LEVY OF TAX ON COMPANIES

Southland Times, Issue 23610, 10 September 1938, Page 8

LEVY OF TAX ON COMPANIES

Explanation Given By Minister

DESIRE TO CHECK EVASIONS

CLAUSE FOR GRANTING OF EXEMPTIONS

(From Our Parliamentary Reporter) WELLINGTON, September 9.

The liability of companies for the social security charge on all profits was examined in the House of Representatives early this morning when the relevant clause in the Social Security Bill came up for consideration in committee. The discussion enabled the Minister of Finance (the Hon. W. Nash) to give his first explanation of the new provisions which, he said, were designed to check tax evasions on the part of companies. The Rt. Hon. J. G. Coates (Nat., Kaipara) said the clause covered the whole question of charges on companies and he would like to know what was the reason for imposing the charge at the source. Apparently the whole taxable income was to be taxed, including sums charged to reserves and carried forward.

“Companies will pay on profits, instead of dividends,” said Mr Nash. “Just as the charge on wages and salaries is collected at the source, so it will be with the profits of companies.”

“It is a far-reaching change,” said Mr Coates. “As I see it, it may have the effect of making companies disgorge the whole of their taxable incomes in dividends, instead of building up reserves in a normal and prudent fashion. It is a sound procedure to build up reserves, but money paid into reserves may be taxed over and over again.” Mr Nash: No, if profits were transferred to reserves in 1929 and they are paid out in 1943 there will be no social security charge. Mr Coates said that in the case of a company earning £lo,ooo' and charging £2500 to reserves and carrying £2500 forward, the whole amount of £lO,OOO would be liable to the tax.

Mr Nash. Whatever net profit is shown by a company is chargeable in the year in which it is made. After that there will be no charge at all on that money. DISTRIBUTION OF PROFITS Mr Nash said the procedure in the distribution of company profits was by declaration of payments of dividends. The law provided that dividends when they were received were exempt from income tax which was paid by the company concerned. However, a number of people were now taking advantage of the company taxation system to avoid paying tax in the ordinary way. There were at least five methods by which they evaded payment ’of taxes which were due and the clause was calculated to make them meet all their obligations. “The old procedure was the distribution of bonus shares,” said Mr Nash, “but the last Government in 1935 declared rightly that these were equivalent to dividends and liable to tax. Since then there have grown up other methods of tax evasion. They are within the law, but that 1 is no reason why the law should not be amended so that the taxation which is due may be .collected. Bonus shares have now been replaced by bonus debentures, which are allocated to shareholders and classed as capital distribution. That practice should be stopped. Another method of evading the tax is by way of loans. A company with two shareholders may make a profit of £5OOO. The shareholders allow themselves a salary of £lOOO a year each, but in addition they obtain loans from the company of £l5OO each. The tax is charged on the salaries, but not on the loans. The next method is for the company to go into liquidation and to arrange for a distribution of assets by which a shareholder may get more than he would have received in dividends. At present the distribution of assets is not taxed. The final way is to accumulate profits as capital, which means that there is no need to pay tax. There is not a member of this House who would stand for tax evasion of the kind I have mentioned.” EFFECT ON DIVIDENDS “This tax must have a tremendous effect on a company’s net profits and on its dividends,” said Mr Coates. “A. company is to pay a tax of 1/- in the £1 on its net profits, whereas previously the tax was levied after the land and income tax had been paid and the

dividend distributed to shardholders.” “The worst feature of this tax is that it perpetuates the unfair system of taxing taxes,” said Mr W. J. Polson (Nat., Stratford). “If a company has a net profit of £lO,OOO it will pay land and income tax at the rate of 10/- in the £l. That will absorb £5OOO. Assuming £lOOO is placed to reserve, and that is only a reasonable sum, there will be £4OOO left for the shareholders. However, they will be obliged to pay this tax on £lO,OOO, or at the rate of 2/6 in the £1 on their dividend. Is that not a correct statement of the position?” Mr Nash: I think you are slightly wrong. The shareholders own the money in the reserve fund. The Leader of the Opposition (the Hon. Adam Hamilton) said he understood the basis of social security was personal. A company received benefits in the general way of trading, but nothing under the-Bill. The position of building societies was raised by the Hon. W. E. Barnard (Lab., Napier), who pointed out that dividends earned by'the majority of these societies were small. There was a clause providing for the granting of exemptions from the tax and he suggested that the Minister should consider an application from building societies for exemption. “The object of the Bill is to ensure that the tax is collected at the source where the profits are made,” said Mr Nash. “The Government has power to grant, exemptions in cases where the operation of the tax proves inequitable. If a positive injustice comes to some people because of the tax, then the question of exemption can be considered.”

The clause was passed without a division.