NEW TAXATION

Evening Post, Volume C, Issue 84, 6 October 1920, Page 7

NEW TAXATION

BILL BEFORE THE

HOUSE

PRIME MINISTER'S COM-

PARISONS

SECOND READING CARRIED

The second reading of the Land and Income Tax Amendment Bill was taken in the House »f Representatives last night. Amendments to the Bill were brought doij^t by Governor-General's Message in. the afternoon. The Leader of the Opposition (Mr. Wilford) asked if the amendments were in the wording of the clauses or in the effect of the proposals? He had given much time to studying tfie Bill, and it was not fair that amendments should thus be brought in just before the second reading. He did not, want to be in the position of criticising the proposals, and then having it said to him across the floor of the House that provision was made for that in the amendments. The Prime Minister said that the main principles of the Bill were not affected. The amendments were not in the least | complex, and could be readily understood. The explanatory memorandum which Mr. Wilford had asked him to prepare was now being got ready and would be circulated before the Bill was taken in Committee. He would not take the Committee stage before members had had time to consider the effect of the clauses now brought down. When the House went into Committee to consider the Governor-General's Message Mr. Wilford proceeded to discuss the amendments proposed. He was still doing so when the discussion was interrupted by the tea, adjournment. Subsequently the amendments -were received. BASIS OF TAXATION. ! The Bill, said Mr. Massey, in moving the second reading, was by no means one of the easiest of the session to deal I with. As a matter of fact, whenever taxation was in question there were always numbers of taxpayers who were under the impression that they were being made to pay too much, and that the I other fellow should be made to pay more. Personally he had always taken up the position that any section of citizens should -contribute to the revenue of the country in proportion to the ability to do so and in accordance with the needs of the country. That was the i line he had. taken With, this Bill. There wore not great changes of principle involved, but there were some important amendments. Ample opportunity had been given for members and those outside the House to consider the measure, | and on the whole the criticism was fav- | oiH'able. While it was impossible to say down to the minutest detail what the ! effect of the Bill would be, ho wanted to say that he was not out to increase taxation. It would give him the greatest of satisfaction to be able to reduce taxation rather, than to increase it to tlie small extent proposed. If.he was not mistaken, the time when he \fftuld be able to do that was not fax off. However, there might be difficult times coming, and the Government must keep the finances of the country sound. No risks must be taken, and if .there was found a surplus at the end of the year it would give them somothing with which to aid in wiping out part of the debt. Incidentally, he mentioned that he had reason to believe that the first two quarters of the financial year were quite • good, but he would be able to speak _ more definitely of that in a few days' time. Most of the criticism against the Bill had been directed towards the proposals in regard to local bodies and Harbour Board debentures. The difficulty in the past had been that it had been impossible tor the Department to follow the debenture-holders and ccc that they paid the tax due by them. Inscribed stock was quite a different matter. In many instance-3 payment of interest on local body debentures was made on the production of a coupon. Many debentureholders seemed to think that the Government was "fair game," and, as a result, the State was losing a great deal annually. What was being asked was that the local bodies sliduld collect a flat rate of 2s 6d in the £ on the interest payable to holders of their debentures, just as companies had done for many years past. He knew the objection ha,d bee.i raised that some small people would be called upon to pay, and that others who should pay would escape. The Government had chosen the lesser of two evils. Provision was made in the Bill for the former by a clause- which provided that if a man paid more as a debenture-holder than he would as an individual he wae to be entitled to a refund of the difference between the two amounts. The local bodies were being asked to collect the tax, and, he considered, were being put in a. better position as far as their finances were concerned than they had ever been before. The Government was encouraging not only the small investor, hut the large investor as well. The principle involved was a sound one ; and one advocated by the political economists, namely, to tax 1 the income at its source as had been done with eompa.ny debentures for years past. The system as far as local bodies were concerned had been in operation in England for over eighty years, but if, after a fair trial,; it wa-a/ v found unworkable heie it could be changed. COMPANY PROMOTION*!. No alteration in system was being made a<s far as companies were concerned, but it was proposed to raise the flat rate from 2s 6d to 3s. It had been suggested that the time had come when the individual shareholder, should be responsible for the payment of the taxation, but the Government thought otherwist. Mi. Mussey went on to show that new companies vere being formed very largely in New Zealand; for instance, tho returns showed that during the past six months: there had been registered 254 empanies with a total invested capital of £5,599.98ri. Mr. Wilford: "How much of that is called up?" Mr. Massey was not in a position to give the required figures. He quoted briefly Australian and English opinion as to* the advantage of taxing at the source, tho principle reasons given in support being the fact that much work was saved and much leakage prevented. There was no intention of inflicting any hardship; he felt that the flat rate of 3s in the case of companies was fair during the critical time through which the country was passing, and, as for local bodies. hf> considered the new system would assist them. Continuing, he referred in detail to the various clauses of the Bill as. already dealt, with in The Post. He dwelt for a moment on the proposal to put a special tax on unimproved land, which he claimed was a departure from anything proposed p.revirtu?!v. Tl!i.a tvoitM 'tpply, lt« /i?i(), to ejij". .unimproved country land allowed tp J

lie idle in any part of New Zealand. The country had reached tho stage when . it pould not afford to allow land to be unproductive. There was plenty of land in the Dominion lying idle at present^ and unless this was remedied the owners must pay the increase of 50 per cent, in taxation provided in the Bill. Jio hardship was being 1 inflicted, for the clause dealing with the matter was not to take eifect until 1923. Members: "That is too far off." The Hon. J. A. Hanan: "Why not apply it to certain roads and .railways?" Mr. Massey: "This is only an experiment, but I agree with the idea of the hon. membeT that land near a road or a railway should first be brought into production. " EXEMPTIONS. Mr. Massey referred to tha proposal, r.-ew to New Zealand but adopted in other countries including Britain, of granting an 5 exemption of a further £50 in the ease of a man who has a widowed mother living with him and dependent upon him. The exemption age of children had also been raised to eighteen years. Clause 14, about which there had been so much discussion, had got there by mistake, and it would be cut out by the amending clause*, introduced that afternoon. For the first time in New Zealand financial legislation, a difference for the purpose of taxation was to be made in the case of earned and unearned income. Now a man whose income was earned would get an allowance of 10 per cent, on the amount of the tax he paid. In regard to the pro■posal, in the assessment for income tax, to allow depreciation in the case of machinery and buildings, etc., the Department had been very, particular not too allow too much. The clause provided that in the case of a safe of a property on which depreciation had been allowed, and on which it was felt that the amount allowed was too much, a claim could be made on the vendor. This', of course, was only in the case of a sale. The Department ha-d informed him that itwould be more satisfactory than the §esent la.w for the owner of a property, le system of assessment had been alterunder the Bill. Under the existing law the tax was collected under two headings : Under ordinary taxation up to 3s in the £ and the war tax of 4s 6d, making 7s 6d. The war tax was collected oh the assessable income, which was different from the taxable income. The assessable income was without exemptions, but there were quite a number of exemptions under this Bill and other Acts. The tex to be collected on the taxable incoinV would be lete than under ths assessable income. He did not know how long the country could carry the taxation. If a drop occurred in the prices of-produce, and there was no doubt it was in sight so far as wool, the principal product of the country, was concerned, the taxation would have to be reduced in accordance. ABSENTEE TAXATION. Mr. Massey said that there might be in New Zealand shipping companies trading between ports outside of New Zealand. A company with its headquarters in New Zealand might have steamers trading, say, between Chile and San Francisco. Under the existing law they would escape taxation, but they should not. In such case," they had to pay it in England. He did not know there was mucft in the law as relating N to companies in New Zealand, but the taxing Department desired it, and it had therefore been put in. the Bill. A ■new provision had been inserted to provide that where children were being educated deductions may be allowed the trustees. The clauses relating to the joint assessment for income tax purposes of two or more companies, was, he knew, viewed with a certain amount •of alarm in certain quarters, but he was not inclined to take that view himself. It was there for the purpose of preventing evasion. Certain amendments wore made to the clause in the new provisions introduced. Clauses 22 and 23, both relating to income tax payable by debenture-holders, were to come out and another clause substituted. The provision relating to the taxation of the profit? of dairy concerns was not intended to hit the producing companies themselves, but the persons or firms who were trading on the produce of the farmers. Mr. Massey briefly referred to the lowering of the value at which the higher rate of taxation would apply to land. At present 'the amount was £192,000, and it was proposed tc lower it to £137,000. .It was just as well to be candid about this matter. The change was not being made for revenue purposes. Hon. members knew perfectly well that excessive areas of land would ■disappear under the tax. Men were not •going to pay this greatly increased taxation for the purpose of holding on to land that was. not profitable to them. The increase was being made for the purpose of forcing land into the market, ("Hear, hear.") It was in the •interest of tho country that this should be done. Mr. T. K. Sidey: " What about the business firms?" Mr. Massey: "It applies to them, but there are very few firms that own land of an unimproved value of £137,000." The number was so few that ho did not think it would affect them, so far as the income tax was concerned. SOME COMPARISONS. ' Mr. Massey went on fco say that in the case of land" there was not much difference, so far as the increased taxation was concerned, until at about £15,000. Take the figure as £1000, the present taxation, after deducting the exemption of £500, would be £6 55, and the proposed tax £5 lls id. The comparisons would then be as follow :— Valuation. Present Tax. Proposed Tax.

TAXATION COMPARISONS. Mr. Massey said that he wanted to show the difference paid in taxation in New Zealand and in the United Kingdom. He submitted the following com-

There was, however, said the Prime Minister, an important point to be remembered in connection with the British taxation : that large as their figures were it was only ordinary taxation he had quoted, for on top of it there was an excess profits tax of 60 per cent. i>Mr. Sullivan: "The British Chancellor is harder on the rich man than you are." Mi 1. Mass&y : "I have not much mercy on him." (Laughter.) He continued that the changes,in the legislation were not) being made for increasing the taxation, but for :i move eqnit?ble adjustment. HOW THE COUNTRY STANDS. Ho wanted to let the House know how the country stood in regard to increased debt on account <>f the war, though he would go more fully into detail on the second reading; of the Loan Bill. There was an impression held that we had not done anything towards paying off the cost of the war, but be. gays ttik following figmva to show what avx b.Wi dftue. Ob 3Ut Mar<& lagfe JJie .oc-

cumulation . of ordinary surpluses amounted to £17,538,976, made up as follows :— Cash in the Public Account Imprest advances 231,170 Investment under the Discharged Soldiers' Settlement Act , 9,265,000 Imperial War Stock and' Bonds invested 5,783,000 Other securities 112,250 Total £17,538.970 At 31st August , last £11,760,250 had been invested in discharged soldiars' settlement, and in other transfers and advances. He proposed under the Finance Bill to provide for the cancellation of the discharged soldiers' settlement securities of the value of £12,500,000, and so discharge this from the gross public debt. THE NECESSITY FOR IT. He would explain this and the necessity for it. That very large sum of money, instead of being regarded as an asset of the country, was looked upon as a debt, and he had to provide sinking fund for it. It was strictly in keeping with the system of account keeping that had obtained for a, long time past,- but it was not right; it was misleading. The sum was unquestionably an asset, and the country should not be compelled to pay sinking fund upon it. It would be a very much larger sum before the end of the financial year. The debt at 31st August last (including soldiers' settlement money), was £97,384,000. Of this amount war purposes accounted for £81,-------266,000; discharged soldiers' Eebtfenent amounts, and advances to soldiers, £16,-------118,300. As against the gross war diebt at 51st August there were sinking funds of £1,620,000, making, the Wai debt £95,764,990, against which the following was held :—Repatriation advances outstanding £948,404, cash £279,182, discharged soldiers' advances £8,930,635, imprest advances outstanding £4,460,000, investments £4,175,218—a total of £18,-------793,000. That was the amount standing to-day against the war debt, according to tbe^ present system of book-keeping. Providing no unforeseen demands were made on the Consolidated Revenue, and expenditure was kept within reasonable limits—there was no certainty of this, because demands were coming in every day which he tried to resist^he anticipated being able to end the financial year with, a total amount of £30)000,000, thus ensuring the application of a surplus revenue towards the war debt extinction. With this accomplished, and financial adjustments made, some, reduction of the taxation would be made if possible. They had had to use part of the surplus tha last financial year for special purposes where expenditure was unavoidable, bub it was hoped to pay it back from the revenue of the present year; and when that was done there would be at least twenty millions, not borrowed money, but raised by taxation, and that would stand as an. asset against the war debt. It would be just as good as if it had' been paid off. He moved the second t reading of th:e Bill. : MR. WILFORD'S CRITICISM. The Leader of the Opposition (Mr. T. M. Wilford) said that a few hours ago the Prime Minister had said it might be necessary to reduce salaries, and then lie had said he hoped to reduce taxation. The two statements would not square. Though the rat© of graduations was increased from one 32,000 th of a penny in the £ on land; to one 20,000 th, the increment was reduced from 50 per cent, to 33 1-3 ptr cent., and the maximum waa reached at £137,000 instead of £192,000. Then the rate was practically the same, 10 7-15 d against -10£ d: Why had the graduation stopped at £137,000? It seemed to him that the scheme of this Bill was to take some of the taxation off the higher incomes,' and put it on companies and local bodies. The deduction in thejnortgage tax should disappear at £lUiCOO, not at £8000. He agreed with the landtax exemptions for hardship and for widows, but thought them mean. More could have been done. The clause proposing taxation of unimproved land left the decision as to whether the land was capable of being improved with the Commissioner ot Taxes There should be an appeal from the Commissioner, and the wording of the clause was also defective, as it implied some land was incapable of improvement. The clause should apply to land which "it is reasonable, under all the circumstances, should have been improved." Town districts should have the same exemption from this clause as boroughs. There was a new departure in making the graduated increment on income tax less after £6000. It was l-100th of a penny up to that amount, and l-200th .of a p'eniiy afterwards. Why was this done? Mr. Massey : "Have you.ever tried to work out a scale?" Mr. Wilford : "That is not an answer." He believed the rate of graduation should be acoeierated instead ofreduced as the amount of income increased. A man with £2000. a year could afford to pay more than twice what could be paid by a man with £1000 a year. As it was, the graduation became leas the higher the income be- ! came. ■ Mr. Massey: "It never increased at all up to the present over £6400." Mr. Wilford said the limit of tax was now 7s 4d against a limit of 7s 6d in previous Acts. He admitted there was an increase of 20 per cent., with a possible reduction of 10 per cent. They had been working away for years to do away with the anomaly under which a man with £6400 paid the same rate as the man with £15,000 They found the same bad old principle underlying this Bill; but the increment was reduced beyond £6000. He thought it. was a great mistake for the Government to allow an absentee exemption if he were abroad for health reasons.. There would not be an absentee who would not claim such exemption. He was delighted to 6ee that something was being done in increasing the exemption on account of children. The Prime Minister's statement regarding clause 14 was most extraordinary. Everyone knew that throughout the country public meetings had been held in regard to this. The original clause proposed to repeal the exemption granted to local authorities to co-operative butter and cheese factories, and to persons absent from New Zealand drawing income from debentures, the interest on which was payable beyond New Zealand. The amend-' ment did not repeal this, but limited the power of exemption. Surely it was outrageous that the whole income of a local body should be subject to taxation. Mr. .Massey: "I have said it does not apply except to trading concerns, and, if necessary, I would have it made perfectly clear." Mr. Wilford: "But it does not say so in the Bill." At most, in his opinion, local bodies should be required to pay only on trading concerns. Under the clause relating to dairy factories, it would be possible for them to escape taxation by distributing all profits in proportion to suppliers. Mr. Massey: "Except from trading concerns." Mr. Wilford said the withdrawal of the exemption on debenture interest payable beyond New Zealand was a broach of faith arid should go out. dESTNITION OF EARNED INCOME. The clause dealing with earned income was weak' and futile. How was the Tax Department or the Court to construe the definition of earned income? It would have been much better to define unearned income and leave earned income for later. The proposal to tax shipping companies on business done outside New Zealand would eimfliy msan

that the public paid. They could never catch a shipping company. Mto tho taxation of investments mado on behalf of New Zealand branches of insurance companies, he was informed that investments were never made for the branches, but for the whole concern. The exemption in certain cases of income from property held by trustees was a fair provision. Clause 20, allowing two or more companies to be treated as one company, required amendment He believed the wealthy man could reduce his taxation by putting portion of his enterprises into a company. The clause authorising a refund of tax paid in excess, which the Prime Minister described as of no consequence, was ip his opinion a regular trap. The amendment limited the Commissioners power of refund to an amount paid "in excess of assessment." That was utter nonsense. The words should be added: "in excess 1 of assessment of the amount properly payable:"- Mr. Wilford also criticised the provision for adjustment of tax when part of the income was derived | from debentures and part from other I sources. The clause was not clear as to | whether the Commissioner had the right Ito assess at the higher rate (as if the debenture income were included) or at the debenture rate and on the balance at the lower rate (as if the debenture income were excluded). OTHER SPEAKERS. Mr. W. D. Lysnar (Gisborne) supported the Bill, out placed on record his view of particular phases. He expressed the opinion thai, tiie Bill would increase taxation, and said that if the surpluses of the past were. used for reducing the sinking funds' it would be possible for the Prime Minister to reduce greatly the taxation collected directly and indirectly. Oiitil the country found its feet again, however, he was preparedto agree to the ' proposals in fcha Bill. It was a good fault to err on the side of caution. The debenture proposals, he maintained, would aid the local bodies, for both largo and small holders would be put in a, better position. Mr. J. P. Luke (Wellington North) said his opinion was that the Prime Minister was wrong in Jjjs opinion as to the effect of the Bill on local bodies. He argued, too, that it was preferable to tax the individual rather than a company, for under the latter system an undue burden was placed on the shoulders of the small investor. The best clauses in the Biil were those lessening the burden on. the family man, and the easement proposed in regard to estates held in trust. Reverting to the proposals in regard to the taxing o£ local body debentures, he said- a man drawing £300 in interest would have to pay £37 in tax. The Prime Minister: "'That is altered in the amendments to be proposed." Mr. Luke said he was glad to hear this, but maintained that, nevertheless, local body debenture-holders would be in a worse position than those who invested in Government loans, at the same rate of interest. Members: " No. The big. holders of Government loans may pay up to 8s 9d in the £." Mr. Luke maintained that the Government must make certain that nothing was ' done to prevent the local bodies securing all the money they required. A BIG ADVANTAGE. Mr. T. K. Sidey (Dunedin South) attacked the Government's proposals in regard to the exemption, of mortgages up to a certain amount in levying land tax. This was giving one section of the community a big advantage over others, and the effect would fee to create a. system of bogus mortgages. Mr. Massey: "Do you know what happens to a man who defrauds the Department?" Mr. Wilford: "He gets wealthy!" Mr. Sidey urged that the deduction of 10 per cent, on earned incomes should have been made from the assessa-ble income and not from the tax payable. Mr. R. A. Wright (Wellington Suburbs) approved the higher taxation of land held for speculative purposes, but thought the increase might be even greater. In connection with the taxai tioD of harbour board debentures, he questioned whether the holder of the I coupons, which stated the amount of interest, %vould not have a right against I the harbour boards for a breach of contract. Mr. Wright believed that larg« amounts of taxation were lost by incorrect returns and the methods adopted in writing off debts, etc. •Mr. J. MC. Dickson (Chalmers) considered harbour boards would have to set up a special department to trace holders of their debentures so as to pay tax on. them. t The Hon. J. A. Hanan (Invercargall) approved the higher taxation of undeveloped land, but considered the proposal ■should be made more definite by proclaiming certain areaa to which it would apply. He wished to see a steeper graduation of income tax, so that person* with more than, say. £5000 a yea-r should return more to the State. LANDOWNERS' VIEWPOINT. Mr. D. Jones (Kaiapoi) considered the higher taxation of land would bring a great amount of lam| into the market. There was a right of appeal against taxation of undeveloped land; but he thought a year's notice would be quite sufficient "to give for the imposition of that tax. Incomes of more than £6000 were mainly from public companies, and if the rate of graduation • were made too ■steep they would hamper those companies, which were essential for th« development of New Zealand. Mr. H. E. Holland (Buller) said that of 944 taxpayers with, income;: over £4000, less than 350 were companies. While this Bill went further than some in the past, it did lay on citizens generally the obligation to pay in proportion to their ability. One of its good features was that it relieved some of ths smaller taxpayers Mr. Holland condemned public borrowing, as it contributed nothing to the wealth of the country. Mr. Holland contended that the taxation on large incomes was still low, when they considered not what was taken from a man, but what was left. In 1917 less than 38,000 persons had sufficient income to be liable for income taxation,.and of these 290 had a quarter of the total assessable income. Mr. Holland also dealt with the increase in unimproved values and land taxation. The figures went all in favour of steeply graded taxation and striking at the men -at the top of the tree. Mr. A. Hamilton (Wallace) held that those endowed with wealth should pay towards the expenses of the country. He enlarged upon the argument that taxes should be levied so as to encourage thrift, and, in doing so, pointed out that the land tax took no cognisance of whether a mail could pay or not. MR. MASSEY REPLIES. In replying, the Prime Minister said it was impossible to say what the future would hold as to reduction of taxation on the one hand or reduction of salaries on the other. To frame a scale with a constantly-accelerated graduation was exceedingly difficult. They would find that 20s in the £ would soon be reached. He anticipated no difficulty in administering the earned income provision with the definition in the Bill. He believed that men who had lent money to local bodies by way of debentures would have less to pay than Defore, and that this would help the local bodies. The land tax was much increased on the higher values, but the working farmer with land of a taxable value of £5000 to £10,000 paid much the same as at present. , The Bill was read a second time. ' ADDITIONAL AMENDMENTS. In addition to the amendments touched on by Mr. Masses, the Supplementaiac

Order Paper changes the amount of the deduction which may be made from income tax in respect of insurance premiums. The Bill proposed to make the maximum deduction 20 per cent, of the earned income of the taxpayer, but , the amendment suggests 15 per cent. It is provided in regard to debentures that local and public authorities shall be the agent of all debenture-holders, and shall make returns and be assessable and liable for income-tax on that income accordingly, no deduction being granted by way of special exemption or otherwise. Income so derived by holders of debentures issued by a local or public authority is to be assessable separately from income derived by the debentureholders from other sources, and is to be assessed at rate of 2s 6d in the £. The new proposal in regard to the allowance by way of refund of tax to debenture-holders sets out that if the Commissioner is satisfied that the aggregate amount of income-tax (including* the tax paid in respect of interest on debentures) payable by the holder of debentures of a local authority or a company exceeds the amount of tax that would have been payable by him if the interest on those debentures had formed part of his taxable income, the Commissioner shall, on application, pay to the taxpayer the amount of the excess. A new clause'provides that the interest on a company's debenture, if a floating rate of interest is paid, is to be computed as part of the assessable income of the company and not of the debentureholder.

2,000 5.000 10.000 15^00 20.000 30,000 138,000 12 17 9 35 3 1 80 1 6 134 15 3 199 4 4 2,126 19 0 4,555 0 0 11 19 4 33 6 8 80 11 1 141 3 4 215 15 4 2,720 0 0 6,018 6 8

Amount. £ 2,000 3,000 6,000 7,000 8,000 40.000 N.Z. Proposed Tax. £ 280 570 2,040 2.535 3,120 17,600 U.K. Tax. £ 525 987 2,336 2,837 3,362 21,712