There are two recommendations to Section 1 in the name of Senator Hayes, and I presume they will be taken together.
Finance Bill, 1941—Certified Money Bill—Committee.
SECTION 1.
(3) The several statutory and other provisions which were in force on the 5th day of April, 1941, in relation to income-tax and surtax shall, subject to the provisions of this Act, have effect in relation to the income-tax and surtax to be charged as aforesaid for the said year beginning on the 6th day of April, 1941.
I move recommendations Nos. 1 and 2:—
In sub-section (3), line 24, after the word "provisions", that the words "as amended by this section" be inserted.
At the end of the section, that a new sub-section (4) be added as follows:—
(4) Section 3 of the Finance Act, 1935 (No. 28 of '35) shall not apply to or have effect in relation to tenements and hereditaments in the occupation of the owner and the rateable value of which does not exceed twenty pounds (£20).
I presume we can take No. 2 first because No. 1 is merely put in to provide for the contingency of No. 2 being passed.
We will take them together.
The purpose of this recommendation, Sir, is to remedy what I have always regarded as an injustice done by the Finance Act of 1935 to property owners, and more particularly to persons living in houses which they themselves own. For income-tax purposes the valuation of a house is now calculated on five-fourths instead of on the previous rate of five-sixths. Before 1935 a person living in a house with a valuation of, say, £30 paid income-tax on £25 only, and he paid it at a much lower rate than the present one. By the Act of 1935 the then Minister for Finance raised the valuation for income-tax purposes by adding one-fourth. I want to put it, Sir, that that particular provision weighs very heavily on a very important and a very meritorious section of the community, namely, people who have bought their houses, particularly the smaller class of houses with valuations up to £20. It was considered after 1922 by the Government, and the same considerations have weighed with that Government's successor—with the present Minister himself, notably—that house purchase should be encouraged. It was considered good public policy for people to arrange with a bank or a building society to buy their houses, and I think it would be correct to say that very little could have been done to solve the housing problem but for the efforts of people to purchase their houses.
The possession of property of that kind, of course, is a good thing; it was encouraged by the State, and is encouraged by the Church, and it is good citizenship from every angle. A great many citizens of a very desirable type—I put it that way—have purchased their houses. The vast majority purchased them through banks or building societies and incurred considerable debts—responsibility which they were barely able to shoulder at the particular moment of purchase. Most of them borrowed more than half the money or undertook by weekly payments to pay off interest, rates, and some small portion of the capital. Their position in the intervening time since 1932, or even since 1935, has worsened very considerably. The rates have gone up. Within the last 10 or 11 years the rates have gone up, roughly speaking, from 14/- in the £ to a little over 20/-; the rate of income-tax has gone up from 3/6 to 7/6, and the valuation for the purpose of collecting income-tax on property has been put up artificially by the Act of 1935 which we are now asking the Seanad to amend. Generally, the repayment, apart from these circumstances, of the purchase money of houses has become more and more difficult. There is no allowance for repairs or decoration, although everyone knows that the cost of repairs and decoration has gone up very considerably.
Without going into minute calculations, the position, roughly speaking, is that a person with a valuation of £20 has had it increased for income-tax purposes from £16 to £24. Valuation for income-tax purposes has been increased by just 50 per cent. Taking account of the rise in the standard rate of tax, for every £ paid ten years ago, the owner of a house is called upon to pay £1 16s. 8d. to-day. That is a very grievous burden, and one which makes it extremely difficult for people who are struggling to do not only what is good for themselves but what is good for the State generally, that is to say, to purchase and become the owners of small houses. A fair case could be made for relief for a valuation over £20, but the shoe pinches more particularly on people who live in houses valued under £20. I submit that to relieve the burden on these people the rateable valuation for income-tax purposes should be permitted to remain at the ordinary rateable valuation, instead of increasing it by one-fourth. I put it to the Minister that it is good public policy to help persons who have made very considerable efforts to help themselves. They are people who, in the main, get no assistance from local funds or public funds. They are not the people who occupy housing schemes where an economic rent is not being charged. They are people who are struggling and who are particularly hit at this moment by the incidence of the difficulties following on the war. Although this would not be a very great measure; it would in some way tend to ease the burden upon them. A great many find themselves in very considerable difficulty in paying off the instalments on their houses, and the least that might be done would be to restore them to the position in which they were before this unfair burden was imposed in the Act of 1935.
I support this recommendation. The House will recollect that I always have been hammering away at this question, without satisfaction. I look at this from the point of view of the demesne owner— an economic prisoner who, when he wants a few pounds, has to kill a wolf. Dealing with the more immediate point, I think what Senator Hayes is asking is eminently reasonable, and I am quite prepared to accept the limitation of £20, though I would like to see the whole thing swept away. This is a most deserving class of the community—people who invest money in house property—and they are badly treated. I wonder if the Minister realised the gradual effect on these people. The combined effect of adding this one-fourth to the valuation, together with the abolition of repairs allowances, has been to increase the schedule value by 50 per cent. That is the basis, and it is most unreasonable and presses very hard on the struggling class of the community. The Minister probably will say that he cannot do anything, but I hope he will ponder this in his mind and give some relief in the near future.
I also wish to support this recommendation. We have a very extreme case in my town. About ten years ago the town was revalued, not in the regular way but in a piecemeal way over two or three years, and it did not have the advantage given to other revalued towns such as Waterford, which was revalued by special order. In that way, our valuation was increased by about 60 per cent. over a couple of years' valuation of the town. Between the increased valuation and the increased property income-tax, this has hit the people very hard. The income-tax demands on property have been increased about five-fold. I know one case—my own property: when I bought the place I paid 37/6 property tax, and the property tax on the same premises now is about £15 15s. That is general all over the town, especially by reason of the increased valuation and this increased income-tax. If any relief is given generally, it certainly would be a great relief to the town from which I come.
Two amendments in legislation were brought in in the last few years—one was the Finance Act of 1935 in relation to this, and there was also another Bill brought in for revaluation in the country. There were two arguments used in relation to these two cases. I wish to point out at the beginning that, where Senator Hayes bases this on what I may call social good—that it is eminently desirable that the State should be just to each individual—the argument for revaluation was that a great many places were overvalued in some parts and undervalued in other parts. That was the case put up by the then Minister for Finance. The implication in his argument in regard to the amendment referred to in the Finance Act of 1935 was that, whereas the nominal valuation of a place was about £20, £30 or £50, the actual rent drawn from it was something enormously in excess of that. That may be the case in a great number of instances but, as far as the State is concerned, when it amends legislation it should assure itself that it will not result in injustice in any individual case.
I have no personal interest in this matter, but will give one instance I know of—that of let houses. If you have a house with a valuation of £20 or £30 a year, I understand it is very easy to let that house at a rent which will pay your outgoings, plus some fruits of the original capital. When you come to a larger house—I mention one I know of—you can let up to £120 a year quite easily. If a rent is required to cover outgoings and give a reasonable, or not too reasonable, return on the capital involved, once it goes to a higher sum, it is very difficult Take the case of a house in a Dublin suburb, the valuation of which is £83 a year, and the ground rent £17 a year. Consider the initial outgoings which have to be met by the owner by reason of his ownership.
I think the rates on the £84 valuation work out at something like £87. On top of that there is another £17 ground rent. That makes £104 which he has to pay out of his own pocket every year right away. Apart from that, in the ordinary course the owner of the lease of that house has to pay for all external repairs, which can mount up, as the Minister probably knows, quite easily to £50 or £70 a year. If you put it at £50—and I do not think that is excessive in a house which was built more than 20 years ago—that means he has to calculate on an outgoing every year of £154 on that house, before he gets a penny interest on the money he invested in it. The Minister comes along and estimates the income that man derives as four-fifths—if I remember rightly—of £84; that is to say, he assumes that he will get a rent of about £254 a year on that house. Of course, I am not calculating this exactly or working out elaborate sums.
I ask the Minister, whether he knows anything about this or not, what he thinks is the prospect of letting a substantially large house in a Dublin suburb at £254 a year. Would there be any chance of doing it? In the case that I am referring to, the Minister actually is charging a person on an income which the person does not receive and has not any chance whatever of receiving. There are houses, to my knowledge, in which the original outlay on the house might have been £4,000 or £5,000 or more. They paid that out and now they are drawing no net income on the property that they bought with that money, and the Minister came along and arbitrarily in 1935 assumed, for the convenience of taxation, that the valuation put on that house of £84 a year was less than the real value. That was the argument put forward for this particular change. In putting that argument forward, there was the implication that the argument was universally true. In relation to a whole type of property in this city—I do not know about other parts of the country—that is completely untrue. In the amendment of the Finance Act, 1935, it worked out—I am not saying in a proportionately great number of cases, but in a great number of actual cases—as an unjust act performed by the Government against individual persons.
There is a section in the Act of 1935 to allow the Revenue Commissioners to reduce the assessment.
I have one case in mind in which they did not reduce it.
Have they been asked?
I am not the owner; I have no financial advantage in this whatever.
Section 3 of the Finance Act, 1935, sub section (5) reads:
"Where an inspector of taxes or such other officer as the Revenue Commissioners may appoint in that behalf is of opinion that the annual value with reference to which an assessment of tax is made on any tenement or rateable hereditament in pursuance of sub-section (1) of this section exceeds the annual rent at which such tenement or rateable hereditament is worth to be let from year to year, he may, notwithstanding that there has been no appeal under Section 5 of the Finance Act, 1929 (No. 32 of 1929), against such assessment and notwithstanding anything contained in sub-section (6) of the said Section 5, at any time before the end of the year of assessment grant relief by reducing such assessment and charging the tax on the amount on which it would, in his opinion, have been charged if it had been assessed with reference to the said annual rent instead of the said annual value, and the said assessment as so reduced shall be final and conclusive for all purposes."
Does not that refer to the annual rent and not to the annual profit rent?
The annual rent.
What are the instructions to the Revenue Commissioners? When you go to deal with them they bring out all sorts of documentation files, with mimeographed strips stuck into them. Take the house to which I am referring. I suggest that the taxation imposed is excessive and against natural justice, unless the annual rent charged to the tenant is something like £254 per year. That is the rent that would be required to produce the net income which would be appropriate to the amount of taxation charged. What I want to get at is the net rent—the rent which has deducted from it the rates paid, the ground rent paid and a fair allowance for the repairs requiring to be done from time to time. The Minister tells me that the Revenue Commissioners, to use that old cliché of which Government Departments are so fond, "consider sympathetically" any case which is put forward. The rent of such a house, on paper, might be £230 a year if the owner were lucky enough to get a tenant. But if you say the rent is £250 and that he is only paying £84, multiplied by 5 over 4, it has no relation to the facts. If the Minister says that the Revenue Commissioners, acting on instructions from the head of the Finance Department, take into account all these modifying factors which should be taken into account, I shall be glad to inform interested parties that they should take the earliest opportunity of making themselves a nuisance to the Revenue Commissioners.
I am informed that hardly a month in the year passes in which the Revenue authorities, either local or at headquarters, are not presented with cases of that kind. They try to reach a reasonable figure, in discussion with owners of property of the type mentioned by Senator Fitzgerald, as representing the rent which that person would receive. It is open to the proporietor of such a piece of property to go to the Commissioner of Valuation and ask him to reduce the valuation. I have, personally, known that to be done. The Commissioner has from time to time reduced the valuation of property which, in his opinion and in the opinion of the owner, would not command the rent which it was possible to get formerly. There is an appeal from the Commissioner of Valuation to the courts. In addition, there is in these cases an appeal directly to the Revenue authorities. There is frequent reference to the Revenue authorities in cases such as the Senator has mentioned.
I agree with Senator Hayes in the sociological arguments which he advanced. What my views were as Minister for Local Government with regard to housing are well known. I made an effort to get housing improved in the country and I made a special effort to get as many persons as possible to purchase their dwellings. I have not changed my views on that aspect of the housing question but I have to deal with the matter now as Minister for Finance and that means that I must look at a variety of things from a different angle.
And elimination of conscience.
I do not think so.
Not entirely.
Not to any extent, so far as my experience has gone up to the present. Senator Fitzgerald referred to natural justice. Having heard the arguments on both sides of this question since this amendment was first brought in to the Finance Act of 1935, I think natural justice is on the other side. We want to be just to everybody, and why should the owner of property, whether he lives in his house or whether he rents it, have an advantage in income-tax over the person who, instead of buying his house or investing in house property, puts his money into some other security? The person who invests in stocks or shares, or in some industry, pays full tax on the yield of the money he invests. The man who invests in Ireland in house property is not, even with the five-fourths arrangement, paying anything like the same amount in income-tax as the person to whom I have referred, though the annual value of the house of that individual is properly treated as part of his income. If the money were invested in any other way, it would be liable to full income-tax. In Ireland, our system of valuation was designed for poor law purposes. The valuation of house property to-day has no relation to the real value.
I have argued that the other way. I gave the Minister a specific case, and I maintained that, with regard to that type of house, there is no relationship between the valuation and the rent. In this case, the man is not drawing the income which is implied by the valuation. The Minister's implication is that a house valued at £20 may command a rent of £50, £60 or £70. On the other hand, there are cases in which the valuation is £90, and the net rent may be nothing.
The valuation of house property to-day is based on the Griffith Valuation of the last century, which was fixed for poor law purposes. It has no relation to real value. If the house to which the Senator has referred had been valued at its proper letting value at the time, the valuation might have been £150 instead of £84. With the exception of a couple of towns, valuations in this country are completely out of date. Many houses in the country, and some in Dublin, have not been valued for a great many years. There are, of course, revaluations going on all over the country, Dublin included, but the basis on which the commissioner and his staff work is still the old basis, and it is entirely out of date. If and when a new basis of valuation is introduced, the valuers will take into consideration the profit value to the individual concerned. That will mean, presumably, a reduction in the valuation of premises of the type Senator Fitzgerald has in mind, but, generally speaking, it will probably mean an increase in the valuation of all classes of property. The present basis is antiquated. It has no relation to the facts, and the owner of property—particularly the person who lives in his own house—gets an advantage over every other class of the community who pays income-tax.
Does that apply to the people who live in new houses of £20 valuation?
In fact, they do not pay income-tax if they are purchasing their houses. Take, as an example, a house of the type the Senator has in mind, costing £650. I think that person would have to put down £150. He would borrow £500 from the bank. The value of the house would be £20 plus one-fourth, that is, £25 in all. He would have to pay bank interest and an allowance would be made to him in respect of that bank interest. Then the ground rent of the house, whether £5 or £6 or possibly £8, is taken into consideration. When these allowances are totted up, he does not pay any income-tax on the house if the value is about that figure. There is no direct tax on that house if the value is only about £20. I am sorry that I cannot accept the Senator's recommendation. I should like, from the sociological point of view, to do anything I could to give a concession in the case of dwelling-houses, but there is a strong case to be made against giving an individual who owns his own house or who lives in his own house an advantage that does not accrue to every other class of the community paying income-tax. In addition to that I understand that if the recommendation were accepted it would cost me this year very close on £100,000.
I am very much surprised to hear from the Minister that if a man who bought or built his house had instead invested the money in Irish industry he would pay the full income-tax. He seems to have entirely forgotten that it was the policy of his Government to give a special concession to certain investments in Irish industry and that a lower rate of income-tax was fixed. That concession was not given to the person who invested his money in a house. Instead of that, the valuation was increased by one-fourth for the purposes of income-tax. Now we are told by the Minister that there was a special advantage for the person who put his money into housing. I do not think myself he has made a case to show that there is a special advantage. I do not claim for a moment that a man who has bought a house, and who lives in it, should pay no income-tax, but I think it is unfair that he should pay income-tax on more than a reasonable percentage of the money he has invested in the house if he has all the time resided in it. I could give the Minister quite a number of cases which would illustrate the hardship inflicted on such persons since five-fourths of the valuation was taken as the basis for income-tax. If a house is bought in the open market for, say, £2,000, and if there is no allowance for repairs, it seems to me that £80 would not be too low a figure on which to expect such a man to pay income-tax. I could give the Minister plenty of cases where houses have been bought in or around £2,000, where the owner has to meet all outlay on upkeep, repairs and decorations and where, in addition, he has to pay income-tax on a considerably higher sum—£l00 or £120. He cannot take advantage of the section read by the Minister because that only applies to cases where the house is rented to another person.
It applies in every case.
Do I take it from the Minister that if I could find a house which cost £2,000, and on which income-tax is charged on £100, there would be any possibility at all of getting the concession because I do not think there is any hope at all from such information as I have obtained? I have known people who endeavoured to obtain it and they got no comfort whatever. They were told that the house could be rented and that if they had chosen to go into the market, they probably could have got a much higher rent for it. I am taking the Minister's own argument. I am accepting the Minister's point of view that a man who puts £2,000 into a house should not be better off than a person who puts money in any other investment, but I do not accept the contention that he is better off. It may be that he could only get 3 or 4 per cent. on that amount in a safe investment. Of course, he might get a higher return if he took a chance with an industrial investment where the dividends might fluctuate from one year to another. I am pretty well certain that the incidence of the tax on the five-fourths of the valuation does not work out as the Minister states.
The recommendation, however, deals with a particular class of case to which Senator Hayes drew attention. That is the type of small man who was induced, rather than rent a house, to build or to buy a small house costing £500, £800, or a maximum of £1,000. In most cases he had to find 25 per cent. or 33? per cent. of the cash himself. I believe that some companies did not insist on more than 25 per cent., but then the man had to take out a life insurance policy. After he has been paying for ten or 12 years, he will have reduced the amount of the loan to ? or ½ so I think it is a mistake to assume that he does not pay income-tax on a considerable portion. The real point, however, is that we want to get a far larger number of houses suitable for housing small families. It is highly desirable in the national interest that people should be encouraged in every reasonable way to buy houses or to undertake the building of them. In 1931, income-tax was 3/6, the valuation was normal and the rates were considerably lower. Ever since then, the position has become harder and harder and it is more difficult than formerly for a person who wants to buy a house. I suggest to the Minister that, apart from the injustice to individuals, it would be better policy for the State to have kept the charges on that type of house lower. That is the reason I hope the Seanad will pass this recommendation, even though it may not be finally accepted by the Minister, as indication of the fact that we think that something should be done for the owner of that type of house.
I think Senator Douglas has made a very important point. People who live in these houses, the owner-occupiers of these houses under £20 valuation, were induced to buy. The Minister agrees that an inducement was held out to them to buy and that they were doing something in accordance with public policy. About that there was no disagreement between Parties in the State. Actually, subsidies were given for houses with a certain superficial area so as to ensure that the valuation would not be more than £20. These people by taking the plunge and taking the responsibility of going into these houses did relieve the burden upon the local authorities and upon the Government to provide houses for certain other people.
I want to deal with one point that was mentioned by the Minister. He said that this concession would cost him £100,000. Just before he said that it would cost him £100,000 he explained very genially, as is his custom, that these people were not paying income-tax. If it is going to cost the Minister £100,000 to remit one-fifth of their tax they must be paying a certain amount of income-tax. There may be some people who are not paying income-tax because their total income does not reach the level necessary to be assessed for income-tax, but the people who are in these houses now find themselves in a position of great difficulty, and they are in that position because they were induced to go into these houses in accordance with public policy. I said before that income-tax is a fair tax, and I do think it is a fair tax, but a man should not be taxed on income he has not got. I think that these people are made to pay tax on income that does not really exist at all. The analogy with people with money invested fails on two grounds, tor if it is an Irish investment a certain amount of tax would be remitted, whereas when money is in an Irish house the tax is increased. A house is surely as good an investment from the national point of view as any other. That is one point.
The second point is that the person who pays income-tax on an investment only pays on the dividend he actually gets, whereas in this case a man who is struggling with rates and repairs and is made to pay back interest on the capital that he has borrowed is deemed to be able to make a profit rent of one-fourth more than the valuation. I think that is a fictitious figure, so that he is made to pay tax on income which in fact he has not got. It was put that if some of the £100,000 were left to him so that he could keep the house in proper condition the money paid out in wages and materials would do very much more good, from the national point of view, than the £100,000 given to the Minister. I think that even the Minister knows that himself, but he is in the position that he has to make a case for finance. Great injustice is being done to these people. The position is being made very difficult, and if they were left with the money it could be put to much better national use and employment than when the Minister collects it.
My object in speaking is to ask the Minister to keep an open mind on this matter. The Minister is a fair man. He is certainly an intelligent man, if I may say so with all humility, because he seems to understand very well the official side of this question much more so than his predecessor, whom I could never get to understand the question at all. He simply repeated what I felt had been told to him by officials. As the Minister well knows, there has been a certain amount of mitigation of this in respect to small properties, but even there there is no set-off given for management. Where there is the cost of management surely the Minister must admit that the management of the houses and the collecting of rents and the rates and the repairs is in no way comparable with the collection of dividends.
On that point I think the Minister cannot sustain a comparison so as to make a similarity between income derived from investments and the tax in Schedule A on the owner of property. I am sorry to be so persistent on this matter, but I think the Government has given a raw deal to the public in this whole matter. Take the question of repairs. Senator Hayes and Senator Douglas both emphasised that the owner is being taxed on money that he does not in fact get. In the case of dividends from securities he gets the money. There may be a great deal taken off, and probably he is only left with a small amount, but he actually gets the cash. The whole question of repairs is submerged in the statement that valuation includes an item for repairs. Under the old system the allowance for repairs was settled. It was one-sixth, and if you could show that you spent more than one-sixth you were allowed the additional amount. That was an attempt to place property income on the same basis as investments, but what is done now? There is an unstated amount hidden away in the valuation. I wonder has that point of view been adverted to by the Minister. Quite likely it has not, because in this case I am afraid his advisers are following the line of simplicity. I do not blame them.
The revenue authorities do not want to have to deal with these claims, and I feel certain that the Minister is being told that this is going to make things very complicated if you take into consideration the question of repairs, and it is only natural that you should. I do hope the Minister is going to look at the question de novo, and if he does I am sure he will be convinced that great injustice is being done not only to those who hold or occupy property, but a still greater injustice to those who let property and who have very heavy expenses for repairs and who are being taxed on money they never receive. If the Minister will say it is unfair to tax people on money they never receive he cannot possibly stand over this tax under Schedule A.
I only want to get a little elucidation. The Minister gave an example of a house that cost £650. You borrowed £500 and provided £150. In order to get relief from the tax you had to have a certificate of interest for £25 from the bank. Suppose as well as providing £150 the builder of this house also provided the £500 he can produce no banker's certificate for interest. How was he to get relief then?
I think it is generally agreed that the idea of increasing the valuation to five-fourths was to make up for the low valuation of property which existed for so long. I would like to know from the Minister whether new houses are being valued strictly in accordance with the Griffith valuation system, because in many parts of the country there is a feeling that new houses are being valued on a newer basis. If it is true that they are being fully valued then, obviously, a certain section of the community is being made to bear an undue burden. In Galway, particularly, where the rates are as high as 30/- in the £, that tax, added to this one-fifth increase in valuation for income-tax purposes, presses very heavily on the owners of houses, especially of new houses, that is, of course, provided the houses are fully valued, as so many believe they are. I would like to have the Minister's view on that—whether they are being valued on the Griffith system or whether they are being valued on a newer basis.
There are two classes of people concerned in this recommendation of Senator Hayes. One class is of people who have bought their houses and who have completed purchase. The other class is of people who have bought their houses but who have not completed payment for them. We all accept the principle of income-tax. Therefore the first group is automatically ruled out of any particular sympathy. The second group, in my opinion, do not suffer unduly. Why I say that is that I happen to have experience of it, because I built a house myself, and built it, as most people build, by getting money from an outside source. On each occasion that I complained to the income-tax people about this increase in valuation I was told that it made no difference ultimately—that the interest charges would cover it. I found out that that was true. When the receipt for the interest was brought in, it covered the increase for income-tax purposes, and I was left just where I started. So that really, in regard to that second group, there is no injustice at all. I think the Minister is correct when he says that even if this recommendation were accepted no relief would accrue to the people who have bought their houses and who have not completed payment for them—which I believe is the section of the community which Senator Hayes mainly has in mind.
Might I ask the Minister if he will say, when replying, whether in the case of two identical houses which, say, were built this year, one in Waterford and the other in Galway, the valuations would be different?
I understand that that is so: that the valuations are on a different basis. Dublin and Waterford have been revalued on what was regarded, at least in 1913, as the up-to-date basis of valuation, that is, taking into account the profit rent.
Does that apply to Dublin?
Yes, when Dublin was revalued in 1913; but I understand there were allowances given by the then valuer that did not at the time bring the valuation up to the 1913 standard, as was originally intended. What the allowances were I do not know. I could find out if the Senator is particularly interested, but there were special allowances given all over Dublin. There was a certain arbitrary figure struck off the valuation of the property that had been arrived at by the valuer. That figure —whether it was 5 per cent., 10 per cent., or 20 per cent—was struck off, and they simply took an arbitrary valuation. That has been in existence and that basis has been worked on since 1913. In Waterford there is a newer basis, a more up-to-date basis, of the profit rent, or what was regarded by the valuers of the day as the profit rent. There is to a certain extent an injustice being done to property owners in Dublin and Waterford cities because they are bearing a higher rate of tax and higher expenses than other parts of the country that have not yet been revalued.
Is not Waterford exempt from the five-fourths rule?
It is, yes.
Dublin is not.
No. The valuation basis in Waterford was much higher—
I know that.
——than the one arrived at in Dublin in 1913. There is to that extent a certain injustice being done in these cases and that was one of the reasons that induced the Government to bring in the Valuation Bill that is on the Order Paper of the Dáil for a long time. I have two typical cases—actual cases— that were given to me by my staff on this question of house valuation and the five-fourths. It is a matter of interest, perhaps, for the Seanad: A.B. is tenant of a house. Poor rate valuation is £20. He pays rent of £70 to C.D. and is responsible for rates. If C.D.'s expenditure for repairs is taken at 20 per cent., he will receive a net income of £70 minus £14, that is £56. C.D. although receiving a net annual income from the property of £56 is only assessed to income-tax, Schedule A, on the sum of £25, that is, £20 plus the one-fourth. If one asks A.B., who has £800 invested at 4 per cent., and is assessed on the income-tax thereon, £32, whether C.D. is being fairly dealt with as regards the assessment to income-tax on his house, the answer will presumably be: A man who pays income-tax only on £25 when the income is £56, is very lucky. If A.B., considering it to be disadvantageous to continue paying rent, decides to purchase the house and in fact purchases the house in question from C.D. for £800, what is now the position of A.B. as owner-occupier? A.B. is now the landlord, but he has a better tenant, vis-a-vis his position as landlord than C.D. had.
Question.
He has himself as tenant. He has no difficulty in collecting his rent. He is on the spot to ensure that the fabric of the house is not abused. If C.D. were not harshly treated when he was assessed on £25, still less has A.B. a grievance if he is assessed on the same amount.
Before the Minister leaves that, this is a house of £20 valuation for which a tenant pays £70 plus rates; that is to say, in Dublin, he would be paying £91 for a house valued at £20. I would like to see it.
There are examples to be had.
It is a very rare example.
Rare, in Dublin.
Very rare.
But pretty common in other parts of the country.
Really?
Yes, houses of £20 valuation for which a tenant pays £70 rent or more are fairly common in the country.
Does the Minister not know that if the occupier puts a few packets of "Quaker Oats" in the window the landlord has to pay the full amount? In this case, they call the premises a shop, although to the knowledge of the country it is simply a nominal £50 worth of stock, put in in order to get it at wholesale prices. A negligible trade is done, but the landlord is at once charged on the full letting value.
I got a note on the case mentioned by Senator Douglas, when speaking on the Second Reading, and, with the permission of Senators, I will read it:—
"The normal salaried man whom the Senator pictures would buy such a house for £650, of which sum a building society would advance £500, repayable over 20 years at the rate of £44 per annum, the rate of interest being 6 per cent. per annum. The poor rate valuation of such a house would be about £18, and the ground rent would be about £6. In the first year, the purchaser's income-tax liability in respect of the house would work out as follows:—Poor rate valuation, £18, multiplied by five-fourths, £22 10s. 0d.; deduct ground rent, £6, and building society interest, £16 10s. 0d., £22 10s. 0d. The tax charged on the house, therefore, is nil. Now, the interest for the first year being £500, at 6 per cent., or £30, and since only £16 10s. 0d. of this interest has been allowed in the schedule Assessment, the balance, £13 10s. 0d. will be deducted from the assessment on the man's salary."
Do I take it that the Minister and his Department consider that 6 per cent. is a reasonable rate of interest in those circumstances? I do not. I could give him plenty of cases where it was much less.
It continues:
"If a point of time is reached when most of the loan is paid off—that is, towards the end of the 20 years—it might be said that at that point of time the purchaser is not the young married man pictured by the Senator in his opening remarks. At least, however, at this latter point of time it will not be too much to assume the purchaser will have three children, for each of whom he can claim the allowance of £60, under the present income-tax law. If he had paid off his loan at this point of time, his earning would require to exceed £479 10s. 0d. before he is personally liable to income-tax. To pay at the 7/6 rate, his earnings would require to exceed £604 10s. 0d. An individual with £604 10s. 0d. from his employment, who at the same time owns his house of poor law valuation of £20, is not regarded as a fit subject for special consideration in regard to income-tax."
It is a great pity that the Revenue Commissioners cannot write propaganda for general election campaigns! No Government could ever lose an election with their assistance—they would prove anything!
It would seem to be disadvantageous to put your own money into the building of a house, because if you put your own money in, you will have to pay income-tax, while if you borrow the money and produce a banker's certificate you will be given the allowance. Is that right?
That is correct. If the Senator has a case in mind where the person has the money to invest in other property, why should he not pay income-tax?
But not at the higher rate.
If he left his £500 invested in other property he would be drawing interest from it, whereas if he put it into his house he would have to pay income-tax.
Does he not save himself by putting it into his own house instead of borrowing the money at a higher rate of interest and investing his own money at 3½ or 4 per cent.?
Is the recommendation being pressed?
Yes, Sir.
The Minister has intimated a desire to intervene for a moment before the division is taken, if there would be no objection.
I am afraid I misled the House with regard to one point. I said I would lose £100,000. I do not know exactly what I would lose. What I should have said is that I would lose £100,000 if I took off that additional amount.
On all valuation?
Yes.
Recommendation No. 2 put.
The Committee divided: Tá, 21; Níl, 19.
Tá
- Alton, Ernest H.
- Barniville, Henry L.
- Baxter, Patrick F.
- Campbell, Seán P.
- Counihan, John J.
- Crosbie, James.
- Cummins, William.
- Douglas, James G.
- Doyle, Patrick.
- Foran, Thomas.
- Hayes, Michael.
- Honan, Thomas V.
- Keane, Sir John.
- Lynch, Eamonn.
- MacDermot, Frank.
- McGee, James T.
- Madden, David J.
- O'Connell, Thomas J.
- Parkinson, James J.
- Rowlette, Robert J.
- Tierney, Michael.
Níl
- Brennan, Joseph.
- Byrne, Christopher M.
- Concannon, Helena.
- Goulding, Seán.
- Hayes, Seán.
- Johnston, Joseph.
- Kehoe, Patrick.
- Kelly, Peter T.
- Lynch, Peter T.
- MacCabe, Dominick.
- Mac Fhionnlaoich, Peadar
- (Cú Uladh).
- Magennis, William.
- O Buachalla, Liam.
- O'Dwyer, Martin.
- O'Neill, Laurence.
- Nic Phiarais, Maighréad M.
- Robertson, David L.
- Ruane, Thomas.
- Stafford, Matthew.
Tellers:—Tá: Senators Crosbie and Doyle; Níl: Senators Goulding and Kehoe.
Question declared carried.
Recommendation No. 1, in the name of Senator M. Hayes, agreed to, consequentially.
The following recommendation appeared on the Order Paper:—
At the end of the section, that a new sub-section be added as follows:—
(4) Income-tax shall be payable on the allowances payable to members of the Oireachtas.
Recommendation No. 3, in the name of Senator Sir John Keane, appears to me to be out of order, for the reason that it is irrelevant to the Bill. The recommendation is, in effect, an amendment of sub-section (4) of Section 3 of the Oireachtas (Allowances to Members) Act, 1938. The recommendation may not, therefore, be moved to this Bill.
Question proposed: "That Section 1, with recommendations, stand part of the Bill.
I would like to ask the Minister whether, since he became Minister for Finance, he has ever had occasion to examine the general rules applying to income-tax, which I think are mainly based on the rules and cases set out in the Act of 1918. I would suggest to him that it would be very profitable and interesting if he were to study all the methods by which assessments were made and the allowances which were permissible and those which are not, and see whether a case could not be made for quite a number of adjustments, having regard to present-day circumstances. I will give one instance where an improvement might be made. If a limited company finds it desirable—as a great number have found it desirable in the last two or three years—acting on the advice of the Government to obtain substantial overdrafts in order to lay in stocks, in many cases the banks very properly have asked for a debenture. Although that debenture brings in a certain tax to the State the Revenue Commissioners do not allow it, and they treat it as capital expenditure, even though the loan may be temporary and only for the purpose of covering a floating overdraft, which for a considerable part of the year may be nil. I think that is a great mistake. If new capital is added to the business, it is only reasonable that it should be treated as capital expenditure, but in the case of a debenture to be given to a bank the old rule has held for a long time.
In regard to subscriptions: At the present time appeals are being made for substantial subscriptions, not only to the Red Cross Society but also to the Local Security Force, and in some cases I believe that appeals also have been made in connection with the A.R.P. services and other State or semi-State services. It seems to me that a certain type of subscription from business, where it exceeds £l, should be allowed as an expense.
At the present time it is allowed if it is definitely for the purpose of the business or if it can be shown that it is definitely for the benefit of employees. I suggest that the facilities given by the Local Security Force, Air Raid Precautions and Red Cross Society are for the benefit of business generally. This is a case where the public might be induced to give considerably higher sums if a reasonable amount were allowed for the purposes of income tax. If that firm gives £100 to the Red Cross and if, by any chance, they had an excess profit, the State will charge them £75 tax on the £100 they gave to the Red Cross.
I have not gone into the rules and regulations to which the Senator has referred. It would be a very big undertaking, requiring a great deal of time, and that time is hardly likely to be available to me under present circumstances.
Would the Minister consider the setting up of an expert committee?
It is hardly fair to expect a Minister to discuss points of such importance when raised without notice.
I do not want to press the Minister for a decision at all. This is the one opportunity we get of ventilating certain matters and all I would expect the Minister to say would be that he would look into the matter.
As I understand the proposal, a firm exploiting the people and making excess profits could convert their action into a virtue by handing over portion of these excess profits to the Red Cross or a similar organisation. That is an aspect of the matter which I hope the Minister will bear in mind. We had an example of this type from a philanthropist—a member of the Oireachtas—who wanted to avoid income-tax and get credit for being charitable.
I do not promise that I shall make the examination Senator Douglas suggests. I find it hard to keep abreast of my work at present. An examination of the kind suggested, if it were to be made in a thorough-going fashion, would take more time than I can possibly give to it at present. The cost of raising a debenture seems to me to be a capital charge which is justly subject to income-tax. As regards subscriptions, they are an entirely voluntary matter. There is no obligation to subscribe except the moral obligation we all have to assist the projects in which we believe and which we think are good for the people and the country. I do not see why any individual or company should seek special consideration because of subscriptions of that nature to public objects.
Section agreed to.
Section 2 agreed to.
SECTION 3.
(1) Where an individual has paid under the Income Tax Acts by deduction or otherwise, or is liable under those Acts to pay, income-tax, or income-tax and surtax, for any year of assessment in respect of any part of his income arising in a country to which this section applies and shows to the satisfaction of the Revenue Commissioners—
(b) that he was, prior to the said year of assessment, resident in the said country to which this section applies for a continuous period of not less than ten years or for a number of discontinuous periods amounting in the aggregate to not less than ten years, and
the Revenue Commissioners may grant to such person in respect of the said year of assessment such relief as is in their opinion just, but not exceeding whichever of the following amounts is the lesser, that is to say, one-half of the amount of his Irish income-tax for the said year of assessment or the amount of external income-tax paid or payable by him in the said country in respect of the said part of his income after deduction of any relief to which he may be entitled in that country.
I move recommendation No. 4:—
In sub-section (1), page 4, that paragraph (b) be deleted.
My object in putting down this recommendation was not so much to get it accepted in the form in which it is down as to bring to the Minister's notice the hardship caused—a hardship which has existed for a long time—by the refusal of the Eire Government to allow Dominion income-tax relief. If the Minister would go into the history of the matter, I think he would find that it rather slipped through in the Adaptation of Enactments Act and it has remained so ever since. It does seem, on its face, unjust that, while you have got relief against British tax, you do not get relief against Dominion tax. I do not want this debate to widen into a discussion of whether we are, or are not a Dominion, but it is somewhat hard on people who have been in the service of the Dominions and who, for reasons sentimental or otherwise, have investments there that they have not in the past been allowed any relief on account of Dominion income-tax, while in Great Britain there is relief. The Minister will, of course, tell us that this whole section is devised to meet special circumstances arising out of the war. I really do not ask that this Dominion income-tax relief should apply to the wider extension of the word "Dominion", arising out of the war, in the form of the United States, but I do wish the Minister would, in the slack season—if the Minister for Finance ever has a slack season—give sympathetic consideration to the injustice caused to these people who have held investments for years in the Dominions, by their not being allowed any relief in respect of income-tax paid there.
The double income-tax relief arrangement with Great Britain is reciprocal, and I think we get some benefit from it. I do not think that there could be an arrangement with any of the British Dominions on a residence basis.
The British have it.
We should gain but, in all probability, none of the Dominions would gain by such an arrangement. It is unlikely that any Minister for Finance would bring in such an amendment within a reasonable time unless it were the result of a reciprocal arrangement. That is not likely. The change in the regulations introduced in this section does not necessarily arise out of the war. It was considered years ago by my predecessor and, I think, by his predecessor. It was introduced to meet the case of people who spent the greater part of their lives in the service of industry outside the country or in the service of some Government abroad and who wished to come back and live here on their pensions or on their income. I thought it was desirable to get these people back to the country, and, therefore, I introduced this amendment of the law. A number of cases were brought to my notice by members of both Houses. Some of the persons concerned were already living here, even though it was very expensive for them to do so in the circumstances. I thought it was desirable to attract as many persons of that type back to the country as possible, so that we should have the benefit of their incomes and their earnings.
The cases provided for in the section have not been arranged on a reciprocal basis?
No.
Would the Minister be prepared to explore with the Dominions the possibility of a reciprocal arrangement such as exists in the case of Great Britain? It is hard that those who, for reasons of association, have invested money in the Dominions—very often in the form of mortgages, which are not easy to realise—should have to pay double income-tax. The matter has become rather pressing only of late. Some of these countries had only very small income-tax until the outbreak of war. Now, they have an increasing tax and it is imposing a burden upon these people. There is a tendency to make revenue primary to equity in the whole of the tax code. Believing the Minister to be a fair man who would not like to have injustice done, I think he might consider the examination of this whole question.
Mr. O Ceallagh
I shall certainly look into it but I do not think there is much likelihood of anything being done while the emergency lasts. In any case I doubt if any of the Dominions would be prepared to make such a reciprocal arrangement with us.
Recommendation, by leave, withdrawn.
Sections 3 to 5, inclusive, agreed to.
SECTION 6.
Question proposed: "That Section 6 stand part of the Bill."
I know that the Minister does not like being asked to supply information without notice but I presume he must have given consideration to this section and I would be glad if he could tell us why persons who are in professions and, as stated in the section, require no capital in order to carry on their professions, are to be allowed to make excess profits whereas no other section of the community is allowed to do so. Wages must not be increased, directors' fees must not be increased, a business, whether a partnership or a limited company, must pay excess profits or excess surtax but under this section it is quite clear that a person carrying on a profession "in which either no capital expenditure or only capital expenditure of a comparatively small amount is required," is to be exempted. I think it extremely unlikely that, during the present emergency, professional people will be able to increase their incomes just as I think that at the present moment it is extremely unlikely that the majority of traders will be able to increase their incomes. If it is unlikely that they will increase their incomes, it seems all the more reason why you should include them within the provisions of this part of the Act so that you can catch any odd one who does happen to make excess profits.
The system of taxation imposed by this Bill, taken in conjunction with the Emergency Order No. 83, in effect means that there are to be no increased incomes without excess profit taxation except in the case of professional men. There seems to be an idea that it is only a professional man who has to depend on his qualifications or his brains in order to make money. I think that applies to a very large extent also to people at the head of a business. Again, a man in business has to put up a large amount of capital, and that capital enables him to employ a considerable number of persons. The professional man does not require to put up capital. It is true that he has spent a certain amount on his education, but he rarely gives employment to many people, and if he does happen to make substantial excess profits, I do not see for the life of me why he should not have to pay tax on them.
The principle underlying the relief that is given to professional men is that it is unlikely first of all that professional men would earn excess profits.
If so, could they not be included amongst those who have to pay tax on excess profits without any hardship?
There was a principle adopted in the excess profits code generally that professional men who earn their incomes by their own skill, by the exercise of mental and intellectual ability, should not be subjected to this excess profits tax. If they do earn somewhat higher income at any period, they do so by the exercise of their talent. The harder the work, the greater the exercise of their talent. That is why these professions were given special consideration.
Does the Minister not think that the same argument applies to Ministers?
I think it would.
It applies to business people also.
Question put and agreed to.
Sections 7 to 17, inclusive, agreed to.
SECTION 18.
Question proposed: "That Section 18 stand part of the Bill."
There is a very considerable section of the community —by no means people of strict puritanical views—who feel very strongly about the whole question of raising revenue from what I might call the vices of the people. Looking at the thing realistically, I do think we ought to differentiate between the man who has a ticket in a sweep or the person who goes to a racecourse, who goes out in the open air to see horses running, and those who frequent these betting shops. I hope I am not unparliamentary in saying that these betting shops are the very devil. Has the Minister ever thought of them in this way? Has he ever thought of the moral responsibility of the Government in getting revenue out of these betting shops?
Surely he knows the temptations of these people who are in need of money to embezzle their employer's money or to take money that should go into their homes and to hang around these betting shops waiting for the result of the next race. Really, the moral damage done by betting shops is incalculable, Every social worker will tell you the same thing. They are far worse than public houses. If you take a drink, it may do a certain amount of good provided you take the right kind of drink, but this betting is a temptation to try and make easy money. The very fact of having a successful bet makes it all the worse.
I am afraid the historian looking at this whole question will form a very sorry opinion of the way we have availed of our political freedom. We have certainly got a fair record to show in the matter of the housing of the people, though I am afraid in time to come many of the new houses will degenerate into slums and many of them will convey a very poor idea of our traditions of architecture as compared with the beautiful Georgian traditions we have inherited. On this matter of betting, the question again arises whether considerations of money should override considerations of social justice. Here we have a country where the people are so meticulous in regard to certain forms of immorality, where the people regard certain forms of immorality as deadly sins, in this matter of the betting tax condoning a form of immorality which is just as bad as these forms we reprehend so strongly. I do feel whatever the revenue that may be derived the Government has a serious responsibility in this matter. I think that if they go to the churches they will get only one answer. I believe that the Government have a very serious responsibility in this matter from the moral standpoint. I trust, even now, the Government will stand back from the picture and look at it in the light of social justice and the real essential and enduring good of the community. There is a distinction between the legitimate form of betting and this form of betting in shops, hanging around the shops where the lorry men on their rounds neglect their employers' work, and drop in for a bet, where the "down-and-outs" are risking the money that should be given to their families, and where money badly needed in the home, which is given as outdoor relief, finds its way into these betting shops. I do hope the Government will even now face up to the moral obloquy of this question.
Like Senator Sir John Keane I can speak with authority on this question. I am sure the Senator has a good deal of experience of these offices, but unlike him I do not agree that relieving these people of taxation is going in any way to hinder the carrying on of these betting shops or offices. Now, I have seen big business people and even stockbrokers resorting to these places. It is not only the lorry-men and draymen that pay money into these shops. I have read of responsible people deploring the fact that money is being spent in these betting shops. But to relieve these people of taxation is certainly not going to reduce the number of people going into these shops. I think the Minister has been very light on these people if he has increased the taxation——
Why not stop them altogether?
Well, the Oireachtas has passed a law permitting the licensing of these shops, and Senator Keane is a member of the Oireachtas. Until we go back on that we must carry on with the taxation. But certainly I have as much experience as the Senator, and I endorse everything the Senator has said about these betting offices.
I would like to endorse everything that has been said by the previous speakers. For many years I have watched the position of these betting shops, and I have seen particular examples of the horrible effects on the poorer and weaker citizens of our great city. We ought to do something to protect them. The Minister for Finance ought not to batten on the weakness of our weaker citizens, because that is what we are doing. This evil has gone a long way, and it is increasing. I think it is about time that the Minister should do something about it. We point the finger of scorn when we see municipalities and financiers in other countries drawing money from other forms of vice. We are doing what is just as bad, and the results will reach us in the next generation, and we will rue it.
I do not know that in principle there is any difference between a bet made on the course and a bet made in the shop. From the moral point of view I do not see that there is any difference.
There is 7½ per cent. difference now.
There is a difference from the point of view of the Minister for Finance, of course, but in principle a bet is a bet wherever made, and I do not think any question of morality arises in principle on the question of bets. I am nothing of a theologian, and I have not any experience of betting shops and very little in the way of experience of betting on the race-course. But I do not think I would be guilty of any greater sin, if it is a sin at all, by betting in the shop rather than on the race-course. I agree that the multiplication of these shops and the temptation they offer has done a considerable amount of harm. I believe that is so, that there is a temptation that would not exist if betting were confined to the race-course. But when this was argued in the Dáil I was told in discussing the question of a tax on betting that we were taxing one of the only amusements or sports that the poor man could indulge in. Well, we have to get money somewhere—everywhere we can. I am not satisfied that, morally speaking, there is any argument against betting as betting. There is an argument, and I think a strong argument, against the temptation that is offered to people that cannot afford to do so to bet. And that has led to the downfall of many individuals. I know when I was in the Local Government Department the number of officers that had to be dismissed—some on account of drink, of course, but mostly on account of betting—was certainly distressing. I do not know if we are going to base our objection to betting on moral grounds, that we can avoid making betting illegal on the courses as well as in the shops. It is like anything else. It is when it is indulged in to excess that the difficulties and the dangers come in.
The betting shops are used by all classes, as Senator Foran properly said. But I think there are numbers of betting shops in the poorer parts of the city that are frequented not only by men, but, indulging in their right of equality in this matter, by women, mothers of families, and it has often been represented to me that the families suffer very seriously by the temptation that is offered in that way. But the Oireachtas has adopted and accepted it in principle, and once the principle is there, and the betting idea accepted, I do not think there is anything immoral in restricting it to a certain extent by taxation. I am told the tax will have the effect of reducing the amount of money that goes into these shops, and to that extent Senator Sir John Keane ought to be satisfied.
The Minister has really made my case stronger. Here is the Government supplying an opportunity for betting. Betting to excess on the race-course in practice cannot take place, and it is certainly in these betting shops that betting to excess takes place. I think the Government should consult social workers and the Churches in these matters, as they would find that they would be unanimous in asking that it should be stopped.
Sections 18 to 35 agreed to.
SECTION 36.
(4) In ascertaining, for the purposes of a charge to corporation profits tax (other than excess corporation profits tax) the profits arising in an accounting period ending after the 31st day of December, 1940, in the case of a company the directors whereof have a controlling interest therein, no deduction in excess of an amount calculated at the rate of one thousand pounds per annum shall be allowed in respect of the remuneration of any director, other than a director who is required to devote substantially the whole of his time to the service of the company in a managerial or technical capacity and is not the beneficial owner of or able (directly or through the medium of other companies or by any other indirect means) to control more than five per cent of the ordinary stock or shares of the company.
I move recommendation No. 5:—
In sub-section (4), line 35, page 20, that the words "one thousand" be deleted and the words "one thousand five hundred" be substituted therefor.
My object in putting this recommendation down is to point to what seems to me a certain amount of inequity between persons who may operate a trade or business as a partnership and as a private limited company. The class of company to which this particular sub-section (4) applies is a company which the directors own and control. For all practical purposes that means a private limited company. There may be a few exceptions but, as a general rule, all the companies of that kind are private limited companies. I take it that that is the type of company that this is meant to deal with. There may be, as I say, one or two exceptions which would make no fundamental difference. In order to illustrate the reasons why it seems to me that the figure of £1,000 is unfair as compared with £1,500, which is the exemption for surtax. I am not referring now to excess surtax or excess corporation profits tax; I am confining my remarks entirely to the comparison between ordinary surtax and corporation profits tax as proposed in this Bill. Let us take three persons who are partners and who make a profit of £6,000 which, for the sake of argument, I will assume is divided equally between them. The three of them will pay income-tax only on £4,500, that is, ordinary income-tax at 7/6 less, of course, the ordinary income tax allowances, and they will pay an extra 6d. on £500 each. The individual on his £2,000 will pay 7/6 in the £ income-tax on £1,500 and will pay an extra 6d. in the £ on the £500.
Supposing there is a private limited company controlled by the same three individuals and that they make £6,000, of which they pay out in directors' fees to each other the same rate, £2,000 each, the way in which their tax will be assessed is: they will be assessed as individuals for ordinary income tax to £2,000 and they will pay on that exactly the same, that is, ordinary income-tax, on £1,500, and they will pay 6d. surtax on the £500. The profits of the company are £6,000, but under this only £l,000 each will be allowed for the purpose of calculation of corporation profits tax. That will leave £3,000 on which corporation profits tax will be chargeable on the amount in excess of £2,500, namely, on £500. That means because they happen to be a private limited com pany they will pay £50 additional tax. I cannot see any reason why that should be so. In fact, speaking generally, as a matter of general practice, it is more desirable to have a limited company than that they should work as a partnership. There is better control over them. It is more convenient and much more easy to control from the point of view of income-tax and the revenue generally. A tax is paid to the State on the formation of the company and I cannot see any reason why that additional charge should be made. I am confining this entirely to this particular amendment. I am not, for the moment, dealing with the question of excess tax at all.
The sub-section refers to cases where the director controls the company.
Where the directors together control it. I think that is clear in the Bill.
The individual, of course, is dealt with in the section. The individual director can only get £1,000.
Yes.
He is restricted to that amount and that restriction is in the law as it stands at present.
I am aware of that.
If that restriction were not there I am satisfied, from the examination I have made of the case since the Senator mentioned it on the Second Reading, that it would leave the door open to considerable evasion.
My amendment does not propose to abolish any restriction. I accept that principle
I think the Senator in making his comparison compared the profit of a partnership of £8,500 with a limited private company's profit of £6,000. In order to make the case comparable, one should take similar figures.
I did take similar figures.
I misunderstood the Senator.
I will repeat them.
If the Senator would not mind.
I stated that a partnership of three persons, each earning £2,000, making £6,000, that being divided equally between them, each of them would be assessed for income-tax only on £l,500, with an additional 6d. surtax on £500. In the case of a limited company I took a profit of £6,000 which was all paid out to the three directors who control and own it, namely £2,000 each. On that £2,000 paid to them they would pay exactly the same tax as the partners, namely 7/6 on £2,000 and an additional 6d. on the £500 portion of it. But when as a company the profits came to be assessed as to whether they were liable or not for corporation profits tax, the £6,000 would be taken and the amount allowed for directors' fees would only be £3,000—£1,000 each, through actually £6,000 had been paid out. They would, therefore, be liable for corporation profits tax assessment at £3,000. From that would be deducted the minimum of £2,500, leaving £500. On that £500 they would have to pay 10 per cent., namely £50. I have taken exactly comparable figures.
Might I ask Senator Douglas if he does not think partners entitled to some compensation in view of the special risks that they have to carry as partners as against companies?
Do I take it that Senator O Buachalla considers there should be an additional tax on a limited company as distinct from persons working as a partnership?
I am wondering, in view of your remarks whether you would not think that partners would be entitled to some compensation in view of the bigger risks they carry as against those carried by companies? If there is an advantage accruing to partners, I think in fairness that they are entitled to it.
That does not exactly deal with my particular point. I am not at all satisfied that it is so, but I would like to hear it argued. What I am dealing with is a private company for which I have assumed a profit of £6,000 paid out to directors. I have taken the amount paid to directors in order to compare it with the position of a partnership. I understood from the Minister, in his reply on the Second Stage of this Bill, that the £1,000, in his opinion, worked out equitably as between the two. He did not base it at all on the argument that he was specially endeavouring to provide an additional tax for persons who earned an income from a limited company. I would not be at all prepared to concede that in every case what Senator O Buachalla says is correct. I would like to take the circumstances of the case and there are certain types of partnerships where I would not at all agree. I think there are other cases where the partnership involves very considerable capital liability, and there might be something to be said for them, but my answer is that those types of partnerships should become limited companies. There is a type of partnership, of course, requiring limited capital, such as that of a firm of accountants, which is in a different position.
I cannot see that the adoption of this recommendation by the Seanad would not open the door to such evasion as would mean a considerable loss of revenue. In regard to the £1,000, there has not been any complaint so far——
You have not had the tax at all except for over £5,000.
Over £5,000 profit. That is so. But, at any rate, it has been accepted as a generally acceptable figure, up to the present anyway. We have not had any cases where people protested against it. They regarded it as a fair allowance in the circumstances. Undoubtedly a change from £5,000 down to £2,500 will perhaps bring more notice to the particular allowance now, and it is possible that from now on we will hear more, but, so far, it has generally been accepted as a fair and reasonable allowance and we are satisfied that if we departed from it that there would probably be wholesale evasion.
With very great respect to the Minister, I do not think I made my point clear. In the first place, how there can be evasion in a limit of £1,500, any more than in a limit of £1,000, is beyond me, and I have absolute confidence in the ability and efficiency of the Revenue Commissioners to detect evasions. At any rate, I would not like to take on the job of getting away with it. But, apart from the question of evasion, my point is this: this corporation profits tax was devised by the British Government in the last war. There was a great deal of complaint with regard to its want of equity, and it was one of the taxes abolished in England after the war. It was continued here over £10,000, and I was told then by a very responsible authority that the only reason it was retained was because of one or two very substantial concerns, whose tax we could not very well afford to lose and which could well afford to pay the tax. Until this Government came in, it was continued at £10,000. Then it was reduced to £5,000, and even at that figure it did not catch any substantial number of private limited companies more than it had caught at £10,000. The number of companies making £5,000 and controlled by the directors which is the kind of company to which this applies is not very great. But, as soon as you come down to £2,500, you bring in a considerable number of companies controlled by their directors.
When you come further on in the Bill to deal with excess profits, then the Minister applies a principle which is based to some extent on justice. When there is no object in evasion and when the salaries or directors' fees are bona fide ones he takes the average paid in previous years. But this is a case you you are applying to a very large number of businesses, a new tax, a tax they have never paid before. The adoption of it brings the £5,000 limit down to £2,500, catching a very considerable number and bringing in the type of company I have indicated. I suggest that it is very unfair to turn now to individuals, of whom there is a good number, who have been earning £1,500 to £2,000 a year as managing directors of companies in which they have put their money and to say we would not charge you extra as partners, but we are going to bring you in and make you pay 10 per cent. on the amount of that in excess of £1,000 and although for years you have been paid salaries of £1,500 or £2,000. To my mind, it is unfair taxation placed on the individual. Most of us will remember a reference in a case recently in the courts where one barrister remarked that a new liability company would probably be formed and the reply was that they did not know, that it would probably be a partnership. Do I take it that if a private limited company winds up and becomes a partnership they can avoid this additional tax?
I am convinced that if the Minister would look into it carefully he would see that individuals who have been earning a sum considerably more than £1,000, when there was no question of evasion, are now being caught under this scheme and will be charged an extra 10 per cent. in addition to increased income-tax which, I am convinced is a great hardship to certain individuals. I raise it in all sincerity and I am not trying to make a debating point. I am convinced that there are bona fide cases where hardships will occur. I am not directly affected myself and my own business is not directly affected, but my attention has been called to a number of cases which would be affected, and I honestly believe that the proposal is not fair.
I am certainly satisfied that the Senator is quite sincere in feeling that hardship would be done in this case, but, as the Senator himself admitted in the case of a partnership, partners are not allowed to reduce their profits by taking salaries, and in the type of case the Senator has in mind it is really a partnership although formed into a limited company. They are, of course, allowed by the rules of the limited companies to draw——
——greater salaries, no. They pay exactly the same tax as the partner.
They pay the same income tax, certainly.
There is nothing in that point.
Strictly speaking, the private family company should not be allowed on the analogy of the partnership to escape, but a concession is given and they are allowed £l,000.
Could the Minister explain where the concession is? There is no concession at all.
It is a considerable concession. In 1920 or 1921—I am not quite sure which year it was—when the limit instead of being £2,500 was £500, that concession, as we are entitled to call it, still remained at £1,000. It has not been changed and we think that it is a reasonable and equitable sum. However, I am quite prepared to examine it again in the light of specific cases. I am sure the Revenue Commissioners will be able to get them. The Senator seems to think there are a good many cases that will be hit by this. I will ask the Revenue Commissioners to go into it for me and I will discuss it with them when they have had time to make an examination of specific cases. As the Senator seems to think strongly that grave hardship is being done, I certainly will examine this sympathetically.
I should like to know if it is the intention of the Minister to charge an extra tax on an individual who has been receiving £1,500 to £2,000 for the last two or three years? Is it his intention to charge an extra 10 per cent. on the excess over £1,000, if it happens to have been obtained from a limited company? If they engage an employee who did not put his own money into the business, of course, it is all right, you can pay him an unlimited amount and it all can be charged in any way you see fit to pay him. I fully appreciate the need for a limit. I quite see that if there is a corporation profits tax at all they should not be allowed to increase salaries over the amount paid previously. It would simply provide a method of evasion. There are two ways of remedying it. One is as it is provided later on, in the case of excess, that there cannot be an increase, above a certain average.
In view of the intention that the Minister has, to carry on the excess profits tax indefinitely, what I am urging is that the limit to be equitable should be the sum in surtax. The normal corporation profits tax can be argued as comparable to surtax which the company does not pay. The individual pays surtax—the company pays no surtax. I do not think it is quite equal to a 10 per cent. tax, but it is comparable to surtax. It is not equitable, if you make a limit of £1,000 in one case and £1,500 in another. I put to the Minister the specific point that, if a person has been director of a company not liable for corporation profits tax, a company where two or three are being paid £1,500 or £2,000, the situation really is that not only is income-tax raised to 7/6, but there is an additional 2/- put on the higher part of his income, making a total of 9/6. If the Minister looks into it he will find that I am correct and I certainly think that, if my recommendations to change to £1,500 is not passed, he should alternatively provide that for a certain number of years a provision that the amount allowed in previous years must not be exceeded. If he would adopt some principle to exempt a man who bona fide is getting it and who is paid without any question of evasion, it should not be objected to. As it is at the moment you are simply charging 9/6 on certain salaries.
The Senator mentioned that it would be a hardship on a number of smaller companies, but in the case of a company they need to have a profit exceeding £5,500 before becoming liable for corporation profits tax, with three directors.
But, then, it is not always a question of three directors. I could give a case of one director—not an uncommon one—where a privately-owned company is concerned. It is not uncommon: the Revenue Commissioners will bear that out. In that case, it would not be £5,500 at all, but £3,000. I am only concerned that one does not put the extra 2/- on people who are not getting an excess.
I will have it examined, but I assure the Deputy that evasion has been attempted.
Would you avoid the evasion on a 1939 salary?
Yes.
If this recommendation is made, the Dáil can have it put in. Something should be done, and I do not think that, under the Standing Orders, the Minister would be able to introduce it otherwise. If the House would allow some such recommendation to go through, the Minister can change it in an form he likes in the Dáil. I am speaking of the practical side of the matter. There is one recommendation going to the Dáil, at any rate. I would seriously ask the House to agree to this. I could withdraw the other recommendations referring to £1,500, if the Minister so desires, as they would be consequential. If the Minister looks into it, he may find it necessary to meet this point in some form or other. If he rejects it, it does not come back to us.
I do not wish to make any promises beyond what I have said. I will look into it.
I am not asking for any promise—implied or otherwise.
I can promise the Senator that I will look into it, and if I am satisfied that a case has been made that we can meet, I promise to introduce something in next year's Finance Bill and make it retrospective.
I would really much prefer to ask the House to insert the recommendation as a suggestion. Actually, the Bill is going back to the Dáil. It would then be in order for the Minister to do something if he wishes. It is a hardship in regard to persons who may be asked to pay 9/6, and it is not a concession to tell them that it may be introduced next year and made retrospective. Also, I might be told then, by the then Minister—not saying who he may be—that I had objected entirely to the principle of retrospection this year.
Is the recommendation being pressed?
Perhaps the Minister would accept it. It would not commit him to anything and would simplify the matter for the whole House. I suggest that the Minister permit the House to accept it without a division. He can then examine it and, if he does not feel justified in adopting it, it can be dropped.
We are quite satisfied that others in this House or in the Dáil will think that it should be £2,000 instead of £1,500. Others may think it should be £2,500.
As an alternative, I could withdraw this and bring it up on the Report Stage next week. The reason I have asked for it now is that we might be able to let the Minister have all the Stages of the Bill to-day and leave it to him to deal with this point when the Bill comes before the Dáil. Otherwise, I am willing to bring it up next week.
I do not think I can accept it.
In that case, if it be in order, I will bring it up next week on the Report Stage, when the Minister will have had time to consider it.
The recommendation will be in order.
Recommendation, by leave, withdrawn.
I move recommendation No. 6:
In sub-section (4), line 41, page 20, that the word "five" be deleted and the word "twenty-five" be substituted therefor.
This is another point of a somewhat different character. In this section it is provided that, if the particular director owns 5 per cent. of the shares there will be a limit of £1,000. If he owns 4 per cent. he can be paid any amount which the other directors think fit to pay him. My object in suggesting that this should be 25 per cent. is quite different from my object in moving the previous amendment. There has been an increasing tendency in the case of private companies—which I consider is a highly desirable one—to encourage managing directors who have been brought in from outside to put their savings into the company and gradually acquire an interest. This has the effect of preventing those businesses from remaining simply family businesses.
It is extremely hard on a man from outside who has not got control and who is not likely ever to get control but who has put his savings into the business to find that, just because he has put savings to the extent of 5 per cent. of the capital into the business, the business is to be penalised. If you made the figure 25 per cent., it would be perfectly safe, as the individual would not be a person with control. Five per cent is far too narrow a figure. I know cases of people who have no connection with the owner-family and who have put their savings into the company in this way. It may be that they can avoid the tax in this case by selling their shares to one of the other directors but I think that it is not a good thing to discourage managers who have been made directors from putting their own money into the business.
I am afraid that the Senator's recommendation, if adopted, would also lead to evasion. This provision has reference to a company controlled by directors and, if one director gives practically his whole time to the management of the company, he is entitled to special consideration. The figure of 5 per cent. is the safest figure we have been able to arrive at.
I thought it was taken from the old British Act.
We ourselves examined it very carefully. Other figures were suggested but it was felt that, if we went any higher, there would be a temptation to evade tax by paying larger sums. Such methods of evasion have been common at all times and it is very difficult to guard against them. We believe that 5 per cent. will not bring about any great hardship.
Evasion will be much easier with 5 per cent. than it would be with 25 per cent. If a man has only 5 per cent. invested in the company, it will be easy for him to sell his interest to the other directors, who will be precluded in any event. If you make the figure 25 per cent., it would be possible for managers to put money into the business to a reasonable amount, and it would not be as easy to get other directors to buy 25 per cent. as it would be to get them to buy 5 per cent., nor would it be as easy to get a managing director to sell his interest. The capital of a private company is not, as a rule, a huge sum. It is rarely over £10,000, and 5 per cent. of that is not a very big figure. Very often, the capital is only £2,000.
I should like to know if the words used in this section are new to legislation. I can see many ways in which this tax could be evaded and in which it would be difficult to say whether it was an evasion or not. Was this form of words previously used in legislation or has it been brought in specially in this case?
The phraseology is deliberately wide so as to make the net as large as possible. I do not know whether the form of words has been used before or not.
Is it the Minister's idea that you should discourage managers from investing their savings in private companies by providing that the tax on the company should be increased because they have put their money into it? It seems to me to be desirable that managers should put their savings into the company rather than invest them elsewhere.
I see certain advantages in having managing directors interested in their companies.
I propose to take the same course in this case as I took in the last case. I shall, with the leave of the House, withdraw the recommendation and bring it up again on Report Stage.
Recommendation, by leave, withdrawn.
Section 36 agreed to.
Sections 37 and 38 agreed to.
SECTION 39.
I move recommendation No. 7:—
In sub-section (2), at the end of the sub-section, in page 23, that a new paragraph (d) be added as follows:—
(d) such sum as may have been placed to reserve not exceeding one-tenth of the aggregate of the sums calculated under paragraphs (a), (b) and (c).
Section 39 deals with excess corporation profits tax and sets out the method by which the substituted standard applicable to a company is to be calculated. If I understand it correctly, the substituted standard will really be used in two general cases: (1) where the company is a new company and has no other standard to go by, and (2) where the profits for that period are lower than the substituted standard— in other words, where the company has made a loss or has not been making a reasonable profit. It is desirable that we should set out what would be proper provision for profit which a company should calculate in providing its capital and in starting out to carry on business. It is quite clear that it must provide for the fixed dividends on any preference shares it has. That is accepted and set out in the Bill. It must also provide for payment of a dividend, at some percentage, on its ordinary shares within a reasonable time. That is set out as 6 per cent., which is similar to the provision in Emergency Order No. 83. It must, of course, provide for interest on debentures or debenture stock. Interest on bank overdraft need not be provided for because that will be allowed for the purpose of income-tax and, therefore, will be provided in any case. Is it sufficient for that new company to provide only for these things? I say it is not. It is absolutely essential that the company should provide for a moderate reserve and, out of that moderate reserve, will have to be paid charges which the Minister for Finance admits are necessary, such as provision for bank overdraft and charge on debentures which are regarded as capital and, therefore, not allowed as a charge for income tax. Anybody with business experience knows that all kinds of small charges, regarded by the income-tax authorities as capital charges are absolutely essential to keeping the business going.
You may have to make some addition to your machinery to bring it up to date for no matter how you plan in the beginning there are always certain charges to be met. You cannot go to the public for a few hundred pounds additional capital. You must provide it out of your profits and it is essential that there should be some reserve for this purpose. I have put down an amendment to provide for a very moderate reserve, in other words a reserve not exceeding 10 per cent. of the other charges. I am pleading for the company—I am not interested in such a company myself—which has had a bad time and which has made lower profits than those provided for in the substituted standard. I think that the State should recognise that there should be provision for a reserve for various purposes. Not only is a reserve necessary to keep the capital at near par value but, as I have pointed out, the company will have to meet quite a number of charges, necessary charges, which are not allowed for income-tax purposes and the money for which will have to be found somewhere. If you take 75 per cent. of the profits, without making any allowance in respect of these charges, it is clear that you are leaving them in an extremely bad position. I am pleading that in the case of a new company or in the case of a company that has not been making a fair profit in years past there should be some provision for reserve. If I were making such provision myself I would say that it should be about 20 per cent. but I have made the amount in the recommendation low in the hope that the Minister will accept it.
Has the Minister taken into account the case of a new company where it has not been possible to pay any dividend in the first year? In all justice, the shareholders should be entitled to something in the nature of a cumulative dividend where nothing has been paid in the first year. It would be only fair to allow a higher rate of dividend in succeeding years than that provided for in this section. I think that 10 per cent. would be legitimate. Has the Minister considered the case of cumulative profits at all in respect of this section? How would cumulative preference dividends fare under this section?
As it stands at the moment, they would not be allowed.
There is no provision for payment of arrears of dividends. I do not know what kind of reserve Senator Douglas has in mind. There is a variety of reserves that might be provided for—a reserve for bad debts, a reserve for wear and tear, etc. Has the Senator anything specific in mind?
If the Minister would concede the point I would suggest 20 per cent. reserve, but I did not think that he would agree to such recommendation. If the Minister will look at the balance sheets of any company, he will find that it is not at all necessary to specify the particular purpose for which a reserve is made. There is generally a general reserve which can be used for any purpose, and it is quite immaterial what the reserve is called in the circumstances. A company has often to incur necessary expenditure which will not be allowed for income-tax purposes, but the State in this case is going to take 75 per cent, not of the actual profit, but 75 per cent. based on the income-tax assessment. The public think very often that when you have got a company assessed with a profit of £6,000 for income-tax that the company has made in cash or even in stock £6,000 for the year. Very often, however, that company may have made only £5,000 or considerably less, because it has had to expend certain moneys on machinery or other purposes, which moneys it could not get by an appeal to the public. I know it is. the view of business men to whom I have spoken, a view which is also strongly held by the Federation of Irish Manufacturers, that there should be some provision for reserve. As the tax is now amended, I am only pleading for a very small number of companies. The majority of companies will have an assessable pre-war standard. I am proposing no change in the tax; I am simply trying to establish a more equitable standard as regards the companies for which this section is intended to provide.
Could the Minister be more illuminating than in his laconic reply that there is no provision for arrears? I should like some justification of that attitude. It seems unfair that if, as I say, a company does run into a better year, there should not be some provision for an average dividend of 6 per cent. without actually confining that dividend to the year in question. On that basis this is a very unfair standard.
If provision of the kind that Senator Keane suggests were made, I do not know where it would lead. We shall have to be very wary in regard to making provisions for payment of arrears of dividends or cumulative dividends. Probably it would involve us in a considerable loss of money. I see that a case can be made for the point made by Senator Douglas. We have had this point in mind but I have not had time to make an examination as thorough as we should like and I do not see how in the next few weeks we would be able to complete that examination. I do admit however, that a case can be made for a greater reserve than is provided for at present.
There is none at present.
Well, whether what the Senator suggests would be a proper figure I cannot say. Many individuals connected with companies, especially with companies that have been formed during the last five or six years, and have not had time to build up a reserve have made representations to us and I am having the question examined. I do not see any possibility of the change being made, or of my examination being completed in time to make the change in this Bill, but I do feel there is a case, and in next year's Finance Bill which will give us time for the change to be examined, I might introduce some amendment if I am satisfied amendment is necessary, and as far as I can see, make it apply to all the types of companies that would be likely to be affected.
Would the Minister examine the effect of putting the average dividend reserve at the rate of 6 per cent. per annum? I think he would know the measure of danger in that.
I will examine that.
It strikes me that this Bill should have a special title? It should be called the Finance (Experimental Stages) Bill. Apparently taxes are being imposed on the basis that they have not been examined, and when they have been worked for a year somebody may find a remedy. I am not an expert at business, but I have met some business men, and I cannot conceive how a reserve even of one-tenth of these sums mentioned in paragraphs (a), (b) and (c) could be too great. I can easily see how it could be too little, but how it could be too great baffles me. It is clearly too little. A third of the preference stock, 6 per cent. of the ordinary stock and interest on the debentures—is it not a tenth of these three sums? How that sum can be too great a reserve baffles me. Surely, every company wants a reserve, now particularly. If the Minister accepts this recommendation surely he will not be sinning against himself by taking too great a reserve?
I am afraid I will have to press this recommendation, and ask the House to divide on it. I believe there is a principle involved, and I am, to some extent, a representative of our industrial interests here, and I know they feel strongly on it.
I am not a representative of the Federation of Irish Industries, but I think that in these very difficult times for keeping business going, a reserve is very important. It seems extraordinary that there is no provision made for a reserve, and the Minister cannot produce an amendment, and cannot accept this amendment, although he admits there is a case.
Question put.
The Committee divided: Tá, 7; Níl, 25.
Tá
- Baxter, Patrick F.
- Conlon, Martin.
- Douglas, James G.
- Fitzgerald, Desmond.
- Hayes, Michael.
- Keane, Sir John.
- Madden, David J.
Níl
- Brennan, Joseph.
- Campbell, Seán P.
- Colbert, Michael.
- Concannon, Helena.
- Cummins, William.
- Goulding, Seán.
- Honan, Thomas V.
- Johnston, James.
- Kehoe, Patrick.
- Kennedy, Margaret L.
- Lynch, Eamonn.
- Lynch, Peter T.
- MacCabe, Dominick.
- Mac Fhionnlaoich, Peadar
- (Cú Uladh).
- Magennis, William.
- O Buachala, Liam.
- O'Connell, Thomas J.
- O'Donovan, Seán.
- O'Dwyer, Martin.
- O'Neill, Laurence
- Nic Phiarais, Maighréad M.
- Robinson, David L.
- Ruane, Thomas.
- Stafford, Matthew.
- Tunney, James.
Tellers:—Tá: Senators Baxter and Conlon; Níl: Senators Goulding and O'Donovan.
Question declared lost.
Sections 39 and 40 agreed to.
SECTION 41.
Where
(c) such company has, since the expiration of the trade year which ended in the year ended on the 31st day of August, 1939, issued stock or share capital or debentures or debenture stock (in this section referred to as the said new issue) consequent on an invitation to the public to subscribe therefor,
then and in every such case, for the purpose of ascertaining the profits on which the said tax is to be assessed as aforesaid, there shall be deducted from the profits on which the said tax would, but for this section, be so assessed an amount, if such company is incorporated by or under the laws of the State, equal to the standard payments (as defined in this section) in respect of the said new issue or, if such company is a foreign company, equal to the amount which bears to the standard payments (defined as aforesaid) in respect of the said new issue the same proportion as the amount of the turnover of the trade or business carried on by the company in the State during the said accounting period or part of an accounting period bears to the total turnover of all the trade or business carried on by such company wheresoever during that accounting period or part of an accounting period.
I move recommendation No. 8:—
In sub-section (1), paragraph (c), lines 37-38, that the words "consequent on an invitation to the public to subscribe therefor" be deleted.
If I understand the section correctly, it endeavours to make provision for assessing excess corporation profits tax for a company which has additional capital and which additional capital was put in after 1939. For some reason that is completely and absolutely beyond me, the Minister applies that only to a public company. If an individual, who is a shareholder in a private company, doubles the capital or obtains an additional director with money, no account whatever is taken for the fact that additional capital has been brought in and that it ought to earn a reasonable amount. The effect of my amendment is to make it apply to all companies where the capital had bona fide increased. In neither case should it be allowed, or is it allowed, by simple writing up of capital, but this is a case where additional cash is brought in and it should apply equally to a private company. The private company cannot, as the Minister no doubt knows, issue an invitation to the public because if it did, it would cease to be a private company. That means that at present if any individual wants to invest additional money in an Irish private company knows that it would not be allowed to make any additional profits except such balance as may be left after the full tax charges, which, the Minister pointed out, come to 75 per cent. The only course left for him is to invest in some other company, or to put his money in an English concern, or in Government securities, or something of that kind. At a time like this, it may become absolutely necessary for additional money to be obtained for private companies without their becoming public companies.
We see by the last vote that the Fianna Fáil Party has no sympathy with the provision of a reserve, but are they prepared to take the stand that they are against the position of putting money into capital in a company formed by Irish enterprise, or that if it is put in, it must not receive any additional provision but must pay excess profits tax to the full amount? That point is met so far as public companies are concerned, but my objection is that the exclusion of private companies is inequitable.
We are satisfied that if what is agreed as the proper-procedure with regard to public companies were adopted in relation to private companies, it would lead to abuses, and I have a number of examples of actual cases which I should like to read to the House to show the kind of things that have happened. We would be inviting people to indulge in these things if we made the same provision for private companies as we propose to do in the case of public companies. This is not an actual case. Private company A has a profits standard of £10,000. It writes up its premises and goodwill by a fictitious amount of £50,000, which it credits to a reserve account. It then capitalises this reserve by the issue of 50,000 ordinary shares of £l each issued to its shareholders. By so doing, under the terms of the section, if it were amended on the lines of the recommendation of Senator Douglas, it would obtain a deduction from chargeable profits of £50,000 at 6 per cent., or £3,000.
What is to prevent a public company doing that under the section as it stands?
I will read these examples. Example 2 is an actual case. Company B was registered six years ago, and has a nominal capital of £5,000. Its original issued capital was £3,000 held by its three directors, members of one family. Profits for six years were £35,000 after payment of directors' fees, £15,000; profit standard, £5,000 and reserves (part), £3,000. The company's nominal capital is now increased to £20,000, reserves are capitalised to the extent of £3,000, and bonuses issued to directors are £2,000. New capital issued to directors in lieu is £5,000. If the recommendation were accepted, a deduction of £300 in respect of an artificial transaction would be given. The capitalisation of the £3,000 reserve involved a loss of surtax on this sum.
The third example is also an actual case. Private Company C was registered four years ago with a nominal capital of £5,000 and issued capital of £5,000. Profits for six years were £75,000 after payment of directors' fees which were substantial but not exceptional and the profits standard was £13,500. The last balance sheet disclosed reserves of £45,000. If the nominal capital were increased and reserves capitalised and issued to the shareholders, a deduction of £45,000 at 6 per cent. could be claimed in a chargeable accounting period.
But they made 200 per cent. per annum as well?
They did very well.
These cannot be very normal cases at all, Sir.
These are four cases typical of a number of these private companies and typical of the way they could treat their reserves by capitalising them and escaping the tax. Private Company D, another actual case, was registered six years ago with a nominal capital of £10,000 and an issued capital of £10,000. Profits for five years available were £60,000 after payment of directors' fees, which were substantial, but unexceptional, and the profits standard was £12,500 approximately. For the last of the five years the dividend distribution was 180 per cent., amounting to £18,000. If this amount were then put back into the company through the increasing of the company's capital and the issue of £18,000 shares, a deduction of £1,080 from chargeable profits could be claimed on the basis of the Senator's recommendation, if it were adopted. Therefore, Senators will see what has happened in a number of these cases where they have capitalised their reserves. They have been able to escape very heavy liability to tax and we would be inviting many similar cases if we were to adopt Senator Douglas's recommendation.
Could the Minister explain how they have escaped income-tax at present? There is now no excess profits tax.
I feel that all this is very technical. It should be further examined. In these cases which the Minister has mentioned, there seem to have been fantastic earnings by the companies. Surely if those earnings are there, that money is earning dividends and the mere fact of converting it into capital would not, I think, affect the case at all. Would the Minister consider the point? Would the fact of turning these reserves, already in the business and earning, affect the basis of the excess profits calculation at all? I am not clear at all about it. The Minister has not answered this point, if it was raised: what is to prevent a public company doing the same thing as the private company?
I would like to take this opportunity to point out to the Minister that what purports to be an argument is not an argument at all. If a man were brought before the courts on the grounds that he was in a crowd and hit out at seven blue-eyed men in the crowd and injured them, no doubt he could bring witnesses to say that because blue-eyed men had often attacked other men, it was necessary for him to take this action before they hit him. To bring up these four cases and say that these things could happen if the law were otherwise is not an argument. If a private company, a family company, is not doing well and it is necessary to keep the company going, this means that people must put money into it. The Minister, without any regard to what I consider is ordinary justice, contends that they should suffer the loss of the capital they have brought in, lest some other company under the same law should take an opportunity of swindling the Government. The Government's business is to make just laws.
When they have made the laws, they see that human ingenuity sets out to try to evade the purposes of those laws. If the Government turns around now and says: "we must make laws which it would be impossible for anyone to get around," that is the Government's business. But, in order that some ingenious and ill-disposed persons should not be cleverer than the Government, the Government not knowing how to legislate properly, the Government is going to condemn people either to stand by and see their businesses probably wound up and going to ruin for lack of extra capital, or say that people who put their money in must suffer the loss so that the Government will reap everything in the form of taxation. Now, in regard to every law on the Statute Book, there are people who set out to evade it. They would set out to evade the Ten Commandments. The Minister says that, lest that should happen, he must make a law without any regard to the rights of the citizens, and although they may suffer injustice, so that it would be impossible for anyone with human ingenuity to get round the law.
The Minister cites four cases where he knows exactly what was done. He can now legislate in a way to make it specifically impossible for these identical things to happen. Instead of doing that, he makes a law which does not aim at giving justice to all the citizens in this State. He reads these four cases, where people have sought a loophole in the law as it stands, to benefit themselves. The Government's business is to prevent that, but not to do it by creating a greater evil and, lest four people should swindle the Government, to enable the Government to swindle 400 people. The Minister's reading of these four cases is a complete waste of our time, as it is completely irrelevant to the matter under discussion. If the Minister can say that it is nationally necessary or naturally just that the law should be as it is, he could get up and explain it; but it is completely irrelevant to say that, as the law was some time ago, people were able to work a clever deal. One could justify anything on those grounds. You could justify murdering a man where you could point out that, if the man had been murdered first he would not be able to murder another man. That sort of argument is too cheap—it is not an argument at all.
We have listened to a case where the Minister admitted that a recommendation proposed was in itself desirable. He accepted it in principle, but then went on to say that he intended to legislate against the proposition which he accepted as right in principle. He was able to get all the members of his own Party to support him, though he himself admitted that the recommendation was right in principle. It makes all legislation perfectly absurd. The Minister can get a regimented party to support him in an enactment which he himself admits is wrong. He says he is legislating without any regard to the total concerned, but only for the purpose of covering these four people. It is an insult to this institution, when one party will support the Minister in this matter, although he admits it is wrong.
I cannot quite agree with Senator Fitzgerald that some of the fantastic cases read by the Minister are not relevant. I think they are quite relevant and I agree that he has found a technical flaw in the wording of my recommendation, which it would not be necessary to read such cases in order to find. If the Minister's only object in having the section as it now stands is to prevent evasion, and if he has no objection to providing for the bona fide addition of cash which was not in the business before, in the case of private companies, then the matter can be met in a different way. If his intention is, as I take it to be from the Bill, to prevent additional cash being put into private companies, then I could not agree. If it is because he could not think of any way, I suggest that a different type of recommendation would be desirable. It is definitely desirable that this particular wording, “consequent on an invitation to the public to subscribe therefor” should be cut out, and in its place there should be “provided that the Revenue Commissioners are satisfied that actual cash not previously in the business has been subscribed.” That should apply in both public and private companies.
If a public company wrote up its reserves and then issued its shares partly paid to the public, it would be just as objectionable from the point of view of evasion. I ask to be allowed to carry this recommendation to the Report Stage, so that I can bring in an additional recommendation to meet the particular point made by the Minister. I do not want evasion, and quite recognise that, if you simply allowed an increase of capital—which may be only on paper—you would be completely evading the position. I do not want that, and I have referred to it previously. In the case of money that is in cash and that may be available, I want a company to be able to get it and to pay a reasonable amount on it. I find it impossible to believe that the Minister would not wish that. I do not at all agree that he has done it in Section 41 except in some doubtful way in the case of a public company. I propose to leave this recommendation over and to change its form for the Report Stage.
I hope the Minister will have regard to the value of this House in helping him to get reasonable amendments. Under our procedure we must have recommendations accepted in order that they can go any further. I hope that the Minister is prepared to recognise that this House does make some contribution to this very technical subject and that he will approach in that way the contribution we make. I hope the recommendations will be accepted—even if the Dáil does not pass them—and so afford us a constitutional opportunity to improve Finance Bills in the only way open to us.
I can answer Senator Sir John Keane's point by saying I am quite willing to bring in a recommendation if Senator Douglas, who has moved this recommendation, is. satisfied that it is a question of new-money.
I am not interested in anything else.
I am absolutely certain that there would be wholesale evasion if this restriction were not accepted. These are not fantastic or hand-picked cases. They are cases which have occurred where the revenue has been deliberately defrauded of tax that justly should be paid, because reserves were taken up in that way.
Was that in the old British Excess Profits Act? It would not apply for income-tax, as you pay on profits, no matter what the capital is.
There would be numerous cases of that kind, unquestionably. There have been deliberate frauds and evasions already of that type. I am satisfied that, in the open way that the Senator moved this recommendation, it would lead to wholesale abuse, but when new money is brought in I think it is fair that consideration be given to it. On the Report Stage I will bring in a proposal—unless the Senator wishes to have his own recommendation—and will undertake to amend this section on the lines of the Senator's proposal, to restrict this to new money.
The Minister has quite convinced me that my own recommendation as it stands would not do, and at no time had I any intention of providing anything except for new money.
May I add a comment on what Senator Hayes said on the last section about this being "experimental legislation?" It is largely experimental. We have had nothing of the kind in our legislation before. I adopt this attitude with regard to it: I do not want to be oppressive on any public company doing good work, employing people and earning profits. I know that the taxes are heavy. Some regard them as very oppressive. I quite agree with Senator Hayes— though he did not mean it as a compliment—that this taxation is experimental. I do not see any reason to be ashamed of saying that these taxes are new. We have not had experience of this type of taxation before. I do not want to injure any public company. If after a year's working, I find that this taxation is oppressive, or has hurt existing industries or businesses, public or private, which are doing good work, giving good employment, earning good profit and revenue for the taxpayer, I am prepared to reconsider it and amend it, bearing in mind the necessity to get revenue.
We shall accept the word "experimental" as complimentary. I am glad to see the Minister's attitude on this matter. In so far as evasion of taxes is concerned, I happen to belong to a class who cannot evade paying taxes on what they earn, and never could. I am whole-heartedly and entirely with the Minister in any efforts he makes, or any experiments he carries out, or any amendment he brings in to prevent people from evading the payment of taxes that are lawfully and properly imposed upon them by the Oireachtas. If, in addition to experimenting in this way—I am using the word in its complimentary sense— he cares to indulge in any new experimetal methods for getting after the tax dodger, I am with him.
I need not put down another recommendation for Report Stage?
No, except the Senator so desires.
Recommendation, by leave, withdrawn.
Sections 41 and 42 agreed to.
I propose to leave over recommendations 9, 10, 11 and 12 to Section 43 until Report Stage.
Recommendations 9 to 12 not moved. Sections 43 to 48 agreed to
SECTION 49.
Question proposed: "That Section 49 stand part of the Bill."
Perhaps the Minister would explain what it is intended to achieve by Section 49. He may have explained the section in the Dáil, but if so, I did not see the explanation.
As Senators are probably aware, it has been necessary to requisition certain foreign exchange, the property of our nationals. We have to set up a special account, so that we may operate on the results of it. We have also asked people to register foreign securities of certain kinds. It may be necessary to requisition these foreign securities and, if so, we must have a special account to operate our exchange business with foreign countries, principally the United States. We have at present certain transactions in foreign exchange, and it is thought proper that a special account should be opened into which all these moneys would be placed, so that the Dáil, the Government and the public would know ultimately what operations were carried out and how much money was involved.
Section agreed to.
Sections 50 to 54, Schedules and Title agreed to.
Bill reported with two recommendations.
Report Stage fixed for Wednesday, 16th July.