The situation as I understand it, at the end of the debate yesterday evening, was that the Minister undertook to re-examine the situation with particular reference to the suitability of subsection (7) and, if possible, generally, in relation to what was sought to be achieved in this section. He agreed that, if necessary, he would recommit the section on Report Stage and in those circumstances I am content to leave the matter with the Minister now.
Finance Bill, 1970: Committee Stage (Resumed).
I undertook on Second Reading, in response to a request from Deputy Cosgrave, to give some details of the proposed savings scheme. As Deputies will see, the effect of this section is to exempt from income tax and sur-tax interest and bonus payments made under instalment savings schemes set up under section 51 of the Bill. Under an instalment savings scheme a person will undertake to save a stated instalment each month for 12 consecutive months and leave the total so saved on deposit for a further two years. The stated instalment must be in complete pounds subject to a maximum of £20. For each £12 so saved and left on deposit for two years a bonus of £3 — 25 per cent — will be payable. This is equivalent to 9 per cent per annum compound interest or in the case of a person liable to income tax at the standard rate of 7s in the £ it is equivalent to almost 14 per cent per annum gross. If a saver completes the 12 monthly instalments but withdraws his savings before the subsequent two-year period has expired, interest at 4 per cent per annum tax free will be payable for each complete calendar month following that in which the final instalment was paid. With exemption from income tax at the standard rate this is equivalent to about 6 per cent per annum gross. For sur-tax payers the gross yield in respect of bonus and interest will, of course, be higher still. Bonus or interest payable under the schemes will not be returnable as income to the Revenue Commissioners.
These will be entirely State schemes? Is there any provision——
No. There is provision for similar schemes being operated by trustee savings banks, by building societies and——
Pension trusts, I suppose?
I cannot see a pension trust operating such a scheme but I think I did give the various categories on Second Stage. I do not remember all of them offhand but I know the list includes those I have just mentioned.
Amendments Nos. 13 and 14 have been ruled out of order as they involve a potential charge both on the people and on State funds.
I want to refer to the problem I dealt with on Second Stage. As the Chair has mentioned, the amendment in the name of Deputy O'Higgins and a slightly different amendment in my own name have been ruled out of order because of the charge which would be involved. A particular problem has arisen and has been drawn to my attention. I presume similar cases have been brought to the notice of Deputy O'Higgins and possibly other Deputies. It arises from the relatively new development, at least in this country, of industrial estates. It arises in a particular case but I have no doubt similar cases exist in other industrial estates. The one I raised happens to be in my own constituency at Kill-o'-the-Grange. It is known as the Dún Laoghaire industrial estate.
The difficulty arises for this reason: the allowances which should apply cannot be granted because the firm concerned holds a factory on a 200 year lease subject to a nominal ground rent plus a certain sum for estate maintenance. As I understand the position, because the firm hold the factory on a long lease subject to a nominal ground rent, apparently they are deprived of the benefit of the retrospective amendment of the law. This, as the Minister will appreciate, involves a considerable sum. Apparently, the industrial buildings allowance amounts to 20 per cent of expenditure on construction. This is an allowance in respect of the factory in the year in which the expenditure is incurred. When this particular benefit was introduced industrial estates were certainly very few if they existed at all. On the scale on which they have now come to be established they are a recent development. Purchasers of these ready-made factories in industrial estates have been denied the allowances.
The Revenue Commissioners have insisted that, as the law stands, such purchases did not constitute actual expenditure on construction. That may be, and undoubtedly is, a technically correct interpretation of the law but I think it is not in accordance with the spirit of the legislation. For all I know this applies to most of the firms in this estate but certainly in the case that has been brought to my attention the particular firm holds it on a long lease and because it is a lease as distinct from an outright purchase it is denied the benefit.
It was obviously difficult to phrase the amendment. Both the amendment that Deputy O'Higgins phrased and the one I phrased would have involved a charge on public funds, but this problem has been brought to my attention because of the interpretation that has been applied — and I understand that accountants or for that matter solicitors dealing with cases of this sort have found that the same interpretation applied. The situation which has developed in the particular case I have in mind and, as I understand it, in other cases as well, is that if the industry concerned purchased the building outright, they would be entitled to the allowance, but because they did not purchase it this is denied to them, and their neighbours or competitors or firms in similar circumstances who avail of ready-made factories. Undoubtedly these developments are useful and have been beneficial in the provision of employment. Their usefulness or their advantages to industrial expansion and as an incentive to promote and encourage industry is adversely affected by this. If it is possible to draft an amendment or to deal with the situation, then I believe it should be done.
As I say, relief is granted where the person acquires the interest in a factory. If the builder held the freehold, then the purchaser must acquire the freehold. If, on the other hand, the builder held the leasehold interest, then the purchaser must acquire that by way of assignment or in any event by purchase. Apparently what the section does not cover is where the purchaser acquires the factory under a long lease, or through a fine or a nominal ground rent. In the ordinary understanding of that, the fine is equated in the mind of the purchaser with the purchase price but the vendor is still in possession of his interest in the land, either the freehold or the leasehold, and the purchaser consequently is merely a tenant. The purchaser has not acquired the relevant interest and, therefore, cannot claim the industrial buildings allowance.
These are the circumstances in which the allowance is refused, and, perhaps, the Minister would indicate whether cases have come to his notice other than these.
I should like to add a few words to what Deputy Cosgrave has said. He has covered the problem very fully, but the purpose of this relief, as appears from the marginal note, is to give an "industrial building allowance in relation to buildings and structures bought unused" and in the section the operative phrase is "where the relevant interest in the building or structure is sold". Of course, that involves what is meant by "sold" or "sale". On a strict interpretation of the word, I suppose "sale" means the out-and-out transfer of the property for value but, as Deputy Cosgrave has said, there are many translations nowadays — and they are becoming more frequent — in which long leases are granted at a pepper-corn, nominal rent, but the substantial consideration for the lease is the payment of a fine which is a substantial sum of money and, in fact, it represents what would normally be called the purchase price of the premises.
In so far as the granting of this allowance is a policy decision to encourage this kind of development, I have no doubt that to perfect the implementation of that policy it would be necessary either now or at a later stage to cover transactions which do not strictly come within the term "sale". However, the reality of it is the out-and-out transfer of all immediate control of the buildings concerned.
The principle involved in the section and in the industrial building allowance was to compensate an industrialist whose capital, having been used to construct new buildings or to extend existing ones, was indefinitely tied up. In 1967 this principle was also applied to a person who, having erected a building, did not use it himself but let it for industrial use, but the principle is to give an allowance to someone who had expended money in the construction of industrial buildings and thereby tied up his capital.
This operates on the basis that the person who expends the money gets the initial allowance and the annual allowance. If that person disposes of his interest, whatever that interest is, to somebody else, then in disposing of it he also automatically transfers the right to claim this allowance. The problem to which the Deputies have referred arises because the lessee in the case cited by Deputy Cosgrave has paid a substantial fine on his lease and presumably is paying a relatively small rent, and thereby feels he is expending that money on the building. However, the position is that the estate owners who granted him the lease are entitled to claim the allowance and to continue to claim the allowance because it is they who have expended their money and tied up their capital.
It may be argued that when they got a substantial fine, to that extent their right to the allowance should be abated. There are two objections to this: one is that you can dispose of property in various ways and you can grant leases in various ways. In the case cited by Deputy Cosgrave I think it is not unreasonable to take the view that the fine or premium being paid is, in fact, an immediate commutation of rent and to say that the bigger the fine the lower the annual rent or, correspondingly, the smaller the fine the higher the annual rent. This bears out the point I am making that the fine is really a commutation of portion of the rent.
Therefore the principle underlying this allowance should not be applied, because what the lessee is doing is not expending capital on the construction of industrial buildings, but simply entering into an arrangement whereby he pays a certain rent which suits his purpose and he commutes part of the rent, the economic rent, which otherwise he would pay, by making a down payment now.
This is one objection to it. Another objection is, I am advised, that to accept the principle involved, as put forward by Deputy Cosgrave and Deputy O'Higgins, would necessarily involve a great deal of apportionment of the allowances into, perhaps, almost impossible fractions. If one considers the various possible ways in which property can be disposed of, the various ways in which the interests of the owners can be divided up, one can get some idea of the complexity of the problems which can arise in this kind of apportionment. I am advised that having regard to this complexity this kind of arrangement, whereby the allowances would be apportioned between different owners, and maybe between very many owners and subowners, would in practice be impossible to administer. However, it is not merely the difficulty of administration that is the objection to it, but also, as I said, the objection in principle that the case described by Deputy Cosgrave does not seem to me at any rate to come within not only the letter but the spirit of the original allowance and the idea behind it.
Technically what the Minister says may be correct as I mentioned initially, but in practice and certainly in the case that has been brought to my attention the difference between the firm which rent the factory and a neighbouring firm which have a similar building is that in one case the firm had the factory built and paid the money for the actual construction and in the other case the builder let the factory at a nominal rent but charged a substantial fine. I can see the difficulty in trying to apportion it but, as I understand it, the fine is a once and for all payment. Certainly, the firm in question consider that while technically they are excluded from the industrial buildings allowance this is contrary to the spirit of the legislation. Although this firm did not actually construct the factory the developer constructed it and then let it, subject to the payment of this fine, at a nominal rent. The amendment suggested was that it would be deemed a disposal by way of a lease covering the period that I suggested was 50 years but as I explained under Standing Orders that would be a charge on public funds. The firm naturally do not claim and would not seek to get the double benefit or that the industrial buildings allowance should be paid to the builder and also to the person who has acquired the leasehold. As at present operating the developer is receiving the benefit which, in effect, was meant for the person providing the industry and putting the plant and machinery into the building that was constructed by the developer or owner of the property and who has leased it to the firm concerned and then charged a substantial fine as the equivalent of purchase price.
I take it that Deputy Cosgrave would agree with what I said, that in the case he cited where apparently a substantial fine was paid and a relatively nominal rent agreed on, that if, in fact, the fine had been much less the rent would be more. This seems to me to bear out the point I was making, that the fine is, in effect, a commutation of rent. I do not think that Deputy Cosgrave would argue that if rent alone were being paid and no fine that this should be allowed as ranking for the allowance. His point is that the fine paid is, in effect, a purchase price. I admit that the argument I am making may be somewhat theoretical but it is borne out in practice by the fact that if the fine goes down the rent goes up. I sympathise with the point the Deputy is making but I have a feeling that it is not right in principle and, as I said, there are considerable difficulties of administration involved in it. However, I will undertake to have another look at it. I do not want to suggest that we will be able to do anything about it because as at present advised we cannot, but I will undertake to have a look at it and see if anything can be done.
I move amendment No. 15:
In page 12, subsection (3) (c), lines 28 to 30, to delete from "by the transfer" to the end of the paragraph and to substitute ", in a case in which the profits or gains of a profession were computed on an earnings basis at the discontinuance thereof, sums realised by the transfer of the work of the profession in progress at the discontinuance, or".
Paragraph (c) of subsection (3), section 20, removes from the scope of the section sums realised by the transfer of trading stock of a trade at the discontinuance thereof or by the transfer of the work of a profession in progress at the discontinuance of the profession. That part of the paragraph relating to the transfer of trading stock is in order but the reference to the transfer of the work of a profession in progress has turned out to be too wide. It was intended that the exclusion from the section of the work of a profession in progress should apply only to a case which was dealt with on an earnings basis. This is because a full valuation of such work in progress is provided for in section 23. It is plain from section 21 (4) that it was intended to charge sums received for the transfer of the work of a profession in progress in certain circumstances, that is where the profession was assessed on a basis other than the earnings basis. The amendment, therefore, proposes to remove from the scope of the section sums received for the transfer of the work of the profession in progress only in a case where the profits or gains of the profession were computed on an earnings basis at the date of the discontinuance.
May the amendment be discussed with the section? It would be helpful if sections 20, 21, 22 and 23 were discussed together.
The amendments or the sections?
The sections and the amendments.
Would the Deputy agree that if this amendment were put in then the section, as amended, could be discussed?
Could we not agree on the amendment and then, at a later stage, discuss the section as amended?
Amendment No. 16 in the name of Deputy O'Higgins.
I will not move amendment No. 16 at this stage.
Amendment No. 16 not moved.
Is that what Deputy O'Higgins means when he says he will not move it this stage? I do not think it is.
I do not think it is. The Deputy is not withdrawing the amendment, is he?
No. I was going to speak on the section.
Amendment No. 16 is to the same section, section 20, and we must take that amendment before we can discuss the section as amended.
Very well. To put it in order I will move the amendment. I move amendment No. 16:
To add to the section a new subsection as follows:
() This section shall not apply to the case of a new partner entering a firm or an existing partner retiring.
It seems to me that sections 21 to 24 are consequential on section 20. So far as the average Deputy is concerned, and I include myself in that category, these sections might just as well have been written in ancient Greek in that they are technical sections, using technical jargon. Undoubtedly they mean something to the Revenue Commissioners who prepared them; they may mean something to people who regularly practise in the tax courts, but to ordinary Deputies they represent only sentences and paragraphs which are very difficult to understand.
Good. At least we can reach that measure of agreement. So far as I have been able to ascertain, these sections appear to be based to a great extent on sections 32 to 36 of the English Finance Act of 1960. If that is so, an explanation is required here because these sections dealing with post-cessation earnings — after a business or a profession had been discontinued — were introduced in England to deal with what was regarded as tax evasion. They were introduced to deal with artists who discontinued their profession, sold their rights to a company and received in return employment in the company or, more important, received royalties or other payments in respect of works they had created or written during the practice of their profession. That was regarded by the English tax authorities as a serious evasion of income tax liability, particularly following the cases associated with the late Peter Cheyney and Leslie Howard. Therefore, in England for the first time these sections were introduced to deal with a particular movement or trend in relation to tax evasion.
I wonder why these sections are now introduced in our Finance Bill? It cannot be to deal with artists because last year we excluded artists and artistic earnings from the scope of income tax. In fact, we have encouraged people who have a message to give in the artistic sense to become resident in Ireland and it is ironic that a measure designed to catch their earnings in England should, the year after their earnings have been freed from tax, be introduced in our Finance Bill.
Where is the problem here as far as tax evasion is concerned? The wording of section 20 and the following sections is incongruous in the sense that there is a reference to professional works. It is incongruous because the provisions were designed initially to deal with artistic works and the transfer of rights in relation to particular works of artists. In our Bill it is clear that the measures were not designed to deal with artists but to deal with trades or professions. What profession operates solely on an earning basis in relation to income tax? I believe there are only two, if I can include a trade — barristers and barrow boys, the latter in the sense of people who have to sell for instant cash and pay any tax liability on cash received.
So far as I am aware, no other profession in this country will be affected by the sections. Is it to be suggested that a widespread tax evasion is being carried on by barristers who proceed to retire from their profession? Old soldiers never die, and I can assure the Minister that old barristers never retire. I am aware of only one case of a barrister retiring from his profession but in the practice of the law here a man continues to practise to the best of his ability until eventually he is called to another Court. Of course, from time to time barristers are appointed to the Bench. In a period of ten years perhaps five might be so appointed. Is it to catch these people that these sections are being introduced? If I am right, and I believe I am, the sections can only have a sense of reality if they operate on the basis of affecting trades or professions where there is payment of tax on earnings.
I do not believe any situation in this country justifies such an enormous change as is proposed here. In so far as it affects barristers and members of my profession, I doubt the justice of the measure. I had the experience at one stage of not practising my profession while I was in Government — I might add that I was not in Government for the statutory period that would entitle me to draw anything as a result — and the only solace I had was that for the initial period in Government the fees that came in were not liable to taxation. If the situation is to be altered, let it be done because there is a huge problem of tax evasion.
We could deal with that, but I do not believe it is being dealt with here. As I said last night, we are simply taking a section from a British Finance Act and putting it into our own finance legislation without any regard to our own particular circumstances. This was designed to deal with the artists of England who built up a worldly paradise for themselves by contrivance to enable them to exist on royalties. These sections were intended to deal with people like the Beatles and the Beatle Empire. But we have a Beatle paradise here anyway because our legislation is to that effect and these sections cannot deal with that kind of problem. They deal with ordinary professional people here. As far as I can see their application must necessarily be limited to professions operating on an earning basis. These appear, in my view, to be exclusively barristers.
I am speaking not only to amendment No. 16, because, quite frankly, I am not sure whether amendment No. 16 is properly tabled to section 20 or to a later section. If the Minister will bear with me, I would like to explain what I had in mind when tabling the amendment. What I have said up to now has been in relation to the proposal contained in the sections themselves but on the basis that we are going to have this kind of legislation here and so far as it deals with the individual professional man — I think it is unfair that it should — if he dies that is the end of it.
When one finds professional men in partnership new problems clearly arise by reason of our partnership law herevis-á-vis income tax and partnership law in the United Kingdom vis-á-vis income tax. This, as I have said, is territory in respect of which I have no competence and very little knowledge except as I can gradually seek out for myself. As I understand the position in relation to the liability of partners with regard to income tax it appears to be this: under the provisions of section 69 of the Income Tax Act, which came into the income tax code in the Finance Act of 1965, a fundamental change was made in the partnership position in both countries.
Up to the passage of section 49 of the 1965 Finance Act the position was that in a partnership, if there was a change by death or retirement of a partner, the surviving partners had the option either to elect for a discontinuance or to carry on the partnership as it had been before. If they elected for a discontinuance the accounts were closed and a new account was opened for the new partnership, but post-cessation earnings which came in were not liable to taxation. In the Finance Act of 1965, now incorporated in the Income Tax Act, as I read it, discontinuance now can only take place when the number of partners drops from three to two, from two to one or increases from two to three. Discontinuance takes place on death in relation to all partnerships that do not exceed three in number without any option being given so that the smaller firms — solicitors, trading firms or whatever it may be — if there are three partners or two partners and one of them dies, no option is given.
I take it the Revenue Commissioners will agree that death is not a very creditable tax evasion dodge: if a person dies, he dies, and that is that. As I understand the position in relation to all partnerships not exceeding three in number, on death at the present moment no option exists and there has got to be a discontinuance. When this discontinuance takes place the carrying on of the partnership subsequently is treated as the earnings of a new partnership and liability for tax is assessed. There is the slight advantage, not a very real one, in solicitors' offices, but in most cases, if tax is being paid on an earnings basis, then the post-discontinuance earnings in that case would be free of tax.
Under these sections, which will only affect the smaller firms in this respect, that is going to end. Once a change takes place in the number of partners by reason of death or otherwise, then all the post-cessation earnings will be liable for tax. There will be no option, whereas in the larger partnerships and the larger firms, where there are five or six partners, the death of a partner will not affect the partnership at all. The partners have the option to elect to carry on or they can elect to discontinue and start a new account. It is for that reason I feel there should be a change.
I must confess this is such a technical Bill I am not quite certain where the amendment should go. I have two amendments rather similar, amendment No. 16 and amendment No. 17 to another section, but the object of these amendments is to ensure in relation to the partnership that is governed by section 69, that the change of partnership brought about by death should not have the effect of bringing into operation tax evasion sections. I put it purely on this basis without knowing the technicality that death itself can never be a designed measure of tax evasion.
The Revenue Commissioners accept that.
As I read the sections now, death occurring in a partnership of less than three persons will bring into operation these particular tax evasion sections. I know I have not made it clear because, frankly, I do not know precisely how to deal with this, but the object of the amendment is to prevent a situation arising on the death of a partner, where the partnership is three or two persons, which would bring into operation these particular sections.
I think I should follow Deputy O'Higgins by referring in general to these sections which deal with post-cessation receipts. Perhaps, I might start by saying that I do not think the Deputy is correct in suggesting that these sections are following sections in a British Bill designed to deal with the situation of the Beatles. I think that that section in British legislation was introduced last year. It is true that in British legislation they have dealt with a number of the items we have here in these sections, but their first approach to it was in the 1960 Finance Act and the second stage of their approach to it was in their 1968 Act. We did not follow this British legislation. We waited until we had positive evidence of loss of revenue caused by lack of comparable legislation here. This evidence has become apparent during the past year. We have reason to anticipate that the loss of revenue would increase unless we take steps to deal with it.
I am sure the Minister has an estimate on this particular occasion.
No. We cannot have one for the same reason which I gave last night. Basically, Deputy O'Higgins's approach to these sections is based on a misconception which he seemed to correct at the end of what he said. The whole tenor of his remarks seemed to be based on the assumption that in practice these sections would apply only to professions operating on a cash basis and, therefore, to barristers. If it were only barristers who were affected by this I think we would not have these sections here at all. Deputy O'Higgins is right in saying that the application of these sections to the barristers' profession would be minimal. In fact, these sections are not confined to professions whose earnings are computed on a cash basis. They apply to other professions.
The area in which the problem has arisen has not been in relation to barristers and, as Deputy O'Higgins has pointed out, has not been in relation to artists whom we have exempted from tax, but in relation to other professions. I do not wish to single out particular professions when I refer to this. Deputies will be aware that in recent years there has been a tendency — and in my opinion it is a laudable tendency — in certain professions for the one man firm or the smaller firms to amalgamate in the interests of greater efficiency. Deputies will be aware of this trend which is growing. Arising out of this trend, we have had situations in which firm A amalgamates with firm B and then becomes firm AB and continues as firm AB. The partners in firm A and the partners in firm B all continue to operate the firm AB with the same clients. The income derived after the amalgamation, the income derived and earned by the firm AB, is income of the firm AB and taxed as such. Nevertheless, in such cases there have been very substantial fees outstanding and due to firm A and similarly substantial fees outstanding to firm B. They have been collected in due course, paid to the partners who are continuing to practise with the same clients, and these substantial sums have been free of tax.
Surely not. As I understand it that could only apply if they were paying tax on an earnings basis. If they are paying it on a conventional basis these fees would already have been accounted for.
No. I think it is called a fees billed basis.
On an earnings basis means one pays tax on the amount of his earnings in the year in which he is assessed. He pays on his receipts. The other basis is that one pays tax on what appears to be owing to one, whether one gets it in or not in the year.
That is the fees billed basis.
Yes — a fees billed basis. What the Minister is saying could only apply if one is paying on a fees basis.
No. The situation I have described has occurred on a number of occasions and is likely to occur on an increasing number of occasions. This is not the only problem which is being covered by these sections. I am mentioning it to illustrate the point that there is a problem of tax evasion in that area. These sections are not designed for the purpose for which Deputy O'Higgins seemed to think they were designed. On the amendment No. 16, I understand the argument which Deputy O'Higgins was making. It, perhaps, relates more to amendment No. 17 than to amendment No. 16.
I think so.
Could I say in dealing with amendment No. 16 that it does not refer to a partnership of two or three persons? It refers to a new partner entering a firm or to an existing partner retiring without reference to the number of partners. Dealing solely with that situation, I am advised that under the system for assessing partnerships contained in Chapter III of Part IV of the Incomes Tax Act, 1967, a partnership is deemed to continue so long as there is a continuity of the persons in the composition of the partnership. When a new partner enters a partnership or an existing partner retires, the computation of the profits of the partnership trade is made without reference to the change in the persons forming it so long as even one of the members of the partnership before the change continues in the partnership after the change. Consequently, a change of that nature would not invoke the provisions of section 20 which we are discussing. On those grounds, I wish to suggest to the House that Deputy O'Higgins's amendment No. 16 is not necessary.
This is a subsidiary section. Would the Minister tell me what is meant by the term "at arm's length"?
This is not to be taken, as the Deputy knows, as a judicial determination of the meaning of the words. I take it to mean the term that would apply in the case of a transaction taking place between two persons or two firms in the ordinary course of business and not because of any special relationship between the parties.
God knows, as Deputy O'Higgins has said, the phraseology is complicated enough without putting in what appears to be commonplace expressions.
I think it is because of the use of this simple phrase that Deputy O'Higgins is surprised.
The Minister referred a moment ago to section 29 of the Income Tax Act and he gave me his advised interpretation on that. I read that section at length many times within the past two days——
Not at arm's length.
Not exactly but I did gather the glimmering of the meaning but when I find a subsection in section 21, which reads:
In the case of a transfer for value of the right to receive any such sums as are described in section 20 (2) or 26, any tax chargeable by virtue of those sections shall be charged in respect of the amount or value of the consideration (or, in the case of a transfer otherwise than at arm's length, in respect of the value of the right transferred as between parties at arm's length)...
I begin to wonder if some new code is being introduced because I have never seen the phrase used before.
I confess that when I read it first I thought the same. I had not seen it before either but I am advised that it has appeared in a number of previous Finance Bills and the interpretation is not in dispute. It is commonly understood.
The late Deputy Seán Dunne described the phraseology in Finance Bills as gobbledegook and it would appear that we are improving on the gobbledegook. Surely some other phrase could be used?
I move amendment No. 17:
In subsection (3), page 15, line 15, after "death" to insert "or where a profession carried on by a partnership consisting of not more than two individuals is discontinued by the death of either of them".
This amendment is to enable this matter to be discussed. I do not know whether this is the appropriate section at which it should be inserted but I am concerned with the principle involved in these sections where they are aimed and expressed to be aimed at tax evasion. Indeed, that is reinforced by what the Minister said a few minutes ago. It is clear under section 69 of the Income Tax Act of 1967 that if a change in a partnership takes place and if the number of partners is reduced from three to two or from two to one—we can forget about an increase — there is a change in the partnership even if that reduction in the number is brought about by death.
These sections come into operation, then, if there is any change in partnership but I wish to exclude a situation in which one partner dies in a small firm of two partners. I do not think that that kind of change should bring about the operation of these sections. Whatever options are open to such a surviving partner should remain open to him. At any rate, I do not think this would be of any great significance but it might be of some significance if tax was paid on an earned basis. In any event, death should not be a reason for bringing this into operation. That is recognised in subsection (3) of section 23 in so far as it applies to a single individual. There seems to be an exclusion in the case of a profession carried on by a single individual being discontinued at the time of his death.
In his amendment, Deputy O'Higgins refers to a profession or a partnership consisting of not more than two individuals. I thought I read the position as being that where a partnership consists of two or three persons, on the death of one of the partners, there is a discontinuance. I am advised that there is no discontinuance in a partnership of three or more when they are reduced to two. The problem arises only when a two-man partnership is reduced to one.
That was my reading of it when I put down the amendment but——
Perhaps if I can confine my case to what is in the amendment I can deal with that, because the other is a different situation. The problem here is tied in with another provision — section 62 of the Income Tax Act, 1967. As Deputies will see, section 23 of this Bill provides a statutory basis for valuing the work of a profession in progress at its discontinuance and it is parallel to the provisons in section 62 of the Income Tax Act, 1967, which provides a similar statutory basis for valuing the trading stock of a firm at its discontinuance. Both provisions are designed to counter the avoidance which could be effected by placing too low a valuation on the stock or work in progress at discontinuance. Section 62 of the Income Tax Act, 1967, excluded a case where the discontinuance of the trade was occasioned by the death of a sole trader on the grounds that, as Deputy O'Higgins put forward earlier, death cannot be regarded as part of a planned tax avoidance scheme, not in normal circumstances at any rate.
If Deputy O'Higgins's amendment were accepted it would have the effect of excluding from section 23 a further case where the death of a person is treated for tax purposes as causing a discontinuance, that is where one partner of a two-man partnership dies. If that were to be accepted it would be anomalous not to make a corresponding amendment in section 62 of the Income Tax Act, 1967. The problem there is there could be considerable loss of revenue in the event of the amendment of section 62. I am faced with a difficulty here. While I can see some merit in Deputy O'Higgins's amendment the consequential amendment which I think I would have to make in the other section could mean a much wider opening of the gap than would be opened by this amendment.
What exactly would that mean?
Does the Deputy mean in money?
I could not say offhand but I think it would be substantial.
The Minister is awfully vague tonight.
It is very difficult to put a figure on evasion.
It is also difficult for the House to accept there would be substantial evasion if a figure cannot be put on it. This is three times this question has arisen and in each case the Minister said he could not put a figure on it.
How can one put a precise figure on evasion?
The Minister must know what the loss would be if he says it would be substantial.
One cannot foretell the number of people who will avail of those things. One can estimate whether there are likely to be many and, if there are, are they likely to be in a substantial way of business. The problem which arises in regard to the amendment which I think would have to be made in section 62 is because the basis of valuation of trading stock is cost or market value, whichever is the lower. In a period of rising prices valuation at cost price could be used to relieve from tax very substantial sums from the realisation of stock in trade at market value. The possibilities of evasion and loss of revenue are fairly substantial in that case.
The most I can do in this is to say I am prepared to look at it and see if we can get a form of amendment which might go some of the way at least to meet Deputy O'Higgins's point. I have explained what the difficulties are. There is a problem of drafting with the amendment as it stands. We will have a look at it and see if we can draft an amendment which will go some of the way at least towards meeting Deputy O'Higgins's point.
I appreciate the Minister's difficulty in the drafting. I have in mind a particular case where a partnership existed and the sole remaining partner died. As the Minister will appreciate, in similar cases it may require considerable rearrangement to continue the business for a variety of reasons. There may be minors involved or if it is a professional business the necessarily qualified persons may not be available. In any event the persons entitled to the partnership in the sense of being entitled to the assets may not wish to engage a person on that basis. As Deputy O'Higgins has said in this particular case it could not be planned as part of the evasion.
The type of case I have in mind is where the sole remaining partner died. In the particular case I have in mind if the person had lived another partner would have been brought into the business but for one reason or another the necessary arrangements were not completed. In that particular case naturally it may take considerable time before it is possible, not to revive the partnership, but to make an arrangement which would succeed in continuing the business. Some sort of saver ought to be considered by way of an amendment which would cover categories of that sort which were due to the intervention of the actual event which occurred, the death of a partner, which it is not possible either to foresee or to have the necessary arrangements made.
There is only one thing I would like to add. I appreciate what the Minister has said and I accept his concern. Would the Minister in considering the matter between this and the Report Stage, consider it in the light of my view as to the effect of section 69 being correct? I have no doubt the Minister will get advice on this but if it is correct that section 69 of the Income Tax Act, 1967 operatesvis-á-vis partnership on the basis that if the number of partners drops from three to two or from two to one and the cause of the drop is death, there would in effect be a change in the partnership, would the Minister consider the amendment as also covering that possibility?
Yes, I will do that. Might I say also in regard to the case mentioned by Deputy Cosgrave that he talked about a single surviving partner. I know what he means but I do not think this is quite correct.
It is not actually a correct description in one sense. Where a partnership existed and the person who carried it on died then it was carried on as a partnership.
The point I want to make is that in the case the Deputy has in mind at one stage it was a partnership of two and the survivor of the two died. At that point there was a discontinuance but we are providing in subsection (3) that in such a case those provisions will not apply. The case Deputy O'Higgins was concerned with was an extension of this to where there were two partners and one of them dies.
Even though the business or profession, as the case may be, in the case of the partnership, was carried on and one partner dies and then the other dies, does the saver in subsection (3) apply in that case?
It applies where the survivor dies. Deputy O'Higgins's case is where one of two partners dies.
I should say on this section—I do not know whether it is clear from the section—that what is intended here is to give a measure of relief to individuals who were 51 years old, or over, on 6th April, 1970. The idea is that a professional man who has reached that age or is, perhaps older, could well have been counting on post-cessation receipts tax free as part of his nest egg for retirement and this is an effort at relief in such cases. As Deputies will see, it is graduated so that somebody who was 65 at the time of the passing of the Bill will, in fact, receive 75 per cent of his last year's earnings free of tax.
This is on the basis that his capacity to earn is reduced?
It anticipates his capacity will be reduced?
The Minister knows that barristers never retire.
I move amendment No. 19:
In subsection (1), page 16, line 47, after "change," to insert "less any payments made".
This sections deals with tax on what has been defined as the conventional basis and the general charge on receipts after a change of basis. The change of basis, as I understand these sections, operates in the same way as discontinuance but, in so far as this refers to sums to which this subsection applies, which are received after the change of basis and before the trade or profession is permanently discontinued, I want to insert after the word "change" the words "less any payments made" so that, if there are payments made in respect of the transaction, it should be the net sum, and that is the purpose of the amendment.
I accept the idea behind the amendment but I think we have already achieved the Deputy's purpose. At least, it was intended to achieve that in the wording of the final paragraph of subsection (1) which applies the subsection to sums "in so far as their amount or value was not brought into account...." The use of the word "value" was intended to enable a deduction to be made for all expenses appropriate to the sums chargeable under the section. On that basis, I do not think Deputy O'Higgins's amendment is necessary.
That has been the advice?
I move amendment No. 20:
In subsection (3), page 17, line 20, to delete "and to the transfer of work in progress".
This is a drafting amendment. There is no reference to the transfer of work in progress in the section itself and, for that reason, the phrase should be omitted from the subsection. We are proposing to delete it.
What is the need for this change? Apparently this has continued for a long time.
The effect of the section is to give the Revenue Commissioners discretion to prescribe the quantities in which wines and spirits may be bottled and packed in warehouses and delivered for consumption on the home market. Deputies will appreciate there have been frequent changes and, with the increasing sale of wines and spirits in supermarkets and alterations in methods of trading, there are demands for changes in the size of bottles, and so on, and these are laid down by law. Because of that there is great difficulty in doing anything about them so it is proposed now to enable the Revenue Commissioners, at their discretion, to prescribe the quantities in which wines and spirits may be bottled and packed. They will be able to do that without our having to introduce amending legislation every time a request comes in for a change.
Section 28 is designed to provide the money for section 27.
No. It is somewhat different. The effect of this section is that from 1st October, 1970, an optional scheme for the deferment of payment of excise duty on spirits delivered from a bonded warehouse will operate. The scheme does not apply to spirits delivered during the month of March in any year. In substance, it means that, by postponing payment of duty in this way for a month, the distillers will have more funds available to finance expansion. It is a form of aid to Irish distillers because of the substantial programme they have undertaken for the expansion of their industry, particularly on the export market. There is provision for partial recoupment to the Exchequer of the cost of this by an increase in the excise duty of 8d per proof gallon, which is roughly equivalent to .09d per glass. Those who do not avail of this option pay the existing rate of duty. I want to make it clear that there is no question of this operating to increase the retail price. There is a benefit to the distillers in it. This is an optional scheme. If they use it it means they pay something extra in the duty as a partial recoupment to the Exchequer. The cost to the Exchequer is estimated at about £100,000 a year.
The reason for the non-payment in March is that it is the last month of the financial year.
Yes, to ensure all the receipts come in within the financial year.
We are dealing now with Part III and death duties. I wonder if I may just make a reference to death duties themselves. In Part III, the Minister is, in effect, re-enacting the code in relation to death duties and continuing their application in our tax law. I think we should appreciate, in doing what we are doing and in discussing these sections, that we are continuing a code of taxation which, from a social point of view, has considerable disadvantages. It pays no regard to the differences in families or in circumstances or anything of that kind. It operates purely on the national value, at times, of property which passes, on death, irrespective of the fact that the unfortunate person whose death has caused the application of the duty may have been a hardworking parent with children or dependants for whom he was endeavouring to provide. The tax falls on him with the same application as in the case of another man who may have been a bachelor with plenty of money and no one to provide for or, instead of a wife and family, may have had two or three mistresses knocking around the place. This is the kind of duty and taxation that we are continuing each year in our finance legislation and which was borrowed from the century before last.
There are grave social objections to death duties and there have been—and it is to be expected—many efforts to evade the net of death duties. Efforts to evade the net of death duties have been made by people—parents, fathers —who were concerned and worried as to those whom they would leave after them. They have done many things to try to secure, after their death, the welfare of their wife and children. Therefore, in so far as we propose to deal now with sections designed further to tighten the application of death duties and the way they fall, I suggest we should examine them very carefully indeed and, I would hope, very sympathetically.
During the Second Reading of the Bill I gave the Minister several instances of what I thought was most unfair application of death duties to the estates of deceased persons. The big trouble is that while, some years ago, an estate of £9,000 or £10,000 value was a very substantial estate and was generally owned by somebody who was reasonably well off, at the present time a fairly medium-sized suburban house, well furnished, may in fact be valued for £9,000 or £10,000.
As Deputy O'Higgins has mentioned, occasionally—far too often—it happens that the breadwinner of the family dies and leaves very little except the house to his widow and family of small children. They must find the death duties somewhere. The only way they can do so is by selling and realising the property they possess. I gave the instance of the man who left a job when his wife got from an aunt what she considered was a reasonably sized farm. By the time the death duties were paid, the family were much worse off than if the father had stayed in his weekly paid job. He had intended to change over to farming but he finished up an itinerant labourer looking for work.
The death duty idea was established in different times and in a different century. Because of the fact that no provision is now made for the situation which has arisen, death duties are not catching the really wealthy people because they will make provision in various ways to try to avoid them. Only those who do not know enough about the law, and most certainly those who do not know enough about death duties to provide against what is likely to happen if the head of the house dies, are caught. I suggest the Minister should attempt to relieve at least people of modest means from payment of death duties particularly when this legislation will tighten the situation rather than make it easier.
I should like to support what Deputy O'Higgins and Deputy Tully have said. This is a subject that has been discussed on many Finance Bills. There are probably no recent occasions that any of us can recall when it was not discussed on a Finance Bill. What Deputy O'Higgins and Deputy Tully have said is particularly apt in present circumstances. Death duties were originally devised in circumstances in which wealth was in relatively few hands. It can be argued that if a person has not an estate of a certain value it will not be liable. The depreciation in the value of money and the substantial rise in the nominal value of house property can mean and does mean that cases that, in the past, would not have been caught for death duties—whose estates would not bring them within the ambit of the death duty code or certainly only at the very lower rates—are now caught within it. As Deputy O'Higgins rightly said, the duty applies whether the deceased was married or single. To that extent, the effect is undoubtedly unfair. In addition—this is one of the things about which we had a very protracted argument in 1965 when the Finance Bill of that year was being discussed—that Bill, which has since become an Act, changed the law very materially to the disadvantage of persons who leave property. We have to consider this on the basis of the ordinary average person who nowadays leaves a house or leaves a house and a small business or a house and a farm as the case may be. In the past, it was possible to take out an insurance policy to provide that, in the event of the death of the breadwinner, for example, —the father or mother in most cases of property of that character—liability or at least portion of the liability in respect of death duties would be met. By reason of the amendment made in the 1965 Finance Act, an insurance policy of that character is aggregated with the rest of the estate. In fact, it has the effect of inflating and increasing the value. This is bad social policy as distinct from the effect on the individual concerned.
In theory both our legislation and our social policy are designed to assist the family and to preserve family businesses. The effect of the aggregation of an insurance policy of that character with the rest of the estate is that the old arrangements which were made cannot be made any longer. If an insurance policy is taken out, the ultimate effect is to raise the total value of the estate and consequently to bring it, in most cases, within a higher rate of death duty.
As has been pointed out, it has very serious effects. The house has to be sold or mortgaged or the business or farm has to be disposed of in whole or in part, or some other arrangements of an onerous character must be made so that the death duties can be met. It is sometimes easier to do that in one type of business or undertaking than in another. It is certainly a tremendous burden to place on a small business or on a widow with a young family who inherits a farm. The position is even worse if the person was in some employment and the principal asset is a house that has been acquired or purchased as a result of very considerable exertions on the part of the deceased person.
This is a matter that should be considered sympathetically from a social point of view. It should be considered apart from the annual Finance Bill. It is always discussed here in the context of other financial proposals or in association with them. Undoubtedly, the decision to make the change in 1965, which was slightly modified subsequently but, nevertheless, operates very severely in many cases, was a bad decision. We have all kinds of assistance to promote and develop industry, to encourage external investment and to attract to this country industrialists or people with wealth. If we do attract that type of people to come in, in most cases, as Deputy Tully said, they can get the best possible advice and they probably have sufficient assets to avoid the hardship the average family has to bear to a very considerable extent.
There is a great deal in what has been said here. We should have a fresh look at the changes which were made in 1965. As I said, they were slightly amended subsequently. Nevertheless, considerable difficulties have been encountered and, indeed, I am sure that in a number of cases the Revenue Commissioners are aware of the hardships caused by them.
I should like to reiterate and support what has been said by other Deputies. I wonder could some way be found of taking the house according to its value. Deputy Tully referred to a suburban house and contents valued at something in the neighbourhood of £7,000 to £10,000. Could a figure be taken and could that get either a special rate of exemption or absolute exemption? It is a great hardship to a widow—and it is worse if she has a young family—to find that, after a lifetime of saving on behalf of the family, the house, into which they put their savings, becomes almost but not quite a handicap. Usually, all the savings are put into a house. Sometimes the widow may have a small pension but it is not very much in this day and age.
If there are any savings apart from the house, they have to go to pay the death duties. If there are no savings the widow has to get out of the house and go somewhere else. This is more expensive on her than if she had been able to stay in her own house. Because of the capital value of the house she has to find a fairly large sum of money. She cannot raise the money so she has to sell the roof from over her head and live more expensively in order to pay a sum of money which is asked for by the Government, which has not arisen through her own carelessness or through the thriftlessness of her deceased husband. There really are tragedies.
There was a time when the exemption figure from death duties corresponded more or less to the price of a house. When some of us undertook to buy a house you could get a very nice house for £1,000 and, indeed, for a great deal less. I remember when the houses in Mount Merrion were built and sold for £700. They are beautiful houses. I do not know what they would cost now but you would find it very hard to buy one for £7,000. Years ago the exemption rate would more than cover the house. Now it will not cover the house. We have the strange anomaly of somebody having to sell the roof from over her head which, in a climate like ours, is a great tragedy. We do not live in a south sea island and we cannot put up reed huts and live in them.
I would ask the Minister and his Department to consider the social effects and to try to relate the death duty exemption figure to something that is equivalent to an unpretentious house or a very small farm. That would be an act of great social justice and value.
On the general question of death duties some people argue that they are an anti-social form of tax, but I think other people can argue, and, perhaps, with greater validity, that not to have a system of death duties is anti-social. It seems to me that on balance—I am speaking purely on social grounds—that a system of death duties is necessary. I think that with most people the area of disagreement would arise with the manner in which the system of death duties is applied. I think there are some misconceptions in this respect and to try to put the situation into proper perspective I should like to mention certain figures I have. The average number of deaths each year is about 35,000. Last year the number of cases in which an application was made for a grant of probate or where administration was extracted was about 14,000. Of those 14,000 duty was paid only in about 2,000 cases. The revenue was about £8 million and 70 per cent of that revenue came from estates exceeding £30,000 in value.
Deputy Dockrell spoke about the exemption figure. Up to 1951 the exemption figure was £100. From 1951 to 1960 the figure was £2,000. Since 1960 the exemption figure has been £5,000. There is a separate and additional exemption figure of £5,000 for sums paid under superannuation schemes. But there is another aspect of our estate duty legislation which, while it may be known, is not widely appreciated. It is an aspect which I think clearly demonstrates that our death duty legislation is much more progressive than that operating in Britain or Northern Ireland. It is that we provide abatements in respect of a widow and dependent children. These are abatements of duty which mean a very substantial amount of duty in relation to the actual value of assets. The effect of this is that, where a man dies and leaves a widow and five children, he would have to leave an estate worth more than £25,000 for his dependants to have to pay any duty. There is no abatement of that kind in Britain or Northern Ireland. This is one area where, even if we are not entirely satisfied with the operation of our death duty legislation, at least we can console ourselves with the thought that we have moved in the right direction and that our legislation is considerably more progressive than that operating outside our borders.
Would the Minister have the figure for a widow without dependent children because the majority of deaths would affect those?
Why does the Deputy say that?
I mean in regard to age.
Yes, I know what the Deputy means. The actual abatement in duty in that case is £1,000. That represents considerably more in the value of the estate which would have to be just under £15,000 before liability arises.
£1,000 represents £10,000?
Yes. Having said that I think that, while nobody would claim that our death duty legislation is perfect, it is a great deal better and fairer in application than is generally realised.
While I understand that the abatements to which the Minister refers apply, I wonder if this is adequate in view of the change in the value of money every year, I think, for many years and certainly for the past 20 years? I remember once when we were in Government — and I think the revenue at that time was about £4 million a year—in one particular year in the case of one person in the country, admittedly an exceptional case, the amount of duty paid on an estate was £1,300,000. The estate was about £3 million. Many would naturally say that if somebody had that much money he should pay the duty but such cases do not occur very often. He was responsible in that case for one-quarter of the total duty, or possibly more, because for a number of years, I think, the revenue from death duties, amounting to something between £4 million and £6 million, remained fairly static. Now, as the Minister says, it has gone up to £8 million.
There are specific cases that come to mind in which the State incurs considerable expenditure to attract industry or make it worthwhile, all of relatively recent growth or development. One is the tax concession in respect of exports as applied to industry. That has been progressively developed over a number of years and has paid off, I think, in attracting industry here and in developing a worthwhile export trade and in providing employment. Only last year there was a desirable change in the Finance Bill, and again it was one designed to encourage people. We made a change in respect of persons who owned stallions and who for one reason or other could not locate them at their own studs or had no stud and who hitherto paid tax because the stallions were not located at their own stud. An exemption was provided. Again, it was, I believe, a desirable change and an agreed measure here. These are two specific measures that come to mind, one applying to industry and the other to agriculture. There are many others.
Purely from a revenue point of view no doubt there is a good deal of money involved in this and no doubt the stock answer of the Revenue Commissioners or the Minister for Finance will be: what substitute can we get to provide the equivalent revenue? That is an understandable attitude if the Minister for Finance is pressed, or the Revenue Commissioners, or the Government are pressed to raise a certain amount of money. Here is an aspect which has probably never been approached at the same time as we approach the incentives designed to assist industry or develop the economy in one way or another: there is, and I think there has been, some evidence here — unfortunately the number of cases that come to mind could probably be counted on one hand — that for some reason or another relatively few wealthy people have been attracted to this country and have provided employment, and left assets or treasures or the benefit of their accumulated expertise in one form or another or a proportion of it to the nation. I think there is a great case for attracting as far as possible that type of person here.
It may be argued that if they had not accumulated the wealth the death duties would not have to be paid. At the same time in every section of the country responsible opinion is convinced that what we want here is to attract more wealth and more know-how of various types. Notwithstanding the exemptions, reliefs or allowances which the Minister mentions, the policy in respect of death duties is diametrically opposed, or as near as it is possible for it to be, to the policy that the Government, or for that matter different Governments, have operated in respect of trying to attract or encourage development. It seems to me, particularly since the changes which were made four or five years ago, that this is a matter which might be considered from a social point of view to see if it is not possible to devise some more equitable system.
A comparatively small number pay a fairly large amount of money in death duties. With the drop in the value of money and with the changes over a few years, it is very easy to see, as Deputies opposite pointed out, that a house which cost hundreds of pounds 15 or 20 years ago now costs thousands. Consequently the beneficiary is liable to an increasing amount of death duties. The Minister should have this matter examined and if necessary appoint some form of committee. I know it has been considered from time to time and was the subject of some consideration by the Income Taxation Committee, but no acceptable solution has been found. The changes introduced in recent years have in almost every case added burdens to people who have enough burdens already and who have had to make considerable exertions in order to meet the charges.
(Dublin Central): There is only one bracket I should like the Minister to consider, that is estates between £20,000 and £35,000. A widow with one child would be exempt in the case of a £20,000 estate and a widow with five children would be exempt up to roughly £35,000.
(Dublin Central): For a widow with five children?
Yes. The amount of abatement for a child is £500 — half that for a widow.
(Dublin Central): I thought it was higher than £25,000. This is not a very large estate. In the case of a widow with five children whose husband was running a business, if on his decease the estate is valued at £35,000, it will be appreciated that the widow must bring in someone to run the business at a cost of between £1,000 and £1,500. With property of £25,000 or even up to £35,000 a widow would have difficulty in paying death duties, particularly if she is educating her children and, as I say, has to employ a manager to run the business. Very little profit can be made out of a business worth £25,000 and very little property in Dublin can be bought today for £25,000.
I would ask the Minister to consider the estate between £25,000 and £40,000 in order to give relief to a widow with from three to five children. If the husband was only starting out in business, he would be carrying a large overdraft which would make it impossible for the widow to negotiate an additional overdraft to pay the death duties. If a businessman with an estate of £25,000 dies young, he has not been too long in business, and this is one section to whom I can see hardship being caused.
The Minister's figures were very interesting. While it might be considered that an estate of £15,000 is a substantial one, with money values dropping the way they are and with house property and business property, as Deputy Fitzpatrick has said, at their present value, no one can claim that anything substantial can be obtained for that money today. One of the extraordinary things about it is that apparently no provision is made for the payment of this except outright, which means that, in addition to having to find someone to run the business, as Deputy Fitzpatrick said, if beneficiaries are just over the sum which is allowed, they are not given exemption. Would the Minister confirm if that is correct? If the exemption figure is £25,000 and they have property worth £26,000, will the full £26,000 be taxed or do they get any exemption?
Yes, they do. In the case the Deputy describes, the abatement would be £1,000.
That is better, but it does mean they would have to find death duties in respect of £25,000. We have been arguing for a number of years here about income tax in general and claiming that, although money values have dropped, no effort has been made to increase allowances in respect of PAYE and other things like that to what they should be. The same thing would apply here. The Minister said that 70 per cent of the money paid in death duties came from the estates of £30,000 and over. Therefore we assume that 30 per cent of it comes from under £30,000. If the total revenue is £8 million it can be assumed that the amount we are considering here is about £2,250,000. Would the Minister agree that is so?
Therefore the provision of large sums of money is not involved in respect of the people about whom we are talking. Personally I have no objection to the representative of a person who dies leaving £1 million worth of property paying a fairly substantial amount of death duties, but I am talking about people of moderate means, the small business person, and particularly the person who has nothing except a house and its contents or a small farm which at the present time may put them over the top, particularly if it is just a widow or an immediate relative of the deceased.
If the Minister wants to deal with this quickly he can do so by increasing still further the allowance which is exempt for death duty purposes, and he can do that without breaking the Budget. As he knows in relation to last year's Budget, towards the end of the financial year we were passing Supplementary Estimates and I think the final figure was £35,800,000 which had not been budgeted for. Therefore a sum of a little over £2 million is relatively small in national finance.
I suggest that the Minister might look at this matter and he might meet the wishes of the majority in the House, including members of his own party, if an exemption could be given with regard to people of what we can now call modest means. Even in country districts, and I live in a country village, house property which a few years ago could be bought for £2,000 or £3,000 cannot now be bought for up to £10,000. Even newly erected houses which cost about £5,000 to build now cost up to and over £10,000. Something will have to be done about this, otherwise it will become a very important matter in the lives of people who not alone are bereaved by the loss of the breadwinner but, in addition, get a bill for death duties which they are unable to pay. I do not expect miracles from the Minister but I suggest he should have a fresh look at it. It should be relatively easy to deal with it.
Can the Minister say when the rates were last fixed?
Nine years ago.
Nearly ten years ago.
We are higher than the North of Ireland from £10,000 to £50,000.
Yes but do not forget what I said about the abatements which they do not have. Effectively we are considerably lower. Perhaps I might put——
For agricultural and business assets we are higher than England for every estate up to £750,000.
Yes, but they do not have the abatements and their farmers pay tax, which makes a great difference.
Our farmers pay rates, of course.
Many of them do not. There are two aspects of the debate on which I should like to comment. Although Deputy Cosgrave did not explicitly say so I think he was suggesting that we should have a look at the idea of abolishing death duties altogether on the same principle as we provide incentives for the development of industry, the development of exports and so on. There is a difference. In so far as we provide incentives for the development of exports or industry we are encouraging growth in the economy. The abolition of death duties, if it operated at all in that direction, would simply attract capital. I do not think we could depend on that operation to attract industry. The people you would attract would not be people who would be coming in to set up industry and, therefore, we are talking about different kinds of incentives altogether and for different purposes.
While I do not say that we do not want to attract further capital, nevertheless, the capital inflow in recent years has been substantial. From the point of view of the development of industry we are much more interested in know-how and access to markets abroad rather than in the attraction of capital. In fact, the availability of substantial sums of money, and this is something of which I had experience as Minister for Industry and Commerce, of people coming along with quite substantial sums of money which they wanted to invest in industry in this country but having no technical know-how and no access to markets, was really an embarrassment because all they would end up doing would be to invest in existing industry, perhaps, on terms that would not be terribly attractive from the point of view of the economy as a whole.
There is another aspect and that is that in 1960 the maximum rate of duty was reduced from 53 per cent to 40 per cent in an effort to test the proposition whether or not it would influence wealthy people to take up residence here. The maximum rate in Britain, by the way, is 80 per cent. To date we have had no evidence that this substantial reduction in the maximum rate has had this effect. Therefore, the theoretical basis for abolishing estate duty is doubtful and the practical basis is even more doubtful.
On the question of increasing the level at which estates are exempt from duty, and the abatements and so on, I can only say that while I sympathise with some of the cases made in this regard, as I have indicated, the situation in this country is not by any means as bad as many people seem to think, especially in relation to our nearest neighbours. I could not undertake in the course of the passage of this Bill to make any changes in that regard. In fact, if any such changes were to be made they would not be made before next year's Finance Bill. I do not want to mislead the House, I am not undertaking that such will be one of the provisions of next year's Finance Bill.
Even if the Minister has £35 million over at the end of this year?
If I felt we were to have that amount over, I would be a lot happier but——
The Minister could retire.
The Deputy can rest assured that will not happen.
In view of what the Minister is taking from the pockets of the workers for their increases he will have a fat amount.
All I can say is that during the course of the year I will examine the arguments that have been made with sympathy and if I find it possible I will, perhaps, propose some changes to the House but I am not undertaking that I am going to do that.
I move amendment No. 21:
Before section 34 to insert the following new section:
In valuing securities which form part of the assets of a deceased person regard shall be had to the value of such in the three years prior to the death.
The Minister and Deputies may have noticed that this amendment is very vaguely drafted. That is for the purpose of enabling it to be in order so that it may be discussed. If I put down in writing what I wanted to do the Ceann Comhairle would have written me a polite note saying that this was a charging amendment and was out of order. The idea of the amendment is, as I indicated on Second Reading, that at particular times — and recent times have been one period — there is a wild oscillation in the value of securities and cases have occurred, and do occur frequently, where on the death of a person if his assets include securities they are valued at the date of death and at the date of death they may have a particular value which on realisation, on the distribution of the estate some time later, may result in nothing at all being distributed, although duty has been paid on what was the apparent market value at the date of death. What I had in mind is in order to avoid injustices that may arise in a rapidly changing stock market of that kind, there should be a situation in which the person who is accounting for estate duty should have the option of taking an average valuation over three years prior to death, as against being compelled to take the value at death. That would prevent injustices and I do not think it would cost the State an awful lot of money. It would ensure that those among whom the value of the assets would be distributed would not suffer in a falling market.
In so far as this proposition applies to quoted securities which fluctuate in value, I would point out that, if one were to accept the principle, there is no reason why the period in question should not include an equal time after death as before. If one is to take an average over a period of three years, one could say why not one and a half years before death and the same period after death?
For the very good reason that there is a precedent for this in the Superannuation Acts.
There is a principle and a precedent in death duties that you apply at the date of death.
There is the principle and precedent in the Superannuation Acts where three years average can be taken. In this instance it could not possibly be the one and a half years before and after death as the Minister has stated.
The Deputy is speaking about a very different situation.
Maybe, but it is in legislation.
The Deputy is comparing chalk with cheese. In relation to quoted securities, to work out the average value over three years could involve the examination of the price of securities on every day in the period of three years.
What is wrong with that?
It could present the most appalling difficulties for those who are dealing with the Revenue Commissioners and it would certainly present considerable difficulties for the Revenue Commissioners. There are further complications also. Much of the property with which we shall be dealing if we accept this idea would not be quoted securities but would include such items as land, house property, bloodstock, works of art and other kinds of property. To work out the value of these items——
The amendment refers only to securities.
The amendment refers to assets——
In valuing securities which form part of the assets of the deceased person.
On which basis could one justify treating quoted securities in one way and all other property, including non-quoted securities, in another?
Other property is not subject to the oscillation to which securities are subjected.
Not as much perhaps, but it is subject to fluctuation.
Works of art?
Certainly. They can fluctuate much more than quoted securities.
The fluctuation is always upwards.
Not necessarily. This would involve an examination of the value of all property virtually on every day for a period of three years and I do not think the proposition is practicable. There are certain other complications, with which I shall not bore the House, as to the method of assessment of duty on certain other kinds of properties, such as settled properties, giftsinter vivos and so on——
They are not in the amendment.
They must be. The Deputy refers to securities. I know what he means and I am not trying to be technical in saying that perhaps this could extend to other property. I am saying that, if one accepts the principle of this, I do not think one can justify applying this only to quoted securities. It must be applied to all property passing on death. On both counts of principle and practical application I find myself unable to agree to this amendment and consider it would create far more problems than it would solve.
I know that some people may be unfortunate in so far as at the date of death the property may be valued considerably higher than it is subsequently. On the other hand, the reverse happens and property that is valued quite low at the date of death may be worth much more when it is distributed subsequently. This may not be any consolation to those who are caught with property valued highly at the time of death but at least as far as the Revenue Commissioners are concerned they are not trying to get the best of both worlds. As far as estate duty on normal assets is concerned, it has operated since 1894 that the valuation is taken at the time of death of the deceased. In practical terms this is the only thing that we can do and I do not see how we can operate on any other basis.
I move amendment No. 22:
In subsection (1), page 19, to delete lines 37 to 44 and to substitute the following:
"(b) by the insertion at the end of subsection (4) (a) (ii) of the following:
`in the case of a trading company and in the case of a non-trading company the amount of dividends or interest on stock, shares or debentures of the company which in the opinion of the Revenue Commissioners are excessive having regard to the value of such stocks, shares or debentures of the company'."
Section 34 seeks to amend section 20 of the Finance Act, 1965. Therefore, it is another section dealing with duty or tax evasion. It is well to recall that section 20 of the Finance Act, 1965, dealt with the device of a person transferring his assets to a company and receiving a yearly benefit or payment in return. That was done by a person in the autumn or winter of his life for the purpose of endeavouring to preserve the assets for the benefit of those who would succeed him.
Section 20 proceeded to provide that the extent of his benefit would be valued and, as it was valued, a portion of the assets would be deemed to pass on death and this particular device was stopped by section 20 of the Finance Act, 1965. However, that section excluded dividends on shares and since section 20 was introduced there has grown the practice of providing exaggerated and unreal dividends. As I understand section 34 it is designed to include the dividends in respect of non-trading companies and is a follow-up to section 20 of the 1965 Act. However, it seems to me in proposing to go as far as this to be unfair.
The dividends in any event following the death will be valued and those who succeed to them will be held accountable on the value of these dividend shares for duty purposes. If they have an unreal, enhanced or bloated value in any event they will fall for tax in the hands of those to whom they go. There is a problem but I believe the way it should be dealt with is to make liable to duty in the sense of section 20 that portion of the dividend which is inflated or excessive. In my amendment I suggest what should be inserted in place of what is proposed in section 20 of the Finance Bill as follows:
In the case of a trading company and in the case of a non-trading company the amount of dividends or interest on stock, shares or debentures of the company which in the opinion of the Revenue Commissioners are excessive having regard to the value of such stocks, shares or debentures of the company.
That would deal with the problem created by this device. It would ensure that the redeemed or declared excess would come within the ambit of section 20, but it would not work the double injustice. If the whole of the share or dividend is put in under section 20 it will create a situation where there would be a double impact of duty because you will have it on the section 20 operation and also in relation to the shares being subsequently valued and held accountable by the persons who receive them. This would avoid a double impact and at the same time it would achieve what the section seeks to achieve.
I might start here by saying that the amendment drafted refers to both trading and non-trading companies. Deputy O'Higgins has described some of the purpose of section 20 of the Finance Act, 1965. He has also pointed out that certain loopholes have appeared and that in this section we are endeavouring to close those loopholes by restricting more than was restricted under section 20 of the 1965 Act. We are proposing now to make even greater restrictions in this regard but we are proposing to apply these restrictions only to non-trading companies not to trading companies. We are dealing here with non-trading companies whose assets have been disposed of to the company by the deceased. I cannot conceive of circumstances in which a non-trading company set up in this way can be in existence for any other purpose than the evasion of death duty.
If that is so it seems to me there could be a different situation where you are dealing with a trading company and for that reason I would have thought Deputy O'Higgins would be dealing here only with non-trading companies because we do not propose to apply these new restrictions to trading companies, only to non-trading companies.
With regard to non-trading companies and the application of this section to them I am not quite clear if I follow Deputy O'Higgin's reasoning but on the basis of what he has said and what is in his amendment the stocks, shares or debentures should be valued having regard to the value of the stocks, shares or debentures.
Of the company.
There is a problem here for the Revenue Commissioners in deciding what is an excessive amount for a dividend having regard to the value of the stocks because if regard is had to the real value of securities then no dividend would be excessive. For example, if a 500 per cent preference share of £1 is bought for £50 then the £5 dividend on that share is not excessive because having regard to the real value of the stocks no dividend is excessive. If the Deputy has in mind, as I think he has, a situation in which the Revenue Commissioners would in some way distinguish between, let us say, a preference share yielding 1,000 per cent and they decided 20 per cent was a reasonable figure on it, in that case the assessment to duty would be based on 980 per cent. I am not sure if I am making the point clear. Is this what the Deputy has in mind?
It is asking the Revenue Commissioners to make the distinction and make a ruling in circumstances where it is almost impossible to do so for the reason I have given that if regard is taken of the value of the stocks no dividend is excessive. I would remind the Deputy and the House that what we are dealing with here is an admitted device for the avoidance of duty.
The point which Deputy O'Higgins is making, even if it could be applied in practice, is fairly unrealistic in terms of the difference it would make to the estate. Consequently having regard to that fact and the fact that it is in relation to a device which is admittedly designed to avoid duty, even if I found it were practical to apply that, and I do not find that is the case, I do not think I could accept it as I understand the case put forward by Deputy O'Higgins.
Admittedly I am only concerned with discussing this on the basis that this is dealing with a tax evasion device. We are merely concerned with the way in which to deal with it. The way it is proposed to deal with it here is to add a section which already provides a means whereby a slice of the assets of somebody else, or of a company, shall be regarded as passing on the death of another legal person. Added to that is the inclusion now of unreal dividends which, in fact, will pass on the death and will become part of the assets of the deceased after his death so that under this section the beneficiaries will be hit twice. They will be hit for estate duty in respect of a proportion — probably a significant proportion — of the assets of the company which will be regarded as rating a duty liability for which they must account. At the same time, they will be liable to account, as part of the assets of the estate, for the value of these dividends. It is because it seemed to me that there is a double liability for estate duty that I thought some other device should be adopted which would ensure that there would be a correct accounting for the property which was put into thead hoc company but which would also ensure that that would not be hit twice. I was suggesting that the Revenue Commissioners cream off the dividend on the real excess and put that into what determines the slice of assets which shall be deemed to be passing on death. The amendment may not achieve that in words but that was the object.
The Deputy is making two points. The Deputy was expressing the fear of a double liability for duty. On that point the proposed new section 37 should take care of that.
I do not know. We shall be discussing that later.
It should eliminate the danger of double liability. The Deputy is making the other point which must be seen in perspective. We are dealing with a sham, a device to avoid duty. In whatever way the deceased has been deriving income from the company, whether by way of salary or dividend or interest or anything else, what we are dealing with is an income derived by the deceased from a company which he set up for the purpose of avoiding duty.
But from his own property.
Agreed. But the manner in which he derives his income from that company is immaterial. The Deputy is not disputing in the case of his drawing a salary that this should be treated in this way. In practice, whatever, way he derives his income from this company is immaterial. It should all be treated in the same way.
If I cannot persuade the Minister I suppose I have not any hope of persuading a majority of this House about the amendment.
Amendment No. 23 and amendment No. 24, which is an alternative, may be discussed together.
I move amendment No. 23:
In subsection (1), page 19, line 41, after "company" to insert "and first became so controlled after the passing of this Act".
This amendment and amendment No. 24 — I do not know whether they will be entertained sympathetically by the Minister or not — are put down because we are dealing here admittedly with a device to evade death duties. We have preceded this debate by a discussion on the social imperfections of this type of taxation. There is, and there has been over the years, a fair battle of wits between those who represent the unfortunate person who is doing his best to provide, after his death, for his dependent widow and family and the Revenue Commissioners. The company that was legislated against in 1965 was only one of many devices. The dividend that succeeded it was another. There will be many more. Each year the Revenue Commissioners, through the Finance Bill, bring in section after section to deal with device after device. Thanks be to God human ingenuity knows no limits. In fairness, and seriously, let me say that the people affected by this amendment are people who are at the end of their days. That is why they entered into the device in the first instance. That is why it came about. The arrangements they have made were not made illegally, unlawfully or in any sort of way of this kind. They were made in perfect knowledge of the state of the law.
The section provides that this section shall have effect only in relation to a death occurring after the passing of the Act. May I say on behalf of all such people "Thank you for nothing"? The section is only to apply to deaths occurring after this Bill has passed. We are supposed to express a word of thanks that the section was not expressly made to act retrospectively. Of course it can only apply to deaths occurring after the Act is passed.
The purpose of these two amendments, which are in the alternative, is to ensure that what was a perfectly lawful arrangement, attracting no duty liability when it was entered into or when it was madebona fide on the advice of people whose profession it is to advise on these matters, should continue to be exempt and that this new section should operate from the passing of the Bill onwards, but it should not seek to bring about a change in the law retrospectively. That is what is proposed here and that is unjust. There is great merit, and I think it is essential, that the law should be clear even if it is to be clear for only one period of 365 days. In order to have confidence in this country and in its institutions, when a man seeks to make arrangements for his own family in relation to his own business, in relation to his own assets and resources, if he seeks advice and gets advice he should be entitled to act on the basis that that is the law of the land. I suggest it is wrong and unjust for this Parliament subsequently to legislate backwards and to change in effect what was the law after a man has made an irretrievable step. That is the point. I would ask the Minister to appreciate that.
Such a person — I do not know who he may be — but I am going to imagine a man who has made arrangements now being legislated against, doing it because he was advised and advised correctly that there was no provision against what he was doing. In effect, he scrambles an egg which he cannot unscramble and now when he is 12 or 18 months nearer death, it is proposed in this section to declare the law to have been different with retroactive effect.
That is unjust and no matter how it is cloaked by providing sections which say "This shall only apply to deaths occurring after the passing of this Act" the harm will not be undone. In the sense of section 20 of the Finance Act of 1965 this is intended to make unlawful and inoperative thebona fide and lawful arrangements of transactions. As well as this being unjust, I am not sure whether it would stand the test of the courts but that is another question. It was in order to avoid that kind of injustice that I tabled amendment No. 23 which deals with the operative words in the section and which seeks to add “and first became so controlled after the passing of this Act”.
If the amendment were accepted, it would mean that any such non-trading company first became controlled, in the sense that is being legislated against, after the passing of this Bill. In other words, this dog will not run. That is a fair way to approach it. If it were approached in this way, it would mean that this kind of device could not succeed again; the battle of wits would continue, something else would emerge and the Revenue Commissioners could take other steps under other sections in other Finance Bills to deal with it but it is only fair that when a transaction of this kind of arrangement is being legislated against, it should be from this on. My first amendment is, accordingly, in that sense and the second amendment is only putting it in another way. Either of the amendments, in fairness, should be adopted by the House.
Deputy O'Higgins said that we are legislating for people who are in the autumn of their days, if I remember his phrase correctly. I admit there may be some such people concerned but I certainly do not admit that they are the only kinds of people with whom we are concerned. There is no doubt that we may well be dealing with the people in the prime of life who have made a good deal of money and who have begun to think about how they can assure in so far as possible within the law that liability to death duties will be avoided.
They certainly cannot take it with them.
Therefore, I do not think that Deputy O'Higgins is entitled to paint a picture of these old people making their last effort to look after relatives.
Does not the Minister know that that is probably true?
I do not. In fact, I know that there are some people concerned with this who would not answer to, Deputy O'Higgins's description of them. The Deputy said also that the process we are dealing with here was irreversible. I do not know why he should have said that because we are dealing with controlled companies. The prospective deceased controls the company. I do not know of any legal bar that would prevent him reversing the procedure. Furthermore, Deputy O'Higgins said that such people would be advised and advised correctly that to do what they did was not unlawful. He is correct in saying that.
However, he omitted to say that if he, in his professional capacity, had been asked to advise in such a case, he would certainly have prefaced his advice by saying that his advice was based on the law as it stands and that he could not give any guarantee that the law would remain as it is forever.
Which lawyer would advise except on the law as it stands?
That is the point I am coming to.
We are not going to imagine people advising on the law as it does not stand.
That is exactly the point I am making. He can advise on the law as it stands only when he gives his advice and any prudent lawyer would certainly add, especially in circumstances such as those with which we are dealing, that of course the law in these matters changes frequently; that his client could act only on the basis of the law as it was with no guarantee that it would not be changed. Therefore, there is no question of such people being misled in any way.
We come now to the principle behind the two amendments with which we are dealing. It appears to me that Deputy O'Higgins is trying to advocate a new principle in this, a principle which I could not accept. What he is saying in effect — we are dealing now with companies that have been set up solely as devices to avoid estate or death duties and the people concerned have worked out a device which, on the law as it stood, would enable them to avoid duty — is that having discovered that, we should say to them "That is all right; we will let you away with it but nobody else will be allowed to get away with this after the passing of the Act". I submit that this is a new principle. Virtually all death duty legislation affects dispositions which were made before the legislation in so far as they operate in relation to deaths occurring after the legislation being brought in.
Deputy O'Higgins himself described the perpetual battle that is going on between the Revenue Commissioners and people with substantial assets in the main, and their advisers, to work out methods by which such people can avoid full liability for duty. It is true that this battle goes on year after year and, as Deputy O'Higgins said, each year's Finance Bill indicates a further effort on the part of the Revenue Commissioners to close some loopholes that have been discovered. In those circumstances how can anyone advocate that the battle should stop in relation to some people if one is prepared to view it in that light? I am not trying to use any derogatory terms to describe the operation or the people we are dealing with but I am trying to deal with it in neutral terms, because I am accepting this description of a battle. Since that battle goes on every year and, every year, the Finance Bill provides proposals for closing loopholes, I am not aware that it has ever been accepted or suggested, certainly in the past, that in such circumstances arrangements, devices which have been come to should be allowed to stand and not interfered with in any way. As far as I am aware, the position has always been that when such loopholes have been closed they have been closed on the date of the passing of the Act and thereafter the people concerned are in the position where they can reverse the process they have embarked on and they have been advised on alternative steps. That advice will always be covered by the condition that there can be no guarantee given to them by their advisers that the law will remain as it is. This is understood by everybody concerned in this matter. If the principle Deputy O'Higgins is advocating were accepted it would surprise most of the people concerned in this kind of operation. I am not aware of any precedent for what he is suggesting but, if there is, it certainly is an exception. The principle he is advocating is, as I say, new and is one I could not accept.
I do not understand the Minister's surprise. I suspect it is to some extent counterfeit surprise.
There is surely nothing unusual in our legislating in this House to observe the Constitution of this country. Should that be a matter for surprise?
It should not. I would have thought that in our legislation here we have regard to one of the principles that you do not change retrospectively the law of the land.
We are not doing that.
I suggest it is precisely what we are doing. I suggest that is very much what is involved here. We are providing by this section that, in a transaction which at the time it was entered into did not attract a liability for death duties, it will attract such liability, that it has and always had. That is passing legislation which is having a retrospective effect. It is unjust. It is not for me to say whether it is unconstitutional or not, but it certainly is unjust.
The Minister says it is a new principle. I believe we are entitled to say in our legislation here: "We are going to stop this from now on". I do not believe we are entitled to say anything more than that. The Minister says this is something new and novel. If to be just in our legislation is to be new and novel, let us start being that. There have been in the past many examples of punitive, penal Draconian legislation brought in here by successive Ministers for Finance at the behest of the angry Revenue Commissioners — livid and furious, that the late Frank Fitzgibbon or somebody else discovered a new loophole in their legislation. Ministers for Finance have said: "It was never there. We are going to pass an Act to say it never existed and can never be operated." There have been too many examples of this kind of thing and they have never done much good to anybody. This is what I suggest is wrong. It is utterly unjust to legislate here in this sense in respect of transactions which were lawful, carried out in accordance with the law, carried outbona fide. It is utterly wrong and unjust to change the law in respect of those transactions with the effect that they now attract legal liabilities which they did not and could never have at the time they were entered into. If there are examples to the contrary I suggest it is merely a case of many wrongs not leading to the proof of anything more than that they are a repetition of error. For that reason I insist on this amendment.
I will say another word or two on that, if I may. Deputy O'Higgins can only argue that this is retrospective legislation by indulging in a great deal of sophistry. He cannot get over the fact that the effect of these as he says, legal sanctions, but I would say consequences, on those transactions were not legal consequences at the time the transactions were entered into. He cannot deny that this section proposes to apply those consequences only in respect of a death occurring after the passing of the Act. Only sophistry can make that out to be retrospective legislation.
Furthermore, since he painted a picture of the Revenue Commissioners being livid because somebody discovered a loophole in their legislation — I think I am quoting his words exactly — let me say in all fairness that the Revenue Commissioners, in so far as they have responsibility for such provisions, are doing their duty to the people of this country. That is what they are there for. They are not there to enable wealthy people to avoid their liabilities to death duties. If this House decides that such people are to be exempt from death duties that is all right; but until the House decides to do so it is the duty of the Revenue Commissioners to make sure that such people do not evade their liabilities to death duties. I must go on record, in view of what Deputy O'Higgins said, by reiterating that in their actions in those matters the Revenue Commissioners are doing their duty to the Irish people and to this House.
We will make a socialist out of the Minister yet.
I might have been more of a socialist than the Deputy ever was.
The Minister seems to think the function of the Revenue Commissioners is to a administer a moral code here and not a legal code. Surely the position is if somebody gets advice, whether it be from his accountant or his legal adviser, and carries out certain measures which are perfectly legal, and afterwards because the Revenue Commissioners or their legal advisers or the Minister's legal advisers find they were not as good as they thought they were — apparently they are always finding this out year after year — they come back then and try to mend their ways. They introduce a new section which they try to make retrospective. It is quite reasonable that they should introduce a new section to close any loopholes they have discovered but it is very unsportsmanlike to change the rules in the middle of the game. That is precisely what they are trying to do. If they acknowledge they have failed to close any loopholes which they think may exist or may be deemed to exist, surely it should be sufficient for them merely to do that and they should not try to improve the position by introducing a punitive aspect of it, making it retrospective.
I am sorry but I cannot let the bone run with the dog. The Minister, having started by referring to my indulging in sophistry, ended up a few minutes ago with an extraordinary outburst of demagoguery. I want to make it perfectly clear in so far as justice is concerned that I do not care whether we are dealing with a succession of people as rich as Croesus. It has nothing to do with the case. From the point of justice we are doing something that is either right or wrong. When we are discussing death duties we are obviously talking about people who have property to leave behind them when they die. If they aresans culottes, people without a penny in their pockets, they may be happy to have no cares or worries in that respect. They will not be involved in this kind of thing.
The Minister says he will not stand — he suggests none of us should stand — for a situation which would enable wealthy people to avoid death duties. That is utterly wrong. I do not think such an approach on the part of the Minister a proper ministerial approach at all. I do not know who these people are; the Minister is, perhaps, closer to them than I am. But I am concerned here with nameless people, people who have worked hard and done their best to provide for their dependants, anxious to make some disposition of their property. I am concerned here with people who seek advice and are told they can do certain things. They do them. They bear the expense of doing them. They are advised that, by doing these things, their estates will attract no death duties. They enter into an arrangement. Then we come along and we seek to change the law. We are, I agree, entitled to change the law. The Revenue Commissioners are, as Deputy Hogan said, entitled to change the rules of the game but they cannot change the score on the scoreboard. That is the difference. The new rules may apply from this on. That is the just and fair way: it is utterly unjust to say, when the rules are changed, that they will carry their effect into the past and will affect the legal quality of a transaction entered into at some time in the past.
The Minister says it is sophistry to refer to these changes as retroactive legislation. It is nothing less than retroactive legislation. It is legislation affecting a transaction already concluded. Of course it is retroactive. Of course, it is retrospective. We are supposed to have the duty and the obligation as legislators here not to wear blinkers. We appear now to be doing something in conflict with the Constitution. That is why I raise this. These benches have often in the past stressed the unconstitutionality of certain things and have been scouted and derided for their efforts. But, quite frequently, in the last decade and a half our legislation here has been held to be unconstitutional by the courts, because Ministers would not listen. Where you have the conjunction of injustice, as you have here, and an apparent infringement of the Constitution, I prophesy that the Minister is heading for trouble. It is perfectly clear that this tax avoidance device can cheerfully and with a great deal of good sense be ended by our legislation; it is a different matter altogether when we seek to change the score up to this point of time. I do not think this is sophistry. The Minister says it is. He is entitled to his opinion. I believe this legislation to be unjust and I think either of these amendments, simple amendments as they are, would provide against this injustice and should be accepted by the Minister.
Deputy O'Higgins accused me of demagoguery. He will know that I have carefully refrained from referring in anything but the most neutral language to the parties or the transactions, though I did, perhaps, go beyond that in my last remarks. If Deputy O'Higgins thinks I am being demagogic, I can assure him I can do much better than that. What I said was in the context of the picture painted by Deputy O'Higgins of the Revenue Commissioners being very upset and vindictive because somebody discovered a loophole in their legislation. It was in that context I said what I did.
Deputy O'Higgins says he considers this provision unjust. I do not consider it unjust, for the reasons I have stated. Deputy O'Higgins thinks this provision may be unconstitutional. I do not think it is. He painted a picture of what happens year after year — an accurate picture, I agree — but the fact that it happens year after year is the very point of principle we are discussing. I am not aware that this House has ever decided that the principle advocated by Deputy O'Higgins is one it should accept. As I say, this goes on year after year. It has gone on for a long time. I will take the liberty now of quoting from the Official Report, column 1471 of volume 151, in relation to the debate on the Finance Bill of 1955. I quote the late Deputy Briscoe:
Will the Minister tell me that he will examine the provision and see does it require some saving words and, in addition, will he say if he thinks it is fair to make this retrospective by having it apply now to transactions which have been completed maybe ten, 15 and 20 years ago and up to this were free from this particular method of getting extra money from the estate of a deceased person?
The late Deputy Sweetman, who was Minister for Finance at the time, replied as follows:
I will deal first with the last point Deputy Briscoe raised about retrospection. The position has always been that, in respect of death duties, the operative date has been the death of the person. That has always been the practice right down through the years. If it was desired to change the rate of estate duty at any time the change would have to be framed so that it would affect the deaths of people who were born on and after the date of the passing of the Act. Obviously, it might not come into effect for 60 or 70 years. It would be quite nonsensical from the point of view of legislation and, from the point of view of administration, it would be utterly hopeless to have different rates running at the same time for people born at different times.
I want to suggest that what was said by the late Deputy Sweetman on that occasion, and has been said on many occasions before and since by different people particularly Ministers for Finance, represents the correct principle and the correct practice and that what Deputy O'Higgins is advocating is something that just could not be accepted.
The Minister knows well—I am surprised at the Minister— that it is rather like a schoolboy debating device to quote Deputy Sweetman at me. All right: let it be. He knows well that Deputy Sweetman was referring there to the broad incidence of death duties which, by reason of their name, operate and arise only on death because it is on death that the property passes. It is as a result of death that legacy or other duties would attach. But here, the operation we are dealing with is not the death: it is the entry into of this particular arrangement, the making of this arrangement, because surely we are dealing with what will happen on the death of the person? The death is a known, accepted, inevitable happening. It is the preparation for the death.
Is it not true that the provisions of this section could operate only on the death of the person concerned?
Death duties can attach only on death. We are concerned with what makes death duties attach to the occurrence of death after the enactment of this Bill — the effect of this section bearing on the arrangement which the deceased made during life. As a result of this section, the arrangement he made will attract the imposition of death duties — not the death but the arrangement he made with this section impinging on it. That is what brings about the liability for duty. Here is a clear distinction.
You can provide that all such arrangements made after the enactment of this Bill shall be caught by this section and shall be dealt with by this section but that arrangements made before the section was brought into operation should not be so caught. It is not a question of death. It is a question of arrangementsinter vivos, during his lifetime, made by the person concerned. There is a clear distinction.
I do not think I can advance the argument any further. We have dealt with all aspects of it. I am still of the opinion that the principle advocated here by Deputy O'Higgins cannot be accepted.
I think amendment No. 26 and amendment No. 25 are cognate.
I move amendment No. 25:
In subsection (1), page 19, between lines 44 and 45, to insert the following:
"(c) by the addition of the following subsection after subsection (8):
`Notwithstanding the provisions for charge arising out of this section, Estate Duty shall not be chargeable more than once on the same death notwithstanding that the property passing shall not be the same.' "
The purpose of this amendment is to endeavour to deal with what I feel may be implicit in the effect of the section just passed and, perhaps, in relation to other sections in the finance code. The Minister said that section 37, which we have not yet reached——
It is an amendment to put in a new section 37.
It is the Minister's amendment?
I shall explain what I have in mind. If the Minister tells me it is covered by the proposed section 37 I am quite happy. Under the provisions of section 7 (10) of the Finance Act, 1894, there is a prohibition or relief against double estate duty. It provides that estate duty cannot be levied in respect of the same death on the same property. It seems to me that the effect now of sections 20 and 21 of the 1965 Finance Act, as amended, is to provide for two different types of property deemed to pass on death — in the one instance, a benefit from the company and, in the other instance, a provision arising from the dividend that will now come into operation. These are two different types of property. It seems to me that there may be a danger of double estate duty falling because the property is not the same. Even if it is covered for a different reason by the proposed section, I am quite happy.
I am not quite sure if what I am about to say covers the precise point made by Deputy O'Higgins. The Deputy I think has referred to section 20 (8) of the 1965 Finance Act the contents of which I need not go into. If a company controlled by the deceased transfer an asset to an individual or to another company controlled by the deceased, the shares of the first company will be valued on the basis of the diminished assets and no question of a double charge will arise. If a claim for duty arises in respect of an instruction received by the company for the transfer, and also in respect of the asset transferred, the possibility of a double charge is eliminated either by section 20 (3) (b) of the Finance Act, 1965, or by this proposed new section 37 to which I have referred previously.
So that, in relation to what is being done under sections 20 and 21, there will not be double duty?
No, there will not.
That satisfies me.
I move amendment No. 27:
In page 21, before section 37, to insert the following section:
(1) Where in connection with a death occurring after the passing of this Act there arises by reason of subsection (4) of section 20 of the Finance Act, 1965, a claim for estate duty in respect of the assets of a company controlled by the deceased within the meaning of the said section 20, and estate duty is payable in connection with the same death in respect of stock or shares (other than debentures) in the company, then for the purposes of section 7 (10) of the Finance Act, 1894, the liability for estate duty in respect of the said stock or shares shall be deemed to be a liability in respect of the net assets of the company as if such assets had been held by it in trust for the members of the company taking the interests of such members as they subsisted immediately before the death of the deceased and the said section 7 (10) shall have effect accordingly.
(2) For the purposes of this section "member", in relation to a company, means the beneficial owner of any stock or shares in the company and the reference to a company holding its assets in trust for its members shall have effect as if the assets were held in trust for the members in accordance with the rights attaching to the stock or shares in the company and as if the company had acted in the capacity of a trustee only with power to carry on the business of the company and to employ the assets of the company therein.