Dunne Peter: Taxation (International Taxation Life Insurance and Remedial Matters) Bill — Second Reading 
Dunne Peter: Taxation (International Taxation Life Insurance and Remedial Matters) Bill — Second Reading 
[Volume:656;Page:5419] 
Hon PETER DUNNE (Minister of Revenue) 
: 
 I move  
That the Taxation (International Taxation Life Insurance and Remedial Matters) Bill be now read a second time 
. I do so with a great deal of feeling because I am delighted that this very large omnibus taxation bill has at last progressed to its second reading. It has taken a great deal of time and a huge amount of hard work to bring the bill to this point. It was originally introduced in July of last year and referred in August of the same year to the previous Finance and Expenditure Committee for consideration. It was one of nearly 80 bills that were before Parliament and lapsed when the House rose for the general election. It was then reinstated by the present Parliament and resumed its place before a new Finance and Expenditure Committee. A major factor in the slow progress of the bill which introduces a number of important highly technical reforms has been its sheer size complexity and scope. 
The bill attracted a large number of submissions many of which were equally very long and extremely technical in nature. The resulting officials report to the committee had to be spread over several volumes in order to deal fully with the points made in the submissions. The bill as reported back to the House is now over 800 pages long. In its report the committee commented that the bill’s size as well as the depth and breadth of the material it covered made its consideration “more difficult than it might have been otherwise”—a very euphemistic statement I think—and it placed the committee and its processes of consideration under considerable pressure. The committee also expressed its preference for future taxation bills to be of a more manageable size with major reforms divided into separate bills. I concur with that view and it is my very sincere hope that in future we can keep our taxation bills to a more manageable size and scope. 
I note in passing as a start that the Taxation (Consequential Rate Alignment and Remedial Matters) Bill that I introduced on 21 July consists primarily of consequential and remedial legislation and at about 50 pages in length it is one of the smaller taxation bills I have introduced in recent years. Many of the committee’s recommendations relate to the application dates of specific measures which needed changing as a result of the time that has passed since the bill was introduced. Other recommendations fine-tune the proposed legislation so that it achieves the desired policy outcome. 
The central feature of the bill is the first stage of the reform of New Zealand’s international tax rules. This reform is intended to help New Zealand - based companies compete more effectively overseas and to encourage New Zealand businesses with international operations to keep their head offices in this country. The reform represents a complete change in the way we tax the offshore income of our controlled foreign companies and by that I mean foreign companies that are controlled by New Zealand residents. In doing that we are better aligning our international tax rules with those of our main trading partners. 
The bill exempts the active income of controlled foreign companies from domestic income tax. Active income is income derived from activities such as manufacturing and agriculture in contrast to passive income which is income from things such as rent and interest. To reduce compliance costs where there is limited risk to the tax base the bill proposes some exceptions to the rule that passive income will be subject to New Zealand income tax. For instance controlled foreign companies operating in Australia which is usually the first destination of New Zealand businesses that decide to expand overseas will generally not be subject to income tax in New Zealand whether their income is active or passive. Likewise there will be an exemption for controlled foreign companies that pass the active business test set out in the draft legislation. They will not be required to attribute their passive income if it is less than 5 percent of their total income. 
The committee has recommended some changes to the reform’s application date as originally proposed in the bill. It will now apply to income years beginning on or after 1 July 2007. One of the most important changes recommended by the committee is that the 5 percent active business test which is based on accounting information be simplified. These changes will make it possible for businesses to place greater reliance on their accounting information and will require fewer adjustments on their part. 
The committee has also recommended a number of other technical changes to the proposed reform. They include relaxing the carve-outs for small and medium sized enterprises in the interest allocation rules and taxing deductible and fixed-rate foreign dividends as non-exempt dividends instead of interest. I am satisfied that these and other changes recommended by the committee will help to reduce compliance costs associated with the new legislation while maintaining its fundamental design structure and policy intent. 
The bill also modernises the tax rules relating to the life insurance business which relate to 1990. Then term insurance was less than 10 percent of the life insurance business so it was not a major consideration in the development of the present tax rules although today it constitutes over 50 percent of the business. Under the current rules life insurers are effectively not being taxed on the profit they make on term insurance business a tax benefit that is not enjoyed by other businesses. So the bill introduces an integrated framework of changes to deal with these problems. It extends the tax benefits of the portfolio investment entity rules to all savers in life products and taxes term insurance business on actual profits as other businesses are taxed. The committee has recommended deferring the application date from 1 April 2009 to 1 July 2010 with term insurance products sold before that date subject to concessionary transitional rules. However life insurers will be able to operate under the new rules earlier than that if they wish to do so. 
The bill also introduces changes intended to strengthen and rationalise the definition of associated persons in the Income Tax Act. These definitions are used mainly to counter tax practices that could undermine the intent of the law because of the closeness of the relationships of those involved whether they are relatives trusts partnerships or entities. The definition relating to land sales is in particular need of strengthening to prevent developers and the like from circumventing the land sale tax rules by operating through closely connected persons. The committee has recommended a number of amendments aimed at reducing uncertainty in the proposed legislation and narrowing the scope of some of the proposed tests of association to ensure that they do not apply more widely than originally envisaged. It has also recommended that the general application date for the changes except for those pertaining to land be deferred to the 2010-11 income year. It has further recommended that the changes to the land provisions generally apply to land acquired from the date of enactment. 
The bill also introduces a voluntary payroll giving system for charitable donations that will operate through the tax PAYE system a measure that has been warmly welcomed by the charitable sector. The committee has recommended that the application date for the introduction of the payroll giving scheme be deferred to 3 months following enactment of the bill. That will give employers and the Inland Revenue Department alike more time to roll out the systems that are needed to implement payroll giving. 
The bill also introduces a change to the KiwiSaver legislation to resolve the problem that was highlighted on the  
Close Up 
 programme last week about KiwiSavers who die without leaving a will and the difficulties surviving families have in accessing their contributions. The bill resolves that problem and the relevant provisions are backdated to the introduction of KiwiSaver in 2007 so that no family should continue to have to suffer in this way. 
These are but some of the many changes the committee has recommended to this very large and technically complex bill. I give notice that at the Committee stage I will release a Supplementary Order Paper that adds a further five measures to the bill. Although they will add to the bulk of the bill the additions are taxpayer-friendly amendments that generally apply to a small number of taxpayers for the already completed 2008-09 year. They are being added to this bill because they need to be legislated for as soon as practicable. Three of the measures amend the financial arrangement rules to reduce tax volatility and the timing of recognition of income and expenditure. We announced one of those in December last year as law changes to prevent unanticipated tax liabilities from arising for troubled finance companies and certain other debtors that enter into work-out agreements with their creditors. 
There will be other measures relating to the range of circumstances under which the Inland Revenue Department can offer relief from use-of-money interest when taxpayers are physically impeded by an emergency such as a flood from paying their tax on time and we are extending that to include pandemics which is completely relevant at the moment. There will also be some amendments to clarify the policy intent of the current provisions allowing life insurance companies to access tax refunds in particular circumstances. 
I put on record my thanks to the Finance and Expenditure Committee for bringing this bill through to its second reading for a considerable piece of work it has done. It was a challenging task. I also acknowledge the work of my officials and the drafters who have worked tirelessly on this bill for a very long period of time now often to near-impossible deadlines and who I dare say are beginning to twiddle their thumbs at what might lie ahead. I commend the committee’s report and the bill as amended to the House for consideration.