Copeland Gordon: Taxation (Annual Rates Savings Investment and Miscellaneous Provisions) Bill — Second Reading In Committee 
Copeland Gordon: Taxation (Annual Rates Savings Investment and Miscellaneous Provisions) Bill — Second Reading In Committee 
[Volume:636;Page:7106] 
GORDON COPELAND (United Future) 
: 
 In my maiden speech to Parliament on 29 August 2002 I stated that one of my goals in coming into Parliament was to overhaul a discriminatory tax system that skews New Zealand investment in the direction of housing while starving business of much-needed capital growth. That was something identified for us by Sir Ivor Richardson one of New Zealand’s tax experts in the 1988 Royal Commission on Social Policy. The United States for example has 34 percent of total household assets in housing and 66 percent in other investment assets such as stocks and bonds. New Zealand is diametrically the opposite with 61 percent in housing and just 39 percent in growth-orientated assets. So immediately I came into Parliament I began working on this issue. 
Prior to coming into Parliament it was obvious to me that saving through interest-yielding bonds stocks and shares etc. through superannuation funds and other managed funds were greatly disadvantaged in New Zealand when compared with the alternative of investing in the rental housing market. I was well aware of those realities because during the 1980s when hundreds of New Zealand corporates were busy winding up their staff superannuation schemes I was busy setting one up for the Catholic Archdiocese of Wellington. I well remember the disappointment of staff members over the next few years that the returns achieved through the fund which was managed by a large financial service organisation were below their expectations. 
Disadvantage of course is a relative thing but I am here referring to the high degree of overtaxation on investment through superannuation and other portfolio investment funds when compared with the alternative of investment in the residential rental housing market. I will briefly outline the three major disadvantages because when this taxation bill becomes law this week they will all have been overcome. 
The first was in relation to the taxation rate on employers’ contributions on behalf of their staff superannuation funds. Those contributions when I came into Parliament were taxed at a flat rate of 33c in the dollar which of course greatly disadvantaged the many staff saving through those funds whose marginal tax rate was just 19.5 percent. Still to this day 75 percent of all New Zealand taxpayers pay tax at 19.5 percent or less. However the top tax rates on such contributions had remained capped at 33c. Early on in the last Parliament I took that point up with Dr Michael Cullen and the tax on such contributions was adjusted to the marginal tax rate of the saver in the 2003 Budget. The first disadvantage had been removed. 
The second problem was that savers’ earnings in portfolio investment funds were also taxed at a flat rate of 33c in the dollar. Others have mentioned that Roger Douglas grappled with that problem. Various Ministers of Finance during the 1990s grappled with that problem but when I came into Parliament such funds were still taxed at a flat rate of 33c in the dollar. That of course also greatly disadvantages the vast majority of New Zealanders who have a marginal tax rate of 19.5 percent. On this issue early in 2003 I worked very constructively with both Dr Michael Cullen and Vance Arkinstall of the Investment Savings and Insurance Association. We looked at how we could practically ensure that those savers were taxed at their correct marginal tax rate—again leaving in place the 33c cap. The issue is fairly technical and previous attempts to resolve it during the 1980s and the 1990s had not managed to crack this difficult nut. 
United Future therefore advanced the matter with the Government in its Budget bids for both 2004 and 2005 and I am therefore truly delighted that the problem is resolved through the portfolio investment entity and see-through provisions contained in this bill. Henceforth savers will be taxed at their correct marginal rates. Disadvantage No. 2 has been successfully overcome after a span of 20 or so years. 
Disadvantage No. 3 was the fact that investors through superannuation funds and other portfolio investment funds were subject to capital gains tax on share investments. That reality is completely skewed and was the principal tax distortion I mentioned in my maiden speech. It has now for some two decades been tilting New Zealand investment away from company equities and towards residential rental properties. We like to think that New Zealand does not have a capital gains tax but that has not—at least for the last two decades—been true of share investments through managed funds. We have had a capital gains tax on such investments for that period of time. Craig Stobo was one of those who early on after my coming to Parliament was a passionate advocate of seeing that distortion removed. I strongly picked up on the theme and again it was included in United Future’s Budget bid for both 2004 and 2005. That anomaly is also removed in this tax bill so problem No. 3 is resolved. 
The net result of those three disadvantages being overcome is that for the first time in a couple of decades we can now say that we will have something of a level playing field between investment in stocks and shares on the one hand and investment in the residential rental housing market on the other. This is a great step forward for New Zealand and for New Zealand savers. In addition this bill pretty much irons out any differences between individual investors—that is people who invest their own funds using their own skill and expertise—and the much larger number of New Zealanders who save through portfolio investment entities. 
These measures combined with the KiwiSaver initiative which will kick in from 1 July 2007 should see New Zealand at long last begin to build a far more balanced savings portfolio. That in turn will give new momentum and strength to both the New Zealand economy and to the financial security of New Zealanders and their families. It will give financial security to people in their retirement years and to families during a person’s working life as he or she prepares for retirement as these two things come together. 
Therefore the second reading of this bill tonight is actually a moment to savour. It successfully and at last delivers on what various Governments of all shades—starting with Labour in the 1980s moving on to National in the 1990s and reverting back to Labour again in 1999—have failed to solve. At long last we have some real solutions to take New Zealand forward. 
I want to talk a little bit about residential housing investment and emphasise that a lot of myths have circulated in New Zealand over probably the last 20 years in relation to this issue. I am talking here about books that have been written encouraging Kiwis to dump their funds into residential housing investment some of which perpetuate myths about the tax system that are factually incorrect. For example there is a myth abroad that there is no capital gains tax on investment in residential housing. Well that is not true. It is true that when people invest in that area they can deduct the interest on the money they borrow for the house then deduct depreciation on it and therefore gain a timing tax advantage as compared with some other forms of investment. 
However I emphasise that in recent times action by the Inland Revenue Department with strong support from United Future and from Dr Alan Bollard of the Reserve Bank has ensured that gains made through capital growth and assessment of depreciation recovered when a house is sold are taxed when a rental property is sold in circumstances where the owner in the first instance purchased the property with the intent of resale in mind. That has actually been the law of New Zealand for many many years. Some of the myths that have been perpetrated in that regard have been singularly unhelpful in terms of the design of New Zealand’s overall macro savings situation. Undoubtedly the great driver of the great majority of rental property owners is that they do buy those houses with the intent of reselling them at an appropriate time and making what they think will be a tax-free capital gain. 
I want to encourage the Inland Revenue Department to remain vigilant in ensuring that the law is upheld in that way. Over the last 3 years the department has assessed literally millions of dollars extra in tax by looking into those arrangements in a little more depth. It is very very important that it keeps that up so New Zealand can at last approach the situation I would like to see—that is about 50 percent of assets are in housing and 50 percent are in other forms of investment shares bonds commercial property and fixed interest investments.