20OIA1110 Combined documents for release Morrison.pdf

In Confidence
20 August 2019

Minister of Revenue
Order in Council  to designate  Provincial Growth Fund Limited  a  public
purpose Crown-controlled company
Purpose
1.
This  report seeks your agreement to designate, by way of an Order in Council,
Provincial Growth Fund Limited (PGFL) to be a public purpose Crown-controlled company.
This status wil  make PGFL exempt from income tax.
Policy background
2.
On the recommendation of the Minister of Finance and Minister for Regional
Economic Development, Cabinet has agreed to establish PGFL as a schedule 4A company
under the Public Finance Act 1989 [DEV-19-MIN-0084].1 It is being established as an asset
holding company to hold loan and equity investments made through the Provincial Growth
Fund while outsourcing the management and administration functions associated with
these investments to the Provincial Development Unit, which is  part of the Ministry  of
Business, Innovation and Employment.

3.
A Crown Law opinion on which entities qualify to be public authorities under the
Income Tax Act 2007 resulted in most of the Crown-controlled companies listed in schedule
4A of the Public Finance Act losing their “public authority” status  for tax purposes.  In
response, legislation enacted in March 2019 provides such companies with an income tax
exemption and GST treatment2 equivalent to their being public authorities when:

•  they have no private sector shareholders  (this requirement avoids  subsidising
private sector investors through the income tax exemption); and

•  their primary purpose is to carry out one of the Government’s public policy
objectives rather than to make a profit (to distinguish them from state enterprises).

4.
The purpose  of  these  amendments  were  to reduce compliance costs for Crown
companies without reducing government revenue or creating economic distortions.

5.
Companies that meet the above criteria are listed in schedule 35 of the Income Tax
Act as “public purpose Crown-controlled companies”. Eleven companies are currently on
the schedule, including New Zealand Green Investment Finance Limited which was added
to the list early this year.

6.
   Companies  can be  added or removed from this  schedule by Order in Council
depending on whether the above criteria are met.  The Governor-General is guided by the
recommendations of the Minister of Revenue when considering an Order in Council.


1 To be listed in schedule 4A, a company must be more than 50 per cent owned by the Crown, its shares cannot
be listed on a registered market, and the company cannot be a Crown entity or a State Enterprise.
2 This new provision in the Goods and Services Tax Act 1985 helps ensure that the companies can, like other
businesses, claim back the GST paid on their purchases.
IR2019/380: Order in Council to  designate Provincial Growth Fund Limited a public purpose Crown-controlled
company
Page 1 of 3

In Confidence
Designating PGFL to be a public purpose Crown-controlled company
7.
Tax officials consider that PGFL meets the statutory criteria to be listed as a public
purpose Crown-control ed company for income tax purposes.  It wil  be a 100 per cent
Crown-owned company (the Minister of Finance and the Minister for Regional Economic
Development wil  each hold 50 percent of shares) and it wil  be listed in schedule 4A of the
Public Finance Act.

8.
In addition, officials believe that PGFL wil  have a primarily public policy objective
as it will have the same policy objectives as the Provincial Growth Fund.  The  overall
objective of the Crown, via the Provincial Growth Fund, is to invest in regional economic
development in New Zealand, by providing various forms of financial support for recipients
in regional New Zealand.  PGFL wil  be the holding company for certain Fund investments.
Decisions on the choice of investments wil  remain with the Crown and wil  be governed by
criteria published by the Ministry of Business, Innovation and Employment, which include
non-financial criteria.

9.
In summary, the Crown wishes to hold its interests in certain Provincial Growth
Fund  investments through a limited liability company, while still  ensuring  the primary
responsibility for management and administration of those investments remains with the
Crown.
Financial implications
10.
Making  PGFL  income tax exempt  will not have fiscal  implications as it is a new
company, and it is likely to be initially making losses.

11.
Officials note there is a provision in PGFL’s constitution that enables shareholders
to  pass a special resolution to change the nature of the company so that its primary
objective would be to operate as a successful business, and to this end, be profitable and
efficient. If such a resolution were passed, this would trigger officials recommending the
removal of PGFL from schedule 35 of the Income Tax Act.
Consultation
12.
The Ministry of Business, Innovation and Employment and the Treasury have been
consulted in the preparation of this report and agree with the recommendations.  The
Ministry of Business, Innovation and Employment is in the process of organising the Order
in Council needed to add PGFL to schedule 4A of the Public Finance Act. This is a necessary
step before an Order in Council adding PGFL to schedule 35 of the Income Tax Act can be
made.
Next steps
13.
PGFL is expected to be operational from October 2019. It would be desirable for
there to be certainty about the tax treatment of the company before this date.

14.
Therefore, if you agree that PGFL should be treated as a public purpose Crown-
controlled company,  officials  will prepare a draft joint  Cabinet paper for you and the
Minister of Finance to take to Cabinet Legislation Committee in mid-September, seeking
its authorisation of the Orders in Council needed to add PGFL to both schedule 4A of the
Public Finance Act and schedule 35 of the Income Tax Act.  These changes can be done
concurrently (although the Order adding PGFL to schedule 4A of the Public Finance Act
must be authorised first).

IR2019/380: Order in Council to  designate Provincial Growth Fund Limited a public purpose Crown-controlled
company
Page 2 of 3

AIDE MEMOIRE
Summary of Provincial Growth Fund Limited: Orders in Council
Cabinet paper
Date:
19 September 2019
Priority:
High
Security
In Confidence
Tracking
0927 19-20
classification:
number:
Purpose
This aide memoire provides information on the Cabinet paper that seeks authorisation from
Cabinet Legislation Committee (LEG) on 24 September 2019 to the Orders in Council for
Provincial Growth Fund Limited (PGFL).
Isabel Poulson
Manager, Strategy and Policy
Provincial Development Unit, MBIE
..... / ...... / ......
Background
1.
This paper seeks LEG  Committee’s authorisation to submit Orders in Council to the
Executive Council to:
a. add PGFL to Schedule 4A of the Public Finance Act 1989 (PFA) and;
b add PGFL to the list of public purpose Crown-controlled companies in Schedule 35
of the Income Tax Act 2007.
Public Finance (Provincial Growth Fund Limited) Order 2019
2.
This Order wil  add PGFL to Schedule 4A of the PFA and wil  make it subject to restrictions
on borrowing and the use of derivatives (under section 162 and 164 of the Crown Entities Act
2004). Applying only these restrictions and not applying others wil  provide flexibility and
avoid any potential issues that would prevent PGFL from carrying out activities aligned with
the company’s intended role and purpose such as holding loan agreements.
3.
The Minister of Finance has recommended that the Governor-General add PGFL to
Schedule 4A of the Public Finance Act 1989 by way of Order in Council because he is
satisfied that:
0927 19-20
In Confidence
2

i.
more than 50% of the issued ordinary shares in the capital of PGFL are held by
Ministers of the Crown, on behalf of the Crown;
ii.
shares in the PGFL are not listed on a registered market; and
iii.
PGFL is not a Crown entity or a State enterprise named in Schedule 1 of the State-
Owned Enterprises Act 1986.
Income Tax (Provincial Growth Fund Limited) Order 2019
4.
This Order will add PGFL to the list of public purpose Crown-controlled companies in
Schedule 35 of the Income Tax Act 2007, making the company exempt from income tax.
5.
The Minister of Revenue has agreed to add PGFL to Schedule 35 on the basis that:
i.
the company wil  be listed in Schedule 4A of the Public Finance Act or it is a
subsidiary of a company listed in Schedule 4A;
ii.
the Minister of Finance and Minister for Regional Economic Development each hold,
on behalf of the Crown, 50% of the voting shares in PGFL; and
iii.
PGFL’s primary purpose of investing in regional economic development in New
Zealand is a public policy objective of the Government.
6.
Adding  PGFL  to Schedule 35 means that the company wil  be exempt from income tax,
better enabled to claim back GST  paid on its purchases,  and be eligible for a resident
withholding tax exemption certificate.
Waiver to the 28-day rule
7.
The paper proposes that Cabinet agree to a waiver of the 28-day rule  on the basis the
Orders in Council wil  have little or no impact on the public. The Orders will be essentially
adding PGFL to Schedule 4A of the PFA and Schedule 35 of the Income Tax Act 2007.
PGFL itself wil  play a limited role in managing the investments that have already been
approved through the PGF.
8.
A waiver will allow PGFL to be established and operational as soon as possible. 11 loans are
already signed and ready to be transferred to the company for management, with further
loans nearing approval
9.
If Cabinet does not approve the waiver then the Orders wil  take effect in late October 2019.
This wil  delay investments from being novated to PGFL.
Background to Provincial Growth Fund Limited
10. On 10 April 2019, Cabinet agreed to establish PGFL as a Schedule 4A company under the
PFA.  PGFL is being established as an asset holding company to hold loan and equity
investments made through the Provincial Growth Fund (PGF).
11. Establishing PGFL as a Schedule 4A company was considered the most appropriate form of
Crown entity to provide the necessary structure and flexibility to best manage loan and equity
investments beyond the life of the PGF.
12. PGFL wil  have no operational role in the day-to-day management and administration of PGF
investments. PGFL wil  outsource these functions to the Provincial Development Unit (PDU)
through a management agreement. Decision making responsibilities on PGF investments wil
remain unchanged.
0927 19-20
In Confidence
3

13. Existing investments are currently being managed by the PDU, and wil be novated (or
transferred) to PGFL once it is established and operational. Thereafter, new investments will
be novated to PGFL once executed.
14. PGFL was registered and incorporated with the Companies Office on 3 September 2019 for
the company to be “established” under the Companies Act 1993. The Minister of Finance
and Minister for Regional Economic Development are Shareholding Ministers, on behalf of
the Crown, each holding 50% of the issued ordinary shares in the capital of the company.
15. In July 2019, Cabinet noted the appointment of Mr Rodger Finlay (as Chair of the Board), Mr
Nevil e Harris and Mr Graeme Mitchell as directors of PGFL. Directors commenced their
three year term on 1 August 2019.
0927 19-20
In Confidence
4

I N C O N F I D E N C E
LEG-19-SUB-0149
Announcement
The Orders will be notified in the New Zealand Gazette.
Proactive
This paper will be proactively released.
Release
Consultation
Paper prepared by IRD and MBIE (Regional Economic Development). The
Treasury, DPMC and SSC were consulted.
The Minister of Revenue and the Minister for Regional Economic Development
indicate that the Minister of Finance, the Prime Minister, the Deputy Prime
Minister, the Minister of Transport, the Minister of State Services, the Minister
for Trade and Export Growth, the Minister for Māori Development, the Minister
of Agriculture, the Minister for Climate Change, the Minister of Employment,
the Parliamentary Under-Secretary to the Minister for Regional Economic
Development and the Minister for Economic Development were consulted, and
that New Zealand First, the Green Party and the Labour Party were consulted.
2
301oi6ek03 2019-09-23 15:31:07
I N C O N F I D E N C E

I N   C O N F I D E N C E
LEG-19-SUB-0149
The Minister of Revenue and the Minister for Regional Economic Development
recommend that the Committee:
1
note that on 10 April 2018, the Cabinet Economic Development Committee agreed to
establish PGFL as a Schedule 4A company under the Public Finance Act 1989
[DEV-19-MIN-0084];
2   note that the Public Finance (Provincial Growth Fund Limited) Order 2019 gives effect to
the decision referred to in paragraph 1 above;
3
note that the Minister of Finance has agreed to recommend that Provincial Growth Fund
  Limited be added to Schedule 4A of the Public Finance Act 1989;
4
note that Schedule 4A companies must comply with certain provisions of the Crown Entities
Act 2004, the Official Information Act 1982 and the Ombudsmen Act 1975;

5
authorise the submission to the Executive Council of the Public Finance (Provincial Growth
Fund Limited) Order 2019 [PCO 22348/3.0] adding Provincial Growth Fund Limited to

Schedule 4A of the Public Finance Act 1989 and applying sections 162 and 164 of the
Crown Entities Act 2004 to Provincial Growth Fund Limited;
6
note that on 21 August 2019, the Minister of Revenue agreed that Provincial Growth Fund
Limited should be added to Schedule 35 of the Income Tax Act 2007;
7
note that the Income Tax (Provincial Growth Fund Limited) Order 2019 gives effect to the
decision referred to in paragraph 6;
8
authorise the submission to the Executive Council of the Income Tax (Provincial Growth
Fund Limited) Order 2019 [PCO 22352/3.0] adding Provincial Growth Fund Limited into
Schedule 35 of the Income Tax Act 2007;
9
note that a waiver of the 28-day rule is sought:
9 1
so that the Orders can come into force as soon as possible;
9.2
on the grounds that the Orders have little or no effect on the public;
10
agree to a waiver of the 28-day rule so that the regulations can come to force on the day
after the date of their notification in the Gazette.
Jack Petterson
Committee Secretary
Hard-copy distribution:
Cabinet Legislation Committee
Minister of Finance
Minister of Transport
Minister for Māori Development
Minister for Regional Economic Development
Minister of Employment
Minister for Climate Change
Parliamentary Under-Secretary to the Minister for Regional Economic Development
3
301oi6ek03 2019-09-23 15:31:07
I N   C O N F I D E N C E

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