I move: "That the Bill be now read a Second Time."
The purpose of the Bill is to give effect to the taxation changes and anti-avoidance measures proposed in my budget statement as well as providing for a number of other matters.
This Bill is the instrument by which the Government hope to achieve one of the main aims of this year's budget, namely tax reform, with the object of ensuring greater equity in the distribution and sharing of the tax burden. To bring this about the Government are carrying out a fundamental reshaping of the whole tax code. This Bill deals in particular with the simplification and reform of income taxation, the provision of major income tax reliefs and the widening of the tax base to include wealthier farmers.
In the interests of fair play the Bill contains a number of significant provisions to counteract tax avoidance and evasion. In Irish tax law some of these changes may appear to be radical but they have long been part and parcel of the taxation code of most enlightened countries. The Government's objective is that people with similar incomes should pay a comparable amount of tax. There will be one law for all, not one for the rich and another for the poor. It must be realised, however, that a thorough reform of any system of taxation is a complex and prolonged exercise.
Nevertheless, the fact that perfection cannot be achieved in one move is no reason why we should not make an effort to make some advance in the right direction. This Bill is not a panacea for all taxation imperfections but it is a real and significant step on the road to an equitable, acceptable and reformed code of taxation.
By far the greater part of the Bill relates to income tax and corporation profits tax, which are covered in Part I, which is in turn subdivided into a number of chapters. Chapter I provides for the new unified structure of personal income tax; Chapter II covers the taxation of farming profits; Chapter III deals with the restriction of tax relief on loan interest; Chapter IV comprises various anti-avoidance measures and Chapters V and VI contain a number of miscellaneous provisions in the field of income tax and corporation profits tax.
Reverting to Chapter I the principal changes in the personal tax structure are outlined in section 3, 6 and 8. Section 3 provides for the new structure of tax rates, comprising a standard rate of 35 per cent, a reduced rate of 26 per cent applicable to the first £1,550 of an individual's taxable income, and higher rates of 50 per cent, 65 per cent and 80 per cent, applicable to the various bands of an individual's taxable income over £4,350. Sections 6 and 8 outline the new personal reliefs which take account of the increases in the personal allowances announced in the budget as well as the withdrawal of earned income relief. One section which was not mentioned in my budget statement is section 9 which makes a change in regard to the amount of life assurance premiums which may qualify for tax relief. Under the old tax code, relief from surtax was not given in respect of life assurance premiums but under the new system it is not possible to retain this exclusion. Accordingly, relief may now arise at rates up to 80 per cent on the appropriate fraction of premium payments in the case of individuals with high incomes. It is reasonable, therefore, to take some offsetting measure to limit the effect of this change, and it has been decided to restrict to a maximum of £1,000 the amount of qualifying premiums. This limit should not adversely affect the vast majority of taxpayers who are saving through the medium of life assurance. Furthermore, in any case where a taxpayer before budget day was paying premiums in excess of this figure, such higher figure will continue to be eligible for appropriate relief.
Section 5 is another item which was not referred to in the budget statement. As recommended by the Commission on Income Taxation, it provides that on payment of dividends, interest and other similar payments tax will in future be deducted at the standard rate in force at the time of payment and not, as at present, calculated by reference to the tax rates in force in the various tax years over which the payment may have been accruing. Having regard to the fact that the standard rate of income tax is unchanged since 1966-67 this alteration affecting deductions will make little material difference. The other sections in Chapter I together with the First Schedule are largely of a consequential nature.
Chapter II of the Bill, comprising sections 13 to 28 deals with the taxation of farming profits.
As I announced in my budget statement, the Government, after careful consideration of all the factors involved, decided that farmers, the rateable valuation of whose land is £100 and upwards, would be subject to income tax as from 6th April, 1974. I indicated that tax liability would normally be based on actual profits derived from farm accounts but that, since this would be the first time that farming profits would be assessed, certain options would be provided to meet the difficulties of farmers who had not been keeping accounts. I promised that full cognisance would be taken of the particular problems of farmers who were now being brought into income taxation for the first time, in effect. I also undertook that relief would be provided for farmers the rateable valuation of whose land only slightly exceeded £100 and said that steps would be taken to guard against avoidance of liability by the fragmentation of holdings so as to bring the rateable valuation below £100. This Bill accordingly includes the provisions necessary to give effect to these proposals.
Since my budget statement, very useful consultations have been held with the National Economic and Social Council and with representative farming organisations regarding the considerations to be borne in mind in the taxation of farm profits.
The views of the National Economic and Social Council and of farming organisations have been taken into account in framing the provisions in the Bill. Some of the problems facing farmers in relation to taxation require further study before decisions can be taken.
Section 13 is concerned with definitions and is self-explanatory.
Section 14 repeals section 18 (2) (a) of the Finance Act, 1969, which exempted farming profits from income tax.
Section 15 is the general charging section which brings farming profits into tax under Case I of Schedule D. The section is so framed that, to be outside the charge, it will be necessary for the rateable valuation of the farm land to be under £100, subject to section 16 throughout the year of assessment. For the purposes of the £100 valuation test account will be taken of all farm land occupied by a farmer— or deemed to be occupied by him—in accordance with the provisions of section 17, which I shall describe shortly.
Section 16—which is an anti-evasion measure—brings into charge farm profits in cases where the rateable valuation of the farm occupied by an individual or his wife exceeds £50 and where either of them carried on at any time during the year another trade or profession or held a directorship of a company carrying on a trade or profession in which one or other of them controls more than 25 per cent of the ordinary share capital. In my budget statement, I referred specifically to the fact that the exemption of farming profit had given a spur to tax evasion and avoidance which, I indicated, I was determined to take firm action against. The exemption of farming profits encouraged certain people with other substantial income to buy farms so that they could attribute an undue amount of their income to farming activities and thereby reduce and in some cases actually cancel their tax bill. This section is intended, therefore, to curb this type of evasion. Persons with holdings of £50 valuation and under will not be affected by the section. This floor has been introduced so as to avoid bringing into the charge to tax the smaller farmer who has to supplement his farm income by working, for example, as a tradesman on his own account or as a small contractor.
Section 17 defines occupation for the purpose of the £100 valuation test and contains measures designed to counteract the fragmentation of holdings with a view to bringing them below the £100 figure and so outside the charge to tax. It provides that beneficial ownership and/or occupation of land will be the test for determining whether the £100 valuation applies rather than legal title. Where an individual's wife occupies a farm—or where a farm is beneficially owned by an individual or his wife but is occupied by any other person—the individual is deemed to be the occupier of the farm for the purposes of the £100 test. Provision is also made for apportionment of the rateable valuation, where a farm is owned or occupied by a partnership. Apportionment is also provided for in section 18 in cases where property does not consist entirely of farm land or where farm land is divided into two or more distinct occupations.
Section 19 provides for the marginal relief which I indicated in my budget speech would be provided in the case of farmers the rateable valuation of whose land only slightly exceeds £100. The section provides for the easing into the tax net of farmers who have rateable valuations of £100 and above that figure up to £119 valuation. It does so by providing for a graduated diminishing remission of the tax which would otherwise actually be payable in the particular case. At £100 valuation, only one-twentieth of the tax will be payable; at £101 two-twentieths; at £102 three-twentieths, and so on up to £119 valuation where the full tax will be payable. The extra amount of tax payable in respect of each additional £1 valuation should not exceed the notional extra income from that extra £1, namely, £40. Consequently, the section also provides for a £40 ceiling to the extra tax payable for each additional £1 valuation; that is the purpose of the proviso in the section.
The next section, section 20, provides for one of the special options I referred to earlier. In the normal way, farm profits for 1974-75 would be assessed on the basis of the profits of the preceding year. However, as this is the first year of assessment, the option of actual profits for 1974-75 is being given. As well, following my consultations with the farming organisations, I am providing—in subsection (2)—that if a person so wishes, the profits or gains of the calendar year 1974 may be taken instead.
Section 21 provides for another option which will, I think, prove particularly valuable to farmers. While tax liability would normally be based on actual profits, the alternative of a notional basis of assessment will be given for a transitional period because of the difficulties that would arise for farmers who have not kept accounts up to now. Under the national basis for 1974-75, profits are arrived at by multiplying the rateable valuation of-the farm land by forty. From that figure rates on land, depreciation of farm plant and machinery and the wages paid to farm labour can be deducted.
In response to requests from farming organisations, I am also providing that payments to contractors for work performed on a farm will be allowed as a deduction since such payments are broadly equivalent to a payment for labour and, to a certain extent, depreciation. I should point out that only these three types of deductions will be admitted in cases of assessment on the notional basis, since this notional basis of assessment by reference to a valuation-multiplier of 40 represents, as matters stand, a very favourable arrangement for farmers and there is no case for making it even more so by allowing further items to be deducted.
Section 22 provides for allowances for capital expenditure on construction of buildings and other works. It has been represented to me during the course of the consultations I have had with the various farming organisations that such an allowance should be given at a rate which would take account of the more rapid obsolescence of many modern farm buildings. I have decided that in all the circumstances an annual allowance of 10 per cent would be reasonable. I am providing accordingly. The allowance will also apply to up to one-third of the expenditure incurred on farm dwelling-houses. For the reason I have given in connection with the previous section these allowances will not be given where assessment is on the notional basis.
Section 23 is a technical provision designed to ensure that relief, under section 20 of the Finance Act, 1969, will continue where dividends are paid by a company after 6th April, 1974. either totally or partly out of farming profits which were exempt up to 5th April last.
I now come to the first of three sections that is, sections 24, 26 and 27 dealing with the treatment of farming losses.
Section 24 is designed to ensure that losses incurred in farming during the years when farming profits were exempt from tax cannot be carried forward against profits assessed for 1974-75 or any subsequent year. In other words, where loss relief is admissable against farming profits, only losses incurred in 1974-75 or subsequently will qualify. In the light in particular of a basic change in the approach to this matter of farming losses generally which is being provided for under section 26, it would clearly not be reasonable that losses incurred prior to the bringing of farm profits into tax should be allowed.
Before coming to the remaining sections dealing with farming losses, I shall deal with section 25 which provides for the apportionment of wear and tear allowances as between what would be referable to the period prior to 1974-75, on the one hand, and to 1974-75 and subsequent years, on the other. It could not reasonably be expected that depreciation referable to the period when farming profits were not taxed should now be allowed against chargeable profits.
Sections 26 and 27 are the other sections relating to losses and are essentially anti-avoidance measures. As I pointed out in my budget statement, the exemption of farming profits has encouraged tax avoidance in that these losses could be set off against other income so as to reduce or wipe out tax liability. Logically, when farming profits were exempted from income tax in 1969, the relief for farming losses should have ceased. It did not cease and the relief constituted a benefit which, together with the availability of the full appropriate personal allowances as a set off against non-farming income—this is dealt with in section 28 —made the exemption of farm profits much more valuable than a simple remission of tax. Now that there are farmers who are subject to tax it would be particularly difficult to justify providing the same loss relief for those farmers who are not suitable to tax. The Government have therefore decided that, subject to the overriding requirement contained in section 27, relief in respect of farm losses will, as from 1974-75, be allowable only in cases where the farm profits are liable to tax. Section 26 provides accordingly.
Section 27 contains an overriding restriction which will apply to the grant of farming loss relief and, as well, to losses on market gardening. As from 1974-75, the grant of such relief will be subject to the overriding condition that the holding is being run on a commercial basis and with a view to the realisation of profits. This section is designed to exclude from the loss relief so-called hobby farmers, that is, persons for whom farming is not a way of making a living but who engage in it as a pasttime.
Their main source of income is from non-farming sources and losses on farming are incurred by them—in the knowledge that these losses will be set against their non-farming income—on a scale or for a period of years that would not be accepted if the farm were being run on a commercial basis. Such hobby farmers will now be excluded from the relief as also will those who incur losses in the immediately preceding three successive years of assessment—since such recurrent losses are an indication that the farm is not being run on a commercial basis. It is necessary to include market gardening in the restriction as otherwise a hobby farmer might claim that he was not farming but engaged in market gardening.
Following my consultations with the farming organisations, I am satisfied that the measures relating to losses in sections 26 and 27 will be welcomed by the odinary farmer.
I now come to the last section, section 28, in the chapter relating to the taxation of farming profits.
I referred in my budget statement to one of the incidental, and unjustifiable, effects of the exemption of farming profits which enabled a farmer to set off the full appropriate personal allowances against the non-farming income of himself and his wife. I have already indicated that to deal with such cases, where farmers were not now being brought within the scope of income taxation, only one-half of the appropriate personal allowances would be allowed to be set off against non-farming income, whether of the farmer or of his wife, but that the restriction would apply only where the valuation of the farm was over £20. As part of the scheme there will be a sliding scale designed to graduate the tax payable by those persons whose valuations are only a few pounds over £20—this is provided for in section 28 (2) (b). Secondly, where a farmer shows that his farming income is less than one-half of the personal allowances, then the restriction will be abated accordingly.
Chapter III deals with the restriction of tax relief on loan interest. Early this year I announced that in order to curb the use of credit for speculative and tax avoidance purposes I intend to include provisions in the Finance Bill to restrict to a maximum of £2,000 a year the amount of loan interest allowed to qualify for tax relief, subject to an exclusion forbona fide business and professional borrowings. The further subsidisation by the Exchequer of vast personal borrowings for speculation, tax avoidance, betterment of one's own physical amenities or for any purpose would be unwarrantable.
The detailed provisions for the restriction of loan interest relief are contained in sections 29 to 51.
The main features are provided for in section 29, which includes a transitional provision limiting to £500 relief for the period 10th January, 1974—the date specified in my original announcement in the matter— to 5th April, 1974, the end of the tax year. Sections 30, 38 and 39 also include provisions of a transitional nature which ensure that there is no gap in relief for allowable interest and, conversely, that there will be no double allowance.
To ensure that genuine business activities will not be affected by the general restriction, sections 32 to 35 provide relief for borrowings to acquire an interest in a business in whose direction and management the borrower is actively involved.
Section 34, 36, 37 and 40 include anti-avoidance provisions which counter artificial transactions involving, for example, withdrawal from an undertaking of capital in respect of which relief has been claimed and its replacement by fresh borrowings or the spreading of interest charges between connected persons.
Sections 41 and 50 provide two consequential amendments of the present legislation to ensure the continuance of relief for business interest. Sections 46, 47 and 48 also effect consequential changes relating to co-operative societies and retirement benefit schemes.
Sections 31 and 49 effect some procedural changes concerning the payment of tax on loan interest. With certain exceptions, including bank interest, companies will be required to deduct tax on payment of annual interest. On the other hand, individuals, except in the case of foreign interest and interest payable to finance houses under "net loan" arrangements entered into before 6th April, 1974, will be required to pay interest in full, that is, without deduction of tax. Sections 42 and 44 are of a technical nature and provide for a consistent basis of assessment to tax in the case of interest affected by these changes.
Sections 43, 45 and 51 secure that interest payable by an Irish resident from income arising outside the State will be subject to the general restriction specified in section 29. Unrestricted interest relief will be available against trading and rental income which arises abroad; this will accord such income the same treatment as similar income arising within the State.
Chapter IV, comprising sections 52 to 61, is designed to counter various avoidance techniques and so prevent loss of tax. The purpose of each measure is set out clearly in the explanatory memorandum and accordingly it is not necessary for me to deal with each in detail. With the exceptions of sections 52 and 54 these matters have already been referred to in my budget statement.
Section 52 is directed against abuse of the tax reliefs which are provided in the legislation to encourage industrial exports. It has come to notice that some tax-relieved companies have given their directors and senior executives tax-free dividends in lieu of remuneration which would be subject to income taxation. The purpose of this section is to enable the Revenue Commissioners to treat the remuneration portion of such dividends as being emoluments assessable to tax. The usual rights of appeal are provided.
Section 53 is designed to counter the avoidance device which I mentioned in my budget statement by which a number of persons have avoided tax in the past by selling certificates of deposit before maturity so as to produce a capital sum instead of taxable interest. The section ensures that gains arising in these circumstances will be subject to income taxation in the ordinary way.
The purpose of section 54 is to remedy a defect in the existing law whereby a shareholder in a company who accepts additional shares in lieu of a dividend avoids the taxation leviable on the dividend. The section provides that such shares shall be regarded as income up to the value of the dividend which could have been accepted.
Sections 55 to 59 provide for the taxation of income arising from the transfer of assets abroad. I mentioned in my budget statement that tax havens abroad were being used for the avoidance of Irish taxation. The absence of legislation to deal with income arising in these tax havens has been a major deficiency in our tax code for some years and the sections mentioned are designed to ensure that individuals who are ordinarily resident in the State cannot continue to use these tax havens as a means of avoiding their fair share of tax. There is a saver forbona fide commercial transactions and the usual appeals provision is included. Section 57 will enable the Revenue Commissioners, subject to certain safeguards to respect confidential relationships between solicitors and banks and their clients, to obtain necessary information to enable these new measures to be implemented.
In my budget statement I also referred to two loopholes which have been used by property development companies to avoid tax. Section 60 counters an artificial arrangement under which some of the costs of a development could be charged against the subsequent rental income thereby reducing the proper tax liability, while section 61 remedies a flaw in earlier anti-avoidance legislation which did not fully cover development achieved by reconstruction, alteration and extension.
Chapter V, comprising section 62 to 72, provides some taxation reliefs and also effects some changes in procedures and administrative controls. With the exception of the subject matter of sections 62 to 65, the items in this chapter have not already been announced in the budget.
Section 62 provides that directors and employees who are, in effect, owners or part owners of their businesses may be admitted to membership of approved retirement benefit schemes. Sections 63, 64 and 65, which are concerned with relief for retirement annuity premiums, provide for the grant of benefits to dependants, the commutation of part of the annuity and an increase in the limits of premiums deductible for tax purposes.
Section 66 provides what is essentially a technical change to enable exports of milk products and bacon products to continue to qualify for export sales relief. The export of Irish milk and bacon products was in the past compulsorily centralised through An Bord Bainne and the Pigs and Bacon Commission, respectively. In accordance with EEC requirements these arrangements have now been replaced by voluntary arrangements, and the section will ensure that the present tax reliefs will be continued in the new circumstances.
Sections 67 to 71 provide for improved administrative and other procedures to facilitate the working of the tax system.
Under the present law taxpayers who appeal to a Circuit Court judge against decisions of the appeal commissioners must have their cases formally heard and decided upon by the judge even if, as happens in many cases, the appellant and the inspector of taxes reach agreement beforehand on the matter in dispute. Section 67 obviates the necessity for a formal hearing in such agreed cases; it should help to reduce the work-load of the Circuit Courts and of Revenue staff and will, no doubt, be welcomed also by taxpayers and their agents.
Section 68 obviates the necessity for the personal attendance by the Collector-General at District or Circuit Court proceedings for the recovery of tax.
Section 69 terminates the stamp book system of remitting PAYE tax. The arrangement was always somewhat cumbersome and there has been a marked decline in its use in recent years. Moreover, the introduction from 6th April, 1974, of the collection of pay-related social welfare contributions through the PAYE machinery has increased practical difficulties associated with this system.
Section 70 is designed to prevent difficulties which at present arise out of the failure of an employer to notify his tax office when he becomes liable to register for PAYE or when he ceases to be liable to remit PAYE tax or to be registered for PAYE purposes.
Section 71 obliges a rating authority to furnish on request to the Revenue Commissioners information relating to rates and rateable valuations. A similar requirement existed up to 1969 when farming profits became exempt from income tax. The restoration of the obligation is necessary now, not merely in connection with the taxation of farming profits, but also as a general anti-evasion measure.
Section 72, which is the last in Chapter V, deals with arrangements for allowing tax relief for marginal coal mines. The relief is on the same lines as the provision for marginally profitable mines of non-bedded minerals which was included in the Finance (Taxation of Profits of Certain Mines) Bill recently before this House.
Chapter VI provides for the further continuance, up to 31st December, 1974, of the exemption from corporation profits tax which has been accorded to building societies and certain other bodies for many years.
I now turn to Part II of the Bill which deals with customs and excise duties. These relate to a number of miscellaneous matters none of which was referred to in the budget.
Section 74 increases from 13p to 50p the exemption limit from customs duty on certain small consignments or parcels. This increase in the exemption limit which will benefit consignees is partly to take account of price increases but it is also proposed as an administrative economy as the cost of collecting small amounts exceeds the revenue collected.
Section 75 removes the spirits duty chargeable on spirits used in recognised medical preparations or for scientific purposes. The rates of duty are small and have not been increased since 1915. The cost of collection has been disproportionate to the small duty yield.
Section 76 gives officers of the Revenue Commissioners and members of the Garda authority to enter premises, other than dwellings, to take samples of oil in the tanks of vehicles, for the purpose of checking whether rebated oil is being illegally used. Access to places of business, such as marts and sandpits, is necessary for the effective administration of the rebate provision.
Section 77 increases the rate of rebate on unmanufactured tobacco where the quantity of leaf received by a licensed manufacturer in any year does not exceed 50,000 lbs. This provision is intended to assist small companies and to prevent loss of employment.
Section 78 confirms three orders made by the Government under the Imposition of Duties Act, 1957, as amended, details of which are outlined in the explanatory memorandum.
Part III of the Bill is concerned with stamp duties. The effect of sections 79 and 80 is to replace on a permanent basis the Order made last year which restricted to office blocks in the Dublin area the 15 per cent rate of stamp duty imposed by last year's Finance Act.
Section 81 which is another item not referred to in the budget, provides for the doubling of the existing rates of stamp duty on transfers of non-Irish stocks and marketable securities in line with the doubling of the duties in Britain and Northern Ireland in this year's British budget. Similar action was taken in 1947 when the UK last increased the rate. I might add that even if we did not increase our rates, Irish purchasers of British securities by virtue of our double taxation arrangement with the UK would still have to pay the new doubled rate in the UK before transfers could be registered.
Part IV of the Bill contains a number of sections of a routine nature. Section 82 is the annual provision relating to the capital services redemption account while section 83 gives effect to the repeals specified in the Second Schedule. Sections 84 and 85 are self-explanatory.
Accordingly, I commend the Bill to the House for a Second Reading.