TAXATION OF DIVIDENDS.

Southland Times, Issue 18822, 15 May 1920, Page 4

TAXATION OF DIVIDENDS.

A decision by the Court of Appeal in Britain that is of more than ordinary interest to this country was delivered recently and its terms were conveyed to us by cable though it is probable that few people realised the full effect of the judgment at the time. The point at issue was whether profits distributed among the shareholders of a company in the form of bonus shares were subject to income taxation, and the Court decided that they were not. In this judgment the British judges took a view similar to that taken a few weeks previously by the United States Supreme Court, though by five to four votes, the American judicial view being that a dividend in the form of shares not only took nothing from the capital of a company and actually added nothing to that of the shareholder, but that the antecedent accumulation of profits showed that the shareholder hud not received any income in the transaction. The matter is of interest to this country because if the present agitation for the change in our law us it affects companies is successful the same point will arise here. At present New Zealand applies the income tax to the entire income of a company, not to the dividends received by the individual shareholder, and it is argued, with considerable force, it must be admitted, that by this process a share holder of small income pays through his depleted dividends a higher rate of taxation than his income warrants. The company’s income bears taxation on a high scale; but it is possible that a part of the balance of the income may go to a shareholder whose total income is below the exemption mark and is, therefore, not subject to taxation at all. That shareholder, however, will have paid an income tax on a high scale through the company’s payment. From the Treasury’s point of view the present system is simpler and more effective, though it occasionally works an injustice. The English judgment suggests, however, that the change now being sought will raise new difficulties for the department and lead even to the release of a proportion of company profits from the operation of the income tax. If any alteration in the present system is contemplated by the government this point will have to bo considered. These judgments are sure to be advanced as arguments against any change, and it will be necessary for the advocates of the taxing of individual dividends to meet this weighty evidence before they can hope (o persuade the Treasury Office to countenance a departure from the established method..