Nash Stuart: Taxation (International Taxation Life Insurance and Remedial Matters) Bill — In Committee 
Nash Stuart: Taxation (International Taxation Life Insurance and Remedial Matters) Bill — In Committee 
[Volume:656;Page:5997] 
STUART NASH (Labour) 
: 
 I first speak in favour of the Supplementary Order Paper in the name of my colleague Brendon Burns on the Screen Production Incentive Fund. It comes down to a matter of principle and that principle is whether we believe that the film industry requires nurturing and growth as a special interest—that is whether it is important to the inherent nature and belief of our country. The issue around this is the ability to claim back expenses in the year they were incurred. Peter Jackson is often held up as the film-making guru but as we all know we have produced a lot of very competent and well-known film producers throughout the years. I suppose the question that has to be asked is whether these film producers would be where they are today if this industry had not been incentivised to the level it is. The film industry itself believes that they probably would not be. 
This amendment is fiscally neutral. As my colleague Brendon Burns has done I thank the Minister and Jim Gordon for conversations around this amendment. I think we all agree that this is a fiscally neutral position and I say to Jim that I think I am right in saying that. Perhaps I should say that the fiscal implications are very very small. So it really comes down to a matter of principle. Is this an industry that we want to nurture? I absolutely believe that it is. On that basis Labour certainly will be supporting Brendon Burns’ Supplementary Order Paper. 
As I started to say before I think it is important that we talk about the life insurance provisions in the Taxation (International Taxation Life Insurance and Remedial Matters) Bill considering that “life insurance” is actually part of its name. Significant changes are being made to the taxation of life insurance business. As I mentioned the changes are a result of work that began in July 2006 in response to submissions and comment received on two officials issues papers and one Government discussion document. So this issue has been out there a long time. The industry has had a lot of opportunity to comment on it—and they have done so through the select committee process—and it comes through a well-informed process. 
Life insurance companies are companies that carry on a life insurance business—that makes common sense—and are registered to write life insurance policies under their own Act which is the Life Insurance Act 1908. That is not quite as old as the Speaker’s ruling my colleague quoted before question time. When the current life insurance rules were enacted most of the large insurance companies in New Zealand were actually mutual entities meaning they were owned by their policyholders and premium contributions as well as retained investment income built up over the years contributed to the capital base of the life insurer. All of the large life insurers are now limited liability companies though some operate in New Zealand as branches of foreign companies and most are owned by foreign companies. Some subsidiaries of banks are now involved in writing life insurance policies. 
That is one of the main reasons why this law needed updating in respect of this part of the economy. Since the current life rules have been in operation term insurance business has increased from being less than 10 percent of total industry premiums to being now over 50 percent. The nature of the business has changed significantly. Term insurance is a pure risk product and pays out only on death. There is no savings component which means that these policies have more in common with general insurance such as motor vehicle insurance or home and contents insurance than traditional savings-related policies. The net assets of a life insurer are owned by the shareholders. The rights of the policyholders are by way of contract with the life insurer and do not extend to specific assets at all. The economic policyholder ownership rights in the company are generally reflected in the unvested policyholder liabilities—very riveting! 
The current rules tax life insurers on a two-tier basis. The first tier the life office base taxes the income earned for the benefit of both shareholders and policyholders of the life insurer as a whole. It consists of investment income less expenses and underwriting income. Income accruing to policyholders is taxed to the life insurer on a proxy basis under the policyholder base. Income is calculated by a formula equal to the increase in reserves plus benefits such as claims paid plus underwriting income less premiums. Tax paid on the life office base generates imputation credits that can then be used to meet the policyholder base liability—thus avoiding double taxation—or as tax credits on dividends paid to shareholders. Individuals generally cannot claim a tax deduction or get a tax credit for life insurance premiums paid as happens in some countries. On the other hand they are not taxed on insurance proceeds. 
There are two fundamental problems with these rules. The first is that they under-tax term life insurance profits. The second is that they overtax savings income. I think we would all agree that it is bad policy to under-tax but it is also very bad policy to overtax. 
Aaron Gilmore 
: Oh my gosh! 
STUART NASH 
: I know that that is a revelation to some members on that side of the Chamber because they want to overtax. It is what they want to see in some areas but members on this side of the Chamber personally believe that under-taxing is bad policy. So we are right into this. The proposed new tax rules—[ 
Interruption 
] If members on the other side listen they may in fact learn something. They did not learn anything during the select committee process so if they keep quiet they may learn something now. I will talk about the proposed new rules because they are very important. Members need to remember that these pay out only on death; some of those guys opposite may need to know that soon. [ 
Interruption 
] It is not political death which is what some members will experience in about 2 years 3 months 3 weeks and 5 days’ time. 
The proposed new rules tax life risk business on actual profits in a manner similar to the way that other businesses are taxed. If I remember rightly I think the only party that has dropped corporate tax in the last two generations is the Labour Party. Of course it also extends the tax benefits of portfolio investment entity rules to all savers in life products. Under the new rules life insurers will be taxed on two bases: a shareholder base which represents income derived for the benefit of shareholders; and a policyholder base which represents income derived for the benefit of policyholders. That is a very important distinction. Detailed provisions apply to taxing participating policy income between the shareholder and the policyholder bases. Policyholder base income cannot be offset with losses or credits from either the shareholder base or any other company in a life insurer’s tax group. The amendments in this bill also extend the benefit of the portfolio investment entity rules to the policyholders in all life insurance saving products. Under the new rules life insurers can also elect to attribute income in investment-linked products to policyholders at their individual portfolio investment entity rates. 
The nature of life insurance gives rise to complexities in applying tax concepts. The long-term nature of most policies makes it difficult to match income and expenses appropriately therefore complex legislative provisions are required to equitably bring to tax income and expenses to the correct period. As I mentioned before the Labour Party is very clear—which is why we support Mr Burns’ Supplementary Order Paper—that tax legislation should be equitable. In addition complexities in determining the relevant mix of savings return savings and risk intermediation and risk pooling inherent in some life policies also require detailed rules to appropriately allocate the tax burden between shareholders and policyholders. I think members on the other side of the Chamber would agree that is a very important legal distinction. 
Moving from the current life tax rules to the proposed rules will affect life insurers’ businesses and accounting processes. We have taken this into account and to mitigate the impact detailed transitional rules will apply; I will not read those rules out— 
Carmel Sepuloni 
: Perhaps you should. 
STUART NASH 
: Does the member think I should? 
Carmel Sepuloni 
: I think Chester wants you to. 
STUART NASH 
: Would the member like me to read them out? OK. Those rules will apply for term insurance products sold before the application date. I think that was a very important point that Ms Adams brought up in the select committee. Policies cannot be subject to any fundamental change in their terms during the transition period otherwise a new policy is created and it is fully subject to the new rules. The proposed portfolio investment entity benefits will apply immediately on the application date which again I think is a very important point. Generally subject to ordinary shareholder continuity and other specific rules tax and credit balances and losses from the life office base can be carried by the life insurer into the new rules. Thank you very much.