THE COMPANY TAX

Dominion, Volume 10, Issue 3182, 5 September 1917, Page 6

THE COMPANY TAX

"INEQUITABLE ANOMALOUS* BIG BUSINESS CONFERENCE DEPUTATION TO FINANCE MINISTER POINTS TO BE RECONSIDERED ■ A large gathering of '.representatives of New Zealand chambers of commerce was hold in Wellington yesterday morning to consider tho Government's proposals for the taxation of companies. Mr. F. W. Manton, president of tho Wellington Chamber, was in the chair. Tho present proposals woro ou all sides considered inequitable, and it was thouglit that the delegates should set about effecting a remedy. In tho evening tho gathering went as a deputation to Sir Joseph Ward, and ho said ho would reconsider certain of the points raised.

The discussion at the morning' gathering was opened by tho chairman, who read the following paper, which had been prepared by Mr. H. D. Vickery, secretary of the Wellington Chamber:— . "The taxation of companies and the proportions of taxation which shareholders, through a company, have to bear on their interest in the income of a company, is a matter which is causing grave concern to all investors in largo joint-stock companies. The point at issue does not arise from any new pronmal embodied in. this; year's Finance Bill,' but concerns tho principle of taxin" companies which 'has boon in vogue in New Zealand -for many yoars. In New Zealand the system is directly to tax the company (dividends on investments not being included in tho assessable income of individual shareholders). In the case of large companies the effect of this is that' all shareholders, whether they have small or holdings, will probably be subject, 60 far as the return on their investments is concerned, to tho highest rato of income tax, namely, 7s. 6d. in the £. N Position of Shareholders Serious. "The position of shareholders, w-liilo it perhaps was . not intolerable when ratcs'of taxation wero comparatively lew, is with the present heavy taxation, now a serious one. Under our Land and- Income Tax Act, a company is treated as an individual taxpayer. The fact that a public company is made up of number of individuals who have "pooled ficir savings under a common manageinent is lost sight of During the past twenty years there has been a radical alteration in the method of trading in tho Dominion. At one time most trading concerns wero partnerships or were owned by individuals, but with the development of the limited liability system the majority of business houses have registered as limited liability companies. Many - industries, .owing to the large amount of capital required, can only bo carried on as' companies, the capital beine; subscribed by a number of individnnls. Although a company is in law deemed to have a corporate existence apart from its shareholders it is. in fact, owned by a number of proprietors-that is, by the abanboldere Large public companies, akhough they may be making only a moderate return on capital,- necessarily have largo incomes.- To tax such incomes on the highest scale simply because they are large incomes, and ■ irrespective, of the fact-that the income belongs possibly to two or three hundred individuals, will inflict grave injustice on numbers of taxpayers of moderate .means. At tins time no one can object if he have a largo income to pay a heavier rato ot taxation than a taxpayer less fortonately situated-but in company taxation snare-, holders with largo or small incomes are treated alike. . Systems in Various Countries. "Tho taxing of companies is dealt with in England in this way: A company pays taxation on all its assessable income, and it is open to individual shareholders to make application to the Revenue Department for'remission of taxation; that fc for an amount representing the <Mferenco in the rate of tax. at which the company has paid, and af which tue individual shareholder should pay on his own income. For example, if holder receives a dividend of Aim, on-, which the company has paid/income ax at the rate of-ss. in the £, and. tho shareholder's rate ou. his income, is 2s. I6d. in the £, the revenue authorities on application, will make refund to tho shareholder at the rato of 2s. fid. in tho £, on tho £200 dividend received. In the Commonwealth of Australia thrv prln- ■ ciple on which companies are taxed. is that there is first deducted from the incomes of the company, the dividend which is distributed among tho shareholders. The company pays income tax on tho amount which is not. distributed, and individual shareholders are required to include in their returns tho'dividends received from companies, and pay, tax accordingly. «Of tho three- systems there is -no doubt that the New Zealand system is the simplest, and the least equitable. There Sire hundreds of persons in New Zealand with moderate incomes who have invested their savings in wo'l-knowii.- hirsre. 'limited liabihty.comnanies. Most of these companies will bo liable to pay the highest, rate of taxation imposed under the Finance Act, i.e., 7s. 6d. in the £. Consequently, under the New Zealand system every shareholder's interest in the" profits of such a company has to tax on thoi highest, scale. Thus a man may have invested capital in a large company from which he receives.an income of .£2OO, and on that proportion of -the profits the company will pay at> least -£75. ft may be that the company itself is making only a moderate return—G per cent, or 7 per cent—on its capital, but owing to its being a large company its income is subject to tho highest rate of tax.

Anomalies of Our" System. "Had the taxpayer invested in a smaller company, which might conceivably have earned a very much greater percentage of profit on capital than tho larger, company, vetiio might on his interest in tho profits of the smaller company pay taxation on a much lower scale, while lie received a greater return on his capital outlay. Or, if ho has used his capital in his own business and earned a higher percentage <if profit than tho investment from the largo company, he would in all probability pay a considerably less amount of taxation. Tho fact is that our New Zealand system gives rise, ft anomalies of various •kinds. AVhilo the percentage of taxation was low, little complaint was made, but now that the taxation is heavy, considerable injustice is being done to .shareholders in large companies; and the system calls for revision. It is admitted that tho English,, method is not a simple one, but it removes the anomaly which requires a shareholder with, say, an income of .£SOO or .£6OO, from investments to be taxed on the same rate as « man with an income of .SGAiIO or .-E7OOO or more. Tho English system is not subject to the objections mentioned, nor is the Australian system of exempting dividends from' tho taxation of companies. The proposals in the Financo Bill provide that the limit of the graduated income tax be 7s. 6d. in the £. If cither tho: English or the Australian method be adnnfed in New Zealand, it is realised that there will bo a falling-oc /in tho amount of income tax which the Minister expects to obtain under his proposals if the present rates cf taxation are adhered to. But if either of thri systems be adopted, the tax would fall on taxpayers as individuals, and tho rates could be revised, and there would not be the necessity to stop the' progressive rate at 7s. Gd. in the £. A Suggestion. "Should it be considered that the adoption of cither tho English or the Australian method would involve too radical a change at this time, .an alternative lias been suggested to the Minister of Financo by the council cf tho chamber. The suggestion is that tho special war tax should not be imposed until a fair return on capital is first allowed to a company; the surplus, profits, above the fair return on capital, only beiii;; subject to war (ax, while the.whole of the profits would be subject to ordinary income tajt. It is realised that

this does not wholly meat the jxjsition, but it would tend to relievo individual shareholders from paying tho highest, rate 3 fcf taxation on tho income which' they derive from a company. Clause 31 of the finance Bill provides that in respect of the shareholder of any company whoso total incomo does not exceed £30(1, the commissioner may pay to tho shareholder a sum equal to tho amount of tho tax' paid or payable by the company in respect of an amount of its incomo equal to the dividends paid to the shareholder. This no doubt gives relief to shareholders with incomes under J3300, but it affords no relief to nmny taxpayers with incomes of between, say, .£350 and £1000, who have invested their savings in public companies.

Revision of the System Sought. "Last year the chamber waited as a deputation upon the Minister of Finance, and pointed out to him when the Finance Bill of lalG wa* before ,tho House, that tho excess profits tax would deal very harshly with young and progressive compauies; that older established companies making good profits in pre-war times, would not bear, the same proportion of taxation as the later established concerns. The Minister has this year justified the abolition of the excess profits tax by quoting examples of inequality in its incidence; but there has been no redress for those taxpayers who paid more than their proportion of tax. If the war continues next year, the probability is that still higher rates of taxation will.require to be imposed upon incomes. The position, will then become so intolerable that some relief will have to bo given to shareholders in companies. What is asked is not that the Minister should reduce the amount of income taxation which he requires for the country's needs, but that he should reviso- the system of taxing companies and eliminate the present inequalities. The matter has been met in both the United Kingdom and in the Commonwealth in the manner indicated, and it can be remedied in New Zealand. All that is asked is that there should be equality of sacrifice among tho same class of taxpayers:"

All Companies Would Feel the Tax, Mr. J. P. Maxwell (Wellington) remarked that there was one thing which seemed to have escaped notice. In,a great many companies there were large surplus profits over and above tho dividends, ard those companies could pay this- progressive tax without trenching on their dividends. But there were many who could not pay without reducing dividends, and they were going to suffer in an aggravated degree because their share values would 'go down suddenly.' wero companies in which the 'shareholders would suffer depreciation possibly to the extent of 30 per cent. This matter should be brought under the notice of tho Treasurer. ,

Mr. G. M. Kebbell.said there was no company in existence which would r.ot feci tho 7s. Od. tax.

Mr. Tyers (Christchurch) said the company tax was anomalous. It did not tax incomes equally. Companies were fictions; the realities were the men and women of whom they were composed. To tax these people in the way proposed made the taxation a "fictional tax."

A voice: Tt is a very real tax! Mr. Tyers said it was "unjustly real" to the individual, but tho basis was fictitious. The only just way to tax was according to ability to pay. Once that principle was departed from anomalies and injustices crept in. Mr. G. Shirtcliffe (Wellington) said, that it had been demonstrated that the only equitable system would be taxation on individuals. The Financo Minister would probably raiso the point cf difficulty in collecting tax from individual shareholders, particularly absentee shareholders. If the meeting could suggest somothing to anticipate this point it would be well to do so. !

Disquiet in Commercial Circles. Mr. C. D. Morpeth (Wellington) thought that that difficulty was provided against in tho Act of, 1916. He remarked that the size of the gathering was clear proof that there was great disquiet in commercial circles. It might bo suggested to the Minister that it would bo wise to set up a committoo of his own responsible officers and. of trusted business men to investigate tho matter and adviso tho Minister.

Mr. Ellison (Napier) considered that an initial increase of the whole taxation would bo a good way to go about tho business.

Mr. P. Barr (Dunedin) said tho views of his chamber were much on tho lines of Mr. Morpeth's views.

Mr. M'Calluin (Auckland) said all wero agreed that the tax would be unjust, but they 6hould have some improvement ready to suggest to the Minister. Mr. T. S. Weston (Wellington) said it was up to the wealthy men of New Zealand to sot a good example and mako it clear that they were not quarrelling with Sir Joseph Ward, over -the amount he was trying to get, but about tho manner in which he was trying to'get it. Tho meeting then disbanded and a conference, under the auspices of tho Associated Chambers of Commerce, was held in the afternoon to draft proposals to put before the Minister of Finance. Tho Wellington delegates appointed to attend the conference were Messrs. F. W. Manton, J. G. Harkness, G. Shirtcliffe, C. D. Morpeth, James MTjellan. It is understood that the delegates did not frsmo any definite proposals .to put before the Minister.

THE DEPUTATION

FINANCE MINISTER'S REPLY., ■ At the deputation to Sir Joseph Ward, Mr. James Macintosh (Wellington), chairman of the Associated Chambers of Commerce, said there was no desire to escape taxation and there was no complaint regarding the amount of taxation, but they wisliod tho incidence of taxation to be as nearly as possible fair. Mr. Williams, (Hawkc's Bay) 'said that tho present tax on joint-stock companies was nicely to press hardly on shareholders receiving' small amounts. Relief, it was understood, was provided up to JC3OO per year, but there was no relief for those getting just over ,C3OO. The deputation asked that the inequalities which would be inflicted on shareholders receiving moderate sums should be remedied.

Mr. M'Callum (Auckland) said tho proposed laxation Would press severely on small shareholders, and would greatly reduce many people's assets. The money had to be raised, and ho suggested that some other people should pay more than they were being asked-' to pay. A man getting .:6100 a year should be prepared to pay more than £6 ss. taxation; a man getting .£SOO should pay more than ,£l2 Ids., and n man jetting' .EIOCO should pay more than .£7O. If the men gettinsr those incomes were deriving them through company investment they would have to pay from live times to ten times those amounts.

Mr. Tyers (Cliristchtirch) presented the Minister' with a Christchurch suggestion for the amendment of Clause 34 of the measure.

57r. T' Barr (Dnneilin) said there was a strong feeling in the Dominion that the taxation levied on companies should be levied on individuals. Dunedin considered that the allowance provided for writing down wnstin?. nsscts was inadequate. He commended the Australian schedule for dealing with assets.

Mr. T. S. Weston (Wellington) dealt with the matter of preference shares. He said the tax proposed would work out so that the ordinary.shareholder would be paying war tax on his own shares and also on preference shares. Tt was suggested that in the case of preference shares 3s. sd. of the taxation should be deducted from the 'dividend. Mr. Weston milled Hint all were proud of tho w;iy in which Sir Joseph Ward had tackled the position. , Tn his reply. Sir Joseph Ward said that company taxation had been one of the (Treat troubles of the Budget. Our Now Zealand company law was one under which both small and large companies could be established with considerable case and tlipre was a great number of these companies. There were difficulties In Uio ivsiy of adopting the English law or Die Victorian law here. The trouble with the companv taxation was to arrive at something fair all round, and tho, problem was not easy of solution. It had boon suggested that there should be a flat tax,'but the members of the deputation would know that that would not work out: nuite as well as some people thought. He had not been able to find a satisfactory way of dealimr with tlm matter, and an exemption up to ,£3OO had been made to ameliorate, not to finally

remove, tho trouble. That the anomaly remained respecting, companies which paid the higher rate -of taxation was unquestionable, but; the question ho had put to himself was,- "If you exempt the man at ,£-100, does, not the man at .£lOl come in just as hardly as the man at £301 ?"

A member of tho deputation: Would it be possible to ihavo a gradation beyond

Sir Joseph Wi>rd ; If there is going to bo a/ gradation which is going to give relief right off the reel, tho minimum tax oif companiils will have to bo increased immediately Member of tho deputation: Hear, hear! Sir Joseph Ward: Well, is not that going to bear moifce hardly than' at present? I think probably the only way I can go into it :>gain is to see if that .£3OO can 7 be extended. „ . Sir Joseph -Wniri added, that if such an extension meant that a lot of money would have to be- made up, they could be euro it would be made up, because the money had t(v be procured. A. delegate: We "will stand by you! Sir Joseph Waird: I am sure yon will. I will go into'this again, and, if lean mako it more equitable, I will. A delegate: Can you not make ifc v heavier on individuals? Can you not start at nincpencei instead of sixpence? Sir Joseph Wjvrd: Well, if you do, it will be an asctrading-scale, but it will press very hardly on some people. The .delegate: Better able to bear it.! ■ Sir Joseph Ward: I am not sure from things that have come to me that they On the subject of wasting assets, Mr Joseph Ward said that he had intended to provide for them, but,had found that the revenue lost would bo so great that he would have to put some additional tax on the same people. He Thought the matter should wait till after the var. He had tried in the Budget to avoid what he might call "repeated taxation of the saino people." When tho war wps over and wo could provide for wasting assets, it would be our duty to do so. E-espect-ing preference shares, he had been going into the matter that day. Ho did not think thev could go beyond preference shares; if "it got to founders' shares they would not know where they were. He would again go into the matters raised to see if he could give relief. }