Dáil Éireann debate -
Tuesday, 13 May 1975

Vol. 280 No. 10

Capital Gains Tax Bill, 1974: Committee Stage (resumed).

Question again proposed: "That section 12 stand part of the Bill."

Mr. Colley

I raised a number of points on section 12 which have been dealt with by the Minister. There are a couple of points on subsection (7) to which I should like to draw the Minister's attention. Perhaps I might start by referring the Minister to line 34 on page 13 which reads: "...may be given in respect of it under the Income Tax Acts." The whole of the sentence is "... and it shall not be given under this Act if and so far as relief has been or may be given in respect of it under the Income Tax Acts."

I preseume that what is intended to be conveyed here is that if certain circumstances qualify for relief under the Income Tax Acts relief cannot be claimed under this Bill irrespective of whether it has been sought or given and, therefore, any situation which under the Income Tax Acts would qualify for relief is automatically excluded from relief under this section. I take it that is what is intended to be conveyed by that. I wonder has the Minister considered whether this is a fully reasonable provision. Of course, I can see the reason behind it, but is it not possible that somebody could find himself in a position where he would be entitled to claim relief under the Income Tax Acts but, for one reason or another, he would not claim it, possibly because he was not aware of it, and would thereby be precluded from the relief both under the Income Tax Acts and under this Bill?

I wonder whether it is absolutely necessary to provide that such relief is excluded under this Bill and whether it is not practicable to provide that relief will not be given under both Acts and thereby ensure that the relief in question is given, that at least it is available, and that it is not excluded entirely under this Bill whether or not it has been given under the Income Tax Acts. There may be good reason why this cannot be done, but I would ask the Minister to consider whether it would not be possible to provide that the relief would be given under one or other Act but not under both.

Minister for Finance (Mr. R. Ryan)

It would be unacceptable that income should be charged to capital gains tax. Nobody is so proposing. In the same way, it is similarly unacceptable that losses that would arise out of the possession or disposal of capital should then be available for reducing liability for income tax. We are dealing here only with losses or gains arising on the disposal of a capital asset and not with earned income or dividends or any income of that nature. It would be a grave error indeed to proceed to legislate here that losses arising on the disposal of a capital asset should be available against income. If a person is engaged in the business of acquisition and holding and disposal of various capital assets of one form or another, that person's trade would fall to be assessed for income tax purposes and, in such cases, the losses would be available for setting off against any possible income which there might be. To duplicate the availability of the allowances to my mind would be wrong in principle and unfair in application.

Mr. Colley

I am not sure if the Minister and I are talking about the same point. Clearly what is involved in this subsection is a situation in which, but for the provisions of this subsection, relief would arise under the Income Tax Acts, so the distinction which the Minister is making between capital on the one hand and income on the other does not arise in this context. If there were a clear distinction of that kind, there would not be any need for the provisions in subsection (7). What is provided for in subsection (7) is that where relief is available under the Income Tax Acts, whether it is received or not, it is not to be given in respect of losses under the capital gains tax provisions.

As I have indicated, I can see reasons for this. When I was suggesting consideration for the provision that relief might be given under one or the other but not under both codes. I was referring, as the section does, to circumstances in which relief could arise under the Income Tax Acts and, but for this subsection, could arise in respect of capital gains. In the context of what the subsection deals with the distinction which the Minister is drawing between capital and income does not seem to arise.

Mr. R. Ryan

Subparagraph (1) of section 2 of the First Schedule provides for the exclusion of considerations taken into account for income tax, and subparagraph (1) of section 4 excludes from sums allowable any amounts allowed for income tax. The effect of these exclusions would be that any gain on an asset chargeable to income tax and any loss on an asset allowable for income tax would not normally come in for capital gains tax. In certain situations, and with regard to assets which might in some circumstances be capital, for instance, land, it might be of benefit to the taxpayer to endeavour to take the asset outside the income tax range and have it regarded as capital in order to get relief for a loss. The type of situation where this might occur would be where there was no income and there would be no likelihood of there being future income to set off the income tax loss against it. Obviously it would be to the advantage of the taxpayer to swing the loss over from an income tax loss to a capital gains tax loss. It is necessary to prevent this happening. Therefore, it is provided that as far as relief has been or may be given in respect of the loss under the Income Tax Acts, it shall not be given against a capital gain. The use of the phrase in subsection (7) puts that beyond any doubt. It ensures that the taxpayer will not have any device with which to do so.

Mr. Colley

Would I be correct in thinking that the effect of subsection (7) is that a loss is not allowed to be carried backwards except under section 14, in the year of death, but it is allowed to be carried forward?

Mr. R. Ryan

Yes.

Mr. Colley

Is it not clear under this arrangement that a person may be taxed on gains and, within a short time afterwards, may suffer serious capital losses? For instance, on a forced disposal of an asset. Is there not a case for saying that there should be provision to carry back losses for at least two years preceding the assessment? Effectively, capital gains tax is, by its nature, a long-term tax rather than an annual tax although it is treated here in a year of assessment. I suggest to the Minister that there could be cases of considerable hardship where a person has become liable to a tax on a gain and has paid it but soon after suffers serious capital losses. As I understand the subsection in those circumstances such a person may not get any benefit in respect of those losses unless, at some time in the future, he manages to bring about a capital gain which may never happen. Difficult circumstances can arise and I wonder whether it is essential, from the Minister's point of view, to restrict the carrying back of losses entirely as is done in this subsection?

Mr. R. Ryan

The Deputy knows that we are applying the same principles as apply to income tax. A person may have a big liability for income tax in a particular year and in the following year make a substantial loss but the loss in the subsequent year is not available for carrying back to the earlier year unless there is cessation of business.

Mr. Colley

While he is likely to have some income in the coming years he may not have any capital gain.

Mr. R. Ryan

He may not but there are many cases where people may be in a continuing loss making situation. There is also the danger that if we were to open it in the way suggested by the Deputy losses could be fabricated in order to recover tax already paid on a gain. I do not think that should be facilitated by the Legislature. There is probably no tax law which will operate in all cases in total easement of the taxpayer. If such laws existed there would be little point in creating liability for tax if reliefs were always available, if future losses were always available against taxes which had already been paid. I do not accept that we should now introduce into capital gains a relief which is not available under the income tax code and which I have never heard people argue in favour of introducing under the income tax code.

Mr. Colley

There is a difference between the income tax code and the capital gains tax code. In the normal way people have some kind of income each year whereas they may not have a capital gain each year. Capital gains tax is, by its nature, somewhat long-term. The Minister has referred to the possible fabrication of losses but if people can fabricate losses they are not going to suffer under this subsection because they will fabricate a loss in respect of the year of assessment in which they have become liable to the gains. It is the man who cannot, or will not, fabricate the loss who will suffer. I urge the Minister to have another look at this. I realise there are some difficulties but I do not think the problem is insuperable.

I have indicated the circumstances in which considerable hardship could ensue. I do not believe it is impossible to devise a method of rewording subsection (7) in order to ensure that some relief can be given in cases of the kind I have indicated. I assume that the Minister's general attitude is that he would not object to a relieving provision of this kind provided it would not be abused?

Mr. R. Ryan

I will certainly further consider the arguments put forward by Deputy Colley but I am sure he will accept that the only point where one can be certain that a person will not make a future capital gains is on death.

Mr. Colley

I accept that but I am sure the Minister will accept that there will be many cases in future years where a person will not make a capital gain having suffered a capital loss.

Mr. R. Ryan

There are cases where people would, over many years, have paid quite an amount of income tax and then arrive at a situation where, due to illness or business collapse, might thereafter be dependent only on social welfare benefits for an income. However, they do not get a refund of income tax. I cannot see how we can treat either tax in a different way but I will look into the matter.

Mr. T.J. Fitzpatrick

(Dublin Central): Where a malicious damage claim for property that is completely destroyed is entered in 1974 and the owner of the property does not develop the site any further, will the allowance which is given in the claim be computed with the site as regards capital gains?

Mr. R. Ryan

Malicious damage would only be compensation for the loss that occurs.

Mr. T.J. Fitzpatrick

(Dublin Central): If the site is not being developed?

Mr. R. Ryan

I should like to refer the Deputy to subsection (3) of this section which states:

Subject to the provisions of this Act and, in particular, to section 47 (options), the occasion of the entire loss, destruction, dissipation or extinction of an asset shall, for the purposes of this Act, constitute a disposal of the asset whether or not any capital sum by way of compensation or otherwise is received in respect of the destruction, dissipation or extinction of the asset.

If he does not restore the asset with the compensation he receives he will be deemed to be disposing of it.

Question put and agreed to.

SECTION 13.

Question proposed: "That section 13 stand part of the Bill."

Mr. Colley

Am I right in assuming that the effect of this section is that a single person has an exemption of £500 in any one year in respect of capital gains tax but that a husband and wife living together between them have an exemption of only £500?

Mr. R. Ryan

Yes.

Mr. Colley

Does the Minister think that is a reasonable proposition particularly having regard to the improvement in the situation in relation to income tax, over a number of years admittedly? Surely the Minister will appreciate that unless we get this right now it will take a long time to get it right in future. It seems to me very unfair that we should restrict the exemption in the case of a husband and wife living together to the same figure as that for a single person.

Mr. R. Ryan

The Deputy will appreciate that a disposal between a husband and wife is disregarded in the gains making up the £500 exemption.

Mr. Colley

Does the Minister consider that is really relevant?

Mr. R. Ryan

It is. If they were single such a disposal would not be disregarded for the purpose of exemption. In other words, they have the disposal plus the exemption.

Mr. Colley

It seems to me the whole concept is an outdated one. In effect, what the Minister is saying is that the husband and wife living together—I stress that because there is a provision later for a change in the situation where they are not living together—are one person and that is why a disposal between them does not count for the purpose of capital gains, and similarly they are treated as one for the purpose of exemption. I wonder how much reality this has in relation to life as we know it? I submit that the exemption of £500 is in the Bill mainly for the purpose of administrative convenience, so that the Revenue Commissioners do not have to trace every possible small transaction. That exemption is applied to each individual unless they happen to be married and living together, in which case the Minister will only give the equivalent of what is given to a single person.

The provision for a disposition between a husband and wife not counting for the purpose of capital gains is not as great an advantage as the Minister seems to think. In effect, all it is doing is postponing liability for capital gains which will become payable eventually by the surviving spouse. The Minister must find it difficult to justify restricting the allowance in the case of a married couple to the same figure as that applying to a single person. He will make a grave mistake if he carries this provision into this Bill and it will be difficulty to change it in the future. I do not think the Minister would have any difficulty in accepting the proposition at this stage that the husband and wife should be entitled to an exemption of £500 each or a joint exemption of £1,000.

Later in this section we provide for the situation where the husband or the wife may apply to be treated separately and there are complicated provisions in that regard. In those circumstances, it is not clear to me if they are to be restricted as before to a joint £500 divided proportionately or whether they will get an exemption of £500 each. Either way, the Minister should have no great difficulty at this point in conceding the same exemption to a husband and wife as that given to two single people and I would urge him to do it now.

Mr. R. Ryan

We could only entertain that if a disposal between a husband and wife were to be taken into account in calculating the £500 exemption. If they want absolute equality of treatment with that allowed to single people, it would have to be carried right across the board. We could not have a situation where they would be more favourably treated, which is what Deputy Colley is suggesting.

Mr. Colley

In so far as they would be more favourably treated—and I contest that—there may be a case for it. Does the Minister accept that the exclusion of disposals between spouses is only a postponement of liability for capital gains, that it is not an exemption?

Mr. R. Ryan

That may be. It all depends on what happens afterwards. The property could depreciate.

Mr. Colley

Is it not true that if a husband disposes of property to his wife and if she disposes of that property after his death the gain is assessed on the difference between the price at which she sells and the price at which her husband bought the property originally, not the value at the time of disposal? The alleged benefit is only an alleged benefit; it is only a postponement of liability, not an exemption. I doubt if one could say the benefit of such postponement is of such value that it is necessary to restrict the exemption given to a husband and wife to the same amount as that given to one individual.

The Minister is not treating the husband and wife as one individual because if he was a disposal between a husband and wife would be treated as though they were one individual and the question of liability on a gain would not arise in the way I have indicated where a wife disposes of property after the death of her husband. Under this Bill she would be liable for tax, calculated on a gain made up of the gain arising from the date on which the husband originally acquired the property. This is not the same treatment that should be given where the husband and wife are regarded as one person. Consequently, the Minister should not restrict the exemption in the way proposed in this section.

Mr. R. Ryan

Would the Deputy not agree that it is because they are treated as one person that we take the gain as arising from the date of acquisition by the husband rather than on the transfer to the wife?

Ruairí Brugha

Will the Minister tell the House if this provision applies only in the event of a transfer of an estate or during the lifetime of both partners? Will the exemption of £500 be applied to a husband and wife together as though they were one person?

Mr. R. Ryan

It is the year in which the gain is actually made only, recorded and identified, that the £500 exemption arises.

Mr. T.J. Fitzpatrick

(Dublin Central): It is not an accruing thing at all?

Mr. R. Ryan

No.

Mr. T.J. Fitzpatrick

(Dublin Central): One does not claim an allowance for each year?

Mr. R. Ryan

No.

Ruairí Brugha

I accept it is only the year but does it mean that the husband and wife, in any given year, are treated as one person?

Mr. R. Ryan

Yes, they are, for capital gains tax purposes.

Ruairí Brugha

Surely that is not justifiable?

Mr. R. Ryan

It operates to the relief of the people. They do not pay capital gains tax if there is a transfer from spouse to spouse. But what I am being asked to do is to give——

Mr. Colley

It is really only a postponement.

Mr. R. Ryan

Perhaps. The Deputy is assuming that assets always increase in value; they do not.

Ruairí Brugha

But if a husband and wife, in any one year, happen to have a gain of £500 each, is there only one £500 allowed? Is that correct?

Mr. R. Ryan

Yes.

Ruairí Brugha

That does not seem to me to be reasonable. One might as well say they would be better off if they were divorced, or separated, and then capital gains tax would be applied to them as individuals.

Mr. R. Ryan

That is often argued in relation to many forms of taxes but, of course, there are many allowances available to people living in lawful wedlock which would not be available to them were they single.

Ruairí Brugha

I do not agree.

Mr. Colley

The bigger allowances are for the single.

Ruairí Brugha

Why should a husband and wife, because they are married, be treated as one person and a single individual have the same advantage as husband and wife?

Mr. R. Ryan

It avoids a liability to pay on the transfer of property from one to the other. That is an advantage.

Mr. Colley

It postpones it.

Mr. R. Ryan

But there is a plea here for a double advantage.

Mr. Colley

Does the Minister not accept that it is only a postponement? Does the Minister not accept that, in the case of a disposal between husband and wife, the benefit is merely a postponement, it is not really an exemption?

Mr. R. Ryan

One of the main arguments being advanced here for many months past is that people prefer to postpone payment of their capital taxation to death instead of paying it by instalments.

Mr. T.J. Fitzpatrick

(Dublin Central): We are putting forward a case here which indeed the Minister has put as regards thresholds allowed between husband and wife. The Minister must agree that this is only a postponement or deferment if the property is sold. If the husband passes it to the wife and the wife disposes of it ten years later, the property goes back to be valued from 1974, the value of the property at 1974, and capital gains will accrue therefrom. But if she sells to a stranger, then there is no concession allowed here at all. She becomes liable to the full impact of the capital gains. Therefore, in effect, what Deputy Colley is saying is correct—that it is only a postponement. That is the reality of the situation.

Mr. R. Ryan

On the previous section Deputy Colley argued that losses ought to be more readily available to be set off against previous gains and tax liability. But by treating the husband and wife as one here losses can be availed of by a spouse. Therefore, it is not all a question of give and no take.

Mr. Colley

What does the Minister mean by saying: losses can be availed of?

Mr. R. Ryan

A loss endured by the wife could pass to the benefit of the husband, against his tax liability. They being treated as one, she might have a loss, he might have a gain. If we do not treat them as one, then her loss could not be set off against his gain and he would be paying on the gain.

Mr. Colley

But is not the basic exemption of £500 per annum, in the case of an individual, meant to exclude smaller gains which are not worth the while of the Revenue Commissioners following up? Is that not one of the main reasons for the exemption?

Mr. R. Ryan

Yes, one of the reasons.

Mr. Colley

One of the main reasons. That being so, is there any great concession involved in applying that to gains of £500 in a year, for the two people, the husband and wife?

Mr. R. Ryan

One is dealing only with one taxable person, that is, the married couple who are treated as one. The Deputy is now arguing in favour of what is in the Bill, that is, merely to have the one exemption and not two.

Mr. Colley

I am not satisfied that the treatment is entirely as if they were one. I agree that, to some extent, it is so but I do not think it goes the whole way. In this case I wonder if the Minister is not perhaps adopting a doctrinaire approach on the basis that it seems to him the logical consequence of apparently treating them as one is that one restricts the allowance as though they were one person. I wonder whether this is not a doctrinaire approach that is a bit removed from the realities of the situation.

Mr. R. Ryan

No, the more I hear about the unfairness of not giving double allowances to married couples the more I am inclined to think that perhaps what is wrong is that the allowances for single people are as generous as they are. This exemption of £500, on the basis of our studies at present, is the most generous exemption given anywhere; it could be made £250 for a single person, then it would be double for a married couple if it was left at £500.

Mr. Colley

It will be worth only £250 soon in terms of money. When the Bill was introduced or the White Paper published——

Mr. R. Ryan

I am not at all convinced that inflation will continue to operate at the rate of 24 per cent; it could not.

Ruairí Brugha

The explanatory memorandum says that the wife may be assessed separately from the husband if she so wishes.

Mr. R. Ryan

That is correct.

Ruairí Brugha

I am back to where I was. Does this mean that if she is assessed for any one year and she has a capital gain of £500, if the husband had a similar capital gain on foot of selling something, that is divided in two?

Mr. R. Ryan

That is right.

Ruairí Brugha

That does not sound right.

Mr. R. Ryan

It is divided in two. It works out to be the same thing, two £250s.

Ruairí Brugha

But they are two people.

Mr. T.J. Fitzpatrick

(Dublin Central): What if they were operating two separate businesses?

Ruairí Brugha

Why should a single individual have this exemption of £500 and married people have it at £250 each?

Mr. R. Ryan

They still have the benefit of not being charged on a transfer.

Mr. T.J. Fitzpatrick

(Dublin Central): Did the Minister ever hear of a wife purchasing a business of her own, independently?

Mr. R. Ryan

Yes.

Mr. T.J. Fitzpatrick

(Dublin Central): There is no transfer there.

Mr. R. Ryan

I have often heard of it being done with the husband's money, too.

Ruairí Brugha

What about women's lib?

Mr. Colley

From the point of view of women's lib the situation is fairly appalling here because not alone is there the situation of restricting the allowance as though they were one person but, as I read subsection (1), it says that the assessment is to be made on the husband and not otherwise, unless special notice is given and so on. The separate existence of the wife as a separate person seems to be ignored. The whole section is geared to the proposition that, as far as possible, one treats the married couple as one, and that one is the husband not the wife—that is the message that comes through all the way in section 13. That approach is completely out of date. The Minister ought to reconsider the whole concept involved here. For instance, on what basis does the Minister justify saying that the assessment and the whole application of the capital gains tax code is to be directed at the husband as though he and the wife were one and she did not count, unless there is special notice given to the Revenue Commissioners?

Mr. T.J. Fitzpatrick

(Dublin Central): She does not exist.

Mr. Colley

Strictly speaking, as far as this section is concerned, she does not exist. If she is to accept she has to be separated from her husband and has to give special notice to the Revenue Commissioners and really the whole concept of this section seems to me to be out of date. Would the Minister concede that there is some substance in the case I am putting?

Mr. R. Ryan

No.

Mr. Colley

I think he ought to have another look at it.

Mr. R. Ryan

Most married women will thank me for allowing property to transfer from husbands to them without liability to capital gains tax arising at the time of transfer. If we were to treat them as separate persons, liability would arise and it is not improbable that there would then be a disclination to transfer from husbands to wives. We are avoiding that by ensuring that, if one spouse is generously moved to make a present to the other, liability to capital gains tax will not arise. We are also conferring freedom on the wife to have herself separately assessed if she so wishes, a choice which may not be available to the other sex, and the husband cannot invalidate that choice if she exercises it.

Ruairí Brugha

If she is separately assessed she can only be allowed £250 exemption if her husband has capital gains.

Mr. T.J. Fitzpatrick

(Dublin Central): Can the husband transfer the entire benefit to the wife? If there are two properties, the husband owning A and the wife B, and the wife sells but not the husband, can the wife claim the entire allowance?

Mr. R. Ryan

Supposing he has no gains it will be available to her.

Major de Valera

The Minister used the word "gift". That must make for a duplication of both taxes; both the gift tax and the capital gains tax arise ultimately on the transaction between husband and wife.

Mr. R. Ryan

If above the thresholds, yes.

Major de Valera

Is that not a further argument for treating the matter as Deputy Colley suggests?

Mr. R. Ryan

No. No charge to capital gains tax would arise at this stage between husband and wife.

Major de Valera

But a gift would.

Mr. R. Ryan

It would on a threshold of £150,000.

Mr. Colley

I presume if the husband and wife are separated but no application is made under subsection (2) the husband will still be assessed as though the wife did not exist. The wife will just disappear from the ken of the Revenue Commissioners; as far as they are concerned she will not exist.

Mr. R. Ryan

If the Revenue Commissioners have on their files a married couple they will remain on their files. People do not always announce to the Revenue Commissioners that they are separated and I cannot see that there would be any difference in future.

Major de Valera

To keep up administration we will need more Revenue Commissioners for married couples to keep track of this.

Mr. R. Ryan

I have greater faith in the influence of Cupid than I have in that of legislators.

Major de Valera

But to implement this you will need colossal staffs.

Ruairí Brugha

If the wife gets a divorce they will be treated as two separate people.

Mr. R. Ryan

No doubt the Deputy is referring to judicial separation.

Mr. Colley

He might be referring to a judicial divorce.

Mr. R. Ryan

If they were no longer husband and wife, then they would be at arms' length and the liability to tax would arise.

Ruairí Brugha

A very bad situation to encourage.

Mr. R. Ryan

It would be discouraging of divorce because liability to tax would arise. Even though I do not regard it as a function of tax legislation, I am having a very good moral influence.

Mr. Lalor

I usually ask intelligent questions: is there a legal definition of "arms' length"?

Mr. R. Ryan

I will demonstrate it for the Deputy. It is a well-known legal phrase.

Major de Valera

Yes, but what does it mean?

Mr. R. Ryan

It means they have not got their arms around one another.

Major de Valera

And more Revenue Commissioners needed obviously.

Mr. Colley

In regard to subsection (4), I presume what this means is that where the husband is assessed for both himself and his wife he gets this £500 exemption against the gains of both the husband and the wife and, where separate assessments are made there is a total exemption of only £500 between the two, and this is apportioned between the two.

Mr. R. Ryan

That is right.

Mr. Colley

Is this reconciliable with the second part of subsection (1) which reads:

... but this subsection shall not affect the amount of capital gains chargeable on the husband apart from this subsection nor result in the additional amount of capital gains tax charged on the husband by virtue of this subsection being different from the amount which would otherwise have remained chargeable on the married woman.

Is there not some contradiction here between the second part of subsection (1) and subsection (4)?

Mr. R. Ryan

Subsection (1) opens with the phrase:

Subject to the provisions of this section....

and subsection (4) provides:

... it shall be assumed that subsection (1) applies for all years...

The parliamentary draftsman has very carefully considered this and is satisfied that there is no conflict. Subsection (1) merely lays down the general principle of the husband being charged on the wife's gains and subsection (4) says that, for the purposes of the £500 exemption, subsection (1) applies for all years.

Mr. Colley

I certainly would not like to pronounce on it but it seems to me to be a rather complex provision. It seems to me that there is a conflict. If, however, the Minister is advised and satisfied that there is no conflict I shall certainly not pursue the matter further, but it is not obvious on its face that there is not a conflict.

Mr. R. Ryan

The Deputy will appreciate the possibility of a conflict was considered. I can understand why he raises the point but I can assure him it has been very carefully considered.

Mr. Colley

Let me refer the Minister to subsection (5), line 26, which reads:

Provided that this subsection shall not apply if, until the disposal, the asset formed part of trading stock of a trade carried on by the one making the disposal...

From when "until the disposal"?

Mr. R. Ryan

Subsection (5) provides that where one spouse transfers an asset to another the asset will be deemed to have passed from the one to the other at the value at which the first spouse acquired it. This is what we were talking about earlier. Accordingly, at the time of transfer there is no question of any gain or loss. In the proviso an exemption of the above treatment is made where the property transferred is trading stock in the hands of one spouse or the other. This is because trading stock is circulating capital in the hands of the trader and any gain or loss on the disposal of the stock is a trading profit or loss for the purpose of income tax. In the case of married persons where either the husband or the wife is carrying on a trade an asset, which is in the hands of one would not be trading stock, and could well be transferred to and taken in as the trading stock of a trade carried on by the other or in the reverse situation an item could be withdrawn from the stock of the trade carried on by the one and transferred to the other who, being a non-trader, would take it not as trading stock but as a chargeable asset. In such situations there could be a conflict with income tax or commercial accountancy principles if disposals of trading stock between one spouse and the other were deemed to pass at the original cost of the stock to the one making the disposal. The special rules for the treatment of transfers to and from trading stock are provided for in Schedule I, Paragraph 15.

Mr. Colley

Could the Minister explain the effect of that proviso in simpler terms? I refer to the effect as distinct from the intended meaning of it. As I see it, the section is saying that in the normal way if there is a disposal of property between a husband and wife this is to be treated as if there were no loss and no gain on the transaction unless the asset in question is part of a trading stock. What is the effect of the "unless" part of it? If they are not to be treated in that way it means there could be a gain or a loss as between the husband and the wife. That is my understanding of it. Would the Minister say if that is correct?

Mr. R. Ryan

Where is the word "unless"?

Mr. Colley

I refer to the proviso.

Mr. R. Ryan

In this proviso we are substituting for the original cost the market value of the property at the time it transfers from one spouse to the other. We are providing here that this will occur where one of the parties is a trader. The trade account will be credited with the market value of the stock which is taken out. It has to be done for income tax purposes. The recipient will be credited with receiving the asset at the same value as it is recorded in the trading account. The market value rule is also to apply where an asset is taken into the trading stock by a spouse.

Mr. Colley

Does that not mean, in effect, that what the Minister said earlier on about disposals between husbands and wives being treated as if they were one person and justifying an exemption of only £500 the same as if they were one person has at least one exception which is set out here in this proviso here to subsection (5)? What the Minister said is correct unless the assets being disposed of between the husband and wife are, in fact, trading stock. In that case they are treated as separate people. Am I stating the position correctly?

Mr. R. Ryan

Yes. This would be an exception but this is a case where an income tax liability arises because one of the parties is a trader and the income tax payable would be affected by the transfer, either taking it out of stock or putting it into stock.

Mr. Colley

What are the consequences of its coming within the jurisdiction of the income tax code? What is the significance of that for the purpose of assessing capital gain or loss?

Mr. R. Ryan

One has to take the asset at the market value for income tax purposes. Quite clearly, it would be an anomalous situation to have the one asset valued at market value for income tax purposes and at its original cost value for capital gains tax purposes.

Mr. Colley

That may be an anomaly but is it not also an anomaly that the husband and the wife are being treated as one person and with the exemption being restricted to one person? There is also provision here that if there is a disposal between a husband and wife of trading stock they are to be treated as two people. That is also an anomaly but it does not seem to be forcing the Minister to consider providing for the husband and the wife exemption the same as that for two single people.

Mr. R. Ryan

When we are treating them like that for income tax purposes I cannot see that we can treat them separately for capital gains tax.

Mr. Colley

They are for income tax purposes, not I admit the whole way. There is a special married woman's allowance in respect of earnings. I am speaking of the income tax code. There is a recognition of the fact that she is separate from her husband, whereas it seems to me that what is being done in this Bill is treating the married woman, who is living with her husband, as if she does not exist until it comes to a problem where trading stock is involved in which case she is treated as a completely separate individual. When the Minister has considered all this, I do not think he will be able to convince himself that the treatment set out in this section and in the previous section is logical.

Mr. R. Ryan

Sometimes logic and tax laws are strangers.

Mr. Colley

True, but that is all the more reason why the Minister should not feel himself tied in relation to giving the same exemption to a married couple as he gives to two single people.

Mr. R. Ryan

Sometimes the best avoidance and evasion practices are very logical but they are very bad tax practices. However, I do not want the Deputy to consider me facetious. The allowance which is given to the working wife is not available to a wife who may have unearned income. It is a working wife's allowance and is paid because she has an income in respect of her labour.

Mr. Colley

At least it is a recognition that she is a separate individual.

Mr. R. Ryan

It is also recognition that she is working to earn her money.

Major de Valera

I thought the distinction between the earned and unearned income was gone?

Mr. Colley

It is actually.

Mr. R. Ryan

It is. There used to be this additional levy on unearned income but the allowance which is given to a married woman, who has an income separate from her husband, is available only if she is a working wife but not if she has unearned income. It has to be in respect of income from her labour.

Mr. Colley

At least it is a recognition of her separate existence. I hope the Minister will reconsider the whole position which I believe is strengthened by this proviso to subsection (5) which shows that when a problem arises the Revenue Commissioners, in treating the husband and wife as one, forget this figment of the imagination and suddenly the two are treated as separate individuals. Could I come back to the query I had in regard to that proviso? It says:

Provided that this subsection shall not apply if, until the disposal, the asset form part of trading stock...

What is the Minister's interpretation of "until the disposal"? From when until the disposal? The day before or its original acquisition or which?

Mr. R. Ryan

It would be at the point of disposal.

Mr. Colley

But it says "until disposal" not "at the point of disposal".

Mr. R. Ryan

"Until" means right up to.

Mr. Colley

From when?

Mr. R. Ryan

From the time it was taken into trading stock until the actual moment of disposal. This section will operate to the relief of people because on the taking of an asset out of trading stock a liability to income tax would arise. If we did not have this special treatment of trading stocks, the situation would arise in which in later years the person holding the asset on ultimate disposal would pay the capital gain calculated on the original cost value instead of the market value on the date of acquisition.

Mr. Colley

I do not think that is true. If you did not have this proviso in they should not have to pay at all according to the Minister because it is a transaction between a husband and wife and is exempted. That is what the Minister was saying earlier.

Mr. R. Ryan

Yes, but we are involved in a trading situation here where an income tax liability arises and this is what makes this proviso necessary, to protect the income tax payer from a double charge which would otherwise arise. If it was not part of trading stock, the income tax liability would not arise and, therefore, a double charge would not arise.

Mr. Colley

Would the Minister consider again the point we made to him in regard to the allowance for the husband and the wife in the light of the separate treatment of husband and wife in subsection (5)?

Mr. R. Ryan

I will.

Question put and agreed to.

SECTION 14.

Mr. Colley

I move amendment No. 17a.

In page 14, subsection (1) (a), to delete lines 48 to 50 inclusive and substitute "for a consideration equal to their market value at the date of death; but".

This amendment is designed to ensure that where the property devolves on death, the person receiving it will be assessed if he is to be assessed for capital gains tax in future, on a base of the value of the property at the date he got it. The provision in the Bill is that it has this practical effect, that if, we will say, a farmer acquired a farm 40 years ago and the farm passes on his death to a nephew and the nephew farms it for another 30 years and then disposes of it on his retirement. In order to assess the gain on which he will pay tax the Revenue Commissioners will value the farm at its value 70 years previously and then its value at the date of disposal 70 years later. There will, of course, be a huge and artificial gain and a situation in which the kind of liability for tax that can arise could be quite out of proportion.

This amendment is designed to ensure that the section would read:

For the purposes of this Act, the assets of which a deceased person was competent to dispose—

(a) shall be deemed to be acquired on his death by the personal representatives or other person on whom they devolve for a consideration equal to their market value at the date of death.

The Minister should consider very seriously the implications of this section if it is not amended in the way I have suggested. This section, as drafted, could lead in the long term to an enforced retention of property by a legatee since the alternative could attract capital gains tax liability accruing over the deceased's period of ownership. In the case I have indicated it would be a liability accruing over 40 years and then over another 30 years in the case of the man who got it. This position would be particularly inequitable where an asset was passed from generation to generation. Chargeable gains accruing to the legatee on the disposal of a private residence of a deceased would not appear to attract relief under section 25 but the disposal on death of a family business or farm to the immediate family would render ineffective the relieving provisions of section 27. All this seems to flow from the provisions of paragraph (a) of subsection (1) of this section. I do not quite understand, and I would like the Minister to explain, the reasoning behind a provision to go back to the date of original acquisition no matter how far back it is in order to get the base from which you calculate the alleged gain on which capital gains tax is levied. I would have thought that the kind of case I have outlined would itself illustrate the injustice and, perhaps, the impracticality of this approach. I hope the Minister will agree that an amendment on the lines I have proposed would make for greater equity and greater acceptance of the equity of the capital gains tax as it is proposed to be implemented.

Mr. R. Ryan

The provision in subsection 1 (a) of section 14 proposes that an asset passing to a legatee on the decease of another person is to be deemed to be taken by the legatee at the value at which the deceased acquired it. This ensures that in the event of a subsequent sale of the asset by the legatee his base cost, for the purpose of computing the capital gain made by him, would be that of the deceased. If a legatee were to be treated as acquiring the asset for capital gains tax purposes at its market value, he could dispose of it immediately or very soon after acquisition and escape capital gains tax while, at the same time, because of the very high exemption thresholds which are afforded in the capital acquisition tax he might not be charged to any capital acquisition tax. This is particularly relevant in the case of transfers on death by parents to their children where the threshold of exemption in respect of each child is £150,000. The possibility of a charge to capital gains tax on a disposal is intended to ensure that tax is payable at the time of liquidity.

Mr. Colley

Like death duties, the Minister means.

Mr. R. Ryan

No. I am talking about capital gains tax arising in the case of disposal of property. Sometimes property has had to be sold for the purpose of the payment of death duties. Capital gains tax would not arise until there has been a disposal.

Mr. Colley

That will happen here, too.

Mr. R. Ryan

I have not closed my mind to the suggestion contained in Deputy Colley's amendment. I would be prepared to have a look at it between now and Report Stage. However, it would be undesirable to allow the principle involved to be applied extensively. This could lead to a situation in which there would be holders of substantial wealth who would never be called on to pay tax.

Mr. Colley

At least I am heartened that the Minister has indicated his preparedness to consider the amendment. I shall endeavour to reinforce the case I was making. Am I right in thinking that the kind of case we are contemplating here is one in which, in terms of the White Paper, it was intended that there would be a liability only either to capital acquisitions tax or capital gains tax but not to both but that, subsequently, the Minister decided that as an anti-avoidance measure he would have to apply both?

Mr. R. Ryan

That is right.

Mr. Colley

Without going back over all that ground again, I suggest to the Minister that the fact that he is now applying both taxes in a situation where the White Paper said this would not occur is all the more reason for not accepting the section as drafted and for accepting the amendment. The case the Minister has been making is designed to produce a death duty situation, a situation which we were told was being got rid of. The very high exemption limits of which he was speaking very favourably in the House not long ago are now being used as a reason for applying capital gains tax on a valuation from way back. There is a considerable contradiction in the case the Minister has been making for the various provisions but I do not wish to labour the point except to say that to accept the section as drafted would be inequitable. I presume the Minister's willingness to reconsider the matter indicates that he will have an amendment for Report Stage but that, in the absence of any such amendment, we would be entitled to move an amendment. I should like the Chair's guidance on this because I understand that, technically, if the amendment is not accepted here nobody but the Minister can table a similar amendment for Report Stage.

An Leas-Cheann Comhairle

If the Deputy withdraws the amendment the Minister would be enabled to table one for Report Stage, if he so wished or Deputy Colley could do it.

Mr. Colley

In those circumstances, I am prepared to withdraw the amendment.

Mr. R. Ryan

The reason for the very generous exemption of £150,000 in respect of capital gains tax is that we do not wish to see comparatively small farms or businesses broken up. That is part of the Government's philosophy. Death duties have the effect of breaking up comparatively small businesses and farms. No liability to capital gains tax would arise if a person received an asset but did not dispose of it. Capital gains tax will arise only in the case of a person disposing of an asset of their own volition but if that person wished to dispose of the property the Bill visualises that it would be appropriate that he pay capital gains tax. I mention this as an illustration of the thinking behind our legislative proposal. However, as I have said, I have not closed my mind to Deputy Colley's amendment.

Mr. T.J. Fitzpatrick

(Dublin Central): The Minister has told us that a threshold of £150,000 is to avoid the breaking up of small properties. I agree with that but situations can arise where it is desirable even in the national interest that property be disposed of. I am thinking of cases of properties that may be inherited by sons and nephews. Because of this section, whereby valuations from 30 or 40 years back can be taken into account, the person who inherited any such property would be inhibited from selling it.

Mr. R. Ryan

Perhaps the wealth tax would be an incentive to him to sell. This shows the need for all three taxes.

Mr. Colley

There will be a lot of buffeting between all three when these Bills go through.

Major de Valera

On the point the Minister made, there are two distinctions to be made and then follows Deputy Fitzpatrick's argument. First, there is the case of a legatee who is a son or a close relative of the deceased and who would be exempt from capital acquisitions tax in respect of the inheritance of a property worth, say, £100,000. The Minister is right in saying that no capital gains would arise until such time as the property was disposed of. However, if the legatee finds it necessary to dispose of the property, there arises the point raised by Deputy Fitzpatrick. Perhaps the Minister will say that if the original holder of the property had disposed of it during his lifetime, he would have had to pay capital gains tax so why should not his successor pay. I can see that point but let us take the second case and this is where the law may be becoming somewhat harsh and near to the confiscation of property. Let us suppose that the legatee is a stranger and if first he pays capital acquisitions tax on the asset and then decides to dispose of it, he will have to pay capital gains tax also.

I do not wish to become involved in the question of charitable trusts and so on but suppose a sum of money or property were left to a very deserving cause which would not come within the definition for other exemptions and, assuming, that the cause is in the character of a stranger their only use of that legacy might be to realise it, to dispose of it. The result would be absolute penal taxation, double taxation. Both of the Acts will be impinging on it in this case.

I realise the Minister's difficulty and I am not trying to create a difficulty. I am trying to clarify the argument. Will the Minister take a point like that into consideration when he is considering Deputy Colley's case? I admit the Minister's logic where a son or a close relation is concerned. In the other case the effect might be completely to inhibit what you might call Christian neighbourliness. I am being cautious in what I say because this needs a complete study of the exemptions, but let us get at the kernel of what I am trying to say. A deserving person could be left a real asset and he could be paying capital acquisition tax on the legacy and, perhaps, being forced by that very fact to dispose of the asset.

As soon as he does that, capital gains tax comes into operation. Deputy Colley's idea about the market value would help in minimising this. Since the Minister has so reasonably said to Deputy Colley that he will consider this, and since Deputy Colley is withdrawing the amendment, I am just trying to help the Minister with this argument. I am not pressing anything on him. This shows the complexity of the whole code. I am grateful to the Minister for setting the precedent and bringing in the wealth tax as well as the other one and I will avail of it.

Mr. P. Belton

Would that be any worse than the legacy duty which a child has to pay?

Major de Valera

It is not a question of being worse.

Mr. P. Belton

I am just asking the question.

Major de Valera

We want to make things better. I hope the Minister will take it in the spirit in which it was meant.

Mr. R. Ryan

Certainly. We are getting rid of something we regard as obnoxious and bad and we do not want to replace it with something equally bad or worse.

Major de Valera

There will always be drawbacks.

Mr. R. Ryan

I accept that there are cases where strangers in blood or with special relationships become deserving recipients. We must not forget that any person who receives something from a deceased person receives a gift. A person who receives a legacy is a lot better off than a person who receives nothing at all.

Mr. Colley

That was argued by Minister for Finance on many occasions to justify death duties.

Major de Valera

Part of the complication of this law is due to people trying to evade tax by twisting perfectly proper proposals for very improper purposes. I think both sides of the House will agree that we have to watch that.

Mr. R. Ryan

The tax laws would be as simple as the Ten Commandments if people were not inclined to sin against them as well.

Amendment, by leave, withdrawn.

Amendments Nos. 17b and 17c not moved.

Mr. R. Ryan

I move amendment No. 17d:

In page 15, subsection (4), line 20, to delete "assets" and to substitute "asset".

This is simply substituting the singular for the plural.

Mr. Colley

It is a misprint.

Amendment agreed to.

Mr. R. Ryan

I move amendment No. 17e:

In page 15, subsection (5), lines 23 and 24, to delete "(otherwise than in right of the power conferred by the Settled Land Act, 1882, to dispose of detailed interests)".

We want to delete "(otherwise than in right of the power conferred by the Settled Land Act, 1882, to dispose of entailed interests)". I am afraid there is a printers' error in the amendment. Instead of "detailed" it should read "entailed".

Mr. Colley

That is right. We can fix it now.

Amendment to amendment amended by leave by the substitution of "entailed" for "detailed".

Mr. Colley

The Minister may want to tell us why he is taking the words out of the section.

Mr. R. Ryan

The amendment removes the limitation which was put on the reference to competence to dispose as the further limitation restricting the term to a competency to dispose by will achieves this without the need for the words which are being deleted.

Mr. Colley

Would the Minister repeat that?

Mr. R. Ryan

The amendment removes the limitation put on the reference to competence to dispose as the limitation restricting the term to a competency to dispose by will achieves this without the need for the words "otherwise than the right of the power conferred by the Settled Land Act, 1882, to dispose of entailed interests".

Mr. Colley

We will take the Minister's word for it.

Mr. R. Ryan

It makes sense when it refers to entailed rather than detailed interests.

Amendment, as amended, agreed to.

Question proposed: "That section 14, as amended, stand part of the Bill".

Mr. Colley

There are a few questions I want to ask the Minister. First, if the personal representative disposes of an estate for the purposes of division between the beneficiaries or legatees, can a chargeable gain arise on the personal representative's disposal of the property and, if so, who is liable to the tax arising?

Mr. R. Ryan

The personal representative has the liability to pay the tax on the sale of any such asset. This would be similar to the liability which lies on any executor or personal representative to meet the liabilities of the deceased or any liabilities which may arise out of the administration of the estate. Of course, the liability would be no greater than the asset he is handling and, in the case of capital gains tax, it would be no more than 26 per cent of the gain.

Mr. Colley

What I am really coming at here is this. If the Minister were to accept my amendment or something very similar, presumably a disposal of the property by the personal representative within a reasonable time of acquiring it on the death of the person who owned the property would not normally lead to capital gains tax——

Mr. R. Ryan

Unless there were a very rapid increase in value.

Mr. Colley

——whereas it could very often lead to it if the section stays as it is.

Mr. R. Ryan

It could never be more than the asset. Assuming that the asset had a nil value at the date of acquisition, it could be no more than 26 per cent of the sale price and, in normal circumstances, that would be 26 per cent of the difference between the original and the disposal value.

Mr. Colley

That could be very substantial unless the base value is that on the date of acquisition by the personal representative. The Minister has answered my question but we will have to wait the outcome of his consideration of that matter to see how this provision will operate.

Subsection (2) refers to "amendments of assessments or repayments of tax" and I should like to know if there is any provision in this, or in any other Bill, regarding interest on repayments of capital gains tax?

Mr. R. Ryan

There is no provision in this Bill dealing with that aspect but I would need to consider the matter further before giving an explicit reply.

Mr. Colley

A section was passed in another Bill which provided for interest on a number of different taxes and for interest on repayments of taxes in limited circumstances. My recollection is that that section did not include capital gains tax. I want to draw the Minister's attention to it to see if he would ensure that there is provision for interest on repayments of capital gains tax.

Mr. R. Ryan

The number of cases of repayment of capital gains tax would be very rare. In what kind of circumstances would it arise except if it was a miscalculation of what the capital gain was? Invariably in capital gains tax cases the gain would be known and it would be a question of fixing 26 per cent of that. There would be a case of setting off losses in the event of death against previous gains.

Mr. Colley

That is the major case where it might arise.

Mr. R. Ryan

This is a special concession which is being given. I will look at the matter. I am not saying no to the Deputy's request but it strikes me as not being similar to cases where, for instance in the case of wealth tax, an assessment would be made which on appeal would be found not to be justified. The Revenue Commissioners in such a case would be making a refund of tax similar to that done in the case of income tax where an excess amount is paid and on appeal it is found to be excessive. This is a different situation, in which the case for refund with interest is not as strong as it is in the others. I am thinking out loud now and I am not refusing to consider the matter further.

Major de Valera

On the general interpretation of the section, has the Minister in mind in subsection (1) (a) the sales by the personal representative in the administration of an estate?

Mr. R. Ryan

Not merely sales because the subsection states: "or other person on whom they devolve".

Major de Valera

I mean disposal. It is not a disposal in death and under subsection (4) the whole matter is transferred to the legatee. Under that subsection the liability is transferred to the legatee. The primary purpose of subsection (1) is to see that there is no escape through the personal representative?

Mr. R. Ryan

That is right.

Major de Valera

In the ordinary course of administration it would arise when the personal representatives would be disposing of the property by sale or otherwise but when it goes intact to the legatee the liability passes to the legatee?

Mr. R. Ryan

Yes.

Major de Velera

Where it is converted and the legatee gets the benefit I take it that all that attaches to him is legacy duty or inheritance tax?

Mr. R. Ryan

Yes, if such arises.

Major de Valera

In subsection (6) there is reference to "a deed of family arrangement or similar instrument". Would the Minister inform us of what is meant by "similar instrument"?

Mr. R. Ryan

A deed of family arrangement is something that is entered into by the parties voluntarily. There could be another legal act, for instance a judgment of the court, which in effect would be a distribution of property. That is the kind of thing that is covered here though it might be said that that is not similar to a deed of family arrangement but its effect would be the same; it is a distribution of property in a certain way.

Major de Valera

Is the Minister sure he is not leaving a loophole or encouraging litigation?

Mr. R. Ryan

The phrase is so wide that it ensures that everything of that type is caught. If we were to limit the description then we might be in difficulty and leaving avenues of avoidance and escapes.

Mr. Colley

I should like to ask the Minister if his consideration of my amendment will also apply to subsection (4)? Is he considering the principle of property acquired whether by way of a personal representative or a legatee being regarded as the market value at the date of acquisition?

Mr. R. Ryan

Yes.

Mr. Colley

Would it apply to subsection (4) as well as to subsection (1)?

Mr. R. Ryan

Yes.

Mr. Colley

I should like to draw the Minister's attention to a problem that may be arising in regard to the financial year 1974-75. Will this capital gains tax legislation operate from April, 1974? In the case of gifts I believe it will be February.

Mr. R. Ryan

That is right.

Mr. Colley

During 1974-75 there is liability for legacy duty under the death duty code and the situation can arise, under subsection (4) of liability for legacy duty and capital gains tax at the same time. That is a liability which would not arise after April, 1975. Will the Minister give particular consideration to the situation arising in that period, where legacy duty ceases to be levied from April, 1975? There is one year of double liability.

Mr. R. Ryan

The Deputy will recall that the gifts liability does not arise until December, 1974, because we did not originally visualise this in the White Paper. It is only from the date of publication of the Bill that liability arises. However, I shall certainly look at it to see if there is need for some special arrangement to cover the situation mentioned by the Deputy.

Debate adjourned.