Deputy de Valera was in possession.
Social Welfare (Pay-Related Benefit) Bill, 1975: - Capital Gains Tax Bill, 1974: Committee Stage (Resumed).
Question again proposed: "That section 27, as amended, stand part of the Bill".
(Dublin Central): At 2.30 we were dealing with subsection (1) and we were questioning whether it was desirable that the words “55 years of age” should be in the Bill. We had put forward the case that there are many instances of a son who gets married at 22 or 23 years of age and whose father may have a farm and another business. We believe it would be desirable if the father in such a case were in a position to transfer the holding even though he had not reached the age of 55. This subsection prohibits him from doing this because if he does so he will be subject to capital gains tax.
I think some of the Government people should be here to hear what is going on.
The Deputy did not call for a quorum. He simply passed an observation.
I am looking for a quorum. I am glad the Government have one man on their side to advise me.
Notice taken that 20 Members were not present; House counted and 20 Members being present,
(Dublin Central): Subsection (1) of section 27 refers to an individual who has attained the age of 55 years and who disposes of the whole of his qualifying assets to one or more of his children. That means that a man would have to reach the age of 55 before he could transfer property to his son or daughter. It is nothing unusual for a man of 55 years of age to have a son or daughter of 30 years of age. The section is undesirable in that it will inhibit the transfer of property which is so desirable. I would suggest that if there must be an age limit, it should be reduced to 45 years of age. A son who is in a job would be reluctant to surrender that job unless he got a transfer of the property to him. Transfers of property take place every day of the week on the occasion of the marriage of a son or daughter.
I would ask the Minister to consider whether the subsection as drafted is detrimental to the transfer of property. A father should be allowed to transfer property freely as between himself and his family. If the age limit were reduced to 45 it would make the subsection more acceptable. Cases will arise where a man of 49 or 50 years of age would like to form a company with his family and to transfer half the assets to his son who, in all probability, is about to get married. I would ask the Minister to reconsider the section for the reasons I have outlined.
I owe an apology to the House for not being here as the Deputy in possession when this Bill was resumed. The other business concluded rather suddenly.
I had followed up the point that Deputy Fitzpatrick has recapitulated and the point made by Deputy O'Malley. I raised the question as to whether an age qualification should be introduced in this section. The Minister gave me a very full and satisfactory answer. Arising out of that answer, I want to put two aspects to the Minister.
I completely understand now the genesis of the section. The Minister said on the one hand, that this was in pursuance of the proposals for capital taxation in regard to retirement. I hope I am not misquoting him in this. I can immediately see the logicality and the place of this section here. On the other hand, the Minister did say something which prompts a very valuable thought and which, perhaps, I would not have adverted to as clearly if the Minister had not drawn my attention to it. I refer to the social aim of encouraging the transfer of executive command, you might say, to the most viable generation, in other words, the transfer of responsibility and opportunity to the generation that is best capable of taking the load, which is being blocked by the older generation hanging on. That is a different social problem altogether and the Minister adverted to that.
Here we have the kernel of the problem and the first basic question that has to be asked on the section: what is the policy behind this section? Quite clearly, the Minister's original intention was to continue the policy in regard to capital taxation. I pointed out before the adjournment of this business that his section was so tightly drafted that in order to bring in the equitably desirable extension to nephews and nieces he found it necessary to bring in an amendment, an amendment for which he was universally commended. When that is so it is quite clear that the intention of the section is to afford relief of this nature to enable the family farm or family business to continue and to pursue the retirement policy.
The question I want to ask now is whether there is not an opportunity also of pursuing the other aspect of policy that the Minister mentioned without prejudice to the first. If there was any contradiction between the two points of view here I would yield to the Minister and say that he has answered me that the consistency and the homogeneity of the code must be preserved. My point is that if you were to delete the age qualification you do not perturb the logicality and the consistency of the section in its original intention and in its place in this revised code of financial legislation of which this Bill is a part.
Because of the tight drafting of the section, unless I can be shown or can see that there is some loophole here that would go beyond that, I am making the point for consideration that the deletion of this age limit would not prejudice in any way the consistency and the homogeneity of the section which would result by the deletion of that age limit. On the other hand, if I am shown in some way that something is breached I will say again that I appreciate the Minister's dilemma when he said ruefully last night that when you try to meet equity there is always the problem of where to stop. I take the Minister's argument on that. If I am right in suggesting that the age limit could go without prejudice to the legislation, that it would not expand it, that it would not bring in any loophole or contradiction, then the Minister should consider whether the putting in of the age limit merely followed from the train of thought that it was retirement legislation. I am qualifying this conditionally the whole way through and I will accept any reasonable answer against that case.
I put it to the Minister: why not achieve the other social gain as well? The Minister mentioned that 55 years was the European limit. I put the case of the younger man with a son or a daughter who has to make up his mind at a particular point in time. He may be short of the fixed age limit. This may completely defeat the intention of the section. I would strongly urge on the Minister to delete the age limit. Deputy Fitzpatrick mentioned an age limit of 45 years. I could suggest 35 years. Therefore I take the high jump and say: "Why have an age limit at all?" I am trying to be understanding and helpful to the Minister. This point is completely distinct from Deputy O'Malley's point about the widow. I do not want to put the Minister to the trouble of having to repeat himself in replying to me but, if anything I have said requires a reply, I would be glad to accept it.
I can go a long way with what has been said from the Opposition benches if I accept as appropriate that all properties passing from parents to children should be exempt from capital gains tax. Having regard to the very large exemptions which will be available under the capital acquisitions tax, very substantial accumulation of wealth could pass from one generation to another without paying any capital tax at all. I do not think that would be justifiable socially.
Is the Minister right there? Would there not be gift tax or inheritance tax?
Not if the amount distributed was below the appropriate threshold.
I think I see what the Minister is at.
It would pass without paying any tax at all. Under the capital gains tax, it is only the element of gain in each disposal which becomes chargeable to tax in certain circumstances if the disposals were above the appropriate level. I do not think it is inappropriate that some small tax should be paid above certain levels in respect of certain gains which have been made.
We can argue about the rates and whether they are too much of a burden now or hereafter. We may argue about the need to adjust them from time to time because of inflation, and so on, but those are all peripheral arguments. The fundamental question posed to me was whether or not there should be total exemption in respect of gifts from one generation to another. I do not think it is appropriate that there should be total exemption in certain circumstances if the payment can be made without hardship. People who receive property are in a position to pay. So far as capital gains are concerned I must not get my fundamental thinking confused. It is the person who is disposing of the property who is making the gain, who is liable for the tax. It is at a time of liquidity in most circumstances that the payment will be made.
The relief is given because we are primarily concerned with retirement situations. I am not saying this is the last consideration that the Legislature ought to give or will give to the whole question of capital gains. With the benefit of hindsight of the operation of this and the other legislation we may come around to what is the very best way to manage the capital assets of the country, for the benefit of the community, for the benefit of the country, and for the benefit of individuals within families. It is unlikely that we are now in a position to prepare an appropriate régime of capital management for generations to come. The tragedy is that we allowed our affairs to be controlled for so long by the outlook of people who lived in 1894. Fundamentally that is what the estate duty system was. There were two small amendments which were made too late. That was bad, and that is what led to the campaign a few years ago to do away with death duties altogether.
Now we are endeavouring to tackle the whole problem of capital management because there is this element of capital management apart from taxation. There is capital management, distribution, the best way and the most equitable way of seeing to the distribution of wealth not simply its distribution through taxation systems but its distribution by having disincentives to undue accumulations so that property is distributed beneficially from the older generation, who have become tired in their ways, to the younger generation who may be more dynamic in the use of capital. That can be generated by tax laws which may collect no revenue at all but, by being in existence, may cause people to distribute their property in a certain way so as to avoid the tax. That is a desirable social end as long as it achieves the right social end.
Having regard to the Irish pattern of behaviour and, indeed, the present pattern, the age limit of 55 years is an advance on previous experience. I doubt very much that there are many farm holding which are distributed by their owners at 55 years of age, or many business holdings either. It may be desirable to bring that age down in the future. When we find that the age of 55 years is becoming restrictive we will have made a great advance and the Legislature will then be able to move forward in the light of that advance.
When the Minister referred to the social aim of the distribution of capital, he was reinforcing my point. He has not given me any specific reason why the age limit should remain but, in the latter part of what he said, he gave me a very good reason why it could be left out. I do not want to take advantage of that. The Minister has prompted me to ask a further question. I will argue against myself now. I want to be fair. Is there any danger that my suggestion of removing the age limit would encourage premature disposals which would prejudice the ultimate return to the Exchequer? It is difficult for me to formulate that question more precisely, although I feel there is possibly something in it. On the spur of the moment I find it hard to work out an example.
In an inflationary situation it is quite clear that it would suggest defeating accruals to the Exchequer by taking advantage as far as possible of the thresholds set in the Bill because in respect of all these thresholds in the Bill—all these Bills and this £150,000 which appears in so many places—one must face the fact that if we talk in such a laudatory way about them here and consider them adequate, any one of us who does so must of necessity have his tongue in his cheek to some extent because we know perfectly well that in a short time these thresholds will be less and less significant. Although the formal answer is that new legislation will fix this, the experience of financial legislation has always been that it is in arrears in catching up on such a matter. In other words, the State always, wherever it is, takes advantage of the situation willy-nilly. That being so, I can see that there might be some anxiety about deleting the age limit completely, but if it is so, I would suggest to the Minister to let us have it out frankly here and we will share with him the responsibility of passing the Bill if we have the opportunity of complete debate on it.
As I say, in the absence of time to construct a useful specific example and in the absence of the information which I would probably need so to do, I cannot be more exact in my remarks, much as I would like to be, but the Minister will appreciate that I am seeking what is the best answer, and as in the latter part of what he said he was making my case for me, I want now to reciprocate to a certain extent by expanding on the part he opened with in order that we may do the best thing in this section and make it the best possible piece of legislation.
It is very difficult to say exactly what is going to happen. We just do not know. We have no information at all about distributions of wealth, other than as a consequence of death or within five years before death. This is the only information available, but all we can suspect is that the cases of distributions at such an early age as 55 years are very few and far between, so I think that we are catering for the bulk of cases likely to occur. Time alone will prove whether we are right or not. If we find that it is otherwise and areas of hardship, arise, certainly the Legislature will then move to put them right. I would prefer in the meantime that hardship would not be done, but having regard to the fact that any transfers at an earlier age are likely to involve smaller gains, the tax will not be a hardship.
Would I be fair to the Minister if I said that his attitude is ex majore cautelae? I will accept that and will not press my point further in the circumstances but I think it should have been made. I am withdrawing the pressure on the total.
(Dublin Central): The Minister might say that the number of people who transfer under 55 years of age is very small. It might be but there are certain groups of people who would like to distribute part of their assets and form a company. I do not have to stretch my imagination too far to see where this section could cause a number of problems. I know people with property, a certain type of property, a certain number of businesses throughout the country. These people might have three or four children—two or three sons—and whatever hope we had up to now of the father transferring 25 per cent of his assets, or 35 per cent, to his son, or maybe there are three or four sons and he would like to transfer 25 per cent to each of them on marriage, what this is going to do now as far as I can see is to compel him to withhold that transfer for a number of years until he reaches 55.
The Minister may say that this will apply only to a limited number of people. So be it—I agree that it may be a limited number but there are cases throughout the country where a farmer has an outside farm—and you will find this in numerous parts of the country —and quite often the son settles down in the outside farm and the father would there and then transfer the holding to his son who is getting married. I can visualise numerous cases throughout the country where the father would be under 55 and would like to carry out this transfer, and this section as far as I can see will certainly prohibit him from doing so. I am not sure— maybe the Minister might clarify it for me—whether he would be allowed to transfer the first £50,000 which is in section 26. Would he qualify under that section for an exemption if he sold a particular part of his holding or transferred a particular part to his son? Would he qualify under the section for that part of the exemption or must that be on retirement?
That is my objection to the section, that I think it will inhibit the transfer of property between a father and his children and I do not think this is good for society generally. It would be much better if they could get established in their own right when getting married, even if the father is under 55 years of age.
Do I understand the Deputy to ask if a person has more than £50,000 but disposes of £50,000 and no more, will he have relief on that?
(Dublin Central): Yes.
The answer is yes.
Is that under section 26?
Yes.
He has to be 55 or over?
Yes.
I would like, first of all, to reinforce the point raised by Deputy Fitzpatrick because I think I am right in saying that as a result of the amendment made by the Minister to the section, and correctly, the position now is that a transfer to a nephew will not be in the high category of exemption from gift tax, and, in fact, will be subject to a fairly substantial gift tax, in addition to being subjected to capital gains tax under this section. That, of course, was something the White Paper said would not happen but it is happening. In view of the fact that the Minister has, in my view, correctly accepted that in certain circumstances a nephew would be in the same position as a son the argument made by Deputy Fitzpatrick is even more powerful in that the inhibition against the transfer of property in this way is much greater because of the incidence of gift tax in such cases on top of the incidence of capital gains tax. For that reason the Minister ought to give further thought to the provision in this section.
I assume what the Minister said on previous sections in relation to wording similar to that in subsection (1) (b) applies also to this, that he will look at it with a view to rewording and making it intelligible. On a previous section we discussed the question of the desirability or otherwise of a provision in the case of a legatee when he disposes of the property he inherits he is liable for capital gains tax calculated on a base going back to the time it was acquired by the person who left him the property. The Minister, arising out of the discussion, undertook to reconsider that position. Does the Minister's undertaking to reconsider that decision apply also to the somewhat similar provision in this section whereby a member of the family benefiting from the disposal would, if he disposed of the property within ten years, become liable to capital gains tax on a base calculated on the market value at the time when the donor acquired the property? It is not exactly the same position but it is somewhat similar and I should like to know the Minister's attitude in regard to that.
The amendment to this section which I moved, and the House accepted, amendment 30, is similar to a provision in the Capital Acquisitions Tax Bill in relation to nephews or nieces who have been working on a farm or in a business for five years prior to the date of acquiring the property. It brings in special treatment for nephews or nieces; they fall into category 1, the same as sons and daughters, in the Capital Acquisitions Tax Bill, provided they have been involved in the management of the enterprise for five years. On the second point, subsection (3) of this section provides:
Where assets comprised in a disposal in respect of which relief has been granted under this section are disposed of within ten years of the earlier disposal, section 9 (acquisition and disposal deemed to be at market value) shall not apply to the earlier disposal and, notwithstanding any other provisions in this Act—
(a) the disposal and acquisition of the assets under that earlier disposal shall be deemed, for the purposes of this Act, to be for such consideration as would have secured that neither a gain for a loss accured on that disposal, and
(b) the acquisition of the assets by the individual making the earlier disposal shall be deemed, for the purposes of this Act, to be the acquisition of the individual making the later disposal:
Provided that nothing in this subsection shall affect the amount of capital gains tax chargeable in respect of the earlier disposal, but to the extent that tax so chargeable has been paid, relief shall be granted by set-off against the amount of capital gains tax chargeable on the later disposal and not otherwise.
I am grateful to the Minister for that but I am not sure that he has answered my question. I asked the Minister whether he intends his review of the position in the earlier section—I think it is in regard to section 9—to be applied to the provision in this section.
There is a fundamental difference between death which mercifully is usually not contrived or designed by a person but is something over which one has no control, whereas we are dealing in section 27 with voluntary and deliberate and controlable acts of people so that they ought to be treated in a different way. Subsection (3) aims at discouraging devices by which the farm or family businesses are disposed of so as to get the relief provided by the section followed by a sale outside the family. To deal with this situation the section, therefore, provides that where relief has been given and assets comprised in the disposal are disposed of outside the family within ten years of the disposal by the parent, the capital gain on the disposal by the child is computed as if the parents' disposal had been made to him at cost. In this way capital gains tax would be payable on the same basis as if the parent had made the disposal in the first instance outside side the family. This is not to result in any adustment in the tax charged in respect of the earlier disposal but if tax has been paid on that earlier disposal the tax chargeable on the disposal by the child will be reduced by the amount of tax charged on the parent.
Would the Minister accept that it is, perhaps, somewhat misleading to say that up to a transfer of assets to £150,000 would be exempt when in circumstances described by the Minister, the liability for tax is postponed even though there may be a good reason for doing it? In my view it would be more accurate to say in such a case that the payment of tax is postponed and not exempt.
The section is designed to deal with the genuine keeping of a property within a family. We do not consider it appropriate, as that relief is being given to families in respect of family properties, where a deliberate decision is taken to put the property outside the family the relief should continue to be enjoyed.
I am not quarrelling with the provision because I can see the necessity for it. I am quarrelling with the fact that in such cases it is represented that there is exemption, whereas there is merely postponement of tax. Would the Minister confirm the position in regard to subsection (1) (b), that the wording of it will be reviewed? It is similar to what we have in previous sections.
Yes.
The Minister will be aware that certain definitions in section 26 are imported into section 27. In regard to two of the definitions being imported into section 27 I should like to draw the Minister's attention to the suggestion that the relieving provision of section 27 may not be available in certain instances to directors of groups of companies. The various accountancy bodies have suggested that two of the definitions which are imported into this section, that of a family company and full-time working director should be extended in order that an individual, who is required to devote substantially all of his time in a managerial or technical capacity, to the service of more than one company within a group may be regarded, for the purposes of this section, as a full-time working director of any of the companies which, in relation to him, is a family company. I imagine that the Minister will have received representations on this point.
I dealt with that this morning. Perhaps the Deputy was not here at the time. I mentioned that, in such a case, they would be treated as being full-time directors of any of the companies within the group.
Does the Minister feel that the point at issue can be dealt with without any extension of the definition of family company or full-time working director?
Yes, it would mean giving them the same treatment as is already given to them under other tax laws where employment is involved.
I do not want to be difficult about this. But the definitions of family company and full-time working director do not, on their face, seem to enable this to be done. Is there some other part of either of the two sections that would apply this to the group of companies or on what does one rely to do this?
No, specifically there is not. It is just the general interpretation and application of the law. The matter will be more specifically dealt with in the proposed corporation profits tax legislation, long promised, long awaited and eventually to be teased through this House probably later this year. We think it more appropriate to deal with those combinations of companies and all matters related thereto within the ambit of the corporation profits tax. Hopefully, the whole think will be netted together there for some years to come. In the meantime, that is what will be done. Any individual who is required to devote substantially all of his time to service in a technical or managerial capacity in one or more than one company in the company's constituted group of companies, or carrying on complementary businesses so as to form a composite unit of business, will enjoy the concession.
Is the Minister satisfied that, pending the enactment of furtheir legislation, the Revenue Commissioners have power to do this?
Yes.
Question put and agreed to.
SECTION 28.
I move amendment No. 31:
In pages 27 and 28, to delete subsection (2) and to substitute the following subsection:
"(2) Subsection (1) shall not apply if part only of the amount or value of the consideration for the disposal of, or of the interest in, the old assets is applied as described in that subsection, but if all of the amount or value of the consideration except for a part which is less than the amount of the gain (whether all chargeable gain or not) accruing on the disposal of, or of the interest in, the old assets is so applied, then, the person carrying on the trade shall, on making a claim in that behalf, be treated, for the purposes of this Act, as if the amount of the gain accruing on the disposal of the old assets were reduced to the amount of consideration not applied in the acquisition of the new assets (and if not all chargeable gain with a proportionate reduction in the amount of the chargeable gain) and the balance of the gain (or chargeable gain) shall be treated as if it did not accrue until he ceases to use the new assets for the purposes of the trade."
This is a drafting amendment and is required to make clear what portion of the gain is to be deferred, what portion is to be chargeable when all the proceeds from the old assets are not utilised for the purchase of new assets.
The amendment is in the form of a substituted subsection (2) which links the computation to consideration not applied in the acquisition of the new assets, while in the original draft the computation was linked with the gains applied in the acquisition of new assets.
Why the change?
The original draft left some degree of ambiguity and uncertainty. This has the advantage of clarifying precisely the treatment the assets should enjoy.
Amendment agreed to.
I move amendment No. 31a:
In page 28, lines 57 to 62, to delete subsection (8) and to substitute the following subsection:
"(8) This section shall apply in relation to a person who—
(a) either successively or at the same time carries on two trades which are in different localities but which are concerned with goods or services of the same kind, or
(b) successively carries on two trades the first of which he has carried on for a period of ten years or more before he ceased to carry it on and the second of which he commenced to carry on within a period of two years from the date on which he ceased to carry on the first trade,
as if, in relation to the old assets used for the purpose of the one trade and the new assets used for the purposes of the other trade, the two trades were the same trade."
As the House knows, section 28 deals with the replacement of business assets and provides relief by way of deferment of the capital gains tax charge on a gain made on the disposal of business assets where the proceeds are reinvested in other business assets for use in the same trade.
Subsection (8), as drafted, extends the relief to a person carrying on two trades in different localities, provided that they deal in goods or provide services of the same kind. Two trades of that kind would be treated as one trade, so that if assets belonging to the one trade were sold and the proceeds reinvested in acquiring assets for use in the other trade, the relief provided by the section would be granted.
In the course of the debate on Second Stage Deputy Fitzpatrick suggested that consideration be given to the type of person who decided to change the type of business in which he was engaged and I think Deputy Paddy Belton advanced a similar argument. I have been considering the Deputies' suggestions and, therefore, propose to extend the relief to cover the case where there is a change from one business into another without any qualifications as to the type of goods dealt in or the type of services provided. However, some safeguards are necessary in order to prevent abuse of the relief. Therefore, I propose in this amendment that, in order to qualify for relief, a taxpayer must have carried on the first trade for a minimum of ten years before he disposes of it and he must have commenced the second trade within two years after disposing of the first one.
I trust this amendment will meet the point made, that not to allow people to reinvest in some business other than one precisely the same as that in which they have been engaged will ensure that business assets which are disposed of are, if I may use a current phrase as regards petro dollars, recycled back into business and, to that extent, will be beneficial.
(Dublin Central): Do I take it that he must have engaged in the second trade before he can get the benefits on the disposal of the first one?
No, but the Revenue Commissioners want to be satisfied that he is going to engage in another business. As we can readily see, situations could arise in which it might take some time to find a suitable new investment or make arrangements. We are allowing two years in which a person may reinvest in another business. If, at that stage, a person has not done so, then liability to capital gains tax would arise.
(Dublin Central): Do I take it that this amendment broadens the scope of the section? The section confined one to the same type of business.
As originally drafted, yes.
(Dublin Central): As originally drafted, that is why I want to draw the distinction. As originally drafted, it confined one to exactly the same type of business one had been pursuing when one sold— the roll-over relief would have to apply to precisely the same type of business. Let us take an example in the grocery or licensing trade. As the Bill is drafted, if one sells a grocery or licensing business, one would have to avail of the roll-over relief and reinvest the money in a grocery or licensed premises. Do I take it that this amendment broadens one's options, that one can now invest that money, be it a farm, drapery shop or something else? Do I take it that that latitude is offered in this amendment?
Yes.
(Dublin Central): Are there some qualifications attached, that one must be engaged in it for a certain length of time before one sells?
One must have been in the first business for ten years or more.
(Dublin Central): In the first business?
In the first business, yes. Then one must start a new one within two years of quitting the first.
(Dublin Central): And one has the option of moving into any other business?
Yes.
(Dublin Central): I welcome that amendment because I have seen examples of cases over the years where, through ill-health or other reasons, people have had to disengage from the type of business they had been carrying on for years. This happened on many occasions in the trade in which I am engaged, where people fell into ill-health and had to move into another form of business. I would not quarrel with the provision that a person must have been ten years in the business. Is the Minister allowing only two years before he can reinvest?
It is a fair length of time.
(Dublin Central): I think it should be slightly longer. A person might be forced because of this time limit into purchasing an unsuitable property. Two years is not a long time when a person is looking for a suitable property or a farm. I have known of many cases where people sold a business with the intention of buying another one and it took three or four years to do so. People may be pushed to the point of buying a property at an inflated price in order to comply with the time limit set out. I know of many people who have sold their business and have regretted that they did not get back into another business. Nowadays speculators and outside interests may be involved and it may not be so easy to find a suitable business in which to invest money. There are similar difficulties with regard to the purchase of a farm and the prospective purchaser may not find it easy to get a suitable property in the county in which he wishes to invest. There is a case here for an extension beyond the two years. It would not leave any loopholes in the Bill but would give some latitude to people who wish to invest their money.
If on the completion of two calendar years the Revenue Commissioners are satisfied that a person is committed to engage in a new trade or business, by concession they would allow the commitment to be fully completed. In the present situation the person will have almost two years to look for a suitable property and to enter into a contract. He would not be made liable to tax simply because he had not completed all the arrangements within two calendar years. Having regard to the liberal interpretation we are now giving on the right to roll over and in view of the necessity of ensuring the assets are not wasted in the meantime—there is a duty on the Exchequer to arrange matters so that there is a reasonable probability that the assets are there —if a person has committed himself to new business arrangements but has not completed them all, such a commitment would be accepted by the Revenue Commissioners as sufficient. In many cases the period could be 2½ years.
The amendment goes a long way to meet the legitimate point raised by Deputy Fitzpatrick on Second Stage. However, there are a few points on which I should like clarification. From something the Minister said on two occasions when dealing with this amendment I got the impression that on the sale of a business tax would not be payable until it had been determined two years later whether the proceeds were going to be reinvested in another business. Am I correct in this?
It would be accessible right away.
I can see great administrative difficulties here.
If a person wished to reinvest in a long-term business he would have two years within which to complete arrangements and satisfy the Revenue Commissioners on that score or else he would have to pay the tax. If a person does not propose to re-engage in business, liability to tax would arise forthwith. I suppose people might claim they were going to reinvest but not complete the arrangements.
May we take it that what would trigger off the two years' grace would be a claim by the taxpayer that he intended to reinvest the proceeds in another trade? Is that how it is visualised it would work?
Yes. The Opposition should not tempt me too much because I might begin to see loopholes.
Perhaps on this side of the House I should not be seeing such things, but I can foresee considerable difficulties. The Minister spoke of the danger of the proceeds of sales being dissipated, and not being there to pay the tax. There could be a considerable danger to the revenue in this proposed administrative approach.
I take it the Deputies opposite will not look a gift horse in the mouth?
No, but I do not think it is any harm to draw the attention of the Minister to possible dangers. There is also another point the Minister might clarify. In paragraph (a) there is reference to two trades. If a person has two public houses in different locations, are they regarded as one or two trades within the meaning of the paragraph? Paragraph (a) states:
either successively or at the same time carries on two trades which are in different localities but which are concerned with goods or services of the same kind, or
Two public houses separately operated are two trades. They are separate entities for income tax purposes.
I am not quite sure what the Minister means by "separately operated". What is the position if there are two separate managers?
(Dublin Central): Are they separately operated for income tax purposes?
I am so advised.
We had better, I think, be a little clearer on this. Deputy Fitzpatrick obviously thinks the Minister has confirmed what I said, but I do not think he has. The question I put was: if you have two public houses owned by one man but operated by two managers is the Minister saying that that amounts to two trades?
There are two ways of looking at it. A great deal depends on how the person runs the business, whether he keeps separate accounts for each trading or whether he keeps them all under one account. A company might operate one trading account and an individual might operate individually or, indeed, collectively. It would be very difficult, I imagine, to supervise the running of the business.
You could divide them. If it were a limited company it would be taxed accordingly. It appears to be one unit then. Is the income tax test sufficient here? On the other hand, if there was a single proprietor or a company with two subsidiaries, or something like that, you would have a distinction; you would have clearly different trades.
In any event the section, as amended, provides that there will be roll-over between them.
If, in fact, that kind of thing was two trades is it not quite conceivable there could be people with three, four or more trades? How then do you confine it to two in paragraph (a) because it is the same case in regard to three as it is in regard to two?
Chain stores.
Is the Deputy suggesting we should say "two or more"?
It might need a little more drafting than that because the "two" qualifies something else. Perhaps the Minister would like to look at it again. We cannot draft an amendment here, but there is a slight flaw.
If the House will accept the amendment I will undertake to look at it again to see if it can be further improved.
The Minister might also look at the possible loophole in paragraph (b) and come back with another proposal.
I will look at it. The payment of interest at 1½ per cent.
I wondered if the Minister would get around to that.
I thought I would save it for somebody else to come up with a brilliant suggestion. I will look at it.
We are not accepting, of course, any responsibility whatever for any amendment of the amendment.
Very good.
(Dublin Central): I thought there was a question of four years to reinvest.
No. We are providing in a later part of this section for the case where a person disposes of an asset of a business and acquires a new asset in three years; it is subsection (3). There is a big difference between a person continuing in a particular business and disposing of an asset in that business and reinvesting in that particular business and somebody who disposes of an entire business altogether and asks to have tax postponed until such time as he gets into a new one. There is a case for having a shorter period in respect of the person who is changing business compared with the person who remains in the same type of business and who is simply changing assets.
(Dublin Central): Would it not be better to make both of them three years?
The Deputy will accept there is a difference.
(Dublin Central): I agree there is.
Amendment agreed to.
Question proposed: "That section 28, as amended, stand part of the Bill."
I do not think the position is quite clear in respect of assets which pass on death. Having regard to the provisions of section 14 and section 28 assets which pass on death and have been the subject of a sale, or successive sales, under subsection (1) of section 28, it would appear that the legatee would acquire those assets at an imputed cost which may relate back to the previously replaced assets held by the deceased and acquired many years previously. I wonder if the Minister could indicate whether or not that is correct.
I do not think I am in a position to confirm what the Deputy says because I do not think it is correct. Would the Deputy be thinking of the British system?
I would be hoping to hear it was not correct. Where there has been a passing of property on death, as the Bill provides at the moment, in the event of a disposal by the legatee the capital gain is assessed in relation to the value at the date of original acquisition by the deceased. Now, if the deceased has been replacing assets before he dies and getting roll-over relief under section 28 for quite a number of years then, on the legatee getting the assets and disposing of them, is the assessment of capital gains tax on that disposal related back to the original market value of the assets away back before they were replaced and roll-over and relief got and replaced again?
Perhaps I should give an example.
That might help.
If I compare the Irish and British systems it will show, I think, where the Deputy may have got his lines crossed between the two systems. Under our system, let us suppose a business premises is sold for £60,000 and a gain of £10,000 is made on that transaction; we will call that stage 1. Stage 2, the proceeds are then used in the construction of a new premises costing £100,000. Stage 3, which would be ten years later, the owner decided to get out of the business and he sells the premises for £115,000. On those new premises, which cost him £100,000, he makes a gain of £15,000. The way in which it will be approached will be as follows: the first stage when he sold the premises for £60,000 and made a gain of £10,000, the gain at that stage is not charged; it is rolled over into the new premises. It cost £100,000 and no charge takes place at that stage. On the third stage there is an ultimate sale for £115,000 and the gain on that is £15,000. Now the gain on the earlier sale was £10,000 so that £25,000 then at that later stage is subject to tax. He will get an eventual £500, of course, for that year so the amount chargeable is £24,500 at 26 per cent.
Under the British system at the first stage of a sale of £60,000 and a gain of £10,000 there is no action. At the second stage, the premises having cost £100,000 the gain, which he made at the first stage is deducted, that is the £10,000, so the new premises is deemed to have cost the man £90,000 at that stage, instead of the £100,000, which it actually cost him. We come to the third stage when the premises were sold. They were sold for £115,000 but you deduct the deemed cost of the premises, that is £90,000, so the amount chargeable is £25,000 and that is chargeable at 30 per cent.
(Dublin Central): I could argue with the Revenue Commissioners about what is an asset and what is goodwill as regards what is valuation for capital gains. A few years ago we had a different type of system as regards stamp duty on the transfer of property. It is very difficult to put your finger on goodwill because it is not a tangible thing. The Revenue Commissioners recognised this a few years ago in the transfer of property as regards stamp duty. The property was valued and it was only on that that you paid stamp duty.
Let us take any business, a public house, a grocery shop or a drapery store that is sold for £40,000. That is the value of the asset. Anything contributed to that by work or ingenuity is not a very tangible thing. When one is assessing assets I do not believe one is entitled to assess goodwill. A doctor's practice is just as tangible as the goodwill a man has built up in a property. If a doctor sells his practice after 20 years is he subject to capital gains? If he is not I do not see why a man who has contributed the greater part of his life to building up the goodwill of his business and has given something to that business should have to suffer capital gains on the goodwill.
At one time the Revenue Commissioners only assessed a property on the bricks and mortar in relation to stamp duty. Anything beyond that was the goodwill built up by a person. Could the Minister say if a doctor's practice, which is disposed of after 15 or 20 years, is subject to capital gains?
The answer is yes if the goodwill has a capital value. I accept what the Deputy says about the difficulty of calculating goodwill and in the very rapidly changing world we now live in goodwill seems more difficult to calculate than it might have been in more stable days. Nevertheless, if a person's assets include the goodwill of his profession, practice or business and it is disposed of for a capital sum that may become liable to capital gains tax.
(Dublin Central): I know about the capital sum but I doubt if it is an asset such as we define here as a business.
There are many aspects, as I am sure the Deputy appreciates, in valuations, including location, trade and so on and the return on capital investment. All these things count as much in a professional person's practice and valuation as in the case of a man who might be in trade as distinct from being in a profession.
Could I refer the Minister back to the example he gave us under section 28 and under the British system? Stage 3, which was the last one he described in each case, was the situation where the taxpayer was no longer investing the proceeds of sale in a business. Then the liability to tax arose. Would the Minister carry this a little further to stage 3½, where the taxpayer is carrying on a business but dies? By his will he leaves the assets involved, which at that stage are invested in the business, to a legatee. What is the position of the legatee at that stage? If he continues the business and continues the assets in the use of the business presumably the roll-over relief will apply to him the same as it applied to his predecessor in title. If he did not continue in business would his liability be the same as that of the deceased, if he was getting out of business?
Under the Irish system a person would be deemed to be taking over an asset worth £100,000, assuming it had not been revalued at the date of death. Under the British system the person would be deemed to be taking over an asset of £90,000.
Perhaps I am not making the query I have in mind clear to the Minister. A considerable amount of concern has been expressed at the possible effects on succession to business, which is arising all the time, if the situation comes about under section 28 that the successor to a business finds himself with a latent capital gains tax liability. This could in some cases be very substantial and perhaps even be a quarter the market value of the assets. It has been suggested that to avoid this kind of latent liability for capital gains tax the liabilities of the deceased, both on capital and income, should be finalised in his estate so that the successor in the business would take unencumbered assets without contingent liabilities.
The Minister may think this is getting back to death duties but if he remembers his inheritance tax it may console him. The real point at issue is that because of the provisions for roll-over relief going on and on everybody who succeeds to a business is in fact taking on a contingent liability and as the years go on this gets bigger and bigger. This in the longer term could have a seriously inhibiting effect on business and it would be better to determine exactly what the liability is on the death and dispose of it.
No question of liability would arise at the time of death.
That is the point.
It would only arise in the event of getting out.
But the argument is that it should arise on death because the consequence of its not arising is that you have a contingent liability growing year after year.
There may be further growth because of further capital gain but any liability on death which is deferred does not itself grow.
But as the assets are replaced the liability is almost certain to grow and ultimately somebody is going to be responsible for capital gains which accrued perhaps a generation or more before. This kind of thing, apart from perhaps in the long run creating a greater objection and outcry than arose in relation to death duties, could have an inhibiting effect as regards succession in business. At least there ought to be consideration given to having the option of clearing the liability on death rather than letting it carry on.
I will consider that option.
I would be grateful if the Minister would look into it. There is another matter I want to raise on this section. I understand that the wording in subsection (1) is taken from section 33 of the British Finance Act, 1965 and it contains the phrase "used and used only". I believe that phrase has been interpreted in a case in Britain in which the British High Court judge dealing with the case said he was not prepared to give any definition in regard to the words "used" and "occupied" which is in subsection (6) of the British section 33. The result of this was a refusal to allow roll-over relief on an asset, which was land, acquired for the trade and disposed of on proving unsuitable for the purpose. The suggestion has been made to me that the section should apply to assets acquired for the purposes of a trade and not used for any other purpose unless it was incidental to the trade so as to avoid the kind of situation which arose as a result of that decision in Britain. I do not know if the Minister has received any representations on this but it does seem to me to be a valid point.
No, I cannot recall that I have and my advisers are not aware of it either but I am glad the Deputy has drawn my attention to it. Would he give me the reference?
Yes, it is Temperley v. Visibell Ltd., 1974. STC 64. The Minister will look into that?
Certainly.
Subsection (6) begins:
If, over the period of ownership or any substantial part of the period of ownership,
I know this is an old question and it is difficult but what is intended to be conveyed by the words "substantial part of the period of ownership"?
This is a matter for determination in the light of the facts of each case. The general purpose of having such a reference is to avoid the need to be concerned with little bits and pieces and only to deal with periods of substance. It is very difficult to define.
I appreciate that but even as a rough and ready guide could the Minister give any indication of what is intended? Perhaps something below a certain proportion would not be regarded as substantial.
It would relate to the length of time that an asset is held and that could vary from a year to 50 years. It would not be possible to lay down any general rule. It would be that part which was significant in the light of any particular case.
Can the Minister tell me what is the necessity or reason for subsection (10)?
This subsection makes provision for further apportionment where consideration applies to assets because some are and others are not subjects of a claim for relief. The consideration has to be apportioned between those which are and those which are not. The apportionment is to be in such manner as is just and reasonable. Perhaps I should make simplicity more confused by giving an example. An apportionment on a just and reasonable basis is to be made where the old assets were used for business purposes during part only of the period of ownership. Here is an illustrated example. In January, 1975 a trader buys for £20,000, including expenses, a building which he uses for his trade except for the top floor which is let. For a just and reasonable apportionment the part which he occupies for the trade is four-fifths of the whole. In January, 1977 the letting of the top floor ceases and he takes in the top floor for the trade. In January, 1985 he sells the building for, say £32,000 and uses the whole proceeds to buy a new building for his trade. The gain made is £12,000. Four-fifths of the building was used for the trade for the whole period of ownership while one-fifth of the building was occupied for the trade for eight years out of the whole ten years. The appropriate fraction is, therefore, four-fifths plus one-fifth multiplied by eight-tenths which equals 24-fifths.
What makes this just and reasonable?
What is just and reasonable is that he did not occupy the upper floor of the building for the first two years. The amount of the gain to be deferred is, therefore, 24/25ths multiplied by £12,000 which equals £11,520 and only £480, which is attributable to the upper floor which was not let for two years, would be charged at January, 1985.
I assume from the fact that the subsection says it will be apportioned in such manner as is just and reasonable there is no mathematical way of laying down the manner in which the apportionment should take place in such cases. What this is saying, in effect, is that the Revenue Commissioners will do it so that there will not be an enormous advantage either to Revenue or to the taxpayer, or conversely, no enormous disadvantage to the Revenue or the taxpayer. Is that really what the intention is?
The phrase "just and reasonable" means that the apportionment must be fair having regard to what was or was not used for the purposes of the trade. Solomon in all his wisdom could not have done better in the circumstances of the case I have given. Certainly, it is a just and reasonable apportionment.
Very well.
Of course, any person who does not agree with the Revenue Commissioners' assessment of what is just and reasonable has a cure.
Question put and agreed to.
SECTION 29.
I move amendment No. 32:
In page 30, subsection (3) (a), line 27, after "part" to insert "not applied in acquiring the new assets".
This is a drafting amendment. It clarifies the reference to "the said part" in paragraph (a) of subsection (3). The earlier words in the subsection contain two separate references to "part". This involves no change in the meaning of the provision.
Amendment agreed to.
Question proposed: "That section 29, as amended, stand part of the Bill."
I have received some representations in regard to this section. The Minister may have received them, too. According to these representations, this section requires that tax be paid on all profits where the capital is not used wholly or mainly for the restoration of the asset. In certain cases of injurious affection no restoration can be effected. For example, where a portion of the front garden of a residence is taken over for road widening the house would require to be physically moved back the requisite number of feet to bring about a restoration of the prior situation. Alternatively, the asset could be a unique painting or work of art which could prove equally irreplaceable. It is suggested that in such cases the application of the provisions of the section would be unreasonable.
So far as the bit of the front garden for the purposes of road widening would be concerned that would be the disposal of part of a private residence and would not give rise to a taxable charge.
If it were a private residence but it could apply to other property.
It was somebody's front garden which was suggested. We dealt on an earlier stage with the question of the compulsory purchase of property. In so far as it is part of a private residence it would not be liable to tax in any event. With regard to the painting, if it is valued at under £2,000 it would be a tangible movable asset and would not be affected. If it is above that figure it would be the same as the disposal of it. It might not be exactly the way the person contemplated disposing of it to burn it, but, nevertheless, it would be a disposal, and the cash return would be similar to the return the person would get if the painting was sold on the open market, assuming the painting was adequately insured and that compensation for the appropriate amount was paid. If not the gain would be correspondingly less. I assume from the fact that a painting is mentioned that it is not a wasting asset. There are probably many works of art which have wasted or are wasting.
Subsection (5) provides that the section shall not apply in relation to a wasting asset. I presume a motor car could be described as a wasting asset. If a motor car is damaged in an accident as a result of the negligence of someone else and the owner brings a claim for damages for the value of the car, does the fact that the section does not apply to a wasting asset mean that the compensation for the destruction of the car or the damage to it would be subject to capital gains tax?
Section 18 provides that no chargeable gain shall accrue on the disposal of a wasting asset. A motor car is deemed to have a life span of less than 50 years and is deemed to be a wasting asset, although there are some old reliables still around which have exceeded that mark.
Why, therefore, put in the subsection? Does it not suggest that the relief, if you could call it that, given by the subsection will not apply to compensation for damage to wasting assets?
No liability to charge arises on a wasting asset so if a wasting asset is destroyed no liability to charge would arise on the disposal of it.
If that is so—and I have no doubt that it is—why say that the section will not apply to a wasting asset?
If we did not have that subsection there I could hear it being argued that because we had not got it there it would be chargeable to compensation received in respect of such property. In order to clarify the position and to put it beyond any doubt, it was thought that it was better to state that there. It might have said that the section shall not apply to compensation received in respect of the destruction of a wasting asset or something of that nature but I do not think those words would be any stronger.
Does the Minister not agree that it seems to be contradictory? If the tax does not apply to wasting assets, the question of relief on the compensation for their destruction should not arise and that subsection (5) appears to be superfluous. There are a lot of provisos to section 18.
If we try to make things clear, it arouses a suspicion in people's minds that we are trying to do something which, in fact, we are not doing. It was to put it beyond any ambiguity or uncertainty that it was specified in the subsection. I think it is better to leave it in than take it out. If we were to take it out at this stage, it would be thought that there was something sinister about it.
Can the Minister tell me on what basis the postponed or deferred charge for a capital gains tax would be made on the disposal of the substitute asset which had been purchased or repaired with compensation or insurance money? From what period to what would the gain be calculated? Would it be from the payment of the compensation or from the original acquisition?
I have a lengthy example here which I can give the Deputy. A person buys an asset for £10,000 and insures it. At a time when its value is increased to £12,000 it is damaged by fire. He receives £4,000 compensation and spends the whole on restoring the asset. He claims roll-over and the asset is eventually sold for £12,000. The position then is as follows: cost £10,000; deduct recovery, £4,000, which is deemed to be a part disposal, leaving a balance of £6,000; and expenditure on reinstatement because he applies the money received in compensation on reinstatement, £4,000, which gives an adjusted cost of £10,000; the sale proceeds are £12,000, less adjusted cost £10,000, leaving a chargeable gain of £2,000.
That is free of tax, is it not?
Free of tax?
The movable asset —the £2,000.
I did not realise that the Deputy was now dealing with a movable asset.
The capital is £2,000.
The gain is £2,000 and the proceeds £12,000.
What is the reason for the deduction of the amount recovered, as in the example given by the Minister? He deducted £4,000 and added it on again and got back to square one.
Could I give a case where all the money is not applied?
Yes.
Cost £10,000; deduct amount of insurance compensation received £6,000. Suppose he does not spend the £4,000 on reinstatement but only £3,900. The adjusted cost is then not the £10,000 but £1,990. He sells for £12,000 and has a gain of £2,100 which falls for tax. There is a disposal of £100 by deducting £100 of the insurance compensation instead of reinvesting it in the property.
The tax on the £2,100 is not payable until the sale of the asset?
Where a property is destroyed and insurance paid and then it is reinstated, the person is back in square one, unless he does not apply the compensation to reinstatement of the property.
If he does not apply the compensation at all and does not restore the property, the position then, I take it, is that the original cost is deducted from the amount recovered?
The amount recovered is taken from the original cost.
If there is to be a gain, the original cost has to be smaller than the amount recovered?
Yes.
If the assets are destroyed and compensation is paid and none of the compensation for the destruction is used in restoring the assets, then effectively is it the position that if the original cost was £10,000 and the amount recovered is £12,000, the gain is £2,000 and tax is assessed on that?
That would be so, if the balance of the asset was completely destroyed. It depends on what the property is, but if it is destroyed, it would be a £2,000 gain. If it is not completely destroyed and part remains, it would be £12,000, plus ultimately whatever profit was made on the disposal of the balance.
If an asset is insured for £10,000 and is completely destroyed, if it is not restorable—a painting or something of that sort—the insurance company pays £10,000 and assuming that the man had it for only a short time, I take it that no capital gains tax is payable on that payment of £10,000?
Assuming that he got it for the same price, no.
Question put and agreed to.
SECTION 30.
Question proposed: "That section 30 stand part of the Bill."
I take it that what is meant by "an amount by way of capital sum or premium" is the same thing—it is the lump sum payable other than the annuity that may subsequently be payable?
That is correct.
Is there any question of this annuity being capitalised for the purposes of this tax?
No.
Before the EEC Retirement of Farmers Regulation, 1974, came into effect, there was a scheme which the Department of Lands had in operation for some years, admittedly not a very successful scheme, to encourage older farmers to retire. Not many farmers took it up but there were a few hundred in the country. Basically, it was the same sort of scheme as the EEC scheme but probably less generous because there were no outside grants. Would payments made under that possibly be liable?
I have my doubts, because so few availed of that scheme. I do not think there could have been 20 and I doubt very much if they would be in the capital gain category. Presumably they have disposed of their interests by now in any event, but if any should come to light and we saw that it conflicted with the principle of this section, I am sure we could deal with it retrospectively, but short of pursuing the people in question to ascertain any probable liability to capital gains tax, we could not deal with it. I think the size of the farms involved is minimal.
I am glad to see that these payments made under this scheme mentioned here are excluded for the purposes of the computation of a capital gain. If the gains that are made under this scheme are excluded, is it not logical that some form of relief would be given to the somewhat analogous situation of people giving land to the Land Commission, not under this scheme but under the ordinary Land Commission acquisition and division methods in the course of which they are paid in land bonds? Normally, this causes a pretty severe loss as I referred to yesterday. Would it not be logical to allow that loss?
We are dealing with fiscal matters and not logic. As I said last night I will discuss the matter with the Minister for Lands and I will bring the suggestion made by the Deputy to his attention.
Is the Minister implying that logic plays no part in fiscal matters?
No, we are dealing with fiscal matters and I am not a magician.
Hear, hear.
Question put and agreed to.
SECTION 31.
I move amendment No.32a:
In page 31, after line 22, to insert the following subsection:
"(6) In this section ‘capital distribution' means any distribution from a unit trust, including a distribution in the course of terminating the unit trust, in money or money's worth except a distribution which in the hands of the recipient constitutes income for the purposes of income tax and in section 32 ‘distribution of capital' shall be construed in accordance with this definition.".
This is a drafting amendment. The words "capital distribution" were used in subsection (3) of section 31 and the words "distribution of capital" were used in subsection (2) (b) of section 32. The amendment provides the required definitions of these expressions. The words "capital distribution" in relation to a company were defined in paragraph 1, Schedule II, and the wording of this definition is now suitably adapted to cover a distribution from a unit trust.
Are we to take it from this amendment that the phrase "capital distribution" is interchangeable with "distribution of capital"?
Yes.
Why not use the same phrase? The Minister seems to be going to some lengths to define it when he means the same thing. The definition of capital distribution would appear to confirm a point I raised on this part of the Bill on Second Stage. Apart from a distribution in the course of terminating the unit trust, is there in reality any distribution of this kind envisaged in the case of Irish unit trusts? Perhaps it would be better if I raised this on the section.
Amendment agreed to.
Question proposed: "That section 31, as amended, stand part of the Bill".
I shall now reply to the Deputy's question put on the amendment. The answer is yes, there could be so far as I am aware.
Is the Minister aware of cases in which there would be a distribution of 80 per cent of the trust net income which is one of the requirements?
The Deputy has in mind the fact that unit trust regulations would appear to stop distributions of the kind to which this section is directed but there are substantial doubts that they operate in that way. Certainly, unregistered unit trusts which may not come to notice are believed to have been established. They could operate as we visualise and we consider it safer to make provision in this Bill to cover such situations rather than to be closing the door when the horse has already bolted.
It is a little difficult to deal with this section without some reference to section 32. The Minister will recall that on Second Stage I queried whether the provisions in the sections in relation to unit trusts were of any practical value, particularly the special arrangements envisaged. On the information I had, it seemed that no unit trust could meet the conditions that were being laid down. One of the difficulties involved is the proviso that trusts would come within the conditions for making these special arrangements with the Revenue Commissioners if they distributed 80 per cent of their net income and chargeable gains. To the best of my knowledge in practice unit trusts do not distribute surpluses on the realisation of investments but rather they reinvest these sums. Has the Minister any knowledge of cases to the contrary?
A number of schemes have come to the notice of the Revenue Commissioners which warrant these sections. Of that I am satisfied.
Is it not the position that conditions are being laid down which on the face of it appear to be incapable of being met? While special arrangements are envisaged and spelled out in considerable detail there is no known case that can come within the conditions.
What we are dealing with here is the value of distribution of capital by unit trusts to unit holders to be treated as part disposals of units in the same way as capital distribution by companies, in respect of shares in the company, is deemed to be part disposals of the shares. We are ensuring that unit trusts and companies are put on an equal footing.
Because it is difficult to discuss this without referring to section 32 I will raise the point in more precise form on section 32.
The section seems to make the trustees of the unit trust chargeable for chargeable gains and they, presumably, would pay the capital gains tax on it. The section then goes on to provide that where a person receives or becomes entitled to receive a capital distribution he will also be treated as if he had, in consideration of a capital distribution, disposed of an interest in the units and, therefore, be liable for tax on it. Is there not a danger there of the same gain basically being taxed twice, first in the hands of the trustees and secondly in the hands of the individual unit holder?
Well, of course, there are two elements in both unit trusts and companies. First of all, there is the company itself and then there are the shareholders. Shareholders get benefit because they avail of the benefit which coming together confers on them in the company and, in companies which make capital gains, the companies would be liable. Afterwards, if the capital is distributed to the shareholders, the shareholders will, according to their several responsibilities, be liable if personally they are liable. Unit trusts are being treated in exactly the same way.
But in fact special provisions are being made for unit trusts that are not being made for companies. Therefore, to that extent are they being treated in exactly the same way?
They will have to be separately mentioned. The treatment of them is similar to that of companies.
As Deputy Colley asked, is there ever, in practice, a capital distribution from a unit trust? Surely the capital appreciation is reinvested and increases the value of the units. The whole point of the unit trust would be to operate in that way rather than to distribute to the members as special distributions out of capital.
There are various forms of unit trusts. Some of the unit trusts which have been established are such as would enable capital distribution of the kind visualised in this section.
How many unit trusts are registered under the Act passed here a few years ago?
I am not aware of the number of such trusts which have been registered but we are concerned not merely with registered trusts but also with the ones which are not registered.
Are there any unit trusts which fulfil the conditions of subsection (5)?
Yes, there are.
Would capital distribution by such a unit trust be subject to——
No, unit trusts would not be liable to capital gains tax if all the units were held by an exempted person.
But, assuming the person was not exempted but the assets were not chargeable because they were Government securities, land bonds or something else?
Or charities.
They would not be chargeable assets.
They would not be chargeable assets to the unit trust, or to the trustees of the unit trust, but will they be chargeable assets?
The exemption would pass through to the unit holder.
Deputy O'Malley asked how many unit trusts were registered under the 1972 Act, and the Minister did not have that information. Can a unit trust legally operate here if it is not registered under the 1972 Act?
I would not like to offer an opinion on that.
I think the position is that legally it cannot. Certainly, as far as control and so on is concerned, it could not.
I think there are certain limitations on it. It cannot advertise or hold itself out seeking money but I do not think there is an absolute prohibition on unit trusts.
Unit trusts which are not registered. The position is that the Minister has been telling us that there are unit trusts which do, apparently, some rather peculiar things, peculiar in the sense that most unit trusts do not do them. I think he told Deputy O'Malley that the unit trusts he had in mind are not registered under the 1972 Act.
I said all are not registered. Even if one looks up the registered ones. I think one will find that they may distribute capital.
Is the Minister saying there are some unregistered ones operating in this country and distributing capital? By operating in this country, I mean having their centre of control within the State.
I have not said that we have knowledge of all their operations.
No, but the Minister has indicated a sufficient knowledge of their operations to say that they do this somewhat unusual thing for a unit trust, the distribution of capital.
We are anticipating that such activity may be engaged in. It may have been done. I cannot say from my own knowledge at present whether they have but there is sufficient information available to indicate the possibility that such distributions could take place.
I must confess it sounds to me like a shot in the dark on the part of some of the Minister's advisers and that the provisions do not bear too much relation to reality.
I did ask the Minister, on Second Stage, to look into this matter because it did seem as though there were requirements here that did not bear too much relation to reality. Can the Minister tell me if that matter was looked into and what was the result of its being investigated?
I have told the House that there is sufficient reason to believe that such distributions could take place as deem it appropriate to take action now to govern them if they should.
I will leave it to the next section.
Question put and agreed to.
SECTION 32.
Amendment No. 33 in the name of the Minister. Amendment No. 33 is consequential on amendment No. 34 and 34a seems also to be consequential on No. 34. Therefore, amendments Nos. 33, 34 and 34a may be discussed together. Amendment No. 34a is on the supplementary list.
May I first take amendments Nos. 33 and 34 together?
Is the Minister allowing amendment No. 34a to stand over?
I shall come to 34a in a moment. I move amendment No.33:
In page 31, subsection (1) (c), line 29, after "managers," to insert "and".
In replying to the debate on Second Stage I undertook to look again at the conditions laid down in this section which would have to be satisfied before a unit trust could enter into a special arrangement with the Revenue Commissioners. I now feel that the condition in paragraph (d) of subsection (1) might impose a severe restriction on a unit trust desiring to enter into such an arrangement particularly in so far as it relates to the distribution of capital gains. Therefore, by this amendment I propose to delete this condition. I take it the House has the amendments concerned before it and that I do not need to read them out?
Yes.
In regard to amendment No. 34a, the definition of "distribution period" is no longer required following the deletion of paragraph (d) of subsection (1) of section 32, by amendment No. 34, and accordingly the words "distribution period" are being deleted.
We have no objection to the amendment. It would be difficult to envisage any unit trust distributing 80 per cent of its capital gains and income in a particular year. It would be a somewhat improvident unit trust that would do that. The condition being imposed would have made it impossible for the unit trust to comply with it and I begin to wonder whether some of the other conditions in subsection (2) may be difficult to comply with. The other two amendments apart from the deletion of paragraph (d) seem to be consequential and they do not call for any comment. I take it that no requirement is being made about the retention of any particular percentage or the payment out of any percentage of the aggregate of the income on chargeable gains of a unit trust for a year or a distribution period?
I cannot say with certainly what specific arrangements the Revenue Commissioners may make.
The Revenue Commissioners should not be entitled to insert unilaterally some requirement that a particular percentage should or should not be retained.
The arrangements the Revenue Commissioners may enter into are those which are necessary for the operation of section 32. Obviously, the details cannot be spelled out in the legislation but the purpose of the arrangements are set out in subsections (3), (4) and (5).
Amendment agreed to.
I move amendment No. 34:
In page 31, subsection (1), lines 30 to 36, to delete paragraph (d).
Amendment agreed to.
I move amendment No. 34a:
In page 32, subsection (6), lines 28 to 31, to delete the definition of "distribution period".
Amendment agreed to.
Amendment No. 35 has been dealt with together with amendment No. 13.
I move amendment No. 35:
In page 32, subsection (6), line 32, to delete "specified securities" and to substitute "securities falling within section 19".
Amendment agreed to.
Question proposed: "That section 32, as amended, stand part of the Bill."
Is the Minister aware of one or more unit trust operating in this country that, on the basis of their present activities, can comply with the requirements of this section? I am referring to the requirements laid down to enable a unit trust to enter into a special arrangement with the Revenue Commissioners.
The Revenue Commissioners believe such exist.
I do not want to be difficult but I asked the Minister if he or the Revenue Commissioners were aware of such cases. That is different from believing that such exist. Do they positively know they exist?
Yes, that is their belief.
Are we at cross purposes in this? Do they know that such exist or do they suspect such exist?
They are satisfied they exist.
They are satisfied on the basis of what knowledge?
Of their own knowledge.
This is a matter of some importance because I believe the conditions being laid down are such that no unit trust can comply with them. If that is so, I do not see much point in going through the motions of this section.
Because there are so few I do not want to give any information here which may identify people whom it may be inappropriate to identify. I am not withholding information from the House. I have some information. The Revenue Commissioners have more because they receive more in confidence and they must maintain confidentiality. I can say they have had discussions with people who are in a position——
To comply with these conditions?
Yes.
I do not want even the inadvertent disclosure of any confidential information. The Minister has said they have had discussions with people who could comply. Does that mean these people think they could comply or have they any knowledge of people who comply at the moment?
I understand the information they have received leads them to believe that they could comply with the conditions. I would draw the attention of Deputies to subsection (5) where the Revenue Commissioners may waive one or more of the conditions. This ensures a degree of mobility and it will ensure that it will not operate disadvantageously.
That is true but I wonder if we are laying down unreal conditions. Will we have to operate subsection (5) so that the Revenue Commissioners may waive the various conditions we are laying down?
I think not.
I rather suspect that that is precisely what will happen.
What is the value of the conditions in subsection (2)?
The general objective is to ensure that to qualify unit trusts must have broad public participation.
From my limited knowledge of unit trusts, I do not know if any of them could comply with subsection (2). Possibly they could comply with it for a while, but they would reach the stage when they would no longer be able to do so. The first condition says:
not less than 80 per cent of the units were held by persons who acquired them pursuant to an offer made to the general public,
I assume that is an advertisement inviting subscriptions. The majority of unit trusts are quoted not on the Stock Exchange but by their managers giving weekly or monthly buying and selling prices. In that, there is an implication of an offer to the public. After a while, less than 80 per cent of the units held may have been bought, not as a result of the original offer or advertisement, but in the course of normal trading by people watching the fluctuating price of the units. That is not an offer to the general public in the normal sense. Is it to be regarded as such?
If they hold themselves forth to the general public, then they are on offer all the time.
But they are not advertising all the time. They are simply quoting in the list of unit trusts which are published in the Financial Times and other papers their buying and selling prices each Thursday or Friday. They are not holding themselves out to the public as such, or if they are, presumably everyone who buys is buying pursuant to an offer made to the general public. Therefore, the question of “not less than 80 per cent of the units being held by persons who acquired them pursuant to such an offer” could arise. Could the Minister tell me exactly what “pursuant to an offer made to the general public” is?
It means that the unit trust scheme is available for substantial public participation. The way in which participation can be obtained can take many forms.
The object of that provision is clear enough—to prevent people having their own private unit trust and using it as a method to avoid liability for capital gains tax. In my view, Deputy O'Malley has a point. The phrase "not less than 80 per cent of the units were held by persons who acquired them pursuant to an offer made to the general public" would seem to suggest that even if one accepts that once they are on offer that does not necessarily mean an advertisement. How does one ensure that a person who wants to operate this for his own benefit will not acquire them "pursuant to an offer made to the general public"? This could be done and what the Minister is trying to achieve here would be defeated. The phrase "acquired pursuant to an offer made to the general public" is sufficiently ambiguous to cover either situation—the one suggested by Deputy O'Malley or the situation I am suggesting.
If it is a genuine public unit trust its trust document should have rules which would prevent that development.
If it has, perhaps this probably unworkable provision should not be there, but rather the trust document should comply with certain requirements.
The trust document requires that this be complied with, so there will be no difficulty in satisfying the Revenue Commissioners that it has been complied with. If it is not, then the trust is in breach of the rules.
"acquired pursuant to an offer made to the general public" is an ambiguous phrase in the light of what the Minister says, that is, that this does not mean necessarily pursuant to an advertisement.
Question put and agreed to.
SECTION 33.
Question proposed: "That section 33 stand part of the Bill."
This section contains some fairly complex provisions. I must admit that in the nature of things the provisions must be complex because of what it seeks to achieve. It might help if the Minister were to outline the provisions of this section in somewhat less technical language.
I shall do my best. This section includes two main measures to prevent avoidance of capital gains by the use of arrangements entered into by what are called connected persons. The first measure provides that an acquisition or disposal between connected persons is to be treated as not being a bargain made at what lawyers call arm's length or an agreed bargain in the open market place. In those circumstances, market value is to be substituted for the actual consideration because it is considered that the actual consideration is not the open market value.
The second main measure is that a loss on the transfer of an asset between connected persons will be allowable only against a gain made on a disposal to the same person. A further measure provides that restrictive covenants imposed on an asset transferred from one connected person to another are to be given only limited weight in valuing the asset transferred. The rules for determining if persons are connected follow those for income tax purposes contained in section 96 of the Income Tax Act, 1967. Generally, connected persons include husbands and wives and their relatives, the trustee of a settlement and the settlor, partners of a partnership, apart from acquisitions and disposal of partnership assets under a bona fide commercial agreement, and companies under the same control. The House will see that “connected persons” is defined in subsection (7). I can go into the subsection if the House wishes.
(Dublin Central): I cannot understand how a loss can be allowed only if a gain is made. Would the Minister explain that again?
The loss would not be allowed at the time this would have taken place but only in respect of a future gain on the part of the connected person. Subsection (3) states that the loss may be allowed only against a chargeable gain.
(Dublin Central): In respect of some other transaction?
Yes. Where a gift in settlement and the income from it are applied to provide education, cultural or recreational benefits and so forth, there will be no restriction, but this position will not apply if most members of the association are connected persons.
In essence, what the Minister is aiming at is that the connected persons are unified so that the gain of one is the gain of all and the loss of one is the loss of all—in other words, netting gains and netting losses—so that one connected person could not make a loss and get away with it where another made a gain and did not account for it.
That is like it.
The rest of it is technical phrasing to try to achieve this. The connected persons are husbands, wives and their relatives, "relatives" being defined in subsection (8). The Minister mentioned the income tax code. Is this provision consistent with the income tax code or is there a variation?
There is a very minor variation.
It does not make any significant difference?
No.
The provision refers to "companies under the same control or under the control of connected persons". That comes into the definition of "connected persons" and it raises a point about companies coming under the same control. That seems to be extraneous to the idea of a connected person. As the Minister said, husbands, wives and their relations, trustees in a settlement and partnerships are all right, but we have this provision later on in subsection (7):
(d) a company is connected with another company—
(i) if the same person has control of both, or a person has control of one and persons connected with him, have control of the other, or
(ii) if a group of two or more persons has control of each company, and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by one or more persons with whom he is connected;
I know what the Minister and his advisers and the Revenue Commissioners are trying to get at but I am wondering how far legislation can pursue this point. There are many ways of evasion. The control of a public company with shares may be in the hands of a hidden trust, which would be quite easy to arrange. If there is a group and if one person in the group is connected but the majority are not, is that the control?
I will take a specific case. If you had two companies with a public issue and if in effect one person was in a position to have an effective controlling interest in both, while that person could join others with him in the guise of trustees having control of one, and if he did the same thing in the other, the majority, say five in each case but with only one connected person in each group, where are you? Is that control or is it not? I know the Revenue Commissioners will have ways of getting after that by inquiring where the revenue is going and where the interest is going. My point is simply that prolixity and attempted exhaustiveness in legislation may be futile where the thing that matters is the discretion of the Revenue Commissioners.
In this connection I find the wording of the explanatory memorandum, from a legal point of view, preferable to the attempts in the Bill itself at defining what is meant. If a court were asked to construe the powers of the Revenue Commissioners or the rights of an appellant under this section, it is much clearer in the words of the explanatory memorandum which states that companies under the same control are under the control of the connected persons, and so forth. We are back to the old rule of law that operates so much in regard to testamentary depositions. Where technical language is used, the matter is technically construed, but where one resorts to legal forms, then strict legality is applied. Where general terms are used with common and general meanings, the court will look to the common and accepted meanings. There are cases where the general phrase is preferable to the other.
(Dublin Central): I should like to get my mind clear on whether this only applies to connected persons and companies— that it has no bearing where an ordinary transaction takes place between A and B. I cannot see any difference in a transaction between A and B and between husband, wife, connected persons and partnerships.
It is less likely.
(Dublin Central): The Minister must be very innocent. Anyway I thought it should be in the Bill, and why it is not there is beyond me. There is no protection at all for an ordinary deal between A and B. Evidently it is assumed that that will be above board.
It might be cheaper to pay the tax than take the risk.
(Dublin Central): Apparently it is not deemed necessary to provide in this Bill for that contingency. I know what the Minister is aiming at, to get the real market in this situation, but it may not be that easy to make this section work. I can see certain injustices that could arise as regards the open market value. Take the case of a man down the country who puts his farm up for sale and it is generally known that one of the relations will bid for that farm. I have as good a knowledge of sales in the country as anybody else. Do we all not know that the open market value there will not be a true market value, because it is generally accepted that you will not bid against the relations? Do I take it that the Revenue Commissioners will have to accept that value arrived at in the open market? Even if the property is withdrawn, is that the market value the Revenue Commissioners will take?
I should like to know how the Revenue Commissioners will assess the value of the property in a deal at an arm's length, a private deal. What the property is worth in being transferred within the family and what it would be worth on the open market might be two different things. The Revenue Commissioners might get the wrong end of the stick in trying to assess the value in a family circle. Certainly if I were caught by that section I would put my property on the open market. It might be a rude awakening as to what the offer would be, but I take it that if a property is put on the open market for valuation purposes and there is an exceptionally low bid, the Revenue Commissioners will be compelled to accept that value. That would be my reading of it, and I think that is the interpretation the Revenue Commissioners would have to take.
There is a great deal of value property in this country today and if it was put up for sale at this time it would not be worth half of what it cost to build. In this present situation I think it would be legitimate for a family to put a value on property of half of what it cost to build and that the Revenue Commissioners would have to accept it, just as I think the Revenue Commissioners would have to accept the valuation of a farm arrived at at a sale in which only the relatives are bidding for that farm.
The law allows the Revenue Commissioners to have cases of doubt adjudicated.
(Dublin Central): What would they adjudicate on? The public market price is the value.
They can get an independent valuation if they are not satisfied that a genuine transaction has taken place——
(Dublin Central): I am speaking of a completely genuine transaction which has taken place on the open market.
Yes, but there are many influences upon the market: there can be a boycott; there can be fashion; there can be popular demand; there can be intrinsic value of the assets, many things, and probably nobody is better informed in these matters than the Valuation Office. It is the Revenue Commissioners who make the decision and they could invoke the aid of the Valuation Office in coming to a decision. However, it is provided in the Bill that disposals and acquisitions are deemed to be at market value, and if there is any reason to doubt that they are at market value, then they can be duly assessed. If, of course, any person affected by an assessment does not like it, he has the right to appeal against the assessment by the Revenue Commissioners.
To come to the point Deputy de Valera made about the complex description of the several arrangements which can take place and the difficulty of defining what is a controlled company and what is not a controlled company, as he has himself acknowledged on previous occasions, the very complexity of statutes nowadays is a tribute to the ingenuity of people who can find ways around the Ten Commandments. If they had been our first Statute Law here, I am sure by now we would have many volume explaining that the various liberties that people have taken in the interpretation of them were, in fact, contrary to the original spirit. Indeed, I suppose the interpretation of these things is what a great deal of Christian thinking today is about. It is not in statutory form but the very complexity of laws nowadays is due to the fact that people have used artificial legal persons between themselves and the Revenue Commissioners and there is no end to the number of such arrangements that can be made. I suppose the more ingenious they are the more it may be necessary to close them off in legislation, because it may be found that the Revenue Commissioners, within their existing powers and permitted discretions, are unable to deal with them.
I agree with the Minister on that latter point. However, it is for this reason I would like to suggest that in new legislation of this nature it is better—this is a comment I make on the section as a whole fully realising that a last-minute change of the kind I am talking about may not be possible, and therefore I am not going to press the point too hard, although I think it is a valid and important one to make—to take the simple form I spoke of earlier and then close the loopholes quickly as they arise on the cases, because they would arise only on the cases.
I do not want to detain the House on this issue, but it is of some general validity for this type of legislation. It is a mistake to try to foresee every case, because you complicate the issue both for the Revenue Commissioners and for everyone else and make administration all the more difficult. I think the approach should be a simple general discretion coupled with the discretion of the Revenue Commissioners. If you do it the way I am suggesting the Revenue Commissioners have a wider discretion. After all, it is they who will make the decisions; it is the other who will have to appeal. If they use their discretion in the way they think it should be done, well and good; if the court upholds them, so much the better. If somebody has found his way through, let them come in fast and deal with it. If the thing is blatant enough I do not know— although it is against all the principles I have ever advocated in a case like this—that I would not put in a proviso in the legislation foreseeing the possibility of retrospection in the sense that you can attach a penalty to anybody who is found to have got away with something in that.
I am recommending that approach because we are talking about anti-avoidance and this whole part of the Bill is bound to bristle with this kind of thing: where you attempt to foresee everything and to legislate for it you get complexities and, as you know, somebody will find a loophole. I am urging this very much on the Minister. I know there are certain urgencies involved but I am almost tempted to urge strongly on the Minister that he take this part of the Bill and look at it again from the point of view I am advocating, to the extent that one would deliberately foresee that a case would go against the Revenue Commissioners and, if necessary, to be ready to deal with that situation on an emergency basis and even bring in some sort of general penalty clause in the case of a blatant breach of the intention shown on the straight words. I shall not labour that point further.
Subsection (2) of the section, as Deputy Fitzpatrick pointed out, can have consequences in regard to market value. The Minister spoke about the Valuation Office, but one of the difficulties about relying too much on the Valuation Office by itself is that the Valuation Office is virtually part of the State organisation and if you put too much of a burden on it in a matter like this you put them in an ex parte position. I would be careful to avoid difficulties about simply saying: “The Valuation Office will give you the answer”. If the House takes that sort of approach with the Valuation Office or any other Department of State we must be careful that we are not merely passing the buck.
Deputy Fitzpatrick has a perfectly good point about market value, but I do not see how one can get over it on the intention here because, obviously, we will not disagree that some safeguard in regard to connected persons is required and that what is stated in the explanatory memorandum on section 33 is reasonable. It is not so much what you are doing but the way in which you are doing it that matters here.
Subsection (3) is all right until we come to the proviso which is:
Provided that this subsection shall not apply to a disposal by way of gift in settlement if the gift and the income from it is wholly or primarily applicable for educational, cultural or recreational purposes, and the persons benefitting from the application for those purposes are confined to members of an association of persons for whose benefit the gift was made, not being persons all or most of whom are connected persons.
Apart from why a proviso of that nature needs to be put in we come exactly to the point I am dealing with —"all or most of whom". The difficulty arises there because if it is not "all", what is "most"? Does it mean the simple majority? That can be dealt with. Perhaps I had better pause here to let the Minister say exactly why he feels this proviso is necessary, in this section, why if there is something substantive to be done in regard to this proviso it cannot be done in a positive way in the body of the bill and taken out of the anti-avoidance section. You are really trying to put in a saver and that can very often be expressed positively. The less of this kind of thing you have in an anti-avoidance section, in the interests of those who have to administer this already very difficult and onerous code, the better. Would the Minister comment on that proviso?
Subsection (3) limits the availability of the loss which accrues to a person making a disposal of an asset. It may only be used against a gain made on disposal of an asset to the person who acquires the asset. It is a restriction on the use of the loss. Where the disposal is done for these purposes which are deemed to be good purposes, deserving of encouragement, it is considered that the restriction should not apply. It operates to the benefit of the person making the disposal. The Deputy raises this in the context of saying that the legislation should not be any longer than it need be and that we should await actual cases before spelling out any further details necessary to protect the revenue.
I do not mean we should leave it all out—on the residue.
I appreciate that. To come back to what we were talking about earlier, the definition of "connected persons", we have, in fact, achieved a briefer definition of what is contained in section 96 of the Income Tax Act, 1967. In so far as we have any lengthy sections they are almost on all-fours with what is in the 1967 Act because here we are relying on experience and the need to draft them in this particular way. The one small amendment that there is something which has appeared to be necessary in the light of subsequent events. You will find it in paragraph 7 (f) where the words "or to acquire a holding in a company" have been added. They were not in the 1967 Act but a great deal has happened in the last eight years which justifies the inclusion of the additional words.
Notice taken that 20 Members were not present; House counted and 20 Members being present.
Subsection (3) is most important because it could have effects on gifts which would not be equitable or, perhaps, foreseen by most people. A disposal between connected people is a definition wide enough to cover the ordinary gift as between a father and son. If a father makes a gift of something, the value of which is easily ascertainable, such as shares in a public company which are quoted on the stock exchange, and if, in making that disposal by way of gift, he suffers a loss it is a bona fide genuine loss. If he had bought shares a year ago at £2 apiece and at the time he made the gift to his son they were £1 apiece he suffered a loss of £1 per share and it is a bona fide loss. The value of the shares is ascertainable and it is a genuine value. If he were selling them he would sell them at the price at which they are valued for the purpose of the gift to the son and there is no question, therefore, of their value on the day they are given to the son not being a genuine value. Why should that loss not be allowable except in relation to chargeable gains accruing to him on some other disposal of a different asset to the same person? If a man has four sons and four different sets of shares of public quoted companies and on a particular day he decides to make a distribution to his four sons and two of the shares are showing a capital loss from the time that he acquired them and two are showing a capital gain, and let us assume, for the purpose of the argument, that the losses approximately outweigh the gains under subsection (3), you would have the position that the gains would be chargeable to capital gains tax but the losses would not be allowable against the gains. I think that is wrong.
To bring it a step further, if there is a bona fide capital loss on a gift to one son and, at the same time, there is a bona fide capital gain on a gift to another son, why can one not be set off against the other? If the father made a gift of something on which there was no loss he would be better off than he would be making a gift of something on which he is, in fact, incurring a capital loss; that, on the face of it, seems unfair and the proviso here to subsection (3) seems to apply only to gifts for educational, cultural and recreational purposes and so on where the beneficiaries are not mainly connected persons. That would seem to indicate that a trust set up for the education of one's children or grandchildren by way of a gift of shares being put into a settlement and if bona fide losses are incurred on those shares on a particular day one is not entitled to set off the loss but, if the settlement is for someone else's children or for general public purposes, one is entitled to set off the loss. That is too severe a restriction altogether on people who would wish to give gifts to their children or grandchildren, their nephews or their nieces. Under subsection (3) they will find themselves in the position that, while gains will be chargeable for tax, the losses are not off-settable against the gains. Would the Minister agree something should be done to allow a set-off of losses and gains on gifts when they are made to people of the same class?
When a person sells stock on the stock exchange and loses on that transaction that would be a transaction standing on its own. If subsequent to realisation a father decided to apply the cash by way of a cash gift to a son there would be no question of capital gains tax being applied.
I said if the gifts were of shares the value of which could be ascertained on the particular day because they would be quoted on the stock exchange.
I understood the Deputy to have two cases in mind. The first was the sale of shares. The loss there could be set off against any gain. There would be no restriction at all. The gift of money is a separate matter entirely. As to the other case, the restriction is quite simple. While there may be genuine cases, such as Deputy O'Malley illustrated, many other cases could be contrived so that people could arrange their disposals in the same way as they arrange their purchases and sales on the stock exchange every other day by engaging in a little speculation and after that using their skills and those of their brokers they make a little profit. The people of substance could adjust the disposal of their property to one another so as to negative the whole purpose of capital gains taxation, which is to collect the tax on capital gains which are made.
I am sorry that the genuine case has to be caught because of the extraordinary inclination that wealthy people, in particular, have to contrive cases to frustrate the intentions of Parliament. So long as it is so I fear we must, in the words of St. Paul, see the innocent suffer for the guilty. In regard to what the Deputy said, that it was done within the family, the father giving it away to his sons and that it should be treated in some special way which would distinguish it from others, if it was the case of the once only gift of father to son, because this was all his property, I suppose he might use the right day when he would pay least tax by having the right amount of loss to set off against the right gains. He would be very fortunate to arrive at that particular arrangement. I am afraid the whole system would be so open to a multitude of contrivances that we could not allow a free setting off of losses amongst connected persons.
Surely the Minister, in what he has said, has to some extent given the people who find themselves in this predicament the very solution to their problem? If their loss is not allowable on, for example, a gift to a son of shares surely the solution is, as the Minister says, to sell the shares, incur your loss in financial terms and then hand over the money? So far as the child is concerned he has only immediately to re-invest the money and he is back where he stood but the parent has had the benefit of the capital loss which he can set off against any capital gains there may be on a gift to another child. Why should people have to go through the only slightly laborious and rather roundabout system of actually having to sell the shares and then buy them back again in order to avoid the penalty which is imposed on bona fide transactions in subsection (3)?
It is the anti-avoidance section that is so described and so intended. I can see that situations, such as those described by Deputy O'Malley, may arise but this will only happen if some person wants specifically to set off a loss against a gain. If they are to gain an advantage, as is their intention by that particular cumbersome process, instead of transferring the shares, so be it. I do not think they are put to any great inconvenience. Is it such a terrible imposition if the purpose of their device is to avoid paying tax?
This is not the bed and breakfast operation, is it?
No. Deputy O'Malley was talking about selling shares so as to use the loss to set off against a gain elsewhere. He said it is a simple device and people would be forced to use it because we will not allow losses to be set off against gains on disposals to different connected persons.
The Minister seems to assume that everyone who makes a gift to one of his children, a nephew or somebody like that, is engaged in tax avoidance. He really has this on the brain, not just in this Bill but in all his other Bills. He is always talking about evaders and avoiders. If I want to give a gift to my son why should I immediately be labelled as a tax evader?
I have not done so.
The Minister says if anyone gives a gift to his son and there is a capital loss on that he cannot set it off against other capital gains. He goes on to say that if tax avoiders want to sell the shares and hand over the money instead let them do it. People giving gifts to their children are not tax avoiders. The Minister seems to think that everyone who does anything naturally is doing it for tax avoidance purposes.
I am talking about people who do not know what this section or Bill is about. They do not even know what capital gains tax is but possibly at this moment they are in the process of giving a gift to a son. That gift will mean a capital loss to them. People think that in this country we have won freedom so dearly that it is all right to give gifts to one's children. Those people will discover to their horror in about six months' time that there was a capital loss involved in one of the gifts and capital gain was involved in the gifts to the other children. Those people will be charged capital gains tax as well as the various other new taxes on the gifts to their other children but will not be allowed to set off the capital loss in the gift to one child against the gifts to other children. That is seriously wrong. It is also wrong for the Minister to allege that people only give gifts to their children in order to evade tax.
I think the Minister's backbenchers should come in and hear him discriminating against children.
Notice taken that 20 Members were not present; House counted and 20 Members being present.
I want to repeat the problem and it is a very definite problem that arises on subsection (3) of section 33 in connection with perfectly ordinary bona fide gifts by a parent to a child. If a gift is made on which there is a capital loss at the disposal —the example I have given is publicly quoted shares—that capital loss is offsettable or allowable only against gifts on which there is a capital gain to the same person and not, for example, to other members of the same family or to other persons connected with the donor. This can be extremely unfair because capital gains tax can be chargeable on a gift to a particular child of a donor because the value of the shares or other assets on the particular day of the gift were higher than they were on the day on which they were acquired by the donor. Capital gains tax would be payable accordingly. If, on the very same day, another gift is made to another child on which there is a capital loss shown that loss is not offsetable or allowable against the capital gain.
The Minister and I have discussed the obvious way there is around this. The donor sells the shares, and hands the money to the son. The son buys back the same shares at the same price and the loss is allowable to the donor. I can see no possible justification for having to put people to the slight extra trouble and extra expense of doing that. Why not allow a man to give his own child a gift and if a loss is incurred or entailed thereby let that be offsetable? I am sure there are many Members of this House, the Members who only visit us now and again by courtesy of Deputy Lalor or others, who do not realise that a capital gains tax is payable on gifts to children. Very few people in the country realise it. Capital gains tax is payable in those circumstances on gifts to children and where a capital loss is incurred in a gift to a child it is quite wrong that it is not allowable against whatever other capital gains might arise on other gifts to other children.
I was listening to the Minister's response to the case made by Deputy O'Malley on subsection (3) and it seemed to me that the Minister was agreeing that Deputy O'Malley had a valid point. Indeed he was going even further and agreeing that there was a way around the difficulty, perhaps presenting a certain amount of problems for people but not a great deal. Nevertheless, he said so be it because this was designed to prevent avoidance of capital gains tax. I doubt if that attitude is really justified on the part of the Minister. It is one thing to say that the subsection is necessary to prevent avoidance and to say that it is unfortunate that genuine cases will suffer as a result. One could discuss that proposition but the Minister is going further and saying there is a way around this. In the case described by Deputy O'Malley the father can sell the shares. Thereby he will establish his capital loss and be able to set it off against his capital gains, give the money to the son who can purchase the shares at the low price and the object is achieved. Despite that the Minister says he must retain this subsection. Would the Minister examine that a little further? If it is so easy to get around the anti-avoidance measure in subsection (3) and if at the same time it is creating problems for genuine cases, is it really worth retaining this provision or is it the position that far wider avoidance could be indulged in if subsection (3) were removed? If that is so, perhaps the Minister would tell us in what way this could happen? On the face of it it would appear that it is a nominal anti-avoidance measure but ineffective and at the same time creating problems for genuine cases. In those circumstances, the Minister should either show us that there is a good deal more involved than is already indicated or should take away this ineffective anti-avoidance measure.
I doubt if, in any year, there would be as many as half a dozen of those hypothetical cases occurring. There might not be one in six years. A father who on the one day has four sons that he calls together and says: "Now, my dear children, I am going to dispose of my assets to you but, unfortunately, I am going to make a loss in disposing of some stocks and shares to you, Johnny and Paddy, and I am going to make a gain on what I am giving away to you, Mark and Anthony, and the terrible injustice has been done by Oireachtas Éireann that I cannot set off those losses against those gains". If there is a father of that kind he should be in a psychiatric institution.
Why?
If he is disposing of his goods out of love for his children he will do it in any event, irrespective of whether there is an anti-avoidance provision in this Bill. Is that not the reality? We either discourage avoidance or else we allow it to operate freely. It seems to me to be making a mockery of our whole society to say that we are introducing a capital gains tax and have a Bill which provides no means by which the Revenue Commissioners can stop avoidance.
Surely it is a bigger mockery to pretend one is including an anti-avoidance measure when one is not?
No. I said that the case with which Deputy O'Malley began was one in which a person could take steps to use the loss against some gains being made somewhere else. This word "loss" that we are talking about here is a notional one in many respects because this device will only be used by somebody who is making a gain elsewhere. The loss will be used to reduce tax liability. It is not a crushing blow to the person's net fortune if the loss occurs.
The Minister does not know that.
The Minister cannot tell that.
If a gain is being made elsewhere the position is net. It is neutral. The person who decides not to give his stocks and shares because there is some loss on them which he cannot use in whatever way he wants against some particular gain he knows of, will sell the stocks and suffer a loss and then make a cash gift. The person who gets the cash gift, according to Deputy O'Malley, then proceeds to purchase the shares back again. The market might be right and in the end they might finish up in a less advantageous position than if they had taken the shares directly. There are too many uncertainties here, too many imponderables. We are really spending a lot of time —I am not querying the right of Deputies to do so—on a situation which people of substance will find some way around if they really want to by adjustment, by waiting, by forecasting, by consulting tax advisers, by getting their stockbrokers to advise them, by reading the newspapers. We are not dealing with a once and for all situation which faces the average family. We are asked to amend the law in some way or other to deal with this hypothetical case.
If people will find their way around it what is the point in having it?
It is a discouragement. It is not everybody who will go to the trouble of going to the Stock Exchange and run the risk of a sale and an ultimate purchase which may be in another loss-making situation when he can simply assign the shares over to his son and not involve himself in any capital gains tax. If a loss has been made or if no gain has been made, the transfer to the child will not involve any capital gains liability. The only case we are asked to consider is the case in which there are four sons and where there is a loss on the shares transferred to two of them and a gain made on the transfer to the others.
This section is designed to prevent people from contriving situations which any person engaged in the stock market could easily arrange between connected persons by, as it were, perpetually keeping all balls in the air so that none falls to the floor because the one which falls to the floor might involve a tax liability. If you are a good juggler you can keep them up in the air all the time. Here we are asked to amend this legislation so that people can let the balls fall on the floor if they want to without any tax liability. If people want to keep juggling so as to engage in tax avoidance, I say let them; but let them expend their own energy on it and do not let us waste any more time in Parliament on it.
The Minister has fairly aptly described the section. Before introducing this Bill into the other House he should seriously consider what I have suggested. The Minister talked earlier about the 1894 Act. Nowadays the courts will get away from the idea that the Revenue Commissioners are, so to speak, the publicans of the gospels to be anathemised. They are a very important element of the State. All citizens realise that the functioning of our lives to a large extent depends on their efficiency. The court would get away from the idea that everything must be severely interpreted against them.
If simple anti-avoidance provisions were put in here and if more reliance were placed on the discretion of the Revenue Commissioners the courts would uphold them in the appropriate cases. It is very hard to recollect a case that went unreasonably to the courts from the point of view of the State. I would strongly urge on the Minister that since he is having a rethink on capital taxation there should be a rethink on our whole approach to the duties of the Revenue Commissioners. We are talking about tax avoidance and we are thinking, rightly, about the too clever people who will take advantage of the law at the expense of the community.
We do not give enough thought to the fact that we may be looking at the Revenue Commissioners from the point of view that they might be exceeding their powers, which is the traditional point of view and the wrong one in the present context. I strongly urge the Minister to reconsider this part of the Bill and to try to bring in a new concept to promote the idea with the public, the courts and the House that the Revenue Commissioners are an essential, constructive and important part of the State service and that it is the duty of the citizens to uphold and protect them. They should not be regarded as criminals when they come into court. They should not be regarded with suspicion. This is the traditional approach to the taxman. It is an old approach. Things have changed. That approach may have been appropriate 50 or 100 years ago. If we trust our Government—I am talking in general terms now; I do not mean the present Government——
I am glad the Deputy added that.
If we trust our Parliament, our Government, our civil service, as we do, why single out the Revenue Commissioners in this way? We facilitate avoidance by this kind of legislation, by tying their hands. The interpretation I am suggesting would be made in the courts in favour of the State and of the commissioners reasonably and bona fide doing their work, as they do. A whole rethink is desirable on these anti-avoidance measures. I appeal to all judges and to all the people concerned to adopt the appropriate approach to this problem. If we are rethinking our social policy and putting it into effect in regard to capital, perhaps we should think about the enforcement and collection end as well. There should be a complete rethink on this part of the Bill.
I share the Deputy's ambition. Perhaps in more leisurely days it may be possible to do it. In the meantime I have to play the game according to the existing rules.
The Minister on his own confession realises that he has taken a chance. He realises, and so do his advisers, that where a code like this is concerned, especially a new one, ingenuity will find answers if there is enough money involved. Why not take the other chance? If he is being forced to take that chance, why not take the chance that, if he makes it general enough, the courts, the public as a whole and the House will support the Revenue Commissioners and will be less tied by technical details and freer to do the good job they do? I commend that to the Minister.
I entirely support the well-deserved commendations which the Deputy has spoken with great conviction and articulation of the Revenue Commissioners, but I doubt that if he were to have a private poll of all the Members of this House, that view would necessarily be the majority view.
But they could be convinced of it.
There is a lot to be said in favour of convincing them, but I have argued, as I know Deputy Colley has and as I think all holders of the office of Minister for Finance have argued, about the fairness of the Revenue Commissioners and their anxiety to help the taxpayer and to draw his attention to the rights to which he is entitled, but time and again at Question Time we find that people disbelieve that and it leads normally to a certain amount of laughter because people regard the Revenue Commissioners as the enemy of the people, as Deputy de Valera has said.
This is the traditional view that must be destroyed. That is the real tax avoidance thing we have to destroy.
It is, but one of the most interesting things is that one of the most heavily taxed countries in Europe is the one with the greatest regard for the duty to pay taxes, Sweden. In Sweden tax evasion, tax avoidance, is regarded as a social sin——
And it is.
——which is condemned by public opinion. I would like to see Ireland moving to that situation. If it did, the tax load on those who are caught would be less——
Much.
——and it would not be as necessary as it is at the moment to have such a paraphernalia of laws to prevent avoidance. It has been suggested that I am obsessed with avoidance and evasion. I am not; I am as inclined as anybody else to pay no more tax than I have to pay, and I do not expect anybody to pay any more tax than the law requires, but I also have a sense of duty to the public to ensure that laws which require taxes to be paid are given sufficient strength, or to use the colloquial word, teeth, to ensure that the tax is collected, and it would be wrong in the present state of the law and the public attitude and without disrespect to the courts, the courts' interpretation of law, to leave it to the recital of a simple phrase which would simply say that the Revenue Commissioners shall take such steps as are necessary to ensure that no person thought to be liable to tax will avoid it by measures which go against the spirit as well as the letter of the legislation.
I know it is difficult to phrase that.
I just wonder what our distinguished judiciary would do if they were to see such a mandate to interpret. They would be faced with "What is the spirit of this legislation? Where has that been spoken of?" They might say "We have to go to the Dáil record", but under the present rules they are stopped from looking at these remarks.
Which may be as well.
Which might be in some regards. There is the problem with which we are faced and I do not think that any modern democracy has found a cure. I heard our own parliamentary draftsmen admired in other jurisdictions on occasions——
Of course.
——and while I was delighted to hear the words spoken of them, I could not quite see it in any of the work that came before us, but I was told that they were able to write a Bill as though it were the Ten Commandments. I would say of those who said that that they were not aware of how short the Ten Commandments are. We live in an age when it becomes more and more difficult for parliamentary draftsmen to interpret our simple wishes in simple ways and I have experienced, as has every other member of this and previous Governments, the terrible frustration of expressing a simple thought in answer to a public demand, to meet some public demand, and then to see it come out in blurred pages of incomprehensive print, and one wonders how it became necessary to express oneself in that way. It is because we live in a democracy. If we had dictators who could issue simple edicts and depend on their cohorts to carry them out without question, the laws could be made simple, but I am afraid that as long as we live under a system of democracy which allows people to avoid the laws as well as respect them, we will always be faced with rather lengthy provisions.
I do not want to delay the House on what can become an academic discussion but the Minister has been rather strong on the Ten Commandments. Might I suggest that these can be supplemented? There were a lesser number of Precepts of the Church—six of them.
The Precepts have since been modified.
Take one of these Precepts—but no, I will not take any of them because we cannot afford to be facetious. This is too serious a matter. I want to illustrate what I mean and then I will leave it. Instead of this whole section, at the end of which you have, fair enough, a definition of "connected persons", though I did criticise the wording and did say that "connected persons" are better defined in the explanatory memorandum than in the Bill—define "connected persons" and then simply say in some form or other "advantage shall not be taken by connected persons of the fact that they are connected to avoid the provisions of this Act". There is literally an off-the-cuff anti-avoidance provision. In the interpretation of this Act, the Act will be so construed that advantage must not or shall not be taken by connected persons of the fact of that connection to effect avoidance of the provisions of this Act.
I suggest to the Minister that, suitably dressed up, that off-the-cuff section which I suggest would be much more effective than this long, very expert and very commendable effort of the draftsman, and I am sure that both the Revenue Commissioners and any advisers the Minister had have had some agonising hours trying to perfect this provision, all stemming from the fact that tradition, so to speak, has put them in the dock and not the person who should be in it.
In the deserving cases a simple provision like that would sway the court and bring the court 100 per cent in favour of these deserving cases. I speak as one who has had experience of courts as had the Minister and Deputy Colley. We all know that such a simple provision would ensure that in all reasonable cases the Revenue Commissioners would have no trouble.
The Minister, as a lawyer, knows well that when a case comes to advice lawyers look to see where they can concatenate or disconnect complex provisions. One either builds a fence by connection for protection or, by disconnection, opens a way to get through. The thing one can never get through is a simple straightforward statement that is unlimited. I commend to the Minister that for connected persons the simple provision should be inserted. The explanatory memorandum, in its definition of connected persons, is ideal. Having defined connected persons we should say that advantage should not be taken by connected persons of the fact of their connection or to avoid the provisions of the Act. I know that is not sufficient and it needs more thought. If the Minister does something on those lines he will have done a great job for the public and will have helped considerably to ease the burden of those administering this onerous load we are about to place on their shoulders.
The approach recommended by Deputy de Valera has much to commend it and the sheer simplicity of it is its most attractive feature if it were to work. There is not any doubt but that it would work to the advantage of the Revenue Commissioners and the genuine taxpayer who was experiencing difficulty. I realise a number of the difficulties involved but, nevertheless, it is a most interesting approach which could produce dramatic results. In the meantime, however, we are faced with the traditional situation which means that we get complex sections which produce, in some cases, pretty silly results.
On principle I have an objection to enacting the kind of provision contained in subsection (3). On the Minister's own admission this will be ineffective in preventing avoidance. It will merely create difficulty for those who want to avoid tax and will not be effective or even half effective. At the same time it will create difficulties for the genuine case which the Minister agrees exists. Having regard to the fact that this does not purport to be an effective anti-avoidance subsection the Minister ought to take it out. Why should we enact a provision which we know is ineffective? It is not a question of surmise in this case because it is clear that it is ineffective in dealing with avoidance measures by taxpayers. I have had suspicions of this kind about some provisions but I do not think I have ever come across a provision that was so clearly ineffective before it was enacted and, at the same time, was going to create difficulties for the genuine case.
Is there any reason for enacting a provision like that? If there is not— I do not think the Minister has tried to convince us there is—why should we enact it? Is it not making a mockery of the whole effort at anti-avoidance to enact a provision which without any difficulty can be got around? The Minister told us that this can be got around by virtually anybody. What is the point of enacting that type of legislation? It is not a question of convenience or otherwise because in principle it is wrong to enact that kind of provision knowing it will not work and that the only people who will suffer are genuine cases not engaged in avoidance at all. The Minister should think again about subsection (3). He has not attempted to tell us that it is necessary except on the grounds of making life a bit difficult. That is not enough. Unless it will be effective in dealing with people trying to avoid liability there is no point in enacting it.
The only case that we have been discussing for more than an hour is the question of a father bringing together four sons to distribute stocks and shares. That is only one form of asset that can be passed on, but there are cash gifts, land, business interests and so forth and all those arrangements are caught by these sections. Very few if any of those will involve a loss situation. We have had a most interesting debate which I thoroughly enjoyed. Deputy de Valera has referred to my preoccupation with the Ten Commandments, and I am one of the poorest observers of them, but this part of the Bill is concerned with those who seek or are concerned with the Eleventh Commandment and I do not have to recall that for anybody.
Will subsection (3) do any good?
It is a discouragement to people to engage in tax avoidance practices. There is no law one can ever devise that will not admit some measure of avoidance and the Oireachtas has a duty to make avoidance of the law if not impossible at least inconvenient.
I agree but we should not make it easy and that is what we are doing in subsection (3).
I do not think so.
We appreciate the Minister's difficulties but I ask him to take a broader view at the earliest possible moment.
I do not want to open up the debate because it would be irrelevant. I would certainly need to look at the Constitution to see what the correct course might be.
Question put and agreed to.
SECTION 34.
Question proposed: "That section 34 stand part of the Bill."
I should like to have what I said on section 34 reiterated on this section.
And my reply also.
Might I ask the Minister if he would explain the thinking behind section 34 and possibly give us an outline or example of the kind of case with which he is trying to deal here?
This section contains an anti-avoidance measure to prevent a device by which a valuable asset could be disposed of in separate parts, so that the sum of the value of each part is less than what the property would command as a unit. In these circumstances the amount to be taken is the larger market value apportioned rateably over the separate disposals. The section would normally apply to transactions made by way of a gift.
Perhaps the following example will prove of some assistance. For instance, take a piece of land worth £50,000. If sold in five equal lots to connected persons at £8,000 each, the aggregate value of the sales is £40,000, which is £10,000 less than if the aggregate had been sold together. To deal with this situation section 34 provides that the value to be placed on each lot for capital gains tax purposes is £10,000 instead of £8,000.
The purpose is clear enough; it is quite clear since the Minister gave that example. But it seems to me that one or two questions arise therefrom. The section provides that if a person is given or acquires from one or more persons with whom he is connected by way of two or more transactions, assets, etc. —as far as I can see there is no time limit laid down in respect of the two or more transactions. Presumably, this could be a series of transactions extending over, say, 20 or 30 years. Apart from the question of uncertainty that that introduces, I am wondering about its practicality. In the example given by the Minister, if the first portion is sold at £8,000, presumably the capital gain involved is based on a market value of £8,000 in the first instance. Subsequently, and perhaps over a long period, other portions are sold. But to determine what is the correct amount of tax payable in respect of each portion sold, presumably one has to wait until the last portion is disposed of and then go back, on the earlier transactions, to levy additional tax. I do not know if I have the picture right. Is this really a practical proposition as far as the Revenue Commissioners are concerned?
I accept that there are administrative difficulties here. Of course, connected persons are connected during their respective life spans, I suppose, and no more.
How many parts were there in the example the Minister gave?
Five.
Well, then, there could be five connected persons connected to the original person but they need not necessarily be connected to each other, need they? It is only the person disposing of the share who needs to be connected with the receiver of it; is not that correct?
That is correct but it is not improbable there would be a connection through him with each of the others. I accept that the Deputy has a point when dealing with the time span over which one would deal with this situation because I can see that one could hive off part of a land holding in, say, 1975 to a connected person and might not dispose of any more for another 20 years, in which case, would one connect what happened in 1975 with what happened in 1995?
This is a matter, like so many others, where the Revenue Commissioners would have to examine the facts of the case to see if the transactions were related, apart from the relationship which might exist between the persons. It is an area in which, as Deputy de Valera said discretion should be left to the Revenue Commissioners. We cannot, in legislation, determine matters of that kind. But, where there is a clear case of a hiving off of land, say, in a matter of a couple of months, to eight connected persons, then I think there can be no serious argument about it.
Agreed, there is no problem there.
Another problem might arise if, for instance, somebody purported to sell half a house to one and half a house to another, in which case there cannot be any dispute.
They are questions of degree and it is very difficult to lay down rules here. If we tried to lay down rules, the only result would be that people would wait until they had complied with the rules and, an hour afterwards, proceed to do the very thing this section is designed to discourage. We have to leave it to the common sense of people in general and the Revenue Commissioners, in particular, to ascertain what situations come within the ambit of section 34. The probability is that there will be transactions of that kind which do not come to the notice of the Revenue Commissioners. On the other hand, if they do, the Revenue Commissioners should be empowered to deal with them, and that is really what section 34 does.
I agree with the Minister about the difficulty perhaps about spelling out rules in this regard. Nevertheless, we ought not pass the section without some consideration being given to the consequences. The consequences in so far as the connected persons are concerned do not worry me too much, because presumably this section will be invoked only where the object of the exercise was to avoid tax, though I can conceive of a situation in which some of the connected persons might be virtually innocent parties to it and find themselves, long years afterwards, being saddled with a bill for tax in respect of a transaction on which they thought they had discharged all of the tax. Nevertheless, I do not think there is any way round that.
I should like to be fully satisfied of the position of a purchaser for value from one of the connected persons in respect of that person's share. Can we be quite sure that no liability in respect of the additional tax that might be assessed at the end of the series of transactions, no liability whatever for that, can attach to the land or to a purchaser for value from one of the connected persons? Is that so?
Yes, that is so.
We can be quite sure of that?
Yes.
If he has constructive notice?
It is a requisition which would never be asked.
Should never be asked.
Where ignorance is bliss, 'tis folly to be wise. No, I cannot see that liability would attach even if the knowledge came to the purchaser for value. Quite frankly, I should not like to be explicit on that.
Since the Minister mentioned a requisition, one of the problems which arises here is that there will be, presumably, a standard requisition to the effect of whether there is any outstanding claim for, say, capital gains tax. The normal reply to that would be: not to vendor's knowledge. How helpful is that in regard to a purchaser for value in due course? In fact it may be that, to the vendor's knowledge, there is not such a claim although he may have knowledge of the fact that there could be such a claim if another piece of the original holding is sold.
There is no charge on the land for capital gains tax. The liability would attach to the disposer.
Is there any time limit envisaged on the series?
None.
If there is none it will create many difficulties.
I explained that it will be a matter for determination by the Revenue Commissioners on the facts of all cases, but if there is a division of property after a passage of time, which I would not be in a position to define tonight, they become such separate properties that one could not reasonably argue they were one. It would be necessary to go back in time and to merge them together to calculate market values. These are matters that must be determined by the ordinary laws of common sense and business practice. They cannot be spelled out here. If a portion of land is given by way of a gift to a son and if another portion is hived off after several years that is quite different to disposing of one property within a matter of a few months to several connected persons. In that case one could reasonably assume an intention to break up the property and to divide it as one transaction. It will have to be left to common sense to interpret this and if anyone considers the Revenue Commissioners are acting unreasonably they will have the right of appeal. If it can be shown the Revenue Commissioners went back 20 or 30 years to try to merge the properties that had become separated properties, I am sure they would get little sympathy from the court.
Question put and agreed to.
SECTION 35.
Question proposed: "That section 35 stand part of the Bill."
I do not wish to take from the tributes paid to the draftsman but I have a criticism to make in relation to the structure of this section and I am afraid the same complaint could be made of much of the finance legislation. Indeed, there is a suspicion that it was deliberately done to make interpretation difficult. I cannot see why in the preliminary part of the Bill it is stated: "‘controlled company' has the meaning assigned to it by section 35 and ‘control' in relation to a company shall be construed accordingly" while in the middle of this complicated section there is a definition that is obviously required for the whole Bill. Why was it not possible to put the definition in the subsection into the preliminary part? That would have simplified the drafting and it would tidy up the legislation. It could be put into section 2. It makes me wonder why these definitions are put into tax avoidance sections only. These sections should be simplified, but a contributing factor to the complication is the specific discussion of a definition of this nature. Since the definition is referred to in section 2 and presmably is required in relation to the entire Bill, I submit it is out of place here.
If the Deputy were to table a Private Members' Motion to ask for the appointment of a select committee for consultation with the parliamentary draftsman I would be inclined to support it.
I am not criticising the draftsmen. They have a most difficult task.
We present them with fairly simple ideas as we see them, and they have to express them in this manner to ensure our intentions are fulfilled. It might be no harm if we had a round table conference of members of all parties with the parliamentary draftsmen to see if it is necessary to have these forms of expression to achieve the objectives of the Government and Opposition. If the answer was that there was no other way of doing it we would have to accept that, but we do not have available to us in the House the parliamentary draftsmen who are strangers to the discussions that take place here. I know they are probably too busy to read our remarks but it might be worth while at another time to have such a discussion.
All the people concerned with controlled companies or transactions by controlled companies are connected persons. Can the Minister state why it is necessary to have the provision in this section when it appears to be covered by section 33? If there is a transfer for less than the arm's length value, the revenue are entitled to value it at market value. Why is this elaborate procedure necessary about putting charges on the shares of the controlled company which makes the transfer?
It is because we are dealing with shares which are something different from the company. The section ensures that the anti-avoidance measures relating to connected persons are operated in full when the transfer of an asset at less than market value is a company under the control of a small number of persons. If we did not have this section there would be a limitation on the effect of anti-avoidance measures. On a transfer of the kind I have described, the value of the company's assets would fall and the value of the shares would fall pro rata. The further step needed if avoidance is to be wholly prevented is to make a compensating adjustment in the value of the shares. Therefore, the section provides that in a case where a controlled company transfers an asset other than by way of bargain at arm's length, the cost attributed to the shares in the company when they come to be disposed of will be reduced by a proportionate part of the difference between the consideration for the asset and its market value.
I take it that the transferred shares are shares other than those of a controlled company —that the charge goes on to the shares of the controlled company?
The Deputy is assuming what?
If the control company transfers some of its own shares——
Under value?
Yes.
——because they have already disposed of an asset?
Yes.
I am not clear exactly what the Deputy's point is.
If it transfers some of its own shares, for example, where does the Minister stand in relation to this?
This is a case where the company has already transferred an asset at less than market value and thereby diminished the value of its shares. We then come to the next step, which is that the shares so reduced in value by virtue of the asset transfer which has taken place at less than market value are transferred and in that way there could be an avoidance of tax.
If the original asset was transferred by the control company at less than market value, surely the transfer would be to a connected person within the meaning of section 33? If that is so, is it not open to the Revenue under section 33 to assess the capital gain at what would have been the market value? The necessity, therefore, for this rather elaborate system of surcharge on the shares in control companies would not arise.
The loss would arise originally but they could devalue the shares and dispose of them at a loss. We therefore, must follow through all the way to the shares at the time they were disposed of.
If under section 33 there was a disposal to a connected person and the Revenue exercised their right under section 33 to calculate the capital gain on the basis of the market value, even though the transfer was by a control company, and imposed a surcharge of the difference between the market value and the actual price envisaged by section 35, would we not then have double taxation? Revenue would have already got their full capital gains tax by virtue of the revaluation of the transfer to a connected person under section 33.
No. Supposing the asset had been transferred at its full value in the first instance, the shares would maintain their full value. There would be a capital gains tax payable by the company on the disposal of the assets in the first instance. The shares would be disposed of and would still be at their cost. They might or might not according to the circumstances of the recipient or owners of the shares, be liable to tax. One must ensure that the full gain is reflected in the shares at the time the shares are ultimately disposed of.
My point is this: if Revenue know the control company is transferring an asset at below market value, they have power to calculate a tax on the basis of the true market value. If they do that, can they not collect their tax? Instead of collecting the tax as they would on a transaction between connected persons under section 33, why delay collecting the tax and collect it in the roundabout way by putting a surcharge on the reduced value of the shares in the control company?
Or, alternatively, do it on the double.
If section 33 is availed of, the Revenue Commissioners would ensure that tax was paid on the market value on the first transaction. We cannot stop there.
Why not?
If the shares reflect the artificially low value at which the asset was disposed of, irrespective of tax liability, those shares could be disposed of at a loss. A loss could then be claimed by the individuals concerned, although the whole exercise would have been a fabrication resulting from an artificial disposal of an asset at below market value.
If the ingenuity which went into thinking that up was devoted to trying to solve the problem of our economy, maybe we would be some way along the road to solving it. It is terrible that good brains are wasted on that sort of thing while there are 103,000 people walking the roads.
Mr. Ryan
It must give Deputies great confidence for the future of the economy, which is one of the soundest in Europe at the moment.
Question put and agreed to.
SECTION 36.
Question proposed: "That section 36 stand part of the Bill."
What is the major difference in the treatment of the non-resident company as distinct from the resident company dealt with in section 35?
The purpose of section 36 is to provide anti-avoidance measures against transferring capital to controlled companies abroad. It enables Revenue to look through the non-resident controlled company to see if it has resident shareholders and, subject to certain exceptions, to assess them to capital gains tax on their share of the gains made by the company. The exceptions are when the gain is distributed to shareholders within two years; gains on tangible property or a lease on it used only for a trade carried on abroad; gains on the disposal of foreign currency or a credit in a foreign bank if used for a trade carried on wholly outside the State; and gains chargeable on the company itself as, for instance, on land or mineral rights or branch of a business in the State. The essential things here is that we have to look through the company to see who are the resident beneficiaries and to make them liable to tax.
Is there a provision in section 36 similar to that to which Deputy O'Malley referred in section 35 to prevent a loss being claimed on the basis of the value of the shares being artificially reduced?
The non-resident company as such is not a taxable entity. You cannot tax either its gains or losses. One looks through the company for the resident shareholders and they are taxed.
That does not answer my question. I appreciate that it is necessary to be able to look through the company to the resident shareholders. Having done that, in a case similar to that described by the Minister under the last section where an asset is disposed of at an artificially low value, even if the tax is paid on the basis of the true market value as the Minister said in the previous case, nevertheless the value of the share would be reduced and unless the matter were carried further, the shareholders would be able to claim a loss which had been artificially created. My question is, is there provision in this section to deal with the shares so artificially reduced in value in the same way as there is in section 35?
The non-resident company is not taxable and therefore has less cause to engage in avoidance or in the disposal of assets at less than their value. They would not be liable to Irish capital gains tax.
That is a company as such?
Yes. Accordingly, the value of the shares should reflect the absence of that liability to tax and the true value of the disposed assets, and accordingly the resident shareholders will eventually be taxed on the full value. We do not live in an isolated world. Non-resident companies, with increasing probability, will be located in countries that have their own capital gains tax system and they may be subject to such taxes in other countries. The Deputy may be assured that these are matters that will receive our attention in any agreements we have with other countries in order to avoid double tax liability. In doing so, we will have a better policing of these operations so as to put both the resident and the non-resident company, as far as practicable, on an equal footing.
That is what I am coming at, whether they are being put on an equal footing—at least whether the shareholders of a resident and a non-resident company, shareholders who are resident in the State, are being put on an equal footing in these two sections of the Bill. On the face of it, it seems to me they are not in so far as the Minister said that in the case of a resident company the shareholders having paid tax calculated on the full market value of an asset disposed of would in addition have this charge added on to their shares so as to prevent them claiming an artificial loss; but in the case of shareholders in a non-resident company who are resident in the State, would they be in a position to create an artificial loss of the kind that section 35 is designed to combat and would the Minister be able to do anything about it under section 36?
I do not want to say, in particular to be on record, as to what I think a non-resident company might be able to do. All I can say is that we cannot charge capital gains tax to a non-resident company, but we are looking through non-resident companies, to the resident shareholders, and taxing them.
Can the same treatment not be given to a resident shareholder in a non-resident company as is given to shareholders in resident companies under section 33 and 35?
If there is a gain in a non-resident company it will be allocated direct to the shareholders. That does not happen in respect of resident companies—the gains are made by the companies, not by the shareholders. The shareholders may or may not get the benefit of the gains but they go to the company initially. In a non-resident company there will not be any delay or watering down of the gains. They will be transferred direct to the resident shareholders for tax purposes.
In subsection (2) does the word "person" include company? It seems to be used in distinction to "individual" in paragraph (b).
It includes companies.
The losses of non-resident companies appear to be allowable as losses only against the gains of non-resident companies under the control of individual shareholders. What is the reason for confining the allowability of the non-resident losses to gains by that or another non-resident company? Why not allow the losses to be set off against any gains of the shareholders concerned?
There is a very good reason indeed for it. It is because in this part of the Bill we are dealing with anti-avoidance and we do not want to facilitate the use of losses generated by non-resident companies for setting off against gains generated domestically. Subsection (7) provides:
(7) To the extent that it would reduce or extinguish chargeable gains accruing by virtue of this section to a person in a year of assessment, this section shall apply in relation to a loss accruing to the company on the disposal of an asset in that year of assessment as it would apply if a gain instead of a loss had accrued to the company on the disposal, but shall only so apply in relation to that person; and subject to the foregoing provisions of this subsection, this section shall not apply in relation to a loss accruing to the company.
This is the appropriate way in which to treat the non-resident company. Otherwise companies over which we have less control than if they were resident companies could be used as a very convenient device to evaporate——
All that is relevant is that they are Irish gains and losses.
—— the gains made in Ireland by Irish companies or Irish persons.
If they have an investment in some European country which shows a loss that is not relevant to the question of gains or losses of a non-resident company for the purpose of Irish capital gains tax. The Minister seems to be suggesting that non-resident companies would manufacture losses outside Ireland in order to be allowed to offset these against Irish gains. Whatever losses they might have outside Ireland has no relevance in Ireland.
There are several situations in which companies might generate losses here within the State. They could be owners of land here within the State in respect of which they might be generating losses. I do not consider it appropriate that shareholders should be able to use losses which companies generate against gains other than gains which are made by the non-resident companies.
Are we dealing here with losses and gains within the State? We are not dealing with any other losses or gains?
No.
Then I wonder could the Minister develop this a little further? If the set-off, if it should exist, is confined to losses and gains within the State, how is there a loophole for avoidance if one allows losses within the State to be set off against gains within the State?
What we are allowing here are the losses and gains related to non-resident controlled companies. They can set them off against one another, but not beyond that. I do not think it is appropriate that they should be able to.
What does the Minister mean by "beyond that"?
I mean up to the amount of gains made by non-resident controlled companies. What is the purpose of creating a non-resident controlled company in most cases?
There might be more than one reason.
I will accept that in most cases it is avoidance. Nevertheless, that does not mean that the Irish shareholders concerned who, presumably, are acting within the law, have no rights. One has to see, without giving any favourable consideration to them, that at least they have basic justice meted out to them, and I wonder whether that is being done here. It may be, but it is not quite clear to me. When the Minister is talking about the properties concerned, is he talking about Irish resident shareholders in non-resident companies and their right to set off losses incurred in this country against gains in this country? That, on the face of it, would appear to be a reasonable proposition, but the Minister seems to be saying that such persons, if they were unable to set off all their losses in this country against their gains in this country, could artificially create an avoidance situation. Is that what the Minister is saying?
I am concerned about the situation that a non-resident controlled company could generate losses anywhere and could generate gains anywhere. The gains will, of course, be apportioned to the Irish shareholders; so too will the losses be apportioned to the Irish shareholders. However, by virtue of subsection (7) we say those losses will be apportioned only to the extent of gains so apportioned and not against other gains they may make in Ireland.
Yes, but is subsection (7) limiting the apportionment of both losses and gains to losses and gains outside Ireland?
No, it is limiting the availability of losses made outside Ireland as against gains made——
Anywhere?
They may be applied against gains made outside Ireland.
By the same or another non-resident company?
Yes.
If it were limited to losses and gains made outside Ireland, that would be fair enough, but I am not quite sure if that is what it is. It is losses inside Ireland, but is it against gains from anywhere?
No, it is only against gains of a particular company.
Yes, but could it be gains inside and outside the country?
The limitation is to set the losses off against gains that are made by the non-resident company but not against any other gains.
In other words, the non-resident company or another non-resident company, but not against gains generated by an Irish company or by the individual. The point I am making is that that is unfair. If you are going to charge the shareholders of a non-resident company the tax on their gains, you cannot justify not allowing them their losses.
They can set them off against those gains.
But they can only set them off against a non-resident company gain. They cannot set them off, for example, against their personal gains in Ireland.
No.
That is unfair, and the Minister has given us no reason for it other than that he thinks that anyone who has anything to do with a company outside Ireland is trying to duck his tax. That is not good enough.
A member of the Opposition acknowledged that one of the principal reasons for it was tax avoidance.
It is certainly not true in all cases, and even if it were, it does not take away their rights entirely.
It does not mean we should facilitate the use of tax avoidance devices in order to avoid payment of a legitimate share of taxes in respect of gains that were made in Ireland.
If the Minister can show us that it would amount to tax avoidance that would be a different matter, but he has not shown that.
If people are making losses on non-resident controlled companies they have a quick way to get rid of them if they do not want to continue to suffer the losses.
Surely the same is true of an Irish company. If they are making losses in an Irish company the Minister's remedy is to tell them to get rid of it.
People engaged in a non-resident controlled company have their own remedies as to how best to look after their affairs. If their losses become unduly onerous in that situation, I am sure they will make the necessary adjustments. It is not unsophisticated people who are shareholders in non-resident controlled companies.
The Minister will appreciate our attitude to tax avoidance here, but I hope he will not take it amiss if I suggest that the attitude he is adopting in this matter is tending to the dictatorial. We are all against tax avoidance, and I have urged very strongly upon the Minister general provisions that would strengthen his hand against tax avoidance. However, when genuine problems arise I do not think they can be dismissed quite in the way the Minister is dismissing them now. I do appreciate that the Minister and his advisors have put a great deal of labour into this Bill, and I do not wish to tax him further.
"Tax" may be the wrong word.
It probably is the wrong word, I do not wish to be acrimonious about this, but, as Deputy Colley has said, people have rights. I spoke earlier about not having the Revenue Commissioners in the dark but let us not swing the pendulum to the other extreme and automatically put the ordinary citizens in the dark. There may be reasons for having such a company other than tax avoidance. Because of tax avoidance possibilities are you going to penalise the legitimate? Have you taken into account that a greater probability is that where such a company would be set up there will be local taxation and that the question really arising on this matter is one of multiple taxation rather than tax avoidance?
I sympathise with the Minister but I trust he will not take it amiss if I protest if we are drifting into a certain attitude of mind here in regard to this matter. The Minister did say that he wished to discourage the formation of controlled companies extra-territorially. I do not think Deputy O'Malley was present when the Minister made this point. There may be good social reasons for that apart from tax avoidance but let that stand on its own merits. To say that we should use the brute force of the State and that everybody should mind himself if he can is the very attitude of mind against which we must guard. It shows the pendulum swinging to the opposite extreme. Let us remain in the equitable middle. I do not want the pendulum to swing against the Revenue Commissioners or against the citizens either.
Let us look at what is involved in a controlled company. In such a company there will be capital gains or capital losses. The gains will certainly be adding to any gains that accrue to the relevant resident taxable persons. Why should not the losses equally accrue in the same way? That is my question. So far, the only valid reason the Minister has given is tax avoidance in the first place. I shall not repeat all I said on that because the repetition would be specific in relation to the futility, perhaps, of some of these provisions. The question of multiple taxation as a certain protection comes into it. Tax avoidance is one defensible reason the Minister has given although it is not to be pushed to the extent to which the Minister pushed it in his remarks. The other reason was a social reason. If so, the place for dealing with this type of operation is, perhaps, not in a Capital Gains Tax Bill but under some other provision. I wish to protest strongly at this late hour against our drifting into an attitude of mind which has been so conspicuously and commendably absent so far from our approach to this Bill on all sides of the House.
Has the Minister nothing to add to what he said?
I cannot push it any further. I have explained the intention of the section and I consider that it has been appropriately dealt with.
It is not clear to me why the Minister is doing what he proposes to do but I do not want to delay on the matter at this hour. Some fatigue is setting in and it might not be very fruitful to pursue it, but on the basis of the information furnished by the Minister so far, I have reservations about some of the provisions in this section.
Genuine foreign business activities are protected by subsection (4) (b): the remainder of the section deals with non-resident companies, tax havens and evasions of that nature which have primarily a tax avoidance purpose. We are taxing the share of gains made abroad. We are allowing losses made abroad to be set off against those gains. That is an equitable way of dealing with the matter. If there is a genuine profit or a genuine business transaction, it is not affected.
Question put and agreed to.
SECTION 37.
I move amendment No. 36:
In page 36, subsection (2), line 32, to delete "during" and to substitute "in".
Notice taken that 20 Members were not present; House counted and 20 Members being present,
This is a drafting amendment which is designed to make it clear that the domicile and residence provisions of subsection (2) need not necessarily apply for a whole year, that is, during a year of assessment before the subsection has effect. The amendment preserves the original intention of the subsection.
(Dublin Central): Would the Minister repeat that? Would the Minister mind repeating the purpose of the amendment again?
If the Deputy had stayed in the House he would have heard the explanation.
With all due respect, the Minister should observe order.
It is order to observe the rules of order and the Member was outside the House. He deliberately left the House when a quorum was called. I think the Member in question has no cause for complaint particularly as I spoke in a very audible voice.
(Dublin Central): I did not hear the Minister and I would like if he would explain the amendment again.
If the Deputy had been in his seat he would have heard it.
The Deputy was in the House.
The Deputy was outside the barrier.
When Members unreasonably call for a quorum at this hour, then vacate the House discourteously and then ask me to repeat what I said quite clearly it is really stretching courtesy a bit too far.
The Minister knows the obligation to keep a quorum is on the Government.
Yes, and when I have spoken in an ordinary audible voice heard by the Chair and the majority of the Members present, it is, I think, unreasonable to call for a repetition of what I said. However, trusting that Members will not do this again, and that it will not happen again, I will repeat myself, even though repetition is disorderly.
(Dublin Central): The Minister was very quick to say what he had to say.
The Deputy ran out of the House.
There will be a quorum in this House from this on.
May we please get back to the amendment. The Minister is about to repeat his observations on amendment No. 36.
Every Member who was in the House and observed the rules of order knows that I said this is a drafting amendment designed to make it clear that the domicile and residence provisions of subsection (2) need not necessarily apply for the whole year—that is during the year of assessment—before the subsection has effect. The amendment preserves the original intention of the subsection. Perfectly clear.
The Minister said that the amendment preserves the original intention of the subsection. Does he mean by that that the intention was not achieved in the way in which it was presented, when drafted, and that this amendment is now giving effect to the intention.
No. It sets it out with greater clarity. We are substituting the word "in" for the word "during".
"Any beneficiary under the settlement who is domiciled and either resident or ordinarily resident in the State in any year of assessment shall be treated"—what is the effect of that as far as the Minister is concerned? Does it mean that in any part of the year, rather than during the year, the domicile or residence arises? Is that the intention?
No. The idea is to make it clear that it is not necessarily for the whole year.
Any day of the year will do?
Yes; "during" has a suggestion of a time span or a passage of time; "In" is more precise and may be momentary.
Even one day would do.
Yes.
Amendment agreed to.
I move amendment No. 37:
In page 37, subsection (5), line 29, to delete "taxation" and to substitute "income tax or capital gains tax".
The only taxation contemplated is income tax and capital gains tax and the purpose of the amendment is to make this clear.
I am trying to get the sense of this. It would be in subsection (5):
In any case in which the amount of any capital gains tax payable by a beneficiary under a settlement in accordance with the provisions of this section is paid by the trustees of the settlement, such amount shall not for the purposes of taxation be regarded as a payment to such beneficiary.
Would a beneficiary include a beneficiary under a will? Would that be one of the meanings of beneficiary in this case?
A beneficiary under a settlement.
Where capital gains tax arose in respect of the benefit he was taking under the settlement any tax by way of capital gains tax or income tax paid would be taken out of account so that the net benefit would still acrue to him. Is that the effect of the subsection as amended?
Is the Minister worried about getting something like VAT, or something like that, into it?
No. The whole purpose of this section is to avoid the trustee being held liable for the payment of any other tax.
I am not quite clear on the meaning of the subsection as proposed to be amended.
As far as the amendment is concerned, it limits the word "taxation" to income tax and capital gains tax.
For the purpose of the amendment, I do not have difficulty, but I shall have to ask the Minister the same question on the section.
The subsection means that, if the trustees of a non-resident trust paid tax on chargeable gains apportioned to a beneficiary under the section, that payment is not to be treated for tax purposes—for income tax and capital gains tax purposes— as if it were a payment being made to the beneficiary.
In other words, he would not be asked to pay again on it.
He would not be asked to pay again on the basis of having an income plus what has been paid on his behalf.
I understand.
Amendment agreed to.
Question proposed: "That section 37, as amended, stand part of the Bill."
Is the general purpose of this section to apply in so far as that can be done a somewhat similar régime on a non-resident trust as is proposed to be imposed on a non-resident company under the previous section?
Yes.
Broadly speaking, that is the purpose.
Yes.
Question put and agreed to.
SECTION 38.
Question proposed: "That section 38 stand part of the Bill."
This is merely to give the Government power to enter into arrangements with other states to afford relief in respect of taxation to capital gains tax.
Could the Minister say whether there is any double taxation agreement in operation at the moment which covers capital gains tax between us and any other country?
Specifically, no, but the agreements refer also to, and I quote, "any identical or substantially similar taxes". Capital gains tax is not identical or similar to income tax or corporation tax so special arrangements will be necessary to cover these new taxes, but most of the countries with which we have agreements have capital gains tax and we do not anticipate we will have any difficulty in resolving the issues. Of course, as has happened in relation to other double taxation agreements, they can be made retrospective so that there will not be any loss to any person affected as a result of delay in completing agreements. In fact, the practice is invariably to anticipate what the ultimate agreements will do.
(Dublin Central): Will this double taxation be retrospective to last April when the taxation is due from?
I would not like at this stage to be explicit as to what the details of the various taxation agreements will be. The normal procedure is for these agreements to take account of the law of each other's countries.
Would it be the intention, as far as practicable, to maintain that?
Yes.
Can I draw attention to the relevance of this section to the intentions and mechanics of the two previous sections and to the Minister's remarks? The fact that there will be double taxation in regard to non-resident companies, controlled companies and non-resident trusts should go a long way to meet some of the problems the Minister was talking about on these sections.
In connection with another proposed tax I think the Minister stated that, due to special arrangements with Britain, although there was not a specific double taxation agreement covering the tax in question, nevertheless, in practice from the moment of the enactment of our legislation effectively a double taxation agreement would be in operation between this country and Britain in relation to that tax. Would the same position be true in relation to capital gains taxation? In other words, in practice, on the enactment of this Bill, will there, effectively, be double taxation relief between here and Britain in relation to capital gains tax?
Administratively that would be the intention.
It would not be necessary to wait for the conclusion of a special agreement in relation to Britain?
In practice what would be done would be that details of the agreement could be anticipated and such provisional relief as might be necessary would be given. There may be some areas, which would have to wait the completion of the ultimate agreement, before one would know what the outcome would be. In practice there could be some anticipation of the main provisions of such agreements.
Question put and agreed to.
SECTION 39.
I move amendment No. 38:
In page 38, subsection (2), line 22, to delete "(4)" and to substitute "(5)".
This amendment is to rectify an incorrect reference and it does not involve any change in the Bill.
Amendment agreed to.
Question proposed: "That section 39, as amended, stand part of the Bill."
This section deals with the special case of the transfer of chargeable assets to the State or to a charity or to certain national institutions, such as the National Gallery or university, county council or municipal corporation or to friends of the national collection. The assets would normally be works of art, historic buildings or other property of scientific, historic or national interest, which are transferred by way of gift or for a consideration, which is less than cost when the market value provided in section 9 will not apply, when the disposal will be treated as having been made for a consideration such that there is neither a profit nor a loss on the transaction.
(Dublin Central): Does this mean that if a gift is given to the State at under value you cannot claim a loss against it for other property?
If a person gives a gift you do not charge him on a gain. There is no question of loss in that situation.
(Dublin Central): He might claim a loss against other assets. Is that what it means?
That is what it seems to mean. I think the Minister said that the assets in question would in the main have to be works of art.
Works of art, historic buildings or objects of scientific, historic or national interest.
In relation to Deputy Fitzpatrick's point, I do not know how you assess a gift at a loss but there is no incentive to the giving of these gifts. It simply means the State is not chargeable. Is that not so?
Yes.
In other words, it is an exemption of the public, not any benefit of the donor.
It is the joy of giving.
Could the Minister elaborate a little further on the effect of subsection (2)?
I am sure it must shock Deputy de Valera that it takes such a long section to deal with such a simple thing as giving away something for nothing. Subsection (2) extends the relief under subsection (1) where a qualifying body becomes entitled to assets held under the trusts of a settlement. To prevent avoidance the relief will not apply in such cases if any consideration is received by any person for or in connection with the transaction.
That does not apply to transactions envisaged under subsection (1). In other words, while they would normally be given free, subsection (1), presumably envisages the possibility of their being given at a nominal price. Subsection (2) seems to say that in the circumstances of an asset forming part of settled property if any sum at all is paid, then the benefit of this section will not apply.
If it is given away for a token price or nominal value, there cannot be any question of——
On a point of order, should we not have a fuller House to hear this?
Notice taken that 20 Members were not present; House counted and 20 Members being present,
Subsection (1) provides that where an asset is disposed of to the State, to a charity or to any of the bodies which are listed in section 28 of the Finance Act, 1931——
Do you want any more in? We have not gone home.
Order.
I cannot hear the Minister.
——and the disposal is made otherwise than under a bargain at arms length, the normal rule in section 9 is not to apply. Instead there is no consideration for the disposal, that is if there is a pure gift, or if the consideration is less than the allowable cost of the asset giving a loss, then the transaction will be treated as resulting in neither a gain nor a loss and the body acquiring the asset will be deemed to acquire it at the same time and at the same cost as the person disposing of it. Where the amount of the consideration results in a gain that gain will be a chargeable gain but such an eventuality is unlikely to arise. Where there is a subsequent disposal there will be an occasional charge. But as the State and most of the other bodies will be exempt the charge will apply mainly to charities set up for a limited period only with a view to obtaining the benefits of the section and with the real object of disposing of the transferred assets at a later date. In this event the body concerned will be charged to capital gains tax on the whole gain computed by reference to the original cost of the asset to the person who originally transferred it to the body, thus negativing the relief afforded under the section.
It is a pity we have to bring in that tax avoidance subsection in what is a section intended to provide relief for people who are donating gifts but that is the overwhelming intention of the section.
Is subsection (2) another ingenious creation? It is difficult to visualise a scheme for avoidance of taxation being set up and based on the giving of gifts to the State or similar body as mentioned in subsection (1). Is this really a practical proposition that is being guarded against?
It is, I am sorry to say.
Is it just that somebody had a bright idea or does the Minister have more to go on?
It has been known to be done.
Who loses by it? If somebody wants to give away property to the State should the State not be grateful instead of trying to tie him up in these knots?
We are dealing here with special arrangements which can be set up suggesting that there are donations to charity which quickly dissolve once the transaction is free from tax and then the gain is made.
This is where charity is concerned?
Yes. It is a pity that people abuse concessions in this way but it has happened and will continue to happen.
I am sure the Minister is aware of the American situation in which there are generous writeoffs for tax on gifts to the State or to charity and similar matters and much of their research and so on is financed out of those gifts. Would the Minister not think it might be no harm, within limits at least, to encourage such gifts for research and other charitable purposes in this country and not tie people up to the extent that seems to be envisaged in this section?
No, if the charity continues and there is not a break-up in the charity there is no disincentive. All we are doing is ensuring that if relief is obtained in favour of a charity the relief will not be permanent if there is a break-up of the charity and benefit to the person who gave the gift originally.
If a charity breaks up and is made cy-près by the commissioners is that all right?
I would understand that it would be. We discussed this on an earlier section. I would say the courts would so ensure.
The Minister said there would be no disincentive but there is certainly no incentive if he will not allow any losses in such cases to give gifts of works of art and so on to the State. Has he any idea whether it would be excessively costly if losses on this kind of gift to the State were to be allowed?
If Mr. X has a painting worth £500,000 and can meet all his tax liability for several years to come by presenting that to the State it would be a serious loss of revenue to the State if the State, on receipt of it, would not be permitted by public opinion to dispose of it.
We take it, therefor, that the Richie Ryan papers when they are presented to the State will not be tax deductible?
I can assure the Deputy that that would only be a small fraction of what I have already donated to the State.
Deputy L'Estrange seemed to doubt that last statement. He looked very quizzically at the Minister.
Question put and agreed to.
SECTION 40.
Question proposed: "That section 40 stand part of the Bill."
This section deals with a trustee or assignee in bankruptcy or under a deed of arrangement. It provides that vesting of the assets in the trustee or assignee or any subsequent retransfer of assets to the bankrupt or debtor are to be disregarded for capital gains purposes. Any chargeable gains accruing on disposal by the trustee or assignee are to be assessed on him. Where the bankrupt or debtor dies the trustee or assignee is regarded as acquiring the assets as a personal representative of the deceased.
If the assignee sells certain assets are they to be subject to capital gains tax and, if so, would the Minister not consider it somewhat unfair in as much as the State is taking a guaranteed share of 26 per cent of the capital gain out of limited assets where the estate of the debtor is insolvent and where the creditors will have their dividends correspondingly reduced by the amount of the tax which the State will get on the disposal by the official assignee or the assignee in bankruptcy?
It is no more unfair than to say that the State is entitled to claim whatever income tax or VAT or any other tax which may be due to the State under the existing code. Either the State is entitled to be paid or it is not and if the liability to tax arises the obligation cannot be wiped clean simply because the person liable to pay the tax becomes bankrupt. The State's claim is as good and not less worthy than the claim of any other creditor.
Surely the Minister must see that the State's claim for income tax or VAT would have arisen before the insolvency and, therefore, before the vesting in the official assignee.
In the case of capital gains tax, the capital gain could only arise not on the vesting in the official assignee but on the disposal by the official assignee for the benefit of the estate and the creditors of the estate. Therefore, the indebtedness to the State for capital gains tax can only arise after the insolvency and the vesting in the official assignee take place. It is quite different from liability to income tax or VAT which would have arisen before the insolvency. I suggest that, if the vesting in the official assignee and any possible revesting of the assets in the original debtor should be free of capital gains tax, the disposal by the official assignee to a third party for the benefit of the creditors should equally be free.
The gain would have arisen before the bankruptcy because the gain would have grown during the period before the bankruptcy occurred.
It might.
Or it might not.
Under the existing law, income derived from investments of the bankrupt have always been liable to income tax.
(Dublin Central): There would be very few capital gains in bankruptcy cases.
Progress reported; Committee to sit again.