TAXATION

Auckland Star, Volume LV, Issue 169, 18 July 1924, Page 9

TAXATION

MUST BE REDUCED. i COMPLETE CHANGE OF METHOD * POLISH COMPANY TAXATION. NO EXEMPTIONS. LAND TAX UNNECESSARY. I TAX PUBLIC TRADING CONCERNS. 1 COJIMISSIO>-S ItECOMMEXDATIOKS I (Bt Telegraph.—Ppfci.'il to "Star.") WELLINGTON*, Thursday. The Prime Minister tonight laid on the table of the House the report of the 1 Eoyal Commission recently appointed I to "inquire into the present system of i land and income taxation in all its aspects, including the scope, rates ami incidence of the several taxes, allowances and reliefs, assessment appeal and collection, and prevention of evasion, i and what alterations of law are necesi sary or desirable. The Commission ! comprised Mr. Jusi ice Pirn, Messrs. J. Begg, ■'". D. Hunt. <;. Sliirtcliffe and X. ' S. Weston. Company Taxation. i The report states that:— "In connection with income tax, the principal question before us was as to tile imposition of the graduated income tax on companies in the same way as if they were individuals. A large number of witnesses expressed opinion on the subject. The majority of them condemned the present system of taxing companies as unjust and as having the effect of preventing the embarkation of large amounts of capital in new commercial undertakings. On the other land a number of witnesses favoured maintenance of the present system. It ■ seems unnecessary for us to enter into any elaborate discussion of the matter ■ here. Arguments against the present ■ system are set forth in the evidence of witnesses who condemned that system, . and also in the report of a majority of the Taxation Committee of 1922. Arguments in favour of the present system are set forth in a' minority report of the same committee. We have considered the matter carefully, and the conclusion ire have come to is that an ideal graduated income tax is a tax upon income from all sources of each individual, and we recommend that the fiscal policy of the Dominion should be shaped so as to secure the abolition as soon as is reasonably practicable of the present system of company taxation. We think it desirable to add that the present system of income taxation lias served a useful purpose during the war and the immediate post-war period under conditions then prevailing, fulfilling, in addition to its natural function, the part of the English excess profits tax, and enabling an astounding amount of revenue to be raised with a minimum of inconvenience to individuals and the general public. With a return to more normal conditions of trade and industry, the inequalities of the present system become apparent, and it is advisable to change over as soon as practicable to a mere ideally correct system. land Tax. We have received a grti t deal of evidence for and against the land tax. The weight of evidence was against both land tax and graduated land tax, in favour 'of abandoning both, and substituting graduated income tax. Conclusions Arrived At. The following are the conclusions at which we arrived in connection with the questions raised bei'ore us: (a) The land and income tax must De considered together/as they are dovetailed into each other. (b) The 'graduated system of income tax is sound in principle and necessary in practice. _(cV In order to put the graduated principle properly into practice it is necessary - that every individual's income from all sources {income from tax free war loans excepted) ehould be Drought together in one amount, so that the graduated ; rate of tax that applies to the whole income may be fixed. The graduated system of income tax makes it necessary that no form of income should escape from 1 it; otherwise injustices, as between one taxpayer and another and indefensible results generally are bound to creep in. Individ-uals-with large incomes can now escape paying graduated tax that otherwise would apply to their total income by investing in several sources that are each taxed separately. The present system of graduating the income of each company as separate income, and charging tax accordingly. Is not in accordance with 'the true principle of the graduated income tax. ( e >lt is wrong in principle to vary the rate of taxation according to ' the source from which it is derived. All lources should pay at the same rate. Graduation, or differentiation in the rate of tax, should be according to the «ze of the individual's income,°and not according to the source from which it is derived. The only exception should be income from tax free war loans in connection with which the State 'has made a definite contract. Tax Not Always Pasaea On. (f) Many of the witnesses before us dealt'with the question of whether or not the income tax imposed on companies is passed on to the consumer. J-ne question is a difficult one, and it is impossible 'to arrive at a definite conclusion on the subject. It is, we think, true that the incidence of the preient company tax varies from industry to industry, and : it is safe at least to say that the view held by many witnesses that the tax is in every'case passed oji to the consumer is not justified. (g) Before a change can be made from the present form of taxation of companies it will be necessary to have data as to the full income of each • individual, in order that a close estimate can be made of the probable yield of any'suggested scale of individual taxation These data are not at present available. l Tax on Small Income, (h) Income tax on smaller individual incomes in New Zealand is on a low, Kale as compared with rates iv > Great ! Britain and Australia. It is only about i 3o per cent of the British rate and i *bout oo per cent o{ tlie Australian

(i) Appendix A shows that of the total individual assessable income of New Zealand less than 11 per cent is held in incomes of over £2000 a year, and less ihan 11 per cent in incomes of over £10,000 a year. Any system of income tax will have to obtain the bulk of ita return whore assessable income is—that is, from incomes under £2000 a year. The individual assessable income above mentioned does not include dividends from companies. In conclusion, these dividends would probably make some alterations in the proportions given above. (j) There is a point beyond which income lax upon individual incomes cannot be pushed without reducing its productiveness through capital leaving the country. A rate inducing inflow of capital would produce larger revenue to the State than otherwise would be obtained. Objections to Land Tax. (k) The graduated system of income tax makes it necessary to aggregate income derived from land with other income for taxation purposes. Exemptions consequent upon land tax stanfl in" the way of this. For this and other reasons land tax, including graduated land tax, should as soon as possible be abolished. (1) The graduated land tax was originally designed to break up large estates. There is no evidence to show that it is required any longer for this purpose, and there was much evidence showing that it is now preventing the development of large areas of laud requiring a considerable amount of capital expenditure to break in. The graduated land tax applied to business premises is a serious handicap to trade and industrial enterprise, and serves no good purpose. VJar Loans and Debentures, (n>) Income from tax-free war loans ran neither be charged as income tax nor 1)0 added - to other income for the purpose of fixing the graduated rate on tlm other income, as this would bo breaking the contract entered into by the State when the loans were issued. (n) There is no undertaking on behalf of the State not to vary the rate of taxation on debentures or any other form of income except income from taxfree war loans. The State is thus free to tax all other income from year to year at the game rate, or at "various rates, »aa it pleases. (o) Alterations in the form of income tax oy the lines of our conclusions will make it necessary to provide special machinery for taxing interests held in New Zealand by residents overseas, either as shareholders in companies-or as debenture holders. Companies in which these oversea interests are held fall into two classes ( 1—Those having their headquarters in New Zealand, and (2) those having their headquarters outside New Zealand.' Each will have to be dealt with separately. (p) We can find no reason whytenants of pastoral lands should not pay income tax. They paid in pre-war days. They pay little or no land tax. (q) The changes in land and income tax we think necessary will take some time to bring about. It may not be found possible to make the whole of the change in one step or in the immediate future. (r) The changes indicated in land and income tax would mean that land held | in an idle and unproductive state would' pay neither land nor income tax. This would have to be provided for. (s) The question of double taxation of oversea investors requires further consideration. (t) The base on which income tax revenue is raised should be made as broad as possible, in order to lighten the weight of the tax. Every decision to free from tax or to tax lightly some source of income carries with it a ] decision to take some other source at a higher rate than would otherwise be necessary. Public Utility Concerns. (v) We can see no adequate reason ■why State and public body trading and public utility concerns should not be taxed as well as private enterprise. This would broaden the base of the tax. Special provisions for taxing this source of revenue would be necessary. (v) Tax paid company debentures are not on the same footing as regards taxation as tax deducted debentures. (w) Land tax presses heavily on land used for growing timber. (x) Death duties are equivalent to addition to income tax, and it is to be' observed that these are much heavier on moderate fortunes in New Zealand than on similar fortunes in Great Britain. These duties act also as a check on the aggregation of land. (y) The foregoing conclusions have dealt with the incidence of taxation, but' we wish to record our view that the weight of taxation is most important, and that it is essential, in the interests of the future prosperity of the Dominion, that the weight o5 taxation should be reduced as rapidly as possible. Commission's Recommendations. The following are the recommendations we make in connection with the foregoing conclusion:— (a) That legislation be passed instructing and empowering the Commissioner of Taxes, when obtaining future income tax returns, to compel each individual to include in his return the whole of his income from all sources, specifying- i the amount from each source separately. j (b) When the data asked for under! (a) are obtained and compiled (which ' will be towards the end of 1925) the question whether or not a complete change can be made from the present, system of taxing companies direct as individuals to a system of taxing every individual upon his total income from all sources (excepting only tax free war i loans) should be carefully considered. If' a complete change is found difficult or j impracticable, then a beginning should be made by taxing individuals in respect. of dividends received by them from com-1 panifis, and supplementary revenue obtained in this way by a moderate flat rate on all profits of companies. (c) That the maximum rate of graduated tax should first be fixed at a level that will not cause an outflow of capital from Now Zealand. It would be advantageous to fix a rate which would cause an inflow of capital. This rate must be adjusted from year to year, according to financial requirements and circumstances, both within and without New Zealand. (d) Having fixed the maximum rate, graduation downwards should be on a scale that will enable the required sum to be raised, such graduation to be made in such a way as not to be oppressive on the taxpayer of small means. (c) The rate upon undivided profits of companies should he approximately j half the maximum. (f) If it is impossible without undue hardship to obtain the necessary revenue from the sources already mentioned, then revenue from these sources should be supplemented by a moderate flat tax on companies assessed upon their total I profit. This supplementary tax should be in addition to the tax on their unprofits. ,

I Overseas Companies. ' (g) Companies registered outside New 1 Zealand should be taxed on their total • ; incomes derived from New Zealand at : the rato at which companies registered 3i in New Zealand arc assessed on their j> ; undivided profits, and should also be t \ liable in respect of such incomes for any 3 j flat rate company tax. 31 (h) Oversea shareholders and deben- , I ture holders in companies registered in \ New Zealand should have their tax stopj ped at the source at the maximum rate. Companies interested should be deemed agents for their oversea shareholders • and debenture holders, and should be fc responsible for payment of tax. Oversea shareholders and debenture 5 holders should have the right to apply " I for and obtain rebate of the difference 5 ! between the maximum rate charged and ■' the rate that would apply to the whole of their income derived from New Zealand. No exemption should be allowed to oversea investors in New Zealand. Taxation on Land. • I (i) Incomes of pastoral tenants should 5 be made subject to tax, and this should ' be done immediately, so that incomes > for the year ending the 31st of March, • 1924, will not be allowed to escape s taxation. 1 {)) The present, graduated land tax should be abolished, and income tax ' should be paid in respect of income from ! land as part of taxpayer's income. (k) Any loss of revenue brought about . by adoption of the last recommendation . should be made up by a flat rate of land tax on all unimproved land values over ' £2000, and a rato below £2000 of twothirds of the rate above £2000. Present £500 and mortgage exemptions should be continued. It is thought that a halfpenny in the £ up to £2000, and throe i farthings in the £ beyond that amount, ■ will produce the sum at present • required. In assessing income tax no i exemption should be allowed in respect ; of this land tax. ' (1) The flat rate on companies referred to in paragraph F, and the flat ' rate land tax referred to in paragraph rK, should both be regarded as tern' porary taxes, to be reduced and ulti- • mately abolished as soon as national ! finances permit. 1 Temporary Adjustments. (m) In the meantime, and until an individual system of income has been 1 brought into operation, incomes of in- ; drviduals from all sources (except taxfree war loans) should be aggregated in order to fix the rate that should apply to that portion of a taxpayer's ' income that is taxable in his own hands. In fixing the amount of his 1 tax, the amount of tax paid at the source in connection with his other ' investments should be taken into account, but no rebates should be made if the total amount paid after'charging the amount taxable in a taxpayer'e own hands at a rate that would apply .to that amount only comes to more than an amount that the tax would have 'been if the whole income had been taxed in the hands of the taxpayer, (n) That when these land tax recommendations are put into effect, the Commissioner of Taxes should be empowered to access the net ■ income at 5 per cent on the capital value of any land that he considers to be either lying idle or not being- utilised, so as Ito produce reasonable income. (o) That the question of double taxation be further considered, and arrange- , ments made that will result in British j capital invested in New Zealand being , placed in a position at least as favour- ' aible as in Australia, provided such an I arrangement does not put British investors in New Zealand on a better footing than New Zealand investors, j (p) That in any event, the favoured position of public body and company I debentures, as ' far as income tax is concerned, should be abolished immediately. (q) That if graduated land tax is not abolished, relief should be given in '■ connection with the present graduated land tax payable on business premises. Public Trading Concerns. (r) That State and public body trading and public utility concerns should be charged income and land tax to the same extent as private enterprises, and that for purposes of taxation their borrowed capital should be treated in the same way as borrowed capital in private enterprises is treated. (s) That tax-paid company debentures should be put on the same footing as tax-deducted company deben--1 tures. (t) That relief from land tax be given to land devoted to plantations of timber trees, and areas not exceeding 23 acres of native bush. (v) That a more reasonable allowI ance for depreciation of tramways, workers' cottagee, and other wasting assets be allowed in the case of sawmilling and mining ventures.