Huo Raymond: Taxation (Consequential Rate Alignment and Remedial Matters) Bill — Second Reading 
Huo Raymond: Taxation (Consequential Rate Alignment and Remedial Matters) Bill — Second Reading 
[Volume:659;Page:7874] 
RAYMOND HUO (Labour) 
: 
 Taxation is a magical word. If someone has the required power to offer lip service plus a certain form of testimony such as a personal guarantee etc. he or she will in all likelihood get the required and expected result. The National Party’s promise of tax cuts which was personally guaranteed by its leader before the election is a typical example. 
This Taxation (Consequential Rate Alignment and Remedial Matters) Bill is a technical bill that continues one of Labour’s work streams and makes some necessary changes. The bill introduces among other things new rates of resident withholding tax or RWT on interest income in order to align them with the new tax rates. Among the issues that were discussed at length at the Finance and Expenditure Committee as my colleagues who spoke before me have pointed out was the new default rate of resident withholding tax. The default rate that applies when an individual does not choose a resident withholding tax rate with his or her financial institution will be changed from 19.5 percent to 38 percent. The reason for changing the default resident withholding tax rate to the highest income tax rate according to the commentary of the Minister of Revenue on the bill is to encourage individuals to select the rate that is consistent with their marginal tax rate. 
In the bill’s first reading I cited a news story published in the  
Otago Daily Times  
on 23 July this year. The headline reads “Tax change could catch investors off guard”. A tax expert Mr Peter Truman stated: “Tax changes being proposed by the Government will catch investors unaware and may see them paying more tax on their investment income”. That is one of the reasons why we spent a considerable amount of time deliberating on this issue in the Finance and Expenditure Committee. The Inland Revenue Department listed a number of bullet points to support its analysis and underlying assumptions as to why the 38 percent default rate is desirable. Generally speaking in setting the default rate at 38 percent rather than at 21 percent the objectives were to promote the integrity of the tax system to reduce fiscal risk to minimise compliance costs and to encourage individuals to elect the rate that is consistent with their personal tax rate. I thank the departmental officials for their great work and I thank our independent specialist advisers for their great work too. 
Basically the proposed clauses are saying that any person who has resident withholding tax deducted at the 21 percent rate and who has not confirmed that rate will be automatically moved to the 38 percent rate. We received valuable submissions from concerned individuals and organisations. In general the submitters were not supportive of a default rate of 38 percent. The main reason was that it would not be an appropriate rate for the vast majority of taxpayers who would be affected. It would result in the over-deduction of tax in respect of those individuals. 
However in respect of those individuals the officials have suggested an alternative approach but it would still have at least two impacts. The first impact is that a large number of interest earners would find themselves having resident withholding tax deducted at a rate that is higher than it should be. This impact would in all likelihood fall disproportionately on lower-income earners. The second impact is that the proposal does not appear to include a requirement that the Inland Revenue Department advise banks to move an account holder to a lower rate. 
Advisers correctly commented that some of those impacts would be minimised if taxpayers were in a better position to elect the correct rate. Conversely—and this is my own take on it—some of the impacts would be maximised if taxpayers were in a worse position to elect the correct rate. One possible solution to that problem would be a major public education campaign. Other suggestions included measures such as the Inland Revenue Department setting up a toll-free phone number so that its advice is available in a timely manner. No doubt those are good suggestions and they would help to remedy the situation. It is important for us to make sure that any problems or consequences either unintended or otherwise are properly attended to. 
I agree with Peter Truman when he said 4 months ago that many Kiwis did not get around to notifying their financial institutions of their correct tax rate. Therefore we have the Government increasing its tax take from those who are not motivated or organised enough to advise their financial institutions of their appropriate and correct tax rate. Further another catch in the proposed legislation as identified by Mr Truman at that time was the failure to alter the resident withholding tax rate on individuals which placed an administrative burden on companies. 
As I said at the beginning this bill is a technical bill and Labour supports it. However it is a good reminder that the National Government has failed to deliver where it matters. This Government came into office with grand promises of a tax cut programme benefiting everyone. As soon as it got in it passed a tax cut package that gave a third of the tax cuts to the top 3 percent of taxpayers. Then in the Budget National broke its No. 1 election promise and cancelled the next two rounds of tax cuts. As a nation the Chinese idiom suggests that civilians or in modern language citizens or voters are like water: water can float a boat and can sink one. New Zealand is not the Dead Sea where one can float easily no matter how one performs. Too many broken promises would eventually haunt the responsible individuals or parties. There are holes in the boat and they will only help to sink it. Thank you.