Financial Resolutions, 2001. Financial Resolution No. 1: Life Assurance – Taxation of Policyholders. – Dáil Éireann (28th Dáil) – Wednesday, 5 Dec 2001

Financial Resolutions, 2001. Financial Resolution No. 1: Life Assurance – Taxation of Policyholders.

The Taoiseach

I move:

(1) THAT Chapter 5 of Part 26 of the Taxes Consolidation Act, 1997 (No. 39 of 1997), shall as respects–

(a) the happening of a chargeable event in relation to a life policy (within the meaning of that Chapter), or

(b) the receipt by any person of a payment in respect of a foreign life policy (within the meaning of Chapter 6 of that Part) or the disposal in whole or in part of a foreign life policy (within that meaning), on or after 26 September 2001 be amended by inserting the following after section 730B:

730BA.–(1) In this section–

‘building society' has the same meaning as in section 256;

‘foreign life policy' has the same meaning as in section 730H;

‘internal linked fund', in relation to an assurance company, means a fund maintained by the assurance company to which fund the assurance company appropriates certain linked assets and which fund may be subdivided into subdivisions the value of each of which is determined by the assurance company by reference to the value of such linked assets;

‘investment undertaking' has the same meaning as in section 739B;

‘land' includes an interest in land and also includes shares deriving their value or the greater part of their value directly or indirectly from land other than shares quoted on a recognised stock exchange;

‘linked asset', in relation to an assurance company, means an asset of the assurance company which is identified in the records of the assurance company as an asset by reference to the value of which asset the benefits provided for under a life policy are to be determined;

‘policyholder' has the same meaning as it has for the purposes of sections 730E;

‘prices' index' means–

(a) the all items consumer price index complied by the Central Statistics Office,

(b) any general index of prices corresponding to such consumer price index and duly published by or on behalf of any state other than the State, or

‘public' means individuals generally, companies generally, or a combination of these, as the case may be;

‘units' has the same meaning as in section 739B.

(2) In this Chapter and in Chapter 6 of this Part, ‘personal portfolio life policy' means, subject to subsection (4), a life policy or a foreign life policy, as the case may be, under whose terms–

(a) (i) some or all of the benefits conferred by the policy are or were determined by reference to the value of, or the income from, property of any description (whether or not specified in the policy), or

(ii) some or all of the benefits conferred by the policy are or were determined by reference to fluctuations in, or fluctuations in an index of, the value of property of any description (whether or not specified in the policy),

and,

(b) some or all of the property or the index may be or was selected by or the selection of some or all of the property or index may be or was influenced by–

(i) the policyholder,

(ii) a person acting on behalf of the policyholder,

(iii) a person connected (within the meaning of section 10) with the policyholder,

(iv) a person connected (within that meaning) with a person acting on behalf of the policyholder,

(v) the policyholder and a person connected (within that meaning) with the policyholder, or

(vi) a person acting on behalf of both the policyholder and a person connected (within that meaning) with the policyholder.

(3) For the purposes of paragraph (b) of subsection (2) and without prejudice to the application of that provision, the terms of a life policy or a foreign life policy shall be treated as permitting the selection referred to in that paragraph where–

(a) the terms of the policy or any other agreement between any person referred to in that paragraph and the assurance company concerned–

(i) allow the exercise of an option by any person referred to in that paragraph to make the selection referred to in that paragraph,

(ii) give the assurance company discretion to offer any person referred to in that paragraph the right to make the selection referred to in that paragraph, or

(iii) allow any of the persons referred to in that paragraph the right to request, subject to the agreement of the assurance company, a change in the terms of the policy such that the selection referred to in that paragraph may be made by any of those persons,

(b) the policyholder is unable under the terms of the policy to select any of the property so as to determine the benefits under the policy, but any of the persons referred to in that paragraph has or had the option of requiring the assurance company to appoint an investment advisor (no matter how such a person is described) in relation to the selection of the property which is to determine the benefits under the policy.

(4) A life policy or a foreign life policy is not a personal portfolio life policy if–

(a) (i) the only property which may be or has been selected is–

(I) property which the assurance company concerned has appropriated to an internal linked fund,

(II) property consisting of any of the following–

(A) units in an investment undertaking, or

(B) cash, including cash deposited in a bank account or similar account (including cash deposited in a share account with a building society) except where the acquisition of the cash was made wholly or partly for the purpose of realising a gain from the disposal of the cash, or

(III) property consisting of a combination of the property specified in clauses (I) and (II),

and the property satisfies the condition specified in subsection (5), or

(ii) the only index which may be or has been selected is of a description specified in subsection (6),

and

(b) as respects a life policy or a foreign life police commenced on or after 5 December 2001 (other than a policy in respect of which the only property which may be selected is property described in paragraph (a)(i)(II)(B) or a policy in respect of which marketing or other promotional literature was published before that date) the terms under which the policy is offered meet the requirements of subsection (7).

(5) The condition specified in this subsection is that at the time when the property is or was available to be selected the opportunity to select–

(a) in the case of land, that property, and

(b) in any other case, property of the same description as the first-mentioned property,

is or was available to the public on terms which provide or provided that the opportunity to select the property is or was available to any person falling within the terms of the opportunity and that opportunity is or was clearly identified to the public, in marketing or other promotional literature published at that time by the assurance company concerned, as available generally to any person falling within the terms of the opportunity.

(6) The description of index specified by this subsection is an index consisting of a prices' index or a combination of prices' indices where at the time the index is or was available to be selected the opportunity to select the same index is or was available to the public on terms which provide or provided that the opportunity to select the index is or was available to any person falling within the terms of the opportunity and that opportunity is or was clearly identified to the public, in marketing or other promotional literature published at that time by the assurance company concerned, as available generally to any person falling within the terms of the opportunity.

(7) The requirements of this subsection are that–

(a) the assurance company concerned does not subject any person to any treatment in connection with the opportunity which is different or more burdensome than any treatment to which any other person is or may be subject, and

(b) where the terms of the opportunity referred to in subsection (5) include terms–

(i) which set out the capital requirement of the opportunity and this requirement is identified to the public in the marketing or other promotional material published by the assurance company at the time the property is available to be selected, and,

(ii) indicating that 50 per cent or more by value of the property referred to in that subsection is or is to be land,

the amount any one person may invest in the policy shall not represent more than 1 per cent of the capital requirement (exclusive of any borrowings) of the opportunity as so identified.".

(2) THAT section 730F of the Taxes Consolidation Act, 1997, shall as respects the hap pening of a chargeable event in relation to a life policy (within the meaning of Chapter 5 of Part 26) on or after 26 September 2001 be amended–

(a) by substituting the following for paragraphs (a) and (b) of subsection (1):

"(a) subject to paragraph (b), where the chargeable event falls on or after 1 January 2001, at a rate determined by the formula–

(S + 3) per cent

where S is the standard rate per cent (within the meaning of section 4),

(b) where in the case of a personal portfolio life policy the chargeable event falls on or after 26 September 2001, at a rate determined by the formula–

(S + 23) per cent

where S is the standard rate per cent (within the meaning of section 4), and

and

(b) by inserting the following after subsection (3):

"(4) Where in the period commencing on 26 September 2001 and ending on 5 December 2001 in connection with a chargeable event in relation to a personal portfolio life policy–

(a) an assurance company which is entitled to deduct an amount equal to the appropriate tax in accordance with subsection (3)(a)(i), or to appropriate and realise sufficient assets to meet the amount of appropriate tax for which the assurance company is liable to account for in accordance with subsection (3) (a)(ii), and

(b) the assurance company fails to deduct an amount equal to the appropriate tax due or fails to appropriate and realise sufficient assets to account for the amount of appropriate tax due,

then, for the purposes of regulating the time and manner in which any appropriate tax which has not been accounted for or paid shall be accounted for and paid section 730FA shall apply to the exclusion of section 730G (apart from subsection (7)) and section 730GA.".

(3) THAT the Taxes Consolidation Act, 1997, be amended as respects the happening of a chargeable event in relation to a life policy (within the meaning of Chapter 5 of Part 26 of that Act) on or after 26 September 2001 by inserting the following after section 730F:

730FA.–(1) Where section 730F(4)(b) applies then, notwithstanding any other provision of the Tax Acts or the Capital Gains Tax Acts, this section shall apply for the purposes of regulating the time and manner in which any appropriate tax which remains to be accounted for and paid in connection with a chargeable event, which happened in the period commencing on 26 September 2001 and ending on 5 December 2001, in relation to a personal portfolio life policy shall be assessed, accounted for and paid.

(2) An assurance company shall for each personal portfolio life policy in respect of which it has not–

(a) deducted an amount equal to the amount of appropriate tax for which the assurance company is liable to account in accordance with subsection (3)(a)(i) of section 730F, or

(b) appropriated and realised sufficient assets to meet the amount of appropriate tax for which the assurance company is liable to account in accordance with subsection (3)(a)(ii) of section 730F,

make and deliver to the inspector to whom it is customary for the assurance company to make a return under section 951 a return on or before 31 December 2001 containing in each case–

(i) the name, address and, if appropriate, the registered office, of the policyholder,

(ii) the amount of the gain arising on the happening of the chargeable event in relation to the policy, including details of all amounts referred to in subsections (3) and (4) of section 730D which are relevant to the determination of the gain arising on the chargeable event in question,

(iii) the amount actually deducted in accordance with section 730F(3)(a)(i) or the amount actually realised in accordance with section 730F(3)(a)(ii),

(iv) the method of payment of the benefits under the policy,

(v) if payment was made to a person other than the policyholder, details of the name and address of that person, and

(vi) details of the property which is a linked asset in relation to the personal portfolio life policy.

(3) An assurance company which fails to deliver, within the time specified in subsection (2), the return referred to in that subsection or which fails to deliver such a return which is correct may, in addition to any penalty to which it may be liable, be made liable for the payment of any appropriate tax due in respect of a personal portfolio life policy to which that subsection applies which remains unpaid. An inspector may make an assessment on the assurance company to the best of his or her judgment of the appropriate tax so unpaid.

(4) Where in connection with a chargeable event in relation to a personal portfolio life policy an assurance company–

(a) fails to deduct an amount equal to the appropriate tax which should have been deducted in accordance with subsection (3)(a)(i) of section 730F, or

(b) fails to appropriate and realise sufficient assets to meet the full amount of appropriate tax for which the assurance company is liable to account for in accordance with subsection (3)(a)(ii) of section 730F,

then the policyholder or the person to whom the payment referred to in subsection (2) was made shall be liable for the payment of any appropriate tax due in relation to the personal portfolio life policy which remains unpaid. An inspector may make an assessment on the policyholder or the person concerned to the best of his or her judgment of the appropriate tax so unpaid.

(5) Where an inspector makes an assessment under subsection (3) or (4) it shall not be necessary to set out in the notice of assessment any particulars other than particulars as to the amount of appropriate tax to be paid by the assurance company or the policyholder, as appropriate.

(6) (a)An inspector may at any time amend or further amend an assessment made on a person under subsection (3) or (4) by making such alterations in or additions to the assessment as he or she considers necessary and the inspector shall give notice to the person of the assessment so amended or so further amended.

(b)After the period of 6 years starting from 31 December 2001, no assessment shall be made under subsection (3) or (4) or no assessment made under either of those subsections shall be amended or further amended.

(7) For the purposes of making an assessment under subsection (3) or (4) or for the purposes of amending or further amending such an assessment an inspector may make such enquiries or take such action within his or her powers as he or she considers necessary–

(a) to satisfy himself or herself as to the accuracy or otherwise of the return referred to in subsection (2), or

(b) where no such return is made or an incorrect return is made, for the purposes of ascertaining the information which should have been included in such a return. (8) Appropriate tax specified in an assessment made under subsection (3) or (4) or in an amended assessment made under subsection (6) shall be due and payable within one month after the issue of the notice of assessment or the amended assessment, as appropriate, subject to any appeal against the assessment.”.

(4) THAT Chapter 6 of Part 26 of the Taxes Consolidation Act, 1997, shall, as respects the receipt by any person of a payment in respect of a foreign life policy (within the meaning of that Chapter) or the disposal in whole or in part of a foreign life policy (within that meaning) on or after 26 September 2001 be amended–

(a) in section 730J by substituting the following for paragraph (a):

"(a) where the person is not a company, and–

(i) income represented by the payment is correctly included in a return made by the person, then, notwithstanding section 15, the rate of income tax to be charged on the income shall be–

(I) where the payment is a relevant payment, the standard rate (within the meaning of section 3) of income tax in force at the time of the payment, and

(II) where the payment is not a relevant payment and is not made in consideration of the disposal, in whole or in part, of the foreign life policy–

(A) in the case of a foreign life policy which is a personal portfolio life policy, at the rate determined by the formula–

(S + 23) per cent

where S is the standard rate per cent for the year of assessment in which the payment is made, and

(B) in any other case, at the rate determined by the formula–

(S + 3) per cent

where S is the standard rate per cent for the year of assessment in which the payment is made,

and

(ii) where the income represented by the payment is not correctly included in a return made by the person, the income shall be charged to income tax–

(I) in the case of a foreign life policy which is a personal portfolio life policy, at the rate determined by the formula–

(H + 20) per cent

where H is a rate per cent determined in relation to the person by section 15 for the year of assessment in which the payment is made, and

(II) in any other case, at a rate determined in relation to the person by section 15 for the year of assessment in which the payment is made,

and

(b) in section 730K by substituting the following for the formula in subsection (1):

"(a) in the case of a foreign life policy which is a personal portfolio life policy, at the rate determined by the formula–

(S + 23) per cent

where S is the standard rate per cent for the year of assessment in which the payment is made, and

(b) in any other case, at the rate determined by the formula–

(S + 3) per cent

where S is the standard rate per cent for the year of assessment in which the payment is made.".

(5) THAT the Taxes Consolidation Act, 1997, be amended as on and from 5 December 2001 in section 904C(1) by substituting the following for the definition of "return":

"‘return' means a return under section 730FA or section 730G;".

(6) THAT the Taxes Consolidation Act, 1997, be amended as on and from 5 December 2001 in Schedule 29, column 1, by inserting "section 730FA(2)" before "section 730G(2)".

(7) IT is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the provisions of the Provisional Collection of Taxes Act, 1927 (No. 7 of 1927).

This Resolution implements the announcement of the Minister for Finance on 26 September last concerning changes to the tax treatment of personal portfolio life assurance policies. By way of background assistance to the House, the personal portfolio life assurance policies are a particular type of life policies which allow investors, with the assistance of life assurance companies, to place personal investments within a life asssur ance policy. This is referred to as the wrapping of personal investments in a life policy and hence the term commonly used for these products, namely, "wrappers".

With traditional life assurance investment products, the insurance company uses its professional expertise and discretion to invest funds on behalf of policyholders collectvely. However, there is no element of a collective investment in these wrapper products. Essentially, such a life policy is a contrived vehicle to allow the investor to gain access to take a tax advantage. The tax advantage which arises in access to the gross roll-up tax regime came into effect for domestic life assurance companies on 1 January 2001. Briefly, this means that the income in gains accruing in respect of the assets underlying a life policy are allowed to grow or roll up tax free over the duration of the policy. Tax is only imposed when a policyholder cashes in or withdraws funds from the policy. When this happens the profit on the policy, that is, the accrued income in gains, is liable to a flat exit rate of 23%. By placing selected personal assets in a personal portfolio, life policy investors could before the Minister's announcement of September last, limit the taxation of income and gains from those assets to a flat 23% and, furthermore, could defer the tax liability until the policy was cashed in or funds withdrawn from it. In addition, no liability to PRSI or levies would arise. If a high income policyholder invested directly, the tax charged on the income arising from the investment would be 42% per annum.

The resolution imposes a 20% surcharge on the profits from a personal portfolio life insurance policy. The surcharge will apply on top of the existing 23% exit tax and will apply to the proceeds of such policies paid out of life assurance companies on or after 26 September last in accordance with the statement of the Minister on that day. A 20% surcharge on top of the existing exit tax should neutralise any tax advantage from wrapping personally selected assets in a life policy, given that the top rate of income tax is 42% and the profits from personal portfolio policies will often be a mixture of income and capital gains.

The details of the resolution are set out. As the Minister said in his budget speech, he has closed off these loopholes through which the well off could reduce their taxable incomes. The personal portfolio policies are an abuse of the gross roll up tax regime for life companies. I, therefore, commend the resolution to the House.

Acting Chairman

Recent modifications have been made to Standing Orders regarding financial resolutions considered in committee. Members may make a number of contributions once they are relevant and not repetitious.

Mr. Dukes

I hope to be relevant, although as a good friend of mine would say, "looking at this resolution code is like looking into a bush". I hope I will not be repetitious.

I will take the Taoiseach at his word in the explanation he gave us of this ingenious method of wrapping. As the Taoiseach will know, I have a long history of being well intentioned towards means of plugging loopholes in our tax system.

A few issues, however, occur to me. I note there is a definitions section in this resolution and it defines many of the operative phrases but it does not define the term "property". I take it that property in this resolution can mean real estate or cash. The first place the word "property" occurs on a quick reading of the resolution is in the proposed subsection (2)(a)(i). Would it not have been useful to define the word “property” in the earlier part to put the matter beyond doubt because I inferred the meaning of the word “property” on reading through the provision?

In subsection (3)(b) of the proposed 730BA, there is a reference to the insurance company appointing an investment adviser irrespective of how such a person is described. Why is it necessary to be so unclear about that? Is there not an accepted definition of who is an investment adviser or what kinds of creatures are regarded as investment advisers?

The Taoiseach said this measure is intended to apply a special extra rate of taxation to funds coming from wrappers. I gather the tax arises when they are unwrapped.

The first reference to a rate is a formula of "(S + 3) per cent" where S is the standard rate. Is that the standard rate of taxation?

The Taoiseach

Yes.

Mr. Dukes

Therefore, "(S + 3) per cent" would be 23%.

The provision on page 6, which modifies section 730F of 1997 Act, provides that where the chargeable event falls on or after 1 January 2001, the charge is at 23%. Where the chargeable event falls on or after 26 September 2001, the charge is S plus 23%. Do I take it that means 46% and that is where the penalty begins to apply?

The Taoiseach

It is 43%.

Mr. Dukes

Yes, 43%. I take it my understanding is correct.

At the bottom of page 8, under section 6, there is a provision that an inspector may at any time amend or further amend an assessment. This is followed by a subsection which allows an inspector to make an assessment without giving notice of the assessment or any of those normal requirements. Why is it necessary to propose that an inspector can have a second or even a third bite at the cherry? Is that not a slightly unusual provision?

On page 10, the provision that amends section 730J of the 1997 Act, provides for a tax rate of H plus 20% where H is a rate determined in relation to the person by section 15 for the year of assessment in which the payment is made. Is that a penalty rate or which part of that is the penalty rate? Am I right in assuming that 20% in that formula is the standard rate and the H is a penalty rate assessed or determined for the person in question for that year?

Mr. Dukes

The Taoiseach might like to answer those questions first.

The Taoiseach

On Deputy Dukes's last question, that would not necessarily be a penalty rate; it could be the standard rate or a higher rate.

There is no standard definition for an investment adviser. There is nothing more than that in not including such a definition.

Property includes everything, real estate and cash. That is deliberately done, otherwise something might be left out. The phrase "further amend" is normal terminology in the tax Acts.

It might help clarify the position if I were to read into the record a part of the speaking note that I did not read. The personal property portfolio is defined in broad terms as a policy which allows a policyholder to select or to influence the selection of the assets which determine the policy benefits. However, the policy will not be regarded as being a personal portfolio policy where the only property may be selected. The property involves, property consisting of units in a unit trust or similar undertakings, property allocated by an assurance company to an internal fund in order to fund policy benefits, cash or a combination of any of these.

These exceptions only apply provided the opportunity to select the property concerned is widely available to the public at the time the property is available for selection by the policyholder and this wide availability must be evident in published, marketing or promotional material published by an assurance company. To ensure that exceptions cannot be exploited and the surcharge avoided, some additional requirements will apply to policies commenced or marketed from today.

The additional requirements are that the assurance company must deal with everyone interested in selecting the property on a non-discriminatory basis. Where the property to be selected is primarily land and buildings and the assurance company is seeking to raise a predetermined amount in investments, each investment made by a policyholder would be limited to 1% of the amount being sought by the assurance company. That spells out the definition of property which Deputy Dukes raised and I hope it makes the position clearer.

Mr. Quinn

The Labour Party has no problem with closing off a clearly defined tax loophole that was identified and on which an announcement was made on 26 September. What concerns me, and perhaps the Taoiseach or his advisers may be able to offer some clarification, is that the resol ution is more than just a resolution. It is the insertion of substantial legislation into the existing consolidated tax legislation. Can I take it that when the Finance Bill proper comes to be debated, this resolution will be in the Finance Bill, 2002, and that if there are any technical changes or anything else comes to light between now and then, the normal Committee Stage process will be available to the House at that time? If that is the case, and I gather from the way the Taoiseach is reacting that it is the case, I am prepared to accept the resolution.

The Taoiseach

Deputy Quinn is correct. In the normal course of events, the Minister's statement would stand until the publication of the Finance Bill and while some people were using and abusing this loophole, others were not, so this measure is by way of clarification and to give certainty now rather than waiting for the Finance Bill.

Mr. Quinn

How will it function?

The Taoiseach

It will form part of the later discussion, but so that the people involved know what is and is not included, and what side of the line they might or might not be on, the view was taken to do it this way, which is effectively a Finance Bill section as drafted, to provide that clarity and certainty.

Mr. Dukes

Will the Taoiseach indicate how common are these wrappers?

The Taoiseach

I am aware that it started off small in July but rapidly moved from one or two to several companies and individuals using it. One company alone put £40 million into it. It grew rapidly from the mid-summer period. We wanted to provide clarity in regard to the position because it was beginning to be used extensively.

Mr. Dukes

One of the new conditions that will be applied, if I understood it correctly, is that in the selection of the property, which has to be open indiscriminately to the general public, no one person may select more than 1% of the property. Can I take it that means these vehicles were being used effectively to bury income in order to shelter it from taxation, except for the exit tax?

The Taoiseach

It was from the point of view of a small number of people investing, but then they were using it to distribute their vehicles for very big money.

Mr. Dukes

Were they difficult people with nicknames?

Financial Resolution No. 1 agreed to.

Acting Chairman

Financial Resolutions Nos. 2, 3 and 4 will be taken together. The time limit for the debate on these resolutions is 60 minutes.

Mr. Quinn

On a point of procedure, will we vote on the three resolutions together or on each resolution separately?

The Taoiseach

I understand they will be taken together, but I am not sure what the Whips agreed.

Acting Chairman

Separately.

Mr. Dukes

Does that mean we will discuss the resolutions together but vote on them separately at the end of the discussion?

Acting Chairman

That is the intention.

Mr. Dukes

It is rather important because apart from my preferences in the matter, I could imagine that my party would wish to object, in the context of today's budget, to an increase in the duty on petrol. I will not get too excited about cider and perry, but my party would wish me to approve of the increase in the excise duty on cigarettes, although I have great difficulties of conscience in doing that. Since the three resolutions are of such a different nature, it would be preferable, and I am sure Deputy Quinn would agree, if we voted on them separately.

Dáil Éireann debate -
Wednesday, 5 Dec 2001