Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill — In CommitteeText is incorporated into the Bound VolumeTaxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill — In Committee[Sitting date: 01 December 2015. Volume:710;Page:8434. Text is incorporated into the Bound Volume.]Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) BillIn CommitteeDebate resumed from 3 November.Part 3 Amendments to Income Tax Act 2007STUART NASH (Labour—Napier): I am happy to stand and talk on the Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill. It is a bill with quite a long name—there is no doubt about that—and Part 3 is quite a long part. In Part 3 there are a whole lot of remedial clauses that change a number of Acts mainly the Income Tax Act but there are several sections that I would like to concentrate on and perhaps get a couple of answers for. There seems to be a level of inconsistency in the legislation and I cannot quite get my head around it just being a simple man from Hawke’s Bay of course.I will look at Part 3 clause 75C which amends section CW 42 of the Income Tax Act and we are talking about business income here. What this clause has added is this. The old law said “no person with some control over the business is able to direct or divert to their own benefit or advantage an amount derived from a business.” What this is basically saying is that a person is not allowed to divert money away from a charity for their own gain. But what this law has added is “other than the trustee or trustees the society or the institution” and I am not too sure why they have exempted the trustee or trustees the society or the institution from the ability to transfer money away from the business. It would seem to me that there are in fact a lot of charities that are actually governed by trustees or societies or institutions and what this is actually doing is exempting a decent chunk of those who are involved in the governance of charities from the condition that allows them to divert money. I am not too sure why that is there and there is a whole lot of inconsistency with that.If I move down that same clause to section CW 42(5)—we are talking about clause 75C(2) here—they have deleted the words “to their own benefit or advantage”. So what this section is about in the Income Tax Act is that it talks about the control of a company. The Income Tax Act says that the control of a company is basically defined around someone’s ability to direct or divert amounts from the business but they are deleting the words “to their own benefit or advantage” and yet those words feature significantly throughout the Income Tax Act. There seems to be a level of inconsistency where that term is used. I am not too sure why that is the case but I just cannot get my head around the inconsistencies with regard to that.I go down to clause 75D which amends section CW 42B and again what it does is this. Clause 75D(1) says “words before the paragraphs replace ‘a trust and its trustees or a company … whose activities are predominantly’ with”—this is talking about social housing—“ ‘a trustee or company … whose activities involve’ ”. So what it is actually doing is it is redefining in law who can actually take advantage of community housing trusts and companies. So what in the past income tax law said was that to be defined as a community housing trust or company your activity has got to be predominantly in the area of managing community housing trusts and companies. Now what the law says is that the company or the trust only has to be involved in that business and I am not 100 percent sure what the definition of “involvement” is.This is where we get into sticky legal situations because we know that the Government is selling down a lot of the State houses into social housing organisations and we could have a large trust or a large company that says “We’re just going to take three or four of the houses here and that will mean that we can take advantage of tax benefits in the Income Tax Act.” because the company itself can say “We are involved in social housing benefits.” So the definition between “involved in social and community housing” versus “predominantly in the business of social and community housing” is substantial and I perhaps see some unintended consequences here.But the other thing that is slightly strange is that as mentioned it removes the words “trust and its trustees or a company” and replaces them with the term “a trustee or company”. I was always of the view that a trustee was a person who actually administered a trust so what it is saying here is it is removing the word “trust” and putting in the word “trustee”. So by definition this is not applicable to a trust; it is applicable only to a trustee.Maybe I am getting my legal technicalities mixed up here but I would have thought that if you put in a trust or a trustee which again is a term that is used throughout the Act it would cover everything and it would make sure that there was no confusion. After all one of the major tests of tax legislation is that it avoids confusion—that it is clear.I go down to clause 75D(2) and this is another clause to do with charities and business income. It has added some words that is “no person with some control over the activities other than the entity is able to direct or divert”—now these are new words—“to their own benefit or advantage an amount derived from the activities.” The reason I highlight this is that I think I mentioned before that we deleted the words “to their own benefit or advantage”. Again it just appears to be a real inconsistency within the space of about three or four clauses. The reason why I am unsure. There is probably a good reason. Perhaps the Minister in his infinite wisdom could let me know when it is applicable to use “to their own benefit or advantage” or when it is irrelevant and therefore why it has been removed from some clauses and why it has been added to other clauses. Again it seems to me that there must be a good reason for it but I am unsure of that reason.I would also like to talk about clause 76. This amends section CW 55BA of the Income Tax Act and this is about the tax treatment of tertiary institutions and their subsidiaries. What this actually says under the subheading “Exempt income” is that “An amount of income derived by a tertiary education institution”—let us say for example a university—“or a tertiary education subsidiary is exempt income.” So what this is basically saying is that for example a business incubator which a lot of the universities have is exempt income—i.e. it does not have to pay tax. But the interesting thing about this is that to be exempt income it has to be 100 percent owned by a tertiary institution or a group of tertiary institutions.The interesting thing about this is that it actually says in new section CW 55BA(2)(a)(ii) “market value interests”—so this is exempt income—“in the company adding up to 100% when a market value circumstance exists;”. The interesting thing about this is I wonder whether in fact this may have the unintended consequence that when a university incubator or a university seeks to commercialise intellectual property that some of its staff have developed what this will actually do is it will delay or stop a university from going out to the market to seek equity in order to raise capital. Once it drops down below that 100 percent ownership then it is not exempt income any more.One thing that we really want to encourage our universities to do is commercialise a lot of the intellectual property that is resident within our institutions and there are a number of exceptionally talented academics across the whole university scheme even though I must admit this is not just about universities. It is about polytechs or any tertiary education institutions. But what we do not want to do is have an unintended consequence where the university does not go out to the market to seek capital in any way shape or form because it knows that it will move from exempt income into income that is taxable. I think that may be a little bit of a problem going forward and I would like to understand why—well part of me understands why. Tertiary education institutions are exempt from income tax because it is a bit like robbing Paul to pay Peter. You take income tax off a tertiary institution and then you give it back in terms of other income that the Government gives to universities polytechs etc. but I think this may well end up with unintended consequences.But the other interesting thing about this is that it talks about the control of a company and it says: “(b) where no person … with some control over the company is able to direct or divert to their own benefit or advantage an amount derived from the company.”GRANT ROBERTSON (Labour—Wellington Central): I am sure my colleague Dr Clark will join us shortly in this discussion on the Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill. I want to talk mainly in this first contribution around the quite large set of clauses and amendments relating to the cashing out of research and development tax losses. But before I do that I actually want to pick up where my colleague Stuart Nash just left off and talk about clause 76.I have to say that at the Finance and Expenditure Committee we did not have a long discussion about clause 76. It did come up and there were a couple of amendments made to the clause as a result of the brief discussion we had. But I do think it is important to put on the record the concern that the Labour Party has that in making a change that is as Mr Nash noted primarily about ensuring that there is consistency in the way that tertiary institutions are treated in terms of tax: be it in their role as a tertiary institution educating people be it a polytech or a university undertaking lectures and providing the normal kind of degree qualifications if it was a university that we would expect the income they derive is regarded as being exempt. What this clause does is put in place a regime for the subsidiaries of tertiary education institutions. Again as Mr Nash has noted these now come in many forms. They run all the way from start-up companies based upon the research of a particular researcher at a university all the way through to small limited companies set up by polytechnics to provide a particular kind of educational service that might be a bit outside the norm. So it could be the provision of a particular service to international students that is regarded as more of a company-based arrangement than the traditional polytech structure.In trying to create a mechanism that encompasses all of those different new subsidiaries of tertiary institutions something is missing in this clause. There is an attempt to deal with the breadth of these institutions in the amendment that is now in new section CW 55BA(2) where a tertiary education subsidiary is a company “(a) in which the tertiary education institution alone or together with other tertiary education institutions holds—(i) voting interests in the company adding up to 100%; or (ii) market value interests in the company adding up to 100% when a market value circumstance exists;”. That deals with the issue of universities or polytechs cooperating with one another. What it does not deal with is what is becoming more commonplace in the tertiary settings particularly in the university settings which is different styles of ownership. These include where individual academics are now starting to take some sense of ownership of these companies so they have their own identity separate from the tertiary institution that they work for. It is also the situation now that private investment does come in from quite an early point. Another kind of investment comes in. We have large research programmes in our tertiary institutions at the moment that are funded by research funding organisations from other countries.If we take the example of the terrific longitudinal study run down at the University of Otago that study has been largely funded in recent times by the American National Institutes of Health by the UK research foundations. How are they going to be treated under this kind of situation? How will a company that spins out from the genetic research that has arisen out of that longitudinal study be treated in a tax sense? We do not want a free ride here for companies that should legitimately be paying tax but where they are genuinely research organisations developed out of a tertiary institution that has a slightly different ownership or share arrangement than 100 percent what do we do? Perhaps the Minister in the chair the Hon Paul Goldsmith might want to take a call to say whether or not there is a different set of structures for those sorts of companies to be considered. But certainly on this side of the Chamber we want to put on the record that we want to see an encouragement of the development and commercialisation of the research that happens inside our tertiary institutions and any tax treatment that discourages that as could be possible under this clause provides us with some concern.I note in terms of this clause that there is a section around who controls the company and there is an important change that was made by the Finance and Expenditure Committee to delete—[Bell rung]The CHAIRPERSON (Hon Chester Borrows): This is your fourth call.GRANT ROBERTSON: My fourth call on this part?The CHAIRPERSON (Hon Chester Borrows): I just thought I would let you know.GRANT ROBERTSON: Gracious it has been so long since those first two calls that I was not aware that it was my fourth call. I will briefly then complete the comment that I was making there that there was a change made removing the question of whether an individual was going to benefit or be advantaged from the work of a company. That will help in the situation that I mentioned before where specific academics might have taken a share within a company separate from the university they work for. So I do recognise that matter has been dealt with but I would ask that we get some clarification around making sure we are not setting up a regime that provides a disincentive to universities commercialising their research.In the brief period that I have remaining to me to speak on this part I did want to come back to the question of the cashing out of research and development tax losses and largely because this is an area where the committee did make a large number of changes. The purpose of this is supported by members on this side of the Chamber. The idea is that we can provide at the early stage of a company’s establishment the ability to cash out the losses from research and development. We want to see those companies investing in research and development from day one and if this is one way that we can do that then we can support that. I would say that the Government’s reluctance to go down the path of a comprehensive research and development tax credit leads it to have to put in pages and pages of definitions and difficult-to-understand processes which people will have to go through in order to work out whether or not they are actually eligible for this.It is worth noting the changes that the committee made. So we are clear that under the proposals research and development start-up companies can claim up to 28 percent. That is the current company tax rate and it helps to be clear and simple about that. The main eligibility requirement is that the company must be a loss-making company resident in New Zealand with a sufficient proportion of expenditure on research and development. That was one of the areas that again presented some difficulty for us because of the potential for a range of ownership arrangements that would make a company primarily a New Zealand one clearly being resident in New Zealand.And then there is that question of what is a sufficient proportion of expenditure on research and development. The amount of losses that can be cashed out has been capped at $500000 for the 2015-16 year increasing by $300000 over the next 5 years to $2 million. When we were discussing this in the committee the issue that I wanted to raise was how research and development was defined and who would make up their mind as to whether or not this genuinely was research and development. And in the end what we drew out as the discussion went on was that that role was effectively being outsourced to Callaghan Innovation.Callaghan Innovation is a relatively new organisation—a good organisation in my view doing some good things in our community. But there are still some issues for us on this side of the Chamber as to whether or not Callaghan Innovation is the right organisation to be doing that checking and whether it has the scope of expertise to always know whether a particular or given company actually is undertaking research and development in its sphere. And for me this highlights the concern we have that by creating a system where we do not have a broad-based research and development tax credit we create a large number of hoops and we create a new role—a bureaucratic role essentially—for Callaghan Innovation whose job should be to be out there in the community supporting researchers to do research not acting as some kind of judge in a sort of Dragons’ Den contest about whether something is or is not research and development. So again we could have come up with something simpler something that did not involve so much hoop jumping. We understand that Callaghan Innovation is going to be paid for its work which is fair enough—it is a Crown research institute that has to make sure that it pays its own way. But we think there is the potential for this to be a fairly substantial distraction from the kind of work that it is going to do.Just briefly the other clauses in here—and I would urge the Minister in the chair the Hon Nathan Guy or another member of the Government who was on the select committee to actually work through—Hon Clayton Cosgrove: David Bennett.GRANT ROBERTSON: No no not David Bennett. Not David Bennett. I urge another member of the committee except for David Bennett to stand up and work our way through the eligibility criteria the wage intensity criteria why $500000 was listed as the amount to be cashed out and then particularly of interest to me are the excluded activities. I would like to know about those.Dr DAVID CLARK (Labour—Dunedin North): I am very sorry to see Mr Robertson cut short given he is limited to only four speeches in this part of the bill. He was cut down in his prime but I am sure there will be another opportunity maybe in the title and commencement debate to finish the argument that he was developing. I did not have the privilege of sitting through the select committee process on this particular bill although the questions I will bring up relate to previous editions of a very similar bill because a very similar bill gets put through this Parliament every year tidying up a number of these same issues and that is a good thing.I want to say something very positive from the Opposition benches about this bill. This is a necessary and important thing and I hope that those listening at home or watching on the TV can also see that there is a very constructive thing going on here where Opposition members are drawing attention to concerns about the bill which is designed to patch up where there are loopholes. This Part 3 of the bill is tidying up the Income Tax Act to make sure it achieves the purpose that it is set down to achieve. So when my colleagues pick some holes in it they are actually doing the Government a favour because there is an opportunity for Supplementary Order Papers to amend the bill to tidy up any little things that come to light through this part of the debate. So my questions are in a similar vein. The Minister in the chair Nathan Guy I am sure can get himself briefed if the answers are not immediately to mind.Firstly I want to just talk about clause 69B which talks about the exceptions for overseas accommodation. I am wondering what level of discussion was had that settled on the paragraph (a) and (b) definitions in new section CE 1C(1B) of what should be included in this aspect of the Act around the cost of accommodation. Paragraph (a) says for the purposes of subsection (1): “the actual cost to the employee for the accommodation; or (b) a reasonable estimate of the expenditure that is likely to be incurred by the employee or group of employees for whom the amount is payable.” When this debate has been had in the past there has been a debate around what constitutes accommodation for the purposes of work and what constitutes accommodation that goes above and beyond that—so the nature of the accommodation.If someone is going to do a simple job fixing a factory line and they are put up in a five-star hotel with swimming pools for a period of a week when the job takes 1 day even though it is “at or near an overseas work location”—those are the words that are found in the Act—is that a legitimate form of accommodation to take and to be included for the purposes of tax exemption? It seems in the spirit of the law that that would not be the case but how you draw those lines is a very difficult thing to do and I wonder—the Minister may know the answer to that—about what debate was had this time in the select committee and why these words were chosen which seem very broad to me. This seems a very broad definition. It is simply “at or near an overseas work location” full stop. The cost to the employee for the accommodation—there is no specified time limit around it or the reasonable estimate and there is no specification of what type of accommodation. So that is my first question that I would appreciate a response from the Minister on.The second question relates to clause 75D which some colleagues have already referred to the community housing trusts and companies aspect of the bill and the shift from the words—in clause 75D(1) it says to replace “a trust and its trustees or a company (as applicable the ‘entity’) whose activities are predominantly” with “a trustee or company (the ‘entity’) whose activities involve”. This is the shift from a trust being defined as something that predominantly does something to something “whose activities involve”. I am trying to understand what the purpose of that shift was because again if this shift means that say for a charitable purpose trusts want to house medical people in a community where they cannot attract medical people because the accommodation is too expensive—this is a debate that has been had before—is that achieved and is there an unintended consequence where trusts are also doing other activities that are not really in the spirit of a trust for that purpose? Why has this been changed? There will have been a live debate—[Bell rung]. Mr Chair?The CHAIRPERSON (Hon Chester Borrows): Dr David Clark fourth call.Dr DAVID CLARK: Thank you Mr Chair. There will have been a live debate I suspect about that if I am not mistaken. What are the checks and balances and how has the select committee assured itself that that purpose will be achieved?The next area that I am interested in—and perhaps I should declare a personal conflict—is the accommodation provided to ministers of religion. This old chestnut—it comes up every time in these remedial matters bills in recent years. Let us remind ourselves that the purpose of this is to ensure—excuse my voice is going; I have a cold—Grant Robertson: He’s really emotional.Dr DAVID CLARK: It is not an emotional response. It is to ensure—as I understand it and the Minister can correct me if I am wrong—that those small communities often in hard-up places that have very few professionals left in the community want to retain their minister of religion. This is because often in some small communities in remote places the minister of religion will be the only person with a tertiary education who has training in counselling and conflict resolution and who can witness documents and so forth. For isolated communities it is very beneficial to have that kind of person available aside from the usual stuff that ministers of religion do in those communities: the “hatch match and dispatch” as it is called in the trade. Aside from the hatch match and dispatch having people in town who can perform those other more secular functions of witnessing documents negotiating their way through disputes and so on is what is being protected here.But the definition is the bit that I want to ask about because it seems very broad. I know that my colleague the Hon Clayton Cosgrove may delve further into this but on the surface—he was talking about it earlier I certainly hope he will; I will be disappointed otherwise—it leaves it largely up to the religion itself to define who is in and who is out: somebody whose duties are related mainly to the practice study teaching or advancement of religious beliefs. What constitutes “religious beliefs” is I guess the fundamental question and how broad is this category? We know in human rights legislation that we have a real issue again and again and again when we have some kinds of discrimination where there are exemptions for people who fall under a religious category. So the Catholic Church for example quite openly says that it will not ordain women to the priesthood at this stage and that does not sit neatly with our wider human rights legislation and it creates problems.At some level in our society a conflict occurs that is challenging to resolve. Actually in this House we are often not willing to go near it. Here in this particular clause of the bill we have the advancement of religion generally defined. I am wondering whether there is going to be guidance provided as to what constitutes a religion that is inside and what is outside the scope when we are talking about this accommodation exception in clause 81 on pages 48 and 49 of the bill. I would be very interested in what the Minister in the chair the Hon Nathan Guy has to say about the definition of that exception. I can see he is studiously studying his papers and I look forward to his contribution shortly. Thank you very much for the opportunity.KANWALJIT SINGH BAKSHI (National): I move That the question be now put.The CHAIRPERSON (Hon Chester Borrows): I will hear from Fletcher Tabuteau on his fourth call.FLETCHER TABUTEAU (NZ First): I just wanted to touch on one of the issues raised in clause 76 “Section CW 55BA Tertiary education institutions and subsidiaries”. It talks specifically about those who have control over an institution.This is where it gets confusing and this is where the Labour Party had a lot to say. The clause kind of contradicts itself and I would just raise this with the Minister: “where no person other than a tertiary education institution with some control over the company is able to direct or divert”. So it has only got some control but then it is able to direct or divert which raises some of the questions around the eligibility of a controller of an institution and about what they are entitled to do in terms of accessing those funds diverting those funds and that particular issue.Unfortunately my primary purpose of this first call for the evening was on clause 71 “Section CF3 amended (Withdrawals from foreign superannuation scheme)”. You can imagine that New Zealand First gets many questions from constituents on superannuation—Hon David Cunliffe: No they don’t. No you don’t.FLETCHER TABUTEAU: And it is obviously no surprise to my friends around me in the Chamber. But actually I have to admit that the clause goes on for four pages of the bill and so my call at this point of the evening is to actually ask for some explanation from the Minister.I have to admit that I was not on the Finance and Expenditure Committee and was not part of the debrief but I think when you look at some of the terminology and some of the wording used you will find that you will get these unintended consequences that New Zealand First speaks so often about when we are referring to remedial matters from the National Government.I will use just a few examples. Clause 189 corrects an oversight around the omission of the phrase “an educational bursary” within MB 13(2)(f) in the Income Tax Act 2007. The reality there is that it was always intended to be both an educational scholarship and the educational bursaries were supposed to be included in that calculation. And yet here we are nearly 10 years later amending the legislation.The other one that has just been spoken to eloquently and with great knowledge was in clause 81 around the commencement date—Hon Clayton Cosgrove: Very piously I thought.FLETCHER TABUTEAU: —piously?—for accommodation provisions applying to ministers of religion. So I think when you look at the legislation we have to acknowledge that the reason it is in there is that the incorrect date was inadvertently changed in the Taxation (Annual Rates Employee Allowances and Remedial Matters) Act 2014. These provisions would apply from 1 July 2013 and not 15 April as is currently written in the Act. So here we are now fixing it up.I will come to it later on in the piece because it is not the appropriate part of the debate tonight to talk to it but Supplementary Order Paper 129 I think it was is an example of just what it is that the public needs to be wary of. We have so much to work through here and mistakes are already being made. I acknowledge that the Government is trying to rectify them at the moment but the reality is that this is a large piece of work and the debate needs to be extensive. I think when I come to that Supplementary Order Paper we need to acknowledge that the work has not been done and we are going to need to look at it again.Just to finish off in the time that I have back to clause 71(3)(a): “A foreign superannuation withdrawal is not income of the person under subsection (2)(d) if—(a) the benefit is an interest of the person in the scheme that is withdrawn on the death of the person or under a relationship agreement arising from an event”—STUART SMITH (National—Kaikōura): I move That the question be now put.Hon DAVID CUNLIFFE (Labour—New Lynn): There are a couple of matters that I would like to draw the Minister’s attention to. The first is clause 76 appearing on page 47 of the bill and in particular the insertion of new subsections CW 55BA(2)(a) and (b). This relates to tertiary institutions and the definition of an eligible tertiary institution for the tax deduction around exempt income. The principle set out in the clause is that the tertiary education institution or subsidiary must be 100 percent wholly owned in order to qualify. New subsection 2(b) says that one of the circumstances is that “where no person other than the tertiary institution with some control over the company is able to direct or divert to their own benefit”. That in the light of recent history will be a problematic clause for a number of institutions currently in the market place. I would like to note some in particular and why that clause is likely to catch them out.Without going into unfortunate personal details and I will not it is well documented that the Taratahi Agricultural Training Centre has had a very mixed period of its history over the last 5 years which has included the enrolment of some 70—70—staff as students inappropriately—The CHAIRPERSON (Lindsay Tisch): Order! That is not part of this.Hon DAVID CUNLIFFE: Well Mr Chairman—The CHAIRPERSON (Lindsay Tisch): Come back to Part 3.Hon DAVID CUNLIFFE: Clause 76 inserting new section CW 55BA(2)(b) goes to the issue of whether a person “with some control over the company”—I am quoting from the bill—“is able to direct or divert to their own benefit”. I am making the point that that has actually occurred in the case of the Taratahi Agricultural Training Centre.The CHAIRPERSON (Lindsay Tisch): That is making assumptions; you cannot do that. It is hypothetical. Come back to Part 3.Hon DAVID CUNLIFFE: The Tertiary Education Commission employed Deloitte and Deloitte concluded that funds had been diverted by the institution inappropriately. That is why the Government clawed back $6.47 million of inappropriately appropriated funds from the institution on the basis of the Tertiary Education Commission’s review. That is not the only institution that would be caught by new subsection (2)(b).The second one of course is the Western Institute of Technology based in Taranaki. That institution had a habit of inflating its student numbers. It too finally after a whistleblower was caught out—The CHAIRPERSON (Lindsay Tisch): No. Come back. [Interruption] I have just stood up. The member is making a lot of comments that are not directly related to the bill. Come back to the bill. We are on Part 3 now and I will not warn the member again—Part 3.Hon DAVID CUNLIFFE: I raise a point of order Mr Chairperson.The CHAIRPERSON (Lindsay Tisch): No look—I have ruled. Part 3—that is what we are on.Hon DAVID CUNLIFFE: I raise a point of order Mr Chairperson. I would like to seek your clarification on—The CHAIRPERSON (Lindsay Tisch): No I have asked the member twice now. Come back to Part 3—that is what we are on—and just focus on the content of what Part 3 is about.Hon DAVID CUNLIFFE: I raise a point of order Mr Chairperson. I am reading from Part 3.The CHAIRPERSON (Lindsay Tisch): You are using a lot of examples that are not relevant. Just keep on Part 3.Hon DAVID CUNLIFFE: I am going to read without reference to those individual institutions the language of clause 76 of Part 3 one more time. New subsection (2)(b) says: “where no person other than a tertiary institution with some control over the company is able to direct or divert to their own benefit or advantage an amount derived from the company.” Without naming a single example I can say that over $50 million of taxpayers’ funds have been so diverted in the last 12 months and caught out by the Tertiary Education Commission and repaid. And those would fall afoul of Part 3 of this bill as written.I commend the Government firstly for the drafting of this clause and secondly I commend the Government for the fact that finally after whistleblowers raised the alarm those miscreants were caught. But they might not have been and that is why we need to be extremely careful about the implications of Part 3 of the bill.Let me turn to a different clause of the bill that relates to black hole expenditure for research and development—[Bell rung] Thank you Mr Chairperson—enough on tertiary institutions. The key part of this bill which is represented in its title—the title of the bill the Taxation (Annual Rates for 2015–16 Research and Development and Remedial Matters) Bill turns on this part of Part 3 which is based upon the cashing out of losses for research and development expenditure. For the Committee to consider that we need to compare the provisions of this clause against the current pre-legislation status quo and the prior status quo. What this bill does is it allows certain loss-making companies to cash out losses of research and development expenditure rather than carry them forward up to a limit of $500000 in the first year and $300000 in subsequent years. Cash will need to be repaid—will need to be repaid—and losses reinstated once the company makes a return on the research and development investment. So essentially what this clause provides for is a tax deferral or in effect a loan from the taxpayer to the company by deferring the period in which it has to pay its tax through a carry-forward.That in principle is one possible means of sharing with the taxpayer the risk from innovation. There are two things that the literature makes really clear about innovation. The first is that the innovator never captures all the benefits on their own balance sheet because there are spillover benefits that go beyond the company. Therefore the public has an interest in encouraging innovation including through the tax system—fair enough. Here is where the design question comes: is a cashing out of losses preferable to a research and development tax credit or preferable to a grants system? Let us examine both of those options.The research and development tax credit is the predominant policy instrument used around the OECD. It was also in the current Labour Opposition’s previous two manifestos at a 12.5 percent discount rate. It is a little higher—I think 24 percent—in the Australian economy. That is a very simple low-overhead way of achieving that objective.The alternative approach that has been used up to now is the use of a grant system as my colleague Grant Robertson mentioned through Callaghan Innovation as the predominant provider. The problem with that is it is either discretionary which has a high overhead or non-discretionary subject to automatic criteria as it currently is which has led to a series of phenomenal botch-ups. The New Zealand taxpayer funded through Callaghan Innovation the Oracle America’s Cup bid against Team New Zealand. We gave it a research and development tax write-off through Callaghan Innovation—unbelievable. It funded a subsidy to the German multinational buyer to effectively develop and arguably expropriate New Zealand intellectual property through a subsidiary in New Zealand. It funded a company that was going to mine seabed sand resources and another one mining phosphate before either of them had a resource consent and which neither of them ever got and they had to repay the money. You see this is the problem with this so-called grant system. The research and development tax credit is a much simpler cleaner and actually more market-based system which most Western Governments have found preferable.So here in this bill is the Government’s fig leaf. It knows that the current system does not really work very well. It does not work for small start-ups the quality control problems are enormous and the bureaucratic overhead is skyrocketing. It needs the appearance of having a market-friendly instrument. Here it is: cashing out losses and paying them back later. But as the regulatory impact statement makes clear the impact of this instrument is so small so limited that any rational policy maker irrespective of political stripe would go back to the tax credit system that this Government turned down in the first place. That based on the criteria set out in the regulatory impact statement would be the rational thing to do rather than this hodgepodge—this policy framework is more like a fruitcake; you never know quite what raisin you are going to find in it—of a baseline of a non-discretionary grant system and this overlay which is kind of like the icing of a tax loss cash-out payback system. It does not work it is high-overhead and it is confusing. Business is saying to us that it wants a simple research and development tax credit system like it was promised in 2011 and 2014 but which it is still waiting for from this Government.DAVID BENNETT (National—Hamilton East): I move That the question be now put.The CHAIRPERSON (Lindsay Tisch): I am going to hear from Jan Logie. She has an amendment.JAN LOGIE (Green): It is with pleasure that I rise to speak to an amendment that we have added to introduce an income tax fringe benefit tax exemption for electric vehicles and public transport. I think this is very very timely considering the talks that are happening in Paris at the moment around the—[Interruption]—this is exactly on topic Mr Chair.The CHAIRPERSON (Lindsay Tisch): Do not talk about climate change.JAN LOGIE: The point of the fringe benefit tax exemptions is to incentivise the use of electric vehicles and the use of public transport within our businesses to be able to help us transition as a country to a carbon-neutral economy which is going to be better for the health of everyone—The CHAIRPERSON (Lindsay Tisch): I hear where the member is coming from. Just concentrate on what the bill is about. You can use that as an example but concentrate on what the bill has in it about the fringe benefit tax that your amendment is about.JAN LOGIE: Sorry could I seek some clarification on that Mr Chair?The CHAIRPERSON (Lindsay Tisch): No no. Do not talk about electric cars and things like that. Your amendment is fine.JAN LOGIE: Yes which is about electric cars.The CHAIRPERSON (Lindsay Tisch): Yes and use that as an example but do not concentrate on it. Yes carry on—carry on.JAN LOGIE: I am sorry Mr Chair. This is possibly me being obtuse but the amendment is specifically about electric cars and public transport so I am not sure how I can make that an example because that is what it is about. So I will try to speak to this.In New Zealand 20 percent of our greenhouse gas emissions come from pollution from transport and we really need to get active and come up with some solutions to help us transition as a country. This amendment would help us do that. Currently road transport accounts for 90 percent of that transport emission and we are spending over $6 billion every year on importing petrol and diesel. These are things we could change if we incentivised businesses to use electric cars and to encourage their staff members to use public transport.This is at the heart of what this bill is about: for very very little cost to our tax system we can encourage businesses to start buying electric cars and help change our car fleet in the country as a consequence. This amendment puts the fringe benefit tax exemption into place for 7 years for electric cars to give businesses the incentive to start changing their fleets.In turn one of the great flow-on benefits of that I think will be that when those businesses turn over their cars they will be introducing electric cars into our secondhand-car market in New Zealand enabling more New Zealanders to be able to go electric to clean up our emissions and to improve the health of New Zealand. That surely is a win-win.The fringe benefit tax exemption for public transport does not have a time limit on it in this amendment because that has no time limit and we would hope that businesses would take that opportunity to encourage their staff to use public transport into perpetuity. Sadly at the moment very few of them do that so there is not likely to be a huge cost to it.I would say just bringing it back to that wider point around the absolute importance of this that as we have heard in the media recently there has been some discussion that there is very little New Zealand can do about reducing our emissions below one of the lowest targets in the world. This bill proves that there is a lot we can do because one example—two small amendments to this bill to put in a fringe benefit tax exemption for electric cars and public transport would potentially shift our culture and business practices to put us on that road to a low-carbon future.That is about protecting the well-being of our communities right now business bottom lines and the future of our country and this planet and I really hope members in this Committee will look at this amendment.ALASTAIR SCOTT (National—Wairarapa): I move the motion be now put.Hon Member: No that’s hopeless. Try again.The CHAIRPERSON (Lindsay Tisch): The question is that we are moving to the vote on Part 3.The question was put that the amendments set out on Supplementary Order Paper 129 in the name of the Hon Todd McClay to Part 3 be agreed to.A party vote was called for on the question That the amendments be agreed to.Ayes 63New Zealand National 59; Māori Party 2; ACT New Zealand 1; United Future 1.Noes 58New Zealand Labour 32; Green Party 14; New Zealand First 12.Amendments agreed to.The question was put that the following amendments in the name of Jan Logie to Part 3 be agreed to:to insert the following new clauses:75ASection CX 6 amended (Private use of motor vehicle)In section CX 6 after subsection (2) insert:Exclusion: electric vehicles(2A)Subsection (1) does not apply if the motor power of the vehicle is wholly or partly derived from an external source of electricity.Expiry of exclusion: electric vehicles(2B)Subsection (2A) expires on the close of the day that is 7 years after the date on which that subsection comes into force.75AASection CX 9 replaced (Subsidised transport)Replace section CX 9 with:CX 9Subsidised transportWhen fringe benefit arises(1)A fringe benefit arises when an employer provides subsidised transport to an employee.Exclusion(2)This section does not apply if the transport is subsidised with a public transport pass.Defined in this Act: employee employer fringe benefit subsidised transportCompare: 2004 No 35 s CX 8A party vote was called for on the question That the amendments be agreed to.Ayes 14Green Party 14.Noes 107New Zealand National 59; New Zealand Labour 32; New Zealand First 12; Māori Party 2; ACT New Zealand 1; United Future 1.Amendments not agreed to.Part 3 as amended agreed to.Part 4 Amendments to other enactmentsHon CLAYTON COSGROVE (Labour): I want to go straight to the Minister of Revenue’s amendments in Supplementary Order Paper 129 that pertain to GST and bodies corporate with reference to clauses 248 to 251 of the bill. It is worth just recalling the context for this. I think it was 19 October when we first debated this and I raised with the Minister of Revenue a major problem that he and his department had overlooked in respect of issues concerning GST on those small businesses that own premises in a building by way of a unit title interest in a body corporate.In essence without rehearsing those arguments again what was amazing about that—I know the Minister put in a Supplementary Order Paper after I wrote to him on the 20th and provided him with my amendment and they are very similar but I have got to raise two points. One is that I think the department—or certainly the Minister—knew about this problem for a very very long time. That is the advice I have. This had the potential to inflict a high degree of cost in terms of retrospectivity on small businesses throughout the country.The Minister after I wrote to him on the 20th providing him with an amendment has submitted one of his own and as I say I have put on record that in large parts it does meet the mark in terms of remedying this. What it appears to provide is a look-through rule—which is what was committed to by the Government the Minister and essentially the department prior to this bill’s introduction but then they changed their minds. What it appears to do is provide the look-through rule but only for supplies made on or before 26 February 2015 the date the bill was introduced.My amendment applies to supplies before 1 April 2016 by which time the bill will have been enacted and people—that is the businesses concerned: those individuals—will be able to make decisions as to whether they register or not based on the new clearer law. Because the Minister’s Supplementary Order Paper provides the date of 26 February 2015 it means that those small businesses that have incurred costs through an unregistered body corporate from 27 February on are still denied refunds and will still be double taxed under GST.The question is: why would you want to do that? The Minister of Revenue the Hon Todd McClay—I have got the dates and I can re-rehearse them again of course—announced in June 2014 the Government’s intention to change the law. The Government gave a series of commitments. The bill was introduced in February 2015 and instead of disallowing bodies corporate from registering for GST the bill then proposed that the registration be generally elective. No look-through rule was provided even though that commitment was made as far back as June 2014.The question is why would the Minister change the dates? Presumably the view is that when the bill was introduced on 26 February people had noticed that there would be no look-through rule as promised by the Minister in June 2014. They could then immediately have the body corporate registered for GST so they could get refunds to GST which all presupposes that small businesses are extremely conversant with the detail and the technical aspects of GST law. It presupposes that those small businesses understand intricately the process of parliamentary legislation-making. It presupposes that those small businesses will be hanging on to every word of Parliament as this bill is introduced right through and analysing every subtle nuance and every clause within the proposed legislation. That is just bunkum. Small businesses have got a lot more productive things to do. Their eye is on the ball of the small business. They cannot be expected to pick up on every little nuance of Parliament.So what we proposed in my amendment was that it apply to supplies before 1 April 2016. That gives people time to absorb the changes. It is a transitional provision and fairness prevails. So although I would say that we will be opposing the Minister’s Supplementary Order Paper 129 we will not be opposing it because we are against it in principle. We are opposing it and supporting my amendment because the Minister has left out a really important chunk in terms of those dates that has the ability to greatly disadvantage a whole series of parties and businesses that will still be liable for cost. We think it is inelegant. We think that this should have been brought to the Minister—well presumably the Minister knew. It should not have taken a letter from me on 20 October—months and months and months after the bill was introduced—for the Minister then to scurry around and go: “Oops there is a major flaw in the bill.” I am advised by some learned tax historians that we may have made a little bit of history because I think it has been a very very long time since an Opposition has actually been able to provide a major amendment to a piece of tax legislation that the Government has been forced to pick up.But the big question I would like to ask the Minister—and it worries the living daylights I think out of the industry and many practitioners—is why are these mistakes continually being made? If you go back—and I will not labour the point—to the Peter Dunne carpark tax and the Peter Dunne computer tax all these sorts of things that were rubbish right out of the Finance and Expenditure Committee when they came through and they were dealt to the Government was forced to then back down and say that this is just crazy. But I have got to say this: it is not a political comment. It is not a comment about which political party is in Government but I know that when we were in Government the quality of advice that Ministers were receiving was I think bluntly world class—absolutely world class. People like Robin Oliver and other people who—apart from David Bennett who I do not think was employed in the department but no doubt feels he is a guru on tax matters—had been around for years and years and yearsand were part of the Inland Revenue Department furniture. A number of these proposals would never find their way to a Minister’s desk or if they did you had Ministers whose eyes were on the ball and who would say “No no this is crazy. We are not doing it.”This particular piece of ineptitude had the ability to impact on thousands of small businesses all around the country. I give the Minister his due when we raid—Andrew Bayly: I think that’s pretty harsh Clayton.Hon CLAYTON COSGROVE: No it is a fact though. If the member actually reads it—and I will tell you why it is a fact. It is because his own Minister has amended it. So if he reads his own Minister’s Supplementary Order Paper 129—Ministers are not in the habit of doing things on a whim—it actually remedies a major problem. My point to that member over there is this: it should not have taken an Opposition without an Inland Revenue Department behind it to raise the issue with the Minister. To his credit he amended it because it was going to provide a major hole and a major impact on small businesses. If the member in the back row had read the bill or maybe even read the Minister’s letter with the explanation he may know why. He purports to stand up for small businesses.Chris Bishop: That’s right.Hon CLAYTON COSGROVE: So why did that member and Mr Bishop not pick up on this an issue that would impact huge cost on those small businesses retrospectively. They are in Government. They have got all the resources and they blew it and they missed it. Even the Minister himself did not even pick it up. I will give him his due. As I have said often before he is the guy with the shovel behind the elephant post-Peter Dunne. Peter Dunne was asleep at the wheel and Mr McClay has had to come in and clean it up. But it is a worry that Opposition members and others—and through the good grace of experts outside this place—have managed to pull this one out for the Government and managed to write to the Minister and say: “Here is a Supplementary Order Paper. This will fix the problem.”To the Minister’s credit he has delivered one back in his own name but still there is an inequity and a gap because the dates in my view are wrong. The 1 April 2016 date as I understand it was the one that was promised the one that was committed to and the one that will ensure that there is no inequity or an unfairness. As I say if this is not corrected what it means is that those small businesses that have incurred costs through unregistered bodies corporate from 27 February on are still going to be denied refunds and will still be double taxed under GST. I do not know what the member whose name I cannot recall in the back row thinks of that. Does he think that is a problem for small business? Does he think that is OK? He is a guru. Does he worry about these things? Does it keep him awake at night if he purports to support small business?We are going to support the bill but we think there is still an inadequacy in the Minister’s Supplementary Order Paper 129. He has gone 90 percent of the way there but there are still businesses and individuals that are going to be impacted on.STUART NASH (Labour—Napier): That was a rousing speech from Mr Cosgrove. In fact he is right on this and it is a shame that the Government actually does not put up its hand and take on board what he is communicating.There are a couple of things—not large things—I would like to talk about on this bill. It will not be a long call but I would like to talk about clause 230 inserting new section 70C. We heard a lot in the Finance and Expenditure Committee about how the Inland Revenue Department (IRD) wants to move to an electronic way of doing business. That is admirable; there is no doubt about that. But it is quite interesting that in statements in return to research and development tax loss credits it says: “A person must file by electronic means”. I guess we can assume that if someone is picking up research and development tax credits then they are going to be au fait with the way of the world in the 21st century—i.e. fully electronic—but I wonder whether at this point in time what we do is we do not deem that they must file by electronic means. Maybe we just give them a touch up and say they “may” or they “should” because when we have legislation I always look at words like “must” “may” “should” etc. and they give me an indication of what the legislative intent is. Often if it says “may” then it gives guidance. If it says “must” then obviously it prescribes it—this is how it has to be done.I just wonder whether at this point in time we do not say “must” and we should say “may” to give the person an option. It is making an assumption that the person who is pulling down research and development credits is not necessarily dealing with computer software or something high tech. They may still be dealing in the backyard putting together a really innovative idea for the 22nd century but they are still on a paper-based system. In this case they must deal with research and development tax credits through an electronic scheme.What I would really like to talk about and something that did take a little bit of the select committee’s time is clause 232B. What this is talking about is officers maintaining secrecy. If we look at clause 232B what it basically says is that nothing shall prohibit the Commissioner of Inland Revenue to communicate with an officer employee or agent of the Callaghan Innovation fund for the purpose of administering subpart MX of the Income Tax Act 2007. The reason this took up a bit of our time is that when we were talking about research and development tax credits we were not too sure about what was defined by research and development and what was not. So the IRD came up with the view that Callaghan Innovation was in fact the organisation that would be the main arbiter on whether or not something constituted research and development. The problem we had with that was that what often happens or usually happens—in fact the vast majority of the time—in these cases is that an organisation comes up with research and development and they are very protective of this. They come up with some new proprietary technology for doing whatever or they come up with a new patent and they require the research and development funding to actually commercialise it. But there does exist in New Zealand—and I have seen this happen a number of times and one particular company in Napier comes to mind—an element of distrust with the Government. Let us be open and honest about this. This is not in any way shape or form—in any way shape or form—to impinge on the integrity of those with the Callaghan Innovation fund. I do need to make that clear.Hon Damien O’Connor: They are the puppets.STUART NASH: Well they do some really good stuff. They are designed to implement the vision of Professor Callaghan and Professor Callaghan had a vision for how New Zealand should be. He was a very decent bloke.The other thing also is it does say in clause 232B(2) that nothing shall prohibit the commission from “(w) communicating to an officer employee or agent of the department that is with the authority of the Prime Minister for the time being responsible for the administration of the Research Science and Technology Act 2010”. Again I have concerns because I suspect that what will happen is that a number of New Zealand companies that would be eligible for research and development tax credits and eligible for Callaghan Innovation funding will have a very robust discussion around the board table and they will make a decision that they will not approach the Government because the element of trust that the intellectual property will be protected just does not exist. When we say here that nothing shall prohibit the Commissioner of Inland Revenue from talking to officers of the Callaghan Innovation fund I think that we open ourselves up again to unintended consequences.Obviously what we do not want to do is to create an environment where people do not trust the Callaghan Innovation fund or they do not seek funding but also we do not want to create a system where people avoid tax by going to the Callaghan Innovation fund. So I think that what we should have done and I take some responsibility because I think I was on the select committee for this—I am not too sure. In fact I do not know whether I was or not; we get a whole lot of these tax bills coming through. I think we actually should have set up a system where it was a lot easier for companies to claim their research and development tax credits and not worry about tax implications but also to allay their concerns around their intellectual property. Secrecy is maintained by an Act of Parliament of course. What happens if someone from the Callaghan Innovation fund or the commissioner or anyone breaches the secrecy? They are in very deep trouble. But what we do need to do as a Parliament I believe is create a much higher culture of trust in the Government and I know at this point in time—as mentioned talking to one particular company—that does not exist.I will leave it at that at this point but there are some other contributions coming. Thank you very much.GRANT ROBERTSON (Labour—Wellington Central): Iwant to make just a brief contribution as well to support my colleague Clayton Cosgrove’s amendment introducing a new clause 254B to deal with the issue as we have previously discussed of what happens to those small-business people in particular who run their businesses essentially via a premises that is a unit title within a body corporate. Most of us will be able to picture the kind of business. I know of one. I used to be a tenant in a building that was a body corporate down on Lambton Quay. It contains a number of businesses. There is a shoe store in it there is a key engraver and a repairer. These are people who are often small-business people whose premises they do not own themselves but they are the unit title holder within a body corporate.What this clause of the bill aimed to do was to create some consistency around the rules of GST registering for bodies corporate. There have been a couple of legal cases that have changed the law. It means that there has been an inconsistency in interpretation between how the Inland Revenue Department (IRD) treats bodies corporate in terms of GST and the decisions of the court. We support the principle of that approach. It is important that there is consistency in terms of GST treatment.What Mr Cosgrove led the Government to do by writing to it was to assess how to deal with people in this situation who looking back on their business expenses would normally have been able to claim GST input credits on their legitimate business activities—to enable them to do that in the spirit of a transitional part of the law. Both sides of the House are now in agreement that that was a gap that was not brought to the attention of the Finance and Expenditure Committee—it should have been. This process of discussion around the treatment of bodies corporate for GST has been the subject of to-ing and fro-ing between IRD and tax practitioners for some time so it was of some surprise to members of the select committee to learn afterwards that this gap had suddenly been identified.Hon Clayton Cosgrove: It was a surprise to the Government.GRANT ROBERTSON: Well it was a surprise to the Government until Mr Cosgrove let it know about it. So we reached the point where yes there was an agreement that there was a problem here.The issue is the date from which the small businesses concerned can continue to make their claims. The Government has proposed in Supplementary Order Paper 129 a date of 26 February 2016—that you can be claiming on services before that date. Mr Cosgrove has proposed the date of 1 April 2016. My contribution here is to ask the Government what on earth it thinks it is doing choosing the date of 26 February 2015 because what we have been told is that that date has been chosen because it is the date of the introduction of the bill. Well quite frankly you may as well have asked Mr Cosgrove his birth date and chosen that date as the day be it any more—Hon Clayton Cosgrove: I won’t tell it.GRANT ROBERTSON: Halloween did you say? Yes I think it is possibly Halloween. Very appropriate. The date of introduction of a bill is completely irrelevant.Why does the date of introduction matter? Who knows what is going to happen to a piece of legislation when it is introduced to Parliament? It may be voted up; it may be voted down by Parliament. The date of introduction means nothing whatsoever. Is it some assumption by the Government that it is all-powerful and that the moment that it introduces a bill it effectively becomes law—that everybody reads it and says: “OK that’s now what the situation will be and we must obey these new tax laws.”?There is nothing in the process of Parliament that would support using an arbitrary date like the introduction date. I would defy members of the Government to tell me when it has ever occurred that the date of introduction is somehow regarded as the date by which taxpayers must obey a new law. As we are seeing right now tax bills get significant amendment as they go through the House. Every tax bill since I have been a member of this House has seen significant changes large Supplementary Order Papers—Dr David Clark: There’s a correlation there.GRANT ROBERTSON: That is right. It is all about me Dr Clark. Every tax bill has seen large Supplementary Order Papers being made.How can the Government justify choosing this date? If this is actually about being fair to small businesses that are now dealing with a change in process with different treatment for bodies corporate—to need to make a series of decisions about whether those bodies corporate have registered and what that means—I think the Government needs to reconsider and support Mr Cosgrove’s amendment because it is fairer.Hon CLAYTON COSGROVE (Labour): I want to pick up on Mr Robertson’s point but I just want to express some disappointment. This is a Supplementary Order Paper. Let us be very clear about it. In February of this year—on 26 February—the Government introduced the legislation. The process is that it goes before the Finance and Expenditure Committee. It was referred to the select committee on 11 March. The closing date for submissions was 30 April. The committee received the submissions heard them and the bill came back to the House. Throughout that whole period this particular issue relating to GST and bodies corporate was never raised with the committee by officials was never raised by Government members and we were never written to by the Minister of Revenue asking us to deal with this. The bill came to the House and I think it was 19 October when in a speech that I and other colleagues made we raised it with the Minister.That was the first time this issue was raised and we provided actually quite a detailed explanation as to the potential impact on small businesses if this hole was not plugged if the issue was not dealt with. It took the Minister then over a month on 17 November to get back to us. His opening line to me in his letter is: “I refer to your letter of 20 October 2015 and the matters you raised in your speech.”—blah blah blah—“I acknowledge your concerns about the historical uncertainties surrounding GST treatment of unit title bodies corporate. I agree that it is desirable to provide greater certainty to GST-registered persons and businesses that tax positions taken during this time will not be routed.” The bill was introduced in February after a whole series of departmental reports and research and papers to Cabinet what have you—that was February. It took him until 17 November when the scales fell from his eyes to actually realise that this was a problem and to do something about it.Hon Damien O’Connor: That was quick for him.Hon CLAYTON COSGROVE: That was quick yeah.My question is this: how on earth—I say to the Minister in the chair and forgive me the Minister in the chair is not the portfolio Minister but represents the portfolio Minister none the less and I am surprised that the portfolio Minister has not taken a call. He has not taken a call I think on these pieces of legislation at any stage this evening. This was a monumental stuff-up—a monumental stuff-up that would have cost small businesses goodness knows how many hundreds of thousands of dollars or millions of dollars across the board. We do not know. What I would like to know from the Minister because it goes to looking at future tax bills is what confidence do we have that there will not be another hole in another piece of legislation which maybe Opposition members do not pick up on to dig the Government out of the mire and it goes through? An explanation I think is warranted because it goes to the credibility and integrity of the Minister of Revenue and via the Minister of Revenue to the Inland Revenue Department itself.Why was this missed? Was it known about? The advice I have from industry is that it was known about for quite a length of time but nothing was done. If nothing was done was that because officials were negligent? Was that because the Minister knew about it and did not clear the paper on his desk between February of this year and 17 November? Did he not bother about it? Did he not care about it? Did he not think it was a big issue? Well he did think it was a big issue when it was raised in this House and I suspect he went back and went: “Oops we’ve got a major problem.” Why did it take a month to correct? Why was the Finance and Expenditure Committee not informed of this as we examined the bill? Because this is not just a small Supplementary Order Paper; this is a major one.As to Mr Robertson’s point it is fanciful that an arbitrary date of the date of introduction was proposed as the mechanism in the Minister’s Supplementary Order Paper. He does not give any explanation for why. He just says: “Well date of introduction so what?”. He does not acknowledge that there will be those who will be impacted by this in terms of being double taxed under GST and denied refunds unless we adopt the date that I have proposed which is 1 April 2016. If it is agreed that people are going to be double taxed under GST and denied refunds could a Government member—or maybe the chair of the select committee Mr Bennett who was running the show—tell us whether they are in agreement with that? Are they happy that that inequity will exist? Are they happy that people will be double taxed under GST? This is the party that purports to support small business.Is the Minister happy with that inequity? Is the Minister going to propose any other amendments to remedy it? We have done most of the work for him; it would be good if he took this point on. Perhaps the Minister in the chair could turn to the officials and ask them that question because there is no explanation as to why the date of introduction was chosen apart from you know finger in the ear. Maybe the Minister tossed a coin rolled a few dice or I do not know watched two flies run up a wall—Grant Robertson: Lotto numbers.Hon CLAYTON COSGROVE: —lotto numbers horoscope who knows? But this is a very serious issue because small businesses and others in this situation will be double taxed in respect of GST and will be denied refunds. If the Government is just happy to sit there and go “Tough” well that is OK; that is now on record. But I do not see any of the three—I think there are two members of the Finance and Expenditure Committee here. There is Mr Bennett the chair. No Minister—no Minister—has taken a call to answer any of these questions. It is bad law it is extremely bad process and it is extremely bad for the credibility and integrity of the Inland Revenue Department which I have got to say has generally been pretty good—up until a few recent incidents over the last Parliament—in terms of advice. But the Finance and Expenditure Committee got zero advice on this.Were the officials told by the Minister to provide no advice on this issue? There is a question that could be answered. Why was it missed? Why was it missed through the Cabinet process? Why was it missed through the Finance and Expenditure Committee in terms of advice? Why when it came back into this House from the Finance and Expenditure Committee and we were examining it did the Minister of his own volition not put a Supplementary Order Paper in to correct it? Why did it take a letter from me and pressure from Opposition members to get this thing corrected? There is not politics in this. This is an issue about the quality of advice the accountability of Ministers and whether Ministers are up to it—whether they are actually up to it whether they are reading the papers whether they are asking the questions. I am also advised that members of industry canvassed this issue with officials with the department and with the Minister and nothing was done not a thing—not a thing. Thousands of small businesses could be just thrown on the heap and impacted in respect of the GST.Well the Minister has provided a partial solution but it appears that the Government is still prepared to have people double taxed under GST and denied refunds simply because it plucked a date of February 2015 out of its head and put it in this legislation saying: “That’s the drop-dead date.” Could the Minister advise us as she is writing down the list of questions as to why that is fair why that is equitable? Is she prepared to revisit this issue and change those dates? If the Minister is not could she advise us as to why? If she feels it is equitable to have people double taxed and refunds denied could she provide us with an explanation? Could Mr McClay the revenue Minister who is probably hiding under a desk obviously because he has not taken a call on this—he is hiding under the desk or under the Table or somewhere I do not know. He has gone down a burrow somewhere around this Chamber. I would have thought given that he missed it—he did not punch the ticket—that he would actually be taking a call and explaining this. The courts of course do look at these debates if there is court action around this. They do actually look at these debates in terms of their evidential value.But it is arrogant for a Minister to say “This is what I want to do. I know there is an inequity inherently in this. I know people will be double taxed under GST.” I wonder whether Mr Scott the vintner down the back—who normally gets up and has a crack at us and says we are out of touch with small businesses we do not know what we are talking about and it is all nanny State and PC—is going to get up and tell us whether he is happy with people being double taxed under GST and businesses being denied their refunds. Oh there is silence—silence—silence from all those members over there even the one in the middle. There is silence. They are prepared to do this. They are prepared to see this inequity slide through. It will be interesting to see what the one in the middle does when he goes back to his constituents—whether he goes down a burrow in the electorate when people front up and say: “Hang on. Why I am being dealt to? Why for the guy down the road is it OK for them? They get treated fairly. But because of a date that that member’s party plucked out of nowhere I’m double taxed and I’m denied my refunds.”I wonder what Mr Scott’s explanation will be to small businesses. Will he be able to say: “Well here’s an explanation from the Minister.”? No because the Minister will not answer any questions. Maybe the member can. Maybe he can whip down the burrow follow the Minister down there and change his mind.Dr DAVID CLARK (Labour—Dunedin North): I leapt up because the members opposite seemed reluctant despite the challenge from the Hon Clayton Cosgrove. I must commend him for his work in spotting those changes and picking them up. I guess he is out there actually listening to the businesses and asking: “What is wrong with this legislation? How could it be improved?”. It is embarrassing that the Government has not picked up on this itself. It is embarrassing that it required a letter from a diligent Opposition member to get this change written into the law. Already my colleagues have suggested that the dates could be changed to make it better still for small businesses.I want to pick up on a similar theme actually because in this bill we see more examples of unnecessary compliance. It is a bill designed to tidy up the tax laws to make sure that compliance is as simple as possible—that is its usual purpose—that it is there and complete and that the tax is hard to avoid if it is fairly due. That is why we are making these amendments that are here—the amendments to other Acts in Part 4. One of the interesting ones is clause 227 where we are removing a completely irrelevant section. This is a section that this Government here on the benches opposite put in place in 2011. It has been on the statute book for 4 years—for 4 years. It has required people receiving Working for Families to furnish details to the Inland Revenue Department (IRD) of each family assistance credit paid to them in the tax year.Why has the Government required that? We learn from the notes that the IRD does not request or require this information at all. So anyone who has been diligent who has read the law who has said “I want to be sure that I meet all my obligations.” will have been filing these details when it was completely unnecessary or they were not used by the department. This is the kind of thing that is in this law. This unnecessary compliance because it is information that is not even being used by the department has been required by law to be collected for the past 4 years. Thank goodness we are getting rid of it now. But those same people who might have been double taxed under GST here may also find themselves required to submit information that the IRD neither needs nor uses. Thank goodness we are cleaning it up finally here. This is the kind of law that gets made when there is not attention to detail when the Minister is not across his portfolio when he is asleep at the wheel.We support this kind of change in the legislation. But you know we are reminded in the double GST example that my colleague has brought up of the child support collection requirements that have been put on small businesses by this Government—that small businesses collect back-owed child support. Again this is something put on small-business owners that they did not previously have to do and that introduces potential conflict into the workplace. The child support legislation that was previously passed through this House introducing a new formula—The CHAIRPERSON (Lindsay Tisch): Order! [Interruption] Order! Come back to the bill.Dr DAVID CLARK: The point which is relevant to this bill is that it is good that we are tidying up those things that need to be tidied up but they should not have got in there in the first place. We should not need to be here debating the removal of unnecessary and irrelevant legislation that was put through this House just 4 years ago.So for 4 years this information has been confusing. Some people will have complied with it unnecessarily. Likewise this double GST issue has been going on for goodness knows how long. But the issue had not been spotted until members on this side of the Chamber pointed it out. We must question why the Minister has missed these things up until now. I would like the Minister very much to get to his feet and say why clause 227 has been required now and not earlier—not requesting or requiring information—and why people will have thought that they had to supply details of every family assistance tax credit paid to them since 2011 and up until now. Why has the Minister not spotted it previously?So I hope the Minister will leap to his feet shortly because my voice will not carry for much longer. I think I have made my point and I am dying to hear the answer. Thank you Mr Chair for the opportunity to raise that issue.The other point I would quickly like to make though while my voice holds is that the family scheme income statements clause 232 gives options for families to—[Bell rung] Mr Chairman?The CHAIRPERSON (Lindsay Tisch): Dr David Clark while your voice holds.Dr DAVID CLARK: Thank you Mr Chairman while my voice holds. It gives an opportunity for families to submit separately their family scheme income statements. To me exactly when this applies and why it applies—I understand it is to make it simpler. The guidance here says that in some circumstances especially those with child support arrangements it can be difficult to identify each spouse’s portion of family scheme income. That is when it is suggested that the statement of family scheme income be submitted separately. That is in the explanatory note not in the bill itself. The bill itself does not shed much light on the issue as I read it initially.It says in new section 80KV(2) set out in clause 232 that a person “must” within the time required file the person’s return of income. New section 80KV(3) describes what “must” be done again but there is a clause that says: “unless that other person gives a statement of their family scheme income”. I want to know how that is coordinated what the rules around coordinating those separate family scheme income submissions are and how they were decided. On the surface at least it appears a little confusing as to when who takes the lead and on what. Thank you Mr Chairperson.Hon CLAYTON COSGROVE (Labour): I seek leave to table two documents. One is a letter from the Minister of Revenue Todd McClay to me of 17 November 2015 finally outlining his proposed Supplementary Order Paper.The CHAIRPERSON (Lindsay Tisch): Leave is sought for that purpose. Is there any objection? There is no objection. It can be tabled.Document by leave laid on the Table of the House.Hon CLAYTON COSGROVE (Labour): The second one is the letter from me of 20 October 2015 to Mr McClay raising the same issue with my Supplementary Order Paper attached.The CHAIRPERSON (Lindsay Tisch): Leave is sought for that purpose. Is there any objection? There is no objection. It can be tabled.Document by leave laid on the Table of the House.Hon DAVID CUNLIFFE (Labour—New Lynn): I rise to take a final call on Part 4 of the Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill and wish to address the Committee on the issue of foreign superannuation. Clauses 71 75 96 133 145 213 256 and 266 admittedly span a couple of parts but they are related. May I make two preliminary comments. The first is that we commend the objectives that the Government has set out here to make a number of remedial changes that clarify—I think the operative word is “clarify”—aspects of the rules applying to foreign superannuation interests and ensure that the new rules operate as intended.Members and the Minister will of course know that foreign superannuation has for many years been a bit of a bugbear. Foreign residents who move to New Zealand who have been contributing members to foreign superannuation schemes typically must report those investments to the New Zealand Inland Revenue Department. They forgo their entitlements and they are replaced by New Zealand superannuation in general. There is a lot of fine print around that including whether the migrant to New Zealand has been in a tax-based scheme or a contributory scheme and the tax consequences if their contribution level has been above the minimum. It is around those grey areas that some of these changes are addressed. The second preliminary comment is that it is an absolute honour to be doing some more work in the area of superannuation.The key features of the proposed changes include firstly ensuring that foreign superannuation rules under the foreign investment fund or FIF rules apply to interest acquired when a person was a New Zealand tax resident under domestic law but is not resident in New Zealand under a double tax agreement as can often happen. Secondly the changes reintroduce the exclusion from the foreign investment fund rules for interest in registered Australian superannuation schemes acquired while a person was a New Zealand resident.That provision is a pretty interesting one to reflect upon at this time when New Zealanders who are resident for most of their lives in Australia and are paying into contributory schemes like Medicare Australia and Medicaid in Australia cannot qualify to draw down the benefits of those schemes. Members on this side of the Chamber have been at some pains to point out the inequity in that. People might have been born in New Zealand moved to Australia when they were 2 or 3 years old worked for 40 years paid into the Australian tax system and when they get older they get sick and they cannot qualify because there is no process under Australian law for the vast majority of New Zealanders resident in Australia to qualify for permanent residency.Here in this Part 4 we are reintroducing the exclusion from the foreign investment fund rules for interests in registered Australian schemes acquired while a person was a New Zealand resident. That is we are making it easier for Australians who were New Zealand residents and had interests in Australian schemes to ensure that they do not miss out on the tax benefits in New Zealand and that it is fair and equitable for them. Why is the Government not doing more to ensure that New Zealanders who have lived all their lives in Australia but who cannot qualify for permanent residence are treated with an equal degree of fairness in the Australian system?The third key feature of the foreign superannuation provisions of the bill is to ensure that the schedule method in the foreign superannuation rules applies to lump-sum withdrawals and transfers from a foreign superannuation interest and the sub-point is if the taxpayer has less than $50000 of foreign investment fund interest. Let us translate that into English. What that means is that the schedule method the particular way that the tax rate applies to different levels of investment applies not only to periodic payments like annuities but also to lump-sum transfers. So if someone has a superannuation scheme they can elect either to keep paying into it and when they turn 65 they get an annuity from it or under certain circumstances they may be able to take a lump-sum investment but there has been confusion around the margins—Hon HEKIA PARATA (Minister of Education): I would like to take the opportunity to respond to or answer some of the questions that have been raised by the member Clayton Cosgrove as to why the saving provision in the Supplementary Order Paper 129 does not apply after 26 February 2015. The proposed application date provides greater certainty for taxpayers. The amendment is intended to create certainty in an area where there has been much historical uncertainty.Grant Robertson: We accepted that.Hon HEKIA PARATA: I am just being very clear. On 26 February 2015 the date of introduction of the Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill the position for bodies corporate was clearer. The proposed legislation clarified that they could register for GST and claim deductions themselves. A later application date would mean two potentially conflicting sets of rules would apply at the same time. Overlapping rules may involve additional complexity in the legislation and create confusion and additional uncertainty for bodies corporate and their unit holders. A later application date may result in compliance costs for bodies corporate.Previously a look-through approach similar to the savings provision was proposed and consulted on. The approach was not supported by submitters because of the compliance costs associated with applying the approach. If the saving provision was to apply from a later date bodies corporate may incur additional compliance costs if unit owners wish to change their tax positions and claim deductions on a look-through basis. Submissions supported the proposed approach and the application date. Submitters to the Finance and Expenditure Committee supported the approach taken in the bill and the application of this approach from the date of introduction—26 February 2015. Submitters did not raise concerns that the amendment did not give unregistered bodies corporate enough time to determine whether or not to register. And finally there may be fiscal risks if the saving provision applied after 26 February 2015.The amendment contained in the bill includes special rules applying from the date of introduction to ensure that GST is neutral for bodies corporate that decide to register. Applying the savings provision to goods and services acquired after 26 February undermines these rules and may give certain unit owners a tax advantage. This could be perceived as unfair by unit owners unable to gain the same tax advantage. The financial costs of the proposal were budgeted based on this neutrality so allowing additional deductions to be claimed post - 26 February could create a fiscal risk to the Government particularly if the application date enabled unit holders to structure their affairs to best take advantage of the provision. I trust that this assists the member.The CHAIRPERSON (Lindsay Tisch): The Hon Clayton Cosgrove.Hon DAVID CUNLIFFE (Labour—New Lynn): Mr Chairman that is Clayton Cosgrove; I am David Cunliffe. People often confuse us—The CHAIRPERSON (Lindsay Tisch): I am sorry—my apologies.Hon DAVID CUNLIFFE: —much to my chagrin I have to say. But there we are.In terms of transfers between foreign superannuation schemes under the rules in amended section CF 3 as set out in clause 71 of the Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill a transfer from one foreign superannuation scheme to another non - Australian foreign superannuation scheme is not taxable income. This is achieved through omission in the current section CF 3(2) which lists the types of foreign superannuation withdrawals that are considered to be income but previously had not listed transfers from one scheme to another. The issue there is that this is trying to close a loophole a loophole whereby a foreign resident can simply transfer from one scheme to another stay a step ahead of the good old Inland Revenue Department and its fantastic computer system—Grant Robertson: Oh yeah we’ll get to that tomorrow morning.Hon DAVID CUNLIFFE: We are coming to that tomorrow morning and thereby—The CHAIRPERSON (Lindsay Tisch): Sorry to interrupt the honourable member. The time has come for me to report progress.Progress to be reported presently.House resumed.The Chairperson reported the Support for Children in Hardship Bill with amendment and that the Committee had divided it into three bills progress on the Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill no progress on the Radio New Zealand Amendment Bill no progress on the Weathertight Homes Resolution Services Amendment Bill and no progress on the Radiation Safety Bill.Report adopted.