I have received representations, as I am sure the Minister has, from the Irish Farmers' Association in regard to section 5 (1). The IFA point out that in recent years quite a number of farms have been put in trust and the effect of section 5 (1) would be to include all such farms under the umbrella of section 5 and thereby remove the benefits of thresholds under other sections of the Bill. They have urged that where it can be shown to the satisfaction of the Revenue Commissioners that the beneficiaries' only assets—I presume to take that literally would not be correct but that where the substantial portion of the beneficiaries' assets were there contained in the trust— that the trust be treated in the same way as if all the property were owned by the individual. They also urge that provision should be made, by way of exemption from gift tax and stamp duty, for the unscrambling of those trusts for those who with to do so within some specified period of time. I would be glad to know the Minister's attitude in regard to those representations from the IFA.
Wealth Tax Bill, 1975: Committee Stage (Resumed).
The arrangements to which Deputy Colley referred were carried out in most, if not all, cases with the objective of tax avoidance and, as the Minister for Lands has already explained, it is not the practice to provide periods during which people may, as a consequence of new tax laws, unscramble existing arrangements which they have made to suit their own purposes under the law as it previously existed. We would not consider that we would be justified in providing a period of exemption such as is sought to allow for the unscrambling of these totally artificial arrangements. It is difficult to visualise any case in which it is necessary to form a company in order to run a farm efficiently. It could certainly be argued in relation to other business enterprises that the best way of carrying them on is through an incorporated company but the same argument cannot be advanced in relation to farms. If, under the existing law, people find that it is not in their interests to continue to hold farms in discretionary trusts they will, no doubt, unscramble those trusts and the worst that can happen is to have a once-and-for-all liability.
I would point out that it was known for a long time that wealth tax was to be introduced. It was not something that was suddenly imposed on people without warning. It was a matter which was announced before the last general election. A mandate was given to the Government for it and a White Paper was published as far back as February, 1974.
The Minister for Lands has already pointed out that the White Paper made no reference at all to allowing a period of time within which people could arrange their affairs in such a way as to avoid liability of tax where the arrangements would affect living persons or the assets of living persons. Such references as exist in the White Paper contemplated allowing people to rearrange their affairs under wills and testamentary dispositions but there was no suggestion at any time that time would be allowed for living persons to rearrange their affairs before the impact of the wealth tax.
First of all, I was interested to note, and I am sure many people who voted for the Minister's party in the general election will note with great interest, the Minister's statement that the Government obtained a mandate at the general election for the introduction of this wealth tax. I noted this with interest and I presume a number of people who voted for the Fine Gael Party will also note this with equal interest. The Minister speaks of trusts that were set up in relation to farms as tax avoidance. Of course, in the main, it was tax avoidance. It was avoidance of death duties.
There are two things to be said about that. The first is that in so far as the Minister and his colleagues could do so they certainly led farmers to believe that the impact of death duties was not only damaging but inequitable and that they should be abolished. In a context of that kind it savours slightly in my view of sharp practice for the Minister now to condemn efforts to avoid liability for death duties, efforts which were legal and fully in accordance with the law, and to condemn them implicitly, if not explicitly, as he has done, and to have no regard at all to the consequences for persons who so arrange their affairs. The consequences are that such persons will get no benefit whatever from the thresholds mentioned here and will pay a wealth tax on the first £ of their wealth and upwards.
As regards the question of providing time for unscrambling, the Minister says that the statement in the White Paper was intended to convey that time would be given for people to alter their wills and testamentary dispositions. Of course, wills and testamentary dispositions have to be formulated in relation to the manner in which one's property is held. It is a little unreal to suggest that time is allowed for that but is not allowed for the necessary changes in the manner in which property is held. I suggest it is illusory to think that one is given any time in that way if one does not give time for changes of the kind advocated by the Irish Farmers' Association. As to what time has been given to persons to change their wills and testamentary dispositions that is a matter which is not very clear to me at the moment, having regard to the date of operation of this Bill and indeed of the other Capital Taxation Bills. Consequently, it seems to me that the Minister's rejection of the representation made to him by the Irish Farmers' Association is unreasonable and without a valid, logical basis. The matter, has, however been put very clearly to him and he has clearly explained his position, which is all I can ask him to do.
I would now like to ask the Minister a question in regard to paragraph (b) of subsection (1) which sets out a number of possible cases in regard to discretionary trusts where the property, or some of the property, is situate outside the State. In each of them except No. (iii) the phrase "ordinarily resident in the State" is used. Why is that omitted in the case of No. (iii)?
No. (iii) states: "The settlor was domiciled in the State at the date of his death." I will come to that in a moment, but I would first like to deal with the other points which the Deputy made in relation to farmers. Lest there be any misunderstanding about the position it should be emphasised that the vast majority of farmers will not be affected by the wealth tax and still fewer will be affected by the fact that the Bill does not allow any temporary arrangement to facilitate those who have been farming through the medium of discretionary trusts. A farmer could have assets up to £250,000 and still pay no wealth tax.
Not with a discretionary trust.
Yes, if it is a family discretionary trust.
Lands could be worth £150,000, livestock and machinery worth £65,000, dwellinghouse £16,000 and other miscellaneous assets £19,000. That is a fair-sized farmer.
(Dublin Central): It would be a very small farm with inflation running at 25 per cent for three years.
That is a fair-sized farmer. The plea made here is one on behalf of such people. If there is to be a wealth tax it will have to be paid by those who are comparatively more wealthy than others. Nobody can dispute that as it is axiomatic. That being so, it seems to me that it is making a plea that has little merit to ask for special arrangements to be made to facilitate people who have that dimension of wealth and have used a device in order to avoid payment of estate duty in the past. The reality of the matter is that they do not need such special arrangements to be made for them.
The normal practice in respect of a settlor is always to look to his domicile. It is very difficult to determine with sufficient legal certainly what was the ordinary residence of a settlor who may be long since dead. That is why, in the case of the settlor who has died, it is necessary to apply the test of domicile and no other.
Why then is it included in No. 2?
The settlor will normally be still alive at No. 2. In No 3 he is dead. It will obviously create difficulty to determine the ordinary residence as of the date of death.
Why should it create difficulties? It is something which arises fairly regularly.
It has given so much difficulty in the past that the practice has been not to endeavour to determine ordinary residence but to rely on domicile as the determining factor in relation to trusts in this instance.
May I take it then that the effect of No. 3 is that if the settlor was resident outside the State at the date of his death, and perhaps for many years before it, but was in the legal sense domiciled in the State in that he intended to return there, any of the property in the trust situate anywhere in the world would be subject to wealth tax without a threshold? Is that the practical effect of No. 3?
Yes.
Does the Minister think that that is reasonable having regard to the terms of Nos. 1, 2 and 4 where some effort is made to approach the matter on the basis of applying the wealth tax only to those who are in the broad sense subject to the laws and jurisdiction of this State?
As the Deputy knows from filling up schedules of assets and administering estates the test is domicile. We are not changing the law or the practice. We are applying the well-established rules. We are dealing with a situation which has a finality. The settlor is dead. What governs the situation is the position at his date of death. The only changeable residence thereafter is from purgatory to a better place.
In reference to the two matters raised by Deputy Colley concerning section 5 (1) the question is that all property in discretionary trusts is brought within the net and there is no threshold. This was discussed briefly. It allows for the exemption of family discretionary trusts such as parents might arrange for their children. This is the normal course taken by a family which has wealth and which would be subject to heavy tax or estate duty. That gets the threshold just as any straightforward trust would.
Further concessions were made where there was a member of a family who was not a minor but who would require looking after because he is unable to look after himself. In such cases a prudent parent would draw up a trust providing for that type of individual. A further concession was made to enlarge that part of the section so that there would be no misunderstanding and that there should be full coverage for such cases. Basically one can look at section 5 —and I am looking at it from my experience of dealing with discretionary trusts—and see that the section does preserve the family's right to deal with property within the family and still obtain the benefit of the threshold provided under the Bill.
Deputy Fitzpatrick (Dublin Central) mentioned inflation. It is well to remember so far as valuation of property is concerned it has been fixed as on 5th April of this year. That valuation persists for three years unless there is a radical change of circumstances. An obvious change would be farmland which was sold and given to a developer for building. Changes in use of such property and its income in such circumstances would make revaluation likely. The previous valuation bears no relevance to the new valuation. Wealth under this Bill means net wealth. It is the wealth as ascertained on 5th April, 1975. That figure will last for three years. There is an inbuilt hedge against inflation.
(Dublin Central): The Minister has not given any undertaking about revaluation or told us what yardstick he will use.
There is certain limitation on valuation. One must be realistic. The valuation office in this country take a realistic approach to the valuation of property. There is also the question of time being allowed to people to unscramble legal technicalities. By its nature every discretionary trust leaves discretion to trustees. The trustees are the absolute authority in so far as the trust is concerned. They have free power of appointment. The general run of discretionary trusts is to leave the discretion completely to the trustees. In those circumstances trustees have the power to appoint. In appointing a trustee could set up another trust for any named beneficiary by virtue of that power. It could be a trust that would not be a discretionary one. He can take property out of the discretionary trust. People might argue that the discretionary trust that gives the threshold exemption is limited to a certain class such as the immediate family. If there is a beneficiary who is not within that group it is easy for a trustee to take that beneficiary out and give him one shilling or his allotted property. He can be taken out of the trust altogether. Then one is dealing with a discretionary trust and gets full exemption. Any discretionary trust that has been properly drawn, where a person has been properly advised by one who understands how to draw up such trusts, will have all these powers and many more.
This section should present no difficulty whatever to the family person who has taken steps to avoid estate duty. He will be no worse off. At a touch of a pen on a sheet of paper all the exemptions and thresholds will be given, but one person will be caught, and that is the man who uses discretionary trusts not for estate duty purposes but to avoid sur-tax and higher rates of income tax. I am talking about a man with a hefty income who likes to have it salted away and to pay just minimum income tax.
Reference has been made in this House to the encyclical Rerum Novarum which concerns a man's duty to society. Fair enough if he can get away with it, he will get away with it, but it is our function on this side of the House to see that everybody pays his fair amount of taxation when he is able to pay it. I have not got a terrible lot of sympathy with people who have an income of such a size that they are in the higher income tax bracket and who enter into these complicated transactions whereby their property varies between all the islands off Europe, America and the Caribbean so as to avoid paying income tax. I have very little sympathy with these people and I think Deputy Colley has the same attitude—he said as much earlier on in the debate—and any person with any experience in the legal or accountancy professions has to concede that, and one cannot shed too many tears for them. I want to come back to the point that the genuine farmer with a family farm, a family property, is amply protected under this section, and if he has a discretionary trust, he need have no worry about getting out. If there is something wrongly drawn for the purposes of the section, it can be dealt with within 24 hours.
I should point out, in endorsement of what Deputy Esmonde has said, that if an appointment is made under a discretionary trust to a member of the family, no stamp duty will be payable in those circumstances and no capital acquisition tax will be payable either in any case where property up to a value of £150,000 is appointed to a wife or children. That caters for the normal run of farms and I would say that 99 per cent would be exempt under that account.
(Dublin Central): Did the Minister say that no stamp duty would be payable?
Yes, where an appointment is made under a discretionary trust. The gift tax thresholds are so generous——
Fifty pence is the nominal amount.
Would there be capital gains tax liability?
Capital gains tax operates only from February, 1974 and there might not be any very significant capital gain.
It can relate away back for 50 years with a time apportionment to 1974—that is a different thing. Is it not a fact that there would be capital gains tax and no exemptions?
There will be no tax on any gain made prior to the commencement.
Thanks very much.
It was the Deputy who suggested going back 50 years.
In support of what the Minister and Deputy Esmonde have said, one of the great merits of the body of legislation we are bringing in is that it does tackle effectively, and highly effectively, the problem of avoidance, primarily in the area of capital taxation, but, as the Minister said, incidentally in the area of income tax. One of the great defects of the capital taxation code is that —I will not say it lends itself to avoidance because that understates the position—it effectively encourages it, and this is both a source of loss of revenue on a large scale to the State and a source of great social injustice because of the fact that those who are best off find it worth while and are most able to avoid it, and a source of great undermining of the public confidence in the tax system and a weakening of the willingness of people to pay tax, a willingness which must relate to the feeling that the tax system is equitable.
Because of the interlinkage between the different Acts and their operation and because of the annual character of the wealth tax as against the uncertain and variable incidence of the existing estate duty—because of these reasons avoidance becomes very much more difficult, and this is a great merit of this body of legislation. In the process of tightening up on avoidance, one comes up against a difficulty always of the margin between avoidance and the genuine hard case, and I think the particular section we are discussing is one of the key cases where this difficulty arises. It arises because, as I understand it, hitherto common law countries had not had wealth taxes of this particular kind, and in civil-law countries discretionary trusts do not exist. I hope I am well advised in this because I am in a technical area in which I have minimal competence, but my understanding is that this is a problem which exists in the common law system where discretionary trusts operate and we have had to devise a solution to the problem —and we are the first, I think, to devise a solution—the very difficult problem posed by the discretionary trust, some of which are genuinely related to family requirements where the property must be protected and the concern put in the same position as if it were not a trust, but others of which relate to tax avoidance on the income tax side.
The problem posed by this is a difficult one. When we were preparing this tax code, the one problem in my mind which worried me was whether we would be able to find an equitable solution to the problem. I lack the technical knowledge to know how one could do it, and it was an act of faith in our taking a decision to go ahead that we would find a way of devising an equitable solution of the problem of discretionary trusts, and as one who was concerned about it and who saw this as the one possible real difficulty about this enormously improved capital taxation code, I am very pleased with the section in the way it has dealt effectively and fully with the genuine problems, while not making concessions to discretionary trusts which are not for family purposes but for tax avoidance purposes.
It is right that Deputy Colley should probe this and try to ensure that what we have done here provides the optimum solution to the problem, and the discussion we are having is very useful from that point of view, but having listened to some of the discussion for the past half-hour and from what I can make of the section in its highly technical form, it seems to me that we have, in fact, resolved ingeniously, and I think satisfactorily, one of the most difficult problems connected with this whole tax code, the one upon which in a sense it might have foundered if we did not find a solution, foundered in the sense that we would have had to bring it in with a bit of a blunt instrument in this area, with possible certain inequities for people and the greater good might have required us to do that but it would still be an unhappy situation. I would like to congratulate the Minister and the Revenue Commissioners for having found a solution to the problem which seems to me, and I am confirmed in this belief by the discussion, to have resolved the issue before us.
I do not think we should underestimate the importance of this antiavoidance effect of these Bills. I recall, and this is what first sparked off my interest in this subject, an article in The Economist of September, 1963, in which it was stated, though no evidence was given for the proposition but as an informed guess, that at that time in Britain two-thirds of the liability for estate duty was avoided. I do not know what the scale of avoidance is here. It may well be that in a country where there is less wealth, a lesser number of wealthy people, less total wealth, the scale of avoidance is less, and perhaps significantly less, than in Britain, but I think that most people connected with the relevant professions, accountancy and law, would feel that the scale of avoidance has increased over the years in Ireland, that the period of growing prosperity of the 1960s, during the latter part of which a number of large fortunes were made by speculative rather than constructive activities, was a period in which there seems to have been a rapidly increasing interest in tax avoidance measures, both in the capital and current taxation fields. It may well be that although in 1963 the problem may have been very much smaller than in Britain, today the scale of avoidance may be not as great as in Britain but very much increased, and certainly any Government has a duty to try to deal with this.
Deputy Colley in his time made all possible efforts within the existing system to tighten up on avoidance. I would not accuse him of any lack of energy in that respect because I remember Finance Bills coming in here in his days and the days of his predecessors in each one of which there were measures to deal with avoidance. But the problem was being nibbled at and the ingenious people who were inventing avoidance measures always kept several steps ahead of the Revenue Commissioners and the Ministers for Finance. They succeeded because the system was one which lent itself to avoidance, the system under which you had an interval of perhaps 80 years of taxation payable or, in other instances, payable perhaps three times in a shorter period. That itself is a source of inequity for the people concerned. It was inequitable, therefore, because of its variability which could involve very long periods indeed in which no tax was payable. It lent itself to avoidance by transference of wealth. To some extent this was recognised by the State in the rule that transfers made more than a certain number of years before death were accepted as being not taxable. In that way the gift tax or capital acquisitions tax legislation will help us to complete this package and tighten up in a way which will certainly make a very big difference to avoidance.
I would not claim, and I am sure neither the Minister nor the Revenue Commissioners would claim, that we have solved the problem. It is not a problem that any legislation can solve short of the kind of legislation which we do not want to see which gives a discretionary power to the Revenue Commissioners to just decide that somebody owes tax and charge them accordingly. Short of that you are always liable to have some avoidance. But the system of annual taxation on wealth over very high thresholds which exempts the vast majority of people currently paying capital taxation and reduces the burden on all but a tiny fraction of the remainder so that 99.5 per cent of the people will be better off in future, has the merit of exempting people who, under the previous system, were quite unfairly taxed on what was described as wealth but which at present, in view of the inflation over the last 20 or 30 years is not really wealth—as well as having that merit of exempting 92 per cent or 93 per cent of people completely from capital taxation and reducing taxation on all the remainder except, perhaps, .5 per cent of the total, that system has this additional merit, because of the regularity of the taxation annually and because of the introduction of the capital acquisition tax, of taxing avoidance frontally in a way which should be largely effective.
The discretionary trust was a real problem in this connection because had we not tackled it and found a solution we would have been forced either to allow it to be a continuing vehicle for avoidance—which we did not wish to do—or else, had we not found the solution ingeniously provided in this section, or else in tackling discretionary trusts as avoidance measures, we would have found ourselves in the position of acting inequitably vis-á-vis cases where the discretionary trusts were genuine. We were concerned to meet genuine family problems of minority or mental incompetence, or whatever it may be. Therefore, I think this is a key element in the legislation and that the solution found here is absolutely essential to the success of the whole body of legislation, both in the revenue sense in ending avoidance—indeed in the social justice end by ending avoidance—but also successful in being fair and just to different elements in society who have a genuine reason, as some people have, for creating discretionary trusts.
It is for these general reasons of policy as well as because of my perception of the merit of the section in this context that it seems to me that this section warrants the support of the House.
It is nice that we are joined in this discussion by the Minister for Foreign Affairs. It is nice to have him anyway; we do not have enough of him. It is particularly welcome because he is, certainly in my view, quite clearly the man who is largely responsible for the fact that we do have a Wealth Tax Bill before the House.
(Dublin Central): He will never be forgiven for it.
And we have it despite the written undertaking by the Taoiseach on 24th February, 1973, that the Coalition would not introduce a wealth tax. That undertaking must be borne in mind when the Minister for Finance claims a mandate for it. One does not know what the people who voted for the Coalition were supposed to be voting on, what was stated by the present Minister for Foreign Affairs, or what was stated by the Taoiseach. Those are the facts.
The facts are that there was a statement of intent that we intended to change over to this system.
And introduce a wealth tax?
Yes. I have not the wording in front of me but it is definitely there.
"... that it be replaced by a tax which would be paid by instalments during the lifetime of the owner of the wealth".
Which is a very good simple description of what we are doing.
It is very odd that the Taoiseach did not seem to understand it because he specifically said in writing that there would not be a wealth tax.
Would the Deputy like to enlighten us further?
It has been referred to on a number of occasions publicly and in the newspapers. I do not want to mention the name of the person to whom the communication was addressed but I would be very surprised if either of the Ministers opposite is not familiar with what I am talking about considering it has been adverted to in the newspapers and in this House on a number of occasions. It suggests that at least there was a certain amount of confusion among Members of the present Coalition Government if the Taoiseach found himself in a position to give in writing an undertaking that there would not be a wealth tax when the Ministers now say that it formed part of their programme which they put before the people. Somebody did not understand something.
The people all over the country definitely did not understand it.
I am anxious that Deputies confine their remarks to section 5, as amended. We seem to be straying from it.
I was about to come to that. We might in normal circumstances be somewhat concerned at the breadth of the speech delivered by the Minister for Foreign Affairs on this section, particularly having regard to the Government's expressed intention of guillotining this Bill through; nevertheless, for the reasons I mentioned, we welcome the contribution of the Minister for Foreign Affairs. I know it has not been possible for him to be here very often and to keep in as close touch as he would like with the progress of the Bill and with particular amendments on this section but I am sure he would like to know that the facts are that this section, as drafted, contrary to the belief he expressed just now, did not fully and effectively solve the problem of discretionary trusts. It has, however, been considerably improved as a result of amendments from this side of the House.
That is what the Dáil is for.
(Dublin Central): Not when you look at today's Order Paper.
I would not say that the problem has been fully and effectively solved but it is certainly a far more satisfactory section now as a result of our amendment than it was when produced by the Minister and his colleague in the form in which the Minister for Foreign Affairs expressed such great confidence a few moments ago.
On the whole question raised by that Minister in regard to dealing with tax avoidance and his statement that this Bill, combined with the other capital taxation measures, will be effective in dealing with this matter, I want to point out—if it should be necessary; perhaps it is; sometimes listening to the Minister for Finance and now to the Minister for Foreign Affairs one wonders if the obvious thought which I am about to offer ever crosses their minds, but in view of what was said I think I had better record this again.
Of course it is possible to devise a system in which there can be virtually no tax avoidance. Of course it is possible to do that. But one has to look at the price one will have to pay and the first price, if you devise a system which is almost 100 per cent effective, is that personal liberty and freedom will disappear. If you are prepared to sacrifice those then of course you can devise such a system. But I do not think either side of this House would be prepared to pay that price although, in the legislation we finished with last night there are indications that the Minister for Finance is prepared to go a great deal further for this purpose; where he sees a danger of evasion he simply does not care what happens to those ordinary citizens acting within the law and he forgets their rights in order to close the evasion loophole. That is by way of general comment.
There is another very important economic aspect of this. If one were to devise such a system and implement it one must also, as a responsible Government, estimate and take into account the economic effects of what one does. Listening to the members of the Government and, in particular, to the two members who are sitting opposite at the moment, one gets a very firm impression that the economic consequences of what they have been doing in regard to capital taxation has just not occurred to them or, if they did, and were reasonably accurately estimated, were totally disregarded because of a simple basic error of judgment. The fact is that, rightly or wrongly, the reaction of the people on whom basically the expansion of our economy depends to this package of taxation has been adverse because it is adverse to the interests of our economy and adverse, therefore, to the interests of the workers.
One could argue at some length as to whether or not this reaction is justified. That is not the point. The point is that it is there, that it has happened and that it has done dam-age. Any responsible Government, introducing measures of this kind, has of course to take account of such things. This is not an ideal world and any Government would wish to do many things it does not do simply because, if it does the sums of the consequences one way or the other, it finds they come out totally adverse; taking the consequences into account one gets and adverse balance which counteracts the good that could be done by the particular steps.
I am sorry to interrupt the Deputy, but it does seem to me we are indulging in what is tantamount to a Second Reading speech rather than relating to the section under discussion.
I appreciate that and I would not say the comment made by the Chair is unfounded. May I say, however, that while the Minister for Foreign Affairs was speaking—I hope Deputy de Valera will not mind my saying this—Deputy de Valera said sotto voce:“Why are we having a Second Reading speech on this section?”
Everything I said related to the section.
The Minister was very broad.
The section was never absent from my mind.
With respect, the Chair will, I am sure, agree there were certain hares raised which I have to follow. However, I shall not pursue them any further. I have made clear what I wanted to make clear. It is an interesting topic though it may not be appropriate to this section. The only point I want to make finally is to reiterate what I have already said: when dealing with a problem like this it is not merely a question of the effectiveness of one's measures in stopping taxation avoidance. It is also a question of the economic consequences of what you do and I am suggesting the Government did not take due account of that aspect of their proposals.
Before Deputy de Valera offers, may I put something on the record? It is, I think, of interest. I am informed that the Revenue Commissioners are not aware of any farm being operated by a discretionary trust.
What?
The Revenue Commissioners are not aware of any farm being operated by a discretionary trust.
But would they be so aware?
They could be. It could come to their notice in certain circumstances.
But it also could not.
May I recall what the Minister for Lands said last week? He said that if cases came to light of particular difficulty they could be attended to in legislation, but it would be very wrong at this stage to produce some kind of speculative legislation relating to matters which never existed. That would be folly. It is better to move on the basis of what one knows rather than on the basis of what might not be.
Perhaps I, too, dealing with the section, might make two slight comments on what the Minister for Foreign Affairs said. In this section one has to take the economic situation into account. I do not want to delay the House by making a Second Reading speech but I am afraid the philosophy behind the Minister's approach is the self-same philosophy that has brought England and Ireland to their present situation. I want to quote now what Mr. Wilson said, as reported in yesterday's papers:
The issue now is not whether this, or any other democratic Socialist Government, can survive and lead the nation to full employment and a greater measure of social justice.
It is whether any Government dedicated to the principles of consent and consensus within our democracy, can lead the nation.
In England now there is the whole question of the future of democracy. It is the same philosophy as that expressed by the Minister for Foreign Affairs here this morning. All I will say is be careful that your road is not leading to the Iberian Penninsula.
Which part of it?
I will leave it to the Minister to choose. I want now to get back to the section.
I was just about to ask was this a Second Reading speech.
There was a great deal of expansion but I shall keep to the rules of order. However, I think I am entitled to make some rejoinder to the Minister for Foreign Affairs and I shall do that as succinctly as I can. He talked about taxing the rich for the benefit of the majority. That is a fair point but one must get it into perspective. There are other points, but this academic liberal approach may lead us where I said. I thank the Minister for his contribution. We have been blaming the Labour Party, possibly wrongly, for the instigation of this legislation. It is obvious now the instigation has come from the if-you-cannot-beat-them-join-them element in Fine Gael.
Having said that, I come now to the section. I am sorry to have to be so blunt. I cannot afford the diplomatic refineries and verbiage of the Minister for Foreign Affairs. Being a mere backbencher I have not the time he has or the status he enjoys. However, after that good-humoured exchange, I hope, let us get back to the section. Before the adjournment of the debate on this section—it is on the record and I do not intend to delay the House—I made a point on subsection (1) paragraph (iv). It seems to me that there is a grave practical difficulty in enforcing it. I have not got the Official Report with me. That is my fault. I do not wish to delay the House particularly as the guillotine is to be applied. I wonder does the Minister recollect the point I was making or has it been brought to his notice?
I read the debate.
I will not delay the House by repeating it but there is something in the section which needs to be examined. There are imperfections of this nature within the context of the section. I freely conceded that the discretionary trust, like the private trading company, was a device which was over-availed of. It was invented by legal ingenuity and exploited by legal ingenuity for the purpose of avoiding death duties. If we are accepting the replacement and reimposition of that capital duty, we should try to make the section as equitable and workable as possible.
It is in that spirit I would ask the Minister whether he has considered this point where the corpus is situated outside the State and the settlor is outside the State or otherwise inaccessible, and only the cestui que trust, the beneficiaries, are within the State. Is it possible to capture that? The answer given to me was that from an income tax point of view the Revenue Commissioners would have information and so forth. Putting it in rather simple and rather crude terms I said that Johnny's Aunt Mary might send sums of money periodically, irregularly and in different forms. Is that income? The actual sums might be traced on arrival. Are they taxable income? Can they be captured if they are based on an extra-territorial trust? This was an impromptu question and I would be interested to know the Minister's answer before we leave the section.
If I understand him, the Deputy's query is whether or not we would be prepared to make an amendment to the provisions which provide that where Irish objects benefit under the trust, the trust should not be treated as taxable.
I was not making a suggestion. I was raising what appears to me to be a genuine difficulty of enforcement or in making the section effective rather than suggesting anything. I am not trying to press the Minister in any direction. Frankly, I do not see a better answer on this point than the Minister's answer.
Thank you.
I think that difficulty arises already with income tax.
So I have been told, and it is now arising here.
The Deputy is dealing with the difficulty they will have in collecting.
It is a difficulty of enforcement.
That situation has arisen already with income tax and the Revenue Commissioners seem to have got over it. There must be some co-operation along the line somewhere, what I might call some hidden international co-operation we do not know about.
Possibly. It raises a slight difficulty of another sort. That was essentially the suggestion made in friendly debate with the Minister for Lands on the last occasion. A very simple answer is that we can trace the money coming in and, if we cannot treat it as capital, we will treat it as income and tax it under income tax. If it were being taxed as income tax and that was a bigger burden than taxing it as capital the person concerned would plead that it was capital in order to pay the lesser taxation. Is the section sufficiently wide to enable such a procedure to be adopted? The Minister thought I wanted an amendment but I was raising a difficulty on the section as a point for focussing on. I have not any very illumined alternative solution to offer.
We may be able to home in on this matter with greater precision when we come to section 14 which deals with accountable persons, the persons who are accountable for payment of the tax because, in the last analysis, that is the critical matter.
The accountable person is likely to be the recipient. I am thinking of the ordinary com-mon-or-garden person who is paying the tax. I do not want to anticipate section 14 but perhaps I would be allowed to make this general remark. It appears to me that when it comes to enforcement we must keep clearly in mind the practical distinction between people such as professional people, trustees, personal representatives and agents generally as accountable persons. They have not sufficient interest to prompt evasion usually and have very great interest in their own integrity even from the point of view that, practically, honesty is the best policy.
There is a totally different situation in so far as the taxpayer is concerned. When he is up against this problem he will go to a length that no agent of the sort I have described will go. This is a practical difficulty which we may have to discuss a little later on section 14, the anti-avoidance section.
What I am visualising here is the recipient of money at irregular intervals. It is probably a theoretical case to the extent that if it were a significant sum of money from the point of view of the Revenue it might be possible for the Revenue to get after it, but it would be very difficult if the only person to be got after was the beneficiary. The Revenue Commissioners are very knowledgeable people in these things in the normal way, and the example I gave of regular donations from my Aunt Mary in Boston would not be the serious one. The serious examples would be those in which accumulations may be made in a foreign location if the settlor in corpus is there. Deputy Esmonde knows it would be very difficult for anybody to contemplate general principles in the abstract in our thinking in common law because no court ever entertains in our jurisdiction, quite apart from whatever the Minister for Foreign Affairs could let us know about the civil law jurisdictions elsewhere, but in common law jurisdictions nothing is ever decided except in a concrete case.
Objectivity.
Deputy Esmonde is particularly equipped to comment from his practical knowledge and experience in the areas on which I am intruding. I am afraid that possibly the inclusion of a section like this may give rise to opportunities for invasion that might be significant. Therefore it always raises the question as to whether it is wise to include a specific detail like this in a section which makes it quite clear what are the limitations of the discretion and power of the Revenue Commissioners. I am back again to my delenda est, in that I am again pleading for certain discretions while at the same time agreeing with adequate powers for the Revenue Commissioners. In this I agree with the Minister for Foreign Affairs that short of providing that they would be as essential as they would be in any drift into a Liberian position——
It will not bring us beyond Biarritz.
——I would be in favour of a certain amount of discretion. I would cut the cackle and face the facts and let there not be the facade that we are limiting powers that in fact we are not limiting. I agree with the Minister about the need to secure the maximum public morale for the acceptance of taxation and co-operation in its payment, but I wonder does this paragraph do anything to help or is there some other little thing needed.
I should like to refer to one of the points raised by Deputies Colley and de Valera. I am very much in tune with what Deputy de Valera said at the end of his remarks but I was puzzled as to why he made such an impassioned plea earlier on of a more general type. My point in intervening in this section is because I think the importance of the section is that it is crucial to find within a common law system a solution to the problem of discretionary trusts which would deal with the genuine problems but would not, however, leave scope for avoidance which would destroy the basic reason for this legislation which has a very marked anti-avoidance feature. That was the purpose of my speaking on this section.
I fully accept what Deputy Colley has said, that this has been done with the assistance of the Opposition. I fully accept that this is something we have worked on together, but on the basis of the original Bill, the section basically does what is necessary and it seems to me we have resolved what could have been a crucial dilemma in the whole process of legislating for this body of capital taxation. As I have said, I cannot quite reconcile the very reasonable approach of Deputy de Valera at the end of his remarks with what he said in more general terms earlier. What he seemed to be saying earlier is that if one tackles the question of avoidance effectively, in some way one is weakening and undermining the economy to such a degree as to lead to political chaos. That seemed to be what he was saying.
I can quite see that if in dealing with avoidance one had to take measures so drastic in terms as to give discretion to the Revenue Commissioners to tax whom they like as much as they like, then you would have a system so uncertain and inequitable that it would create problems for the democratic system. I fully accept that limitation. Therefore, I was glad that we were able to deal with the point of avoidance without having to give that discretion which would be undemocratic and unacceptable. It is very important that we solve that problem. If we do not and if it were to be the case that it was impossible to reform the capital taxation system in such a way as to minimise avoidance without taking the kind of drastic undemocratic measures that have been referred to, then it would raise a doubt of the viability in justice of the capitalist system.
If we accept this system in its mixed form, with the large measure of State enterprise we have, which from a broad political viewpoint is a desirable one, then we must try to resolve this problem because the unacceptable face of capitalism would be totaly unacceptable if avoidance could not be tackled. I do not think people would accept a system which was as defective as that.
That is where I see the danger. This section is crucial to the Bill. Our success in legislating in a common-law situation for the first time for discretionary trusts, seemed to me from the beginning, before the Bill was drafted, to be crucial to our success in tackling this problem. That is why I was moved to speak on the section.
I think I would be entitled to reply to one specific misunderstanding—I would prefer to say rather than misrepresentation—of what I have said, with the diplomatic politeness I should accord to the Minister for Foreign Affairs in the game he is currently playing. All I would say is that the Minister has not put me in context. May I just record that, and I hope the record will show what I have said.
Getting back from Second Reading speeches or any general discussions, it is a different thing to talk about the policy of the Bill as a whole and to talk about the section, and it is the section we are dealing with. My point was that I wanted to try to help to improve this section. Perhaps I might be permitted to say this for the benefit of the Minister for Foreign Affairs who has not been in on this legislation —nobody can criticise him for this; he has been busy elsewhere—that our attitude on this side of the House has been strictly this: we have opposed the principles of these Bills for good and sufficient reasons stated on the Second Readings and on the other Stages but when it comes to Committee Stage our attitude is that two things arise on any section like this: one, the particular policy of the section itself may be objectionable and then we oppose it in principle and on policy, but if we do that then the attitude is to try to co-operate as far as we can to improve the section——
As you have done in this instance.
——to do everything we can to improve because even if we disapprove the principle of the Bill as a whole, we still have the duty, even if we do not like it, to try to make it as good as it can be made in the House. The Minister for Finance cannot fault us to much on that approach. I am saying this so that the Minister for Foreign Affairs will understand the context in which I said these things.
The point in brief, without repeating myself, is that I wonder should paragraph (1) (b) (iv) be omitted, particularly having regard to (c) as being ineffective and, in providing for something that is not completely effective, may provide the mechanics for evasion and that possibly in a case like that a more general provision would be better, even, as I said, if the only way of getting out of the situation that I dealt with, thinking in terms of income tax, was to take some special step. I was not able to help the Minister with a positive amendment or proposal here. I did want to help him, but expressing my fears, and if they are not grounded I am very happy and will not delay the House or the Minister any further on that. Nor do I expect any analytical answer. If there is anything the Revenue Commissioners can be caught on they will have been alerted and no doubt will take what they consider to be appropriate action.
I do not wish to pursue further the point I raised in regard to subsection (1) paragraph (b) (iii) in regard to the omission of the phrase "ordinarily resident in the State," except to say that I am not satisfied with the explanation the Minister has given. However, I have drawn his attention to it and if he is satisfied with the position, that is a matter for him.
I would like now to refer the Minister to subsection (1) (c) and to ask him if he would explain the thinking behind it and would it be possible for him to give an example of how it would work?
Paragraph (c) is a corollary to the earlier part of the section. A foreign trust in so far as it has Irish objects is to be regarded as Irish to that extent. Paragraph (c) provides that in the case of a foreign trust "the following property shall in addition to its entire Irish property be liable to tax, that is to say, the proportion of its property outside the State which is equal to the proportion that its Irish beneficiaries bears to all the beneficiaries." To give an example, if the Irish beneficiaries represent one-quarter of the total beneficiaries, then one-quarter of the property outside the State would be deemed to be Irish property.
When the Minister says "beneficiaries" does he mean potential or actual beneficiaries?
Potential beneficiaries in the discretionary trust.
In regard to subsection (2) in the first line there is a reference to where the sole objects under a discretionary trust are a child or children of a marriage. Is that phrase "sole objects"—plural—used in a technical sense or would the meaning be better expressed by referring to the "only objects" under a discretionary trust?
I thought the Deputy did not like the word "only". He has caused it to be deleted in my absence.
Perhaps in a different context.
It has the same meaning as "only". It means that these are the objects and there are no others.
"Sole", I thought, conveys generally the singular rather than the plural, although it goes on to refer to it in the plural.
It is an interesting semantic point. I will look it up. I would not like to speak ex cathedra on it now.
In regard to subsections (2) and (3), where these apply should there be a right of recoupment in respect of the wealth tax against a trust property?
Yes.
I am not sure if that in fact is provided—is it—where subsections (2) and (3) apply, which are intended to be relieving?
I have an amendment which puts this beyond doubt— amendment No. 23 (h).
That meets the point I was raising. It is right that there should be a right of recoupment in cases coming under subsections (2) and (3). Could the Minister explain in somewhat simpler terms the meaning of subsection (5)?
This deals with a life interest or a limited interest which is comprised in a discretionary trust. Where an individual has a limited interest in property the property underpinning the limited interest is the taxable wealth. The relevant sections as regards the individuals are subsection (3) of section 3 and paragraphs (b) and (c) of subsection (5) of that section. The same treatment is accorded to a limited interest in the hands of a discretionary trust by the application of these relevant parts of section 3 with, of course, any necessary modifications to the limited interest. The result is that where the discretionary trust has acquired a limited interest the property in which the limited interest subsists is the taxable wealth.
I presume the Minister means that is the taxable wealth in so far as the trust is concerned. Does this bring us back to the question we had before that this is a case in which the tax can be levied on both parties, that is, in this case, the trust on the one hand and the owner of the superior interest on the other? Does it mean that either can be assessed in respect of what, in effect, is the whole property, not just a limited interest?
The Deputy will accept that two people cannot own the one property at the same time and there can only be one liability to tax. If the person with the limited interest hands that over to the discretionary trust then it becomes part of the trust property. If the trust property has it and wants to get rid of it then it can be appointed out of the trust.
(Dublin Central): In the Capital Gains Tax Bill where leases were concerned there was an underlying value. Here it is the limited interest that is being taxed.
What the Minister said would make sense to me in the normal way but I have to have regard to the provisions of subsection (4) of section 3 and also to (ii) at the top of page 3. I think the effect of those two together is that the limited interest is the taxable wealth of both parties, and the question arises as to who is going to be liable. In this case it would be the taxable wealth of the discretionary trust and of the owner of what I may call the superior interest. The question then is which is going to be taxed.
There cannot be two owners of a limited interest.
That makes sense, but I do not think that is what the Bill says. I was making the point before that the Bill seemed to be making two parties the owner at the one time of the same property, each being liable for wealth tax and the Revenue Commissioners having the option as to which they would go for.
Where an individual has a limited interest it is the property underpinning that limited interest which is the taxable wealth. All we are doing here is according similar treatment where the limited interest is part of the property comprised in a discretionary trust. We simply apply the provisions of section 3 to the limited interest which is part of the property of the discretionary trust.
(Dublin Central): But it may not constitute the full value of the property.
Now we are back to a debate on section 3.
The Minister has said that there cannot be two owners of the one property at the one time, and I would agree with that proposition, but it is not what the Bill says, and in relation to a discretionary trust it would now appear that where the property in the trust includes a limited interest the position will be that the trust and the owner of the superior interest will both be liable in respect of that limited interest and that the Revenue Commissioners will be entitled to choose which they will go for. Does the Minister accept that that is so?
No, I do not. I am afraid the Deputy may be misreading the Bill, and I cannot see the basis for his belief.
The reason is that "entitled in possession" is defined in subsection(1) and it includes both
a remainder expectant on the determination of a lease,
and
a reversion expectant on the determination of a limited interest created by the person.
That is at the bottom of page 2 and top of page 3 of the Bill. In subsection (4) of section 3 it is provided that
where the property to which an individual is beneficially entitled in possession includes a reversion expectant on the determination of a limited interest, the individual shall himself be deemed to be entitled in possession to that limited interest and the provision of this section shall apply accordingly.
Let us take those two provisions together. First of all, there would appear to be a conflict between them, but we dealt with this before and I understood the Minister to say that the practical effect was that both parties were deemed to be entitled in possession and, therefore, liable for wealth tax on the limited interest and that since both were liable in respect of the same property and the Revenue Commissioners would not be collecting the tax twice in respect of the same property in practice what would happen would be that the Revenue Commissioners would opt as between one or the other. If that is so that would appear to me to include the position in regard to the discretionary trust under subsection (5). It does not make a great deal of sense to me. The proposition put forward by the Minister that you cannot have two owners of the same property at the one time makes sense to me, but I do not think that is what the Bill says, and that is not what the Minister is proposing to do in regard to a discretionary trust.
Section 3 (4) deals with an individual and is not relevant to section 5. The relevant sections here are 3 (3) and paragraphs (b) and (c) of section 3 (5). The phrase "limited interest" is defined in 3 (5) (b).
But they each refer to an individual.
Yes, but the interest is as defined in 3 (5) (b). If you leave out the word "individual" the interest, which is a limited interest in any case, is
(i) the income, or part of the income, if any, or an annuity or other periodic payment out of the income of property to which he is not absolutely entitled, or
(ii) an annuity or other periodic payment which is not charged or secured on any property.
That is the limited interest which is the property of the discretionary trust and that is what is involved in 5 (5).
May I suggest that what the Minister has quoted from, 3 (5) (b), is setting out what is a limited interest in addition to what is normally a limited interest? In other words, it is making clear that these items set out are in fact deemed to be a limited interest in addition to what would normally be a limited interest and that the treatment of a limited interest in general in the Bill, which presumably should apply to a discretionary trust also is, as I have stated and not as the Minister said, that you cannot have two owners of the one property at the one time.
A limited interest has under section 1 of the Bill the meaning which is assigned there, that is that it shall be construed in accordance with section 3 (5) (b). It cannot have any other interest or any other meaning so far as a discretionary trust is concerned.
Does the Minister say that that definition in 3 (5) (b) excludes a limited interest under section 5 (5)? I do not think he can say that because the use of the phrase "limited interest" in section 5 (5) is clearly related back to the definition section. Therefore, what is being provided in section 5 (5) is that where there is a limited interest, as defined in section 1, forming part of the trust property, then sections 3 (3) and paragraphs (b) and (c) of section 3 (5) will apply. Does the Minister say that the provisions of section 3 (4) are excluded in relation to a discretionary trust?
That is right. They are not relevant to it at all.
May I refer the Minister to the wording of section 3 (4) which states:
For the purposes of this Act, where the property to which an individual is beneficially entitled.
It refers to an individual.
If the Minister's interpretation is correct why the different treatment in this case between an individual and a discretionary trust?
It would not be normal or, perhaps, even a possible arrangement in the context of a discretionary trust. I get the point made by the Deputy but I doubt very much if any amendment is needed.
I should like to refer the Minister again to the provision of subsection (5) which says:
For the purposes of this section, section 3 (3) and paragraphs (b) and (c) of section 3 (5) shall apply with any necessary modification in relation to property comprised in a discretionary trust which includes an interest which is a limited interest...
The important words which follow are:
as they apply in relation to property to which an individual is beneficially entitled in possession and which includes an interest which is a limited interest.
On the face of it the latter part of the subsection would appear to be saying that where discretionary trust property includes a limited interest it will be treated in the same way as a limited interest which forms part of the property of an individual. Maybe that is not what it is saying but it appears to be saying that. If it is saying that, is the contention I was making not correct?
I will examine the situation before the next Stage.
The Minister will appreciate that one of the difficulties which arises when he says that is that if he examines it and decides there is no need for any change nothing will come before us on the Report Stage.
I will communicate with the Deputy.
I would like to know.
A general comparison of section 3 with section 5 and indeed section 6 should entail a note of where the sections differ and where they are together. The taxable wealth of a discretionary trust shall include all property. The taxable wealth of an individual is essentially the same concept but has to be worded differently. I want to come back to points like the one I made on section 5 (1) (a) (iv). There is in the sections referred to in section 5 (5) reference to section 3 (3) and also reference to subsection (5). In particular there is reference to paragraphs (b) and (c) of section 3 (5). Paragraph (b) refers to annuity or other periodic payment which is not charged or secured on any property. It also refers to income or part of income or an annuity or other periodic payment on property. This raises in a much more general manner than I raised the import of these paragraphs in subsection (5) of the section under discussion and the question of periodic payment as a measure of limited interest. It seems to suggest to me periodic payments which are irregular and can be taken out of the category of periodic—almost by definition one considers an annuity to be a periodic payment—and income. The Minister could perhaps help me on this point. When one looks at the question of income how does this element of periodicity come in? If somebody is assessable for income tax and does a casual job on television, for instance, and is paid for it the State body concerned will be very careful to co-operate with the Revenue Commissioners by noting that that payment has been made and is returnable.
This question in relation to a block of wealth or assets which are the property of the subject of this section can be dealt with in a broad discretionary way, but does the use of the words "periodic" and "annuity"—and these defined words are designed primarily to capture what might escape—also circumscribe and leave a lot of scope for the further exploitation of devices or other things? If one takes subsection (5) is it required to bring in these subsections from the earlier section? What would be the consequences of omitting this subsection?
I know that the Minister will say that this already is in for individuals and that its omission would be as significant as its inclusion. I take that point straightaway and I see the difficulty. It would mean a throwback. This is always a difficulty we meet at Committee Stage. Something occurs on a later section which suggests possibly even a new approach to a section which has already gone. We cannot help that. We can only point out to the Minister that there may be substance in it. That particular section includes a limited interest. The section starts off by saying that the taxable wealth of a discretionary trust shall be all the property. Other considerations are then put into it. Going into fine detail in regard to trusts and limited interests makes me wonder whether this is necessary or desirable.
The Deputy raised the question of the necessity of putting in the words "periodic payment". This has been utilised in the past in order to avoid annual payment and to get over certain taxation provisions in other Bills. The legal profession have advised people to so draw their documents to avoid being caught within the taxation net. Basically, the first thinking in regard to taxation was to base tax on annual payments. That is the reason why the words "periodic payment" are used. If I find that a client is going to be stuck for an annual payment I will change that perhaps to quarterly or to a payment every second year or every 18 months and still give him the same amount as he would get on an annual basis.
I take that point.
There is an incidence of this if my memory is correct. There is a stamp duty on covenants and it is at a different rate on an annual covenant to what it is on another period of payment. I have a distinct recollection of deeds where the period was changed in order to avoid stamp duty on an annual payment. I changed it to quarterly or to a nine-month period or to 13 months. I changed it to get my client outside having to pay what would have been a higher rate of tax. This is here to deal with that sort of situation.
What happens if it is completely irregular?
That catches it. It is left open. It says "annuity or other periodic payment". There is wide cover.
There are some other points I want to put to the Minister before we conclude on this section. The Minister will appreciate that I am in some difficulty because some time has elapsed since we dealt with this section before. I am not certain whether this point was raised but I do not think it was. In regard to subsection (3) it says:
Where it is shown to the satisfaction of the Commissioners that a discretionary trust exists on the valuation date for the exclusive benefit of—
(a) one or both parties to a marriage, or
I am wondering how could it be a discretionary trust if it was for the exclusive benefit of one person to the marriage?
This point has been made. I was not here personally but note on reading the record that it was pointed out that the discretion might not be exercised at all. If it is to be exercised it must be exercised in favour of one individual but it still remains discretionary because it need not be exercised at all.
There is a definition of discretionary trust. Does it cover the situation that the Minister is describing here where the discretion may not be exercised?
"To the benefit of any person or persons"——
If the Minister is satisfied with that I will not push it.
It is essential to a discretionary trust that it may not be exercised at all.
At the bottom of page 7 there is a definition of "body of persons". I understand that that definition is taken from section 2 of the Income Tax Act, 1967, except that there appears to be one addition in this case. The word "partnership" is included here and not included in section 2 of the 1967 Act. Could the Minister indicate why "partnership" has been added in in this definition?
It was in the VAT Act of 1972.
That may be so, but I have to say again that I am in some difficulty here because the discussion took place some time ago and by reason of my preoccupation with the Capital Gains Tax Bill I have not had the opportunity to go back on the record of what was discussed. Would the Minister confirm what Deputy Esmonde says, that this definition is precisely as in the VAT Act?
Yes.
The words were added in the VAT Act as against the Income Tax Act?
Yes.
Section 5, as amended, stand part of the Bill?
In view of the approach of the Minister to the points raised earlier on and his response or lack of response to the representations by the IFA, we ought to show a little disapproval of what he is doing.
I fully explained it to you.
You did, but explain it to your supporters in Wexford.
There is a practical explanation for it.
I might point out that the IFA did not press the matter because they saw how unnecessary was the request being made—because an appointment could be made under a discretionary trust which would effectively avoid the tax.
There is a response to that which I could make and did not make and will not make now. I do not wish to hold up the progress of the Bill but I ask you, Sir, to put the question.
Tá
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- Barry, Richard.
- Begley, Michael.
- Belton, Luke.
- Belton, Paddy.
- Bermingham, Joseph.
- Bruton, John.
- Burke, Dick.
- Burke, John T.
- Burke, Liam.
- Byrne, Hugh.
- Clinton, Mark A.
- Cluskey, Frank.
- Collins, Edward.
- Conlan, John F.
- Coogan, Fintan.
- Cooney, Patrick M.
- Corish, Brendan.
- Cosgrave, Liam.
- Costello, Declan.
- Coughlan, Stephen.
- Creed, Donal.
- Crotty, Kieran.
- Cruise-O'Brien, Conor.
- Desmond, Barry.
- Desmond, Eileen.
- Dockrell, Henry P.
- Dockrell, Maurice.
- Donegan, Patrick S.
- Dunne, Thomas.
- Enright, Thomas.
- Esmonde, John G.
- Finn, Martin.
- FitzGerald, Garret.
- Fitzpatrick, Tom (Cavan).
- Gilhawley, Eugene.
- Governey, Desmond.
- Griffin, Brendan.
- Harte, Patrick D.
- Hegarty, Patrick.
- Hogan O'Higgins, Brigid.
- Jones, Denis F.
- Kavanagh, Liam.
- Keating, Justin.
- Kelly, John.
- Kenny, Henry.
- Kyne, Thomas A.
- L'Estrange, Gerald.
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- McDonald, Charles B.
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- McMahon, Larry.
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- Murphy, Michael P.
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- O'Donnell, Tom.
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- O'Sullivan, John L.
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- Reynolds, Patrick J.
- Ryan, John J.
- Ryan, Richie.
- Spring, Dan.
- Staunton, Myles.
- Taylor, Frank.
- Timmins, Godfrey.
- Toal, Brendan.
- Tully, James.
- White, James.
Níl
- Allen, Lorcan.
- Andrews, David.
- Barrett, Sylvester.
- Brady, Philip A.
- Brennan, Joseph.
- Breslin, Cormac.
- Briscoe, Ben.
- Brosnan, Seán.
- Browne, Seán.
- Brugha, Ruairí.
- Burke, Raphael P.
- Callanan, John.
- Calleary, Seán.
- Carter, Frank.
- Colley, George.
- Collins, Gerard.
- Gibbons, Hugh.
- Gibbons, James.
- Gogan, Richard P.
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- Hussey, Thomas.
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- Meaney, Tom.
- Connolly, Gerard.
- Crinion, Brendan.
- Cronin, Jerry.
- Cunningham, Liam.
- Daly, Brendan.
- Davern, Noel.
- de Valera, Vivion.
- Dowling, Joe.
- Fahey, Jackie.
- Farrell, Joseph.
- Faulkner, Pádraig.
- Fitzgerald, Gene.
- Fitzpatrick, Tom (Dublin Central)
- French, Seán.
- Gallagher, Denis.
- Geoghegan-Quinn, Máire.
- Molloy, Robert.
- Moore, Seán.
- Murphy, Ciarán.
- Nolan, Thomas.
- Noonan, Michael.
- O'Connor, Timothy.
- O'Kennedy, Michael.
- O'Leary, John.
- O'Malley, Desmond.
- Power, Patrick.
- Smith, Patrick.
- Timmons, Eugene.
- Tunney, Jim.
- Walsh, Seán.
- Wilson, John P.
- Wyse, Pearse.
Amendment No. 6a in the name of Deputy Colley was discussed with amendment 5b.
Could the Chair say, in view of the long interval since we discussed this, what happened to amendment 5b?
It was withdrawn.
I move amendment No. 7:
In page 9, subsection (3), after line 1, to insert "but does not include—
(i) a body corporate (other than a company within the meaning of section 2 of the Companies Act, 1963) established by or under an Act of the Oireachtas, or
(ii) a company within the meaning of section 2 of the Companies Act, 1963, which is under the control of a Minister of State,".
On reconsideration it appears that the section as drafted had the effect of making taxable entities of certain companies which were not intended to come within the scope of the section. Among those unintentionally captured by the section could be State bodies established by statute and companies under the control of a Minister of State. As regards (i), State bodies such as the ESB and Bord na Móna are bodies corporate without being incorporated as companies under the provisions of the Companies Acts. They are incorporated under special Acts. If they had less than 50 shareholders and had not issued shares to the public and were under the control of not more than five persons and fell into the non-trading category, they could be liable and taxable entities. As regards (ii) there are quite a number of companies in which the Minister for Finance holds the vast bulk of the shares, the remainder being held by nominees or, in some cases, by another State company. As the section stands they would be taxable entities. In subsection (3) company as such is defined and at the end of the subsection such of those companies as are treated as private non-trading companies are defined. It was never the intention that the bodies or companies referred to at (i) and (ii) should be regarded as companies for the purposes of this section. The purpose of the amendment, therefore, is to take them out of the definition.
On the face of it this is a reasonable amendment because I think it is reasonable to expect that it was not intended that what are broadly called State companies would be subject to wealth tax. There is, however, an implication in this which ought to be considered. There are many State companies—I am using that term in the particular sense of covering what is covered in the Minister's amendment—which are in effect in competition with private enterprise. The effect of this amendment would be to exclude from liability for wealth tax these State companies in competition with private enterprise. When I say "private enterprise" that includes not only individual traders but also companies in competition with State companies.
The Minister may say trading companies are not liable. That is true, and I think we dealt with this at some length before, and the position is that in so far as the impact of the wealth tax falls on shareholders in trading companies it does, of course, affect the operation of trading companies. It is quite illusory to suggest that the impact of the wealth tax on individual shareholders would not in any way affect the operations of trading companies. Therefore, in effect what the Minister is providing in his amendment is that where State companies are in competition with private enterprise, whether in the form of individuals or companies, the State companies will have the competitive advantage conferred on them by this amendment in that they will not be affected in any way by the imposition of wealth tax, whereas private enterprise in the form I have mentioned will be so affected and thereby made less competitive with State companies. While, as I said at the outset, on the face of it this amendment would appear reasonable I think, for the reason I have given, further thought should be given to the implications to which I have drawn attention. We are justified in saying that, in cases like this, competitive advantage is conferred on State companies as against the private sector with which many of them are in competition. I should like to hear the Minister's view on this.
We are not dealing here with State companies which are in competition with trading companies in the private sector. That does not enter into the picture at all, because such companies will not be taxed at all.
Do not let us go over this argument again.
The shares in companies will be taxed. Individuals might have shares in some State companies, but we are simply providing here that State companies will not be regarded as non-trading companies. As such they could find themselves liable to tax but will not now, in fact, be taxed. That is all.
(Dublin Central): Of course they will. The Minister is trying to bring forward the case that companies are not taxed. We know companies are not taxed but shareholders are. Let us get away from that argument now. We have been listening to it for the past month. Deputy Colley is right about exempting State companies. One or two examples spring to mind. I can think of CIE hotels. They will be exempt from wealth tax. A private hotel in the hands of an individual will be subject to wealth tax, while CIE hotels will be exempt.
This does not affect CIE at all.
(Dublin Central): Are we not exempting them?
No.
(Dublin Central): Or any of their property?
No.
Why? Because it is not a company?
It is exempt in the same way as any trading corporation.
In what way does CIE not come into this?
It is a trading company and it gets the same exemption as any other trading company. The shareholders are not put in any privileged position.
I am sorry the Minister is repeating this argument because now a good deal of time will have to be spent on something on which we have already spent a good deal of time. Is the Minister seriously suggesting that the imposition of wealth tax on shareholders in a trading company does not in any way affect the operations of that company? Is that what he is saying?
I am saying that the companies are not taxed.
That is true, and we are not disputing that. Trading companies are not taxed. The question is are the operations of trading companies affected if some, or all, of the shareholders become liable to wealth tax in respect of their shareholdings? That is the real point at issue.
Not necessarily.
Does the Minister accept that it could happen?
Not necessarily.
What exactly does that mean?
If "not necessarily" then it may possibly.
Anything is possible.
We are dealing with the principle of certainty and it would help the discussion considerably if we could avoid going around in circles. We are dealing with realities. Does the Minister accept as a reality that the imposition of wealth tax on shareholders in respect of their shareholdings in trading companies will affect the operations of the companies in at least some cases? Does he accept that as a fact or not?
I am at the moment dealing with the amendment which seeks to ensure that a State company is not itself going to be taxed merely because it has less than 50 shareholders, does not issue shares to the public and is under the control of no more than five persons and is non-trading.
Is non-trading?
Yes. Otherwise any State company under the control of the Minister for Finance which had not issued shares to the public, is not trading and has not less than 50 shareholders will not be subject to tax. All I am doing is ensuring that State companies are not subject to tax. Most of them are carrying on activities which are not profitable and, if we did not get this amendment, they might be subject to tax.
Did the Minister not mention Bord na Móna as an example of the kind of State company covered in this amendment?
State companies like the ESB and Bord na Móna are bodies corporate. They are incorporated under special Acts.
The Minister mentioned them as being covered under (i) of the amendment.
That is correct.
In the Minister's view is Bord na Móna a trading company or a non-trading company?
It is a trading company.
If it is what does the Minister mean by saying this amendment covers only non-trading State companies? Could we be clear on what we are dealing with here?
What I said was that if they fell into the category of non-trading companies they would be liable to tax.
(Dublin Central): How do you put a trading company into a non-trading company?
The Minister specifically mentioned Bord na Móna.
I explained that they are bodies corporate which are not incorporated under the Companies Acts. If they, or companies like them were non-trading companies with less than 50 shareholders and not issuing shares to the public but under the control of a Minister of State, they would be taxable entities. That would put them in a position which would be unfavourable vis-á-vis other trading companies.
Would the Minister say are any of the shares in Bord na Móna held by private individuals? To my knowledge they are not.
I do not think they are.
In that case is not the effect of this amendment to ensure that no liability in respect of wealth tax will fall on the shareholder or shareholders in Bord na Móna? Is not that the effect of the amendment?
Yes.
Is it not true that there are many individuals and companies in the private sector who are in direct competition with Bord na Móna—I mention Bord na Móna only because the Minister mentioned them; there are many other examples—and is not the effect of what the Minister is doing to confer on Bord na Móna and similar State companies an advantage vis-á-vis their competitors in the private sector? If the Minister thinks that is a good thing to do he should say so and justify it. At least let us be clear on what we are trying to do.
Is the Deputy suggesting that the State should pay wealth tax to itself on all the State companies?
I said in my opening remarks on this amendment that, on the face of it, it appeared reasonable for the very reason indicated by the Minister for Foreign Affairs. I went on to say that we should consider the implications which I have been outlining. It does not help if we try to obscure the issue by talking about the fact that trading companies are not taxed. The reality is what we should be concerned with.
If the reality is, as the Minister for Finance has now admitted, that by accepting this amendment we would be conferring a competitive advantage on State trading companies who are in competition with the private sector, if the Minister believes that is a good thing to do he should say so and justify it. It is not an answer to the question raised to pretend it is not happening. At least we ought to know what we are doing and we should be clear on which line we are taking. Is the Minister saying it is a good thing to ensure that State trading companies should have conferred on them this benefit when they are in competition with the private sector whether they are individuals or trading companies?
To put the record right Bord na Móna have issued stock and therefore the argument in relation to Bord na Móna is irrelevant.
What kind of stock? Loan stock or equity?
Loan stock.
That is what I thought. Then it does not arise.
I think it is loan stock. Owners of stock in companies like CIE and the ESB will be liable to wealth tax on the shares held by them in the same way as if they held shares in a private company. Surely it is not being suggested that the State ought to levy tax on the general body of taxpayers in order that the State may itself then pay wealth tax on the public moneys which it had advanced in the public interest for the purpose of setting up various organisatons to carry on activities which are necessary for the public good?
It pays VAT on a lot of its activities.
Does it pay income tax?
There is no administrative way out of avoiding paying tax. It is not imposed directly by legislation.
Would the Deputy indicate how he thinks the competitive position of a private individual would be improved if the State, as a shareholder, had to pay wealth tax to itself on its shareholding in a State company?
(Dublin Central): To keep the balance of equity.
How would it?
(Dublin Central): We must keep our balances right with regard to the private sector and ensure that the State does not go into competition with it by virtue of exempting one section. I agree it sounds nonsensical, but I would prefer to put a levy on a State company even if I had to bring it back into the Exchequer and distribute it. We must ensure that the competition is right on the other side.
If it is a trading company it is the shareholder who pays the tax, not the company. I think I am right in saying that.
So?
The Deputy is talking of the State as a shareholder paying tax to itself on its shareholding in the whole body of State companies. How would that book transaction inside the Exchequer affect the trading position of a trading company vis-á-vis the private sector? I hope I understand it correctly. Perhaps I do not.
May I suggest that the fact that State companies pay valueadded tax and in some cases income tax——
The company pays it, not the shareholder.
I am coming to that. The fact that such taxes are paid on the operations of State companies means that the imposition of wealth tax on the operations of State companies would not be inconceivable. The question raised is not whether it is a good idea to levy wealth on shares held by the State or shares held by individuals in the State companies. The question raised is: is it right and proper to confer an additional competitive advantage on State companies which are in competition with the private sector?
In the case of many State companies there is, of course, a certain subvention from the State. That is recorded and it is possible, to some degree at any rate, to measure the position of the State companies vis-á-vis their rivals and to see the degree to which they are getting assistance in their operations. I suggest this provision would have the effect of giving a form of hidden subsidy which is not measured to enable State companies to compete more successfully with the private sector and would distort even further than is at present distorted the competitive position of State companies.
I am posing the question whether that is a good or a bad thing. I am suggesting that the Minister for Finance, by implication, is saying it is a good thing. If he is, I want him to say openly that is what he is doing, and to justify doing it in the context of conferring a greater competitive advantage on State companies. It is possible to make a case for that. The point I am at is that that case should be made and it should not be slipped through without adverting to the consequences of what is being done.
If what the Deputy said were correct, of course a case should be made. He has not answered the point I made. If we are talking of a competitive position being affected it must be a trading company. If it is not trading it cannot affect somebody else. If it is a trading company it does not pay wealth tax. Therefore, only the shareholders, which is the State, pay wealth tax. What the Deputy is suggesting is that the State with its hundreds of millions of pounds invested in State companies should, through a book transaction, pay wealth tax to itself on its shareholdings. Being a circular book transaction this would in no way affect the trading position of the companies, nor would it affect the ability of the State, because it is paying the money to itself, to plough money back into State companies. Therefore, the whole basis of the Deputy's case is faulty in fact and the question of affecting the trading position does not arise. Perhaps the Deputy would advert to my argument and tell me if I am wrong. I may be wrong. Would he say where I am wrong?
Why does the Minister say that the imposition of wealth tax would not affect the operations of a company—I am talking about the shareholding in State trading companies?
Because the State as shareholder would be liable for wealth tax on hundreds of millions of pounds invested. The sum of money would be calculated and the State would pay that money to itself. The net position of the State is unchanged. The State's ability, therefore, to plough money back into the company, which is the point the Deputies are talking about, is unaffected. The case being made by the Deputies is that wealth tax can in certain circumstances affect the viability of a company because if there is a shareholding in a private company which keeps it going by ploughing money back in, the shareholding's ability to plough money back in is affected.
This has not been covered by the provisions of the legislation and we are endeavouring to cover it to a very large degree. We are now talking about whether if the State were exempt from having to pay tax on its shareholdings in State companies its competitive position would be affected. Its competitive position could be affected if the State, by having to pay tax to itself, found its ability to plough money back into the companies adversely affected, thereby changing its competitive position vis-á-vis the private sector. Because it has been paying the money to itself, unlike private companies who pay money to the State, this could not have that effect, and therefore the difficulties the Deputies are raising are inoperative.
The Minister is completely missing the point Deputy Colley has been making. Each semi-State company stands on its own feet. The capital is provided by the State and therefore the shareholders are the State. In its trading situation, its competitive situation, its financial situation, each State company either gets a massive subsidy affecting the charge for its services—that is what the Minister is missing—and it is not a question of each semi-State body being part of the Exchequer. It is a separate entity in itself.
I accept that this may be the case. There are some companies which are not affected. We are talking now about whether the State as shareholder in a State trading company—it must be a trading company or this issue would not arise— having to pay tax to itself on its shareholding in a State company would affect the operation of the State companies. The only way I can conceive that it would affect it is if as a result of imposing this obligation to pay wealth tax, the State's ability to plough money into these companies was unfavourably affected, thereby creating a situation of parity with trading companies. Because the State is paying the money to itself, that could not happen, and as I do not see any other way in which the payment of wealth tax by the State in respect of its shareholdings could affect the competitiveness of State companies I do not think there is any argument. If there is some other way I have not understood, perhaps Deputies opposite would mention it.
The Minister is confusing the Exchequer with State companies.
On the contrary, I am making the distinction, the Deputy is confusing it.
The Minister's point would apply in a case where the State was actually trading.
It cannot apply otherwise.
Allow me to make the distinction which the Minister is missing and which Deputy Brugha drew attention to. If, for instance, the Department of Posts and Telegraphs were a company, that case would be completely covered by what the Minister said because both the trading and the capital of the company would be covered. The point of the Minister for Foreign Affairs has full validity in any case such as that which I invoked the Department of Posts and Telegraphs, where the State is not only the shareholder but also the operator and is involved in the trading accounts of that company. But the situation is totally different in the case of semi-State bodies. In the case of such bodies the normal thing is that the State is the owner, the shareholder, and puts the capital into it, and the body is expected to trade in normal circumstances and to be economic and successful as a business venture. That is the whole concept of semi-State bodies.
Such concerns were set up because the capital to set them up was not otherwise available and, the capital coming from the State, it was right that the State should have the proprietary interest, but thereafter, in principle it is expected that each company should trade normally. It may happen that continued subventions are necessary but I do not know of a case where, so to speak, the State enters into the routine profit and loss accounts of each body. An essential part of the profit and loss accounts is taxation.
But not wealth tax. That cannot enter into it.
Regular routine taxation has to be found out of revenue. I go a good deal of the way with the Minister but I am trying to give him the answer to the question he posed. Let us take CIE which are attempting to trade and are perpetually trading at a loss because they have to fulfil the role of a social service, in commercial competition. Let us assume we are talking about a semi-State body, owned and controlled by the State, which are in competition commercially. The validity of Deputy Brugha's point is that in such cases, in the efficiency of trading, the moneys required to service the demands of taxation come from revenues earned. I am purposely avoiding the trap the Minister for Foreign Affairs has set for me in labelling particular accounts. Incidentally, in trading you do not necessarily have the same type of accounting as we have in budgetary accounts or statistical public assessments of economic returns. I am talking about the common-or-garden businessman and of business companies such as Deputy Fitzpatrick spoke about. If what I have been saying is correct, there is a point in what Deputies Colley and Brugha have been saying, namely that there is money to be found for taxation in the case of the private company that we do not have to find in the other type of company.
I admit the validity of what the Minister for Foreign Affairs said— that in the last analysis it leads to the absurdities he postulated, but then there are many absurdities in our financial and banking system. We have to live with the realities, which in this case is that if there are two such companies in competition, a trading company can provide taxes. Of course, the question of a trading company comes into this in a peculiar way.
The section deals with non-trading companies. Therefore, the entire discussion is irrelevant.
I was adverting to this but still the question of the impact on trading companies comes in.
How?
I will tell the Minister how it comes in here. All right. Take the case of a trading company simpliciter. I admit I am thrown back on the argument of Deputy Colley about ploughing back in this case.
A very interesting question arises out of the interjection by the Minister for Foreign Affairs. Why is this amendment being moved in a section on non-trading companies when it includes trading companies?
It does not. It is governed by the first sentence in the section.
May we take it that the intention of the Minister for Finance is to subject State trading companies to wealth tax?
No.
Or the shareholders in State trading companies?
No. My reference to the ESB and Bord na Móna was simply to give examples of incorporated bodies which were set up other than under the Companies Act. That was the only purpose of that. I would accept that this has led to some confusion. I then went on to deal with the situation of private non-trading companies. A State body might be regarded as a non-trading company, and they will now be dealt with as trading companies.
I confess that just for the moment the Minister for Foreign Affairs put me off course. Fair enough, in the cut and thrust of debate. The point is that I was making the point about revenues here and revenues for taxation. Although you make the distinction between the shareholder and the company itself, in the last analysis the company is the shareholder, the shareholder is the company and the taxation coming off the shareholders is going to have a repercussion on the company itself, because it means there are levels of remuneration required at the capital level and that affects trading accounts. I am still back to where I started— a comparison of the revenues here.
The section deals with non-trading companies.
I know but I am talking about trading companies.
Can we deal with the section?
All right. If it is a non-trading company, if you put me back on the question of a non-trading company, in that case, I grant you, there is some substance in what the Minister says, but in the case of a non-trading company it boils down to this, that the State is furthermore moving in a direction of socialisation. That is all I can say about that.
On this amendment there is another very interesting point. "Under the control of a Minister of State"—I wonder could that not have unforeseen consequences. I am not accusing the Minister, but could the Minister not possibly conceive of the situation where a company would be put under the control of somebody and that somebody would become a Minister of State by election to this House and by selection of the Taoiseach into a Government?
They are different persons.
This is a question I am asking. Would that simple process exempt the company? I ask it with full consciousness that the Interpretation Acts or some other provisions will cover the point I am making but prima facie it is “under the control of a Minister of State”. I know the Minister will appeal to the essential difference between himself as Deputy Ryan and himself as the Minister for Finance with a corporate sole. He would make that distinction in his own case and a similar distinction for any of his colleagues or a similar Minister sitting over there, but I wonder is that a sufficient distinction for the purposes of an Act of this nature. It is clearly the intention—and I am making no further point on it than that—but if that possibility were there it might be as well to ensure that it was not. In other words, in contemplation of law and accepted interpretation, is it quite clear that the phrase in an Act, “Minister of State”, can mean and mean only—the important thing is can mean and mean only—the corporate person who is the Minister of State and whose corporate identity is personified in the seal of office? If that is so, the intention here, which is not impeached, will be properly implemented, but if perchance the phrase should be interpreted to have a wider meaning—and in this connection we have had some surprising results of the constitutionality of statutes that were thought to be clear —having regard to the wording of the Constitution for the setting up of Ministers and the Government and to other relevant enactments and case law, is the Minister absolutely satisfied that that would not automatically import an exemption of a company if it was under the control of a person who happened to become a Minister of State.
It is not a likely thing, and the Minister might answer that in any case it is customary for people to resign such posts, but there is no constitutional requirement, unlike the case of the Judiciary, and there has been controversy in this House about office-holders, Ministers even holding similar offices simultaneously with the office of Minister. It would be useful to have that point examined.
As I say, I clearly appreciate the intention here and, read in connection with subparagraph (1) of the amendment, the intention would seem to be abundantly clear. Nevertheless, there are technicalities and this is tax law and it would indeed create a very piquant situation—it might even be a motive for seeking the office—and even amending retrospective legislation might not cure it. If there is any danger I suggest that the wording should be looked at.