Cullen Michael: Taxation (Annual Rates Savings Investment and Miscellaneous Provisions) Bill — First Reading 
Cullen Michael: Taxation (Annual Rates Savings Investment and Miscellaneous Provisions) Bill — First Reading 
[Volume:631;Page:3440] 
Hon Dr MICHAEL CULLEN (Minister of Finance) 
: 
 Goodness me! Of course the National Party policy was to lower that 92 percent rate to 90 percent but also to take away the $10 a week of family support payments per child that were due on 1 April next year. So the vast majority of low-income families would have been significantly worse off under that proposal. It is good to hear the National Party oppose the first major tax cut of the new tax year. No doubt we will hear more about that as time goes on. 
The reform to the taxation of share investment income and offshore income as proposed in the Taxation (Annual Rates Savings Investment and Miscellaneous Provisions) Bill will introduce a much fairer set of rules for the taxing of income in New Zealand and offshore. As the Hon Peter Dunne said the current rules are inconsistent distortionary out of date and do not meet the purposes for which they were first introduced. They favour investment overseas into companies in eight countries over investment in companies in all other countries in the world including the countries that are most rapidly growing at the present time and are likely to be the most rapidly growing over the next generation or so. They favour investment in companies in those eight countries over investment in companies in New Zealand which does not make a great deal of sense. They favour direct investment by individuals over investment through managed funds when most modest-income people save through managed funds rather than by individual investment. They discriminate even further when investing through funds by favouring high-income investors over lower-income investors. 
The reforms proposed in this bill take the system back towards achieving a reasonable balance between a very wide range of competing interests. The bill seeks a reasonable balance between those people who are at a disadvantage under the current rules and those who are favoured often unintentionally by the current rules. It was never the intention of the current rules that people would avoid paying income tax on their offshore income entirely or almost entirely. It was assumed they would be taxed in the “grey list” countries; that is why the “grey list” was introduced. It was considered there was no need to tax in New Zealand and that paying tax in the “grey list’ countries was easier than trying to offset the tax paid offshore against tax due in New Zealand. In practice people have found offshore non-taxable vehicles which in effect means they have found a way of avoiding tax entirely on their investment income. 
We will therefore line up all those various elements. It will cost the Government something like $120 million a year in annual revenue loss to achieve that line-up. Overall it represents a very significant tax cut for New Zealanders who invest here and overseas and on New Zealanders’ investment income which sadly one sees is not large when one looks at the total level of New Zealanders’ investment income. I understand that in managed funds the total average balance at maturity is something like $30000. Most of the tax cut will come from tax forgone on investments while in managed funds. Overall the offshore investment tax changes for all investors are approximately revenue neutral. Many of the winners will be the thousands of ordinary people who save through managed funds. Hundreds of thousands of people already invest through such funds but that number is expected to increase significantly with the introduction of KiwiSaver especially with regard to low and middle income savers who may not have access to a work-based savings scheme at the present time. 
The reform of the tax laws is therefore crucial to developing a better savings culture—one that encourages people to start saving early in their working life for their retirement years. Many people tend to do nothing apart from paying off the house leaving it far too late and far too close to their retirement before they try to save in addition for that. By then it is too late to accumulate any significant total capital. Now it is too easy not to save. KiwiSaver will change that by introducing effectively an opt-out system rather than an opt-in system. With deductions at work by way of the employer with the Inland Revenue Department managing much of the compliance costs and handling very small balances in order to remove those costs from the managed funds and with the upfront and additional incentive in relation to saving for a house the Government anticipates there will be a reasonably significant take-up of KiwiSaver. Indeed the main objection now is that KiwiSaver should be augmented or turned into a compulsory savings scheme. But I note that New Zealand businesses do not want to contribute to a scheme like the one that operates in Australia where businesses rather than the individual employee pay for the compulsory savings scheme. 
We anticipate a lot more people will invest through managed funds so it is important to remove the tax disadvantages that face people who save through those vehicles. One of the most obvious disadvantages is that there is a flat tax rate of 33 percent on the earnings in the fund which overtaxes all those people who earn under $38000 a year and whose marginal tax rate is 15c or 21c in the dollar. That overtaxation will cease under the proposed rules and lower-income investors through funds that elect to be portfolio investment entities will be taxed at their correct rate. In order to ensure that there is no incentive for funds not to opt in that taxation will be capped at 33 percent so that there is no incentive to try to create separate vehicles for 39 percent taxpayers or indeed not to have such vehicles at all. Those funds will no longer be taxed on their share gains from New Zealand and Australian companies. That is why the bill is timed to come into effect at the same time as KiwiSaver does. 
That is one half of the job. The other half removes the tax advantages—we should be clear about this—enjoyed by some individuals who have offshore portfolio share investments and ensures that direct investment is not tax favoured over investment through funds. In the past the National Party used to subscribe to the notion that taxation reform was not always just a matter of cutting taxes but also a matter of fairness and equity and of achieving an appropriate balance around the taxation area. Now the National Party basically says in this House that it supports the continuation of tax avoidance schemes. It says it believes that it is perfectly right and proper that people should invest in tax avoidance entities offshore and avoid the taxes they would pay if they invested in entities within New Zealand either directly or through managed funds. I do not know how National Party members can keep a straight face when they get up in this House and argue that particularly when— 
R Doug Woolerton 
: They try do they? 
Hon Dr MICHAEL CULLEN 
: They try. Well they put up Dr Lockwood Smith who does not really try to keep a straight face to be fair. But there is even a de minimis level of $50000 so that those with smaller accumulated savings will not be affected by this measure. 
The largest single group thus affected investors in Guinness Peat Group will be exempt for a period of 5 years to allow that group to rearrange its affairs before registering in New Zealand. I have to say very gently that Mr Gibbs was always unable to answer the very simple question of why Guinness Peat Group could not incorporate within New Zealand but had to stay incorporated within the United Kingdom—a very simple mechanism to avoid the consequences of these taxation changes. It has something to do with the tax loss companies held in the UK— 
Hon Bill English 
: What’s the answer? 
Hon Dr MICHAEL CULLEN 
: I have not been told. It has something to do with the tax loss companies held by Guinness Peat Group in the UK which can be offset only against UK taxation not against New Zealand taxation. 
The uneven operation of the current regime—the disadvantaging of some and advantaging of others—has to be addressed in some form or another. It has always been an extremely difficult public policy issue. Many suggestions have been made over the last 2 or 3 years about the best way to do so. This is the best set of compromises I believe that we are capable of coming up with moving forward into the future. In particular it is very important to send the signal given where we are in the world that the New Zealand Government no longer says it prefers New Zealanders to invest offshore in the older lower-growth countries—such as the UK Germany and so on—and not in the new more rapidly developing countries in Asia and elsewhere with which we will have growing economic links in the future. It is hard to say we are part of that developing world of economic growth if we then have a taxation system that discriminates against someone who invests there rather than if you like in the old world. 
These reforms are complex. This is a complex bill in most of its parts. The bill also has other matters in it that will be welcomed by a wide range of business interest groups. Those matters address particular issues like geothermal exploration for example. I am sure the Finance and Expenditure Committee will want to consider the bill very carefully. I have no doubt it will suggest some changes. I have never seen a tax bill that provides for a complex structural change to come back to the House without being altered in some form or another. I look forward to the bill returning to the House and I look forward to New Zealand having a fairer system that in particular does not overtax low to middle income earners on their savings.