FIXING TAX RATES

Evening Post, Volume CXXVII, Issue 140, 16 June 1939, Page 5

FIXING TAX RATES

SOME ANOMALIES

COMPANY DIVIDENDS INCLUDED

BUT NO CREDiT ALLOWANCE

One of the anomalies under the existing scheme of income-tax laAv in New Zealand (involving, in truth, a dual anomaly)' is that arising from the provision in the Land and Income Tax Act which requires the bringing into account of company dividends for the purpose of arriving at the rate of tax payable on a person's taxable income (says a statement by the special taxation committee of the Associated Chambers of Commerce of New Zealand). At the outset, it is to be remarked that under the system of income taxation which has been in vogue since income tax was introduced in this country in 1891, companies are liable for income tax on their full annual income at a rate of tax appropriate to the amount of such income. In other words, they are for this purpose regarded as separate taxpaying entities, and dividends paid to shareholders are accordingly exempted from income tax in the hands of the recipients because of the dividends representing merely a distribution to them of income funds which already have been fully subjected, to tax at the source. Furthermore, it is relevant to note that in the case of nearly all public companies the rate of tax payable is the maximum, rate—namely, 7s 6d in the £—which applies to company incomes of £8950 and over.. AN UNTENABLE PROPOSITION. The contention generally urged in justification of the inclusion of company dividends in the assessments of individual shareholders is that the process followed does not involve the levying of any direct tax on the income thus brought into account for the purpose of fixing the taxpayer's appropriate rate of tax, the only result of the adjustment being that his true rate of tax is determined, and this rate is then applied in computing the tax payable on his ordinary taxable income. On a first consideration, this vieAv of the matter appears to be sound enough, because it does seem reasonable that' the whole of ?. person's income should be taken into account in | determining his appropriate rate of tax, or, in other words, in arriving at. his relative taxable capacity. When . the basic reason underlying the exemption of company dividends from income tax in the hands of shareholders is considered, however, this particular proposition is shown to be untenable, since it is clear that if the object of including company dividends in a taxpayer's assessment is merely to fix his appropriate rate of tax, then, in the event of such rate being found to be lower than the.'rate at which the dividends themselves have actually borne tax in the hands of the companies concerned j (which is, in fact, the position in the great majority of cases), the. taxpayer should be entitled to a credit allowance in his personal assessment to cover the excess payment which he has made through the medium of the company. In other words, if the dividends are properly to be used to fix .the. appropriate rate of a person's tax for the purpose of his personal assessment, then it follows logically that the same process should be applied in arriving at the rate of tax appropriate to his income from dividends. ILLUSTRATIVE EXAMPLES. The true effect of the existing anomaly may be simply illustrated by the following examples:— 1. A's income is £250 (equivalent to gross amount of £400) from dividends paid by public companies which pay the maximum rate of tax —7s 6d in the j £. B's income is £400, being derived from wages. Each supports a wife and two children. Tax paid by A, per medium of companies (based on gross amount of £400), £150. Tax paid by B, direct, £3 Bs. 2. A's income is £400 (equivalent to gross amount of £640) from dividends paid by public companies Avhich pay the maximum rate of tax —7s 6d in the £. B's income is £640, being salary £500 and interest on Government securities £140. Each supports a wife and two children. Tax paid by A, per medium of companies (based on gross amount of £640), £240. Tax paid by B, direct, £31 0s Bd. It is to be observed that in England the income of a company is, in the first instance, taxed at the standard maximum rate at the source, but each shareholder is subsequently entitled to claim an adjustment in relation to his normal liability for tax, and to obtain a repayment of any amount paid in excess per medium of the companies concerned. In other words, companies are virtually regarded as being merely the agent of their shareholders for income-tax assessment purposes. A somewhat similar position obtains in Australia. Under the existing system in New Zealand, however, companies are. in the first instance regarded as separate taxpaying entities, but when the assessments of the individual shareholders come to be dealt with, this primary consideration is conveniently overlooked.