COMPANY TAXATION

Dominion, Volume 14, Issue 244, 9 July 1921, Page 8

COMPANY TAXATION

ITS OPERATION AND EFFECT A CRUSHING PENALTY ON ENTERPRISE PROTEST BY FARM AGENCY FIRMS i. A strong protest against the present system of company taxation in this country is made in a pamphlet issued under the joint authority of they principal stock and station companies and farmers’ co-operative associations of tho Dominion—business organisations engaged mainly in trading with and financing farmers. Wo' have prepared a summary of tho principal features of the pamphlet, which will be published in two ar- ' tides, tho first of which is given below. The pamphlet instructively reviews the operation of the New Zealand income tax as it affects large companies, and compares it with the taxation methods ruling in other parts of the Empire. Tho opening passages mention that a deputation representing the companies responsible for the publication interviewed ihe Prime Minister in January last, and pointed out to him the probable effects Of the excessive taxation of large companies. Mr. Massey, it is added, received the deputation with his usual courtesy, but did not hold out any hope of relief. He has since stated in Parliament that something will have to be done to relieve large companies, but nothing definite has been proposed. A Comparative Survey.

Opening its comparative survey of the scale and methods of taxation here and elsewhere, the pamphlet emphasises the fact that although in all ■ British countries the income tax has been used to bring in a very large additional revenue towards meeting war expenses, there is a great difference between the New Zealand system of company taxation and that adopted in Great Britain and the other Dominions. In this country a company’s income is considered as one inoome. and is taxed on the full graduated rate. Shareholders are not taxed On their dividends. In Great Britain and in other Dominions the individual is taxed on the whole of his income, including dividends on shares, and where there is a. direct tax on companies it is tomparativaly small.

In Great Britain, now that the excess profits tax has been abolished, the only direct taxation actually paid by companies is the corporation tax, which cannot exceed Is. in the pound, and may be ■ a great deal less. In addition to this, companies pay a tax of Gs. iu tho pound, but. only as agents for their shareholders. The latter, bn receiving their dividends, adjust their taxation with the Taxation Department. If their total income is balow the exemption limit, they receive a rebate of the whole Gs. In the pound provisionally paid on their dividends. Tho tax in every case is adjusted in accordance with the shareholder's liability as an individual taxpayer. In Australia there are both State and Federal taxes. The State taxes range from Is. in the pound in Victoria, to n possible maximum of 3s. in the pound in Queensland. ■Shareholders are exempted from taxation on their dividends. Tho Queensland rates vary according to the proportion profits bear to capital, and it is only where the percentage of profit is high that the rate is 3s. in the pound. The Federal tax on companies is 2s. Bd. in tho pound on their undivided profits only. Companies pay no Federal tax on the amount distributed as dividends. Shareholders are taxed upon, their individual incomes. In arriving at tho taxable income for Federal purposes, taxation paid to the States is deductable. N.Z. Small Investors Pay the Maximum Tax. "In New Zealand,” the pamphlet continues. “companies are taxed direct, the tax being graduated in proportion to Income. The maximum is reached nt 8s 9 3-sd. in the pound on nn income 'f .£lO.OOO a year. This means that practically all largo companies pay tho maximum rate. When they get their dividend from companies, shareholders do not have to pay any further tax, but they get no rebate allowed them of any kind except where their income is below AMOO and their dividend less than six per cent, on the amount paid up on their shares, when they get a small allowance. The result is that the small investor in a company in New Zealand pays tho maximum graduated rate fixed for the largest income.” In Great Britain and in Australia, it is added, a man can invest his savings in anything he likes, including companies, and he is taxed as an individual in proportion to his means. In New Zealand a man can invest in any form of investment except company shares, and is taxed as on individual in proportion to his means. But if he invests in a joint stock company his tax is graduated, in proportion, not to his own income, but to that of the company. However small his own total income, if the company in which he invests is large, he is taxed at the highest graduated rate fixed for the millionaire.

Comnrmies in Britain Better Treated. It is another point that in Great Britain income tax is paid on the average income of the three previous years, and this enables years when losses are made instead of profits to be brought into account. In New Zealand income tax is paid on the income of tho previous year. If there is a loss on the year no income tax is paid tho following year, but no rebate is made on account of the loss, nor can it bo deducted from profits m subsequent years. The pamphlet cites the example of a company which obtains the following results before payment of taxation: — In year 1 Profit £12,000 In vear 2 Profit £15,000 In year 3 Loss £lO,OOO In vear 4 Profit £14,000 In y ear 5 Profit £20,000 "If this company were in England, it would pay in year 4 income tax on the average profits of years 1,2, and 3. I lie profits for these years are £27,000, less £lO,OOO losses— equals £17,000 profits, and the average profit for the three years is, therefore, £SG6«. In year a the tax would be 011 the average profits of yeais 2 3 and 4, which would he £63J.J. m year G, the tax would bo on the average profits of years 3, 4. mid 5. which would lie £BOOO. Tax would, (lierefoie. be pa in England on a total profit tor the three vetus of £20,000. In New Zealand th»ie would be no tax in year 4 because- Ihe . was a. loss in the PH’™' 18 >7’.' [ . 5 tax would be paid on £14,000, and in vear 6 on £20,000, making <1 total ot £34 000 on which tax would bo paid m hVthree rears.” in England the direct oworation tax for Ihe three years woiild be say, Bd. in the pound, or A6G6. Ihe eompanv would pay a further 6s. 111 tho 1 na njrpnF for Hs shareholders—an amount of .£6OOO, but in the co go of small shareholders much of this £GOOO wou d ,b'e rebated. In New Zealand if he> sen e culminating in ft maximum of 8». 9 3-sd. tn the pound came into operation, the Uanv would pay (on -£34 000) an amount of £ILM» >" tnxatmn. and qluiveliolders would get no rebate. In England there is a tere ndjustmen of K against profits. In New Zro nnd whore the not income exceeds All,(.00 “ he State is the predominant par ner with no capital interesta and takes hull he proflta in hnrd cnrii for land and income tax, Whilst the companies have to pay all thoir losses thenisnlves out of the remainder of the profits.

How Companies are Affected, Touching on tho admitted faot that in this country anything that affects the prosperity of farmers affects the prosperity of tho whole population, tho pamphlet goes on to observe that the farmers of tho Dominion have their business chiefly conducted by a number of large companies, such us slock and station companies, farmers’ co-operative societies, freezing companies, and others. Most of these concerns have a very large number of shareholders of moderate or comparatively small means. There are comparatively few large, wealthy shareholders. All these companies are now liable to be faxed at the maximum rate of Ss. 9 3-sd. in Ihe, 'pound. It really comes to more than this, because any well-managed company must debit- its profit and loss account with much- larger payments into depreciation and other funds than arc exempted from taxation. Tho depreciation exempted by the Taxing Department is insufficient, and such items as contributions to staff pension funds and other funds for the benefit of employees are not exempted from taxation. “In most cases tho income tax [on tho Ss. 9 3-sd. rate] will work out at nearer 10s. iu the pound." Under this hardship it is very difficult for the management of a largo company to satisfy shareholders by paying a reasonable dividend. "If tho management fails in this respect, even for a short time, all growth and development in connection with the company ends, and if the failure is continued the company must liquidate and cease to exist.” A Reasonable Dividend. Discussing the question of a reasonable dividend, the pamphlet remarks that in this country a standard by which to measure a reasonable profit for any undertaking to earn appears in the return in State loan stock. The State has issued stock bearing interest at per cent., free of income tax, repayable at par in 1938-39. Late market quotations show that the public values this stock at about .£Bl for every .£l9O of face value. At this price there is a return of nearly G 1 per cent, on the safest investment the country can offer—an investment secured by a first mortgage, on the whole country. Company shareholders who carry the risk of business and stand tho loss when there is a loss, will, it is suggested, expect a dividend of at least 8 per cent. Otherwise they could not be induced to take shares, or to bold them. They will expect also to see adequate provision made for possible lessee, reserves, etc. This provision should amount to at least half the sum paid as dividend, that is to say, another 4 per cent. Thus, to satisfy shareholders, a company management must earn on its share capital a total net return of 12 per cent. "Twelve per cent, for dividends and reserves, however, means that another 12 per cent, has to be earned to meet taxation, which, makes a total earning of 24 per cent, to meet the situation, and therefore the company has to adjust its charges and profits te earn 24 per cent. In other words, it must make Its charges for services to ite customers sufficiently high to enable it to show a. return of 24 per cent, on its capital before deduction of income tax. That is, it must pass this extra charge on to ite customers. Losses on Compulsory Loans. "This, however, is not the endi. Companies jhava boon compelled to take large amounts of compulsory loans. These loans cau only ba realised on at considerable loss and companies must provide for this loss in their profit and loss accounts. If they sell the stock they must writs tho loss off. If they do not sell the stock they must write it down in. their books to its market value, so the effect will bo the same. Tho War Loan Stock due in 1938-39 is now only worth, about <£Bl for every AlOO of stock, and tho Soldier Settlement Stock due in 1933 is worth only about ABB. [The position of Government stocks has improved slightly since the pamphlet was written.] Mriny companies are being compelled, to sell their stock at this ruinous loss in order to pay their income tax. They are not allowed, to deduct this loss when making up their income tax returns, but must pay it out of the 10s. in the A they are allowed to keep for their shareholders. New Zealand is the only British country where compulsory loans exist.”

[The remaining portion of tha pamphlet, further analysing the New Zealand system of company taxation and offering constructive suggestions for the removal of the penalties now imposed on business enterprise, will be summarised: in our next issuo.]