TAX ON COMPANIES.

Taranaki Central Press, Volume IV, Issue 396, 1 April 1937, Page 2

TAX ON COMPANIES.

INDIVIDUALS PENALISED. “Inequitable System.” The recommendations that will be made by the Government committee which is at present investigating the < xisting land and income taxation legislation should be of considerable interest and importance to the taxpaying community (says a statement by the Associated Chambers of Commerce of New Zealand). One of the moat important matters to which the committee could give attention is the New Zealand system of taxing companies, which is a subject closely concerning both the investing public and the community at large. In Britain and other countries, graduated Unixes are applied to ihe incomes, not of companies, but of the individual shareholders 1 receiving company dividends. In other v'ords, the tax is purely an individual one, companies; being regarded as the property of their shareholders, and each shareholder being responsible. at his rate of graduation, for the taxation of his share of the profits. In New .Zealand, on the other hand, a company is ttsated as an individual, and its profits are taxed ar if they all belonged to an individual —with lhe exception that the company receives none of the taxfree allowances and concessions which are available to the individual.

“Wrong in Princinle.” T/h& £16,384,368 of personal incomes left last year (1935 36) after deducting exemptions, paid in income tax £1,445,316, or an average of 1/9 in the pound. Under the prerent system of company taxation, the shareholder. even if he ha l ? no taxable balance of income after his exemptions (personal, wife, children, etc.) ire deducted, does not receive his dividend until it has been reduced by the amount of taxation the company has been compelled to pay. This rate of company itux was increased last year, to a maxi mum of 7/6 in the pound—which, in effect, applies to companies of moderate size. The company incomes are owned in just the same measure by individuals as are 'the personal in comes. Many thousands of small investors who would ordinarily be liable for little or no taxation are paying heavily in this indire-. t way. How does a system which gn es this result harmonise with the conclusion of the British Rojal Commission on income tax that “the amount of the income and not the manner in which it is eiairned is the correct measure of the taxable capacity.” and with the conclusion of the 1924 Royal Com mission on land and income taxation in New Zealand that “it is wrong in principle to vary the rate of taxation according to the source from Which it is derived.” As it is, the present system is unjust because it taxes the small shareholder’s l dividends and the wealthy shareholder’s dividends at the same rate.

The second point about the present company taxation is the cost of living factor. If 3, much higher tax is levied on compliny profits than on profits from other sources, company directors must w.deu their margin of profit sufficiently t o enable them to pay the additional tax and at the tame time make a reasonable return to their shareholders. Company capital. however employed, must in the .long run earn suflicient to justify the existence of the company in whicji

it is invested, or capital is attracted elsewhere, and the company must .go out of business. Thin means, in short, that ultimately the tax —or at least that portion of it that exceeds the average tax on other investments — must be passed on to the general public in higher pricer for goods, services and commodities. In this way, company taxation, to a considerable extent, becomes an indirect tax on the community. Hampering Development. The third effect of excessive taxation on companies is the check on enterprise and the smothering of the expansion of industry. A concern with a capital of £lOO,OOO must make at least 8 per cent. (5 per cent, for dividends and 3 per cent, for income tax) which does not include provision for land tax, and reserves. At meet ■ng after meeting of shai eholders in different New Zealand companies recently, comment ha-s been made upon the present heavy taxation, plus increased industrial costs. The chairman of the Auckland Gas Company stated that its income tax equalled 64 per cent, of the total amount of dividend that wlas being paid to shareholders. The chairman of the New Zealand Refrigerating Company pointed out that “there was little inducement to risk capital in new enterprises or to spend money on improvements to existing factory equipment when nearly 40 per cent, of -the earnings went awaiy in tax.’’ The present Government committee has ample authority, in the. exhaustive investigations and strong re commendations of both the 1922 Taxation Committee and the 1929 Royal Commission on taxation, for recommending to the Government that the individual system of taxation be adopted l , and that companies be only subjected to a moderate tax on undivided profits. .Such a change would result in a true and just form of income tax, and Would give encouragement to company enterprise and expansion.