PARLIAMENT NEW COMPANIES TAX TO BE RETROSPECTIVE

Press, Volume XCVII, Issue 28660, 9 August 1958, Page 14

PARLIAMENT NEW COMPANIES TAX TO BE RETROSPECTIVE

Excess Profits Retained Last Financial Year (New Zealand Press Association) WELLINGTON, August 8. Government plans to tax dividends in the hands of shareholders and to introduce an excess profits retention tax have been modified as a result of protests since the broad outline of the new tax scheme was announced in the Budget. The Minister of Finance (Mr Nordmeyer), introducing the main taxing, bills in the House of Representatives this morning, said it had been decided to allow companies to retain 60 per cent., instead of 50 per cent,, of their residual undistributed profits after dividends are paid, before being liable for the excess retention levy. The tax will be a flat rate of 7s in the £ on the remaining 40 per cent, of .undistributed profits. i Referring to the excess retention tax, Mr Nordmeyer said: “The tax will apply, where appropriate, on income during the year ended March 31, 1958, or the accounting year of the company corresponding with that year and subsequent years.” Companies formed for a new project will, subject to certain conditions, be free from the retention tax for six years from the time they derive taxable income. “That will take care of new companies and the problems they have to face,” said Mr Nordmeyer. There is also power for the Commissioner of Inland Revenue to release a company wholly, or partly, from payment of the retention tax for 1958 and any one or more of five succeeding years.

Mr Nordmeyer said Commissioner must be satisfied that the company was unable to pay sufficient dividends because of commitments existing at Budget date last month. The Government will set up an appeal authority to consider objections to any decisions made by the Commissioner in this respect. “The necessity for an excess retention tax is consequential on the taxing of dividends in the hands of the individual shareholder. Similar provisions have been enacted in other countries where dividends are so taxed. The purpose of the tax is to counter a company, particularly a private company, from omitting to declare dividends,’* said Mr Nordmeyer. “Interim dividends paid in the accounting year, and any final dividends paid in the ‘prescribed period’ of 10 months ending after the end of the year will be taken into account in determining whether there is any insufficient distribution.’’ Overseas Companies “If a company which becomes liable for retention tax in one year subsequently declares in any one of the succeeding years dividends in excess of the amount required to avoid the retention tax for the succeeding year, the excess may be carried back to reduce the tax payable in the earlier year. “Certain companies will be exempt from the retention tax. They include companies incorporated overseas and trading in New Zealand through a branch, and New Zealand subsidiaries of overseas parent companies. “In these cases, the dividend declared by these companies ■would npt attract New Zealand tax and counter avoidance measures are not warranted where there is nothing to avoid.’’ Method of Calculation The calculation of the retention tax will be as follows: From the assessable income of the company for the particular year will be deducted the ordinary income tax and Social Security tax. From this residue of assessable income will be deducted the 60 per cent retention allowance. To the resultant balance will be added any dividends received by the company from other companies, and this will give the distributable portion of the income. • Mr Nordmeyer, citing a case of a company with an assessable profit of £20,000 after deducting all expenses and depreciation allowances as approved for tax purposes, said Its position would then

pot to declare any dividends, the excess retention tax at 7s in the £ on the £4OOO would amount to £l4OO. This gave additional tax of 16.8 d in the £ on the total income of £20,000, or an increase og 14.8 d, if the reduction of 2d this year in the. maximum company rates was taken into account. A company at maximum rates of tax, not paying any dividends and being assessed with excess retention tax, would in point of fact pay less in total taxes under the new system than it would have paid on a comparable income in 1950, when a 15 per cent, surcharge on income tax applied. On the above figures, said Mr Nordmeyer, the company would pay total taxes, including Social Security tax and excess retention tax, of £11,400. In 1950, the total income tax and Social Security charge on £20,000 ■company income would have been £11,466 13s 4d, he said. Generally, assessments would not be issued until some time after the “prescribed period”— 10 months after balance date—had expired, so that the actual dividends paid in that period might be allowed, said Mr Nordmeyer. In the definition of ‘‘total income,” income derived overseas by a New Zealand company would be included for the purposes of the excess retention tax. That would also apply to a fire and accident insurance company incorporated in New Zealand, and assessable under Section 151 of the Land and Income Tax Act, 1954. However, taxation payable overseas on the overseas income would be deducted in calculating the excess retention tax. Exemptions The new tax would only apply to the New Zealand companies, whether public or private, and the following companies would be exempt from the excess retention tax: (a) Companies incorporated overseas and trading in New Zealand through a branch only. They are liable, however, if they are controlled by a New Zealand resident. (b) Co-operative dairy companies and co-operative milk marketing companies. (c) Life insurance companies which have a special method of assessment (d) Companies which are wholly or partly exempt from income tax. (e) Companies in which the shares are held by the Crown or by persons who are exempt from tax, such as charitable institutions. Dividends Tax Dividends will be treated as assessable income in the hands of individuals only. Dividends’ received by one company from another company will continue to be treated as non-assessable income in the hands of the receiving company, said Mr Nordmeyer explaining and clarifying further points from clauses in the bill. There is provision that the average rate . of tax payable on the dividend income shall hot exceed 7s in the £. The new provision will apply so as to tax dividends derived by individuals

Assessable income, £20,000. Ldss ordinary income at 8s 6d. £B5OO. Social Security tax at Is 6d. £l5OO. Residual income, £lO,OOO. Retention allowance, 60 per cent., £6OOO. Distributable portion, £4OOO. If the company distributed!, oy way of dividends, £4OOO of its residual income, leaving £6OOO of the £lO,OOO for reserves, it would no* be involved in any excess retention tax. On the other hand, if it chose

in the income year which began on April 1, 1958, and which ends on March 31, 1959, or in the accounting year of the taxpayer corresponding with that income year.

In calculating the provisional tax payable in respect of the income for the year ending March 31, 1959, there is power for the Commissioner of Inland .Revenue to into account dividends received in the 1958 year, as if they were assessable income.

There is also power to treat as assessable income in the 1959 year, dividends received in the 1958 income year, but which under the P.A.Y.E. legislation are “abnormal” income in that year and are deemed to be derived in the 1959 year. Dividends from Overseas

Dividends received by ' New Zealand residents from another country of the British Commonwealth and chargeable with tax in that other country will continue to be treated as non-assess-able income.

Dividends will continue to be exempt from Social Security tax in the hands of recipients. Distributions made from purely capital profits of a company, or from the mere writing up of capital assets, will not be treated as dividends and will accordingly be exempt from tax in the hands of the shareholders.