Cavan): I apologise for the absence of the Minister for Finance.
Capital Acquisitions Tax Bill, 1975: Committee Stage (Resumed).
Debate resumed on amendment No. 27:
In page 24, subsection (3), line 24, after "is" to insert ", at any time within that period of five years,"
—(Minister for Finance.)
The Minister will understand when I say the phrase "Box and Cox" springs to mind in relation to his role in regard to capital acquisitions tax measures. We are on the amendment and, just before Questions, I suggested I should like to think about this while Questions were in progress. I have done so and, as far as I am concerned, I have no objection to this amendment.
Amendment agreed to.
Question proposed: "That section 29, as amended, stand part of the Bill."
On the section, as amended, the first point I want to raise with the Minister is contained in subsection (1). It is the definition of property as not including "any property to which a donee or successor became beneficially entitled in possession prior to the 28th day of February, 1969". By implication, by even more than implication, property to which a done or successor became beneficially entitled subsequent to 28th February, 1969, is being taken into account. It seems to me that what is being sought to be done here, while the section of itself is acceptable, is to extend the section retrospectively to transactions which took place in 1969, 1970 and subsequent years. I do not think that is a justifiable approach and I would like to hear the Minister's approach and to be told why he thinks this is justified.
(Cavan): I do not accept that there is any retrospection involved here. I am absolutely clear in my own mind that there is no retrospection. We are discussing property which passed before the coming into operation of the tax. We are not taxing that property but We are taxing the increase in value of that property occasioned by the second transaction, the transaction subsequent to the coming into operation of the Act. It is the increase in value that is being taxed and that increase in value is brought about by something that happened since this Act came into operation.
In so far as there is an increase in value from, we would say, 1970 on, does that not affect the amount of tax payable?
(Cavan): But the increase in value is brought about by the second transaction and the second transaction occurs subsequent to the coming into operation of the Act. There is, therefore, clearly no retrospection.
Let me put it another way: why is provision in subsection (1) there at all? Why does the Minister have to have regard to property coming into possession on or after 28th February, 1969?
(Cavan): Simply because we are ignoring any property that came into the possession of the donee before 28th February, 1969, and we are taking the same period as the period taken in the earlier section for aggregation.
Of course, that period, in our view, and I doubt if the Minister can effectively dispute this proposition, taking into account the earlier section, is, in fact, involving retrospection, because it is determining the rate of tax payable by reference to events occurring prior to the issue of the Government's White Paper. It seems to me that the Minister has just confirmed that the same approach is now being adopted in this section and what is involved, for the purpose of determining the tax and the rate of tax, are events which occurred and transactions which took place a number of years ago when this legislation was not in contemplation at all. If events and transactions of that kind can affect the amount of tax or the rate of tax, I suggest it is mere semantics to say there is no retrospection involved because the tax is charged in relation to a transaction occurring after the relevant date under this Bill. If, in fact, the amount of tax or the rate of tax is affected by what happened five years ago, then there is no way in real terms that the Minister can deny that it is proposed under subsection (1) to introduce retrospection.
(Cavan): I honestly cannot accept that there is any retrospection in this. I am quite satisfied in my own mind that there is no retrospection. Suppose A gets a house in 1970 and he gets another house in 1976, which increases the value of the first house, it is the act which is done in 1976 that increases the value of the first house and there is no retrospection about that. If the 1976 transaction did not take place and the house passed to someone other than the owner of the first house, there would be no question of tax at all.
Why speak of February, 1969? Why have any time limit?
(Cavan): We did not want to go back to very old transactions. We would be accused of being unreasonable if we did that.
And it is purely coincidence that it is 28th February, 1969?
(Cavan): We wanted to make it coincide with the other.
And the reason the other coincides is to make it coincide with the death duty provision in relation to a gift made where the donor dies within five years.
(Cavan): The object was to provide a basis for the tax.
Why that basis? Surely this is an attempt to substitute for the death duty provision. On a previous similar section I indicated that, as far as this side of the House is concerned, if the object of the exercise was to ensure that persons who would have been caught under the death duties provision were still to be caught, we would not object to a similar law being imposed on them, but introducing this is, in fact, retrospection because the rate of tax or the amount of tax is being affected by things which occurred when this Bill was not in contemplation. On the other hand, to apply the death duty five-year provision to transactions which took place during the previous five years is to apply it in a way that was contemplated when such transactions took place. This is quite justifiable because the parties were aware of what the situation was. Effectively what is being done here is to affect the rate of tax by having regard to transactions which occurred when the parties to the transactions had no reason to contemplate this kind of provision.
I do not want to drag this matter out unduly because we made our position clear on the previous section. However, I do not wish to allow this section to pass without placing on record our view that how ever one tries to gloss over it, this is retrospective taxation and, secondly, it is reprehensible. One cannot approve of retrospective taxation such as is proposed in the section.
(Cavan): I do not wish to go into the previous argument about the aggregation period of five years. On that occasion I demonstrated that the alternatives suggested by the Deputy to extend it to people who would otherwise have been caught by death duties would be to impose on many estates which were exempt from death duties, death duties, in other words, to impose death duties on the estates of people who made gifts in 1972 and 1973 and died on or after 1st April, 1975.
It would not impose anything that was not in contemplation at the time the persons entered into their transactions.
(Cavan): It would have imposed death duties on gifts which were totally exempt. If a person gave a gift away in 1972 and did not give any further gift he would not be taxed under this Bill but Deputy Colley's suggestion would mean that he would be liable for tax. We are taxing the transaction which takes place subsequent to the passing of this Bill and that transaction only. I do not accept that there is any element of retrospection in that. Any impartial tribunal to which that argument was submitted would hold with me in that regard.
I put our position on the record and I am not going to pursue it any further at this stage. I should like to raise some other matters on this section. Subsection (2) refers to "where the taking by any person of a beneficial interest..." and, later, refers to "and which had been derived from the same disponer". May I take it that the two words, "taking" and "derived" include purchase? In other words, "where the purchase by any person of a beneficial interest" or, later in the section, "which had been purchased from the same disponer".
(Cavan): Yes, they are intended to include purchases.
Including a purchase for full value and consideration?
(Cavan): For full value and consideration of each portion.
Could the Minister give us an example of what is contemplated where there is a purchase and it is for full value and consideration?
(Cavan): Suppose a person who has two adjoining houses situated in a good location, decides to sell them separately, he will not get as much for either as he would if he was selling the two of them in one lot. That is the sort of transaction this section is intended to cover.
The Minister will appreciate that the Bill is supposed to be imposing a tax on gifts and inheritances.
(Cavan): If a person was so foolish as to split up these houses, or to split up something which is obviously more valuable as a unit than it would be in two separate parts, then he is giving a gift to the person to whom he sells these things in parts instead of as a unit.
(Dublin Central): That is not right.
In the case mentioned by the Minister does the purchaser of the two houses have to be the same person or a connected person?
(Cavan): He must be the same person.
(Dublin Central): What is the position if he is only prepared to sell one, which is often the case?
(Cavan): It is affected if he sells the second to the same person later. If he does not sell the second he is all right. He must be the same person within the definition of the section.
(Dublin Central): Adjoining properties owned by the one person are seldom put up for auction at the same time. A person would want to be a fool to put the two properties up together. That would not be good business practice. It is usual that a person puts up one property first to ascertain its value and, at a later stage, decides whether it is desirable to sell the second property.
(Cavan): I would say that the converse is the case.
(Dublin Central): Except for development purposes.
(Cavan): That is what I am coming to. It would be crazy, in certain cases, for a person to split up his property and sell it separately. It would be more in that person's interest to sell it as a unit because it would be more attractive to a developer. In the case of shares, where a person in a company sells 30 per cent of the shares to A today and some time afterwards sells another 25 per cent, the effect of that 25 per cent sale is to increase the value of the whole lot; it would add enormously to the value. I am told that there is a similar provision under capital gains tax—in section 34 of that Act.
The point the Minister is making is clearer in relation to the example he gave about shares where control of the company is being given by the second sale.
(Cavan): The control of the site is being given in the other case.
As Deputy Fitzpatrick pointed out, that depends on the purpose; development purposes or nondevelopment purposes. If development was not involved one could obtain a lower price by selling the two properties together.
(Cavan): The question would not arise if the second transaction had not the effect of adding to the value of the first.
There are things contemplated here that clearly would be evasion if they were dealt with. I have some reservations about this in the case where a house is sold for full value and consideration by A to B. Subsequently another house is sold for full value by A to B and the consequence is that the houses taken together are more valuable than the sum paid for the two. In that case, A is deemed to have made a gift to B of the increase in the value. I had some reservations about this in practice.
(Cavan): If this section were not in the Bill, there could and would be wholesale collusion and it would be impossible to operate the section.
Would the Minister consider that where full market value and consideration are given in each transaction, taking it on its own, there might be a different approach?
(Cavan): If this section were not there, the transactions could take place one day after the other. Take it that A sells the house for £5,000 and some time afterwards he sells the second house for £5,000. Now B has two houses which are worth £20,000, not £10,000, and he is taxed on the difference.
(Dublin Central): How would that we worth £20,000?
(Cavan): The local bank might want two houses instead of one.
(Dublin Central): It is more a matter of capital gains.
(Cavan): Only the two people are involved. Surely if a man had these two houses and he wanted to sell to the best advantage, what he would do is sell them to the same man, at the same time, perhaps reserving the occupation of one for a limited time. Before the question of tax arises, the Revenue Commissioners would have to be satisfied that the acquisition of the second item of property enhances the value of the first. Otherwise no question of tax would arise.
(Dublin Central): I thought it was to cover such a situation that a capital gains tax was brought in. I can see situations in Dublin and in various parts of the country where this situation would arise. There would be two properties, one complementary to the other as regards potential development, but not at one particular time. A person would sell both but would not be in a position to sell one of them at a certain time because he intends to keep it at that time. Then after three or four years, perhaps family circumstances would decide for him that he should sell the grocery part in the house next to the other which is a public house. Naturally, the man in the best position to buy it would be A, the person to whom he had sold the first house, now a licensed premises, and how that transaction can be treated as a gift and not as a purely commercial transaction, I do not know. I can see how a person could be subject to capital gains.
Assuming that A bought the first property for £10,000 and five years later he bought the second property for £4,000. The second property, if fully developed, might be worth £15,000 but I do not see how that could be deemed as a gift. It would be unfair to B so to treat it because it would depress the value of his property in a later sale and he will have to take that into consideration when purchasing the property. He will say he intends to develop it and buy the property at market value from B who, if he has any sense, will put the property up at public auction because he will know that A next door will be the main interested party.
But C could come in and buy the property at any price and there would be no gift tax attached to it. I do not think that is good law because, although it would have no effect on purchaser C, it will depress the market value as far as B is concerned because A will have to take into consideration that, when he develops it complementary to his licensed premises, it will enhance its value in the eyes of the Revenue Commissioners who will be entitled to say the property is worth £25,000 to £30,000 and they can tax him on the difference between that and the purchase price. Therefore, the man selling the property will lose something in the region of £20,000 in the value of his property. If a third party wishes to come in he can buy it for 25 or 30 per cent less than A was prepared to pay and will pay no gift tax. If A purchases it because of the potential he sees in it, he will have to pay gift tax. There is bad business practice in that.
(Cavan): First of all, it would appear to me that Deputy Fitzpatrick may think that the increase in value due to development is being taxed. That is not so.
(Dublin Central): Not due to development.
(Cavan): I just want to clarify the position. It could have been taken from what Deputy Fitzpatrick said that he thought that was taxed. I want to make it clear that there is no proposal here to tax an increase in value due to development. The proposal here is to tax the difference between the price they would fetch when sold separately and the price they would fetch if sold together. If there is no difference in value there, then there will be no tax.
The main object of the section is to deal with collusive transactions. If this section were not here it would be impossible to operate the tax. I have given the example of the shares. I will come back to that again. At least, it is understood. As I have said, before the Revenue Commissioners are entitled to tax they will have to show that the acquisition of the second portion of the property added to the value of the first portion. Deputy Fitzpatrick says that the effect of this might be to deprive the owner of the best price for his house. As a matter of fact, you could have a situation where the second bit of the property would not be of any value or of interest to anybody except the person who had bought the first portion. That quite frequently happens.
(Dublin Central): There are other cases where the opposite is the case.
(Cavan): There are cases where the person who acquires the first part of the property has the unfortunate owner of the second part where he wants him because nobody will buy it except the buyer of the first part. It can work both ways.
(Dublin Central): Usually the person who holds a small property as against a big property can ask his price.
(Cavan): It can, as I say, work both ways. I want to emphasise this and drive it home: before the question of tax arises the acquisition of the second item of property will have to have increased the value of the first. I wonder how often does it genuinely happen that a person splits up his property of this sort which is obviously more valuable in one lot than in two pieces and sells it separately to the same person? I say it does not often arise. If a man is well advised, it will not happen. If a person was getting on in years and wanted to keep a portion of the property for his day, as we say, the sensible thing would be to sell the whole property at the one time but to reserve a life interest or limited interest in the remainder.
Could I ask the Minister, in the kind of transaction we are contemplating here would not capital gains tax arise and if it would is that not the better way to deal with it?
(Dublin Central): Of course it is. They both arise.
(Cavan): I do not think that this is a case where capital gains tax will arise because capital gains tax would only come in here in respect of the donor and what we are saying here is that any gain is to the purchaser.
If we could leave out donor or donee, where clearly there is a case—we are not disputing that— the case we are concerned with is where there is purchase at full value for a consideration in each case. The Minister could consider a case of that kind. The purchaser, say, of the two houses we have been talking about having paid full market value for the first and then full market value for the second house some years later now has two houses which taken together are worth more than the sum of what he paid for the two separately. At some time, either when he disposes of it, develops it or dies, that increased value will be brought into some form of tax. It will become liable either to capital gains tax or to inheritance tax. This seems to be a new concept that is involved in this section of applying a gift tax to the increase in the value that is deemed to come about by reason of this. If, in fact, there is an increase in value, will it not be caught in the normal way under capital gains tax and, if so, why complicate it by introducing it here? In regard to the other question that arises, if it is going to be subject to capital gains tax, why should it be subject to capital gains tax plus gift tax, which appears to be what is happening under the section?
(Cavan): The capital gains, of course, only affects the vendor.
No. I think we may be at cross-purposes. I am talking about the purchaser of the first house and then he is the purchaser of the second house. It will affect him.
(Cavan): If he sells the place later on.
At some stage it will affect him because he purchased for X and its value is Y, which is bigger, so he will be affected.
(Cavan): What I am saying here is that a person by selling his property to the same person in two different lots may be conferring a gift on that person and if he is he should be taxed. That is as simply as I can put it.
If he sells it at the market value he is conferring no gift.
(Cavan): It may if he is selling in two lots because the market value for each lot does not necessarily amount to the market value of the entire item. I cannot put it any clearer than that.
I must confess I am not too happy about this section in relation to transactions which are at full market value as I said at the beginning. I am less happy about it now than I was at the beginning. There is another matter I want to put to the Minister. In the kind of situation we have envisaged, say, two houses each being sold for full market value, if the first house is sold by A and the second house is sold by B, his executor——
(Cavan): Will the Deputy say that again?
A sells the first house and then the adjoining house which he also owns is sold by his executor after A's death to the same purchaser. Does this section then apply?
(Cavan): I would not say so because there would be a different disponer. For example, if a man directed that after his death a property would be disposed of in some manner or if he left the house to somebody who directed subsequently that it be sold, the disponer could not be regarded as being the same person.
(Dublin Central): That makes a joke of the section.
(Cavan): It does not. I have no wish to return to the argument which I thought had ended but let us consider the case of a person who sells half a house and retains an interest for himself in the other half but who eventually would sell that other half to the same person to which he sold the first half. That other person would have the whole house with vacant possession and, of course, it would then be much more valuable. The unfortunate man who had sold in that way would have been foolish.
This situation is less than satisfactory.
(Dublin Central): How will the Revenue Commissioners value the other unit if it is bought at full market value? Will they deem it to be worth more than full market value?
(Cavan): The Revenue Commissioners will proceed in relation to such matters in the same way as they have been proceeding in respect of death duties for the past 70 or 80 years, that is, with common sense.
Why not make the section simple and give them a chance to use their common sense?
(Cavan): The section does that. Essentially, it is an anti-avoidance section and, consequently, people are bound to say it is unnecessary.
Although it is an anti-avoidance section the real problem is the danger of catching transactions which are not designed to avoid liability, genuine transactions at full market value. Can the Minister say what is meant by paragraph (d) of subsection (2)?
(Cavan): As I understand it, one must take the market value of the entire part and then take a proportion and apportion that between the entire property and the part. A fourth in terms of area might not necessarily be the equivalent of a fourth in value but what is behind the section is the question of getting the value of the entire property.
Having got the value of the entire property, portion of it is treated as being such proportion of the total value as may be ascribed reasonably to that part?
(Cavan): This is to give the Revenue Commissioners discretion to be reasonable.
I think the Minister is trying to appeal now to Deputy de Valera.
Question put and agreed to.
SECTION 30
Question proposed: "That section 30 stand part of the Bill."
Can section 30 stand apart from section 31?
(Cavan): No, they are related sections.
I trust the Chair will allow me to refer simultaneously to some extent to both sections. Section 30 says that a person shall be deemed not to be beneficially entitled in possession to the benefit unless and until the power of revocation is released by the disponer or otherwise ceases to be exercisable. That appears to be granting certain relief but in the next section we read that a person shall be deemed to take a gift in each relevant period when he is allowed the use, occupation or enjoyment of any property otherwise than for full consideration in money or money's worth. In other words, he is deemed to take a gift. Am I right in understanding section 30 to say that if the disponer reserves to himself the power to revoke the benefit the person entitled beneficially shall not be deemed to be so entitled unless and until the power of revocation is released? Let us take a case that could apply to both sections. If, say, I lend the use of my property for example, a summer residence, to a friend for a couple of months in the summer, according to this section that case would be included and I would be preserved from the consequences of gift tax. However, the situation seems to be captured in the next section.
(Cavan): Section 30 says simply that a gift which is given subject to a power of revocation shall not be subject to tax or be deemed to be a gift until the power of revocation comes to an end.
In other words, if one lends property retaining the power of revocation, the person to whom it is lent can enjoy it freely and not be liable to gift tax?
(Cavan): Section 30 says that where the disponer has reserved to himself the power to revoke the benefit——
Implicitly a person who lends something retains the power of revocation.
(Cavan): Yes, but section 31 says that:
A person shall be deemed to take a gift in each relevant period during the whole or part of which, not being beneficially entitled in possession thereto, he is allowed to have the use, occupation or enjoyment of any property otherwise than for full consideration in money or money's worth.
If that were not so a person could transfer to A a property value £50,000 subject to a power of revocation and, under section 30, no tax would be payable. A could continue to enjoy the property for 20 years and not pay any tax.
Agreed but the intention is that he would be assessed on the value of what he gets.
(Cavan): He would not be taxed on the value of the property because one would not value it for stamp duty purposes. If you transfer a property worth £20,000, subject to a power of revocation, you will stamp it with £1 because it is regarded as valueless. The Revenue Commissioners cannot value it. They do not treat it as being of value because it could be revoked the next day. And that is why we cannot tax it there. On the other hand, we tax the benefit that the transferee takes under section 31.
The matter would have been simplified if this had been all one section because I can see the logic of what the Minister is doing. Having it appear as two separate sections is slightly confusing and one asks the reasons. The court, too, would ask the reason. From what the Minister says I am beginning to see the light. I hope the Leas-Cheann Comhairle will bear with me if I have to refer to the subsequent section because the two are interlinked.
The Minister rightly visualises the case where a gift duty could be evaded by the simple device of a disponer presenting the property to be enjoyed in possession to another person and by the mere legal formality of retaining a power of revocation. I should imagine that if such an evasion were attempted the Revenue Commissioners would require evidence. It is clear that what people are thinking of is a formal transaction in which, like some of the evasive transactions which were availed of before this system was brought in, there would be a document with the power of revocation which could be adjudicated upon as such. In so far as that goes I have no quarrel with the section. But the section as couched here is wide enough to read that if the power of revoking the gift remains in me, whether evidenced by a formal legal transaction or merely by the operation of law, then the section will operate.
Apply that consideration in the specific case where there is no formal arrangement—which can happen very simply and which raises a somewhat serious problem on the next section. I will take the same example but the difference between its application on the two sections will be merely a question of a period of time. If it is convenient for me, who owns a property, to make an arrangement with somebody else to occupy it as a caretaker, that friend enjoys the full beneficial ownership of my property, other than the title, and it is a voluntary gift for no consideration, and I am legally entitled to recover at the end of any period reasonably within the limitation period. The Minister's 20 years is clear and his point about formal evasive tactics is also clear. In this incidental case the period is so limited as to make it fairly certain that the power of revocation lies in me and the arrangement is in the nature of a mutual convenience. Does the Minister intend to catch that case?
(Cavan): The case Deputy de Valera puts forward could involve a benefit to the donee of a considerable amount.
Yes, a year's occupation.
(Cavan): And that year's occupation could amount to £500 or £5,000 and it is intended to catch that.
How will it be caught in this section?
(Cavan): It will be caught by making the use for a year subject to gift tax.
I am talking about section 30.
(Cavan): Section 30 will not apply to that.
Why?
(Cavan): Section 30 clearly only applies to cases where somebody parts with the occupation of property but reserves the right to take it back, or to give it to somebody else. If exempt, that person shall not be taxed on the value of the property. I do not think section 30 gives anybody any trouble. It is a section which is an easing of the person——
Quite, but I am asking if the section applies to the case I have given.
(Cavan): It does.
Therefore, the person who is there for a year would not be caught on that section.
(Cavan): The person who has the property for a year——
Will be beneficially entitled in possession.
(Cavan): Is the Deputy dealing with section 30?
Yes.
(Cavan): Section 30 reads:
Where, under any disposition, a person becomes beneficially entitled in possession to any benefit and, under the terms of the disposition, the disponer has reserved to himself the power to revoke the benefit, such person shall, for the purposes of this Act, be deemed not to be beneficially entitled in possession to the benefit unless and until the power of revocation is released by the disponer, or otherwise ceases to be exercisable.
Let us go over that again:
Where, under any disposition a person becomes beneficially entitled in possession to any benefit and, under the terms of the disposition,——
it does not matter whether it is a formal, informal, oral or written disposition.
Agreed.
(Cavan):
—the disponer has received to himself the power to revoke the benefit,——
That clearly applies to the lending transaction which the Deputy has in mind.
——such person shall, for the purposes of this Act, be deemed——
the donee
——not to be beneficially entitled in possession to the benefit unless and until the power of revocation is released by the disponer, or otherwise ceases to be exercisable.
In other words, until such time in the case of a formal transaction, with a formal power of revocation, that power is released and in the case of an informal transaction the person who says another person can keep the bicycle or motor car because he does not want it back.
I am in complete agreement with that interpretation.
(Cavan): The person who gets a loan——
——for a year is not taxable?
(Cavan): It is not taxable on the value but it is taxable under the next section.
We will come to that in due course. I do not want to delay the Minister or the House but I would like to make an observation which may be a little technical. This is a peculiar Bill because one section says that in certain circumstances a person is not taxed and the following section in exactly the same circumstances says a person is taxed.
(Cavan): No. I do not want to interrupt the Deputy but let us be clear about who is wasting time. Section 30 says that the capital value of the property is not taxed but section 31 says that an occupation rent in respect of the period it is used is taxed.
That is an interpretation that needs to be looked at. On the face of it I doubt if it is completely valid. It would have been neater if the two sections were drafted as one section. If a person gets a gift of a property for a limited period, section 30 operates as long as the owner has the power to reclaim it.
This section provides that where a person takes property under a disposition which can be revoked he will not be taxed unless and until the power to revoke is released or is no longer exercisable. If we assume that the power to revoke is released four years after the original transaction and, therefore, the question of his being deemed to be in beneficial ownership in possession arises, what valuation of the property comes into play? Is it the one at the time of the original transaction or the one at the date four years later when the power of revocation is released?
(Cavan): The property would be valued as at the date of the release of the power of revocation because that is the effective date of the gift. The owner can do anything he likes until he revokes the power of revocation.
The original transaction is totally ignored?
(Cavan): Exactly, but, of course, he might be caught. I should like to refer Deputy de Valera and others to section 53 which exempts small transactions. It would be very unlikely that allowing one's relatives to occupy one's house for a few months in the summer would be caught. It would not be caught.
Question put and agreed to.
SECTION 31.
(Cavan): I move amendment No. 28:
In page 24, subsection (4), line 52, after "period" to insert "or, if earlier, immediately prior to the time when the use, occupation or enjoyment referred to in subsection (1) comes to an end".
This amendment is required to take account of the possibility of a use, enjoyment or occupation ending before the end of a relevant period, especially by the death of the deemed donee. For example, an object of a discretionary trust is allowed the free use of a house, the letting value of which is £1,000 per annum. He is taxed each year as receiving on 31st December a gift of £1,000. If he ceases to occupy the house on 1st July, 1977, the gift tax due in respect of the six months occupation—value £500—would not be due until the date of the gift—the valuation date under section 21—that is, six months later on 31st December, 1977. Similarly, if he died on 1st July, 1977, the valuation date would be six months after his death.
While "gifts" may be taken after the donee's death—for example, where property is given to A for five years, then to B absolutely, and B dies within the five years—it is more realistic in the present section to relate the valuation date to the cesser of the use: the enjoyment thereof had taken place prior to that date and the purpose of the "relevant period"—normally one year—is merely to avoid a multiplicity of returns for a continuing use, enjoyment or benefit. When the use has ended, the relevant return will thus be due within three months of the cesser—section 36 (5) —where the donee is living; if he is dead, an assessment may be made on his personal representative—section 39 —who is accountable under section 35 (6).
Amendment agreed to.
Question proposed: "That section 31, as amended, stand part of the Bill."
The Minister said that section 53 exempts small transactions but one can visualise occupations that may be for a longer period. The section seems to raise a technical point so far as phraseology is concerned. Section 31 provides:
That a person shall be deemed to take a gift in each relevant period during the whole or part of which, not being beneficially entitled in possession thereto, he is allowed to have the use, occupation or enjoyment of any property otherwise than for full consideration in money or money's worth.
The words used are ".... not being beneficially entitled in possession thereto ...." but section 30 refers to ".... becomes beneficially entitled in possession to any benefit ...". Is there not a danger of creating a loophole in that section 30 operates where a person is in the legal sense beneficially entitled to possession while it is specifically excluded in section 31?
I have not looked up the details and my memory of it may not be quite reliable but it seems to me that there could be a distinction, as is made in the section, between "beneficially entitled in possesion thereto" and "the use, occupation or enjoyment". Clearly there is a contrast made between the two phrases in section 31 (1). The same phrase:
beneficially entitled in possession to any benefit
appears in section 30. If the Minister's interpretation of section 30 is correct, I am a little confused as to the net operation of both sections in a conceivable case.
(Cavan): I will read a detailed note on it but before doing so I would like to say that in the case of a person who takes property subject to a power of revocation, that person is legally and beneficially entitled to that property until such time as the power of revocation is exercised. He could sue for trespass. However, principally because it would be legally impossible to value such property, we would deem him not to be in beneficial occupation but we catch him under section 31 as a person not being in beneficial occupation of the property but having the use of it. That is my understanding.
I am merely trying to help the Minister.
(Cavan): Section 31 provides that where a person, who is not beneficially entitled in possession to property, is allowed to use the property he will be taxed on the basis that he takes a gift in each year of the value of the use of the property for that year. The section will apply, for example, to persons who are objects of discretionary trusts and to a person occupying property under a disposition which may be revoked. If a person who is not entitled to property in possession is allowed to have the use of it, section 31 proposes to tax him on the benefit of having the use of it. In each year the net value the use had in that year is deemed to be a gift or inheritance received at the end of the year. The purpose of subsection (5) is to treat appropriate cases as inheritances rather than as gifts. Subsection (3) creates a notional sum for taxation purposes and subsection (6) provides that it shall not be taxed where the disponer and the disposition are both foreign. Examples of cases of this type are (1) the property held on a discretionary trust includes a dwelling house or a farm. The trustees allow one of the objects of the trust the use of the house or farm. (2) A gives B a farm as a gift but reserves the power to revoke the gift. Under section 30 B does not take a taxable gift until the power of revocation is released or lapses. B has the use of the farm in the meantime. (3) A father gives his son a loan of money free of interest.
(Dublin Central): What would be the position of a person who is transferred abroad for two or three years and has a house which he gives to somebody on a caretaker basis?
(Cavan): Each case will have to be taken on its own facts. That case could be exempt because there could be genuine caretaking and the duties performed by the occupier could amount to the value of the rent. In other cases it might not be a genuine caretaking transaction at all. It might be a letting. In that case they would be caught.
One of the examples given by the Minister was a loan from a father to a son free of interest. How is that assessed as a gift? On the basis of the interest that should have been charged?
(Cavan): Yes.
At what rate of interest would that be?
(Cavan): I would say the going rate.
Which going rate?
(Cavan): It would not be exorbitant. It would be the ordinary rate of interest that one would expect to pay on money having given a reasonable security for it.
(Dublin Central): Is it not a very poor effort to promote the business sector?
(Cavan): Is the Deputy telling me there is money going around free of interest?
(Dublin Central): There is nothing wrong with a father giving a loan to his son.
(Cavan): He will have to reach a threshold of £150,000.
A person becomes beneficially entitled in possession to any benefit and under the terms of the disposition the disponer reserves to himself the power to revoke the benefit. That is section 30. Do I understand the Minister to have said that under that section that transaction is not a gift that is taxable?
(Cavan): It is ignored until the power of revocation——
But if the power was never revoked, it is ignored?
(Cavan): Yes. If it was a power of revocation that was only exercisable during the life of the donor it would come to an end on the death of the donor.
But if it is never exercised it would not operate so that means that although the person "becomes beneficially entitled in possession, to the benefit" under those conditions no tax attaches "until". Is that right?
(Cavan): If I understand correctly, the Deputy inquires whether tax is payable on a gift given subject to a power of revocation until the power of revocation ceases and my answer to that is that no tax is payable until the power of revocation ceases but powers of revocation, of their nature, are given for a limited time or are exercisable during the life-time of the person who gives them or during some other person's life time. As long as the power of revocation is effective no tax is payable on the capital value of the gift but the person is taxed on the application of section 31. A person who gets a gift subject to a power of revocation is not liable to tax by virtue of section 30 as long as the power of revocation lasts.
If that is so under section 30, then section 31 expressly excludes a case with the words:
not being beneficially entitled in possession thereto
It, therefore, I suggest only covers user and occupation in cases where there is no entitlement to possession. My point is that there may be entitlement to legal possession, plus user and occupation, nevertheless escaping under section 30 and the net result of the two would be a loophole. I hope I have made the point clear because it is a matter for the Minister's legal advisers to consider if there is any substance in it.
(Cavan): We are satisfied there is not any loophole, but we will have it looked into in the light of the Deputy's argument.
That is the only point I am making on section 31.
Question put and agreed to.
Progress reported; Committee to sit again.