Nash Stuart: Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill — In CommitteeText is incorporated into the Bound VolumeNash Stuart: Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill — In Committee[Sitting date: 01 December 2015. Volume:710;Page:8434. Text is incorporated into the Bound Volume.]STUART NASH (Labour—Napier): I am happy to stand and talk on the Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill. It is a bill with quite a long name—there is no doubt about that—and Part 3 is quite a long part. In Part 3 there are a whole lot of remedial clauses that change a number of Acts mainly the Income Tax Act but there are several sections that I would like to concentrate on and perhaps get a couple of answers for. There seems to be a level of inconsistency in the legislation and I cannot quite get my head around it just being a simple man from Hawke’s Bay of course.I will look at Part 3 clause 75C which amends section CW 42 of the Income Tax Act and we are talking about business income here. What this clause has added is this. The old law said “no person with some control over the business is able to direct or divert to their own benefit or advantage an amount derived from a business.” What this is basically saying is that a person is not allowed to divert money away from a charity for their own gain. But what this law has added is “other than the trustee or trustees the society or the institution” and I am not too sure why they have exempted the trustee or trustees the society or the institution from the ability to transfer money away from the business. It would seem to me that there are in fact a lot of charities that are actually governed by trustees or societies or institutions and what this is actually doing is exempting a decent chunk of those who are involved in the governance of charities from the condition that allows them to divert money. I am not too sure why that is there and there is a whole lot of inconsistency with that.If I move down that same clause to section CW 42(5)—we are talking about clause 75C(2) here—they have deleted the words “to their own benefit or advantage”. So what this section is about in the Income Tax Act is that it talks about the control of a company. The Income Tax Act says that the control of a company is basically defined around someone’s ability to direct or divert amounts from the business but they are deleting the words “to their own benefit or advantage” and yet those words feature significantly throughout the Income Tax Act. There seems to be a level of inconsistency where that term is used. I am not too sure why that is the case but I just cannot get my head around the inconsistencies with regard to that.I go down to clause 75D which amends section CW 42B and again what it does is this. Clause 75D(1) says “words before the paragraphs replace ‘a trust and its trustees or a company … whose activities are predominantly’ with”—this is talking about social housing—“ ‘a trustee or company … whose activities involve’ ”. So what it is actually doing is it is redefining in law who can actually take advantage of community housing trusts and companies. So what in the past income tax law said was that to be defined as a community housing trust or company your activity has got to be predominantly in the area of managing community housing trusts and companies. Now what the law says is that the company or the trust only has to be involved in that business and I am not 100 percent sure what the definition of “involvement” is.This is where we get into sticky legal situations because we know that the Government is selling down a lot of the State houses into social housing organisations and we could have a large trust or a large company that says “We’re just going to take three or four of the houses here and that will mean that we can take advantage of tax benefits in the Income Tax Act.” because the company itself can say “We are involved in social housing benefits.” So the definition between “involved in social and community housing” versus “predominantly in the business of social and community housing” is substantial and I perhaps see some unintended consequences here.But the other thing that is slightly strange is that as mentioned it removes the words “trust and its trustees or a company” and replaces them with the term “a trustee or company”. I was always of the view that a trustee was a person who actually administered a trust so what it is saying here is it is removing the word “trust” and putting in the word “trustee”. So by definition this is not applicable to a trust; it is applicable only to a trustee.Maybe I am getting my legal technicalities mixed up here but I would have thought that if you put in a trust or a trustee which again is a term that is used throughout the Act it would cover everything and it would make sure that there was no confusion. After all one of the major tests of tax legislation is that it avoids confusion—that it is clear.I go down to clause 75D(2) and this is another clause to do with charities and business income. It has added some words that is “no person with some control over the activities other than the entity is able to direct or divert”—now these are new words—“to their own benefit or advantage an amount derived from the activities.” The reason I highlight this is that I think I mentioned before that we deleted the words “to their own benefit or advantage”. Again it just appears to be a real inconsistency within the space of about three or four clauses. The reason why I am unsure. There is probably a good reason. Perhaps the Minister in his infinite wisdom could let me know when it is applicable to use “to their own benefit or advantage” or when it is irrelevant and therefore why it has been removed from some clauses and why it has been added to other clauses. Again it seems to me that there must be a good reason for it but I am unsure of that reason.I would also like to talk about clause 76. This amends section CW 55BA of the Income Tax Act and this is about the tax treatment of tertiary institutions and their subsidiaries. What this actually says under the subheading “Exempt income” is that “An amount of income derived by a tertiary education institution”—let us say for example a university—“or a tertiary education subsidiary is exempt income.” So what this is basically saying is that for example a business incubator which a lot of the universities have is exempt income—i.e. it does not have to pay tax. But the interesting thing about this is that to be exempt income it has to be 100 percent owned by a tertiary institution or a group of tertiary institutions.The interesting thing about this is that it actually says in new section CW 55BA(2)(a)(ii) “market value interests”—so this is exempt income—“in the company adding up to 100% when a market value circumstance exists;”. The interesting thing about this is I wonder whether in fact this may have the unintended consequence that when a university incubator or a university seeks to commercialise intellectual property that some of its staff have developed what this will actually do is it will delay or stop a university from going out to the market to seek equity in order to raise capital. Once it drops down below that 100 percent ownership then it is not exempt income any more.One thing that we really want to encourage our universities to do is commercialise a lot of the intellectual property that is resident within our institutions and there are a number of exceptionally talented academics across the whole university scheme even though I must admit this is not just about universities. It is about polytechs or any tertiary education institutions. But what we do not want to do is have an unintended consequence where the university does not go out to the market to seek capital in any way shape or form because it knows that it will move from exempt income into income that is taxable. I think that may be a little bit of a problem going forward and I would like to understand why—well part of me understands why. Tertiary education institutions are exempt from income tax because it is a bit like robbing Paul to pay Peter. You take income tax off a tertiary institution and then you give it back in terms of other income that the Government gives to universities polytechs etc. but I think this may well end up with unintended consequences.But the other interesting thing about this is that it talks about the control of a company and it says: “(b) where no person … with some control over the company is able to direct or divert to their own benefit or advantage an amount derived from the company.”