TAXING SECURITIES

Evening Post, Volume CXI, Issue 129, 1 June 1926, Page 10

TAXING SECURITIES

N.Z. BORROWING IN AUSTRALIA

ADVANTAGES UNDER PRESENT TAXATION

VAGUE SUGGESTION OF FEDERAL '' LOAN COUNCIL.

A somewhat vague cablegram published on Friday, and received from Sydney through the Press Association, suggests certain taxation with regard to the borrowing of other countries in Australia. The • matter is obviously of interest to New Zealand, aa both the New Zealand Government and New Zealand local bodies have been, and are, borrowers in Australia. The cablegram reads as follows:— "At. a meeting of tho Federal Loan Council, the question of the taxation of interest on loans issued and securities sold in Australia in respect of the borrowing of other countries was considered. It was, decided to ask the Commonwealth and State Governments to consider the question of taxing the interest on such loans and securities." The Federal Loan Council is a,n official body representing all the Australian Governments except New South Wales, and its function is to coordinate the borrowing of these Governments to their mutual advantage. The Federal Loan Council is an advispry body, but it is not legislative. Until its vaguely outlined proposal takes concrete shape,, any criticism, thereof must be largely on a basis of assumption. But the occasion is opportune for giving aome indication of the interests at stake, jnd the considerations which have influenced Australians to buy New Zealand iecurities. A wealthy Australian investor who Invests so as to increase his taxable Australian income not only increases his income taxation but increases it in the higher grades of the tax. If he invests in the New Zealand Government's 5i per cent, debentures, his investment does not count for Australian income-taxing purposes; and that fact, plus the fact that the Australian money market has lately moved downward from a 5§ per cent. basis to a basis of 5i per cent.—at which the Commonwealth Government floated its last seven millions loan—has been making the New Zealand 5J per cent, securities attractive. HOW NEW ZEALAND STOCKS HeTe is tin line of argument which fi.n Australian writer commends, the purchase of 5J per cent. New Zealand Government loan (due Ist February, 1936) to those investors "to whom the inroads of the Federal income tax collector aro a heavy burden": "The interest on this loan (he writes) is subject, to New Zealand but free of Commonwealth taxation. Being free*- of Commonwealth taxation, the interest •would not swell the Australian income, and consequently increase the. rate of . taxation over the whole' taxable income, \ while the rate of New Zealand absentee ' tax is 'such that its payment would still leave a net return well above that obtainable from local tax-free securities. The New' Zealand rate of absentee tax is 7d in the £ up to £300 of income, and the rate then rises 2/300ths of Id for every £1- until the actuall income reaches £6000; over £6000 the rate is 3s 9d in the £, rising l/300ths of Id for every £1 over £6000 until 4s 6d in the £1 is reached at £8700. The New Zealand 6i per cent. 1936 loan is available at £100 10s, at which price the return, including redemption, is £5 8s 8d per cent. The taxation position in regard to the purchase of (say) £2000 of the loan is as follows:— Amount purchased, £2000.. Interest at -5J per cent, per annum; £110. Absenteee tax, 7d in the £ up to £300, £3 4s 2d. Therefore the net income, after deduction of New Zealand tax, is £106 15s lOd, or a net yield of £5 6s 9d per cent, per annum. This is a return considerably above, that offered by tax-free issues of similar currency. Tho interest is payable and principal repayable in Wellington, and it would be necessary to allow for exchange of 7s (id per cent, for remitting the principal to Melbourne. This, however, would reduce the net interest yield over the whole period by only 9d per cent, per annum to £5 6s per cent." \ TO CONTINUE EXISTED TAXATION. In Australia, as elsewhere, the investor scrutinises closely the taxation outlook, whether it affects Australian or other countries' securities. The Australian investor has before him Commonwealth bonds that are subject to income tax by the Commonwealth (Federal) • Government, but free of income tax by any State Government. If tomorrow the Commonwealth Government retired—as it has often talked of tSoing—-from the field of income taxation, than apparently these Commonwealth bonds would be completely free of income tax and would become so much the more valuable—unless the Commonwealth Government, while retiring from the general field of income tax, or from the field of individual income tax, were to pass at the same time special legislation to continue a tax on the interest of the Commonwealth bonds., In some quarters doubt was expressed in Australia as to' whether thi3 would be done, but a statement by the Commonwealth Government a few days ago made clear that the Government intends, while giving up the tax of incomes on individuals, to specially tax "the interest on Commonwealth' and State loans which aro subject to Commonwealth tax." In other words, those Commonwealth bonds that are subject to Commonwealth (Federal) income tax only shall not escape income tax merely because the Commonwealth Government wishes to cease to be an in-come-taxer. The tax on these bonds will be continued; to do otherwise would be to throw away an immense re,venue and make a present to Uondholdevs. In the case of certain New Zealand securities held in Australia, and subject to Commonwealth but not to State income tax, a similar position arises. Does the Federal Loan Council propose to merely continue existing imposts, or is fresh taxation contemplated—taxation that would affect the 1 availability of tho Australian market to New Zealand as a borrower? PRESH TAXING NOT DEEMED PROBABLE. When the points outlined above were submitted to a banking authority in Wellington, he replied by explaining .' that "the Australian States tax only income which is derived from sources in Australia, effect being that the income from loans raised in Australia by the New Zealand Government and New Zealand local bodies are not subject to State taxation. The Commonwealth (Federal) tax is based on the name principle, but in 1923 an amending Act was passed which provided that the interest accruing on loans raised in Australia after 31st December, 1923, by the Government of any country or Dominion outside tho Commonwealth, or by any authority constituted by or under any law of any such country or Dominion, shall be subject to taxation under any law of the Commonwealth relating to income tax in the

, same manner as if it were derived from a source within Australia. The income derived from any loans raised in Australia since 31st December, 1923, by either the New Zealand Government or New Zealand local bodies,, is, therefore, subject to Federal, but is free of State, income tax. The Federal Government is now considering the question of vacating the income tax field, and if the proposal is given effect to, the income derived from loans raised in Australia by outside Governments or local bodies would be tax-free unless the States amend their present practice of taxing only income which is derived from sources within Australia. "It is probable that the Federal Loan Council is'not seeking to impose fresh taxation on ■ the income from such loans, and that it is only suggesting that, if the income is to be free of Federal taxation, provision should be made rendering it liable to State tax. I cannot see that sny exception could treasonably be taken to this proposal. If New Zealand or a New Zealand local body raises a loan in London, the income is subject to British income tax, and .there is no good reason why, if they raise a loan in Australia, tho in-' come should be tax-free." Questions were then asked as to the 5} per cent, loan (due 1936) mentioned above, and as to the tax-free deben- | tnres. The answer was: "The 5J per cent. New Zealand Government loan duo on- Ist February, 1936, is not being issued in Australia, principal and interest being payable in Wellington, and it is unlikely that any attempt would be made to make the income from such a loan liable for Australian State tax in tho hands o: an Australian holder. The income is at present subject to. New Zealand tax at precisely the same rates as if it were receivable by a person resident in the Dominion, except that no exemption is allowable in the case of an absentee."