Let me refer the Minister to subsection (5), line 25, page 15. At the end of the line he will see the word "assuming". The context is: "assets of the deceased ... which he could, if of full age and capacity, have disposed of by his will, assuming that all the assets were situated in the State and that he was domiciled in the State...." I should like to inquire from the Minister if the word "assuming" in that context means even if the assets were not so situate. In other words, in a case where the assets were not situate in the State, are they deemed to be situate in the State? Is that the effect intended to be achieved by using the word "assuming" in that context?
Capital Gains Tax Bill, 1974: Committee Stage (Resumed).
Question again proposed: "That section 14, as amended, stand part of the Bill."
The point the Deputy makes is that there is no doubt about the location of his assets.
I am wondering if the word "assuming" in that case, in effect, means that the assets are deemed to be situate in the State even though they are not.
What it means is that regarding his competency to dispose of the assets they are the laws of the State which apply and not the laws of any State.
Let me try to put it in context. I think we amended the subsection to delete the words in brackets.
Yes, because they were unnecessary.
The subsection now reads:
(5) In this section references to assets of which a deceased person was competent to dispose are references to assets of the deceased ... which he could, if of full age and capacity, have disposed of by his will, assuming that all the assets were situated in the State and that he was domiciled in the State....
I shall omit the remainder for the moment. The word "assuming" seems to me to be slightly ambiguous there in that it could mean assets of which he was competent to dispose, being assets which the deceased could, if of full age and capacity, have disposed of by his will, if they were all situate in the State. Or it could mean assets of which he could have disposed of by his will whether they were situate in the State or not but, for the purposes of this subsection, being deemed to be situate in the State. I do not know if I am making it clear to the Minister the alternative meanings of "assuming" in that context that I think arise.
What I am trying to get at is the intention of the use of the word "assuming". I do not think I can put it any more clearly than by asking: is it intended that whether the assets are situate in the State or not it will not affect the competence of the person to dispose of them?
We assume that his competence covers all his assets irrespective of their location. It includes any assets which a deceased person who dies domiciled in the State could have disposed of by his will, irrespective of the location of the assets.
Does that not mean then that they are deemed to be situate in the State whether or not they are for the purposes of this subsection?
No, not necessarily. One could dispose of assets which were not located in the State because they are the laws of this State which would operate in relation to the disposal. It is really a question of competence to dispose of the property and that competence is determined by our law.
As if all the assets were situate in the State.
Yes, because if the assets were situate in the State nobody would challenge the competence to dispose of them.
But does the word "assuming" in that context not strike the Minister as somewhat unusual?
There could be—and offhand I cannot even say in what circumstances this could arise—but there could be laws of some other State that could be a restriction in this area. We are providing that they are the laws of this State which will apply irrespective of any restrictions which may apply in some other jurisdiction.
I know what the Minister wants to achieve but I want to put it to him that the use of the word "assuming" there is somewhat ambiguous. I would suggest that he might have it looked at again to see if it could be made less ambiguous.
May I also refer the Minister to the second portion of subsection (5), the reference to the severable share in any asset to which immediately before his death he was beneficially entitled as a joint tenant? Is the effect of this provision that, if the asset were severable but not in fact severed, liability would arise for the surviving tenant?
First of all, I can understand the Deputy's concern about the word "assuming" which does appear to be all embracing, perhaps too extensive or too wide. We gave the very widest and most serious consideration to the wording of this section and we could not find any other more apposite wording to deal with the particular situation we want to cover. We wanted to cover all assets which would be affected under Irish law and there was no other word we could find other than the word "assuming".
The question is, if the assets are severable, as envisaged, but not severed before death, does liability for capital gains tax arise in that case and fall on the surviving joint tenant?
No.
Presumably, in the case of a joint tenancy, which is not severed, the share of the deceased joint tenant will pass to the surviving joint tenant. I take it that is not deemed to be a disposal because it is a transfer on death.
Yes.
In that case, if it is not deemed to be a disposal, then liability will not arise at the time in regard to the share which the surviving joint tenant is receiving but, in due course, if he disposes of that share, then liability will arise. On what basis will the liability be calculated? What will be the basis for the calculation of the gain? Will it be the value of the share at the date he acquired it, namely, the date of death of his former joint tenant, or will it be the date of acquisition by the deceased joint tenant?
Where property under joint tenancies is disposed of but consideration received for the disposal is taken by the joint tenants in equal shares, notwithstanding that they may have contributed in different proportions to the cost of acquisition—this arises out of the nature of a joint tenancy—the chargeable gain or loss of joint tenancy is to be computed on this basis, except where they divide the proceeds among themselves in proportion to their original contributions. The computation then would be on the basis of their original contribution.
That is where they dispose of the joint property.
That is right.
There are a few angles to this. The one envisaged clearly in this subsection is not the one I am pursuing. Where property is held by joint tenants and is severable, but is not severed before the death of one of the joint tenants, am I right in thinking that the share of the deceased joint tenant passes to the surviving joint tenant and no disposal arises on that passing on death? That is step No. 1. Step No. 2 is, if the surviving joint tenant disposes of that share in due course, what is deemed to be the value of the share of the deceased tenant for the purpose of assessing capital gains tax? Is it the value at the date it was acquired by the surviving joint tenant, which is the date of death of the deceased joint tenant, or is it the value at the date it was acquired originally?
It has to be the date of the original acquisition because a joint tenancy of its nature is a unified ownership.
I think the Minister would agree though that the surviving joint tenant would only have acquired that share on the death of his joint tenant.
Yes, but there would be no loss or gain at the time of his acquisition of the share that the deceased joint tenant originally had.
If that is so what is the point of saying in the subsection that references to assets of a deceased person include references to his severable share in assets to which he was entitled as a joint tenant? That would suggest that his share, although not severed, is to be included in the property deemed to pass on his death whereas the Minister seemed to suggest a moment ago that that share would pass to the surviving joint tenant who, if he disposed of it, would have to pay capital gains tax on it calculated on the basis of its value at the date it was acquired. Does there not seem to be a double liability arising here? On the one hand, the liability arises in the hands of the surviving joint tenant and, on the other, on the basis that under this subsection the share is deemed to be part of the assets passing on the death of the deceased tenant.
One of the difficulties all the time here is that one has to approach every particular asset from a number of different angles; one, the person who originally held the asset and, on the other hand, the person who succeeded to the ownership of it. What we are deeming here is that the person who has a severable share on death is the owner of that severable share. There cannot be any doubt about that. When we come along to calculate the gain later on of the person who succeeds to that share we calculate the gain as that which follows the original acquisition.
Is there not a discrepancy here? What is the point of including it as part of the property passing on death? What is the reason for including it in that way? What is the effect of doing that? Is this case in the same category as the others I was talking about earlier which the Minister undertook to have a look at?
It depends on whether or not one takes the original value or the market value at the date of the transition of the ownership.
That is the point I am really coming at. It seems to me that it comes into that category or alternatively that subsection (5) should be reworded. This subsection seems to me to be bringing a non-severed share of a joint tenancy into the category of property passing on the death of a person to be treated in the same way as any other property, whereas in the normal way with a joint tenancy, as the Minister has indicated, it would be deemed to be property passing to the surviving joint tenant and, when disposed of, having its original value at date of acquisition taken into account in assessing the amount of the gain.
There seems to me to be some discrepancy in those two approaches. If there is, it ought to be clarified. Even if there is not, I think it is a case coming within the same category as the ones we referred to earlier where there is a strong case for the base value for the purpose of calculating the gain being fixed at its market value at the date of acquisition by the person who becomes liable rather than its original value perhaps many years previously when acquired by the joint tenancy.
I will look into it.
Is subsection (6) intended to be a relieving section?
Yes.
Question put and agreed to.
SECTION 15.
I move amendment No. 17f:
In page 16, subsection (4) (b), line 16, to delete "shall," and to insert "shall, except where at any time previously, those assets, while forming part of that settled property, were, by virtue of subsection (5), deemed to be disposed of and immediately re-acquired for a consideration equal to the whole or a corresponding part of the market value of the asset,".
Subsection (4) (b) could give rise to an anomaly where in the course of administration of a settlement the provisions of subsection (5) of section 15 had been applied at any time. Subsection (4) deals with the treatment of an asset which passes out of a settlement to a person who becomes absolutely entitled to it on the death of the person who had a life interest in it. It provides that there is not to be a charge to capital gains tax at that point and that the person absolutely entitled takes the asset at its value of entry into the settlement. To ensure that any gain accruing before 6th April, 1974 is not charged it is necessary to provide an apportionment formula and this is what was proposed by the words "... and shall, if the trustee had first acquired the property at a date earlier than the 6th day of April, 1974, be deemed to be at that earlier date".
The effect of this apportionment provision is that the time at which the trustee first acquires the asset is to be substituted for the time the person becomes absolutely entitled to the asset and time apportionment will take place from that earlier time, being a time before 6th April, 1974. This provision was intended to apply to the simply case where an asset was put into trust for the life of a person with remainder to another and the latter became absolutely entitled on the death of the first person. The manner in which the provision operates may be seen from the following example.
Is the Minister describing the situation unamended?
Yes. On 6th April, 1970 A creates a trust in an asset worth £1,000 for B for his life and remainder to C. There is no charge to capital gains tax on A by reference to the £1,000 as it occurred before 6th April, 1974. On B's death the property passes to C and there is no charge and C is deemed to have acquired the asset for £1,000 at 6th April, 1970. If C disposed of the asset on 6th April, 1980 for £1,500 he would be charged to capital gains tax on £300. Suppose that A created a trust on 6th April, 1970 for B for life, then for C for life, then for D, with remainder to E and that after the death of B on 6th April, 1975, C on 6th April, 1976 and D on 6th April, 1980, E then acquires the asset. There will be a charge under subsection (5) on 6th April, 1975, say, at a market value of £1,200 and, again on 6th April, 1976, say, at a market value of £1,400, but no charge on 6th April, 1980, with a market value of, say, £1,500. If E disposes of the asset for £2,000 on 6th April, 1985 there will be a gain of £600, that is £2,000 less £1,400, but this gain would, as the subsection stands, be apportioned over the period from 6th April, 1970 to 6th April, 1985, 15 years, and only £440 would be chargeable. It is not logical to apply the time apportionment formula in a case where the base cost is taken at a date subsequent to 6th April, 1974 and there is no reason why the charge should not be £600 instead of £440.
To correct the anomaly it is necessary to exclude the case where there has been a charge under subsection (5) because a consequence of the charge under that subsection is to bring up the base cost to the market value at the time of the charge. It would be wrong to provide for time apportionment back to a date before 6th April, 1974 when the base cost for calculating the gain is a value fixed at a date subsequent to 6th April, 1974. The amendment proposes, therefore, to achieve the necessary correction by interpolating in the subsection the words set out in the amendment.
I think I have the point but I am not too sure. Could the Minister assure me that in no circumstances would a base figure prior to 6th April, 1974 arise for the calculation of the gain?
No.
There is no case where that would happen?
No.
Would the Minister try to look at this rather lengthy interpolation in the context in which it is proposed to put it in? It would read: "and shall, except where ... for a consideration equal to the whole or a corresponding part of the market value of the asset if the trustee had first acquired the property". Does it hang together from the point of view of syntax? Is the Minister satisfied it does?
I hope it does.
It is so lengthy that it is a bit difficult to make it out but I have some doubts about it. I am certain that if it is interpolated as it is at the moment the syntax may be right but the difficulties of reading that paragraph will be enormous and the difficulties of interpreting it will be greater, if that is possible.
I think it can stand on its own.
I was wondering whether it would not be clearer if it was made to stand on its own.
I will certainly look at the draftsmanship when we see it together in the reprint after the Committee Stage. If there is anything wrong with it I will amend it on the next Stage.
Amendment agreed to.
I move amendment No. 18:
In page 16, subsection (5), line 22, to delete "these" and to substitute "the".
This is a printing error. We have substituted the definite article for "these".
Amendment agreed to.
I move amendment No. 18a:
In page 17, lines 24 to 46, to delete subsection (12) and to substitute the following subsection:
"(12) (a) In this section `life interest' in relation to a settlement—
(i) includes a right under the settlement to the income of, or the use or occupation of, settled property for the life of a person (or for the lives of persons) other than the person entitled to the right,
(ii) does not include any right which is contingent on the exercise of the discretion of the trustee or the discretion of some other person, and
(iii) does not include an annuity, notwithstanding that the annuity is payable out of or charged on settled property or the income of settled property except where some or all of the settled property is appropriated by the trustees as a fund out of which the annuity is payable and there is no right of recourse to settled property not so appropriated, or to the income of settled property not so appropriated.
(b) Without prejudice to subsection (6) (b), where under paragraph (a) (iii) an annuity is to be treated as a life interest in relation to a settlement, the settled property or the part of the settled property appropriated by the trustees as a fund out of which the annuity is payable shall, while the annuity is payable, and on the occasion of the death of the annuitant, be treated for the purposes of subsection (5) as being settled property under a separate settlement.".
There is no change in the substance of this subsection which is mainly concerned with the definition of "life interest". The first part of the existing subsection sets out the definition and the last part of the subsection sets out that in certain conditions the property out of which the annuity is payable is to be treated as a separate settlement. The revised draft divides the subsection into two parts (a) and (b). The first part contains the definition. The second part contains the provision relating to the treatment of the property involved as a separate settlement.
Would it be possible for the Minister to indicate where the difference arises? The amendment incorporates a great deal of what is proposed to be deleted.
It is really a question of setting it out in what we regard as a more satisfactory manner. It is a question of lay-out rather than a change of substance.
Paragraph (iii) of the amendment starts off: "does not include an annuity, ..." May I ask the Minister why an annuity should be excluded? Presumably we are talking about an annuity payable for life and yet it is being excluded from the definition of a "life interest".
Are we talking about 12 (a) (iii)?
It is 12 (a) (c) in the section and 12 (a) (iii) in the amendment. Why are we excluding it?
An annuity does not necessarily have any life value. This is simply excluding an ordinary simple annuity which has not got a relationship to the duration of a life.
If the annuity had a relationship to the duration of a life would that make any difference?
Yes, if it was related to a life it would be a life interest.
I do not think that is what the amendment says. Paragraph (iii) says it does not include an annuity except where some or all of the settled property is appropriated by the trustees as a fund out of which the annuity is payable and there is no right of recourse to settled property not so appropriated, or to the income of settled property not so appropriated. That does not seem to relate at all to whether the annuity is related to a life but rather to whether it is appropriated by the trustees to a fund, whether there is a right of recourse to the settled property. They seem to be the factors that take an annuity out of that exclusion but it seems to me, on the face of it, that an annuity which is related to a life, and this is quite frequent, is by this definition being excluded from a life interest. There may be a good reason for it but it is not obvious to me at the moment why that should be so.
I am sure the Deputy is concerned with relief for the taxpayer and this subsection would operate to the relief of the taxpayer. On that account, while I know there are certain difficulties in interpreting and understanding the section, I do not think one need be unduly worried about it because it operates in that way of easement to the taxpayer.
I am not entirely convinced by that. Furthermore, I think there ought to be a good reason for different treatment of what appear to be similar interests. A life interest in the ordinary sense of certain property is dealt with in one way. A life interest which is in the form of an annuity for life appears to be dealt with differently. There must be some reason for this.
I find it very difficult. The Deputy will understand I have notes here which are related to the original Bill. I am trying to relate the numeration to the amendment.
Is the whole journey really necessary?
Yes. The most difficult tasks are sometimes the most worthwhile.
I am thinking of the unfortunate people who will have to work this legislation.
Once we have the legislation in order, everything will be all right but I am not assuming that there will not be amending legislation in future years.
It will be very difficult to administer.
If property is appropriated for the payment of an annuity, once the annuity ceases there will be a deemed disposal of that property because another interest in the property would be set up then. That is why we are treating in this way this life interest relating to annuity.
Substantially, is it the position that an annuity is treated as a life interest in relation to a settlement where there is a fund set aside specially by the trustees out of which the annuity is payable or there is a right of recourse to the property?
Yes.
This takes us back to the straightforward question as to why we are dealing with this amendment, an amendment which was prepared on the basis that subsection (3) of this section was inadequate or was in some way misty. I share Deputy Colley's difficuty in trying to get to the bottom of the thinking behind the amendment in so far as it changes the original intention of the section. The section deals with the definition of "life interest". Did the Minister say that the amendment is to protect the taxpayer? I should find that rather remarkable.
The Deputy ought to have more trust in me.
The Minister is tempting the Deputy.
After a couple of years' experience I am sorry that my trust in the Minister has not been improved. Deputy Colley asked what aspect of the original section was being changed by the insertion of this amendment. We should like to know the answer.
The answer to that simple and honest question is that there is no change in the impact of the section as we are proposing to amend it. It was thought that the amendment might make the intention clearer.
To that extent, it succeeds. I had some queries on the section which do not arise on the amendment because of the removal by the amendment of some contradictions that appeared in the section but I am not saying that the whole intention either of the section or of the amendment is clear.
I know there is still some difficulty regarding interpretation but Deputy Lalor must be encouraged to know now that he would be justified in believing in me. Suppose an annuity is payable out of the general fund of a settlement, there would be no disposal, actual or deemed, as soon as that general charge would cease. But if funds are appropriated specifically there is a disposal when the annuity ceases. However, if it ceases on a death there would be no charge.
Why?
We are dealing with a death situation in which no charge to capital gains as such would arise.
When would the charge arise?
If there was a termination of an annuity which was related to specifically identifiable appropriated assets because once the annuity would be terminated, some new interest could arise on those assets.
This would be an annuity terminating other than on death?
Yes.
What is intended to be achieved by the insertion of the phrase "without prejudice to subsection (6) (b)" at the beginning of paragraph (b)? On the face of it it would seem that this says one thing while subsection (6) (b) says another and that the two are reconciled by saying "without prejudice to ...".
It is no defence to say that I would not pretend to read the minds of the draftsmen but they considered it appropriate to have this reference to subsection (6) (b).
It is a very odd phrase to have in legislation.
One could almost say "without prejudice to any other section of this Bill, such provision will have effect". However, I am advised that the phrase is necessary to provide for a situation where, for the purposes of subsection (5), the same settled property would fall to be regarded as being a settled property under a separate settlement in accordance with the provisions both of subsection (6) (b) and subsection (12). Perhaps I should give an example to explain the situation.
Let us say that under a settlement, property is held to pay the income thereof in equal shares to A, B and C for their lives subject to the payment of an annuity of £100 to D for his life. A's interest is a life interest which is a right to a one-third part of the income of the settled property and this part falls to be treated as being under a separate settlement in accordance with the subsection (6) (b). In order to answer the annuity, the trustees appropriate, say, £1,000 of 10 per cent loan stock out of the funds already segregated to provide the incomes for A, B and C, respectively. This loan stock would, under section 12, be treated as being under a separate settlement. The position then would be that one-third of £1,000, £333, would be common to the two separate settlements. In these circumstances the provisions of subsection (6) (b) would prevail on the termination of a life interest and the part of the settled property representing A's interest, including the specific fund appropriated to the annuity, would be regarded as a separate estate to which the treatment in subsection (5) would apply.
(Dublin Central): It is very simple.
It is, if you think about it.
Might I ask what is the authority for saying that subsection (6) (b) would predominate? I think I was right in saying there were two contradictory things and this phrase "without prejudice" was meant to reconcile the contradictory things. If I understand the Minister's illustration of the situation which he has just given us, when it came to the crunch of reconciling the two contradictory things he said that subsection (6) (b) would prevail. Why would subsection (6) (b) prevail? "Without prejudice to subsection (6) (b)" does not seem to me to make it prevail.
It provides that the provisions of subsection (6) (b) will apply except in relation to the specific circumstances which are set out in the later subsection. I have illustrated in this example that subsection (6) (b) would prevail on the termination of the earlier life interest.
That may be the intention, but I am not sure that is being achieved. Again I would urge the Minister to have this one looked at. I do not think the phrase "without prejudice" is the right phrase to achieve what the Minister wants to achieve. It is confusing and in substance what it is saying is that you have two contradictory provisions. I believe it does not convey, in circumstances where the contradictions arise, that subsection (6) (b) will prevail. That could be said quite clearly or more clearly. I urge the Minister to have it looked at again to see if what is intended as described by him cannot be more clearly conveyed in the wording.
I would agree to do that but my feeling at the moment is that the correct wording has been used. It provides that subsection (6) (b) will not be overruled by this provision in section 12.
I suggest to the Minister that a phrase other than "without prejudice" would convey more clearly what I think the Minister is trying to convey.
I think the Deputy is looking at the words "without prejudice" in a sense which solicitors might understand but which is not appropriate to the legislation.
We had better brief counsel so.
Then we would be in a right mess.
When the Minister goes back to his profession——
——there will be a lot of work for him.
Is amendment No. 18a agreed?
On the understanding that the Minister will have the wording looked at again, yes.
Amendment agreed to.
Question proposed: "That section 15, as amended, stand part of the Bill."
I have a number of queries on the section. I should like to refer the Minister to the proviso of subsection (1). At line 51 he will see the words "not at the time". The context is "... shall be treated in relation to that trust as not resident in the State if the whole of the settled propery consists of or derives from property provided by a person not at the time ... domiciled, resident or ordinarily resident in the State ..." I was leaving out the words in brackets to try to make it clear, but perhaps I made it more confusing. Does the phrase "not at the time" mean at the time of providing the property?
Could the Deputy refer me to the line?
Line 51, page 15.
And the Deputy wants to know?
Whether "not at the time" means at the time of providing the property?
"...not at the time" refers to the period of domicile, residence or ordinary residence in the State.
At which point in time?
It is the time at which the property is provided.
That is what I want to know. The next point is in regard to subsection (2) which begins: "A gift in settlement, whether revocable or irrevocable, is a disposal of the entire property...." My first question is about the word "is": a gift of settlement is a disposal. Should that not be "shall be deemed to be"? Just to state baldly that it is, seems to be going a little far and to have possible implications beyond this Bill.
I wonder whether there is any difference in effect between the word "is" and the words "shall be deemed to be".
The words "shall be deemed to be" for the purposes of this section or even this Bill rather than to say that it is a disposal of the entire property——
I agree with the Deputy that we have often seen in legislation the words "shall be deemed to be" or "shall be" rather than the present tense "is".
Perhaps the Minister would have a look at it.
I will look into it to see why the emphatic present tense is used.
The essential point may well be what Deputy Colley has mentioned en passant: whether this definition is limited to this code or whether the use of the word “is” as an absolute definition may turn up in another Road Traffic Bill or something like that. That point must be watched with the wording there.
I should love to see somebody using the capital gains taxation in a road traffic prosecution.
The Minister knows what I mean.
Or in a gaming or lotteries prosecution.
The first two lines of subsection (2) read:
A gift in settlement, whether revocable or irrevocable, is a disposal of the entire property thereby becoming settled property notwithstanding...
Does that mean that the gift causes the entire property to be deemed to be disposed of or does that relate only to the gift itself? It would appear to mean that a gift in settlement causes the whole of the settled property to be deemed to be disposed of even though it is only the gift that is being disposed of. For instance, if the gift formed one-tenth of the settled property on the face of it this subsection seems to be implying that a gift, whether it is revocable or irrevocable, causes the whole of the property to be subject to a disposal within the meaning of this subsection? Is that the intention?
It is whatever property is given. That might be one-tenth but the whole of that one-tenth of the property is given. It may be received in different proportions by the recipients of that property—that is another day's work—but the property that is disposed of which one must be able to measure at the time of the disposal is whatever is given. At that stage one does not look at whatever is received by others.
Is it merely a valuation problem that the Minister is dealing with? Surely the tax only attaches to what is actually disposed of?
That is correct.
Is the Minister taking the entire property for valuation purposes or if there is one-tenth involved is he taking one-tenth of the valuation?
On the face of it the subsection seems to state that a gift in settlement is deemed to constitute a disposal of the entire settled property.
And that is why I asked if it was a question of valuation. If a disposal of the entire property is involved the tax would attach to the whole of the property and would be assessed on the value of the entire property. From the point of view of valuation that is all right provided only one-tenth of that is charged to tax if only one-tenth passes.
A situation could arise in which there is a disposal of property to a number of persons one of whom would be the settler himself and that is taken as a total disposal of whatever property is passing.
Even what he retains?
He would not be retaining it; he would be giving it to himself again. If we did not have this provision it would open an avenue——
Supposing A has three units of something and he disposes of one of those units, surely he and those holding the other units have not changed their status or position. I can understand the whole lot being valued at that point but I believe the tax should only attach to the property that passes.
That is all that would happen.
That is why I am asking is there a valuation point. Is that all that will happen? Will the Minister tax the people who hold the units as well?
No. We are going to tax the market value of the whole property which is going into the trust, not the property from which portion is taken out. It is easy to value one-third of a property but if that one-third is in turn placed in the hands of three more people one of whom happens to be one of the original owners we will take the total value of the property going into the new trust.
Could the subsection produce a capital gains tax on property greater than the gift which precipitates the disposal?
No.
Why does it provide that a gift is deemed to be a disposal of the entire property thereby becoming settled property? The wording seems very peculiar if that is not what is intended.
The owner of the property could be A and he could settle that property on himself and B and C. In that case the capital gain would be measured on the property, notwithstanding the fact that A would be receiving part of it.
That is a case of a settlement being made.
It is, but we are dealing with settled property here.
Yes, but the disposal of it.
Why is it worded in that way?
In other words, one cannot take a lump out of the settled property and say that this is not changing its character because A who was the beneficial owner before is settling upon himself and others. It is the total asset that is valued or that the capital gains tax is calculated on.
The subsection could be worded in this form:
A gift in settlement, whether revocable or irrevocable, shall be deemed to be a disposal of the property comprised in the gift thereby becoming settled property——
Would that meet what the Minister has in mind?
I think that is what the subsection says.
No, the subsection refers to the "entire property thereby becoming separate property". That conveys that there is something involved other than the property comprised in the gift.
I do not think so. If one-third of a property is involved it is only one-third of the property which is thereby becoming settled property and not the entire property. The Deputies have made a point which I will look at but I do not think any of their alternative language makes the position any clearer.
I was trying to illustrate that it is possible to say what the Minister is saying the subsection means in a way that does not raise doubts.
It will be fixed in the courts.
We would prefer to fix it here.
There are some great days awaiting the profession.
The Minister is providing that if a person makes a gift in settlement to himself, and others, he becomes liable to capital gains tax on the gift to himself.
If he is transferring the property, yes.
Let us suppose he is transferring property to himself——
He is creating a trust but he could not do that if it was disposed of in some other way. He would be paying capital gains tax.
Unless he gave it to his wife, in which case the Minister has said it is exempt.
It comes back to the definition of settled property. What happens if a person divides his property into three parts, if he gives one part to his wife, one part to his daughter and keeps one third? I have great sympathy with the Minister, the Revenue Commissioners and the parliamentary draftsman. We are going into a line of country where a great deal of ingenuity is used to dodge all kinds of taxes. We seem to have reached the ridiculous stage where a person cannot divide his property into three parts and retain one part without paying tax on what he keeps or else the whole operation can be defeated by calling it a gift and paying on two-thirds. We are legislating in an area where there are many dangers so far as settled property is concerned, where there can be complete evasion by a simple operation. Will the Minister tax a person if he divides his property into parts, if he gives some to his children and keeps a part for himself? Will that person be taxed on what he has not disposed of?
No.
If that is the case, the obvious way to dodge all taxes is to resort to some such device.
If a person retains one-third of his property he does not give it to himself but if he creates a trust and settles property on himself and on others there is the question of a disposal.
I am in sympathy with the Minister and I am not trying to knock him but the ridiculous result is that we have blocked all the loopholes but we have left the door wide open.
Has the Minister not said that it applies only in a discretionary trust? If a person settles property on his wife and children and, for instance, settles one-third on himself, in that case he is giving himself one-third of the property and there is no way to change it.
In this competition between the State and the tax evaders, between the ingenuity of the advice and administration available to the Revenue Commissioners in competition with lawyers advising clients on how to get around the law, we have got to the point where the State is winning hands down. It will beat all the discretionary trusts but if the Minister does not tax the part of the property that is left the purpose of this section will be defeated by the simple transaction of dividing the estate into disposals. The limits and reliefs must be considered in conjunction with the capital acquisitions tax. I am concerned that between the two measures we will meet with some unforeseen situations. A man with a substantial amount of property will dispose to the limit of £150,000 and he will be taxable for capital gains only on the fraction he has disposed of directly. He will get off scot free on what he has retained. I am making these points in a general way because, quite frankly, one would want to retire for a month to consider the full implications of this legislation. Many loopholes will be blocked but we are leaving the hall door wide open when the three Bills are taken together.
We are trying to keep the door closed.
Between the three pieces of legislation, I am at a loss to understand what will be the effect. Certainly the Minister will win the war against trust settlements but I wonder what will be the final result?
Am I correct in thinking that if a man settles his property as to one-third on his wife, one-third on his child and one-third on himself it is a disposal of the whole property, including the portion he keeps for himself?
Yes.
Is he liable to tax on that one-third?
Yes.
If that is the intention, what would be lost by providing that the portion settled on himself would not be subject to tax? What loophole would that create?
He could keep it for himself absolutely and give away only two-thirds.
Why tax it? There must be a good reason.
It is only if he settled a kind of life interest for himself. I can understand the Revenue Commissioners' point here because this is where big money may be involved. I imagine this will be a problem only with big estates. But, if one takes the reliefs under the Capital Acquisitions Tax Bill into account there, it might be better for the Minister to give the exemption at this point rather than let it work out, remembering that each child will have his £150,000 limit, will he not under the other Act? I am saying this purely to be helpful and I realise the fairly large amount of money that would be involved but I wonder could all this be done in a simpler manner. With all this legislation we are getting very near the stage where the House might have to consider whether or not the Revenue Commissioners be set up as a judicial body, give them general powers and then, subject to appeal to the court, and not try to define their powers. Their powers are so wide now that, perhaps, a new concept of this is necessary but that is a Second Reading speech.
It is, I think.
In other words, set them up as a tribunal and leave them subject to the Supreme Court, give them a general direction.
That is what the legislation gives them all the time.
I know, but it is tying them up also.
Could the Minister throw any light on whether if the portion of a man's property settled by him on himself were to be excluded from liability to capital gains tax, that would provide any loophole and, if so, what loophole?
One of the most significant differences between our legal system, which we have inherited from our association with Britain for so long, is that we have this notion and practice of trusts. These are strangers to the Roman law system that operates say, across the European continent. It might be said that the effect of this would be to discourage people from creating a trust to settle property on themselves and so on. Probably it means one gets a clearer definition and recognition of where property lies if one has not got those interfering trusts.
As Deputy de Valera said, we are arguing here over a very small number of people who create trusts because of the massive wealth holdings they possess. If a trust is created whereby somebody settles property on himself, that is very seldom the end of the trust. It usually carries on to somebody else. It is settled on the person himself for life and passes afterwards to somebody else. To that extent invariably it involves some alienation of proprietary rights which existed before the trust was created. Obviously, there would be little point in the creation of a trust simply to settle property on oneself for life and leave the future to guesswork or to somebody else. Those kinds of trusts are very rare if, indeed, they exist at all.
I was going to ask the Minister whether or not a trust stood up at all if the donor or his wife was involved in it. In actual fact, I do not think there are any trusts like that at all.
Well, very seldom. I simply cannot think of one where it would be created in isolation. Invariably, it is linked with some on-going rights to some other person, or persons, in some cases, yet unborn or unascertained. But there is no worthwhile value—and certainly there will not be in the future—in the creation of a trust under which a donor would simply settle the property on himself.
Take the case mentioned by Deputy Colley where a person gave away one-third to himself, one-third to his wife and one-third to his child. Why would such person give it away to anybody? Why not keep one-third and give away two-thirds? Why have a third in a trust? I cannot understand why one would place a third in a trust. If it was for a wife, why not give it to her? Why put it in a trust?
I would assume that in a case like that the donor might be keeping a life interest and, perhaps, giving his wife a life interest. Why should he be liable to capital gains tax on the life interest he retains in his own property? I can understand why he should be liable on what he is alienating to other people. Of course, the Minister is correct in saying that technically once he disposes of it to, say, a trustee, in trust for himself for life, it is an alienation. But, in real terms, so far as it is held in trust for himself, it is not an alienation. On the face of it, I do not see a loophole in that. If there is not a loophole, I do not think we ought be imposing a tax in circumstances in which, for the purposes of carrying out these arrangements, the man is, in effect, retaining an interest in portion of his property. That he should have to pay capital gains tax on it does not seem to be a reasonable proposition.
We are really engaging now in the realm of improbable theory but I will look at the points that have been raised.
I doubt if it is that improbable or the Minister would not have the subsection there.
Is this not the point of the whole thing? Under the old death duties code there were a whole series of devices, in settlement, in trust and with private companies to escape the consequences. Sometimes if one looks at a thing like this in principle before one gets lost in the words, one gets further. What the Minister is really dealing with in this section is based in the area properly appropriate to the capital acquisitions tax but the trouble in which the Minister finds himself is that in the Capital Acquisitions Tax Bill his limits make it difficult for him. Am I correct in that so far?
Substantially, yes.
That is one of the Minister's problems. What the Minister is trying to do is partly to deal with blocking loopholes well established under old legislation. I shall not open up old sores by saying. Not having abolished death duties, the Minister is afraid that the old incidents will remain, and remain they will. If we look at it that way, one has to ask what is the purpose of the settlements about which we are speaking? In every case in the past they were to evade death duties. The Minister's problem is that they will be adopted again now, not so much to evade capital gains but, in the first instance, the continuing trust will be to evade the contingency of death. If that is the background, then there is no point in resorting to trust merely to avoid capital gains. One has to put something in. One must put in one's provisions. I am not saying one should omit them because capital gains could be evaded by the same devices. But I think you could afford to leave the property that remains with the settler free and tax the fractions disposed of only. One should take care, at the other end, that it is not done in such a way that there could be an escape through the device of the other Bill.
Therefore for that reason a look at the principle of what is involved might be beneficial, whether or not there is need for adjustment between two different Bills, quite apart from the amendment of the section involved here. But this will occur only in relation to large estates and a relatively small number of people. Perhaps the Minister should consider certain powers being granted to the Revenue Commisioners to deal with the abnormally large estates in their own separate rights.
Was this brought in——
Was it above a certain limit, in other words?
To take Deputy Colley's example, is this section devised to prevent a trust being formed that would never fold up? Is that the reason this is brought in? You would have these three and an insurance company could be the fourth and the trust could be held in perpetuity and would never break up and nothing would ever be paid on it. Is that the reason this is brought in?
Our concern is that something might be fabricated which would perpetually postpone any possibility of collection of capital gains tax. If the donor were to reserve a fraction absolutely for himself, if it were under some trust arrangement which limited the total position and benefit of that element to himself, then it would not be caught. This is a rather unreal situation. People do not create trusts just for the fun of it. They are usually engaged in them for avoidance purposes or for the benefit of people who, for very good reasons, should not be given absolute control of property themselves. There are many cases like that. There always will be. We are concerned here with somebody who is alienating his existing property rights to some other person or group and, in that case, there is a disposal of an interest and in such circumstances we say that disposal is taxable.
I can see the distinction and I quite agree with the Minister. If the donor keeps his own absolute interest, even if it is under the name of a trust, this will pass on his death anyway and I suggest it is captured here. It is very easy to devise so that the date will be the date of death. I do not see any logic or wisdom in taxing him for capital gains when, in fact, he does not part with the property. Suppose a man holds a property in fee simple and he disposes of two-thirds, one-third to his wife and one-third to his child, that is clearly taxable. Suppose he keeps a life estate for himself the situation is not really changed. Everything can be collected on death on the valuation and I have no objection to taking it for valuation purposes, but he should not be taxed on the one-third he is holding merely because there is a change of name. If he were selling it would be a different matter. It cannot be postponed beyond his death. We have strayed a little from Deputy Colley's original point, but all these things should be looked at as well. If it is converted it really does not make a difference if he has all the incidence. It is quite different though if he keeps only an annuity and gives rights to others. This needs careful looking at. It certainly intimidates me. We are starting here on a course of legislation that will have very unforseen consequences.
(Dublin Central): I think the Minister should look at the simple trust as we know it. I know there are the trusts Deputy de Valera talks about where an annuity is kept and the rest passes. Where a man allocates a third to his wife, another third to his son and keeps a third himself I cannot see how he could be subjected to capital gains in that simple type of trust. It is different in the case of the more sophisticated type of trust that Deputy de Valera was talking about. I think it would be ludicrous to subject a man in a simple trust to capital gains and exempt his wife and son.
Suppose I have a fee-simple estate and I divide it into three portions and settle one-third on my wife and one-third on my child and keep the other in fee simple, what happens then? What is the settled property?
If a settlor has property divided into three and he disposes of two-thirds under a trust——
Will the Minister take the case where I hold an estate in fee simple or even under a very long lease in which there is one integrated title and the property is, therefore, one unit; in order to effect the particular operation I have to divide the property legally into three parts and substitute for the existing legal instrument three legal instruments or deeds, keeping one part absolutely under the old terms—here we get into all sorts of possibilities of confusion —but I have broken up the property and, if the Minister is right, I have not in fact changed my interest but in point of law there has been a conveyance to myself which is not a trust or a settlement? Where am I?
You retain one-third and give away two-thirds.
But I want to know where I am for tax? Has the Minister got my point? What would the Revenue Commissioners say I am doing? I want to know what the law will be on this.
As I understand the Deputy he says he is the owner of a property, that he has absolute interest in property. He proceeds to divide it into three parts, giving himself one-third, no charge.
I agree with that.
He gives one-third to his wife. I referred to that earlier when I said I was conferring benefit on the wife.
That is a settlement.
Yes, but the wife is treated for capital gains tax purposes as though it was the person himself.
All right. Say a stranger or anyone else.
We will say the wife for the moment. If he gives one-third to a stranger then the charge is on the stranger. If it is one-third to two strangers, the charge arises to the two strangers but not on the portion he retains for himself. If you are the absolute owner of the property——
It is a question of retaining the same interest. There is no change of interest.
Is the Deputy contemplating that you create three leases?
The Minister will have seen that I saw the trap I was laying. If it was on a fee simple it would not have been necessary for me to have an integrating legal entitlement. Suppose I have a 999-year lease of 3,000 acres of good land and that I take that lease and retain 1,000 acres for 999 years and I achieve a partition with the consent presumably of the lessor. If it was fee simple there would be no problem and the Minister's argument would hold. Here is a unit of property and in order to effect that division I will have to have new conveyances. There will be a formal conveyance for myself where it will not be a trust. Under the terms of this section where do we stand?
It makes no difference whether it is a freehold or a leasehold.
Is it the whole property of a settlement?
If you are proceeding to dispose of two-thirds to others you will be paying capital gains tax on what you are disposing of.
It is the disposal of the entire property. What was the entire property at the beginning of the transaction?
The entire property thereby becomes a settlement but if you retain one-third for yourself——
If new leases are put in is that settlement on myself?
No.
If I do it by trust is it a settlement?
If you are creating a trust with yourself as beneficiary the property becomes settled property.
Surely the trust is the fourth person in this case?
If you are a beneficiary with interest given to somebody else then you have created a settled property.
If it is the disposal of the entire property it thereby becomes settled property.
I give the Deputy the assurance that the points he has raised will be examined.
I am not pretending to give an opinion but trying to raise questions for consideration.
There is a danger here of losing sight of the wood for the trees. Could I suggest to the Minister in his consideration of this that he would remember this, which was the basic point I was trying to put: we should not impose a tax on an arrangement whereby a man retains, whether through a settlement or otherwise, an interest in property which he has unless failure to do so would open a large scale loophole for the evasion of tax. That is the simple proposition I put, which I think would be acceptable to both sides of the House.
There is a danger that this subsection may in fact be doing just that, applying capital gains tax to property which a man is in fact retaining simply because instead of owning it absolutely he would thereafter own it under a trust. Unless that kind of arrangement creates a loophole there is no justification for applying tax to it. There is a danger that not only we but the Revenue Commissioners and the draftsmen may be losing sight of the wood for the trees. The Minister ought to reconsider this subsection in the light of that. He has undertaken to reconsider it and I am asking him to bear this in mind, which is the basic principle put by this side and indeed by Deputy Belton. Would the Minister bear this in mind in his reconsideration of subsection (2)?
I will do that.
In regard to subsection (2) and the other provisions relating to settlements is it intended that these provisions will apply to settlements made before April, 1974?
If the Deputy is referring to any benefit that was transferred before 1974 it would not be caught for capital gains but if a benefit is to be transferred in futuro then it could give grounds for capital gains tax.
This makes it all the more imperative to have a change in the wording I referred to earlier about "is a disposal" and about confining it to the operation of this capital gains legislation. If these provisions are to apply to settlements, whether made before or after 1974, and if the wording "is a disposal" is to be retained it seems to me that subsection (2), for example, could certainly affect liability for death duties in cases that are subject to them. Presumably the Minister is not purporting in this legislation to alter the law relating to death duties.
No, I am not.
Does the Minister see my point that it is important to specify precisely to what these things are to apply. In this subsection (2), particularly, the word "is" is very dangerous. Would the Minister accept that?
I will certainly have a look at that word in the light of what the Deputy says. As he knows there is no intention to have a dual liability to tax. We are not dealing with settlements created before the appointed day but we are dealing with the disposal of property after the appointed day. Some of them might take effect as a consequence of settlement made before the appointed day.
The danger of the word "is" is one matter and the other is the evasion of tax or postponement of it for good. Could the Minister provide in regard to the settlor in retaining the part he retains, the liability did not accrue until his death and that then the account could be balanced between all the acts and not to tax the whole lot at the one time? Keep the liability in regard to the settlor until the normal time when he departs. That is another suggestion for the Minister.
It is another suggestion. A totally new field.
On subsection (3) could I refer the Minister to line 5 which says: "re-acquired by him in his capacity as a trustee", does "him" refer to the trustee?
Yes, it does.
On first reading it does not seem to but I think it cannot refer to anyone else. It might be possible to word that subsection in such a way that this is absolutely clear. Could the Minister explain the overall effect of subsection (3) and if possible could he give an example of how it would work? I am particularly concerned about how it works in regard to valuation. There is this provision here:
re-acquired by him in his capacity as a trustee within section 8 (3)
which is a very technical provision. Perhaps the Minister could give an example.
Subsection (3) provides that where a person becomes absolutely entitled to a settled property the trustee will be deemed to have disposed of the property to that person at its market value with a consequent charge to capital gains tax.
It means there would be a charge to capital gains tax?
There could be. The trustees will then be treated as the nominees of that person and any subsequent transfer of the property by them to him will not mean a future capital gains tax charge. The manner in which this result is achieved by the subsection is to treat the trustees as disposing of the property and immediately re-acquiring it as trustees for a consideration equal to its market value at the date when the beneficiary becomes absolutely entitled to it.
This subsection reads:
On the occasion when a person becomes absolutely entitled to any settled property as against the trustee....
I take that to mean that when the trust falls in, if some person becomes entitled as against the trustee the trustee becomes defunct. In other words, the person becomes absolutely entitled to it. Am I right so far? That is a common enough case. If there is a trust and then one person becomes absolutely entitled to the property the trust virtually ceases and the trustee falls out. Am I right in taking that meaning?
Yes.
It continues:
...all the assets forming part of the settled property to which he becomes so entitled....
When the property falls in to that person absolutely it is all the settled property to which he becomes entitled and falls in. If that is so I will go on:
shall be deemed to have been disposed of by the trustee....
It will be disposed of by the trustee to him but if it is to be deemed to be disposed of by the trustee for the purposes of this Act it is attracting a special tax. It seems that what is being said so far is that where there is a case of settled property which falls into one ownership and the trustee becomes discharged that circumstance is to be deemed, for the purpose of this Act, as a disposal by the trustee to the person absolutely entitled within the meaning of this Act and attracts tax. Am I right?
That is right.
It continues:
and immediately re-acquired by him in his capacity as a trustee within section 8 (3) for a consideration equal to their market value.
First of all he has taken the property. Is he chargeable for capital gains on that?
The trustee is.
No, the recipient?
But the trustee is deemed to be the nominee of the recipient for the purpose of paying tax and ultimately if there is an absolute transfer from the trustee to the recipient there is no further charge because the capital gains tax has been paid already.
It says:
re-acquired by him in his capacity as a trustee within section 8 (3),
I do not understand why it must be worded this way. Am I right in saying that wherever a trust terminates and the property falls in from the trustee to the beneficiary there is a tax paid? What does the rest of the section mean? In the phrase "re-acquired by him" who is "him"?
The trustee. The effect of this is to eliminate such capital gain as may have been assessed at the time that the trustee as nominee paid the tax and if thereafter the property is ultimately absolutely transferred to the beneficiary then no liability to further capital gains tax would arise on any gain which was made up to the original date.
The Minister wants to block another loophole, namely the loophole that the property actually falls in beneficially but if it was left in the name of the trustee, payment of tax could be postponed indefinitely. I suppose one cannot object to that.
It may seem an elaborate way of dealing with the situation but one finds that the ingenuity of tax avoiders is such that one must express the provisions in a complicated way.
This reminds me of rat catchers blocking holes.
I would not call an avoider a rat.
I am talking of blocking the holes.
In regard to subsection (4), paragraph (b), I think I know what is designed to be achieved by the words "...shall, if the trustee had first acquired the property at a date earlier than the 6th day of April, 1974, be deemed to be at the earlier date". However, I would appreciate the Minister spelling out what is intended to be achieved by the paragraph.
This deals with the date and allows for an apportionment over the time and, accordingly, the gain, if the asset was acquired before 6th April, 1974.
Is this to ensure that liability would not arise in respect of a date prior to 1974?
Yes. The Deputy will recall amendment No. 17.
There is a small point on subsection (5) which reads:
On the termination at any time on or after the 6th day of April, 1974, of a life interest in possession in all or any part of settled property, the whole or a corresponding part of each of these assets forming part of the settled property...
My query relates to the word "each" as in each of the assets. Why not say the whole or corresponding part of the assets? Would that not be the normal phrase to use?
The Deputy will appreciate that each asset will have to be considered separately in order to calculate what loss or gain might have arisen in relation to it.
But the nature of the asset would not make any difference?
That is so.
Is it not the proportion of value that is of concern?
Obviously, the asset could be of different types—ingredients of valuation are based on the times of acquisition and so on.
This is only a small point and I shall not pursue it but it seemed odd to me. Subsection (6), paragraph (a) reads: "a life interest which is a right to part of the income of settled property shall be treated as a life interest in a corresponding part of the settled property." Is the word "corresponding" what is intended or is it intended to be in a proportionate part?
That corresponds to the part of the income.
Is it intended to convey proportion?
Yes.
The same proportion?
Yes.
Perhaps "proportionate" would be a more appropriate word. Would the Minister explain subsection (8)?
This subsection ensures that where a trust is wound up in whole or in part, any loss which has accrued on the property and which cannot be set against gains accruing to the trustee is to be treated as an allowable loss accruing to the beneficiary of the property and available for set off against gains accruing to him. It allows the beneficiary to use the losses against liability. Deputy Lalor would not accept that I was operating to the benefit of the taxpayer but I am.
I suppose the Minister must do so some time.
We may not get that impression when the taxpayers' party is formed as will happen before the Minister is finished.
I shall be leading them.
There will be a big and popular movement against taxation.
Not against capital taxation.
No, but taxation is hitting other areas.
In order to make my point on subsection (9) I must read the subsection:
If any amount of capital gains tax assessed on the trustees, or any one trustee, of a settlement in respect of a chargeable gain accruing to the trustee is not paid within six months from the date when it becomes payable by the trustees or trustee, and before or after the expiration of that period of six months the asset in respect of which the chargeable gain accrued, or any part of the proceeds of sale of that asset, is transferred by the trustees to a person who as against the trustees is absolutely entitled to it, that person may at any time within two years from the time when that amount of tax became payable be assessed and charged (in the name of the trustees) to an amount of capital gains tax not exceeding the amount of capital gains tax chargeable on an amount equal to the amount of the chargeable gain and, where part only of the asset or of the proceeds was transferred, not exceeding a proportionate part of that amount.
I have another point to raise on the subsection but the first one is, how is a person assessed and charged in the name of the trustees? What precisely does that mean?
The primary liability here would lie on the trustees in these cases. They might pass property to the beneficiary. It is primarily designed as a tax avoidance clause to ensure that on the winding up of a trust liability to tax is not avoided. This is done by empowering the Revenue Commissioners to assess and charge the beneficiary on the amount of the capital gains tax applicable to the assets which were held by the trustees and by the trustees transferred to the beneficiary. Such an assessment may be made within two years from the time the tax charged on the trustees became payable. The tax charged is on the trustees.
I appreciate that but what I am interested in is how is a person assessed and charged in the name of the trustees, in other words, the beneficiary. How is he assessed and charged in the name of the trustees? What does that mean in practice? How is it done?
The charge is on the trustees and is chargeable on the trustee assets if the trustees transfer the assets to others. It still remains a tax which is payable by the trustees. The trustees cannot avoid the liability simply by transferring their assets to the beneficiary.
I appreciate that but if the beneficiary is assessed and charged in the name of the trustees——
You could have a situation in which a beneficiary might have certain allowances and certain rights of his own and possibly losses of his own on other property which would be outside the trust. They could not be set off against the liability which arose on the original trust which was being broken up. That is the reason why we speak about the charge being in the name of the trustees. There will be no more right to offset anything against that liability other than what already existed within the trust itself.
The form of assessment would be issued to the beneficiary, Mr. X, in the name of So-and-So, the trustee—is that the way it is done? I am questioning this because I do not think I have ever seen a phrase like this in legislation before.
I would not say I have any more familiarity with the usage than the Deputy because I have not, but he will see the necessity for doing it in this Bill. If it were a tax charged against a beneficiary whom we will call B, and the trustees are A, the tax charged is against B, and B might be in a position to claim certain allowances which would not be available to A as the trustees.
That might be achieved by a different wording. I am slightly concerned at the technical problem which may arise on foot of this phrase of charging somebody and perhaps suing him in court in the name of the trustees. The Revenue Commissioners may run into a little difficulty with that. I would urge the Minister to have it reconsidered. If the only point involved is to ensure that the individual cannot claim his personal allowances in the way of losses, and so on, that might be achieved in some other way. However, that is a matter for the Minister and his advisers.
I want to refer the Minister now to the phrase immediately following those brackets. In the context it reads "...that person may at any time within two years from the time when that amount of tax became payable be assessed and charged (in the name of the trustees) to an amount of capital gains tax not exceeding the amount of capital gains tax chargeable on an amount equal to the amount of the chargeable gain..." I think the Minister will agree that that is somewhat unwieldy, to say the least of it. What I want to know is if that portion coming after the brackets is equivalent to the amount of capital gains tax so assessed on the trustees. Is that what it means?
Yes. It also says that it cannot exceed the amount equal to the amount of the chargeable gain. I would find it hard to think of circumstances in which it could exceed such an amount.
I suggest that the wording might bear looking at again to make it a little clearer. One has to read it, reread it and re-reread it to try to make any sense of it.
And does that not make it much clearer at the end?
We had an amendment earlier but I do not think we had an amendment to subsection (11). Am I right in saying that?
No, we had not.
The Minister will see that in subsection (11) we have the phrase in brackets "...(and in particular where settled land within the meaning of the Settled Land Act, 1882, is vested in the tenant for life and investments representing capital money are vested in the trustees of the settlement)...". Does that fall into the category in which in a previous amendment the Minister deleted the reference to——
The Settled Land Act, 1882.
It is not precisely the same wording but I want to draw his attention to it because it may be that on the same basis as he deleted the last reference to it he should be deleting this.
The Deputy will recall that in the other case it was considered that the reference was unnecessary because we were dealing with disposals by will. Here we are not dealing with disposals by will and I assume that is why the reference is considered to be necessary here.
The substance of the section is that where part of the property comprised in a settlement is vested in one trustee or several trustees and part in another, they shall be treated as together constituting and, in so far as they act separately, as acting on behalf of a single body of trustees. Why is this provision necessary?
It is to ensure that one has a system which avoids fragmentation and that one gets a total and unified view of the handling of property. If we had not got this, there would be a possibility of fragmentation and, as a consequence, possible avoidance of tax.
Can the Minister easily visualise a situation where part of the property comprised in the settlement is vested in one trustee and part of it is vested in another trustee, comprised in the one settlement?
It can happen; it is not common but Deputy de Valera has already spoken about closing the doors.
All these peculiar subsections are based on some case in the files of the Revenue Commissioners and some experience has prompted them. Subsection (11) is prompted by the fact that a common type of settlement would be a settlement on the tenant for life and trustees for the remainder of the settlement. Obviously, it is a natural administrative thought. It is broadened by the words quoted by Deputy Colley. It is difficult to visualise it in a practical case other than the case put by the Minister in parenthesis. The case referred to in parenthesis is a common enough one and the Minister has said that this is to block a loophole but I should like to know if it is purely a paid provision for administrative convenience. It is not for blocking a loophole.
It may be for blocking a theoretical loophole.
I prefer to bolt the door before the horse goes.
It is purely hypothetical and for administrative convenience.
The Deputy is right when he visualises that this rule will apply where land is vested in a tenant for life with the power of sale. The proceeds of sale are invested in other assets by the trustees of the settlement.
That is the only one I can visualise.
I can understand the Minister's generalisation but is it necessary to have this subsection?
It is desirable because it is the only way one can get a global view of assets held within certain circles and keep a track on the assets. That may be called administrative convenience on ensuring that avenues of avoidance are not open.
Question put and agreed to.
SECTION 16.
I move amendment No. 19:
In page 18, subsection (4) line 11, to delete "a claim for".
This amendment is consequential on the deletion from section 6, the alternative charge section, of the references to the making of claims by taxpayers. I propose that section 6 will now be applied by the Revenue without a claim having to be made by the taxpayer.
That is something we urged on the Minister and we are happy to accept it.
Amendment agreed to.
Question proposed: "That section 16, as amended, stand part of the Bill."
Subsection (1) says that an individual shall not be charged with capital gains if the amount on which he is chargeable to capital gains does not exceed £500. This seems to state that he will not be chargeable if he is chargeable. The words "chargeable" used in both contexts seem to be wrong. In this regard I should like to refer the Minister to subsection 1 of section 17 which refers to a gain not being a chargeable gain in certain circumstances. How can a person be chargeable and not chargeable?
He is chargeable under section 5 (1) which states that the total amount of chargeable gains accruing to the person chargeable in the year of assessment shall be subject to capital gains tax. We cannot ignore the charging section.
The Minister does. It happens in subsection (1) of section 17 to which I have referred.
No. It is a chargeable gain. All gains are chargeable gains unless certain allowances are given and in this section we are stating what the exceptions and reliefs are.
The Minister is correct. Section 5 defines what is a chargeable gain and it goes on to state that if that gain does not exceed £500 it is not to be collected. However, Deputy Colley is also right when he refers to the wording used in this section. Would it not be better to state that the individual shall be exempt from payment of capital gains tax for the year of assessment? The distinction is that section 17 (1) concerns property while tax is under consideration in section 16. I believe a compromise can be reached by an acceptance of Deputy Colley's point and using the words, "shall be exempt from payment", instead of, "shall not be chargeable to capital gains". That would remove the ambiguity.
I can recall being reprimanded as a student when I said there was always virtue in compromise and I was asked if that was universally true. In the light of experience I can say it is not universally true. There are some matters upon which one cannot compromise. I am not saying that this is one of them. Section 5 imposes a charge on all gains and the only allowances given are losses which may be set off against gains. The only argument between us is whether the words "an individual shall be exempt from payment of tax" should be put in instead of "an individual shall not be chargeable to capital gains tax".
It would make what the Minister is saying clearer. I know what is intended by the subsection. We will not push the Minister at this stage but, perhaps, he would look at the matter.
Another way of putting it would be "shall not be chargeable to capital gains tax on the first £500". We could also say "shall be exempt from payment on the first £500". At this hour I should not like to say which phrase is clearer.
It means anyone can make £500 capital gains in any year on which there is no charge.
It could be said "shall be exempt from payment." I wonder if Deputies have noted that the heading of the section is "Exemptions and Reliefs".
In subsection (3) it is stated:
In the case of an individual dying in the year of assessment, this section shall apply with the substitution for the reference to the individual of a reference to his personal representatives,
The remainder of the subsection reads:
and the amount of chargeable gains shall be that on which the personal representatives are chargeable in respect of gains accruing before death.
Will the Minister state why these words were added?
It is to avoid an interpretation being put on the section that the personal representatives will be chargeable only in respect of gains accruing after death on the estate left by the deceased. There could be an accrual of gains before death which were enjoyed by the deceased and this liability would be assumed by the personal representative. It was put in to avoid somebody instituting the High Court action Deputy de Valera and myself want to avoid.
If property of the deceased remains in the hands of representatives, if there is a dramatic change in the market in a very short time and the assets are disposed of by the personal representatives, is there a period after death where capital gains will be involved?
Yes. On the other hand, there could be a loss and that would be set off.
The subsection states that the personal representatives will be chargeable in respect of gains accruing before death. Is the Minister limiting it to gains accruing before death? If a man had capital gains of £450 and was not chargeable but if he had shares in which there was a sudden boom after his death, would the capital gains be limited to those accruing before death? If the words "before death" were not there, it is quite clear that if the estate were sold in the week after death capital gains would be payable on the year of assessment.
We are dealing with the case of an individual dying in the year of assessment. With regard to anything accruing after the date of death——
There is no danger in the words "before death"?
I do not think there is. We are simply transferring the liability to the personal representative. As I said earlier, it might be said it is unnecessary because I do not think anyone could dispute that the liability passes to the personal representatives.
My original question was whether the words were necessary.
My additional question was whether they were dangerous.
I consider it desirable to have them there but I am not sure if they are necessary. However, it gives less occasion to challenging the section by having them there than by leaving them out.
Subsection (4) provides that relief on the first £500 of gains to be exempt from capital gains tax will be withheld in the various cases mentioned in the subsection under sections 6, 26 and 27. Would the Minister confirm that where such relief is withheld in accordance with this subsection it will be withheld only in the year of assessment in which the relief under sections 6, 26 and 27 is given?
Each year would stand on its own.
Therefore, the with-holding of relief would apply only to the year of assessment in which the particular section operated.
Question put and agreed to.
SECTION 17.
Amendment No. 20 in the name of Deputy Colley. Amendments Nos. 27 and 29 are cognate and might be discussed with amendment No. 20.
I move amendment No. 20:
In subsection (1), page 18, lines 18 and 19, to delete "consideration for the disposal" and substitute "gain".
The object of this amendment is fairly fundamental to this Bill. It is to assess capital gains tax on the amount of the gain rather than on the amount of the consideration for the disposal. In this Bill and particularly in this section we are making the criterion for chargeability the amount of the consideration. I understand that in the capital gains tax legislation in Britain, the criterion is the amount of the gain. I would suggest to the Minister that this is a more logical approach and that a number of anomalies can arise by accepting the approach in the Bill of basing the criterion on the amount of the consideration. As an example, under the Bill as it stands, a person might buy a farm for, say £10,000 and might sell it for £45,000. The amount of the capital gains tax he would pay on the £35,000 gain under the Bill is nil. But, on the other hand, a person might buy a farm for £45,000 and sell it for £55,000 and be liable to capital gains tax on the £10,000 gain. This arises because the amount of the consideration is the criterion used in the Bill for assessing the basis of the capital gains tax. I suggest it is more logical to approach the liability to capital gains tax on the basis of the gain rather than on the amount of the consideration. The very nature of the tax itself, given to it in the Bill, is capital gains tax. Surely a tax should be levied on the gain. If one gets oneself into the area of the amount of the consideration, quite a number of anomalies can arise. I would strongly urge the Minister to accept the change that is involved here in assessing the tax on the gain. It seems to me to be not only more logical but, perhaps, more equitable if, in fact, it is a capital gains tax with which we are dealing.
I am sorry that I am unable to agree to accept the amendment because it would play into the hands of the exceedingly wealthy and confer no benefit on the ordinary person.
For instance, under section 17, there would be no charge on the disposal of a chattel where the gain, as distinct from the total price, was £2,000. Under section 26 any person on retirement from business would be free from capital gains tax if the consideration did not exceed £50,000. Deputy Colley seeks to substitute gain.
Yes.
So, any person on retirement from business would be free from capital gains tax if the gain did not exceed £50,000.
I am willing to discuss with the Minister the question of the thresholds but the Minister will appreciate that what I am at here is the principle of whether the assessment should be on the gain or on the consideration.
That does put a different complexion on it because the amendment seeks the deletion of "consideration" and the substitution of "gain". Let me just deal with the implications of Deputy Colley's amendment. Under section 27 a disposal within the family would be free of capital gains tax if the gain did not exceed £150,000.
I was well aware of that when I put down the amendment but I thought the Minister was the person to decide the thresholds.
It seems to me that the important thing in dealing with capital gains tax is the gain.
Agreed.
Because that is the profit we are seeking to tax. The major argument with regard to capital gains tax is that it is analogous to income. A gain in certain situations is analogous to income and tax is imposed on income according to the size of the net income, not the gross income. To some extent I suppose it could be argued that "consideration" should be regarded as the gross figure but we are taxing here the net profit made and not the gross profit. It is the gain which represents the net profit. I think the gain is the most important element to try to determine, and to tax that.
That is my case.
I do not think it is because there could be a situation in which one could have quite a sizeable amount which would avoid tax were one to adopt the proposals suggested. For instance, in the case of a disposal of firm or business, the amendment would almost eliminate capital gains tax in many of those cases. Taking the proportion of gain into consideration at say, 20 per cent, a firm or business disposed of for up £75,000 might not be taxed at all. If the rate of gain taken into consideration was 50 per cent, the value of the disposal could amount to approximately £300,000. I fear that the adoption of the amendment would put outside the charge quite wealthy people. They could arrange their affairs in such a way that a fairly rapid turnover of the assets would avoid liability to tax at all.
The Minister's case I presume, is based on the existing thresholds in the Bill.
Yes.
On the pay related principle here, as I understand it what Deputy Colley is saying—I do not think the Minister feels very strongly against it—is that the exemption should apply to the capital gain rather than to the amount of the consideration. That is the fundamental point.
But the tax should be levied on the whole principle.
The Minister has done that in section 16. He has given an exemption on the capital gains tax. We come then to section 17—I already touched on this point—and under subsection (1) the gain accruing by the disposal of an asset not exceeding £2,000—that is, the moveable asset— will not be chargeable. I am wondering if a better approach would not be if the Minister decided a suitable threshold at which he would exempt in the same way as he exempts under section 16—it will probably be a higher level—in other words, to attach the tax to the capital gains. That is the first point. There is a kind of change of philosophy between these two sections and that bears out what Deputy Colley said.
The next point is something the Minister said. After all, what matters is the gain. That is what the Minister is after. It does not matter whether it is a chattel being disposed of for less than £2,000 or property unexempt being disposed of for £2 million, in both cases there is a standard for assessing and charging a capital gain. If the Minister charges according to the same standards and then brings in a measure of exemption he will get all his gain on the £2 million and he will exempt the equivalent of the £2,000. It is a question of principle of approach here.
To recapitulate, in section 16 the Minister adopts the principle of charging but giving an exemption where the tax chargeable does not amount to more than £500. In section 17 (1) he changes his approach. Under that one will be chargeable to capital gains but, if the capital gains tax does not exceed £500, under section 16 one is exempt.
Not the capital gains tax but the capital gain—if the capital gain, not the tax, does not exceed £500.
That is right.
It is related to the gain.
It is related to the gain, that is the point. But under this section it is related to the amount of disposal and, if the Minister is right in his point that he is interested only in the gain, then by continuing to relate to the gain he could get the same effect and there will not be that confusion in the £2 million case. I think that is the net point at issue.
Clearly consideration is more easily identifiable than the gain in all cases.
I agree. In fact, in order to assess your gain, you must know the consideration.
That is the point.
Once the consideration is a known, stated thing it is readily identifiable and, for reasons of administration, there is a great deal to be said for specifying that items of consideration should be looked at rather than gain. If it is gain one has to look at every transaction to see wherein a gain evolved at certain separate levels but, if one takes consideration, one does not have to look at every transaction.
I would like to make it clear that this and the cognate amendment I have down were designed to get at this principle of dealing with gain rather than the consideration. As I indicated, I did not attempt to set new thresholds in each of these cases because, if the Minister accepted the principle, he would set new thresholds himself and, in order to assess them, one would have to have a good deal of information available probably only to the Revenue Commissioners. Certainly it would not be available to me. In so far as the Minister suggested these amendments would create all sorts of huge exemptions, while he is technically correct, that is clearly not what is involved here. It is the principle that is involved here and, if the Minister thinks about it, I suggest he will find it is more logical, avoids anomalies and even finds the kind of evasion that would arise under section 17 (2) (a) where tax is being set off against consideration. That is completely illogical. I did give an example of one anomaly that arises.
From the point of view of administration, the Minister says it is easier to deal with consideration. I suggest that in order to find out the consideration you must know the gain and it does not really matter from the administration point of view whether one goes for consideration or for gain, you still need two items of information, original value and disposal value. You know both of these whether you are going on the basis of consideration or on the basis of gain and, that being so, I do not think there is any administration advantage to suggest there is a great deal of logical advantage and control in this because, if you want to give the exemption, you must determine the exemption in relation to the gain. If you determine the exemption in relation to the consideration it is totally unrealistic and you could have a situation in which somebody dealing with a transaction under £2,000 could have a much bigger gain as against somebody dealing in a consideration much greater than £2,000. Yet, the Minister is exempting one and not the other and, under subsequent sections where the same principle is applied, you get much greater anomalies like the one I illustrated of the man making a gain of £35,000 in one case being exempt from tax and, in the other case, a man making a gain of £10,000 is liable for tax. These various anomalies can be avoided if one accepts the principle of these amendments of working on the basis of gain rather than consideration.
I suggest it is illusory to think there is any administration difficulty in going for consideration and the acceptance of the principle of going for gain rather than for consideration gives much greater control in regard to exemptions and means you can pinpoint precisely how much exemption you will give whereas under the provisions of section 17 and other similar sections you really have no control over the kind of exemption you are giving because you are relating it to the consideration whereas the tax is, in fact, on gain so that to exempt on the basis of consideration bears no relationship to what should be the basis for the tax. I suggest, therefore, that the Minister ought to accept the principle of these amendments. I do not think there are any great problems from the point of view of drafting. There may be some consequential amendments needed and, of course, the exemption limits would have to be changed if we were adopting this. I suggest that the Bill would be far more acceptable and far more logical if those amendments were accepted.
Progress reported; Committee to sit again.