I move: "That the Dáil agree with the Committee in Financial Resolution No. 6." The purpose of this Resolution is to continue to give authority to the Revenue Commissioners to persist in the practice which has been theirs heretofore; that is, when computing a builder's profits, to treat as income both the amount received for the sale of a house and the capitalised value of any head rent reserved thereon.
Financial Resolutions—Report Stage. - Financial Resolution No. 6—Income Tax.
The Minister has gone one better in this. He is taxing a man on an income he has not got. I think that a little more explanation was necessary from the Minister than what he has given. He tried it out in the courts and got beaten, and now he comes in here with this Resolution to get power for an injustice. I should like to put it to the Minister that the following is the position. A man takes a plot of land at, let us say, £5 a site and he builds houses on those sites and sells them at £1,000. He puts £10 ground rent on. The Minister, in dealing with the total profit of that, will say that out of that house the builder has got a gross return of £1,000, plus the capitalised value of a £5 a year profit rent. Let us assume that he assesses the value of that £5 at 15 years' purchase — that is, £75. But it will take him 15 years before he gets that £75 on which the Minister now proposes to collect income tax.
Take another case. Suppose that builder instead of selling that house, rents it at £100 a year. The Minister will only charge him on the income he was getting out of the house or rather on the valuation calculated at five-fourths. The Minister has now discovered that there are five fours in a whole unit. In the other case he capitalises the profits. Why does he not capitalise the ordinary rent in the case of a house let at £100. Let us take another instance. If I had a private income of £1,000 a year, in a year in which I did not get any of that income I would pay no income tax. I put it to the Minister that that is the position and that that is the policy of the Revenue Commissioners because obviously they could not charge me income tax on an income I did not receive even though I was entitled to receive it. In the instance I have taken, provided the ground rent of £5 was created, it will take the speculative builder 15 years at the rate of £5 a year to receive that ground rent. And during that 15 years he would be paying 4/6 in the £ annually on that £5. I do not see how that could be justified from any angle. The Revenue Commissioners tried it in the courts and they were kicked out with costs. That was since the Minister passed his last year's Budget. But now he is going to make sure that he is going to get all the tax on an income that does not exist.
Will the Minister tell us why he cannot wait until the income tax accrues?
He is getting income tax on that as well.
Is it suggested that he should first tax the capital value of the income before it accrues and then tax the income tax when he gets it? If that is so, I suggest there is no justice in it at all. I submit that that is the case. As a general representation I make this submission to the Minister: at the present time owning house property is not a very attractive proposition. You have instances like Edgeworthstown. You have combinations of town tenants coming up to interview the Minister; you have strong agitations rising here and there demanding a reduction of rent. Very frequently these agitations develop into rent strikes. In fact the business of collecting rents in this country is not a very attractive proposition to anybody who could invest his money in any other way. I think the community is very much indebted to the individuals who go to the assistance of this State and, as speculative builders, help the housing resources of the country. It is becoming more difficult to get enterprising men to engage in that kind of work on account of the many fortuitous circumstances that arise. Surely it should be the care of the Minister to lighten the burden on these men so far as equity will allow. I do not want these men to be placed in any sort of a privileged position. If the Minister is casting about for an opportunity of raising another thousand pounds for the revenue he should look to this particular source last, because the individual burden on the speculative builder will be substantially increased, whereas the gain to the revenue will be comparatively trifling. The individual builder will be hit, but in comparison with the whole of the Budget this will be a trifling gain. We want houses and we would prefer to have as many as possible of them built by speculative builders. Otherwise the State will have to provide those houses either through the local authorities or by direct grants themselves.
It will cost the State very much more.
Yes. It all boils down to the position that we want to help the speculative builder. We are not prepared to put him in a privileged position, but we are not going to place vexatious burdens upon him while the revenue can be raised in some other way. I do not think the Minister has given any estimate of what he expects to get from this particular tax. What exactly does the Minister expect to get?
Nothing; it is merely to safeguard the existing revenue. This has always been the practice.
The Revenue Commissioners held under the existing Finance Acts in the past that they were entitled to levy capital sums, and perhaps also income tax later as it came to hand. The courts held that they were not so entitled, and that is why the Minister has this Resolution now. My submission to the Minister is that what he is going to get out of this in cash is very little. If the only purpose he has in mind is to soothe the ruffled feelings of the Revenue Commissioners he should find some other way of soothing their feelings. He is a master of soft words, and he knows how the soft answer turneth away wrath. He should deal with the matter in some other way.
Do I understand the Minister to say that he will get no revenue out of this?
Yes. Where the speculative builder——
Is the Minister to conclude?
No. There are just one or two points that I should like to deal with in order to help the House. It had always been the practice of the Revenue Commissioners to have builders' profits computed for the purpose of making assessments, on this basis; that where the speculative builder having built a house sells it and reserves to himself the ground rent; they take for the purpose of computing his profits the price at which he sells the building plus the capitalised value of the ground rent which he has reserved. Income tax was always charged on that. That has always been the practice, but it was ruled against recently in the Circuit Court. An appeal will probably be taken to the High Court. In the meantime, without making this section retrospective at all, we are asking the Oireachtas to reinstate the law as it was. Irrespective of any decision that may be given on appeal, the Oireachtas is entitled to make this law. When the Revenue Commissioners were first given authority to compute income tax on this basis, they acted rightly and in accordance with authority. We propose merely to give them a renewal of that authority without giving it any retrospective effect, that is, the position which has always been maintained up to the present. Notwithstanding the effect of this law, speculative building has gone on at an increased rate. No speculative builder has been deterred from taking advantage of the provisions of the Housing Act, by reason of the fact that he knew that if he did take advantage of these Acts his income for the purpose of income tax would be computed on that basis — the basis of what he gets for the fabric of the house and the capitalised value of the ground rent which he reserves to himself. I submit the arguments used against this are fallacious arguments which will not stand examination. We ask that the Dáil now should reinstate the law definitely by a more definitive provision, making the law what it was always thought to have been. There will be no impediments placed in the way of the speculative builder, as can be quite easily seen if you consider what happens when you are computing the profits of a motor car salesman. A number of firms do a very large business on the hire-purchase system. A person has to put down a substantial cash payment and he may arrange to pay the balance in instalments. But the actual turnover for the purpose of computing profits is the turnover manifested by the sales of the cars. In the same way in regard to clothes, quite a lot of business is done on that basis. It is the same in regard to these houses. A substantial cash payment is put down and the rest is paid by instalments in the ground rent. That goes on year after year. There is no injustice, taking the profits of one year with another, taking into the consideration the two elements in the bargain, the cash-down payment, however the purchaser may secure the cash which he pays for the building, and the capitalised value of the instalments which he pays in the way of ground rent, even though they may be instalments in perpetuity.
In the case of a motor car sold on the instalment system these instalments would not be taxed a second time over. The seller would be taxed in the first place on the capitalised value of the instalments, if you like to put it that way, but he would not have to bring into his income return for subsequent years the same instalments as they came in. The suggestion made by Deputy Belton was that you bring in the ground rents again. If that is true, it seems to be an obvious case of taxing something twice.
There seems to be some substance in what the Deputy says, but even there, consider this position: in the case of the motor car if the seller takes these instalments and re-invests them in something else, then the income which he derives should be taxed. There is another element too. A motor car is not quite an exact analogy — I merely brought it in as an example. There is this fact, which is very important, that when the builder has created the ground rent he has created what is a marketable entity. He can take it and dispose of it in the open market.
And you tax that the following year?
No.
As part of his income.
We might have lost by the transaction in any event. They create this marketable entity which they can dispose of. It is a part of the house. You cannot consider the house apart from the site. The two go together. The revenue authorities are entitled to refuse to dissociate the site of the house from the fabric of the house in the way in which Deputy Belton asks us to do; in the way in which he tries to do when he says to a man: "I will sell the fabric of the building, but I am going to charge £10 a year for the land upon which it stands." We are entitled to refuse to look at the transaction in that way and say: "You sell the house and the site; we know what actual cash you were paid for the fabric, and we are entitled to capitalise the value of the continuing payment you have reserved on the site."
That is perfectly sound as long as you do not afterwards proceed to make Deputy Belton pay income tax every year on the £10 ground rent. I feel there must be some better case for the revenue authorities than the Minister is making.
Consider another aspect of it. Supposing that Deputy Belton ends the transaction—again we are safeguarding ourselves against evasion in a matter like this — supposing he says: "The Revenue Commissioners are going to have their way with me, and I have to endure having my profits assessed on the capitalised value of the site. So far as I am concerned that is the end of it. I will sell it in the open market." He sells it to an individual called B. Surely Deputy MacDermot will not hold that we are not entitled, B having made an investment and purchased Deputy Belton's capitalised ground rent, to assess B, who has bought the ground rent, on the income he derived from the ownership of it. It is an income derived from the ownership of land and we are entitled to assess him on it. If we are entitled to assess the second person, who has bought it from Deputy Belton, on the income which he will derive from it, I suggest that we are entitled to assess Deputy Belton, in the first case, on the capitalised value of the land, which of course allows for a fair return upon his capital, and we are also entitled to assess Deputy Belton on the return which he gets from it.
The fact of the matter is that if he sold the site outright to the original purchaser of the house, it is quite clear that the person who bought the house in these circumstances, who bought both the building and the site upon which it stands, would pay a very much higher price. If Deputy Belton took what represented the value of the land, and reinvested it somewhere else, reinvested it, say, in other ground rents, that being the closest example, we would then tax him upon the income which he derives from the investment of what was the actual value of the site so far as it is capitalised. That is the justification.
Is not this the view taken? Let us take a house with £10 ground rent, the capitalised value we will say, for convenience sake, being 20 years' purchase — I do not think the Minister will be as extravagant as that — that will be £200. Let us assume the all-in selling price of the house would be £1,000. If the ground rent was reserved it would be £800. With the ground rent capitalised it would be £1,000. The Minister's case is that the selling value of that house is £1,000. Is not that so?
Yes.
He looks upon the reserved ground rent as a deferred payment for the house and ground. Is not that so?
As a re-investment.
Supposing the owner did not sell it, but rented it at £100 per year. Will the Minister capitalise the £100 a year? If instead of £200 being deferred, £1,000 was deferred, the Minister would not capitalise any of it. Is not that so?
The income in that case would be much more uncertain than it is in the case of a ground rent, as the Deputy knows very well.
You capitalise none of it. So that the big man, with plenty of money, can go and build houses and let them at a big rent, and the revenue is making no profit out of that by capitalisation. The poor man who builds a house and sells it, reserving a few pounds ground rent is mulcted. He has to pay the capitalised value of the ground rent. But the speculator, the real big fellow in the upper regions, for whom the Minister is catering, can build as many as he likes and let them at any rent he likes, but he pays no income tax on the capitalised income. He bases it on his income. I would like to hear from the Minister how he explains that away.
I should like to remind Deputies that the House is debating the Report Stage of the Financial Resolutions. the Chair has been lenient in allowing questions, obviously put for the purpose of eliciting information, but the leniency of the Chair should not be presumed upon too far. Any further questions to the Minister might be answered after the Minister had concluded.
I take it that only applies to Deputies who have spoken already. I simply rise for the purpose of putting one or two questions to the Minister. Despite the very long explanation of the Minister, I think I understand the case that he has made.
Then we will give the Deputy full marks.
Am I to understand that in no sense is this legislation retrospective? I am not thinking now of impending cases. I gathered from what the Minister said that a certain practice has been, shall I say, indulged in by the Revenue Commissioners in this respect over a long number of years. In other words, they have been collecting income tax in a way that they were not entitled to. That, I understand, is the law as at present interpreted. I gathered from the Minister that no effort is being made in this clause to make anything retrospective. Therefore, I take it, if taxes have been collected illegally they will be paid back. Is that the position?
No, there is nothing in this clause which provides for that.
But suppose the law is that these taxes have been illegally collected, no effort is to be made now, I take it, to make that illegal practice of the past legal?
When the law on the matter has been finally determined, then we will see what the position is.
What I am anxious to get from the Minister is a clear statement as to the intentions of the Government. Is it the intention to make this retrospective? The Minister, speaking earlier, made the boast and the claim that there was nothing retrospective about this clause, but from what he said a moment ago it is obvious that if the legal decision, already referred to, goes to the Supreme Court and that it decides that the practice up to the present was illegal, the Government are going to introduce retrospective legislation to make what was an illegal practice in the past legal now. That is the position, although the Minister has already pledged himself that this particular clause does not do anything of the kind.
Surely the Deputy is not without hope that it may be his responsibility to do that by the time the decision of the Supreme Court is given?
Anyway, there is going to be retrospective legislation, so that we may wipe out of account altogether the promise, or the boast, that there is nothing retrospective about this. The Minister has the firm intention of making it retrospective if the Supreme Court confirms the decision of the Circuit Court. That is what I gather from the answer the Minister gave me by way of an interruption.
I assure the Deputy that I have not considered the matter at all.
If the Minister asks me to believe him I am bound by the rules of the House, but really he is not as simple as all that.
It is the simplicity of holy innocence.
It may be holy innocence, but not in the sense of being sanctified. When the Minister was asked a question about this he gave the answer that it would bring in no new taxes. I wonder if he can answer the question in another way. Suppose he were to accept the law as interpreted by the Circuit Court judge, what would the revenue lose? I admit that to the question —"What extra taxes will the Minister get?"—the answer is "None," because there is no increase in taxation so far as the existing law goes. The force of the question is, whether he can estimate what he would lose, and whether, owing to the importance of house building, this is not really, to some extent, against public policy. There are urgent reasons why house building should go on and, in view of that, might it not be wise to forego this particular revenue?
I would like to know from the Minister if it is a fact that a large portion of the profit on speculative building at the present time is aimed at in this Resolution. What I mean is this: in many districts at the present time houses are being sold at the actual cost of erection, the profit to the speculative builder being in the ground rent. If the Minister wants to take that profit, or to reduce it by 25 per cent, it is obvious that builders will have to increase the price of houses. It is quite clear that the builder is going to have his profit. He cannot work without a profit. If the Minister is going to take a certain portion of the profit which the builder derives from ground rents, then the price of houses will have to be increased. That is the position, and it is just as well that we should face up to it.
I think the Deputy forgets that the builder has been paying on this basis up to this year.
And that building is falling off, and that rents and costs are as high as ever.
Was not the test case three or four years in suspense, and the builders did not pay during that time?
May I point out to the Minister that he is getting this on the double. He is getting it on the land value, and he is getting it annually as a ground rent. If the Minister must have this on the double, the builder will be left with no alternative except to get his profit on the houses he builds by increasing their price. It all comes down to this, that the cost of housing will be increased.
Deputy O'Sullivan made the point that there is no change in the law. I am not in a position to tell the Deputy what the revenue would lose, but I can assure him it would be a considerable amount. There is a great deal of speculative building going on all over the State. Those who have engaged in it have received substantial encouragement and inducement from the State. The Housing Act of 1932 was passed, and it is on the basis of that, and not of a purely fortuitous decision given in the courts recently, that house building has gone on. When our predecessors were in office they taxed builders' profits exactly as we propose to do. Were they more guilty of something against public policy when they did that than we are when we propose to continue what has been the general practice? I do not believe for a moment that the re-enactment of the law in this more precise and clearer form is either going to interfere with house building or to send up the price of houses. Most of the people who have gone into speculative building in recent years did so on the same basis that people take up other pursuits or occupations: on the basis that they would be charged income tax on the profits of their undertaking, and that is all we are proposing to do here. I am advised that if this Resolution were not accepted by the Dáil a considerable number of speculative builders who are making very large profits would not come into account at all for income tax purposes.
I gather that the Minister accepts what was implied in Deputy Good's question, namely, that the bulk of builders' profits is really got out of speculation in ground sites?
That may be so.
The Minister accepts that?
I am accepting it in view of what Deputy Good says. He has a more intimate knowledge of the building trade than I have.
What grounds has the Minister for saying that if the Dáil turns down this Resolution a great many speculative builders, who are making large profits, will escape income tax? How can they be making large profits and escape income tax?
Profits on their trade.
Fictitious profits.
Question put and declared carried.