Collins JudithTAXATION (ANNUAL RATES FOR 2016-17 CLOSELY HELD COMPANIES AND REMEDIAL MATTERS) BILLSecond ReadingHon JUDITH COLLINS (Minister of Revenue): I move That the Taxation (Annual Rates for 2016-17 Closely Held Companies and Remedial Matters) Bill be now read a second time. This technical tax bill continues the Government's focus on improving strengthening and updating our tax rules so that they continue to work well for taxpayers and for the Government. This is a large and challenging tax bill. Many of the measures it proposes are complex and address the more technical parts of our tax rules and have in the main been welcomed by the private sector. The private sector is generally supportive because it recognises that we need to ensure that the tax rules continue to be fit for purpose. Tax rules must be responsive to change they must work well in practice and compliance costs must be minimised. The Government believes that these principles are vital for the health of our tax system by promoting voluntary compliance and ultimately contributing to a stronger economy.There are four main groups of changes in this bill. To recap briefly the first group of proposals are intended to simplify the look-through company rules and the dividend rules as they apply to closely held companies in order to reduce compliance costs for these taxpayers. Although closely held companies typically have just a few shareholders they are a significant proportion of the total number of companies in New Zealand. Look-through companies are in the same way as a partnership of individuals looked through for tax purposes. Income and expenditure is attributed back to owners and taxed at their personal tax rates rather than at the company tax rate. It is important that the tax rules apply as intended and that tax as far as possible has little impact on a business owner's decision making. Therefore the proposals in this bill aim to ensure that the decision to convert a small business to a company is not driven by tax considerations. The proposed measures aim to simplify the current rules to reduce compliance costs and ensure that the rules remain robust and true to their intended purpose. They include addressing a number of complexities raised through consultation with the private sector as well as proposals to tighten the eligibility rules for an entity electing to become a look-through company. The result will be a much more workable set of rules and the removal of some areas of overreach will make the outcomes fairer for taxpayers.In its consideration of the bill the Finance and Expenditure Committee made an important recommendation to include a transitional rule for look-through companies. This rule allows those companies that will lose their look-through status as a result of the changes to the eligibility criteria to be able to transition to ordinary companies without immediate tax consequences. This change will further improve the fairness of the rules.The second group of measures aims to bolster the rules around the tax treatment of interest earned in New Zealand by foreign lenders. Changes are therefore proposed to the non-resident withholding tax and approved issuer levy rules. They ensure these taxes apply consistently to transactions that are similar in economic substance. They include changes to the non-resident withholding tax rules to ensure they apply as intended to related-party debt or arrangements that are equivalent to related-party debt and correcting anomalies relating to branch structures which can be used to remove the requirement to withhold non-resident withholding tax or pay the approved issuer levy.The third group of measures proposes various amendments to fine-tune the GST rules and ensure they continue to work as intended. They include taxpayer-friendly changes such as enabling businesses to deduct GST associated with the costs of raising capital and allowing partially exempt businesses to use an alternative apportionment method. There are also changes to fine-tune the rules around the zero-rating of services provided in connection with land in New Zealand.Finally the fourth group of changes proposes a large number of mainly technical amendments. Although mostly remedial in nature these measures are considered by the private sector to be of major importance to make sure the tax rules work well in practice. They form part of the Government's ongoing work to ensure that the tax rules are clear and apply as intended and that they do not impose unnecessary compliance costs on taxpayers.The bill also includes a number of taxpayer-friendly measures to promote greater fairness and certainty in the tax rules. Proposed changes to the debt remission rules for example address a problem that can arise under the current rules when a debt is remitted between associated parties. Debt remission refers to the extinguishing of a borrower's or debtor's liability by a creditor. The reduction of the liability is treated as taxable income because it increases the wealth of the debtor. But when the creditor is associated with the debtor the creditor is denied a bad debt deduction resulting in income to the borrower but no deduction to the creditor. The bill proposes to correct this asymmetric result by treating the debt as being fully repaid when a debt is remitted between related or associated parties. The proposed changes follow consultation with the private sector in February last year and are part of the Government's efforts to ensure fairness across the tax system.I would like to thank the Finance and Expenditure Committee for simplifying and clarifying the legislation that codifies these rules. This will be welcome news for group companies in corporate New Zealand as well as smaller mum and dad partnerships or businesses.Other changes proposed in the bill include amendments to improve the consistency of income tax legislation with insolvency law correct an overreach of the current land tainting rules affecting council-controlled organisations ensure that the tax pooling and life insurance business rules work as intended and ensure that the Working for Families tax credit rules work correctly.Fourteen charities are to be added to the list of donee organisations with overseas purposes in schedule 32 of the Income Tax Act 2007 which means donors to those charities will be eligible for tax benefits on their donations from 1 April 2016.Finally the bill sets the annual rate of income tax for the 2016-17 tax year. Many of the measures proposed in this bill have been developed through open consultation with the general public and private sector groups. This is a particular strength of our tax system and helps to ensure that tax and social policy changes are well thought through and that they will work well in practice. Further amendments have been recommended by the Finance and Expenditure Committee and for these I acknowledge and thank the committee members for their close attention to the technical detail of this complex bill. Briefly those recommendations include amendments to simplify or clarify the original purposes where this is possible. The result will be greater coherence across proposed changes and reduced compliance costs for taxpayers where possible.I would like to thank submitters whose feedback was considered by the Finance and Expenditure Committee. The bill has been improved by that feedback. In addition I wish to advise that I shall introduce Supplementary Order Paper (SOP) 261 at the Committee of the whole House stage. This SOP will introduce practical measures that will provide relief for people affected by the recent Kaikōura earthquake and subsequent aftershocks. It will ensure that businesses are not faced with an unexpected tax liability as a result of receiving replacement insurance proceeds on destroyed capital assets. This rollover relief in effect replicates a measure that the Government provided for Canterbury businesses. The SOP will also contain a number of changes of a consequential remedial nature to ensure the legislation operates as it is intended.I think it is fair to say that we live in a very dynamic period of technology-driven change. Every day there are constant challenges and opportunities to manage our affairs and do business differently. It is important that our tax system remains current and in tune with these changes. At the same time the tax system must be and be perceived by New Zealanders to be fair and coherent. The proposals in this bill have been developed with those very important objectives in mind. I commend the Taxation (Annual Rates for 2016-17 Closely Held Companies and Remedial Matters) Bill to the House.