Tax failure: New Zealand's short-lived First World War Excess Profits Tax

ABSTRACT

In 1915, Great Britain introduced an Excess Profits Duty to help fund the costs of World War One and to ensure social cohesion in the context of war. New Zealand followed the Imperial lead in 1916. Unlike in other British Dominions, the New Zealand Excess Profits Tax was discontinued after only one year. This article discusses the New Zealand Excess Profits Tax. It reviews the context of this tax within the British Empire, the development of the tax in New Zealand, and considers reasons for its early demise. This narrative provides a basis for future research into the practice of taxation in wartime, and the relationship between tax and society.

KEYWORDS:

• Excess Profits Tax
• Excess Profits Duty
• World War One
• war taxation
• New Zealand

Acknowledgements

The author thanks the two anonymous reviewers and the editor for their helpful input.

Disclosure statement

No potential conflict of interest was reported by the author.

ORCID

Rob Vosslamber http://orcid.org/0000-0002-3761-3826

Notes

1 The proclamation of New Zealand as a Dominion rather ironically reflected the fact that New Zealand had already enjoyed over half a century of responsible self-government, for the term ‘Dominion’ was ‘ambiguous’ (McIntyre 1999, 193). However, self-government did not extend to external relations, which remained the prerogative of the British Government in London.

2 Billings and Oats (2014) (following Stamp 1932) suggest that the UK war financing can be split into two sharply contrasting periods the first under Chancellor of the Exchequer Lloyd George (lower taxes), the second under McKenna (higher taxes).

3 At the 1919 Paris Peace Conference, New Zealand was awarded £26 million as its share of German reparations (AJHR 1921, B.-6, xxxv). None of the ordinary reparation claim was received (AJHR 1922, B.-6, xxxvi).

4 For a summary of the history and rates of direct taxation in New Zealand from 1891 onwards, see Ross (1967, Appendix 1).

5 Like the British precedent, Part II of the New Zealand Finance Act 1916 referred to the tax as an ‘Excess-Profits Duty’, being ‘a duty by way of income-tax’ (s 9). To avoid confusion with the UK EPD, the New Zealand version is referred to by the more generic ‘EPT’ throughout this article.

6 Enacted as the War-time Profits Tax Assessment Act 1917 (Cth Australia), which levied the tax on ‘all war-time profits from any business to which this Act applies’ arising after 30 June 1915 ‘up to the thirtieth day of June next after the declaration of peace in connexion with the present war’ (ss 2, 7). The Australian Act was amended several times (in 1918, 1924 and 1926).

7 During the First World War, there were five British Dominions: Australia (1901–1953), Canada (1867–1953), Newfoundland (1907–1949), New Zealand (1907–1953), and South Africa (1910–1953). The Irish Free State, India, Pakistan and India did not become Dominions until after the First World War. Only certain British dominions were considered Dominions, ‘whose [post-First World War] position and mutual relation may be readily defined. They are autonomous Communities within the British Empire, equal in status, in no way subordinate one to another in any aspect of their domestic or external affairs, though united by a common allegiance to the Crown, and freely associated as members of the British Commonwealth of Nations’ (Imperial Conference 1926, 2, emphasis in original). This was commonly referred to as the Balfour Formula, and subsequently enshrined in the Statute of Westminster 1931, which was not adopted by New Zealand until 1947 (Statute of Westminster Adoption Act 1947; see also Marshall 2001).

8 For Britain, Gault (1921) brought together, in separate sections, ‘the several sections and sub-sections of the Finance Acts 1915–1920 and of the Munitions of War Act 1915, 1916, relating to excess profits duty … and to include under each section or subsection the cases that have received judicial interpretation thereunder’ (1). The Australian federal government published ‘A guide to the requirements of the Act, concisely explaining the law under each heading and arranged in alphabetical order of subjects for facility of reference’ (Commonwealth of Australia 1917). I have not located any similar publication for New Zealand, Canada or South Africa. New Zealand's Commissioner of Taxes provided examples of the operation of the EPT (Press, 1 Sep 1916) and undertook a roadshow around New Zealand ‘to give information to taxpayers desiring it regarding excess profits taxation.’ (Press, 19 Sep 1916). The lack of a published guide may be attributable to the short life of the EPT. Only passing mention is made to the EPT in Hemingway (1917b); there appears to have been no 1916 edition of Hemingway's text.

9 In contrast, earlier writers had focused on the need to raise revenue, e.g. Davenant (1695).

10 Daunton (2001, 2002) further explores this consent thesis for taxation in detail in two volumes.

11 Stamp (1932) refers specifically to the Cardiff firm of flour manufacturers, Messrs Spillers and Bakers Ltd, whose profits increased from £89,000 in 1913 to £368,000 in 1914 (39f.), see also Arnold (2014, 67). Shipping lines also reported very high rates of profit during the war.

12 The income standard was calculated as the difference between the profits derived in each year ending after 1 September 1914 and the average profits of two of the three preceding trading years (which were termed ‘pre-war profits’). The capital standard was 6 per cent of capital for a company (Finance (No. 2) Act 1915 (UK), s 40(2)), and 7 per cent for any other trade or business (s 40(2)). The computation of profits was defined in Schedule 4 part I of the Act; the pre-war standard in detail in Schedule 4, part II. Capital was defined in Schedule III, part IV of the Act, with net assets effectively valued at fair value. The capital basis was adjusted for increases and decreases in capital (s 41), and the first £200 of excess profits were exempt (s 38(1)).

13 A list of percentages fixed by the Board of Referees is provided by Sutcliffe (1919, app. I), and ranged up to 27½ per cent for companies engaged in gold mining in India, Egypt and Sudan. New Zealand also ranks a mention for tramways – 7½ per cent. Of the more than one hundred special rates listed by Sutcliffe, about two-thirds were for overseas operations. Six applications did not result in an increase.

14 The Land-tax and Income-tax Act 1892 s 2 had set the income tax rate for companies at 1s per pound (5 per cent), and for other taxpayers at the progressive rates of 6d per pound (2 ½ per cent) for income up to and including £1000, and 1s per pound thereafter.

15 The concept of depreciation was still being developed at this stage and its deductibility uncertain, see Vosslamber (2014).

16 To alleviate this, ‘An arrangement was entered into with New Zealand under which only the higher of the two taxes was imposed and the proceeds allocated between the governments (Haig 1920, 32)’. The Finance Act 1917 (UK) made this procedure available, through an Order in Council, to ‘all His Majesty's possessions’ but by then the New Zealand EPT had been discontinued.

17 The exceptions were the inclusion of commission income as part of salaries in calculating the salary exemption, and the removal of a clause which restricted rates of interest.

18 The commandeer first applied to frozen meat (March, 1915), followed by tungsten ore scheelite used in armament manufacturing (September, 1915), cheese (November, 1915), wool (December, 1916), sheepskins (February, 1917), hides and slipe wool (March, 1917), and finally butter (November, 1917). See Shoebridge and McLean (2017).