Dunne Peter: Taxation (Annual Rates Savings Investment and Miscellaneous Provisions) Bill — Second Reading In Committee 
Dunne Peter: Taxation (Annual Rates Savings Investment and Miscellaneous Provisions) Bill — Second Reading In Committee 
[Volume:636;Page:7121] 
Hon PETER DUNNE (Minister of Revenue) 
: 
 I thank firstly my colleague Gordon Copeland and also Doug Woolerton for their comments on Part 2 and the contributions they have made. I also say to Dr Smith that I am going to attempt to respond to a number of the points he raised. I go back to the first point he raised concerning the portfolio investment entity rules as they affect superannuation funds. He will be aware that the Finance and Expenditure Committee has made a number of changes in that area. For example there is now a simplified method of allocation available for entities such as superannuation funds to allow them the benefits of being a portfolio investment entity with few compliance costs. That method will require the fund to continue to pay provisional tax. The fund will be required to calculate the portfolio investment entity tax accurately on behalf of its members at the end of each year rather than on a quarterly basis and would make an annual investor interest adjustment within 3 months of the end of the tax year in order to ensure that 19.5 percent taxpayers receive an additional entitlement to reflect their lower tax rate. The fund will also be liable for the tax on the share of the current year’s income that is paid out to investors that exit the fund during the year. The select committee has recommended some other changes as well. 
I should just say to Dr Smith that the complexity issue has been substantially modified and the proposals that the bill now contains are largely supported by the industry as being a vast improvement on what was in the bill in the first instance. The claim that was made based on the St John and Littlewood evidence has been substantially addressed in the amendments recommended by the committee. 
I turn to the question that Mr Groser raised regarding share ownership schemes which has been acknowledged as a problem. Again the Finance and Expenditure Committee has made some amendments that seek to address that issue; for instance no tax will now be payable for the period when an employee is unable to sell out of the ownership scheme. So some improvements have been made there. 
I will talk on a point that both Dr Smith and Mr Groser also made about unrealised gains currency shifts and all of the impacts that they might have on the value of an individual investment. The key point to make here is what the key difference is between the respective arguments in this whole bill. The bill says that the fair dividend rate is deemed to be 5 percent or the actual value of the dividend paid in years where a profit accrues—in other words where a gain takes place. Where a loss occurs no tax is payable. The position taken by the National Party has been a 3 percent flat rate payable in years when there is a gain but also payable in years when there is a loss. So the difference is essentially between 5 percent which will actually average out at around 3.4 percent over a period of time versus a situation that says it is 3 percent regardless of whether the value of one’s investment has increased or decreased. That is the essential difference between the two broad positions on this bill. 
The members say it is complicated. Frankly I think there is an issue of fairness here. Taxpayers will feel that it is reasonable to pay a tax in years when they have something positive to show for it. They will resent the idea of being taxed in years when there is a loss and that is the nature of the debate that has taken place. 
The one other issue is the debate that has been ongoing about whether this is a capital gains tax. The whole notion of the changes that the Minister of Finance and I recommended to the select committee was around dividend yield and to get away from the notion that was implied in the original proposal—the 5 percent of the 85 percent and all of that—of that being a capital gains tax. We wanted to make it absolutely clear that that was not our intention; we were seeking to get a reasonable tax payable on an investment. That is why we called it as such—the notion of a fair dividend rate became available. I note that again the difference between the parties is not great: a deemed rate of return on the one hand versus a fair dividend rate on the other 3 percent flat on the one hand versus 5 percent—or zero in loss years—on the other. It is a very small point of difference. 
Having heard a lot of the arguments—and I am sure the member will appreciate my saying this—having received several thousand letters and countless delegations and having talked to lots of meetings up and down the country we believe that the mechanisms contained in this part of the bill are a step forward. These things will always be difficult to some degree or other but we sought to try to address the major issues and come up with a regime that is fair and equitable and that recognises a couple of key points. 
The member touched earlier on the question of the “grey list”. I thought I referred in my second reading speech to one of the anomalies which is that the emerging economies of Singapore China and India are not on the “grey list” so we immediately have a disadvantage for investment that goes into those economies as opposed to those on the “grey list”. We have been trying to create a regime where it is attractive for New Zealanders to invest offshore. We recognise that most people invest through their own efforts and most of that investment goes into Australasia. Around 70 percent of investment from New Zealand goes into Australasia around 15 percent into the “grey list” and around 15 percent into non - “grey list” countries. Part of the emphasis on Australasia was simply a recognition of what is the status quo. 
We have attempted therefore with the remaining 30 percent to draw rules that are clear and unambiguous and that are essentially fair and do not discourage people. That is the real point in essence here but I come back to the point that I began on. The essential difference between the two sides in this arguments is 5 percent for the funds and a floating rate if you like for individual investment versus a flat 3 percent win or lose. I think it is a very small point of difference. 
The question was put that the amendments set out on Supplementary Order Paper 84 in the name of the Hon Peter Dunne to Part 2 be agreed to. 
Amendments agreed to.