INCOME TAX FREE STOCK

Evening Post, Volume CVI, Issue 141, 12 December 1923, Page 6

INCOME TAX FREE STOCK

THE GOVERNMENT WAR LOANS

A correspondent, ~tA," intimately associated wijh finance, writes to "The Post" expressing the opinion that he is not surprised at the keenness of the Commissioner of Taxes with respect to collecting income tax on savings bank interest, where the depositor is liable for •payment of income tax. The writer remarks that "it is certainly cutting it fine to collect income tax on such interest, considering that the rate allowed is 4 per cent, up to £500. At the same time," the correspondent adds, "it is well to point out that' considerable misapprehension exists on the part of the Government, no less than the public, as to the benefits derived by holders of 4£ per cent, tax-free Government bonds and stock maturing in 1938 or 1939. Mr. Massey thought he was doing a wonderfully clever thing in arranging for conversion of these 4j per cent, debentures into 5£ stock with the right, to collect income tax on interest derived therefrom. But was he? Certainly, he placated unthinking Labour members by doing^ so, and so endeavoured to satisfy their insistence upon income tax being paid on an interest derived from such Government securities. What ' are the actual facts? £1000 invested in 4i per cent, income tax free stock yields £45; £1000 in 5i per cent, not tax-free stock yields £55. There is a gain to the investor here of £10. , But allowing for the deduction of the full amount of income tax at Is in the £ on interest derived from the 5^ per' cent, stock, without, the various deductions and exemptions, there is still a return to investors who have "converted from 4J per cent, to 5i per cent, stock of £7 ss; in other words, a loss to the country of £7 5s per annum on £1000 invested. This illustration assumes the recipient of interest comes within the scope of the income tax. In all cases where the total income tax. of the stock-holder does not! reach £300 the conversion would represent a loss to the country' of £1 per cent., or £10 per annum on every £1000 converted." .

The point .raised by the correspondent was brought under the notice of a'Tesponsible authority, who remarked that the Government had been steadily acquiring the 4i per cent, income tax free securities referred to, and 5 in that way was disposing of them. In any case, the advantage was not so great to the purchaser, as the correspondent appeared to believe. The Government knew very well , that these securities were popular with "big" investors, who had bought many from small holders because of the freedom from taxation of income derived from interest upon such securities. The Budget disclosed what had been done in the way of redemption of Government securities bearing 4i per cent, interest and free of income tax. The longer terms of the 1938, 1939, and 1941 debentures had also to be taken into account when compared with the 5£ per cent, debentures maturing in 1933.