Woodhouse MichaelTAXATION (ANNUAL RATES FOR 2016-17 CLOSELY HELD COMPANIES AND REMEDIAL MATTERS) BILLFirst ReadingHon MICHAEL WOODHOUSE (Minister of Revenue): I move That the Taxation (Annual Rates for 2016-17 Closely Held Companies and Remedial Matters) Bill be now read a first time. I nominate the Finance and Expenditure Committee to consider the bill. This large and wide-ranging tax bill proposes several suites of largely technical changes to the tax rules. The principal purpose of the proposals is to improve strengthen and update our tax rules so they continue to work well for taxpayers and for the Government. Changes in the economic environment business practices or the way that the law is interpreted can result in unintended consequences for taxpayers. These consequences may include unfairness inefficiencies complexities or uncertainty all of which affect the integrity of the tax system. Maintaining the tax rules to ensure that they continue to be responsive to change that they work well in practice and that compliance costs are minimised is vital for all taxpayers and for our economy to prosper and grow. The bill therefore continues the Government's work in making sure that our tax system remains fit for purpose.As I mentioned this is a very large bill. Many of the measures that it proposes are complex and technical in nature. They are however generally taxpayer-friendly and will be welcomed as such by the private sector. For the sake of convenience the bill can be viewed as comprising four main suites of measures.The first suite proposes changes to the look-through company rules and the dividend rules as they applied to closely held companies. Although closely held companies typically have just a few shareholders they are also a significant proportion of the total number of companies in New Zealand. Look-through companies are in the same way as partnerships of individuals looked though for tax purposes: income and expenditure is attributed back to owners and they are taxed at their personal tax rates rather than at the company tax rate. It is important that the tax rules apply as intended and that the decision to convert a small business to a company is not driven by tax considerations. The proposed measures aim to simplify the current rules to reduce compliance costs and to ensure that the rules remain robust and true to their intended purpose. They include proposals addressing a number of complexities raised through consultation with the private sector as well as proposals to tighten the eligibility rules for an entity electing to become a look-through company. The result will be a much more workable set of rules for taxpayers.The second suite of proposed measures is intended to bolster the rules around the tax treatment of interest earned in New Zealand by foreign lenders. Changes are therefore proposed to the non-resident withholding tax and for approved issuer levy rules. They ensure that these taxes apply consistently to transactions that are similar in economic substance. They include changes to the non-resident withholding tax rules to ensure they apply as intended to related party debt or arrangements that are equivalent to related party debt; changes to the approved issuer levy registration process to reduce the risk that the levy is paid on related party debt instead of the higher rate under the non-resident withholding tax rules; and correcting anomalies related to branch structures which can be used to remove the requirement to withhold non-resident withholding tax or to pay the approved issuer levy.The third suite of measures in the bill proposes various amendments to fine-tune the GST rules and ensure that they continue to work as intended. They include taxpayer-friendly changes such as enabling businesses to deduct GST associated with the costs of raising capital and allowing partially exempt businesses to use an alternative apportionment method. There are also changes to clarify the rules around the zero-rating of services provided in connection with land in New Zealand.Finally the fourth suite of changes contains a large number of mainly technical amendments. Although they are mostly remedial in nature these measures are considered by the private sector to be of major importance in making sure that the tax rules work well in practice. They are part of the Government's ongoing work to ensure that the tax rules are clear and apply as intended and that they do not impose unnecessary compliance costs on taxpayers. Measures proposed to clarify the deduction and timing rules for aircraft engine and overhaul expenses including those incurred by commercial aircraft operators—Fletcher Tabuteau: Bring back Todd.Hon MICHAEL WOODHOUSE: —for example will better align the timing of deductions with income arising from the use of the aircraft and will better reflect the economic basis for the overhaul process. It is certainly getting the aircraft industry excited Mr Tabuteau.The bill also includes a number of taxpayer-friendly measures to promote greater fairness and certainty in the tax rules. Proposed changes to the debt remission rules for example address a problem that can arise under the current debt remission rules when a debt is remitted between associate parties. Debt remission refers to the extinguishing of the debtor's liability by a creditor. The reduction of the liability is treated as taxable income because it increases the wealth of the debtor. When the creditor is associated with the debtor the creditor is denied a bad-debt reduction resulting in income to the borrower but not a deduction to the creditor. The bill proposes to correct this asymmetric result by treating the debt as being fully repaid when a debt is remitted between related or associated parties. The proposed changes follow consultation with the private sector in February last year and are part of the Government's efforts to ensure fairness across the tax system. This will be welcome news for group companies in corporate New Zealand as well as smaller mum-and-dad partnerships or businesses.Other changes proposed in the bill include amendments to improve the consistency of income tax legislation with insolvency law correct an overreach of the current land tainting rules affecting council-controlled organisations ensure that the tax pooling and life insurance business rules work as intended and ensure that the Working for Families tax credit rules work correctly. The bill also adds 14 charities to the list of donee organisations with overseas purposes in schedule 32 of the Income Tax Act 2007. They are not donee organisations. As a result donors to those charities will be eligible for tax benefits on their donations effective from 1 April 2016. Finally of course the bill sets the annual rates of income tax for the 2016-17 tax year. Many of the measures proposed in the bill have been developed through open consultation with the general public and with private sector groups. This is a particular strength of our tax system and it helps to ensure that tax and social policy changes are well thought through. As I mentioned earlier we live in dynamic social and economic times. It is important that our tax system remains current and in tune with change but at the same time that it remains fair coherent and unambiguous. The proposals in this bill will help to achieve those objectives and are part of the Government's ongoing governance of the tax system. I commend the bill to the House.