Taxation (Tax Credits, Trading Stock and Other Remedial Matters) Bill

  • Bill Birch
Finance

I move that the Taxation (Tax Credits, Trading Stock and Other Remedial Matters) Bill be now read a second time.

I will be recommending to the House that the bill be referred to the Finance and Expenditure Committee for its consideration, to be reported back to the House on or before 27 July.

This first tax bill of the year introduces two major tax reforms: one on the taxation of income from superannuation fund and life office savings, the other on trading stock tax rules.

The bill also proposes a number of remedial and base maintenance amendments.

In short, the contents of this bill reflect the Government's continuing commitment to better, more effective and fairer tax law; lower taxpayer compliance costs; and the protection of the revenue base.

Tax credits

The first major reform solves the problem of how to tax savers in superannuation fund and life office schemes at their correct rate, when funds and life insurers are taxed on earnings at a flat and final 33%.

Up to 600,000 low tax rate savers are therefore paying more tax on their investment income than they should.

The tax credit system proposed in this legislation provides a mechanism which, as far as practicable, allows people who save through these schemes to pay tax on their investment income at their correct tax rate.

Funds and life offices will be able to offer tax credits to their customers, who in turn will be able to choose whether to receive them.

Where they do so, funds and life offices will pay less tax, and can credit the benefit to the accounts of their savers.

The proposed system will make a real difference to low rate savers.

For example, someone with a 21% tax rate and $10,000 invested in a retirement scheme could receive up to $1600 in extra savings over ten years on an investment earning an average 8% a year, where the saver gets a tax credit of 12 cents in the dollar, compounded over the ten years.

The tax credit system therefore significantly increases the gain being delivered to low-rate taxpayers in the 1 July tax cuts. It gives people more money to save, helping them and the country contribute more savings towards the greater future prosperity of the nation.

The proposed legislation follows the publication of a discussion document and very wide-ranging consultation with the superannuation and life insurance industry. Our goal was to ensure the proposed system is workable and has the flexibility to contain compliance costs.

When enacted, the legislation will take effect from 1 April 1998 to make the benefits to savers available for the current taxation year..

Trading stock

The other major reform proposed in the bill also follows extensive consultation. The tax treatment of trading stock - or inventory - affects every business that derives income from manufacturing, producing or trading in goods.

Businesses must include in their tax returns the annual change in the value of their trading stock.

At present, that involves applying an amalgam of rules, only some of which are set out in legislation. The remainder are matters of administrative practice or common law.

The reforms proposed in this bill clarify the rules, make them more consistent, and measure income more accurately. They will improve the coherence of the tax rules on trading stock, thus reducing compliance costs.

The main features of the new trading stock rules are as follows:

Large taxpayers will not have to incur the compliance costs involved in preparing separate valuations for tax purposes for stock valued at cost. Instead they will use financial reporting standards to value stock at cost for tax purposes.

Trading stock will be valued at either cost or market selling value, if the latter is lower than cost.

Special provisions for obsolete and slow moving stock will be repealed. The market selling value will be available to take obsolescence into account. However, when the market value of stock falls below its original cost, taxpayers can write the stock down to its market value and claim this loss as a tax deduction.

Transitional measures will be introduced to spread any income arising from repeal of the obsolescence provisions over a three-year period.

There will be simplified rules for smaller taxpayers whose annual turnover is less than $3 million.

When valuing stock at market value, certain anticipated direct selling costs may be deducted from the market value to give a more accurate measure of income.

Shares will be valued at cost only.

The legislation will apply to stock valuation at the end of a taxpayer's 1998/99 year.

Wrongfully obtained money

This bill also contains an important tax base protection measure. It ensures that wrongfully obtained money will continue to remain taxable.

The proposed legislation will apply to money and property that has been stolen or gained through fraud, embezzlement and misappropriation. It will prevent the loss of $77 million in tax from tax investigations already completed or under way.

Until recently, Inland Revenue's practice was to regard wrongfully acquired money and property as income, and thus subject to tax.

However, a recent Court of Appeal decision held that stolen money and property were not income according to ordinary concepts - and so were not taxable, because technically, the thief may have to repay the property to the rightful owner.

An amendment to the law therefore became necessary.

The Government has no intention of tolerating a situation where law-abiding citizens are taxed on their income, but criminals can avoid tax. So we're changing the law to ensure that stolen money continues to be taxed.

The amount to be taxed will not include reparations made to the legal owner.

When enacted, the legislation will be backdated to 1 April 1989, to ensure that tax already paid on stolen money during that period does not have to be refunded.

The amendment will not apply to anyone who before 6 March 1998, the date the amendment was announced, made a competent objection to misappropriated property being subject to tax.

Other amendments

The remaining amendments in the bill span a number of areas.

Employees will be allowed to choose to have employer superannuation contributions included in their salary or wages and taxed at their personal tax rates if they are lower than the statutory rate of 33%. This will resolve the problem whereby employer contributions are over-taxed for employees whose personal tax rate is below 33%. The problem was identified by the Working Party on the Taxation of Life Insurance and Superannuation Fund Savings - otherwise known as "TOLIS", who were instrumental in developing the tax credit proposal.

The conversion rate for excess imputation credits is being reduced from 21.75% to 21% for the 1999/2000 income year. This is consistent with recently enacted reductions in the extra emolument rate, with effect from 1 July 1998.

Several minor technical amendments are being made to the depreciation rules.

A remedial amendment is being made to the consolidation rules relating to the foreign investor tax credit.

The annual income tax rates for 1998/99 are confirmed. This amendment reflects the tax cuts coming into effect on 1 July this year.

Notices of proposed adjustment, which are part of the dispute resolution process, will have to be accompanied by a prescribed form. This will enable Inland Revenue to identify them more readily and respond to them within the time specified by law.

A final amendment is to the privacy provisions of the Student Loan Scheme Act. It will enable Inland Revenue to supply the Ministry of Education with taxpayer information relating to a case the Ministry is investigating when it suspects that a student loan has been fraudulently obtained, or someone is attempting to obtain one fraudulently.

At present, Inland Revenue can release to the Ministry only such information as is required to correctly identify a borrower. The amendment will help the Ministry of Education to investigate and prosecute fraud.

Closing

The amendments proposed in this bill are described in detail in a published commentary, which also explains their purpose and policy intent. Members will find that commentary very helpful, especially its detailed explanations of the tax credit system and the trading stock reforms. Mr Speaker, I commend the Taxation (Tax Credits, Trading Stock and Other Remedial Matters) Bill to the House.

------------------------- Debate -------------------------

Minister then moves:

I move that the Taxation (Tax Credits, Trading Stock and Other Remedial Matters) Bill be referred to the Finance and Expenditure Committee for its consideration and that the bill be reported back to the house on or before 27 July.