The provisions in the Finance Bill may be grouped into three broad categories.
There are, first, those sections which incorporate in permanent legislation the Financial Resolutions passed in Dáil Eireann on Budget day. This year, in addition to the customary resolution dealing with the rates of income-tax and surtax for 1958-59, the Budget day resolutions covered proposals with regard to expenses allowances and benefits in kind given to directors or other employees, tax avoidance by means of superannuation schemes, retirement provision made by self-employed persons, the treatment for tax purposes of husband and wife, the removal of the customs duty on films, the abolition of the additional duty on tobacco dealers' licences and the restriction of double relief from death duties in certain circumstances.
Secondly, the Bill makes legislative provision for other proposals of which notice was given in the Financial Statement and, thirdly, it deals with some matters, notably "dividend stripping", which were not mentioned in the Financial Statement.
Part I of the Bill contains seven sections dealing with miscellaneous income-tax matters and five sections dealing with the taxation of husband and wife. The miscellaneous sections provide as follows:—
Section 1 imposes income-tax and surtax for the year 1958-59 at the existing rates.
Section 2 provides that income from market gardening is to be chargeable under Schedule D. The alteration is a technical one and does not impose any increased charge to tax.
Section 3 provides that an outstanding appeal may, at any time, be settled by agreement between the taxpayer and the inspector of taxes. Under existing law, such an agreement may be valid only if arrived at before the date fixed for hearing the appeal.
Section 4 relates to the admissibility of statements made or documents produced by a person in cases of fraud or wilful default. Statements may be induced by its having been drawn to the person's attention that—while the Revenue Commissioners cannot give an undertaking in any particular instance —it is their practice, in deciding whether to accept a pecuniary settlement or to institute proceedings, to be influenced by the fact that a person has made a full confession. The section secures that such statements shall not, by reason only of their having been possibly so induced, be inadmissible as evidence in penalty proceedings. The section will obviate the danger of proceedings failing on such a ground where a person has promised a voluntary disclosure but in fact makes an incomplete disclosure and deliberately withholds essential information.
Section 5 provides that any notice to be given under the Income-Tax Acts by the Revenue Commissioners or by an inspector of taxes may be served by post and also that any notice to be given by the Revenue Commissioners may be given by an officer authorised by them. Any doubt as to the validity of notices previously issued is removed.
Section 6, which is relevant to Part IV of the Bill, extends the scope of the information which employers are obliged to give the Revenue Commissioners regarding cash payments to or on behalf of their employees.
Section 7 brings up to date, by reference to the Army Pensions Act, 1957, the existing exemption in respect of wounds and disability pensions and gratuitites payable under the Army Pensions Acts. The section is so worded as to extend the exemption in the event of future amendments of the Army pensions code.
Sections 8 to 12 re-cast and assemble the chief provisions concerning the assessment and collection of tax in the case of husband and wife. Sections 10, 11 and 12 are new.
Section 10 enables the Revenue, for 1958-59 or any subsequent year, to recover from a wife, income-tax or surtax assessed on her husband and not paid by him, in so far as it is attributable to her income.
Section 11 empowers a husband to serve, on his deceased wife's personal representatives and on the inspector of taxes, a notice disclaiming responsibility for unpaid tax in respect of his deceased wife's income, whereupon the Revenue will exercise their powers of recovery under the previous section as against the wife's estate.
Section 12 defines the circumstances in which a married woman is not to be treated for tax purposes as living with her husband.
Part II of the Bill deals with various customs and excise matters.
Section 13 terminates the customs duty on cinematograph films.
Section 14 is a technical amendment of the law necessitated by the Transport Bill, 1958, so as to preserve the existing duty relief of 6d. per gallon on diesel oil used in road passenger services.
Section 15 removes (as it is now inappropriate) the limitation as to seating capacity placed on certain fully assembled private motor cars of British or Canadian manufacture admitted under quota at a special rate of customs duty.
Section 16 increases the entertainments duty rebate granted to certain cine-variety shows in patent theatres from 30 per cent. to 50 per cent.
Section 17 restricts to shows of the normal length (two-and-a-half hours) the rebate of entertainments duty payable on film shows having a specified content of sound films in languages other than English. This has been found necessary to stop abuse of the concession.
Section 18 terminates the additional excise duty on licences to sell cigarettes and tobacco.
Section 19 exempts persons who sell hydrocarbon oils or lubricating grease from the requirement of a hawker's licence.
Section 20 makes three amendments with regard to motor vehicle duties. It enables the Minister for Local Government to authorise the repayment of duty on surrender of a licence; it clarifies the law regarding farmers' tractors taxed at the £8 rate and permits such tractors to be used for the haulage of live stock for reward in certain circumstances.
Section 21 confirms in force three Imposition of Duties Orders, two relating to the special import levies and miscellaneous customs duties, and one relating to the termination of the customs duty on roofing slates.
In Part III Section 22 provides that any death duty payable in a foreign country on a death, whether occurring before or after the passing of the Finance Act, in respect of property situate there shall not, if double taxation relief arrangements subsist between Ireland and that country, be deductible from the value of the property for purposes of assessment to estate duty.
The eight sections in Part IV of the Bill deal with the taxation of expense payments and benefits in kind which employers may make to or provide for directors and highly paid employees. The provisions will not become operative until 6th April, 1959.
The purpose of the legislation is to tax benefits in kind and those cash allowances which purport to be made for expenses, but are in excess of the expenses "wholly, exclusively and necessarily" incurred in performing the duties of the office or employment. At present these, for the most part, escape tax, although they represent disguised remuneration. It would not be fair to the general body of taxpayers to allow this to continue.
The terms "director" and "employment" are defined in Section 26; employments, as distinct from directorships, are not, in general, within the scope of the new legislation unless the gross remuneration from the employment is £1,500 or more. It is proposed to treat such payments and benefits as remuneration of the director or employee concerned subject to his right to claim a deduction in respect of properly allowable expenses.
Benefits in kind would include the provision of living or other accommodation, entertainment, domestic or other services for the director, employee or his wife, family, guests, etc.
Part V contains nine sections the main purpose of which is to prevent avoidance of tax by means of schemes under which benefits are provided by companies and other bodies for their directors and employees on retirement or on death. Tax avoidance arises because the company is entitled to charge expenditure in respect of such schemes against profits and in this way to reduce its tax liability, while the director or employee, for whose benefit the scheme is provided, is not taxed on the contribution made on his behalf though it is equivalent to extra remuneration.
Usually the scheme is one under which an endowment assurance, maturing on death or retiring age, is effected on the life of the director or employee concerned. The amount of assurance is sufficient to provide a pension of, say, two-thirds of his salary. If a pension were provided income-tax would be payable on it, but it may be arranged that the pension may be converted into a lump sum payment which is not subject to income-tax. When this happens no income-tax is collected at all—the contributions are deducted from the tax liability of the company, the beneficiary is not taxed on the extra remuneration represented by these payments on his behalf, and, when the benefits are received, it is arranged that they come in a non-taxable form.
This part of the Bill is designed to correct and regulate the position. It will not take effect until 6th April of next year. Very briefly, the control will be as follows.
Sections 32 is a general barrier set up in order to regulate the traffic. Under it, an amount equal to the cost to the company of providing the retirement benefits is to be treated as taxable income of the director or employee for whose benefit the contributions are being paid. Where, however, the company pays a premium on a life assurance policy, the director or employee will get the relief to which he would have been entitled if he had himself paid the premium.
The trapping of the initial payments in this way will not, however, apply to various forms of legitimate provision for directors and employees. The director or employee will not have the company's payments counted as part of his taxable income where the retirement benefit provisions conform to certain conditions. These conditions are intended to secure that more than a normal proportion of the benefits does not become payable in the non-taxable form of a lump sum and that the benefits themselves are not excessive.
The intention behind the technical provisions of this part of the Bill is that retirement benefits will not get a double relief from tax—a relief when the contributions are made and a second relief when the benefits are paid out.
Roughly, reasonable retirement benefits, as envisaged in the Bill, would conform to what public servants are entitled to by way of pension and lump sum, that is, the aggregate benefits must not exceed the value of a pension for life of two-thirds of final salary, of which not more than one-fourth may be taken in the form of a lump sum. If the scheme which is adopted by any company for its directors and employees conforms to these requirements then, generally speaking, the contributions will qualify for tax relief and the pension when it becomes payable afterwards will be subject to income-tax as earned income.
Proprietary directors and employees are excluded from membership of schemes approvable under this part of the Bill. The interest they possess in their business represents to them at retirement the equivalent of the lump sum permitted to the ordinary director or employee under an approved scheme. Moreover, having regard to their proprietary interest their position is more analogous to that of owners than of "arms-length" employees and it is open to them to avail themselves of the reliefs in Part VI of the Bill in respect of provision made by such persons for retirement annuities.
The four sections in Part VI are concerned with providing a new relief from income-tax and surtax. Payments made by self-employed persons to secure annuities for themselves in their old age are being relieved from tax. The relief will extend also to payments made to secure, after the death of the individual, an annuity to his widow or other dependent. Relief of this sort has long been argued for by professional organisations and others but it is an extremely complicated one to express in legislative form.
It is obviously necessary to limit the amount of the payments which will qualify for the relief. The limit has been set at 10 per cent. of the person's "net relevant earnings" or £500, whichever is the less. "Net relevant earnings" are defined in Sections 40(8) and 41 (4). Roughly speaking, they correspond to earned income for income-tax purposes, as reduced by payments in the nature of charges on income and all losses and capital allowances which are regarded as reducing such income.
If a person, besides being self-employed or in non-pensionable employment, also holds pensionable employment or is over 40 years of age, there are appropriate modifications of the limit. These are detailed in the First Schedule to the Bill.
In order to qualify for relief, annuity contracts or trust schemes must be approved by the Revenue Commissioners and certain conditions have to be satisfied before such approval is given. These precautions are included to prevent abuse of the reliefs. A basic condition is that the benefits must in general be confined to an annuity commencing between the ages of 60 and 70 or, in the event of the individual's death, providing for his widow. The conditions may, however, be modified at the discretion of the Revenue Commissioners, for example, to permit of retirement before 60 years of age on grounds of ill-health or to allow of payment of an annuity to dependents other than the widow. An annuity under an approved contract or scheme may be payable at the age selected whether or not retirement has taken place.
The effect of Section 42 is that the investment income of the part of an annuity fund of an assurance company which relates to pension annuity business will be exempted from tax in so far as it is applied for the benefit of the annuitants. Profits on such business retained by the company would be subject to taxation.
The general idea behind the provisions is (1) that the premiums or contributions paid by an individual will be treated as reducing his income for tax purposes and (2) that the income arising from the investment of such premiums or contributions will be exempt from tax, but (3) that the benefits must be provided entirely in the form of annuities which are subject to tax.
The purpose of Part VII is to revise the machinery for giving statutory effect to agreements with foreign countries for relief from double taxation in respect of income-tax and surtax, corporation profits tax and death duties. At present the procedure is to schedule each agreement and the requisite technical rules to a Finance Bill. Instead of this, it is now proposed to enact the rules once and for all and to enable such agreements to be given the force of law by Government Order provided that the draft Order has been approved by resolution of the Dáil.
The rules, which are contained in the Second Schedule to this Bill, are similar to those enacted in the Finance Acts of 1950 and 1955 in relation to the conventions with the United States and Canada, respectively, and are made applicable to those two conventions also, so that the rules for all such agreements will be found in the one place.
To eliminate double reliefs it is provided that death duty reliefs granted under two existing statutory provisions shall not apply in cases covered by a double taxation agreement. The first of these is Section 7 (4) of the Finance Act, 1894, which provides generally for the reduction for death duty purposes of foreign assets by the amount of foreign death duty payable. The second is Section 20 of the same Act which allows double taxation relief in regard to certain British possessions.
Arrangements for giving statutory effect by Government Order to double taxation agreements with foreign Governments on sea and air transport profits already exist under Section 15 of the Finance Act, 1951. A technical point is cleared up by providing that these arrangements will apply if the agreement, instead of being concluded with a foreign Government, is made with the head of the foreign State, as is the constitutional practice in some countries.
The provisions in Part VIII of the Bill and the Third Schedule are intended to counter the device known as "dividend-stripping," which could make serious inroads on the Exchequer.
The idea in "dividend-stripping" is that one company artificially puts itself in a position to claim a refund of tax already properly paid by another company. The dividend-stripping company acquires shares in a concern which has large liquid reserves built up out of tax-paid profits and it uses those reserves to pay itself a large dividend, the amount of which (i.e. the gross dividend less tax, or the actual cash received) compensates it for its outlay on the shares. The dividend-stripping company, however, being in a position to claim repayment of tax, can then claim a refund of the tax already paid on the gross dividend. This brings it a net profit at the expense of the revenue.
Companies dealing in securities would be in a specially favourable position to exploit this device because they could establish a loss on the purchase and re-sale of shares entitling them to claim a tax refund on the dividend. But it could also be used to advantage by trading concerns with accumulated losses and by bodies such as charities which are exempt from income-tax and entitled to claim repayment of tax suffered on income which they receive. There is evidence that some dividend-stripping has already taken place, involving considerable and unjustifiable loss of revenue, to the detriment of the ordinary taxpayer. The provisions of this Part of the Bill, while applicable to shares acquired on or after 6th April, 1957, will, as amended in the light of prolonged discussion in the Dáil, affect only dividends payable on or after 19th June, 1958, the day following that on which the relevant Financial Resolution was moved. In this way, retrospection is being avoided.
The protective measures to be taken in the case of investment-dealing companies and tax-exempted persons such as charities are set out in Section 51. Section 52 deals with the measures to be applied to the operations of ordinary, that is non-financial, trading concerns. Special precautions are being taken to avoid interference with normal transactions.
The provisions of the Bill are designed only to catch the culpable cases where, for instance, the dealing concern acquires a sizable proportion of the shares of the company possessing accumulated liquid reserves and being thus able to dictate its dividend policy in fact distributes these accumulated reserves. They do not apply where merely a trivial holding is acquired. Nor is there any quarrel with the case where the post-acquisition dividend represents distribution of genuine post-acquisition profits.
The Third Schedule to the Bill contains the rules for ascertaining whether a dividend is to be regarded as paid to any extent out of pre-acquisition profits.
In Part IX, two of the Sections relate to recovery of tax while the third has to do with the amendment of the Finance (Miscellaneous Provisions) Act, 1956.
Section 54 will, broadly, bring the position in the High Court as to recovery of tax into line with that existing in the Circuit and District Courts under Section 11 of the Finance Act, 1924, and Section 39 of the Finance Act, 1926. It authorises High Court proceedings to be taken in the name of an officer of the Revenue Commissioners and prescribes a simplified mode of prima facie proof.
Section 55 extends to surtax and corporation profits tax the recovery procedure laid down in Section 7 of the Finance Act, 1923, in respect of arrears of income-tax. In other words, recovery of arrears can be effected by a county registrar or sheriff on the authority of a certificate issued by an authorised officer of the Revenue Commissioners.
Section 56 of the Bill amends the Finance (Miscellaneous Provisions) Act, 1956, mainly as regards the Tax reliefs in respect of exports:—
(i) It extends those reliefs to profits from the export of fish produced on a fish farm and of cultivated mushrooms and it also enables the reliefs to be granted to publishers in respect of the export of books printed within the State.
(ii) In relation to new or increased exports, it lengthens the exemption period from five to ten years. Relief is not to be given for any year subsequent to 1969-70.
(iii) Where a company gets relief under the exempting legislation, it is required to pass on that relief when making a dividend distribution. It is proposed now to ensure that, if the recipient of such a dividend is itself a company, it will likewise be required, on paying a dividend, to pass on the relief to its shareholders.
(iv) This section also provides that, where an "industrial building allowance" prevents the granting, within the six years limit, of relief in respect of a trading loss carried forward, the displaced loss is to be carried forward for relief purposes without restriction as to time.
The four sections in Part X deal with stamp duties.
Section 57 authorities the Revenue Commissioners to enter into agreements with bankers for the payment in bulk of the stamp duty of 2d. chargeable on cheques. Under existing law, each cheque must be separately stamped with either an adhesive stamp or an impressed stamp.
Section 58 exempts from stamp duty receipts issued by the Land Commission for certain payments made to them in their capacity as successors to the Commissioners of Church Temporalities in Ireland.
Section 59 exempts from stamp duty any instrument which otherwise would have to be stamped solely out of moneys provided by the Oireachtas.
Section 60 repeals the stamp duty on bonds required for customs and excise purposes. These bonds relate mainly to the temporary importation of motor vehicles, the importation of goods for further manufacture, the payment of entertainments duty on the basis of certified returns, etc. This duty is no longer worth collecting.
The provisions in Part XI of the Bill are of a miscellaneous and general nature.
Section 61 is the usual section to provide for the charging of annuities in respect of voted capital services.
Section 62 removes the requirement contained in Section 4 of the Central Fund Act, 1956, that Exchequer receipts in respect of special import levy be paid into the Capital Fund.
Section 63 consolidates and extends the powers relating to the holding and investment of moneys of the Post Office Savings Bank. The new powers of investment relate to the holding of these moneys in stock of the Bank of Ireland, mortgages of certain local authorities, securities and mortgages of harbour authorities and (arising out of the winding-up of the Foreign Exchange Account) United States and Canadian Government securities. It also adds the power to hold United States and Canadian dollars and to lodge them to an interest-bearing deposit account in the State, Britain, U.S.A. or Canada.
Section 64 provides that the powers of investment of the Savings Certificates Reserve Fund shall be the same as those for the time being applicable to the Post Office Savings Bank.
Section 65 enables the Minister for Finance to determine the manner in which the remuneration payable for the management of prize bonds will be computed.
Section 66 and the Fourth Schedule deal with repeals.
Section 67 is the customary clause placing the various taxes and duties under the Revenue Commissioners' care and management.
Section 68 is concerned with the Short Title of the Bill; and with its construction and commencement.
I have alluded to the Schedules already in the course of my comments on the relevant provisions in the Bill but perhaps I should mention again that the First Schedule contains certain modifications of the limit for payments for retirement annuities for self-employed persons. The Second Schedule contains the technical rules to govern double taxation agreements. The Third Schedule is relevant to the provisions of Part VIII of the Bill regarding dividend-stripping. The Fourth Schedule is confined to setting out enactments repealed.
I hope those remarks will help to clarify for Senators the various provisions of the Bill.