Finance Bill, 2001: Second Stage.

I move: "That the Bill be now read a Second Time."

I am pleased to put before the House my latest Finance Bill. This builds on and develops measures taken since I became Minister to ensure we have a tax system that facilitates growth in employment and prosperity. The budget and Finance Bill deliver Government commitments on personal taxation and contain various measures to tackle inflation. This Bill will introduce innovative new measures to promote savings and encourage donations as well as providing for significant structural changes arising from the move to tax credits, the change to a calendar tax year and the conversion to the euro.

The income tax and capital gains tax year will, from January 2002, correspond with the calendar year. This change is long overdue. The 6 April start to the income tax year is a leftover from the 18th century. From January 2002 we will also be operating in euros. The change to the calendar year, the short tax year this year and the conversion to euros require extensive revisions throughout the tax code and these are contained in this year's larger than usual Bill.

I will now outline the main contents of the Bill. The Committee Stage provides the opportunity to debate the detail of the Bill. I will listen with interest to the contributions from Deputies.

Sections 2 to 4, inclusive, set out the main personal tax changes announced in the budget. The increases in basic personal allowances, or tax credits as they now become, are set out in section 2. Section 3 provides for the reductions in the standard rate of tax from 22% to 20% and in the higher rate from 44% to 42% as well as for an increase in the standard rate band. Section 4 increases the income tax exemption limits for persons aged 65 years or over.

Section 2 and the First Schedule also reflect the move to a tax credit system. This is the final step in the move to convert standard rated allowances into tax credits. As part of the simplification process, permanent health contributions will be given on a net pay basis similar to superannuation contributions. Section 2 and the First Schedule also reflect the transition to the calendar year and the euro in relation to personal tax credits.

Section 7 increases the allowance for family members who employ a carer to look after an incapacitated relative from £8,500 per annum to £10,000 per annum. Section 8 changes the rules for claiming medical expenses in respect of a dependent relative. Currently medical expenses relief can be claimed only in respect of a relative where the claimant qualifies for a dependent relative allowance for which there is an income limit. Alternatively relatives had to use covenants to achieve a similar result. In future taxpayers will be able to claim medical expenses relief directly for designated relatives. The restriction on relief for routine maternity care is also being removed. I also intend to introduce an amendment on Committee Stage to bring expenditure on educational psychologists and speech therapists for children within the relief. I indicated in the budget that I favoured providing tax relief for insurance products geared at providing for future care needs. I will introduce an amendment on Committee Stage to provide for this.

Section 11 is new and recognises the role of trade unions by providing a flat rate allowance of £100 at the standard rate of tax in respect of trade union subscriptions. This provision will have effect from 6 April 2001 but the Bill provides that the amount for the 2001 year will be added to the amount for the 2002 tax year and the total allowed in 2002 to facilitate the administration of the credit in the introductory period. Section 13 amends the ESOT legislation to allow an ESOT trust to give either shares, or cash if the shares are encumbered or the holding period has not expired, tax free to the estate of the deceased's beneficiaries. Until now such a payment or transfer would have given rise to a tax charge.

The appropriate tax treatment of share options has been the subject of significant discussion over the last few years with arguments made for and against giving tax relief. I have weighed the issues carefully and I consider the arrangements put forward in section 15 provide a good balance between the objectives of facilitating the participation by all employees in the fortunes of the company for which they work and of helping companies retain staff vital to their success in a difficult international and national labour market. This section will change the tax treatment of share options where they are granted under an approved scheme so that the benefit is taxed at the CGT rate of tax rather than at the taxpayer's marginal rate of income tax.

For a share options scheme to qualify for this tax treatment, it will, as with other employee share schemes, have to be approved by the Revenue Commissioners. Schemes must be open to all employees on similar terms. However, schemes may incorporate a key employee element which does not meet the similar terms conditions provided at least 70% of the total amount of share options is made available to all employees. There will be a requirement for a retention period of at least three years between the time the option is granted and the time the shares are sold by the individual. There will be no limit on the amount of shares that can avail of the tax treatment.

The Bill as published provides that the new scheme will apply to share options granted on or after 15 February 2001 provided the scheme is subsequently approved by the Revenue Commissioners and would have met all the conditions applying at the time of grant and exercise. It has been put to me by various industry representative groups and individual companies that it would facilitate staff retention if those employees who had share options granted before 15 February 2001 but had not yet exercised them were eligible for the new tax treatment provided, of course, that the scheme under which the options were granted met all the other conditions. I see the benefit of this approach and I intend to bring forward a suitable amendment on Committee Stage to provide for this.

Section 16 amends certain provisions relating to retirement annuity contracts. For ease of administration and to prevent any tax leakage, the Bill provides that annuity payments will be subject to deduction under PAYE from 1 January 2002. Where a person contributes to a contract for dependants or for life assurance, there is, within the overall limit of relief, a limit of 5% of net relevant earnings on the tax relief for these contributions. The Bill provides that the splitting of the overall tax relief in this way will be abolished. Individuals will still be free to contribute to a RAC for their dependants. Contributions to the contract for the dependants and contributions to the main RAC will now simply be aggregated and subject to the overall tax relieved limit for contributions to retirement annuity contracts.

Sections 17 to 21 deal with arrangements for introduction for tax relief at source for medical insurance relief and mortgage interest relief. Section 17 also extends the coverage of medical relief to cover premia for primary health care. My recent initiatives in moving certain reliefs to a tax relief at source system are aimed at relieving some of the pressure on the tax administration system and at the same time making life a little easier for taxpayers claiming those reliefs. Under relief at source the correct relief will be given up front, there is no annual paper chase and generally no need to contact the tax office to get the proper relief due. From April 2001, medical insurance relief will be given at source. From January 2002 mortgage interest relief will also be dealt with in the same way. This is a simple and efficient method of channelling these tax reliefs to the persons who wish to avail of them and will help to ease the burden on an over stretched tax administration system.

With the aim of increasing the supply of child care the 1999 Finance Act introduced an exemption from benefit-in-kind tax to employees in respect of employer provided child care. Section 22 amends this to allow the exemption for schemes where employers are involved in financing but not managing the facility. In such circumstances the exemption will be restricted to cases where the employer provides financial support for items of capital expenditure and equipment but not other costs. Where the employer is involved in the management of the facility, the current financing conditions will continue to apply.

Section 26 provides for the amalgamation of the existing tax relief for third level education fees and for standardising the conditions that apply. Various restrictions which currently apply to the reliefs will be removed and the relief will be extended to postgraduate fees paid in the US and other countries not covered by the existing scheme. This is something I undertook to look at for this year following requests on Committee Stage last year.

A special allowance of £5,000 per annum is currently available for seafarers. Section 27 reduces, from 169 to 161, the number of days a seafarer is required to be on voyages to or from a foreign port in an EU flagged ship for the purposes of claiming the allowance.

Section 28 closes an existing loophole in the foreign earnings deduction relief by amending the definition of a day for the purposes of this relief. The section also inserts an expiry date for the scheme of 31 December 2003 allowing for a review of the scheme before any extension is agreed.
Sections 29 and 30 deal with measures to help ease our current housing pressures. There are many homes where the possibility exists of spare accommodation being rented out. A barrier is often the fact that such rental income is taxable. Section 29 introduces a new "rent a room" scheme. Where a room or rooms in a person's principal private residence is let as residential accommodation and the gross annual rental income is less than £6,000, the rental income will be exempt from tax. This will not affect full entitlement to CGT relief on one's principal private residence in the event of a subsequent disposal of the property or full entitlement to mortgage interest relief. Section 191 provides that room rental coming within the scope of this scheme will not trigger a stamp duty clawback.
The Government's objectives are to increase housing supply to meet the hugely increased need for housing, to tackle house price inflation and to give the first-time buyer a chance in the market. The Government has taken a range of measures over recent years to ensure this and I do not need to enumerate these. The Government is also concerned to ensure there is a supply of good standard accommodation in the private rented sector. The Bill provides for various tax incentives announced by Government arising out of the recommendations of the Report of the Commission on the Private Rented Residential Sector.
Section 30 restores the relief for interest on borrowings to purchase, improve or repair certain rented properties converted into multiple residential units before 1 October 1964 under certain conditions. The tax relief will apply to the tax liability on rental income only. Section 77 provides for CGT rollover relief to be made available to landlords where the proceeds of a sale of rented residential property are reinvested in new accommodation. It will be a condition that the reinvestment property must contain at least as many residential units as the one disposed of, with a minimum of three units to apply in any event.
An amendment will be proposed on Committee Stage for a general 100% capital allowance over seven years against rental income in respect of capital expenditure on the refurbishment of rented residential properties. Taken together these measures should help to improve the standard of accommodation in the private rented sector and provide an incentive for investment in this sector.
In introducing a stamp duty rate of 9% and the 2% anti-speculative property tax for investors last summer the Government undertook to keep the matter under review. We have now decided to reduce the rate of stamp duty for investors in new property from a flat 9%. The new rate will be 3% for properties up to £100,000 and the same rate as for non-first time owner occupiers for properties above that. The investor rate for second hand properties will remain at 9%. I can provide a table of the new rates.
The Government considers that this reduction will provide an incentive for increasing supply in the new built rented sector while leaving the relative position of owner occupiers and investors in the second-hand market unaffected. In this context, it should be noted that approximately two thirds of first time buyers buy second-hand houses. This stamp duty change will also increase the attractiveness of tax incentives for student accommodation which are new-build. This change will apply to conveyances made on and from today.
The Government has also decided not to proceed with the anti-speculative property tax due to come into effect next April. In the light of developments in the housing market since last summer the Government does not consider it necessary to go ahead with this measure, which would, in any event, have applied in practice to a very limited category of investors. These changes will be implemented by amendments to the Bill on Committee Stage. Given these changes the Government does not now propose to introduce section 23 relief for targeted groups.
Sections 34 to 37 make changes to the capital gains tax code and double taxation relief provisions following the decision of the European Court of Justice in the St. Gobain case. As a result an Irish branch of an EU resident company will be given the same credit against Irish tax for foreign tax suffered on the same income as would be given if the branch were an Irish resident company.
Section 38 is an anti-avoidance provision which amends the rules for the valuation of stock for tax purposes at the discontinuance of a trade where the stock is transferred from the trader to another trader with whom the first trader is connected.
Section 39 provides for the extension of exemption from dividend withholding tax to a number of new categories of shareholders such as incapacitated individuals who are exempt from income tax in respect of the investment income from personal injury compensation payments. In addition, Irish resident subsidiary companies will be able to pay dividends free of DWT to their Irish resident parent companies, without the necessity of the parent company making a formal declaration to the subsidiary.
Section 41 introduces a new uniform tax relief scheme for donations. This will involve merging almost all existing reliefs. The new relief will be available at a taxpayer's marginal rate of tax for both personal and corporate donations. The minimum donation which can attract relief will be £250. There will be no upper limit on the total amount of relief afforded to individuals or companies. The relief will be available for donations to all beneficiaries under the existing schemes which are being merged, including those for Third World charities. It will apply to donations to all charities which have tax exempt status for three years and to first and second level schools and third level institutions. This represents a major expansion in the relief, for example, for personal donations to domestic charities and educational establishments. I am very aware of the enormous sound contribution made by charitable donations in the United States, triggered by their tax relief arrangements. We have a tradition of voluntary effort and charitable donations in Ireland and this should be encouraged.
For ease of administration, it is envisaged that the tax relief for most taxpayers will be paid by Revenue to the body receiving the donations rather than paid to the donor. Individuals on self-assessment will claim the relief and companies will make the deductions as if the donation were a trading expense.
Sections 42 to 44 provide for an extension of the existing general 25% general stock relief for farmers and the special stock relief of 100% for certain young trained farmers from 6 April 2001 until 31 December 2002 subject to this being in conformity with EU state aid rules.
Section 45 amends existing legislation so as to provide for standard capital allowances to be available for non-domestic users who make capital contributions towards water supply infrastructural capacity provided by local authorities.
As part of the Government's policy in introducing the new regime for taxi licences, it was announced that the existing taxi licence owners would be able to write off the actual cost to them of these licences as a capital allowances. Section 46 provides for: a write-off period of five years; a write-off period for taxi licences backdated for three years to 21 November 1997 or the commencement of trade, whichever is the later; the write-off to be allowed against the trading income of the licence owner who drives a taxi and against both the trading and rental income only where one licensed vehicle driven by the licence owner is also rented out on a part-time basis. I indicated that I would look at specific cases of hardship where some modification of this scheme would help and I intend to bring forward some amendments on Committee Stage.
Section 47 provides for the write-off period for the annual wear and tear capital allowances for plant and machinery to be shortened from seven years to five years. Up to now the allowances operated on a straight line basis over a seven year period, that is, 15% in the first six years and 10% in year seven. This measure takes effect for expenditure incurred on or after I January 2001 and applies both to the general plant and machinery capital allowances as well as to capital allowances for business motor vehicles, excluding taxi and short-term hire vehicles which retain their 40% reducing balance arrangement.
Section 50 provides for the measures on taxation of credit unions which I detailed in the budget. Credit unions will also be able to operate the new savings scheme which I will be introducing on Committee Stage.
Sections 51 and 52 deal with changes to the relief for park-and-ride facilities, multi-storey car parks and the rural renewal scheme. Relief for qualifying commercial premises located at park-and-ride facilities is being restricted to facilities that provide local services only. This is to conform with requirements arising under EU state aid rules. Eligibility dates for qualifying expenditure are being extended under the multi-storey car park arrangements. Upper limits in the total floor area for qualifying houses under the rural renewal scheme are also being increased in the Bill.
Debate adjourned.