THE H.B. TRIBUNE. FRIDAY, SEPTEMBER 15, 1922. TAX-FREE STATE SECURITIES.

Hawke's Bay Tribune, Volume XII, Issue 234, 15 September 1922, Page 4

THE H.B. TRIBUNE. FRIDAY, SEPTEMBER 15, 1922. TAX-FREE STATE SECURITIES.

Among yesterday’s telegraphic Parliamentary news was a message which told us that the Prime Minister, in the course of a statement, had said that the Government was arranging to permit the holders of 41 per cent, tax-free war-loan debentures to convert them into 5| per cent, taxpaying debentures maturing in 1941. In another column of this issue we give the fuller report of the statement which appears in a Wellington exchange, and from which any who may be interested will be able to gather the more detailed conditions upon which conversion may be made. From this it will be seen that the option remains open only until the end of this year, and that the Government reserves the right of redeeming the new securities—otherwise maturing in 1941 —on any half-yearly interest day after Ist September, 1927, on giving three months’ prior notice in the “Gazette” of an intention so to do. It is not indicated whether this constitutes the whole or on’y an instalment of the scheme which Mr. Massey has for some time been saying he had in view for the recovery of these now highly expensive war-loan securities. We may fairly assume that the latter is the case, for it is not at all likely that the proposal now officially put forward will result in the conversion of any very great volume of this taxexempt stock. For the present holders of the vastly greater proportion of them a return of per cent. subject to income-tax would seem to have but small attraction when we consider that to the payers of the current maximum rate of tax the 41 per cent, free of tax is as good as 8 per cent, subject to tax. Still, the step is one in the right direction, and will probably result in the exchange of an appreciable aggregate of tax-free bonds that may still be scattered about among smaller holders. The movement is, however, we fear a bit belated to have any really substantial effect in the direction desired—that of saving the revenue of the country. As a matter of fact, some such proposal as is now being made was suggested to the Government in this column some six or seven months ago —about the time of this year's early session of Parliament—and was repeated at the beginning of this session. It is not by any means clear, from the report of Mr. Massey’s statement, whether or not the plan now for the first time publicly announced has already been in quiet operation. We should imagine, however, that it can scarcely be the case that it has, as it would manifestly have been quite unfair not to let all the bondholders know the opportunity that was open to them. It may easily be realised what the difference would have been had the suggestion been adopted and acted upon when first made here, let alone

at a still earlier date. Tn February of last year the 1938 War Loan stock, to which alone the Minister’s presently offered option appears to apply, was quoted on the Wellington market at buyers £B7 10s., sellers £BB 2s. 6d. Yesterday’s corresponding quotations on the same market were £97 and £9B respectively. This, of course, is no indication that ordinary investment money in this country has been more plentiful or to be obtained at a cheaper rate of interest. It means that the tax-free securities have been in strong demand among the big income-tax payers who could effect the greatest saving of taxation by putting all their available capital funds into this class of investment. The rapid rise in price may, of course, have also been appreciably accelerated by the purchases which the Minister has previously told us the Government has itself been making. The inevitable assumption from the indications thus afforded is that during the interval a very large proportion of the smaller holders who, six or seven months ago, might have been attracted by the option of conversion now offered have sold out on the rising market to companies and individuals for whom the option can have no allurement. Nor can it have -much for such of the smaller men as still hold their original investments. It can readily be seen that it will pay them quite as well, if not better, to sell their stock at the present buyer’s market price and put their money into sound five-years mortgages at 61 or 7 per cent., which they would find no difficulty in doing. The right of early redemption which the Government is reserving with regard to the conversion stock has the effect, of course, of materially reducing their marketable quality. It is a matter of certainty that such right will be exercised only if the money market has eased to such an extent that it will pay the Government to borrow elsewhere, and this will also, in all probability, mean that rates on loans other than to the State will have fallen also. Most small holders will therefore prefer to sell now rather than convert, thus having the assurance that they will have the handling of their own money in the way that will best suit their own interests, rather than be in the uncertain position in which the State’s redemption right places them.