In New Zealand available figures on company finance are limited, particularly as regards private companies. Some insight, however, into the operations and financing of public companies is provided by an analysis made annually in the Reserve Bank of New Zealand of the financial statements of about 300 such companies, including all the major ones listed on the stock exchange. The analysis covering the operations of 307 companies balancing during the year ended 31 March 1960 showed among other interesting facts that:
Four companies each have total shareholders' funds of £5 million or more.
Net profit to shareholders' funds varies considerably among companies engaged in different activities, ranging from 3.9 per cent for companies in the “gas” group to 10.1 percent for companies in “printing and publishing”.
Of the total funds available to the 307 companies (over £29 million) two-fifths represented depreciation and one-fifth long-term retained profits. Short-term sources of funds, namely increases in liabilities such as bank overdrafts, creditors, and deposits plus decreases in such assets as cash, debtors, and stock, provided nearly 8 per cent, and other long-term sources, largely paid-up capital, accounted for the balance of 32 per cent. The funds were mainly used in expenditure on property, plant, and depreciation, which totalled over £24 million or nearly 83 percent of the total.
Excluding meat-processing companies, which as a group sustained net losses in the period covered by the analysis, the proportion of net profits (after tax) distributed by companies was 58.9 per cent. This figure appears high but must be related to the figures for taxation. In 1960 the 307 companies' total income to be appropriated was just over £26 million, of which £13.3 million was paid in tax. Net profit after tax was £12.8 million.
Companies in New Zealand pay tax on their assessable incomes before the distribution of dividends. There are no special exemptions as in the case of individual taxpayers. The rate of tax for every £1 of taxable income is: (i) where the taxable income does not exceed £3,600, 2s 6d. increased by one-hundredth of a penny for every £1 of taxable income; (ii) where the taxable income exceeds £3,600, a flat 8s. 6d. per £1. In addition, companies pay the social security charge of 1s. 6d. per £1. Thus the maximum rate of tax is 10s. in the £1, but for certain companies the excess retention tax may be an additional charge. Excess retention tax, at the flat rate of 7s. per £1, is paid where dividends distributed are less than 40 per cent of income after normal taxation in the case of companies in which the public is not substantially interested, and where the shares are held by 20 or fewer persons, or where the company is under the control of seven persons or less.
The directors and management of a company requiring additional funds for expansion have a large number of factors to consider in determining the most suitable source or sources. If an issue of ordinary shares is being examined, they would have to take into account the cost of an issue, the need to comply with various statutory requirements and the implications for future dividend distribution, having regard to taxation that further profits would incur. If they are considering a debenture or preference share issue or the acceptance of deposits, they would have to take into account the company's capacity to raise the necessary funds at the current market rates of interest and to service the debt.
As a result of various measures announced in the 1962 Budget, there are, however, some factors which companies no longer have to take into account. Unless a New Zealand company wishes to borrow overseas, it no longer needs the approval of the Minister of Finance for the reason that capital issues control, exercised under delegated authority by the Capital Issues Committee, was abolished and the Committee's services terminated. If a company wishes to accept deposits, the maximum rates of interest it may pay are no longer fixed as the Interest on Deposits Order was revoked. If it decides to issue convertible notes, it is no longer handicapped by the fact that the interest payable on the notes is not deductible from the company's income for tax purposes. This concession only applies, however, to New Zealand companies officially listed on the stock exchange and in respect of interest on notes which are convertible into shares within five years of the date of issue.
An overseas company wishing to commence business in New Zealand must obtain the approval of the Minister of Finance. In his 1962 Budget the Minister gave the reason: “While welcoming overseas investment in this country, the Government desires to retain power to withhold approval for overseas companies wanting to commence business in New Zealand where this could, for example, lead to undue dominance of New Zealand industry by overseas concerns.”
The Overseas Take-overs Regulations of 1964 require that certain take-over offers made, or proposed to be made, by “overseas persons”, be registered for approval at the Reserve Bank of New Zealand in Wellington. “Overseas persons” are defined as persons not ordinarily resident in New Zealand; companies or bodies corporate incorporated outside New Zealand, or their New Zealand subsidiaries; or New Zealand companies in which 25 percent or more of the voting power is controlled by overseas persons. The regulations apply if the result of the acquisition of shares under an offer will be that the offerer controls 25 percent or more of the voting power in the offeree company. The Government has announced that it proposes to keep intervention to a minimum and that only a small percentage of take-over proposals is likely to be affected.
In the nineteen fifties 188 overseas companies were registered in New Zealand. One indication of their importance is provided by the statistics for overseas direct investment in New Zealand. In the year ended 31 March 1961 this amounted to £14.4 million made up by investment in New Zealand subsidiaries, £10.2 million (comprising holdings of paid-up capital £3.9 million, intercompany indebtedness £3.0 million, undistributed profits £3.4 million), and by increased net assets of branches, £4.2 million. New Zealand companies, in contrast, increased their investment overseas by £1.4 million. It seems probable that investment by overseas companies in New Zealand will expand in future years. It also seems equally probable that, while there may not be a steady annual increase in the number of companies registered, there will be significantly more at the end of the present decade than there were at the beginning.
by Robert John Familton, M.COM., Economist, Reserve Bank, Wellington.
- Morison's Company Law in New Zealand, Spratt, F. C., and Taylor, H. (3rd ed. 1958)
- Introduction to Company Law in New Zealand, Northey, J. F. (1954)
- Company Secretarial Practice in New Zealand, Dale, D. A. (1959)
- Reserve Bank of New Zealand Bulletins, Nov 1960 and Jan-Feb 1965.