Norman Russel William: Taxation (Tax Administration and Remedial Matters) Bill — First Reading 
Norman Russel William: Taxation (Tax Administration and Remedial Matters) Bill — First Reading 
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Dr RUSSEL NORMAN (Co-Leader—Green) 
: 
 I rise to speak to the Taxation (Tax Administration and Remedial Matters) Bill. The Green Party will not be supporting this bill. The bill has a couple of elements that we do not particularly like and I will talk about those briefly. We will obviously be following the select committee process very closely because during that process our minds might be changed. But we will see. 
I will talk about two key elements. The first is information sharing and some of the privacy elements in this bill. The bill enables greater information-sharing and we have concerns about some of the bill’s privacy elements and about whether the privacy of individuals will be affected as a result of the bill. The second concern relates to the abolition of gift duty which has already been canvassed at some length tonight. 
I will talk briefly about the regulatory impact statement because obviously there will be a very lively debate about the extent to which this bill affects tax avoidance. But the officials are telling us in the regulatory impact statement that basically they do not know. Paragraph 64 of the regulatory impact statement states: “Concerns about the potential for income tax reduction as a direct result of gift duty repeal are not possible to quantify particularly because the extent of protection currently offered by gift duty is speculative.” So the officials are telling us in the regulatory impact statement that if this bill were to proceed into legislation and if gift duty were to be abolished it would be very hard for us to know to what extent income tax would be reduced. That is one of the unknowns around the action of gift duty. We know that gift duty acts to some degree to stop various tax avoidance practices. It certainly has done so in the past and thereby one would think the abolition of gift duty would open the spigot to some degree of tax avoidance. To what degree is actually unknown according to the officials. 
We know however that tremendous activity is currently undertaken to avoid gift duty and the way that that is done according to the regulatory impact statement is through the use of gifting programmes. I quote from paragraph 25 of the regulatory impact statement: “Gift duty is easy to avoid through the use of gifting programmes. Under a gifting programme an asset is sold at market-value in exchange for an interest-free on-demand loan for the value of the asset. Legal title to the asset instantly transfers but no payment is made. The interest-free on demand debt that the recipient of the asset owes to the donor is then progressively forgiven by the donor at a rate of $27000 every twelve months.”—which of course is the level currently at which gift duty kicks in—“The forgiveness of the debt constitutes annual gifts; however they are within the acceptable levels so as not to attract gift duty. Until it is completely forgiven the debt owed is legally an asset of the donor and the donor can demand that it be repaid.” Paragraph 26 states: “These gifting programmes are widely used to transfer large assets without attracting gift duty. The fact that just 0.4% of gift statements received by Inland Revenue result in liability for payment of gift duty is clear evidence of the widespread use of these programmes.” and finally: “They are most often used by individuals to transfer ownership of their assets to a family trust.” 
We are seeing at the moment that gift duty is having a very significant impact. The impact of gift duty is that individuals are structuring their financial affairs to transfer assets into family trusts but they are doing it in a way that means they do not have to pay gift duty. This is strongly suggestive of a tremendous thirst out there to transfer assets into family trusts. The fact that 99.6 percent of all gift statements do not result in liability for the payment of gift duty shows that in the vast majority of cases according to the officials individuals are transferring ownership of their assets to a family trust. If we remove the gift duty then we will open the spigot on that process. 
We could argue that gift duty is not currently working and I think that would be a fair argument. But there are two responses to a tax that is currently being avoided: the first response is to change the tax so that it cannot be avoided; the second response is to give up put our hands in the air and simply say: “Oh well the Inland Revenue Department gives in because we aren’t going to tighten this rule.” With this bill the Government has basically adopted the surrender approach. The Government has acknowledged that gift duty has the purpose of trying to find a way to tax the movement of assets into family trusts but that that tax is basically being avoided so the Government will therefore abolish gift duty. There is another response which is to ask how we can close the loophole and try to reduce the level of tax avoidance. 
The second issue that has come up means that since changes in the tax rates were made there has been an alignment between the trust rate and income tax rates. Arguably there is lower incentive for individuals to use these mechanisms to try to avoid paying tax because previously a differential between the highest tax rate and the trust rate meant there was an incentive for people to slowly move their assets into those trusts to try to avoid paying the full rate of tax. One argument would be that with the alignment of these tax rates there is no longer that incentive. 
The problem is that there is a whole problem in tax avoidance that operates in relation to trusts which will continue to operate even with the alignment of the tax rates. We have a problem with the trust law essentially because it is very very difficult for the Inland Revenue Department—or for anyone else for that matter—to get a very clear perspective about what is happening inside family trusts. They can operate and it is very difficult to see through them so they are a classic way that has been used a lot in New Zealand to minimise tax payments or to run tax avoidance schemes. 
Currently even in the worse case scenario gift duty provides the Inland Revenue Department with a paper trail of what is going into those family trusts so that the Inland Revenue Department has some record of the money pouring into the trusts. If we were to abolish gift duty—so we would not have any incentive any more for people to arrange their affairs in such a way that over 99 percent of them would not pay gift duty—but at least alert the Inland Revenue Department to that money flow we would reduce the level of intelligence that the Inland Revenue Department has operating in respect of family trusts. That is we would make it easier for people who know how to operate these systems to avoid paying their tax. For that reason the Greens have a concern about this legislation. 
This legislation should be put in the context of course that a series of tax changes we have had have benefited those at the upper end. It is a matter of public record that of the tax cuts that were introduced 40 percent went to the top 10 percent of income earners. So we are operating in a context in which we have already made very significant changes to our tax system which have overwhelmingly benefited people on incomes like those of the people in this room. We are the major beneficiaries in fact of the tax changes. Of course the chief executive of Westpac New Zealand is an extremely major beneficiary of these changes as are high-wealth individuals. In that context I ask whether we want to change gift duty and get rid of this attempt to control this flow of money rather than try to actually tighten it up. That is the challenge before us. I ask whether we should try to close the loophole or just give up and surrender. This bill says that we should give up and surrender. 
The Green Party does not think that that is the way we should be amending our tax system. We do not think that the broader context in which we are operating—which is to make the tax system more hostile to low-income individuals—is really the way that we should be changing the tax system. The Green Party would support for example a capital gains tax that excluded the family home. We think that that is an important missing part of the New Zealand tax system and earlier on Mr Cunliffe talked at some length about the need to ring-fence losses coming out of loss attributing qualifying companies. So there are a number of ways that we could improve the tax system to make it fairer; getting rid of gift duty is not one of them. Although we will be listening closely to submissions at the select committee we will not be supporting this bill at the first reading. Thank you.