LAWS OF TAXATION

Waikato Times, Volume 127, Issue 21245, 16 October 1940, Page 2

LAWS OF TAXATION

ACCOUNTANTS ADDRESSED LAST TWO YEARS TRACED LECTURE IN HAMILTON “Dividends are, of course, generally included in income for the purpose of arriving at the rate of tax. and the word has now been given an extremely wide meaning by the 1939 Act, as since amended by the 1940 Act,” said Dr. H. A. Cunningham, of Auckland, in an address in Hamilton last night on the amendments made to the land and income tax laws of New Zealand in the last two years. Dr. Cunningham gave his address to the South Auckland branch of the New Zealand Society j of Accountants. Mr C. W. Arm- | strong presided. “It includes every- t thing distributed by the company J among its shareholders. In particu- : lar, it includes distributions of bonus ! shares, even if they are paid out of j profits from capital assets, and also . any sums received on a winding-up in excess of the amount paid up on the shares. The price the taxpayer has paid for the shares may be more or less than the amount paid up, but that is not material. “It further includes any advances made to shareholders, which the j commissioner considers are not in- j vestments, but are virtually a dis- j tribution of profits. If a company issues shares to its shareholders for less than their real value, the dif- j ference comes within the definition j of a dividend. Special provision is included to ensure that distributions made out of premiums on shares paid by the shareholders to the company are excluded from the definition of dividend. A special definition of dividend contained in one section relating to gold-mining and scheelite-mining companies is now repealed and the new definition applies to these companies also.” Anticipating Sales Dr. Cunningham also discussed the law relating to stock-in-trade and said that for the year ended March 31, 1940, and subsequent years, the closing stock must be taken into account at cost price, market selling price or the price at which It could be replaced. The market selling price in the department’s view apparently meant the retail selling value without allowing for the cost of selling, and the taxpayer would thus be anticipating sales. “None of these options enables the taxpayer to make any reserve, either of a general or of a specific nature, and the effect is that reserves at present existing must be taken into account as an addition to the assessable income for the year ended March 31, 1940,” he continued. “The department, however, allows taxpayers, provided that they made application before March 31, 1940. to spread the reserves over a period of five years, commencing with the year ending on March 31, 1935. If the application was made after March 31, but before income tax returns were sent in, it could be spread over four years, or, alternatively, it could be spread over future years. Provision For Relief “A new provision provides for relief in those cases were unduly low standard values of livestock have •been adopted, for the purpose of income tax returns. It does not apply to any farmer who did not derive an income from farming during the four years ended on March 31, 1935. “The adjustment is made on the values for the year in which the farmer first became liable to tax. Those farmers with land of an unimproved value of over f 14,000 first became liable in respect of their income year commencing on April 1, 1928, those whose lands were over £7500, but under £14.000, on the income year commencing on April 1, 1929, and those whose lands were over £3OOO, but under £7500, on the income year commencing on April 1, 1931. Refunds of Tax “The taxpayer ;s entitled, with the consent of the commissioner, to take the difference between his commencing values at the standard values fixed, and the actual values, and deduct that difference from the amount realised at a clearing sale or from the value at the date of death, as the case may be. The true value, however, is not to exceed 19s a head in the case of sheep or £5 a head in the case of cattle. The commissioner may reopen an assessment and refund any tax so o\erpaid. even beyond the usual period of three years allowed for refunding tax.”

Special provisions in recent legislation affecting companies, with particular reference to proprietary companies, were also examined by Dr. Cunningham. He said that the term proprietary company as defined in the 1939 Act meant “in respect of any income year a company which at the end of that year is under the control of not more than four persons.” It applied also to such companies which were in the course of being wound up. The words “under the control” were very widely defined for the purpose of determining whether a company was a proprietary company. Groups of Shareholders “The income of an ‘ordinary proprietary company’ is deemed to be income derived by its shareholders in the proportion which the number of shares held by or on behalf of each of them bears to the total number of shares issued by the company,” he said. “A company is an ‘ordinary proprietary company’ if the shares all rank equally as to dividends. If they do not rank equally, the commissioner is entitled to apportion the income among the shareholders as he thinks just and reasonable, having regard to their rights. “The shareholders are divided into two groups. First, those entitled to cne-fifth of the income of the company, and secondly, those who are entitled to less than one-fifth of the income of the company. Shares held by a wife or relatives, partners or beneficiaries in an estate, are not combined for this purpose, although they are combined for the purpose of determining whether the company is a proprietary company. Method of Assessment “In the case of shareholders who

hold one-fifth of the shares and are thus entitled to o/ie-fiflh of the company income, they will be assessed on that income as if it were their own income. Dividends actually received by such shareholders will not be taken into account for the purpose of increasing their rate of tax if they are paid out of income derived by the company in the year ended March 31. 1939, or in any income year in which the shareholder derived proprietary income from the company. They will be entitled to deduct from their tax their share of the tax paid by the company on their share of the income. This latter deduction is limited, so that if the shareholder is taxable at a lower I rate than the company, the deduc- | lion allowable will not exceed the j shareholder's own rate. For the | purpose of arriving at the sharei holder’s rate of tax in respect of proj prietary income, the total tax payj able by the shareholder in respect I of either earned or unearned income i is divided by the number of pounds j included in his total earned income j or unearned income as the case may be. on which tax is payable by him. “The taxpayer is not entitled to deduct from his proprietary income any loss incurred by him in previous years, although he may set it off against his other income.”