TAXATION COMMISSION.

Star (Christchurch), Issue 17345, 18 July 1924, Page 10

TAXATION COMMISSION.

COMP AIM Y AND GRADUATED LAND TAXES. The Prime Minister to-night laid on iho table of the House the report of tlie Royal Commission recently appointed to inquire into the present - system of land and income taxation in all its aspects, including scope-, rates and incidence of the several taxes, allowances and reliefs, assessment, appeal and collection, and the prevention of evasion, and what alterations of the law are necessary or desirable. The commission comprised Mr Justice Sim, Messrs J. Begg, W. D. Hunt. G. Shirtcliffe and T. S. Weston. The report states: — INCOME. TAX. In connection with income tax the principal question before us was as to the imposition of graduated income tax on companies in iho same way as ii they were individuals. A large number of witnesses expressed opinions on the subject. The majority of them condemned the present system of taxing companies as unjust, and as having the effect of preventing embarkation of largo amounts of capital in new com mercial undertakings. On the other hand a number of witnesses favoured the maintenance of the present system. 1•; seems unnecessary for us to enter into any elaborate discussion of the matter here. The arguments against the present system arc set forth in the evidence of the witnesses who condemned that; system, and also in the report of a majority of the Taxation Committee of 1922. Arguments in favour of the present system arc set forth in the minority report of the same committee. Wo have considered the matte;- carefully and the conclusion we have cume to is that the ideal graduated income tax is a tax upon the income from u:i sources of each individual, and wo jv commend that the fiscal policy of the Dominion should be shaped so as to secure the abolition, as soon as reasonably practicable, of the present system of company taxation. We think it desirable to add that the present system of income taxation and the immediate post-war period under the conditions then prevailing, fulfilling, in addition to its natural function, part of the English excess profits tax and enabling an astounding amount of revenue to bo raised with a minimum of inconvenience to individuals and the general public. W ith a return to more normal conditions of ! trade and industry the. inequalities of j the present system became apparent, j and it is advisable to change over as soon as practicable to a more ideally correct system. LAND TAX. ; We received a great deal of evidence ! for and against land tax. The weight | of evidence was against both land tax I and graduated land tax, and in favour ! of abandoning both and substituting a graduated income tax. CON CL U SIGNS. ' The following are the conclusions at i which we arrived in connection with i the questions raised before us; i (a) Land and income tax must be

i considered together, as they dovetail } into each other. (b) The graduated sj'stein of income ' tax is sound in principle, and necessary j ; in practice. f’c) In order to put the graduated ( : principle properlv into practice it is J necessary that every individual’s income from all sources (income from ; tax-free war leans excepted) should be I brought together in one amount, so that the graduated rate of tax' that applies to the whole income may. be fixed. The graduated .sysxepi. of income tax makes it necessary that. no form of income should escape from it, otherwise injustices as between one taxpayer and another and indefensible results generally are bound to creep in. Individuals with large incomes can now escape paying graduated tax that other- j wise would apply to their total income \ by investing in several sources that are j each taxed separately. * J j uB The present system of graduating S ! the income of each company as sepaI rate income and charging tax accord- j | iugly is not in accordance with the true j | principle of graduated income tax. j (e) It is wrong in principle to vary j i the rate of taxation according to the ! | source from which it is derived. All j sources should pay at the same rare. I : Graduation or differentiation in the j ; rare of tax should he- according t-< the ; -■i7.o of iho individual’s income and not •; according the source from whicli it Is j : derived. Hie only exception should be ! I income from tax-free war Joans in con- j. j nection with which the State has made j a definite contract. ! (! ; > -Many of the witnesses before -,13 j | dealt with the question of whether or j j not the income tax imposed on com j [ panics is passed on to the consumer j j Tlio question is a difficult one, and it ; j is impossible to arrive at a definite con- ! ! elusion on the subject. It is. we think j | true that tin- incidence of the present \ ! company tax varies from industry to ] | industry, and the statement, at least ■ | that is the view held by many wit- j ; nesses, that the tax is in every case I j passed on to the consumer is not justi ! | liod- ■ (g) Before a change can be made from ■ | the present form of taxation of com- j panics 'it will ho necessary to have data I as to the full income of each individual | in order that a close estimate can be j made of the probable vield of anv sug- ] Rested scale of individual luxation | Those data are not at present available. \ (h) Income tax on the smaller indi- j idual in. oine in \ . Z< ah d is on I :• low scale as compared with the rales ; in Great Britain and Australia. It. -is j

I only abut Ho per cent of the British * ralc. and about ; - < ni of th. \.ua- ! traliaTi rat-.-. (iV An appendix shows that of the i total individual assessable income of j New Zealand less than II per cent -s ' held in incomes of over £2OOO a year, I and less than 1* per cent in incomesVff j over £IO.OOO a year. Any system of i income tux will have to obtain the bulk j of its return where tlie assessable in j come i.' that is. from incomes under £2OOO a year. The individual assess . income above-mentioned does not , include dividends from companies. The inclusion of these dividends would pro- i bably make some alterations in th.» ! proportions given above. j) There is one point beyond which j income tux upon individual incomes cannot he pushed without reducing its ; productiveness through capital leaving j the country. A rate inducing an inflow } of capital would produce a larger rove- j nne to the State than otherwise would ; lx obtained. (k) The graduated system of income j ' tax makes ii- necessary to aggregate j incorno derived from land'with other iM.-om*. for taxation purposes. Exemjr j none consequent upon land tax stand | h the way of this. For this and other j reasons, laud tax including graduated . la%d tqx. should SGOSJ 5$ p3gs;b)e ba | abolishedG'i The \ originally designed to qp large estates There is no evidence to show Ibnt if is anv longer for thi T "' «rid was much evidence shoeing that it if, now preventing de- ! voiopment r,f large areas of land

(q) The changes* in land and income j tax we think necessary will take some •' capital expenditure to break in. Gradu ? ated land tax applied to business premises is a. serious handicap to trade and industrial enterprise, and serves no good purpose. (in) Income from tax-free war loans can neither be charged income tax not be added to other income, for the purpose of fixing the graduated rate on this other income, as this would be breaking the contract entered into by xlie State when the loans wore issued. (n) There is no undertaking on behalf of the State not to vary the rate of taxation on debentures or any other form of income, except income from tax-free war loans. The State is thus free t-o tax all other income from year ( to year at the same rate or at various ' rates as it pleases. (o) Alterations in the form of income tax on the lines of our conclusions will make it necessary to provide special machinery for taxing interests held in New Zealand by residents overseas, either as shareholders in companies or as debenture holders. J Companies in which these overseas interests are held fall into two classes, (1) those having their headquarters in New Zealand and (2) those having their headquarters outside New Zealand. E&ch will have to he dealt with separately. (p) We can find no reason why tenants of pastoral lands should not pay income tax. They paid in pre-war days. They pay little or no land tax. (q) The changes in land and incometax we think necessary will take some time to bring about it may not be found possible to make the whole of the change in one step or in the immediate future. (r) The changes indicated in land and income tax would mean that land held in an idle and unproductive state would pay neither land nor income tax. This would have to bo provided for. , (s) The question of double taxation cf oversea investors requires further consideration . (t) The base on which incorno tax . xevenue is raised should bo maue a* i , broad as possible hi order to lighten the weight of th© tax. Every deeisior. to free from tax or tax lightly some source of income carries with it a de- , vision to tax some other source at a | higher rate than would otherwise be [ (u) AYe can see no adequate reason , why State and public body trading and I public utility concerns should not be j taxed as vie 11 as private enterprise - This would broaden the base of tax Special provisions for taxing this source of revenue would be necessary. (v) Tax-paid company debentures pro not on the same footing as regards taxations as tax-deducted debentures. , (w) Land tax presses heavily on land use({ for growing timber. lx) Death duties are equivalent to rt n addition to income tax, and it it to be observed that these are much , heavier on moderate fortunes in New ' Zealand thau on similar fortunes in Great Britain. These duties act aa check on aggregation of land. (y) The foregoing conclusions have dealt with the incidence of taxation, but we wish to record our view that the weight of taxation is most import- ; ant, and that it is essential in the t interests of the future prosperiy of the Dominion that the weight of taxation ; should bo reduced as rapidly as pos-

sible. RECOMMENDATIONS. Following are the recommendations | we make in connection with the fore- ! going conclusions ; (a) That legislation be passed instructing and empowering the Commissioner of Taxes, when obtaining future income tax returns, to compel the indi vidua! to include in his return the whole of his interne from all sources, specifving the amount from each source separately.., .. ; . -(b) When the data, asked for under (a) is • obtained and compiled (which will be towards the end of 1923) the question whether- or not a complete change can be made from the present system of taxing companies direct as | individuals to the system of taxing S every individual upon his total income ? from all sources, excepting only tax | free v/ar loans, should bo careful]. ! considered. If a complete change is | found difficult or impracticable tlier j a beginning should be made by taxing ; individuals in respect of dividends re j ceived by them from companies and , supplementing the revenue obtained ir this way by a moderate flat rate or i all profits of companies, j (c) That the maximum rate o' : graduated tax should first be fixed a | a level that will not cause the outflow j of capital from New Zealand fj would be advantageous to fix a rati i which would cause an inflow of capi ' tal. This rate must be adjusted fron j year to 3-ear according to financia i requirements and circumstances botl j within and without New Zea and. J f dj Having fixed the maxiinun i rate the graduation downwards shoulc ibe a scale that will enable the re ; quired sum be raised, such graduti j lion to be made in such as way as no I to be oppressive on the taxpayer u i small means. i (e) The rate upon the individual pro j fits of companies should bo approx; : (f) It it is impossible without undu i hardship to obtain the necessary rev ! eiiuo from tlio sources already monj tio-ned then the revenue from these [ sources should be supplemented by f j moderate flat tax on companies, :;.s----j sessed upon their total profits. This j supplementary tax should bo in addi j tion to tho tax 011 their undivided pro--1 iitw. j (g) Companies registered outside Nev | Zealand should be taxed on their tota! I incomes derived from New Zealand at ! the rate-at which companies registered i in New Zealand are assessed on theii ! undivided ijrofits, and should also b< liable in respect of such incomes 10; ; any flat rate company tax. ; (h) Overseas shareholders and deber turo holders in companies registered S in New Zealand should have their tax stopped at the source at the maximum j rate. The companies interested should ! l>e deemed agents for their oversea ! shareholders and debenture holders i and should be responsible for payment j of tax. Overseas shareholders and de benture-holders should have the right ! to apply for and obtain a. rebate o. ’ tho difference between the maximum j rate charged and the rate that would I apply to tlie whole of their income derived from New Zealand. No exemption \ should bo allowed to oversea investor;--j in New Zealand. j (i) Incomes of pastoral tenants should ' be made subject to tax, and this j slfould be done immediately so that ! incomes for tlio year ending March 31 I 1924. will not bo allowed to escape J taxation. I (j) That the present graduated land ‘ tax should be abolished and income ! tax should be paid in respect oi in-' j come from land as part of the taxpayer's income. J (k) That any loss, of revenue brought | about by adoption of the last, recomi mendation should be tnafle up by o fiat i*ats of Jaiad tax ail proved land v*lue* 'sso oo. r^.qe below £2OOO pf tworth;rds of the rap=above £?0C0. The present £SOO anc mortgage exemptions should be con tinued. It is thought that id in th‘ £1 up to £2OOO and §<l in the £ bevoru that amount will produce the sum at

in resj his 0) The flat rate tax on companies - rr It in pa *agi lpl Eli 1 the flat rate land tax referred to in paragraph (k) .should both be regarded as temporary taxes, to be reduced and uJti national finances permit. (m) In the meantime and until the individual system of income tax has been brought into operation incomes cl individuals from a*' - - • gated in order to fix the rate_ that should apply to that portion of the taxpz own hands. In fixing the amount of his tax the amount of tax paid at the t source in connection with his other investments should be taken into account, but no rebates should be made if ths ’ | total amount paid after charging the amount taxable in the taxpayers’ own hands at the rate that would apply to that amount only, comes to more than the amount that the tax would have , been if the whole income had been taxed : in the hands of the taxpayer. \ (n) That when these land tax recom- ' mendations are put into effect the Com--1 mioner of Taxes should be empowered 1 ‘;o assess net income at 5 per cent on ' the capital value of an 3' land that he considers to be either l>*ing idle or not being utilised so as to produce reasuuable income. >• (o) That the question of double tax- [-■ ation be further considered and ar- :] rangements made that will result in , British capital Invested in New Zealand being placed in a position at least as t favourable as in Australia, provided such an arrangement does not put British investors in New Zealand on a better footing than New Zealand investors. (p) That in any event the favoured position of pubiiy body and company debentures as far as income tax is concerned should be abolished immediately. (q) That it graduated land tax is not abolished relief should he given in connection with the present graduated land tax payable on business premises. (r) That State and public bodj* trad ing and public ultity concerns should be charged i icome and land tax to the same extent as private outer prises, and that for the purposes <4 r _ taxation their borrowed capital should be. treated in tho same way as bor- - rowed capital m private enterprise is treated. [ (s) That tax-paid company debentures should ?3e put on the same footing as * company debentures. * ■_ -.t) rsUer Is-nd tax be 3 4'iveu tsv to plantations •’ 1 & r trees areas exceed- ; ing twenty-five acres of native busk ! (u) That a more reasonable allowlanoe for depreciation of tramways workers’ cottages and other wasting assets be allowed in the ca«r- of -r.v/-