The Minister rightly pointed out that there are two sides to this. He was perfectly right when he pointed out losses and I hope he will not charge me with inconsistency if I point to another aspect, having said before 6 o'clock that, perhaps, this was an encouragement to invest in State funds. That statement must be qualified by "in part" and, furthermore, the Minister's drawing my attention to the fact that it cuts both ways brings me to make the following point. This section would cover, for instance, the issue of a government loan, I take it?
Private Members' Business. - Capital Gains Tax Bill, 1974: Committee Stage (Resumed).
Question again proposed: "That section 24, as amended, stand part of the Bill."
Yes.
Heretofore it has been fairly standard practice to, say, issue a loan probably at a fair market percentage and a small discount. The loan would very often rapidly appreciate. Say you issued a loan at 98, if the terms were favourable you might find it temporarily going up to 100 or 101. I can see the Minister making the point that we do not want to have any gambling in this, that a person might buy in at 98 and then get out at 101. I believe the market would regulate itself.
The more serious aspect of the exclusion of such a loan as a capital asset is that in a period of rampant inflation, and inflation is very largely an international problem aggravated by a local problem—we forget the local problem—and inflation is something that is very much there, anything of fixed value and a fixed interest fund is bound to depreciate rather rapidly. That will entail a fairly large capital loss I imagine and I wonder if it is altogether fair to exclude such funds as capital assets. I am forced to revise, where that type of fund is concerned, the suggestion I made before the debate was adjourned that this section would be an incentive. If the Minister cares to argue against me that it is a disincentive I might have to capitulate.
It has been argued from opposite that property being taxed is a disincentive to investment. If that holds good, then that disincentive would not apply in respect of Government securities by virtue of section 24. Of course, in the market place Government securities, like any other securities, can vary in value. The most recent experience is that they have been appreciating rather than depreciating but, taking one period with another, Government securities are valuable things to hold. Profits can be made from them but that will not be caught within the capital gains code. People buying into Government securities today, when the market is far from being on top, could make a very handsome capital gain and not be required to pay tax on it. That, therefore, would be the incentive to which Deputy de Valera referred earlier.
I refer the Minister to subsection (4) (b):
an annuity granted otherwise than under a contract for a deferred annuity by a company as part of its business of granting annuities on human life, whether or not including instalments of capital.
Such annuities are according to sub-section (4) not chargeable gains. Could the Minister tell me why the exclusion "otherwise than under a contract for a deferred annuity"? Would a contract entered into by a self-employed person with an assurance company for what is from his point of view a pension be a contract for a deferred annuity which would be excluded?
I refer the Deputy to section 20 subsection (1). That deals specifically with life assurance and deferred annuities on the life of any person. We are providing in this section that no chargeable gains shall accrue on the disposal of rights to an annuity granted otherwise than under a contract for a deferred annuity by a company as part of its business of granting annuities on human life, whether or not including instalments of capital.
Yes, but is there some contradiction between section 20 subsection (1) and this subsection, or what is the purpose of the exclusion in this case of a contract for a deferred annuity?
Section 20, as I have said, deals with the annuity of the type to which Deputy Colley refers and which is already specifically exempted.
Then why the reference here to a contract for a deferred annuity?
It is an annuity otherwise than under a contract by a company as part of its business of granting annuities on human life.
I see. In other words, a contract for a deferred annuity entered into with an assurance company would get the benefit? The only thing that is being excluded here is a contract for a deferred annuity that is entered into, say, with a private individual, not with an assurance company?
That is right.
I see. Presumably the reason for that is that it is open to abuse.
Yes, exactly.
But the position is that a genuine provision for a pension by a self-employed man arranged with an assurance company——
In the ordinary course of insurance business—exactly.
——would not be subject to capital gains tax.
No.
Or the disposal of the rights under it would not be subject to capital gains tax—is that right?
The person originally entitled would not suffer a capital gains tax.
That is what I mean—— yes.
So far as section 24 subsection (2) paragraph (c) is concerned, do I understand this to mean that a sum obtained by way of compensation or damages for injuries sustained by an individual's property is subject to this tax and, if so, is that not unreasonable if the purpose of the damages is simply to restore him to his pre-accident situation?
If the compensation in those circumstances is reinstated in an asset similar to the property destroyed then no gain would arise. Otherwise, it would be treated as a disposal. That does not arise here. This deals purely with the question of compensation in respect of injuries to a person.
But, by virtue of the fact that it excludes references to property, is there not an implication, reading this subsection on its own, that damages received as compensation for injury to property——
There is a separate section which deals with damage done to property and the reinvestment of compensation. We have already dealt with that. It is section 8 subsection (2).
I think it comes up again in one of the Schedules.
It would, yes.
On section 24 sub-section (1) paragraph (b), do I understand the position to be that if somebody buys Government securities and makes a loss, he cannot set off that loss against his other assets?
It would be fundamental to capital gains legislation that if gains are not taxable, losses in similar circumstances are not allowable either.
Would the Minister not feel that this discouragement of investment in Government securities in view of the fact that most people who bought them from time to time have suffered heavy losses?
No. I would advise them to hold on to them, to wait until the market improved. If anybody in 1974 had the wit to ignore Fianna Fáil's advice they would have made an appreciable capital gain on such Government securities.
Like land bonds.
If the Minister had had the good fortune in his practice or otherwise to have been landed with a load of paper that goes in the name of land bonds—I know some people who got last week a load of paper with the name "land bonds 1974, 12½ per cent" for land that was taken off them in December 1974—and if he went to his stock broker yesterday with them and was told that the best price that could be got for them, on the Dublin Stock Exchange, if he could get anybody to buy them—and nobody will buy the rubbish except the Government stock broker—is £81.50, would the Minister not feel that it is somewhat unfair in those circumstances that a person has to stand a capital loss of 18½ per cent on the very day that he got the wretched things? Is there not some justification in those circumstances for allowing him for the very serious loss that he is suffering in having to take land bonds that are currently being doled out by the Land Commission?
This is an argument against the system of compensating people for land bought under the Land Acts. The Deputy's colleagues issued more land bonds than have been issued by this Government.
Naturally. We were in office for a great deal longer than the Minister was and the problem of inflation was not nearly as acute, as the Minister knows.
Is the Minister also aware that when land bonds were issued in previous years they were standing at or very close to par? On the very day they are issued now they are being traded in on the Dublin Stock Exchange at £81.50 or £81.75.
I am not so aware.
If the Minister would care to open any of the newspapers today he would find that 12½ per cent land bonds were traded in on the Dublin Stock Exchange at £81.50 to £81.75. I know the Minister does not care a rap for the misfortunate people who have to take them and who have to suffer an enormous loss after having their land confiscated.
Apart from land bonds, so far as ordinary Government securities are concerned, securities issued some years ago—perhaps as recently as six or seven years ago when the going rate of interest was 6½ or 7 per cent—are now standing at figures ranging from £55 to £60 with a consequential capital loss of £40 to £45 on every £100. If those people are not able to take the Minister's cynical advice that they should keep the bonds or the securities until such time as they mature 20 years hence, or whenever, because of the economic situation in which the country is, and in which so many individuals are, they have to sell them at a capital loss of 45 per cent or more. Does the Minister not feel that the enormous losses which they suffer through having to sell such securities at such bad prices should be offset by allowing them to be put against any gain they might make on the sale of more useful or lucrative securities than Government loans?
Before that idea could be entertained you would have to make gains on Government securities taxable. You could not introduce the idea of allowing losses to be set off if gains were not taxable as well.
The Minister could exclude land bonds from this and let them claim the gains.
This is one of the problems which arises from the interlinking of all this legislation. There are two separate issues here. One is the question of land bonds which Deputy O'Malley raised and the separate issue he raised about Government securities. He made the point much more precisely than I did when he adverted to it earlier. The Minister will recollect that on another occasion recently the question of land bonds was raised. It would be totally irrelevant to go into the details. Here is a very strong case for excepting land bonds from this list.
Deputy Colley has just made the very important suggestion that this problem could be met by the Minister by omitting the paragraph which specifies land bonds. I wonder is that in itself sufficient. One would have to be careful to ensure that it was not captured, so to speak, by something else, possibly by section 24 (1) (c) or by some general provision elsewhere in the section. I wonder would the Minister consider that because there is obviously a very specific case here. I suggest that he should consult with his appropriate colleague in the Government. All our legislation becomes very much intertwined in matters of this nature.
Deputy O'Malley mentioned the history of Government securities and capital losses. The Minister said you would have to charge capital gains on Government securities if you were to allow for losses. Suppose we accept that. The probability of losses on securities of the nature mentioned by Deputy O'Malley is infinitely greater than the probability of gains. The blocking of what you might call a quick take at the point of issue is only blocking the speculator, not the investor. I mentioned the case where there was a favourable float and a temporary appreciation, and that is the only likely time at which a gain can occur. It is a speculator who will be involved rather than a bona fide investor. I, for one, would not object very much to taxing that gain.
In the case of compensation, or a pension, or a gratuity, where there is a question of a genuine investment in Government funds which are supposed to be safest and best, the situation is different. There is a rapid deterioration, not through any loss of reputation by the State or the Government, but through the inevitable action of inflation due to two factors also mentioned by Deputy O'Malley, the inflation in money values and the consequent depreciation of any settled sum, which is your capital, coupled with the inflation of interest rates. These two things conspire to mark down the stock and this means a considerable capital loss.
I know the Minister can very easily tell me that is not how I started off. We are here in Committee to examine the possibilities and the Minister and the Opposition often change their point of view in the face of argument. I must confess that having started one way I feel myself coerced by the arguments of Deputy Colley and Deputy O'Malley to change my view. I earnestly recommend to the Minister that he should consider what is to be gained—that is a pun—from the point of view of the Minister or the Revenue Commissioners by having this section in the Bill and what is to be lost by removing it.
Prize bonds, of course, are a problem in themselves. They are a fixed payment at a particular time. How the fund goes is the Minister's problem, in a sense. I am thinking in terms of the individual taxpayer, the citizen, rather than the Government. Whether it is prize bonds or land bonds or any of the things listed here, perhaps there could be a revision of that list following another look at whether such a section should be in the Bill at all. This might be a useful exercise.
We have followed well established practice in relation to Government securities not just in Ireland but elsewhere. I certainly do not mind considering the matter in greater depth but we are satisfied that, on balance, this operates to the benefit of the investor.
I appreciate the fact that the Minister says he has followed standard practice. I do not doubt that for a moment. As Deputy O'Malley has pointed out, standard practice is now irrelevant to a large extent. There was a time when standard practice was very relevant because of stability. Here we have an absolutely unstable moving situation which is affecting us not only here but in the whole environment and therefore it is not likely to be brought under control quickly. We do not quite know in what direction it will go, so that the plea of relying on standard practice leads me to ask the Minister to consider whether maybe this is not the time to ask the question: "Do we depart or should be depart from standard practice?"
I am not going to open an economic argument at this stage——
And neither do I wish to.
——but remember that if we follow the pattern elsewhere, as I am sure we will, the rate of inflation will decline and that will mean in that situation capital gains on Government securities compared with their current prices, so that the very amendment sought here might operate to the disadvantage of investors.
It would, of course, be possible to amend the Act when that happy time arrives.
If and when—it is better to deal with things as they are at the moment.
Land bonds are in a particular situation or are a particular category of Government securities in which it is virtually impossible for anybody ever to make a capital gain. Everyone who has ever had the misfortune to hold land bonds of any kind loses and loses heavily on them. Can they not be excluded in view of the fact that there is no possibility of a capital gain? The people who get them invariably do not want them but are lumbered with them because this is the method of payment. The people who are inflicted with them are people who had a valuable asset which in the normal course of events was growing in value every year and instead they are given a paper asset which declines in value every year. Everybody who holds them loses on them. They are to a great extent irredeemable, so that the question of waiting until they become redeemed is just not on for most people. Could they in those circumstances not be excepted from this Bill at least to the extent that losses sustained on them would be allowable against any capital gains made elsewhere in a particular year?
I think the Minister should understand that nobody voluntarily buys land bonds but they are doled out with these things by the Land Commission against their will. One does not buy them and in spite of the fact that one does not buy them and does not want them and that one makes a huge loss on them every year one holds them, still they are not allowable against any other gains you might make. Surely it is only equitable that because the system here demands that some people who have land taken from them by the Land Commission have to be paid in these virtually non-negotiable pieces of paper the heavy losses they sustain should be recognised by the State for the purpose, if not of relieving them directly of tax, of offsetting some other or any other capital gains which they might be fortunate enough to make.
This is really opening a land bond debate again on a Bill which by this clause is not treating them in any different way from the way they are now treated.
That is no answer to the point put. We all know that they are wrong and want to see an end to them but we are faced with the fact that, unfortunately, many people hold millions of pounds worth in paper of these things and are losing money with every week that passes. Why should they not get some relief? We are not asking that they should be exempt from capital gains tax. All we are asking is that the Minister recognise the reality of the situation, that they entail, invariably and constantly, for the people unfortunate enough to have them a continuing annual loss and that loss should be allowed against any other capital gain in the year that the person concerned might be fortunate enough to make. It is very unfair that if a man loses £2,000 on land bonds in a particular year and makes a gain of £1,000 on some other form of security, he should have to pay tax on the £1,000 gain and get no relief and can offset in no way the £2,000 loss which he makes through no fault of his own.
Again, I would remind the Minister that land bonds are not bought by individuals as speculative ventures. They are inflicted on unfortunate individuals against their will by the Land Commission and they are quite distinct from any other Government security because any person in the State is free to go out and buy a Government security if he wants to, but nobody buys land bonds, but many people get inflicted with a lot of them every year and suffer very heavily as a result. There is the example I have given of someone to my knowledge being given within the last few days 12½ per cent land bonds in payment for land taken from him last December because the Land Commission allege that it is the date of acquisition of the land which is the relevant date and that the new bonds were not in operation in December, 1974, with the result that this person is given bonds which are worth £81.50 or £81.75, less commission, if you can sell them at all. If there was any case of downright blatant confiscation of property, that is it, when you are given pieces of paper in payment for your valuable asset which on the very day you are given them are worth almost 20 per cent less than what your land was valued, and judicially valued in many cases.
As the Minister has said, we could stray into another area here but the Chair and the Minister will bear with me if I point out another possibility to reinforce Deputy O'Malley's argument. The Wealth Tax Bill will be coming and I think we have to have regard to that fact, because if we start here without looking at this whole thing together the House may find itself tied either in complexity or contradicton. The suggestion I would like to make is this: take land bonds clean out of this category as Deputy O'Malley suggests and consider them absolutely separately, if necessary, by a separate Act, and let normality take its course in this connection.
It does not seem very difficult to justify that a specific case where it is, as one might say, mathematically certain that substantial losses are going to be incurred that would normally if it were any other type of investment qualify as a compensation where capital gains are concerned under the Act anywhere else, should be singled out specifically as it is in this section. It is not that this is an accidental consequence of a general provision in a section. It is that there is a paragraph (c) of the first subsection specifically dealing with this and in actual fact, imposing, to use Deputy O'Malley's word, unfairly a penalty on the holders of these bonds who, as he points out, were unwilling recipients in the first place.
With that in mind, I would urge strongly on the Minister that he take the initiative himself to eliminate land bonds, if only these in this paragraph, from the section and divorce them from the rest of the discussion and, if necessary, deal with the question of land bonds as a whole with his colleague on another occasion.
That raises a different issue. This section will operate to relieve holders of land bonds, not the reverse.
How is that?
Unless they were exempted here—this is an exemption section—they will have to be taken into account.
It leaves them, in fact, with the penalty Deputy O'Malley pointed out.
It is not a penalty. They would not be charged to gains and, therefore, losses are not available either. With interest rates falling as interest rates are falling now, gains are more likely in the foreseeable future than losses. Land bonds are part and parcel of the Government money market and they cannot be distinguished. Essentially their nature is that of being a Government security and they cannot be treated, fundamentally, in any different way. If there are arguments about the rates of interest, the surrender value and so on of land bonds that is a matter for consideration in the realm of land bonds itself and we had a full debate in the House recently about them. With respect, it does not fall for consideration here. The only reason why this debate has taken place is that we are treating them, as we must necessarily, as part and parcel of the securities issued by the State.
I understand what the Minister is saying and I accept his approach but it is not irrelevant to point out that land bonds are such an exceptional thing that they should be taken out of the Act and dealt with separately. We cannot pursue that now but we can say on the section that if that is what we are advocating the first step is not to have them referred to in the section. Secondly, land bonds are different from the rest of Government securities so that the Minister's argument, though formally justifiable and correct, I submit—I do not mean any disrespect to the Minister—is a trifle specious when applied to land bonds because they are not voluntarily bought. A State loan is voluntarily bought.
Land bonds have depreciated and there is no profitable market in them. They are likely to attract considerable capital losses. Although the Minister is correct in what he is saying, the equitable fact is that the holders of these bonds will, pending a revision of the system, be the sufferers of capital losses. Had land bonds been in any other form of capital other than State capital such losses would have been taken into account as a contra where capital gains are concerned. It is in this sense that I say that the land bond holders are being penalised. I accept that the Minister is exempting land bonds but, in doing so, he is exempting them as a chargeable asset and the factual position is that in practice it operates as a penalty. My submission is that land bonds are such a peculiar category that it would be better to take them out of this legislation, put them aside and deal with them in a short Bill. Of course, that would mean dealing with the Minister's colleague.
The Minister stated that this section was an exempting section but it is not in so far as land bonds are concerned. It simply provides that they, among other things, shall not be a chargeable asset. We are not asking that any profit that anyone might make on land bonds, which is unlikely, should be exempt from capital gains tax. That is purely an academic point because no one can make a profit on them unless one happens to hold them at the time they are drawn for redemption. I have been suggesting that heavy losses on them are inevitable because they are issued at a time and in a way that their very issue causes a loss, as I demonstrated, at present of almost 20 per cent in the value of land acquired by the Land Commission.
Because nobody voluntarily acquires land bonds but has them inflicted upon him compulsorily in these circumstances it would only be equitable, not that they be exempt from this tax, but that the inevitable losses that would be suffered on them would be offsetable against capital gains on some other property or securities which that person might be fortunate enough to make in the same year. I do not think that is too much to ask. It is incorrect for the Minister to say that land bonds are just part of the ordinary Government securities; they are not. They are totally different. Nobody is compelled to buy national loans, Exchequer stock or conversion stock. If one acquires them one does so of one's own choice. One pays the money and takes the chance. Good luck to the person who can make a profit on that but it is unlikely that one will. However, land bonds are totally different. Nobody voluntarily acquires them; they are inflicted on the people.
If the Minister has any sense of fair play left in him, he should look into the position of people who this week are getting £50,000, £60,000, and £70,000 nominally of 12½ per cent land bonds, which are being sold on the Dublin Stock Exchange at £81.50 and £81.75. It should be remembered that the person who owns land has the constitutional right to appeal to a judge of the High Court if he is dissatisfied with the price and to have that price fixed by the High Court ultimately. The High Court in fixing that price fix the price that in its opinion is the value of the land. If the court fix a price of £50,000 as being the value of the land the court take for granted and assume that the owner of the land would be paid £50,000.
Our land bond legislation and this whole system never envisaged the situation we have today, that a man whose farm is valued at £50,000 is handed £50,000 worth of land bonds and the value of each bond, if one could sell them and one can only sell a small quantity at a time, is £81.50 and £81.75 and dropping. I doubt if the Constitution envisaged such a situation. Certainly the High Court judge in fixing the price on appeal did not envisage that if he fixed the price at £50,000 the person concerned would be paid £40,000 which is, in effect, what is happening now. I venture to think that if the judge who fixed the price in the cases talked about in early 1974 knew that this would happen instead of valuing a particular farm at £50,000 he would have valued it at £60,000 or £65,000 in order to allow for the serious drop that was going to take place. It may be that the judge would be precluded from doing that; that he would have to assume that land bonds would be issued with a value close to par.
I would ask the Minister once again, if he has any sense of fair play left in him—and I often wonder since he changed sides in this House whether he has—would he take account of this situation? As Deputy de Valera has said, it is quite different from the ordinary Government securities. The arguments that might or might not be valid in relation to them do not apply to these land bonds which I would emphasise again no private individual in this country acquires voluntarily. In every case they are imposed on him by the Land Commission. I have never seen anyone anxious to get paid in land bonds; a person will always say: could we be paid in cash?
I would ask the Minister to consider seriously accepting what Deputy O'Malley has said because it is one thing about which I know a lot. Nobody accepts them; they are forced upon them. Deputy O'Malley mentioned a percentage of 12½ but there are land bonds at present being sold at 30 per cent, old land bonds, because there is no guarantee given at all. They may be for years and they may be forever. They are different from any other State loan. It is because the land is acquired compulsorily that they are paid in land bonds. The price for the land is settled in the High Court and supposed to be the genuine price of the land. Even taking 12½ per cent bonds into consideration, that amounts to 80 per cent of the price of the land only. Therefore, an exemption for them is not sufficient.
I do not want to delay the House but I wanted to add my voice in support of that aspect because I know a lot about land bonds. Land bonds should be taken out of it altogether.
The case has been made so convincingly by my colleagues I do not need to repeat it. There are practical steps which could be taken which I should like to suggest to the Minister. There are two separate issues involved here. I shall deal with the first, which is the issue of land bonds. That is a separate, distinct issue which was raised by Deputy Colley earlier, by Deputy O'Malley in detail here this evening and supported by Deputy Callanan. Having grasped what is the case we want to investigate what should be done about it. Obviously what should be done is to allow land bonds fall into the category of general capital, treated for capital gains the same as any other form of capital and let gains and losses be taken on their chances on land bonds. In other words, it means excluding it from the section. We are not asking for any specific treatment for land bonds, we are asking for the removal of a specific treatment of land bonds.
I know the Minister's difficulties when this type of argument develops and I will give him credit that he wants to do the right thing and to help in this respect. A very simple amendment would meet that case, provided the section stood. Suppose he had only sub-paragraphs (a) and (b) in subsection (1) of section 24; delete the italic (c) and continue (b) as follows: "other than". In other words, after the figures 1965 in subparagraph (b) insert the words "other than", when subsection (b) would read:
securities issued by the Minister for Finance under section 4 of the Central Fund Act, other than
—if you like—"other Government securities"
land bonds issued by the Minister for Finance under section 4 . . .
That would not be necessary.
That could be done if there was any trap. I was worried that there might be a residuary trap in the rest of the section. But, as Deputy O'Malley has just said, it can be dropped, though I was trying to safeguard against what I might call a residuary capture. It is quite obvious that the intention is to capture Government securities by the section. Technically the Minister is correct in his argument. Technically, I suppose, land bonds would come into that general category. Perhaps the Minister could see his way to doing this which would be an equitable act but would not be a large administrative or drafting job. I would strongly urge it on the Minister for consideration.
It is not appropriate, it seems to me, to a tax Bill but I shall certainly examine the arguments that have been made in consultation with my colleague, the Minister for Lands.
Might I suggest that it is hardly necessary to consult with the Minister for Lands in relation to this particular part. There may be need to consult in regard to other aspects of land bonds. But, in relation to this Bill, it is merely a question for the Minister himself to decide whether or not he should omit paragraph (c) of subsection (1).
The fact that the Minister says that it is not germane to this Bill is all the more reason for leaving it out.
The tax principle is properly attended to in the way in which it has been; on that I think there can be no argument at all.
It only means it is subject to capital gains the same as any other investment, if it is taken out. If the remedy suggested is adopted, it only means that they are treated as general capital rather than as Government securities.
The Minister is undertaking to have a look at the situation, is that correct?
Yes.
Question put and agreed to.
SECTION 25.
I move amendment No. 25a:
In page 23, subsection (5), line 28, to delete "subsection" and to substitute "subsections".
The purpose of this amendment is to correct a printing error. It is clear that the intention of subsection (5) is to apply all the foregoing provisions to the situation where part of the premises is used for a dwelling house. Therefore, the word "subsection" should be "subsections".
Amendment agreed to.
I move amendment No. 26:
In page 24, subsection (9), line 24, to delete "a person" and to substitute "an individual".
This section, which gives exemption from tax on the disposal of a private residence, applies the exemption to individuals only. This amendment is proposed in case the use of the word "person" might be extending the scope of the section in any way.
Could the Minister throw any light on the position in regard to a residence owned by a company, perhaps occupied by an employee, in a situation in which a company owns, say, only one such residence and provides it for one of its employees, very possibly its chief executive? What would be the position of the company in that regard? Would it be treated as a trading asset? On the face of it, it would not seem that the reliefs provided in this section would apply to it.
No, such an asset is clearly a business asset. It is the property of the company, not the individual occupying the house and as such, would not get the exemption applicable to an individual residing in his own private residence.
But it would be treated as a trading asset and dealt with accordingly, with roll-over relief?
Well, it would be one of the assets of the company. Yes, roll-over relief would apply if the property was disposed of by the company and a similar property acquired by it.
If this amendment proposed by the Minister were not made would the relief be applied to companies as well as individuals?
It could possibly be so argued.
Amendment agreed to.
Question proposed: "That section 25, as amended, stand part of the Bill."
Section 25 states:
(1) This section applies to a gain accruing to an individual on the disposal of, or of an interest in—
(a) a dwelling-house or part of a dwelling-house which is, or has been occupied by him as his only or main residence, or
(b) land which he has for his own occupation and enjoyment with that residence as its garden or grounds up to an area (exclusive of the site of the dwelling-house) not exceeding one acre:
The rest of the section provides for the circumstances under which there will be no chargeable gain in respect of such an interest, namely, a dwelling house with one acre. The section also states:
Provided that where part of the land occupied with a residence is and part is not within this sub-section, then that part shall be taken to be within this subsection which, if the remainder were separately occupied, would be the most suitable for occupation and enjoyment with the residence.
The Minister is saying the one acre must be the land surrounding the house. Having regard to the specific descriptions in paragraphs (a) and (b), I should like confirmation that if a man has a house and two acres he will get exemption for the house and for one acre and that only the surplus residue will attract the gain. I do not know if I am correct in that assumption and I should like the Minister to clarify the matter.
The Deputy's interpretation is correct.
I do not wish to be unduly contentious but it is worth recalling that when the White Paper was issued originally it was intended not to exempt private residences but to apply a certain threshold. I regarded that as a most misguided approach and anti-social and in my immediate comment on the White Paper I made a strong point in that regard. For that reason I welcome the fact that this relief is provided in the section. However, there are other matters arising—admittedly they are more peripheral—that the Minister might, with advantage, consider since he has found it possible to take the major step involved in this section, as distinct from what was in the White Paper.
I understand there is a provision in the British legislation that might commend itself to the Minister in relation to the private residence. Where a residence is provided free by a taxpayer for a dependent relative it is added to the special relief in addition to the principal residence. There cannot be many such cases but the arrangement makes sense and it is equitable that it be done. I stress it is only in the case of a dependent relative, which would clearly prevent abuse of such a provision. I mentioned this on Second Stage and I should like to hear the Minister's views on inserting such a provision in the section.
In addition, there is another provision in the British legislation that might also commend itself to the Minister. I confess freely I have some reservations about it on general principles but in a difficult situation it may be the only way to approach it. in the British legislation I understand there is a provision relating to the area surrounding a house, somewhat on the following lines: "such larger area as the commissioners may in any case determine". My objection to that in principle is that it may be too wide and may give too wide a power to the Revenue Commissioners. However, the idea seems to have something to commend it and I should like to hear the Minister's reaction to this point. I wish to raise other points on the section but it might be as well to let the Minister deal with this matter before I proceed further.
If one takes the case of a house and one acre plus a margin of land beyond, that land may not have much market value because it may be too small or it may be scrubland or rock. However, it may enhance the value of the house because it may make it more remote or give it a certain setting. The additional land may not have much market value and in that case the Revenue Commissioners will not be concerned with trifles. However, the extra land may have a significant value—in an urban area it might have a considerable value—and if one goes beyond that one is getting into the realm of land that might have an exceedingly high value.
The weight of criticism in relation to this section has been against the generosity of the exemptions which is not bound in any way by the value of the principal private residence or the number of acres that residence could cover. I do not think there is any element of meanness so far as the Exchequer is concerned with regard to this relief.
With regard to the dependent relative, I would be prepared to examine that point further. As Deputy Colley pointed out, the number of such cases would be quite few and the number of cases where capital gains would be made on the disposal of a residence for a dependent relative would be even fewer because in that case the disposal would be by the person who owned the asset. In most cases a person would not dispose of an asset made available for a dependent relative unless that relative moved into an institution——
He might win the Sweep but in that case he would not be a dependent relative.
It is a definition that would need to be tightly drawn because otherwise there could be avenues to avoidance.
Will the Minister have another look at it?
Yes.
Regarding the question of discretion on the part of the Revenue Commissioners am I right in thinking that, as the section is drafted, in the case of an area which was somewhat bigger than one acre and which in their view did not have any substantial value they would have no discretion but would have to deal with the matter on the basis that anything outside the one acre must be taken into account?
If we take a case of a residence and, say, 1.1 acre of very substantial value, no capital gain would be calculated in respect of the residence and one acre and I do not think any great hardship would result from some element of gain being calculated on the one-tenth of an acre remaining. If it has significant value, it is because it has a site value.
Yes.
If the 0.1 consisted of scrub land or rock de minimio non curat lex would apply or even if it was to be given a value of £100 there would be only £26 to be paid on its disposal although it was something which Deputy Colley would refer to as having considerable value.
Let us take the case of a residence and one-and-a-half acres. Capital gains will arise only on disposal but suppose that the whole lot is sold as one item, on what basis will the exemption be computed? The house occupies less than one acre. The Minister has assured us that the house and an acre is exempt, that it will be the half acre that will be taxable but how is the gain computed in respect of the half acre? Is it taken as a third of the entire lot? That would defeat the idea that a house and an acre would be exempt because in such computation there would be no allowance for the house. Therefore, some type of mechanics of evaluation must be invoked here. Has this aspect been explored?
Yes. The Deputy is dealing with an auctioneer's advertisement which refers to a house standing on one-and-a-half acres but that will not be the way in which the Valuation Office will consider it. They will look at the house and the land around it and that may be 1.2 or 1.4 acres, depending on the ground covered by the house. All they will do is take the fraction of land left after allowance has been made for the house and one acre. The remainder would be valued on local site value for capital gains tax purposes.
In other words. the price would be the market price?
Yes. There may be agreement as to the value of the site so that there will be no question of dispute but all matters of valuation are ones for the Revenue Commissioners who have the assistance of the Valuation Office in determining the appropriate values to be applied.
I would refer the Minister to subsection (10) about which, if it means what I think it means, I would have some reservations. Can the Minister spell out a little more clearly what is intended to be achieved by this subsection?
Subsection (10) ensures that exemption is not to apply where a house was acquired wholly or partly for the purpose of realising a gain and the same principle is to apply in relation to such gains as are attributable to any further expenditure on property incurred with the object of making a gain. In other words, if it is a business as distinct from a roof over a family, it would not qualify for exemption.
Yet, in order to qualify it has to be the taxpayer's principal residence. It seems to me that what is being said here is that if a house was purchased for the purpose of making a gain or if expenditure was incurred in respect of the house by the taxpayer for the purpose of making a gain, although it is his principal residence, the relief in this section will not apply. At the very least it seems that in such circumstances the onus of proof should rest with the Revenue Commissioners and not with the taxpayer.
Let us put it this way: the onus would be on the Revenue Commissioners to establish their right to tax in the event of a person being aggrieved by a demand for tax. One could visualise a situation in which a person might acquire a large office block and occupy it or claim to be occupying it——
He would have to occupy the whole building.
——as a principal private residence but these are all matters for determination in accordance with the merits of each case. The purpose of the section is to ensure that any far-fetched schemes of property dealing for the purpose of tax avoidance not be engaged in but if a property was genuinely occupied as a dwelling house, it would not be involved in tax. It is not beyond the capacity of some people to dream up far-fetched schemes and to put them into operation.
(Dublin Central): There is a point which the Minister might qualify for me. I have in mind a case where a principal private residence was also a place of business. This is the situation in many instances throughout the country. In what way will the Revenue Commissioners apportion the acre as between the business and the private residence? Will it be possible to claim that the whole building is a private residence?
The business would not be involved in the question of the private residence and we are dealing in this section only with the question of the private residence.
(Dublin Central): Is there provision in any other section for apportionment as between the business and the private residence aspects of the property?
Subsection (5) provides:
If the gain accrues from the disposal of a dwelling-house or part of a dwelling-house part of which is used exclusively for the purposes of a trade or business or of a profession, the gain shall be apportioned and the foregoing subsection shall apply in relation to the part of the gain apportioned to the part which is not exclusively used for those purposes.
(Dublin Central): I know that.
That was amended. It is not (4): it is (1) to (4).
Yes, it should be subsections. The merits of each particular case will have to be looked at because it is not possible in legislation to define the precise break-up there would be in any property as between that part which was a private dwelling and that part which was a business premises. The case of the farm is quite clearly a case of maximum occupation even down to some of the rooms of the house; the kitchen might be one of the most effective parts of the running of a farm.
(Dublin Central): I am visualising a situation of the private dwelling consisting of six or eight rooms and one used as a business, the dwelling standing on one acre; am I to take it that one acre will be deemed part of the private residence and therefore exempt?
The situation the Deputy describes seems to me to be one in which the Revenue Commissioners would take the view, and nobody could dispute it, that the acre was attached to the dwelling house. Even though part of the dwelling house might be used as a business premises the private premises would carry the acre with it and would be exempt.
The wording would suggest that because subsection (1) distinguishes between the dwelling house on the one part and the land on the other, and the apportionment subsection refers to the dwelling house only and not to the land, whatever apportionment is made of the dwelling house as between business and private purposes the land is automatically attached to the dwelling house.
Could the Minister tell us what sort of gain or acquisition is envisaged in subsection (10) because the drafting of the subsection is very broad and, leaving out the nonessentials, one could read it as follows:
This section shall not apply in relation to a gain if the acquisition of the dwelling house was made partly for the purpose of realising a gain from the disposal of it.
Virtually every house bought in the last 25 to 30 years as a private residence is included because everyone had as a part of his motive in buying a house the ultimate hope—indeed, assurance in recent years—that on selling it he would realise a gain from the disposal of it. That is inevitable, times being what they are.
That is a gain in terms of the Bill. It would not be a real gain.
Inflation would, of course, take the reality out of the gain but in terms of a gain as defined in this Bill, without any allowance for inflation, which the Minister has so persistently refused to make, it would seem to me on the wording of this subsection that virtually every main private residence bought within the last 25 years does not get the relief. To me, that is unacceptable because the Revenue Commissioners or the inspector of taxes, if so disposed, could argue that virtually every house bought as a main private residence was bought purely for the purpose of realising a gain from the disposal of it.
A few years ago—I do not think it is there now because the grants are not worth it; they are too small now —when in real terms the grants were far more generous than they are now, there was a tradition of people buying houses, going into them, getting the grants and rates remission and going out again after about three years and going into another house. The grants have not been increased now for several years and they are worth little or nothing and so people do not do that any more. Would a person in that situation not clearly forfeit the relief given here? Indeed, someone who acted not as blatantly or obviously as that but decided to buy a house because it might be worth more in a few years and he would sell it then and buy another one, then virtually, leaving out the non-essential words in subsection (10), any realisable gain will be subject to tax and in virtually every case the gain made is not really a profit in the normal meaning of the word; it is merely an increase in the paper value of the house because of inflation. To take away the relief and impose capital gains tax on the paper profit made, because of inflation, on potentially practically every dwelling house is quite wrong. Subsection (10), read in that way, is far too wide and could defeat the whole purpose of the section. The words "or partly" should certainly be excluded and, by agreement, we could agree to exclude them now.
That would be to open the door to the kind of avoidance devices people of considerable property could engage in where they would be able to show they were using the premises partly as a dwelling house and partly for the purpose of making a gain and, because they had partly used the premises as a dwelling house, the gain would be exempt. However, I will take another look at the section to see if it needs to be tightened up to prevent even the Revenue Commissioners acting unreasonably or in the way Deputy O'Malley suggests. The facts of every case would have to be looked at, the nature of the occupation, the duration of the occupation, the size of the dwelling, the number of occupants and the purposes to which the proceeds of the sale were applied. If they were applied in the acquisition of an alternative dwelling that would tend to indicate that the purpose of acquisition and disposal was for the improvement of the family home. That would be perfectly laudable and nobody could question that or say it was for the purpose of making a gain. There are several different factors I have mentioned which are, I think, sufficient to indicate the necessity to draw this subsection widely so that all the facts of individual cases can be taken into account. This is not a section which would apply to the general run of cases and it is quite clearly not intended to apply to the general run of cases. It would apply where the nature of the original acquisition, occupation and disposal were such as to lead one to the reasonable conclusion that the purpose of realising the gain was the dominant factor in the disposal of the property. I would prefer to take a look at it in the light of the suggestions that have been made.
I indicated earlier that I had reservations about this subsection. Deputy O'Malley has spelt out very clearly some of the dangers involved. I must confess my reservations have been increased in listening to the Minister now. All the time we are dealing with the principal residence. If I understood the Minister correctly what he said was that if a man sold his principal residence and invested the proceeds of the sale in the purchase of another house this would be evidence of the fact that it was a genuine case coming within the provisions of this section and entitled to the relief. By implication does that mean if a man sold his house and invested the money in a business, which might be in need of that investment, and moved himself and his family into rented accommodation, that that would be evidence of the fact that he should not get the benefit of this relief under this section? I do not know if that is what the Minister had in mind, but it seemed to be implied in what he said. If that is so this matter needs to be looked at a little more closely to see precisely what we are trying to do under sub-section (10).
Deputy de Valera asknowledged the fact that there is no end to the ingenuity of people in devising avoidance measures. Section 25 is a section which grants exemptions to private residences. I consider it necessary, in the public interest, that steps be taken to ensure that the exemption, which is to cover the genuine person who invests in a dwellinghouse for himself and his family, is not availed of by people whose purpose is that of making a profit and not that of housing their families.
The worst that can be said about this subsection is that the effect of it is that occasionally somebody who has occupied a dwellinghouse for that purpose only may have it alleged against him by the Revenue Commissioners that he occupied it and disposed of it wholly or partly for the purpose of realising a gain on the disposal of it. I would prefer to look at this between now and the next Stage to see if something needs to be done to deal with that extraordinary rare case. If such a case was a genuine one I am quite certain that the person's conduct would stand up to any effort by the Revenue Commissioners to suggest that the purpose of the sale was for making a gain on the disposal of it and not in relation to the fundamental thing which we are endeavouring to protect, which is the principal private residence.
I appreciate what the Minister has said and I do not wish to prolong this discussion, but could he give us an idea of what I might call the worst kind of abuse of this relief that he can envisage, having regard to the fact that we are talking about the principal private residence? It seems to me the scope for abuse is fairly limited by reason of the fact that it must be the principal private residence.
The only purpose of answering that would be to give an indication of the attitude of the Minister for Finance towards tax avoidance. I do not think it would be appropriate for me to give a whole range or indeed the most extreme sample of tax avoidance devices that could be engaged in. I have given a fair cross section.
I know some people are obsessed with using avoidance measures. I believe the Minister and his advisers are becoming a little obsessed in relation to this. It is difficult to see how any real abuse could be created under this section. We must be satisfied that it is the principal private residence before any relief can be given.
The Deputy says he does not think there could be any real abuse and I am sure he would add to that "even on the part of the Revenue Commissioners". Therefore, what has he to fear from section 10? If no abuse has occurred on the part of the person involved there is no reason to fear any abuse on the part of the Revenue Commissioners in the operation of this section. If there is such an abuse it will be open to the person affected by it to appeal.
I do not know that that is a sufficiently good answer on the ground that one should not be creating a situation like this. I am satisfied, if the Minister will have a look at it in the light of what we have suggested. If the Minister does not want, for his own reasons, to go into details of how this might be abused I respect that. I feel this thing may be going a bit too far in the light of a purely theoretical possibility of abuse.
The ones which are the most profitable are the applications of theory.
May I point out to the Minister that Deputy Colley and I mainly referred to the first half of that subsection. The second half is equally ominous. Deputy Colley referred to having reservations about that. Indeed, well he might. This section is two-and-a-half pages long and there are 61 lines in each page. It is very boring for everyone to have to go through this but is it not in the public interest that we should do so? The Minister for Finance should not be in the position that he can have legislation passed without any comment on it at all, that this relief section will not apply to someone who acquired a house as his principal private residence, which in most cases is the only private residence, partly for the purpose of realising a gain from its disposal.
The second part of this talks about expenditure and says that the relief shall not apply to a gain so far as it is attributable to any expenditure which was incurred after the beginning of the period of ownership and was incurred wholly or partly for the purpose of realising a gain from the disposal. Clearly envisaged here is the sort of a situation where a man buys a house, his family grows or he becomes more affluent and he decides he needs another room or two. This is a common thing which happens in every part of the country every day in the week.
This man adds one or two rooms to his house, which may be a humble back kitchen in the country or something more elaborate. He knows this will increase the value of his house and he knows he will get more for the house when he sells it. He would not add the extension to it if he did not expect to get some gain from it. Does he not come within this definition, that he is incurring this expenditure partly for the purpose of realising a gain from its disposal. Does this mean that anyone who adds anything to his principal private residence, which in the case of 99 per cent of us means the only private residence, is rendering himself ineligible for the relief given in subsection (1) of this section but which is grudgingly taken away in various ways afterwards? Surely the Minister does not seriously expect that this subsection should go through without any comment?
What is the point of the relief if it is taken away afterwards? If a man spends money on his house he is not doing so for the purpose of allowing the value of the house to remain static or even to decrease. He obviously partly has in mind the realisation of a gain on the sale of the house, that the house was too small. Perhaps it had three or four rooms and needed another room or two. He adds them and it becomes worth proportionately a lot more. Why should he be penalised for having done that? It is quite unfair. If it was done wholly for that purpose one would think he would be nearly entitled to do it anyway, but certainly when it was partly for that purpose it is most unfair because in the usual course of events it is being done to accommodate a larger family or to give the existing family more room in their home. It must inevitably be partly for the purpose of increasing the value of the house. Unless that was going to happen he would not do it anyway. People often say, when they are adding a room or two to a house: "When we come to sell it, it will be worth all the more." It is a perfectly laudable and legitimate reason for adding rooms to a house, but notwithstanding the fact that it is laudable and legitimate by any normal standards the Minister is here excluding people who do this from the scope of this relief. It is not right, and subsection (10) should be amended.
One very good argument for passing this legislation en bloc is that it would stop the mischievous interpretations being put on the legislation. I am all in favour of full and frank and fair debate, but the most outrageous, mischievous suggestions have been made not only in this House but elsewhere about this legislation which, in comparison with capital gains legislation in any other country, is extremely generous. That does not limit at all the capacity of people to make——
If the Minister would answer the arguments made and cut this out we would get on much more quickly.
We got along here fine during the day before Deputy O'Malley came in on his usual late night mischievous rampage and I have no doubt that, I having fairly described him now, he will go berserk between now and 10.30.
That is hardly a reasonable observation by the Minister.
It is perfectly reasonable and it is in kind with which I have had to endure from Deputy O'Malley in his most mischievous interpretation of this. He speaks in one breath——
Does the Minister think he is helping the passage of this legislation by this display of petty bad temper?
He asks us to weep for the person who is in need and has premises because he says this section is out to catch him when in fact this section is out to catch somebody who has the purpose of misusing the exemptions in this Bill that are given to genuine people who are in dwelling houses for themselves and their families. We want to protect those people. We have given them that protection but we propose in this subsection to ensure that that genuine, reasonable relief is not going to be availed of by the fly-by-night speculators who will use that section in order to make tax free capital gains by a misuse of relief that has been provided for the genuine citizen. I make no apology for ensuring that as we grant exemptions they are not going to be abused by people, and no matter how much Deputy O'Malley may make mischievous comment in a debate which, until his arrival, was a constructive one I am not going to yield to that kind of pressure, no matter how much of it goes on, because it is contrary to the national interest, it is contrary to fair taxation and it is only making it more difficult to produce a fair code which will work to tax capital gains which deserve to be taxed and, at the same time, will relieve people who should not be called on to pay a capital tax on their dwelling houses.
(Dublin Central): Can the Minister give an example of how it could be abused? This is the principal private residence.
I have given a number of examples.
The office block occupied as a private residence. That is pretty fantastic. How could anybody propose to do that? After all he would have to occupy the whole office block which would mean he could not get any benefit out of it as an investment, would it not?
Wait till we get an answer.
Deputy Colley will recall that I dealt with this matter earlier.
That is how the Minister dealt with it. As the Minister said, we have been having a constructive discussion on this Bill all day. Now for some reason the Minister has suddenly blown his top. Deputy O'Malley, I think reasonably, took subsection (10) on its face and said this certainly could have the effect that he outlined.
The Minister tells us that his purpose in subsection (10) is to avoid abuse of the reliefs. Nobody is quarrelling with that purpose. What is at issue is whether subsection (10) merely prevents the abuse of the relief or whether, although the Minister did not intend it, it goes further and does the kind of thing outlined by Deputy O'Malley. That is what is at issue, and I do not know why the Minister should blow his top in relation to that situation. He would be wise not to do so. I am sure he is at least as anxious, if not more anxious, than we are to make progress on this Bill, and that kind of thing does not help us.
If we could have an example, if there is any example other than the rather far-fetched one we got from the Minister of a person living on his own in an office block, it would put this matter more into perspective. For asking a perfectly simple and obvious and necessary question like this I am accused of being mischievous and a number of other things. I realise that by asking a perfectly obvious and necessary question I will provoke another display of uncontrolled, petty, ill-temper from the Minister. Nonetheless, I feel it is my duty as a Member of this House, as it is Deputy Colley's, Deputy de Valera's and that of anyone else who wishes to take part in the debate, to ask these questions. I have put up the postulation that on a strict reading of subsection (10) somebody who adds a back kitchen to a labourer's cottage is liable to find himself in the position that he is taken out of the relief or exemption given for principal private residences. I put that up to the Minister. If that is wrong let the Minister explain to me how it is wrong. It is not enough just to get up and make abusive personal comments about me. That is no answer. It may display a lot of things about the Minister personally, as it quite clearly does, but it does not help this legislation. If adding rooms to one's principal private residence partly—I am not talking about wholly—for the purpose of realising a gain when one comes to sell it, in other words of getting more money for it when one comes to sell it, should take a house out of the relief that was given in this section I think it is wrong and I make no apology for thinking it is wrong. If I am wrong in suggesting that I would like the Minister to explain precisely how I am wrong. I do not want any more abuse. It does not matter to me, but in the national interest it would save time if the Minister would just answer the questions and leave out the personal abuse.
If the Deputy would leave out the mischievous misrepresentation then we could get on with the legislation, but his objective is perfectly clear. It is not so that we can get an understanding of the legislation but to spread misunderstanding. Deputy Callanan always has something useful to say.
I hope I will not be accused of trying to misinterpret the Minister. I am as anxious to catch speculators as the Minister is, but in this case we are dealing with a private residence. If a speculator buys a house and renovates it to make profit on it and he has a private residence other than the one he buys he should be caught but the person for whom I am afraid is the person who, for example, gets an appointment in a certain town and buys a house which is not big enough to accommodate his family and who adds to the house. He may then get a change of appointment and have to sell that private residence. The back kitchen was not added for the purpose of making a profit but to accommodate the family. Would there be a danger that they would be caught simply because they had made an addition to their private residence? I should like a clear answer to that question. The addition to their residence was not done for the purpose of making money. On the other hand, it was not done with the intention of losing money. If a man has a house and he changes his job and has to sell that house he may look for more than he bought the house at. It would be worth, say, £200 more. Is there a danger of such a man being caught by this provision? I am not trying to throw a spanner in the works. As a neutral observer I would like an answer.
We have had a long day here. Let us try to maintain the calm we had. I see the problem in this section that is in so many sections, the capturing of more than was intended and perhaps not capturing what was intended. Deputy O'Malley is quite right in the case he is making. I am afraid the bona fide case might be captured by this section. It is always just as well when arguments get to this stage to be specific. Supposing I have a house on less than one acre and am living in it with my family; I have occupied it for the whole period of ownership; during that period I have done things to improve the house. Suppose I am going to move, in other words, taking cognisance of the last words of subsection (10), surely, the natural thing for me to do would be to paint the house or in the course of ownership to make an addition such as Deputy O'Malley and Deputy Callanan talked about. There is a point for the Minister to consider here.
On the other hand, I think I know what the Minister is getting at and this is where the speculator would come in. I would have sympathy with the Minister if he pointed to this possibility. Suppose I own a residence that is too big for one residence. I happen to be a bona fide owner or have acquired it and lived in it for a while to qualify as a bona fide owner. I get a bright idea and change the whole character of the residence by turning it into flats and get a gain out of that transaction. It is something like that that the Minister is thinking about. Surely one can differentiate between the two?
One does not have to go to the extent of looking for office blocks on the site to see the type of thing the Minister would want to stop here. If somebody acquires a residence like that and manages to be bona fide to come within the qualification and then alters its character so that what he is selling is not the bona fide residence he had but a set of flats, already made. That involves expenditure. To be specific, if to every room you add sanitary and plumbing accommodation and erect partitions, and so forth, so that what was a bona fide residence is turned into a set of residences for speculative purposes, I can understand what the Minister is at and the difficulty of opening the door. If one analyses it in that way one can understand the Minister's problem, but that does not take away from the fact that an extremely valid point has been made by Deputy O'Malley. It is beyond our ingenuity as a Parliament to devise a way out of that difficulty and to meet both these problems satisfactorily? It is in that spirit that I would approach the section.
I think the Deputy acknowledged that that is the way I approached it an hour ago or whenever the debate began. Since then it has been interpreted in a way which was never intended and which could not be reasonably applied. He has given a perfect description of the kind of situation that could arise. To some extent it would be dealt with under the next subsection which deals with apportionment of considerations where the person disposes of a dwelling-house only part of which is his or his only or main residence. If he was occupying, for instance, some of the flats or a flat himself, that would be his residence. The remainder would not qualify for the relief.
In reply to Deputy Callanan, I can say once again that the case he described of a person who adds to the house to provide additional accommodation for himself, to improve his own housing standards, is not caught and is not intended to be caught. I have said a long time ago that I was prepared to take a look at it to ensure that such a person could not conceivably be caught even if the Revenue Commissioners were to be unreasonable in their application of the section.
(Dublin Central): Is there discretion in the Revenue Commissioners to operate along these lines? If I reside on the Hill of Howth and have a small house which is my private residence, I could spend £50,000 in building a new house on the site which is also my private residence. My children grow up and leave and in five years time I sell the house for £100,000. In that case, am I exempt from capital gains tax?
If it is your principal private residence and you are improving your principal private residence that is a perfectly legitimate activity and is one which is not caught for capital gains purposes.
(Dublin Central): Suppose I dispose of it after four years?
Yes. If it is done for the purpose of making a profit, that is another thing. This is not a new concept in law because under the law as it existed up to now where there was no question of capital gains, the Revenue Commissioners have often had to decide whether a particular activity was in the nature of trading or was a casual or accidental gain.
That is different, surely, from this?
No, it is not. It is simply a question in each case of determining the nature of the activity being carried on, the purpose for which certain things may have been done.
The distinction is quite different here.
No. A person could have improved a house and disposed of it in the past and questions have arisen as to whether or not the frequency with which he engaged in that kind of thing converted a casual gain into a trade, an activity generating profit, which ought to be treated as an income for income tax purposes. The only effect of this section is to allow the Revenue Commissioners to do as they must do in the application of the law, to look at situations which this section envisages could occur.
Deputy de Valera has argued earlier today that the ideal legislation would be that which covered only a tiny fraction of the paper covered by this legislation, leaving it to the Revenue Commissioners to act reasonably in the exercise of their discretion. Yes, we can agree that that would be the ideal but it is not the practicable one for the simple reason that the Revenue Commissioners must act within the law and they only act on the specific powers given to them.
Very generous exemptions have been spelled out here which will mean that the ordinary person with a property who occupies it as his private dwelling house, who uses it as his private dwelling house, and who improves it for private residential purposes will be exempt. We want to ensure that, where people seek to avail of that exemption in order to generate profit, they will pay their fair share of the capital gain when they have, as it were, used that private residence for the deliberate purpose of generating a capital gain. Nobody can be certain at the time he goes about improving his property that he will sell at a price which will cover the cost of the improvement. Nobody can be certain that he will, in fact, make a capital gain.
Not even a speculator.
Not even a speculator, but with hindsight it may be possible to assess, studying the whole pattern of behaviour, whether or not the improvement was made or the original acquisition and ultimate disposal were made for the purpose of making a gain as distinct from the legitimate purpose which we all seek to exempt, that is, the occupation of a dwelling house as a principal private residence.
Why did not the Minister exempt it last year in the White Paper?
The Minister wants what we want but what we all see is a danger of misrepresentation by whoever is deciding it. Is there no appeal?
There is, of course.
Under the planning legislation officials have misinterpreted the views of planners. This has been happening all over the country. Somebody could get caught by a misinterpretation.
There are better provisions for appealing against decisions of the Revenue Commissioners than exist in relation to planning matters, as the Deputy will be glad to know.
Who do you appeal to in this case?
The appeals commissioners and ultimately to the courts.
To the courts, if necessary.
That entails a lot of bother.
The number of such appeals under the existing tax laws are few and far between.
If the test in subsection (10) were to determine whether what was being done in effect constituted a trade I would have no reservations at all. As the Minister says, this is well-established and the tests are clear. I take it that the Minister's approach is the same as ours, that he wants to prevent abuse but he does not wish in any way to take away the relief in the ordinary genuine case as described by various Deputies. On the assumption that the Minister will have a look at the subsection with a view to making it as clear as possible that the situations envisaged by Deputies cannot arise, I would be quite happy to let the section pass—on the assumption that the Minister is looking at it in the same way as we are and will see if he can reword it to ensure that that is what is brought about as distinct from what is intended.
I will.
Question put and agreed to.
SECTION 26.
Amendment No. 27 has already been discussed.
Amendment, by leave, withdrawn.
Amendment No. 28 is related to amendment No. 27a and they can be discussed together by agreement. There can be separate decisions.
Amendment No. 28 covers quite a different point.
Amendment No. 28 has nothing to do with amendment No. 27a.
I do not think so.
I do not see it.
In fact, amendment No. 28 incorporates the ten years which amendment No. 27a seeks to change. It deals with a different point.
The Chair is saying that they can be discussed together and there can be separate decisions if the House likes. If the House wishes to discuss them separately that can be done.
It might make for a clearer debate.
We will take the amendments separately.
I move amendment No. 27a:
In page 26, line 18, to delete "ten" and substitute "four".
The purpose of this amendment is to reduce the period for which a business or farm which is disposed of on retirement has to be held before the relief given in subsection (1) would become applicable. We feel that a requirement that the qualifying assets as defined in the section should be held continuously for a period of ten years up to the time of their disposal is too long. People may well have held assets perfectly bona fide for a shorter time than that so far as shares in a family company or a business company or a farming company are concerned. A man could have been working all his life at a particular business or at farming and have changed his business or farm within ten years before he wanted to dispose of it on retirement and he would be deprived of the rather limited relief given under this section.
In all the circumstances, to require him to have held that particular company or farm for a period of ten years is too long. The limited value of the relief given under the section should be available if the qualifying assets have been held for a period of four years. This should be long enough to prevent any abuse of the situation because it would only apply in the case of a farm or family business which the man had carried on over a reasonable period. The fact that he may not have carried on in that farm or in that company for the full ten years should not disqualify him.
(Dublin Central): I support Deputy O'Malley. There are a few reasons why we thought ten years was too long. A man could buy a farm or a business and through ill-health he could be unable to carry it on for the time laid down in this section. His business could go against a man and it would be desirable that he should dispose of it within less than ten years. As I say, a man could fall into delicate health after purchasing a business or a farm. He would be deprived of this exemption if he were forced to dispose of it within that time limit. If a man's business went against him he might find himself in the bankruptcy court. If he had to dispose of his assets he would not qualify under this provision.
These are some of the reasons why we put forward this amendment. We believe that four years is a more acceptable period. These are the people we have in mind whom we tried to cover in this amendment, people who will be forced out of business through no choice of their own. They are not doing it voluntarily but will probably be compelled to do it, and we would like to think that they would get this qualifying concession in regard to the £50,000 relief. I think the Minister could accept the amendment.
The more I hear arguments criticising the additional exemptions we have given, the more I see an argument in favour of having left the original ideas in the White Paper alone. Every time one gives a further exemption or concession one widens, I suppose, the circumference and more and more cases are drawn to your attention which are just on the other line of the exemption granted. What we are dealing with here is the case of a person who is retiring from business, and I do not think it is unreasonable to suggest that a person of 55 years of age would be expected to be about ten years in the business or the farm from which he is retiring in order to gain this exemption.
What we are being asked in this amendment to do is to say that four years' involvement in the business of farming would suffice for this exemption. I think it would not be difficult for any reasonable speculator to set up an arrangement to gain from section 26, if it were limited to four years. It may be possible for him to do it in a ten years' span too—that I would accept—but it is at least two-and-a-half times more difficult.
(Dublin Central): This would be a once in a lifetime operation. There would be no speculation.
A man only retires once.
Nevertheless he could so arrange his affairs, could make his investment in such a way as to produce for himself a tax free gain of £50,000 if he made his arrangements at 51 years of age and went out at 55. That is not too long a period for a person to make an arrangement. Indeed, he may make an arrangement over his life span, and people have been able to do it in the past to avoid liability to income tax and estate duties, but the genuine purpose of the section—and I think nobody will dispute this—is to come to the relief of a person who has spent a lifetime, or a substantial part of his lifetime, in some particular business and who is forced for some reason or another to retire at the comparatively early age of 55, or above that date, because the relief applies to anybody above that date, and even though they are not transferring the asset to a member of the family they can get total relief on consideration up to £50,000.
That is a significant help, and to extend it now would be to encourage entry into and quick exit from business in order to make an untaxed gain. I would think that entry into and exit from a business within four years is of such a nature as to lead one to believe that the particular action was dictated by a desire to avoid liability to tax. A ten-year period makes that a lot less likely, the element of avoidance a lot less likely, and a ten-year period is related to a significant proportion of a person's working life, and that is the relief we want to give. Hard cases make bad law, and I noticed that throughout the whole debate on capital taxation, the extremely unusual case, the unique case, is always produced to suggest that hardship is being caused to the case which is not typical. I would consider that we have a duty to provide relief in all appropriate cases, and I am not arguing that anybody's predicament is insignificant or beneath the concern of Parliament. It should not be, but to suggest that retirement relief should be given to people who are only four years in the business is to urge upon the Oireachtas a suggestion which is not related to the ordinary experience of mankind where retirement occurs from business at the age of 55 when one has spent at least a decade in that business, and that is the case we are giving relief to here.
The Minister is missing the point of this amendment. It is not that one should be only four years in a business or in farming, or whatever. The point we have been endeavouring to make is that particularly in regard to farming—it would arise less obviously in relation to business as such—a man could have been in farming all his working life, for 30 and perhaps even 40 years, and he wants to retire. Because he has been progressing in his farming throughout his working life, he may have ended up in the second, third or fourth farm since he began, having purchased larger farms and sold smaller farms as he worked his way along. If he has the last farm for less than ten years, he will not get this exemption, and we feel that is wrong. He should not be penalised in that fashion.
I have no objection whatever, and we would have no objection, to a requirement that he should have been in farming or in a business, or the profession or in any of the activities set out here for at least ten years. Indeed, we would have no objection to a requirement that he be in it for perhaps 20 years, but we do think it is wrong that if he sells within ten years of having acquired the particular asset which he holds at the date of retirement, even though he may have been 30 or more years at the particular trade, whether it is farming or otherwise—it is wrong that if he holds the particular asset for less than ten years at the time he sells on retirement, he should be deprived of this relief, which is not particularly generous in any event, to say the least of it. This is dealing with people who have never made speculative gains but who have worked hard all their lives to build up an asset and find themselves now in the totally unsatisfactory position that they are being charged the same rate of tax, capital gains tax, after a lifetime of hard work as someone who went in and out of a speculative mining share in a matter of a month and made a large sum of money in that time.
(Dublin Central): I cannot see that there would be any element of speculation in this section when the consideration is only £50,000. The Minister mentioned that it could open up an element of speculation and avoidance but the consideration here is for £50,000. It is obvious that no speculators would concern themselves with this type of a consideration of £50,000. That element can be discounted. The proposals put forward by Deputy O'Malley are genuine. There are cases where property would have to be disposed of within the statutory time laid down but I could not see how it could be used as an avoidance measure if the proposal was accepted.
Question put: "That the words proposed to be deleted stand."
The Dáil divided, Tá, 61; Níl, 55.
Tá
- Barry, Richard.
- Begley, Michael.
- Belton, Luke.
- Belton, Paddy.
- Bruton, John.
- Burke, Dick.
- Burke, Joan T.
- Burke, Liam.
- Byrne, Hugh.
- Clinton, Mark A.
- Cluskey, Frank.
- Collins, Edward.
- Conlan, John F.
- Coogan, Fintan.
- Corish, Brendan.
- Cosgrave, Liam.
- Costello, Declan.
- Coughlan, Stephen.
- Crotty, Kieran.
- Cruise-O'Brien, Conor.
- Desmond, Barry.
- Desmond, Eileen.
- Dockrell, Henry P.
- Dockrell, Maurice.
- Donegan, Patrick S.
- Donnellan, John.
- Dunne, Thomas.
- Enright, Thomas.
- Taylor, Frank.
- Thornley, David.
- Timmins, Godfrey.
- Esmonde, John G.
- Finn, Martin.
- Fitzpatrick, Tom (Cavan).
- Flanagan, Oliver J.
- Gilhawley, Eugene.
- Governey, Desmond.
- Griffin, Brendan.
- Hegarty, Patrick.
- Hogan O'Higgins, Brigid.
- Jones, Denis F.
- Kenny, Henry.
- Kyne, Thomas A.
- L'Estrange, Gerald.
- Lynch, Gerard.
- McLaughlin, Joseph.
- McMahon, Larry.
- Malone, Patrick.
- Murphy, Michael P.
- O'Brien, Fergus.
- O'Connell, John.
- O'Donnell, Tom.
- O'Sullivan, John L.
- Pattison, Seamus.
- Reynolds, Patrick J.
- Ryan, John J.
- Ryan, Richie.
- Spring, Dan.
- Staunton, Myles.
- Toal, Brendan.
- Tully, James.
Níl
- Allen, Lorcan.
- Andrews, David.
- Barrett, Sylvester.
- Brady, Philip A.
- Brennan, Joseph.
- Breslin, Cormac.
- Brosnan, Seán.
- Browne, Seán.
- Burke, Raphael P.
- Callanan, John.
- Calleary, Seán.
- Carter, Frank.
- Colley, George.
- Collins, Gerard.
- Connolly, Gerard.
- Crinion, Brendan.
- Crowley, Flor.
- Daly, Brendan.
- Davern, Noel.
- de Valera, Vivion.
- Dowling, Joe.
- Fahey, Jackie.
- Farrell, Joseph.
- Faulkner, Pádraig.
- Fitzgerald, Gene.
- Fitzpatrick, Tom (Dublin Central).
- Flanagan, Seán.
- French, Seán.
- Gallagher, Denis.
- Geoghegan-Quinn, Máire.
- Gibbons, Hugh.
- Healy, Augustine A.
- Hussey, Thomas.
- Kenneally, William.
- Kitt, Michael P.
- Lalor, Patrick J.
- Lemass, Noel T.
- Leonard, James.
- Loughnane, William.
- Lynch, Celia.
- Lynch, Jack.
- McEllistrim, Thomas.
- MacSharry, Ray.
- Meaney, Tom.
- Moore, Seán.
- Murphy, Ciarán.
- Noonan, Michael.
- O'Connor, Timothy.
- O'Leary, John.
- O'Malley, Desmond.
- Power, Patrick.
- Timmons, Eugene.
- Walsh, Seán.
- Wilson, John P.
- Wyse, Pearse.
Tellers: Tá, Deputies Begley and B. Desmond; Níl, Deputies Lalor and Browne.
Question declared carried.
Amendment declared lost.
I move amendment No. 28:
In subsection (6), page 26, line 28, after "individual" to add "provided always that the period of ten years aforesaid may by decisions in writing of the Revenue Commissioners be reduced by such period as to the Revenue Commissioners seems just where the individual has been prevented by ill-health from working as a full-time director for the said period of ten years or where the individual concerned is the widow or widower of the next preceding owner and is unable to carry on the trade, business, farming, office, employment or profession of his or her former spouse".
As indicated in the discussion on the previous amendment, the relief proposed in this section is that in connection with the disposal of a business or a farm, on retirement. But there are, of course, a number of conditions in the section to be met before the relief can be obtained. In subsection (6) (b) there is the definition of qualifying assets for this relief. That definition refers to assets which an individual has owned for at least a period of ten years ending with disposal and the shares or securities of a company which has been a trading or a farming company and has been a family company during the period of ten years ending with the disposal and of which he has been a full-time working director throughout that period. There are further references to the ten years—the period of ten years shall be deemed to include a period immediately prior to the transfer during which the assets transferred were owned by the individual.
I would suggest that a fairly common situation can arise in which this relief should be given but, in fact, in the section as drafted would not be given. One such situation would arise where, say, a man had been a full-time working director of a family company throughout his working life. Then ill-health strikes him. The normal pattern would be that he would try to carry on as long as he could. But ultimately he might well be told by his doctors that if he continues any longer it will probably mean his death. Therefore, he does not have any choice. He has to give up the full-time working directorship. Of course, in the meantime, an effort is made to carry on the business. Eventually— and again this is the common pattern —as a result of the absence of that man from the business, the business deteriorates until ultimately it becomes necessary, in order to avoid further losses, to dispose of it.
Of course, the same thing could apply in the case of a farmer, as indicated in the discussion on the previous amendment. But in either case—as the section is drafted—this relief would not be obtained because, in the ten years immediately prior to the disposal of the assets, the man would not have been a full-time working director. He might have been a full-time working director for 25 or 30 years but, because of the ill-health situation and his retirement from the business for some time before it becomes necessary to dispose of the assets, he loses the benefit of the relief given in the section. That is one situation.
Another reasonably common situation is where the owner of the assets, be it either a farm or a business, dies and his widow tries to run the farm or business but, not being trained for the work involved and perhaps with a lot of family commitments, ultimately finds it is not possible for her to carry on the business or farming. In both those cases, again on the wording of the section, the relief would not be available, cases in which I believe the relief should be available.
But, recognising the dangers of abuse of this section, I have tried to cover the kinds of cases involved by providing a discretion to the Revenue Commissioners that, where they are satisfied in circumstances of this kind, that it would be just to allow the relief even though the period involved was less than ten years, then the relief would be given. It seems to me that this amendment is meeting cases that should be covered and, secondly, since it puts discretion in the hands of the Revenue Commissioners it is ensuring the relief will not be abused or availed of by people to avoid liability for capital gains tax. In the circumstances I hope the Minister will not have any difficulty in accepting the amendment.
The Deputy as a former Minister for Finance knows the pitfalls inherent in any system which visualises giving tax relief for health purposes. The question whether a person is in a proper state of health to devote more than a certain amount of time to a particular activity is a matter that leaves itself open to wide diversification of views, medical, commercial and fiscal. While I accept the amendment is well intended, I am not able to accept it because to do so would create very bad tax law for very good motives.
The question of what is ill-health, which prevents a person from carrying out his business, obviously is something that is not easily determined. I do not think giving discretion to the Revenue Commissioners would solve it because there are questions of medical degree here and it is not improbable that there may be conflicts of medical evidence. The same predicament would face the appeals commissioners. While the amendment endeavours to deal with a comparatively small number of hardship cases, it would leave itself open to considerable abuse.
With regard to widows, the section will be interpreted as meaning there is a continuity and the Revenue Commissioners will count the deceased husband's ownership and the widow's ownership as one. The capital gains tax code visualises that a husband and wife are treated as one and, therefore, the latter part of the Deputy's amendment would not appear to be required.
I know that the previous section says a disposal between a husband and wife is not chargeable to capital gains but it seems to be stretching it a good deal further to say that for the purpose of this section a widow is deemed to be in exactly the same position as her husband and that there is no break in continuity. Can the Minister state if there is a more specific basis for that?
There are a number of references in the Bill that are based on the principle that for capital gains purposes a husband and wife are treated as one person.
I do not think it actually says that although that is the effect.
It would be going against the whole code if the Revenue Commissioners were to interpret this section contrary to the fundamental philosophy behind the Bill.
As the Minister knows, it is not the philosophy but the actual provisions relating to husband and wife on which one would have to rely. Can the Minister quote anything that would support that contention? I would be very relieved to hear it was so, but I have some doubts.
Husband and wife are one for the purpose of charging the tax but this is a specific relief section.
Section 13 (7) provides:
Where subsection (5) is applied in relation to a disposal of an asset by a husband to his wife, or by his wife to him, then in relation to a subsequent disposal of the asset (not within the said subsection) the one making the disposal shall be treated for the purposes of this Act as if the other's acquisition or provision of the asset had been his or her acquisition or provision of it.
I agree that is so in relation to that subsection but surely the Minister would not contend that subsection would have the effect of giving this relief to a widow in the circumstances I have described? On the face of it it does not do this.
I know the Revenue Commissioners' interpretation. They are satisfied the proper way of treating it is to treat it as a continuity between a husband and wife. Therefore, the ownership of the deceased and the ownership of the widow are treated as one.
Section 13 (5) appears to deal with one year only. If the effort to sell by the wife was more than a year after the death of her husband the continuity the Minister spoke about would not apply.
The year of assessment is the year in which the disposal takes place and the gain is calculated.
If the disposal took place before the year of assessment, what is the position? If the husband died this year and if the wife disposes of the property next year, what will happen?
There would be no charge this year. There could be a charge with a subsequent disposal. The ownership is treated as a continuity between husband and wife, as one ownership. Calculation of the gain would be made only on the ultimate disposal.
If the Minister were asked to give an opinion, quite apart from the way the Revenue Commissioners may intend to interpret this section, would he be inclined to say the wife would get the benefit? I venture to suggest that if the Minister were asked for his opinion he would say it did not extend to that.
I do not think I would be that definite.
I think the Minister would give a reply something on those lines.
I might refer it to counsel for an opinion and counsel would confirm the opinion I am giving of the Revenue Commissioners' interpretation. However, I will look at the section to see if the intention can be expressed so that it is beyond doubt. However, there is the difficulty that if we are specific in one section in dealing with the case and are not specific in another, by a process of deemed exclusion it might be regarded as not applying in other cases.
That is true but it is also true that there are a number of references to disposals between a husband and wife in different sections. So long as there is more than one, the danger to which the Minister has referred arises. It is another reason for saying the widow would not get the benefit unless it is specifically provided.
As they have not dealt with that situation in this section it shows they do not consider a disposal takes place. They see it as a continuity between husband and wife.
I should be much happier to see it spelled out.
I will think about it but I do not want to cause any difficulties to widows in other sections.
At least we have established that the Minister's intention is that the widow should get the benefit. When he looks into the matter I am sure he will find that it is both possible and necessary to spell it out more clearly. If that is so, then one of the points sought to be achieved in the amendment will be dealt with. The other point involved in this amendment is not covered by what the Minister has said. I put it to him that there is a serious problem involved here and it is not sufficient to say there would be problems about medical certificates. The Revenue Commissioners are obliged already to operate under the income tax code in determining matters about illness and medical certificates.
Progress reported; Committee to sit again.
The Dáil adjourned at 10.30 p.m. until 10.30 a.m. on Thursday, 22nd May, 1975.