Vol. 82 No. 5
Before we take up consideration of the Committee Stage of this Bill, I should like to indicate that I have ruled that Recommendation No. 2 standing in the name of Senator Eoin Ryan, is out of order on the ground that it involves a charge on the people. The Senator has been notified accordingly.
SECTION 1.
I want to raise what may be a very simple query on this definition section. I am a bit puzzled about the definition at line 35, page 5, which is professionally——
The Senator seems to be raising this on section 2.
Sorry.
I move recommendation No. 1:
To add to the section the following subsections:
"(9) In this Act, a reference to a gain shall be construed as meaning the relevant gain appropriately reduced in accordance with the calculations of the Central Statistics Office relating to the increase, if any, in the consumer price index during a period commencing on the date of acquisition of the asset in respect of which the gain accrued and ending on the date of disposal of the asset.
(10) In this Act, a reference to a loss shall be construed as meaning the relevant loss appropriately reduced in accordance with the calculations of the Central Statistics Office relating to the increase, if any, in the consumer price index during a period commencing on the date of acquisition of the asset in respect of which the loss accrued and ending on the date of disposal of the asset."
The purpose of this amendment is to suggest a guideline by which the Minister would be guided in the future as to the effect of inflation on this Bill when it is in operation. During the Second Stage I spoke on the danger of inflation, how it would affect this Bill and how it could reflect adversely on tax Bills. My fears in this respect were reflected by a number of other Senators. There is no question at all that, unless the affect of inflation is watched and allowed for as each year goes by, this legislation could perpetrate extreme injustice on the taxpayer. Consequently there has to be some guideline or some method by which the Minister for Finance, as each year goes by, makes an appropriate and full allowance for the effects of inflation.
I recognise the fact that it will be difficult to do this and that there is probably no perfect system of allowing for inflation in each year. Nevertheless, an effort should be made. Unless there is some guideline, unless there is some method which the Minister will refer to each year then the danger is that he will not make any allowance. Certainly he will not make an adequate allowance. This will be particularly so when he will have so many other demands on him and so many other factors which would mitigate against making any adequate allowance.
The Minister has said that he will make an allowance for inflation, I have no doubt that he is saying this in good faith and means it, but we must face up to the facts. On the one hand, he says he will do it and, on the other hand, he has said that the kind of amendment I have put down is not the way to do it and would not be perfect or workable.
We are in the situation where the Minister must really intend to do this. If he really intends to do it he must have worked out some method of doing it. Either he intends to do it, has thought about it and has decided on a method by which he will do it or else he does not intend to do it at all. If we accept the fact that he really intends to do something about this, then he must have a method in mind. This amendment is really to ask him to define what the method is. I suggest the method by which it could be done. I am not suggesting it is perfect or it is the only way it could be done, but it is one way which would at least help and would provide a method of doing it. I suggest that the Minister adopt this method of checking the effect of inflation and consequently making allowances, making adjustments in the light of the increased consumer price index each year. If he thinks this is not the right way I certainly would not object to him introducing something similar or some other method of doing it on Report Stage.
Everybody who has spoken on this Bill recognises the danger of inflation. Most people are in favour of the Bill and its general principles, I am in favour of the Bill and its general principles but I think that the question of inflation is the key factor and the greatest danger involved in this Bill because we must talk in terms of real gains. A real gain would not be a real gain if the value of the asset has merely increased as a result of inflation. Consequently, I am asking the Minister to accept this amendment or to indicate that he would accept some similar amendment to deal with the problem in another way.
I would like, in the strongest possible way, to urge the Minister to consider an amendment along the lines suggested by Senator Ryan. In doing so I take account of the fact that the Minister has designed these various Bills as part of a reform of our capital tax code. It is well to start the argument by reminding ourselves that there existed until the enactment of the Finance Act of 1975, a capital tax code, to wit the code which was initiated, in so far as it was estate duty, by the Finance Act of 1894 and also that part of the code consisted of legacy and succession duties.
I submit to this House, for the consideration of the Minister, that if an amendment of a character like this one, not necessarily in this form, not necessarily even indexation, though I prefer indexation, is not accepted, this Bill, which I think in its impact will have the greatest effect of the three Bills, will not be to reform but to deform. May I say immediately that the burden of my submissions with regard to this is entirely concern for what we may describe as the smaller people. The very rich can, generally, take care of themselves. The rich, while they would be beneficiaries to some extent under this code, with an acceptance of this amendment, will under the other codes be caught for taxation on any benefits they get from the acceptance of this or a like amendment.
I would remind the House that until the abolition of death duties a person who died worth £10,000 was wholly exempt from any kind of capital duty, if you disregard the duty on capital which exists in the form we know as the annual rates tax. There was also provision, which the Minister indeed improved in an earlier Finance Act, for widows and dependent children where the net estate was under £100,000. I am thinking about people whose net estate is under £100,000 in all conceivable circumstances. In such cases there was a deduction available to the widow of £4,000 for herself and £2,000 for each dependent child and there was an effective exemption from all capital duty in the case of a childless widow who left £25,500. If she had one child it was an effective exemption of £33,333. If she left two children, £38,095, three children — we are getting towards the normal Irish kind of family — £41,667, four children £46,200, five children, £50,500 and six children — I leave it at that — £53,333. Now the idea of the exemption of £10,000, the idea of the exemption for widows and children, or something like it, is to be found in the provision of thresholds in the wealth tax. One may think anything he likes about these thresholds, one may think that they are insufficient as I understand the Green Paper of the British Labour Government does, or one may think them excessive, but they exist and their existence is not disputed. If they did not exist it would be a change adverse to people who are in relatively poor circumstances.
I recognise that there are certain types of investments which are exempt from this capital gains tax. Certain assets which are being held, sold and realised are not subject to capital gains tax. These exemptions are quite inadequate to cover the whole range of the type of securities that people may be in, through their circumstances, or may have taken up, hopefully. Say a young, progressive husband sees an opportunity in his firm, takes a position in it and dies prematurely there is no exemption for him. I find it impossible to reconcile a provision whereby if a rich man sells a yacht or a picture for £2,000 he is exempt from the gain on that and a man dies with his little house subject to a mortgage which is covered by a life insurance and that house has got to be sold. Perhaps it is not a little house, perhaps in his circumstances he could then afford something better than his widow could, and they have to move to something smaller. There is exemption for a private residence, and we will come to deal with that, but there is no exemption for the gain made on the sale of a private residence by the personal representative, who, in the circumstances of that estate, has got to sell it.
I submit to this House that we have here in the economic and financial circumstances of our time not merely a Capital Gains Tax Bill but we have concealed in it a wealth tax unless we accept an amendment something along the lines of that suggested by Senator Ryan. I will not tie myself down to mathematical calculations in which I could so very easily be proved to be wrong.
I quote again the illustration I gave at the Second Reading debate of the Bill, that somebody with a piece of property worth £100 in 1914 would find that property really totally unchanged now £1,316 and being sold effectively. Something like 24 per cent of wealth tax would be exacted in that case irrespective of the circumstances of the person who held that property.
If that be so, that is a wealth tax that is to take part of the wealth within the pre-existing circumstances under the estate duty code. If the estate is small enough, if the circumstances of the widow and the children existed it would not be subject to any capital tax. I know there are difficulties in the sense that there is difficulty in making a decision as to what road to go on. I know there will be something arbitrary about choosing the consumer price index or any other index, and it will be open to question as to whether the right one has been chosen. It is open to question as to whether all sorts of figures in any capital gains tax code are rightly selected. They are all arbitrary. You have to draw the line, make a decision. In this case you have to make a decision or else you will have wealth tax imposed on people who ought not to be required to pay it.
I would remind the House that the UK tax code may have come out of an enactment of 1962, but it took the shape it has, with amendments that were made — the most significant of which was made in 1971 — in 1965. We did not then have inflation that signified. Incidentally, in relation to the case I am thinking about, the case of the person prematurely taken away leaving his widow and children, we did not have and we do not have today in the UK, a provision for taxing that personal representative on the gains made during the lifetime of that man. We did not have it from 1971 because under the provisions in the UK with regard to that, the realisations, if they were forced to be made — it is the smaller estates in which they are forced to be made — mean that there is no latitude for arrangements if you have to pay debts or if you have to raise cash for some purpose.
Under the UK code at the moment you do not have to go back and find out what the deceased had paid for something 20 years before. Incidentally the provision freeing from taxation gains made from sales of £2,000 does not apply to the sale of a personal representative. The rich man striding down the street can sell his yacht or his picture and get £2,000 for it. If the personal representative of a poorish man has to sell some furniture he does not get any exemption from it. He pays tax on it if there is a gain, and has all the expense of discovering what would be almost impossible to discover, what was in fact paid for it on acquisition.
In so far as one takes the consumer price index here, one is probably taking a figure favourable to the Revenue, in so far as moneys are invested in property. Historically, the value of work of construction has always risen more steeply than the value of those things that are a result of current production. This certainly used to be so according to the most recent figure that I saw. I believe it is still so. It is not as if one was to break away into entirely un-pioneered territory.
In Sweden — I am quoting from Tax and Trade Guide on the country — it is provided that the cost of property as well as the cost of improvements exceeding £3,000 a year may be written up tax free by applying coefficients to take account of changes in the price level. This avoids taxation on gains resulting merely from inflation incurred between acquisition and sale. The coefficients are fixed annually by the national tax boards. As an example the cost of real property sold during 1969 may be multiplied by a coefficient of 5.66 if acquired in 1914 or earlier or by a coefficient of 1.39 if acquired in 1960. This was produced in June, 1972, which, indicates the rather moderate rate of inflation the Swedes have had to combat.
The inflation here is not, as the Minister concedes and as everyone I imagine in this House agrees, putting the proposition in a modest form, entirely under his control. One does not have to follow the full argument as regards the link with sterling to agree that at least a very considerable part of the inflation experienced here will not, in circumstances which may continue for as long as one thinks in terms of our trading relationship with Britain, be under our control to the fullest extent that we would desire it to be. Therefore, if there is a wealth tax involved without thresholds, if there is no provision for indexation or something like it, we will let the rate of British inflation determine the rate of our capital gains tax in its total effect on people here or rather the extent to which it would prove in any given circumstances a wealth tax. Those who think that the rate of capital gains tax is not sufficient, and if we lived in a different land, if we were not just Ireland, if we were the USA, we might be able to afford a higher rate of capital gains tax——
Hear, hear.
——though this view, the existence of which has produced a hear, hear, is not shared by the left wing in Britain.
Or Germany?
I will wait for the Senator if he will be patient for me.
All the experts in Socialism are rising now.
I think that is a little unfair. I was trying to be serious. The non-existence of indexation, which will effectively pressurise people of modest possessions, will make it more difficult for those who want to raise the rate of capital gains taxation, rather than less difficult. If we effectively isolate real gain from apparent gain, there will then be an opportunity for those who want to argue that case to do so, with some hope of success. Take the next ten years, assume this Bill is enacted in its present form, assume, in particular, that the section relevant to the treatment of debts, section 14, and how you will evaluate the assets, subject then to capital gains taxation, if there is to be a subsequent sale.
If that goes through unamended it will press profoundly and hardly on a great many people in circumstances out of which they cannot easily get. Take, for example, the ordinary man who has got to move from his house. If I understand the Schedule with regard to the computation of the liability of the personal representative, if that house has to be sold, the interest paid on his mortgage during his life is not even going to be allowed. If he incurred expenditure on that house, if it had been used for a business purpose, which it was not, that will be treated as if it had been used for a business purpose and disallowed, if it were an item which could have been allowed as a revenue deduction in the computation of a businessman. Reality has got to force its way home. We are not a record-keeping people. We are not a people who clutter up our houses with filing cabinets. We have little possessions, but which of us here know what it cost us to have them but we are going to have to have them until our grandchildren maybe take over from us.
I speak as one who favours the capital gains tax code. I do not think there is very much to be said for it in terms of efficiency. It does have an economic effect of shifting people's attention from capital gains to income earnings and more sensibly considering their investments. There are disadvantages from the efficiency point of view which are accentuated if there is no provision for taxation of apparent, but not real, gain. The tendency will be for those who can avoid it to stay locked in. That tendency will exist anyhow if there is any capital gains tax. That is one of the disadvantages, but that disadvantage becomes very much greater if there is to be no allowance for the inflationary increase in the cost to the investor of his acquisition. Incidentally, the people most likely to make gains are the people who are prepared to take risks with their money or their borrowed money and, whether it is their money, or their borrowed money, it is the community's money. It is capital which they invest. They are enterprising about using it. They are the very people who in normal circumstances would shift their money again, moving in and out to the benefit of the community, if their judgment of the risks is correct.
There are a great many other effects resulting from the provisions of this Bill which get accentuated if there is not provision for indexation. It seems inevitable to me that some type of threshold will have to be put into this code if we do not index. To insert a threshold in this code at this stage, the stage at which we debate under the shadow of the Constitutional requirement, would be extremely difficult. I am quite sure that if this or a like amendment is accepted there will be anomalies. Time can cure these anomalies. There are anomalies built into the code. There always are such anomalies. There are anomalies in any wealth tax code. Why should there be a special provision for people who are holding secure employ ment and have pension rights which are capable of being capitalised and are excluded in the treatment for wealth tax of their capital value? There may be all sorts of reasons for not including them. I am merely saying there are anomalies. I am prepared to accept that there will be anomalies if you impose on this base an indexation to determine how the gain is to be determined. Let us look at these anomalies after we have created them. We can come again next year. But can we come again next year with indexation? I would suggest, and I have been hanging around with politics for a fair while, that it would be very hard to index a capital gains code by way of amendment where there is not an indexation of income tax.
The Minister knows perfectly well that this cannot be without a severe impact on the rate of the tax. I understand why the Revenue want this. They are going into business, and everyone going into business wants to make a profit out of it. They are very well aware of the disappointing net return of capital gains tax everywhere. The search for equity and equality is to some extent an assuagement of the envy of other people's avarice. This is, if you like, a kind of a justification. We have got to give up for all the conveniences which will result from it, the artificial treatment, as it is, of a cost of acquisition whose real terms have disappeared by inflation and the gain which is to be treated as a capital gain is to be made a real gain by some method. Now is the time to do it when we are determining the structure of the Bill. We can amend it here and there like we did with the income tax code.
I am not talking about the principle of the capital gains tax. We accepted the principle on the Second Reading. I am now talking about the structure by which that principle is applied. This is one of the most important elements in that structure. There is a later amendment, but I much prefer this approach to the approach of treating the gain differently according to the rates and the length of time during which it is realised. The effect of that would be again to favour the well-off man who can hold on. I much prefer this kind of approach.
I do not want it to be thought this view I am now expressing is just simply a view without any kind of support. May I make a glancing reference to wealth tax? There is nothing disreputable at all about wealth tax. It exists in many countries and has done so for many years. There is a very strong economic argument in favour of it. Questions may arise as to whether we should have these three together but, then, who is responsible for the absence of the third, which is now accepted, but the proposer of the amendment and his friends facing me. Why are we faced with three? There should have been this one long ago. There is this question of whether we should have the three together but I think, if you have one that should be there and you want to have the others, then you may as well have the one that should be there as well. A question may arise about the appropriateness at this time, and there is scope for discussion about it. But there is nothing disreputable about it. It is a perfectly open, legitimate and, if I may say so, not necessarily a socialist view either, though the socialists will have it. What there is a strong argument against is having a wealth tax which is not called a wealth tax, such as there will be in this Bill, if there is not indexation or some equivalent to it. Let nobody say that the basis of the consumer price index changes from time to time — it has changed in the past many times and will no doubt change in the future—and there will be something rough and ready about indexing anyhow.
I do not know if the Revenue Commissioners are equivalent to the National Tax Board in Sweden because I do not know as much about the National Tax Board in Sweden, as I ought to, as I may know or be expected to know about the Revenue Commissioners. The Revenue Commissioners could have the power to determine the base on an annual basis. It is all going to be arbitrary. The 5th April in relation to wealth tax is arbitrary too. You just have to choose a date. Some people will be a bit lucky because of that and some will be a bit unfortunate. There will be a certain amount of timing of transactions to get in one way or another, a certain bunching effect. I can see that. There may be administrative difficulties and anomalies, but there will not be the injustice of taxing people who ought not to be subject to capital tax.
I am going to read, because I think it is desirable that I should, a fairly extensive quotation from Taxing Personal Wealth, published by George Allen Unwin, a professor of political economy in Bath University. He is a man who favours the wealth tax. This part of his text is headed “An Allowance Against Inflation in the Capital Gains Tax”. He is not bothering at this point about how you treat the stakes, how you determine the gains to arise after death. At that time there was a particular position in Britain which has since changed. This was published in 1971 before the Finance Act, 1971. He says:
We have already pointed out that in so far as gains are a product of price increases they are monetary only, not real. On the other hand, it is argued that what matters in taxation is the relative rather than the absolute position of taxpayers. A capital gains tax is primarily thought of as a substitute for income tax if not an equivalent to it. No correction against inflation is allowed on income tax. Why then allow a relief on taxation of capital gains?
One answer to this question is that whilst the lack of a corrective against inflation increases income tax on ordinary income, it does not entrench on the assets which give rise to that income. For earned income these are the abilities of the individual. Personal abilities have a capital value equal to the present value of the future earnings to which they give rise. Sometimes these future earnings can be capitalised, for example, when an entertainer contracts to work for a company in exchange for a low salary and a capital sum.
Also, a very important point for everyone to remember:
Borrowing on the strength of future earnings——
And which of us has not done it?
— is a form of capitalisation. It is perfectly true that ordinary taxable income, whether earned or unearned, is subject to tax without correction for inflation. But individuals are not subject to tax at all on the changes in the capital values of the asset—namely personal abilities — which produces earned income.
Hence taxation of earned income involves no comparable case on which to base the taxation of changing capital values of unearned income and financial wealth.
In other words, in so far as a capital gains tax is levied on monetary gains, i.e., gains which simply reflect price increases, it becomes——
And this is what we are doing
— a tax not on capital gains but on wealth.
Pause for a moment here. At this rate of inflation a very high rate of wealth tax, and all the comparisons with the rates of wealth tax in other countries, start fading away as a support for what is our rate, also selective, imposed only on those who can stay locked in and who are not forced by circumstances to pay the wealth tax by realising the gain because the gain is needed, maybe to pay a debt, to get a chap started at school, to give him a trade, set him up in business, or whatever. To go on with the quotation:
It is possible to make out a case for the taxation of wealth in this way. First, the long-term capital gains tax of the United Kingdom is at a comparatively low rate compared to the full rigours of income tax and surtax.
At that stage there were these long-term and short-term provisions.
Second, nominally, except for the concessions to small incomes——
There is the half income rule which does not apply in the case of a realisation by a personal representative if there is a premature death
— it is not progressive; but, by and large, the wealthier a man is, the larger the proportion of his wealth which he holds in assets benefiting from capital gains; hence the flat rate gains tax in times of inflation may effectively be progressive.
When one thinks of the fixed income receiver the value of whose capital has fallen as a result of inflation, it is not easy to feel compassion for the holder of equities, the capital value of which may have risen enormously.
He has given the case for not indexing. Yet the argument for taxing monetary gains as a form of wealth tax is fundamentally unsound. If we want to tax wealth let us have a wealth tax. If we wish to make a capital gains tax progressive cannot we find a more systematic method of doing it than relying on this haphazard way of taxing monetary gains.
Our answer must surely be that these deficiencies should be remedied by other means and that, in principle, we should introduce a provision against inflation into the capital gains tax. How should this be done? One suggestion has been to taper the rate of long-term gains so that the longer the asset was held the lower would be the rate of tax. This solution too means disadvantages, the reduction in the rate of tax would have to be accorded according to a fixed scale and would not bear any relationship to the actual rate of inflation. Secondly, it would seem to accentuate the lock-in effect for postponing realisation would reduce the rate of tax. A more attractive proposal is to allow a percentage addition to the acquisition price of assets equal to the percentage increase in a specified index of prices. There is room for argument about the nature and composition of the index but because of the links between capital gains tax and income the index of retail prices would probably serve well enough. It could be a corollary that, if prices fell, there would be a corresponding deduction to the acquisition price.
We would all wear that no matter how much capital we had, because the real value of any capital we had would then have increased. Of course, if there is a realisation then, as a result of that you should say a capital gain tax.
There is a partial precedent for this procedure, this book which led me to the quotation which I made earlier, in the Swedish capital gains tax applicable to gains on real property sold on or after January 1st, 1968. These are taxed as income to 100 per cent of the property that is held for less than two years and 75 per cent in other cases. In calculating the capital gains, however, the historic cost to the real property is recalculated by an index so as to take into account the rise of the general price level up to the time of scale. What I have just read to you is a quotation from a summary published by the Ministry of Finance in Stockholm in 1968 about the Swedish budget of 1968-69.
These provisions, it is interesting to note, replaced previous ones which had provided for a tapering rate falling to zero after ten years.
I think that is more or less the amendment to the forthcoming section.
With regard to this whole question of taxation of capital gains and taxation of income, I should like now to quote from the Minority Report of the Royal Commission on the Taxation of Profits and Income in 1955 which argued that capital gains should be treated as income. It nevertheless concluded that gains should be subject to income taxation, that is to say, to 26 per cent, but not to surtax which, presumably, now starts after 26 per cent, because the taxation of capital gains beyond a certain rate would have highly undesirable effects on a risk-bearing saving and capital formation.
That is the view conceded by people who argued that capital gains should be treated the same way completely as income, but they did say "subject to tax as income tax but, not to surtax". Surtax is gone and there are replacements of different rates according to different brackets and layers of income. One of the reasons why I think it should be in this Bill — I wholly accept the Minister's sincerity and genuineness with regard to what he has said about future arrangements he will make — is because people will not know what these arrangements are going to be. They will be wondering from year to year what the provision is going to be. This, in itself, will have a lock-in effect. People will be hoping for some concession to come at a later date which would mean that the realisation would not produce quite the same tax. The only way they are going to know, and this is the way they ought to know in a free community, is by being able to pick up the enactment of the Oireachtas and discover what their rights are.
The form this recommendation might take, capable, as I recognise, of producing anomalies of one kind or another, and I am aware there is a range of provisions with regard to retirement, for example, and sales within the family of particular types of assets, but I am thinking of people who do not have farms and who do not have businesses and yet have their modest investment, hopefully sometime producing some kind of a capital gain, or people who move into little businesses that may not be capable of being transferred to family — say, for example, the widow who, being left with a large house, turns it into digs, a business, and, if I understand the provision in regard to that, it is subject to capital gains tax and, if she incurs expense on turning it into a digs, and it no longer looks like a digs the day she sells it because she assumes it to be the better way of dealing with it, she is not even allowed claim the expenditure that was incurred in making it into a digs because that is no longer surviving in the appearance of the property.
If this amendment were made, or something like it, and if a different treatment existed from the treatment on death — there are lots of bits and things that could be changed or improved and I would not be fussed about when they would be changed or improved since this could be taken care of easily enough in future legislation — if these particular changes were made, I would say this would represent a significant improvement in our system for taxing capital, because we must remind ourselves that the unreformed State duty code chose to tax capital at a most unhappy moment in the family's history. But it may be that the residue of that treatment will have survived if this Bill is enacted unless the provisions which are contained in section 14a and the provision which arises—whether it arises properly on section 2 or not but properly on this amendment—are not changed.
Of course, everything I have been saying on the question of indexation is really only relevant for the future. We are fixed with the latest date of April, 1974. Since that date, while inflation has increased, and there is the fact of the peculiar circumstances in the UK and Ireland, there has not really been anything significant in the way of gains in relation to investments of any kind. We are talking about the structure for the future and I am not going to bore this House by treating it as if it were a class or a jury. I am told that the best way to treat a class is to tell them what you are going to tell them, tell it to them and tell them what you have told them.
I have told you what I think. Whatever way you view it in the exigencies of time — I recognise it is the Minister's decision — I would urge on the Minister consideration of that fundamental matter to which I referred on the Second Reading: the question of the morale of Members of this House, the question of the role and the significance and justification of the existence of the Seanad at all and in particular its significance in the last days of July with the Dáil about to go on its holidays.
I think it is of immediate moral importance to the Members of this House to feel that they are playing a role, that is to say that the arguments that are offered here are good, that they will be listened to, irrespective of the exigencies of time, that the decisions of ahe Oireachtas are not pre-empted. An assembly like this could be tainted with corruption if it tolerated a situation through time under which it does not get the respect that it ought to get. The late Vice-Chairman of the Seanad, the Seanad which was abolished for showing spirit — the spirit it showed, incidentally, was as much against the Executive which it in general supported as against those who abolished it — wrote a pamphlet called Pro Domo Sui, Senator O'Callaghan West, and it is a fine boast of the achievements of the Seanad which then existed.
We could be talking anywhere but we are not talking anywhere: we are talking in an institution established by the Constitution of this people. We are talking before legislation is enacted. We are talking to effect legislation and its form, and if we are not to be listened to, for my part I think the quarter of a million pounds that goes to support this institution could be far better employed in donations to the parties that sent us all here. I took only a glancing look at the newspaper reports of the Dáil debates on the Capital Gains Tax Bill and I know now that every word I said today has been said there, and I do not much mind if it is being said by those who are opposed to me, and I do not think that the Seanad, if it is to be a desired institution, ought to be a mirror image of the Dáil, a cracked, bad image. I do not think we ought to repeat the conventions — and it is appropriate to say this now because I am in general supporting an amendment put down by a Fianna Fáil Senator. We were both elected to the Industrial and Commercial Panel of this House. We were put here, at least made ourselves available for selection, on the basis that we qualified as having some kind of skill in this kind of field and why should we not agree — if we do agree?
What I want to say to the Minister in conclusion is that, irrespective of all the commitments that I imagine everyone in this House recognises he has — and I must say whatever criticisms Fianna Fáil may have, whatever difficulties they may place in his path, they recognise the grim ability with which he goes on facing all the problems that are around him — he could make a great contribution to the health of this Assembly if he listened to what we said with ears which are not merely open in general, but in particular open to the consideration of amendment of this Bill and any other Bill that he may introduce here, and irrespective of the exigencies of time, irrespective of the vocational prejudices of the Revenue Commissioners, who are naturally concerned, being in business, to get profit out of business — that too anxious a concern all the time about the justice of the distribution of the burden of exaction.
But the Minister and the Revenue Commissioners ought to be prepared to accept, and of course put in language which is appropriate for the job, amendments that come to him, either formally by way of amendment, or as others may come by way of recommendation in the course of an address which is the sort of form you might expect them to come from somebody who is supporting the Government, as I do. He will improve this Bill by accepting recommendations to amend it, and in particular this, I think, all important recommendation. There are two important recommendations here, one relative to the treatment of the cost of acquisition and one relative to the treatment on death. There are lots of all sorts of other things, but these are the important ones — all sorts of other things in regard to the time element can be looked after in future Bills.
I do not see, without injustice being done to people who came before and after, having regard to general politics anyhow, that these amendments will ever be made unless they are made now. But not merely will the Minister improve this Bill if he hears valid points being made here with regard to it, but he will improve this House and the Members of this House and give them a sense of justification for the remuneration that is given to them and the time they devote to it. I know no request could be more inconvenient to the Minister, but from his predecessor I got a recommendation to the Finance Bill at 1 o'clock in the morning and the Dáil was rising the following day. We have not reached that time or that day. There are people there to do the work, if there is work, involved in getting this kind of idea incorporated in the legislation.
We have had a very worthwhile contribution from Senator FitzGerald, one indeed, without any question of the Opposition entering into it, which embodies some ideas that are fundamental to our society and its social and economic growth. First of all, on the general principle of indexation, he is right. I know that the Minister may say that the principle itself in an inflationary period can be a dangerous matter to incorporate, but generally across savings, gains, taxes, incomes, across the whole area of human economic activity, it is the most equitable principle to seek to incorporate.
Senator FitzGerald very rightly said that if we do not start it here it will not be started anywhere, because surely in the whole area of capital gains, in particular with reference to Senator Eoin Ryan's amendment, we have a clear case where both from the economic point of view and the point of view of equity it is completely justifiable to incorporate an element of indexation.
I do not think inequity can be disputed, that between periods of acquisition and disposal, if due to inflation, depreciation in the value of money, a fall is taking place, it is inequitable by any criterion to regard the capital gain in the interim period between acquisition and disposal as a capital gain absolutely, in monetary terminology. That is so self-evident that I do not think it requires any argument.
Therefore on the grounds of equity or basic justice, the case for a system of indexation is, in my view, unanswerable. One practical argument I will not accept straight away is to the Revenue's benefit. State finances and revenue taken from people must reside on some basis of equity to command respect. For any taxation system to depart from this basic justice or equity will be very dangerous for a democracy, because we then enter an area where taxation laws are not accepted by a large proportion of the people. It is fundamental to a well-ordered society that taxation, even though people may complain about it, by and large is reasonably equitable and is seen to be such. That is a basic rule.
This amendment seeks to bring a basic scheme of equity into the capital gain that accrues from acquisition to disposal. One argument that may be advanced is that revenue will not gain as much if there is some indexation principle incorporated. That is no argument, for the reason I have just mentioned, that any revenue case must rest on some basis of equity and fair play. Another argument that may be advanced is that the amendment relates to the calculations of the Central Statistics Office relating to the increase, if any, in the consumer price index during a period commencing on the date of acquisition of the asset. It may be argued that the Central Statistics Office and the consumer price index or any calculations the CSO may make relating to the consumer price index, are at the moment not effective enough for this purpose. That again is no answer. I am well aware, and I am sure the Minister is much more aware, of the inadequacy of the consumer price index. That is a common case. Everybody is aware—I know there are studies taking place in the Minister's Office at the moment in relation to this area—of the inadequacies of the consumer price index and the Central Statistics Office, and they are no argument against an amendment of this kind being adopted. As Senator A. FitzGerald rightly said it is up to the Minister to bring an appropriate amendment that will incorporate the principle and this is the time in which to incorporate the principle. There may be arguments about the measuring rod of the indexation and the type of indexation to be adopted, but that is secondary to having an amendment of some kind incorporating this principle because if we are ever to get the principle of indexation off the ground—this is not the most appropriate time by reason of the general inflationary pressures—it will be in a measure of this kind where its justice is so self-evident.
Senator A. FitzGerald made a point that has not been sufficiently adumbrated by contributors to the whole taxation, financial, monetary economic debates which are taking place at the moment, either by commentators outside or Members of the Oireachtas and that is that there is in-built into this package of taxation a conservative principle against change. This applies in particular to this section. This can be pushed too far—if we do not tax capital gains. I agree that capital gains must be taxed because if they are not it can lead to rampant speculation, which is undesirable. If we tax them on an across-the-board basis without any regard to the increase in the cost of living, inflation, or the period within which the asset has been acquired, we are adopting a totally regressive form of taxation when we apply a rate of 26 per cent right across the board—I am talking now about the general economic climate of investment and the well-being of the community—we have a locked-in situation where nobody wants to move his or her assets and a conservatism built-in against any change. This is very undesirable.
The laissez faire approach is wrong, where we allow for a total exchange of assets without any form of taxation. Have some change in taxation by all means, that is the principle of the Bill. There is general agreement in both Houses on the need for capital gains taxation. This would have happened irrespective of Government. I suggest that this is a very serious and important departure. We would do very well to look at the experience in other countries. We have seen, as Senator FitzGerald has quoted, the Swedish experience where they have built-in safeguards, as are outlined in amendments 1 and 2. We would do well, particularly at the present time, when the whole emphasis on Government policy should be in the general direction of incentive, encouraging enterprise and providing for a reasonably free or radical movement of assets, change in this whole area of investment and reinvestment. If you decide to lock in a situation where conservatively minded people hold on to assets, their property, may not change, may not be willing to sell on the basis of disincentive such as embodied here, we are into a dangerous area when this is built-in without the safeguards that we are suggesting in amendments Nos. 1 and 2. These safeguards would be recognised as being both equitable and, from the enterprise point of view, economic. They would ensure that, as far as inflation is concerned, that would be taken for granted on a certain indexation principle. A profit over and above that would then be incorporated as a legitimate area for capital gains taxation.
Apart from the justice of it, the incorporation of the principle in Senator Ryan's following amendment—which has been ruled out of order—makes good economic sense, and would go a long way towards meeting the manifold criticism which the Minister is well aware is rampant in financial and investment circles vis-a-vis this whole package of taxation legislation.
A Capital Gains Bill is needed in principle, but this is a new departure. To meet the criticism which is very strong in the areas of investment and financial interests I already mentioned, which is important as far as this community is concerned and has been spelled out recently by the Taoiseach, it is important that our credit and bona fides vis-a-vis not alone our own financial community but the world financial community are maintained and enhanced. We would go a long way towards maintaining and enhancing that credit by introducing some form of reasonable criterion in regard to capital gains taxation. That of itself would show that not alone is this country concerned about the basic equity involved, but we are also concerned about our own repute and standing in the creditworthy sense.
People in finance can have no objection to any form of tax legislation if it is fair and is seen to be fair. In my view as it now stands, this section is neither fair nor seen to be fair but can be made to be fair and be seen to be fair by the incorporation of an amendment along the lines suggested by Senator E. Ryan.
There is no disagreement between Senators who have spoken and the Government regarding the desirability of ensuring that increases in values which reflect no more than depreciation in money values should not be taxed. I gave voice to these views as far back as the 15th May, 1974, when I expressed my anxiety to provide for some automatic regulator which would ensure that it would not be left to the whim of the Finance Minister to decide what adjustment should be made, but that a specific regulator would be available which would provide automatic adjustments.
It has not been found possible to obtain in the time available a satisfactory indicator. I will give one instance why the consumer price index would be wrong. The consumer price index at the moment has been shoved up by almost two points because of the six weeks drought in Ireland. The price of potatoes is going up to a record level. Will the price of the acquisition or disposal of a property during a period of drought give the person a concession of 2 per cent? The consumer price index this year has risen because the Government, with the endorsement of the Oireachtas, have found it necessary to discourage people from the use of petrol because of the harm it was doing to our balance of payments. We have also found it necessary to impose, for revenue purposes, a tax on nonessentials like alcholic liquor and tobacco. The result of these taxes was to shove up the consumer price index by 3 per cent.
As far back as November, 1974, and on innumerable occasions since then, the Government have asked people to agree to forego the use of the consumer price index for income increases related to these items. As I have said again and again, nobody has yet said the Government were wrong. During the recent budget debate in the Dáil it was interesting that although I mentioned the issue three times in my budget speech nobody took it up.
When things are going wrong the Government blame the good weather.
If there was genuine criticism anywhere of the validity of what the Government were saying it would have been voiced. People know that it is wrong for the consumer price index, where it contains an element of necessary taxation, to be used to automatically increase incomes. Similarly, it would be wrong to use such an inadequate index as an automatic regulator for taxation liability. As Senator A. FitzGerald acknowledged, there are many other things afflicting property valuation besides the cost of consumer items. It would not be appropriate to use the consumer price index as the automatic regulator of tax liability.
Senator A. FitzGerald also said he thought it was wrong that people should be uncertain as to what adjustments would be made in valuations to take account of inflation. I can sympathise with his misgivings about the uncertainty, but uncertainty would not be removed if the consumer price index was to be used because there would be no certainty as to what the future behaviour of consumer prices might be. We would always have to operate with hindsight. Any adjustments would have to be made after alterations in value had occurred. The problem is how does one assess what alterations in value have occurred attributable to inflation only? It is very difficult. Not only would the Government have to look at the consumer price index with all its warts and limitations but it would also have to receive advice from the Commissioners of Valuation. It would also have to look at monetary matters, including the value of currency. There are other considerations which should properly be taken into account before adjustments are made, but we have given in Government an assurance that this matter would be reviewed from time to time and the necessary adjustments made.
It has been said—with some validity —that the old system of estate duty became unfair because the thresholds were not adjusted. That is true if you compare the 1894 rates with the 1973, 1974 or 1975 rates. Because adjustments were not made frequently, as required by circumstances, a tax which was introduced to tax the really wealthy ended up by being a confiscatory tax on people of comparatively small means. That should not have happened. As this Government have abolished that grossly unfair tax and replaced it with alternative taxes, they will have a strong determination to ensure that these taxes do not deteriorate into the grossly unfair tax which estate duty became.
How are we endeavouring to meet the problem of inflation since there is no convenient regulator? We are doing it by providing in the Bill a comparatively low rate of capital gains tax of 26 per cent, which is, as far as I have been able to do research, the lowest rate in Europe or in any of the countries we have had an opportunity of studying. We are excluding from capital gains tax the principal private dwelling, chattels up to £2,000, a gain of £500 per annum, the sales of farms and business outside the family for up to £50,000 on retirement and the disposal on retirement of farms and business within the family for up to £150,000. Government securities are also excluded.
The principal private dwelling is the principal capital item held by people in this country. First of all, the majority will never make a capital gain because they have no capital. Of those who have it, the vast majority of such people are those with a home of their own. Of course, cash itself is also exempt from capital gains tax. The home, cash or chattels of under £2,000 from the principal manner in which capital is held in this country and they are all exempt. While I am not minimising any arguments made about the impact of the tax upon people who are lucky enough to have property beyond the exempted thresholds, it is pertinent to remember how few will be affected by this tax. The vast majority will not be involved in any tax liability.
I will look at the point which Senator A. FitzGerald raised about the disposal of property by the personal representative of a deceased person. As far as the home is concerned, I understood he was in part contemplating that the private dwelling left by a deceased husband to a wife would be caught for capital gains tax purposes if disposed of by the personal representative. That is certainly not the intention, and it is not my understanding of the Act.
Nor mine.
I apparently misunderstood the Senator when he was dealing with that point because the principal private dwelling is exempt. He made another point to the effect that a widow who received property from her husband should not be obliged to pay capital gains tax if she subsequently disposed of the property herself, and should not pay capital gains tax from the date on which the husband originally acquired the property. We, of course, would like to exempt everybody from all taxation, including people to which Senator A. FitzGerald referred, but we could not give the relief he suggested without creating another and unjustifiable anomaly. A widow whose husband was decent enough to give her gifts during his lifetime would have to pay capital gains tax from the date of acquisition of the property by her husband. How would we match the tax treatment of those two widows if we gave exemption only to the widow who received the property on death and not give similar exemption to the widow who received property from her husband during his life? Assuming the taxing of capital gains is justified—and I thank the House for endorsing the capital gains tax principle—then a gain must be calculated from a date of acquisition. Supposing a husband at the time of acquiring any property put it in the joint names of himself and his wife. It would surely be appropriate that the gain would be calculated from the date of acquisition. That is the proper way of treating it.
Under section 56 of the Succession Act a wife has an automatic right to have the family home appropriated to her. She has also under the Succession Act, 1965, an automatic right to a legal share. In the capital gains tax we are providing that there is no liability to tax if there is a transfer of property from one spouse to another. We treat them as one unit. This operates to their advantage. Once we maintain that principle—and I think it is the right one to maintain—it becomes very difficult to break up the period of ownership and then give special treatment to widows which would not be available if the property was transferred during life.
Senator A. FitzGerald thought there were some technical defects in this Bill and I will certainly look at what he said.
want to give him and the Seanad an assurance that the Government are only too happy to consider any recommendations made by the Seanad, and, if they are acceptable, to see that they will be implemented in this Capital Gains Tax Bill. As I said earlier, I do not want to engage in political discussions at the moment or at all during the course of this debate, but it is not the Government's fault that the Bill was not in the Seanad before now. We would have liked the Bill to have passed through the Dáil with greater expedition than it did, but the Government are convinced that the best interests of this country require that this legislation on capital taxation, which has been so long talked and written about and debated, should pass through both Houses of the Oireachtas without any further undue delay. Nothing could be worse or more unfair to potential liable taxpayers than to leave this critical area in doubt any longer. We want to make this, the first Capital Gains Tax Bill in Ireland, a fair Bill, but we are not so presumptuous as to assume that we have provided for every possible complexity which may arise in the future, nor do we think we are drafting capital gains tax legislation that will remain untouched until the year 2024. I hope we are not. What was wrong with estate duty legislation was that it was not looked at frequently enough to ensure that hardships did not arise.
If we look at the capital gains tax position annually then I would anticipate that if any problems are thrown up with the passage of time those problems will be sensibly dealt with. I would hope they would be dealt with in sufficient time to enable the Seanad, with its own special expertise, to make useful contributions to the improvement of the legislation.
One aspect of the debate this morning which disappointed me was that it was assumed that the present rate of high inflation will continue. Senator E. Ryan, Senator Lenihan and Senator A. FitzGerald assumed this. That is a very wrong assumption and I hope the Government's recent actions in this regard may be the beginning of the end of the very rapid spiral of inflation from which we have suffered. The truth is that inflation will not continue at the rate at which it has operated because it just could not. The country would collapse if it did. In common with our European partners and with the industrialised world, we are now embarking upon a crash programme of crushing the menace of inflation. It is not going to be easy and it is not going to be——
Four per cent on 25 per cent—that is the crash programme.
I said it was the beginning, and it is a significant beginning to turn the tide of inflation downwards, after it has been escalating with such severity for such a long time. It is a move in the right direction. This will be followed by further moves which will bring us back to at least single figure inflation—at least this would be a very significant improvement on what we have at the present time.
We are not proposing to tax capital gains going back to 1914. Senator A. FitzGerald produced figures only for illustrative purposes because he knows that the tax will only operate from 6th April, 1974. In relation to a great deal of property there has been a decline in values since April, 1974. From the point of view of the taxpayer, the tax has been introduced at a very useful time because losses could be available to be set off against gains.
Could they in all circumstances?
Not in all circumstances, but they could in appropriate circumstances.
I would like the Minister to itemise that one.
Bearing in mind the Government's declaration of intent regarding the adjustments to be made for inflation, the fact that we have the lowest rate of capital gains tax in the world, and the most extraordinarily generous exemptions, the Government have taken care to ensure that for the foreseeable future, certainly the short term, people will not be paying an undue load of tax because of the absence of an automatic regulator in the Bill itself.
Business suspended at 12.30 p.m. and resumed at 2.15 p.m.
The Minister finished his reply on the basis that we would not have the same rate of inflation in the future. Of course, we all hope he is right in that belief. We all feel that there will be some inflation, but if we can get it down below 10 per cent we will be doing well.
It is true to say that the dramatic effects of inflation, which might be produced by some of the examples mentioned during this debate, might not be justified. Nevertheless, there will be some inflation and some effect of the kind about which we are apprehensive. The Minister also went on to say that there might be no increase in the value of property, that we might get back to the kind of situation which existed in the last century and even beyond that. If that happens we will pass a vote of sympathy to the Minister for Finance because the Capital Gains Act will not be bringing in any money.
As far as this amendment is concerned, the suggestion was made that there may not be much inflation in the future and possibly not even an increase in the value of assets, but there is no harm done if this amendment is accepted. It may not be entirely necessary in the Minister's view, but no harm would be done by accepting it. It is not an argument against providing some kind of a regulator or guideline to deal with the question of the inflation, which will take place to some extent in the future.
The Minister rejects the idea of a consumer price index as a guideline and talks about the fact that, for instance, the price of potatoes had a rather fortuitous effect on it in the last few months. There is no doubt that now and again certain items on the index have a rather unusual effect and distort it for a short period. But on balance, the consumer price index gives a fair picture of the value of money from year to year. Taken over the years, it would reflect fairly accurately the decline in the value of the £ and consequently would be useful means of approaching the question of capital gains tax, even though I concede it would not be an entirely accurate one
In the absence of a better suggestion I am putting forward the consumer price index as a means of measuring the decline in the value of the £ and the decline in the value of property and, consequently, a means of making allowances each year so that we will have a Capital Gains Tax Act which is taxing real capital gains and not capital gains that appear to be there but which are largely due to the effect of inflation.
Although the Minister rejects the suggestion made in this amendment he does not really put forward any alternative method. What he says is rather disquieting. He says that his approach, the approach of the Government, to this question of capital gains is that, because they have introduced a low rate of taxation, because there are high thresholds and because there are various exemptions, in fact it is fair tax, and consequently—perhaps I am misinterpreting him—the capital gains tax will not press very severely upon anybody.
What he is saying, in effect, is that he has not any method of dealing with inflation in the future, that he will rely, perhaps for a few years at any rate, on the fact that there is a low rate of taxation, high thresholds and various exemptions. This, in effect, is saying that capital gains tax will be higher next year and that all the Government or the Minister are doing is pointing out that the effects of that will be cushioned because of the low rate of taxation. In my view that certainly is not a satisfactory reply to the arguments which have been made, to the fears that have been expressed about the effect of inflation.
If you look at this from the point of view of property originally worth £10,000 and sold for £20,000, even if that is not entirely due to inflation, if £5,000 is due to inflation and £5,000 is due to real gain, the capital gains in a few years' time would be £2,600 on that. That would be a rate of taxation of 52 per cent because half of it would be inflation. The Minister would be charging £2,600 on the £5,000 real gain on that property. The rate of taxation would jump from 26 per cent to 52 per cent. This is what could easily happen in the next few years unless some positive guideline or method is adopted which would ensure that inflation is allowed for. It would not be enough for the Minister merely to say that, because the initial rate of taxation is low, thresholds are high and so on, the shock and effect would be cushioned. This is not an answer. It is merely saying that, although the fears expressed about inflation are true and that the rate of taxation will, in effect, go up, nevertheless it will not be very hard on people. That is an entirely different thing from saying that inflation will be provided for in some methodical and real way.
I must come back to the argument that if the Minister is genuine in saying that he will allow for inflation over and above what he has already said about the low initial rate and so on, then he must have thought about it. The Revenue Commissioners must have thought about it. They must have a plan and a method in mind. They must have some guidelines in mind as to how they will approach it. To say that they have not any plans in mind is to suggest that the Minister is being quite insincere in saying that he will allow for inflation.
I do not think he is being insincere. I think he really means to do something about it. What does he mean to do? How will he approach it? The method, the guideline, whatever it is, must be capable of being defined. It must be capable of being put into this Bill so that he will be able to act on it in the years to come.
I am a little bit surprised that the Minister has not only put this in himself but, as the debate has progressed in the other House and here, he has not accepted the views that have been widely expressed. Not merely because there is a strong feeling about this, but in his own interest I am rather surprised that he has not done something about this. In the years to come the Minister's successors will undoubtedly be subject to strong pressures, pressures from socialist friends and pressures from various pressure groups and of course the temptation of the Minister of the time not to make allowances for inflation or not to make an adequate allowance.
In the interests of the Minister and of the Revenue Commissioners one would imagine that it would be much more satisfactory to have something in the Bill which would enable them to resist the pressures and the temptations and say that we must make allowance for inflation, that we must at least have some regard to a guideline which has been laid down in the Bill and we must conform to this. Consequently, even though there are strong pressures on us we do have a guideline to which we must conform and so even though it would be easier this year to ignore inflation we must have regard to what is in the Bill.
I am surprised from the point of view of the Minister, the Revenue Commissioners and the establishment that they have not in their own interests written in something into the Bill which would be helpful to them in the future to resist the kind of pressures and temptations that will arise.
I want to get back to the approach which most of us have to this Bill. As I said on Second Stage, although I was reported by the newspapers to the contrary, and I say now, I accept the necessity and the equity of the Capital Gains Tax Bill. In spite of the fact that it will hurt people and in spite of the fact that nobody likes taxation, I accept in principle that the Bill is one which should be accepted and should be put into operation.
It must be on real gains. It must not be on artificial gains drawn up by inflation. As long as there is a real gain, then I do not think anybody can really object to the principle of a Capital Gains Tax Bill. The purpose of this amendment and the purpose of this debate is to make it clear that it must be a real gain and that it cannot be merely something that is thrown up by inflation. It should be capable of being defined and should be capable of being put in the Bill in some way that would be a guideline for the future.
There may be some people who are saying or thinking that it does not really matter if the effect of this Bill in the future is that people are taxed on gains that are not real, on gains that are thrown up by inflation, and that it does not really matter, on the basis of the kind of example I gave earlier on, that people will find themselves paying capital gains tax on something like 52 per cent. That will be the real effect of the taxation system if inflation is allowed to continue without any allowance being made.
If anybody in this House is taking that view, of course, the honest and responsible thing for them to do is to propose to the Minister that the rate of capital gains tax should be increased to 30, 40, or 50 per cent. It would be quite irresponsible for anybody to support this Bill on the basis that it is not merely a rate of 26 per cent that will be applicable in the future but that the Minister for Finance at the time will not be able to make allowances for inflation in the future and that the rate of capital gains tax will go up in real terms every year and will be 50 per cent or more within a short time. If anybody feels that it should be 50 per cent then he should advocate that but he should not support the Bill or, to put it another way, he should not oppose this amendment on the basis that he does not really care if the effects of inflation will go up from year to year to a far higher rate than the 26 per cent that is provided for in the Bill. It is not enough for the Minister to say that the rate at the moment is low, that there are high thresholds, that there are exemptions and so on and not give us some idea of how he proposes or the Revenue Commissioners propose in the future to deal with inflation. If he is not prepared to tell us what the measures are, he should tell us what these guidelines are and in one way or another to put these guidelines into the Bill.
I have a great deal of sympathy with the Minister and indeed with anybody in his position at this stage facing the proposal which is involved in this recommendation. There has been a very great deal of debate about this not merely in both Houses of the Oireachtas but also in presentations of points of view by parties, who are not necessarily self-interested but informed about the Irish situation. In almost all those that I can fairly say are not self-interested the recommendation of this course has been made. Therefore, there has been every opportunity to consider it. In any case we have only 21 days from the date on which this Bill reached this House in which to make a recommendation and the Minister and his advisers ought to be geared to make the amendments in accordance with the recommendations we make.
Senator Ryan has referred to thresholds and so has the Minister. The only thresholds I find here are quite irrelevant to this problem. There is a threshold of £500 a year gain, a threshold of £2,000 from a particular chattel and a threshold where it is an individual who comes under the half-income rule. If my view of what is involved here is correct we have a wealth tax without a significant threshold. Not one of the three I have just mentioned applies. In most of the cases of people dying where there were thresholds they have now disappeared. I recognise the difficulty of the Minister. This will be my last contribution on this section no matter what anybody says hereafter. The consumer price index is, of course, unsatisfactory but it is operative for many situations, and, although unsatisfactory, operates for these situations. If it is unsophisticated let us sophisticate it for the purposes of the capital gains tax hereafter. We need not necessarily use it.
I suggest to the Minister—I accept that he agrees with it in principle: assuming that there is inflation of the kind we have had, there has to be indexation of some kind—he ought to include a provision whereby the Revenue Commissioners can determine each year what is to be the adjustment to the cost, upwards or downwards, in the light of the consumer price index or any other index they may direct or request the Central Statistics Office to determine for this purpose or any other factor such as those that he has mentioned, the views of the Commissioners of Valuation, the decline in the value of money or the change in currency. It should be a once-and-for-all decree each year. Agreed decisions are involved in all these matters. Agreed. Some people will benefit and some people will lose. But there would be then built into this Bill, which is the first Bill providing for capital gains taxation, a system whereby this problem can be coped with in future.
If it is left to be dealt with in future what will we be faced with? A Finance Bill with just another section called capital gains tax, whereby there will be some provision for indexation, some adjustment for the method of determining the base, some statement by the Minister in the course of his budget speeches as to what this will cost. At the same time he will be forced by financial exigency to cut this, deny that, adjust this upwards, or whatever. If any of that happens what is to be the likely consequence? Even though all the justice in the world howls for it, it will be extremely difficult for him to do so.
I simply ask him to give further consideration to the possibility of some provision whereby the Revenue Commissioners should determine by annual decree the percentage upwards or downwards. Let us hope it is downwards. More capital gains will come in if it is downwards and if the Minister's hopes—everyone in this House hopes they will be realised—are realised in regard to the control of the cost of living. I know perfectly well that the Revenue Commissioners do not want these powers, but that really is not a matter that should determine our consideration of this. We are thinking about justice, a just distribution of the burden of taxation. I, in particular, am thinking of the situation after death, which is being well provided for with regard to smaller estates in the code, which has been removed and for which there is, it seems to me, no adequate provision in the new code. The Minister and his advisers should take account of the views here expressed and—we did not think of these matters alone—the views of informed people on the whole subject.
Even though there is no provision in the UK, it is no reason for not making a proper provision. It is nowadays no model to follow faithfully. There is a certain convenience in following the general shape of their fiscal legislation in so far as they can employ without payment their judges in determining what their language means because the same language is used in our legislation. If there is no provision for indexation in the UK, that is no reason for not having it here.
Confidence in the Government—by the Government I mean not merely this Government but the Executive—and in our system of debate, in our system of Government and in the reality of our debates would increase with advantage to many of the operations of the Establishment which the Minister is presently a prime ornament.
The problem with this amendment appears to be that the Minister claims to be totally in agreement with what everyone is saying and yet I do not think it would be unfair to say he does not, in fact, intend to do anything about it. He agrees the principle of taxing inflation is bad and he promises that will not happen. He keeps on using this mysterious phrase that he will "change the thresholds". It seems to be a puzzle to Senator Alexis FitzGerald and it certainly is a puzzle to me. I have never been able to make out what he means by thresholds. He says that he will change matters but he has not as yet done it and neither has he explained how he proposes to do it in the future. He does, however, say it is not possible to use the price index. I personally am not impressed by his arguments.
We all know the price index is out of date. It does not adequately represent variations in living costs. It is an index we have. It is used for many purposes and while, it is not accurate, it is not that inaccurate. One might put it this way: the latest price index for mid-May, 1975, said that the cost of living as computed in the index had gone up by 24.5 per cent in the previous 12 months. When the Minister says this is inaccurate, I take it he means that the real figure should be perhaps 25 per cent, 26 per cent, 23 per cent, some relatively narrow margin between the figure as stated in the index and the real figure. I do not believe, if the index were brought up to date, changed to incorporate many other items which for various reasons were left out or inadequately weighted at the time the index was first brought in, it would make any fundamental change in the actual figures involved.
The Minister has here an index which may not be dead accurate for his purposes but is near enough. The variation in a new index would be quite small. Certainly the existing index is better than nothing. It is far better to use an index which may be inadequate than not to have any index at all and to say that the 24.5 per cent inflation since last year is to be taxed without any allowance for the fact that there is this inflation. The Minister says he will provide against inflation in any event by fixing a low rate. I cannot see how fixing any specific rate would provide against inflation. After all, the rate is 26 per cent and it was 26 per cent last year, since the tax will ultimately go back to 6th April, 1974, and it will presumably be the rate for next year. We have this continuing rate of inflation, but the rate of taxation remains the same.
Let us consider the effect of this. In the past 12 months, the cost of living has gone up by 24.5 per cent and the effect of that in real money terms or value is that the Minister's 26 per cent based on the 26th April, 1974, is now in effect 32 per cent. If one allows for the increase in the cost of almost everything that anybody is selling, the average increase of around 25 per cent, it means effectively, if one takes the real gain that anyone has, the amount the Minister is asking people to pay is 32 per cent. By this time next year, and I think I am being modest in suggesting that between April, 1974, and April, 1976, the total increase in the cost of living for the period will be 40 per cent —it could well be more—then the effective rate of capital gains tax on real gains as opposed to inflationary gains will be 43 per cent. This will be the continuing result of this inflationary process. Even though the Minister may be right, and one certainly hopes he is right, in saying the rate of inflation will slow, nonetheless year by year this so-called rate of gains tax will be increasing in real terms. The Minister hopes that inflation will fall considerably. It certainly will have to. Indeed, one can only hope the Government will stop talking about the problem and do something practical to solve it.
I would remind the Minister that, even at present day terms, what would seem a very low rate of inflation of 10 per cent per year means that living costs double in seven years. The certainty, therefore, is that year by year an ever greater proportion of these so-called capital gains will be inflationary gains, utterly unreal gains. By way of examples, take an article which cost £1,000 and was sold for £1,100. That is a gain of £100 on which you have to pay capital gains tax, but in real terms, because of a 25 per cent price rise, the real value was £880 and, the owner of this article has lost £120. But he is paying capital gains tax on a notional profit of £100. Take the situation where there has been a 50 per cent price rise. Since 1st January, 1973, there has been approximately a 50 per cent price rise. Say, one buys an article for £1,000, and sells it for £2,000, one pays £260 on the so-called gain of £1,000 but, since £500 of this is due to the inflationary process, in real terms the rate of tax has gone up from 26 per cent to 52 per cent. Take the case, where over a longer period, there has been 100 per cent price rise and I would remind the Minister that at present rate of going, which we certainly hope will decrease, that will happen in four years or even less. You buy an article say for £1,000 and sell it for £2,500. That is a large capital gain of £1,500. You pay capital gains tax on two-thirds of £1,000 out of the £1,500 because of inflation. Here your effective rate of tax goes up to 78 per cent.
At this stage I think Senator Halligan is feeling very happy at the thought, since he apparently feels 26 per cent is too low. The rate of inflation was at one time far less than it has been in recent years, but since 1950 there has been a 350 per cent rise in the general price level. If an article of jewellery bought in 1950 for £1,000 was sold now for £3,500 there would be no real gain at all. It would be entirely inflationary. In future years when gains of this type arise you will find yourself paying on the whole gain of £2,500 which would be a purely illusory gain. As the years go by we will have the position that anyone who sells anything beyond the relatively low thresholds the Minister has set will find himself paying tax on a notional gain of which 80 to 90 per cent is not a gain at all, but purely inflationary.
The Minister says he is going to deal with this matter and keep abreast of inflation. Since he has not told us how he proposes to do this it seems an unsatisfactory undertaking on his part, particularly so when we all know, as a matter of practice, that no matter how well meaning Ministers for Finance may be—I have no doubt that the present Minister is as well meaning as most—when they come to budget time it is not possible to carry out rigidly undertakings of this kind. The Minister in his budget of 1973 gave an explicit undertaking that in future income tax allowances would keep abreast of inflation. They have not come near to doing so. I take it they will fall back still further in next January's budget.
It is not possible for Ministers once the going gets tough to carry out undertakings of this kind. I would be particularly suspicious of an undertaking given in the terms in which the Minister has given this one. He gives no indication at all as to how precisely he proposes to carry it out. All he has said is that there are various exclusions from the Bill. He says he has provided against inflation by fixing a low rate. As I have tried to point out, year by year the real rate as opposed to the notionally low rate will be rising. It already has risen from 26 per cent to 32 per cent or 33 per cent since April 6th of last year when the start for this capital gains tax was fixed. By next April it will be up to over 40 per cent. Under these circumstances it is simply unrealistic to tell us that he is providing against inflation by fixing a low rate.
I think the debate on this recommendation has to a certain extent been a little biased in one direction. For that reason I add a modest few comments simply to redress the balance, hopefully, in the direction of those who really do not have much capital by which they might derive a gain at any point in time at all, and that constitutes most of us.
The recommendation raises a point which has value in the whole sphere of taxation and I do not want to dismiss it or decry the motivation of those who have spoken in its favour. I do not necessarily disagree with the type of analysis to which the recommendation has been subjected by its proposer, by Senator FitzGerald and Senator Yeats. The balance may be redressed if, at a time of very high inflation, we seriously consider the introduction of indexation but we should seriously consider introducing it in a universal way. We should not simply confine our attentions to a Capital Gains Tax Bill, a Wealth Tax Bill or a Capital Acquisition Tax Bill.
Start here.
In fact, I would suggest there is another more appropriate place for us to start, namely, in the general area of income taxation. I would simply say to the Senators who have argued very persuasively from the Opposition side in favour of the introduction of comprehensive indexation that, in the sphere of income taxation, they are the last ones to make any such argument. When they began their last period of office, if my memory serves me correctly, approximately one person in four was paying PAYE. When they left office three in four were paying PAYE. Admittedly a great deal of the reason for this was a real increase in incomes, but there was also a fairly substantial element of depreciation in the value of money. This was the way in which successive Fianna Fáil Ministers for Finance effectively increased the rate of real taxation without apparently actually doing so.
I would agree the argumentation in favour of the introduction of indexation in respect of capital gains has a certain amount of validity if I had seen during the period of office of the Fianna Fáil Government solid proof that that same concern had been applied to the taxation of the incomes of the workers of this country. But that evidence is not there. Therefore, I must be permitted to advance the proposition that this is, in this instance, a case of special pleading. Perhaps it can be justified by allying it with a universal argument in favour of indexation, as Senator Lenihan has suggested. But I doubt it.
The basic question at this stage is: are we going to permit a distinction between earned and unearned income in respect of indexation? I think the answer is that we are not so prepared. I do not think anybody will have the gall to argue that we should. If we are going to introduce indexation here we must introduce it comprehensively into income taxation in particular. I would suggest that, in respect of indexation, we should tread just a little warily because I do not believe the principle of comprehensive indexation has been sufficiently analysed, not only by economists but by those who are expert in the area of public finance generally. It is a bad principle in law to erect a legal edifice on the basis of exceptions. We might be falling into that trap if we were to listen to the persuasive arguments in favour of indexation in respect of capital taxes and from there go on to comprehensive indexation.
It would seem to me that, at a time of high inflation, if one is to index taxes one must take account of the fact that expenditure is not indexed in the sense that increases in the provision of the current and capital services are not expressed in so far as the Exchequer is concerned in real figures. They are expressed in money terms. We have got an equation where, on one side, expenditure is expressed in money terms while on the income side, the figures are expressed in real terms. They are deflated downwards to account for inflation. This leads to the situation where the difference has to be made up through buoyancy, which is a function of the growth of national income.
At a time when national income is static—it may be decreasing—there will be no factor permitting the increase to be absorbed. There will, in fact, be a growing deficit. Admittedly this is a crude analysis—it is not a sophisticated and comprehensive analysis—but I think one sees in it the seed of a possible disequilibrium being introduced into inflows and outflows from the Exchequer. Before one would go wholeheartedly in favour of automatic indexation, one should think twice about it and await the next outflow of Finance Bills before we would come to a final decision.
If we were to accept Senator Ryan's recommendation we would, in the absence of indexation in the field of income taxation, be instituting another source of social inequity. One could take, for example, two individuals, one of whom derives 100 units of taxable income through realising a capital gain. He does it over a period of two years and let us accept Senator Yeats's figure of 50 per cent for the rate of inflation during that period. He would then be taxed at 26 per cent on 50 units and would pay a taxation of 13 units. His neighbour next door earns 100 units in year one and in year two he is also earning 100 units of taxable income. He is taxed in income tax at the rate of 26 per cent and he pays 26 units of taxation. This would clearly be a social inequity. The movers of the recommendation must accept that behind that type of example there is reasoning and justification which says that income derived from capital gains cannot be singled out as the one area at the moment where indexation would be introduced. If we are going to have indexation let it be comprehensive and let us be absolutely sure, before we introduce it, that it will bring about a situation which, not only from the point of view of social equity but also from the point of view of fiscal efficiency, is actually going to work towards the overall benefit of society.
I would make this point to Senator FitzGerald hoping that it will not impel him on to his feet, thereby breaking his promise: if we are going to use Sweden as an example—I am not going to argue against the introduction of Sweden as an example; Senator FitzGerald knows the intense admiration I have for that society which has proposed for over three-and-a-half decades under a social democratic government—I would be happy to support the thinking behind this recommendation based on the observations which Senator FitzGerald drew from the book Tax and Trade Life in Sweden provided the whole gamut of taxation policy which is currently applied in Sweden is also incorporated here. I do not think it will be and, for that reason, I could not possibly support the passage of this recommendation, especially in circumstances where indexation is not being applied to earned income.
When I hear these words of admiration for the Swedish system, I wonder whether Members would share the latest recommendation of the Swedish Government which is to the effect that the ownership of private motor cars should be prohibited because the experts have worked out that, if private motor-car ownership did not exist, the number of motor cars on the roads would be reduced from between 40 per cent to 70 per cent. They may be right or they may be wrong, but it does not reflect people's appetites or answer their immediate wants and needs.
Say that louder for Senator Halligan.
It is true. Over the luncheon break I read a report that this was one of the economic measures the Swedish Government were recommending. Indeed, it has a great deal to commend it. It would save an immense amount of private and public capital if that discipline were to be observed. I suppose people want to be assured of as much convenience as ownership of a private motor car at present confers. This is somewhat removed from capital gains and I want to get back to it. Obviously, if you did not own a motor car, there would be no question of having to pay capital gains tax on it or of living off any loss. That is one of the reasons we are exempting wasting assets from the capital gains tax code, so that losses on motor cars will not be available for set off against other gains.
I am not going to disagree with anything that has been said about the desirability of ensuring we do not tax gains which are attributable merely to inflation and devaluation of money. Senator Halligan was quite right in saying that you cannot contemplate introducing a form of indexation for one form of tax unless you introduce it for all forms. It would not be an impossible thing to introduce as long as people accept the consequences. The consequences would be a very massive cut in public revenue, which would have to be compensated by increased rates of tax. You may argue that that would be a more honest way of doing it because then people would see precisely what the rates of tax were, but it would not necessarily mean any greater public contentment, nor would it lessen demands which people, collectively and individually, make upon the Exchequer for further expenditure, with lower rates of tax. Until such time as we are happy enough to have energy resources we can sell to the rest of the world at massive profits to enable us to abolish income tax and capital taxes, we cannot indulge in the luxury of that contemplation. It is a nice academic exercise, but it has little comfort for the individuals who may have to pay tax or for Ministers for Finance who may have to collect tax in the interests of the common good.
I should like to give some figures to the House which will help to show people just how benign the proposed rates of tax are. I am going to make a contrast between income tax rates on taxable income and the capital gains tax rates. In most, if not all, cases taxpayers who will pay capital gains tax will also be income tax payers. They will certainly be people who will have an income either from the capital itself or from some other source, such as the sale of their labour. The effective rate of charge on gains up to £500 a year would be nil. The effective rate of charge on gains up to £750 would be 8.7 per cent. The effective rate of charge up to £1,000 would be 13 per cent and up to £2,000 it would be 19.5 per cent. Contrast that with income tax on taxable income and you get a 26 per cent rate up to £1,550. Up to £3,000 taxable gains 21.7 per cent is the effective rate charged but, at the taxable income level, you would then be in the 39.5 per cent range. There is a very substantial advantage built into this Bill for capital gains compared with income so far as the tax rate is concerned.
Several countries apply the normal income tax rates to capital gains, in particular capital gains made in the short term. If that were so you could have capital gains tax here operating at the rate of 77 per cent. We have deliberately chosen a low rate, and have a uniform rate so that the effective rate of charge is, as I pointed out, comparatively low: even on a gain of up to £5,000 in a year the effective rate of tax would be only 23.4 per cent. That is a very substantial gain by any measurement. If people who have taxable incomes of that level thought that they were fortunate enough to have a rate of tax of 23.4 per cent on income they would be very content indeed.
I can accept that under capital gains tax you are in some cases taxing the means to make an income, but you are undoubtedly taxing a capacity to pay because the capital gains tax will not be payable unless there is liquidity, unless there is a disposal. It will arise at the time when the gain is made. It is not, having regard to all the thresholds and low rates which we have, a tax which will be onerous. It must be borne in mind that people with assets maintain their economic power at a time of inflation—the value of their assets tends to reflect inflation so that the original cost is preserved. The original economic power is preserved and the value increases in accordance with inflation. I accept that, but even the total inflation will not be taxed. It will not be taxed even if there was never a corrective put in. The total inflation itself would not be taxed, it would only be a proportion of it because of the reliefs. Certain people who have assets and who dispose of them are in a better position to pay tax than people who have income only.
I have offered these thoughts not by way of contradiction of the recommendations which Senators have made for some corrective mechanism; I have indicated that nobody is more anxious than I to provide the corrective mechanism, but nothing has come readily to hand—such as would be necessary to take into account are so complex that it is not possible to produce a statutory form.
I would not entirely agree with the suggestion of Senator FitzGerald that the matter should be left for determination by the Revenue Commissioners because fundamental to democracy is that taxation should be imposed by Parliament. Therefore, if there are any changes in taxation, either alleviations or additional burdens, Parliament should make the decision as to what the appropriate level is and the rate of taxation at any particular time. This is an argument in favour of not having any automatic regulator except in so far as the operation of an automatic regulator might remind parliamentarians of the need to make other adjustments. If the Government fail to make appropriate adjustments I have no doubt that with our very active and vigorous democracy the Government's omission will be brought to public notice and the public, who have the ultimate power in this country, will have the way of punishing those who have omitted to discharge their duties towards the public.
This may be a way which may cause certain frustrations and certain feelings of impatience but it is one of the drawbacks of the democratic system. It has been said that democracy is a bad form of Government until you look at all the others. Those corrective mechanisms are there for our people to express their disenchantment with any Government that fails to make such corrections in the tax system as may be necessary.
I do not want to make a political or partisan point, but one of the contributory factors of the change of Government in 1973 was that there had not been a sufficiently rapid adjustment of the tax system, and the capital tax system, and this caused a certain amount of frustration. Several Senators would not disagree with that. They might say that people were led to believe the change would take a different form. So be it.
A certain promise to end inflation may have had something to do with it.
I do not want to start a debate which would be irrelevant now. The other aspect was a relevant one. What was particularly relevant was that there was a certain frustration in some sectors that the tax system had not been sufficiently sensitive to inflation. The Government are aware of the need to make adjustments to reflect inflation. We have done so in relation to the income tax code, perhaps not as much as some people would wish, but we have made very dramatic improvements in two successive budgets. It is my personal determination, and it is the wish of the Government, that our capital tax position will be equally sensitive to any changes which may take place, but they must be sensitive not merely to inflation but to other changes in property values. These can only be looked at with the advantage of hindsight and on that account it is not possible to insert a particular provision in this Bill which would take account of the several factors which would sensibly have to be taken into account when adjusting the thresholds, the exemptions and the rates in future years.
The Minister has given us some very interesting figures and comments on the taxation system, but the gist of them is that this tax is no worse than any of the others and that he cannot do something in this that has not been done in the other taxation systems, income tax and so on.
In the first place, I do not accept that merely because sufficient allowance has not been made for inflation in income tax and so on, that is a good reason for not doing it in this one. Let us start with this one and get around to doing it with the others, eventually. The gist of what the Minister has said is that he is not going to allow fully for inflation in regard to capital gains. In effect, our worst fears have been realised by the Minister's contributions, in particular by his last contribution. Quite plainly, we are not to have an adequate allowance for inflation in the future. The Bill which is before us and provides for a 26 per cent rate of capital gains tax, in effect will provide for 30 per cent next year and probably 35 per cent the following year, and in five years time it will be, at the current rate of inflation, at least double what it is at present.
That is the prospect which is before us. Our worst fears have been realised. It certainly makes a Bill, which was acceptable on the basis of a 26 per cent rate of capital gains tax on real gains— which makes it acceptable if we have what amounts to acceptance by the Minister that he cannot really provide for inflation—far less acceptable, to say the least of it, than it was as originally envisaged. It is a pretty bleak prospect for anybody in the future who will have capital gains. It is no longer 26 per cent. It was 26 per cent when the Bill was introduced. It was 26 per cent last April. Now we are talking about a Bill where the capital gains tax is considerably in excess of 26 per cent. By next year it will certainly be more than 30 per cent and within no time at all it will be up to 40 per cent and higher.
So we must have a completely new look at this Bill because 26 per cent is already gone; it is no longer relevant. We are now talking in terms of at least 30 per cent before the Bill has gone through. Our worst fears are realised. Not only are we up to 30 per cent already, but there is no real prospect that the situation will be kept under control in the future or that the Minister will do anything about it in a methodical way.
The Minister has said he agrees with the fears we have expressed and that he will make some allowance for inflation, that he will make some gesture about inflation, in relation to this tax in the future, but that will be a very small gesture, not from lack of goodwill on his part but just because he will not have any method or guideline for doing it. In the circumstances, he will not be able to do enough to provide for inflation. It is a bleak prospect. Our fears have been realised. The Bill is already assuming proportions which are very frightening.
However, I will not press this matter any further, not because I am satisfied with the Minister's reply but I am satisfied that the recommendation will not get through in its present form. Therefore, I propose to withdraw the recommendation and think up some other way of phrasing it for Report Stage which I hope will be more acceptable.
The Minister in his most recent contribution seems to have backtracked quite a bit from his original standpoint in the Dáil. His attitude there was quite unequivocal, there was no question or doubt about it. I refer the Minister to the statement he made on 5th February, in column 1749 of the Dáil Official Report:
Nobody should be in any doubt of my anxiety to ensure that people are not required to pay capital gains tax on real gains which are not a reflection of actual gains but merely reflect changes in the value of money.
That is quite unequivocal and candid. It was a definite undertaking by the Minister for Finance that nobody need be in any doubt: so far as he was concerned he did not want anybody to pay capital gains tax on real gains which "are not a reflection of actual gains but merely reflect changes in the value of money."
The Minister's attitude has changed a lot from that statement. He has been telling the Seanad that it is impossible to deal with it without having regard to income tax. I do not accept that this relationship, as the Minister suggests, exists. They are two very different taxes. In one case, people are actually selling part of their capital assets and once sold the assets are gone forever; in the other case there is recurring income.
In any event, the Minister now says it must be looked at in relation to income tax. We all know what that means—that nothing will be done. It must be pointed out again that in this Bill, with regard to the thresholds of £2,000, £5,000 and so on, the Minister has made no change in spite of the fact that there has been a 25 per cent rise in living costs since this time last year. On that point alone, the £500 should now be £625 and the £2,000 should be £2,500 and so on. The Minister has not made these changes.
The Minister referred to all the Government had done for income tax payers with allowances and so on. All I can say is that the ordinary income tax payer would be far better off if he had a combination of Fianna Fáil income tax allowances and Fianna Fáil inflation, if one can use those terms. He would be far better off than with the Coalition rate of inflation and the Coalition rate of income tax allowances.
I have a small query. On page 5, line 35, we have the definition that "profession" includes "vocation". I am a little puzzled at the circumstances in which somebody who has a vocation would be involved in a capital gains tax. Perhaps the Minister could explain how this arises.
The reason the Bill states that "profession includes vocation" is that every time "profession" is referred to "vocation" would also have to be mentioned. The term is used in other finance legislation and "vocation" is regarded as being a calling, an occupation from which practical benefits flow. It is relevant, as Senators will accept, in other sections of the Bill to look at the occupation of a particular taxpayer, to see if he is entitled to get certain exemptions—for instance, exemptions which exist in relation to farming and business, where there is the special exemption threshold in respect of a £50,000 disposal outside the family or £150,000 within the family.
The definition of "legatee" has been properly amended in the Dáil Committee by virtue of the Succession Act, 1965. Does that take care of the case of the legal rights of the surviving spouse? I am not clear as to whether the language covers the position of a child who establishes to the satisfaction of the court that he has been insufficiently provided for and if, for example, the provision for him is required to be made involving the realisation of whether it gives rise to a tax. Perhaps the Minister would prefer to take note of the point and deal with it when we get to the section.
How right the Senator is.
We will talk about the definition of "wasting asset" when we discuss the Schedule rather than now, because the question of short leases will arise.
We will have a long debate on the Schedule.
In regard to the sidenotes, the disposal of business, farm and other assets and the outside/ inside transfers of £50,000 and £150,000, is there a definition anywhere of business as including "profession"?
In reply to the Senator's queries about discussing "wasting assets" now or on the Schedule, they would be better discussed on the Schedule. As regards his query in relation to business, it is not defined in section 2. In sections 26 and 27, for instance, the test would be whether the assets are qualifying assets and the qualification would be whether they are used in a trade or in a farm.
It is "trade or profession" in the Income Tax Act.
It is. "Business" comes in in relation to something in a wider context.
I move recommendation No. 3:
In subsection (3), page 6, line 46, to delete "26 per cent" and substitute:
"in accordance with the following Table:
TABLE.
|
On a gain realised within |
6 |
years of acquisition of the asset |
26% |
|
,, ,, ,,,,,, |
7 |
,, ,,,, ,,,,,, |
23% |
|
,, ,, ,,,,,, |
8 |
,, ,,,, ,,,,,, |
18½% |
|
,, ,, ,,,,,, |
9 |
,, ,,,, ,,,,,, |
14% |
|
,, ,, ,,,,,, |
10 |
,, ,,,, ,,,,,, |
9½% |
|
,, ,, ,,,,,, |
11 |
,, ,,,, ,,,,,, |
5% |
|
,, ,, ,,,,,, |
12 |
,, ,,,, ,,,,,, |
4% |
|
,, ,, ,,,,,, |
13 |
,, ,,,, ,,,,,, |
3% |
|
,, ,, ,,,,,, |
14 |
,, ,,,, ,,,,,, |
2% |
|
,, ,, ,,,,,, |
15 |
,, ,,,, ,,,,,, |
1% |
|
On a gain realised more than 15 years after the acquisition of the asset Nil.” |
This recommendation is put down in an effort to ask the Minister to recognise that the length of time a person has an asset in his possession is relevant to the rate of tax which should be paid. We would all recognise that somebody who acquires an asset and sells it again within a very short time, possibly gets a good tip for shares, buys and sells them within a few months and makes a good profit on them, is in a very different category than somebody who owns a business or a farm over many years.
Inevitably, when one talks about this kind of situation one mentions speculators. It is an emotive term and perhaps it is better not to dwell too much on the particular word. Most of us would recognise that a person who buys something and keeps it for a short time and sells again is in a different category. A person like that has almost certainly put no blood, sweat and tears into the asset and could not complain if there was a high rate of capital gains taxation on the gain he made over that period.
A person who has an asset, any kind of a business or farm, and who has had it over many years and the value of which has probably improved not because of the length of years and not because of inflation but because he has put something into it, because he has improved it as a result of his work and enterprise and sacrifices made on his part, is in a different category. Some allowance should be made for a person having an asset like that. Some distinction should be made between the person who has had it for a short time and the person who has had it over a long period and who has probably, although not necessarily, put a good deal of effort and so on into it.
It has been said that this kind of recommendation would not necessarily be a good idea, that some people would deliberately hold assets for a long period to enable them to make a capital gain, that this recommendation was aimed at getting the lower rate of capital gains tax. It has also been suggested that this would favour the rich people who would be able to wait. I think both of these suggestions are possibly true in certain situations. There is the possibility that there will be examples of cases where people would deliberately hold assets and consequently get an unduly favourable situation from their point of view. I think they would be the exceptions.
In general, people who have held property for a long period would not have done so deliberately; they would be people who have put something into the property, and they should be treated in a different way. Mostly, people like that would be selling because of family or personal reasons. Due to some financial difficulty they would have to sell their goods, and certainly from their point of view it would not be a question of deliberately selling to make a capital gain and to benefit in that way. In most cases it would be something that would be forced on them or would be necessary for them because of their family or financial circumstances.
This recommendation is put down in an effort to persuade the Minister to make some distinction between longterm and short-term gains—to make a distinction between those who have to do this over a long period for family and other reasons and those who make a gain over a very short period who could in most cases be regarded as speculators and who should be in a different category.
There was another recommendation which would have met the situation perhaps more fully but the recommendation which is before the House is a completed version of that, again to make the distinction between those who have assets for long periods and those who merely make a quick turn and a quick gain and who should not be treated in the same way as people holding property for a long period.
The recommendation visualises that the only circumstances in which an owner of property might dispose of it in a short time would be where the owner was a speculator interested only in making a quick gain. I think the Senator would accept that that is not universally applicable. People might be forced for good business reasons or family circumstances, even tragedy, to sell their property in a comparatively short period. It could be asked why that person should pay a higher rate of tax than a person of very substantial means who had ample income and plenty of assets and who could afford to remain locked into an asset for a long period in order to make over a long period not merely a significant gain but also a significant gain free of tax.
I am suggesting that it is an exception rather than the rule.
No matter how you approach this there are different situations. It is very difficult to find a neutral tax which will produce a neutral effect on the taxpayer. There are varying circumstances, but people remain holding on to assets for a variety of different reasons for different lengths of time. It is impossible to come forward, I think, with a kind of moral judgement such as is contained in the recommendation to say the person who is in for a short period is in to make a profit which should be taxed heavily relative to the person who is in it for a long period and is not interested in profit but merely has the asset for some other reason. The end result is the same: the profit is made, the gain is generated and that ought to be taxed.
The way in which other countries approach this problem of the short term gain as against the long term one is to subject the short term gain to the full rigours of income tax. Now, we are not making that proposal and I know the Senator is not either, but there is an argument for treating the speculator under the income tax code. In fact the person who is in the business of property dealing is engaged in the trade of a property dealer, if I may use the tax words instead of the general run of business, and as such is liable to the full rigours of income tax in any event. But I think it would be wrong to assume that under the capital gains code any person who sells a property fairly quickly is necessarily a speculator and should on that account be taxed more heavily than others.
The Minister makes the legitimate point that people sometimes have to sell rapidly. They may have a particular article or piece of property for a year or so and then for family reasons, financial difficulties or otherwise, they have to sell. While it is true I do not see why we should allow this undoubted fact to prevent the Minister from accepting this recommendation, which clearly is right in principle. The Minister has been saying from the very start that what he is after is the speculator, as opposed to the man who has built up a family business. On the introduction of this Bill into the Dáil he put the matter very clearly when, on 20th January, at column 1100 of the Official Report he said:
In the Government's view the existing tax system is inequitable and indefensible in that huge tax-free capital gains can be made by people of means while less fortunate people are inescapably obliged to pay significant slices of their regular income in tax.
He makes it quite clear there that what he is after—and we agree with him in this—are the people who buy and sell property, land or whatever it happens to be, with a view to making a quick profit. This is obviously the type of person everyone would like to see taxed. If we were in order in doing so, we would have preferred Senator E. Ryan's amendment recommendations No. 2 to No. 3. As No. 2 is out of order, this is the one we have to discuss. Clearly, there is a lot to be said for having a much higher rate than the Minister is asking for the short-term speculators and a lower rate for the person who holds property over a long period.
There may be people who keep an asset for years on end with a view to making a profit but I should have thought that, with the present rate of inflation or the rate of inflation we are likely to have in the foreseeable future, this is not really a very sensible way of conducting a business. If a man has kept an asset for ten or 12 years, by the end of it he would not be that much better off in real terms than at the start, allowing for the fact that his capital has been tied up in this property over the years and is not bringing in very much revenue. Clearly, in principle, a very good case is to be made for this amendment.
Why should someone who has built up a family business or a farm, or held a piece of family jewellery for many years and for one reason or another had to dispose of it, have to pay the same rate of tax as the get-rich-quick speculator, who buys a piece of land one year in the hopes that by the following year or a couple of years later it will have greatly increased in value and he can make a quick profit? We are attacking both ends of the economic spectrum with the same weapon and it seems wrong in principle and in every other way. The Minister's attitude, to the capital taxation with which he is dealing at the moment is that essentially it is not so much a question of revenue as one of redistributing wealth and so on and bringing about greater equality in the holding of wealth in the country.
It is fair to say that for a number of years to come neither this nor the other Bills with which we will be dealing shortly will bring in more than a minimal amount of revenue. In terms of the £1,000 million or so that was raised in this year's budget this is only peanuts. The basic point is that the Minister is trying to redistribute wealth in a fairer way. He does not do that by taxing the householder who has a piece of jewellery he got from his parents perhaps, or the man who has built up a business over the years and has to sell it. He is not achieving an equitable redistribution of wealth taxing such people for the same amount as he taxes the people he described as people of means, people who make huge tax-free capital gains maybe over six months or a year. He is treating them all equally, and that seems particularly contrary to the principle that the Minister has been expounding.
I move recommendation No. 4.
To add to subsection (3) the following:
"Provided always that the foregoing rates of tax shall be halved where an individual disposes of an asset which is, or is an interest in, an asset used for the purposes of a trade, farming, profession, office or employment carried on by the individual, or as the case may be by the individual's family company, other than a private residence to which section 25 applies, and the individual, or the individual's family company as the case may be, has owned the asset throughout the period over which the gain was made and the individual was throughout that period engaged full-time in the trade, farming, profession, office or employment or was a full-time working director of the family company as the case may be."
This recommendation is on the same type of points I was making a few minutes ago, that is, that we ought not treat the man who has built up a business or a farm in the same way as the speculator. Many of these businesses were built up by the hard work of the individuals concerned. We say that he must have been employed in carrying out this activity for the whole of the period over which the gain arises. Much of the gain will be due to inflation, but the remainder of the gain, in so far as there is a real gain, will be due to his own hard work and not to any element of speculation or chance gain of that kind. There seems to be inequity here and a very strong argument to be made —and I hope the Minister will accept this recommendation—that such a person should not be taxed at the same rate as the speculator, the person who is in the business of making capital gains for the purpose of the profits.
A person who had a family business or farm all his life, working in it day in and day out, built it up and then, for whatever reason, has to sell it, is in no way in the same position as the person who buys and sells with a view to making a capital gain which up to now has been tax free. That is a completely different situation and I think that it is entirely wrong in equity to tax in the same amount in each case. I would urge the Minister to accept this recommendation.
I am not certain if the Senator envisages that this would operate in addition to the relief provided in sections 26 and 27. He nods his support for the idea that it should operate in addition to the concessions in sections 26 and 27. Frankly, I do not think this additional concessions would be justified. Sections 26 and 27 cover the majority of cases of disposal of business assets, either outside or within the family. Section 27 is part of the Government's plan to encourage the passing on of properties within the family where those properties are the means by which families make their livelihood. People who have no more than their own labour to sell incur no capital gains tax liability and the capacity to labour disappears with death. On the other hand, people whose means of livelihood depends upon the holding of certain assets could incur a liability to pay tax unless the concessions in sections 26 and 27 were given. While I accept the opinion expressed earlier today by Senator FitzGerald that we must make our own tax decisions in the light of our own circumstances and not by comparison with what occurs elsewhere, I think it is occasionally relevant to look at what happens elsewhere. Indeed, Senator FitzGerald did so too when he looked to Sweden and other places for examples, opinion and advice. The concessions in sections 26 and 27 cater for the vast majority of Irish asset-holding situations, where the assets are held for the purpose of generating an income from a business or farm. I would not feel justified in making any further concession.
I should like to mention a drawback which would apply if one were to adopt the remedy suggested by Senator Yeats. The rates would become so low in the tenth year that there would be a positive encouragement to hold on to the assets and not to renew them. I believe this could have a bad effect on industry and farming and could discourage modernisation and efficiency. When one bears in mind the very low rate of charge, the provisions of the Bill are not such as to cause any great hardship. In relation to family assets, there will be a positive encouragement to retain the family assets in a business or farm. We consider that would be socially desirable. If however they are disposed of, and the business for which the assets were retained is liquidated, then a point of liquidity is reached and it is at that point we consider it appropriate the capital gains tax should be paid.
I fear also that if the recommendation were to be accepted it would add greatly to the problems of the taxpayer as well as of the administration. It would introduce a number of complexities and calculations which the taxpayer might not welcome any more than the administration. As I pointed out on many occasions, it is in the interests of the taxpayer that the cost and complexity of the administration be reduced to the minimum, because the taxpayer has to pay the cost of a complicated and onerous administration. There is a great deal to be said for simplicity. We have therefore made our capital gains tax code as simple as possible in the hope that it will meet the majority of situations without creating hardship. If difficulties or problems arise, they can be looked at and corrective steps can be taken.
The Minister asked whether this would be in addition to the reliefs in sections 27 and 28 and I said it was. I pointed out that sections 27 and 28 are somewhat limited in scope, even though I accept that they probably provide for the majority of the cases that arise in Parliament. They by no means provide for them all. They are limited, as I understand them, to situations where a farmer or businessman is 55 years old, has been at work in his business for ten years, full-time, and hands the business over to his children, to a nephew or a niece who has been working for five years, full-time, in the business. This does not provide for the case where, perhaps due to ill health, a farmer or businessman has to retire earlier than 55 and this, unfortunately, happens. Indeed, when it happens the financial hardship on the family is particularly great, and the Minister's concessions in sections 27 and 28 do not cater for this. This recommendation would.
It would also cater for the situation, which unfortunately is only too typical of rural Ireland, where a farmer who has no children, may have no nephews and nieces but perhaps has a brother who is working on the farm with him. Under sections 26 and 27 when he is passing it on at the age of 25 to a brother, he is not protected and has to pay 26 per cent. In one respect this recommendation is more onerous than the Minister's because it is not limited to the family or the age of 25. It provides that during the whole of the period over which the gain arose the person concerned must have been working in his business. It means that, if he retires earlier than 55, if he has no family or perhaps only a brother, he can hand on the farm and he does not pay the full rate of tax.
The principle ought to be established that such a person should not pay the full amount of tax. I do not think the Minister's protection in sections 26 and 27 covers this point. It is an addition, but it is not sufficient because it does not cover the instances where the individual who, for whatever the reason, has to hand on his farm. He should be treated somewhat better than the individual who has bought and sold an asset for the purpose of making a profit.
I should like to support Senator E. Ryan. Farming is a hazardous occupation and there has been a rapid decline in the number engaged in that industry. The Minister mentioned this morning the importation of potatoes. If he accepts this recommendation he will encourage people to improve their farms and to take advantage of membership of the EEC.
In addition to the 26 per cent tax the people concerned in this recommendation have to pay, in the cases I am particularly worried about— where, for example, a farmer wishes to hand on his farm to a brother—the capital acquisitions tax will begin to be paid as low as £10,000. In the case of a brother, and more so in the case of a stranger who gets the farm under these circumstances, the full 26 per cent would be payable under this Bill. Quite considerable amounts would also be payable under the capital acquisitions code, because he is not an immediate member of the family. The total amount payable would be very high indeed.
We cannot possibly deal with all situations with the precision we would like but tax law tries to steer a middle of the road course. When people know what the middle of the road position is they tend to make their own arrangements, to make the arrangements that best suit themselves and that have the least tax effect. I think Senator Yeats would accept that it is not normal for a comparatively young man of 25 to transfer a substantial asset to his brother.
If he was 50 years of age.
It is not normal. Twenty-five was the age suggested for this transaction.
Did the Minister say 25? I said 55.
I am sorry.
I said he should be under 55.
Fifty-five is a comparatively young age under Irish statute law for retirement. The only other case we have in Ireland which contemplates retirement at 55 is an EEC provision in relation to development farms. We have gone for the 55 years of age, and I would prefer to have some experience of the operation of that section to see if it is adequate enough. Maybe with the passage of years people will tend to retire at a younger age. There is a body of opinion which expresses disappointment that people are forced to retire at all when they have many years of useful working life left in them.
We have gone a long way to meet the points raised about transfers within the family not only from one generation to another but also within the same generation. I think it is best to allow that to operate before we give any further concessions. The truth is that the wisest people and the people with the best intentions have to operate in a field of speculation at the moment as to what is the right thing to do. The measures the Government have already decided upon are substantial socially progressive steps. When we see the advantage of the operation of those sections we can see if it is necessary to trim them any further.
One of the problems facing the Minister in relation to this point and others will arise in the course of this Bill because of the change he made since the White Paper on Capital Taxation originally appeared. Originally gifts were not to be included in circumstances where capital acquisitions tax was payable. If he had stuck to this, we would have no problem. I would not object to a situation where someone at the age of 50 because of ill health had to sell his farm. He would be getting the money on which to pay the 26 per cent, and could retire on whatever was left. The problem now arises because the Minister has said that a gift, where no consideration passes, is to be taxable. If you hand a farm on to your brother, no money passes and yet you have to pay 26 per cent of the value of that farm. It is simply because the Minister made this change that this problem arises.
I am not going to discuss this point now, as it will arise on a later section, Nonetheless, that is the reason we have this difficulty on this recommendation. I will withdraw this recommendation, but I will try before Report Stage to redraft it so that it will cover only cases where no consideration passes. Where a farm or other property is sold, and the Minister wants his full pound of flesh, he will get it. But in a case where no consideration passes he should consider very seriously the possibility of taking 13 instead of 26 per cent.
When one takes section 3 in conjunction with sections 26 and 27 one sees the enormous scope there is for some people, such as Senator Alexis FitzGerald and others. When one relates these three sections to the proposed sections of the capital acquisitions tax measure, one can see quite clearly—I do not want to go into this in any great degree—the enormous incentive involved for very substantial evasion.
The scope for encouraging disposal of either a business or a farm before the age of 55 in the case of section 26 and, in the case of section 27, within the family on the basis of payments that are not gifts—because they will be caught under the Inheritance Bill, as it is now being popularly called—is fictitious. This is fundamentally what this type of legislation will drive people towards. The big danger in this legislation with which we are now faced and which we are passing through the Oireachtas is that it will drive people into undercover activities. It will act as a demoralising force in regard to revenue and taxation.
I am a firm believer that there must be a degree of respect for taxation. If there is not at least a residue of such respect for taxation, one is driven into the undercover type of techniques that are wide open—I do not want to elaborate on them here—to anybody who cares to read the relevant sections I have just mentioned in conjunction with the gift and inheritance measures. The incentive should bring people along with it, some aspect that would show people there was a degree of equity involved. There is a degree of equity involved in a situation where there is a scaling down in regard to the period of time within which the asset is held. That is an obvious equity which should be built into the system. There is an obvious equity in having some indexation in regard to the tax gain. To have a 26 per cent tax across-the-board as envisaged under section 3 is a crude mechanism.
We are engaged here in a new departure. We have the opportunity to look at the capital taxation systems that exist in other countries. Surely at the very initiation of a new taxation procedure—with which I agree in principle —we should look at it in a way that will involve a degree of sensitivity or sophistication in its administration so that there will at least be the appearance of justice. The last recommendation on the section was designed to secure that in regard to the disposal of assets within a family or family company.
What I fear about this section and the related sections is that we will have a position where people will devise a way out. I know they have always done this. The wealthier have always done it to a greater degree than the less wealthy. That has been the situation for years. On some reading of this Bill, the ways out are there in a far more nefarious manner than the ways out that were there heretofore.
Until now the business of tax avoidance, to use the proper phrase, was a respectable gentleman's business between reasonably attuned solicitors, accountants and revenue people. The business of tax avoidance under the umbrella of this section and the subsequent sections related to the potential sections in the Wealth Tax Bill and Capital Acquisitions Tax Bill will lead to a far more nasty form of tax avoidance. It is rather analogous to the sort of situation which arose in America when they tried to drive drink underground during prohibition. If you try to drive tax avoidance underground in the sense of seeking to establish and copperfasten a complete tax avoidance control system, you will have a very nasty situation in regard to tax avoidance. It will no longer be a semi-legitimate game between solicitors, accountants and the Revenue Commissions. It will become a far nastier, mafiatype avoidance operation.
Unless these taxation measures are reasonable in appearance, reasonable in regard to how they affect people and to their acceptance, unless there is an acceptability in regard to them, one will have the sort of situation which nobody would desire. I do not desire it and I am certain the Minister does not desire it. I fear that very much, taken in conjunction with the other Bills. That, in particular, is our reason for opposing section 3, which is the kernel section of the Bill.
May I say briefly in reply to Senator Lenihan that I believe one of the reasons for so much of the agitation against the Bill is because it is realised that the Government's package will not facilitate avoidance and evasion in future to the extent that the old law facilitated avoidance particularly? Of course, I suppose the more taxation imposed on one the greater the temptation to avoid its impact. An obvious cause of frustration and anger in our society until now was the relative ease with which people of relatively considerable property could avoid paying their fair share of tax while the regular wage earner had no option. In fact, he did not have the pleasure of receiving the money into his hand before the tax liability was taken from the wage packet. It never went in.
It is common knowledge that professional advisers considered they were failing in their duty towards their wealthy clients if they paid any tax at all, or paid a substantial sum. Before this Government closed off a number of avenues of avoidance and some of the concessions that existed, there were many ways by which people of substantial wealth could avoid liability to tax of many kinds.
We do not want to tax legitimate enterprise unfairly. We do not want to tax capital unfairly and we do not want to tax income unfairly. We want to maintain initiative and enterprise, the urge to make profit and the urge to accumulate. All these are perfectly natural human inclinations and they are desirable because they help to promote the common good as long as they are exercised with social needs in mind. The best state is that in which there is free rein for the exercise of natural rights and at the same time a communal will that profit—by profit I mean profit arising out of the sale of one's labour, one's goods or one's skills—and capital should pay a fair share towards the revenue which must be collected by the State for the common good.
That is our aim. When the package of capital taxation is completed we will be closer to achieving that goal than we were before we started. I am not saying we will have achieved perfection along the way. That would be impossible to achieve no matter how long we spent at the operation. The operation of this Bill will ensure a fairer tax code at the end of the day. In the long run we will have less inclination towards tax avoidance and evasion in the future than in the past. If we can create a code, which is regarded as being fair, there will be less inclination to avoid tax.
One of the most significant features of the Scandinavian system of taxation —perhaps I should say Sweden and Norway rather than Denmark—is the readiness of people there to pay tax and their acceptance of the obligation to pay tax. It may be because they realise the tax system there is fair, that it is seen to be fair. If we can produce a similar system I am sure there will be a much healthier approach to taxation generally.
I suggest to the Minister that perhaps the Scandinavian willingness to pay tax may be due to differing national characteristics though even with the relatively equable fiscal attitudes that Scandinavians tend to have, the machinery is breaking down. It has already happened in Denmark and recently there was great dissatisfaction over the tax system in Sweden, so that even the Scandinavian worm is beginning to turn. The Minister should not quote them too vociferously as examples for us to follow.
One of the difficulties with this legislation—I include in this the three Bills rather than specifically this Bill— is that it does nothing to help directly with our problems of inflation, unemployment and so on. There is a danger in certain cases that it may actively harm our economic progress.
Subsection (7) of this section provides that foreigners who are not resident here are now contributing tax under certain circumstances. This affects a foreign industrialist, who is brought in as a result perhaps of the activities of the IDA, and sets up an industry here because of the various tax-free inducements dangled before him by the IDA. Under this subsection if this industrialist repatriates his profits immediately, they are not liable to capital gains tax or indeed to any other kind of tax. If, however, as we certainly hope he would, he reinvests his profits, if he repatriates these profits after they have been reinvested then they become liable to 26 per cent capital gains tax.
There was, of course, an undertaking given to industrialists that they could reinvest or repatriate their profits free of control or tax. I am well aware of the fact that it has been made clear to industrialists that this is the present position but that it can change and so on. I am not suggesting that the Minister has in this instance broken the rules or breached any principle. I am making the point that we should be completely interested not in the acquisition of a few hundred thousand pounds a year for the Revenue Commissioners but in the future industrial development of the country. We are interested in the provision of employment and the increasing of people's incomes.
This subsection will not help in this respect but will hinder it. It is not any use for the Minister to say that he has not had complaints from foreign businessmen. The fact remains, that there is now, for the first time under this Bill, a definite incentive to a foreign industrialist to withdraw his profits immediately, free of tax. There is a definite disincentive to the investment of such profits here because if they are repatriated later on they will be liable to capital gains tax. This is completely contrary to the country's economic needs and the provision of employment at present. I suggest to the Minister that he withdraw this. All Government activities, in particular the fiscal and tax legislation which is enacted should be geared to the economic development of the country. This is definitely harmful.
It must be remembered that if the assets are rolled over into another business then liability to capital gains tax will not arise immediately. If the gain is made in Ireland I do not think it is unreasonable that capital gains tax should be paid on such a gain. The tax code which attracts foreign industrialists is that which confers a right to income tax exemption on profits generated from manufacturing industry. That has always been the practice and it was the only tax relief. It did not confer relief from estate duty. In certain cases, estate duty would probably have been payable from profits generated from such activity and invested in Irish assets in Ireland, so we have not changed the fundamental approach. The income tax concession to foreign investors in Ireland is not being interfered with. The statutory tax exemption which has been conferred is not being interfered with. In so far as capital gains may be made from assets which are acquired in Ireland, it is not unreasonable that tax should be paid whenever those assets are realised.
I have a few comments to make on the section. First of all, perhaps the Minister can enlighten me on this, I do not read subsection (2) as giving rise to a charge to tax if a person is not resident but simply has shares in a company carrying on business here. These shares seem to be taxable only on sale if they are used in or for the purposes of the trade carried on by the person in the State through a branch or agency. I do not see where the charge arises. As to the roll-over provisions referred to by the Minister, I presume we will find this in the Second Schedule to the Bill. That arises on the question raised by Senator Yeats. I feel I have missed the point and should like to be told where I am wrong.
I should like to relate subsection (2) to subsection (8) of this section, where persons not resident or ordinarily resident here hold shares in companies which derive the greater part of the value directly or indirectly from such assets as are specified in subsection (2), in short, land and minerals, and then to relate these subsections to paragraph 11. I made this point in my Second Reading speech. I feel there may be an answer to me but the persons charged under section 4 seem to be persons who hold such shares, other than shares quoted on the Stock Exchange, but the requirement as to the retention of consideration where the consideration for the sale is in excess of £50,000 under paragraph 11, pages 74 and 75, refers to shares in the company deriving their value or the greater part of the value directly or indirectly from such assets as I have mentioned. Here in paragraph 11, in the Fourth Schedule, the obligation to retain seems to be there whether the shares being disposed of are shares of a quoted or an unquoted company. The persons charged under the subsections referred to in section 4 seem to be only persons who hold shares in companies which are not quoted. This at least needs clarification.
The next point I wish to make is in regard to the proviso of subsection (2) where it is implied that persons neither resident nor ordinarily resident will not be subject to capital gains tax if they come within the exemption provisions of the Income Tax Act, 1967. I am not sure that this reference has not been changed. My comment was based on the first printing when it was Part XXII of the Income Tax Act. In that part of the Act there are provisions for reliefs as distinct from exemptions in various circumstances set forth in a whole series of sections in that Act. I wonder if the Minister could say whether there are any reliefs, reduced rates, ensuring that not more than an overall figure would be paid in this situation, will be provided in the case of capital gains as in the case of income tax.
My next point is a rather more substantive one and it relates to subsection (3) which states that subsection (1) does not apply where an individual satisfies the Revenue Commissioners that he is not domiciled in the State. I wonder if the Minister would consider the situation of the personal representatives of an individual who is not domiciled in the State who has an Irish and a Spanish estate. There could be a liability because of the absence of the limiting provision with regard to remittance falling on the Irish executors, which they could not discharge, because the actual substantive assets to enable them discharge it might lie outside this estate. This is the UK language but I cannot see what difficulty is created by giving to the personal representatives this relief and perhaps aid their business.
The next point I want to make is to be told really, rather than to criticise, where are there provisions here for allocating gains between partners in the case of partnerships. Incidentally, on a point I made earlier to the Minister with regard to business, I notice in subsection (5) there is a reference to a trade, or business, or profession. In fact the same language appears in section 25 and it does seem that, if you were selling your practice, or transferring it to a relation there seem to be relieving provisions there.
Finally, is there any way of dealing with a case whether there is an inter-partnership transfer, somebody moves up the scale and somebody moves down, some shift in goodwill? How is that treated in terms of liability? Who is liable? Presumably it is a gain by the person who is losing by giving to the other person. Presumably he is deemed under this Bill to be making a gain which will be taxably determined. What precise method will be adopted for determining the valuation of goodwill?
Now, as was to be expected, Senator FitzGerald has posed a number of questions. I will try to be as specific as I can in my replies. I have already dealt with the points he raised on subsection (2) of section 4 and the proviso there. I said that related to the United Kingdom only. The operation of paragraph (II) of Schedule 4 and section 4 will not create problems. The purpose of requiring a certificate in respect of shares in a company deriving their value or the greater part of their value directly or indirectly from assets, is because situations could arise where it would not readily be known whether or not the company in question was a quoted company, particularly in relation to things like minerals and rights to the Continental Shelf. The shares might well be registered on some foreign exchange but not registered in Ireland. This is something which might not be readily known to the parties at the time of completion of a transaction, though I would agree that most people engaged in that type of transaction would usually be sophisticated enough or have available to them advisers who would be sophisticated enough to know. Persons who would not themselves be liable, on applying for a certificate under paragraph (II) would get a certificate and production of that to the purchaser would then relieve the purchaser of the obligation to deduct the tax provided for under paragraph (II) of Schedule 4.
The question of allocating gains between partners, and how to handle transfers of property inside a partnership, is not one capable of being provided for in a detailed way in a piece of legislation. Partners may be connected persons. The transfer of property from one partner to another would have to be looked at and measured in the circumstances of each particular case. If Senators have any particular problems in mind I would be only too happy to look at them and to study the possibility of providing for them in the legislation. I warn against the possibility of putting people, including partners, in the strait-jacket of the law which might not be exactly a very good one to choose.
Senator FitzGerald has some worries that the word "individual" in subsection (3) would not extend to personal representatives. If he looks at subsection (3) of section 14 he will find a provision which provides that personal representatives may, as it were, step into the shoes of the individuals themselves. That ensures that the individual may, in appropriate cases, be the personal representative of that individual.
I am obliged to the Minister for what he said overall. With regard to paragraph (II) (1) (d), I agree that in such a transaction the person concerned can get a certificate. Of course, it does mean that brokers and those who are dealing in shares between the dealing—the contract day and the closing date of the transaction—have got to go and get a certificate circumscribed in a manner that solicitors buying and selling property very often are not. Can we not make a simple amendment to make it quite clear that the word should have been quoted "company", not just any company. I would recommend that to the Minister.
The Minister's view of subsection (3) of section 14, which repeats like language in the UK, is not shared by the commentators on the meaning of that section. The personal representatives are a body of persons and a body of persons under the interpretation section is to be discovered by reference to section 1 of the Income Tax Act, which means any body politic, corporate or collegiate, and any company, fraternity, fellowship and society of persons whether corporate or non-corporate. I would find that difficult to substitute for individual. If the Minister thought there was merit in my point he might insert the words "personal representative" after "individual" in subsection (3). I do commend this from the point of view of business accuruing to this State incidentally. There are trustee companies doing business on an international scale and the more flexible they are in their positions the better business it is. There are invisible earnings from it. There is a point here of some usefulness.
I would like to return for a moment to the point I raised on this section about the industrialists who were given these tax-free concessions to set up industries in this country. I am aware of the fact as the Minister says, that they can roll-over their profits and, on reinvesting them in this country, no tax is payable. The present situation is a definite encouragement to them to invest their profits as against repatriating them. If they bring their profits home at once to invest them in some asset in their own country the likelihood is that they will be faced on the ultimate disposal of the asset in which they have invested their profits with capital gains tax in their own country. Whereas if they reinvest that profit in Ireland on the later disposal of the assets concerned they are not at the moment liable to capital gains, but the Minister is now providing that they will be. I am not suggesting, as I said already, there is any objection in principle to this. Indeed, these people are in general well off and one does not particularly grieve about their welfare in this regard. But the fact remains that, whereas now there is a definite fiscal incentive to the reinvestment of these profits in Ireland rather than their immediate repatriation, this incentive will disappear on the enactment of this Bill. I would suggest to the Minister that what he should be doing above all else is considering, in relation to each individual section of this Bill, whether or not it will do anything that might possibly harm the provision of employment, which is the basic problem we should all be seeking to solve at the moment. I suggest to the Minister this will certainly have some marginal effect in hindering the provision of employment. It certainly will not do any good. It will not do anything active to provide employment and, that being so, I think he should drop this aspect of it and maintain the present fiscal incentive to the reinvestment of these profits.
I will certainly look at the point Senator FitzGerald raises in relation to administration. We have made a provision in section 15 dealing with trusts and I will see if there is any objection either in theory or in practice to achieving what Senator FitzGerald has in mind. It is a question of whether or not it is necessary for the purpose of the Act to insert the words "or personal representatives". I would not like to give a specific undertaking to insert it here without having to consider in how many different parts of the Act it might have to be done and it might not be the most suitable draftsmanship to put it in here, but I will certainly look at the need for it.
In further reply to Senator Yeats, I would observe that it will be necessary to have double taxation agreements covering capital gains taxes between this country and other countries. We have not got such agreements at the moment because we have not got a capital gains tax. Most of the double taxation agreements we have are necessarily tailored to comparable taxes in other countries and in our own. Now we will proceed, once the legislation is through, to negotiate appropriate agreements with other countries and, where a foreign investor in Ireland will be liable to taxation in his own country on repatriated gains and so on, the double taxation agreement would ensure that he would not pay it in both jurisdictions. There will be no question at all of people paying capital gains taxes in more than one jurisdiction.
My last remarks should be qualified. A person might pay capital gains in both but there would be a credit in the second country. That is a technical point, but there will be no duplication of the tax load. It is simply a setting-off one tax against liability in another place.
I have very little to say on this. This is generally called the half-income rule. It applies again to individuals and I am not greatly worried if it does not apply to trustees, but I am concerned that it does not apply to the situation of beneficiaries after a death where there is a small income and where they ought to be able to get the benefit of the half-income rule. It does not seem to apply to the personal representatives in that case. Just for clarification, am I correct in thinking that, unlike the UK, life assurance relief is going to be made available under this section here where it is not available in the UK? But, on the other hand, there may be absent from our reliefs under the section, relief for health expenses, such as we rather elaborated over the years in a particularly special way, which you would think should be appropriately available here. Similarly, the reduced rate relief for blind persons does not seem, as far as I can understand the incorporation of the reliefs by reference to section 193 of the Income Tax Act, 1967, just that first glance at it, to take in all the reliefs which are, in fact, being given on the income tax returns by way of allowance which it would seem sensible and wise to give.
The final point I want to make is in regard to section 196 of the Income Tax Act which is brought into play by section 2, the interpretation section. For some reason that is not very obvious to me, the subsection (3) brings in subsection (1) and (2) but does not seem to make available the reliefs the Revenue Commissioners can give under subsection (3). I am sure there is some excellent reason for that. I would just like to understand what it is.
The Senator has posed a question which I will frankly have to examine in respect of section 193 of the Income Tax Act, 1967. I would not be able to respond to him immediately, but I will certainly communicate with him in good time before the Report Stage. It would, of course, be my intention to provide that personal reliefs would be available under this provision.
That is what I thought. I think various personal reliefs have been given since the 1967 code of taxation which have not been incorporated in the section.
I would not like to give a rule of interpretation, but perhaps section 193, as amended, might cover the point. I am not even certain whether the additional reliefs given are reliefs additional to section 193.
They might possibly.
I will certainly look at it. The Senator's other point was provision for relief under subsection (3) where a married woman is living with her husband and one of them is and one of them is not resident in the State for the year of assessment, or both of them are resident in the State for a year of assessment, one of them is and one of them is not absent from the State throughout that year. This is subsection (2). The same consequences should follow for income tax, including surtax, purposes as would have followed if throughout that year of assessment they had been in fact separated. In such circumstances the separation would very likely to be permanent.
This sort of thing happens. You are financing a development agency for personal services where people are abroad in Africa, and elsewhere, helping. This kind of thing does happen here and there and they are treated then as permanently separated for the purposes of the income tax code.
Where the subsection (3) applies, it says:-
and the net aggregate amount of income tax falling to be borne by the husband and the wife for the year is greater than it would have been but for the provisions of that subsection, the Revenue Commissioners should cause such relief to be given——
I am skipping something here.
——by the husband or the wife, as the Revenue Commissioners will direct as will reduce the net aggregate amount by the amount of arrears.
In other words, they do not suffer through the treatment as a permanent separation. They get back to the better position, if they can. That does not to be in the provisions of this Capital Gains Tax Bill.
It could rise to capital gains in that kind of situation.
Ministers of State forced now to be absent so much from home and from their wives have sympathy with people who are faced with this problem. The Senator may be assured I will look into it. Even if they are permanently separated, there is that sense of deprivation.
I wonder would the Minister comment on how under subsection (1) (a) you could have a capital gain on a debt?
One could purchase debts due to another at a price lower than the book value of the debts and subsequently realise a capital gain.
In the case of a debt which bore interest at the rate of 30 per cent per annum it might be worth more than the principle value of the debt to get the right to collect the 30 per cent.
Interest from the point of view of a loss, not as a gain.
The right could involve a capital gain?
The debt could appear, for instance, in an estate duty schedule of assets as well as a liability.
There is just one question on this. It just occurred to me, as I was either taking a bath or going round the corner in a motor car, what happens to a person who finds himself having to dispose of his property because somebody has squatted long enough on it. He has become statute barred. He has lost his property. Does this give rise to a loss chargeable against gains he has made in that year? Squatters' rights arise at some stage. I do not know how it would work incidentally, whether it would give rise to a gain to somebody. The squatter presumably has gained something through squatting and he should be taxed on his gain. The person who has lost his statute has lost it and presumably should be given credit for the amount of his loss and should know that in 1978 he can afford to sell his blank holding and such shares and not suffer capital gains tax.
I hope the Senator does not go around many more corners in his motor car pondering legislation passing through this House. Might I refer him to section 12 (3) which provides:
... the occasion of the entire loss, destruction, dissipation or extinction of an asset shall, for the purposes of this Act, constitute a disposal of the asset whether or not any capital sum by way of compensation or otherwise is received in respect of the destruction, dissipation or extinction of the asset.
It seems to me that covers the circumstances the Senator has described. If a person loses an asset through it being squatted upon by somebody else, that would be the occasion of a disposal, if he suffered loss, as presumably he would, because he would have disposed of an asset without any compensation. It would appear there would be a right to set off the loss against the gain.
I move recommendation No. 5:
In subsection (2), page 12, after line 3, to add the following:
"and provided also that whenever a disposal inter vivos results in a liability both to Capital Gains Tax and to Gift Tax, only such one of those taxes as imposes the higher amount of tax shall be chargeable.”
The purpose of this recommendation is to avoid the payment of capital gains tax and gift tax under section 4 the Capital Acquisition Tax Bill. It was set out in the Government White Paper last year that it would be inequitable to have capital gains tax and gift tax on the one disposal. It does not appear to me that anything has happened in the meantime to make it any less inequitable at the present time. The Minister has approached this point in a number of different ways. First of all, one of these taxes is going to be paid by the donor and the other by the donee. Nevertheless, this may not always occur and, whether or not it occurs, it is in fact having two taxes paid on the one transaction. It is not a defence because certainly it is inconsistent with the principles set out in the Government's White Paper.
The only reason the Minister has apparently changed his mind is because he now takes the view that, if the position is not as it is in this Bill, there would be loopholes and possibly in certain cases a taxpayer might avoid being caught by either Bill. Once again we are getting back to a situation where something is being done for administrative reasons because, whatever the cost to the citizens, there must not be any administrative inconvenience and there must not be any possibility of a loophole through which the Minister could be deprived of any tax.
This is another area where there is no thought or consideration being given to the taxpayers. Everything must be framed to ensure that, no matter whether it is inequitable or not, whether it imposes a hardship or not, income tax must be provided with the least possible inconvenience to the Revenue Commissioners. The situation should not be dependent on these grounds. The situation should not exist on these grounds. This recommendation was put down in the hope that the Minister would revert to the position in the White Paper and would accept the principle that there should not be two taxes on the one transaction. Whether or not the recommendation, as worded, is acceptable there is the problem that a gift tax is not defined, indeed, does not even exist at the moment. But we are all conscious of the fact that the Capital Acquisitions Tax Bill has passed the Second Stage in the Dáil and will be coming to us in due course. This Bill is one of a package of three Bills and we must have reference and regard to what is happening in the other two Bills, and where any provision of this Bill is likely to impinge on or to be impinged upon by either of the other two Bills, we have to have regard to that and take precautions at this stage. No matter what the mechanics of it may be and no matter what the proper procedure may be, we should deal with this situation as far as possible before this Bill goes through.
I am sure the Seanad will agree that our laws should be based upon realities and probabilities, and not on theories and improbable cases. I would say that most disposals in this country by way of gifts will be exempted from capital gains tax. Money gifts will not bear a liability for capital gains tax. A gift of the donor's private dwelling house and its normal contents will not attract a capital gains tax charge. Various items up to £2,000 in value are not chargeable with capital gains tax. Irish Government securities and similar securities are not chargeable assets and therefore will not bear any capital gains tax. Wasting assets such as a motor car, and even animals, are free from liability to tax. That is a fair amount of gift-giving that will not attract liability to capital gains tax.
So if somebody is feeling in a philantropic mood he has plenty of opportunity for exercising that plenty of opportunity for exercising that generous disposition without liability to capital gains tax. That is not the end of it, either. Under section 27, assets may be disposed of free of charge up to £150,000, which is an extremely generous concession. So we are left with comparatively few transactions by people of substantial means who are transferring property that do not fall within the categories I have mentioned.
That is not the end of the matter. Let us look at the thresholds of exemption for capital acquisitions tax. To whom normally does a donor make substantial gifts? He usually makes them to his spouse or children, persons for whom he has a natural love and affection. He may make the gift to his mistress and have a natural love and affection for her, but I think people would consider it appropriate that such a gift might bear a fair share of both capital acquisitions tax and capital gains tax.
In the normal situations which have social value and merit, there will be exemption in most cases from both capital acquisitions tax and capital gains tax. So it is clear that the vast majority of people will not be brought within either the capital gains tax or the capital acquisitions tax code. It is only the exceptionally fortunate who will be asked to pay tax or who may be in a situation where occasion for payment of both taxes arises. Even then, the tax will not be payable by the one person. The person who is disposing of the asset, if doing so by way of a gift instead of selling it, is deliberately volunteering to dispose of the asset without making a cash gain at the time. That is no reason why he should not, as he has voluntarily made that decision, pay capital gains tax at that time. The person who receives the gift is obviously in a better position to pay the tax than before he received it because after payment of his capital acquisitions tax he will have left to him a considerable net benefit.
If the donee is asked by the donor, as a condition of accepting a gift, to pay the donor's capital gains tax, then the value of the gift will be diminished by the amount of tax which the donee may be called on to pay on behalf of the donor. Correspondingly, if he is lucky enough to be above the capital acquisitions tax threshold at that stage, he is about to receive a considerable gift but the value of the gift will be reduced by the amount of tax which he has paid.
These are the probabilities of the situation, and they are very generously met by the Bill as drafted. It is on that account that I say the Government would be unable to receive the recommendation of Senator Eoin Ryan. I suspect he appreciates the reason why we had to have both capital acquisitions and capital gains taxes applicable. If we did not, then very convenient avoidance avenues would be opened whereby people could escape liability to capital gains tax by making a gift of property on a particular day and arranging with the donee to sell the property and pass back the proceeds of sale to the donor. This could be carried on in a multitude of other simpler ways which would ensure that capital gains tax could be avoided altogether.
Finally, I want to make the point that we cannot touch on the merits of the recommendation at present. There is no gift tax in existence at the moment and there is no capital acquisitions tax in existence so therefore we could not amend the Capital Gains Tax Bill to insert words in relation to a tax which does not as yet exist. If the merits have to be considered and the issue has to be met, then it would have to be met in the Capital Acquisitions Tax Bill and not in the Capital Gains Tax Bill.
If I could have the Minister's assurance that he would accept the principle of what I am suggesting I could guarantee that I would draft a recommendation that would meet the situation.
This recommendation merits serious consideration in principle. I appreciate the Minister's enumeration of the practical areas where it would arise immediately and with the threshold limits as envisaged in the two pieces of legislation. What we are talking about is permanent legislation. This is a matter we should never forget. In either House of the Oireachtas this is a permanent piece of fundamental legislation. The Capital Acquisition Bill is in the same category. It is an even more fundamental piece of legislation.
When considering amendments and legislation we must look ahead to the future. It is not enough to say it will not arise because of A, B, C, or D practicality as of now. It is a question of when the thresholds come down in a Finance Bill next year or the year after.
Surely Senator Ryan's recommendation, which specifically states that only one of the taxes, be it on the gains side or the gift side, and the higher tax, shall be the one arising out of a disposal inter vivos. I would imagine that if there is a double taxation situation with donor on one side and donee on the other, it could be open to a very serious challenge in the courts. That is another question. On the basic ground of equity and fairness the Minister sees the validity of not having double taxation in respect of the same transaction—the same amount of money on donor and donee—if he agrees with that view in principle and gives an indication to the House that he will consider the principle in this recommendation for incorporation in the Capital Acquisitions Tax Bill, it would meet the views of people who would support the amendment.
There will be very few situations where more than one tax will become payable arising out of the one transaction. Take an ordinary transaction in a shop. The shopkeeper will have to pay income tax on the profits which he generates out of sale. The purchaser will have to pay value-added tax on the same transaction and the purchaser will be offering the purchase price out of an income which he has earned and on which he has already paid income tax. There you have three tax situations arising out of the one transaction.
Not out of the same amount of money.
The same amount of money passes in respect of the same purchase of an article in a shop. It is the money that the purchaser parts with that bears the value-added tax and somebody else is paying income tax on that. I do not want to push that parallel too far. Like all parallels there are usually some holes in it.
There are other situations where liability to tax may arise on the part of different people and will be borne by different persons—capital gains tax by the donor and capital acquisitions tax by the donee. The number of cases where this will arise will be few and far between. It is doubtful if it will represent a significant percentage of all the gifts made in the country that could possibly be of the size that would bear a liability to both taxes.
The Minister mentioned when he was discussing this earlier that it might often happen that the donor would make the gift on condition that the donee paid the capital gains tax. This is likely to happen in that situation. It means that it is not two different people. One person going to pay tax—two sets of tax—on the one disposing of an asset or acquisition of an asset. It is all very well to say he is getting something for nothing but in that situation he is paying two different sets of tax on the one acquisition. One tax in any situation is bad enough, but two are too much.
The Minister has been defending the proposition in principle that there should be these two taxes on the same transaction, which is the gift. It is not long ago since in his white paper on capital taxation he disowned this very principle. The Minister and the Government, who presumably approved of the white paper, specifically said that there would not be capital gains tax in circumstances where, because it was a gift, capital acquisitions tax would fall to be paid. He did this presumably because he accepted that this was the correct principle on which to act.
For reasons which have never been adequately explained, he has changed it. He may have reasons of revenue or some kind of obscure administrative convenience which made him change his mind, but he should not come along now and assert as a principle the very point he repudiated in his white paper in which he proposed a totally contrary principle that there ought not to be two taxes—that where capital acquisitions tax was payable there would be no capital gains tax payable. We are simply seeking to go back to the original white paper which contained the first thoughts of the Minister. Let not the Minister assert as a principle the very point he denied in his white paper.
I have only one point to make on section 9 and it is a drafting one. I wonder whether "including in particular where he acquires it by way of gift" should not exclude the gift donatio mortis causa, which is treated as a legacy? Under the terms of the Bill it would not be in the market value unless the Minister has the excellent sense to accept the recommendation that I have been making to him as to how he should treat section 14 of the Bill. The gift seems to me to be a gift, whether it is an inter vivos gift or a gift in the contemplation of death. Under this section it is to be treated as a market value operation. However, it is defined as a legacy and under another section it is deemed not to be a realisation. There is a conflict between these two sections.
Just one small point of information: subsection 1 (a) of section 9, states:
where he acquires the asset otherwise than by way of a bargain made at arm's length.
To what extent has that phraseology got drafting validity or court sanction or otherwise? What does it mean exactly in definition of terminology? I just wonder what approval has been got for it in drafting terms.
Whatever may be its meaning in courting language its meaning in court language has been understood in various tax measures which have adopted this phrase "at arm's length". I had a curiosity similar to that of Senator Lenihan—
I am glad to hear about the curiosity.
——in this regard. We are still interested in this kind of thing. It is one of these phrases, like "business", which is so generally understood and does not require specific statutory definition, yet it appears to cause some puzzlement. The tax experts speak a language that other human beings do not know. It is practically and generally understood as meaning "at a distance". People use the phrase "a 40-foot pole" and do not know what it means. But when the phrase is used people understand what the meaning of it is. It is a phrase which is also used in double taxation agreements internationally. It is not defined in the international code any more than it is in our domestic code.
I would refer Senator FitzGerald to section 2, page 5, where "a legatee" is defined. Since the Senator still has a query in relation to this section I will take a look at it.
It is because of that definition I have a query.
Very briefly on the question of "arm's length", the problem I can see is that while everyone knows what it means in the lay sense, I suspect some poor soul will have to pay a lot of money to get a legal definition of it. To save that person that money, could the Minister not put a definition into this section? There are a large number of definitions there already, some of an esoteric nature, and it might save somebody legal costs in the future if a definition were put in now.
It gives private people their right to argue the matter before the Supreme Court or to deny ourselves the pleasure of reading a Supreme Court judgment on the matter.
I hope the Revenue Commissioners pay the cost.
If it had caused any trouble before now it would have reached the court level, but there have been no appeals from any finding which involved an "arm's length" situation.
It has become a much more important issue now than ever before under this section.
It might be more costly to try to define it in a statute than to have the matter resolved by the courts. I invite Senators between now and Report Stage to draft the definition they suggest we should have put into section 2 to cover the situation.
I move recommendation No. 6:
In page 12, lines 19 and 20, to delete "(variations on appeal being disregarded for this purpose)".
The problem I seek to deal with in this amendment is related to the question of compulsory acquisition of property. One of the difficulties I have in moving this recommendation is that I am not certain what precisely the Minister means in this section. He provides, as I understand it, that where there has been a decision to acquire property compulsorily, for the purpose of capital gains tax this tax should be payable from the moment of the fixing of the compensation and that this should be so, even where the person from whom the property is being acquired has appealed. The difficulty here is that if my land, for example, is being taken compulsorily, the compensation is fixed. I appeal against this and in due course the court of appeal decides to vary the compensation or leave it as it was originally. In any event I am liable for capital gains tax as from the moment of the fixing of the compensation, even though I have not received any money out of which I can pay the tax.
This is clearly undesirable. Even though the Minister may say that the Revenue Commissioners will not seek to take the tax until I have actually been paid, it seems bad legislative practice to incorporate such a section in an Act which gives the Revenue Commissioners power to demand the tax. If my property is acquired compulsorily not only do I have to pay tax on it—and this is another issue with which we will deal later—but I must pay tax from the moment the compensation is fixed even though I have not received the money. As I said, this seems to be a contrary principle and I should be glad to have an explanation from the Minister as to why this is so.
The taxpayer would not be required to pay tax until the consideration had been finally settled. The provision is to deem that the time of disposal is the earlier time. The reason for this is that, if we did not deem the time of the disposal to be the earlier time, appeal procedures could be used for the purpose of delaying payment of the tax.
I know the Senator is shocked that anybody would contemplate doing such a thing, but it has happened frequently in the past that appeal procedures have been used purely for the purpose of obtaining postponement of payment of tax. I am sure the Senator would agree it is not desirable that people should abuse appeal procedures in order to obtain a prolonged postponement of payment of the tax—tax which is paid by straightforward people who do not resort to such abuses of the appeal procedures. Even if they were to engage in the appeal procedure they would not be required to pay the tax, but we would deem the time of disposal to be the time at which the consideration was first determined.
At the end of his speech the Minister saw the trap into which he was falling and endeavoured to extricate himself from it. He started off by saying that this legislation I am seeking to delete was necessary to prevent people misusing the processes of law to avoid paying. The implication there is that, if the Revenue Commissioners decide that a person is abusing the law, it is not a genuine appeal, that they can take the money from that person. At the last minute the Minister realised that this would cause problems and he said, in a hurried kind of way, they would not make the person pay it anyway. In that case, it becomes pointless. The only meaning of this can be, as the Minister says, that a person is liable to pay the tax from the time the compensation is fixed; then the person appeals. If the Revenue Commissioners think the person is honest, and has a genuine cause for appeal, they leave him alone. If, on the other hand, they think the person is only appealing to avoid paying, then they demand the money. If this is so, it makes it more necessary than ever that this recommendation should be passed. Am I not right in this assumption?
I do not know if what I want to say relates particularly to Senator Yeats' recommendation, but it can be made to relate. Generally, in clarification of the entire section, on the Minister's observation I cannot see how people would engage in appeals in relation to compulsory acquisitions which would be concerned merely to postpone a capital gains tax liability. I can understand why people use the income tax machinery because if they keep on appealing they can borrow the money from the Revenue and use it. If there were appeals in relation to compulsory acquisition, they would relate to the exploitation of the property and the person's desire to get more out of it.
Trying to relate section 10 to section 8, and in particular looking at subsection (3), is the position that, despite all that has been said about time of disposal, the actual time of disposal is ultimately determined by the time of receipt of the capital sum where there is a compulsory acquisition? If that were so, I would be happy. If it were not so, I would be extremely unhappy. I do not think it should be left to the general provision of section 5 with regard to the assessment of capital gains tax and the date of payment. We must exclude by legislation any question of liability to make a payment from a realisation which is compulsorily effected until the person affected has cash in his hand which enables him to discharge the amount. I do not know whether this is quite relevant to the Senator's recommendation or it is an observation more appropriate to the section itself. I thought I would mention it at this point and I do not think the Minister will object.
I suggest that the answer to the Senator's question is quite clear, in so far as anything is clear in this Bill. Section 10 (1) (c) states quite categorically:
...the time at which the disposal and acquisition is made is the time at which the compensation for the acquisition is agreed or otherwise determined (variations on appeal being disregarded for this purpose)...
This means that the time of acquisition and disposal is specifically said to be when the compensation is agreed or otherwise determined.
Could Senator Yeats explain the relevance to the rest of this section, subsection (3), referring back to section 8, subsection (2), which does not seem to have relevance unless it is saying that when people get cash then they must pay and the time runs from then?
This relates to compulsory acquisition. I take it subsection (3) relates to other forms of acquisition.
Such as are set out in section 8 (2)?
I want to emphasise that all we are doing in this section is fixing the time of disposal. The fact that there might be variation in the consideration does not matter. I was pointing out—and I think it is already accepted—that the appeal procedure has been used in the past to postpone payment of tax. Senator Yeats thought I discovered I was walking into a trap and then stealthily dropped out.
There are ways in which one could use the appeal procedure under capital gains to reduce liability. For instance, one might use the appeal procedure to postpone the time of disposal, if we had not this section, in order to ensure that at the time of disposal the taxpayer had a loss which could be set off against the gain. There are many situations in which a taxpayer can so adjust his affairs as to have, at a particular time, a loss to set off against the gain which would effectively reduce the gain and conquently the tax liability. We do not think it is desirable that the tax law should be used in that way. Therefore, it is important that the time of disposal should be fixed and not be capable of being varied by the manipulation of the appeals procedure. I take it that there would be no strong objection to that. The appeal is on the ground of the amount of consideration. That is fair, and that right of appeal would not be affected or interfered with in any way. The only thing we are ensuring is that there will be certainty about one thing— the actual time. The timing would be the date on which the price was first determined.
If I may take the Minister's last point first. I am not impressed by this notion of people solemnly appealing in order to delay the matter until they had a loss to set against it. This is a case where a man is having his property compulsorily acquired. I think there are strong arguments in principle against having to pay tax under these circumstances, where one does not even want to sell one's property, but we will leave that aside for a moment. A man is having his property compulsorily acquired. Suppose he was selling freely. If he was selling his property, he could wait until such time as he had a convenient loss to set against it. What is so immoral, so unprincipled, where he is not selling voluntarily but is having his property taken away from him involuntarily, that he should, by means of legal procedures perhaps stagger on for a few months until he has a loss to set against it? He is only then in the position that the rest of the community are in when they sell voluntarily, or perhaps the Minister would like to close that door too. He would have certain problems in preventing people selling voluntarily at a time which suited them. Basically that is the position. I do not think that anyone can be impressed by that argument.
What I would like to know is this: under paragraph (c), as drafted, do the Revenue Commissioners have power to make the man pay the tax before the appeal is heard? That is a simple issue. If they do, then this recommendation is essential. If they do not have that power, then all this paraphernalia of saying that the man must be prevented from misusing the processes of the law falls down because it all ends up the same way. He cannot be made pay in any event. We must know this for definite. So far as I know the Minister has not yet not said definitely whether the Revenue Commissioners have this power. I am not interested in information as to whether they would use the power or not. I think it is essential before we go any further to know whether they have the power under this paragraph, whether it gives Revenue the power to demand that capital gains tax be paid at the time the compensation is agreed or otherwise determined.
The Revenue Commissioners would make an assessment in the first instance, and by reference to the date on which the disposal took place. There might be an appeal against the amount awarded. There would be no collection of the tax pending determination of that appeal, but the date on which the disposal is deemed to take place would be the first occasion and not whenever the appeal on the amount would be finally determined.
As I say, experience has shown that the appeal procedure may be abused. When appeals have been due for hearing, they have been postponed many times in the past at the very last moment at the behest of the taxpayer. This is an abuse of the system. It would be wrong if compulsory acquisitions were to be held up by an abuse of the appeals procedures on awards. I am sure Senators will agree with me on that point. We do not want to see the public good frustrated by abuse of appeals procedures. That is why we must ensure that if appeals procedures are being made available, they would be available for the purpose of allowing the person to have the consideration properly determined. They would not be available for any other purpose which would not be relevant to the determination of the consideration.
I followed the argument fairly closely and appreciate the argument the Minister made, but I would ask him to look at it from this point of view and possibly consider the matter further. The argument the Minister made, while undoubtedly having validity, does not seem to be an argument which is valid in the context of the Capital Gains Tax Bill. I appreciate that anyone concerned with administration might take the view that to allow any kind of machinery which might enable a person from whom land is being compulsorily acquired in any way to delay that acquisition, might in some sense be frustrating the public good.
That argument does not seem to be related to the capital gains position. I feel there is a great deal of merit in the point made by Senator Yeats—again trying to look at it solely in the context of capital gains—that here we have an individual who has not gone out of his way to try to make a capital gain, he does not want to sell the land. That is probably the last thing on his mind— and by the operation of a local authority he suddenly finds himself in a position where, despite his own wishes in the matter, his land is going to be compulsorily acquired. He will be put in the position—I am not saying that this applies in all cases, but it will apply in some—of making a capital gain against his will.
To my mind that individual is in a completely different position from the individual who hawks his land for sale for the purpose of trying to make a substantial profit and getting a capital gain. I would rather feel that the person who is forced into the position of making a capital gain which he does not want, should be viewed with a certain amount of leniency by the Minister, the Revenue and the Legislature.
If that person brings an appeal he is not doing so primarily for the purpose of trying to defeat the Revenue. If he succeeds in his appeal, and if the words which Senator Yeats wants to have deleted are deleted, the Revenue will do better out of it because there will be a greater capital gain to be taken into account.
I am not opposed to the Minister's point of view on general grounds although it does not seem to be entirely relevant in the context of capital gains, and it might be well worth the Minister's while having a look at this again.
I am sure the Seanad will agree that we must fix a time of disposal. One can certainly determine what that is by looking at a contract, if a contract exists, or in relation to a certain event, when that event occurs. Where a compulsory purchase procedure is used, one has to have some event or time as the time of disposal. It is not something which should be left to chance. It would seem that the most satisfactory time is to take the time when the compensation is first determined. That is the crucial point—the determination of the compensation.
I accept what Senator O'Higgins said that if an appeal takes place against the first adjudication of compensation, and if a higher sum is awarded, that the tax return would be greater. Some people have found that on appeal the consideration has not been increased. There is no certainty that the patience of the Revenue Commissioners would be rewarded with a higher yield. There is no certainty that it will be rewarded with a higher yield even if the consideration was increased, because there might be a loss available for set-off against the higher consideration by the time the consideration might be fixed.
What we are concerned with in this section is fixing the time of disposal, and fixing it in such a way that it does not leave it open to argument. I am not certain that special consideration has to be given to people where compulsory purchase arises. I know that may horrify some people, but compulsory purchase can only take place when it is shown that the public good qualifies an individual right. The Constitution recognises that exigencies may arise where the private right may have to be qualified by reason of the greater public good, subject, of course, to appropriate compensation. If the compulsory purchase procedures are unfair, that is a matter for rectification in the compulsory purchase laws. It is not a matter to solve in taxation laws. It would be wrong to use taxation to compensate for any unfairness or difficulties that may exist in the compulsory purchase laws.
I want to assure the Seanad that I will consider what they have urged on this section but I would be less than fair to them if I were to give them any impression that I saw any substantial reason for varying what I think must be as certain as possible, and that is fixing the time of disposal.
Oddly enough on hearing the Minister again, I am not sure that from the point of view of the taxpayer he is not better off to have these words in. If one assumes that the end result of his appeal will be that he is going to get more, maybe he is doing better to have it in. I still stick to the remarks I made previously, which I shared with Senator Yeats and they do have validity in the context of capital gains.
As regards the question of the time at which the disposal takes place, that in itself I am not particularly worried about. The Revenue Commissioners and the Minister are being unduly finickey about this. I cannot see that it would do any harm to fix the time at the final determination, whenever the appeal process is over. However, if they feel it would do them harm, I am not worried. What does worry me is the consequences which can flow from this. The Minister may have answered my question categorically, but I am not certain that I understood him to do so, as to whether this paragraph gives the Revenue Commissioners power to demand payment of tax before the appeal is determined. If he tells me they specifically have not got that power and that they cannot take a penny from him under the law until the appeal is over, then most of my worries disappear. If they do have that power that is another issue.
No, they would not collect the tax until the issue was determined.
They would not have legal power to do so?
They would not collect the tax. They would not have legal power because the consideration would not be finally determined and until the consideration is determined the amount of tax cannot be assessed. What we are fixing here is the time of disposal, we are not concerned with variations in the consideration.
We are getting into deeper waters. The Minister now says that of course they cannot demand any money until the consideration is finally fixed. I had been under the impression from the discussion that took place in the last few minutes, particularly Senator O'Higgins's interventions which appeared to match the views of the Minister on this point, that whatever happened on appeal did not make any difference to the tax, that whether the final amount went up or went down the tax payable was still the same. If that is so, there is no question of waiting to see what the final amount is, because it does not make any difference to the Revenue Commissioners.
Perhaps I did not conclude my sentence and if I did not I apologise. I was saying that this section is not itself concerned with the amount of the consideration. This section is only fixing the deemed time of disposal. That is all it is concerned with here. Of course, there would be a variation in the tax depending upon the ultimate consideration awarded but the time of disposal would be the year in which the first determination was made, not the time in which the consideration was ultimately fixed.
So, Senator O'Higgins will have to withdraw his kindly thoughts with regard to the Revenue Commissioners. There is, in fact, no question of the taxpayer being able to gain at the expense of the Revenue Commissioners, because whatever is fixed on appeal will be the amount on which tax is payable.
Yes.
I must say I am considerably relieved to find the Revenue Commissioners apparently will not have the legal power at all to collect the money. One last question. What if the appeal is not wholly on the question of the amount of the compensation? Supposing I appeal against the actual order for compulsory purchase and the order is then revoked, they decide there will be no compulsory purchase, we are told in this paragraph that already before this has happened, the time at which disposal is made has been fixed by the original fixing of the compensation. That being so, what happens to this compensation situation in the event of an ultimate revoking of the whole order?
Let us deal with the practical case that the Senator presents. Supposing the Revenue Commissioners decided on hearing that compensation had been determined that they would assess the taxpayer. If the taxpayer was, in fact, appealing against the compulsory purchase order and any compensation awarded, he would then appeal against the assessment. If the Revenue Commissioners could not collect on foot of an assessment under appeal and if in the final event the compulsory order was quashed, there would be no disposal and no occasion of making a capital gain would arise.
I gather from what the Minister said—his remarks have eliminated my understanding of the section—that really what is being proposed to be enacted here is that in relation to a compulsory acquisition, the time of disposal is the time at which the compensation is agreed or otherwise determined. That fixes the year in relation to which the gain is to be assessed and if there are appeals going on for a number of years that does not matter.
I presume we will find in the schedule some indication of the basis on which the Commissioners are prevented from raising an assessment until the appeal has been finally determined, because otherwise you would have the taxpayer not merely having to appeal against the corporation or whatever local authority was performing the compulsory acquisition, but having to appeal against his own inspector in relation to an assessment made on him. Then the question arises about the liability to pay and the time he receives payment from the local authority which enables him to pay. At this point, if there is a compulsory purchase, and if there is a great gain being made, in a way the Revenue and the taxpayer are in partnership. The Revenue will get 26 per cent of the gain and the taxpayer will get 74 per cent of the gain, and the original base price, so they should be working together. I find it difficult to understand that in relation to tax the taxpayer, the appellant in relation to the compulsory purchase, should be in any way concerned with his liability to pay tax in the question of the determination of what amount of compensation he will get.
That does not seem to me to be a reason for disregarding variations on appeal except in so far as a matter of policy it may be desirable—I would understand that—to fix the time of disposal in one particular year provided there is no power to raise an assessment until there is not merely the figure determined. Here we are in rather a different situation to a sale by vendor A to purchaser B where they may be culloguing about when they will pay and so on. If you made any question of an assessment to determine whether or not the payment was made by the purchaser, you could easily see people getting together for that purpose.
Here we have a local authority finally becoming bound to pay £100,000. I honestly think in that situation the taxpayer ought not to be obliged to pay and should not be assessable until he receives the compensation money. Everybody knows the Revenue behave sensibly and agreeably in relation to all these things but that is not the point. There ought to be a question of right in relation to this. It may be that all this will be turned up when we get to the rules of computation. If the Revenue has power to make an assessment, and if there is interest charged if the assessment is not paid, this is really important.
If a taxpayer receives an assessment in respect of a transaction which had not been completed because he has not received the consideration, the taxpayer could in practice appeal against an assessment, and that would debar the Revenue Commissioners from collecting the tax until the issue had been finally determined. It would not be finally determined until the consideration had been paid over.
What will be the practical position? There will be no assessment until the completion of the year in which the gain is deemed to have been made. Then the potential taxpayer would notify the Revenue Commissioners of tax gains and losses in the year. That would make the Revenue Commissioners at that stage aware, even if there was a transaction outstanding or if compensation had been determined in a given year, that he had not yet received it. From the ordinary practical situation and administration of the tax it is improbable that the situation could arise in which the taxpayer would even be assessed for payment of tax if the consideration had not been received. If he received such an assessment he would, no doubt, prudently inform the Revenue Commissioners that the consideration had not been received by him. In such a situation the Revenue Commissioners, apart from the legal position, as Senator FitzGerald anticipates, would act in a reasonable manner and would not insist on extracting tax from a person on a transaction in respect of which the consideration had not been received.
There is just one small point. The Minister is undoubtedly correct in saying that if a taxpayer is assessed in these circumstances, his remedy would be to appeal against the assessment. I wonder if the Revenue will be in a position in relation to an assessment here whereby interest will be payable if the taxpayer does not come to an agreement with Revenue with regard to a part payment to be made in the event of his appeal not succeeding in the same way as income tax.
While the Minister is thinking about what Senator O'Higgins has said I would like to say that I am a trustee of a rather substantial estate in relation to one item of property. I have no interest whatever in the matter other than as trustee. We are the subject of a compulsory purchase order, which was made four years ago, which has not yet its validity as a compulsory purchase order let alone the assessment of the compensation have not been disposed of. We have since sold our property subject to the compulsory purchase order and somebody has taken a spec on it. These particular things go on for quite a long time. I think that the rights of the taxpayer should be set out in relation to this situation somewhere in the Bill.
The whole area of local government is very strange.
If it was four years ago it was before April last year anyhow.
I am not worried about the case. The Senator is quite right.
I think Senator FitzGerald has advanced a very good argument for fixing the time of disposal, otherwise there might be sales, sub-sales and further sub-sales.
I am not too sure.
If the law states what the time of disposal is, then the parties will know precisely where they stand. If any sale is taking place the vendor and purchaser will take that into account. If it is a matter of guess work it might be very difficult to strike a price.
In regard to Senator O'Higgins's query as to whether interest would be payable as from the deemed time of disposal or the time of ultimate determination of consideration, the position is that the Revenue Commissioners could not assume that a compulsory purchase order would go through or that consideration would ultimately be paid at all. Therefore, there could be no question of making an assessment or creating a liability to tax until that uncertain matter had been determined. When it would be determined an assessment would be made and then a liability to payment of interest would arise if the tax was not paid within due time.
It is determined in the final sense.
Yes, it is determined in the final sense when the appeal is concluded. Assuming that the compulsory purchase order is going through and that the consideration will be paid the assessment would then be made and tax liability would arise thereafter in relation to the final determination and not the earlier one. The deemed time of disposal would be the earlier one, and that would determine the person's liability to tax if the gain was deemed to have occurred in the earlier period.
On the income tax code, if an assessment is made by the Revenue Commissioners on certain profits and the taxpayer shows that he has not made that profit, then the assessment has to be reduced by the amount of profit which was not made. Similarly, under capital gains, if consideration is not received, in whole or in part, obviously the assessment has to be modified accordingly.
The result of all this discussion would appear to be that it is still open to the taxpayer to delay the procedures of the law to his utmost in order to avoid paying tax. The only conceivable advantage from the Revenue Commissioners' and the Minister's point of view of this whole rather complicated procedure is the slightly notional advantage that in their view the taxpayer will not be able to delay in order to acquire a loss somewhere else. It is still open to the taxpayer to use all the possible means of delay in order to avoid paying.
The only point at issue is, therefore, that according to the Minister the taxpayer might use the law to delay things for a year or two in order to acquire a loss somewhere else. It seems a rather vague and obscure reason for having this provision. I would have thought that it would be much simpler and more straightforward to say that the time of disposal would be the final determination of the whole matter in whatever court it ended up in. However, there is no great matter of principle involved but it would have been simpler for all concerned if the Minister had done things that way. There is no possibility of evasion of anything except conceivably this idea that you could carry on appealing until you obtained a loss somewhere else.
On this section I should stress that the Minister has made no allowance for the effect of inflation.
In what the Senator said is he referring to the section or the Schedule? It is a matter for the Seanad to make up its mind whether it wants a substantial debate on the section or on the Schedule.
I think it would probably be better on the Schedule.
The Schedule is the major debate in this legislation.
The point I am making is not related to the Schedule. I refer the Chair specifically to——
As long as the Senator does not anticipate the debate on the Schedule.
I do not propose to discuss the Schedule. I am relating my remarks to the first couple of lines of subsection (2) which says:
Every gain accruing on or after the 6th day of April, 1974, shall, except so far as otherwise expressly provided by this Act, be a chargeable gain.
The other matters otherwise expressed I would like to refer to are the various thresholds that if a gain is less than £500 you do not pay and so forth. The point I would like to make is that most of these figures appeared originally in the Minister's White Paper on capital taxation, which dates from February, 1974. This laid out that——
Which paragraph?
Paragraph 90, page 43. It laid down that capital gains by an individual not exceeding £500 in a year would be exempt or disposals by an individual in any year of tangible moveable property worth less than £2,000 would be exempt. The disposal of farms or family businesses for a consideration up to £150,000 would not attract liability in the case of transfers within the family.
These figures were originally fixed by the Minister in his White Paper as far back as February of 1974. Since then the cost of living has gone up by approximately 30 per cent. Yet no alteration has been made in these various figures. To allow for the fall in the value of money one would have thought that the Minister, in accordance with his expressed interest in this matter, his undertaking to make allowance for inflation, would have allowed gains of up to not £500 but £650 would be exempt from tax and disposals of not £2,000 but £2,600 in a particular year would be exempt. If we were to change the figure of £150,000 to provide for the change in the value of money it would be around £200,000. These are the thresholds which were originally laid down at the beginning of last year. In spite of a 30 per cent rise in the cost of living since then or the 30 per cent fall in the value of money the Minister has done nothing to change these thresholds, which ill matches his oft repeated undertaking to do so.
He may have done nothing to affect the thresholds since the publication of the White Paper but he has done a fairly significant job on the rate of capital taxation by reducing it from 35 to 26 per cent which I thought might have been some mild concession to the inflation to which the Senator referred.
I have before me the price index for ordinary shares of Irish companies. It is done by way of graph. I understand things so much better if they are in that form. There were 540 Irish—this was compiled by the Central Statistics Office —around the date the Senator is referring to and at the beginning of 1975 they had gone down to 180. The inflationary factor the Senator is referring to is not to be found reflected in the capital value of assets. That is what is relevant to the exemption figures in the paragraphs. The limitation on the gains from private residences of £15,000, which was contained in this sacred document the Senator referred to, paragraph 90 (a), has been eliminated. On that point, I do not think there is much in it and it does not help the advance of the debate to make such a point. Does the Senator think we should be changing these figures as if they were absolutely based on some rationale that has got to be accepted for ever like the £500 a year or the £2,000 for tangible moveables and adjust them for a month or a year? I made radical criticisms of certain sections of the Bill earlier today but I do not make that proposal at all. It is not a help to have that proposal made.
There is no basic rationale.
There is no basic rationale.
I move recommendation No. 7:
In page 13, after line 34, to add the following:
"(8) Provided however that the Revenue Commissioners on application to them may allow a person to carry back capital losses against capital gains which may or have already accrued to him, if, in their opinion the request is reasonable having regard to all the circumstances of the case."
This is a very modest plea which the Minister could accept without any danger of undermining the tax edifice, which is rather top-heavy. The purpose of it is to allow in certain circumstances that losses could be brought back as well as forward. The position is that, as the Bill stands, losses sustained in a particular year can be brought forward and set off against gains in a subsequent year. The only circumstances in which a loss can be related back is where the loss occurs in the year of death of the taxpayer.
I am suggesting that in certain circumstances the Revenue Commissioners would have power to allow a person to carry back capital losses against capital gains. It could happen that a person who never had a capital gain in his lifetime had one small capital gain, which was entirely fortuitous. In the following year he could have serious capital losses. Where it is quite plain to the Revenue Commissioners that the gain was fortuitous and the loss in the subsequent years more than blotted out whatever gain existed, I am asking that in special circumstances they should be given power to do this if an application was made, and in a special case. This could not be abused because firstly under subsection 7 of this section it states:
Relief shall not be given under this Act more than once in respect of any loss or part of a loss.
Secondly, this application would only be granted if in the opinion of the Revenue Commissioners the request is reasonable having regard to all the circumstances of the case. What is proposed is something very modest to deal with an unusual situation.
This again is a very reasonable amendment which seeks to put a human face on the cold operation of the new form of taxation. Certainly, once it is within the discretion of the Revenue Commissioners one would think that an application to them in regard to carrying back capital losses against capital gains would appear to be a reasonable approach to meet situations where injustice may arise. I agree it will arise only in very exceptional circumstances, but at the same time it is highly reasonable in this amendment to ensure that where those circumstances arise this discretion is vested in the Revenue Commissioners. In any dealings I have ever had on behalf of people with the Revenue Commissioners I have found them very reasonable people. It would appear to be reasonable that they would have this discretion in regard to back capital losses and to deal vis-à-vis capital gains on a quid pro quo basis and allow for a proper assessment to be made and to give the person an agreed set off in losses and gains.
The recommendation offends against Adam Smyth's Canons of Taxation, which he regarded as necessary to ensure the wealth of nations. Those canons are equality, certainty, convenience and economy. There would be no certainty if losses could, on the application of some people, be carried back at the discretion of the Revenue Commissioners if in their opinion the request was a reasonable one having regard to all the circumstances of the case. I could not think of a more uncertain tax provision than that. I do not question the good intentions behind it but it would, I suggest, open up a Pandora's box of fiscal mischief.
The concept of carry back of losses is much wider than capital gains. If admitted in capital gains tax it would also have to be admitted in relation to income tax. If it is admitted in either or both of these it would lead to a situation in which one's tax liability could never be determined. Losses under the income tax code can be carried back only when a business has terminated. Then losses can be carried back for three years on the termination of a trade. The only time when there is termination of the capacity to generate further capital gains is on that certainty that we all face, that is death. On death, it is provided in the Bill that losses may be carried back for three years before death. If you were to allow the carry back of losses in any other circumstances, they might have to be allowable under the income tax code.
It is in the Bill that losses may be carried back for three years before death. If we were to allow the carry back of losses in any other circumstances then they might have to be allowable under the income tax code and income tax liability would never be determined and that could cause as much frustration, annoyance and unease to the taxpayer as it clearly would to the Revenue Commissioners.
Having regard to the fact that the recommendation would lead to a situation of no finality and of great uncertainty, and as it would impose an unworkable discretion on the Revenue Commissioners, I must respectfully ask that the recommendation not be pressed and, if it be pressed, I will have reluctantly to decline to accept it.
When the Minister rejects this on the basis that it would lead to uncertainty and that it would be unprecedented for the Revenue Commissioners to have to consider applications and assess the validity of them, of course, the Revenue Commissioners every day of the week have to consider applications for expenses, for instance, whether expenses are necessarily incurred, and so on. In 101 different ways they must consider the pleas made by taxpayers as to whether or not things are taxable, whether allowances should be made and so on. I cannot accept the proposition that it would be unusual or impossible for the Revenue Commissioners to look at a particular application and assess whether it was reasonable in all circumstances. There is some validity in the Minister's statement that, if you introduce it for this code of taxation, there would be agitation to bring it into income tax and so on, but, nevertheless, if the Revenue Commissioners have the discretion which they are given here and if, in practice, they would only consider it on the basis of the year immediately following the one in which the assessment was about to be made, and they would always have a good idea of the year following before they actually made the assessment, then they should be given this power. There is a great deal to be said for the plea made by Senator Lenihan that some effort should be made to give the Revenue Commissioners a human face by giving them the discretion to do things like this in the very deserving case, the case which would be, in a sense, outrageously inequitable if something of this kind were not done to regard it as a special case.
I know there is always the plea made that this would be creating a precedent. If you have it for capital gains tax, you will have to have it in income tax and so on. These protestations about creating precedents are always made when an effort is made to save the taxpayer something. There is never any hesitation at all about creating precedents in order to impose more taxation on the taxpayer. That is always regarded as a fair game but anything that would save an individual taxpayer in very special circumstances from an inequitable situation is creating a precedent and that must not be done under any circumstances and, consequently fair play must be rejected.
I think Senator Ryan is a bit unfair. In this Bill we are giving exemptions of £500 per annum to the taxpayer and exemption in respect of each chattel worth up to £2,000. I admit that is being given in part for administrative convenience because it avoids the necessity of having to calculate capital gains or losses on such a small scale. Certainly it operates to the great relief of taxpayers, as I pointed out. The point of exemption of capital gains means that you do not reach the 26 per cent rate of capital gains tax until you have gains in excess of £500 a year. That is quite a significant gain to the taxpayer.
In reply to Senator Ryan, taxpayers who make a gain on the 6th April and make a loss on the 5th of the following April will be able to use the loss to set off against the previous gain although it is almost 12 months, all but a day, that has passed by in that period. As capital gains are paid in respect of a tax year, you would have to assess the gains and losses within that year just as income is assessed within a year even though in a year following a year in which the person paid high income tax the person might, in fact, suffer a severe fall in income and, maybe, even a loss.
This section would seem somewhat outdated in the principles it sets out, particularly so in this year which is supposed to be International Women's Year. It provides, in effect, that the threshold of £500 capital gains tax does not fall to be paid if it does not exceed this figure per individual taxpayer and it also applies to the husband and wife taken together. It seems quite contrary to principle that the very existence of the wife should be ignored in this way. If two people were not married, if they were brother and sister, or even man and mistress, they would have £500 each but because they are married the figure is left at £500. It is very extraordinary and it seems almost a sort of economic tax regress back to the Middle Ages. It is very difficult to understand the reasoning behind this. I would urge on the Minister that we might, at this late stage, recognise the existence of wives as separate people or, indeed, of husbands as separate people and allow a total tax gain of £1,000 where there are two people living together who happen to be married. If they are living together unmarried, of course, then they have £500 each. We might extend this to those who are married.
If they are living together and unmarried they might have that £500 apiece, but they would not be able to make gifts to one another without having the disposals subject to capital gains tax. If we accept, and I trust the Seanad does accept, the value of not taxing disposals between spouses —that is, gifts between spouses—then one must accept, as a corollary to that, that they should be treated as the one tax unit, if I may use such neutral words in relation to a married couple. If they are treated as the one tax unit there are considerable benefits flowing from that. A gift from one to the other is not taxable. If treated separately and as having separate allowances of £500 each we would, as it were, have to break up the marriage for tax purposes and then transfers from one to the other would have to be treated as disposals, thereby giving rise to capital gains. I do not think that would be advantageous. In the majority of marriages the property is communally shared, if not legally, certainly in practice, and until the marriage is severed by the death of one partner. This is the reality and that is what the law recognises. I know that the charge has been levied that these arrangements encourage people to live in sin, but it is not the function of the tax law to dictate people's moral behaviour. If the religious leaders are unable to persuade people to observe the moral law a tax allowance of £500 a year will not make any difference to people in the matter of observing the moral law or not. That fact is well recognised.
This practice of treating married couples as the one tax entity is not at all peculiar to this country. It exists in other countries, even in those much further advanced on the road towards recognition of equal rights for men and women. It is a necessary element in the tax code if the benefits of the marriage arrangements are to be maintained. Given a choice and a complete explanation of the advantages, most people would opt for the present system rather than interfere with it.
On the last point, it is not merely £500 a year capital gains exemption. There are many other financial advantages offered by the Revenue Commissioners if a couple can arrange to have a marriage which is in accordance with the obligations of their religious institution and not in accordance with the laws of Ireland because they do not pool the incomes for the purposes of the upper rates of tax, although there is this disadvantage in the interchange of gifts. That is just a point apart.
I now wish to make three small points. First of all, on subsection (4), am I correct in understanding that the entire reference throughout this section to a married woman is to a married woman living with her husband? If there is a situation where a married woman is not living with her husband, each of them can get the £500 a year capital gains?
That is true, they are no longer joined.
Is that so because that is not set out. This was my second point but the Minister anticipated it. I will leave it with him and he can deal with it.
My next point is, if my view—I hope Senator Halligan will open his ears to this even if he will not agree to indexation—is correct that we take either the pre-1971, the 1965 treatment on death in the UK, where you did have a realisation but a realisation which gave rise to capital gains only in respect of an excess of a specified figure, or a post-1971 situation where there is no realisation but there is a deemed receipt by the personal representative at the market value at the date of death, if these are, as they should be in my view, the just divisions in a situation in which there is no threshold, which ought to appear in section 14, then subsection (5) requires amendment if this argument is correct to ensure that the gift from husband to wife is one at whatever is the market value at the time prevailing. It is only if that is the situation that it is reconcilable with the kind of treatment on death; otherwise all sorts of complications would arise and there would be scope for all sorts of things.
My last point is that we have the wealth tax position, and the thresholds themselves in capital acquisitions tax cope with the situation, the situation of the handicapped child, the person unable to provide for himself or herself. We have got the exemption for gifts between husband and wife, for gains made by charities and many other exemptions which we will be looking at in due course. Would the Minister consider an exemption from capital gains tax where there is a provision being made, within an overall specified limit, for some handicapped child of the parents concerned, so that that gift does not give rise to capital gains tax? There is a problem, of course, if it is somebody well heeled with cash, but that may not be the situation at all. It might be somebody with a block of shares in a private company and he wants to provide for the child. He must have it looked after by somebody else and, if he wants to provide for the child, he may have to pay capital gains tax on that provision. If there is to be an exemption in a transfer between husband and wife, I think this Legislature ought seriously to consider that there should be in justice a provision to enable that man make provision, without giving rise to taxation, for the handicapped situation. The handicap may be any one of many different kinds.
We are not in the capital gains code giving personal allowances. They are provided for in the income tax code. The argument has often been made, and it is one with which I can sympathise, that the allowances are not as great as people wish them to be. There are allowances in the income tax code for dependent children and a special allowance for handicapped children. The qualifications are not a matter of agreement. There are some handicaps which are not yet recognised for tax purposes because they are difficult to determine. We have not provided any personal allowances under the capital gains code. If the capital gains code is ever amended to introduce personal allowances then the matter mentioned by Senator FitzGerald is one which would certainly fall for consideration in the preparation of such a personal allowance code. If I were to introduce it now in respect of the handicapped child, I am sure there are many other situations which would also be urged for consideration. The fact that we have a low flat rate is to some extent a way of meeting some of these points. If we had a much higher rate, and did not have the exemptions and thresholds we have, the case in favour of personal allowances would be greater.
The new code will be difficult and complex enough in relation to capital gains and capital losses and the determination of them and I would not favour grafting on to the code at the present time anything which would require consideration of the personal situation Senator FitzGerald has outlined.
As to treatment on death, I would point out that where the value of an asset is taken to be its market value on the date of acquisition following death, the practice is to treat death as a disposal and therefore to treat it as an occasion giving rise to a chargeable gain. We are not making that provision. We are not going to make death an occasion for assessing capital gains tax. The only circumstances in which a capital gains tax would arise would be if the survivor were eventually to dispose of the asset.
I know the situation in Britain is somewhat different. That is due to an amendment which the Conservative Administration made to laws introduced by the Labour Administration. There is now a Labour Administration which has expressed itself as being in favour of returning to the situation which was amended by the Conservative Administration. I think the code we have is a fair one. It is one which is certainly related to the Government's thinking on this matter, which is not to impose on the taxpayer a charge where assets are retained within a family in order to maintain the family's fortune and the family's ability to carry on a business and generate an income for family purposes.
I do not think any of this even begins to answer the point I was making. The Minister says that there are no personal allowances to capital gains tax. I am not greatly exercised as to what he describes them as, but the nearest thing we have in the capital gains code for personal allowance seems to me to be this £500 per individual. Each individual is allowed to make a capital gain per year of £500. Whether you call it a personal allowance or something else does not greatly matter; it is an allowance of some kind given to each individual. In many respects it is very similar to the personal allowances allotted to people—wives, children and so on—in the income tax code. At any rate, this allowance is given to each individual, but not to wives or not to husbands, depending on which way you look at it. Husbands and wives are treated as one single individual. I cannot see the justice or the equity of this.
The Minister makes a big thing of his kindness and generosity in not taxing gifts between husband and wife. I would suggest that there is one simple basic reason why he does not do it. It is because he would never get after them. It would be utterly impossible to trace transactions of this kind between husband and wife. I think the Minister and the Revenue Commissioners have made this provision because they know that there would be absolutely no way of collecting tax under these circumstances. That is not a concession. It is a piece of self-defence on the part of the Revenue Commissioners who just do not want to get involved in this kind of thing. There would be nothing in it for them.
The £500 is in many respects a means of saving administrative costs and inconvenience because obviously these relatively small transactions would be very difficult to deal with. There is no great generosity involved in these matters. It is very difficult, however, to understand or accept the reasoning behind the proposal that a husband and wife together have precisely the same allowance given to them as a single individual or half as much as the allowance given to individuals, who are not married, who are living together. It is quite contrary to principle. I think it is mediaeval. I would urge the Minister even at this late stage to consider very seriously giving a husband and wife £500 each.
Senator FitzGerald asked a question, which I do not think was answered, as to what happens if a husband and wife split up. The Minister has said that in that case they would presumably be allowed up to £500 each. It would be interesting to refer specifically to the section of the Bill which provides, as he suggested, that gifts from one to the other after that period are taxable. I do not know where it is in the Bill, but perhaps the Minister could refer us to it.
I would like briefly to support the plea made by Senator FitzGerald for the incapacitated child. It might seem odd to mention it in this context, but I feel I should declare an interest and, from that point of view, I am therefore possibly more acutely aware than a person who has not got an interest of the problem raised by Senator FitzGerald. The Senator raised this matter of his own accord. I was not aware of the fact that he intended raising the particular problem.
I understand the Minister's point of view and technically I can see it is correct. In this particular scheme of legislation, we are not dealing with personal allowances after the manner of the income tax code. At the same time it would seem to me that an extension of the provisions in this section to the case of a disposal from a parent to a totally incapacitated child is not extending very greatly. It is certainly not bending the principle in so far as one can regard this as a principle applicable as between husband and wife. It does seem to be entirely wrong that, in the case of a parent who has a totally incapacitated child, a child who is going to be quite incapable of ever earning his or her living, if a parent, in proper discharge of his parental duties tries to make provision for that child, the Revenue should cash in on that situation and the provision which the parent endeavours to make should as to portion of it be captured in taxation or annexed from a person in taxation, from a person who has to depend entirely on his family for his continued support.
While I see the technical validity and correctness in the Minister's argument, I do not think there would be any serious breach of the code laid down here when one considers that this concession, if one could regard it as a concession, is being given as between husband and wife. Certainly it is very minor and I would think a very proper extension to extend it in the way suggested by Senator FitzGerald.
I would again come to the practical end of it. I want to assure Senator O'Higgins, and I am sure he knows it, that I would be very sympathetic to the arguments he and other Senators have advanced in this regard. What would be the normal provision that a parent would make for a handicapped child? It would very frequently involve money. Money is exempt— there is no question of capital gains. A person could settle £100,000 on trustees for the benefit of a handicapped child and there would be no question of an occasion for capital gains tax. One could purchase a home for a handicapped child and one could either purchase the home himself and make an instant gift of it to the child or provide the money to purchase the house and have it bought in the name of the handicapped child if the child was not so handicapped as to exclude it from ownership; or the money could be given to trustees to buy it for the handicapped child. National loans, Government stocks of any kind, chattels each worth up to £2,000, all these could be given to or settled on for the benefit of a handicapped child.
The area and the scope for making donations for the benefit of a handicapped child which would not give rise to capital gains is quite extensive and I could certainly understand that occasions could arise where one would be giving property to a handicapped child, but the nature of the handicap in many cases would exclude the probability of such property which might give rise to capital gains being given to a handicapped child at all. In fact the provisions of the Bill would enable most benefits to be given to a handicapped child.
In so far as it might be necessary to look at the other areas, I think that would be a matter for examination when we have had some experience of the operation of a capital gains code. The best way of getting experience which you can understand and interpret is to have the code as simple as possible and not to build in so many complexities for the future when it is not certain how the code is operating or how it might have operated if it had been simple and straightforward in the first instance.
I would hope the Seanad would have regard to the items which are not subject to capital gains and would see in effect that there is a very substantial area of relief available for a handicapped child.
I move recommendation No. 8:
In page 14, subsection (1) (a), to delete lines 48 to 50 and substitute "for a consideration equal to their market value at the date of death; but".
This deals with the provision in this section whereby the valuation of a piece of property, say a farm, for capital gains purposes is, you might say, totted up from generation to generation. If a father leaves a farm to his son or to a nephew, there is no capital gains tax payable on death, but it is merely deferred, not eliminated. If a farmer owned his farm for 40 years, left it to a nephew who in turn kept it for 30 years, the whole 70 years are added up as the period over which the capital gains could be computed.
This thing could carry on indefinitely. There could be a number of deaths. Some unfortunate soul at the end of a long line, through his uncle or his father or his grandfather or great-grandfather going into the future, could have handed on a farm or family business. It was kept in the family and ultimately it is sold, for whatever reason. Perhaps the person concerned had no relatives to give it to or else had financial problems. He might wish to leave the country for whatever reason he decided to sell and suddenly to his horror he realises that for the purpose of capital gains the original valuation is computed way back generations earlier, and of course with inflation the way it normally is, it would mean that the tax would be payable on almost all the consideration.
This seems unfair. It would be a totally unexpected and an unfair imposition on unsuspecting taxpayers. This amendment therefore suggests that lines 48 to 50 should be deleted from subsection (1) (a) and instead there should be inserted "for a consideration equal to their market value at the date of death". This means that if, for example, the man I mentioned left his farm or business to his nephew, that again of course there would be no tax payable on the death but that the value of the property concerned would be assessed as of the date of death, not 30 or 40 years earlier, or whatever it happened to be. The loss to the Revenue would be minimal. I cannot see that there would be any particular possibility for evasion and it would certainly mean that innocent individuals would not suddenly find themselves faced with a very large and unexpected charge to tax.
I can quite see from the Minister's point of view that it would be open to evasion in this sense and this is the only way I can think of: the person, say the nephew, who receives a farm or business in this way could immediately sell it without paying any capital gains tax. If this is the Minister's attitude it would be perfectly possible to change this recommendation somewhat to say that in fact the tax would be payable back to the original date if the farm or business was sold within, say, ten years— some reasonable period like that. In these circumstances, whatever possibility of evasion there was would disappear and I would recommend to the Minister that, if not accepting this recommendation, he should certainly accept the principle, perhaps on the basis that there would be a certain delay after the death during which the property could not be sold, without having to pay capital gains tax way back to the original date.
Senator Yeats was right to put a brake on his own recommendation, to suggest that before a benefit could be acquired by the operation of his recommendation the legatee would have to retain his property for some time after the death of the donor. I understand that is the effect of his recommendation. The thinking behind the Government's proposal in the Bill is that assets which are retained within a family to maintain a family business or farm of moderate dimension should not have to bear tax. That is the reason we got estate duty abolished. Therefore, the object of treating death as not being an occasion of charge for capital gains tax, together with the high exemption thresholds in the Capital Acquisitions Tax Bill, meet the problems of the moderate business and family farm which the Government were anxious to relieve.
The adoption of market value for capital gains tax would enable a legatee to sell the asset immediately after acquiring it without any capital gains tax being paid. Therefore, to provide that that could be done would, I think, be quite wrong. The use of the testator's base cost prevents tax being avoided in this way. It also ensures that what the Government seek to protect will be protected because it will tend to encourage the maintenance of the family business and the family farm. Because there would be under the Bill a liability to capital gains tax, if sold any time after acquisition, there would be a discouragement to sales outside the family.
This treatment is more generous than that which existed under the estate duty code. It also has the advantage that there is no liability to tax unless the asset is disposed of and it is fair that there should be a liability to tax when a taxpayer is in a liquid position and when the taxpayer would have funds. That is what the Bill provides.
In practice, having regard to the very high exemption rate or exemption thresholds in regards to capital acquisitions tax, there would be very few cases in which capital acquisitions and capital gains tax would be paid in relation to the one asset. The reason why the deceased cost has been taken is that the capital acquisitions tax exemption limit is so high that on a death there would only be in a very few cases where capital acquisitions tax charged.
Again, I point out there will be no tax charged until the money is received on disposal. Of course, there would be no tax charged on money itself. There is no hardship in that a member of the family who realises an asset should have to pay capital gains tax, especially when it is only in the case of comparatively wealthy people that capital acquisitions tax would be paid.
To take the market value of an asset at death as the base value for a future disposal would enable a member of the family who obtained an inheritance of up to £150,000 to sell the asset immediately afterwards, and be charged neither to capital gains tax nor to capital acquisitions tax. I think that would not be a fair provision. I do not think there is anything unfair in asking that tax would be paid in that situation under the capital gains code. For instance, supposing a legacy is left, property worth £150,000, and it is sold some time later. He would still be left, even after payment of capital gains tax with something like £110,000 on which to live, and, if invested, it would produce a reasonable income. The case can be made, of course, that the threshold in the capital acquisitions tax is not £150,000 in all cases—that only applies to the immediate family; a much lower threshold exists for strangers.
The purpose was not to have total relief from taxation in respect of all gifts. We did not say, at any time, there should be relief from capital taxation for gifts donated to strangers. We said there should be a relief given where property is transferred within an immediate family. If one is a total stranger to the doner and receives a gift, one is lucky to receive the gift at all. It is not asking too much that in that situation a person should then pay some taxation. No matter what happens, the donee would always be left with more than he had before the gift was given to him.
Having regard to these circumstances, and the fact that the bite of taxation will be less than it would have been under the estate duty code, the Government's proposals are deserving of commendation. There is no need for the additional exemption which Senator Yeats suggests in his recommendation.
I did not suggest the possibility of a 10-year delay within which the property could not be sold without being liable for tax, because I thought there could be an improvement on the recommendation to meet what I think the Minister's point has been that it would be open to people to receive property in this way and then sell it instantly at the expense of the taxpayer. However, I prefer the recommendation as it stands, if only for the simple reason that it provides for the case, which certainly will arise, and frequently, where a widow is left a farm, or a small family business, which she is quite incapable of running, simply is not able to deal with the business or the farm, as the case may be. She therefore has to sell it. In these circumstances she has to pay 26 per cent tax. It is to deal with, at least in part, that situation that this recommendation is intended.
Apart from that, there is the other point that the thing can carry on generation after generation, totting up capital gains all the time as a result of inflation, the development of the farm or business as the case may be. Then, totally unexpected sums of capital gains could be paid in later years. The Minister keeps on referring us back to the former estate duty and saying this is better from a widow's point of view and so forth. In the first place, that is an irrelevant consideration. We are not looking at this legislation on the basis of whether it is better or worse than anything that went before. We have to look at it as a piece of legislation and consider whether it can be improved. This recommendation will improve it.
Even in the Minister's own field of comparison with estate duty, it is not by any means as simple a matter as he suggests. Take for example, the leaving of a family business or farm to a nephew. It is not a very big business or farm that is worth £88,000, with the constantly devalued £. We find in such a case that if the value of the property concerned is £88,000 capital acquisitions tax amounting to one third, 33.13 per cent, falls to be paid. If you take, in addition, 26 per cent on capital gains, if it goes back any distance it will be in later years the greater part of the consideration and you find a nephew or niece in these circumstances would have to pay something around 50 per cent, which is more than they would have paid under the old estate duty system.
The situation is not by any means as simple as the Minister suggests. This recommendation would in particular be in relief of widows who frequently simply have to dispose of family property because they are unable to run a business or a farm themselves. You could also avoid this totally undesirable totting up from generation to generation of the valuations in order to make them assessable ultimately for capital gains. It is all very well to say that so long as these things are kept in the family no tax will be payable, but ultimately we all know that there will come a time when some member of the family will have to dispose of them and they could find themselves facing totally unexpected sums to pay.
I hesitate to intervene in what has been a very technical discussion, but the present case is a reasonable one, that is the case made by Senator Yeats, because there are two principles involved here that the Government skate over completely. First of all there is the inflation factor which, of course, is the one that is boosting up all the capital gains, and in this case where property passes on from one generation to another and is eventually disposed of, it is just plain property confiscation to ignore the inflation factor and to base, as in the section, the computation of the capital gain as the gain from the point at which it is realised back to the first owner in the passage of handing on. I know of a farm bought for £1,500, 40 years ago. Today it is worth £80,000. These factors are such as to show the effect of inflation—inflation in a time when it was not inflation at all by our standards today. The mind boggles at the fantastic figures that can be put up even if the Government attain their target of trying to cut back inflation and even if they attain something like the European target. The whole thing seems plain confiscation.
Would the ordinary allowances of capital exemption—the £500 per annum —be credited against the gains made in that period even though the person who held and passed on—there may have been two doing that job—be available for set-off against part of the capital gain assuming that the person concerned had not used that exemption in his lifetime? The Minister makes the plea that he is dealing very generously in this situation. He says he is only taking 26 per cent. The 26 per cent is only worth half a sentence in the Minister's Finance Bill. Just as income tax rates are changed, that can be changed at the stroke of a pen by any subsequent Minister for Finance. That is the type of change that is made regularly.
The other point is a principle and is much more difficult to change. The 26 per cent may become 50 per cent without a Minister batting an eyelid, but to get the principle of this continued responsibility undone once it has been accepted in the Bill is a really impossible task. Senator Yeats has gone a fair distance to meet the objections of a quick sale instead of the asset being held for a number of years. That is another principle that the Government have refused to yield on. I think they are very wrong not to have taken some cognisance of the length of time that the asset is held that would tie in with Senator Yeats' suggestion on this.
All in all, the Minister would be wise to ponder on this and to show that the Government are not out for nationalisation by confiscation of capital assets and that they are not setting the stage for the future where those who have no interest in an asset at the moment may find, with inflation going the way it is, even if it is got in manageable proportion they will be affected not within a generation but within perhaps ten years. That is the situation we are setting the scene for. The Government have totally failed to estimate or to take account of the inflation factor in this Capital gains tax in an age of inflation is something totally and utterly different from the type of capital gains taxes which were equitable in a more moderate era. Therefore, I would appeal to the Minister, between now and Report Stage, to consider this amendment and see if he can meet the legitimate points of view that have been expressed.
I anticipated when debating an earlier recommendation what I would be saying on this one. I do not want to engage in unnecessary repetition, though a degree of repetition may be important. We have to remind ourselves that what are of concern here are the estates of people who will not be able to take advantage of the provisions for transferring within the family of £150,000 worth of a farm or business. We have got to think about the case of people who are jolly hard got and who up to this have had a protection in the estate duty code because there was exemption for their widows and children which is not in this code.
I pressed hard for indexation in support of an earlier recommendation on this. We must be content to do without it if we are not going to get it. I cannot see why we cannot either get the acceptance of a recommendation of the kind Senator Yeats has proposed which would be merely to accept what is the present UK law on this matter or go back to the pre-1971 situation and have a realisation deemed to take place on death and let the chargeable gains be in respect of sums in excess of a particular sum and have regard to the particular situation of the family.
The fact of the matter is that if the personal representative has to sell the private residence of the deceased he will have to pay capital gains tax on it. If it had been sold before the death there would not have been capital gains tax paid on it. The personal representative will not be allowed to make a gain of £500 because he is not an individual. He will not be exempt if he sells a chattel for £2,000. He will pay tax on it. If he carries on and conducts the affairs of the estate and makes a loss these losses will not be available for the beneficiaries who come after him.
If this Bill is enacted, the costs of administration and the delay in administration will be greatly increased. Look at the position of the duty of a personal representative—I am talking about a post-1974 situation; it does not arise in relation to estates now because we start with 6th April, 1974. Let us talk about 1984 and 1990. What will the duty of the personal representative be for his legatee? He will have to establish for the legatee what the base cost was to the deceased when he acquired the asset. He will have to find out what its value was in 1974. He will have to find out what enhanced expenditure was incurred afterwards and what expenditure was incurred that can be allowed. He will have to certify this to establish for his legatee what is to be the base of his future charge to tax. Maybe the inflationary situation will have disappeared and maybe it will not. We should not have what we have, but one of two other propositions. Anything that facilitates the administration of an estate, particularly if it is a small estate, the better for the people concerned.
The situation in most cases will be that they will have to sell. They will have to get cash to pay debts. We are not talking about people who have plenty of money. We are talking about people who have not got it—the progressive chap who is taken away in the middle of his progress with money he has borrowed involved in assets which have to be sold. The present position in the UK seems good enough for me. It is clean and easy to administer.
We have the position here where the parties come together and rearrange the affairs. This is not to be regarded as a disposal if they do it within two years. Two years, my foot. You could not get them together in two years. They will not know what they are talking about in two years. Somebody may have gone abroad. They may have to get the court's approval. There may be a Succession Act application. There may be a probate suit. There should be some system of extending this. I can only strongly urge the Minister to reconsider this recommendation before Report Stage.
If Senator Yeats's recommendation is one worthy of consideration, together with his recommendation for an amendment to the recommendation to provide a period after death——
I accept the fact that the Minister might only agree to it on that basis.
We will in fact have this period and, with all due respect, it can be considered up to 1984 without doing any great harm to anybody. Certainly there ought to be a requirement that, if a concession is given because an asset has been kept within the family, the asset should be kept within the family for a period after death and not be available for immediate disposal to a stranger so as to generate a capital gain which would be tax free.
To deal with a problem which is worrying Senator FitzGerald, I am not with him in his fears that a donor of a principal private dwelling to his legatee widow or child would generate a situation in which the personal representative, or indeed the legatee who is in residence, would have to pay capital gains tax on the disposal of that asset. I do not know how he reads that from the Bill.
That situation, in my view, would not give rise to capital gains tax. The situation which would give rise to capital gains tax would be if a personal representative had to sell the private residence, as he so very often has to.
Yes, but the case which Senator Alexis FitzGerald illustrated this morning, as I understood it, was where a married couple might be residing in a house which was greater than their requirements. A man might be in a substantial dwelling on a fashionable road with heavy outgoings. On his demise, his widow might wish to go to another house in a less fashionable area with less accommodation so as to reduce her overheads. In such a situation an occasion for capital gains taxation would not arise. If the widow is residing with her husband and remains in the premises as her principal private residence after his death, on disposal of it an occasion for capital gains would not arise. I accept that in the ordinary course of administration the personal representative—it may or may not be the widow—would be effecting the sale for the beneficiary, the beneficiary being a person who would be in residence. It would still be the widow's residence and accordingly a capital gains charge would not arise.
If she wanted to dispose of a farm?
She would still have the exemption for capital gains purposes of the principal private residence. There might be liability——
Only one acre; the rest of the farm would be liable to tax.
Yes, if she was under 55 years of age. If she was over 55 years of age she would be able to avail of relief under section 26. The situation is not as horrendous as Senator A. FitzGerald fears. If there is any section he feels justifies his fears, I will be only too happy to look at it. I am satisfied that the Bill does not bring about that effect.
The Minister seems to mention two aspects of the Government's approach to this Bill. One is what he mentioned a few moments ago: that it is the motive of the Government to ensure that farms or small businesses do not have to be broken up but can be kept together. The other motive must be to ensure that members of a family, where the husband dies, are not faced with the situation where they have to raise money to pay death duties or are put in an impossible financial situation.
The objection to the Bill as it stands now is that a widow may find herself with a farm or business which she is unable to run. She has to dispose of it and the result is that she is little better off than if she had to pay death or estate duty, because when she sells it she will have to pay capital gains. If it had been in the hands of her husband for many years, the capital gains will be very high.
The purpose of this recommendation is to ensure that if she has to sell because she is completely unable to run the farm or business there will be no capital gain because the valuation will be taken as at the time of her husband's death. It depends on one's policy motive, whether it is purely looking at it from a national point of view and saying we must not have small farms or big farms or farms broken up, and perhaps this meets the case. But if it is to try to ensure that a widow or relation is not placed in the situation of having to sell and having to pay capital gains, then the Bill is not achieving a very worth while improvement. This recommendation would ensure that the person concerned would be able to sell in these circumstances and would not have to pay very large capital gains taxes.
This section brings into focus part of the reason for this whole package of taxation Bills before us. As Senator Ryan has rightly said, the end product as far as the estate owner on death and his estate in the hands of his personal representative are concerned, are probably worse than if the Minister and the Government did the elementary thing of raising thresholds in regard to death duties. Much of the trouble under this section and under the subsequent Capital Acquisitions Tax Bill—which we have not yet got—deals with the inheritance and gift tax which arise from the election promise to abolish death duties.
Fundamentally there was nothing wrong with death duties, except that the threshold was far too low. All the Government had to do was to retain death duties, but at a far higher threshold. Instead of the then existing threshold they should have brought in a Bill amending the death duties legislation and raising the threshold to £100,000 or £150,000.
Where would you replace the money?
That is the point. The sums have never been given to us. The end product of all of this is that the Revenue will not be one bit better off, and the ordinary property holder will certainly be worse off. All of this is gestating an amount of legislation, and debate and what will the end product be? It will be a mouse one would see if one adds up in the coming year what will eventuate from capital gains tax, particularly this section dealing with death duties, the Capital Acquisitions Bill and the Wealth Tax Bill, and put it on one side of the ledger against what it could have eventuated to the Revenue without any great pain or any great excitement by a simple raising of the threshold of estate duties. I feel very strongly that we have not been given in either House of the Oireachtas the exact ledger balance in this respect. I should like to hear the Minister's views in this respect. To what degree, as a guesstimate, will this section, plus the other two tax Bills, advance the revenue as against a simple raising of the threshold in regard to estate duties which would have done equity to the ordinary property owner and at the same time, and without any fuss, have given the Revenue Commissioners reasonable continuity of income?
That is a very interesting question but it does not arise on this recommendation.
Not strictly.
Or even remotely. The suggestion that this is going to impose greater hardship on the widow does not mean a post mortem.
It does.
Under estate duty the widow would have to pay estate duty on the whole estate, including the house and all its contents, the bank accounts and all chattels.
What the Minister is saying is that it is not as bad as death duties.
It is a darn sight better than death duties.
It could still be a hardship on the widow.
In any situation that would arise, if she sold immediately after acquiring the gift, or years after that, she would still be in a much better position than she would be after the death duty code. If she is a person of small means, the probability is that the small means consist of the house, its contents and money, all of which are exempt anyway, and wasting assets like a motor car, the dog, the horse and a few other things. All these will be out anyway but they would be in under the estate duty code. Every darn thing would have been in under the estate duty code.
I never saw estate duty paid on a dog yet.
I know but Senator FitzGerald knows what I mean. There is a long list of items caught by the estate duty code. They will not be caught at all by the capital gains code.
In the case of a farm?
A farm is also caught by the estate duty code. There were certain reliefs but, notwithstanding the substantial improvement that I made for them in the 1973 Finance Bill, they were becoming irrelevant in relation to the modern value of farms, so that more and more farms were being caught. It was because so many more farms were being caught that the agitation developed for the abolition of estate duty altogether. On any random selection of cases, there will be much less liability to payment of capital gains——
It is much ado about nothing. Where are the figures?
——than under the estate duty code. If the assets are maintained within the family, no occasion of capital gains arises. That is agreed. The one case of hardship which is offered is that where circumstances would oblige the widow to sell. I accept that that could occur. It is, in the majority of cases, the tendency for widows to maintain the means by which the family has acquired a livelihood. In cases that would not arise outside the family, the exemptions granted under the capital gains code will ensure that her lot would be much better than it would have been under the estate duty code. I have letters to that effect from people who have been affected by the estate duty code and see what immense relief is being given under the capital gains code.
As I mentioned in the Second Stage, nobody who made any representations about the capital gains suggested the code was wrong or suggested that it would work as harshly as estate duty. Not at all. People were delighted with the relief. The only time I heard it suggested that the two were comparable was now. In my view, that is not genuine belief and if it is, an examination of any likely cases will show that it is not well founded.
I should like to give an example of a widow who would be worse off under this legislation. I am speaking in terms of a poor widow whose husband left her a small farm or business, that had come down through the family over the years, so that the greater part of the value was liable to capital gains tax. Because of the existing wording of this section, after a series of deaths the family business or farm will come to that widow, carrying with it gains accrued over many years. Under the former estate duty code, that widow, if she had five children, which is an average-sized Irish family, would not have to pay any duty up to the figure of £50,500. If the value of a small business or farm which she inherited in this case was around £50,000, allowing for the fact that after a period of years the greater part of this would be notional gains, for capital gains purposes, she would probably have to pay about £10,000 in capital gains tax if she was forced to sell the family business or farm. Under the former estate duty code she would not have to pay anything.
In spite of this, one expects that the position of a widow is better under this legislation than under the estate duty code. It is gilding the lily unnecessarily to suggest that all is well, and nothing needs to be changed, that all the widows will be happy because they will not have to pay anything. They will have to pay something because there is no threshold in the case where the widow must sell the family business or the family farm. There is a threshold of £500 which will not get her very far. Everything above that figure is liable for tax at 26 per cent. Whereas, under the estate duty code, the widow had a considerable threshold rising according to the number of children she had and below which she did not pay anything.
I wanted to make the same point as that made by Senator Yeats which was based on calculations I made two years ago. At that stage the exemption rate from estate duty was £4,000 for the widow and £1,000 for a child. This meant that an estate of £50,000 owned by a widow with five children, was tax exempt. Under the present proposal, with inflation as it is, after a period of 25 years between acquiring the farm and selling it—taking a figure of 10 per cent for inflation which would seem magical to us at present with our present rate of 24 per cent— many of us would feel we had controlled it if we could keep it at 10 per cent in the future—at compound rates amounts to almost a 500 per cent increase in value; that is, the property would then be worth five times its present value. Under our unreal approach, which ignores inflation, the gain would be taken between the five-fold increase and its present value, in other words, there would be an 80 per cent supposed capital gains, on which tax would have to be paid at the present benign rate of 26 per cent—but I have no doubt we will become more socialist as time goes by—and with a few strokes of a pen, 26 per cent will become 35 per cent, 45 per cent and so on.
What are we faced with? Inflation on an asset held for 25 years, despite whatever exemptions can be written against it, means in effect that the amount written off will be negligible and will amount to almost a direct tax on the value of the asset at the prevailing rate.
I am afraid I must interrupt the Senator as he is straying from the recommendation before the House. Inflation was dealt with in a previous recommendation this morning. The House is now dealing with recommendation No. 8 under section 14.
On section 14, I am trying to use simple applied mathematics to show the absurdity of the failure to cope with inflation. Senator Yeats seeks to amend this section and Senator FitzGerald and I support him. We are trying to provide for the widow and her children who is not able to carry on the business and must sell it because the creditors put the squeeze on her and force her to sell. Under the old death duties scheme she would be better off than she is likely to be under the present scheme, after a period of inflation at an unknown rate and a period of creeping socialism to back it has been taken into account.
As the discussion progresses on this recommendation, it bears out the point I made earlier—it would help everybody concerned and be for the edification of the public generally and the professional people involved who advise people under this and the other legislation, if we had the sums worked out in some degree.
The Senator got away with that on recommendation No.8 but not again.
It is straightforward that what Senator Yeats is seeking to do in this recommendation is to equate the market value to the date of death. This in effect is equitable and gets rid of the inflation aspect to which Senator Quinlan referred and is the purpose of the recommendation and which will arise in regard to assessments in relation to duties under section 14. At the same time, it will ensure that this legislation, which for good or ill will become law, will wear some human face and bear some credibility in regard to the changing value of money. It will also ensure that we do not drift into a situation which in X years time will bring us back to where we were two years ago in relation to death and estate duties, because the Government, through neglect or unawareness on their part, failed to keep the death duty threshold raised sufficiently. Unless this recommendation is accepted, we will find ourselves back to square one.
There was nothing fundamentally wrong with death duty or estate duty, other than the threshold was not raised as money depreciated. We are seeking in this recommendation to ensure that this mistake is not repeated. In line with other recommendations discussed earlier, we are seeking to ensure that in any depreciation of the money situation, capital gains assessment, whether on death, as in this case or otherwise, in the case of earlier recommendations, will keep pace and be equated.
I would ask the Minister to look at this again on the basis that he is very proud of the fact that he has abolished death duties certainly for the immediate family and that the spectre of financial hardship and so on need no longer hang over a family where the husband dies. Because the Minister is doing this in a case where the family can hold on to a firm or farm and continue to work it, he is turning a blind eye to this situation, financial hardship, which he has done much to obviate by removing estate duty, will still apply where a widow or a daughter, through no fault of her own, is unable to work the business or farm and must sell.
If he wants to do the job properly, if he wants to ensure that there will be no financial hardship in a family where the bread-winner dies, he should have regard to this situation as well as to the normal situation. By making the kind of change recommended here, he can deal with that situation as well as the other. If he is going to do the job properly, he should accept a recommendation of this kind.
There are many difficulties which possibly the Senators have not thought about. Supposing a young widow decides to quit the farm or the business. It has been urged upon me that she should be free of tax. What happens if she remarries? Should she remain immune to paying capital gains tax? If you think she should not in that situation, then you would find yourself operating a tax law which might be deemed to be contrary to public policy because it might operate as a discouragement to the widow to marry again.
The Minister should be chivalrous.
I would like to be chivalrous and abolish taxation on everybody without discrimination of sex. Unfortunately, as long as demands are made upon the public purse I have to discharge the onerous, unpleasant and unpopular duty of collecting revenue, and doing it as equitably as possible, by observing the canons of all good taxation, which require equity and certainty. We have done that. We are not unsympathetic to the problems that have been debated here, and Senators have expressed the view that it is reasonable to provide some safeguard to ensure that the provisions are not abused.
All we are dealing with at the moment are capital gains generated since April, 1974. I would anticipate that there will be amending legislation to this Bill within the next decade. I would respectfully suggest that this is a matter which would be pertinent to such legislation and that no grievous harm would be done if in the meantime we were to leave the section as it stands. In expressing this view I am not taking any hostile position to the views that have been expressed in respect of widows who for good and sufficient reasons might not be carrying on the business or maintaining all the assets that have been received from the husband.
The Minister said there will be no grievous hardship caused because the date will be April, 1974, and that it can be changed in ten years time. We are bartering a very sound principle—the principle of helping the weak, of making allowances for the widow and her dependent children in the computation of duties to be paid on the estate—for a principle that makes no allowance for the hard-pressed widow in those circumstances. I suggest that if the Minister meets our points in this it will not involve any loss to the Exchequer. On the other hand, the principle of giving special treatment to the widow with dependent children will be safeguarded. We should cling to that and ask the Minister, seeing there will not be finance involved since the base time is 1974, to accept the clear-cut principle rather than saying that we can fight for that principle in ten years time when it is beginning to bite someone.
This is a very big section with all types of aspects to it.
If there is still a good deal to be said on this section, it might be as well to deal with it in the morning.
I want to say that this is perhaps the most important section in the Bill.
Is it proposed that the House adjourn?
Unless we were to agree that we could deal with the section within a quarter of an hour or half an hour, we should adjourn. I do not think it would be fair to push out people who want to speak on the section. I suggest that we adjourn until 10.30 tomorrow.
This is a very fundamental section.
