Coleman Jonathan: Taxation (International Investment and Remedial Matters) Bill — First Reading 
Coleman Jonathan: Taxation (International Investment and Remedial Matters) Bill — First Reading 
[Volume:668;Page:15120] 
Hon Dr JONATHAN COLEMAN (Minister of Immigration)  
on behalf of the  
Minister of Revenue 
: I move  
That the Taxation (International Investment and Remedial Matters) Bill be now read a first time. 
 At the appropriate time I shall move that the bill be referred to the Finance and Expenditure Committee for consideration. The bill before us today introduces a number of important business tax reforms that are variously aimed at helping New Zealand businesses to compete internationally and at reducing business tax compliance costs. They complement other recently enacted reforms such as the reduction of the company tax rate from 33 percent to 30 percent and the introduction of the new research and development tax credit which was designed to encourage companies to invest more in research and development. The focus of other reforms in the bill is on updating tax law to align it with today’s commercial environment ensuring the law works effectively and as it was intended to work protecting the revenue base and further strengthening New Zealand’s culture of charitable giving. 
The central feature of the bill is the proposed reform of New Zealand’s international tax rules to help New Zealand - based companies to compete more effectively overseas. In my view this is one of the most important taxation reforms to come before this House. What is being proposed is a complete change of direction in the way we tax the offshore income of our controlled foreign companies—by which is meant foreign companies that are controlled by New Zealand residents. At present New Zealand taxes all the offshore income of those companies with the exception of income from operations in the so-called “grey list” of eight countries that our law singles out as having taxation systems comparable to our own. In that respect we are completely out of step with what happens in much of the rest of the world. Many other countries including our main trading partners distinguish between passive income—such as that from interest dividends rent and royalties—and active income such as income from manufacturing and exempt the latter from tax. Therefore the fact that our controlled foreign companies are taxed in New Zealand on their active income puts them at a competitive disadvantage internationally. 
The cornerstone of the proposed reform of our international tax rules is to exempt from domestic income tax the active income of controlled foreign companies of New Zealand - resident businesses. That is intended to encourage businesses with international operations to remain in New Zealand as well as to enable them to compete effectively in foreign markets. The passive income of those companies will still be taxed as it is earned although there will be some exceptions to the rule. For example it will not apply to passive income for controlled foreign companies in Australia which is usually the first port of call for our smaller businesses that want to expand overseas. There will also be an exemption for passive income that is less than 5 percent of a company’s total income. Other important features of the reform include an exemption from tax for most foreign dividends paid to companies as well as measures to protect our revenue base when the active income exemption comes into force. 
The bill also introduces further measures aimed at reducing tax compliance costs for small and medium sized businesses of which there are many in New Zealand. Lacking the resources of larger companies smaller businesses tend to bear a disproportionate tax compliance cost burden. Reducing tax-related compliance costs is an incremental process consisting of many small steps. There is no single solution to the problem short of abolishing taxation. A measure that will help one small business may not help another since businesses vary significantly in their needs problems and operating styles. Compliance cost reduction measures introduced in recent years have included for example the alignment of payment dates for provisional tax and GST. That change was designed for small businesses that prefer to make smaller and more frequent payments of provisional tax to help with their budgeting. Likewise some of the fringe benefit tax rules were changed with smaller businesses in mind. For example the minor benefits threshold under which the tax is not payable was raised and a tax exemption for business tools was introduced. 
The changes proposed in this bill raise several other tax thresholds. They include for example the PAYE threshold above which employers must file and pay deductions from employees’ salaries twice a month. That threshold is being raised from $100000 to $250000 a change that will allow a greater number of small employers to pay their deductions to the Inland Revenue Department once a month thus saving them time and money. 
The bill clarifies the law to ensure that employer payments for employee relocation and overtime meal allowances are exempt from income tax and fringe benefit tax if certain criteria are met. Those changes which were announced last year simplify the law and remove longstanding uncertainty about the tax treatment of those payments which will save time and money for everyone involved. 
The bill modernises the tax rules relating to the life insurance business which date back to 1990. Since then products and business practices have changed significantly with the result that the tax rules are out of date in several areas. For example many term insurance profits are under-taxed today with profitable business often leading to tax losses. The reason is that term insurance was a very small part of the business in the late 1980s so it was not a big consideration in developing the rules. Today term insurance is a major part of the business and by being under-taxed it enjoys a considerable subsidy under the present tax rules. A further anomaly in the rules is that people who save through life insurance products face a heavier tax burden than do savers who invest directly or through managed funds that become portfolio investment entities. Under the proposed reform the term life insurance business will be taxed on actual profits as other businesses are taxed and many of the tax benefits of the new portfolio investment entities will be extended to all savers in life products. 
The petroleum mining tax rules are also being updated to remove potential disincentives to further investment in oil and gas exploration and development in New Zealand. At the same time the bill introduces measures to ensure that New Zealand receives its proper share of the benefits from our growing petroleum mining industry. In order to safeguard New Zealand’s taxing rights on its own petroleum resources the changes will allow expenditure on petroleum mining operations undertaken through a foreign branch to be offset only against income from petroleum mining operations outside New Zealand. 
As a further measure to protect the revenue base the bill introduces a number of changes to strengthen the definitions of associated persons in income tax law. The definitions are used primarily to counter tax practices that could undermine the intent of our tax laws because of the closeness of the relationships of the people or entities involved whether they are relatives trusts partnerships or companies. The definition relating to land sales is in particular need of strengthening in order to prevent land dealers developers and builders circumventing the land sale tax rules by operating through associated persons. It is not new law that gains on land sold by dealers and others in the business are taxed if the land is sold within 10 years of acquisition. That was clearly stated 35 years ago when Parliament enacted the current land sale tax rules. This bill closes the gaps in the definitions of associated persons that allow that tax obligation to be sidestepped. The bill also makes the other definitions of associated persons more robust. For example it will no longer be possible to use certain trust structures to circumvent the tax rules. Similarly it will not be possible for companies and shareholders to avoid being associated by fragmenting shareholdings amongst closely related people and entities. 
The bill introduces further measures designed to strengthen the climate of charitable giving in New Zealand. The measures build upon related tax changes that came into force this year that removed the caps on the dollar amounts of charitable donations that are eligible for tax relief. As a result individuals can now claim tax rebates for donations up to the level of their taxable income and companies and Maori authorities can claim deductions for donations up to the level of their annual net income. The bill introduces a voluntary payroll-giving system that will operate through the PAYE tax system. People whose employers adopt payroll giving will be able to donate regularly to charitable and philanthropic causes of their choice through work-based payroll deductions. They will receive the tax benefit of their donations each pay day without having to present donation receipts. The voluntary scheme will be open to employers who file their employer monthly schedules with the Inland Revenue Department electronically. Growing numbers of employers in New Zealand see social responsibility and good corporate citizenship as an important part of their business. I have met many of them including some who have already adopted a form of payroll giving for employees who want to participate. They will undoubtedly be interested in the payroll-giving scheme introduced in this bill. 
On a similar theme the bill also clarifies the law relating to the tax treatment of honoraria for voluntary work and the reimbursement of volunteers’ expenses. That will make life easier for both volunteers and charitable organisations which often incur unnecessary compliance costs in trying to understand their tax obligations. 
These are brief descriptions of some of the main reforms that are proposed in this omnibus taxation bill. Time does not permit a description of every measure contained in the bill so I refer members to the separate 160-page commentary on the bill which describes the changes in detail and has been distributed to members. I commend the Taxation (International Taxation Life Insurance and Remedial Matters) Bill to the House.