade and it's already on income account.
Brownlee Gerry; Parker DavidHon GERRY BROWNLEE (National): Look I would take issue with some of those generalities that the Minister in the chair David Parker just referenced with this current situation being different to what we faced in Christchurch. Yes there was for a very short time a number of people who left the city but the population was on the rise relatively quickly within 12 months of those earthquake events and that's evidenced by the numbers of people who are registered with the Project Management Offices rather than any particular census data. Leaving that aside urban intensification is an important part of housing supply and we're going to have to see more and more of it as time goes on. So my question is this: if someone buys a property in an area that is earmarked for more intense housing and they demolish those properties they then put forward a plan that's consented for the building of a multiple number of dwellings on that property how is that going to be treated in relation to the brightline? Will the whole purchase be exempt because of the new dwellings that are built on that land? Will it be apportioned? If the owner decides to hold it for a period of time how long do they hold it for? What will the overall effect be on the transfer of focus on to the special housing areas that a lot of councils are now developing as opposed to new subdivision which is obviously going to be an important part and the Government is staking somewhat of its future success of this policy on that by the announcement of that large infrastructure fund. I'd like to return to this in a minute if the Minister was able to answer that question. Hon DAVID PARKER (Minister of Revenue): I may have misunderstood the member's question in which case if I have he can restate it. But in respect of if there was a development on a piece of land building new houses it wouldn't be affected by these new rules because they are intended over time to be exempted. In respect of capital improvements to an existing property they become part of the asset base and so would be counted in respect of the cost that is assessed against the eventual sale price.
Parker DavidHon DAVID PARKER (Minister of Revenue): Thank you Madam Chair. In response to the member's last question I don't recall advice from the Treasury on that point about—I don't believe there was advice as to taking into account inflation so I don't think that was considered. In respect of one of the points that the member made referring also to the Hon Gerry Brownlee's comments there are some differences between the Canterbury earthquakes and the current circumstance but there are also some similarities. I agree that land supply is important. The Government agrees that. It's one of the reasons why outside of this bill the National Policy Statement on Urban Development requires a lot more land opportunities to be made available particularly in high growth areas both in respect of intensification but also land at the margins. I would make the point that in Canterbury of course there were other things at play including the fact that some people left so there was for a period a declining population and fewer people to house. There were billions of dollars of insurance moneys that were flowing into the city to make that an easier transition and of course there were significant Government contributions which were wise which contributed to infrastructure. Of course there are comparisons to that in other parts of this package that have been announced today but none of that's in this bill.
Parker DavidHon DAVID PARKER (Minister of Revenue): The answer to that is that officials aren't sure. The experience in New Zealand has been that rents have not increased at the same rate as prices. We've had a massive increase in prices without a massive increase in rents and we've had a—Andrew Bayly: What? Rents have gone up $120 a week. Hon DAVID PARKER: We have not had the same rate of increase in rents as we have had an increase in prices. There's quite clear divergence between those two. In respect of the Hon Gerry Brownlee's point on the one hand he says this won't change buyer behaviour and it will have no effect on prices because it's all about supply. Well if that's right then why would it necessarily have an effect on rents? Those are the imponderables. I agree that the answers to the housing crisis do not lie in demand side measures alone; they also lie in supply measures which are outside the provisions of this bill.
Brownlee GerryHon GERRY BROWNLEE (National): I just wanted to ask the Minister some questions about the advice that has been provided that had given the Government such confidence in this extension of the brightline test to actually move it so quickly through the House today. Going back the brightline test was extended three years ago to five years and the claims then were that this will effectively slow down the investor rate into houses it will make more houses available for first-home buyers and it will arrest the runaway prices of houses. Now is there any similarity between what was said three years ago and what is being said now? I can't distinguish one. So we look at it and say OK well if someone bought a house for the average price three years ago they would have experienced a $250000 capital gain in the meantime and they'll be subject to the brightline test. So you work it all through—and let's assume they can't deduct any expenses for sales or anything else that might go on—they would pay the 33 percent on the $250000 and be left with $170000 in their pocket. That equates to somewhere between $56000 and $57000 a year which is not a bad sort of return. So the question is: will this make any difference? My suggestion is of course it won't because as long as there is constraint in supply there will always be upward price pressure.It gets a little bit worse when you dig into this bill because the interest rate that has been deductible against other income at a rate of whatever their tax rate was—so let's say it was the 33 percent rate—works out that over the term of a 25-year loan on that average house it's around about $156000 worth of interest. So you break that down to the yearly figure working on a rate of about 2.65 percent—which may not last longer; it could be more—and the deductible component of that interest is $40 a week. The cost is $120 a week but the deductible part is $40. My point is that if the $40 part that's not deductible is gone and the whole cost is $120 why won't rents rise? Simon Court: They will. Hon GERRY BROWNLEE: Of course they will and the Minister needs to tell us what advice was given to him by their officials that gave them any confidence that this set of moves will have a deflationary effect or a stabilising effect on rental costs in a very constrained market. Do we have an answer to that simple question? What advice did the Government get that gives them the confidence that a brightline test will work and that the removal of the interest deduction planned will in fact also see downward pressure or stabilising pressure on rents?
Parker DavidHon DAVID PARKER (Minister of Revenue): I am responding to the specific question that the Hon Michael Woodhouse has made in respect of page 13 of the commentary on the Supplementary Order Paper. The member's correct that in respect of an irrevocable offer there are transitional provisions that mean whether the purchaser does nothing or—well the purchaser can't do anything—Hon Michael Woodhouse: Or doesn't know whether the tender's been accepted. Hon DAVID PARKER: Well if it's an irrevocable offer the purchaser can't do anything to protect their own position and therefore even if it was subsequently accepted after this three-day warning period then they are only bound by the old brightline rules.Andrew Bayly: So you're saying that's specifically catered for? Hon DAVID PARKER: Yeah that's specifically catered for. In respect of the person that has a revocable offer then they have to make an election really quickly as to whether they're going to proceed with the offer in the knowledge that if they do they'll be subject to the new brightline rule and they of course have the choice of not proceeding by withdrawing their offer because it's not an irrevocable offer. Hon Michael Woodhouse: That's harsh.Hon DAVID PARKER: Well that's the position. They can protect themselves.
Parker DavidHon DAVID PARKER (Minister of Revenue): Thank you for those contributions. I agree that there are factors behind the escalation in house prices that go beyond taxation including the unprecedentedly low interest rates in the world which have had an effect on cap rates and therefore asset values. It is though having a detrimental effect on inequality and is making it very hard for younger people and other first-home buyers to get into the property market. It has also created the risk of a property bubble and the Government as well as various agencies that advise the Government have been worried about that. We don't control interest rates. We do have some influence on macro-prudential tools the Reserve Bank can implement and the Minister of Finance answered questions about that. That said this bill is only about the brightline test. It isn't about interest deductibility and there's nothing in this bill about it.While I'm on my feet I will respond to the Hon Michael Woodhouse's point in respect of irrevocable offers. If someone's already in a contract—for example a long-term agreement for sale and purchase of a section often has a long date by which the vendor has to perfect their subdivision beyond which the agreement can be called off. That sort of agreement is not affected by these changes and the old brightline rules will apply to it not the new ones.
Smith DamienDAMIEN SMITH (ACT): I'd just like to challenge the Minister Hon David Parker on some of the facts he provided on underlying demand. Is he saying so long as there's strong underlying demand and a shortage of supply that capital gains tax will not deter speculators because they will continue to buy and they'll continue to pay a tax? So the logic—I don't know if anybody at the IRD or Treasury's thought about this but if you can buy something for 60 percent equity and it's as safe as houses people are going to still do it aren't they?And the second point is: has anybody at Treasury or at the IRD or in Government not been honest today and said A lot of what's happening is not about taxing housing it's because the fiscal and monitory policy settings of the country have led to these problems."? Interest rates and the lack of land supply have also accelerated this problem and taxation isn't going to fix it. What's going to happen—and I'd like the people who share our social values to understand as well that Grant's broken a promise today and so has the Prime Minister. With rents going up $125 a week I can guarantee you because I've had 20 calls about it that there'll be another $100 on rents in this country and this is a really dangerous game. In terms of supply and demand the people that are actually purchasing these houses are providing rental property. So the unintended consequences of this extension is that landlords are going to hold and then rents are going to go up and those people are going to get punished. And those people then are out earning their money and paying excessive taxes.And the one other point I'd like to ask is: has anybody thought at Treasury or IRD that now every other business in New Zealand can still claim tax deductions but not landlords? So where's the sense in that? So there's a couple of fundamental aspects to this where I think today the Government's created a bigger problem for itself with its tax and expenses rules than they could ever have even thought about and more importantly the broken promises to the people of New Zealand. And I think less houses will be built landlords won't sell—they're going to sit and hold—and the private sector will not get a chance to come to the party here. So I'd like to just see if anybody did address those questions within the thought process of rushing this through."
Parker DavidHon DAVID PARKER (Minister of Revenue): I now have that point of advice in respect of Mr Bayly's question. There is no change to the definition of residential land" in relation to the brightline test. The exclusions that previously were in the law still apply for farmland and business premises. There is a change in the bill to ensure that vacant houses are not outside of the brightline rules—a relatively minor matter—otherwise it created an incentive which is even worse to have a vacant house so as to be outside the brightline rules. There's also a change to the definition of "business premises" to exclude short-term accommodation provided in houses that are not a person's main home and that is in the Supplementary Order Paper. But other than those two discrete changes there is no change.In respect of the "Why is it that we're passing this under urgency?" in respect of the Hon Michael Woodhouse's question since May 2020 there's been a 26 percent increase in residential house prices in New Zealand. Various bank economists as well as some of the international agencies have been warning that we may be seeing a bubble and that if the bubble popped there could be financial consequences that were detrimental not just to the people that bought at the height of that bubble but could also have wider economic damage. Our view was that if we were to have but a short transitional period we would actually be encouraging people to get in ahead of the change and we would cause a flurry of activity that could have made the current situation even worse. So for that reason we've chosen to do this quickly.We do have a three-day transitional period so that people aren't caught unawares and the Inland Revenue Department as soon as we were making the announcement this morning was advising real estate agents accountants and lawyers of the change so that people who are about to make an offer in a few days' time aren't caught unawares by this. In respect of people who have already made an offer but their agreement is not yet unconditional those agreements are also grandparented pursuant to the transitional provisions that are in the bill."
Parker DavidHon DAVID PARKER (Minister of Revenue): Nothing in Part 1 is being changed by the Supplementary Order Paper and it has gone through a select committee process. This urgency motion really doesn't unduly affect the full consideration by the House of that provision in Part 1 which is also the subject of commentary—including minority views—in the report from the select committee.
Parker DavidHon DAVID PARKER (Minister of Revenue): I note again that there is nothing in this part of the bill other than income tax rates for the 2020-21 year. I would also say in reference to some of the comments that have been made as to progressivity of the tax system that you can't assess that in relation to income tax alone. GST of course is a regressive tax that's not affected by this provision. But members who are making sweeping assertions as to the progressivity of the tax system and who they think pays the proportions of tax can't really make a meaningful contribution without taking into account the effect of GST which of course is not set by this part. In respect of Mr Brownlee's comments about other parts of this bill as amended by the Supplementary Order Paper with respect Mr Brownlee you're wrong. There's nothing in either this bill as introduced or in the Supplementary Order Paper about interest deductibility.
Parker DavidHon DAVID PARKER (Minister of Revenue): Part 1 talks only to income tax rates for the 2020-21 year. It says nothing about GST or other taxes. The Supplementary Order Paper 23 which is the Government's Supplementary Order Paper in my name makes no changes to Part 1 of the bill so the only thing that I can see as being relevant that has been raised by members to Part 1 so far is the question as to whether we should have an inflation adjustment of income tax rates so as to prevent what is commonly called fiscal drag. The Tax Working Group considered this issue and they noted that the fiscal impact of indexing income tax thresholds to inflation would likely be high the benefits to low-income earners compared to others would be low the benefits to higher-income earners obviously would be higher and the resulting revenue loss and potential reduction in Government services would disproportionately affect low-income New Zealanders and that the projected increase to the labour supply from the increased investment that would result from lower taxation was modest compared with the projected costs.
Rurawhe AdrianHOUSE IN COMMITTEECHAIRPERSON (Adrian Rurawhe): Members the House is in committee on the Taxation (Annual Rates for 2020-21 Feasibility Expenditure and Remedial Matters) Bill and the Regulatory Systems (Transport) Amendment Bill.
Woodhouse MichaelTAXATION (ANNUAL RATES FOR 2020-21 FEASIBILITY EXPENDITURE AND REMEDIAL MATTERS) BILLReferral to Finance and Expenditure CommitteeHon MICHAEL WOODHOUSE (National): Point of order Mr Speaker. I move that Government notice of motion No. 1 be discharged and that the Taxation (Annual Rates for 2020-21 Feasibility Expenditure and Remedial Matters) Bill with Supplementary Order Paper 23 be referred back to the Finance and Expenditure Committee for further consideration. SPEAKER: I think the member might have meant Government order of the day" not "notice of motion". Hon Michael Woodhouse: Oh did I say—SPEAKER: Well the member I think has essentially moved a nonsensical motion. Hon MICHAEL WOODHOUSE: Point of order Mr Speaker. I move That Government order of the day No. 1 be discharged and that the Taxation (Annual Rates for 2020-21 Feasibility Expenditure and Remedial Matters) Bill together with Supplementary Order Paper 23 be referred back to the Finance and Expenditure Committee for further consideration."