Woodhouse MichaelHon MICHAEL WOODHOUSE (National): I always chuckle when we are lectured by that Yoda of the House" Chlöe Swarbrick—that font of all knowledge—Simon Court: Point of order Madam Chairperson. I think that language was unparliamentary to my colleague Chlöe Swarbrick who I do work closely with on Auckland issues. CHAIRPERSON (Hon Jenny Salesa): Thank you Simon Court. You can't take offence on behalf of another member. Hon MICHAEL WOODHOUSE: That font of all knowledge on matters relating to tax law or jurisprudence. I humbly suggest my 25 years as a chartered accountant and a couple as Minister of Revenue gives me perhaps a better long-term perspective on actually the definitional difference between taxable income and capital gains. Now the Government has introduced this new nomenclature called capital income which actually doesn't have as far as I can tell—the Minister can correct me—actually a definition within the Income Tax Act. But one thing that Chlöe Swarbrick did say that I have to take issue with is that capital value growth from housing is somehow historically treated differently from other forms of capital income growth and that's not true. The Income Tax Act treats the accretion of assets for taxable purposes exactly the same or at least it did until 2016-odd when the previous Government bought in the brightline test. If one purchases shares with an intent to gain income from them usually from dividends and the share price happens to accrue in value then that value increase is not taxable. If one buys a business and the goodwill value is in that business it earns income for the owners and they pay tax on that income. But if the capital asset grows that is not currently taxable. The purpose of the brightline test is because everybody needs—particularly in residential rental property investment—to demonstrate that at the point that they purchased the property their intention was not capital gain it was income from rental. The purpose of the two-year brightline test was to say "If you sell the property between one day and two years we default to a point in the Income Tax Act where you are deemed to have purchased that asset for a capital gain." Now one can't say that actually about a five-year test; one can't say it about a 10-year test let alone a 15- or 20-year test that Treasury was advising on; and quite simply Treasury favour a capital gains tax. They realise the language can't be used with this Government but that's essentially what they were saying. They wanted a capital gains tax on everything but the family home and so there are differences. Chlöe Swarbrick also sort of danced a little jig around the likelihood that the deductibility of interest will be removed at some time in the future and again that is completely at odds with our tax framework. Our taxation framework requires businesses firstly to return all matters of taxable income but then allows them to deduct from that income those legitimate business expenses incurred in the gaining of what then becomes taxable income. Interest is paid by property developers. It's paid by the plumber who goes into debt to purchase her business. It's paid by Rocket Lab if they have gone to the bank. Why on earth from a philosophical perspective we would not allow somebody to deduct the full cost of their business expenses simply because they are doing pretty well out of that business is fundamentally wrong. Now Mr Brownlee was modest—overly modest in my view—in his description of the supply side issues related to house price inflation because he knows more than any what increasing supply will do for house price inflation. He did it in Christchurch. He got rid of the urban limits after the earthquake. The only place in New Zealand where house price inflation is moderate is in Christchurch. Why—because we had such great supply. Now what worries me about this is if by some miracle the Government achieves its goal of moderating house price inflation to something equating the Consumers Price Index then the very fiscal drag and bracket creep that we were talking about in Part 1of this bill will come in because inflation will erode the value gain the capital gain over 10 years and therefore a person would have to pay tax even though they were not materially better off. So all of this is predicated on the Government not being able to control the house price tiger that it's got by the tail. Madam Chair I'll just have a little extra. I know my time's up but I've just got about 30 seconds more in this question. CHAIRPERSON (Hon Jenny Salesa): I call the Hon Michael Woodhouse.Hon MICHAEL WOODHOUSE: So there is a question to this and that is: did the Government get advice on whether or not inflation should be taken account of when it considers the marginal tax to pay on the sale of a property within 10 years? Forgetting the interest problems—and we'll deal with that later in the year—the jurisdictions around the world deal with this by having a lower capital gains rate. Fifteen percent is usually used as a sort of a catch-all arbitrary rate that says that well there's a time value of money. The longer one keeps the asset inflation will erode the capital gain. There's also expenses that can be incurred of a capital nature that aren't included in the wash-up so let's just call it 15 percent rather than the top marginal rate because this is punitive. If we succeed in getting house price inflation under control this will be unnecessary and actually it will work—it will have completely the opposite effect that the Government intends it to if it doesn't allow for the time value of money."