Cunliffe David: Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill — In CommitteeText is incorporated into the Bound VolumeCunliffe David: Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill — In Committee[Sitting date: 01 December 2015. Volume:710;Page:8442. Text is incorporated into the Bound Volume.]Hon DAVID CUNLIFFE (Labour—New Lynn): There are a couple of matters that I would like to draw the Minister’s attention to. The first is clause 76 appearing on page 47 of the bill and in particular the insertion of new subsections CW 55BA(2)(a) and (b). This relates to tertiary institutions and the definition of an eligible tertiary institution for the tax deduction around exempt income. The principle set out in the clause is that the tertiary education institution or subsidiary must be 100 percent wholly owned in order to qualify. New subsection 2(b) says that one of the circumstances is that “where no person other than the tertiary institution with some control over the company is able to direct or divert to their own benefit”. That in the light of recent history will be a problematic clause for a number of institutions currently in the market place. I would like to note some in particular and why that clause is likely to catch them out.Without going into unfortunate personal details and I will not it is well documented that the Taratahi Agricultural Training Centre has had a very mixed period of its history over the last 5 years which has included the enrolment of some 70—70—staff as students inappropriately—The CHAIRPERSON (Lindsay Tisch): Order! That is not part of this.Hon DAVID CUNLIFFE: Well Mr Chairman—The CHAIRPERSON (Lindsay Tisch): Come back to Part 3.Hon DAVID CUNLIFFE: Clause 76 inserting new section CW 55BA(2)(b) goes to the issue of whether a person “with some control over the company”—I am quoting from the bill—“is able to direct or divert to their own benefit”. I am making the point that that has actually occurred in the case of the Taratahi Agricultural Training Centre.The CHAIRPERSON (Lindsay Tisch): That is making assumptions; you cannot do that. It is hypothetical. Come back to Part 3.Hon DAVID CUNLIFFE: The Tertiary Education Commission employed Deloitte and Deloitte concluded that funds had been diverted by the institution inappropriately. That is why the Government clawed back $6.47 million of inappropriately appropriated funds from the institution on the basis of the Tertiary Education Commission’s review. That is not the only institution that would be caught by new subsection (2)(b).The second one of course is the Western Institute of Technology based in Taranaki. That institution had a habit of inflating its student numbers. It too finally after a whistleblower was caught out—The CHAIRPERSON (Lindsay Tisch): No. Come back. [Interruption] I have just stood up. The member is making a lot of comments that are not directly related to the bill. Come back to the bill. We are on Part 3 now and I will not warn the member again—Part 3.Hon DAVID CUNLIFFE: I raise a point of order Mr Chairperson.The CHAIRPERSON (Lindsay Tisch): No look—I have ruled. Part 3—that is what we are on.Hon DAVID CUNLIFFE: I raise a point of order Mr Chairperson. I would like to seek your clarification on—The CHAIRPERSON (Lindsay Tisch): No I have asked the member twice now. Come back to Part 3—that is what we are on—and just focus on the content of what Part 3 is about.Hon DAVID CUNLIFFE: I raise a point of order Mr Chairperson. I am reading from Part 3.The CHAIRPERSON (Lindsay Tisch): You are using a lot of examples that are not relevant. Just keep on Part 3.Hon DAVID CUNLIFFE: I am going to read without reference to those individual institutions the language of clause 76 of Part 3 one more time. New subsection (2)(b) says: “where no person other than a tertiary institution with some control over the company is able to direct or divert to their own benefit or advantage an amount derived from the company.” Without naming a single example I can say that over $50 million of taxpayers’ funds have been so diverted in the last 12 months and caught out by the Tertiary Education Commission and repaid. And those would fall afoul of Part 3 of this bill as written.I commend the Government firstly for the drafting of this clause and secondly I commend the Government for the fact that finally after whistleblowers raised the alarm those miscreants were caught. But they might not have been and that is why we need to be extremely careful about the implications of Part 3 of the bill.Let me turn to a different clause of the bill that relates to black hole expenditure for research and development—[Bell rung] Thank you Mr Chairperson—enough on tertiary institutions. The key part of this bill which is represented in its title—the title of the bill the Taxation (Annual Rates for 2015–16 Research and Development and Remedial Matters) Bill turns on this part of Part 3 which is based upon the cashing out of losses for research and development expenditure. For the Committee to consider that we need to compare the provisions of this clause against the current pre-legislation status quo and the prior status quo. What this bill does is it allows certain loss-making companies to cash out losses of research and development expenditure rather than carry them forward up to a limit of $500000 in the first year and $300000 in subsequent years. Cash will need to be repaid—will need to be repaid—and losses reinstated once the company makes a return on the research and development investment. So essentially what this clause provides for is a tax deferral or in effect a loan from the taxpayer to the company by deferring the period in which it has to pay its tax through a carry-forward.That in principle is one possible means of sharing with the taxpayer the risk from innovation. There are two things that the literature makes really clear about innovation. The first is that the innovator never captures all the benefits on their own balance sheet because there are spillover benefits that go beyond the company. Therefore the public has an interest in encouraging innovation including through the tax system—fair enough. Here is where the design question comes: is a cashing out of losses preferable to a research and development tax credit or preferable to a grants system? Let us examine both of those options.The research and development tax credit is the predominant policy instrument used around the OECD. It was also in the current Labour Opposition’s previous two manifestos at a 12.5 percent discount rate. It is a little higher—I think 24 percent—in the Australian economy. That is a very simple low-overhead way of achieving that objective.The alternative approach that has been used up to now is the use of a grant system as my colleague Grant Robertson mentioned through Callaghan Innovation as the predominant provider. The problem with that is it is either discretionary which has a high overhead or non-discretionary subject to automatic criteria as it currently is which has led to a series of phenomenal botch-ups. The New Zealand taxpayer funded through Callaghan Innovation the Oracle America’s Cup bid against Team New Zealand. We gave it a research and development tax write-off through Callaghan Innovation—unbelievable. It funded a subsidy to the German multinational buyer to effectively develop and arguably expropriate New Zealand intellectual property through a subsidiary in New Zealand. It funded a company that was going to mine seabed sand resources and another one mining phosphate before either of them had a resource consent and which neither of them ever got and they had to repay the money. You see this is the problem with this so-called grant system. The research and development tax credit is a much simpler cleaner and actually more market-based system which most Western Governments have found preferable.So here in this bill is the Government’s fig leaf. It knows that the current system does not really work very well. It does not work for small start-ups the quality control problems are enormous and the bureaucratic overhead is skyrocketing. It needs the appearance of having a market-friendly instrument. Here it is: cashing out losses and paying them back later. But as the regulatory impact statement makes clear the impact of this instrument is so small so limited that any rational policy maker irrespective of political stripe would go back to the tax credit system that this Government turned down in the first place. That based on the criteria set out in the regulatory impact statement would be the rational thing to do rather than this hodgepodge—this policy framework is more like a fruitcake; you never know quite what raisin you are going to find in it—of a baseline of a non-discretionary grant system and this overlay which is kind of like the icing of a tax loss cash-out payback system. It does not work it is high-overhead and it is confusing. Business is saying to us that it wants a simple research and development tax credit system like it was promised in 2011 and 2014 but which it is still waiting for from this Government.