Nash StuartSTUART NASH (Labour—Napier): Minister Woodhouse is right. It is a large tax bill. It is a remedial matters bill. Therefore there are a number of—Hon Ruth Dyson: Remedial matters.STUART NASH: —matters yes—Fletcher Tabuteau: But it's not sexual.STUART NASH: —remedial matters in it. Ha ha! It is fixing up a lot of legislation. But you know the thing about this tax bill—and there have been a number through the House this year—is that it is just not dealing with the really substantive issues facing our tax system. I mean it is great that the aircraft overhaul reserves are being dealt with. I am sure those in the airline industry will be really happy about this because no doubt it is something that they have petitioned the Government for for a long time. But we have a number of very serious issues in our tax system at the moment that have hit not only national headlines but also international media and have impacted upon our global reputation—things like the ability to avoid paying tax in this country things like inequity in our whole tax system and things like income that can be earned without any tax being paid on it. These are the really big issues—or just a couple of the really big issues—that are impacting upon the fairness coherence and ambitious nature of our tax system as the Minister over there said. If the Minister really meant what he said when he talked about a fair tax system then it would not be this sort of bill that we would be conducting a first reading of; it would truly be an ambitious bill that really worked to deal with the inequities in the tax system that really benefit those who can afford your fancy tax lawyers to engage in a whole lot of aggressive tax planning while those in the middle and the bottom—certainly middle New Zealand—pay their fair share and feel as if they are getting reamed day after day. One thing I would like to talk about a little more than most—and I must say to start and I should have said this at the beginning: we will support this bill because Labour supports every single tax bill to the select committee so that we can hear the experts' opinions on this so that we can get submitters in and so that we can get a very robust debate. I must admit that in select committee we find that all parties work together to ensure that any tax legislation that comes before the House is very robust. Let me talk about look-through companies. The Minister of Revenue very briefly alluded to this. This is quite a complex area but it is something I think is worth expanding on. Generally the company tax regime treats companies and shareholders as separate taxable entities. Companies are taxed at the company rate which is 28 percent and dividends are taxed at the shareholder rate of say 33 percent. It is part of the imputed dividend system. What this means is that if a company is taxed at 28 percent and hands out its dividend if the person receiving it is on the top tax rate then they have got to pay an extra 5 percent to bring it up to their marginal tax rate. It is fair because it is all about taxing income at the marginal rate. You would think that is what the tax system should be based around but only some income is taxed at a taxpayer's marginal rate; some income is tax free—for example capital gains. One consequence of company tax law is that capital gains are tax free to a company but are taxed when paid out as a dividend. The company can distribute capital gains tax free if that company is liquidated. Company losses are not available to offset against income of shareholders. If I invest in a company and that company makes a whole lot of loss but I also get a wage in salary then I cannot write off that company loss against my personal income. If you want individual tax treatment then taxpayers can use a partnership or joint venture but it is difficult to use in a number of situations. So many investors want the advantage of a company that is limited liability and therefore has legal protection but the advantages of non-corporate tax treatment: i.e. capital gains tax free without needing to liquidate the company and access the losses. What happened was that in 1990—and this is quite important because this is a vehicle for the vast majority of people who are accessing capital gains for free. Mr Bennett as the chair of the Finance and Expenditure Committee you are well aware that a decent chunk of this bill is about look-through companies. I think that if I just rambled on about this like the Minister did then the people listening would have no idea what we are talking about. I think it is only fair that we let people understand the sorts of issues we are dealing with. What happened in the 1990s was that the Government introduced something called a loss attributing qualifying company. What this did was it taxed at the company tax rate capital gains were distributable tax free and in some cases shareholders could write off the loss attributing qualifying company losses against their own personal income. It was used a lot in the forestry industry for example where a forest made losses for the first 24 years and made a gain only when it was harvested. So what happened was that if an investor invested in the forestry industry he or she could write all those losses off for 24 years against their income. But it was primarily set up for the purchase of investment properties. For example as mentioned it affords the protection of limited liability but if negatively geared a shareholder can write off the losses against personal income. How this basically works is that negative gearing is a practice where an investor borrows money to buy a property which is an investment property and expects the gross income generated by that investment at least in the short term to be less than the cost of owning the property. So they are making a loss—they can write it off against their income—but then when they sell it and make a capital gain they pay no tax on that. So it was primarily set up for this. Mr Assistant Speaker you may ask why I am talking about this. The reason I am is that a very decent chunk of this bill is reviewing and changing the look-through company tax regime. What happened in Budget 2010—[Interruption] It is a fair question. It proposed to change the qualifying company regime with a look-through company—very similar. Whereas qualifying companies were taxed like a partnership with corporate form shareholders were taxed at the personal rate and not at 28 percent of the company rate. Capital gains were tax free and shareholders could access losses. But there was opposition to those who wanted an even better deal. These were the guys who could afford the tax lawyers who understood aggressive tax planning. What they wanted was a company tax rate and access to tax-free capital gains. The result of this was the look-through company regime. But they kept their existing qualifying companies—i.e. you could not start a new qualifying company but if a qualifying company existed you did not have to fold it and replace it with a look-through company. What the Government did promise in December 2010 was a review of the system and what this bill is is the result of that review. What is a look-through company? A look-through company is a company that elects—so it has to be elected by the shareholders—to be treated as transparent for income tax purposes. It is like a partnership. It does not pay income tax in its own right rather its income and expenses flow through to shareholders and are taxed at its marginal tax rates and losses can be offset against other income. There are many advantages of a look-through company. What I am very interested in and what we will be looking at very very closely in the review of this legislation and the review of the look-through company regime is to make sure that investors are actually paying their fair share. What this bill does not do is legislate for tax-free capital gains which in effect is what they are. There is something called a tainted capital gain and I will not go into the detail of that because I have probably got only about 30 seconds left. But what we are saying is that we are going to take out the tainted capital gain and it will apply only to asset sales between companies that have at least 85 percent common ownership. I guess what I am saying is that this bill does deliver on the promised review of the look-through company regime but what it does not deal with is the capital gains tax issue. So what is happening is that investors can still get tax-free capital gains on assets if they invest in them and buy them and sell them through the look-through company without having to liquidate that company. I do not think that is particularly equitable when the vast majority of good hard-working—or middle—New Zealanders are actually paying tax on every single cent they earn. You invest in a look-through company you earn capital gains and no tax is paid on that. So this is why I am looking forward to this. I am looking forward to hearing what the submitters say and I am certainly looking forward to hearing what the Inland Revenue Department says on this rather important issue. Thank you very much.