Taxation (Annual Rates Business Taxation KiwiSaver and Remedial Matters) Bill — In Committee 
Taxation (Annual Rates Business Taxation KiwiSaver and Remedial Matters) Bill — In Committee 
[Volume:644;Page:13713] 
Tuesday 11 December 2007 
( 
continued on Wednesday 12 December 2007 
) 
Taxation (Annual Rates Business Taxation KiwiSaver and Remedial Matters) Bill 
In Committee 
Debate resumed. 
Part 2 Amendments to Tax Administration Act 1994 ( 
continued 
)  
Dr the Hon LOCKWOOD SMITH (National—Rodney) 
: 
 Part 2 as I mentioned when we were heading towards closure last night covers the amendments to the Tax Administration Act 1994. The main set of issues in Part 2 in respect of that Act relates to compliance and this is obviously very important because New Zealand’s tax system relies on voluntary compliance. We do not have a huge army of inspectors out there going around inspecting all employers to see that they are complying with our income tax requirements in relation to PAYE or to our GST requirements. As a PAYE taxpayer and a GST taxpayer I do my own returns. One does get checked from time to time but the system essentially relies on voluntary compliance and therefore on a certain amount of goodwill because it is impossible to check every taxpayer. That is where the provisions in Part 2 are so important. 
There are three clauses in Part 2 that in particular cause concern. The first of them I mentioned last night—and I will not go over it in full detail again this morning—is clause 184 “Unacceptable tax position”. I mentioned last night that in 2006 Parliament tried to fix this problem. Parliament accepted that the way in which the unacceptable tax position provisions were applied was unreasonable unfair and in fact did not lead to sensible voluntary compliance with our law. So in 2006 Parliament amended the law to try to give the commissioner the opportunity not to impose unacceptable tax position penalties on people where it was unreasonable. The net outcome of that was unsatisfactory. We did not succeed in 2006 in fixing up the unacceptable tax position provisions. So subsection (2) in clause 184(2) makes it very clear that GST and withholding tax payments will henceforth be excluded from unacceptable tax position provisions leaving only income tax in there and the thresholds are changed for income tax to try to make that a little more fair as well. 
But the key issue I was referring to last night is that clause 184(3) makes these new provisions come in from 1 April 2008. National is arguing that this is unreasonable. They should be backdated to when Parliament tried to fix the problem before. If we believe that in fact our effort to fix it in 2006 did not work we should fix it now and backdate it to when Parliament wanted the change. Parliament wanted the change in 2006 so the amendment I have tabled amends clause 184(3) to replace 1 April 2008 with 1 April 2006 to make this clarifying provision come in from when Parliament intended it should. 
I covered that in detail last night so I will go on to the next issue which relates to clause 188 “Reduction in penalty for voluntary disclosure of tax shortfall”. Again this is very important because as I said our system relies on voluntary compliance. Therefore it is really important that taxpayers when they realise they have done something wrong actually tell the Inland Revenue Department that they got it wrong that they disclose to the department they made a mistake and that they pay the additional tax required. That way we collect more revenue. It is really important that when people make these voluntary disclosures they do not get penalised for it because if they get excessively penalised for it they will not do it; they will try to cover up their mistakes and get away without paying the extra tax. 
The issue here is that clause 188 reduces the penalties for voluntary disclosure and that is good; we all agree with that. But again the provision is coming in from 17 May 2007 and all the professionals feel that again because we tried to deal with this unsatisfactorily in 2006 it should be backdated to when Parliament tried to fix this problem and failed. 
So there are two key clauses in relation to which Parliament tried to fix the problem last year and it is accepted that we failed because the legislation is back in the House now. We are actually trying to fix up what we tried to fix last year because when we tried to fix it last year it did not work. In the meantime people have been caught through the commissioner not applying the law in the way Parliament expected that the commissioner would. We expected the commissioner to do certain things but it did not happen. Hence I have put forward these two amendments to backdate these provisions to when Parliament intended that the change should happen. 
Hon PETER DUNNE (Minister of Revenue) 
: 
 I will take a brief call to respond to the points that have just been made because I think the spin that has been placed on the events of the last couple of years by Dr Smith does not accurately reflect the position. Let me rehearse the situation as it occurred and I speak with some long-term interest in this having been the Minister of Revenue at the time the original voluntary disclosure disputes and penalties regime was put in place over a decade ago. When I returned to this portfolio after the last election the issue of the way in which the voluntary disclosure rules and unacceptable position rules were working was raised with me. The upshot was that in a similar piece of legislation to this last year I introduced what I said at the time was an interim measure—that we would work on a detailed solution which is the solution contained in this bill. 
So I do not accept the proposition that what we did then we are now correcting because it had not worked. What we did then was put in place an interim solution recognising all the way through that a more detailed solution would emerge and that solution is contained in this bill. The consequence of that in terms of the commencement dates aside from any administrative complexity that going back to 2006 might give rise to is that the dates more appropriately take effect from the time of the passage of this legislation or in relation to the provisions of clause 188 from the time of the Budget announcement in May this year. 
I acknowledge that Dr Smith has put forward his amendments and I acknowledge the fact that he had the courtesy to come and discuss those with me sometime yesterday. I appreciate that. I had officials consider those amendments and give me some advice about them and we are satisfied that a couple of issues arise. Firstly there are practical difficulties with the timing change; there are revenue implications that are potentially significant. The second issue is that we are not persuaded that the situations he sets out in particular with regard to clause 188 are in fact desirably changed by legislation or not even provided for in the current provisions. So we are not disposed to support those amendments but I acknowledge the way in which he brought them forward and I appreciate the fact that he had the courtesy to alert me to them in advance and enable us to give some consideration to them. But I put on record that the genesis of this is not a recognition that what we did last year failed; the genesis of this is that what we did last year was to say that there was an interim regime pending the development of more final rules which are given effect to in this bill. 
CHRIS TREMAIN (National—Napier) 
: 
 I take the opportunity in this urgency debate to speak to Part 2. This part specifically deals with amendments to the Tax Administration Act 1994. I want to use my 5 minutes to ask the Minister in the chair the Hon Peter Dunne about the way in which this policy will be introduced particularly in respect of clause 175 with the insertion of section 139AAA and the new proposals around the late filing penalty for GST returns. I know that it is a matter of some interest or more than some interest for many constituents around the nation. I know that Parekura Horomia’s constituents throughout his electorate will be interested in this particular issue and I look forward to the Minister taking a call about the late filing penalty for GST returns. Maori businesses and Pakeha businesses will be impacted by this will they not Mr Parekura? 
Hon Darren Hughes 
: Mr Parekura! 
CHRIS TREMAIN 
: Mr Horomia. They will be impacted by it. Many small businesses around this country deal with taxation and the taxman. They know that dealing with taxation—the filing of GST returns fringe benefit tax returns PAYE returns resident withholding tax and provisional tax—creates large compliance costs for them in terms of getting their returns done. The key issue is whether we are creating a regime that will enhance the provision of these returns or will exacerbate the provision of these returns. That is the point I am making. Although we write into legislation the particular penalties that may accrue here we are actually changing the system quite dramatically from what it was. 
In clause 175 which inserts section 139AAA into the Tax Administration Act we are changing the system so that a business that is working on an invoice basis will be charged $250 if it has a late return. If it is working on a payments basis or on more of a cash basis then it will be charged $50 for the late filing of a return. This is particularly in relation to GST. That changes the system somewhat from what it is currently. Those late filing charges have not been placed on taxpayers when they put in their returns but there has been an assessment of the revenue that would be taken. In that regard the Inland Revenue Department has not been lenient—“lenient” would probably not be the correct term—but it has been helpful. I know of certain situations where businesses—for example my own business—have put in tax returns and for one reason or another they may have been late. Often in small businesses that happens accidentally not because there is any purpose to try to defraud the department. I remember one time when on holiday I asked someone else to do a particular return for me and it was just never done. In those situations the department has been lenient and has come back and allowed us to put in the return as long as it was within a particular time. With these fines we will see a fine of $250 or $150—whack! This will happen as soon as a business is late in putting in a return. 
I just want to know from a policy point of view how the department will deal with those late returns. I know that small businesses around the nation will be interested in this matter. Minister Horomia’s constituents will be interested in it as well so I ask the Minister in the chair Peter Dunne to take a call on that. 
I guess the key point I am making is that although we may relax penalty regimes or change them to encourage compliance and try to decrease compliance costs it will do nothing if the Inland Revenue Department is pernicious in throwing these fines into place and starts getting small businesses’ backs up. These people pay most of the tax in this country. Not only do they pay provisional tax fringe benefit tax and GST but also they employ the majority of people in this country. Those employees pay a significant proportion of tax in this country and on that basis it is very important that the Inland Revenue Department stays onside with small businesses. They are a key part of our nation and that is why I am asking how the department will deal with the situation where a return is late. Will it be Draconian in the implementation of the $250 fee for a person working on an invoice basis and will it be hard on a taxpayer on the $50 basis? 
KATRINA SHANKS (National) 
: 
 It is my pleasure once again to speak on Part 2 of the Taxation (Annual Rates Business Taxation KiwiSaver and Remedial Matters) Bill. When looking at this bill we see it is a very very comprehensive bill. The thing we have to think about when putting together legislation like this is that we should be putting together legislation that is streamlined that is in accordance with all the other tax legislation and that flows nicely instead of putting together piecemeal legislation that will then create complexities for the people who use it. Although the Inland Revenue Department gives out booklets to guide business people and anybody else who has to use this type of legislation at the end of the day there has been a history of those booklets having errors in them. 
The electoral funding legislation is an example of a situation where the Electoral Commission put out booklets telling people about its summary of that legislation and how it would impact on their lives and their returns only to find its interpretation was different from the law. The commissioner’s interpretation was different from the law itself. The onus is on the person concerned to go back and understand the law and not to rely on those booklets which are guideline booklets for people. 
My concern is that this tax legislation is very very complex and we cannot really expect Joe Bloggs on the street the dairy owner the owner of the chemist shop or the person who owns the garden centre people who are really busy in their businesses to go ahead and read this legislation because they cannot rely on the guidance provided by the Inland Revenue Department in the booklets that it gives out. At the end of the day the onus is on people who are filling out returns to get things right themselves and to understand the legislation. So it is very important that we try to keep the tax legislation as streamlined as we can because it does impact on most New Zealanders. It is important that it is not complex. 
I become concerned when I see big bits of legislation—and the legislation before us is massive—and also big Supplementary Order Papers around the legislation. That means that maybe the legislation has not had as much discussion as it should have had if there are such big Supplementary Order Papers supporting it. I would like to think that discussion is available. For example there was obviously not enough discussion around the finance lease provisions of this legislation when it was put out. I am hoping that the Government has a good strategic view on that issue and that we have a vision for where we want to be with regard to taxes in the future and a view on whether this legislation is a good vehicle to take us to where we want to be. 
I would like to talk specifically to one measure in Part 2 of this legislation today: new section 34B inserted by clause 153 which is about tax agents. Tax agents play an extremely important role in terms of getting people’s tax returns right to begin with and also in ensuring that if they get them right then the Government and the Inland Revenue Department are maximising their net revenue because they know they are capturing all the revenue they should get. As time has gone on tax agents have become more and more important in our society as the tax legislation has become more and more complex. Now the onus is on those accountants—it is normally chartered accountants who are tax agents; that is not always the case but quite commonly they are chartered accountants—to have a good understanding of this legislation. Also they are now accountable for the returns that they put in. If people represent themselves as tax agents and as professionals they are liable I do believe for any errors in those tax returns. 
So when we are talking about penalties I say it is important that this legislation gets the provisions on tax agents and the listing of tax agents absolutely right. The legislation states in new section 34B(2) inserted by clause 153 who can be a tax agent. It can be a person who “(a) prepares the returns of income required to be furnished for 10 or more taxpayers; and … a practitioner carrying on a professional public practice”. A person providing that information also has to update the commissioner about the changes around him or herself. The Law Society has brought out a really good submission on clause 153 where it talked about its issues in relation to that. When it talked about new sections 34B(2)(b) and 43B(12)(c) it talked about the Tax Administration Act and how it should apply to the size of an organisation so that the obligation to provide an updated list of partners or members is relaxed in the case of organisations over a particular size. 
In big organisations where a tax lawyer or a tax accountant does the returns for that big organisation or in a chartered accountancy practice where returns are being done for many many organisations there can be a very high turnover in staff in the organisations themselves where those people work. Part of the requirement here is for the tax agent to provide details of shareholders of closely held companies partners in partnerships and members of unincorporated entities. It may not be appropriate in all cases to go back to the commissioner and keep on telling the commissioner about the changes in those organisations. In some instances changes could be occurring nearly weekly. That is a massive administration nightmare for some of the big organisations. It is also another form of cost for the people who use those organisations because every time the organisation fills out a new form more time is spent on doing administration the cost of which is then passed on to the clients. That is particularly the case in large partnerships where partner turnover is such that lists of partners would be required to be updated several times a year. 
The submission from the Law Society pointed out that maybe we should include a size threshold in new section 34B(12) or enable the commissioner to dispense with those requirements in certain cases having regard to the size of the organisation. When looking at tax agents I think it is important to see the whole range that is offered there. We need to have provisions in this legislation that do not make it more onerous on those tax agents moving forward. 
The other area that the Law Society talked about was the type of foreign investment fund and the determination on the type of interest in foreign investment funds and the use of the fair dividend rate model. That is in clause 165 of the bill which seeks to repeal sections 91AAO(2) and 91AAO(3) of the Tax Administration Act 1994 and to repeal their effect on a retrospective basis. In this clause we are talking about a retrospective basis going back to 2006. That is a long way to go back in legislation considering we are coming into 2008. Section 91AAO(2) provides the principles by which the commissioner would be guided when issuing determinations as to the availability of the fair dividend rate model. The society disagreed with the proposal to repeal that provision though it did accept that there might be an alternative form to amend it. 
The repeal of that provision would allow the commissioner to determine whether the fair dividend rate method applied to an investment without giving taxpayers any basis for reviewing that decision. The commissioner would not be required to follow the published criteria. If criteria were published there would be an amendment as the commissioner saw fit. If the fair dividend rate method has any validity then the principles as to when it does and does not apply must be capable of expression. Those principles should be expressed in section 91AAO(2) of the Tax Administration Act so that the commissioner is not left to make and change the law in that area at his or her own discretion and without principled guidance. 
I think it is also important to look at the penalties around people when they are doing their voluntary tax because tax is voluntary. As my good friend beside me Chris Tremain from Napier said many many people do make stupid mistakes and normally they are just stupid mistakes—they are an error. It is really important to allow the Inland Revenue Department to keep having some discretion so it can go in and say someone is a good taxpayer and it knows he or she has made a mistake. The inputs may have been put in the outputs and the outputs in the inputs by mistake because the schedule was accidentally upside down in the spreadsheet when the taxpayer was compiling it. Many people do that. Many people do not have accounting systems in their small businesses and they run things off spreadsheets all the time. It is easy to look at a revenue line and an expenditure line and to put inputs and outputs in the wrong way around. It is actually really really simple to do that in a small business. 
CRAIG FOSS (National—Tukituki) 
: 
 I welcome the welcome from those members on the other side and I would like to note that we are under urgency at the moment. The only good thing about urgency is it gets the members on the other side of the Chamber to work before lunchtime. I say good morning to Mr Swain in particular and I am sure my fellow Finance and Expenditure Committee members will comment on that one later. 
Part 2 deals with the nuts and bolts of this legislation although as I noted last night it is a moving feast. I presume it will not change much from the version for which we have had notice in total of not even 12 hours yet which as I have noted quite frankly I find a disgrace and not a good look for Parliament at all. 
Part 2 talks about tax credits tax rebates etc. and I think it is important to note two things. The attraction of a tax credit a tax rebate be it a research and development credit or be it a rebate as mentioned in Parts 1 and 3 and on Supplementary Order Paper 167 is that the higher the tax burden the more attractive are rebates and credits and special favours. As previous speakers have noted around various bills covering KiwiSaver taxation etc. many submitters to the Finance and Expenditure Committee are now saying essentially “me too” because they would like a share. 
I think it is important also to note that the Inland Revenue Department has had a lot to do with the formulation of this bill and it will be administering it and the Minister of Revenue is in the Chamber and to note two of the key points of the “desired future” of the department. The second major point—and there are five of them—is that the Inland Revenue Department’s desired future is: “We make it easy for customers to get it right and hard to get it wrong.” Well after I do not know how many pages of a bill plus the Supplementary Order Papers I think that is around the wrong way at the moment. The redundancy rebate was announced yesterday—in fact the Minister himself talked about a simpler less complex regime. Essentially he argued for a flat tax on redundancy payments but we will talk more about that in Part 3. 
I also note that Dr Lockwood Smith’s Supplementary Order Papers tried to address issues where that regime is not made easy. Also the fifth point in the “desired future” of the Inland Revenue Department states: “We are professional approachable effective and efficient.” 
I have talked about a few of the clauses in Part 2 particularly clause 147 which is about the keeping of business records. The majority voted for a change to the heading to section 22 in the principal Act from “business records” to “business and other records”. On a first look that is fair enough. Perhaps it is a modernisation. It is a different way of keeping records or is it spreading the tax matrix even wider and higher and longer and deeper? In fact what are “other records”? To me that reads as: “Just hand over any all and total information about your relationship.” particularly as it concerns superannuation contribution resident withholding tax rules. 
We have had a recent example of the Inland Revenue Department putting the onus on and increasing the cost structure—and the Minister touched on it before—around the fair dividend rate changes of last year. He mentioned that there were worries at the time that the earth was going to freeze over etc. Actually the costs have gone up because the onus there was that the record keeping had to go back to the year dot in order to claim the $50000 de minimis for the various fair dividend rate issues in the earlier taxation bills. 
Clause 147C which inserts a new section 28B into the principal Act again puts the onus further down the track where the investor again changes to the portfolio investment entity regime: “Investor to advise portfolio tax rate entity of investor’s tax file number”. Again on the face of it most people accept that. I think it is on our bank statements now. But actually must we do that? There are already provisions. There is a 45c tax rate to be charged if people do not do that—it is the non-declared tax rate and tax code. I do not quite understand why that might be there. Perhaps there is a simple answer and the Minister could address it. 
Hon PETER DUNNE (Minister of Revenue) 
: 
 I will respond briefly to a couple of the questions that have been raised. I want to go back to Dr Smith’s comments earlier. I have now received some information about the interim measures that were put in place over the last year which he may be interested in. I am advised that since the legislation was passed last year the commissioner has received some 604 applications not to apply penalties and of those 604 applications 393 have been agreed to. That is about two-thirds in the year to June 2007. It is clear contrary to the assertion that has been made that the interim measures actually have worked out extremely well. If two-thirds of the applications for relief have been agreed to then I think that is a pretty high hit rate. I think it sets a good platform for the changes that are contained in the current bill. 
Mr Tremain asked some interesting and valuable questions about the new GST filing rules. Just to refresh the point on this I note that we are moving from a system where at the moment effectively a penalty is applied to the principal outstanding to one where in certain circumstances a fee of either $50 or $250 becomes payable. The concern he was raising was related to how arbitrary the application of those fees would be. In other words could we have a situation where at the moment under the current regime that amount might be added to principal and take some time to be resolved but a flat regime of specified amounts could apply immediately? 
I want to assure the member of a couple of things. Firstly the way this regime will work in practice is that where a taxpayer clearly is in error through the employer monthly schedule then the Inland Revenue Department will advise that person that the GST payment is late and that subsequent breaches will be penalised. The late filing penalty will be imposed on any returns that are filed late in the 12 months following that first breach. So if all the returns are on time then the process kicks off next time around. So I want to assure him that the concern he expressed as I understood it related to whether the removal of the current regime and its replacement with a flat fee would mean that people would simply be stung like an instant traffic fine. The answer is no. They will receive a warning and if there is a breach for the second time within that 12-month period then those fees will apply. 
I again want to make the point that this change is really designed to simplify the process to make it easier for people to comply and to get away from a situation where the way in which the current rules apply often means that the debt imposed is much greater than simply having a fee regime. But we are not going to turn the Inland Revenue Department in this instance into a set of GST traffic cops who go around stinging those who fail to meet that first date. There will be that warning period then the follow-up if the breach is repeated within the 12-month period. 
Dr the Hon LOCKWOOD SMITH (National—Rodney) 
: 
 I appreciate the advice the Minister has just given us about the situation in respect of unacceptable tax positions and shortfall penalties. But I might say to this Committee that the concern about backdating the provisions in this bill is not just something that the Opposition has dreamt up. There are many in the profession who believe it should be backdated to 2003 and National has simply said that that is unreasonable and that we should go back to when we tried to fix it up. I accept what the Minister has said—that the effort to fix it up last year has improved the position for many taxpayers. But this is a balance of the Government’s desire to keep maximum revenue and its responsibility to be fair to taxpayers. The changes that are made in this bill are designed to try to make the system more fair to taxpayers and it therefore should be accepted that what will be left now from 2003 on—but we suggest backdating it to only 2006—is that there will be some taxpayers left who will be treated unfairly by the way this Parliament sees this situation today. That is not right. 
I want to go on because we are running out of time I sense. My most important amendment is in fact to clause 191. If we look at clause 191 we see it looks very simple. It is simply headed: “Section 141KB repealed”. So it is important that members understand what section 141KB is in the existing Act. What section 141KB is all about is that it gives the commissioner discretion to cancel some shortfall penalties. That was the provision we brought in to try to deal with some of these problems. But what section 141KB gave the commission to do was to deal with issues covered by section 141B. Now section 141B is the section that deals with unacceptable tax positions. So what is being repealed here is section 141KB which gave the commissioner discretion to deal with what were considered to be unacceptable tax positions. 
The amendment I want to make is this: none of the provisions in this bill deal with simple mistakes. It is what my good colleague Katrina Shanks was talking about. She is an experienced person in this area and she knows that people filing tax returns can make simple mistakes. Let me give the Committee an example of what I mean. Some taxpayers pay the correct amount of tax but file the wrong tax return. They have made a mistake. According to the tax returns filed they have not paid the correct tax because according to the return they were meant to have filed they have paid no tax. Those taxpayers have paid all the tax they should have paid but filed the wrong return so that cannot be recognised as the correct tax paid. What happens? The taxpayer gets penalised for making a mistake—in fact the correct terminology is “not taking reasonable care”—which is covered in section 141A. 
My amendment to clause 191 simply retains the title of section 141KB—“Discretion to cancel some shortfall penalties” and would enable the commissioner to deal with unfairness in both unacceptable tax positions and not taking reasonable care—in other words deal with issues that arise under sections 141B and 141A of the existing Act. My amendment would enable the commissioner to use the discretion when faced with a clear mistake—when someone has paid the full amount of tax owing yet has done something wrong technically. The officials look a bit puzzled. The Institute of Chartered Accountants of New Zealand is deeply concerned about this not just Lockwood Smith. The institute is concerned because it sees this happening amongst its members all the time. People make these simple mistakes and although they have paid the correct amount of tax they are penalised. Is that fair? 
I really put it to the Minister and urge the Committee to give full consideration to the amendment that I have placed on the Table. All it would do is give the commissioner the discretion to not impose shortfall penalties where it is obvious that a mistake has been made. The Government has all its revenue. If the Committee says that it will not accept my amendment because it would have fiscal implications and that it was lodged with less than 24 hours’ notice I would argue that that decision was not valid because the amendment just gives the commissioner the right to exercise discretion. The Government is not going to lose any revenue. A technical mistake might have been made but at the moment the commissioner cannot deal with that issue in a fair manner. I urge that my amendment be given consideration. 
CHARLES CHAUVEL (Labour) 
: 
 I move  
That the question be now put 
. 
CRAIG FOSS (National—Tukituki) 
: 
 I would like to speak to two other clauses in Part 2—first to clause 173 and then to clause 184 which talks about the International Financial Reporting Standards. Clause 173 deals with provisional tax and rules on the use of money interest. There is always discussion about this but in particular this provision looks at the rules around the use of money interest—that is when there are excess funds at the Inland Revenue Department the department has use of funds. At the moment it pays a credit rate of I think 6.5 percent or if the taxpayer supposedly has moneys due he or she has use of the funds owed and is charged something like 13 or 14 percent—about a 7 percent spread. So that is a 7 percent spread between the money that is owed to a taxpayer and stays at the Inland Revenue Department and the money that it is essentially lending to the taxpayer. Any bank or financial institution would give its right arm its left arm and probably both its legs to have an interest rate spread between deposits and loans of over 7 percent. That is absolutely outrageous. I think the term there is “usury”. 
There has been much commentary even from members on the other side and from the smaller parties on the unfairness of charging interest rates like that and actually driving people into further debt borrowing to pay the borrowings to pay the borrowings. The amendments proposed by my colleague Dr the Hon Lockwood Smith try to address some of the issues that bring people into that position. Again I will quote from the Inland Revenue Department’s desired future details: “Society has confidence that appropriate action will be taken against customers who do not apply.” That also implies that those customers who are doing the right thing and pay the right money at the right time but perhaps tick the wrong box in the form they send in also need to know there is good faith on the part of the Inland Revenue Department. I would be interested to hear the comments of the Minister in the chair the Hon Peter Dunne on the good-faith ambitions of the Inland Revenue Department and whether it will be addressing the difference between its borrowing rate and its lending rate. 
Clause 184 as Dr Lockwood Smith touched on earlier talks about the unacceptable tax position. Towards the end of clause 184 is an explanation of what does and does not put someone in an unacceptable tax position. Interestingly it talks about the International Financial Reporting Standards which have been recently adopted. I believe that there is such a thing as the New Zealand version of the International Financial Reporting Standards. Is that deliberate or is it just to internationalise it? We have asked Treasury about this quite a few times at the Finance and Expenditure Committee and even the Government accounts have been reproduced under the New Zealand Financial Reporting Standards as opposed to the International Financial Reporting Standards. I apologise to the many listeners out there who think that this may sound like gobbledygook but sadly this is taxation law. Even Landcorp in its annual report suggested that the International Financial Reporting Standards made a mockery of its reporting etc. So Landcorp cannot understand it. 
I believe that in a recent paper Treasury said it was looking to readdress the necessity of the New Zealand Financial Reporting Standards or at least how it was created and measured against the International Financial Reporting Standards and whether it was having a desired outcome for New Zealand. In many instances the fluctuations in their profit and loss accounting and therefore their tax obligations were flying around all over the place and not giving a solid and transparent report to whomever their agents might be. 
There is one other clause in here that we discussed at the select committee—and I apologise for not finding it right at the moment—but the Minister or the officials may remember it. It addresses KiwiSaver and refers to KiwiSaver members being able to forgo interest in relation to funds at the Inland Revenue Department or I believe at some entity. 
DAVE HEREORA (Labour) 
: 
 I move  
That the question be now put 
. 
DAVID BENNETT (National—Hamilton East) 
: 
 I rise to take a call on this bill because when we talk about the implication of putting penalties on people who do not file GST or other returns simply for the sake of having a mandatory penalty it smacks of a Labour - United Future - Progressive Government that has no comprehension of what it is actually like to be in business. These people have never been in business. They have probably never filed a GST return—apart from for a union. For them to now put in a mandatory penalty just for the sake of it shows their comprehension of what it is like for the people who actually earn the money that pays the wages of those members who sit on that side of the Chamber and tell them what to do through tax bills such as this. 
The Minister has come back and made a valid point that there will be some discretion within the 12-month period and that people’s history in relation to the filing of returns will be looked at. That is fair enough. That is what happens now. The Inland Revenue Department looks at people’s history of filing returns. If they have a history of being a good filer of tax returns then it will sometimes waive the penalty let them get away with it and say they made a mistake. That would be the appropriate approach and the department does that now. It looks back over the past year at one’s filing history. 
What is the purpose of putting on a $50 mandatory filing fee? Why put on a $50 or $250 mandatory fee for people who fail to file on time? The only purpose can be that the Government wants to sting hard-working employers in this country. It wants to hold business back and it wants to increase compliance costs—to be the bane of hard-working New Zealand business people basically. The Labour Government wants to restrict and compromise the ability of those people to carry on their own approach in their businesses. There is no need for an extra filing fee for late filing. The Inland Revenue Department still can use discretion and that should be sufficient. There is no need at all for these fees. The Government should take a call on this issue and explain why it wants to introduce these fees. There is no good rationale to do so. It is merely another attempt to put more compliance costs on to small business and it shows that the Government lacks any comprehension of what it is like to have a small business and have to file GST and other returns on a compulsory basis over a number of months in a year. 
I encourage the Minister to take a call and explain the rationale for introducing these fees. 
The CHAIRPERSON (Hon Clem Simich) 
: The amendments in the name of Dr the Hon Lockwood Smith to clauses 184 188 and 191 are out of order because there may be an impact on the fiscal aggregates and they were lodged with less than 24 hours’ notice. 
The question was put that the following amendment in the name of the Hon Peter Dunne to the proposed amendment to clause 151(4) set out on Supplementary Order Paper 168 in his name be agreed to: 
to number the paragraph being inserted after section 33A(2)(d) as “(db)”. 
A party vote was called for on the question  
That the amendment to the amendment be agreed to. 
Ayes 65 
New Zealand Labour 49; New Zealand First 7; Maori Party 4; United Future 2; Progressive 1; Independents: Copeland Field. 
Noes 48 
New Zealand National 48. 
Amendment to the amendment agreed to. 
The question was put that the amendments as amended set out on Supplementary Order Papers 167 and 168 in the name of the Hon Peter Dunne to Part 2 be agreed to. 
A party vote was called for on the question  
That the amendments as amended be agreed to. 
Ayes 65 
New Zealand Labour 49; New Zealand First 7; Maori Party 4; United Future 2; Progressive 1; Independents: Copeland Field. 
Noes 48 
New Zealand National 48. 
Amendments as amended agreed to. 
A party vote was called for on the question  
That Part 2 as amended be agreed to. 
Ayes 65 
New Zealand Labour 49; New Zealand First 7; Maori Party 4; United Future 2; Progressive 1; Independents: Copeland Field. 
Noes 48 
New Zealand National 48. 
Part 2 as amended agreed to. 
Part 3 Amendments to other Acts and Regulations 
The CHAIRPERSON (Hon Clem Simich) 
: We now come to Part 3 clauses 200 to 275 with new clauses 276 to 545 therein on Supplementary Order Paper 168. The debate on this part includes schedules 1 and 2 and new schedules 3 to 5 also set out on Supplementary Order Paper 168. 
Dr the Hon LOCKWOOD SMITH (National—Rodney) 
: 
 Part 1 of the Taxation (Annual Rates Business Taxation KiwiSaver and Remedial Matters) Bill which we debated earlier covers amendments to the Income Tax Act. Part 2 covers amendments to the Tax Administration Act. Part 3 which we are debating now covers amendments to other Acts and regulations. The principal set of amendments that National will be focusing on in this debate is the set of amendments to the KiwiSaver Act 2006. 
They are very significant amendments. What these amendments do and what Part 3 does is introduce the whole compulsory employer contribution regime for the KiwiSaver system here in New Zealand. These are the provisions that caused Business New Zealand to come to the Finance and Expenditure Committee and say that New Zealand businesses had been ambushed by the Government and that the Government proposed these measures in the Budget without consultation with employers and businesses in New Zealand. 
That is pretty powerful language from a group that is not known to be anti-Government. Business New Zealand works quite closely with the Government but it said to the select committee that these provisions ambushed New Zealand businesses. It went further and told the select committee that some of the provisions around the compulsory employer contributions were “employment relations sandpaper”. In other words the provisions would cause major problems to employment relations in New Zealand as we look ahead. 
What did Business New Zealand mean by that? Probably the best example of what it meant by that can be found if we look at clause 219 in the bill which is on page 363. Clause 219 is a long clause with many amendments to the existing Act such as sections 101A 101B 101C etc.—it goes right through. The new section that will cause quite a lot of trouble is new section 101B to be inserted by clause 219. Let me draw the Committee’s attention to what that new section is doing. It states: “The purpose of this section is to ensure that for contractual arrangements of parties to an employment relationship (as defined in section 4(2) of the Employment Relations Act 2000) compulsory contributions are paid in addition to an employee’s gross salary or wages described in section 101D(3).” 
This means that employers may have entered into existing agreements with employees based on an employer’s ability to pay a certain level of wage or salary based on the business’s income. Suddenly this legislation will require employers to add to employees’ total remuneration package through making contributions under this clause to the compulsory employer contributions. To land that on employers part way through negotiations on an employment relations agreement when they may be already fully stretched in meeting the obligations of that agreement is obviously a very significant imposition on employers. 
We will be covering a number of the various new sections inserted by clause 219 as this debate goes on but perhaps one of the features that concerns us most as we look ahead—and a number of features concern us—relates to employment agreements and the negotiation of them. How are employers to handle them? An employer may negotiate an employment agreement with a number of workers and some workers may say: “Yes we want to be part of KiwiSaver.” and the employer may say: “OK if you want to be part of KiwiSaver we can afford this much as a salary or wage increase. But then we have to consider that on top of that we have to pay our compulsory contribution so we will agree to this deal for you.” Other employees may say: “No we’re not going into KiwiSaver.” so the employer may say: “OK to make it a fair package you have to be remunerated a little more to make sure you have an equivalent package.” So a slightly higher wage or salary is agreed on for that person because the employer does not have to make a compulsory employer contribution which is part of a total remuneration package. 
What happens then if a few weeks or a couple of months later an employee who gets that slightly higher wage or salary remuneration because he or she is not part of the KiwiSaver scheme suddenly says they want to be part of the scheme? That person has a right to do that under the law so the employer is caught. The employer has agreed to a certain wage or salary package on the basis that a person was not part of the scheme but the person changed his or her mind and now wants to become part of the scheme. 
That is the kind of friction that Business New Zealand was talking about. The select committee heard a lot of submissions on this particular issue. A lot of submissions were received on new clause 219. There are a number of other areas such as the age of entitlement on which employers make contributions. Other colleagues will be covering the full range of issues but I wanted to emphasise that first set. 
CHARLES CHAUVEL (Labour) 
: 
 I would like to make some brief comments about the changes to KiwiSaver made in Part 3 and also to direct some comments to the Minister’s Supplementary Order Paper 167 at least in as far as that Supplementary Order Paper will make changes to the KiwiSaver scheme. The changes proposed on the Supplementary Order Paper will assist to make sure that KiwiSaver does work as intended and to the best effect. 
Dr Smith is quite right; we did hear some very compelling submissions on KiwiSaver at the Finance and Expenditure Committee. The select committee proposed a number of changes to the legislation and recommended for example allowing employees who contribute to KiwiSaver schemes to phase in their minimum 4 percent contribution starting at 2 percent on 1 April 2008 and arriving at the full 4 percent as late as 1 April 2011. To be consistent that option is to be offered to members of complying superannuation schemes as well and that is obviously a commendable move. I note that the New Zealand Council of Trade Unions last week issued a statement welcoming in particular that change and asserting—I think with a degree of justification—that the KiwiSaver improvements will help those on low incomes. It was speaking in particular about that recommended change and I think that will encourage what is already a spectacular rate of KiwiSaver uptake. 
Just having a look at the other changes recommended by Supplementary Order Paper 167 in this area I note there will be good consumer protection measures that will require complying superannuation funds to ensure that their fees are not unreasonable. This requirement already exists for KiwiSaver schemes. The Government actuary will be empowered to monitor any fee changes to see whether they are unreasonable so there is a good prudential oversight regime that will be introduced. These changes will see the introduction of a public register of complying superannuation funds so that everybody can see whether a specific scheme will attract the relevant KiwiSaver benefits. So the changes mooted will increase transparency and make what is already an excellent scheme an even better one. 
GORDON COPELAND (Independent) 
: 
 I will also speak about Part 3 in particular about clause 235 and the provisions thereafter that relate to the mortgage diversion provisions in relation to KiwiSaver. I think that all of us in this Committee recognise the importance of homeownership not just to provide stability for families which in itself is a most important public policy goal but also in retirement. In fact a free home in retirement is the difference for many hundreds of thousands of New Zealanders between relative comfort and moderate to severe hardship. All of us know that New Zealand superannuation is inadequate if at the same time a person is trying to pay rent on a house. 
In that connection I will draw some statistics to the attention of the Committee prepared for me by the Parliamentary Library. The number of privately owned owner-occupied homes in New Zealand peaked as a percentage of all homes at 73 percent in 1986 but by the year 2000 that percentage had dropped to less than 50 percent. That is a massive drop of 23 percent in just 20 years. By contrast the percentage of people renting or leasing a home went from 23 percent in 1986 to 44 percent in 2006—almost a corresponding offset. One statistic the percentage of private homeownerships went down 23 percent and there was a 21 percent increase in the number of people renting or leasing. 
That brings into focus I suppose the tremendous importance of the mortgage diversion part of the KiwiSaver scheme. It can be utilised by people who have been in KiwiSaver for 12 months and it enables them under subparagraph (i) of new section 229(2)(i) in clause 235(6) to divert “half of the total contributions deducted for or contributed by the person received by their KiwiSaver scheme provider;” into the repayment of a mortgage on their home for as long as that mortgage continues. That of course is a very very important part of the overall arrangements. That is a holistic approach to savings because it enables a KiwiSaver member both to pay off a mortgage and to save systematically for retirement at one and the same time. As a result many will enter their retirement with both a freehold home and a well-diversified portfolio of financial investments. That is the goal we want to achieve through this important legislation. 
The first anniversary of people coming initially into KiwiSaver will occur on 1 July 2008 so in practical terms mortgage diversion will start from that point onwards. I can confidently predict that this facility will be extremely popular. Why do I say that? I say that based just on my own personal experience and that of many other people I know. We all appreciate that for young people raising children and endeavouring to pay off mortgages it is also very difficult at that point in time—when the bills are mounting and there are mouths to feed—also to be setting aside money systematically for retirement. That reality has not changed. In fact the statistics I have just quoted show that it has actually become worse—much worse—in the last 20 years. 
In my view the huge reduction in the level of homeownership rates and the increasing number of people who are forced long-term to rent is now one of the great problems that face our society. So we need to find a way through that and that is what mortgage diversion does. It is a vitally important component of KiwiSaver in my view and one that I have no doubt will make an important contribution to both the social and financial security of hundreds of thousands of New Zealanders as we move through time. I can foresee 20 years from now that this House and all New Zealand will look back on the introduction of KiwiSaver including the mortgage diversion component and say that it has profoundly affected the financial and social security of New Zealanders and their families. For that reason this part of the bill has my wholehearted support. It was something I personally worked very hard to bring into legislation. I am delighted that it was adopted by the Government and I think that in time it will prove to be a very very important contribution. Thank you. 
CHRIS TREMAIN (National—Napier) 
: 
 Gordon Copeland has just spoken on the mortgage diversion scheme and on the part he played in bringing that to its inception. Although I certainly have empathy with his view of the level of homeownership in this country—and he is right; it has dropped significantly which is nothing for us to be proud of as a nation—I am not so convinced that the mortgage diversion scheme will be as successful as he makes out. 
It is an initiative yes but the reality is that other issues involved in getting people into their own home such as the cost of that housing need to be considered first. There is a lot of debate around once people are in properties where the full amount of their savings should be going. There is a lot of argument to say that the money should be going fully into the house. With the combination of higher interest rates and capital accretion that can be achieved through having our own home it can be argued that people are far better to have their money going entirely into the savings in those homes than going by a convoluted process through KiwiSaver with its added bureaucracy back into the home in another way. However it is an initiative and part of the scheme and we will be interested to see how the numbers work out when we go into July next year and see the effect then. 
I will focus on Part 3 of the Taxation (Annual Rates Business Taxation KiwiSaver and Remedial Matters) Bill largely on the amendments to the KiwiSaver Act 2006. In my 5-minute slot this morning I will focus on three specific areas. The first I will deal with is the age of entitlements debate which was an area the Finance and Expenditure Committee had quite significant representation on. I will also talk about the salary sacrifice agreements and the position that employers such as the Christchurch City Council found themselves in. I will also touch on the transitional rates and the position we have got to in regard to those rates. 
I start with the age of entitlements. This was an issue that did not perplex the committee but that the committee gave some consideration to. It concerns the question of whether we should allow individuals under the age of 18 to obtain all the benefits of the KiwiSaver scheme. Many submissions were received from people from across the board and particularly from the unions who felt that the full benefits of the KiwiSaver scheme should apply to 16 and 17-year-olds. Both the National Distribution Union and the Council of Trade Unions were most vocal on this particular aspect of the legislation. The Council of Trade Unions the National Distribution Union and the New Zealand Nurses Organisation said that preventing young workers from gaining tax credits and employer contributions was somewhat discriminatory. 
The argument behind not providing the credits to 16 and 17-year-olds was that the Government felt that it would take away the focus on education and that 16 and 17-year-olds should remain in the education system. I take a different point of view in that I believe that some 16 and 17-year-olds out there are better off in the workforce. They have reached a point in time at that age when for one reason or another they have decided that they have reached the end of the road as far as school is concerned. But many of them go on into careers. They become young apprentices and take on jobs where their future is in doing the hard yards of being an employee and learning a trade. Sometimes their education blossoms for them as they take up an apprenticeship and learn many more skills through doing that. 
My argument is that we should be encouraging 16 and 17-year-olds to be saving as early as possible. In that regard I think it is good reasoning to allow 16 and 17-year-olds to take up that opportunity once they end up in employment. 
I understand the argument that by totally removing any age criteria we are allowing many families to take up these tax credits for very young children. It will be interesting to see how many take-ups of KiwiSaver there are by those under 20 which have been taken up by families getting their 5 6 and 7-year-olds into a savings scheme early on in their life. I think members will find that quite a significant number of families of high net worth are taking up that opportunity. 
KATRINA SHANKS (National) 
: 
 It is my pleasure to speak to Part 3 and I will address the KiwiSaver aspect of this bill. I would like to talk firstly about the uneven playing field out there. With this legislation I would not like to be an employer or an employee because the playing field has become really uneven. When an employer goes along and offers KiwiSaver to its employees that is all very good but the reality is that not everybody will take it up. Employers may be offering this scheme to encourage their employees to work and save which is absolutely great but under this scheme employers are also contributing up to 4 percent going forward. An employer is giving one employee who is taking up the scheme 4 percent and another employee who has not taken up the scheme is not getting that 4 percent. 
The Government says that is fine because the employer can negotiate with its staff according to who has taken up the scheme and who has not. But at the end of the day somebody may leave the scheme because he or she is in financial hardship and needs to have a respite from it so he or she will lose that 4 percent or an employee may decide to enter the scheme after he or she has been through a wage negotiation round and that employee has every right to enter that scheme. But all of a sudden the employer’s payroll is changing. It cannot predict what the payroll will do from month to month so it is up to the discretion of the employees as to what they will do. 
The great thing we have had in the past with salaries and wages is that they have been pretty transparent. When someone goes in and earns $20 an hour that person actually earns $20 an hour. The person beside that employee who earns $20 an hour earns $20 an hour as well and that is the way it is. I thought that we brought in the fringe benefit tax a few years ago to keep that situation transparent. To keep things even those people who got benefits like cars and perks relating to their work would put in a fringe benefit tax and they would be taxed at a higher rate. There was a disincentive so that people got a dollar value for the work they did. In that way we could even out that playing field and there would be a bit more transparency. 
Now in the workplace we still have the fringe benefit tax to keep that transparency but we also have Working for Families which complicates that situation. We can now have a situation where two people are working beside each other and doing exactly the same job. One person is getting Working for Families and is getting a little more. That person is still doing that same job but is getting a little more. That person could also decide to go into KiwiSaver and could again get a little more. All of a sudden a gap is created and it is growing between two people who are doing exactly the same job. One is getting KiwiSaver and Working for Families and the other is not getting those payments but is doing the same job and the gap is growing. It also works in the reverse which is quite complicated. One person who is getting Working for Families might not want to go into the next income level because that would affect the Working for Families payments and the other person is not getting Working for Families and might take that promotion because it does not affect the income that the person is bringing home. By the time we put KiwiSaver into that mix as well it all gets really murky. 
Where is the transparency in the workplace when employers go into negotiations with their employees? We are creating complexity in the workplace. I would ask how employers are meant to act in good faith with their employees all the time which is what we ask them to do under our labour legislation when there is a moving feast in front of them. What employers want to do is to reward and pay people an amount of money for the work they do but how can they do that when there is shifting ground underneath those employees all the time? Employers cannot do that. 
I think we will find that going forward a lot of court cases will show that employers are not being fair when in fact they are trying to be very fair but the rules they have been given create this changing ground underneath them. I would ask how an employee who cannot afford to go into KiwiSaver might feel working beside somebody else who can afford to go into the scheme and who is getting a 4 percent bonus to go into KiwiSaver. The first employee cannot afford to go into KiwiSaver and has not gone into the scheme so he or she is not benefiting from it. How do those people in the workforce feel? We have to ask ourselves whether we have given employers and employees a fair playing field now. 
CRAIG FOSS (National—Tukituki) 
: 
 I speak now to Part 3 which deals with changes to various other Acts and regulations. First of all a previous speaker Mr Gordon Copeland mentioned the mortgage diversion part of the general KiwiSaver scheme which is alluded to in I think Supplementary Order Paper 168 and in this part. Gordon Copeland is no longer on the Finance and Expenditure Committee since he went out on his own and I think it is important to note that pretty much after he left there has been virtually no discussion whatsoever no lobbying for and no sponsoring of the mortgage diversion facility or that part of KiwiSaver. In fact commentary has been very very silent because most commentators believe that yes it is a worthy goal or worthy ambition to have some facility like that but it does not sit very tidily at all within KiwiSaver—a long-term retirement savings scheme—to have as part of that same suite of bills a system that assists and encourages people to borrow money. 
I note that even the monetary policy inquiry we had which touched on all things KiwiSaver shied away from the mortgage diversion part of KiwiSaver. There is obviously a reluctance to take that part out but I imagine the Minister’s preference would be to take it out—perhaps to carve it out and let it form some part of other legislation. I do not think that is such a bad idea and the National Party would welcome such discussions firstly to simplify the KiwiSaver legislation and secondly to make a more pure and transparent method to homeownership. Further to that even the Council of Trade Unions did not comment on the mortgage diversion part of it but it did note how unaffordable New Zealand housing is. It was not talking about the debt of the mortgage; it was talking about the ability to fund a mortgage or to get a deposit for a first home. The council lamented how badly New Zealand wages had fallen behind Australia’s. The head of the Engineering Printing and Manufacturing Union Andrew Little before our committee on other business recently also noted that. He used the example of how in New Zealand an electrician could get between $70000 and $85000 a year while over in Australia the same electrician was on A$120000 to A$130000. He agreed as part of his submission about some other matters before the committee that that attraction was pretty hard to resist. 
I think it was Mr Tremain and Katrina Shanks who earlier touched on the contributions around KiwiSaver. That issue is alluded to in this part but is not hugely addressed. It is more about home affordability and KiwiSaver will struggle because—remember—it is 4 percent of gross not 4 percent of those moneys left which is about 5.5 percent or 6 percent of net. Quite frankly when people are saving towards KiwiSaver over time their annual return after tax will be about 3-ish percent I guess and their mortgages will be at 8 percent to 10 percent. Why on earth would they save towards KiwiSaver whilst they still had a mortgage? That is the contradiction that the mortgage diversion part starts in this bill. 
I will just touch on the amendments to clause 284 set out on Supplementary Order Paper 168. It defines certain disposals by portfolio investment entities or by the New Zealand Superannuation Fund. I would like to mention that New Zealand is heading towards some dangerous territory here. Admittedly it was not a portfolio investment entity or the New Zealand Superannuation Fund although they have been doing this; it was the Earthquake and War Damage Fund I believe which divested from tobacco stocks thinking that Dr Cullen wanted it to divest from those and believing that he would be pleased and happy for it to do so. Now that is a debate that we should have for sure but Ministers of Finance Ministers of the Crown and any members of Parliament of course must be at total arm’s length from any funds that the Crown owns and from any way that their influence could even be misconstrued. Be they for moral or ethical reasons if it is set up in the deed of those funds then they should be left alone. 
I also seek the Minister’s opinion and advice on the amendments to clause 263B set out on Supplementary Order Paper 168. I would welcome it if he could explain to us the issues around the Health (Drinking Water) Amendment Act 2007 which is included in the Supplementary Order Paper—or perhaps someone from the various health portfolios would like to participate on that one. 
Dr the Hon LOCKWOOD SMITH (National—Rodney) 
: 
 The Opposition would really appreciate the Government responding to some of the concerns that are being raised—for example the concern expressed by my colleague Chris Tremain about the age limitation on the KiwiSaver provisions in the Taxation (Annual Rates Business Taxation KiwiSaver and Remedial Matters) Bill. 
The select committee was asked many times by people making submissions why the provisions were restricted to people above the age of 18. If we want to develop a savings culture in New Zealand if we want to encourage saving at a younger age when people first start to work—and of course they can legally work at age 17—why not enable them to be part of the full KiwiSaver scheme when they can legally work in New Zealand? If the Government is serious about supporting a savings culture with this now quite complex KiwiSaver scheme it seems wrong to tell young new workers that sorry they cannot become part of the full KiwiSaver scheme until they are 18. Where is the logic in that? 
If the Minister stood up and said that at the end of the day it was a revenue issue that the whole scheme was costing a lot of money and that if the Government lowered the age of eligibility down to 17 or 16 it would cost too much money I could understand that. I could understand the Government making a pragmatic decision about the revenue cost because KiwiSaver is going to cost the Government a lot of money over the next few years—a lot of money—and there are very significant revenue issues. But we need to understand why we do not let people be part of the KiwiSaver scheme when they start work. It is very clearly spelt out in clause 219 where the age of entitlement is specified. National members are at a loss to understand why new workers cannot get into the KiwiSaver scheme when they first start work. It seems bizarre that they cannot do that at whatever age they can legally start work. That is the first issue and we would really appreciate hearing the Government’s explanation. 
The second issue is covered in the transitional provisions of clause 237. Members on the select committee listened to submissions—often from unions particularly the Council of Trade Unions—that argued quite strongly that the 4 percent contribution from employees is a big ask for low-income earners. Middle and higher income earners already save. One of the big issues with the KiwiSaver scheme—if it is to work properly—is whether it can help lower-income people to start saving and to get the benefits of saving. So many submissions to the select committee stated that 4 percent is a big ask for middle to low income earners. 
Many of them asked why we would not allow flexibility whereby an employer could agree with an employee as part of a remuneration package to make a greater contribution thus allowing the employee to put in say 2 percent rather than the full 4 percent. The Government partially responded to this question by saying that as a transitional measure it would allow an employee to put in 2 percent for 2 years if the employer agreed to put in 2 percent—rather than 1 percent which is the standard rule for employers that is set out in this legislation. It said it would allow that transitional provision for 2 years then in the third year the employee would put in 3 percent to be matched by 3 percent from the employer. 
The issue is that the transitional measure is not recognising the position of low to middle income earning New Zealanders. A lot of our people are in that area. People do not realise that the average income of New Zealanders is about $10000 a year higher then the median income from memory. It is significantly higher. If we look at the median income of New Zealanders we see that it is somewhere down in the $30000 to $38000 range. It is a huge ask to expect people with families to contribute 4 percent of that gross pay to this scheme. 
We should hear from the Government why it was unacceptable to it to have employers agree to make up the difference as part of a total remuneration deal and why it refused to listen to the representations from the unions that it allow a more flexible scheme. 
Hon PETER DUNNE (Minister of Revenue) 
: 
 I am glad that earlier Mr Foss spotted the most critical element of this bill in the massive amendments that are being moved to it when he referred to the new Part 2A inserted by clause 263B which affects the Health (Drinking Water) Amendment Act 2007. This was the deep dark secret of this bill and I give him credit for having discovered and revealed it. 
I should tell the Committee precisely what this change does. It replaces section OB 1 of the Income Tax Act 2004 with section YA 1 of the Income Tax Bill. More seriously this change is a drafting change consequent upon the rewrite of the Income Tax Act. It picks up the provision that is in the 2004 Act which technically no longer exists and carries it over to the bill. But I give the member credit for his perspicacity in getting to the heart of the issue. 
On a less serious note I turn to the more substantive comments the member’s colleagues have made. Mr Tremain and Dr Smith have raised questions about young people taking up KiwiSaver why the member tax credit is not available to those under the age of 18 and a range of associated issues. The underlying concern that they have expressed is that this legislation is potentially limiting entry into KiwiSaver by people under the age of 18. I am pleased to inform those members that of the 316000-odd people who have signed up to KiwiSaver already just over 16000 of them are 16 and 17-year-olds. So despite the absence of the member tax credit and despite some of the other incentives such as compulsory contributions not being available to those people we still have a significant uptake. 
Craig Foss 
: That’ll be by the parents. 
Hon PETER DUNNE 
: The member says that may be by the parents entering into a savings arrangement on behalf of the children. That is quite probable. I can remember many years ago when some of us were young callow youth there were various savings schemes our parents entered into on our behalf that as we grew older and became earners we were able to carry on. I think precisely the same will happen with KiwiSaver and I welcome the fact that we are already seeing such a significant uptake. 
Dr Smith said earlier that the Government may run some huge fiscal risks here. That is absolutely correct. We have already exceeded 100 percent of our year 1 target for KiwiSaver and the year from July is barely half over— 
Charles Chauvel 
: An excellent response. 
Hon PETER DUNNE 
: On the one hand it shows that we will run some risks and on the other as Mr Chauvel says it is an excellent response. People can see that KiwiSaver is a scheme that is entirely beneficial to them and to their long-term interests. 
Dr Smith raised a concern about employers having to pay their contribution on top of existing salary or wages they may be paying out and settlements they may be reaching in respect of their employees. He overlooks the fact that employers will be eligible for an employers’ tax credit of up to $20 a week to offset the cost of that contribution. The consequence of that is that in 2008 the employers’ contribution is 1 percent and the salary or wages that will be covered will be up to $104000 per employee. That will go to 2 percent in year 2 or down to $52000; 3 percent in year 3 or down to $34000-odd; and in year 4 with the 4 percent contribution rate the subsidy will still cover $26000 of salary contribution. 
Over that 4-year period there is a deliberate phase-in. Employers will be able to restructure their costs in such a way as to not be adversely impacted. If the current trends continue we will see a substantial proportion of the New Zealand savings market enrolled in KiwiSaver and able to take advantage of all of its provisions—for the first time perhaps. 
I remind the Committee that this country has had a shocking history of long-term savings over a long period. We can go back to the 1970s and the superannuation debacle at that time the 1980s superannuation debacle and the mid-1990s superannuation debacle. For the first time KiwiSaver based on voluntary contributions has the potential to get us over that crisis that we have all lamented at various times over the last three decades. That crisis has put us into a position where our lament now is: “Look how good Australia is. Look how good Australia has become since compulsory superannuation came in in that country.” I remind the Committee that that was in the mid-1990s. It is a comparatively short transition. I suspect very strongly that if we were to have this debate in a decade’s time we would be saying that some of the great strengths of the New Zealand economy at that point will be occurring because of the investment through KiwiSaver and the level of uptake. 
I think that this scheme not only is very timely but also is on the right track. It has all the right incentives for people to join. I want to make just a quick comment as I close in response to Katrina Shanks and one or two others who have talked about—and I think Dr Smith used this phrase—“ambush and sandpaper arrangements” in respect of employers. I think that is most unfortunate. At the time that these proposals were being developed earlier this year in the context of the 2007 Budget it was totally appropriate that there be a measure of secrecy and security about their development. I well recall being at the Budget lock-ups where employers were first briefed on the impact of these changes. I did not see and do not remember anyone at those meetings talking about ambushes or other things. In fact their initial reaction to the changes was extraordinarily positive. If one goes back and looks at their initial statements immediately afterwards one will find that that was the case. 
There will be implications for employers—of course there are—but they are essentially matters to be resolved between employers and employees. I find it somewhat ironic that those groups that spend a lot of time telling successive Governments to butt out of the employer-employee relationships now turn round and say: “Oh you’ve made it difficult for us because you’re going to require us to talk to our employees to negotiate with them.” This is the very thing these groups have been telling Governments for years they should be able to do in a free and unfettered way. They cannot have it both ways. 
CHRIS TREMAIN (National—Napier) 
: 
 I want to take the debate in a slightly different direction in this 5-minute speech. I want to focus on the Customs and Excise Act 1996 and the two amendments to that Act that will have quite a significant impact on child support payments in this country. 
The first is section 280K which is inserted in the principal Act by clause 263. It deals with the disclosure of arrival and departure information for the purposes of the Child Support Act 1991. Subsection (1) states: “The purpose of this section is to facilitate the exchange of information …”. Section 280L provides for the Inland Revenue Department to have direct access to arrival and departure information to help it apply the Child Support Act 1991. In that regard a range of information is to be provided and I think that is a good thing. Subsection (4) of section 280K refers to the person’s name the person’s date of birth the person’s tax file number—all information that I think will be hugely relevant in starting to dealing with what can only be described as the mountain of unpaid child support. 
I want to bring to the Committee’s attention some of the figures which are frightening. I find it unbelievable that parents can have children then walk away from their obligation to bring up those children. I find it simply quite unfathomable. 
Hon Peter Dunne 
: Unconscionable. 
CHRIS TREMAIN 
: “Unconscionable” is the word that the Minister uses. For the life of me I cannot understand how someone can bring a small baby into this world see that baby grow then walk away from one’s responsibility to bring up that child. I accept that people move out of relationships. I understand that. It happens around the world and that is not going to change. But for a parent to actually walk away from his or her obligation both financially and on a relationship level to bring up that child I find totally unconscionable. 
Here are some of the figures. Child support debt now has risen to $1.129 billion. That is up from $380 million in 2000. We have seen this exponential increase in parents of either sex—but I have to say mainly men—walking away from those relationships walking away from their responsibilities to bring up their children. Quite frankly I find that unconscionable as the Minister said. 
The second point I will make here is that the amount of assessment debt has gone from $192 million to $450 million. As at 31 March 23959 liable parents owed more than $10000 each in child support. Over 23000 people in this country have walked away from their obligation to bring up their children their obligation to financially support their children. To allow the State to take over that role is just unbelievable. 
Of those parents 11793 now live in Australia and they owe a collective $354 million. Although this side of the Chamber does not support the vision of this bill particularly the taxation provisions in terms of the Customs and Excise Act 1996 I believe that there is an onus on this Parliament to come down on those parents to make it difficult for them to walk away from their obligations. We should not accept by any stretch of the imagination their walking away from their obligations. We should come down hard on those parents who are living in Australia. The provisions of section 280K “Disclosure of arrival and departure information for purposes of Child Support Act 1991” and the provision allowing that information to go to the Inland Revenue Department will help us to clamp down on those parents and get them to take on their obligations. I do not know why the Government should have to do that. It is something that parents should do as of right. 
Lastly and in that regard although both men and women are involved in this issue 288 fathers earning over $100000 have total child support debts of $5.5 million. What are those men doing? What do they think? Do they think they can just walk away from their obligation to raise their child? It is totally unacceptable. National supports sections 280K and 280L. 
The question was put that the following amendments in the name of the Hon Peter Dunne to the proposed amendments to Part 3 set out on Supplementary Order Papers 167 and 168 in his name be agreed to: 
to omit from subparagraph (ii) inserted by paragraph (b) of clause 201(6) the word “share” and substitute the word “scheme”; 
to omit from paragraph (a) of clause 298(3) the words “paragraph (c)” and substitute the words “paragraph (d); 
to renumber paragraph (c) inserted by paragraph (a) of clause 298(3) as paragraph (d); 
to omit from paragraph (db) inserted by subclause (2) of clause 402 the words “section LH 2(4)” and to substitute the words “section LH 2(6)”; 
to omit from the heading to section OB 7C inserted by clause 464 the word “business”; 
to omit from subsection (2) of section OB 7C inserted by clause 464 the word “business” and substitute the words “research and development”; 
to omit from row 5C inserted in table O1 by clause 466 the word “business” and substitute the words “research and development”; 
to omit from the heading to section OK 4B inserted by clause 480 the word “business”; 
to omit from subsection (2) of section OK 4B inserted by clause 480 the word “business” and substitute the words “research and development”; 
to omit from row 4B inserted in table O17 by clause 481 the word “business” and substitute the words “research and development”; 
to omit from paragraph (bb) inserted by clause 482 the word “business” and substitute the words “research and development”; 
to omit from the heading to section OP 11B inserted by clause 484 the word “business”; 
to omit from subsection (2) of section OP 11B inserted by clause 484 the word “business” and substitute the words “research and development”; 
to omit from row 6B inserted in table O19 by clause 485 the word “business” and substitute the words “research and development”; 
to omit subsection (3B) other than the heading inserted by clause 519B and to substitute the following new subsection: 
(3B) Despite subsection (3) this section does not apply for the purposes of section LH 1(2) (Who this subpart applies to); and 
to omit paragraph (ob) inserted by subclause (1) of clause 521 and substitute the following new paragraph: 
(ob) subpart LH (Tax credits for expenditure on research and development):. 
A party vote was called for on the question  
That the amendments to the amendments be agreed to. 
Ayes 65 
New Zealand Labour 49; New Zealand First 7; Maori Party 4; United Future 2; Progressive 1; Independents: Copeland Field. 
Noes 48 
New Zealand National 48. 
Abstentions 6 
Green Party 6. 
Amendments to the amendments agreed to. 
The question was put that the amendments as amended set out on Supplementary Order Papers 167 and 168 in the name of the Hon Peter Dunne to Part 3 be agreed to. 
A party vote was called for on the question  
That the amendments be agreed to. 
Ayes 65 
New Zealand Labour 49; New Zealand First 7; Maori Party 4; United Future 2; Progressive 1; Independents: Copeland Field. 
Noes 48 
New Zealand National 48. 
Abstentions 6 
Green Party 6. 
Amendments agreed to. 
A party vote was called for on the question  
That Part 3 as amended be agreed to. 
Ayes 65 
New Zealand Labour 49; New Zealand First 7; Maori Party 4; United Future 2; Progressive 1; Independents: Copeland Field. 
Noes 48 
New Zealand National 48. 
Abstentions 6 
Green Party 6. 
Part 3 as amended agreed to. 
Schedule 1 
A party vote was called for on the question  
That schedule 1 be agreed to. 
Ayes 65 
New Zealand Labour 49; New Zealand First 7; Maori Party 4; United Future 2; Progressive 1; Independents: Copeland Field. 
Noes 48 
New Zealand National 48. 
Abstentions 6 
Green Party 6. 
Schedule 1 agreed to. 
Schedule 2 
A party vote was called for on the question  
That schedule 2 be agreed to. 
Ayes 65 
New Zealand Labour 49; New Zealand First 7; Maori Party 4; United Future 2; Progressive 1; Independents: Copeland Field. 
Noes 48 
New Zealand National 48. 
Abstentions 6 
Green Party 6. 
Schedule 2 agreed to. 
New schedule 3 
A party vote was called for on the question  
That new schedule 3 inserted by Supplementary Order Paper168 in the name of the Hon Peter Dunne be agreed to 
. 
Ayes 65 
New Zealand Labour 49; New Zealand First 7; Maori Party 4; United Future 2; Progressive 1; Independents: Copeland Field. 
Noes 48 
New Zealand National 48. 
Abstentions 6 
Green Party 6. 
New schedule 3 agreed to. 
New schedule 4 
A party vote was called for on the question  
That new schedule 4 inserted by Supplementary Order Paper 168 in the name of the Hon Peter Dunne be agreed to. 
Ayes 65 
New Zealand Labour 49; New Zealand First 7; Maori Party 4; United Future 2; Progressive 1; Independents: Copeland Field. 
Noes 48 
New Zealand National 48. 
Abstentions 6 
Green Party 6. 
New schedule 4 agreed to. 
New schedule 5 
A party vote was called for on the question  
That new schedule 5 inserted by Supplementary Order Paper 168 in the name of the Hon Peter Dunne be agreed to. 
Ayes 65 
New Zealand Labour 49; New Zealand First 7; Maori Party 4; United Future 2; Independent: Copeland; Independent: Field; Progressive 1. 
Noes 48 
New Zealand National 48. 
Abstentions 6 
Green Party 6. 
New schedule 5 agreed to. 
Clauses 1 and 2 
Dr the Hon LOCKWOOD SMITH (National—Rodney) 
: 
 I will use this debate on clauses 1 and 2 to re-establish exactly why National is opposing this legislation because there are some matters in here that we support as members listening to this debate will have heard. We support for example the reduction in the corporate tax rate. We support a number of the different measures in the bill. But the fundamental issue in respect of this bill is that this bill is what is colloquially called “the May tax bill”. It is an annual tax bill. What the annual tax bill does every year is set the income tax rates for New Zealanders. The Government had the opportunity with this bill to cut tax rates for ordinary wage and salary earning New Zealanders. This was a fantastic opportunity given that the Government now says that cutting taxes for ordinary wage and salary earning New Zealanders is a priority on its agenda and is something it now considers important. It could have done that with this legislation because this is the bill that sets those income tax rates. But the Government has not. It has not had the slightest interest in reducing income taxes for New Zealanders. Sure the corporate tax rate is reduced but there are not that many corporates in New Zealand. Most New Zealanders pay personal income tax. This bill the annual tax bill is the vehicle for dealing with that. It is spelt out in the title of the bill. Clause 1 “Title” spells it out. It has those words “annual rates”. 
This is a bill that sets the annual income tax rates and the Labour members could have used this bill if they genuinely believed in lower income tax rates for wage and salary earning New Zealanders. They could have done it with this bill that we have been debating for these last few hours which has been in front of this Parliament since May this year. But the Government has not done so. That is why the Opposition is opposed to this bill. We believe in reducing personal income taxes on all New Zealanders. That is what we totally support. We are committed to it. The ACT party is committed with us but certainly none of the Government parties are committed to income tax reductions for New Zealanders. I know that the Minister in the chair the Hon Peter Dunne has taken exception to that comment and I accept that United Future believes in personal income tax reduction. But does that not show the paradox? He is the Minister of Revenue. Does he not feel something like a neuter? What an extraordinary situation we have in this country today—the Minister of Revenue can say he personally thinks that income taxes should come down and everyone knows his views are irrelevant. His views do not matter a damn. This Labour Government is not about to bring down income taxes regardless of what the Hon Peter Dunne personally believes. It is staggering. I was at a conference with the Hon Peter Dunne the other day and as the Opposition spokesperson I dared not say what I believed because it would have set the hares running whereas Peter Dunne the Minister of Revenue could say what he thought should happen to personal income taxes because everyone knows it does not matter what he thinks. Everyone knows that Labour takes no notice of what he thinks. 
What we all know in this Parliament and I think what New Zealanders are coming to see is that Labour might in election years talk about tax cuts. It did last time; Labour talked about tax cuts prior to the last election and once it got back into office it changed its mind. Labour promised to shift the income tax thresholds—a very minimal move but it would have helped. It would have helped avoid the need to deal with redundancy payments in this legislation as an ad hoc measure brought in at the last minute. If the Government had shifted those tax thresholds as promised at the last election we would not need the ad hoc measures that are being brought in by this legislation. So that is what the people of New Zealand have to be very sceptical about. Labour promised personal income tax cuts prior to the last election and then backed down. It broke its promise on it. We know that Labour will promise income tax cuts again as we head towards this election. We know that Labour thinks about personal income tax cuts only in election years and all New Zealanders should be very suspicious. Last time Labour promised tax cuts and reneged after the election. New Zealanders should be very suspicious because everyone knows that Dr Cullen does not believe in lower personal taxes. 
CRAIG FOSS (National—Tukituki) 
: 
 I am speaking to the title of the Taxation (Annual Rates Business Taxation KiwiSaver and Remedial Matters Bill. As I keep noting this debate incorporates many many Supplementary Order Papers some of which are very very fresh off the press. 
I think this bill should actually be renamed the “Sorry the Government Spending Has Dragged You Into a Higher Tax Bracket Bill”. Because as Dr the Hon Lockwood Smith just noted with Government spending New Zealand workers are being dragged into higher and higher tax brackets. In fact the infamous “chewing gum tax cuts” announced in the 2005 Budget were dragged off the table and are now no more than a piece of dodgy disgusting chutty on the bottom of some school desk somewhere. They are long forgotten. But as Dr Smith just noted election year is coming up and funnily enough tax cuts are being talked about. 
If the Prime Minister wrote the bill perhaps it would be entitled the “Oops Sorry Treasury Got It Wrong Bill”. Apparently the Prime Minister’s road to Damascus conversion on tax cuts has come about and previous lack of tax cuts are all Treasury’s fault because its forecast was so wrong over so long. In fact—I tell members just as an aside—Treasury produced some papers recently that point out its forecast has not been wrong. It has been predicting surpluses for quite some time and it has just projected a structural forecast further out. 
Perhaps this bill should be the “We Just Thought of Something About Redundancy (We Have Had a Chat to the CTU) Bill”. I would like to talk about the redundancy clauses of this bill. The redundancy provisions were picked up in the Supplementary Order Papers and there were public relations statements from both Ministers Dunne and Cullen. But I raise the point again about the redundancy rebate clauses in this bill. They have never been aired. They have never been aired in this forum. They have never been aired in a select committee. They have never been discussed by this Parliament. We have not received advice from officials on this—absolutely never. These provisions have never been debated in this Chamber up until the last 15-odd hours. They have never been debated in Committee with cross-party buy-in to try to make some decent legislation. Even if philosophically National might disagree with it we would try to contribute and help. 
The redundancy rebate has never been challenged out in the public by those taxpayers who at the end of the day will have to be funding this. It has never been challenged by those who perhaps want some of this tax revenue spent somewhere else—be it on hip operations education student loans or whatever. It has never been challenged other than in a dodgy discussion in a backroom in some Minister’s office up in the Beehive. 
The redundancy rebate has never been quantified or qualified. How much is it? What will it cost? What is the fiscal impact? National has Supplementary Order Papers pushed aside because of the supposed fiscal impact of them some of which is quite minimal. What is the fiscal cost of the redundancy rebates of 6c in every dollar up to $3600? What is the cost? What is the study historically? How does that rewrite the accounts? How does that rewrite the forecast accounts? 
This bill is part of a suite of bills that fell out of Budget 2007 which is a good reminder of the confidence and supply issue. I guess the confidence and supply issue is why the Greens over there are abstaining on this bill and of course why National is voting against it. We do not have any confidence in the supply of funds to the current Government. 
The title of the bill I think is quite misleading. There are some absolutely classic quotes that came from Dr Cullen’s and Minister Dunne’s press releases that I think will come back to haunt them. This is their road to Damascus. Dr Cullen has essentially said that he likes a flat tax rate of 6c in the dollar for any redundancy payments. That is actually what he says. I will read to members perhaps with a minor change or two what he said and this could be the title of the bill. Dr Cullen and Mr Dunne said yesterday when talking about redundancy that taxation payments should be fairer to people who are pushed into a higher tax bracket when they receive redundancy payments—and they extended it to lump-sum payments. Well income is income. If one tries to argue that this income should be treated differently by the Inland Revenue Department than one’s own income then one is in trouble. The department will go after that person. If one keeps it simple—“keep it simple stupid”; give the department a big kiss if you like—one sees income as income. The complexity that this starts to bring into the tax system is not welcome. 
Another point is that the redundancy rebate is not quite as generous as the Ministers have announced because it has to be claimed. It is not a rebate. A person does not suddenly get a cheque when he or she receives redundancy pay. It has to be claimed. 
TIM GROSER (National) 
: 
 As with my other colleagues I think it is really important to go back to first principles when we look at this massive complex bill and see the giant central piece of the jigsaw puzzle is simply not there—a coherent and strategic approach to tax reform which is the very purpose of this massive undertaking and which this Government has singly failed to address. The reason it is the central issue and the reason it will be one of the central stories next year as the political competition heats up is because fundamentally we are a market driven economy. That means that people move themselves and their resources in accordance with economic incentives which are vitally influenced by tax policy structures. Therefore the absence of any coherence in the life of this Labour Government since 2000 towards a strategic approach to tax is a massive missing central piece of the political jigsaw puzzle. 
The idea that perhaps we could have looked at this in a closed economy setting 30 or 40 years ago is completely out of date in light of the rise of the global economy. The often quoted facts about this massive exodus of New Zealanders—not simply to Australia but elsewhere—is perhaps the clearest illustration that members of the public can fully understand the need to have a competitive tax structure. Even when we look at the bits in this curate’s egg that we like such as the reduction of the corporate tax rate we see that we are lacking coherence there. This is not an overall strategic approach and I will just mention two or three of the obvious reasons why it is not. Firstly it is not a comprehensive approach to business tax reform. What we know is that there were—from memory—75000 individual proprietorships and 44000 partnerships in New Zealand in the year to December 2006. If we were to have had a comprehensive approach to business tax reform we would have had some solution for those people. 
The second obvious point is that we all know the issue of disintermediation in tax and banking policy—we are about to discuss that in a bill coming up shortly the Reserve Bank of New Zealand Amendment Bill (No 3). What the Government has now done by failing to have a strategic approach is open up a massive wedge of 9c in the dollar in relation to the top marginal rate. I find it laughable to use the phrase “top marginal rate” when I know it cuts in at $60000 gross tax but nevertheless that is the decision the Government has made. To me $60000 a year does not sound like an enormous amount of money—and we could ask any nurse doctor or teacher earning that salary whether he or she feels “rich”—but that is meant to be the threshold for cutting in at this tax rate. So this gap has been opened up and the lack of a coherent strategic approach now creates this problem. So yes bits of this legislation make sense but overall when we look at this massive document we have to say it is a lack of strategy and a lack of coherence. 
More recently we have heard the Prime Minister in particular rabbit on about the tax being consistently made in respect of the surplus. She said: “Well nobody told us. Treasury got it wrong. Treasury didn’t tell us.” What a load of cobblers—I do not think that is unparliamentary language Mr Chairperson. Let me quote directly from the Treasury advice to the incoming Government in 2005. Members will recollect the Prime Minister’s spin that nobody told the Government it had a surplus and nobody told it about income tax reform. Let us reflect on the following statement to the incoming Government 2 years ago: “high marginal tax rates on personal and company income are more likely to have a negative impact on growth than others by inhibiting the decisions that drive investment and enabling people to make the most of their economic opportunities.” There are a dozen other such statements from Treasury contained in documents that even we have public access to going back years that indicated to the Government if it had been of a mind to listen the need to address the problem of growing surpluses the need to address the growing competition in tax policy and the need to advance a coherent and strategic approach to these issues. The reduction in corporate tax to 30 percent might have been a pretty hot policy position to take 15 years ago but not so today. 
KATRINA SHANKS (National) 
: 
 It is my pleasure to speak on the title of this bill. In the debate on this bill I have spoken about KiwiSaver and research and development tax credits but I have not yet spoken about corporate tax rates and I want to address them for a little bit. However the one theme that is coming through as we read this bill digest it and understand it is the theme of how complex it is. Where is the long-term strategy for tax in New Zealand? There does not seem to be a long-term strategy. It all seems to be very piecemeal and I have a problem with that. 
I talked about research and development tax credits. We can talk about how there are now vehicles to try to get research and development tax credits. The perfect example was that the policy for research tax credits came from Australia. In Australia banks tried to take advantage of these research and development tax credits by saying that development of their software was research and development when actually it was redevelopment of software they already had. And that is what we will see. We will see people coming in and trying to take advantage of situations. Obviously there are loopholes in this legislation that enable people to do that and I do not think they have been addressed as they should be. 
When we talk about research and development it is just one tiny portion of this legislation. There are gaps in the legislation where people will try to take advantage of tax credits. Once again we have created a little tax pocket for a limited number of businesses. When we talk about KiwiSaver tax credits we are talking about exactly the same thing. We are taking about applying a specific tax advantage to a small portion of our population—to those going into KiwiSaver. I get confused as to where the strategy is. Should we not have one tax structure—structure not rate—for everybody that is the same so that everybody progresses through the tax structure instead of “You belong in this silo you belong in this silo and you belong in this silo.” and making it very piecemeal? 
I believe that the Minister Peter Dunne who has put this big bit of legislation together—and it is a big bit of legislation—supported Working for Families when it went through this House and it is another form of tax credit. The Labour Government would say that it is a tax cut but in effect it is a tax credit. For years this Minister has campaigned on income splitting but nowhere in this bill have I seen income splitting come through. He has campaigned and campaigned on income splitting for the last 24 years. One would think that the Minister of Revenue would be able to get it into this tax bill but it has not made it. So how does what he has here line up with his long-term strategy for where he wants to see tax in New Zealand? It is quite interesting because obviously he is passionate about that matter but this legislation does not support what he believes. It will be interesting to see what the long-term strategy is for this legislation. 
I would like to touch on the corporate tax rates in this legislation because I believe that they add another level of complexity. We now have a corporate tax rate at 30 percent a personal tax rate at 33 percent a personal tax rate at 39 percent and then there are not-for-profits which are still sitting on 33 percent. We have a range of tax rates now that people can use depending on the legal entity vehicle they are using. So we have silos again. People will really have to think about how they will structure their organisation to get the best tax benefits they can. This creates another vehicle for people to get into the 30 percent rate. We do not want to encourage avoidance which I think this legislation does by widening the gaps between all the different tax rates. We have to be careful when we generate new legislation that we do not allow this to happen but I believe that is what we are doing in many areas in this legislation. We are creating silos where people can apply do a bit of manipulation and move their businesses around. Accountants and lawyers must be extremely happy with this. 
CHRIS TREMAIN (National—Napier) 
: 
 I rise to speak to the title of this bill and to bring another strain of thought to the research and development tax credit side of this debate. I want to speak specifically on that matter and more generally on the wider tax base. 
National will not be voting for this legislation. We believe that the tax position put forward under clause 3 is not the direction in which this country should be heading. This bill is not going down the track of setting the vision that we need as a country and as a result we will not be voting for it. 
I want to focus on the research and development tax credits and why we do not believe they will specifically achieve what we need in this country. Under the Labour Government we have seen a supposed agenda of economic transformation. But the reality is that although the New Zealand economy has changed over the last 6 to 8 years there is no way that it has transformed. Other countries have changed rapidly. The export composition of many countries—of many small nations like Finland Ireland and Singapore—has transformed their economies significantly to the point where their exports as a percentage of GDP are significantly higher than those of New Zealand. We still wallow at the 20 percent level of exports to GDP while other countries like Ireland have a significantly higher rate than that. Those countries saw 10 years ago 8 years ago 6 years ago the need to transform their economies away from specifically agricultural-based industries into more of a weightless economy and they transformed their economies rapidly. 
The legislation before us gave us the opportunity to leapfrog to go forward and to focus specifically on the industries that will transform our economy. I think the bill has lacked focus in that regard and that New Zealand has lacked focus in terms of its economic transformation agenda. New Zealand needs to act quickly to take its exports forward. The area where I think we can do that significantly is in the weightless economy. In 1996 our total exports were $20 billion and in 2006 they were $32 billion—a growth rate of some 51 percent. That is a significant contribution. If we look at the weightless economy which are services that New Zealand provides to economies overseas—such as 24-hour telecommunications services and helpdesk services—we see that they have grown from $792 million to $2.3 billion over the same period of time. That is a 193 percent increase in exports generated out of this nation. To me that is the focus that we should have had with this bill. 
I see that the research and development tax credits in this bill are across all industries such as my own businesses—my real estate business my travel business and development companies in Hawke’s Bay. I fail to see how an investment in research and development tax credits for those businesses will take this nation forward or encourage export growth or improve our balance of payments deficit. Quite frankly it will not. Companies that are not in that market will use all manner of means to get a tax credit they would not otherwise get. I think that is the wrong approach. The research and development tax credit was an opportunity to focus on the weightless economy and to focus on our export markets to drive our exports as a percentage of GDP forward and upward. In that regard I am disappointed. 
I do not think there has ever been a precedent for an Opposition party to vote for another party’s tax bill and National will not be changing that tradition. National is against this bill and will not be voting for it. 
A party vote was called for on the question  
That clause 1 be agreed to. 
Ayes 65 
New Zealand Labour 49; New Zealand First 7; Maori Party 4; United Future 2; Progressive 1; Independents: Copeland Field. 
Noes 48 
New Zealand National 48. 
Clause 1 agreed to. 
The question was put that the amendments set out on Supplementary Order Papers 167 and 168 in the name of the Hon Peter Dunne to clause 2 be agreed to. 
A party vote was called for on the question  
That the amendments be agreed to. 
Ayes 61 
New Zealand Labour 49; New Zealand First 7; United Future 2; Progressive 1; Independents: Copeland Field. 
Noes 48 
New Zealand National 48. 
Amendments agreed to. 
A party vote was called for on the question  
That clause 2 as amended be agreed to. 
Ayes 61 
New Zealand Labour 49; New Zealand First 7; United Future 2; Progressive 1; Independents: Copeland Field. 
Noes 48 
New Zealand National 48. 
Clause 2 as amended agreed to. 
Hon PETER DUNNE (Minister of Revenue) 
: 
 I move  
That the Committee divide the bill into the Taxation (Annual Rates of Income Tax 2007-08) Bill the Taxation (Business Taxation and Remedial Matters) Bill and the Taxation (KiwiSaver) Bill  
divided into Taxation (Annual Rates of Income Tax 2007-08) Bill Taxation (Business Taxation and Remedial Matters) Bill Taxation (KiwiSaver) Bill  
pursuant to Supplementary Order Paper 169 
. 
A party vote was called for on the question  
That the motion be agreed to. 
Ayes 61 
New Zealand Labour 49; New Zealand First 7; United Future 2; Progressive 1; Independents: Copeland Field. 
Noes 48 
New Zealand National 48. 
Motion agreed to.