Cullen Michael: Taxation (Annual Rates GST Trans-tasman Imputation and Miscellaneous provisions) bill — First Reading 
Cullen Michael: Taxation (Annual Rates GST Trans-tasman Imputation and Miscellaneous provisions) bill — First Reading 
[Volume:609;Page:6653] 
Hon Dr MICHAEL CULLEN (Minister of Revenue) 
: 
 I look forward in this debate to actually speaking to the bill—unlike the position in the last debate—because there is a great deal of meat within the bill. I move  
That the Taxation (Annual Rates GST Trans-Tasman Imputation and Miscellaneous Provisions) Bill be now read a first time. 
 I shall be recommending to the House that the bill be referred to the Finance and Expenditure Committee for consideration. 
The major feature of the bill is the introduction of legislation that brings into effect New Zealand’s part in a joint Australia - New Zealand agreement to remove a tax impediment to trans-Tasman investment which we have just learnt from Mr Gerry Brownlee that the National Party opposes. 
Earlier this year Mr Peter Costello and I announced that Australia and New Zealand expected to be introducing legislation to deal with a longstanding tax problem involving trans-Tasman investment often referred to as triangular tax. The problem arises when investors in either country make equity investment in their own country for a company resident in the other country. Under current law both countries that are only tax-paid in their own country can generate imputation credits—what the Australians call franking credits—and only resident companies are allowed to pass on imputation credits to their shareholders. The shareholders in those trans-Tasman companies do not have access to imputation credits for tax that the company pays in the other country so they are effectively taxed twice on the same income. 
The legislative solution is to extend each country’s imputation system to include companies resident in the other country that want to take part and participation on the part of other companies is entirely voluntary. The bill before the House today achieves that for New Zealand making it possible for Australian companies to join New Zealand’s imputation credit rules. Meanwhile similar legislation before the Federal Parliament in Canberra will make Australian franking credits available to New Zealand companies. 
Given its necessary bilateral nature the solution to the triangular tax problem has been a long time coming. Over the years successive New Zealand Governments have tried to move things along so I am very pleased of course that we have finally progressed to the point of introducing legislation in both countries and I am pleased that Mr Costello has agreed to move this issue along in a way that previously had not been the case. New Zealand has always been seeking that movement. This long-sought change will remove an obstacle to trans-Tasman business and it is particularly fitting that it is happening in the year of the 20th anniversary of the signing of the closer economic relations agreement. 
The bill also introduces a better alignment of the GST treatment of the financial services sector with that of other sectors. This is a major change that will be particularly welcomed by the financial services sector. A wide range of transactions will be affected including the provision of loans taking deposits and trading in financial securities. When GST was introduced in New Zealand financial services were exempted because of the difficulty of including them within the rules—a difficulty that is acknowledged internationally. Being exempt from GST however can disadvantage the finance sector because it cannot recover GST on purchases related to the supply of services to other businesses which results in the overtaxation of the sector. The recoverable GST formspart of the cost of production and providers must raise the price of the services or absorb the GST cost. When they pass the cost on to other businesses those businesses face the same choice. 
The bill proposes a solution. Financial services supplied to registered businesses will no longer be exempt from GST but they will be zero-rated for GST purposes. That means that financial services will still not attract GST but providers of those services to other businesses will be able to recover GST on related purchases. Again participation in the new rules will be entirely voluntary. Registered suppliers who do not wish to take part may continue to treat the supply of financial services as exempt from GST. 
Another major change introduced in the bill ensures that GST does not unfairly disadvantage New Zealand interests at a time when we are making increasing use of electronic commerce and importing many more services than we did in the past. The problem is that under current law services purchased from New Zealand companies attract GST but similar services purchased from non-resident companies do not. That is because when GST was introduced our consumption of imported services was low so their exclusion from the tax base was not particularly distortionary. The later deregulation of telecommunications and financial services markets in New Zealand together with rapid developments in communication technology and electronic commerce opened the door to a wide range of services produced in other countries: such things as management computer and advertising services. Thus New Zealand service providers who must charge GST on services supplied in New Zealand face a competitive disadvantage. 
The bill proposes a solution to the problem in the form of a reverse charge in imports and services by GST-registered businesses such as financial institutions that would not be able to claim back the cost of the GST in those solutions. If a business requires services that would be subject to GST had they been supplied in New Zealand the recipients will be required to add GST to the price of the service. This measure will alleviate the current distortion in favour of imported services and align New Zealand’s treatment of imported services with that of most other countries that have a value-added tax or GST system. 
It will also introduce an important revenue protection measure to combat certain aggressive tax arrangements that are often mass marketed. These are arrangements that result in investors receiving more in tax deductions than the money they invest in the arrangement. Investors typically make a cash return regardless of whether the arrangement is a commercial success. A new rule would target arrangements in which investors are not at any real risk of having to repay associated loans raised for the purchase of high-value assets that diminish in value over time and the higher the purchase value the greater the tax deduction. The proposed solution in the bill is to defer tax deductions on loans to meet the criteria set out in the bill. Following initial consultation on the proposed rule its coverage has been tightened to ensure that it does not apply to genuine commercial transactions. 
The bill also introduces legislation enabling employer contribution to superannuation funds on behalf of employees earning less than $38000 a year to be taxed at a lower 21 percent rate. I acknowledge the pressure exerted by the Green Party for this measure over a number of years though that pressure was nothing like as large as the pressure exerted on the Minister and his officials to achieve this outcome. This measure is intended to reduce the over-taxation of retirement savings of low-income people and to remove a disincentive to saving. 
This is an omnibus bill covering a very wide range of activities so I do not have time in a 10-minute speech to cover all the areas available. For a detailed description of these and other measures in the bill I recommend the separate 123-page commentary on the bill as weekend reading. It has been distributed to all members. 
I do need to deal with one other matter. The bill has not had a positive New Zealand Bill ofRights vet because in common with the remainder of the Income Tax Act in certain key areas there are provisions where in effect old-fashioned definitions of a marital relationship apply rather than more modern definitions. That is in dealing with associated parties in certain connectionswe use the old-fashioned definition of marriage which can be regarded as discriminating in favour of de facto couples or same-sex couples. It is difficult to deal with this issue as a one-off in one particular amendment bill and the Government is working on full amending legislation covering the entire range of these issues some of which of course involve discrimination against some in favour of traditional married couples but it is fair to say—ironically given the views of some members in this House—that most of the current provisions of both social security legislation and tax legislation actually discriminate against traditionally married couples and in favour of de facto or same-sex couples—for example in the ability to access two single-level payments under social security as opposed to the combined married-level payments which is lower. 
I recognise this inadequacy. I am sure the select committee will want to address that and comment on it. If it finds that it is able to arrive at a solution within this area—which deals with the issue just within this area—I have no objection to that but I thinkit will find that it is impossible to deal with that within an isolated part of the Income Tax Act. The whole set of relationships needs to be dealt with across the board and work is proceeding as quickly as possible in those respects.