Seanad Éireann debate -
Thursday, 7 Dec 1978

Vol. 90 No. 7

Capital Gains Tax (Amendment) Bill, 1978 (Certified Money Bill): Second Stage.

Question proposed: "That the Bill be now read a Second Time."

Minister of State at the Department of the Public Service (Mr. MacSharry)

This Bill proposes several important reforms in the capital gains tax code. Its main aim is to change that code into a form which, while reinforcing the tax on speculative gains, will take account of the effects of inflation and will not penalise the individual who has spent time and effort in building up a business.

In his budget statement last February the Minister stated that this Government have never opposed the principle of a tax on capital gains. The Government, however, do believe that such a tax should not be a global instrument penalising hard work and inhibiting enterprise. We favour instead a more refined system. The chief fault in the Capital Gains Tax Act, 1975, is that it does not make a distinction between gains which are the returns of investment and hard work over the years, and speculation which looks for quick profit and is not concerned with economic input. A second major fault with the 1975 Act is that it does not distinguish between real gain and paper gains resulting from inflation, which means that a person could be taxed on a purely nominal gain when disposing of an asset whereas in real terms he had made a loss on the disposal. Another deficiency in the 1975 Act is that, where there is a compulsory acquisition of a person's property by a local authority or other body and where that person reinvested the proceeds in comparable assets, he would not only be obliged to give up his property but could also find himself liable for capital gains tax on that involuntary sale, even though payment of the tax could be postponed under the roll-over relief arrangements.

The Bill now before the House, as well as remedying these faults in the existing capital gains tax code, also changes the arrangements governing property passing on a death and the arrangements relating to disposals within the family by persons over 55 years of age.

I now turn to the individual provisions of the Bill. Section 1 is the interpretation section and is self-explanatory. Section 2 increases the basic rate of capital gains tax from 26 per cent to 30 per cent. This increased rate will apply in the case of gains arising from disposals of land with development value or mineral assets and, consequentially, to gains from disposals of unquoted shares deriving the greater part of their value from such land or assets. In the case of other assets, this 30 per cent will appply to all disposals by companies and to disposals by other taxable persons within three years of the acquisition of the assets in question. For other disposals, rates less than 30 per cent are provided for in section 4.

Section 3 proposes a fundamental reform in the capital gains tax system. It provides that, in calculating the gain on the disposal of an asset, the allowable expenditure—such as the cost of the asset and certain enhancement expenditure—may be adjusted in line with changes in the all items consumer price index between acquisition and disposal. The Minister pointed out in the Dáil three years ago, during the debates on the Capital Gains Tax Bill, 1975, that the lack of any such provision was a basic flaw in that legislation. The Government do not regard it as either satisfactory or equitable that a capital gains tax charge should arise simply because of an increase in the monetary value of an asset between one given date and another. In the circumstances of recent years one could easily be in the position of being taxed on a paper gain which was, in fact, a loss.

This section rectifies this basic fault by providing that any increase in the value of an asset due to inflation as measured by the consumer price index should be taken into account in deciding the real gains consequent on the disposal of that asset. It is not proposed that the new indexation arrangements will operate in such a fashion as to charge an amount in excess of the monetary gain or to transform a monetary loss into a gain. Also, the new procedures will not operate so as to increase a monetary loss or transform a monetary gain into an allowable loss.

In the case of assets held on 6 April 1974, the market value on that date will be the base cost for indexation purposes and for determining any gain arising on a disposal. Because only the gain since 6 April 1974 will be liable for taxation in the case of disposals of such assets, and since it will be necessary for indexation purposes to obtain a valuation of those assets at that date, in any event, the time apportionment method of determining the gain, which applied hitherto in the case of certain disposals of assets held on that date, is no longer appropriate, and is being abolished.

A fundamental change in the rate structure of capital gains tax is proposed in Section 4. The new structure is based on the principle that the rate of tax should be related to the length of time for which an asset is held between acquisition and disposal.

The Government are firmly of the belief that any capital gains tax should distinguish clearly between the speculator and the genuine entrepreneur or businessman or farmer. A man who invests his time, effort and money in a business or farm for perhaps 15 or 20 years should not be taxed on the same basis as an individual who simply buys and sells an asset within a short time, relying solely on market forces to produce an increase in the value of the assets involved.

An appropriate way of discriminating between the two categories in the capital gains tax system is to have the rate of tax depend on the length of the period of ownership. I think that Senators would agree that the length of ownership of an asset can be regarded, in general, as indicating whether the owner acquired the asset for genuine non-speculative reasons or whether he acquired it in the hope of selling it for a short-term gain as soon as market forces were favourable. Section 4 of this Bill proposes a sliding scale of tax based on this general principle. It provides that there will be a reduction in the rate at which tax will be charged for every period of three years during which an asset has been held prior to the disposal, leading to total exemption after 21 years. The period of 21 years will run from the date of acquisition of the asset, irrespective of when it was acquired. This tapering relief will not apply to disposals by companies or to gains arising from disposals of development land or of mineral assets or to gains from disposals of unquoted shares deriving the greater part of their value from such land or assets.

A special provision is made in subsection (8) of section 4 which will have the effect of extending the period of ownership of a surviving spouse on the disposal by that spouse of assets which were acquired on the death of the deceased spouse, and of which the deceased spouse was competent to dispose. Thus a widow or widower in such circumstances will be able to take account of the deceased spouse's period of ownership of the assets for the purposes of the tapering relief where such relief applies.

Section 5 remedies another major deficiency in the 1975 Act by providing a special relief in the case of compulsory acquisition of property if the compensation proceeds received are reinvested in similar or comparable assets. This relief is introduced for equity reasons and to provide an incentive for reinvestment. The Government believe that a man should not be penalised on the occasion of a compulsory disposal of an asset provided he reinvests the compensation in a similar or comparable asset. Since he has been forced to sell the asset to a public body it is clearly inequitable to tax him on the basis of a normal sale. The reinvestment condition caters for the situation where a man chooses to use the occasion of the compulsory purchase proceedings to realise his assets in order to achieve a gain. Such a case will be treated as a normal disposal.

Provision is made for situations where a sum which is more or less than the amount of the compensation proceeds received is reinvested. Thus if an amount exceeding the compensation received is invested in the replacement asset, the extra amount will be treated, for the purposes of indexation and tapering relief, as having been invested in the purchase of a new asset. If, on the other hand, a part of the compensation proceeds is not reinvested there will be a part disposal of the original assets for the purposes of capital gains tax.

Section 6 amends the provisions concerning the transfer of assets on death. Under the 1975 Act, where assets which were acquired on a death are disposed of, the base cost for calculating the chargeable gains was the cost incurred by the deceased owner in acquiring the asset and not the value of the asset at the time of the deceased's death. This valuation arrangement is open to criticism on a number of grounds. First, it seems inequitable that a successor should be made liable for capital gains tax on gains arising during a time when he did not own the asset. Secondly, as a result of this inherited liability, successors who might not have the capacity to use inherited business or farming assets to their best economic advantage could be discouraged from disposing of the assets, thus preventing their acquisition by more active hands. Thirdly, if the inherited property had to be sold in order to pay debts incurred by the deceased or for other reasons, the imposition of a charge to capital gains tax could cause a financial burden in certain cases. The new arrangements which are being introduced in section 6 will remove these deficiencies by providing that assets acquired on a death are to be valued by reference to the market value at the date of the death. Death will continue not to be an occasion of charge to capital gains tax in respect of all assets of which the deceased person was competent to dispose. The special provision I mentioned earlier, which will allow a surviving spouse the benefit of the deceased spouse's period of ownership for tapering rate purposes, will not prevent the surviving spouse from getting the benefit of these new arrangements.

Section 7 applies provisions similar to those in section 6 to certain settled property passing on a death. It provides that, where a person becomes absolutely entitled to assets under a settlement on the death of a life tenant, the assets are deemed to pass at their market value at the date of the life tenant's death and not, as hitherto, at their cost to the trustees of the settlement.

Section 8 removes a number of restrictions on the availability of the relief provided under section 27 of the Capital Gains Tax Act, 1975. Section 27 gave total relief from capital gains tax in the case of disposals of certain business assets on retirement by a parent to a child or, in certain cases, to a niece or nephew, subject to the fulfilment of various conditions. If the value of the assets transferred exceeded £150,000 the relief was not granted. It is considered that the existence of this qualifying limit could inhibit some parents from transferring farm or business property to their children during the parents' lifetime. This £150,000 limit is now being abolished and the early transfer of family property into younger and more active hands, which is desirable on both economic and social grounds, is thereby encouraged.

Another restriction being removed in relation to the section 27 relief is the condition that the parent had to transfer the entire farm or business property to the child. This condition discouraged transfers where a father wished to hold on to a small portion of his farm for himself while transferring the remainder to his son, or where a father wanted to divide his farm between his children by way of transfers at different dates, say when each child reached a certain age. It is proposed that the relief may now be given if either the whole, or only part, of the asset is disposed of to the child.

The third restriction which is being abolished relates to the relief provided by section 26 of the 1975 Act. Section 26 grants relief in the case of disposals outside the family where the consideration does not exceed £50,000, and prior to this, a person could not avail of it if he was being granted section 27 relief. This means that up to now the situation where a father wished to sell part of his business or farm for cash outside the family, say to provide for his old age, while transferring the remainder of the property to his children, was not catered for. Under the provisions of section 8 of this Bill the two reliefs can now apply in any particular case if the other conditions governing their availability are met.

Section 9 is concerned with the interaction of the new reliefs provided in sections 3 and 4 with the operation of the roll-over relief arrangements contained in section 28 of the Capital Gains Tax Act, 1975. Section 9 ensures that the deferment of the charge under roll-over relief will not qualify the owner for indexation and tapering rates based on a period of ownership longer than the period during which he owned the old assets on the disposal of which the original chargeable gains arose.

Section 10 amends the anti-avoidance provisions in section 39 of the 1975 Act concerning disposals to and by charities and certain other bodies in order to bring those provisions into line with the indexation and tapering reliefs. The exemption given to genuine charities under section 22 of the 1975 Act is not being interfered with.

Sections 11 and 12 provide for amendments of the company tax legislation in the Corporation Tax Act, 1976, to take account of the new basic rate of 30 per cent for capital gains tax provided for in section 2 of this Bill. Sections 13 and 14 make further technical amendments to the Corporation Tax Act, 1976, to take account of the indexation relief contained in section 3.

Section 15 extends from 21 days to 31 days the time limit for lodging a notice of appeal against a capital gains tax assessment. This is a technical amendment to bring capital gains tax into line with income tax and corporation tax as respects time limits for giving notice of appeal against assessment.

Section 16 and Schedule 1 are concerned with the technical details of the operation of the indexation and tapering reliefs contained in sections 3 and 4. Paragraph 6 of the Schedule is an anti-avoidance provision aimed at counteracting the manipulation of the tapering relief by certain shareholders in close companies.

Sections 17 and Schedule 2 provide for the necessary repeals in the Capital Gains Tax Act, 1975 and in other legislation as a consequence of the measures proposed in this Bill. I commend the Bill to the House.

Mr. Alexis FitzGerald

When the estate duty code was terminated from April 1974 a new set of capital tax measures designed to provide a more just and efficient method in substitution for the old estate duty code was introduced and I would remind the House that no amendments of these substituted measures, including this Bill, should be considered save in the context of the capital taxation which was levied up to April 1974 and which yielded significant revenue to the Exchequer. Now, though I am left to say it myself—I cannot, I am afraid, rely on anybody else to say it for me—in relation to these measures I come with particularly clean hands because I very trenchantly criticised the wealth tax in this House and the wealth tax is now abolised, and I regret it. I regret its abolition. I regret the timing of its abolition. It was capable of reform. It was not reformed.

I had very little to say on the Capital (Acquisitions) Tax Bill, now an Act, but I did criticise certain elements of the Capital Gains Tax Bill and there are four substantial amendments effected to that code, or proposed to be effected to that code, in this Bill, which I welcome. If anybody wants to look up the record, he will find I proposed two of them myself in this House when the Capital Gains Tax Bill was going through. I thought the original provision with regard to capital taxation on death was wrong and would have the effect eventually—though it did not have the effect in fact to date—if it were left unreformed, of being a heavier wealth tax than the wealth tax Act itself. I therefore welcome that change.

I also welcome the acceptance of what I also proposed in this House—the indexation of the cost of acquisition in the assessment of what was the taxable gain tax and, in so far as that is there, I welcome it though with some reservation. In so far as I can discern a policy in this Bill, it is a policy to discourage, in the words of the Minister, speculative gains. To index the costs of the speculator is not to discourage speculative gains. The only extent to which this Bill, in fact, seeks to discourage speculative gains is by the exclusion of development land from the benefit of tapering relief, but it is included for the purposes of indexation. Now, if it is desired to discourage speculation in development land by depriving the speculator of the benefit of tapering relief in respect of the speculation, I cannot see why we give him a chunk of benefit by indexing his cost. So, in so far as I welcome indexation as the second of the four items I welcome, I do not welcome its extension to development land.

I also welcome—a point I do not think I made when the Bill was originally introduced—the provision with regard to compulsory acquisition and I note, if I understand the section correctly, that the benefits here do not extend to investment in development land. The compulsory acquisition provision, if it does not, ought to exclude the investment in development land. I take it to do so, but closer examination on Committee Stage will tell me whether I am right or wrong on that.

I also welcome the removal of the limit, though to ordinary urban dwellers striving to earn their daily bread £150,000 sounds a hell of a lot of money. Still if it be merely a valuation of something which lies at the structure of the whole family earning, to wit, a farm, then I think it is not meaningful in our kind of terms and, therefore, if that is correct, I welcome the lifting of that relief because its limitation does, I agree with the Minister, discourage the gift on from an older person to his children. These are the matters I welcome.

What I have to say after this is not likely to please the kind of people out of whom I make my income, the kind of people who can see about as far as my nose and back, who are very glad to get any kind of tax relief irrespective of its justice. I know one cannot get perfection ever in this matter of a just system of taxation. I know it is immensely difficult to balance the thing out so that at once you have a stimulus which makes the economy more efficient, makes people go about their work and business with energy and, at the same time, does not mean that people in like conditions are treated differently. The effects of this Bill in so far as it contains changes other than those I welcome will not be to reform—the word of the Minister—the capital tax.

Why do we have capital gains tax? Why did the most successful capitalist economy in the world, however you may criticise the social ambience created by its economic success, America, why did the Americans when they introduced federal income tax in 1915 at the same time introduce capital gains tax? It was no afterthought by the Americans. It was a recognition of the extreme difficulty of drawing a line between income and capital, between income in cash and capital gain in cash, both equally spendable, both equally capable of financing some worthwhile investment, some saving, some pleasurable expense. They introduced capital gains tax at the same time as they introduced income tax because in the free society, and let every Senator know it, there are countless means, as the Revenue Commissioners know, whereby if you have access to capital—and we are administering a tax code which affects people who have no access to capital of any significance—which can generate income, there are countless means whereby you can convert that income into capital. In so far as capital gains tax is being lifted, as assuredly it is being lifted from a whole host, a whole magnitude of capital in this society, we are leaving free from taxation sources of financial expenditure while, at the same time, imposing taxes on people in no similar positions. One single sentence establishes this. When this Bill becomes law, as assuredly it will become law, no asset in 1957 by any person resident, or ordinarily resident, in Ireland, other than development land, and let us add mines and minerals and exploitation rights thrown in to stir us, will be subject any longer during the lifetime of the holder of that capital to any capital gains, real or monetary. That is a change in the law of a very significant kind.

Now I know that accountants and people of my own profession are only delighted with all of this. Are we not only delighted, like happy little poodles, to go along and lick our master's toes and hands? Of course, the possessors of these assets are very pleased. They can go on and live for another three months, three years, 30 years and pass them on to their children and, on their death, a fresh period of tapering relief will run for their children. Or have I got all of that wrong? Is that right? If I am wrong, will the Minister tell me? Is it just? Is the following just? We have in this country a tax relief, and I had some part, and I am prepared to boast about it, in its being part of our fiscal system, called the export tax relief.

Take someone who is benefiting from export tax relief—say all his turnover is export—that is very good for the economy and long may that relief continue. But it has created a certain anomaly between people and businesses who are engaged in other kinds of activities and people who are engaged in exporting, but it is the kind of anomaly one can live with. It is reasonably just if we want to reward very heavily those who are engaging in such an important task from the economy's point of view. But, at this moment, before this Bill becomes law, the shareholders in these concerns were at least subject to capital gains tax. Now their investment will not merely be indexed but there will be tapering relief and the time they have spent since their original investment will count in determining that tapering so that, if they held it for 21 years, they are free of the burden of capital gains tax. Take the very rich man or the modestly rich man. These matters are all relevant. We know the story of the American who said at breakfast he felt absolutely wretched—he felt like a millionaire. These are relative matters. People who can organise their affairs so that they have portfolio investments held in companies, the corporation tax does something to provide for tax in such cases but, unless the income generated brings the company beyond the small company limited—I have forgotten what it is but it is something of the order of £25,000 or £30,000 a year—it will still benefit the holder of that portfolio to leave it locked up in a company and the surcharge, if his other income is ample enough and he liquidates the company in due course, will still leave him with a margin over the 60 per cent he would have had to pay if he were enjoying the income himself. The man who works as an executive and so on will have to pay the 60 per cent. I do not see the justice in that. I do not see the benefit to the economy in it. It is dead money. I know, the Minister and his advisers know and Senators know that one of the factors we have to take into account in relation to this kind of taxation is in the words of Lord Keynes—he may not have been a lord at the time—to Mrs. Roosevelt: "Tell your husband money is timid". It is. But really it was not all that timid. It would have been satisfied with indexation which is fair, which arguably should be extended to cover bands and allowances.

I do not think it was a happy thing—I do not know whether it was not in some way significant—that the Bill which contains these changes and these reliefs and improvements for the very well off should take away the one section in the Capital Gains Tax Act which applied to those who were not well off. There was one section specifically designed in the 1975 Act to help the man with the modest income and the happy beneficiary of a windfall gain. It was section 6—the half income group. The authors of that section being the designers of the UK Finance Act, 1965, decided this year just about the time the Minister was preparing his budget proposals that this was not well understood and, therefore, the original authors decided to destroy their creation and we, who hopped along and imitated them when we introduced the provision, hopped along again, to imitate them in destroying their creation. I would ask the House to take note of the fact that, if the British took away that exemption in this year, they did it in the context of a very considerable increase in the exemptions. Here we have an exemption of £500 of gains. If I remember the UK provision correctly, it was a different position before. It was a £1,000 realisation figure, not a gain as such before. Now a gain in the UK can stretch up to £9,500 and get marginal relief so, if they took away the half income rule, they substituted something better for it. We are taking it away and not substituting anything for it. I find it hard to see great justice in that.

The Minister said that he is against speculative gains and in favour of long-term investments. I said the only evidence I can find for that in this Bill is the non-application of tapering relief to development land, minerals, exploration and exploitation, and, of course, companies representing these. Has nobody been speculating in property in Dublin in the last 12 months? Nobody? Have people not gone into that market with their money?

Tapering relief is to be extended to every other interest in land. I should have thought that in the modern world, where so much confidence has been lost in Government money, paper money, where all the people who are able to make free investment decisions—that is to say, those who are not hard pressed—who can only think about how they are going to pay their bills during the next month are opting for artefacts, constructions, land. Is this a disposal of resources that it is thought should be encouraged? Take, for example, the case of someone who wants to buy a property in Dublin and turn it into flats. The income tax code provides he can borrow without limit for that operation, get relieved the full interest charged on his borrowing in determining what is his taxable income irrespective of his £2,000 relief chargeable against the income from these flats. Now we are going to treat him as if he were engaging in a disposal of resources improving the Irish economy.

I have to be convinced that there is such a remarkable distinction between speculation in development land and speculation of the kind to which I refer. What I say every Senator knows. The inevitable exclusion of residences from capital gains tax has been one of the contributory factors to the increase in the prices of property in Dublin. That is combined with other tax reliefs such as rates relief. I have to be convinced that there is justification for this, that it is either equitable or makes for greater efficiency in the economy. If we have indexation so widespread as to benefit those who borrow up to the hilt which, in general, indicates already a pretty good position, what of the people who are helping the whole economy by providing the resources of the banking system, who hold their money and have maintained their faith in money? If inflation is to be provided for in relation to particular types of investment, why is there no provision for it? Will I be told it is administratively impossible? Maybe it is a difficulty. We in the public sphere, who have committed ourselves to the welfare of this society, ought to seek to educate those who have or are getting the necessity for them to think of the social fabric. There is not a great deal of value in having a lot of individual wealth amid social disturbances or having an insufficient sense that you are a member of a just society or a citizen of a just society with solidarity between all the citizens.

When the wealth tax code was introduced a few years ago, a gentleman complained bitterly to me about it and told me he was going to Portugal. He rang me up one Saturday morning. I had been reading about the soldiers on the streets of Lisbon with red carnations in their button holes. I said to him, addressing him by his Christian name, there were some things worse than wealth tax. There could be some things worse than paying capital taxes of one kind or another for those who are well off. Have we a society knitted together so strongly with a sense of solidarity that we are happy about it? Are we wise in not maintaining as a top priority the design, re-design and re-shaping of a tax system, adjusting it all the time to the realities and experiences of the people, so that they feel equal treatment is being given to them?

There is no doubt that the men who will not be able to take the benefit of tapering, that is to say, of continuing to hold the assets through a long period of years so that the tax lessens and lessens, will be the smaller men, or have I got it all wrong? I would like to think that I had it all wrong. The people who can organise their affairs so that they do not have to sell things until they have got outside the range of capital gains tax, and those who will not sell things until they have got outside that range, are those with a lot. I have nothing at all against people having a lot. I wish everybody had a lot and they could all give it away to each other. I am not concerned about that, but we know we have a society where the resources of the Exchequer are stretched and people brought within the net of taxation do not feel justly treated. We cannot ignore needs that are felt to be oppressive. We must see that as an important duty as legislators.

Another thing that is wrong is the failure to maintain the option for time disposal in the case of companies. Companies get no tapering relief. I would have thought that it was companies that ought to get the tapering relief, not individuals. I am not talking about portfolio companies or investment holding companies. I am talking about enterprising companies—companies engaged in business and trade.

It may well be that there will not be many cases where the tax will impact more heavily than the existing code, but if there are any such cases the option should be given to the company. I will be proposing a recommendation in relation to that.

This seems a good point at which to raise what I have long thought about raising and that is the treatment of illegitimates under the tax code. This Bill contains a section, which I have welcomed, with regard to gift disposals to children. It is right that Senators, when they are considering section 8, should appreciate that the child who can get the benefit, or in respect of a gift, through whom the benefit accrues to the parent, does not include an illegitimate child. If Senators have any difficulty in relation to that, I would draw their attention to section 36 of the Finance Act, 1977, which proivdes that:

for the purposes of the Tax Act and the Capital Gains Tax Act, 1975 unless the contrary intention appears, the child includes stepchild, adopted child.

It does not include an illegitimate child. You might say they are out. That would make some sort of sense even though it is monstrous. If you look at the income tax code where you want to get relief in respect of settlements, for example, made on other people, that is, people other than your children, the contrary intention appears there. So for the purpose of depriving you of the relief, an illegitimate child is included. I find little sense in that. I do not know how many cases there are. We all know that the number of cases, according to the law of this land, is increasing. We all know that there are nullification proceedings in the Roman Catholic Church, giving rise to the creation of a status for children which, according to the law of this land, is a status of illegitimacy. There are an increasing number of such persons. If there is to be an encouragement to give to children, such as I welcome in this Bill, I invite the House to consider a recommendation that that relief should be extended to include illegitimate children as well.

Mr. Jago

I welcome this Bill which is amending a situation of taxation which is not for the common good. Taxation can be used in a penal manner just to take money from people. It also can be used in other ways, such as a redistribution of wealth to give equity among the people of the community. It can be used to direct people's actions in a way that is good for the community and it can deter actions which are bad for the community. Up to now, I do not think that has been the situation. This Bill tends to amend that situation in that it gives incentives. It gives incentives to the man who works for a wage to save money. If a man works for £1, and puts in the equivalent in work of that £1, and invests it, when the time comes for him to use that investment he wants to get back the working equivalent of that £1. Therefore, indexation has been brought in. It also, by the scaling taxation, encourages investment for a period.

I would like to give a practical demonstration of recent legislation that has been brought in, how it affects the worker who wishes to look to his old age and how this legislation has improved the situation. Generally, the aim of a man is to get married. So today he will get £1,000 grant to build his house. As he proceeds, the next thing he will want to do, looking to his old age, is to buy his ground rent, and he can do that. Then, as he proceeds he may wish to buy a car and he probably does that. Now he has got to the stage where he can invest money.

The day comes to retire and he has a reduced income. He, at least, has a house, he has no rates or ground rent to pay, he has probably got the car and he has only £5 tax to pay. Unfortunately, I cannot say the same thing about insurance. He has the petrol cost on, probably, the small use he gets out of the car. Then, say he finds his income is not adequate and has to draw on the money that he saved: he can draw on that money and be sure that he is not being taxed on it. He would have been taxed on it without this Bill because, as Senator FitzGerald has said, over the period taxation has gone. I just wished to illustrate the benefit of this Bill to the ordinary working man. I was very surprised to see that it was suggested in Dáil Éireann that this Bill may create a division in our society.

This Bill helps to direct people to do things which is good for the economy. The small business and the farm have been valuable to our economy and will still be valuable. One of the things we wish to do is to get the best production that we can from those sources. There are two things that they require, money and labour. We do not wish to starve them of money. We wish to keep the labour to an adequate level so that management and output is at a viable level and are still valuable to the community as a whole. I wish to stress this because they also are of benefit to the worker who is earning a wage in industry and otherwise. We had a position where if the value went over £150,000, it was out for relief.

You also have the position where a farm had to be handed over in one lot. Now if a person is over 55 years of age and does not wish to hand over the whole lot he does not have to do so. He can hand over part of it. At a later stage, a second member of the family could hand it over to the next member of the family. Not alone that, but if the person who is over 55 years wishes to hand over to the younger person but still wishes to have an income he can still sell part to get that income.

All these are forms of taxation which try to keep the small business and the small farm viable, not just for the farmer but for the community as a whole in order to keep up output and help the economy. This Bill is definitely doing that but it does other things as well, for example, a compulsory purchase order under which land can be bought for the same value. Against that, it deters the person who is trying to make an income by appreciation of capital and not making an input into it in the way a worker services the community. Therefore, development land is exempt from the sliding tax scale as is mineral land.

Senator FitzGerald suggested that indexation should not be allowed in the case of developing land but one has to be just. Indexation is to keep money at the same value as it was when invested. No developer or speculator trying to make money will make it on inflation alone. The person who wishes to make an income by capital appreciation over a short period is caught. Any investment will have to be for a minimum of three years before the sliding scale of taxation comes in.

I welcome this Bill. It has made some matters fairer for the community and is not a Bill, as some people have suggested, which benefits only the well-off. It is a Bill that benefits all sectors of the community and, if properly presented, should not in any way divide the community as has been suggested.

Mr. Donnelly

This Bill provides a lot of points for discussion. It is essentially bringing reform and common sense which, to be non-controversial about it, experience of the last Bill showed to be badly needed. There are some essential reforms which have already been debated. Before touching on them, there are a few essential basics which should be pointed out.

This Bill increases the rate of capital gains tax. The suggestion that the Bill is being brought in to provide for a small wealthy group of people hardly stands up when examined on that basic point alone. Gains within a three-year period from acquisition will be taxed at 30 per cent, an increase of 4 per cent on what had existed. Our attitude to capital gains and the essential distinction that should be made between long and short-term gains, was very well known before the last election. The Tánaiste and Minister for Finance when debating the 1975 Bill repeatedly insisted that a distinction should be made. It was well known at the time. I suggest that the results of the election and the extraordinarily huge majority would not indicate that the middle or lower income people in any way felt that our proposals for capital gains tax reform, which we now have in this Bill, were in any way detrimental to their income. That may be a predictable type of debating point from a political point of view, but it certainly does not stand up to critical analysis of the opinion apparently of the people.

We indicated that there was a great deal of reform needed in the capital taxes and in taxation generally. It should also be borne in mind that most of the reforms have already been effected in the Finance Act, 1978. The greatest increases that were ever given in personal allowances for income tax were given in the last Finance Act. In the general debate on this Bill, it was alleged that, while we are giving preference to a small number of people who would benefit, no relief is being given to the income taxpayer. That point is based on the yields which are being received from income tax generally. That argument would not stand up to critical analysis. The facts remain. The personal reliefs were dramatically increased. If we have an increase in yields on income taxes we have it because there are more people earning more money which, of course, was one of the basic economic points behind our whole approach to reform of taxation, apart altogether from the question of equity, that if we could bring into our system of taxation a level of competence by both the workers and the entrepreneurs, we would raise the level of economic activity, we would expand the economy and we would provide more jobs. That is how we would get an increase in yield in a year in which we give greater tax allowances. That vindicates our economic strategy as far as taxation is concerned. This Bill is the final phase in the initial steps to breathe some sense and equity into our system of taxation in this case in the area of capital taxes.

The two points which have come up for most discussion are the questions of tapering relief and indexation. Just what is the case for suggesting that tapering relief should not apply? Should we disregard the length of time in which an asset is held? Should we make no distinction between an asset and a gain made in 12 months and a gain made over ten, 20 or 30 years? Does anyone seriously suggest that those situations are identical and should be classed in an identical manner? If they do, let us hear the case for it.

Mr. Alexis FitzGerald

I cannot speak twice.

Mr. Donnelly

Let us take some of the points that were made in support of that point of view. For example, the suggestion was made—and I think this indicates a great deal of confusion and perhaps political confusion about the matter—that an investment in property which is let in flats in no way contributes to the economy. Frankly, the logic of that escapes me. We must decide what type of economy we are going to have. If that type of investment does not take place, people are still going to look for accommodation. That service and that facility are essential and in great demand. If people who provide that service, decide against providing it, then somebody else—presumably the State—must step in and make that provision. We are talking about the essential type of economic system we are going to have. If individuals who provide that service are not contributing to the economy and should be taxed accordingly, who is going to provide the service? The simple answer is that the only agency left is the State. Is that really what is intended? Is that what we are driving at?

I repeat the basic point on tapering relief: individuals or people who have contributed over a large number of years to the development of an asset, perhaps towards the provision of employment—in many cases we hope in fact to the provision of employment—who have sunk their lives and their endeavours in the building up of that asset, are clearly in a totally different position from someone who makes a quick gain overnight or over a small period of years. It is absolutely fair, absolutely just and I have no doubt that it will meet with the approval of the public that that essential distinction should be made and relief granted accordingly.

Indexation is also a relief which to me is self-explanatory. How in equity it can be suggested that people pay tax on paper gains which reflect nothing more than the fall in the value of money escapes me, if that point is made from a viewpoint of equity which apparently it is. When you bear in mind the type of inflation we have had, is it correct that, people, as all of us have, suffered over the last four or five years from inflation rates of 15, 18, 20 per cent and more, should not only struggle through that, but should then, if they are fortunate enough to realise a gain, pay tax in that situation? Clearly this is an inequitable situation and one which has to be remedied and one which is remedied in the Bill. I find the debate on those two reliefs to be argumentative and somewhat unconvincing.

Mr. Alexis FitzGerald

I do not want to interrupt the Senator but I wonder did he understand that I welcomed the reliefs provided by indexation.

Mr. Donnelly

I am glad to hear that, but I was not specifically addressing my remarks to the Senator although they were very interesting remarks.

Mr. Alexis FitzGerald

I happen to be the only person who made any point against the Bill. I thought the Senator might possibly be referring to me.

Mr. Donnelly

I accept that but I was, in addition to the Senator's remarks, referring to criticisms generally that have been made on the Bill. In relation to tapering relief, why should there be this distinction, and why 21 years? Twenty-one years is an extremely long time in terms of finance, in terms of the economy, and assets, family business, and the circumstances of families may differ greatly over that period of time. I would suggest that the continuation of a system of gains tax beyond some time within that range of years is something which is inappropriate having regard to the basic reliefs which are sought both by the tapering relief and indexation.

I indicated at the beginning that I wished to keep my remarks short because I feel the Bill speaks for itself. Indeed—and with reference to the Senator's remarks while I was speaking, I think his comments and his criticisms are very courageous and show very commendable loyalty. It was quite remarkable that for much of the debate so far today he has been alone on the Opposition benches. It is particularly remarkable that on this occasion so far, and I think I am right in saying when we were discussing the Finance Bill with particular reference to the wealth tax, for most of the time, if not all the time, the Senator had to stand and fight alone. It shows the commendable loyalty to the Coalition that existed but it was quite remarkable that there appeared to be so little support, if any, from his former colleagues and members of the Labour Party.

An Cathaoirleach

There should be no reference to the presence or absence of any Senators in the Chamber.

Mr. Donnelly

I accept your ruling and I did not intend to reflect in any personal way. I was simply making a point which I regarded as of some significance. I feel that we have delivered on the final phase of reform in both the income tax and the capital tax systems. The Bill breathes sense and will continue to give grounds for confidence by the investing public in the type of taxation system which will exist in this country and which has already brought forward tremendous gains in terms of growth and employment to this country.

Mr. Mulcahy

I am no expert in taxation and so my interpretation of some of the measures in the Bill may be at fault but I still feel that it is important to make some general points on this Stage of the Bill. I cannot help feeling that if we did not have Senator FitzGerald in the House we would have to invent him because every time I listen to him on a Finance Bill or a Bill of this kind I learn a lot and I appreciate that very much. As far as the support he gets, and your ruling on that, the record will speak for itself.

My interest in this is the continuing problem of balancing justice in society on the one hand and the need for an entrepreneurial development on the other and instruments of this kind are fairly blunt in attempting to achieve a redistribution of wealth and at the same time to encourage entrepreneurial activity. Where legislation is introduced which will bring about a greater measure of justice and an acceptable sharing of wealth in society, people who will sometimes benefit are not putting in the effort and are not really making a great contribution to the development of the country. As I see it, the approach here is, through the instrument of capital gains tax, to attempt to provide a measure of fairness. While at the same time encouraging the entrepreneurial behaviour which this country requires if we are to provide the business activity and that means the jobs that are required for an expanding population.

We must not inhibit our businessmen or make it more difficult for them to compete with others, particularly in the European market situation. We are balancing the need to provide employment with the need for a just redistribution. It seems to me that Ireland in trying to provide this employment must put that first and then go step by step with the larger grouping, the EEC for instance—let them develop the initiative, let them develop the new instruments which might go for a more harmonious social partnership and let us go step by step with them, but we cannot get out of step because we must provide the employment.

The facts are that under the previous administration where you had a combination of Labour on the one hand and Fine Gael on the other, one nominally Left and the other nominally Right, one would have hoped for the type of compromise formula which would have produced the environment which would accept the notion of just redistribution and at the same time encourage the entrepreneurial activity. In the event we all know what happened. There was some redistribution—I will grant that— but the motivation for the entrepreneur was removed and we had an atmosphere which did not in any way encourage people who are motivated by money, who are motivated by the accrual of wealth. They were inhibited, lost interest and felt that it was not worth the candle. I think that the measures that are in this Bill help to restore the balance.

Senator FitzGerald said that he bravely—those are my own words— took a position on wealth tax at one particular stage; he has mentioned this in the House before: we talked about it last year; but now he feels it should have been reformed and not thrown out. I think there is a fundamental difference between the case of what I would call what you have and what you realise. It is one thing to realise a capital gain and then have it taxed under certain rules and regulations as applied in this Bill: it is another thing to have wealth and to have it depleted incrementally on the basis of a wealth tax. The example I gave before is on record and here I am influenced again by comparable competitiveness. We have situations where on the same Irish market you have businesses owned by Irishmen trading in competition with businesses owned by companies outside Ireland where the Irishman would have to put aside an amount to cover his wealth position and provide that from the gains of his business whereas the people he was competing with did not have to do that. That puts people at a disadvantage; it puts Irish wealth-holders at a disadvantage and, as such, was again a contribution to inhibiting the entrepreneurial behaviour I am talking about. We are not talking about wealth tax in the Bill but it came up in debate and we, in fact, have thrown it out and I think there was good reason for doing so.

I would not feel very happy about the position where wealth is obtained through the manipulation of artificial mechanisms, like the stock exchange, where the value of a share is based on earnings per share multiplied by some notional figure which is a function of market speculation. People used that mechanism in the last decade to "rationalise" Irish businesses and to take over. That is an example for me of the artificial manipulation of capital market and in fact the market punished many of the people who were involved. I was in favour at the time of not inhibiting the motivation of the individual but obviously some method like appropriate capital gains measures could be used to cover that issue. I just want to make myself clear on that.

I welcome the Bill and I welcome particularly what it is doing to encourage passing farm land and farms into the hands of the younger farmers who might be more inclined to practise modern husbandry. We all know that the productivity of the agricultural sector is going to depend on husbandry and the management of the land and to the extent that the Bill helps in that direction, it is very welcome. I also see an advantage in the way that the Bill deals with compulsory purchase orders and the gains derived therefrom. Unless I am misinterpreting it—and here I bow to experts—it seems to me that this measure, which means that people must transfer their gains into similar holdings, might get rid of some of the eyesores and the empty tooth sockets that I have to put up with in the inner city of Dublin where people are sitting on property in the hope that they will be pushed into that position. It seems to me that this measure should help.

In summary—I am speaking in general—I see that this Bill does go towards providing that partnership between the need for just redistribution and entrepreneurial activity and it is, in fact, showing the way where the Coalition, who were a Coalition of Left and Right interests, failed. I welcome the Bill and look forward to any further discussions that take place on Committee Stage.

Miss Harney

I, too, welcome the Bill. When we are discussing this Bill we cannot overlook the fact that it has, as the Minister said, two main functions: first, to rectify the serious errors that existed in the Capital Gains Act of 1975 and, secondly, it is a beginning by the Government of reforming the Irish system in such a way that, hopefully, in the not-too-distant future we will have a more progressive form of income tax.

In 1975 the capital gains tax introduced by the previous Government was modelled completely on the United Kingdom taxation system which dated back to 1965. No effort at all was made to draft a Bill that suited the circumstances of the Irish economy. The two main faults in the Act were pointed out earlier. First, no regard was taken of inflation in the calculation of the gain that was chargeable to tax and in a period, obviously of very high inflation that we had over the past number of years, the gains were obviously illusionary but the tax charged was very real indeed. The secondary fault was that no distinction was made between short-term and long-term gains. Thus, as we heard earlier, the speculator who got in fast and made a quick profit, was charged the same amount of tax as the entrepreneur who had spent years building up his business. Obviously, these were very serious defects and ones that no Government could stand over.

The amendment Bill introduced here today takes account of these faults. It ensures that all gains will be inflation-proof by indexing the cost of the assets to the consumer price index. In section 4 rates of tax will be charged on a sliding scale for assets held for more than three years and there will be a further reduction on every three years the asset is held thereafter until eventually no tax is charged after 21 years.

In section 6 assets inherited on death will be considered acquired at the market value by their successors. Obviously, it was very unfair that the person who received an asset or inherited an asset was liable for capital gains tax on gains arising during the time when he did not hold that asset. For that reason, I am happy that the Government have brought in these necessary amendments and have rectified the major faults. I hope that it is a beginning by the Government in tidying up the ludricrously regressive taxation system that exists in this country. I believe that tax on income should be charged at the same rate from whatever source that income is received. If you have a progressive form of taxation, taxing all incomes fairly, there is no need for a wealth tax or anything like that. I welcome this Bill.

Minister of State at the Department of the Public Service (Mr. MacSharry)

First, I should like to thank Senators for their contributions and their welcome of the Bill. One can fairly say that it was generally completely accepted and welcomed with the exception of the two major points made by Senator FitzGerald, the fact that companies did not qualify for tapering rates and his argument against the repeal of section 6 of the 1975 Act. In general—I do not want to misquote anybody—there was acceptance and welcome for all the provisions of the Bill.

In my original remarks I answered some of the points that have been made by Senators but there are just a few other detailed points that I would like to mention. I am glad that Senator FitzGerald said that in the debates on the original Bill he had mentioned two of the major items in this Bill—namely capital gains tax on death, and indexation—and said that he would have favoured what is being done now. He also went on to say, in reply to what I said about discouraging speculation, that he felt that indexation would encourage speculation, I do not think that that can be so. First of all—it is difficult to define speculation—to qualify for indexation the asset must be held for at least 12 months and the real distinction between the speculator and the ordinary citizen is in the tapering rates where the tax rate is lower the longer he holds the asset. Of course the rate of 30 per cent is charged if the asset is held for less than three years.

The question of reinvestment of the proceeds arising from compulsory acquisition was raised also by Senator FitzGerald. If the proceeds were reinvested in development land tapering rates would not apply on the disposal of that land. He was making a point about that.

There was also a point raised about accrued gains being taxed. The gain that has accrued on an asset up to the owner's death is not taxed. The beneficiary who inherits the asset obtains it at market value at date of death and begins a new period of ownership for tapering rates, so that if he disposes of it in the first three years after death he pays at the 30 per cent rate.

On the question of the repeal of section 6 of the 1975 Act, the effect of indexation is to eliminate from the charge to tax gains due to inflation. It could then be argued that the gains left in charge should be assimilated to income for tax purposes. Having decided in principle not to apply the income tax rates it would be inconsistent to retain section 6, which in effect charges half the gain at income tax rates. The provision of tapering rates of charge based on the period of ownership of the asset is considered to be fairer to the taxpayer, especially as it applies equally to all individuals and not merely to an individual whose income for a given year of assessment happens, often fortuitously, to be pitched at a level enabling him to derive some benefit from the relief.

The Senator gave the example of the British situation. The half income rule is gone here and in the UK but the UK compensated by increasing the exemption to £1,000 and giving marginal relief up to £9,500 gains. The simple answer to that is that the UK do not have indexation or tapering rates and our £500 exemption is reasonable in view of the indexation of the gains.

Mr. Alexis FitzGerald

They could not afford to give them. They are very poor over there.

Mr. MacSharry

That is a matter of argument, who is poor and who is not. The question of tapering rates being applied to companies was raised. Companies are excluded from the tapering rates because a company has a separate existence apart from its members and enjoys perpetual succession. Accordingly, unlike an individual whose death involves the commencement of a new period of ownership by a successor, a company generally speaking, has no life span and the giving of tapering relief would therefore be inappropriate. Indexation which will apply across the board will remove most gains from the tax net. A combination of indexation, tapering and roll-over relief, under which a diverged gain in the hands of a company in effect escapes tax in perpetuity, would probably result in a "nil" tax yield from companies. Therefore, it is necessary to exclude companies from the tapering rates.

The final question that was raised by Senator FitzGerald was that of illegitimate children. We are obliged, in tax law, to maintain the situation as it exists in general law. That has been the position in all tax law so far. This is a matter of concern to many people no doubt, as it is to Senator FitzGerald, but I think the matter has already gone for consideration to the Law Reform Commission. The matter is by no means closed at this stage.

Mr. Alexis FitzGerald

On that point might I refer the Minister to the Income Tax Act where illegitimate children are included? I think it is Part 27 of the Income Tax Act. We can discuss this on Committee Stage.

Mr. MacSharry

I do not think what the Senator says is correct but, as he says, we can develop it further on Committee Stage. Like many of the other points that Senators might like to raise, in addition to those raised on Second Stage, we can go into them and give a more comprehensive reply to them on Committee Stage as questions arise.

Question put and agreed to.

An Cathaoirleach

Next Stage?

Mr. E. Ryan

Next Wednesday.

Committee Stage ordered for Wednesday, 13 December 1978.