Ardern Jacinda: Taxation (Residential Land Withholding Tax GST on Online Services and Student Loans) Bill — In CommitteeText is incorporated into the Bound VolumeArdern Jacinda: Taxation (Residential Land Withholding Tax GST on Online Services and Student Loans) Bill — In Committee[Sitting date: 12 April 2016. Volume:713;Page:10397. Text is incorporated into the Bound Volume.]JACINDA ARDERN (Labour): I would like to base my contribution on Part 2 around some of the discussion contained in the regulatory impact statement because that canvasses the degree to which the Inland Revenue Department (IRD) under the direction of Ministers explores alternatives to the tool that was eventually settled on to underpin the brightline test which is the residential land withholding tax that is set out in Part 2. I think that what is interesting is in the setting out of the problem definition before the officials went out and consulted on the options that are then contained in Part 2—the problem definition that we see the Government has used in that consultation document and in the subsequent regulatory impact statement is obviously quite broad. It says: “The Government is concerned with high house prices”—something we can all agree is of major concern—“particularly in the Auckland area. … Other possible causes both on the supply and demand sides are being separately considered.”—we wait with bated breath but—“Property speculation is seen as one of a number of causes of the current prices.”So there is obviously up front some acknowledgment of the issues but there are some limitations to our ability to use an evidence-based approach in dealing with some of those issues and those limitations are included in the regulatory impact statement. It does set out that one of those limitations is of course the lack of information that we have on the exact breadth of the offshore speculator issue. We see that on page 1 of the regulatory impact statement it states: “The exact fiscal and compliance cost figures for the proposed bright-line test are not available because Inland Revenue does not currently have accurate data on the types and levels of land sales occurring or how much is collected under the current land sale rules.” So we have had to make some assumptions but I think it is fair to assume—as Labour obviously has—that the issue of overseas-based foreign speculators is significant in terms of the impact it is having which is essentially what Part 2 speaks to.The other limitation is also set out in the regulatory impact statement. It states that “The analysis in this RIS needs to be considered in light of the additional constraint faced by Inland Revenue at the present time”—which is not just a lack of data—“which is its inability to make significant systems changes in advance of the relevant stage of development of its Business Transformation programme.”So I guess my question to Minister Michael Woodhouse is on the consideration of the various mechanisms in order to underpin the brightline test which include: “Option 1:Relying on existing compliance measures … Option 2: Status quo but provide more guidance on tax obligations;”—a bit of an education programme—“Option 3: Status quo but review effectiveness of bright-line test in three to four years;”—so have a punt and see whether or not it is working—“Option 4: Introduce a withholding tax on sales of residential property made within the two-year bright-line [test].” In amongst all of those options what options were not canvassed as a result of the constraints that the IRD has articulated are as a result of the significant systems changes it is experiencing as part of its Business Transformation programme? Was there anything that was not considered because of those constraints? I am interested to know. There may not have been—we may have canvassed everything in the submission process that we are now debating in Part 2 but I doubt that would be the case because we have heard of instances before where the IRD has expressed concerns over those limitations and its ability to alter the rules under which it operates.But I do want to come to the question of compliance because the reason that we have fallen on the residential withholding tax option is that obviously the IRD has determined that other forms of compliance would be less effective. As I mentioned previously option 1 is to rely on what is existing—so the status quo—and having more guidance around obligations was dismissed. Why was that option dismissed?Well the reason that the withholding tax option in Part 2 was chosen is set out in the regulatory impact statement which says: “7. New Zealand taxes its tax residents on their worldwide income. New Zealand also taxes foreign investors on income that is sourced in New Zealand. When a foreign investor has a branch or controls a subsidiary in New Zealand tax can be imposed on the New Zealand-sourced income of that branch or subsidiary in the same way as it would be on New Zealanders. However when the foreign investor does not have a New Zealand presence it is more difficult for New Zealand to collect tax from them. 8. New Zealand’s tax system operates on the principle of voluntary compliance which relies on taxpayers understanding their tax obligations and how the wider tax system works.”—keeping in mind that we do operate somewhat of a “don’t ask don’t tell” operation here as well—“9. Foreign investors may not always have the same level of understanding as taxpayers based in New Zealand and they do not have the same level of connection to New Zealand that would otherwise create an intrinsic incentive to voluntarily comply with their New Zealand tax obligations.”I think that last statement is quite interesting—“they do not have the same level of connection to New Zealand that would otherwise create an intrinsic incentive to voluntarily comply with the New Zealand tax obligations.” I think you could apply the same rule of thumb generally where one who might use New Zealand for instance as a tax haven might also not have concern for perceptions and the reputational risk for New Zealand around their use of a New Zealand- based tax haven as well.I guess that what the IRD is pointing out there is that unless you have a domestic connection to New Zealand your sense of obligation to us—be it in your literal tax obligations or even in the reputational risk you may pose by the way that you conduct your affairs—is not top of mind.It is a reason perhaps for us to be somewhat more concerned about compliance by those who should be covered not only by the brightline test but also probably more broadly within our tax system. I hope I am not being too subtle in drawing that comparison there.I think it is a point well made in the regulatory impact statement. Actually it is canvassed in option 2 of the regulatory impact statement as well. Option 2 of course was simply maintaining the status quo but providing more information and guidance on tax obligations in relation to residential property. I am glad that option 2 was not opted for. From my perspective the idea that with a bit of a pamphlet we could assume that tax obligations would be fulfilled would I think be a bit naive. In fact that is expanded on in paragraph 42 of the regulatory impact statement. It says that “the success of this option is dependent on another major assumption—that non-compliance with the proposed bright-line test will arise from a lack of information and knowledge about the tax implications of sales of residential land.” Saying “I’m sorry I didn’t pay. I just didn’t know.”—if only that were a basis for not complying with one’s obligations I am sure many will think.It goes on to say “There will be instances where an improved understanding of the tax rules and one’s tax obligations in relation to a particular transaction may lead to higher levels of compliance.”—if only that were the case—“However there will be taxpayers who regardless of their level of knowledge will not voluntarily comply with their tax obligations.” Sadly the IRD is articulating here what many of us will know which is that just because people know about their tax obligations it will not mean that they will merrily skip to their IRD office in order to fulfil them forthwith.So there are a lot of interesting issues playing out in this paper where the IRD is freely acknowledging that knowledge is not enough and that connection to a country is not enough; in fact if anything it probably undermines our system. It has built in assumptions in this case that non-compliance is often deliberate. I am glad that the officials have done that because it is a realistic take on people’s approach to taxation in New Zealand let alone the approach of those who do not have a connection to New Zealand. So although I think that probably the option that officials opted for was the right one we would do well to reflect on the rationale for why it is that we opted for something more proactive. But I would like to highlight again that I would be very interested in having the Minister expand on whether other options were canvassed.