TAXPAYERS PENALISED

Gisborne Herald, Volume LXVI, Issue 20028, 29 August 1939, Page 16

TAXPAYERS PENALISED

BORROWED CAPITAL INTEREST LIABILITY OUTGO TREATED AS INCOME “The general scheme of our system of income taxation in New Zealand is based on two primary considerations, namely, that liability shall attach in respect of (1) all income derived from sources in New Zealand, and (2) all income derived from elsewhere by persons (which term includes companies) resident in New Zealand,” says a statement by the taxation committee of the Associated Chambers of Commerce of New Zealand. “Where income is derived partly 'from New Zealand and partly from some other country, power is given to the Commissioner of Taxes to make an apportionment of such income between its source in New Zealand and its source elsewhere, but this provision for apportionment has application only in the case of taxpayers not resident in New Zealand. “In the case of taxpayers resident in NeW Zealand, however, all income derived is liable for income tax in. New Zealand unless it has been derived from some other British country and is chargeable with income tax in that country. Special Provision Introduced “In view of these fundamental considerations, it is surprising to. note that a special provision was introduced into the Act in 1933 which empowers the commissioner to levy income tax on certain income which is neither derived from New Zealand nor derived by a person resident in New Zealand. The section provides that where a company carrying on business in New Zealand pays interest to any person or company not resident in New Zealand, and claims such amount as an item of deduction for the purpose of arriving at its assessable income, then the company claiming such deduction shall be separately assessed for income tax on such interest as though the amount were in the nature of taxable income which it had derived.

“It is to be remarked that (1) only companies are penalised by this particular provision; (2) that the company paying the interest is liable for assessment as a principal and not merely as an agent; (31 that the outcome is to require a company to pay income tax not on income derived, but on expenditure actually and exclu sively incurred in the production of its assessable income. “As has been pointed out already, the Act provides for ’the payment of income tax in respect of all income erived 'from New Zealand or derived by a person or company resident in New Zealand, so that it is clear that the particular provision under consideration aims at levying tax on indome which falls in neither of these categories. In short, it-imposes tax on income derived from sources outside New Zealand by a person not 'resident in New Zealand, and attains its objective by making the New Zealand company which pays the interest primarily liable for payment of the tax.

Arrangement With Commissioner

“It is true that by a further amendment in the Act, introduced in 1935, provision was made whereby a company might arrange with the Commissioner of Taxes that it be assessed as agent instead of as principal, the object being to provide the New Zealand company with a -means of recovering the'tax from its loan creditor overseas, but this provision appeals to be of little real value in the absence of- some identity of interests between the parties, since if the interest received by the overseas creditor is not actually in t'he nature of income derived from New Zealand, then it is not —in the hands of the recipient—liable for New Zealand income tax. The introduction of the amendment, in fact, really only serves to emphasise the fundamental unsoundness of the original legislation. “It appears that the only justification which could be urged in support of the legislation is that if ‘interest paid’ is claimed as an item of deduction in a New Zealand taxpayer’s return of income, then the person or company receiving such interest—out of New Zealand funds—should be required to pay New Zealand income tax theleon. If such a contention were sound, however, then, on the same line of argument, all payments by New Zealand importers for goods purchased from sources overseas should be made the subject of a special assessment in respect of the profit arising therefrom to the overseas supplier.

“In our view, the only question which merits consideration in every such case is whether or not the income has been derived from New Zealand. If it can be shown that it has been derived from New. Zealand, then it will be liable for New Zealand income tax in accordance with the provisions of the principal Act. If it is not so derived, however, then there certainly appears to be no justification for placing a penalty on the New Zealand company which has to pay the interest, in the form of an additional claim for income tax, based not on income derived by it but on expenditure actually incurred. “Basically Unsound” “Curiously enough, it is to be remarked that if the section under consideration were administerd in accordance with its strict liberal terms, then payments to the various banks in respect of interest on overdraft accommodation would be affected, since in most instances the banks operating in this country are not resident in New Zealand within the meaning of the Act. The fact that the provisions of the section are not, in practice, applied in such cases seems to confirm the view that the legislation is basically unsound.”