WAR TAXATION

Feilding Star, Volume XII, Issue 3022, 17 August 1916, Page 4

WAR TAXATION

HOW IT WILL OPERATE

ARRIVING AT EXCESS PROFITS

METHODS OF ASSESSMENT,

(From the Post.) Ju connection with the Finance, Act of last session, imposing war taxation, it has to be pointed out that it is only in operation for one year. 11 at the end of the year it is necessary to re.impose that system of taxation, tho Act will have to be re-enacted. In other words, the Act is not, and is not intended to be. of a permanent nature. Following is the first of two explanatory articles setting out tho manner in'which tho war-tax will ope-

rate: — Tho excess of profits of a taxpayer is the amount by which tho assessable income derived L>y him during tho year ended March 31, 1916 (referred to as the "income year") exceeds his standard income. The standard incoino of a taxpayer is at his election — (a) Hi.s average yearly assessable ■income for the three years ended on March 31, 1914; or (I.)) His average yearly assessable income for any two of the said three years 5 or (c<) His assessable income for any one of tho said three years; or (d) A .sum equal to 7| per cent, of tho amount of tho capital employed by tho taxpayer in the production of his income as at April 1, 1915, together with ■such additional sum (not exceetling £000 in any case) as the ■Commissioner deems jfiist and reasonable as remuneration of the personal exertion of tho taxpayer during the »»- como year in. the production of his income: Provided that in all cases where, in the. opinion of tho Commissioner, tho standard income cannot bo ascertained in the manner referred to in paragraph (a) or in paragraph (l>) or in paragraph (c) of this section, it shall bo ascertained in the manner referred to in paragraph (d) hereof. The income for the year ended March 31. 1915, does not come into consideration, as it is partly within the war noriod.

For the sake of illustration, let the assessable income for tho years ended March 31, 1912, 1913, ami 1914 be taken, as £1500, £1200, and £1800 respectively, and the assessable incomo for the incomo year—i.e., tho year ended March 31, 1916, at £2400. * 1. If tho taxpayer elects under (a), the excess profits will bo as follow: — Assessable incomo for income year £2400 0 0 Less ista.ndard incomo (average assessablo income for three years ended March 31, 1914) 1500 0 Oj Excess profits £900 0 0 Excess profits duty, 45 per cent. ... £405 0 0 2. If the taxpayer elects under (b), choosing tho years ended March 31, 1912 and 1914 A tho excess profits come to — Assessable incomo for income year £2400 0 0 Less standard incomo (average assessablo income' for years ended March 31, 1912 and 1914) ..'. IGSO 0 0 Excess profits ... £750 0 0 Excess profits duty, 45 per cent. ... £337 10 0 3. If he elects under (c), and chooses the year ended March 31, 1914— Assessable income for income year £2400 0 0 Less standard income . (average assessable income for year ended March 31 3 1914)... 1800 0 0 Excess profits £600 0 0 Excess profits duty, 45 per cent £270 0 0 4. If the taxpayer elects under (d), and assuming that the capital employed in the business at April 1, 1915, was £20,000, and he could satisfy the Commissioner that £400 was a fair remuneration for his personal services to the business, his standard income would be: — £20,000 at 7-i' per cent. £1500 0 0 Add for personal exertion 400 0 0 Standard income... 1900 0 0 Assessable income for income year £2400 0 0 Less standard lincome 1900 O 0 Excess (profits ... £500 0 .0 Excess profits duty 225 0 0 Where there is a difference between the capital employed during the income year and that employed in the production of the standard income an adjustment will be made. Thus, supposing in the foregoing examples tho capital employed in tho business was stationary at £20,000 throughout tlie period from April 1, 1911 (the commencement of the election period), until October 1, 1915 (half-way through the incomo year) when fresh capital amounting to £5000 was introduced: —■ £5000" at 7i ■ per cent. per annum £375 0 0 For six months (Oct. 1. 1915. to March 31, 1916) 187 10 0 In each of tho above cases tho amount of the excess profits would bo reduced by £187 10s. If, instead of being added, £5000 capital had been withdrawn on October 1, 1915, then the amount of excess profits woul<l in each case be increased by £187 10s.

The assessablo incomo of a taxpayer is Jiis net income before any ".special exemptions" are- deducted. The .allowance of £300, life insurance premiums, superannuation, and National Provident Fund contributions, children allowance, and 5 per cent, on capital value of business premises owned are all "special exemptions." The assessable income derived during the standard period and during the "income year" must be computed on a uniform basis, i.e., in accordance with the provisions of the Land and Income Tax Act, 1916—e.g., the Land and Income Tax Act, 1916, permits of tho deduction of interest on registered mortgage. Lα prior years such interest was not allowed as a deduction. For the purposes of arriving at the standard income the item must be treated as a dcductiblo one throughout tho period. A fair comparison is thus obtained.

Thus supposing a, taxpayer elects to take the income derived during the year ended March 31. 1914, as his standard income, and ' that during that year he paid away the sum of £250 interest on a registered mortgage. Such interest was not then de-

ductible. If his assessablo income .as assessed for that year (the interest on the mortgage not being deductible) was £1000, his standard income must be taken as £750. That is, it must b e arrived at on same basis as in "income year" when interest on mortgage is deductible l .

Take a converse example. Under the provisions of "The Land and Incomo Tax Act, 1916," rents are assessable. During tho election period they were, not assessable. For the purposes of ascertaining tho standard Income the item must bo treated as

an assessable ono throughout tho period. , , Thus supposing a taxpayer elects to take tho incomo derived during tho year ended March 31, 1913, as Ilia standard incomo, and that iho received diuring that your £250 m rents .Rents were not then assessable If his assessable income as assessed for that yonr (tho rents being excluded) was £1000 his standard_ income must bo taken as £1250, i.e., it must bo arrived at on same- basis as in "iucomo year" when rents received is part of tho assessable, m-

coino. . . . For the purposes of option (d) tho capital employed by a taxpayer in tho production of his incomo us at April 1, 1915. is taken to be tho difference between the valuo of his assets employed in the production of his income and the amount of his liabilities incurred for tho purpose of producing his income as on that date. lv certain cases tho. assets may in tho discretion of tho Commissioner be deemed to include any land used by tho taxpayer in tho production of his iucomo and for which ho pays rent, and then tho rent paid by tho taxpayer during the income year shall bo'added (o his assessable income for that year.

E.G. A leaseholder Jias a capital of ,€SOOO oinployed in his business. After deducting rent paid £1000 he has an assessable incomo of £2000. The interest of tho owner in tho property ■for- which ho pays tho rent is valued at £20,000. Tlie lessee's' interest (if any) would bo included in arriving at his capital. His personal services arc assessed at £300. Under option (d), apart, from flic above special provision, his standard income would bo: — Capital £5000 at 7.J p.c. ... £375 Add for personal exertion... 300 Standard income £G75 Assessable incomo for incomo year £2000 Less .standard income G75 Excess profits £1325 If Iho Commissioner applied the special provision his standard incomo would bo: — Capital,£sooo; plus valuo of owner's interest in property, £20,000; £25,000 at H p.c £1875 Add for personal exertion ... 300 Standard incomo £2175 Assessable incomo for incomo year £2000 Plus rent paid 1000 £3000 Standard income 2175 Excess profile £825 "Capital" is the differenco botween tho assets oinployed and the liabilities incurred by the taxpayer in the production of his incomo. For the purpose of determining the capital of the , taxpayer at April 1, 1915, tho Commissioner may accept tho value of tho assets and tho amount of the liabilities as appearing in any balance-sheet furnished to him by the taxpayer, or ihe may. require the taxpayer to furnish a statement as to the said valuo and amount, and any other information necessary.

If tho Commissioner does nob accept tho balance-sheet of the taxpayer, then: — (a) The value of any land included ■in such assets shall bo deemed to bo the capital value of tho laud as appearing on the district Valuation Roll. ' (b) The value of all other assets shall bo determined by the Commissioner, but shall not exceed in any case the cost of such assets to the taxpayer.

If tho Commissioner is satisfied that during the aggregate period of three j years ended on March 31, 1915, any business carried on by a. taxpayer (the profits, if any, of which would have been assessable for income-tax if the Land and Income-tax Act, 1916. had been then in force) has resulted in a loss, the amount of excess profits will be reduced by an amount sufficient to make good that loss. "Loss" means tho loss shown after allowing all tho deductions permissible under tho Land and Income Tax Act, 1916. Thus, if a- taxpayer for tho year ended March 31, 1913, mado a loss of £300. for the year elided March 31. 1914, mado a loss of £500, and in the year ended March 31, 1915, made a profit of £700, the result is an aggregate loss over the period of £100. If ho made excess profits for the incomo year of £500, lie would be charged 45 per cent, duty on £400 only. Salaries and wages are not chargeable with excess profits duty. Salaries and wages include any bonus gratuity or allowance given to an employe© in respect of his services. Payments by way of commission 01" share of profits are not chargeable with the duty so long as the employee's total remuneration, whether by way of salary or commission or share of profits does not exceed £600. But if liis total remuneration exceeds £600 then any commission or share of profits included in such excess is liable to excess profits duty. Example.—(l) An employee receives in respect of his services for tho income year a salary of £300 and a share of profits £300; no duty is payable.

If lie received a- salary of £500, and a share of profits, say, £200, £100 would bo liable to assessment for excess profits duty. If his share of profits in the standard year was £50 his excess profits would be :—• Assessable commission for income year 100 Assessable commission for standard year 50 Excess profits £50 . Excess profits duty, '~- 45 p.c £22 10s (2) An employee receives a salary of £700 and a share of profits of £500; £500 would bo liable to assessment for excess profits duty, and the amount of excess profits would be ascertained as in tho previous example.

la the case of a company, provision is mado to prevent evasion of duty by charging an excessive amount as remuneration for services of directors. The aggregate allowed for the income year must not exceed the average annual amount allowed during tho three years ended on March 31, 1914 (in the case of companies carrying on business during those years), and in any other case shall not exceed the sum of £1500.

No excess profits duty is chargeablo on incomes less than £300, and in any other case the excess profits duty charged shall not exceed the amount by which tho assessable incomo exceeds tho sum of £300.

Example (1). Taxpayer's standard assessablo incomo is £250. His assessablo income for the income year is £299. His excess profits aro thus £49, but as his total assessable incomo is less than £300 110 duty is chargeable.

Example (2). Taxpayer's standard assessable incomo is £270. His assessablo income for tho year is £320. His excess profits are thus £50; 45 por cent, of £50 equals £22 10s. The duty payable would not, Jiowevcr, be £22 10s, but £20, that being the amount by which his income exceeds £300.

[The second explanatory article dealing with other phases of the new taxation will appear in to-morrow's issue.]