Price Waterhouse Coopers oppose measures aimed to cut tax avoidance

I came across an opinion piece from the Dominion Post on Friday where multinational tax advisors Price Waterhouse Coopers (PWC) attempt to start a scare campaign about the Government introducing a capital gains tax.

The article is headed 'Capital gains tax lifts its ugly head'. All that is lifting its ugly head here is the spectre of tax advisors complaining they will be less able to help their wealthy clients avoid paying their fair share of tax.

Is the government proposing to introduce a comprehensive capital gains tax? Sadly no. Ugly? Well assuming such a tax included an exemption for the family home, it is only ugly for the well off who have taken advantage of the lighter taxation on property investments, and have driven first home buyers out of the market as a result. It is a shame Labour didn't close this complete rort when it raised the top tax rate to 39c in the dollar in 1999.

Between 1989 and 2005 the residential property market provided investors and owners with a tax free gain of 319%*.

Despite PWC attempts to scaremonger, all that is happening is that the Government is tightening the rules around existing tax law that makes investments in housing for the purpose of making a capital gain taxable. So the Government is seeking to remove the loopholes that PWC and its clients love so much. It is not a new tax. As Michael Cullen explains:
"Associated persons: ... The definitions are used extensively in the Income Tax Act, primarily in an anti-avoidance capacity to counter transactions that are not conducted at arm’s length and therefore have the potential to undermine the intent of the law. ....There are a number of major weaknesses in the current definitions, particularly in the definition relating to land sales. That definition contains some major gaps which allow land dealers, developers and builders to circumvent the land sale tax rules by operating through closely connected entities. Parliament’s clear intent in 1973, when it enacted the current land sale tax rules, was that land dealers, developers and builders would be generally taxed on all gains on property sold within ten years of acquisition, and they could not claim to hold non-taxable investment portfolios."

PWC's Chris Leatham says
"In our view, the changes will not be well received. Land dealers, developers and builders have previously been allowed to structure their affairs to avoid tainting of rental properties so that they are not placed at a disadvantage to other taxpayers."

The New Zealand tax system generally taxes property investments with a lighter touch than other forms of investment. The whole point of removing such obvious loopholes in tax law is to ensure particular taxpayers are not disadvantaged over others. Why are PWR defending such loopholes I wonder?

Opponents of capital gains taxes often make unsubstantiated claims about how unpopular a capital gains tax could be - just because they don't like it. I think views are changing. Many economic commentators, including many on the right, now support capital gains taxes because they can see New Zealand would benefit from more money being invested in companies rather than sitting in bricks and mortar. A capital gains tax introduced in a declining or flat housing market would have limited immediate impact, but it would help to slow the next housing boom that will eventually happen. Then there are the growing numbers of twentysomethings and thirtysomethings, now on good incomes, who are becoming more and more aware of how the baby boom generation have shut them out of the housing market by speculating for tax free gains on the housing market. Bernard Hickey is really onto something when he identified "The generation that New Zealand Inc failed"

If it was up to me I would introduce a comprehensive capital gains tax (with an exemption for the family home) and direct the proceeds towards affordable housing initiatives. Ironically, a declining or flat housing market can make the structural issues easier to address.

Returning to Leatham's little opinion piece, one could be mistaken for thinking that the Dominion Post are now running free advertising features for Price Waterhouse Coopers.
"The new rules will apply only to property purchases from April 1, 2009 onward (or, in the case of builders, to property improvements made after that date). This gives you the opportunity to talk to your accountant to understand the impact of the changes."

As for their views on the taxation of housing investments - their vested interests are plain to see.

* Source: Sunday Star Times (17/6/07), "The Rent Trap"

Leading the tax system in a progressive direction

Vernon Small of the Dominion Post has made a cheeky post where he speculates on how Cullen could stop the very rich from taking the lions share of benefits from tax cuts.

His solution - introduce a new top tax rate of 42c in the dollar on incomes above $150,000, and thus allow greater tax relief to be given to those on lower incomes.

While I don't think its going to happen, I like it. The call for tax cuts could be answered, yet the left could claim a victory in making the tax system more progressive. If there are to be tax cuts, this does not necessitate complete submission to the screaming of the right.

There are many other ways the tax system could be improved. I would be happier about cuts to the top tax rate (39c at 60,000) if Cullen used the opportunity to introduce structurally useful changes such as a capital gains tax on secondary residential properties, and/or a financial transactions tax to discourage short term speculation. While the currency speculators may have means of avoiding the later (eg the EuroKiwi), it may still lead to a lower and more stable currency, which makes the Kiwi a less exiting toy for international currency speculators.

Many other countries have a higher top tax rate than 39c, but they generally apply at a higher threshold. If Cullen dared to introduce a new top tax rate, the National party would scream on behalf of its very rich mates, and Cullen could point this out with some of his trademark glee. Yet in order for this to work Cullen would be best to deliver tax cuts before the election, so voters can't be hoodwinked by the Nats into believing a $150,000 threshold is going to affect them.

As the Nats have called for the New Zealand tax system to be more like Australia, shouldn't we also have higher tax rates at higher thresholds? Kevin Rudd recently increased the threshold of 45c tax rate to $180,000 - why do the right wingers never mention the existence of the 45c rate?

The privatisation of taxation

Given the disgraceful way in which Air New Zealand have treated their workforce this year it was with some surprise I found myself agreeing with their description of the way airports set their charges.

"A privately owned unconstrained monopoly with the statutory right to set fees as they see fit is tantamount to the privatisation of taxation."

I would like to think this is an indictment of how privatisation of strategic state assets is contrary to the long held constitutional principle that taxes should only, and can only, be levied by Parliament, but I don't think so. Sadly, I don't think they understood the full significance of what they said.

While the fuselage of the planes may be round, it is a long bow to make any comparison with a Roundhead.

Privatisation of essential services such as electricity and water are also examples of the privatisation of taxation, whether they be in private ownership or operating as State Owned Enterprises. Why are there no calls for Contact Energy to give tax cuts?

Some would argue the Reserve Bank's so called 'independent' power to raise the Official Cash Rate has a similar function to a tax. Earlier this year, Treasury and the Reserve Bank looked at economic stabilisation (read anti-inflation) measures they could use as alternatives to raising the Official Cash Rate. Interestingly, one of the reasons they cautioned against the introduction of a variable levy on mortgages was the real constitutional issues raised. These issues were also raised with the head of Charles I in 1649. Should a mortgage levy be increased by a Reserve Bank without recourse to Parliament? What say the Finance Minister implemented the levy on advice of the Reserve Bank? But this only shows the distinction between monetary and fiscal policy is a monetarist illusion. For me, the debate over the mortgage levy showed there is no such thing as an 'independent' Reserve Bank - it is an attempting to give over control of our economy to an undemocratic institution.

But back to Air New Zealand.

Some would argue their description of the airport companies could easily apply to Air New Zealand itself may times in its history. There have been many occasions where Air New Zealand and Qantas have tried to merge, only to be told there is too much danger they could become an privately owned unconstrained monopoly (merger plans usually involve privatisation). A recent code sharing arrangement with Qantas failed after concerns were raised by the Australian Competition and Consumer Commission.

If Air New Zealand were really worried about the 'privatisation of taxation' they would be calling for the renationalisation of the airport companies. This would allow airport charges to be treated as an economic development issue concerning the operation of an essential service. This could also assist climate change policy as more fuel efficient planes could be charged less.

Air New Zealand says airlines and airports should have the ability to negotiate on a level playing field, and call in an expert to only arbitrate if they could not reach agreement. I look forward to Air New Zealand applying this same principle when they cannot reach agreement with their workers and their representatives.

The Labour-led government try and pretend they do not own Air New Zealand. But they do - and they fail to take responsibility for the disgraceful industrial tactics of their own airline. Perhaps Michael Cullen thinks this will constrain inflation. Even worse, they allow the board of Air New Zealand to issue more shares - therefore diluting the shareholding of the Government. Air New Zealand's plans to contract out airline services also amount to privatision. So its privatisation by stealth under Labour - if they did not support the actions of Air New Zealand they would have fired the company board by now.

PS: I am flying Qantas to Christchurch tomorrow. While I would normally support a New Zealand owned company I detest the way Air New Zealand have treated their workforce under the leadership of Rob Fife. While their marketing department would like me to be thinking about 'amazing journeys' all I can think of is the chilling call of 'contracting out'.

Combating Corporate Spin: Westpac Bank

This week Westpac Banking Corporation released their half year profit figures, along with a predictable press release attempting to make Westpac look wonderful. To say this statement is 'carefully worded to be misleading' would be a touch too charitable!

"In the latest benchmark AC Neilsen Consumer Finance Monitor survey, covering the March 2006 quarter, Westpac was the only one of the major banks to record an increase in the percentage of respondents rating overall service as 'excellent' or 'very good'’. Our rating now stands at 60%, not far off the leading bank."

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One would hope Westpac would record the greatest improvement when it comes to customer satsifaction - given they have been sitting at or near the bottom of such surveys for years.

In the University of Auckland business school retail bank survey released in November 2005, Westpac only gained a satisfaction rating of 64% - the lowest of the banks. New Zealand owned TSB and state-owned Kiwibank lead the ratings with 95% each. (Press, 14/11/05, 'Kiwi banks shine')

"An increase in income tax expenses, from $92 million in the half-year to March 2005 to $162 million in the current period, is primarily a result of the unwinding of structured finance transactions in the prior period."

Which is only because Westpac were told off by the Inland Revenue Department for using structured finance transactions the IRD regarded as tax abusive. The taxmen and taxwomen presented Westpac with a lovely large bill, and they continue to investigate the dodgy tax dealings of the banks. Westpac faces a potential tax liability of NZ $611 million (NZ$750 million if you include the interest). More detail here.

"Ann Sherry said Westpac continued to demonstrate its commitment to corporate responsibility with a number of initiatives. These include the installation of '‘talking'’ ATMs in the five major centres, and the raising of more than $500,000 in Westpac's annual chopper appeal in support of rescue helicopter trusts around New Zealand. “In the next few months we will also roll out a financial literacy programme, initially to Westpac staff and later to customers and the wider community. "

In 2005 Westpac's "support" for the Westpac Rescue Helicopter included free chopper rides for children of Westpac executives, and eight of their little friends, for a 'special treat' (NZ Herald, 4/3/05, 'Birthday treat on rescue copter'). The executive in question later resigned, with no one saying why. Management thanked her for her "great contribution" to Westpac.

No doubt the aim of the 'financial literacy' programme will be to blame individuals for making poor money management decisions, instead of Westpac demonstrating some real corporate responsibility. Financial union Finsec and others have called on Westpac to change its debt selling practices that encourage people to make poor money management decisions. Of course, the banks make more money when the debt levels of their customers are higher.

The Consumers Institute criticised Westpac in 2005 when it heralded its decision to lower minimum monthly payments from 5% to 3% as "good news" for customers. "Of course its not good news," said David Russell. "Its about keeping people in hock for longer". Westpac staff gain more 'performance points' on their reviews by selling debt products, such as credit cards, than they do for savings products. Profit driven debt selling also places pressure on interest rates. In greedy pursuit of profits, Westpac damages the New Zealand economy.

Last year Westpac were also blamed for fueling an unsustainable 'mortgage price war'. The CEO of Westpac expects the 'war' to flare up again this year.

It should be no surprise that Westpac was one of the co-winners of the 2005 Roger Award for the Worst Transnational Corporation Operating in Aotearoa/New Zealand.

There is heaps more in the Westpac statement I could fisk, but that will do for now :)

Tags: New Zealand, Corporates, Westpac

Privatised police are a bad bad idea

When Helen Clark appointed Annette King as Minister of Police, I was reasonably relieved - as I thought she would be unable to do much damage in this portfolio.

It appears I was wrong.

King now says she is willing to discuss the introduction of private police, using private contractors to do police work.

While advocacy of part-privatisation may be surprising from a "Labour" minister, it has got to be remembered that King is on the right of Labour's caucus, and was close to Roger Douglas during the forth Labour Government.

The proposal has been slammed by Police Association President Greg O'Connor, who quite rightly points out that merely using private contractors is "not going to make things any cheaper". Any extra police are "still going to have to be paid for". Using private people is "not going to solve anything."

There could be significant issues regarding conflicts of interest, especially where 'police' could be conceivably in the pay of somebody else at the same time they are undertaking investigative work. They also might be concerned where their next pay check is coming from after they finish their current 'police' contract.

New Zealand's lax accounting requirements allow a company to appoint the same accounting firm to be both its auditor and its tax/accounting policy adviser. The auditors end up auditing their own work. While it may be claimed there are 'chinese walls' within the auditing firm to prevent information being passed within these two functions, they leave open the perception of compromise.

Now imagine the same accounting firm is employed as a police private contractor in a fraud case. Even the presence of 'the great wall of China' could not prevent perceptions they could have a vested interest in favour of finding 'not enough evidence to prosecute'

Categories: New Zealand, Politics, Privatisation, Labour, Police

Young Jon Hunt retires from Parliament

As a way of marking the retirement of Jonathon Hunt from the house I thought I would share a speech Young Jon Hunt made as a first term MP in 1968. I came across this speech quite by accident, while researching some background for a submission on the Overseas Investment Bill.

On the 20^th of November 1968, Young Jon Hunt made a fiery contribution to parliamentary debate on the Land and Income Tax Bill (No. 3). With the passing of nearly 40 years, this speech now contains some lovely ironies!

“"I thought I that I might, as the youngest member [he is now the oldest], reflect for a couple of minutes on this system of social security tax which tonight is going out after 30 years of existence".” The Land and Income Tax Amendment Bill (No. 3) removed the social security tax implemented by the first Labour Government in 1938.

Hunt defended the need for an equitable tax system and criticised National for giving greater tax cuts to the wealthy.

“"Why did the Labour Government in 1938 initiate the legislation which this bill is removing? It was initiated to provide a more equitable basis for taxation in New Zealand…...more importantly it was to offer that great levelling point, that equity of opportunity which is the basis of the Labour party’s philosophy.”"

Hunt criticised the bill for imposing “"extra indirect taxation on the young people, who marry when they are 21 or 22, without giving them an equivalent reduction elsewhere is merely to discourage them, to force them overseas, and to force them into unfair debt.”"

Later in his career Hunt was a minister in a Government that bought in student fees and planned to bring in a student loans scheme.

In the same speech Hunt also warned about the dangers of Government by Executive, yet later in his career was a minister in the Forth Labour Government, which probably still remains as the most infamous recent example of a Government dominated by the agenda of the cabinet.

The speech also included this gem.
“

"Presumably the member for Waipara would not know how to speak to a young person if he met one. He would be jealous if he was twice my age."

I doubt Jon Hunt continues to claim others are jealous of his age, as anyone twice his current age would be dead :)

While our former speaker is now widely respected for his encyclopaedic knowledge of parliamentary protocols, during his fiery speech in 1968 the Young Jon Hunt was pulled up by the Speaker more than once for breaching standing orders -– once for making a reference to past debates, and secondly for suggesting that other members of the house were trying to mislead. For the later parliamentary ‘crime’ Jon Hunt was forced to withdraw. But even in his first term Jon Hunt was not adverse to ‘helping the speaker’ 'interpret standing orders', so perhaps this impertinence lead to the day Hunt sat in the Speakers chair.

Robson bites like a big fish

Perhaps in response to my posting on the 11th of November, where I questioned whether the Progressive Party's campaign for corporate tax cuts was being funded by corporates, it is possible this blog may have gained mention in Matt Robson's latest email newsletter. Of course, someone else may be asking the obvious questions too, as just like Robson's reaction, it does seem fishy.

"I'm happy to tell a snide ex-colleague that the billboard money isn't Parliamentary funding nor from corporates, but donations from Progressive members and supporters."

"Ok, Matt, but what about the three large newspaper ads in all the major papers? Those cost a lot more than a few billboards. Are you saying the Progressives got no corporate funding at all? Did any wealthy businessmen in favour of corporate tax cuts get out their personal cheque accounts to become 'Progressive party supporters'?

Might I suggest a way we can clear up this matter once and for all, that could even help the Progressive party promote its policies.

I note the Progressive party has a policy of 'full disclosure' of political donations over $250. This is a fine policy party hopped from the Alliance. Under current electoral law, parties only need to declare political donations over $10,000. This limit is clearly too high. One only needs to think of the dodgy trust scheme run by the ACT party in 1996 - this allowed ACT to receive huge donations split into anonymous $10,000 lots. For some strange reason, the rich funding the scheme did not want their name associated with the ACT party.

I call on the Progressive party to follow their own policy and make a full public declaration of all donations made to the party over $250 over the past year. It would be a principled way to promote their own policy, and it would put to rest any rumours of recent corporate cheques.

If they do so, and they are clear of corporate or corporate linked cash, I would consider a retraction and would celebrate it as a victory for parliamentary accountability. But I doubt they will, as the Progs have consistently shown they won't stand up for anything that will stand in the way of Jim's ministerial LTD.

I looked up 'snide' in the dictionary. Apparently it means 'derogatory or mocking in an indirect way'. Me? Taking the mocky out of the Progs? :)

Anderton shots himself in the foot with call for corporate tax cuts

Jim Anderton's recent advocacy of a lower corporate tax rate has all the hallmarks of a cheap political stunt. He has attempted similar things before.

In the run-up to the 1999 election Jim Anderton stunned the Alliance Council by advocating that the Alliance should campaign for a top personal tax rate of 39c in the dollar, to cut in at $80,000. This was $20,000 higher than Labour's proposal, which became the top tax rate. I believe it was the same council meeting that Jim also tried to take the knife to many key Alliance policies, such as $20 extra a week for beneficiaries. Not surprisingly, the Alliance Council completely rejected Jim's proposal that the Alliance become a lower tax party than Labour.

While Jim's advocacy of a 30 per cent corporate tax rate may have given the hapless Progressive party some short term profile, for a party that supposedly advocates for greater social and education spending it was a dumb move. Jim now needs new shoes, as he has shot himself in the foot.

In the same week the Progressives announced a policy of write offs of student loans for students that stay in New Zealand for three years after they graduate. They say it will cost $100 million. No Right Turn thinks its similar to a 1998 National party education policy, and from memory I think he is right.

Hmm, $100 million. What is going to happen when the Progressive* attempts to advocate this policy? Cullen will simply make a crocodile smile and say "now Jim didn't you advocate for lower corporate tax, how do you expect to pay for both?", and Cullen will have a good point. The end result will be that the so called progressives will be even more lame duck in this parliament than they have been in this one. They will be unable to credibly advocate for anything that involves extra cash. And for a party that advocates greater social spending, that’s terminal.

On the 9th of October 2001 Jim issued a press statement challenging then new National leader Bill English to say how he planned to fund corporate tax cuts. “National needs to spell out how it can pay $300 million to cut the company tax rate...". Well Jim, now you have to spell out.

Advocating for corporate tax cuts is also likely to drain the funding of Jim's pet project, economic and regional development. At the time Jim Anderton was setting up the Ministry of Economic Development and Industry New Zealand, National and Act were making scathing noises about 'picking winners'. They told Jim to lower the corporate tax rate instead of providing active Government support to business. To his credit, Jim successfully rejected these calls and instead advocated how active government assistance to help to businesses to grow. The estimated $500m tax cut could buy a lot of economic and regional development Jim. Corporate tax cuts are just a return to the flat, scorched earth business policies of Ruth and Roger.

It now appears Andrew Little of the EMPU now regrets rushing to Jim Anderton's aid following his defection from the Alliance in 2002. Giving the $20,000 to the Alliance and endorsing Laila Harre in Waitakere in 2002 would have been a safer bet, and now Laila could be providing Labour with an extra seat buffer, a seat that could save the Government majority in the event John Tamihere resigns from Parliament. Eventually, that decision was always going to bite Labour on the bum.

In another ironic twist, Cullen and Anderton were at odds on this issue in May 2000, but on opposite sides of the argument. On the 12th of April 2000, Cullen made a speech to the Asia Society in Hong Kong where he suggested reducing the company tax rate "when fiscal conditions permit", although he made it clear it was not a priority. In response Anderton said Cullen had not discussed corporate tax cuts with him, replying that "People might like to do without taxes altogether when fiscal conditions allow. Anything might happen when fiscal conditions allow. I'd like free education and free health when fiscal conditions allow" (Dominion, 13th April 2000).

To make matters worse, he is now making a direct comparision with the 30 per cent corporate tax rate in Australia, despite the fact that he previously argued (correctly) that his was not a good comparision because Austrialian companies pay additional taxes that NZ companies do not, such as captial gains taxes.

The large colour advertisements that appeared in this weeks papers were apparently paid for by "Progressive party supporters". There was no Parliamentary Crest so no public money could legally be used to pay for the ads. Is it just a chance thing that the same week Jim is advocating corporate tax cuts he suddenly finds the money for several 3 x 1/4 colour advertisements in major newspapers? Did some corporate come up with the cash so Jim could instigate a tacky little coup from inside the Government? If it was a donation over $10,000 we will know by April next year when the electoral commission releases the return of party donations....

*as it is likely there will only be Jim