I want to ask the Minister to elaborate a little more in regard to some points in subparagraph (1) which provides that where a person receives or becomes entitled to receive a capital distribution he is treated as if he had disposed of an interest in the shares. The question of his being treated as if he had disposed of an interest when he became entitled to receive it after distribution as distinct from when he would receive them requires explanation. I should like to know as well whether the reference to a company in the second line of the subparagraph refers either to a public or private company.
Capital Gains Tax Bill, 1974: Committee Stage (Resumed).
Question again proposed: That Schedule 2, as amended, be Schedule 2 of the Bill.
It does.
What is the reason for providing that a person who becomes entitled to receive a capital distribution as distinct from actually receiving it is treated as if he had disposed of an interest in the shares?
Once a person acquires a right to receive a capital distribution, that person has an acquisition which is of value. Even if not actually transferred at that time, the benefit he would receive is something which a person can dispose of.
This question will come up again under a subsequent provision, but what is the position if a person becomes entitled to such a capital distribution but ultimately does not receive it or cannot receive it? Under this subparagraph he is treated as if he had disposed of an interest in the shares when in fact he has not received anything.
In which circumstances does the Deputy think this could arise?
One example that springs to mind is if a shareholder becomes entitled to a capital distribution but subsequently it is discovered that because of, say, embezzlement in the company, the company is not in a position to make the capital distribution?
Even if there is destruction of the assets by embezzlement, the entitlement would still be there and the benefit would have been transferred on the date on which the entitlement arose.
(Dublin Central): It might not be there when he applied for it.
Supposing one takes the case illustrated, if the person actually received the shares and an embezzlement had taken place, they might be valueless, so the position is exactly the same. I cannot understand the difficulty the Deputy is in where he sees that a different situation arises simply because an entitlement to receive shares is described as well as the actual receipt of the shares.
An entitlement to receive shares, where in practice one does not receive anything, seems to me to be different in kind from being in receipt of some capital distribution.
Once entitlement arises, a right to dispose of that entitlement either by way of a gift or for value to another would also arise, and, therefore, the same benefit accrues.
The effect of treating this as if the person had disposed of an interest in the shares presumably is to bring about a liability at that point for capital gains tax?
Yes.
If there is a gain. I am assuming that, in the case I have mentioned where because of embezzlement, a person does not, in fact, receive anything, liability for capital gains tax would arise because he became entitled to receive a capital distribution. That being so, I am also assuming that if he did not receive anything, for the purpose of the assessment of capital gains tax nothing would be assessed against him in respect of what he did not receive. Nevertheless, as distinct from that, if there had been a gain in the value of the shares and a gain to the shareholder, he would there and then, I think, become liable to capital gains tax on a disposition which is purely imaginary. He did not dispose of them at all and nothing happened that would enable him to dispose of them. That situation is distinct from that in which he actually receives a capital distribution.
I do not think so, because a person could receive a capital distribution of shares which, because of the reasons described by the Deputy, could be valueless at the time he acquired them, and the process of the calculation of the gain or loss would be exactly the same.
Except that he becomes liable at that point in time as though he had disposed of his interest, when, in fact, he had not. It is one thing to become liable when you have received a gain, when there has been some disposition, but here there is an artificially created disposition which produces an immediate liability for capital gains tax.
There is the acquisition of the right to dispose of those shares.
The acquisition of a right which is not worth anything is purely an artificial concept.
But the receipt of shares which are worthless is also an artificial concept for the purpose of the calculation of a capital gain.
Yes, but they would not be worthless if there is a capital distribution.
No, but the right to receive capital would be entirely worthless, but the actual receipt and the right to receive, if they are of value—and both could be of value— are equivalent.
If you receive a capital distribution you are receiving something, but if in the circumstances which I outlined, because of embezzlement, the money is not there to distribute, then there is not, in fact, a capital distribution and a person would not receive a capital distribution. However, under this subparagraph the fact that one was entitled to receive a capital distribution which did not exist, produces this situation of an artificial disposition, therefore, a liability to capital gains tax on a gain which may have accrued earlier and which the shareholder did not intend, perhaps, to dispose of at all or certainly did not intend to dispose of at that time. There is a distinction between the receipt of an actual capital distribution and the right to receive a capital distribution which does not exist.
(Dublin Central): Why put in the word “entitled” there? I can see Deputy Colley's point that you can be entitled to something but when the full transfer takes place, after debts and various things, the company might be almost bankrupt and the shares would be valueless. I think the fact that the word “entitled” renders a person liable to capital gains tax is what concerns Deputy Colley more than anything else.
A person might elect not to receive the capital distribution but to use it in some other way, to assign it immediately instead of receiving it. One has to provide for a situation in which a person does not, of his own election, actually receive it. The right confers a benefit even if it is not exercised.
If there is a benefit, I accept that that is so, but the situation arises under this provision that, even though there is no benefit——
We are dealing here with a tax on actual benefit. If there is no benefit, obviously there will be no tax. The gain has to be established before——
He is not going to pay tax on a gain which does not exist, I agree——
No.
——but this triggers off a liability to capital gains tax on some gain that may have arisen over the previous 20 years?
Yes, but the Deputy has been describing a situation in which the shares are valueless.
No, in which the proposed capital distribution is valueless, which will be, of course, on top of the existing value of the shares.
I shall look into what the Deputy says. Offhand, I am unable to understand the cause of his anxiety. It seems to me that, once a person acquires an entitlement as a right, that itself confers a benefit which must be considered.
Would the Minister examine it, please?
I will, certainly.
There is another matter I am in a slight difficulty about; I think I mentioned it already, but I have not got the Official Report yet and I am not absolutely certain. I shall just mention it briefly in case I have not mentioned it already. It is in relation to paragraph 1 of Schedule 2. Under that provision it would seem that where a shareholder receives a capital distribution no matter how small in relation to the share-holding a charge to capital gains tax would arise, subject to the exemptions for individuals that are provided in the Bill. This might well involve a great deal of time in pursuing quite trivial cases. I understand that in such cases in Britain they treat distributions which are small in relation to the shareholdings as a reduction of the cost against the future disposal and this saves a great deal of unnecessary work on the part of the Revenue Commissioners. I think I have made the point already.
I think the Deputy did make the point before. I pointed out that in Britain they have not got the £500 exemption which we have. Therefore, they have to make a special provision in respect of small distributions, but with the £500 exemption that we have it would exempt a substantial number of these capital distributions.
But would it still not involve the Revenue Commissioners in examining each case of a capital distribution to see if the exemption had been exceeded, taking into account any other gains which might also exist?
I do not think it would require the Revenue Commissioners to look at all of them, but certainly, nothing like the same number of companies as across the water. We have not the same number of capital distributions. Even if those that do occur were to be examined it would not be a tremendous burden on the Revenue Commissioners.
I shall not pursue the matter. I mentioned it already and I merely wanted to draw attention to a possibility of reducing the burden on the Revenue Commission staff.
First, I want to apologise to the Chair for not being in the chamber when this debate was resumed as I was in possession on the last occasion. I have been thinking over what I was saying then and I confess that to make the modifications that I think desirable would at this stage, I fear, amount to a substantial redrafting. Perhaps it would be unfair to ask the Minister to undertake that in respect of the technical details of the Bill. But I repeat my criticism: if we have a Schedule dealing with the particular matter, to say the least of it, it is untidy that sections that vitally affect the provisions within that Schedule should appear in another Schedule. I was referring to paragraph 21 appearing in Schedule 1 which vitally affects the provisions and interpretation of Schedule 2 with which we are dealing. Essentially that is a drafting matter but it is something that will mislead and it can produce future argument in the courts.
It is obvious that this Schedule is an example of what some of us have complained about throughout the legislation: when it comes to implementing a simple provision to ensure that the law and the principles pertaining to capital gains attach to transactions in shares and in regard to capital or other distributions—or manipulation if you wish—of the capital funds of the type of body corporate known to our law as a limited company, it becomes necessary to include these very complex provisions. Essentially they are anti-avoidance provisions, an attempt at the start to block possibilities of devices to avoid due payment of tax. In so far as that is the Minister's intention and the intention of his advisers he will meet nothing but co-operation from us, but I join Deputy Colley in questioning whether these complex provisions will be really effective, whether some loophole will not be found in them in spite of all the experience there is as a guide and which is obviously availed of in the drafting.
Secondly, I am more than ever apprehensive of the burden being placed on the Revenue Commissioners and the administration in this regard. I hope they have been adequately consulted, and I have no reason to believe that they have not, but since I think this House is prepared to accept the fact that our Revenue organisation is primarily concerned with the fair and just implementation of the intentions of the Legislature as laid down in law, if we lay down the law in clear terms, I think some general discretion—appealable if you wish—should be given. I have made this point so often that I do not want to repeat it. I have made it on practically every section dealing with these complex matters and I again appeal to the Minister and, through him, to his advisers that if there is any revision or codification of this legislation particularly in regard to the related legislation, the Finance Act, the approach I advocate should be adopted.
I am straying into what, perhaps, should be comment on the Fifth Stage and I do not intend to delay the House because, on second thoughts, dealing with the individual provisions of it and attempting to readjust them would involve so much amendment as probably to be unacceptable to the Minister at this stage whether he agreed with me or not, unacceptable on the ground that it would not be practical politics for him to attempt drastic revision of that nature at this stage. For that reason I do not wish to press the Minister on any further point but I support fully what Deputy Colley has said.
I can sympathise with what the Deputy has said but it is fair to remark that the paragraph to which he refers is not one which must be understood by a person of little education, sophistication or experience. It is dealing with an area where people usually employ professional advisers who would be in a position to understand the language. That is not to say that it is easily understandable to the expert. It is language that must be studied carefully but the Deputy being a lawyer, will know that very often lawyers are obliged to use language which to the layman may be incomprehensible but the necessity for which is apparent to the lawyer because to fail to use it would lead to certain ambiguities. Although it may be difficult to get through to the precise meaning of some of these sections, if they were not expressed as they are, there would be ambiguity and imperfections in regard to them. Therefore, we find ourselves in the dilemma of having to resort to language not comprehensible to the layman and often not easily comprehensible to the expert, but which if not used would lead to great difficulty.
I share the Deputy's views regarding the desirability of simplicity but, unfortunately, we are not living in a simple world. Rather, we are in a very complex world and dealing with complex situations and we must use this difficult language to which people, understandably, take exception.
I have mentioned also that we debate in Parliament at great length many Bills but that we never have available to us the Parliamentary Draftsman. We have those who ask him to interpret in legal form the wishes of Ministers but we never have immediately available the person who puts those wishes into legislative language. Perhaps this is a matter for study by a select committee of the House but it is not something that can be resolved across the arena of the Dáil Chamber in the course of a public debate.
I understand the Minister's difficulty in this and all I would say is that we should not try to increase the complexity and rely on technical advice. There is already a sufficient superstructure of that nature in the community. We want to stimulate productive activity. I am sorry if I have trodden on toes by that remark but since Deputy Colley is smiling I must explain. The imbalance in the community is not affected beneficially by the approach the Minister indicates in the matter although I agree with all he says. The Minister will appreciate that I have some little experience of this technical language.
I would hope that in provisions of this nature, particularly where bodies corporate are concerned, the Revenue Commissioners would have sufficient discretion, notwithstanding our tight legislation, to do justice. It is not that I am worried about the Revenue Commissioners not having power to use a device to prevent the evasion of payment of a tax due in equity and justice, but what I am afraid of is that this type of approach will so tie their hands and the hands of their inspectors that they will be unable to use their discretion to do justice where the law because of its technicalities and technical phrasing may do injustice. I am concerned that in giving power to deal with abuse we are taking away the power to do justice because of the shackles imposed by the provisions of legislation. This is one of the great apprehensions I have about this type of complexity in the law.
We are all with the Minister in giving the authorities proper powers to deal with abuse and to prevent exploitation but in so doing let us be careful that we do not deprive them of the power to do justice and equity in exceptional cases where unforeseen circumstances arise which would cause severe hardship or injustice. In his Finance Acts the Minister has gone a long way to removing a situation that we found in regard to death duties under previous Acts. He will appreciate the point I am making.
Question put and agreed to.
SCHEDULE 3.
I move amendment No. 50:
In page 66, paragraph 4 (3) (b), to delete "actual amount" and to substitute "amount of the actual premium".
This is a drafting amendment which clarifies what is meant by "actual amount"—that is, actual premium paid on the grant of a lease. The amendment does not involve any change in the meaning.
Amendment agreed to.
I move amendment No. 51:
In page 67, paragraph 5 (3), to delete "Schedule 1" and to substitute "the said Schedule".
This, too, is a drafting amendment which involves no change in the meaning. The Schedule is already cited in the subparagraph at the foot of page 66.
Amendment agreed to.
Question proposed: "That Schedule 3, as amended, be Schedule 3 of the Bill."
I would refer the Minister to paragraph (1), subparagraph (2) and ask him if he could explain to us what is the meaning of this. If he has an example, it would help to clarify even more what is involved.
Paragraph 1 deals with a lease of land which has 50 years or less to run and it provides the rules for determining the portion of the cost of acquiring the lease which may be set against the premium received for the assignment. The cost is to be regarded as wasting away during the period of the lease at the rates set out in the Table at the end of the paragraph. When a short lease is assigned only the residue of the remainder has to be deducted from the consideration received for the assignment.
Paragraph 1 provides that the lease of land becomes a wasting asset when it has 50 years or less to run. Subparagraph (2) deals with a case where a lease is acquired, subject to an existing sub-lease, not at a rent of full value. In such a case the head lease even though a short lease, may not really be a wasting asset as its value may increase as the sub-lease draws towards an end. The subparagraph, therefore, provides that if the lease is subject to a sub-lease but not at a rent at the full value of the land the value of the head lease at the time the sub-lease falls in but estimated at the time that the head lease was acquired, is greater than the consideration paid for the head lease, the head lease is not to be treated as a wasting asset until the end of the sub-lease itself.
I should like to give an example. "A" took a lease of a shop for 40 years in 1960 at a rent of £500 per annum. In 1970, ten years afterwards, he ceases business and sub-lets the premises to "B" for ten years at an annual rent of £800 per annum. In 1977 "A" sells his interest in the property to "D" and because it is expected that by 1980 the shop will fetch a rent of at least £1,100 per annum he, "A", can hold out for a price of £5,800, taking the going rate of interest at 6 per cent net. "D" pays £5,800 for an interest which immediately will produce a net income of only £300 per annum—that is the rent receivable, £800 less outgoings of £500—in the expectation that after three years he will be able to increase his net income to £600 per annum—the rent receivable, £1,100 less rent payable £500. In fact the property will be worth £7,300 in 1980. Consequently, the expenditure of £5,800 will not be regarded as wasting until 1980 although in 1977 the lease has only 23 years to run.
I am grateful to the Minister for the explanation he has given which makes what is intended to be achieved by subparagraph (2) a good deal clearer. In regard to subparagraph (3) of paragraph 1 which provides:
In the case of a wasting asset which is a lease of land, the rate at which expenditure is assumed to be written off shall, instead of being a uniform rate as provided by paragraph 9 of Schedule 1, be a rate fixed in accordance with the Table . . .
Why is this so? Why is it not to be deemed to be written off at a uniform rate?
Subparagraph (3) provides that the rate at which expenditure on a lease of land which is a wasting asset is deemed to waste away is to be determined in accordance with the Table instead of the straight-line basis which normally applies. The percentage rate of wastage is in accordance with the normal fall in the value of a lease with the passage of time, ignoring any change in the value of the property which is the subject of the lease. In general, the manner in which the expenditure is written off under the Table is more favourable to the taxpayer than the straight-line basis since at any point in the Table the residue of original cost will be larger than it would be on a straight-line basis.
A short lease is one with 50 years or less to run and a long lease is a short lease when the remainder of its term is reduced to 50 years. A long lease is treated as a permanent asset whereas a short lease is treated as a wasting asset so that when a long lease is assigned full acquisition cost is allowed whereas on the assignment of a short lease only a proportion of the acquisition cost, proportionate to the term of the lease which remains, is allowed. The reason for this difference in treatment is that in the case of a long lease the fact that the term is running may have no effect on its value. A person usually would be prepared to pay the same for a leasehold property where the lease has 95 years to run as he would if it had 99 years to run.
The dividing line between a long lease and a short lease may be said to be where the running of time makes a significant difference in value and this difference can be very marked in the case of a short lease. To take an extreme case there is a marked difference in value between a lease that has five years to run and one with only a year or less to run. The major problem of a short lease is that the running of the same period of time can produce a significantly different result, depending on the amount of expired length of the lease at the time the transaction affecting it is entered into. The running of a period of three years may have only a marginal effect on the value where a lease has 50 years to run. The same period will almost completely eliminate the value where a lease has only four years to run. On the assignment of a short lease the amount of the consideration will be determined by reference to the remainder of the term. Our basic philosophy behind the proposed legislation is to determine the allowable expenditure on the sale of assets so that it is possible to compare like with like for the purpose of capital gains tax and to exclude the wastage of expenditure that has already occurred at the time the transaction is entered into.
(Dublin Central): Is the Minister placing the man with a short lease at a disadvantage in this regard? The Minister has stated that he is not allowing the full acquisition on a short lease but that he is against the long leases. Is it apportioned right through?
This particular provision operates to relieve the taxpayer, not to put him at a disadvantage.
On the calculation, on what base was this Table compiled? What formula was used? In the earlier part of the Schedule the Minister embarked upon arithmetical exercise which is interesting, but we should have the basis of it. On what formula was this tabled? I have not gone to the trouble of graphing it to see what the nature of the curve is but this table was obviously arrived at on some basis. It is not a uniform one. Is it an exponential one?
Yes.
An exponential decrease?
Yes.
If it is an exponential decrease, I would like to ask the Minister why is an exponential wastage taken. An exponential decrease in its very nature gives you a very rapid decrease. It is fair enough from the point of view of convenience but I wonder if it is altogether equity for a reason that I shall give in a moment. What it really means is that the logarithm of the table is a straight line and that also facilitates calculation but I wonder if it is the best. Let me see what principles the Minister is operating. He is presumably operating on the principle—correct me if I am wrong—that it is not a wasting asset until the lease reaches 50 years from termination, that a lease, no matter how long, when it comes to 50 years within termination becomes a wasting asset and equally a lease for 50 years or less is by legal definition under this section a wasting asset. I am right in that, I take it. I have to ask questions like this as I go along. There is no use in developing an argument on false premises. Would the Minister please correct me if I ask a question and I am wrong? Assuming that is the case, then the Minister's philosophy is that presumably you have a better chance of getting money for a lease if it is, say, in the 40 to 50 bracket than if it is about five years from expiring. Is that not the Minister's philosophy in this?
Yes.
Therefore, he has adopted an exponential formula which fairly well fits that approach, I have to admit, but there is a bit of a snag here. I wonder has the Minister provided for it. What about rights of renewal? Has the Minister thought of that?
I am not, I am sorry to say, au fait with the details of the matter nowadays as it is a long time since I practised but there is what used to be called the landlord and tenant code and there is the Land Acts code. There is a code of legislation that gives rights of renewal of leases in certain cases and these rights of renewal are pretty extensive in the case of business premises. If you depreciate a lease on that basis—I merely want to ask—I may have missed something here and I am merely focussing on this section at the moment—is there somewhere else in the Bill or in any other provision to safeguard that? The Minister may answer me that he cannot think of any such leases that I am talking about because I have not been keeping up with the details, but there is a premises and there is a lease and it is at the expiring stage at which it is getting the full benefit of the latter part of this table. There may be attaching to it a right of renewal which itself may be very, very valuable. It is extremely difficult to say how a right of renewal affects the value of the lease at any particular stage. I know of a few cases in my former experience where renewals under certain circumstances were actually taken at an earlier stage and where it worked out very profitably as the market went. For instance, a reconstruction or something like this. I have known cases where the environment deteriorated and values fluctuated.
In the net, therefore, in the application of paragraphs 4, 5 and 6 of this Schedule has that factor been taken into account or is it of importance?
A right of renewal is, of course, taken into account. The right of renewal would be part of the residual value which would attach to the lease and, of course, I agree with the Deputy that it is something which has a considerable value itself. If a right to renewal did not exist, obviously the value of a lease would be considerably less. We dealt with the calculation of residual values in Schedule 1. Paragraph (9) in particular refers to residual values and defines what residual values are.
It is just in the application of the sum. You have become very explicit about your arithmetic in this section. If I may be facetious, I would say that before we finish we will need a blackboard.
And a pocket calculator.
Calculators are impersonal things that do what they are told and we are the people who have to tell them what to do. This is an exercise in arithmetic that is to my mind dangerously precise for legislation. I am not going to delay the House on this. It would be impossible to spell it out for the notetakers in any intelligible form. There are two formulae given here that enter into the calculations, all based on the table and, as I say, the right of renewal may be a fluctuating thing in it. I have raised the point. I leave it at that. I am wondering what the practical application will be in certain cases.
I do not want, and indeed I am not competent, to get into the esoteric fields that I know Deputy de Valera is capable of going into in the mathematical aspects of this but he has raised a point which we ought to be a little clearer on than I personally am at the moment.
As I understand it, the primary purpose of the table set out in paragraph (6) is to establish in the case of the acquisition of a short lease the percentage of the expenditure, say, the cost of acquisition, which may be allowed as a deduction in calculating a gain. For instance, if one takes it that the lease had 30 years to run according to the table the percentage of the expenditure allowable would be 87.3. If a person acquires a business lease with 30 years to run, there is no doubt he would calculate he would have the right of renewal. How is the right of renewal dealt with in the assessment of the gain and in the assessment of the cost of acquisition? Unless I have misunderstood the Minister, I do not think he was saying the table takes account of that.
I think he was saying it is taken account of under the previous Schedule in the residual value of the lease. Perhaps he would elaborate on what happens to the calculation where somebody acquires a short lease under the terms of this Schedule and where such a lease has, or is likely to have, a right of renewal at its termination. How does that affect the calculation of the gain, both in what can be assessed as the gain and what can be deducted by way of expenditure?
The table takes account of net expenditure. Paragraph 8 of the Schedule 1 has provisions in respect of the residual or scrap value.
Perhaps the Minister would elaborate a little further on what would happen in a case of the kind I described where somebody acquires a lease of duration less than 50 years but has, or will have, a right of renewal at the termination of that lease. As I understand it, the table is used to determine the proportion of the cost of acquisition which he is allowed to deduct in arriving at the amount of the gain, but that takes account only of the lease and the cost to him. It does not take account of the right of renewal. Where there is such a right of renewal, the Minister has said this is dealt with under paragraph 8 of Schedule 1 which deals with residual or scrap value. However, at the point of acquisition of a lease that may have 30 years to run, is it possible or necessary to determine the residual value of that lease in order to determine the liability for capital gains tax of the person acquiring the lease? Presumably what must be determined at that stage is the vendor's liability and it will be necessary also to fix the base at that point on which calculations will be made of the cost to the person acquiring the lease so that if he disposes of it eventually it will be possible to determine what gain he has made. How does one apply the provisions of paragraph 8 which relate to residual or scrap value to a transaction of the kind I have outlined, in conjunction with the table?
I would refer the Deputy to paragraph 8 (3) of Schedule 1 which answers the query regarding the question of ascertaining the value of a right to renewal at the time of acquisition of a leasehold interest. It states:
The question what is the predictable life of an asset, and the question what is its predictable residual or scrap value at the end of that life, if any, shall, so far as those questions are not immediately answered by the nature of the asset, be taken, in relation to any disposal of the asset, as they were known or ascertainable at the time when the asset was acquired or provided by the person making the disposal.
I admit it may not be easy to establish the value 30 years before the end of a lease——
It raises all kinds of interesting legal hares, as the Minister will appreciate.
The value one person would put on an asset might be quite different from the value put by another person.
There is also the question of determining whether a person would have a right of renewal. The Minister will appreciate the pitfalls and the difficulty of establishing the value 30 years in advance——
Yes. Legislation might change in the meantime. What matters is what is in the minds of the parties when the bargain is made or when the disposal takes place. That is what determines the value. One person might anticipate that certain rights might accrue and he might be prepared to gamble that certain rights might arise——
I thought it was market value——
Yes. It is market value.
That is not what is in the minds of the parties.
It might be asked, what is the market?
It is an ascertainable average of what the Minister has mentioned but it is not in the minds of the parties concerned.
One may find various assessments of what the market is prepared to pay at any given moment depending on the outlook of the valuer who is presenting the valuation. I admit uncertainties exist but they exist at present in relation to valuations of capital property. They have had to be dealt with under estate duty law although I admit the complexities are doubled in relation to capital gains tax because there is a starting point as well as a concluding point. Under existing law one is concerned only with the value on a certain date. We are not dealing totally in a strange field. It is difficult to lay down rules in legislation and Deputy de Valera has emphasised this point from the beginning. However, certain guidelines must be given——
Guidelines must be given but I am objecting to the detailed prescriptions.
At the same time we must have some finality. Deputy Colley referred to the fertile field we are creating for litigation. I do not think it will come to that in the vast majority of cases but, even if it does, one must be as explicit as possible in order to assist the parties involved.
I agree.
I also agree. In cases of this kind people, whether they agree or not, want rules. That is true.
Yes.
I am sorry, but I am still not quite clear how this operates. If someone acquires a lease with 30 years to run and, if it is assumed in accordance with subparagraph (3) of paragraph 8 of Schedule 1, that both parties to the transaction contemplated a right of renewal, how does the operation of the Table and of the first Schedule affect that transaction in calculating gains and/or losses?
I do not think I can make it any clearer.
Perhaps I could clarify my question a little. I am assuming, first of all, that what happens in regard to the purchaser of the lease is that, by using the Table, one can determine what percentage of his cost of acquisition he is allowed to deduct in order to determine the actual cost to him so as to arrive at a base when calculating a gain or a loss.
Yes.
In regard to the residual value of the lease, I am predicting that both parties assume the lease will be renewable so as to avoid complications under paragraph 8 of the first Schedule, if we assume that was in the minds of both parties then some value is attached to the right of renewal. How does that affect the Revenue Commissioners' calculation of the transaction? First of all, as regards the vendor, if we assume the value and the right of renewal is £X, do the Revenue Commissioners then say, from the point of view of the vendor of the lease, that he sold for £Y and therefore they assume that £Y equal the cost of the lease for the 30 years still to run plus the value of the renewal and, therefore, the sum he received is the measure of the actual receipt by him to calculate his gain, if he had one; but, from the point of view of the purchaser, having made the adjustment provided for here under the Table, what does one do with this figure of £X which is the estimated value of the right of renewal? Does one say he paid so much but what he was acquiring had a lease of 30 years to run plus £X as the value of the right of renewal? Does one therefore take £X and deduct that also in addition to the deduction provided for in the Table or does one add it on? I am not quite clear as to what proportion is applied in dealing with the right of renewal and its value.
It is the difference between the consideration and the residual value that is written off.
Yes.
I will see if I can illustrate it but, even to illustrate it, is almost as complex as the formulae themselves.
(Dublin Central): Illustrating it is the best way of understanding it.
It is the difference between the gross amount and the residual value which is written off. Let us take the case of a lease with 41 years to run. The premium paid is £10,000. The residual value or, if you like, the right of renewal is £8,000 and the balance of expenditure for the purpose of the allowance is £2,000. Might I refer Members to paragraph 9, subparagraph (1) (a) of Schedule 1? That, of course, deals with a uniform rate of write-off but it is qualified by the Table on page 64. To come back to the case I was using as an illustration, let us assume that the lease is assigned for 30 years, the calculation would therefore be as follows: 96 minus 50 over 96 multiplied by 2,000—that is as near as is practicable—980.
I am with the Minister on that. The 96 is the precentage related to 41 years. What does the 50 represent?
There are 41 years at the time the premium was paid and the assignment, as I said, is for 30 years. There are 11 years and that gives us a percentage of 50, so it is 96 minus 50 over 96 multiplied by 2,000 and that gives us 980. So we have 10,000 less 980 and allowable then would be 9,020.
I shall not pursue the arithmetic of this. I will leave it to the Revenue Commissioners.
(Dublin Central): And the lawyers.
And the lawyers afterwards. Let us look at a little basic law in this for a moment. I find the Minister falling back on paragraph 9 of Schedule 1. Is that correct?
Yes.
Let us have a careful look now at the drafting. First of all, I will take subparagraph (4) before I come to paragraph 3 of the Schedule because I want to deal with something substantive. The first thing to notice is that that subparagraph for the purposes of computation under Schedule 1 refers to paragraphs (3) (1) (b) and 3 (1) (a) of Schedule 1 but, when you come back to that particular paragraph in the Schedule, it starts with the words "Subject to the provisions of this Act the sum allowable . . . ". My submission is that that is occasionally a very necessary proviso in a section but it can be an extremely dangerous device and there are far too many sections in this Bill commencing with or embodying phrases like "subject to the provisions". It is an attempt to save but as I pointed out earlier, you can have section X subject to section Y and section Y subject to section X if you are not careful with this device. It is important to notice that paragraph 3 of the first Schedule is imported to Schedule 3 but its importation has a subjection to provisions in the Act. It raises the whole question as to which provisions rule. If I pursued this in detail we would have a technical, legal argument. I will leave that to the courts and the lawyers, in due course.
I now come to paragraph 3 where the Minister relied on paragraph 9 of Schedule 1, which is imported into Schedule 3 in subparagraph (3) of paragraph 1 which reads:
In the case of a wasting asset which is a lease of land, the rate at which expenditure is assumed to be written off shall, instead of being a uniform rate as provided by paragraph 9 of Schedule 1, be a rate fixed in accordance with the Table to this paragraph.
That does not translate paragraph 9 of the first Schedule into this Schedule. It simply says that the expenditure, instead of being calculated at a uniform rate as provided in paragraph 9 of the first Schedule, will be at a fixed rate in accordance with the Table. It does not import the paragraph. Paragraph 9 (1) of Schedule 1 states:
In the computation under this Schedule of the gain accruing on the disposal of a wasting asset, it shall be assumed—
Then subparagraphs (a) and (b) are given. It does not go any further. Does paragraph 9 (1) apply at all to Schedule 3? It may be the Minister's intention but I do not think it applies. I am trying to help the Minister here. When he found himself relying on paragraph 9 in making his argument on Schedule 3 I was immediately alterted by the fact that as far as I can see on reading the two together paragraph 9 of Schedule 1 is not imported into Schedule 3. Schedules are not sections of the Bill. I suggest that the Minister might have occasion on a later stage to put in something to the effect that paragraph 9 shall apply, or something like that. This is another incident of the type of thing one is perturbed about. I hope I made the point clear to the Minister because I think there is some substance in it.
It is purely a drafting matter. I do not think it is any more than that. I am not certain if we can make it any clearer. Subparagraph (3) of paragraph 1 of Schedule 3 is rewriting paragraph 9 (1) (a) of Schedule 1 in so far as it deals with leases of land. One could express the whole thing in extenso by saying in the computation of the gain accruing on the disposal of a lease of land it shall be assumed that any expenditure attributed to the asset under paragraph 3 (1) (a) of the first Schedule after deduction of residual or scrap value of any of the asset is written off in accordance with the Table of this paragraph.
How does the Minister confine that to paragraph 9 (1) (a)?
Paragraph 9 (1) (a) deals with the rule that is to be applicable to all assets save a wasting asset which is a lease of land.
How can the Minister rely on paragraph 9 of the first Schedule in order to get the residual value as in the case we mentioned where there was a right of renewal? It would appear that subparagraph (3) excludes paragraph 9 of Schedule 1 from valuing a lease of land.
All that subparagraph (3) of the first paragraph of Schedule 3 is dealing with is the rate at which the expenditure is to be written off.
I do not want to delay the Minister with a technical, legal argument. It is a matter of drafting. I am submitting to him that actually the wording of subparagraph (3) does not import paragraph 9 of the first Schedule. I will leave it to him to look into and if he is satisfied well and good.
I will certainly look into it.
I make that suggestion in order to be helpful to the Minister, not for making any scoring points.
I accept that. It does not purport to import paragraph 9 of the first Schedule. It is simply modifying it in so far as paragraph 9 of the first Schedule affects a lease of land. We will look at it.
It alerted me when the Minister fell back in an argument on paragraph 9.
I must be careful then not to quote paragraphs in future.
It should be examined.
This is helpful. It enables us to help the Minister and that is our purpose.
I accept that.
(Dublin Central): I should like the Minister to clarify something for me. A leases a property to B for 25 years with a renewable clause. B wants to sell the property to C for £X but, due to fact that this property has become valuable, A would like before B sells the property to change that clause as regards renewal and he will give him £20,000 for it. Is A caught for capital gains?
A leases to B for 25 years.
(Dublin Central): With a written in renewable clause.
B sells the balance of the lease to C.
(Dublin Central): Before he does so A comes to him and says: “Will you change that clause?” Is A caught for capital gains?
I would refer the Deputy to paragraph 3 (2) on page 65 which provides:
Where, as consideration for the variation or waiver of any of the terms of a lease of land, a sum becomes payable by the lessee otherwise than by way of rent, the lease shall be deemed for the purposes of this Schedule to have required the payment of a premium to the lessor (in addition to any other premium) of the amount of that sum for the period from the time when the variation or waiver takes effect to the time when it ceases to have effect.
Did I understand the Deputy to say that in the case he illustrated the lessor is prepared to pay £20,000 to abolish the renewable right?
(Dublin Central): A has leased the property for 25 years to B with a renewable clause written in. B wants to sell his lease but, in the meantime, A realises that at a certain time within 25 years this will become very valuable property. He goes to B and says: “If you will delete that particular clause which gives the renewable right I will give you £20,000 and then you can sell the remainder of your lease to C”. Is A caught for capital gains on the £20,000?
He is selling an interest in land.
(Dublin Central): I wonder is he.
He is.
(Dublin Central): He is deleting a clause. He is not selling an interest in land.
B is selling an interest in land.
(Dublin Central): He is deleting a clause in a contract.
A is prepared to pay the £20,000 because B is ceding a right to renew.
I think he is caught and if he is not he should be.
B is the person making the gain at that point.
(Dublin Central): B is making the gain.
B is selling his right to renew.
(Dublin Central): B is selling to C.
Whether or not he is selling to C, A wants to acquire an interest which he has already alienated by selling at an earlier date. He now wants to buy it back. A is acquiring from B and therefore B is selling something. B is surrendering his right to renew. In that situation obviously the consideration which C would pay to B for the lease would be a lot less than he would pay if it carried a right to renew. We assume B is selling for value and we trust he has the good fortune to make a capital gain. Whether he makes a capital gain by surrendering to A or by selling a greater interest to C does not matter. B is making the gain.
(Dublin Central): He is not surrendering it to A. He is just changing the lease. He is deleting the right of renewal.
He is surrendering the right to renew which is a very valuable right.
(Dublin Central): It is just a case which came to my mind.
The next point I want to raise is a rather small one but I should like to know from the Minister what the reason for it is. If he looks at the table on page 64 he will see under the heading "Years" 50 (or more). Why "or more"? I thought we were dealing only with 50 years or less.
A long lease for over 50 years would become a wasting asset when it gets to the 50 year period.
We are dealing here only with where it has 50 years to run. This table does not apply if it is more than 50 years.
Of course, 100 per cent represents the highest you can go.
In this Schedule, as I understand it, we are dealing with leases with 50 years or less to run. They are defined as wasting assets.
They are defined in paragraph 1 (1).
Why are we dealing with anything more than 50 years? It is contradicting the definition. This is not a major point. I am just drawing the Minister's attention to it. Somebody may use it to argue at some stage in the future that there was an intention to deal with leases longer than 50 years. It is not of major importance.
The Table would not be applicable until the non-expired portion did not exceed 50 years.
Agreed. Why are we talking about anything more than 50 years?
Because originally it might have been for a longer period. I will look at the need to have it there.
Could I refer the Minister to subparagraph (6) which starts off: "Paragraph 10 of Schedule 1 shall apply in relation to this paragraph as it applies in relation to paragraph 9 of that Schedule." I should like to know what is intended to be the meaning of that. If you look at Schedule 1 it would appear that apparently where paragraph 10 of Schedule 1 applies paragraph 9 does not apply. I am somewhat mystified as to what exactly is intended to be conveyed by that sentence.
This provides that an asset is not to be treated as a wasting asset to the extent that the original purchase price or the expenditure on additions has qualified for capital allowances.
If the Minister looks at paragraph 10 of Schedule 1 he will find that it seems to be saying that in a case dealt with there paragraph 9 does not apply. On the other hand subparagraph (6) says that paragraph 10 of Schedule 1 shall apply in relation to this paragraph as it applies in relation to paragraph 9 of that Schedule. If you look at paragraph 10 it does not apply in relation to paragraph 9. What does it mean? Paragraph 10 starts off by saying paragraph 9 shall not apply.
They are both excluding the operation of paragraph 9 in respect of certain disposals. If I understand the Deputy, he is suggesting that, perhaps, subparagraph 6 should read in the same way as provided in paragraph 10 of Schedule 1.
I am not quite clear what is the intention. Is the intention to exclude the operation of paragraph 9 of the first Schedule to these transactions?
Yes. It is applying, in a positive way, the negative provisions of paragraph 10 of the First Schedule.
It is a very roundabout way of saying that.
The alternative is to repeat a similar section.
I see something further on the point I made on section 3. I think it has been assumed that paragraph 9 and the Schedule are parallel and, in a sense, related. In other words, this paragraph legislates in relation to leases of under 50 years, making them wasting assets. It is intended to legislate in this paragraph with which we are dealing parallel to paragraph 9 of the First Schedule on wasting assets in general. That thinking has brought about the position that, since paragraph 10 excludes paragraph 9 in certain conditions, one needs exactly the same type of exclusion as in the case of paragraph 9, and that is all it does. In other words, by applying paragraph 10 of the First Schedule to this paragraph one is simply making the same exclusion as one makes from paragraph 9, but one does not make any further relation of paragraph 9 to this paragraph than is there already in the section. In no way does one connect paragraph 9, through paragraph 6, with this section. It only applies to paragraph 10 in the same way as it is applied to paragraph 9.
That is correct.
I think Deputy de Valera is correct. The only sense I can make of this is on the assumption that paragraph 9 of the First Schedule would otherwise apply to this Schedule but for the provision applying paragraph 10, which is, in fact, excluding paragraph 9. In fact, paragraph 9 is not imported into the Schedule at all.
Sorry, it is.
We could be here for a very long time if we attempt to sort this out. I know what is the Minister's intention. It is fairly clear. He wants a parallel, in the case of short leases, with paragraph 9. He has enacted something of a parallel in this paragraph. Unless there is something else in the Bill to capture it, there is a flaw in what I might call the drafting. The Minister would be well advised to look at the homogeneity of the sections. It is another case of where a provision in a previous Schedule was imported into another Schedule by implication.
It is an interesting legal point for the Minister, on the form of the Schedule in this Bill, to say what is really appropriate as a Schedule or what is a positive substantive enactment in the Bill. On this Schedule, as a whole, the point can be raised, as on other Schedules, that we are getting very near the stage where some court will have to ask what is the difference between a schedule and a section or if there is any. I do not know what may be the legal consequences of posing and answering that question. Why are there many things in a Schedule and why are other things in a section? Why, for instance, is paragraph 9 in Schedule 1 and this paragraph in Schedule 3? Why is not the whole lot part of substantive enactment? This legislation is becoming extremely complex.
I shall certainly look at it.
In regard to subparagraph 6 also, there is another question I wanted to raise. This subparagraph provides what is to happen if a lease is not for an exact number of years but for so many years and so many days or months. It raises the question as to what is to happen if the duration of a lease is not fixed. If, for instance, it is a lease for a period of somebody's life, how is that dealt with in such circumstances? I agree that is not a very usual situation but certainly it is not unknown.
I know one cannot, with certainly, foretell what is going to be the duration of human life. I am certain one cannot lay down any general rule on it. The Revenue Commissioners would have to look at the facts of each case and, with the assistance of an actuarial table, work out what they would consider to be the most appropriate expectation of life and determine values accordingly.
That is what I would expect but is it provided that they may do so?
If the Deputy will look at paragraph 8 of Schedule 1 again, he will see that it deals with settled property but it refers to a life interest. Subparagraph (1) (d) of that paragraph says:
a life interest in settled property shall not be a wasting asset until the predictable expectation of life of the life tenant is 50 years or less, and the predictable life of life interests in settled property and of annuities shall be ascertained from actuarial tables approved by the Revenue Commissioners.
The same general rules in respect of life expectations would have to apply to leases for life as well. As the Deputy says, it is not a common form nowadays but he is correct in saying it cannot be excluded.
I do not want to labour the point but, again, this raises the point that the assumption is made by the Minister, and I think also in the drafting of the Schedule, that the provisions of Schedule 1 are being imported and applied. But, as far as I can see, under the Schedule, they are not. In fact, they are being specifically excluded. Here we are dealing with a lease of land which is treated as a wasting asset. It is specifically provided that the rules applying to other kinds of wasting assets will not apply to these. This Schedule is purporting to lay down rules to be applied to them. Almost all the Minister's replies are on the assumption that one will apply the rules of Schedule 1 to this.
I do not want to labour the point, but the more we pursue this and the more the Minister finds himself relying on Schedule 1, the more essential it is to make it clear that the rules under Schedule 1 will apply and the circumstance in which they will apply, to leases of land. It is clear that that is the assumption they are applying although it is not clear from this Schedule that it is being applied.
There is provision in paragraph 8 of this Schedule dealing with the duration of leases.
It does not cover the point I raised. It draws attention to the necessity for making clear what rules of Schedule 1 are to be applied, and what rules are not, in dealing with a lease of land.
Paragraph 2 (2) provides that
In applying paragraph 6 of Schedule 1 to such a part disposal, the property which remains undisposed of . . . shall be valued as at the time of the part disposal.
For what purpose does one value the undisposed part of property as at the time of the part disposal?
I will give an example which will illustrate the application of the provision. "A" has a freehold house, previously let, which cost £10,000, including all allowable expenses. When he obtains vacant possession he grants a lease for 99 years at a premium of £12,000 and a ground rent of £20 per annum. The disposable value of the reversion at the time of the grant of the lease is virtually entirely the right to the rents, valued at £200, that is, ten years' purchase of the ground rent. Under the part disposal rules the chargeable gain is computed as follows:
£12,000
cost £10,000×———— = £9,836.
£12,000 + 200
The chargeable gain is, therefore, premium, £12,000, acquisition cost attributable, £9,836, and chargeable gain, £2,164. The acquisition cost has now been written down to £164, that is, £10,000 minus £9,836. If, therefore, the reversion is later sold for £244, there will be a further chargeable gain of £80.
In order to use the mechanism necessary to arrive at the chargeable gain on the part disposal, is it necessary to calculate the value of the undisposed portion of the property?
Yes.
And having done that, is that value then used in connection with any future disposal of the undisposed part of the property?
Yes.
Paragraph 3 (1) reads:
Where, under the terms subject to which a lease of land is granted, a sum becomes payable by the lessee in lieu of the whole or part of the rent for any period, or as consideration for the surrender of the lease, the lease shall be deemed for the purposes of this Schedule to have required the payment of a premium to the lessor (in addition to any other premium) of the amount of that sum for the period in relation to which the sum is payable.
What is the meaning of the phrase "for the period in relation to which the sum is payable" when it is applied to a sum paid in consideration of the surrender of the lease? The Minister referred to paragraph 3 (5) which reads:
Where under subparagraph (1) a premium is deemed to have been received as consideration for the surrender of a lease, that premium shall be regarded as consideration for a separate transaction consisting of the disposal by the lessor of his interest in the lease.
I cannot understand how a sum paid as consideration for a surrender of the lease will be deemed to be payment of a premium for a period in relation to which the sum was payable, as provided in paragraph 3 (1).
I understand the Deputy's point, which is that once the surrender takes place there is a termination——
Yes, it is not over a period.
——even if it is a surrender of a period——
Subparagraph (5) appears to cover the surrender of a lease. I am not sure why it is brought into subparagraph (1).
The Deputy has made an interesting point but I do not think it is a material one. Whatever surrender takes place will be related to a period of time defined in the lease. There may be a lease for ten years and if the surrender takes place after a period of five years the sum paid would relate to the remaining five years.
It would be spread over that period for the purpose of allowance.
Yes.
What, then, is the effect of subparagraph (5) in relation to this, where it is treated as a separate transaction?
Quite frankly, I will have to examine this.
I do not expect the Minister to be able to deal with each point straight away and I do not want to harass him. An interesting case can arise over the whole Schedule. First of all, one must ask a question in relation to a case where, for example, I have a lease and have a right of renewal but it does not suit me to exercise it: it suits me to forego that right and I simply let the lease fall in. What is the position there?
Question No. 2 relates to the situation where I let the lease fall in and later, perhaps by a devious route, I acquire that property again, in effect renewing the lease in a completely separate transaction. That is hardly what one would call during the currency of the lease. What is caught there or has something slipped through? What happens if I simply let the lease expire? My renewal right is optional. I do not know what the courts would decide if the Minister attempted to interpret that optional right as a mandatory one. I think he would be in trouble.
Following Deputy Colley's line of thought and having regard to the words "currency of lease or premium", suppose by a simple operation I get the property back on another lease, what is the situation? One of the things this legislation will drive people to do, and this is one of my objections to it, is to collaborate —I do not want to say "connive"— to do perfectly legal things, to do nothing wrong, but still to defeat the intention in the Bill. It is an old story as far as legislation is concerned. Shakespeare had it in the Merchant of Venice: if you go for your pound of flesh you will get it, but no more.
I am extremely concerned about the impact of what we are doing in this legislation. I have the greatest sympathy with the Minister who has to take it on single-handed—nobody has come in to support him—and he and his advisers must be extremely harassed and tired. For that reason I am not pressing him for answers. I hope he will not take me as trying to stir anything up. There will be another Stage of this Bill in this House and I am sure the same questions on this matter will be asked in the Seanad. There are big interests involved in this and if the Minister feels he has not the answers now I will understand.
Each case will have to be looked at and it is very difficult to give a general answer.
We are trying to legislate in a general way and where our law does not hold up the courts will have to enforce the loopholes.
A citizen has the right not to pay any more tax than the law imposes. I am not too clear about the point the Deputy is making on non-exercise of the right to renewal. If such a person later on were to obtain a new lease he would be paying a premium for the new lease or a higher rent than he might otherwise have been paying.
I could give a multitude of instances to get over that. The surrender is not a measurable right. The tax people cannot get after that. The Minister seems to be assuming that the surrender would be in circumstances where the lessor would be getting a free gift of the surrender. I pointed out that this type of legislation encourages collaboration. People will have legal advisers and legal advisers have a way of settling matters, perfectly legally and above board, usually with the object of avoiding unnecessary expense for their clients and to give their clients the best service possible. My point is that this legislation is stimulating this kind of thing and I am drawing attention to the type of loophole that can be a fruitful source of trouble. That is all. Paragraph 4 deals with sub-leases out of short leases, and subparagraph (2) reads:
In the computation under Schedule 1 of the gain accruing on the part disposal of a lease by way of the grant of a sub-lease for a premium (in this paragraph referred to as the actual premium), the expenditure attributable to the lease under clauses (a) and (b) of paragraph 3 (1) of Schedule 1 shall be apportioned in accordance with this paragraph, and paragraph 6 of Schedule 1 shall not apply.
Again I refer to the qualification of paragraph (3) referred to already, which is, "subject to the provisions of this Act". It raises the interesting question: is the Schedule part of the Act or not? That is a very broad and inaccurate way of putting it; of course it is part of the Act in one sense, but again that point is imported into this. Subparagraph (3) reads:
Out of each item of the expenditure attributable to the lease under the said clauses (a) and (b) there shall be apportioned to the part disposal—
Then it goes on to deal with sub-leases out of short leases. There again you have a mechanism which is designed to cover abuse, but it is doubtful if it does what it is intended to do.
Section 51 makes the Schedules effective for the purposes of the Act.
Yes, this is precisely the trouble because if the Schedules were looser they might be regarded merely as guiding rules, but because of that section they are substantive enactments and the pound of flesh of Shakespeare's Merchant of Venice becomes a warning in the matter of interpretation.
As the Minister knows, while these may appear to be rules for calculating liabilities and so on in certain cases and allowable expenditure, a later Schedule actually imposes specific obligations on taxpayers, quite apart from calculations. However, we shall come to that. I would like to refer the Minister to subparagraph (6) of paragraph 3 which reads:
Subparagraph (2) shall apply in relation to a transaction not at arm's length . . . .
Why does that not say that subparagraph (1) shall also apply? What is the distinction in this context between (1) and (2)?
In subparagraph (1) the terms of the lease itself would have been examined for the purpose of ascertaining whether or not the lease was a genuine lease. The subparagraph deals with anything which would be done under those terms which have already been tested, as it were, so it is not necessary to bring them into subparagraph (6) because they have already been subjected to test. Subparagraph (6) is applying certain provisions where a transaction was not done at arm's length. It deals with things which would be outside the terms of the lease.
I would have thought that the provisions of subparagraph (6), in the event of a transaction not being at arm's length, should really apply to any transaction which is not at arm's length. However, that is a matter for the Minister. I want to refer the Minister to paragraph 4. It is only a drafting point, if there is any validity in it at all. Would the Minister look at subparagraph (2) of paragraph 4 where there is a reference to a premium, in this paragraph referred to as "the actual premium". Then (b) of subparagraph (3) starts off by saying: "if the actual amount is less than the full premium." Should that be "if the actual premium"?
The Deputy will recall that I moved an amendment to that.
My apologies. That is correct. Subparagraph (5) sets out where income tax has become chargeable with reference to a premium. It goes on to provide certain things and then says:
except where, in an apportionment under paragraph 6 of the said Schedule, the value of the consideration is taken into account in the aggregate of the said value and the market value of the property which remains undisposed of.
What is the effect of that exception "except where"?
A person would wonder why we do not number the lines in the Schedules at all.
I find it very inconvenient.
I think we must have that practice amended.
I assume there is no good reason for that except practice and tradition.
I imagine that is the only reason. I shall see if I can cause a change to be made. It certainly does not help one's reading of the Bill and discussion on it not to have the lines numbered. Subparagraph (1) of paragraph 5 deals with the case where the interest out of which a lease is granted is not itself a short lease and in computing a chargeable gain the normal rule for a part disposal applies. The amount chargeable to income tax will be excluded from the consideration for the part disposed and in order to achieve the correct mathematical result it will also be excluded from the numerator of the fraction used for apportioning allowable expenditure in computing a chargeable gain on the part disposal.
Perhaps I should give an example. Suppose a freehold property is acquired after April, 1974 for £100,000. Four years later a lease for 21 years is granted at a premium of £25,000 subject to a rent of £8,000 per annum. The interest remaining undisposed of, that is the reversion, is valued at the time the lease is granted at £105,000. Income tax liability on the premium is——
Which is the premium in that case?
The £25,000. The total premium is £25,000 less a fraction under section 83 of the Income Tax Act of 1967 which is 21 minus 1/50 multiplied by £25,000 which is equal to £10,000. So, chargeable income tax is £15,000. The capital gains liability is: total premium, £25,000, less the amount chargeable to income tax which is £15,000, leaving a balance of £10,000. We deduct the proportion of allowable expenditure—that is £100,000 which is the cost—multiplied by £10,000—which is the premium less the income tax charged—over £130,000. That is the premium plus £105,000 which is the value of the reversion. That equals £7,692. The chargeable gain therefore is £2,308.
I thank the Minister for that example. I take it the effect of the subparagraph is that where income tax has become payable in accordance with section 83 of the 1967 Act account is taken of it both in assessing what is the gain—in other words, it is deducted from the gain— but it is also taken account of in assessing the part disposal calculation. That is the effect of this subparagraph?
Yes.
I refer the Minister to the next subparagraph, No. 2, the last line of which says: "but not so as to convert the gain into a loss, or to increase any loss". I want to know why that provision is there having regard to the fact that income tax has in fact been paid.
This subparagraph provides that where a short lease has been granted the amount charged to income tax under Case V will be deducted from the gain computed under the rules relating to short leases. The maximum deduction will be the amount of the gain so that the deduction cannot convert a gain into a loss or increase a loss. The reason for this restriction is to ensure that the net tax liability is not reduced below the charge for income tax.
The net capital gains tax liability?
Yes.
Is this principle right? Perhaps I am misinterpreting it, but it seems to me to be saying that if the amount of income tax you have to pay is such that if deducted in full it would reduce your liability for capital gains tax or even create a loss, you will be allowed to do that. Is that right in principle if, in fact, this consequence arises because you have paid income tax?
It is very complicated.
Is it over-simplifying it to say that because you paid income tax, if that were allowed in full and were to create a loss situation, you are not to be allowed to claim a loss situation? If that is so, it seems to me to be wrong in principle. Incidentally, there is exactly the same provision at the end of the next subparagraph, subparagraph (3).
It works the other way round.
I notice that. I am not questioning that yet. This relates to what I was saying earlier—that these Schedules are not merely laying down rules of calculation. This is one example, but there are more striking ones later. It is one example of some important principle being introduced, apparently, in the Schedule.
Generally speaking, the intention is to provide that sums which have been brought into charge to income tax will not be liable to capital gains tax.
That is true only in so far as it does not produce either gains converted into losses or increase losses. I am not clear as to why that should be so.
I will look at the point the Deputy raises.
I would ask the Minister to do that in relation both to subparagraphs (2) and (3) because it is an important departure from the principle laid down in the Bill and should not be adopted without very good reason. Apart from that point, I would refer the Minister to subparagraph (3) and ask him whether he could explain and, perhaps, give an example, of how the proviso would work.
Subparagraph (3) provides for the exclusion from the charge to capital gains tax of any sum charged to income tax under Case V of Schedule D by virtue of the special rule in section 85 of the Income Tax Act, 1967, for dealing with the sale of land subject to a right of reconveyance.
In the case of a short lease the amount charged to income tax would be deducted from the gain as computed under subparagraph (2), subject to the same limitation, the maximum deduction, in subparagraph (2). In other cases the amount charged to income tax would be excluded from the consideration under the same conditions as in subparagraph (1).
Effectively what is being done here is to provide that where income tax has become payable in respect of a premium in accordance with certain provisions of the 1967 Income Tax Act, the amount in respect of which income tax is paid is to be excluded from the consideration except where there is a part disposal. This is provided for in relation to charges arising under section 83 of the Income Tax Act, 1967 and under section 85 of the same Act, but where such happens in relation to leases of a duration of less than 50 years, it would appear in either case that that is not the way it is to be treated and that the amount on which income tax is paid is to be deducted from a gain. I am not sure as to why the proviso is drafted in this way. Subparagraph (2) seems to be the proviso to subparagraph (1) and there is a proviso added to subparagraph (3). As far as I can see the same thing is being done in each case where income tax becomes payable under either of those sections and the proviso here is having the same effect as subparagraph (2). The point I am raising is the same as that which I raised on subparagraph (2) and which the Minister has agreed to look into. I presume that either he will change the provision or explain why it should be there. On that assumption I will leave those points and refer the Minister to subparagraph (5) of paragraph 5 which reads:
Paragraph 2 of Schedule I shall not be taken as authorising the exclusion of any amount from the consideration for a disposal of assets taken into account in the computation under that Schedule by reference to any amount chargeable to tax under Chapter VI of Part IV of the Income Tax Act, 1967.
Can the Minister tell us what that means and what is the effect of it?
I have an illustration in respect of subparagraph (3) if the Deputy would like to hear it.
Yes, please.
A acquires land for £10,000 and later sells it to B for £15,000 reserving the right to buy it back after five years for £12,000. The amount chargeable to income tax is £3,000 less 5 minus 1 over 50, multiplied by £3,000 which is the difference between £12,000 and £15,000, that equals £240 and, consequently, £2,760 is chargeable to income tax. The chargeable gain on the sale, is consideration for disposal, £15,000 minus £2,760 which equals £12,240 and the base cost of £10,000, which leaves the chargeable gain at £2,240.
If the proviso is applicable, if "A" had a long leasehold interest with 40 years left to run, the computation for income tax would be unchanged. The computation for capital gains tax under the proviso would be as follows: consideration received, £15,000; expenditure allowable per Table to the paragraph, £10,000, multiplied by 96 per cent, which would be £9,600; gain on disposal, £5,400. Exclude £2,760 and the chargeable gain would, therefore, be £2,640.
The use of the word "Table" by the Minister is giving me a clue as to what this is all about or why it is being done in this way. I presume the Table is intended to give greater relief to the taxpayer than the ordinary system and that is why we have this exclusion.
That is correct.
Having said that I got a glimmer as to why this has been done I am not saying that I am accepting it; I would like the Minister to have another look at it.
I will certainly have a look at it.
I should like to ask the Minister what subparagraph (5) means.
It ensures that the general rule excluding sums chargeable to income tax from the consideration on the disposal of assets is not to prevent any amount being taken into account in a capital gains tax computation because it has been taken into account in a charge under Case V, Schedule D. This provision is necessary to enable such an amount to be brought into the capital gains computation before the part chargeable to income tax is excluded to give the final amount chargeable to capital gains tax.
I am afraid that is not much clearer than paragraph 5. Is what the Minister has just said not a breach of the general principle laid down in the Bill about the exclusion of amounts which can become liable to computation for capital gains tax purposes?
The Deputy will see that it has to be brought in for the purposes of computation, and that is the only purpose for which it has been brought in. There is no double charge.
It is possible that we are talking in different terms. I should like to refer the Minister back to subparagraph (1) of paragraph 5 of Schedule D which reads:
Whereby reference to any premium income tax has become chargeable . . . on any amount, that amount shall be excluded from the consideration brought into account in the computation under Schedule 1 of a gain.
Does that not contradict what the Minister has just said? That is the exclusion of the amount on which income tax has become chargeable from the consideration brought into account in the computation of capital gains tax. That seems to be directly contradictory to what the Minister has said in relation to subparagraph (5). What I have just quoted from subparagraph (1) is the general approach in the Bill.
It is certainly not intended to be operated in the way the Deputy fears. There appears to be some contradiction between subparagraph (1) and subparagraph (5) but the effect of subparagraph (1) is to ensure that there is no double charge. Similarly, as far as subparagraph (5) is concerned, there will be no double charge but in order to compute the appropriate gains account has to be taken of the full amount.
In the example which the Minister gave under subparagraph (3) were there not payments of both taxes?
Yes, but there was no double charge. There was no charge of capital gain on that which had already borne income tax.
My recollection of the example is that whatever the figure was on which income tax had been paid that amount of the consideration was deducted before any computation of capital gains which arose.
That is correct.
That is what is being said in subparagraph (1) and in many others but subparagraph (5) and the Minister's explanation of it would appear to suggest that the figure is left in to calculate capital gains and then deduct the amount on which income tax is paid which, I must confess, confuses me.
If we had not subparagraph (5) there would be a double deduction.
(Dublin Central): Would the Minister be calculating the capital gains on a much higher figure?
Would the Minister mind repeating the explanation he gave for subparagraph (5)?
It ensures that the general rule excluding sums chargeable to income tax from the consideration of the disposal of assets is not to prevent any amount being taken into account in a capital gains tax computation because it has been taken into account in a charge under Case V, Schedule D. The provision is necessary to enable such an amount to be brought into the capital gains computation before the part chargeable to income tax is excluded to give the final amount chargeable to capital gains tax.
That could not be right. The Minister is going to charge capital gains on the amount, including tax.
No. This effect will enable such an amount to be brought into the capital gains computation before the part chargeable to income tax is excluded to give the final amount chargeable to capital gains tax.
It defeats me, I must confess. Could I suggest to the Minister that it cannot be a question of excluding a double deduction because, the wording in subparagraph (1) states:
That amount shall be excluded from the consideration brought into account in the computation of a gain.
If what the Minister said about a double deduction is correct then a double deduction is being allowed under subparagraph (1).
I will have another look at this.
I appreciate that, but I hope the Minister appreciates that I am anticipating some difficulty in regard to matters of this kind which can only be dealt with, as far as I can see, on Report Stage. This will limit the Minister and ourselves where there is a question of principle involved under discussion. There may be certain parts of the Bill, such as this where it might be necessary to recommit on Report Stage. Would the Minister agree that it might be difficult to discuss this and the principle involved without recommitting this part of the Bill. I am not talking about the whole Bill, of course.
I will consider it between now and Report Stage, and if such procedure should be necessary I shall not raise any difficulty.
I have just been listening to the discussion on paragraph 5 rather than taking part in it. It strikes me that it is totally unsatisfactory that we have this situation once again on this Bill—no doubt we will have it several times more—that nobody in this House knows what paragraph 5 means. I am not blaming the Minister. He is supposed to know because he brought in the Bill but I know as a matter of practice that it is not always feasible in financial legislation of this kind. Nonetheless the situation is that he does not know and because he does not know presumably the Revenue Commissioners do not know either because they are there to advise him.
Are we not in a situation, therefore, that we are being asked to pass a Schedule which contains paragraphs such as this that literally nobody knows the meaning of? So far as I can gather from this paragraph the general intention of it seems to be to exclude double payments of income tax and capital gains tax. The examples and the explanations given seem, in fact, instead of excluding the double payments, almost to make provision for the double payments. There seems to be some attempt to divide part of the gain or consideration in relation to some transactions into two sections part of which will be liable for income tax, part of which will be liable for capital gains tax. Presumably the intention is that the two parts will not overlap, but there is no one here who can say with certainty that they will not. The Minister cannot say it.
Deputy Colley's suggestion that parts of the Bill, such as this, will have to be recommitted is one that will certainly have to be accepted. This is probably the most technical legislation that ever came before this House. In my opinion it is going through inordinately quickly, if anything. It is the biggest effort to change capital taxation in 81 years. An effort is being made to close off in advance all kinds of difficulties and possible loopholes. Many people would consider that the better thing to do would be to bring in the simple principles and as loopholes came up to try to close them each year.
In what is being proposed in paragraph 5 and the five subparagraphs of it the efforts to tie up possible loopholes are so great that the Minister has got himself and all of us into the situation that none of us knows now what exactly is meant and what exactly the effect will be.
If the people who thought out all this are not in a position to say what it means, what will the High Court or the Supreme Court be able to do about it when some aggrieved taxpayer goes there at possible considerable expense to himself? If the Bill had to be made so complicated that nobody, neither the Minister nor the Revenue Commissioners, can understand it, the sensible thing would be to withdraw it or, at least, to withdraw those parts of it that are beyond human comprehension at this point in time and have it brought forward again at some other stage.
These Schedules are supposed to be only minor rules in relation to computations and so on—supposed to be. In fact, they form nearly half the Bill and they are of the utmost complexity, so much so that large parts of them are beyond the comprehension of the Minister and consequently of everyone else in the House. Would it not be better to drop these Schedules that nobody can understand? Is it necessary to set out in statutory form extraordinarily complicated rules? Could this not be done by way of order which the Revenue Commissioners could make after some period of experience of the working of this Bill?
At the moment, apart from the principles contained in the Bill, it is totally unsatisfactory that four or five people are here hour after hour after hour trying to decipher what is meant and finding it quite impossible to do it. The responsibility for that situation, in all fairness, has to be taken by the person who brings the Bill into the House, and I do not think it is fair of him to expect the House to pass a Bill that, in his own admission, is beyond human comprehension. The examples given are so complicated that I do not know that they can be followed, let alone the text or the other explanations given.
What should be borne in mind at all times in relation to things like this is that ultimately they will have to be interpreted by the courts. For the last 20 to 30 years or more the courts have been pretty scathing about financial legislation and how they are expected to interpret statutes. The Finance Acts of the last 20 to 30 years are not a patch on this sort of stuff. They are shining in their clarity by comparison with this Bill. If the courts got bogged down ten to 20 years ago, as they did, and complained bitterly about the gibberish that financial legislation had been reduced to, what will they say about paragraph (5) of Schedule 3 and the five subclauses thereto?
I understand that there is a tendency nowadays on the part of those who have subsequently to interpret the legislation to read the Official Report and, while they cannot take the explanations given by the Minister or replies to questions in the Dáil into account in their interpretation, at least it generally puts them on the right track as to what to look for. If they read the debate on this Schedule they will not be put on any right track. In the circumstances, if they find, as we do and as the Minister does, that this paragraph is incomprehensible, they can just give the benefit of whatever doubt there is to the taxpayer. In the interests of the Revenue Commissioners, would they not produce draft legislation which somebody can understand because the courts will have to give the benefit of any doubt there is—and there must be enormous doubts here —to an aggrieved taxpayer?
We appreciate the fact that the Minister is prepared, as he says, to look again at this between now and Report Stage, but I wonder if it is enough. Deputy Colley has drawn his attention to the fact that on a Report Stage, apart from the proposer of an amendment, any other Deputy can speak only once and there are only about five or six Members in the House who have any interest in this, all but one of them on this side of the House. It would be impossible on a Report Stage, you will agree, a Leas-Cheann Chomhairle, looking at paragraph (5) and the five subparagraphs, so to resolve the difficulties and the doubts which have now come to light as a result of the debate on this paragraph by way of amendment or amendments. It would be impossible for anyone to put down an amendment because it has been demonstrated clearly that there is nobody here who knows what it is about. Would the Minister consider the possibility of withdrawing these appallingly difficult and complicated Schedules so that they might be recognised and redrafted in language that is comprehensible to people other than the draftsman?
(Dublin Central): I should like to reiterate what Deputy O'Malley has said. Throughout our discussion on this Bill the Minister has stated he will look at certain sections and will make some adjustments. When Report Stage is reached it is important that Deputy Colley should not be restricted to speaking once on any section. If we cannot get that undertaking we will not have good legislation. If they are restricted to speaking once only Deputies on this side of the House cannot get from the Minister the necessary information. The Minister has said that he would not place any restrictions on the debate and it is vitally important on Report Stage when we are discussing this and other sections that our spokesmen at least should have complete freedom to speak on any section. I should like an undertaking from the Chair and the Minister in this regard.
Paragraph 2 of Schedule 1 says in the clearest language that any money or moneys worth which is subject to income tax will not be subject to capital gains tax. That provision affects the property we are talking about under Schedule 3. We are providing that there cannot be a double exclusion. Deputy Colley has suggested that there is some conflict between subparagraphs (1) and (5) of paragraph 5. I agree that a quick reading of the two subparagraphs might suggest that but, as Minister for Finance who is promoting this legislation, I assert there is no conflict. I am asserting also that the money or moneys worth that is subject to income tax will not be liable to capital gains tax also. If the operation of subparagraph (5) is to the contrary it would be a clear breach of this assertion and obviously amending legislation would be necessary. I am satisfied it will not be necessary but if it should be I shall be only too happy to promote it and I am sure my successor in office will do likewise. I am satisfied that we need subparagraph (5) to prevent a double exclusion which was not intended. I will see if it is possible before Report Stage to use some other form of words that, even on a quick reading, will not suggest that there is conflict between subparagraphs (5) and (1).
I take it the Minister is still adhering to what he said earlier, namely, that if it appears necessary in relation to this or certain other portions of the Bill that he will not raise objection to recommittal of such portions if this appears necessary in order to discuss adequately the points involved?
The Deputy will understand it would not be appropriate for me to give any general undertaking that every section will be recommitted on Report Stage.
I am not asking the Minister to give that undertaking. The Minister will agree that in order to achieve not only a situation where income tax and capital gains tax will not be payable on the same gain and in order to understand what is being provided, it may be necessary to have recommittal. I do not want to pursue this further but I would point out that merely to ensure that capital gains tax and income tax are not payable on the same gain or income does not quite answer the problem. It may be that if it is done in a certain way the rate of tax payable will be higher than if it were done in another way. I mention this merely to indicate that an amendment on the lines indicated by the Minister may not be sufficient to enable matters to be discussed in an adequate way. I am saying this without any offence to the Minister but merely to put on record the reason I am talking about recommittal. The reason we cannot discuss this adequately is because we cannot get an adequate explanation for what is provided. To ask for recommittal in such circumstances is not unreasonable.
Earlier in the debate I mentioned the effect of paragraph 21 of Schedule 1 on paragraph 2 (3) of Schedule 2. It is somewhat similar to the effect of paragraph 5 (4) of this Schedule on paragraph 1 (2) of Schedule 1. This kind of confusion and possible contradiction must be taken into account. The Minister has attempted to give undertakings for himself and his successors but, without any offence to the Minister, we must question what this assurance amounts to in the face of such binding legislation. I support fully what Deputy O'Malley said in regard to this legislation. My concern is that the Revenue Commissioners will be bound hand and foot by legislation and the undertakings given by anyone will be worthless when it comes to the test. That is not to say I do not accept the undertakings but I wonder if they will be effective with this form of legislation.
I should like to refer the Minister to paragraph 6 (1) which I find difficult to follow. Perhaps the Minister might give us an explanation?
This subparagraph provides for an adjustment of a capital loss where an allowance under the provisions of section 92 of the Income Tax Act, 1967, is given for income tax purposes. That section provides that where a person who holds property under a superior short lease and who grants a sub-lease is liable to income tax on the rent reserved and on the appropriate proportion of the premium he is entitled to a deduction of a part of the premium he paid to the superior landlord when he acquired the lease. That part of the premium is calculated by reference to the part of the premium already assessed on the superior landlord under section 83 (1) of the Income Tax Act, 1967. The amount so assessed is treated as a rent payable accruing from day to day by the person granting a sublease spread over the period during which he holds the property under his superior lease.
A proportion of the rent so deemed to be payable is then calculated by reference to the period of the sub-lease the amount apportioned to the sub-lease is the deduction to which the sub-lessor is entitled in adjusting the income tax assessed on him. This paragraph provides for a corresponding adjustment in the computation of capital loss, and this adjustment is made by reducing the loss incurred on the grant of the sub-lease. The adjustment is not in the end to convert a loss into a gain or to increase any gain.
I would again raise the point I raised earlier with regard to subparagraphs (2) and (3) of paragraph 4. I am raising the same point in regard to the arrangement in this subparagraph which is not to convert a loss into a gain or to increase any gain. The Minister undertook to examine the principle involved, and I am asking him to include in that examination the provision in paragraph 6 (1).
I shall do so.
Subparagraph (2) of section 6 provides:
Nothing in paragraph 2 of Schedule 1 shall be taken as applying in relation to any amount on which tax is paid under section 84 of the Income Tax Act, 1967 (charge on assignment of lease granted at undervalue).
Why not? We are back to the same point we were discussing a few moments ago.
It is the same point.
The same as in subparagraph (5).
Yes. This subparagraph relates to a situation arising on the assignment of a lease at undervalue by a transaction not at arm's length. The market value is substituted for the consideration in computing the amount chargeable as rent.
But I take it that where it is at undervalue the Income Tax Act, 1967, provides that in effect the income tax is to be calculated on the market value and not on the undervalue and, if that is so, I do not quite follow why the amount on which the tax is actually paid should not be excluded from the consideration for capital gains purposes.
We are all agreed that capital gains taxation is complicated and it is not simplified by relating it to the Income Tax Acts.
Yes, but we should be clear nevertheless as to what we are doing. I do not want to repeat the observations made on subparagraph (5) of paragraph 5 but they all apply to this as well.
In my examination of paragraph 5 paragraph 6 will also be considered.
Subparagraph (3) provides:
If any adjustment is made under section 85 (2) (b) of the Income Tax Act, 1967 (adjustment of charge on sale of land with right to reconveyance), on a claim under that paragraph. . . .
What paragraph is referred to there? Is it meant to be under that section by any chance?
It would be a claim under paragraph (b) of subsection (2) of section 85 of the Income Tax Act, 1967.
You could have fooled me.
Might it not be safer to put in the section there? It would be a claim under the section.
Or a claim under that paragraph of that section.
Or a claim under that section.
I have not got the section before me.
I appreciate that.
The Minister will agree it would be improved by clarification.
I will see if we can clarify it.
I wonder could the Minister explain subparagraph (3). Ideally, of course, if he had an example it would help, but maybe he has not.
I do not think I have. This deals with an interest in land where it is sold in terms providing that it be sold or leased back to the vendor or a person connected with him and, in the case of a resale, an income tax charge is imposed on the vendor by treating the difference between the sale price and the price fixed for the resale back to him as a premium. As the price on the resale may vary with the date, the section provides that the price to be taken is the lowest possible under the terms of the sale and the vendor may within six years after the event be given an adjustment of the income tax assessment by reference to the facts as they eventually emerge. This subparagraph therefore provides that where a statutory adjustment is made all such adjustments to capital gains tax computations as are necessary are to be made whether under this paragraph or under paragraph 5.
Section 85 (2) (b) referred to reads:
The vendor may before the expiration of six years after the date at which the reconveyance takes place claim repayment of any amount by which the tax assessment by virtue of this section exceeded the amounts which have been so assessed if that date had been treated for the purpose of this section as the date fixed by the terms of the sale.
That is an adjustment. Paragraph 5 in the Schedule could not work, for instance, in such a way that that adjustment could become capitally chargeable.
If the allowance is excessive obviously an adjustment would have to be made.
I am wondering whether the whole purpose of this is not to charge capitally an adjustment of income tax. I am sure it is not intended, but I am wondering could it happen.
Quite frankly, I do not think it could. Clearly we will have to make allowances. We have to provide for adjustments when we calculate assessments under the Income Tax Acts.
I appreciate that, but I wonder what the effect of this method of procedure might be. I am only expressing thoughts that can arise for further pursuance. Further development of that thought is probably more appropriate to the Fifth Stage.
The Deputy should not worry himself too much because it will not arise.
I would like to refer the Minister to paragraph 8 dealing with the duration of leases, particularly to subparagraph (2) which reads:
Where the terms of the lease include provision for the determination of the lease by notice given by the lessor, the lease shall not be treated as granted for a term longer than one ending at the earliest date on which it could be determined by notice given by the lessor.
Should there not be added to that, unless it can be shown it is implied, "notice given by the lessor otherwise than for breach of covenant"?
Every lease normally has a notice for determination on certain contingencies, breach of covenant being one of them, and quite common. There is nothing easier than to put in some clause of determination by notice. We should look carefully at the paragraph.
Perhaps I could anticipate the Deputy by saying that I think Deputy Colley has made the point well and I think he is right.
It also applies to subparagraph (4).
Suppose you had a clause in a lease stating that the lessor, subject to some condition that the lessor had control over, could give a notice determining the lease. Suppose he had a simple notice in it whether a lease which contained a notice of arbitrary determination by the lessor was a lease at all. It is not the Revenue Commissioners who will decide it. It is the Courts who will decide it. Suppose you had the lease with the extraordinary term in it that the lessor can determine the lease at certain periods by notice in writing and still the lease were granted for a term of years the courts would have a nice question of intention there, which is something new. This legislation is also new.
As Deputy Colley said, this paragraph needs amendment and it may need wider amendment than has been suggested. Why should we have to embark in this Act, taking all the provisions in regard to the duration of leases and the provisions with regard to leases, on defining how long a lease is? We have determined the wasting asset aspect earlier in this Schedule. Why do we have to legislate for the duration of a lease? Subparagraph (5) of paragraph 8 states:
The duration of a lease shall be decided, in relation to the grant or any disposal of the lease, by reference to the facts which were known or ascertainable at the time when the lease was acquired or created.
That is another matter that could give fruitful cause for argument on appeal or ultimately in court. I fear the psychology behind a lot of this. The size of the interests involved are relatively small and nobody will go to the law so if we have this in the Act, fair or foul, we will get away with it. It will save a lot of trouble to have it in and we will put it in. Is there some subconscious thinking of that nature behind it if we enact this kind of thing?
I come back to Deputy O'Malley's point, which is not something which is likely to arise in relation to big interests that will be taken into court. Although these are legal matters I have adverted to the type of interest involved is small enough to prevent any great inconvenience to the administration by resort to the courts. Is that not all the more reason why we should be rather careful about what we are enacting? We should not enact certain things just for fear that there will be an evasion.
I think duration of a lease is a very important thing to deal with because the whole character of the lease could very easily change by clauses allowing for determination of it by the lessor. If we did not specify here that the determination of a lease by notice was the factor which would determine the length of the lease then we could have a situation in which the lease might be for a period of 200 years and yet there could be a clause which would allow its termination within a year or in a year's time. Quite clearly such a lease could in reality be for 12 months. We have been very specific in this connection. We have found in the past that failure to deal in a tight way with leases in legislation has multiplied the opportunity for avoidance. It is very important that we be as specific as we can be in the legislation. It is not put in for the fun of it.
I appreciate that the Minister agrees that it is necessary to add on some words such as I have suggested like "otherwise than for breach of covenant" to subparagraph (2). As I said I think the same thing would apply to subparagraph (4). I want to refer the Minister also to subparagraph (3) which on the face of it seems to be an extraordinary provision.
Progress reported; Committee to sit again.