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Thursday, 21 May 1936

Senator PAYNE (Tasmania) . - I move -

That the following new clause be inserted lo follow clause 253 : - " 253a. Any amount which has been paid to the Commissioner by a company under the provisions of clause 88a of the Income Tax Assessment Act J 931, or of clause 253 of this act, and which amount has been deducted from the preference dividend due to a shareholder shall, on the shareholder satisfying the Commissioner that his total net income was less in any year, in which a deduction was made, than the statutory exemption of £250, be refunded by the Commissioner to the shareholder."

Clause 253 contains a provision to which during the last three or four years I have repeatedly referred, pointing out an injustice which it inflicts on a large number of small preference shareholders. I shall recapitulate my arguments on this matter in the hope that something may be done to remove this injustice. That clause repeats a provision contained in the Act of 1931 whereby companies were given the option of deducting from dividends on preference shares a proportionate share of the amount of special property tax paid by the company. Our income tax law has always recognized that a very large number of people do not come within its purview because they are not in receipt of an income on which tax could be justly levied. Yet, under this provision, if a person has a total income of only £5, and that income happens to be derived from dividends on preference shares, special property tax is deductable from it by the company. Thus a person .who is relatively poor is taxed at the highest rate.

Senator Collings - If a person is not liable to tax. it cannot be deducted.

Senator PAYNE - These shareholders are not liable, but they have to pay. Clause 253 reads -

A company which has paid or is liable to pay special property tax may, notwithstanding anything contained in its memorandum or articles of association, or in any other document or agreement, deduct from any dividends payable to the preference shareholders of the company an amount equal to the amount of special property tax which it has paid or is liable to pay upon taxable income distributed to its preference shareholders. I have here two printed notices received by certain people from United Provisions Limited. One notifies a preference shareholder of a dividend of 4 per cent, on 250 preference participating shares, and forwards a cheque for £9 3s.' 4d., rep- resenting the dividend less 16s. 8d. for special property tax. This shareholder is not obliged to pay income tax at all, because his income does not reach the statutory minimum. Yet he has to pay this heavy property tax.

Senator Collings - Because he is a member of a company which is liable to property tax.

Senator PAYNE - In the second case the dividend is £25, and the deduction for special property tax £21s. 9d., the shareholder receiving a net dividend of £2218s. 3d. As this man has an income very much in excess of the statutory minimum of £250, he gets the advantage of the provision that the first £250 of income is not liable to the property tax. This is an instance where a taxpayer who is better off, gets full advantage of the law, whilst another taxpayer, who is relatively poor, is penalized.

Senator Sir George Pearce - If the former is a taxpayer whose rate is over 2s., he is taxed at the company rate, so it cuts both ways.

Senator PAYNE - The unfortunate individual whose income is so small that he cannot take advantage of the statutory exemption of £250 a year, must pay the special tax on income derived from preference shares.

Senator Brown - Is the company forced to deduct this tax from the dividend ?

Senator PAYNE - No; only a few companies do this. I am not blaming the company; the fault lies with the law.

Senator J B Hayes - Cannot such shareholders obtain a refund of the tax?

Senator PAYNE - I have suggested that the Commissioner should make a refund on receiving a declaration by the shareholder that his total income for the year has not reached the amount of the statutory exemption ; but I have been told by Ministers, and by officials of the Taxation Department, that the administrative difficulties would be too great to permit of such an arrangement. I fail to see that any difficulty would arise. If, over a period of four or five years, a person had received an annual income of less than £250, any amount deducted on account of the special tax oh income derived from dividends on preference shares could not fairly be said to belong to the department.

Senator A.J.McLACHLAN (South Australia - Postmaster-General [12.5] . - On the surface, the proposed new clause appears to contain an element of justice, but I submit that it abrogates the whole of the principles underlying the taxation of the income of companies. The argument which the honorable senator has used in regard to preference shares could be applied to ordinary shares. In regard to income earned by an individual in his private capacity, he would not get the benefit which Senator Payne has proposed. Who has to bear the burden of the special tax on income derived from property? The. shareholders mustbear it, and in the long run it falls on the ordinary shareholders. The company deducts the tax, and if under the proposed new clause the preference shareholders are exempt from the payment of it, the whole of the burden will fall on the ordinary shareholders of the company, for the reason that, as preference shareholders are entitled to dividends at a fixed rate out of the profit available, the special tax on property income has to be deducted from the remaining profits before any dividend can be distributed among the ordinary shareholders. The contention has been advanced that the statutory exemption, which is the right of the individual, should be extended. The honorable senator seeks to impose on the department the burden of refunding the amount of the special tax to a particular class of persons. The proposal would benefit thousands of shareholders, and completely undermine the principles of company taxation.

Senator Payne - It does not affect the principles of company taxation.

Senator A J McLACHLAN (SOUTH AUSTRALIA) - The honorable senator cited the case of a man receiving about £10 a year by way of dividends on preference shares, from which amount a deduction had been made to meet the special tax which the company had paid. If the company had that income, and the special property tax was applicable to it, why should not the shareholder have to pay it? I am 'instructed that, if the proposal of Senator Payne were accepted, the administrative work of the department would be reduced to a state of chaos.

Senator Payne - Why do so few companies exercise the option of deducting the tax from the dividend?

Senator A J McLACHLAN (SOUTH AUSTRALIA) - Because most of the companies take the burden of this tax upon themselves.

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