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Dáil Éireann debate -
Wednesday, 29 Jan 1975

Vol. 277 No. 8

Capital Gains Tax Bill, 1974: Second Stage (Resumed).

Question again proposed: "That the Bill be now read a Second Time."

Last night I mentioned that the promise to abolish death duties was welcomed by farmers in particular. When a man died at an early age and left a wife and young family the widow was obliged to borrow the money to pay the death duties or to sell a certain amount of the property to raise the money. Wealthy people were able to avail of expert advice regarding the setting up of trust funds, thereby avoiding the payment of tax. The replacement of the death duties by gift and acquisition taxes, which set out a liberal allowance of £150,000 per person, as well as the capital gains tax were well received by businessmen and industrialists and even by Fianna Fáil. It was agreed that the "quick sell", the person who bought a property, developed it and sold it quickly, should be taxed.

Very few people will object to capital taxation on shares. In most cases the business of buying shares was regarded as a "nixer"—the term in the building trade for work carried out after hours. Prior to this Bill the speculator and the person who dealt in shares as a semi-permanent job did not pay any tax on the transactions even though it was part of their income. In some cases they developed their dealings to such an extent that it became their main business. One might have some sympathy for these people if they had tremendous knowledge of shares and their dealings but in the main it did not require much business acumen.

As I pointed out last night the person concerned might wish to back a shell company or a professional person might have knowledge of a take-over of a company. There have been cases where some of the shares in the case of a shell company could be bought at 1 per cent and, in fact, I have seen them as low as .5 per cent. The person who bought such shares did so for capital gains on which he was not obliged to pay tax. This practice must be stopped. This legislation will ensure that there is a more correct situation, that a person will buy shares and give a return on them. Because of the collapse of stock exchanges throughout the world some of the shares that were 1 per cent now have a return of 22 per cent.

Prior to this Bill the person who did not take any risk was not liable to tax. If any preferential treatment is given it should go to the businessman or the industrialist who takes a risk. The man in the retail or manufacturing industry is entitled to a better return with a lower tax liability than the man who lies in bed, reads The Financial Times and then gives instructions regarding the purchase of shares.

Most of the points raised on this Bill will be better discussed on Committee Stage. The objections raised by Fianna Fáil were, first, that there should be a 50 per cent capital gains tax, reducing each year until it is nil at the end of a 15-year period. I agree with Deputy Colley who said that in killing speculators there is a danger that we may kill enterprise in business. Fianna Fáil speakers mentioned that ill-health might force a person to sell and he would be caught for this tax. Another point raised by Fianna Fáil was that compulsory purchase should not be liable to capital gains and they also said that where income tax is paid capital gains tax should not be levied.

I do not agree with the figure of 50 per cent capital gains tax. The Minister was fair in his proposals, he was even liberal but we must have a lower capital gains tax than England to encourage money to come in and be invested here. England have many very wealthy financial houses and we have only one or two so we must encourage them to come in here. I believe the Minister is correct in including the CPO. The corporation put a CPO order on a building and the interested parties try to fix the matter up through negotiations. If they do not it means a loss of money and also it takes time to put the CPO into effect. The price may be fixed at slightly above its value but if the person gets a fair bargain and reinvests his money he will not be caught very heavily. If the CPO were to be left free of capital gains tax nobody would agree to anything. People would make sure that a CPO was put on and that would mean they would get more money.

The Deputy is quite right. It was for that reason that I said because of the difficulties for local authorities you could not exempt them but I suggested there ought to be allowed to the person concerned the cost of a comparable property before you assessed his gains.

He may be a bad dealer. He may pay too much or too little for it. He might get a better property.

Yes, if he is in business.

I know in relation to farming it can work both ways. I know a farmer on whose property a CPO was put. Another person purchased his property. That man went out and bought another farm and came into an area where planning was to take place. He was able to sell that land at a big profit. I can see the Deputy's point but generally the person gets a fair amount. He will not sell if he does not. If he is forced to get a CPO we will be in a worse position.

I agree with the point mentioned by Deputy Colley that anybody who pays income tax should not pay capital gains. The way this works out in practice is that you have a company dealing in property and if they are selling property they make capital gains. As far as I know, that company are assessed for income tax and corporation profits tax and not capital gains. If it is a company in the retail business where one of their businesses is sold off and a capital gains is made tax would be charged on that capital gains.

Deputy Fitzpatrick made a point yesterday about a business which is held for ten years. If a barman buys a small premises, develops it, sells it and buys a bigger one he is still investing all his money in that business. If that takes ten years that person should be free of capital gains tax because he did not go into it to make capital gains. He went in to work the business he knows and he should not be charged capital gains on it.

A person who has to sell his business because of ill-health should not have to pay capital gains tax. If there is a capital gains and he dies within a certain number of years whatever capital gains there was plus interest should be given to his widow or dependants. The Minister said that he is against death duties. I agree with him. I am not as worried about the individual who has to sell his property because of death duties as about the people who have worked for years in a business, who have now reached 50 years of age and who are put out of work. The Minister stated:

...gifts are to be treated as disposals for the purpose of the capital gains tax. It has been necessary to treat gifts in this way as otherwise gift arrangements could be fabricated to avoid capital gains tax. Under section 9 of the Bill, however, it is provided that disposals of assets by way of gift prior to the date of publication of the Bill viz. 20th December, 1974, will not give rise to chargeable gains or allowable losses.

I should like to see a way being found of closing that gap. In farming and business the sooner a person can pass on his property or business to one of his family the better. It is wrong to bring the gift tax under capital gains. Gift tax should be the same as acquisition tax so that it is not judged as a change of ownership. I cannot see why that gap cannot be closed up.

I believe there should be no capital gains tax after ten years. If that matter is cleared up as well as the other matters which I have mentioned, I believe this Bill will be acceptable to everybody. There may be some small matters which can be cleared up on Committee Stage. Before this Bill was introduced speculators and share dealers got preferential treatment over business people. They are now on a par. I hope the Minister will accept what I said in relation to gift tax and a ten year period. If a person has a public house and he renovates it it will increase the value of the premises but it will also increase the profits of that business. This business becomes more valuable and the Revenue Commissioners will get a bonus. They may allow something against the cost, but they will get the benefit of the extra property. In other words, to the extent of 26 per cent you are working for the Revenue Commissioners and the Government. The Minister should allow these renovations or extensions to be written off the following year against tax, like wear and tear.

I will come back to a point I mentioned yesterday. Rather than have the threshold agreement, I believe business should be valued on its replacement value. With inflation, values can fluctuate. The actual cost of replacing it should be allowed rather than the notional value.

Another point is that as a private house with one acre is exempt from capital gains, a second house at a seaside resort should also be exempt. There would not be much money involved in it, but people who have a house at the seaside should get credit for holidaying in Ireland and spending their money here, rather than going away for a month or six weeks to the Continent and spending it over there.

As far as trusts are concerned, it works the same way as for an individual, and, if the Minister agrees on the two matters I have already mentioned, trusts would come under it. I believe the person who set up the trust, rather than the trustee, should be liable to the gift tax or capital gains tax.

As I said yesterday, a person who becomes a doctor or a solicitor has no capital gains assessed on his fees, but a chef who decides to open a restaurant and, after doing business for a number of years, sells it off, will be charged capital gains tax on his labour, on the premises, and on the goodwill he has created because he is good at his job. It is very unfair that it should be divided in three ways. The person who buys it from him may not be as good at the business, the business goes down and he, in turn, sells it, and is at a loss. Does he carry a placard around on his back saying: "I am a failure. I carry a capital gains loss forward". It is the premises that should be valued not the business.

The interference of a Minister can upset a business. If the price of drink goes up that has an adverse effect on the trade. If a person is in a business and does not come into it to make a capital gain, he should be free of capital gains tax liability after ten years. I also believe that, in order to encourage people to give away their property when they are young and when their family are young, the capital gains tax should not be charged on a gift, just as it is not charged on acquisition.

It would probably help the nation and certainly this House if the Fianna Fáil Party could make up their mind as to what their attitude is to the taxation of capital gains both in principle and in administration. They have attacked this Capital Gains Bill, asserting that it was complicated, that it was lengthy, that it was involved; yet it contains only one tax rate while the Fianna Fáil alternative contains no fewer than 13 different rates of tax.

Apparently Fianna Fáil gave no consideration to the question of the capital gains tax until we announced in Government our intention to introduce it, and even then, to judge from the hasty and badly thought-out reaction to the Bill when introduced, I can assume they did not give any consideration to the matter until after production of the Bill. If they had taken the trouble to explore the experience of other countries, they would have found that other countries, particularly Britain, who started off with a complicated code such as the one suggested by Deputy Colley on behalf of the Fianna Fáil Party, were forced within six years of introduction of the complicated code to abandon it and go for a simple one. When in 1965 Britain introduced her original capital gains tax there was provision for treating differently gains over different periods. But by 1971 the Government were forced to abandon that procedure and go for a simple system. That was four years ago and when the British Government changed the system, which involved treating some gains more harshly than others, there was almost unanimous thanks expressed because the new code was a simple and understandable one, one which was easy to administer, and on that account was less costly to administer than a complicated one.

One of the criticisms, a valid one, offered against any system of capital taxation which tries to close gaps is that it involves considerable cost to administer, both to the private sector, who have to engage accountants and legal advisers and so forth, and to the Government, who have to engage quite a number of staff on the Revenue Commissioners side, to administer the tax. I was as anxious as anybody in this House who has professed himself in favour of treating long-term gains less harshly than short-term ones. But the more I looked into the great complexities which any code would have to deal with in that situation, the more I saw it was necessary, in the interests of fair play to the taxpayer, in the interests of efficiency in business and commerce, to let people know precisely their liability, and in the interests of the cost of public administration, which the taxpayer has to meet in any event, to give them a fixed medium tax rate which would take into account all the different arguments relating to both long- and short-term gains.

I would like to point out now the many defects in the suggestions made by the Fianna Fáil Party. We were criticised yesterday and in other recent utterances by the conservative Fianna Fáil Party because we were introducing capital gains taxation at this particular time. They have, I think, put on some sackcloth and ashes for their inaction over their period of 16 years by their admission now that capital gains tax is justified in principle and their complicated proposals, ill-thought out as they are, at least indicate a willingness now to consider the matter. We were criticised that in this time of economic uncertainty and some financial difficulty we should be introducing capital gains tax. Yet the tax we are introducing will run at a rate of only 26 per cent while those who criticise us for unnerving the business community at this time are themselves proposing taxation which would commence at a rate of 50 per cent.

On what?

On gains made in the first year and, for the first six years of the Fianna Fáil scheme, the tax rate would be above anything now proposed by the Government.

And at the very time we want to encourage investment Fianna Fáil say: "Go out and slaughter any investor."

No—speculator.

Any investor who would have the temerity to sell his investment in the next six years would be punished by Fianna Fáil at a rate in excess of anything proposed in this Bill. The word "speculator" has been rather emotionally thrown around this House and elsewhere in recent times. There are different ways of considering what a speculator is. Oftentimes people apply the word "speculator" to someone who shows a greater capacity than they have themselves to think ahead and anticipate demand, invest and take risks where others would be unwilling to invest and take risks. The Fianna Fáil argument is apparently that taxation is not right unless it introduces new principles of what is moral and what is not, what is a respectable activity and what is lacking in respectability. If this be a valid consideration for capital taxation it is also a valid consideration in relation to any tax. Are Fianna Fáil now proposing we should have different rates of tax according to the respectability of the vocation of individual taxpayers?

(Dublin Central): They are there already.

I am not aware they are there already. I do not know what the Deputy has in mind when he asserts there are different rates of tax according to whether a person's vocation is respectable or otherwise.

(Dublin Central): Different rates of income.

That is in relation to the size of the income, not in relation to the particular activity carried on. The proposal yesterday was that one should adjudicate upon the nature of the investment and the crude rule of thumb offered by Fianna Fáil was that, if a person sold a property in a shorter rather than a longer period, then that person would necessarily be engaged in anti-social speculation.

No. That is not fair.

That would be the implication of the Fianna Fáil suggestion and that would necessarily involve the presumption that the person selling in the first year was engaged in speculation and deserved to be taxed at a rate of 50 per cent.

Was there not another leg to the proposal in regard to half rates?

Under this Bill, if farmers or business people sell their assets and reinvest the proceeds, then there is total relief. This is desirable and essential to encourage investment. It maintains investment. It ensures that those who might be tempted to get out of business by making a total gain will think twice and keep their money in business, not necessarily in the same premises. This will ensure that the money is recycled in business. This is the correct approach. If taxation is to command respect it must be neutral. The proposals in this Bill are neutral. We do not seek to condemn people who sell at a particular time by fining them more heavily than those who may sell later.

But that is what the Bill is doing.

No. Under the Fianna Fáil scheme the speculator could well be tempted to remain locked in his investment in order to get the tax advantage which delay in sale would confer upon him. The investor could stay there simply in order to get the tax rebate Fianna Fáil would give him at the end of the period. To say that speculation per se is something that is necessarily of short duration is to enunciate something that cannot be proved from past experience. Speculators can sometimes look into the distant future and see advantage for themselves in building up a capital gain instead of taking current income. Now one of the inequitable arrangements crying out for correction is that arrangement which people of means can enter into, perfectly respectably and perfectly legally, to create for themselves an investment which many years hence will produce a capital reward which would not be subject to tax. If they spent the same money to generate a recurring annual income such income would be subject to tax. Under the Fianna Fáil scheme there would be no disincentive to such activity since there would be no taxation of the capital gain made at the end of a 15-year period. It seems to me undesirable that we should maintain such an inequitable practice.

(Dublin Central): There are very few speculators who will wait 15 years.

There are plenty.

Even longer, as Deputy Dockrell said. If a person has adequate means to cover current expenses the wisest thing for him to do is to invest in such a way under the present law, or under the Fianna Fáil scheme, as will enable him to obtain several years hence a capital gain which would be free of tax. Now that is not treating everybody in the same way. It is treating those who are fortunate enough to have sufficient to cover current expenses much more favourably because it will give them a profit many years later free of tax. The line between capital gain and ordinary income is sometimes very, very difficult to draw.

It is wrong to maintain a system of tax laws which makes it possible for people in better off circumstances to avoid paying their fair share of tax. The ordinary worker is obliged to pay tax. Tax is taken from the worker before he even receives his pay, under the PAYE system. Surely it is not wrong that people with much greater means, who postpone making a capital gain for many years, should be asked to pay on that capital gain a rate of tax which, if anything, can be criticised for being as low as the lowest rate of income tax. That is the minimum rate of 26 per cent. To allow such gains to be totally tax free would be wrong.

So far as business is concerned, we have provided that any person retiring from business may, on disposal of property, be relieved from the capital gains tax if the consideration does not exceed £50,000 and, if the person is getting out of business and transferring to a member of his family, the consideration can be £150,000. I have said on numerous occasions, and I repeated it in introducing the Second Stage of the Bill, and I am now saying it again, that it is my intention to adjust the various thresholds in the capital gains tax system so as to take account of inflation.

I gave very earnest consideration to the possibility of building a regulator or indicator into the Bill itself which would be automatic. The great difficulty is that the various assets which come to be taxed here have different rates of inflation. Their values vary for a multitude of different reasons. Some can vary in value because of the customary over-emotional reaction of the stock exchanges. Others can vary in value at rates quite different from the rate of inflation.

We know, for instance, that notwithstanding the current rate of inflation of 20 per cent, many properties—I include land and buildings— have a lesser market value this year than they had last year. In other days the increase in the value of buildings far exceeded inflation. There is a multiplication of other problems, so that it is very difficult to find an appropriate indicator. I am studying —and I have the assistance of a number of bodies and State agencies in these studies—the possibility of obtaining an indicator which could be used for many different purposes. As long as we have different movements in a free market, such as we have, it will not be easy to find the appropriate indicator. If and when we do, we can apply it in an automatic manner in legislation.

In the absence of a perfect indicator, would the Minister not make do with the consumer price index?

No, because there are many factors in the consumer price index which are not related to the true value of property or to movements in the value of property. As I pointed out on recent occasions, there are movements in the consumer price index which themselves represent no more than a redistribution of money incomes by transferring some moneys from the better off to the less well off. For instance, such tax changes as occurred in this year's budget by taxing the old reliables could generate an increase of about 2 per cent in the cost of living index. That exercise is carried out in order to make our country more socially just than it would be if the transfer had not taken place from unnecessary expenditure on comparatively luxury items to give relief to the poorer sections of the community. Is it proper that in capital taxation you should allow 2 per cent in respect of such socially necessary transfers?

There are other ways of calculating the fall in the value of money. Is not a fall in the value of money what the Minister really wants rather than movement in the value of different kinds of assets? Is it not the value of money the Minister should be concerned with because the other adjustments will automatically be built into the gain or the loss?

Transfers of pure money will not involve capital gains.

I said the fall in the value of money as the measure——

Money is not necessarily the test of movement in the value of assets.

Does the Minister want to measure the movement in the value of assets? Surely the Minister is not right in talking about the movement in the value of assets. If he adjusts for the movement in the value of money, any movement in the value of assets will automatically be taken into account whether it is up or down.

Yes, but I think the Deputy will agree that assets could multiply in value for many reasons. A particular asset could become very scarce. A particular asset could become very fashionable and generate a new demand.

That is true. Suppose it goes up by 50 per cent and the fall in the value of money is 20 per cent. If you operate on the basis of the fall in the value of money you will automatically get the correct gain in the case where it went up by 50 per cent.

The world is not in agreement as to the movements which take place in the value of money——

No, but you could arrive at it.

——particularly in the market in which most capital gains are made. That is not a domestic but an international market and values can change very rapidly. One of my ambitions as Minister for Finance is to make the tax code as simple as possible so that it can be easily understood and easily and cheaply administered. That is why we have gone for one rate of tax. That is why we have struck the rate of 26 per cent. By and large, that takes account of many of the uncertainties and many of the incalculable elements which exist in the whole field of capital taxation. It also takes account in a kind of rough and ready way, I would agree——

Very rough and not so ready.

In a very ready and not too rough way at all. If the Deputy wants to play with words we will qualify them very correctly—in a ready and not too rough way by going for a figure of 26 per cent.

Deputy Belton very properly said it was desirable that our rate of capital gains tax should not be higher than that of our immediate neighbour, in particular, and that of other comparable countries. This is one of the reasons why the Government and I opted for the figure of 26 per cent. We were criticised originally when we suggested as the appropriate rate in the White Paper what was then the standard income tax rate of 35 per cent. It was argued—and I think cogently—by many people that it would be wrong to have a rate 5 per cent higher than the rate in Britain, having regard to the speed at which money moves between our respective countries.

That would be true across the board.

The 26 per cent rate is now 4 per cent lower than the rate in our neighbouring country. According to Fianna Fáil, we are wrong to go for that and we should be going for a 50 per cent rate initially and maintaining a higher rate on all capital gains for the first six years during which property is held. This seems to me to be the most foolish thing we could do in present circumstances, or in any circumstances in which this country requires continuing investment from abroad. We have gone instead for a rate which, by comparison with any comparable country, is a low one because the rates tend to vary from 30 per cent up to the ceiling of income tax in various countries.

In many countries, instead of treating the short-term gains in the way suggested by Fianna Fáil, they are subjected to the full rate of income tax which, as we know, under Fianna Fáil could rise to 80 per cent, to confiscatory levels. Our aim is to get rid of as many elements of our taxation system as are confiscatory and as tempt people to avoidance and evasion. We want to broaden the taxation base and to make it an enforceable system of taxation without loopholes for avoidance and evasion.

This is a challenging task. I am not claiming that we will succeed but we are moving in the right direction. This Capital Gains Bill is a very significant step towards broadening the base of taxation. It is also a very significant step towards closure of avoidance and evasion loopholes. One of the greatest merits of the alternative system of capital taxation that we have proposed to replace estate duties is that it will be much more difficult in future for people to engage in avoidance and evasion because the possession and movement of capital will be traced year after year. The system of death duties, because of the high rates at which it was operated, was confiscatory and provoked people to engage in tax avoidance practices which were perfectly legitimate. Because the rates were so high, people were necessarily obliged to protect the family fortunes by taking evasive and avoidance action. If they did not do so, they found at the most difficult time of the family's history that the family's capacity to earn was ruinously destroyed. We are replacing that devastating system with one which will ensure that capital taxation is paid by comparatively small instalments over a life span while there is no family distress.

The capital gains tax of 26 per cent will not be charged until the gain is realised, until an actual sale takes place. It will not be charged if the proceeds of the sale are re-invested and it will not be charged at all on the family house and one acre which surrounds it. So the old crucifying element of estate duty is being eliminated. Death duties caught everything including the family home, the garden, anything in the garden or in the family home, furniture, personal belongings—the whole lot, money in the bank or anywhere else. It was all caught under death duties but under capital gains the home and its contents and money itself will not be caught but only other assets.

Perhaps I should deal briefly with a point raised by Deputy O'Malley. He said it was unfair that the House should be asked to consider this Bill in the absence of the Government's proposals on wealth tax and capital acquisitions tax. That might have validity if the Government had not already given an indication of their policy in both these areas, but we spelled out very clearly what our proposals are and the legislation will very shortly be available for consideration in the House. I can assure the House that they have no reason to anticipate that any difficulties are being created for them by the absence of the other two Bills. Considering that it is only about a year since we revealed our outline thinking and that we are now discussing the details we have moved with extraordinary speed in a most complicated area.

In the course of my study of this matter I have been looking at the legislative history of capital taxation in other countries and there is no example that I found of any country undertaking such massive reform of the taxation code in such a short period. When the whole package in all its details is revealed people will see that the Government and their advisers have moved with extraordinary speed in a very difficult area.

We should not have been able to move with this speed if we had not got the wholehearted co-operation of the public in general and the professional bodies in particular. I should like to thank them for their very quick responses to the Government's White Paper and any consultations we had following that. Often, when difficult decisions have to be taken there is much to be said for making them quickly rather than dragging on the process of thinking for so long that nothing is done. That was probably one of the great difficulties of the Fianna Fáil administration—they thought about so many things for so long that they really achieved little or nothing. Lethargy surrounded the whole unreformed Irish taxation code while they were in power and now they have some difficulty, as they acknowledged in this debate last night, in trying to keep up with the Government.

The problem is that the Minister is having difficulty in trying to keep up and he is doing very foolish things. If he listened to his own party he would know that.

The Minister is having no trouble at all. Deputy Colley can be assured of that.

If he will not listen to us, will he listen to his own party?

If the Deputy will bear with me, I did not interrupt him, and if he listens to me he will learn a great deal more about the many shortcomings of his own proposals. He can then go away and think about them again.

On the question of taking account of inflation, the only countries that have any specific provision or take account of inflation in any way in the EEC are Denmark and Belgium, but none of the other countries provides any correction in respect of inflation. Having regard to the fact that the countries I mentioned have a higher rate of tax than the one we propose, it was imperative in their case to have some method of correcting for inflation; but they are having very great difficulty with its operation. I am very interested in devising a suitable corrective, and if and when I can find a suitable one which will commend itself to the public at large I shall introduce it.

(Dublin Central): How does the Minister hope to adjudicate on assets sold in 1974 seeing that he has no inflation clause?

The thresholds we are now introducing will apply as from April, 1974. These thresholds are: the first £500 of chargeable gain in any year is excluded; the sale of any chattel of a lesser value than £2,000 is excluded; the sale of any business or farm up to £50,000 is excluded and the transfer of a farm or business within the family for a consideration up to £150,000 is excluded. These thresholds can be revised as may be deemed appropriate having regard to our experience in the light of inflation.

(Dublin Central): But you have no practical proposals at the moment.

I am introducing these rates for the first time, operable from April, 1974. I consider that the rates and the exemptions which are being granted are reasonable and that there will be no unfair charge against anybody in respect of the years in question.

Does the Minister not think that the threshold——

Questions should be reserved until the end of the speech. The Minister should be allowed to continue his concluding speech and then questions may be put to him at that stage.

Very well, if that is the way we should do it, we shall do it; but I think that the Minister at this stage has a better opportunity than he may have again to spell out the thinking on the principles involved.

When the Bill is in Committee Members will have a better opportunity of dealing with it in detail.

Obviously, it will be a slow Committee Stage.

Of course if Fianna Fáil carry on as we expect them to carry on, opposing capital taxation, we will have a slow Committee Stage. On the other hand if they are truly converted as some of them pretended yesterday then they will not obstruct in the way they now seem to be attempting to do.

It would be helpful if the Minister understood the principle of what he is doing in capital gains and he clearly does not. When he is talking about thresholds he does not understand, though we are trying to spell out for him what is involved.

I suggest Deputy Colley read the White Paper of 1974 and then our thinking might begin at the same point.

The Minister is talking about gains which are inflation and he is going to tax them.

The Bill says specifically what the provisions are and I have told the Deputy why we have taken one tax rate. I have said that we will adjust the thresholds as may be required in the light of experience. There has to be a start made some time.

The Minister is missing the point.

We are starting with these figures in this year and we will adjust them as may be necessary in the light of experience and in the light of the fact that we have taken the lowest rate of income taxation as the rate applicable to capital gains. These factors, together with the thresholds and exemptions which I have mentioned, will ensure that there will not be any unbearable hardship on anybody. Many of the assets referred to yesterday will not be caught by the provisions of the Bill.

(Dublin Central): If a property bought in January, 1974, for £100,000 is sold in December, 1974, for £120,000 what amount will be subject to capital gains tax? What amount will the Minister allow for inflation during that year?

The rates and the thresholds will take account of inflation.

(Dublin Central): That does not apply.

Of course it does. It could be argued that there should be no exemptions at all and that a capital gain is a capital gain and, like income, it should not be treated differently and should all be taxed.

(Dublin Central): Is the Minister saying that a 20 per cent increase in inflation in 1974 will not be taken into consideration?

I am bringing in a simple form of capital gains tax so that people will get the experience of operating it. The income tax code is complicated enough. What Deputy Fitzpatrick would like to do is to have a reduction in the rate of income tax every month to take account of inflation the previous month.

The Minister is missing the whole point of capital gains.

Why should capital gainers be given greater favours than income earners? Fianna Fáil are once again showing themselves as being opposed to capital taxation or favouring special treatment for persons fortunate enough to be making gains on capital.

If the Minister cannot do better than that he should get off the subject.

I will remain on the subject for as long as the Deputies opposite continue their harassment and continue to expose that their real loyalties are to the people of substantial means whom they wish to continue to enjoy exemption from tax while the ordinary taxpayer is fleeced.

The Minister complained a moment ago that we wanted to tax them too highly.

As long as the Deputy keeps arguing in the way he is now arguing he is showing that he only put on a front yesterday, a most unconvincing, complicated and costly front. He is showing that his loyalties are still with the people on whose behalf he, at the Fianna Fáil Ard-Fheis last year, rejected a capital gains tax.

The Minister should have a chat about inflation before he makes that statement.

I suggest the Deputy explain to the country his volte face between the Fianna Fáil Ard-Fheis last year and his statement yesterday. He was arguing last year that it would be wrong to be taxing capital gains and the Fianna Fáil Party yesterday came in to argue that capital gains were all right as long as——

On a point of order, the Minister has attributed a statement to me and I should like him to quote it.

I have not the quotation here.

Then the Minister should not attribute to me a statement which I told him yesterday I did not make unless he can quote it.

Did the Deputy speak against capital gains at the Fianna Fáil Ard-Fheis? If he did the Ard-Fheis rejected his advice. Apparently there was such a row at the Ard-Fheis that they had to take two votes to make sure they were right. Having taken two votes the record was that the Fianna Fáil Ard-Fheis twice rejected capital gains tax so convinced were they from Deputy Colley's support for or opposition to capital gains tax. That is the record of their collective wisdom and of democracy at work in the Fianna Fáil Party.

As I mentioned on the introduction of the Second Stage it is proposed to impose capital gains tax on gifts. If we had not taken this particular step it would have been open to people to take very simple evasion and avoidance action which could not be justified. They could do so by simply arranging transfers of properties notionally as gifts but with hidden consideration. The capital gains tax could have been avoided. It was therefore necessary, as it has been found necessary in other countries, to treat gifts as disposals and at the time of disposal to subject the calculated gain to tax.

To appreciate that this is not in most cases going to generate difficulty it would be well to realise that the following would not be regarded as exempt under the capital gains tax code: gifts of money without limit; farms or family businesses valued up to £150,000 transferred on retirement within the immediate family; farms and businesses transferred on retirement outside the immediate family up to £50,000; the principal private residence and ground attached thereto of up to one acre; any chattels of less than £2,000 per annum; a gain of £500 a year. The gain could be quite small and the chattels of a considerable value. Others not regarded as liable are: normal life assurance policies; Government securities or State guaranteed stocks; chattels with a life of less than 50 years; land bonds and gifts to genuine charities, national institutions and public bodies.

Even when the gain on any gift would be chargeable if the gift is made, as in most cases gifts are, to members of families then the capital acquisition tax would be charged only on so much of the gift as remains after payment of the capital gains tax on the gain.

Would the Minister explain that?

The capital gains tax would be deducted from the value of the gift, that is assuming that the value of the gift is diminished by the amount of capital gains tax that would be deducted.

Would it be subject to the two taxes?

Not necessarily. It would only be subject to two taxes if the gift exceeded the thresholds in the capital acquisition tax.

Where it would, would it be subject to the two?

Yes. In reply to points made by Deputies Belton and O'Malley I should like to point out that the rate of capital acquisition tax is reduced by 25 per cent in respect of gifts inter vivos.

Also a disposal of property as a consequence of death is not regarded as an occasion for calculating a gain. It was suggested by Deputy O'Malley that what we were proposing would lead to a situation in which people would continue to hold on to their property because there was nothing to be gained by its early transference. Of course, as the inheritance tax would be higher than the tax on a gift, there are advantages to be gained by transferring during lifetime.

Would it be higher than the combination of capital gains and gift tax?

It would depend on who was the donor, who was the donee, the accumulation of gifts in the hands of the donee, having received them from the donor, and so on. One cannot give an absolute answer as to what would be the situation. One would have to deal with particular situations.

Deputies Colley and Fitzpatrick (Dublin Central) criticised the imposition of capital gains tax on companies which had been induced by the IDA to set up here as a consequence of income tax relief on export profits. In this case it is important to realise that capital gains tax is not collected unless there is a disposal of capital assets. Therefore this tax would not be collected unless and until the foreign investor was selling out and leaving the country. While there are certain safeguards in relation to grants and so on from the IDA, a situation can arise where foreign investors can come in here with public moneys, set up here, operate for a number of years, then realise the assets and get out with the total assets without payment of taxation of any kind, either income or capital. I do not think that is right or defensible. It is desirable that, in the event of such a foreign investor realising the assets here and quitting the country, we should collect a 26 per cent tax on the capital gain, a capital gain in some cases made on assets which were paid for by the Irish Government on behalf of its people. Unless something extraordinary happened the capital gain would be less than the assets themselves. But, in any event, if a gain is made by some person while in this country and then that person proposes to get out, surely it is not wrong that the State should try to recover part of the gain so made for the benefit of those who remain?

Does the Minister consider this to be in accordance with the undertaking given to those firms?

Quite, absolutely. The undertakings given were in relation to profits earned on exports. The undertaking was not to subject such profits to income tax.

Nobody in any part of the world has a right to assume that the taxation code shall be frozen in a particular way and that no new taxes will be introduced. No reasonable business person expects that taxation codes will be frozen. But undertakings given have been and will be honoured.

It is important to point out again that in the event of such persons selling capital assets, if they are reinvested in a similar enterprise here no question of charge arises. Therefore, as we are requiring that in the event of a person getting out 26 per cent of the gain be handed over to the Exchequer for the public good, we are providing also that in the event of sale and reinvestment here there will be no charge at all. This is an encouragement to continuing investment.

(Dublin Central): The Minister did say reinvestment in a similar type of business? It must be the same, must it?

It must be in a similar type of business. If one put no limit on the type of reinvestment which could occur, then one would be opening many avenues to avoidance and evasion and that, again, would be undesirable.

(Dublin Central): Do I take it that if one sells a business and buys a farm, that transaction would not constitute reinvestment?

It would have to be in the type of trade carried on by the original investor.

(Dublin Central): That is not specified in the Bill.

I think the Deputy will find that it is.

(Dublin Central): I did not take that reading of it.

Does that apply to a national as well as non-national?

Yes. In any taxation code there has to be a happy balance between comprehensive fair legislation and ensuring that there are no avoidance loopholes. It is very difficult to refine any taxation measure, precise code, which will not involve some element of difficulty. It has not yet fallen to man to have such wisdom to produce the code that does not generate some anomaly or other. But the code we are providing here is one which will ensure that there is reinvestment in business and I think that is desirable.

(Dublin Central): No, it is on a wider scale, which makes it very difficult.

If a person merely buys shares, as distinct from capital investment, would that be considered an investment in business?

No. That would not be an investment in business.

I should like to ask the Minister for clarification of a point on which I am not too clear. It arises particularly in relation to shares but could arise in relation to other forms of assets. Let us assume somebody bought shares—we shall say in 1972, or any time before April, 1974—which at that time cost, we shall say, £200. Assuming they went to £100 by April 1974 and then sometime later the individual sold and the shares went up to £150 but were still below the price £200 paid originally, would any capital gains tax arise on that transaction? The point I am making is that the individual would not have made a gain; in fact he would have suffered a very considerable loss. But the figure might be above the April, 1974, one.

No, at the option of the taxpayer; the taxpayer could take the lower value, or the higher value.

Yes, the higher value.

If the taxpayer takes the higher value of £200, sells them at £150, then there would be a £50 loss overall. There is no charge to tax.

I see. He will not be held to the April, 1974, figure when in fact he bought at a higher figure?

Whatever may be the asset and so on?

However, if he wants to take the April, 1974, figure, he is free to do so.

I think we ought to erect a statue to him if he did.

We look forward to the erection of a statue to Deputy Dockrell.

I shall make no comment.

(Dublin Central): Why is the Minister confining it to a similar type of investment? Is there any reason for it?

For the reason I have stated—to prevent avoidance and evasion.

(Dublin Central): I think there is no avoidance if it can be proved to the Revenue Commissioners that the reinvestment was in any type of business.

It seems to the Chair that we are having a Committee Stage discussion.

If the investment is used for the same type of business, then no difficulty arises. But we have to strike a fair compromise between having a workable system of taxation and avoidance and evasion. I think what we are doing ensures there will be that fair compromise.

(Dublin Central): Often during a lifetime a person may like to change the type of business he is in. There is no consideration being given to him.

Oh, every consideration.

(Dublin Central): That is, if he pays his capital gains tax.

If the gain is on the realisation of assets and if it is not the intention of the person to reinvest in the same type of business, there could be many avoidance and evasion loopholes. I would not be justified in providing in legislation for such avoidance and evasion.

(Dublin Central): I cannot see any question of avoidance.

I assure the Deputy that those who have been engaged in legal and accountancy practice for many years would have no difficulty in finding many convenient avenues for avoidance if this formula were to be used too widely. I am sincere about this. I would not wish to have an unduly restrictive provision in respect of a case of a genuine change of business, but an amendment could not be considered unless some suitable way of blocking avoidance and evasions can be devised. It could not be provided for in too liberal a fashion. The Revenue Commissioners have administrative responsibility in this matter. They have many years' experience and people who have had problems with them have found often that the commissioners are not as harsh or as unreasonable as their general image might convey.

(Dublin Central): If it could be proved that a person sold a property on the public market and bought another at a different time on the public market also, would the Revenue Commissioners be prepared to accept that for the purposes of relief?

Details should be kept for the Committee Stage of the Bill.

Knowing Deputy Fitzpatrick's trade, perhaps he has in mind his own trade when he talks of the sale of one property and the purchase of another. No difficulty would arise if the same type of business were carried on in different properties but if a person were to change the whole nature of a business, the relief would not be available.

Deputy Colley raised the possibility of relief under section 27 being used where there was retirement of a young person because of ill-health. It is said that hard cases make bad law. But the age of 55 is a comparatively young age for retirement in Ireland, certainly in normal circumstances. It allows for an element of ill-health in mature years. It is most unusual for people to give up business before that age. The normal retirement age is 65, or more where a person has any option in the matter. We have provided for retirement ten years earlier than 65. There would be a possibility of abuse and avoidance if we were to bring in a provision relating to ill-health. I have no wish to criticise any medical certificate issued in the past by anybody for any specific purpose but any provision of this nature could lead to practices that nobody here would wish to condone. The interpretation we have given of what would be normal family circumstances and the allowing for the comparatively early retirement age of 55 takes account of the kind of problems Deputy Colley had in mind.

(Dublin Central): I think he had in mind a case in which a husband died and his widow was unable to carry on the business.

That would not create any difficulty because any transfer from husband to wife is not regarded as a disposal for tax purposes.

(Dublin Central): What Deputy Colley had in mind was the eventuality of a widow being unable after the transfer to carry on the business.

We will have a look at that. Deputy Colley asked me also why I was not giving relief on the size of gains rather than on the amount of the consideration. Normally there is a relationship between gains and consideration. In certain cases the consideration could be a fairer measure of the size of the assets than the gains. For instance, a farm might tend to have a truer value in relation to the consideration rather than to the gains that might be made from it, particularly farms located in certain areas.

If the gain were used as a measure it could exclude many small farms or businesses from the relief, particularly if they had been held for a long time or if the gain was large and the property small. On the other hand, there could be a very big farm or substantial business held for a comparatively short time with a gain sizeable in relation to the assets because the asset was big in value but the gain could be made during a short time. There is more stability in using the consideration rather than the gain for the purpose of measurement.

I was asked also what is the position of an adopted child under section 26 and 27. In law an adopted child is treated precisely the same as a blood child. Therefore there is no need to make any provision in this or in any legislation for an adopted child.

As the House is aware, I have undertaken to introduce an amendment on Committee Stage to provide that a nephew or niece who stands in the shoes of a child would have the same rights of succession, without charge to tax. An argument is made here as to the same rights being conferred on brothers and sisters. Again, this brings up the demon of possible avoidance. There is a danger that if we provide for moving sideways, as it were, in the one generation, avoidance measures could be devised easily. What I have in mind would provide the necessary desirable relief in the majority of cases but I would be prepared to consider any amendments or suggestions put forward on Committee Stage.

(Dublin Central): In relation to the proposed amendment, is it envisaged that the provision will be confined so as to include only those nieces and nephews who have been engaged in the businesses concerned for a certain length of time?

What I have in mind is that they would have been involved in the operation of the business or farm for a period of, say, five years before the transfer taking place. Otherwise, we could have the undesirable practice developing of people visiting their relations to see how ill they looked and of moving in at the last minute in order to avail of a concession. But there are many genuine cases where nephews and nieces work in businesses for many years and have a reasonable anticipation of succession. In some cases they may receive wages less than the level that would be considered reasonable elsewhere but are prepared to accept such arrangements in anticipation of succession. We would not wish to spoil any such arrangement by a provision of this or any other Bill.

Deputy Colley asked why interest payments are not to be allowed as deduction for capital gains tax. Interest, for example bank interest, is an expense of a revenue nature. Where business assets are involved it is a business expense which can be set off against tax liability. Therefore, it is an expense which enjoys relief under the ordinary income tax code. For capital gains tax, allowable expenses are confined to capital outlay. The interest will continue to enjoy such concessions as are enjoyed under the income tax code.

Deputy Colley asked if the provision means that the exemption implied in paragraph 88 of the White Paper will apply. There will be a liability to capital gains tax but this does not create an anomaly. I think what Deputy Colley had in mind is the proviso to paragraph 2 of Schedule 1. Where this proviso applies, the gains for the disposal of investments will not have been brought into charge. This is a technical matter relating to the restriction in the relief in respect of management expenses which relate to insurance companies and the proviso is not inconsistent with paragraph 88.

Will the effect be that such funds will be liable to capital gains tax?

Yes. Deputy Colley also asked for an assurance that the question of whether the value of an asset had become negligible could be brought to appeal. The answer is "Yes". The charge in respect of capital gains tax will be imposed by assessment. Each assessment is, like any other tax assessment, open to appeal by the taxpayer if he is dissatisfied with the assessment and any reductions and reliefs given. The loss envisaged under section 12 (4) would be a deduction in computing chargeable gains for assessment and as such the value of an asset becoming negligible would be proper grounds for appeal.

I hope I dealt adequately, by way of intervention when Deputy Belton was speaking, with his query about a house with one acre of land attaching. It is the house and the acre attaching to it which are exempt. Any land in excess of that can become liable to capital gains tax. In the case visualised by Deputy Belton there would be no real charge to tax. He spoke of a house which might stand on one good acre and have several acres of rock and gorse surrounding it. Of course, that might greatly enhance its amenity value, especially if it were close to an urban area.

He gave other examples.

Yes, he did, but I will deal with this one first. On its own the rock area would be unlikely to attract much capital value. Having regard to the exemption of £500 gain, it is unthinkable that it would come within the tax net. Where there is an acre attaching to a house in an urban area the acre itself could be of immense value, even without buildings. In fact, its value could be greatly enhanced by not having a building on it. This is a further indication of the generosity of the Government in giving exemptions and considerations to the representations made that private homes should be exempt from the charge.

Deputy Colley also visualised the possibility of a person resident in Ireland and Britain being doubly charged.

Is that all the Minister proposes to say about the house and one acre?

Yes. What else does the Deputy want me to deal with at the moment?

I do not want to hold the Minister up but I wondered if he was going to say anything else because other points were made.

I am going through my notes in sequence and am dealing with Deputy Colley's points at the moment. We will be entering into double taxation arrangements with all relevant countries to ensure that there will not be double taxation under this code, as applies to every other tax code. Therefore, the possibility of double taxation as feared by Deputy Colley should not arise.

He also asked for clarification on the contradiction between section 8 (2) and clauses (a) (ii) and (b). Clause (a) (ii) treats the receipt of capital sums under a policy of insurance as a disposal of an interest in the property which has been damaged or destroyed. The sums in question become payable after the happening of an event covered by the insurance policy. Obviously it can be related to particular assets. Clause (b) relates to rights under an insurance policy as such. By virtue of the rights sums may or may not become receiveable, depending on whether certain specified events occur. Under this clause the disposal of rights under an insurance policy, apart of course from life assurance policies which are dealt with separately in section 20, is not to give rise to a chargeable gain nor correspondingly, an allowable loss. In another respect, an amendment in clause (b) will be needed to counteract possible abuse, and I will be considering that for Committee Stage.

It was argued that the Revenue Commissioners should be the people to decide on the alternative charge under section 6 instead of leaving it to the taxpayer to elect. As I pointed out earlier, the provision is advantageous to the taxpayer because he is given two years to review his capital gains tax position and in the light of that review to elect for the alternative charge which suits him. These taxpayers are likely to have available to them plenty of good advice. We are allowing a complete exemption for the first £500 of gains. In general, the small man will be outside the capital gains tax net altogether and will not have need to make an election. Incidentally, in Britain where the revenue authorities make the review without an election, the exemption is given only up to a consideration of £500. We are providing it for a gain up to £500, again accepting the desirability of having a less severe tax code here in order to encourage continuing investment.

Is the election intended to help somebody on a low income and paying a lower income tax rate?

It is. I am always concerned with easing the problems of taxpayers.

Then go a little further and accept my suggestion.

And that is demonstrably true.

I think it is demonstrably true. We have given to taxpayers more allowances and considerations than the Fianna Fáil Party did in 16 years.

Not that again.

Deputy O'Malley suggested that funds raised for productive investments should be relieved from capital gains tax. His suggestion is that we tax only unproductive assets. The exemptions given in sections 26 and 27 show our wish to provide relief for the moderately sized business. It would be very difficult indeed from a tax point of view to make the differential suggested by Deputy O'Malley. In any event, to give relief beyond what we are proposing would be to give relief to the better-off section of the community. As we are seeking to broaden the base of taxation, we are also seeking to bring within it people who have previously avoided paying their appropriate share of tax. The exemptions which we are giving will ensure that there will not be hardship and if people go above those exemption levels it is not unreasonable that they should be required to pay a comparatively light tax on substantial gains.

Deputy Belton suggested that if the qualifying assets are transferred by a settlement the relief on a £150,000 disposal should apply. There is a provision in section 15 which is designed to ensure that the objects of the Bill are not defeated and one way of defeating the objects of the Bill would be by the creation of settlements. It would be contrary to the spirit and intention of the Bill if the reliefs in section 27 were to be available to settlements. However, in the case, where the trustee holds the property for another person absolutely entitled to the property as against the trustee or for any person who would be so entitled but for being an infant or other person under disability, such as mental disability, the provisions of the Bill are to apply as if the property were vested in and the acts of the trustee were those of the person for whom he is a trustee. Section 8 (3) of the Bill so provides. Where this situation applies the relief under section 27 would be given in the same way as if the child took it directly.

I think it was Deputy Colley who queried whether ordinary residence can be established with legal understanding in the same way as "residence" or "domicile". There are court decisions which have given rulings on the meaning of both "ordinary residence" and "residence" and both of those terms in this Bill have the same meaning as they have in relation to income tax. There is a difference between the British "bed and breakfast" operations referred to by Deputy Colley and the provisions of the Bill. The British provisions of "bed and breakfast" have been so called because they are one day transactions but our provisions apply to four weeks' transactions because this is broadly the stock exchange accounting period. It will, of course, embrace same day transactions and is, therefore, more extensive than the British one.

I understand that in Britain they can do the "bed and breakfast" operation but the Minister does not intend to allow that here.

No, it is an avoidance.

Does he intend to allow it on a four weeks basis? Is a four weeks "bed and breakfast" operation intended to be allowed?

It would have to be outside what we regard as the normal accounting period in order to get exemption but if it were done within that four weeks it would be caught.

It is argued that there is double taxation from the same source where a company realises a capital gain on the sale of an asset and distributes it to the shareholders by way of a special dividend on capital distribution. If a company is not resident in the State the dividend will be taxable as income in the hands of the resident shareholders and there will not be any charge to capital gains tax. If, however, the company is resident in the State the dividend will not be taxable as income in the hands of resident shareholders under the present income tax code. The charge to capital gains tax under paragraph 1 of Schedule 2 on the capital dividend is designed to achieve equity in taxation between the shareholder who sells his share cum divided thereby getting the distribution in the sale price of his shares and the shareholder who retains the shares and receives the distribution in the form of non-taxable income.

Would tax be payable twice on the one transaction in the case the Minister has mentioned, by the company and by the shareholder?

No, they are two different things. There will not be a double charge to capital gains tax.

It will be on the one transaction?

Yes. Deputy Belton effectively replied to the criticism of charging compulsory purchase transactions to capital gains tax. Compulsory purchase arises where it is considered that it is necessary in the interests of society to make a compulsory purchase to meet the common good. The Constitution specifically provides for laws which are required to meet the exigencies of the common good. I cannot see any reason why a purchase or a sale which takes place in answer to the exigencies of the common good should be treated in any way different from any other sale. In practice, if the exemption of 26 per cent were to be given in those circumstances people would remain locked into their properties requiring all public authorities to go through the full process of compulsory purchase——

That is true.

What is wrong with that?

——in order to effect, at the end of it, a profit of 26 per cent. In the public good it is desirable that people should enter into voluntary arrangements for the sale of their properties so that the public good may be met. If that can be achieved at a reasonable price with the vendor content with the price we should allow those free forces to operate rather than cause a situation where simply because a public authority sought the land the vendor would find himself obliged to push the public authority through the compulsory purchase procedure in order to get a tax advantage. The alternative to going through this compulsory purchase procedure, if we were to make this allowance, would be that the public authority would have to pay 26 per cent above an agreed price in order to avoid the delay of the compulsory purchase process.

Why not exempt it altogether whether it is voluntary or by compulsory purchase if a local authority acquires it?

(Dublin Central): All we are looking for is that the person would be entitled to the same concession when he is reinvesting his money.

If he re-invests the money that is all right.

But if he is not in business—suppose it is a man who owns property which is set in bedsitters, or something like that.

A person in the business of setting or of letting land who acquires other land for letting would, of course, enjoy the exemption.

But if he does not get the exemption, what about the proposition we put forward?

It cannot be entertained for the reasons I have mentioned and of which I think Deputy Colley has some understanding.

We did not suggest that the Minister should exempt compulsory purchase things from capital gains for the reason the Minister said but rather that in the case I have described that he would allow, as an allowable expense before assessing the gain, the purchase of a comparable property.

Again you run into new avoidance difficulties. The Fianna Fáil Party were loud in their condemnation of "speculator." There are many situations where people could invest in anticipation of a compulsory purchase order being made affecting certain property and hope to enjoy the open market price for the property without having to meet the capital gains tax. The more you consider this problem the more you see that you would be generating many undesirable and inequitable situations. As we are trying to get rid of anomalies and prevent inequitable arrangements as between one taxpayer and another, I would urge Deputies not to press that point any further.

Deputy Colley raised a point about partnership assets. He shares with me some knowledge of the variations that can exist between one partnership and another. All I can say is that the general rules that apply to income tax will be the rules that apply to partnership assets under the capital gains tax.

That is not stated in the Bill.

It does not require to be stated.

It would be helpful.

It does not require to be stated specifically in relation to partnership assets. The Deputy is aware that in the definition section of the Bill we have a multitude of provisions that relate to definitions in the Income Tax Acts and to the provisions of this Bill where they are so applicable.

Debate adjourned.
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