Rurawhe Adrian; Bayly AndrewPart 3 Amendments to other enactmentsCHAIRPERSON (Adrian Rurawhe): We now come to the debate on Part 3: clauses 40 to 97 and Schedule 1. ANDREW BAYLY (National—Hunua): Thank you Mr Chair. Thank you for calling me back. I missed the opportunity in the last part to make a further contribution so it's nice to be able to be talking about this. I think that this is a part of the bill that we really do have a problem with because what this part does—one of the principal parts of this bill is about changing the arrangements around how losses on rental properties are treated for tax purposes and how they can be claimed. I think the context for this is that we've got a trillion dollars' worth of housing stock in New Zealand 40 percent of which is owned by mums and dads ordinary New Zealanders who choose for differing reasons not to put their money into the stock market because for many they do not understand it sufficiently. Some put their money into the bank but for most people putting their money into a house—and these are ordinary New Zealanders; these are not wealthy people. A lot of wealthy people don't invest in residential property because it's not actually a good investment but for many people this is a legitimate way of investing their money. Of course in virtually all those cases that 40 percent of the housing stock owned by ordinary New Zealanders mums and dads is actually available for rental purposes. Those people do a good service for New Zealand. In the main most of these people are very diligent and look after their rental properties. It's a major investment for them apart from their own house. For them to make sure that they protect their asset and maintain it in a way that retains its value as a consequence and also as part of that offering they want to make sure that their tenants are well housed. I'm not saying for a moment that every rental property owned by mums and dads in Zealand is maintained up to absolute best practice but in the main they are and it would be wrong to vilify ordinary New Zealanders any other way—most of them are very conscientious towards the people that rent their property their main investment asset. So under the current New Zealand tax systems or settings tax is applied against a person's net income and deductions that relate to particular activities—Hon Ruth Dyson: This is really interesting. ANDREW BAYLY: Sorry? Kieran McAnulty: She's being sarcastic—it's not really. ANDREW BAYLY: Thank you. I'm glad the two members on the other side are riveted by this because in many cases not many people actually understand tax. With the tax system under the current settings people can deduct losses against their personal income and in many cases what we're talking about is people where this is their only other source of income. They might have a KiwiSaver account but essentially the rental income from their main investment is their only source of income. Previously what would happen is if you sold a property that you had an investment in you could offset the losses of that against your personal income and of course depending on your situation you may have had to pay capital gains tax on that under that current setting even before the changes were made because if you were deemed to be a trader of any sort then the tax requirement was that you would have to pay tax on the gain. So what this bill has done is actually limit the ability to offset those losses against your personal income and you would have to ensure that that loss could only be used against future investments in rental properties. Now for people who continuously buy and sell rental properties that's a fair issue in terms of being able to offset those loans or those losses. But the reality is that in many cases people do not have that ability to offset against future profits because in many cases they invest in these houses for the long term. They might only have a few over their lifetime before they retire and then they sell and what we're now talking about is stranded losses that they cannot utilise until they continue to reinvest in the property market. That then is perversely a really strange thing. As a result my Supplementary Order Paper (SOP) 252 seeks to change a number of sections listed in clause 2(12)—sections 41 46 right through to section 70—and to actually bring into place that these ring-fencing proposals should come into force not on 1 April 2019 but actually stretch for the year to 1 April 2020. The reason for that first of all is one of equity. So normally what we don't try to do with tax legislation is to retrospectively bring in a bill partway through a financial year and then claw back previous tax arrangements and say that What you did back there in history is now captured by the new rules and you will now be commercially or financially disadvantaged." This is what this bill does at the moment. It imposes a retrospective requirement that any tax losses are ring-fenced—basically limited—to future investment in property by saying that from 1 April 2019 any transactions from that time forward are captured under this rule and that is not right. That is not right. So we have taken a view and this is what this SOP is about—it is saying "Look give people time to understand what the requirements are for all the arrangements to be put in place." because with any tax bill of this nature normally there's a whole lot of regulations and for people listening in that means that the Minister can go away and basically write a whole lot of regulations that support or underpin the bill. That all needs time to be completed. That's why we're suggesting with this SOP in my name that the ring-fencing proposals should come into effect on 1 April 2020 and of course there are a lot of people who are very concerned about these provisions altogether. We heard very strong submissions from a whole range of submitters including the property investors council that act for a lot of private people who have investments of this nature right through to commercial operators. This is a very very important thing because for many this bill cuts to the core of their investment—their central investment that they've made often as a couple—to support New Zealanders and provide these rental properties. That sense of inequity is just wrong and I think it is poor practice and a poor precedent that we're increasingly seeing in a number of these bills where bills are coming in that apply retrospectively. There is no reason why this should be incorporated at this point in time. There is no overarching commercial reason why it should apply from 1 April 2019 rather than 1 April 2020. The whole thing about this is that using the taxpayer ring-fencing deductions taxpayers would be able to offset ring-fenced residential property deductions from one year against residential rental income in future years or against income from the sale of any residential land and the bill proposes to allow the transfer of ring-fencing deductions between companies in the same wholly owned group but these deductions would remain ring-fenced. So it actually deals not only with the personal situation but where you have the corporate structure or you have some entity that people legitimately put in place. So it is a real curtailment of the rights of people who have gone about doing this—legitimate investments; something that is appropriate—and yet this bill has come in. I think that this whole issue is one that this Government has continued to slice away at and is increasingly making the rental market in New Zealand a place where New Zealanders do not want to invest. I know the intention is to allow first-home buyers into the market and we agree with that. We need to see more first-home buyers coming into the market but that shouldn't be at the expense of those who provide rental properties to ordinary New Zealanders and often the most vulnerable New Zealanders. By driving them out of making investments of this type of nature all we're going to do is reduce the housing stock and we're increasingly seeing that now. All the anecdotal evidence is that a lot of people are selling their properties and sometimes they're being sold at a loss. They won't be able to access that loss. They are making a real substantial cut in their future earnings and investment that's going to support them into the future."