TAXING PROFITS.

Dominion, Volume 4, Issue 998, 13 December 1910, Page 6

TAXING PROFITS.

•-,:.; AND; GRA'DUATED! TAX. IMPORTANT ISSUE. - v ; ! , ,rfho. graduated: taxation imposed under :-':;; ilib.jLandiand. Income' Tax Assessment ffi v !: : : 'l 90 7: came under:; review '-in- -the i(; : . Supremo. Court yesterday. Mr; Justice ?•;: Copper was .occupied- during the greater ;.', '■■■'' part, of the day in hearing, an action ;,;;..-"iri;which' the Whiterock Estate Company /:■-. claimed: a refund; of taxation paid, under -'.'■protest, to the' Commissioner, of. Taxes. V-K Mr.>C. P. Skerrett,, K.C, and Mr. Bes- .-•'..: Wick'appeared; for'the. plaintiff company, ;!;!; and;! Mr. ,'J. -W! Salmond (Solicitbr- !!;;!;; '•■ General; together with Mr. T. Neave, .v' . appeared. for the Commissioner of Taxes. (:« ;: ; -The- statement.of claim set forth that '• :,; itho -capital of the' company .was .£35,000, >G; D. Greenwood h01ding.34,998-'£l- share's; :;-\;-''and;.George Humphries and W. Smale fv, ono'each. By the; sale'. of; the Whiterock "':: [property, the company made a' profit of ;■•.-'-;■'•'i£52,961... The ■ Tax ' Department claimed "■■•'. -that tho company'was liable to, pay in- .;•:'.. come tax. unon,this profit, and assessed ':'.'.; thei.amount at .£2650.' This sum the •, : " .,-company:had paid.under protest. : The. case stated' on behalf- of the ■ Commissioner of Taxes, was, that in January, .;•.• 1905;'Mr!,Greenwood, of Ambcrley, sheep-',;---.farmer, .agreed to .purchase from Helen y: > Nichblls 40,608.acres, of freehold (the /;'■■ estate-above-mentioned), near Lbburn, for.-.£75,000.. Of this sum- ;",., .represented: payment for. stock. !:■/', tWhpn he purchased the estate, Greenwood '-.;:.' owned another freehold estate having ; ;. ; an unimproved yaluo of ~£72,000, and, in ~-'■: order,to evade.payment of:graduated tax v,-.^.bn.the_ aggregate value.;of his estates, ho !V T determined, to. form a private company ;,." for -'the purpose; of. .taking, .a transfer of •:., the 'Whiterock .estate to that! -.company .'■;■':'■■ ;.- instead-'of-.'to-'.himsolf.' personally. Of the •':'.. purchase/money,. JE25.000 (for the'stock), .;.. -"': end ,£5000.0n account of the prico of the ':"<:;:'■. land.were paid... The balance was secured ,'.';, by a;mortgage; on/the land a*nd stock. : :,;,■''ln>;. April,,'; 1906, : the. company, purchased -i; . -snqther piece'.'of.-'■ land adjoining the ! : ,'.Whiterock.. Estate, and comprising ,553 :..-,. Bcres, .from , Albert: Edward• Tutton, for :;■;■■ i.-_-:"-ie2792..,' /Cfntil'.; March 14, 1908, the lands .•-: so, acquired were'used-for the purposes [1.-of. a .sheep-station., On that date the :....combined.estate was cut into eight lots ■.■■:".'rand ..sold, at: a' profit of -£53,061." -The •. idefence. alleged' that ■ : the • ■ Whiterock - MEstatb and-the land acquired from Tutton ..,: yere purchased, .by, the company with •:,;...'-•,intent to hold them .until a profit could :'- - to made by their re-sale. The nrofit of ':■: -was made by the. company from a ;. : transaction, in real estate, and such ;: -^dealing,,wins comprised in tho ordinary ■-. the -company, which had, ..: accordingly; .'been duly, assessed :for gradu; ;,.,-: ated^income.tax on the amount of the ■ -:.-profit. .-;'.; ;-. .';: -■■-. ~!"-■ ;::.". NptiaSpeculator, - ;, _Stating, the case.for the-plaintiff, Mr.' ;.•..- 'Skerrett-; said that this was -an action ... ■ ,to-. recover the:-siim of £2650 'which had .: Jbeen , paid . under - protest as tax upon ,; /(profits acquired in- the sale of a- farm -',-,- .property in' Canterbury known as White- ,-,'•'.-■ .rock.--.The.plaintiff .was not a'land specu- '-.: 'Jator,-: but/avgentleman' who, for' many .:•;,-'. years- past,- .had been a sheep-farmer. in '■ vva large way "of business. -Mr. Greenwood; ;;: : ' a5 | Was'"no,t.;infrequent--'witn-- sheep-farm- .•-.'-. ers, prospered....Seeking an I .outlet;for sur- ■;..\ -pins capital' and also intent on finding an' i;.-.'.' opening',for -his; sons, he entered, upon nefotiations'for. the purchaseof a property nown,, as Mount Parnassus: Ultimately : ' - with'-the;ca'mis:6bjects in viewhe purchas"V.t ed.Wh'itefdck. ;-.fieforo"doing so lis-con-' : : ;-..;sultedhisvSolicitor:as to-what his: posi-. ; : -tionVwould be-in;Tegard to taxation ifOhe.made «the purchase.and particularly 1. .whether ho would bocomo liable to grad- ■:...-.-..'.. uated- tax. -Mt ; ''Greenwood,. was advised.; '< / that'.the, niost;-prudent' course 'would'be 7 ."tbjfprm a-limited liability company.-to, ; .-/take over the estate! Under the lawvlas', ."■- it then stood—it :was priorto 1907—such ,'. a 'company was-, regarded as a separate "entity 'and"-Was immune from graduated '.'.,. tax.-: Accordingly .the :Whiterock Estate : -!. " Company ?va.i.formed,(in-pebruary; 1905). .'.; The" property 'w:as. purchased' in January', :' 1905,, and' the' purchase.' completed in' "■'."'-" March;;. .'1905:'-■.";.':..-.'•:'/..'. ! .-'. '■'.-",' ■;..-'■ A thing to be considered, counsel cbn- \ > tiiiued, was. that if Mr. Greenwood had i; retained Whiterock in his own name it :. -;could nothave. been, suggested that he •;.'.-':: Was liablo to, the tax. ; on ,tho profit' aris- ': ,'ing from this'sale.. Thetax was only pos- " ifiiblei"because'-,this property -.Was'-trans-' :. : : {erred to a company in-which Mr. Green--■wood was practically the only sharehold-.er'-v In-April, 1906, .an, area of- about' : 6oQ :.ac'res was' added to" the' Whiterock Es-' : : tate/This circumstance, counsel submit-' •■'■; ,ied,-.was destitute, of any significance. The ':.' -'smaller "area was obtained'with an" eye ~'. .'■' A<s improving the outlet from the- station .-,-" *nd.-further .With a view .to the possiblo '. sub-division of the property for Mr. ,' 'Greenwood's sons. The acquisition of this' : rorea: was.not in. any sense a .separate : /transaction: ' :'■■■ , - The- Act ..of. -1907. completely frustrated !the; object and purpose for which the :;Whiterock Company was formed. ClearV. ily: enough : tho object of that company ■''.-'."ivas to evade payment of. the graduated .-.-■'.-'itax'.-- \The-. Act of- 1907. made liable . to graduated tax the, interests of shareiholders on lauds-owned "by companies! : . The reason for the continued existence of :\ the Whiterock Company-had-gone. < '•■.■'- Values: " "At Vlater stage Mr. Skerrett remarked . that under the legislation of 1907 if land -was' taken for" 'settlement under the lands for.Settlement Act the ;test.of- thecoripensation inrespect-of the_ uriimpi'ov..«d:value was fixed in a case like, that of, ■"■' Whiterock at- the unimproved, value as - dt'appeared'on the Government valuation v rolls; plus an additional '5 per cent. The ..effect of this'provision that that owners - :..■'■ of.' ; land --likely' to. ■ !be required, ': for settlernent purposes • had to 'submit '.-. ■ to taxation at. a :much. higher valuation ''■'•;" than' they, would -otherwise have done. "It'was: un-doubtedly .a. circumstance, ,' bearing-on-tha : case, that taxing values in NeW Zealand were too high. .''••'• .'•His Honour: I- have no doubt that taxpayers think SO.: - ' :, : Mr. Skerrett: -There. .is .some . solid foundation for it, particularly in the ! oase'. of city values. These; values are "'fixed frequently .in '•" -..'His Honour ■ remarked that his cxperi- . .'ence.'-in • the Compensation Court had. ■convinced . him that the, unimproved : -value of Jahd about! Wellington, and. in , some - p.ther places was, startling,, to '. say the: least.- Always,, of course, there-were. , bome witnesses bent on depreciating-the ".'. value of the land, and others prepared ~ to boom it' up. ■- . . . Proceeding, Sir.' Skerrett. stated, that the time. when.the sale of; Whiterock. ■..' .'.took'' placo 'was'not' opportune, -and-, his ... client had little time in which to effect '.it. The Act of 1907 having been passed, :!. Mr.. Greenwood had to realise on White-' "'■-, rock,before March'3l," 1908, in. order to •escape-paying' graduated tax for that /. year. " laid stress on the "fact •. that'..when-Whiterock was, sold the com- ■-" pany' sold its entire undertaking. . Sub- . etantially what occurred was the liquida- : tion-of the company, and thereafter it did;.no business. The Whiterock'Estate' Company- was'not a land . speculating . company or a land trading company, but a 'company formed for the purpose of working Whiterock Estate as, a sheep-' ..farm. James Kelly, District Land Valuer for >:. North -Canterbury, called as a witness '-.. for the defence, stated that the odvan:tage accruing to Whiterock; Estato by :; the;'!iddition of Tiitton's -property, was -practically the. advantage that sprang -..." from addition to area. The addition of :, this-.area-'improved means of access to '-. the station very little. ' In a co'nversa- : tibn witness "had with Mr. Greenwood • in 1908 the latter mtntioned the large "'. profits made .by syndicates dealing in "-.' Jan<l.. : He (Mr. 'Grebiiwcbdj. also menripned that lie- had only, failetl.in nego- •. sating.- for-th« • purchase. of ,a large .-'. property.-because'his had been unable to - convince -his'■ ixirhrers as to the "huge . .profits, to'bc.'iolAaincd. ■ - -To Mr. Sferrctt,' witness stated that it would be a slight advantage to the station to gain -thu Tutton area. It -would add to tho value 'of about onehalf tho property'by affording access at one end of the station.• ■'; -. Argument' was suspended, by consent ••of tho counsel concerned, until eiidence bad been taken in tho case, i.Marainanga Estate Company, Limited,-v. the Commiseiouer of Taxes, which in:its leading features is similar to: that above;reported., |,