LOAN MARKETS

Evening Post, Volume 137, Issue CXI, 10 June 1926, Page 10

LOAN MARKETS

LONDON AND AUSTRALIA

THAT INTEREST-TAXING IDEA

FEDERAL LOAN COUNCIL'S

ADVICE,

The Victorian £3,000,000 5 per cent, loan has been over-sub-scribed in London, to what extent is not known at time of writing. The price is 98_, and it is understood that the currency is about the same as that of the New Zealand £6,000,000 loan, 20 years. If so, tho terms of the two loans are almost identical, and the fact that Victoria did noi ask for better terms is notable. It might have been thought that, seeing that 110 millions were subscribed for the six million New Zealand issue, the Victorian Government would ask for an extra _■, and would issue at 99. The fact that Victoria did not do so seems to be a compliment to the judgment of the New Government's advisers. The Victorian judg-ment-after-the-event confirms the New Zealand judgment-before-the-event. AUSTRALIAN INTEREST RATE. In commenWng on the. New Zealand London loan, the Melbourne "Argus" says that, pending the London issue, New Zealand has been applying to the Australian market, and "£500,000 has been obtained in Australia at 5i per cent., the currency of the loan being 25 years. That such a rate had to be conceded probably arises from the fact that when fresh capital is needed in the Australian open markets, 5£ per cent, has to be paid for it. Competitive buying by the Federal Treasury of the Commonwealth securities may tend to the establishing of such prices for them as will reduce the interest return to investors who also may want -to purchase stock in the open market to a 5} per cent, level, but it is another matter toobtain fresh capital at that rate. If money was plentiful, the States would not be offering stocks over the counter at 5i per cent, as is being done today." Evidently the fact that the recent States loan in Australia was issued at 5J per oent. is not considered a precedent tor a borrower from outside. In the "Evening Post" of Ist June attention was drawn to the following Press Association cablegram from Melbourne:—"At a meeting of the 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." In the course of a tentative article on the subject the question was raised whether the Federal Loan Council's recommendation overlies a desire to reduce the popularity on the Australian market of New Zealaud securities, of to discourage borrowing by the New Zealand Government or local bodies. WHAT IS UNDERLYING? The Melbourne "Argus" of 29th May discusses on the spot a similar question. New Zealand is- not named, but New Zealand is. one of the countries borrowing now in Australia. And the lists of "tax-free investments" referred to by the "Argus" are almost ''certainly New Zealand loan securities. The "Argus" writes: — "The final paragraph of the report of the proceedings of the Australian Loan Council deals with a subject of great importance to investors. This is the question of taxing interest on loans issued and securities sold in Australia in respect of tho borrowings of other countries. The council has decided to ask the Commonwealth and State Governments to give consideration 'to the question of the taxation of interest on such loans and securities.' At present it is possible to float loans for other countries in Australia or for the investor here to buy their stocks and avoid taxation on the interest he receives. Indeed, lists of such tax-free investments have been issued both in Sydney and Melbourne. Tho intimation by the council, therefore, has to be taken as a warning that States and Commonwealth retain '.o themselves their constitutional right to reach interest derived from such securities by imposing income tax upon it. Underlying .the decision of the council may also be the wish to keep other borrowing countries out of the Australian market. Of course, it may be presumed that there is no design to impose double taxation. At present an agreement exists with Great Britain that where taxation is levied there and in the borrowing country on interest of its loans that the total impost shall represent a fair division of taxation between the two countries. COUNTERACTING «' TAX-FREE' • PULL. "The suggestion of the council constitutes a departure from the principle of taxation which limits income taxation to within Australia in the case of the Commonwealth, or within any State concerned. The question is sure to bo asked why interest on such securities should alone be selected for taxation. The reply is that the idea is to counteract investment which has been going on in Australia in the securities of other countries because of the freedom of interest paid on them from taxation. In connection with the final proceeding of the Loan Council it is noticeable that congratulations were passed because during the year the rate of interest on war loan and other Commonwealth as sold in the open market had been held at 5£ per cent. It seems odd that representatives of the States should not have.recollected that during the current financial year they had to renew war loan borrowings of £18,000,000 from the Note Issue Board at a 5_ per cent, rate, despite all their efforts to obtain a lower interest charge." ___________