Terry Baucher talks to Deborah Russell, a Government MP about her role on the Parliamentary Finance & Expenditure Committee

The following is a transcript of a discussion between Terry Baucher and Deborah Russell, who is now the MP for New Lynn, and was the co-author with Terry of the book, Tax Fairness.

Welcome to The Week in Tax.

You were on the Finance and Expenditure Select Committee (FEC) which is responsible for all the tax legislation. Briefly, what else does it cover? The Inland Revenue commissioner reports to you as well.

DEBORAH RUSSELL:
Sure, there are two big chunks of work that we do.

One is reviewing legislation as it comes through. We review any legislation that has financial implications or concerns itself with finance matters. We’re looking at the Credit Contracts Act at the moment. We’ve been looking at some derivatives legislation. We’re looking at the Infrastructure Commission that has got to be set up.

Obviously, we look at tax legislation. That’s a big chunk of our work.

The other chunk of our work is the annual reviews of government departments. People kind of forget the Parliament has an oversight role for how the government is behaving – the executives. We actually need to review what government departments are doing, review what ministers are doing, and then hold them to account.

TB:
Every minister and every department pretty much must report to the FEC and say, “Here is our annual report,” and all the rest of it.

DEBORAH RUSSELL:
We allocate a lot of them out to other committees.

In theory, all of those annual reviews come to us in FEC. In practice, they get allocated to committees of interest. I chair the environment committee. At the environment committee, we do all the work for the Ministry for the Environment and Department of Conservation and the Parliamentary Commission for the Environment and Zero Carbon 2050 anything that’s kind of in that environmental space.

TB:
That’s a hell of a lot of work. You must be reading enormously.

DEBORAH RUSSELL:
There is a lot of work.

Actually, Finance and Expenditure Committee is busy. It has a lot of reading associated with it. We can often get a chunk of papers – I was going to say three or four inches high

TB:
The legislation obviously you’re going through. You’ve got a bill in Parliament right now – and this is one that’s not terribly welcome in some parts of it – the loss ring-fencing. Where is that at this stage?

DEBORAH RUSSELL:
It’s the Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Bill http://taxpolicy.ird.govt.nz/news/2018-12-05-tax-bill-introducedGetting GST on online sales, basically and loss ring-fencing – those were the two big issues. There are a few other things as well. We’ve just finished that going through Finance and Expenditure Committee.

What happens is the bill gets its first reading in the house. Then, it gets referred to Finance and Expenditure Committee, and we call for submissions on it. You put in a submission on that, didn’t you?

TB:
I did. There were a couple of submissions on that. I also submitted for the Accountants and Tax Agents Institute of New Zealand.

DEBORAH RUSSELL:
Right, of course, and various other tax and accounting put in submissions on that bill.

We hear all those submissions.

TB:
You also got quite a lot from the public on that and people who are clearly going to be affected.

DEBORAH RUSSELL:
Yes, and they were basically saying, “Don’t do it.” Of course, no one likes paying tax.

We hear all of those, and we’ve got officials from Inland Revenue that are working on the bill as well and an independent tax experts because, you know, tax is quite complicated and most MPs don’t have a lot of tax knowledge in particular – although there’s plenty of them with good business and economic experience.

We talk about the submissions. The officials read them through, and they make recommendations to us based on those submissions about what we might need to change in the bill.

For example, on the ring-fencing rule – you know, isolating residential rental losses and saying you’ve got to write them off against future profits – we had a number of submissions that came in saying to IRD, the law draft is morally saying, “Gosh, the way you’ve written these rules is really confusing. Could you tidy them up?”

TB:
I was one of them, but there was a very good submission by NSA Tax who wrote a very good submission http://www.nsatax.co.nz/wp-content/uploads/2019/02/Submission.pdf  on the matter. It was a mess such as definitional terms we’d never seen before.

DEBORAH RUSSELL:
Yes, you’ll be pleased to hear it’s been tidied up.

TB:
That’s good. That’s good to hear the process works.

DEBORAH RUSSELL:
We’ve gone through that. We’ve recommended specific changes to the bill. The drafters have come back to us with actual changes in the legislation. We’ve done all that discussion and we’ve completed that in Finance and Expenditure now.

We’ve reported it back to the house. That means that, once it’s in the house, it’ll get its second reading. There will be a series of 12 speeches or so on the tax bill which I love, and other people have a cover on.

TB:
Yes, but you’ll be one of the speakers.

DEBORAH RUSSELL:
I certainly hope to be.

And then, it goes into the committee stages. That’s like the whole Parliament, the whole house like acts like a select committee examining the legislation in detail. We don’t have submissions at that stage, but at that stage you can put up more amendments to the bill. They’re called supplementary order papers or SOPs.

If there are any last-minute changes or anything where someone sitting in the Parliament says, “Why have you guys done this? Shouldn’t you have done that?” you can change the law at that stage, so we debate all those supplementary order papers and the bill itself.

On other stages of the bill, you can only speak once. At the committee stage, you can take, I think, up to four speeches on particular parts of the bill, so you really can nut out a problem if you have to. That’s the committee stage that’ll happen some time soon.

And then, after that, you have the third reading which is, again, a series of speeches on the bill, but that’s a pretty formulaic debate and, after that, it becomes a law if it’s passed.

TB:
The on-and-off ring-fencing will affect quite a few clients. The proposal was it would take effect from the 1st of April – I can’t believe I’m saying this – the 2019/2020 tax year. That is still the intention?

DEBORAH RUSSELL:
Yes, it is.

TB:
There will be a slightly retrospective sense to it, but that’s not unusual in legislation.

DEBORAH RUSSELL:
I think that was tax legislation, and that does happen from time to time.

TB:
Yes, tax legislation, I’ve seen that quite a bit.

DEBORAH RUSSELL:
But that’s because tax has got really well-defined periods from which something applies and this one is so clearly signalled that, if anyone who owns a residential rental property didn’t know about it by now, you’d sort of say, “Well, what are they doing in that business?”

TB:
Yes, ignorance is quite common. We come across that quite a bit.

Getting people involved in that, I mentioned that ordinary people or non-tax specialists will submit, and I think it’s great that they do because you have two processes. You have the written submissions and you have the oral submissions.

Now, of course, with the use of video as well, you’ve got the ability for people who don’t have to go down to Wellington to appear in front of you, so that’s really, really good because one of the criticisms I would have of the policy process is the ability for small businesses and individuals to actually contribute to the policy process is very restricting because we don’t have time and the resources.

There’s no easy answer to that, but how do you think that could be addressed? Talking to your MP is obviously one thing.

DEBORAH RUSSELL:
You can talk to your MP, but then you’ve got to rely on your MP getting involved in the process themselves.

I just think putting a submission in, particularly with tax legislation, is quite effective. Even if all your submission says is, “Hoorah for this change! I think it’s going to be excellent!” or “Boo for this change! It’s going to have a real impact on me and my business!” we actually need to hear that because tax isn’t just technical. It’s also political. It’s about what you value and don’t value.

We need to hear from ordinary people or non-tax people saying, “Actually, this is going to affect my life, and here is how it’s going to affect me,” because we need to weigh up those considerations. One way of doing it is to put a submission in. A written submission is fine. They all get read.

TB:
The Tax Working Group said it received a number of form submissions which were driven out by the Taxpayers’ Union, but that actually happens in other places. I think you’ve been involved in the euthanasia bill, is that right?

DEBORAH RUSSELL:
No, I’ve heard some hearings. I’ve been to some of the hearings, but I wasn’t reading them but, yes, we got form submissions on that. I go, “Look, we’ve got masses of form submissions on, of all things, the Conservation of Indigenous Fish Bill,” because you do.

What happens with form submissions is it’s basically someone has written up a form and all you have to do is add your name to it and put it in. What tends to happen for us is they get counted. If they’re all the same, we don’t certainly hear every single one or you certainly don’t read the same words over and over again, but you count up the number of form submissions.

You say, “Well, Greenpeace facilitated a form submission and we received 3,468 of these forms.” That’s quite valuable information because it says to the minister and it says to MPs how many people are concerned and that they’re concerned enough that they’re saying, “Yes, I agree with Greenpeace,” or they don’t agree.

I think form submissions can be good. We don’t often get them on tax bills.

TB:
That’s interesting, but certainly what I saw was quite a lot of individuals took the time to write about the loss ring-fencing. There were two points they were making, actually. It was quite interesting.

One was the obvious one. “Please, don’t do this.” It was as simple as that.

The other one was there was a number of people who said, “At that stage, we didn’t know what was going to happen with the Tax Working Group’s recommendations and the government’s response to all that. Let’s move on.” But they were saying, “Do we need to do this if there’s going to be a capital gains tax?” because that was widespread it accepted that that was going to happen.

It’s a bit of a hypothetical but, if the government had said, “We are going to proceed with the capital gains tax on residential property,” what would have happened to the loss ring-fencing at that point? Do you think that might have said, “Let’s just park that for now”?

DEBORAH RUSSELL:
The loss ring-fencing would have been parked, but I could think of one way through, it would have been to say, “Well, you’ve still got to carry your losses forward and write them off against future profits, but you might also have been able to write them off against any capital gain on sale, so that, one way or another, those losses could get used up.”

That makes conceptual sense to me because you’re talking about the gain in value from a property over time which includes both the short-term rental income and the long-term capital gain.

TB:
Or economic gains.

DEBORAH RUSSELL:
Yes, that’s right.

As it turns out, we’re not going down the capital gains route anymore. I think that makes a more powerful case for loss ring-fencing, actually.

TB:
The loss ring-fencing was an issue in the Australian Election but the scale of what goes on there is unbelievable. I think they were talking about the tax effect of that, and they do have a higher tax base. It is a bigger country, but I’ve seen numbers as high as $13b Australian dollars whether that’s the gross deductions, but you’re still talking a substantial whack – $3b to $13b are the ranges I saw.

DEBORAH RUSSELL:
Wow. If you do a lot, what’s $1b of tax revenue?

TB:
Even in a country as big as Australia, giving New Zealanders the vote for starters.

Sorry, quick political jab there at our so-called mates across the ditch.

Anyway, moving on, that’s the process, so people can get involved in there and you can, in the course of a legislation, a piece of work comes up, let’s say, you can actually also say while you’re looking at it because remedial matters, you can actually go in there and say, “Hang on, there’s an issue here. It’s not in the bill, but I think you should look at that.” You’ve had that once or twice even from individuals as well.

DEBORAH RUSSELL:
I’m just trying to think of one in the most recent bill. PEPANZ – the Petroleum Exporters and Producers Association of New Zealand – pointed out a little wrinkle in a particular exemption they had to do with oil rigs and that exemption was to do with whether or not an oil rig here is a permanent establishment.

TB:
That’s a long standing issue.

DEBORAH RUSSELL:
We had to get around the rules. They had to shift the oil rigs out of New Zealand every 182 days or something like that, so there was a lot of time and effort and money spent doing that. And so, there’s an exemption. That’s been there for quite a few years now. It just needs to be rolled over every five years.

TB:
Yes, double tax agreements do talk on that, for example. I think the Australian treaty includes references to oil rigs.

DEBORAH RUSSELL:
Yes, so we’ve got that little exemption.

Some people say, “Why aren’t you giving anything to the oil producing industry?” and I’m kind of sympathetic to that view given what’s happening with our climate. But, equally, we’re pretty keen on making sure that, as we transition away from an oil-based economy, that we actually do it slowly and carefully so that we don’t ruin people’s lives.

TB:
Just as an aside, that’s quite important.

One of the interesting things that I came across in my business was the scale of the expertise down in Taranaki. You have something that is actually very common in Germany. You have lots of small German companies – they’re called the “Mittelstand” – actually, the world’s leading producers of a particular type of small ball bearing which is used only in a particular type of factory or instrument, but they’re highly specialised.

Part of the Taranaki were replicating that for the oil and gas industry and that’s the sort of high-value work we want. I understand one of the things that could be interesting to watch is, as we transition out of oil and gas and maybe into hydrogen which has been in there but maybe the expertise rolls over, but that’s just an aside. Useless, not necessarily tax-related, but this is a podcast, so we’ll go wherever we want.

People have misconceptions about the system and the Parliament’s role in the system.

DEBORAH RUSSELL:
Yes, I think there is in some ways.

Often, people think that an individual MP can change things by themselves. I’ve got lots of views on things which I’d like to see the Parliament enact, but there’s one of me and there are 120 MPs. If I want to get something done, I need 60 friends to agree with me. That means I’ve got to persuade 60 people, and that’s what our parties are. Of course, they are blocks of votes.

People can come to me and say, “You’ve got to change that.” I go, “Well, actually, have a think about how the system works.” In some ways, people think, “That’s terrible. We need to be able to get things changed quickly.” In other ways, it’s quite a good thing because you don’t want one person to be able to race in there and change everything. You actually need a process that gathers consent around particular issues. I think that’s one misconception that people have.

Equally, one MP can have an influence because we can go and talk to a minister or we can talk to officials and we can try to persuade them – not on the grounds of thumping the table or anything like that but actually on the sense or the logic of your views. We do get that access to the processes of change, so that’s quite good.

People have misconceptions all over the place about tax, but you’d know all about that.

TB:
You mentioned about parties and you have to get 60 friends on board, but one thing that people probably don’t realise is most tax legislation goes through unopposed. There will be some party debates, I imagine, but most of the time, you’re all working on that select committee and you’re bringing your various viewpoints to it, and it is truly bipartisan – unless there’s obviously a political measure. Capital gains tax would have been that because you would have clearly seen groups split off, so there’s that.

You’re often working across the group.

DEBORAH RUSSELL:
Yes, I’ve been in Parliament for 18 months now. I’ve seen some interesting cases of that. I think the National Party opposed or has opposed some tax bills recently. The annual rates bills, you’ve got to put the annual rates through. It’s constitutional, and they oppose them on the grounds that they say, “We should be cutting tax rates.” That’s what they do in the House.

In the select committee, the same MPs who vote against the bill as a whole in the House because that’s what their party is doing, we’ve all sat together and worked on issues and tried to sort some of the stuff out – like around the loss ring-fencing or around what to do about the GST measures. I’ve seen opposition MPs saying, “We totally oppose you guys on this, but here’s how to fix this little bit of the legislation.”

I saw that in the overseas investment tax changes we put through a year or so ago. Opposition members said, for political reasons, they totally oppose the bill, and here is how to make it better. That’s great, really, isn’t it?

TB:
It’s constructive.

DEBORAH RUSSELL:
Select committees, you know, the good old argy-bargy across the table, if you want to, but, actually, most of the time, we are there trying to get something right.

TB:
It’s an enormous amount of work though.

What is your working day like? When you’re in Wellington, it’s nonstop.

DEBORAH RUSSELL:
It is.

Tuesday is the day I travel down. My Wednesdays, I usually get into the office at about 7:00 AM – into my office, answer some emails, finish off a bit of reading.

First meeting is at 7:45 AM when I meet with the other government members of the Finance and Expenditure team to talk through what’s on the business for that day.

Then, at 8:45 AM, we have our procedures meeting for the day. That’s the Labour caucus meeting. We don’t have to be at it, but lots of us are to work out what’s coming up in the Parliament that day and who’s going to be speaking on what bills.

By about 9:30 AM to 10:00 AM, I’m at the Finance and Expenditure Committee, and that will run through to about 1:00 PM most of the time, so that’s a three-hour meeting, sometimes longer.

And then, at about 1:00 PM, my daughter usually comes to meet me for lunch. I buy her a meal and give her money because that’s my job as a parent. We’re back at the house at 2:00 PM for question time which goes through to about 3:00 PM. And then, the House carries on its programme. Usually, I will either be in the House speaking on a bill, or I’ll have meetings, or I’ll have a reading to do.

We have a dinner break from 6:30 PM until 7:30 PM. I can have a meeting in that space.

And then, we work until 10:00 PM at night. It’s a long, long day.

I figured I have my three days in Wellington when it’s a sitting week. You get a 40-hour week done within those three days.

TB:
It sounds like from what I’ve seen you’re busy. And then, of course, on the ground, you’re back on the weekends and on recess weeks you’re dealing with constituents.

DEBORAH RUSSELL:
Today, it’s coming across here to do this with you. And then, I’m going to a meeting with a constituent in my office, then I’m speaking at a graduation, then I’m off to visit one of my schools, and then I’m visiting a mosque.

TB:
Oh. What tax issues do constituents raise at the moment? What proportion? Do you get a lot on that or not so many?

DEBORAH RUSSELL:
We very rarely get tax issues. Constituents tend to go straight to Inland Revenue. To be fair to Inland Revenue, they’re pretty good at dealing with interventional constituents issues around tax because they’re often just around salary and wages and things like that.

We get a few people approaching us of child support which, of course, Inland Revenue is involved in collecting that.

TB:
It’s highly controversial to most. In my experience, it’s really one that really pushes everyone’s buttons.

DEBORAH RUSSELL:
It sure does.

TB:
Nine times out of ten, it’s not pretty.

DEBORAH RUSSELL:
What family separations are? You know, that’s one of those things.

I used to get occasional queries about secondary tax. Hopefully, that will sort itself out.

TB:
I’ll come onto that in a minute.

DEBORAH RUSSELL:
Occasionally, I get people who want to lobby me on a tax issue, or they’re got a particular view on monetary policy and they want to talk to an MP about it, but I don’t get a lot of tax issues through my electoral office.

The issues I’m dealing with tend to be immigration and housing.

TB:
Going back onto the oversight, you’ve had oversight of Inland Revenue through its business transformation. You’ve met with the Commissioner fairly regularly.

DEBORAH RUSSELL:
We do.

TB:
Were you not getting monthly updates on the progress of business transformation? 

DEBORAH RUSSELL:
I don’t think we were getting monthly updates. We were getting regular updates, though.

We get the Commissioner in for the annual review. But, in addition to that, she came in a couple of times to talk to us about the business transformation project because, actually, all of us were hearing concerns about it.

TB:
I might have said something.

DEBORAH RUSSELL:
You might have.

People were concerned that IRD wasn’t sufficiently geared up particularly for this latest changeover and we did keep on asking questions about that of the commissioner saying, “How are you prepared for this? What’s going to be happening with the changes? What is the failsafe you’ve got in place?”

We had the commissioner up there and the leaders of the project in quite a number of times asking those sorts of questions. It’s gone smoothly enough – except for letters to children.

TB:
I have some sympathy about what is a massive issue, but there are one or two things that’s going on and I’m thinking, “No, I think you ought to have handled that one better.” Just as an aside, the tax agents, I mean, we were getting used to it, but we have all felt all along that we were never involved in the project as we should have been.

An IT consultant said to me that Inland Revenue, when it looked at who it was dealing with, it overlooked that tax agents are the biggest users of its platforms. Therefore, we would be more affected than anybody else, because we’re more integral.

The one repeated concern I keep hearing amongst tax agents is that the process has been done deliberately to cut tax agents out of the system completely. I don’t think that’s the case, but I do think it’s a by-product of what I just said that the system was looking at the wrong customers. I don’t like using the term here, but when it looked at who is your biggest single customer and who are your most important customers – your regular users – the 80-20 rule would come in.

Most taxpayers will have one interaction with Inland Revenue, and it will be at this time of year when they want to see if they’ve got a refund, too. The rest of the time, it’s tax agents, and we’re with them all the time.

Systems come in that are a little bit clunky. I’ve got a wee story about that in a minute. That’s my thought on that. I thought it was an insight into the whole process. That said, Inland Revenue has been working pretty hard on this, and there’s a medley of things here that are irritants, but there’s no major malfunction – fingers crossed – that has happened.

DEBORAH RUSSELL:
Think of the scale of the project, it’s quite remarkable.

What they’ll have is they’ve been developing a list of faults that need to be fixed and they’ll be working their way through them, but there seems to have been no major fault which means they’ve done pretty well in getting away from the old system and into their new system. That old system was held together with sellotape and paper clips.

TB:
I remember about five or six years ago – not long ago – I went to an Inland Revenue office and got to see what they were looking at. I go, “My god, I haven’t seen a screen like that since 1986”. It was really clunky looking. To be frank, the project probably should have been started five years before it did.

DEBORAH RUSSELL:
Yes.

TB:
Now, next week is the budget. Obviously, you’re going to talk about this for the well-being budget and the rest of it. As a backbencher, you probably don’t get much insight to what’s going on with that. This will be your second budget. What’s the budget week like for a backbencher?

DEBORAH RUSSELL:
To be honest, last year was our first budget as a government. Everyone was a bit nervous – not in terms of the content of the budget, but just how was this all going to go.

This year, it’s almost feeling like a party. I know that sounds odd but going, “Okay.” First of all, I just sort of think that the word “budget” is not a good word. We should be calling it the government’s “plan” for the year. But, of course, it’s got huge financial implications, but I’ve just been realising that people don’t quite understand what the budget is. They don’t understand what it does because the government is saying, “Here is where we’re going to be doing our really hard work and here is what it’s going to cost.”

Anyway, this year, we’re sort of going, “It’s budget day on Thursday. We’re looking forward to hearing the Minister of Finance’s speech. We’re pretty confident about what we’re doing as a government. We’ll deliver a speech and we’ll have a little meeting of Finance and Expenditure Committee to divvy up some responsibilities to other committees and then we might have a drink.”

TB:
At the end of the day, what happens?

For those who don’t know, with a bunch of processes like these, if you’ve ever wondered why at 2:00 PM when the Finance Minister stands up, all these experts on TV seem to know exactly what he’s saying, that’s because we’ve been quarantined away in the beehive from 10:30 AM beforehand with the actual budget pages, so we’ve all been through it. There’s a frantic hive of activity that goes on there.

What happens to you? Do you get told in advance this is what’s going to be in this budget? Or do you sit down at 2:00 PM and say, “Okay, what has Grant got for us today?”

DEBORAH RUSSELL:
Of course, there’s a series of pre-budget announcements that are made, so we know a lot of what’s in the budget already. We’ve been talking about well-being. That’s the well-being budget. We’ve been talking about it some months. We’ve done some work in Finance and Expenditure Committee on what well-being means.

We’re fairly well up on the broad framework that we’ve got for how our budget is framed. However, in terms of getting the actual budget documents and the like, for us, it’s 1:00 PM. We go into a similar sort of lockup. I don’t think the Minister of Finance will be there, but his senior off-siders will be there to talk us through the issues, and we get a chance to sit down, look through the budget documents, and see the details of stuff.

TB:
It’s called a well-being budget, but it’s built on the living standards framework which has attracted a lot of attention around the world on that. It’s something that takes a little bit to get your head around it, but conceptually the four capitals.

DEBORAH RUSSELL:
That’s Treasury. Treasury has been working with it quite some time.

TB:
Yes, this is something that just didn’t happen with the change of government.

DEBORAH RUSSELL:
Yes, but what we’ve said is that we actually really do need to measure how government is doing – not just in terms of GDP or growth. We really need to have some of those measures upfront and centre. That’s what the well-being budget will do.

The number of people in employment, the number of people who are educated to a particular level, the number of homes that are warm and dry – you know, those sorts of issues and measures of well-being.

It goes back to work that’s done by people like Amartya Sen and Martha Nussbaum. Looking at enabling people to exercise their capabilities to lead lives that they value at a recent value. It’s trying to get a much more wholistic approach to the way we do our budgets.

TB:
Excellent. That seems probably a good point – a happy note to finish.

Here’s a special prize for those who listened through. Deborah and I co-authored Tax and Fairness. We have autographed it and we’ll mail it out to the first person who listens to the podcast and emails me at info@baucher.tax and I will send you an autographed copy of Tax and Fairness.

That’s the Week in Tax this week!

Next week, we’ll be talking about the budget.

Until then, ka kite anō!

This article is a transcript of the May 24 edition of The Week In Tax, a podcast by Terry Baucher.  Some minor editing/correction has been done after this was originally posted. This transcript is here with permission. You can also listen below.