When we adjourned I was suggesting to the Minister that he might consider, in relation to this amendment, an alternative by which there would be applied either capital gains tax or capital acquisitions tax to one transaction, whichever was the higher. Would the Minister give some further consideration to this or consider some variant to it? If he did he would find there would not be avoidance in the sense that whichever was going to yield the greater amount to the Exchequer would be the tax applied. At the same time he would maintain the principle adumbrated in the White Paper of not applying both taxes to the one transaction. I appreciate that one tax is payable by one party and another by another, but the Minister accepted in the White Paper that in such a case payment of one tax would be sufficient. If he gives some further consideration to something on the lines I have suggested he might be able to achieve what he originally proposed to achieve in the White Paper and at the same time close the loophole to which he has referred and which he has put forward as the main reason for rejecting this amendment and departing from the proposals in the White Paper.
Private Members' Business. - Capital Gains Tax Bill, 1974: Committee Stage (Resumed).
I have always shown willingness to consider the views of other people. The fact that the legislation is different in some respects from the White Paper is an indication that I listened to the representations made to me. What the Deputy has said in relation to this amendment will certainly be considered. If something can be done, without offending against the principles of the Bill and a fair and equitable taxation without avoidance facilities, I will be only too happy to do it.
In the light of what the Minister has said we are happy to withdraw the amendment. Without trying to be in any way provocative could I point out to him that he will make much quicker progress if he deals with the arguments we put forward on the same basis as he did in the last ten minutes of the discussion.
Would the Minister explain why subsection (1) to the end of paragraph (a) appears to be an exact duplication of subsection (2) to the end of paragraph (a) except with the addition of "or" in the latter? It appears to me to be a complete duplication but maybe there is a reason for the similarity.
Subsection (1) is an acquisition and subsection (2) is a disposal.
Yes, the Minister is correct in that. Should the word "or" not be added at the end of paragraph (a) of subsection (1)?
No, because there are three alternatives in subsection (1) and there are only two in subsection (2). Grammatically the "or" is not required.
In the Minister's view is the "or" implied or "and" between paragraphs (a) and (b) of subsection (1)?
It is a question of any of the three.
The word "or" appears at the end of paragraph (b) so paragraphs (b) and (c) are alternatives.
If (a) and (b) were not alternatives the word "and" would go in. When it is not in and you get three choices the word "or" is sufficient to put in before the last one.
Is it the intention that each of the three should be alternatives, that it should be (a) or (b) or (c)?
Yes.
Would the Minister spell out what is the meaning of paragraph (c) of subsection (1)?
The kind of items which come under this subsection would be personal considerations which do not consist of any property or a right in any property, such as marriage or the personal undertaking or liquidated damages. The subsection sets out that it is consideration which is to be valued and not necessarily the asset. The value of the consideration is not likely to differ much, if at all, from the market value of most assets. I hope that explains it.
There is a reference to "in connection with his own or another's loss of office or employment or diminution of emoluments". What kind of situation is envisaged there?
If a person is given an asset, a gift, on leaving employment that would be such an item.
I can understand that in his own case, but in the case of another person's loss of employment or office or diminution of emoluments, how would that arise?
It is not often it could arise. It is one of these sections which has to be widely expressed so as not to allow a situation to be fabricated in relation to two people closely connected.
I find it difficult to envisage this type of thing being covered. Does what might be called the golden handshake come under this paragraph, and, if so, would such in the normal way be liable to income tax?
If it takes the form of cash it would not come within the section because it would not involve a capital gain. If a person were given some land or property it could apply.
In general, if a gain is liable to income tax is it thereby exempt from capital gains tax?
Yes, there is no double liability.
Can the Minister refer me to the particular provision in the Bill?
The Deputy will find it in paragraph 2 of Schedule 1.
I will come back to that in a moment. There is reference in a number of paragraphs, specifically in subsection (2) (b):
where he disposes of the asset wholly or partly for a consideration that cannot be valued:
The subsection provides that in such cases the consideration shall be deemed to be equal to the market value of the asset. If the consideration cannot be valued how can you ascertain its market value?
It might not be possible to value the consideration but the asset itself could be valued.
Can the Minister give an example of a consideration that cannot be valued?
Marriage, and I am not being cynical. It is invaluable and the benefit incalculable.
In the event of a marriage settlement, would that be deemed to be a disposable asset for the purpose of capital gains tax?
There would be a transfer of property to somebody else.
In that event, the property so transferred would be valued as at the date of the marriage settlement and if any gain arose by calculating the difference in value between that date and the value of the property on the date on which it was previously acquired, a chargeable gain could arise. This would be in addition to the normal stamp duty that would arise, though I think there is a special concession in that case.
It could be an asset without any stamp duty.
I doubt if there is a general realisation of the fact that capital gains tax liability can arise in regard to a marriage settlement and it is as well to have it on the record of the House that this is clearly envisaged in this section. Now I wish to refer to a matter that is absent from the Bill but if it were in the Bill it should be in this section, the question of group relief for companies. I should like to quote from the Newsletter of the Confederation of Irish Industry for 4th February last. I quote:
In view of the provisions under consideration for group relief in the forthcoming Corporation Tax Bill, the confederation sees no reason why the new Bill on Capital Gains Tax should not incorporate group relief for capital gains tax purposes. No real gain can be realised for the benefit of the shareholders in a transfer of assets from one company to another within a group. There should be no charge to capital gains tax on the disposal of assets until the asset is disposed of outside the group or until a group company within the group may leave that group. It is essential that the businesses should be allowed the flexibility to move around plant and machinery within the same group without incurring tax liability.
It seems to me there is quite a valid point made by the CII. When I raised this on Second Stage the Minister said it was intended to deal with this point in general in the Corporation Tax Bill when introduced. I think he said that in the meantime persons who felt aggrieved could appeal to the Revenue Commissioners. I am not sure that is a satisfactory situation. Perhaps I might start by asking whether in the Corporation Tax Bill the Minister intends to deal specifically with capital gains as between groups of companies.
I have not yet settled with the parliamentary draftsman the precise lay-out of the Corporation Tax Bill but I expect it will need to be handled differently. It is something about which I do not wish to come to a conclusion at present. We propose to deal with this matter in the corporation tax legislation because it is in such legislation we ought to bring together the law as it affects corporations. That Bill will include provision to cover taxation of capital gains accruing to members of a group of companies. We will also be dealing with the corporation tax situation.
The Minister is quite sure that is what he intends to do?
Yes. It is appropriate that corporation tax liability should be brought together in one measure. As I said on Second Stage, pending introduction of that legislation, any company that think they are adversely affected by the absence of group treatment in this Bill may apply to the Revenue Commissioners who will consider the granting of relief in any cases of genuine hardship. They have the administrative power to do that. Companies may be assured their cases will receive a genuine hearing and that assistance and relief will be given where appropriate.
I note the Revenue Commissioners have power in certain circumstances to grant relief, but is it quite clear that they have power, if necessary, to grant total relief in cases such as are contemplated by the Minister and myself at this stage?
In practice, where cases of hardship arise relief is given. While I am not in a position to say that the discretion will be exercised in all cases in which the potential taxpayer might consider it would be appropriate to exercise it in his favour, by and large it is an administrative arrangement which operates satisfactorily.
The Minister refers to companies or taxpayers who may feel aggrieved. Since there is no provision in this Bill, in what circumstances should they reasonably feel aggrieved? By what standards do the Revenue Commissioners judge the legitimacy or otherwise of their sense of grievance? In other words, is it intended to provide the kind of thing that is sought by the CII in the extract from their newsletter which I read out, that is, that businesses would be allowed the flexibility to move around plant and machinery within the same group without incurring tax liability?
It depends on how flexibly we interpret flexibility but, broadly, that is the intention, and, pending the introduction of the corporation tax legislation, the Revenue Commissioners will give administratively the relief which will be given in the Corporation Tax Bill eventually.
This is a somewhat unsatisfactory position, in that it is not unreasonable to expect that the Corporation Tax Bill will not be enacted for quite some time. It has yet, according to what the Minister has said, to come from the parliamentary draftsman, and with the other procedures that will have to be followed before it can be circulated and passed by both Houses of the Oireachtas, a substantial interval will elapse before it is enacted, but in the meantime groups of companies will be dependent on making appeals to the Revenue Commissioners, on a basis which is not specified anywhere, against their treatment as being unfair or inequitable, without their being in a position to point to what would be fair or equitable according to the law.
It would be far better if the provisions relating to capital gains tax treatment of groups of companies were incorporated in this Bill and, if necessary, repealed and re-enacted in the Corporation Tax Bill. If that is not done, it is expecting taxpayers who, in some cases, would be very substantial taxpayers of capital gains in certain circumstances, to operate with the Revenue Commissioners, neither side knowing with any degree of certainty at all what is the correct way to operate or what is the law on the subject. That is an indefensible position and I would strongly urge the Minister to reconsider it and to spell out the provisions in this Bill; then if for tidying up purposes he wants to incorporate them in the Corporation Tax Bill, he can incorporate them in that and repeal them in this Bill.
Deputies have already complained about the size and complexity of this Bill. It is some comfort to know that it would be twice as bad if we were also to deal in this Bill with the company group treatment under the capital gains code. The general provisions have already been specified in the Government's White Paper on corporation tax, and the scheme proposed is similar to the scheme which is already in operation in Britain and with which most accountants and tax consultants will already be familiar.
The Minister will remember that when I asked him about that he said it would be generally similar but he did not want to be tied down too tightly. I understand why he did not, but, nevertheless, that was the answer he gave.
There was a perfect example today of the drawback of trying to be frank and honest if somebody tries to screw you a year later because of something you intended to be able to do.
I do not want to go back over that, but the Minister should not tempt me.
I am glad to see the Deputy has a conscience. He knows how unfair he was.
The Minister is really tempting me now.
The broad scope of the capital gains code as applied to groups of companies is, as I said, generally understood by the business community, and I am quite certain they will be grateful to have it brought within the Corporation Tax Bill, in one measure rather than to have it in two. While I can see the point Deputy Colley is making, that we could put it in here and transfer it later into the other Bill, it would make this Bill a very clumsy one. It is much easier to have, as we are proposing to have, clean Bills that deal with each individual problem. It is only people who would be concerned with corporation tax and capital gain on groups of companies who would need to know about this. Therefore it is better to leave it outside this Bill altogether and to have it in a tidy and as concise as possible Bill.
I have as great a desire to see a clean Bill as the Minister has, but we are talking about a tidying operation, and I do not think that is a sufficient justification for leaving a substantial group of taxpayers and, indeed, the Revenue Commissioners, up in the air as to how capital gains tax legislation is to be applied to their activities, when we are enacting a Capital Gains Tax Bill. I feel sure the Minister agrees in principle with what I am saying and that the difficulty he faces is partially what he said and also the fact that he does not have available at the moment the actual terms which would be applied to the handling of capital gains tax among companies. However, that is not an insuperable difficulty, and it would be possible, I am sure, between now and the next Stage for the Minister to have amendments prepared which would incorporate this. It is not the ideal solution, I freely admit, because it would be untidy and we would have to repeal this in due course. Nevertheless, it is wrong in principle that a very important part of the capital gains tax legislation, with possibly very important repercussions, should not be spelled out in any way and that it should be operated on groups of companies without they or the Revenue Commissioners knowing precisely what the law is.
In practice they have an adequate understanding of what the law will be.
Do you mean the Revenue Commissioners or the taxpayers?
I mean the taxpayers. We are not dealing here with individual people with little knowledge or understanding. We are dealing with companies that are in groups, and they are usually well advised financially. If such groups or their representative organisations or professional organisations or accountants have any doubt at all about the matter, they can be assured that the Revenue Commissioners will give every possible assistance and advice. I would propose to say as much to the CII. I have seen their recent submission to which I propose to reply shortly telling them that, if they are in any doubt as to the applicability of the relief which is proposed under the corporation tax code in relation to capital gains tax, the Revenue Commissioners will be only too happy to assist them.
Is it the position, then, that so far as such taxpayers are concerned, if they are to try to determine whether any transaction would be liable to capital gains tax, the only yardstick they would have for guidance would be the British legislation? The same would be true of the Revenue Commissioners if they are asked to advise such taxpayers on certain problems. Is it not true also that, while the Bill before the House is similar substantially to the corresponding legislation in Britain, there are some significant differences, one of which was referred to earlier by Deputy Belton—that was the treatment of capitalised interest? Is there any guarantee for taxpayers who might be involved potentially as members of corporations or companies or for the Revenue Commissioners in dealing with their applications that the legislation in Britain will be followed to a very significant degree? I would not mind some minor changes but a change such as the non-allowance on capitalisation of interest would be a major change. In the absence of this matter being spelled out, where will the taxpayer and the Revenue Commissioners stand?
I cannot presume to say what Dáil Éireann or Seanad Éireann may decide, but I can say my intention is to do as we said we would in the White Paper on corporation tax. It is fair to point out that the postponement of corporation tax legislation was sought by the business community.
I may have missed a point made earlier by the Minister and to which he has referred now. Did he say that it was intended to deal with capital gains as between groups of companies in precisely the same way as it is intended to deal with corporation tax between groups of companies?
It is proposed to deal substantially with it in the same way, to provide the relief on a somewhat similar system. Relief would be given appropriately within the group of companies.
Therefore they would be the grounds on which the Revenue Commissioners would base their advice?
Yes. The Deputy is right in saying that the taxpayer is entitled to know the law, to know whether he is putting himself in peril. While we are endeavouring to change the laws we will have unfortunately some periods of uncertainty. The mere announcement of change generates uncertainty but this is inescapeable. In regard to the postponement sought by the business community in general, I was only too willing to accede to a delay because I thought it desirable to have more time in which to complete the draftsmanship in what was a very difficult and complicated area. In the meantime anybody having any problem, or who may think that the details are not sketched sufficiently already in the White Paper, may communicate with the Revenue Commissioners and, contrary to their general image, the Revenue Commissioners are as willing to advise taxpayers on their non-liability to tax as on their liability. The people and their advisers with whom we are dealing here are well up. We are not dealing with a non-sophisticated and non-skilled group.
I agree with the Minister's description of the kind of taxpayers that are involved but I am happier to think of them and the Revenue Commissioners relying on the White Paper on corporation tax rather than on the British legislation. I take it that the White Paper on corporation tax will be the framework on which both the taxpayers and the Revenue Commissioners can operate.
The best thing to do in order to avoid any uncertainty is for anybody who is concerned about this matter to communicate with the Revenue Commissioners so that any element of divergence as between the White Paper and the British system of legislation can be pointed out. In order to assist such people we will take some initiative now by notifying all major organisations of the Revenue Commissioners being available to assist them.
I consider this to be an unsatisfactory way of dealing with the matter but in view of what the Minister has said I presume it will be practicable to operate on this basis.
I wish to revert to a matter I referred to earlier—the question of liability for capital gains tax not arising where there is a liability for income tax, that is, on the same monetary gain which, in some cases, could be deemed to be income. Section 115, subsection (1) of the Income Tax Act, 1967, provides that:
Tax shall not be charged by virtue of section 114 in respect of the following payments, that is to say—
(a) any payment made in connection with the termination of the holding of an office or employment by the death of the holder, or made on account of injury to or disability of the holder of an office or employment;
On the face of it that would appear to suggest that some of the items envisaged in paragraph (c) of subsection (1) to which the Minister referred earlier would not be liable to capital gains tax. Golden handshakes may come within that. Certainly some of what is envisaged, as adumbrated by the Minister, would appear to come within the terms of section 115 of the Income Tax Act, 1967. If that is so they would not be liable to income tax and if they are not so liable, neither are they liable to capital gains tax in accordance with, I think, paragraphs 2 and 3 of the Schedule to this Bill.
Section 9 does not say that the asset or acquisition is subject to tax. It says what is an acquisition of an asset, and that is something entirely different. Once the asset is acquired the possibility of the gain increases and there is a possibility of tax on the gain subsequent to the date of acquisition as defined in section 9.
I think the Minister said paragraph 2 of Part I of the Schedule. Is that the reference the Minister gave?
Schedule I, paragraph 2, on page 46.
Section 2 (1) reads:
There shall be excluded from the consideration for a disposal of assets taken into account——
Where is the Deputy now?
Page 46, paragraph 2 (1). It reads:
There shall be excluded from the consideration for a disposal of assets taken into account in the computation under this Schedule of the gain accruing on that disposal any money or money's worth charged to income tax as income of, or taken into account as a receipt in computing income, profits, gains or losses for the purposes of the Income Tax Acts, of the person making the disposal:
It would seem—and I think the Minister agrees—that under section 115 of the 1967 Act, terminal payments of the kind we have been discussing would not be liable for income tax. Would they therefore be excluded from section 9 by virtue of Schedule I, paragraph 2 (1)? In other words, if they are exempt from income tax, they do not seem to be exempt from capital gains tax under this provision in the Schedule. What would be the position arising in the situation envisaged here in subsection (1) (c) if, in fact, they are not liable to income tax?
No capital gains tax would arise on the acquisition of the asset. Capital gains tax will be charged only on such gain as is made during the ownership of the asset, which is a different thing. Income tax might be chargeable on certain receipts at the time of receipt, but the capital gains tax is only payable at the time of disposal of an asset, and provided the gain has been made over and above the cost of the acquisition of the asset.
For the purposes of subsection (1) of section 9, in the kind of case we are envisaging there may be no cost of acquisition and the provisions of subsection (1) in such cases would seem to apply the market value as the deemed consideration at that point. Therefore, in the case of some from of substantial presentation to somebody on the termination of an office, other than money, he would be deemed to have acquired it at that date at its market value. Apparently, on foot of section 115 of the 1967 Act, he would not become liable to any income tax on that. Is the Minister saying that, in due course, if he disposes of that asset, whatever it may be, he would then become liable to capital gains tax?
On that gain. It is the difference between the value on the date he acquired it and the value on the date of disposal, but only on the gain, on the growth in value, not on the original gift.
I appreciate that. Would that apply whether or not the asset in question was liable to income tax?
Yes.
It does not make any difference?
No.
So what is the significance of the reference in Schedule 1, paragraph 2, to which the Minister referred?
It refers only to references in the Schedule and not to references anywhere else.
I am wondering if, in view of that provision in the Schedule, it is correct to say it makes no difference for the purposes of section 9 (1) whether or not the asset in question becomes liable to income tax, or whether the income from the asset becomes liable to tax.
The first part of the Deputy's question is right but it is irrelevant really for the purposes of this Bill.
The Schedule says: "There shall be excluded from the consideration for a disposal of assets ... in the computation ... of the gain accruing on that disposal any money or money's worth charged to income tax as income of ... the person making the disposal".
The Deputy will appreciate that this is for the purpose of preventing somebody from getting double relief and, of course, of preventing any question of double charge. There are expenditures and profits which are income and are properly treated as income and appear in income accounts. Separate from that, there are expenditures for the purpose of acquiring an asset which are part and parcel of the cost of the asset which are not available for income tax purposes. They must be treated differently. We must ensure that there is no duplication of either charge or profit.
This is really what I am trying to satisfy myself about— that they are so treated reading this section and that portion of the Schedule together—that that, in fact is the effect. That is the intended effect, at any rate?
It is. I cannot see that there is any room for doubt. Needless to say, since the Deputy has drawn attention to this matter, I will have it looked at very carefully.
I will have another look at the matter in the light of what the Minister said. He has put on record what the intention is. If it achieves that I am happy. I just want to make certain that it does.
We have an obligation to ensure that the Legislature does what it intends to do.
Could the Minister enlighten me on what is meant in section 9 (1) by, "be deemed to be for a consideration equal to the market value of the asset"?
I dealt with this earlier. If the Deputy wants to see what valuations are all about he will find the information in section 49 which says what the meaning of market value is in relation to assets.
How does it arise? It can arise only if the asset is disposed of. Is that not correct?
Yes, if the asset is acquired for other than valuable consideration, a consideration which is related to its market value. We have to have some way of assessing the value of something which is not paid for.
That means that if shares are distributed they will be subject to capital gains tax.
They could be.
Even though they are not disposed of.
Even though they are not disposable.
Not disposed of.
Nevertheless, if there was distribution, it could be a gain.
What the Minister is saying is that if there is an issue of shares, which is, I suppose, a capital distribution, capital gains tax will be charged even though the recipient may not dispose of the asset.
I have not finalised thinking on that.
I appreciate it could arise only where the issue is big enough.
As I say, I have not finalised thinking on that. I will certainly be looking at it again and considering what the Deputy has just said.
I have only just come in and I have not heard the argument but, prima facie, if shareholders were placed in a very disadvantageous position vis-à-vis other shareholders abroad or, perhaps, in foreign companies that might militate very much against the holdings of Irish shareholders in companies or against them in the sense not just from the point of view of the holding but from the point of view that Irish nationals would not be able to exercise their rights, would not be able to build up a dominant position in the company and they would thereby be hindered by the action of their own Government placing them in an invidious position vis-à-vis shareholders of other nationalities. I would like the Minister to consider that point.
The Deputy may rest assured that the Government are concerned not to inhibit in any way the reorganisation of companies, discourage investment or a proper reorganisation of companies and shareholdings. It is a very complicated matter and I would refer the Deputy to Schedule 2 which deals with companies and shareholders. He will, I think, find his worries allayed by a consideration of that Schedule.
I would call the Minister's attention to the disadvantageous position in which Irish shareholders are placed in companies in which there are issues of shares made in lieu of dividends. That has become quite a common practice in the last few years especially when companies outside Ireland are endeavouring to help their strained liquidity position by giving shares instead of dividends. Irish shareholders are already placed in a disadvantageous position in that they have to pay full tax while shareholders of other nationalities do not have to do so. It would not be good if, added to that position, they found themselves in difficulties under this particular provision.
I certainly would not wish to add unnecessarily to their burdens, but there could be people in other countries who suffer on their own domestic front a disadvantage comparable to that suffered by Irish people.
That is no consolation to the sufferer.
Sometimes it is a consolation to know that others are also suffering.
It is no financial consolation.
The Deputy can be assured that we will not do anything unfair.
This could affect majority holdings and so on.
Notice taken that 20 Members were not present; House counted and 20 Members being present.
The Minister would want to define what kind of asset, which was not disposed of, would be chargeable.
Section 9 explains that a person's acquisition of an asset is as defined and disposal is as defined. An asset is anything other than the specific exemptions written into the Bill.
But consideration is money valued and money worth. Section 9 seems to imply that this consideration would be chargeable even though it was not disposed of.
No. The consideration itself is not chargeable. We are dealing in section 9 with the situation where an asset is acquired for some consideration other than cash. Marriage was a case I used to illustrate where you had a consideration which in itself could not be valued because it is invaluable. There you would have to take the market value of the asset as being the consideration and that would then be the starting point. It is only subsequent to that, that any gain or any loss might arise. The starting point would be the time of the acquisition of the asset which would be taken at its market value and thereafter you would tax only the gains that could be made.
That is quite clear but how does the capital gain arise? Is this merely to determine the value and it is only when you dispose of it that the gain would arise?
That is right, not at the time of the acquisition.
I thought I understood the position to be different from that which I think the Minister has described. As I understand it what Deputy Brugha is talking about, and indeed Deputy Dockrell was too, is a company which issues additional shares representing a capital gain by the company, if the company makes a capital gain as such and distributes it to its shareholders by the issue of additional shares. I think that is the situation which was envisaged.
To avoid paying dividends in a liquid situation.
Is it not true that in such a case the company, on making the gain and distributing it to the shareholders, is disposing of that gain? There is a disposal at that point. Is that not so? And capital gains tax arises—on the assumption that there is enough money involved—on that disposal to the shareholder?
We are getting mixed up now. We are mixing up the blessings of marriage with the intricacies of company operation. I have already said that I am looking at the position of the issuing of shares to people in lieu of profits or, say, a capital gain made on existing shareholdings. We had better leave that aside for the moment. It is a problem we are very carefully examining. I thought Deputy Brugha was asking me what kind of consideration had we in mind here in section 9. We are dealing here with the kind of consideration which could arise which could not be easily calculable. The case I gave is a case in point.
We will raise it on section 11.
What is the thinking behind subsection (1) paragraph (a)? It seems, on the face of it, to provide that where an asset is disposed of and acquired under a contract the time at which the disposal and acquisition is made is the time the contract is made and not, if it is different, the time at which the asset is conveyed or transferred. What is the thinking behind that provision?
Perhaps I should explain what the section is all about. The section sets out the rules for determining the times of disposal. This is normally the time when the contract is made but where the contract is subject to a condition the time of disposal will be when the condition is satisfied. On a compulsory acquisition of land by an authority so empowered the time of disposal is either the date the compensation is agreed on or the time of entering on the land, whichever is the earlier. In the case of an asset subject to a hire purchase agreement the time of disposal is when the person hiring the asset obtains the use of the asset. Where compensation or insurance money is received the charge to capital gains is to apply at the time of receipt. Subsection (1) provides for three types of disposal: (a) in the case of an unconditional contract the time of disposal and acquisition is the time at which the contract is made and not, if different, the time the assent is conveyed. If the contract is subject to a condition, the time of disposal and acquisition is the time when the condition is satisfied. Where an asset in land is acquired by an authority under compulsory purchase powers, the time of disposal and acquisition is the time at which the compensation is agreed on or the time when the authority enters into possession. Would the Deputy like me to stop there?
Perhaps the Minister would stop there for the moment. I am grateful to him for what he has told us. What he has done is to explain in slightly simpler terms what is actually in the Bill. My question relates to subsection (1) paragraph (a) which provides that where a contract is without condition the time of disposal is the date of the contract, not the date of conveyance, say, of the property. My question is why is it the date of the contract and not the date of conveyance of the property?
The only thing certain in an unconditional contract is the date on which the contractual arrangement is made and the actual relationship is established.
That may depend on the kind of asset involved, I suppose. If it is land or buildings there will be a definite date.
Normally the condition to be fulfilled is that on receipt of the consideration the proper transfer of the property will be completed but an unconditional contract could be written in order to avoid indefinitely liability for capital gains. People could enter into a contract for the disposal of a property and not have any date for the completion of it. Another person, could, under that contract, get a right in the property which was about to be conveyed, something that might never be completed but be quite content with it in order to have an indefinite postponement of capital gains tax.
In those circumstances would the Minister not visualise the consideration actually passing before the would-be purchaser gets the right to use the particular asset? In other words, the correct date would appear to be the date on which the consideration passes?
That is if that is the condition in a contract. There you have one where the event is known and identified, where the condition is set out, but if you have a contract with no condition then you have to have some finality and the only finality you can have is the date on which the contract was made.
Is the Minister visualising a contract which does not provide for the payment of a consideration and does not provide a definite date for completion of the transaction? Is that the kind of contract he is envisaging? It seems a peculiar contract on the face of it.
You could have one which would provide for the payment of a consideration but not for acquiring it. On the payment of a consideration something would be done.
I appreciate that but the date of payment of the consideration in the normal way would seem to be the date on which the disposal takes place or could be deemed to take place. In the case of a normal contract what happens on the date of the contract, as the Minister knows, is that only a deposit is taken and on the face of it it would not seem to be the right date for deeming it to be the date of disposal.
If it is a normal contract it will provide that on the happening of a certain event or the passing of a consideration the transfer will take place or a certain deed be done but you could have a contract which would be indefinite as to the point at which something is to be done. It could be indefinite in duration. Some gain might arise out of the existence of that contract. There must be some starting date and the only thing known for certain is that date. If the contract is unconditional I cannot see how there can be any event to identify it other than the date on which it is made.
Would the payment of a consideration not be a definite date?
Is that not a simpler way of identifying it?
If it was a payment of a consideration over a long period, by a lump sum or by instalments, which date would be the appropriate one?
The Minister provided in another section for the payment of a consideration by instalments and provided for payment of capital gains tax by instalments. The point I am raising is not a totally academic one. As the Minister knows, in the case of a normal, unconditional contract it is possible that, the contract being signed, a dispute may develop between the parties that could drag on for a long time. If there is a long interval between the date of the contract, which under this section is the date of disposal, and the actual completion of the transaction, it is clear in the ordinary sense that the asset is not disposed of until the transaction is completed. As a result of the dispute it could happen that no gain would accrue and, in the kind of circumstances we envisage, will the Minister say when is a gain deemed to accrue?
If we take a case where a person acquires an asset two years prior to the unconditional contract being entered into, under this subsection on the date of the contract, there is deemed to be a disposal. Presumably the value of the asset on that date is taken for the purpose of determining what gain there was in the two-year period. Let us assume there was a gain which is a chargeable one arising during that two-year period but a dispute develops between the parties that goes on for one-and-a-half years or two years. After that time either the asset has increased in value so that there is a larger gain or it has decreased so that there may not be any gain whatever. Does this subsection affect the amount of the chargeable gain? It seems that it does because it determines the time of disposal and, consequently, the time of acquisition.
On the face of it the subsection seems to be out of touch with the reality of what is happening and it will cause a chargeable gain to arise in a case where the gain is considerably bigger or considerably less. Either situation could arise.
Of course the date of acquisition or disposal will determine at what point capital gains tax may be paid and who pays what amount. Taking the case put forward by the Deputy, if a person has an asset for two years and enters into an unconditional contract to dispose of it, that is the point at which the person decides to dispose of it and enters into an agreement to do so. It seems to me that is the appropriate time to say that is the point of disposal if there is no further condition to be fulfilled. By signing the contract the person confers rights on another. With regard to a situation where there may be a dispute between the parties, the Deputy wishes to know who will end up paying tax on such gains as may be made in the two years of the dispute. The answer is whoever wins. If A contracts for the disposal of an asset to B and if there is a dispute——
The dispute might go on for 18 months.
I take it the point the Deputy is making is that A has not disposed of the asset?
According to subsection (1) he disposed of it on the date of contract. If the asset has increased in value in the interval of 18 months, presumably B will be the beneficiary of the increase in value?
We should qualify all this by saying what the dispute is about. If the vendor is disposing of it but has second thoughts and is challenging it, if he wins and the contract is declared invalid that is a straightforward case. If the dispute is about the consideration, the Deputy's point may be at what time does the gain of A stop and when does the gain of B commence. The gain of A will stop at the time of the making of the contract and if there was any gain or loss made after that it would be the liability or gain of B.
The position of B would be that his date of acquisition and, consequently, valuation of the asset at acquisition would be as at the date of contract?
Yes.
Is that irrespective of what occurred to the value of the asset in the 18 months during the course of the dispute?
Yes. It might be part of the claim to get restitution in respect of liability but I am not presuming to draft a summons at this stage. However, it occurs to me that might be an element of the claim.
The gain is deemed to accrue in this case as at the date of contract?
Yes. It accrues to A at the date of contract and to B subsequent to that date. I am assuming that the contract is subsequently held to be valid; if not the whole thing evaporates.
Paragraph (c) of subsection (1), deals with the situation in the event of compulsory acquisition. Lines 19 and 20 carry the words, in brackets, "variations on appeal being disregarded for this purpose". I want the Minister to clarify whether this subparagraph determines only the time of disposal. If there were variations on appeal in the amount of the compensation would these be taken into account in computing the gain or loss or, since the date of disposal is the date on which the compensation is agreed, and disregarding subsequent variations, is the gain based on the figure originally agreed?
If there is a difference in value by reference to change in, for instance, the market value of land bonds, the value most favourable to the taxpayer will be taken. The date would be the date upon which the compensation is originally agreed or determined. That is the point at which the public authorities' rights over the property become absolute— that may not be the correct word because oftentimes the transaction has to be crystallised through various legal forms. This section operates so that there cannot be any question of gain subsequent to the date of the original agreement. For instance, there could be a situation where the land bonds might increase in value after the date of the original agreement and there would be no additional gain involved there, that was the mode by which the compensation was being paid.
That could be so in the case of land bonds but if one assumes negotiations in connection with compulsory acquisition by a local authority and that on a particular date the owner of a property agrees on a figure with the local authority, as I read it this paragraph says that date is deemed to be the date of disposal and acquisition. The paragraph envisages variations in this subsequently on appeal. Presumably in such case the agreement already arrived at is gone back on and, as a result of the appeal, there could be either an increase or a decrease in the figure which was agreed on the date of disposal. In such circumstances is the gain in question computed by reference to the figure agreed originally on the date deemed to be the date of disposal or is it computed by reference to the figure ultimately agreed on appeal?
I agree with the Deputy. Appeals seem to be impossible in a situation in which agreement has previously been reached. An agreement is an agreement and no appeal normally lies against it.
Nevertheless, the section envisages this.
I agree it does.
If one assumes for the purposes of the discussion that what is stated in brackets can happen—I admit I cannot envisage how it happens but if it is there it is possible— then which figure is used for the purpose of calculating the gain or less?
For the purpose of this it is the compensation as agreed and that seems to rule out appeal. If there is no agreement the phrase, "or otherwise determined", would cover the striking of a value in a conflict situation where it was fixed on appeal or by reference to the court or an arbitrator.
Presumably that is the situation we should concern ourselves with, where the arbitrator determines a figure and subsequently on appeal to the court the figure is varied?
Yes, this would be a case where the arbitrator's finding would be in dispute. I assume it would have to relate to the date upon which the original assessment was made and not to any delay which occurred following an appeal from that assessment. A lot depends upon whether or not the assessment by an arbitrator would be a determination within the meaning of the subsection. If it was a determination it would appear that that would be the appropriate date. If it was not then it would go on to the date upon which there was a determination. I will look at the particular words in brackets and I will contact the Deputy to see what he considers to be necessary.
On the question of authority to enter on the land, it is conceivable that an authority would enter on to land before arbitration following which there could be an appeal. Paragraph (c) says that the time that the consideration is determined is when the authority enters on the land, but that could be a long time before any compensation is paid.
We could have a situation of a compulsory purchase order being made but compensation not determined and the authority could take possession of the land. In most cases it would be to the advantage of a taxpayer that the date of entry be taken as the date on which the capital gains accrued. Living in the world in which we do, where values tend to increase, in such cases it would therefore be to the advantage of the person disposing of the property that the earlier date be taken as at the point of determining the gain.
It could not be advantageous if the person owning the land had not been paid and the tax was chargeable.
There would be no question of collecting taxes before the compensation is paid.
There could under this section.
Is the Minister sure? I asked earlier when is the gain deemed to accrue and the Minister said it was deemed to accrue in relation to paragraph (a) on the date of contract. In another section the financial year in which the gain accrues determines the date of liability of payment and that liability arises within some months of the end of the year in which the gain accrues. This becomes of some importance, particularly in the case envisaged by Deputy Brugha which, as we all know, happens where the compulsory acquisition order may be made and the land may be entered into but the compensation is not paid for some time afterwards.
Administratively the Revenue Commissioners would not be seeking payment of tax on consideration where payment had not been made.
Could we have a categorical assurance on that topic?
One cannot get blood out of a turnip and the Revenue Commissioners are as aware of that as anybody else.
The turnip could have blood somewhere else.
It is only the turnip in respect of which the capital gains tax arises that would be looked at in this situation.
Nevertheless, it could arise and the Bill is the law.
The Deputy has raised a point and I shall certainly look into it for the Report Stage.
The Minister has undertaken also to look into the question of the words in brackets. I want to pursue that a little further and point out to the Minister that, in a case where a determination is made by an arbitrator, in most cases as envisaged here it would be a determination within the meaning of this section and subsequently there is a variation in the figure for compensation. Where that variation increases the original figure, obviously the taxpayer will not complain if a gain is assessed as at the date of the original determination. The real problem would arise if, on appeal, the figure is reduced and he is being charged capital gains tax on a gain which he did not get. I want to draw the Minister's attention to that particularly in his consideration of the matter. That is the one that will present the problem.
Deputy Colley is now advancing an excellent reason, which I had not thought of at the time, for the rejection of his amendment for the sliding scale of tax, paying a higher tax in an earlier year than in a later one. The problem the Deputy now identifies would not arise if on the variation there was a different value put on the consideration, because the same rate of tax would apply even if the time of disposal was at an earlier date. There would be no difference in the rate of tax because of the time of disposal. It would be a difference in the amount of tax payable.
I think the Minister may be missing the point I am making, which is quite independent of the rate of tax or the period over which it is made. The point I am making is related to the amount of the gain and how that is determined. Is it determined on the date of determination by the arbitrator or the determination by the court on appeal? If the subsequent one is less than the first, then the taxpayer will be asked to pay capital gains tax on a gain which he did not make—or at least on a gain which is bigger than the one he actually made.
It would be paid on the lesser sum.
Is the Minister right in saying that considering the section says that the time of disposal or acquisition is the time in the case we are talking about at which the arbitrator determines the value? If the disposal and acquisition are deemed to take place on that date, surely that must be the date on which you assess the value of the gain and that can only be done in relation to the arbitrator's figures and it specifically says that you disregard variations on appeal. Can the Minister be right in what he said?
You visualise that on appeal there could be a reduction?
If there were to be a reduction—I know it is an unusual situation but I think it could happen.
All we are dealing with in this section is specifying the time of disposal, not the amount of the consideration.
Agreed, but does not the date of disposal determine the amount of the consideration involved?
Suppose £10,000 was the consideration on the date outside the brackets and £9,000 was the consideration on the date within the brackets, which of those would be deemed to be the consideration? I think that is what the Deputy has in mind.
Yes. On the face of it, the £10,000 would be deemed to be the consideration.
Not necessarily. What we say here is that we would take the disposal to be on the date upon which the earlier figure was decided on but that would not necessarily mean that would be the consideration that would be deemed to have passed at the time of disposal on that date but the consideration would be that which actually was paid and that would be the £9,000.
Would the Minister point to any part of the Bill which says that?
"Consideration" is a term which is generally understood to be something of which the court already has notice other than such consideration as is dealt with in section 9. Therefore there is no need to specify in section 10 or anywhere else that "consideration" is the actual cash received. Where parties are at arms length, where there is a genuine transaction, the consideration is whatever actually passes between the parties. That would be the appropriate one, whether it was by agreement or determined by a valuer. We are dealing specifically here with the time of disposal so that the gain would be determined by the profit that had been made between the date of acquisition and the date of disposal. We are only dealing with the time of disposal in section 10.
The Minister will agree that the general principle involved is that the amount of the gain is determined by deducting the value of the asset as at the date of acquisition from its value as at the date of disposal. My original question in relation to this was: in this kind of case, will that principle be applied? If it is, in the example the Minister gave the second figure, the value as at date of disposal would be £10,000, not the £9,000 within the brackets. If that is so, it seems that this subparagraph needs to be amended to cure that. If it is not so, I should like to be assured by the Minister that it is not so and evidence in the Bill to that effect drawn to my attention. I appreciate the Minister may not be able to do that offhand but perhaps he would undertake to do so in due course.
We are dealing only with the time of disposal here and with nothing else. "Consideration" is what is actually paid over.
Is there any section of the Bill in which that is said?
No, because it is something like "price", a general term that does not require statutory definition except in so far as it is extended for any purpose. I shall look at the point the Deputies have raised and if there is any doubt about it I shall bring forward the necessary amendment on Report Stage.
It may be that if an amendment is necessary it would be in the Schedule rather than the section as the rules are laid down in the Schedule for computation of the gain.
Does subsection (2) mean irrespective of the time period, say five years, in any arrangement like that, that the capital sum will be chargeable to capital gains tax right at the beginning in a hire purchase agreement?
Subsection (2) fixes the time of disposal and acquisition where an asset passes under a hire purchase or other transaction under which the use and enjoyment of the asset is obtained by a person for a period at the end of which the property in the asset will or may pass to him. If a person is acquiring a property under a hire purchase agreement the title to the article does not pass until the instalments due under the hire purchase contract are paid. But the use and enjoyment of the asset is from the date on which he first takes possession of it and has it under his effective control. Such a transaction would be treated by both parties as an outright sale as at the beginning of the period of hire. Of course the price would be determined at the commencement of the contract at the time possession was taken.
The subsection further provides that if for any reason the hire terminates without the property in the article passing to the person who had the use and enjoyment of it, as, for example, by repossession for failure to pay instalments, the capital gains tax is to be adjusted by repayment of tax if necessary in accordance with the circumstances of the case.
Subsection (3) relates to capital sums received as compensation, insurance money, sums received for forfeiture of rights or for the use or exploitation of assets and provides that the time of the disposal is to be the time of the receipt of the capital sum.
I understand that. I am not really concerned with the person who is disposing of an asset as much as the person who is getting the use of it. If it is on a long-term basis—so much per month over five years for example—does this mean that the instalments would be the capital sum? Does this become chargeable? It is not a hire purchase but a sale agreement over a period, such as is done in the case of machinery.
If any of the instalment charges are treated as capital, then they are capital. But if somebody is using some payment made by them under an agreement to set off against profits, then it cannot be computed for capital gains or losses purposes. If this is dealt with as a capital acquisition and not treated as an income arrangement, then it would fall to be dealt with under the capital gains tax.
I expect that at the selling end it is chargeable for income tax purposes as part of a business?
Most of them would be. In the ordinary business or a farm, assets which are acquired would be dealt with in the ordinary business accounts and would not be capital for the purpose of capital gains.
The danger I see is that if it were it would discourage the kind of very useful commercial activity which provides working assets for people who have not the capital to pay for them at once.
I want to ask the Minister a question on subsection (3) and I will try to make it as clear as I can. First, I want to refer to section 8 (2) to which this subsection refers. For simplicity, I am referring only to (iii) and (iv) which read:
(iii) capital sums received in return for forfeiture or surrender of rights, or for refraining from exercising rights, and
(iv) capital sums received as consideration for use or exploration of assets.
It would be reasonable to expect that in any of those cases there would be a contract entered into in regard to the forfeiture or surrender of rights or refraining from exercising rights or from the use or exploitation of assets. Let us assume that the contract is entered into for one of those purposes. The question then arises whether for the purposes of this Bill that contract is to have the date of disposal determined by section 10 or section 8. On the face of it, that may appear straightforward enough, because subsection (3) says the disposal shall be the time when any capital sum is received.
Subsection (1) (a), assuming there is no condition attached to the contract, says that a contract if it is unconditional, will determine, by the date of the contract, the date of disposal and acquisition. My question is: if one has a contract in any of these circumstances, how does one know if the contract comes under section 10 or section 8? A contract for one of the purposes I have mentioned could well fit into the description in subsection (1) (a). We get a different result, of course, with the date of disposal, depending on which section it comes under.
Subsection (1) (a) of section 10 is subject to subsection (3). In other words, it specifies the general rule, except as provided for in subsection (3). Subsection (3) takes us back to section 8 in order to specify the items which do not come within section 10 (1) (a).
The Minister is saying that a contract for any of the purposes mentioned, such as surrender of rights or refraining from exercising rights or a contract for the use or exploitation of assets, anything of that nature comes within subsection (3) and the date of disposal is determined by the date of receipt of the capital sum and does come within paragraph (a)?
That is right.
Is the Minister reasonably satisfied that there will be a clear-cut distinction in cases of contracts of this kind, or can he envisage a number of grey areas where it may be difficult to determine under which section the contract would come for the purpose of determining the date of disposal and acquisition?
I am not saying there will not be grey areas because, as any practitioner knows, there are often arguments about various contracts and their implications. There is also the right of appeal if the assessment made by the Revenue Commissioners is disputed by a taxpayer. In my view, it is as clear as it can be made by the use of parliamentary language.
I do not wish to make it less clear but, in so far as this is clear, why should there be a distinction? In other words, for any of the purposes I have mentioned why should a contract not be treated the same way as the ordinary unconditional contract envisaged in paragraph (a) and the date of disposal and acquisition be deemed to be the date of the contract?
In certain cases the capital sums might be received before the other part of the contract was performed. For instance, one might receive the capital sum on undertaking to refrain from exercising certain rights. This might be an ongoing restraint on the person who receives the capital sums but they would not be performing their part of the contract until long after the capital sums were received.
Surely the performance of the contract is not relevant? What is relevant is the date of the contract. That is determined under section 10 (1), the date of disposal and acquisition. My question is why in the case of contracts for the kind of purposes I have mentioned, like the use or exploitation of assets, they should be treated differently for the purposes of determining the date of disposal.
In many cases the dates will be different. In practice they will be different. For instance, in the case of insurance there will be a difference in the dates.
Could the Minister elaborate a little on that?
We are specifying in subsection (3) that the time of disposal is the time at which the capital sum is received of whatever is disposed of. That is a very specific thing and that is what Deputy Colley thought ought to apply to all transactions. In most cases that is what happens because most contracts are conditional on some event happening or the passing of some consideration. If you have an open-ended contract the appropriate thing seems to be, in order to have some finality on it, to decide the cut-off point. That can only be the point at which the contract is entered into. There is no other event which you can recognise as determining the issue.
I would agree with the Minister that you can have an open-ended contract but in many of the cases covered by subsection (3) there would not be open-ended contracts at all. They would be normal, unconditional contracts which, but for subsection (3), would operate the same as those under paragraph (a). Why should such clear-cut contracts, which are not open-ended, be treated differently? This really gets back to the question I asked about how you know which section they come under.
We must get the tax collected at some stage. We have to relate it to events which can be identified, as otherwise you could have a situation of people escaping tax for an indefinite period. The contract in the cases mentioned could be, for instance, in the first stage in this year but the compensation might not be paid for ten years to come. In other words, it might not arise for ten years and it might not be paid. It is only fair that the appropriate time to charge the tax would be the time the compensation was actually passed.
It seems to me the argument the Minister made is not unreasonable but it is really justifying this suggestion we put to him on subsection (1), that the date involved should be the date on which the consideration passes, which in effect is the argument he is making for subsection (3). It seems to me to be far more realistic than the date of the contract. The argument he has made for the date of receipt of the capital sum in some cases makes sense. In effect, what that means is the date of payment of the consideration. Does that not make more sense than the date of the contract as provided in subsection (1)?
Of course, in the cases mentioned there are various events which are to happen before the compensation is paid.
Not necessarily. Some of them could be quite clear.
It states that "capital sums received in the terms of forfeiture, surrender of rights or prevention of exercising of rights" and so on. It could be a long time after the contract. A long time could elapse from the time of the signing of the contract. As the Deputy said, there could be cases of unconditional contracts when it would be impossible to determine the time at which benefit accrued. We have to have some point to determine when liability arises. I cannot see any other way of determining it.
The Minister actually provides for that in paragraph (b) subsection (1).
That is conditional.
If there are conditions.
Then when the condition is fulfilled. In an unconditional contract there is no condition to be fulfilled.
Yes, but an unconditional contract in the normal way, according to paragraph (a) is deemed to be a disposal at the date of contract whereas an unconditional contract for any of the purposes specified in section 8 (2), is deemed to be a disposal on the date the capital sum is received or the date on which consideration is paid, which is the argument we were making to the Minister on the earlier section. I will not push that and I do not want to hold it up. Would the Minister have another look at this because it seems to me that the provisions of subsection (3) are far more realistic than those of subsection 1 (a)? It might be advisable to apply the same principle to subsection (a) as is applied to subsection (3).
I will certainly look at it. I do not know if it is symbolic or not but I have just seen a spider descend from the ceiling of the House to the floor. This seems to be symbolic of some of the contributions to the debate.
You should try and try again and you never know what might happen.
I should like to refer the Minister to subsection (2) which says:
Every gain accruing on or after the 6th day of April, 1974.
I would like to be assured that the word "gain" in that context refers to a capital gain and cannot include an income gain.
Section 3 says what tax is to be charged in this Act and section 2 (5) says that references to profits or gains in the Income Tax Acts shall not include references to chargeable gains. Anything that would be a gain under the Income Tax Acts would not be a chargeable gain under capital gains tax. A chargeable gain, by virtue of section 2 has the meaning assigned to it by section 11 (2).
May we take it that "profit or gain" in the Income Tax Acts includes a profit or gain which is subject to income tax? I will explain. If a profit or gain under the Income Tax Acts is excluded from capital gains tax, there are certain profits or gains which are income but which are not subject to income tax. Take receipts of artists. There are others. I think the Income Tax Acts refer to such things as profits or gains even though they are not subject to income tax. I am trying to verify this so that we will know which gains are properly chargeable to capital gains tax.
They are exempt from the tax but they are within the meaning of the Income Tax Acts. I was faulted last year when I properly said that farming profits were also within the ambit of the Income Tax Acts but that they were exempt. A profit which is income is chargeable unless exempt. Anything which is by definition an income is subject to income tax unless exempt in relation to the occupation, the source of the income or the nature of the beneficiary. In strict terms they are income within the meaning of the Income Tax Acts.
On the basis that such profits are profits or gains in the Income Tax Acts, no problem arises in relation to my point but could I refer the Minister to subsection (2) and suggest that there should be added to this a provision corresponding with section 12 (7) on page 13 of the Bill?
I refer the Deputy to the First Schedule, Part II, page 46. Paragraph 2 (1) states:
There shall be excluded from the consideration for a disposal of assets taken into account in the computation under this Schedule of the gain accruing on that disposal any money or money's worth charged to income tax as income of, or taken into account as a receipt in computing income, profits, gains or losses for the purposes of the Income Tax Acts, of the person making the disposal:
It is the inclusion of the word "losses" that makes me raise the point. Losses are included in the same way as gains in that part of the Schedule and is it not necessary that they should be included in section 12 in the same way? Should there not be a similar provision in regard to gains, or otherwise would not subsection (7) be unnecessary, or that portion of it that refers to it not being payable more than once?
There are two paragraphs on page 46. Let us go back to one I mentioned earlier, paragraph I (2) which deals with the computation rules.
I do not know if this is particularly helpful on the point I am raising. I wonder if I have made myself clear to the Minister. In view of the fact that the Schedule refers both to gains and losses, should it not be necessary to refer to gains and losses in section 12?
I am afraid I do not follow what the Deputy means but I will examine it.
The reason the Minister gave for it not being necessary to provide this in regard to gains is that it is already provided in the Schedule. If that is so, it is also provided in regard to losses and yet specific provision is made in section 12 (7) in regard to losses. Perhaps the Minister will have another look at it?
Yes.
What is the provision in the Income Tax Acts in relation to inventions?
Income arising out of patent rights is exempt from income tax but if a person sells a patent right it could be liable to capital gains tax.
I was referring to section 11 (2). Does that mean a sale of an invention would come under that subsection?
It would only be the gain, not the full consideration that would come under it. That would probably be very difficult to assess.
The consideration might be nothing.
Then there would be no gain. If a person has an income from a patent, because he is collecting rent on its use and so on, that would be free of income taxation.
That would be free of tax?
Yes, but if a person disposes of it, that would be an entirely different thing. There might be a question of a gain then. It would be very difficult to assess, I would imagine, what the increase in its value might be. Most inventions tend to decrease with time, not increase.
The question I am putting to the Minister is in relation to subsection (2): if a person invents something and disposes of it, it will be liable to capital gains after 1974?
If a charge to income tax arises anyway, there is no question of liability to capital gains, too. That is axiomatic, that there is no liability to both taxes.
On the income?
Yes, on the income. If it is a sale of an asset, then the liability could arise.
Does the Minister think it should arise in the case of an invention?
It arises on the sale of business assets, farm assets and so on, above a certain level. It would be difficult to assess what the capital gain would be in those circumstances.
It is a tax on money if somebody invents something. Would the Minister look at it again?
All right. I shall certainly look at it.
I think it is appropriate on this section to raise the point that was raised earlier by Deputy Dockrell as well as Deputy Brugha, that is, the position whereby, when a company makes a capital gain and distributes to its shareholders the amount of that gain, there is a disposal by the company and therefore a liability to capital gains tax arises, payable by the company. The appropriate shares having been distributed to each shareholder, say, by way of additional shares—as was indicated earlier, this is quite a common practice at the moment in order to preserve the liquidity of the company—if these shareholders subsequently dispose of those shares, a further liability to capital gains tax can arise. This would appear to be capital gains tax being paid twice in respect of the one gain. A somewhat similar position appears to arise in the case of unit trusts and unit holders.
No question of capital gains tax arises until there is a disposal. If a person holds an asset and ultimately disposes of it, that person has made a gain. There are many forms of taxation which involve what could emotively be termed double taxation. A person with an income pays tax on the income, and, having paid tax on income, may be obliged to pay further tax on the expenditure of the income which is left. They may apply the income left after income tax in payment of other taxes such as motor taxation. There is hardly anything in the complicated life in which we now live in which the handling of any portion of money does not involve more than one form of tax. What we are taxing in this Bill is the making of a gain upon the possession of an asset, and there are generous exemptions, as I have emphasised.
The making of a gain?
The making of a gain on the possession of an asset at the point of disposal of the asset. The fact that that asset has involved an element of tax somewhere along the line is no reason why thereafter possession of that asset by somebody else should exclude the possibility of any chargeable gain on that asset.
The Minister is, no doubt unintentionally, leading us on a false trail when he talks about the person who pays income tax then having to pay tax on, shall we say, motor tax, VAT or whatever else of his expenditure. Of course, the second tax in that case is not a tax on his income but a tax relating to the item of expenditure in which he engages. That is not what we are talking about here. We are talking about a capital gain arising in the operations of a company on which the company becomes liable and pays the capital gains tax when it disposes of that gain by distribution to the shareholders, distribution by way of shares rather than cash. Does the Minister agree that at that stage the company itself is liable for capital gains tax?
The company becomes liable when it sells the asset; if it does not reinvest that asset in the business but distributes it.
If it distributes it by way of shares to shareholders it has already paid capital gains tax on the gain. When it distributes to the shareholders and when the individual receives those additional shares representing his proportion of the gain made by the company, and if he then disposes of those shares, he becomes liable to a capital gain. The Minister can correct me if I am wrong, but when he acquires the shares he acquires them for nothing in the sense that he did not actually pay money for them. Presumably the gain is assessed on whatever their market value would be deemed to be when he gets them, as the commencement figure, and whatever he disposes of them at, as the disposal figure.
Whatever the Minister may say about VAT or motor tax, this is the one gain being subjected to tax twice. Subject to correction, I suggest that in a similar situation in regard to income tax the tax is not payable twice. The Minister has suggested on a few occasions that capital gains tax is analagous to income tax but the actual working of the system in regard to companies and dividends and the income tax system in regard to those does not mean that income tax is paid twice.
I do not wish to go into lengthy argument on this. It might be better to pursue the question when we are dealing with Schedule 2, which deals with companies and shareholders. As I said earlier, I am having an earnest look at some of the problems that arise in relation to realisation of assets by companies and the distribution of those to shareholders. I cannot accept, though, that there is an element of double taxation. However, if people wish to draw a parallel with the income tax system I will produce another example which is on all fours with what is being alleged is double taxation in the company and shareholder arrangement.
A person may earn an income which is subject to tax but out of that income he may pay wages to others, and these wages too may become subject to tax. For example, if people are employed in the course of one's business they become a liability which may be deducted for the purpose of computing one's own tax; but if people are employed on the domestic front and not in connection with one's business, one pays income tax on his own earnings, while those to whom part of that income is distributed for rendering other services pay income tax also. Therefore in respect of the one income there may be several different liabilities to income tax.
But what would be involved would not be the same transaction.
Neither is it the same transaction when a company, which is a different person in law, makes a capital gain. A company is a separate entity. A gain is the company's and the shareholders get the asset if the company distribute it to them and, if later, a shareholder, who is a separate person, proceeds to make a gain on that acquisition and disposes of it, there is another element of gain enjoyed by him. A second gain might never have been made if that person was not a shareholder.
Am I to understand from what the Minister said earlier that he might be bringing in amendments in relation to this matter?
I am looking very seriously at the representations that have been made to me and I have noted what has been said here today.
For the purpose of consideration of this matter at a later stage can the Minister say whether he agrees that the description of the situation I have given is correct, that is, where a capital gain is made by a company on disposal of an asset, the company pay capital gains and where they distribute that gain by way of shares to shareholders, and if they in turn dispose of the shares, they are liable for capital gains tax on any gain?
That could arise.
Regarding the hypothetical case raised by Deputy Colley, may we consider a case of a company which for liquidity reasons, instead of paying cash decide to issue bonus shares? The advantage of this to the company would be that they do not have to pay cash in dividends and also they keep capital available for their own business. If the Minister is right in what he says, the situation is as Deputy Colley suggested.
The first problem for a company that have not acquired capital gains is that of cash if they wish to capitalise and increase. If a company increased their cash resources, can these be classified as capital? If they cannot be so classified, the logical result of what the Minister is saying is that companies will be careful not to expand their assets as capital and will vouch for cash liquidity. In that case they would be forced to distribution. The two undesirable consequences of this action would be, first, that the Minister's purpose would be defeated and, secondly, that where it is desirable that money be ploughed back and kept for productive purposes, it would be dissipated by what I might call broadly payments for consumer purposes. However, I appreciate the complexity to which the Minister, Deputy Colley and Deputy Brugha have been referring. What I am saying is merely to bring into the argument a further facet for the Minister's consideration.
When the Minister is looking at subsection (2) in regard to the question of capital gains being charged on a company and then on a shareholder if the shares are distributed, he might consider the ordinary tax factors whereby a limited company that had paid tax on their profits will deduct that tax when distributing dividends.
I assure the Deputies that what they have said will be considered very carefully; but, even allowing for a faster rate of progress than we have had already, a little time will elapse before we come to the Schedule.
I would refer the Minister to subsection (3) and ask him if there is not conflict between that and section 8, subsection (2) (a) which provides that there is a disposal of assets by their owners where any capital sum is derived from assets notwithstanding that no asset is acquired by the person paying the capital sum.
Subsection (3) of section 12 refers to "the occasion of the entire loss, destruction" and so on "shall constitute a disposal"—I am leaving out some of the words—"whether or not any capital sum is received", whereas subsection (2) of section 8 provides that there is a disposal where a capital sum is derived from assets notwithstanding that no asset is acquired by the person. To confuse the issue still further subsection (3) of section 10 defines where there is a disposal in cases where a capital——
What section is that?
Section 10, subsection (3). That refers back to section 8 (2) and defines when there is a disposal, that is, when the capital sum is received. In other words, section 8 (2) provides that there is a disposal where a capital sum is derived from assets although no asset is acquired, and section 10 (3) says that in such a case the disposal occurs when the capital sum is received. Section 12 (3) says that the disposal occurs whether or not a capital sum is received. The question I am putting to the Minister is: is there not a conflict, or at least a possibility of a conflict between this subsection and section 8 (2) in the light of section 10 (3)?
I cannot say that I follow all the Deputy's tour.
I do not blame the Minister.
I will do my best. Perhaps the best way of approaching it would be to get the section in perspective. The section says that we are to compute losses in the same manner as we compute gains. The principle by which a gain is determined to be a chargeable gain is to apply in deciding whether a loss is an allowable loss or an available loss and thus a loss will not be allowable if a gain would not be allowable on the same transaction.
The occasion of the complete destruction or extinction of an asset is to be regarded as a disposal, even where no capital sum is received by way of compensation, or otherwise, with the result that a loss may be claimed in the event of a destruction. If, on a claim being made by the owner, the inspector of taxes is satisfied that the value of the asset has become negligible he may allow a loss, computed as if the asset had been sold for an amount equal to the value specified by the owner in the claim. An owner of buildings and structures may claim a loss when their value has become negligible by treating them as separate from the land on which they are situated. In order to allow for the possibility that the land could have increased in value, the site is deemed to have been sold separately at the same time, and re-acquired at market value. Any gain so arising would be set off against the loss on the buildings or structures.
Relief for losses where a person is neither resident nor ordinarily resident in the State would be confined to losses on the disposal of those assets in respect of which he would be liable to tax on chargeable gains under section 4 (2) if a gain instead of a loss resulted from the transaction. These assets are land and mineral assets in the State, trading assets of a branch or a business in the State, and rights of exploration or exploitation on the Continental Shelf. An allowable loss may not be carried back and set off against a gain in an earlier year of assessment, but an exception to this rule is provided in section 14 to allow a carry back of a loss incurred in the year of death to the three years immediately preceding death. Relief for a loss may not be given, of course, more than once, and it cannot be given for capital gains tax if relief in respect of it has been given under the Income Tax Acts.
Subsection (3), to which Deputy Colley refers, provides that the destruction or extinction of an asset is to be treated as a disposal of the asset, even when no capital sum is received by way of compensation, or otherwise, and relief for a loss consequently may be claimed. The subsection is subject to the options section which is section 47 which lays down the rules for the treatment of options. I hope that background may be of assistance to Deputy Colley. If he is not satisfied with that and wants me to deal with them separately perhaps he would not mind directing me briefly on the path he is trying to follow and I will do my best to take him up on it.
There are some other points I want to raise on the section but I will try to put more clearly the point I was raising. I confess it was not clear the last time. In trying to put it clearly I may be over-simplifying it. Could I refer the Minister to section 8 (2)? Broadly speaking, that provides that, if a building is destroyed completely, and a capital sum by way of compensation is received, there is a disposal of the asset. Section 10 (3) says that in such a case the date of disposal is the date of receipt of the capital sum. Is the Minister with me so far?
Yes.
Section 12 (3) says that if an asset is entirely destroyed the occasion of that happening constitutes a disposal. There seems to me to be a possible conflict there in so far as it says that the occasion of the happening constitutes a disposal, whereas in the other case which could be similar, the date of the disposal is the date of receipt of the capital sum. This goes on to say that, even if no capital sum is received, the occasion of the happening is a disposal. It seems to me that section 12 (3) and section 8 (2) both envisage in some circumstances the same occurrence but spell out different consequences from the same occurrence.
We are treating two distinct events here. One is the destruction of a property. That creates a loss. If there is no insurance involved, and if there is no compensation involved, nobody can doubt that that would create a loss. There could be an exceptional case where the site value would be higher than that of a site with an unwanted building on it. Let us take the loss situation. That is one event and a loss has arisen as a consequence, and the taxpayer is entitled to claim that a loss has arisen. If subsequently the person recovers compensation against that, then the loss can be set off against the gain to determine what in fact has been the gain, if any. If the money recovered is re-invested in the property, no question of any gain arises because the property is reinstated. If, however, there is a realisation at that stage and a gain has been made, then the gain can be calculated, but one treats them as two separate events and it would be to the advantage of the taxpayer to have them treated as one but, as there may be a passage of time between the two events, it is better to keep them separate.
In the circumstances envisaged by the Minister, under subsection (2) of section 12 where the complete destruction of the building constitutes a loss, as the Minister says, that constitutes a disposal. Under subsection (2) of section 8 the receipt of a capital sum in respect of the loss constitutes a disposal. How can they both be a disposal? One would appear to be a disposal and one an acquisition but, here, on the face of it, the same circumstances constitute a disposal, one on the occasion of the destruction and the other on the occasion of the receipt of compensation, the capital sum.
I suppose they would have to be defined but, if a person is to get the benefit of the loss when it occurs and wants to claim it, then we have to treat that as an event separate from any subsequent event. They are so defined and the law will not operate to the disadvantage of the taxpayer.
I appreciate what is sought to be achieved in subsection (3) but the Minister will appreciate that, in order to operate the whole system, there are built into many sections of this Bill totally artificial concepts. On a particular occasion there is deemed to be a disposal and immediate re-acquistion without any loss and no gain. I understand why that has to be done but the fact is that it is done and there is the building up of this artificial structure and that is why I am concerned about any possible conflict between these two, even though subsection (3) of section 12 is designed to enable a person in such circumstances to claim the loss. With this kind of artificial structure it is important that there should not be any apparent conflict even between one section and another in relation to the same circumstances because, should there be, the taxpayer involved is almost certain to lose out in trying to have it determined as to which section he comes under. My purpose in raising this matter is to draw the Minister's attention to the possible conflict and if, when he examines it further, he accepts that there is a possible conflict, then I am certain some redrafting will avoid that possibility.
I shall certainly look at the possibility of there being a possible conflict and, if amendment is necessary, I shall introduce an amendment on the Report Stage.
I want to raise now a matter I raised on the Second Stage in relation to subsection (4). I do not think the Minister dealt with the matter then when he was replying. Perhaps he overlooked it. I refer to the use of the word "negligible" in the second line of subsection (4). What is that word "negligible" intended to mean or convey? Clearly it is a very relative term and what might be negligible in relation to one particular asset might not be negligible at all in relation to another. It seems to me there would be plenty of room for litigation if we do not specify somewhat more clearly what is intended by the word "negligible" in this context.
I am immediately reminded of a lengthy debate on the occasion when the late President Childers used the word "nugatory".
I do not think he used it in legislation.
He used it in relation to an expense. Subsection (4) enables the owner of an asset to make a claim to the inspector of taxes for the allowance of a loss on an asset, the value of which has become, as the section says, negligible even though the asset remains in existence. The word—I quote it—"valueless" could be used but then we would certainly have to change the sentence because one could not have the value of an asset being "valueless". I suppose one could say the asset had become valueless. Where the word "negligible" is used in this context it is regarded as not having a value or having no depreciation. The inspector of taxes being satisfied as to the merit of the claim, the loss would be computed as if the asset had been sold at this value, as it were, and if it immediately acquires for the owner an amount equal to the amount set out in the claim the value would then form the base cost of the asset for the purpose of the computation of any gain in later disposal.
I appreciate the difficulty involved but I think we must pursue this a little further. Suppose there were a derelict house, the value of that derelict house could well be nil or almost nil. That might be counterbalanced by the cost of removing, let us say, the rubble. On the other hand, in the case of a derelict office block or a large old factory, one can separate the actual building from the site value and I appreciate why that has to be done. In the case of the derelict building, the large derelict building could have a value. Let us say it is worth £500. The value of the derelict house might actually be nil and the cost of removing the rubble might outweigh the value of taking it away. Does "negligible" mean valueless or almost valueless or does it mean "negligible" in relation to the value of the asset before it deteriorated? In relation to what is the value supposed to be negligible? Is it in relation to zero or is it in relation to the value of the asset before it began to deteriorate?
What we are concerned with here is the value of an asset which has become negligible, which is of small value today.
Does the Minister mean small in absolute terms? Is this in relation to zero?
It is not because it has become a small fraction of its original value. It could have been worth £1 million at one time and now could be worth only £250,000. There would be no disposal there so no question of a loss would arise. If something has become well-nigh valueless and not something which in the ordinary course of events would give rise to a gain, but quite the reverse, if the property is to be disposed of, then the owner of that asset can, at his own option, ask to have it assessed at its negligible value.
Devalued.
Devalued and deemed to be devalued and, therefore, have the benefit of the write-off of the loss. Of course, this involves the risk that if it seems to gain value again afterwards the greater gain would arise. It is something which is done at the option of the owner of the asset. It is a relief that is made available if a person wants to use it. If a person does not want to use it, there is no question of using it against him.
There is another matter I raised on Second Stage in relation to subsection 4. I asked whether or not there was a right of appeal from the inspector's decision on whether the value of the asset had become negligible.
The answer is "Yes".
I know the Minister said "Yes" in reply but could he indicate the statutory authority under which that right arises? Is there somewhere in this Bill where the right of appeal in the income tax code is imported into the Capital Gains Tax Bill?
Schedule 5, paragraph 8—Appeals:
A person aggrieved by any assessment under this Act made upon him by the inspector or such other officer as is mentioned .... shall be entitled to appeal to the Appeal Commissioners....
I presume a decision of an inspector on a claim by the owner of an asset that the value of the asset has become negligible would be an assessment by the inspector?
Yes.
In regard to subsection 6, may I ask why this provision is being applied to persons who are neither resident nor ordinarily resident in the State as distinct from other persons?
Such a person would not be liable on a gain in the State until such time as a remittance was made to him, wherever he was resident, of the gain which had been made, so, as there is no liability to pay tax on the gain, then there is no right to set off the loss either except in the case of land or minerals. Any other gains would not be liable.
I wonder what the effect would be if one were to substitute "a person who was resident in the State". It would be: "A loss accruing to a person in a year of assessment for which he was resident in the State shall not be an allowable loss for the purposes of this Act unless, under section 4 (2) ... unless he would be chargeable to capital gains tax in respect of a chargeable gain if there had been a gain instead of a loss on that occasion."
Section 4 (2) deals only with a person who is neither resident nor ordinarily resident in the State.
He would not be chargeable for gain then?
I assume the object of this subsection is to say a person who is neither resident nor ordinarly resident in the State will not be allowed to claim losses unless he is liable for gains.
That is right.
Broadly speaking, that is the intention. Is this a question of the year of assessment in which this arises? In the normal way, if he is not liable for gains he will not be claiming losses.
Each year will have its own assessment. In any year you have to look at the location of the taxpayer. The question of his residence will determine his liability. That is why we have to import here the phrase: "in the year of assessment".
And it relates only to the particular year of assessment?
It is a loss accruing to a person in the year of assessment.
In the case of a person who is resident he is allowed to claim a loss——
Because he is liable to pay a gain.
——in the year of assessment but he is not allowed, I think, to claim the loss in a year of assessment in which he has no gain?
If he has, he can carry it forward.
If he has a gain, he can claim a loss incurred in the same year or a loss incurred in the previous year. Is that correct? One year previously or only in the year of assessment?
The year of assessment. You can carry forward losses but you cannot chase back——
How far forward?
In the case of death you can go back three years but in life no.
Where the person is non-resident if a gain has accrued in the year of assessment he can claim the loss incurred in that year of assessment. Can he also carry forward losses as the resident can?
Yes, in the same way against such gains as he could have been charged on.
The last portion of this subsection is somewhat confusing. He would be chargeable to capital gains tax in respect of a chargeable gain if there had been a gain instead of a loss on that occasion. That is not clear to me. Is the intention of that to convey that he can charge a loss when he has a gain and that he can carry forward losses from previous years to the year in which he had a gain?
Yes.
I know that what the Minister says is intended but I cannot read it into it. The end of that is somewhat confusing.