THE OTAGO DAILY TIMES FRIDAY, SEPTEMBER 2, 1921. COMPANY TAXATION.

Otago Daily Times, Issue 18340, 2 September 1921, Page 4

THE OTAGO DAILY TIMES FRIDAY, SEPTEMBER 2, 1921. COMPANY TAXATION.

For some time past the inequalities in the incidence of taxation as at present affecting companies in the dominion have been a subject of wide publicity. It had been hoped in commercial circles that, as a result, an amendment of the law would be secured during the coming session, but a statement made in Auckland last week by Sir Francis Bell, Acting Prime Minister, does not offer any prospect of an early change. He expressed, in fact, the opinion that a modification of the system of taxation whereby income tax now collected “ at the source ” upon the profits of companies might be levied upon the taxable incomes of individual shareholders was “ quite impossible.” Whatever else can be said of the proposal for the taxation of individual shareholders in companies in relation to their separate incomes, instead of under the present system which groups them all together and counts the total income as one, it is certainly not the impracticable proposal that the Acting Prime Minister would make it out to be. The system which is now bsing' advocated, and which Sir Francis Bell characterises as “ impossible,” is in actual operation in Gx-eat Britain among other countries. The Federal Government of Australia, as was observed by Mr Sidey, M.P., in an in-

terviow which wo published yesterday, taxes only the undivided profits of companies. Objection to the present system of companies is based on the fact that a shareholder in receipt of a dividend of £5 from a company is, in effect, taxed at as high a rate as a shareholder who receives a dividend of £IOOO. At the moment many small shareholders who are not in receipt of a taxable income of £3OO per annum pay indirectly, through the companies in which their savings are invested, a rate of 8s 9d in the pound for income tax. The possibility of , altering the system is proved not only by practice elsewhere but also by the method of debenture taxation which is adopted in New Zealand. If the holder of debenture stock is not in receipt of a taxable income he does not pay the debenture tax; he establishes his non-liability by a declaration on a prescribed form as to his income. Exactly the same procedure could bo followed by shareholders not liable to income tax with respect to dividends received by from company investments. Indeed, that system is followed in Great Britain. Sir Francis Bell urged that the present method made collection of the tax easy. That is, of course, to be admitted. Ease in collection cannot be accepted, however, as a proof of the equity of any form of taxation. A second argument advanced by Sir Francis Bell against the proposed change is rather remarkable, f'lt was suggested by the Minister that “s, largo number of people had invested in companies as they had invested in the Government 4£ per cent, stock—for the purpose of ascertaining what their true income would be and at the same time without increasing the scale of their taxation. For this reason it would probably be very unfair to alter the incidence.” That statement does less than justice to the clarity of mind which usually characterises the public utterances of Sir Francis. An analogy between an investment in a tax-free Government loan, such as that specifically indicated by the Minister, and one in a public company seems to us to be fallacious. The return upon the Government loan is in essence and fact free of income tax. Onlv in theory is the shareholder’s dividend free of tax. The company certainly pays the tax in the latter case, but when the rate reaches 8s 9d in the pound it must necessarily affect the value of the investment. If Sir Francis places importance on the point that both- these hypothetical investors have the same motive of gaining a “true income,” it is to.be recognised that the successive increases in the rate of income tax must have seriously upset some calculations. Nor can the Minister’s contention that “ no companies had reduced their dividends by reason of the tax ” be accepted without reservation. More than one case has recently been reported of a company in New Zealand paying to the. Government in income tax a larger sum than it has distributed in dividends to its shareholders, and it is perfectly plain that a system under which, as in the publicly recorded instance of one company, it has been necessary to draw upon reserves in order to maintain dividend payments cannpt be continued indefinitely and must sooner or later end in a reduction of dividend. It cannot seriously be denied, either, that the existing rate of taxation and the incidence of taxation are hampering industry, preventing the expansion of business, and thus impairing the ability of companies to provide the funds out of which dividends are payable. Arguments more tangible than those advanced by Sir Francis Bell are necessary to justify the present system of taxation of companies.