Cullen Michael: Taxation (Annual Rates Venture Capital and Miscellaneous Provisions) Bill — Second Reading 
Cullen Michael: Taxation (Annual Rates Venture Capital and Miscellaneous Provisions) Bill — Second Reading 
[Volume:621;Page:16397] 
Hon Dr MICHAEL CULLEN (Minister of Revenue) 
: 
 I move  
That the Taxation (Annual Rates Venture Capital and Miscellaneous Provisions) Bill be now read a second time 
. The Finance and Expenditure Committee has considered the bill and recommended a number of changes some of them minor to ensure the legislation operates effectively. The bill confirms the annual rates of taxation and that is probably the only part of the bill that is reasonably significantly controversial. The rest of the bill is pretty widely supported. Some would argue that it should go further in some respects. I do not think anybody argues that changes should not occur. 
The bill removes the tax barrier to unlisted New Zealand companies gaining access to offshore private equity including venture capital. Private equity investments encompass everything from the funding of new companies—the early expansion capital—to management buy-in and buy-out transactions for established companies. Investment is usually into unlisted companies. At present there are no special tax rules for venture capital investment so investors who purchase shares in an unlisted New Zealand company may be taxed on any gains in accordance with ordinary tax concepts. If they hold the shares on revenue account they will be taxed on their share profits. That could create uncertainty for non-residents who may be contemplating venture capital investment in New Zealand. 
The changes proposed in the bill are targeted at non-resident venture capital investors who are considered sensitive to the imposition of New Zealand tax. They are usually investors who are tax-exempt in their countries which means that they cannot claim tax credits there or make use of them with the New Zealand tax they have paid. A number of institutions that have invested in venture capital internationally such as US pension funds are in that situation being tax-exempt in their home countries. The bill introduces venture capital rules that are similar to Australia’s and that should help us to compete effectively with Australia for venture capital investment. 
The main change introduced in the bill is that certain non-residents who sell shares in certain unlisted New Zealand companies will be exempted from New Zealand income tax. The change will apply to foreign investors who are resident in one of 28 countries with which New Zealand has a double tax agreement and who cannot claim tax credits for tax they pay in New Zealand. It will also apply to foreign funds that invest on behalf of foreign venture capital investors who are generally exempt from income tax in their own countries. The committee has recommended extending the second aspect of the exemption to foreign funds established in one of 28 countries with which we have a double tax agreement. The original proposal limited the exemption to funds established in countries representing our main trading partners. The change will remove tax barriers to a greater range of venture capital investment. 
Another important feature of the bill is the introduction of changes to improve the legislative framework within which disputes between taxpayers and the Inland Revenue Department are resolved. The current framework for resolving those disputes introduced in 1996 was established to ensure that tax disputes are handled fairly efficiently and quickly before they end up in court. The changes introduced in this bill are the result of the Government’s post-implementation review of the legislation to see if it is achieving that. 
Several of the changes proposed in the bill either ensure that the disputes process is completed as the legislation intended or due to the costs involved re-preparing the necessary documentation. Others affect the timing of various stages. The committee has recommended a number of changes to clarify the proposed amendments. For example a proposal to improve the rules where Inland Revenue may exceed the 4-year statute bar for disputes is being removed from the bill for further consultation. 
The bill contains amendments to protect the tax base against transactions that allow deductions to what are in substance repayments of loan principal contrary to policy intent. Some concerns were raised in submissions that normal commercial leasing transactions that do not raise tax base concerns could be inadvertently affected by the amendments. Therefore the committee has recommended a more targeted approach to ensure that the legislation operates as intended. 
 The bill also deals with the tax treatment of replacement plantings of fruit trees and vines following consultation with the fruit-growing industry. It will give the industry certainty about when deductions can be claimed for orchard plants and provide amortisation rates that reflect the useful lines of different kinds of plants. The changes are intended to ensure that the most commercially desirable varieties are used. The Finance and Expenditure Committee has recommended that wine growers be excluded from the proposed treatment at the request of the wine industry and that they continue to operate under the existing tax rules for vines. 
The bill introduces the first of a series of changes as a result from the publication last year of the Government discussion document “Making Tax easier for Small Businesses”. There is a 6.7 percent discount for self-employed people who make voluntary payments of income tax at any point during their first year of business to reduce the financial strain of paying 2 years’ tax in their second year of business. The measure has enjoyed a relatively wide measure of support both in industry consultation and in submissions on the bill and I emphasise of course it is a voluntary measure by business. 
The main change recommended by the committee is that the proposed measure be tightened to prevent it from being misused. During the committee’s consideration of the bill I asked it to consider the inclusion within the bill of changes proposed on two Supplementary Order Papers. The committee has recommended that the provisions on the Supplementary Order Papers subject to minor amendments be incorporated into the bill. The first deals with a legislative loophole through which New Zealand residents receive income from Australian unit trusts that is taxed neither in New Zealand nor in Australia. The changes will close a technical gap in the way the New Zealand dividend tax rules operate. The committee recommended some useful changes including limiting application to offshore unit trusts. 
The second Supplementary Order Paper is in response to the February storms and floods in the lower North Island and deals with issues such as the tax treatment of trading stock that was donated because of the disaster. The committee has recommended extending these amendments as well as the disaster relief provisions enacted in March to taxpayers affected by storms in the Bay of Plenty in July. The March legislation enacted under urgency as members will remember gave the Inland Revenue Department greater flexibility in dealing with business taxpayers who were badly affected by the disaster and was part of a Government package of relief measures for the agricultural sector and wider community. 
Those are the main changes the committee has recommended to the proposed legislation contained in this bill. There are several other measures to which the committee has recommended no major change so I shall not describe them here. I want to thank the committee for its careful consideration of the bill. I commend its report to the House and I commend the substantial improvements in this bill in the taxation regime. I have no doubt that most of the debate will concentrate on why we should lower tax rates. I simply remind the public that it is quite a simple issue: if one wishes to lower tax rates one either lowers expenditure or one will face higher interest costs as a consequence. We have seen a recent election fought on the issue of higher interest rate costs so I invite the Opposition to propose them over the coming period of time.