PARLIAMENT COMPLEX BILL TO IMPLEMENT BUDGET TAXES

Press, Volume XCVII, Issue 28671, 22 August 1958, Page 12

PARLIAMENT COMPLEX BILL TO IMPLEMENT BUDGET TAXES

More On Incomes, Profits, Dividends (New Zealand Press Association) WELLINGTON, August 21. An admission that he did not understand the complexities of the Land and Income Tax Amendment (No. 2) Bill was made by the Minister of Finance (Mr Nordmeyer) in the House of Representatives tonight when he moved the second reading debate on the measure. The Minister of Finance in the National Government, Mr J. T. Watts (Fendalton), made the same admission. Mr Nordmeyer, in a 75-minute speech, explained about half the provisions in the bill, and Mr Watts in about the same time also failed to complete his survey of all its clauses. Each speaker was granted extended speaking time. Mr Nordmeyer said there had been a great deal of misguided talk that the proposed dividend tax would result in hardship but that was not so. The tax would carry with it all the exemptions to which any individual taxpayer was entitled. He said he had given the greatest consideration to representations made on the excess retention tax and had been advised that if most public companies were left with 60 per cent, residual income, no hardship would be involved. For others, some exception would have to be made.

Mr Watts said that there was a case for dividend tax, but bonus shares created from premium share reserves, should be free of tax. The provisions in the bill were a considerable improvement on the Budget proposals, but the whole conception of an excess retention tax was “very bad.”

The debate was interrupted by the adjournment at midnight.

Mr Nordmeyer said the bill gave effect to the Budget proposals to tax dividends in the hands of the individual, to impose an excess profits tax, to make adjustments in personal allowances to remove some anomalies in the existing tax structure, to clarify P.A.Y.E. provisions and to implement new tax tables. Discussing the proposed dividend tax, he said it was important to remember that 7s in the £ was the maximum average rate that would apply. The proposal was linked to the proposed excess retention tax on companies which failed to distribute a reasonable proportion of profits as dividends. This tax, in effect, was an alternative to the dividend tax. Some consideration had to be taken into account in determining the form the dividend tax was to take. Company tax in New Zealand was relatively high reaching a maximum of 8s 6d in the £ of income tax, plus Is 6d in the £ Social Security charge. In Australia, the rate was 7s 6d in the £. The proposal to limit the dividend tax to a maximum average of 7s in the £ represented a compromise between leaving the company tax and the dividend tax, or reducing the company-tax to a flat rate and allowing dividends to be taxed as income from any other source received by the individual. Mr Nordmeyer said many organisations had made representations to him, and although they had disagreed on details, they had generally accepted the principle of a dividend tax. Their objections had been concentrated on the excess retention tax. Reviewing the provisions of the bill in detail, Mr Nordmeyer said income from debentures, where the interest was at a floating rate, was treated as dividend income Dividends from other companies would be treated as non-assessable income in the hands of the holding company. Taxed dividends received by companies from companies overseas would also be nonassessable. In the case of debentures issued on or after the date of the introduction of the bill, interest would be assessable income. Department's Advice

Mr Nordmeyer said the Inland Revenue Department had advised him that if the excess retention limit was raised to 60 per cent, this would cover the position of most public companies. The reason for the retention tax was to discourage companies from not. paying out dividends at a reasonable rate. In some cases companies could ensure that, in the event of a change of Government and anticipating the rate of tax might be changed, take advantage of accumulating a considerable sum for payment as dividends at a much lower rate of tax. It could be that companies could evade dividend tax for a fairly considerable period and would find it to their advantage to do so. Mr Nordmeyer assured Mr T. P. Shand (Opposition, Marlborough) that no New Zealand company would be placed at a disadvantage, compared with an overseas company trading in New Zealand, because of the operation of the tax.

With certain exceptions, exemptions from the tax would be made in the case of new companies for a period of six years after they had begun to earn profits and taxable income. “This will apply only to genuine new companies and not to existing companies which have taken steps to transform themselves into new companies,” he said. Mr S. W. Smith (Opposition, Hobson): What about a company that has been going for only two years?

Mr Nordmeyer: The provision will apply for the remainder of the period.

Dealing with a provision in the bill, which relates to a rebate of Social Security tax for the transitional year, the Minister discussed at some length the previous govS r ’Unent’s proposals relating to

self-employed people and the paymeat of the Social Security charge. He said the present-Government proposed to collect the tax over a period of three years while concessions would be made in the case of those who had paid the tax in advance. The amount involved was about £lB million, but concessions would probably reduce it to about £ 16.5 million net. The yield for this year would be about £6.6 million. It had been contended by Opposition members that the Government’s decision would mean that the self-employed people would pay the same tax twice. The Government had examined the position; and if, in fact, it could be shown that a person would pay the tax twice, he would be relieved of that obligation and be put on the same footing as a wage-earner with income from other than salary or wages. 7 The only persons who were entitled to relief where those who derived income from other than salary or wages when the first unemployment tax was imposed. The provision would be interpreted fairly. In some cases, individuals could be helped by records in the department which would assist in proving claims. Oil Exploration Rebate

Mr Nordmeyer said that companies exploring for oil in New Zealand would be granted a tax concession. The provision apjflied only to New Zealand companies. If a case could be made out for a company not registered in New Zealand, but which operated here, sympathetic consideration would be given to the provision of amending the legislation next year to give it relief.

The concession was to encourage the exploration for oil in New Zealand, and if oil was found the concession would be repaid. Mr Watts said Mr Nordmeyer had his sympathy. The Government's three taxing bills all increased the rates of taxation, all had been opposed by the Opposition and all would be badly received throughout New Zealand. Government voice: You hope.

Mr Watts said the foundation for the bills was the Governfrient’s argument that the country was in difficulties. He admitted there were exchange difficulties: but, in the nine months after the elections, private imports were running at £4 million higher than at the same time last year. The Government, in spite of heavy borrowing overseas, was still not able to arrest the run-down of overseas funds which were £5O million lower than at this time last year. The Government’s tax rebate and the very large number of its election promises were the major causes of present difficulties, rather than falling prices and unfavourable terms of trade. The Opposition had set out its own views, but it was not the function of the Opposition to provide alternatives, and it was a poor argument for the Government to say so. Income Tax Increase Income tax was being increased by something like 33 1-3 per cent, from October 1 next, in spite of the Prime Minister’s election-night promise that the basis of income tax would not be changed. “When this bill comes to a vote, the Prime Minister will go into the lobbies and vote against his words which were spoken not under stress, but in a recorded talk,” said Mr Watts.

The Government was presenting unemployment as an alternative to higher taxation. However, the high taxation proposals of the Government were tending to a tightening of employment. Costs were going to increase—the Minister himself had said that companies tended to pass on company tax—and this would be reflected in prices. Wages would be then again chasing costs. The excess retention tax would make it more difficult for private companies to expand, and he foresaw a v slowing down in commercial life, said Mr Watts.

The bill was one of the most complex measures for a long time. Jt amended the P.A.Y.E. legislator* of last year and also tbe 1954 AcJ. The provisions relating to

excess retention tax were particularly hard to follow. The bill should be referred to the Statutes Revision Committee, so that it could be fully studied and so that interested parties could show how it would affect them.

Improvement on Budget “The provisions of the bill are a considerable improvement on the Budget, but the whole conception of an excess retention tax is very bad indeed,” said Mr Watts. “It takes away from the shareholders the management of a company’s affairs and will not lead to prudent management.” Of 200 public companies whose shares were quoted on the Stock Exchange, there would be perhaps only six who would not distribute 40 per cent, of residual income. But they included some of the large developing ones. There were so many special cases, and so many anomalies, that he still thought the idea of the tax bad. It was a great pity to tax private companies in this way. At a time when they should be encouraged to hold their funds, the Government was forcing them to put money into the hands of shareholders who would spend it. The companies needed money for expansion and to pay off overdrafts. Since the Budget Mr Nordmeyer had raised the excess retention limit to 60 per cent., made concessions to new companies, and offered concessions to companies which had entered into commitments, or were engaged in essential capital expenditure. These changes showed the proposal was hasty and that a decision had been taken without a full appreciation of the facts. Dividend Tax Anomalies

“There is a case to be made out for *a dividend tax in New Zealand.” said Mr Watts. A majority of the 1951 Taxation Committee had favoured it, subject to alteration in the rate of company tax. So far as those on the lower incomes were concerned they should get some sort of concession. People who received dividends from investments totalling £30,000 were, under the proposed rates, in a more favourable position than those who received £4OO or £5OO a year. Another anomaly was that people who received incomes from other parts of the British Commonwealth where tax had already been paid would get a tax-free income. There would be considerable hardship for elderly and retired people who would be worse off than before. Mr Watts added that he doubted if it was the time or place for the tax to be introduced. Bonus shares out of shares were subject to dividends tax, but bonus shares created from premium share reserves should be free of the tax. Taxing the interest on debentures was going to have the effect of discouraging people from lending to companies and this would adversely affect industrial expansion.

Redaction In Exemption In reducing the personal exemption from £375 to £3OO, With consequential reductions for people over 65, the Minister was making a plain cut in the wages of single people. It was not necessarily easy for young people today, some of whom were saving to get married, and some of whom had responsibilities. The bill did make it a little easier for a husband to pay a wife for certain services in a business carried on in a home, without going into partnership, provided authority was obtained. But the vital clause in the bill was that * whicli took away the 25 per cent, income tax rebate. It was a complement to the Prime Minister breaking his preelection promise. Revenue for Works The Minister of Industries and Commerce (Mr Holloway) said the bill provided new methods of collecting revenue for the Government in order that its works and other programmes could be maintained. It would induce unemployment if Government expenditure was to be reduced. The only alternative was to dismiss a large number of State servants, but the Government would not do that in any circumstances. If the dividend tax would lessen the rate of industrial development, it would be a bad tax; but, after examining it, he could see that it would not, in any circumstances, reduce development.

The excess retention tax was not a penal tax. It was to make sure that no-one avoided taxation.