TAXATION

Nelson Evening Mail, Volume LVI, 25 August 1922, Page 7

TAXATION

COMWIIITEE’S FINDINGS K£VI£W£D INTEUVIKW WITH -Ml! A. LEIGH, lib’AT

The Taxation Committee was set up at tlie instance of ll«: Chambers ul ■Commerce throughout New Zealand, Its re--1 lort is now before Parliament. Mr A. heigh Hunt, a member of the (Tiumittee, is now mi a visit to Nelson, and. interviewed by The Mail regarding the preceding* cot the Committee, lie made several interesting observations. . On ■> number of questions the Committee arrived at- unanimity, the most important of wliieh were the early abolition of the super land tax, provision for setting off losses one year against profits of another year, necessity tor the abolition of the final tax on British companies operating in New Zealand. The Committee, suggested that the tax on debentures, both local body and companies, should be brought into line with ordinary income tax. It also recommended that all local hotly and Government trading concerns he subscribed to taxation.

The Committee was not unanimous in regard to the distinction between carnet and unearned income. Tim majority, however, recommended that the distinction should cease.

Continuing, Mr Hunt said the taxation of companies was one of the mosl important sources of revenue of the total income lax collected in New Zealand., 57 per emit was for iudivdual.s and 43 from companies. These figures showed the enormous thing company taxation was. New Zealand was the only British country which had adopted the system of collecting a graduated tax from companies as if they were individuals The maximum rate was 8s in the £l. On this' important question the Committee were divided. The majority recommended absolving companies from income tax and taxing the individual shareholders. A minority upheld the present system nt company taxation. Mr limit submitted an individual recommendation based on modification ot the British system of taxing companies as follows: TAXATION OF COM PANICS "Present System of Craduated Taxation.— I The present system ul taxation ol companies is both unscientific and. unjust, the application ol the lux graduated ou Lite aggregate amount of profit being wrong in principle and unfair in practice. For instance, a shareholder with a small holding whose total income is less than the exemption (£3oo)_pays through the company at the maximum /•ale of 8s 9gtl in the’fil equally with the largo shareholder whose aggregate income would entail his paying the maximum rate. This results from the operation of the present system of graduation, by which a company hs taxed on the aggregate amount of profit it makes, irrespective of the-relation the profit bears to the amount of capital employed : that is to say, a company employing a large amount of capital and earning only a small percentage of profit lias to pay the maximum tax (8s 9,’yl in the £1), because the amount of profit it makes exceeds a certain sum, whereas a group of companies making the same aggregate amount ot profit would pay a much lower rate of tax, though their respective percentages of profit on capital employed are much greater. Large companies are commonly of a large number of holders of small interests, whereas the holdings in small companies are usually much greater. To levy a lax according to the height or weight of the taxpayer, or to revert to the old English tax, based on the number of windows in the taxpayer s dwelling, would be as reasonable as to perpetuate this method ol graduated tax on companies. "Equitable System of Graduation.— The only equitable system of graduated taxation applicable to companies is- a tax based on the relative proportion of profit to the shareholders capital employed in the business: that is to sa\, a company earning 20 per cent on its capital should boar a greater burden of taxation than a company earning only, say, 5 per cent, irrespective of the amount of the aggregate profit in each case. The fairness of this method of company-taxation was generally recognised, but evidence of the practicability of its application given before tire Committee disclosed apparently insuperable difficulties. An alternative method which is equitable and readily practicable must therefore be found. 1 “Transferring Company Tax to Individual Shareholder.—To entirely absolve companies from taxation would give them an undue advantage over the. private trader with whom they are in competition, and who has to pay graduated tax on his trading profits. Consequently the company being a separate trading entity, should bo taxed, if only as agent for its shareholders, hut communes should be uniformly taxed. T am therefore, unable to recommend the transference of the entire tax to the individual. “Proposed Solution. —lo arrive at a method of taxing companies which will avoid the existing discrimination between large and small companies already indicated, I suggest, the adoption of a flab rate of tax on all the profits ol companies, whether distributed oi not. While this fairly adjusts the tax as between large and small companies,_ it docs not, per se, adjust the rights of indivi-dual-shareholders. To achieve this i recommend a modification of the -British system (which may be safely followed) whereby the indmliual shareholder, after receipt of his dividend, may claim an adjustment of the difference between the tax already paid by the company as bis agent, and the graduated rate which he is entitled personally to pay. “Advantages of Proposed Method.— The advantages of this system are. (a) Graduation now unfairly applied to the agregate profits of companies (irrespective of percentage of profit to capital) is abolished; (h) the lax is levied on an equal basis on all the profits of all companics; (c) the company is vecognisetl as a, trading entity which should pay tax as such, or as agent for its shareholders; (d) the collection of tax from companies, in first instance, enables prompt collection to be made at the source and reduces evasion to a minimum ; (c) the provision for adjustments with shareholders ensures that the tax ultimately paid by the individual will be on a just basis, wliieh should be the aim ot any system of taxation; (f) the adoption of tins system is immediately practicable, because it does not involve any revolutionary change in the present method of collection; (g) it fully ensures the provision of whatever revenue is levied through this channel, and eliminates the uncertainty wliieh would inevitably attach to a reversion to direct taxation ; (h) any loss of revenue thaTmay be occasioned by the adjustments with shareholders could rightly be equalised by a variation of the graduated tax on individuals. “It. has been argued that, the w’ork of making adjustments with individual shareholders will entail an expense inAn ideal drink with meals or between weals, is a little Kola-Nip in a glass of aerated water. 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COmniCllSUl’atO will! Hie ut.-m.-iii. HI IH.N----1 ravers, but this is a nebulous bogey, unit should not be allowed to jnterfere with the equitable incidence o fthe tax. There would necessarily be u ininiiimni amount of rebate fixed, as it would be absurd to make refunds which would be of no benefit to the individual taxpayer,, and the retention of these fractions would easily counterbalance the bookkeeping expense connected with the adjustments generally. .1* rom the fact that such adjustments are part Of the established British system it is reasonable lo conclude Unit they involve no undue, expense, and that the principle is quite practicable and subject to no serious disadvantage. “Urgenev of Change. — r l he present svstem of graduated company taxation being unjust, it should be immediately abolished', its retention being intolerable. The alternative system here recommended makes it easily practicable for the change-over to bo enacted during the present session of Parliament, T therefore recommend: — (1.) That the income-tax on companies he levied on the basis of a flat rate on the profits (whether distribute !, or not). (2.) That provision he made for adjustment between the rates of tax payable bv individual shareholders anil that paid by the company." REDUCTION OF INCOME-TAX EXEMPTION Another important, matter on whiff; Mr Hunt made an individual recommendation was in regard to the reduction oi the income-tax exemption. Ihe appended reservation in the report sets tort! his views on the matter; “I ain confident it is on right linos, and thatjt should lie adopted in New Zealand with as little delav as possible. It is entirety inequitable' that unmaried persons earning good salaries should not contribute towards the administration and upkeep oi the ‘country in at least the same proportion as the' taxpayer having family responsibilities. “As I find myself unable to subscribe to the section of the general report dealin" 1 with the 1 above subject. I submit the following statement and recommendation :—■ “In New Zealand the exemption (£300) allowed on income before taxable income is readied is higher than in Great Britain or in other parts at the British Dominions, as will he seen by the following: Britain. £150; Canada and Now Soul I. Wales. £250 ,: Queensland, £200; Western Australia. £lj6 for married persons and SIOO for single persons; Victoria and South Australia, £150; Tasmania. £155 for married persons and £125 for single persons. “There appears no reason whatever whv'this Dominion should adopt a higher exemption than obtains in the countries cited. I am not, however, prepared to recommend its reduction to married men, believing as I do that the burden on the family man is quite sufficiently hoav vat the present time. I am. how ever, 'strongly of the opinion that the exemption should be lowered to £2OO to unmarried persons, and it should bo applicable to persons of either sex. I bw to see why persons haying no family burdens, who are in receipt of an income of £2OO or over, should not contribute thenquota to the general expenses of the cmmtrv. This view was supported by evidence of a number of witnesses hefor the Committee, and. in fact, the only argument that has been put forth against it is the cost of collection. I fail to see why the cost of collection should be greater in New Zealand than in anv of the countries above mentioned. t further contend that in this Dominion the cost should bo very much lower I ban in a densely populated country like Great Britain. “It is, in my opinion, reasonable to assume that the conditions prevailing in the Australian States are very similar io those in this country, and, further, that the poliev of a much lower exemption adopted i’n Australia is sufficient ground for believing that the cost of collection is not excessive. In the ease of Western Australia, it is found that it .pays the State to collect, income-tax on an amount as low as even £IOO. Ido not, however, suggest so low a limit. “If legislation provides a sufficiently heavy penalty for the failure to submit income-tax returns, then the cost of collection will be minimised, and should be no greater per taxpayer than it is at the present time. Moreover, the present system could he extended whereby every employer would be required to send in a return to the Taxation Department setting forth the salaries and wages of al lemployees. , “It is impossible lo secure any actual data on which to base an opinoin as to the amount of revenue which would he derived from this source, but I contend that it may be reasonably assumed that the amount would be considerable, and would go towards relieving' the undue burdens of other classes of taxpayers. I therefore recommend—- “ That the income-tax exemption to unmarried persons bo fixed at £200.” Speaking generally, Mr Hunt said taxation did not. appeal to the man in tlm street, but he was vitally interested as everyone was subjected to some form of taxation. In normal years it was an unimportant matter, but at a time like this, when it ranged from 10s in the fil downwards, it was a matter of vital concern, not only to business concerns' and companies, but to every individual. It was a bad policy to be frequently changing the incidence of taxation, and it was hoped that as a result of consideration of the report by Parliament many of the existing anomalies would be, removed and a fair and equitable incidence decided upon which could remain . undisturbed for many years to come. During the next few months, particularly in view of the coming Parliamentary'elections, all Chambers of Commerce and similar bodies should give special consideration to the question of taxation land endeavour to mould public opinion to an extent as will be a guide to the members of the new Parliament to be i elected in November next. The fact that the Taxation Committee itself did not ai-rive at unanimity on some of the more important features taxation, may bo exemplified from the fact that it was composed of representatives of very varied interests —Farmers’ Union, Shepowners’ Federation, accountants, law societies, and industrial associations. The report, however, has thoroughly analysed the position, and, above all, has made it clear that in the unanimous opinion of the Committee the present, burden of taxation cannot he continued without vital injury to the commercial and industrial life of the country. The chief source of relief is substantial reduction of Government, expenditure, and in this connection it is satisfactory to know that the Prime Minister and his colleagues have done a great deal to indicate that further large economies will be effected before, the end of the present, financial year. With regard to the land tax it may be mentioned that this particular tax does Nothing equals “N;mol” for putting colds and Hay Fever to rout. Inhhlc or take it on sugar. 1/0 for 00 doses. N.Z, MOTOR WRECKING CO. Ltd. Used Spar© Parts in stock for hundreds of different makes and models of Cars and Motor Cycles. Parts equal to new, at from 50 per cent, to 75 per cent, below list price. All Guaranteed. 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not pertain in many countries. It is true that a Government must have some assured revenue to depend oli, and come lax alone would in times of depression prove somewhat precarious so fains Government revenue is concerned. The land tax was, therefore, adopted, and while it remained at a nominal figure no complaint was made. Now. however, the total land lax coliecled in New Zealand mounted up to nearly one and throy-quartor millions a year. B is a. matter of considerable moment, particularly to primary producers, who have no control over markets or nettreturns of produce. Land tax is purely an arbitrary tax, and is not based on “the ability to bear the burden,” as is generally recognised as the onl\ fait basis on which taxation can be levied.! As an instance of Ibe arbitrary nature o. tins tax, lie pointed out. that during the last two years, while the producers have been making considerable losses, it has meant that they have bad to pay (heir land lax mil of capital, there being m course no profits which could be utilised for this purpose Any tax which was a levy on capital must necessarily retard enterprise and tend to dry up the sources of taxation. It is, thcrefoie, hoped that the Government will adopt a poliev of reducing the land tax very substantially at the earliest possible date, which course would not only restore confidence, bul ennble the settlement, of land to progress at an increased rale.