Cunliffe David: Taxation (Bright-line Test for Residential Land) Bill — In CommitteeText is incorporated into the Bound VolumeCunliffe David: Taxation (Bright-line Test for Residential Land) Bill — In Committee[Sitting date: 10 November 2015. Volume:710;Page:7849. Text is incorporated into the Bound Volume.]Hon DAVID CUNLIFFE (Labour—New Lynn): Mr Chairman thank you for the opportunity and I thank my colleague Stuart Nash for his insights there. I wish to dig down into the drafting of new section 43B(1) in clause 16: “A trustee of a trust is not required to furnish a return of income for the trust for a tax year if—(a) throughout that tax year the trust is—(i) a non-active trust; and (ii) a complying trust … and (b) a trustee of the trust has made and furnished to the Commissioner in a form approved by the Commissioner—(i) a declaration that the trust is a non-active trust and that it will notify the Commissioner if it stops being a non-active trust; and (ii) a statement of such other matters …” that the commissioner may from time to time require.The issues here are quite interesting. The fact that the trustees need to seek permission in advance from the commissioner rather diminishes the purported saving in overhead that the supposed simplification was seeking to achieve. In other words it is no less work for the accountant to write to the commissioner with a declaration that the trust is a non-active complying trust than it is to write and say that it is a nil return so I guess we question whether the construction of section 43B(1) assists in achieving the stated aim of the section which is to reduce a compliance burden.In subsection (2) the plot as they say thickens because there are a number of criteria that need to be met apparently simultaneously for a trust to be deemed to be a non-active trust in section 43B(2). It says “For the purposes of this section a trust is a non-active trust for a tax year if throughout that tax year”—so that is the first point; it must be true throughout the whole of the tax year and any exception to that must be notified again implying probably more compliance than would have been required if it had simply filed a nil return—“the trustee of the trust—(a) has not derived or been deemed to have derived any income;”.So there are two parts to that subsection (2)(a): “derived” and “deemed to have derived”. “Derived” means the trust has produced income and the trustee has self-declared it. “Deemed” means that that has been inferred. I would imagine—and I ask the Minister in the chair the Hon Paula Bennett to clarify if I am wrong—some other party has inferred or deemed the trustee to have had income. So there is a grey area there about what the deeming process is who is able to deem whether they can deem for themselves whether any third parties can deem them—I think that is probably something akin to deeming with faint praise.The definition of income is not specified in the subsection which is you know the first thing one would think would need to be done. Presumably income is defined elsewhere in the Tax Administration Act but there is a very special importance of the word “income” here because the whole brightline test turns on the benefit of capital gain being defined as income if that accrues to a property that is not a farm and not a business that has been sold within 2 years and that is not lived in by the owner—or in the event that the owner has more than one property their wairua or their vibe or their feeling is that it is not the one to which they are the most attached. You can see the hornets’ nest of subjectivity that is opened up through that word “income” especially in subsection (2)(a) if the deeming provisions allow that subjective interpretation to be inferred by a third party. So I think that third party issue is something the Minister really needs to address.In subsection (2)(b)—this is an “and” provision—it must also have no deductions. In the first pass again deductions are not defined in this clause; the clause is reliant upon the general definition and case law of the word “deduction” but it does impinge on the definition of costs because any costs of sale or costs of the land that is being disposed of and thus taxed could be construed as a deduction. The tax test elsewhere is a net test in the sense that the costs for example of real estate fees of interest of any other activity—you know painting the house before it is sold rehousing the family pets you name it—are all costs against the sale and they can be deducted from the sale price in order to reach the net taxable amount. Yet here in subsection (2)(b) there is a “has no deductions” clause and I think that is confusing.The fact that something is a trust rather than a natural person or a different form of legal entity should not obviously determine the definition of deduction so it would be very helpful for the Minister to take a call and specify to the Committee whether the definition of deduction here is the same as the definition in those other parts.In subsection (2)(c) a non-active trust “has not disposed of or been deemed to”—there is that word “deemed” again—“have disposed of any assets of the trust;”. So we are talking trust assets here and the law here is requiring the trustees to certify that there have been no disposals. That should be self-evident; again there is case law around the definition of disposal. In subsection (2)(d) the trust “has not been a party to or perpetuated”—there is a lovely word—“or continued with any transactions with assets of the trust which during the tax year (i) give rise to income in any person’s hands; or (ii) give rise to fringe benefits to any employee or to any former employee.”I am just literally giving a plain English reading of the subsections of the section inserted by that operative clause clause 16 the most important operative clause in this part partly because it is almost the only clause in this part. What is clear already from this cursory romp through the jurisprudence of this one clause is that it would have been a bally sight easier for the poor old trustee to do an email to the commissioner saying “nil income” than to wade through this veritable thicket of definitional quagmire to mix a metaphor.This ain’t simple. There are any number of deemings that could trip a trustee and often trustees are working pro bono especially in family trusts. I know that there has been a great stack-up of liabilities for trustees of late in trust law and that is discouraging people from taking on trustee roles particularly family trustees.Let us turn now to subsection (3)—so we are talking new section 43B(3). In determining whether a trust complies with the requirements of subsection (2) the one we have previously exegeted we turn to paragraph (a) which says “reasonable fees paid to professional trustees to administer the trust;” which goes to the point I have just made. Sometimes trustees are in fact pro bono friends and family who administer a family trust for others. Paragraph (b) says “bank charges or other minimal administration costs totalling not more than $50 in the tax year;”. When are we going to get over the habit of writing numbers like $50 in legislation? Ten years from now $50 will be worth only $40 or at the rate of inflation with the current Government probably $35. Is the Government going to put this bill through the House to adjust for inflation?Why on earth has it put a manual amount as trivial as $50 in the legislation? Surely that is further evidence that this has been rushed through the Finance and Expenditure Committee in an inappropriate manner and that kink was not ironed out at source. It does go to the point that this whole bill is a sham. As we said in the debate on Part 1 if you were really wanting to do something about the Auckland property bubble you would not do a 2-year brightline test that people can avoid by doing it in 2 years and 1 day with more exceptions than I have had hot dinners.Subclause (3)(c) states: “interest earned on trust assets in any bank account during the tax year to the extent to which the total interest does not exceed the total of any charges or costs incurred by the trust to which paragraph (b) applies.” I do not know about you Mr Chairperson but I have got a headache reading through this subclause putting myself in the shoes of “Joe Average” who takes on the role for a friend of being a trustee of their family trust because they are given the ability to state that they have no income and so they should not have to file a tax return. But the mere process of making that statement is so much more complex than filing the tax return as a nil return would have been in the first place so why are we here? Why are we here making complexity when there was no need for any? The answer is that the bill is a shambles.