Financial Resolution No. 4: Income Tax.

Minister for Health and Children (Deputy Mary Harney)

I move:

(1) That, as respects the year of assessment 2008 and subsequent years of assessment, section 122 of the Taxes Consolidation Act 1997 (No. 39 of 1997) be amended in the definition of "the specified rate" in subsection (1)(a)—

(a) by substituting “5.5 per cent” for “4.5 per cent” (inserted by the Finance Act 2007 (No. 11 of 2007)) in both places where it occurs, and

(b) by substituting “13 per cent” for “12 per cent” (inserted by the Finance Act 2007 (No. 11 of 2007)).

(2) 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 proposes an increase in the specified rate used to calculate the taxable benefit to employees from loans provided by their employers of preferential rates of interest. Where an employee receives such a loan at a rate below the specified rate, the employee is chargeable to tax on the benefit-in-kind reflected by the difference. The specified rate, which differentiates between home loans and other loans, is reviewed annually in light of the rates——

An Ceann Comhairle

I hate to intervene in the debate taking place in the periphery of the House but must do so to allow the Minister to make her contribution.

Deputy Mary Harney

The purpose of the resolution is to keep pace with the changes in interest rates in the market over the past 12 months. If an employer gives a loan to an employee at 2% below the market rate, this represents a benefit-in-kind and is taxed accordingly. The purpose of the resolution is to take account of the increase in interest rates and therefore the increase in the benefit to employees during the past 12 months. It is estimated to raise €3 million next year and €4 million in a full year.

Deputy Kieran O’Donnell

It is generally felt that rates are due to fall early in the new year, yet the Minister is providing for increases from 4.5% to 5.5% for home loans, and also from 12% to 13%. Will this be an annual measure? Will the Minister clarify this before Fine Gael makes a decision on her position? Fine Gael feels that if interest rates are falling, there is no need for the measure. Second, if we are to implement the measure every year, it could become very cumbersome. We try to oppose increases in respect of benefits-in-kind because people are being taxed enough.

Deputy Eamon Gilmore

Will the Minister set out the current position? I understand from her that the difference between the preferential rate of interest and the market rate is deemed to be a benefit-in-kind and is therefore taxable. What tax liability applies to somebody who gets a loan from a particular source at a rate of interest other than the market rate?

Deputy Kieran O’Donnell

The Minister is quoting a rate of 5.5%, which seems to be in excess of the current market rates. How and why was the figure calculated? It does not seem to tie in with the rate currently applicable to home loans, or that applicable to commercial loans, namely, 13%.

Deputy Mary Harney

This is not a new provision; it is an adjustment that takes place annually. We are making an adjustment in light of the increase in interest rates. The measure does not apply to a large number of people. Individuals with the loans in question have, over the past year, enjoyed a very beneficial rate. We are simply taxing benefits-in-kind at the marginal rate. Health insurance, cars or holidays provided by one's employer are regarded as benefits-in-kind. The benefit that a preferential loan represents should be treated in the same way. The rate is adjusted annually in light of interest rates. The data come from the Central Bank, which provides the information on the appropriate rates.

Deputy Kieran O’Donnell

Does the rate for commercial loans or personal loans rest at 13% at present? Is the rate for all home loans 5.5%?

Deputy Mary Harney

The data used for calculating the rates are provided to the Department of Finance by the Central Bank. I presume the data apply to average market rates.

Deputy Kieran O’Donnell

Is the measure to be applied from 1 January?

Deputy Mary Harney

That is correct.

Deputy Kieran O’Donnell

It is not for the year gone by but for the coming year, in which interest rates may fall.

Deputy Mary Harney

It is for the coming year. If they fall, it will be reviewed again next year but they increased substantially this year, so people would have had the substantial benefit in this calendar year of the lower benefit-in-kind rate applying.

Deputy Arthur Morgan

The example the Minister used was a company giving a loan to an employee. I take it that is just an example and I assume a director of a company, for example, who may not be a worker in the enterprise would similarly count and that this would be across the board.

Deputy Damien English

It is acceptable if the person pays tax on the difference in profit from the interest rate he or she is charged and the market interest rate. The problem we have is that the rate which is being set will be well above the market interest rate for home and personal loans. It seems excessive and too high. We accept the principle of what is being done but it is too high and is unfair.

Deputy Mary Harney

We are taking about a range.

Deputy Damien English

It is different if it is a range.

Deputy Mary Harney

It is a range. I am going on anecdotal evidence but I believe this mainly applies to employees of financial institutions and perhaps to other employees. If one is on the standard rate of tax, one will pay 20% on the benefit and if one is on the higher rate of tax, one will pay 41% of it. One will still get 59% of the benefit, or 80% of it. There will still be a huge benefit. People will not be out of pocket.

Deputy Damien English

I accept it is treated as an income and that it can be used by banks to reward staff. The Minister said it is a band, so if the market rate is 4.75% and the employee gets the loan at 4%, does he or she pay the tax on the difference of 0.75% or up to the 5.5% at which it is being set? It is not very clear from the way it is written.

Dáil Éireann debate - Wednesday, 5 Dec 2007

Dáil Éireann debate -
Wednesday, 5 Dec 2007