TAXATION INQUIRY

Dominion, Volume 18, Issue 184, 30 April 1924, Page 8

TAXATION INQUIRY

COMMISSION IN DUNEDIN INCOME TAX ON COMPANIES A WITNESS’S SUGGESTIONS Br Telegraph—Press Associatio*Ounedin, April 29. The Taxation Commission commenced its sittings this morning. Air. Roderick Finch, public accountant, Oamnru, stated that the present method of levying income tax on companies as separate entities should be retained, and no chance over to the method of taxing dividends paid be made. The Commonwealth taxation authorities had decided that the advantages and equity of the New Zealand system were better than other methods. The taxation of individual shareholders would , prevent company formation. In spito of the present taxation, on companies as separate entities, it was almost the usual practice in New Zealand that when an individual business developed it was converted into a company. Ho considered the reasons why largo companies were hit by income taxation was that when a slump came many ignored the fact that when profits were made a definite liability was immediately created to the amount of tho State share of. that profit. They were carrying on a policy of letting subsequent years’ profits pay the tax, of which actually the liability was that of the previous year. In fact, they distributed amounts of property not available for distribution. If the incidence of taxation changed preference shareholders in companies would suffer while ordinary shareholders gained increased dividends. Witness suggested (1) The abolition of the land tax as a means of raising the annual revenue, and the substitution of a special tax to prevent undue aggregation of land and burst up large holdings. 12) The inclusion as a taxable profit of any profit cn the sale of land purchased within 12 months of such profit. (3) Re-imposing a tax on income diverted from the land exactly in the caso of other income taxation. (4) All interest cn debentures on the same basis as other mIn reply to Mr. Hunt, Mr. Finch stated that he had known of both small and large companies that had let subsequent years’ profits pay the Mr. Hunt: Can you point to any largo companies that have been formed during the past year or two? Witness: Yes. Mr. Hunt: But is it not a common thing for a company to be formed with a large capital but only to call up a nominal tram? Witness: Yes. Mr. Hunt suggested that tho income tax might be escaped by a few wealthy men forming a small company. Witness: It depends upon where thev get their capital fromMr. Hunt: There are many men who are in a large number of small companies where the tax is very much reduced. Witness replied that the assumption was that a man made an investment to avoid taxation. The ordinary individual, however, went out to get income first and when he had got an income he would use his brains to avoid the tax. Mr. Hunt: The bulk of the companies floated during the past few years have been small private companies. Practically no largo companies have' 1 been floated with paidup capital. I take no notice of nominal capital. In reply to further questions by Mr. Hunt, witness said that he thought 10 per cent, was a fair return for a trading concern, especially when it was remembered th7t mortgages produced 6 per cent. His experience of balance sheets was that they were produced for concealing purposes and that they did not disclose the trueposition of companies’ affairs. Mr. Hunt: Ten per cent, is not being earned on the total capital companies are using. Witness said that was the result of trading conditions rather than taxation. Mr. Hunt: But the trading conditions are all right. Witness said he thought that conditions were still abnormal. In reply to further questions, witness said lie believed in the system of the graduated tax, but it went up too high. There was no difference in the rate of tax paid by individuals in eacn companyMr. 'Weston: Would you say that really first-class security was as safe as, say, Government Bonds? Witness replied in the negative. He agreed that a higher price would have to be paid for tax free investments than for taxable investments.

In reply to Mr. Shirtcliffe, witness said that ho would advocate the maintenance of a graduated tax for the purpose of preventing aggregation. If there were no income tax, and if competitive conditions remained the same in business, the profits would remain the same. Witness said that he was nob prepared to say if companies were paying dividends substantially less than in pre-war times. Mr. Shirtcliffe: What effect on profits would the removing cf taxation from companies to individuals have ?

Witness replied that the change <vould be gradual. It would ultimately facilitate the formation of trusts or rings. Tho small trader would be at a disadvantage. He did) not think there was any injustice as between small and big shareholders in a company in regard tn the system of taxation.

Mr. Begg asked, seeing that Mr. Finch considered that companies should be treated' as individuals, could not a company with a large capital be a poor company and a company with a small capital a very rich company? Was there not a difference between companies and individuals?

Mr, Finch' replied that tho graduated tax related to income, not capital, so that an individual was parallel to a company. He admitted that in certain important particulars a company was different from an' individual. He agreed that if an individual's income was taxed that was an end of it. He did not think this admission vitiated his contention regarding a company being the same as an individual. There was an inconsistency to some extent. Ho admitted that if evils had grown up under the present system these were not based on principles. To Mr. Hunt: He submitted that companies did not pass on their tax. This meant a reduction in the profits of a company. The tax paid ultimately came off shareholders. An alteration in the present system would squeeze out the small trader if they went back to the individual svstem. As regards his contention that if farmers sold their land within twelve mouths they should pay tax on the profits accruing, the argument) was different when applied to town sections. Selling farms was against production. Mr. Malcolm Stevenson, a carrying contractor, said that he understood that if a farmer owned freehold he was exempt from taxation of income. If he was the lessee of a farm, however. he had got to pay income tax. He happened to be a leaseholder and paid income tax on his farm. The

lessor of the farm paid land tax. He (witness) paid income tax, but the lessor did not. The lessor derived his land tax from witness. He did not see why, because a man was a leaseholder with a farm, he should pay income tax and the freeholder shquld be exempted. Then, again, he owned certain house property, which he let to tenants. After allowing for the collection of rents, depreciation and interest, lie considered that he got barely 2| to 3 per cent, on his capital. On this he was charged unearned income tax. He failed to sec why this should be so, considering the shortage of houses at the present time. He also owned some war bonds. On these ho would not mind being charged unearned income tax, because here there was no depreciation, no trouble collecting money and no rent restrictions.

Mr. Clark pointed out that the only income tax levied in this instance was on owners or occupiers of land who were dealing in live-stook or products. A leaseholder _as a leaseholder was not liable to income tax.

Mr. Stevenson said that he carried on farming as part of his business. He kept a separate account in his office. He had got to pay income tax on that. Mr. Clark: No. Mr. Weston: Y'ou are not dealing? Mr. Stevenson: No; I am not.

As regards Mr. Stevenson’s second complaint, Mr. Clark said that the allowance of 5 per cent, on capital value was made, and if Mr. Stevenson was only earning 24 ■per cent, he could not be paying income tax. The commission adjourned till 10 o’clock to-morrow morning.