INCIDENCE OF TAXATION

Dominion, Volume 16, Issue 172, 9 April 1923, Page 6

INCIDENCE OF TAXATION

ARE FARMING SECURITIES DETERIORATING?

TREND OF RECENT INVEST-

MENTS

EFFECT OF TAXATION ON COMPANIES

The Incidence of taxation^, — and the effect of taxation on companies, particularly in regard to the public taste in investment, which is indicated' by a preference for debentures in Government or local authority securities, is the subject of a correspondent’s letter, who asks why is money unprocurable for investment in land today, whereas a few years ago it was looked on as a most remunerative investment. A special investigation by 1110 “Dominion” reveals interesting facts and tendencies, which go to show that farm and pastoral properties have appreciably deteriorated in the investment market. The accompanying is the first of several articles on the subject.

A correspondent, L. A.- Rutherford, of Haydon nowns, Woodgrove, writes: “I wish to inquire through your valuable paper why it is that money is unprocurable for investment in land to-day, whereas a few years ago it was looked upon as a most remunerative investment, considering the security to be found. I am reliably informed that the big lending companies are withdrawing money from reinvestment in land as it falls due.

“It appears to ine that the graduated company tax is the big hurdle, as we are told that these lending companies, such as the Australian Mutual Provident Society now have to pay 7s. 4d. upon every £1 of interest, derived from money invested in land, whereas money invested in anything else pays from nothing to 2s. 6d. in taxation. “Any reduction in land tax that could reasonably be asked for from the Government would bo a mere ‘bagatelle’ compared with the great benefit that would be derived by us all, if this passon tax, otherwise the graduated company tax, wer<j to be abolished. “If this country is to progress money must be attracted to tho land, but if what I have stated is correct the reverse is taking place, and the Government should do everything possible to remedy the evil, as it affects every individual in the Dominion. “I hope that some abler pen than mine will dip into this matter.” “MONEY UNPROCURABLE ON LAND” “Money is certainly unprocurable for investment in land,” said Mr. W D. Hunt, chairman of tho Taxation Commission, when approached. “The reason is not far to seek. Largo investment companies have to pay 7s. 4d. in the pound on tho interest earned by them. In order to get a reasonable net return, the companies have, therefore, to charge the farmer a rate of interest that they know he is unable to pay. As a result, they are not lending to farmers- Outside the large investing institutions, there is not enough money to go round. On the other hand, if a financial institution lends money to a public body, it is charged 2s. 6d. in the pound on the interest, by way of income tax. Therefore, public bodies can got all the money they want, and farmers have to go without. There is a certain number of people—-private individuals and trustees —who lend to farmers, as they do not come under tho 7s. 4d. rate of income tax, but they have not by any moans enough money to meet the demand. They simply pick the eyes out of tho securities offering, and tho balance have to go without. POSITION OF LANDHOLDER To illustrate the position of the landholder, Mr. Hunt quoted the case of a holding in which the total capital employed was £50,000, in property and stock, assuming an earning of 7-} per cent, on total capital, before deduction of land and income tax. After deduction of' £l5OO from his assessable income, .th® owner’s taxable income was £2250. On that the would now have to pay income tax, amounting to £285 18s. 9d., under the 7s. 4d. rate, as compared with £343 2s. 6d.. under the previous rate of Bs. 9d. His land tax would bo approximately £335, as against £4OB 6s. Bd. under .the old rate. In all, he has now to pay £620. If he paid income tax alone, he would have to pay £7lO 18s. 9d. Was this better, he asked, than paying income tax and land tax combined ?

LOCAL BODY’S HAPPIER POSITION

If the Wellington Harbour Board wished to build a new wharf, thev could raise tho money, and the people to whom they paid interest would pay 2s. 6d. in the £. If the City Council wished to asphalt a street it would be tho same. But, if a farmer wanted to raise money, to grow something to cart along that street, or ship from that wharf, the people who lent him tho money would bo required, said Mr. Hunt, to pay 7s -Id.'tax. Was it not obvious that the in both cases passed on? The’'people who lend did not lend at the gross, but at the net rate of interest left to them. “I can buy 4 J per cent. Government loans at 97, and, taking into account tho £3 extra 1 will get when it is redeemed, it leaves me about £4 16s. per cent, net; that is tho best investment in tho country,” said Mr. Hunt. “I can buy public body loans at a rate that will- roturn me 5J per cent., and I have to pay 2s. 6d. in the £1; that will leave me £5 12s. 6d. net. To lend to a farmer, I want to earn 5J per cent, at least, because it is not e-uch a good security; but to net 5J 1 have to charge £8 12s. 6d. per cent. I know the farm can’t pay it and live; therefore, I can’t lend it to him.

WHAT WOULD AUSTRALIA DO? Characterising as “rotten” the present system of taxation, Mr. Hunt urged consideration for the individual system adopted in other countries. Ho referred to the reports of tho Royal Commission on taxation in Australia, especially to the second report, last year, dealing with income tax. Tho Commonwealth system was that tho companies paid a tax of 2s. Bd. in the £1 on their undivided profits only. Their shareholders had to “return” the dividends as part of income, and

pay tax on it. A proposal put before 'the Royal Commission was that, instead of paying 2s. Sd. (as then) on the undivided profits only, tile company should pay a flat rate of 2s. Bd. on all their profits, and that tine dividents should be taxed free. That was a proposal for 2s. Sd., not 7s. 4d. The decision of tho Royal Commission was announced in the following terms: There is no need to traverse the arguments in suport of method under discussion, beyond saying that its comparative simplicity and greater productiveness are purchased at the cost of so great a degree of inequity that we have no hesitation in unanimously deciding that it is a method, that cannot he recommended for inclusion in a system of taxation which it is intended should rest upon a “sound and equitable basis.’ “What would the Royal Commission have said if it was 7s. 4d., instead of 2s. Bd. ?” asked Mr. Hunt, in conclusion. (The second instalment of the series will appear to-morrow.]