The situation would be that the first £10,000 is exempt. The rate of tax applicable to the £30,000 balance would be that rate which was averaged over the previous five years. I do not see any grave inequity in an arrangement of that sort. Had the person remained in employment, earning the kind of money in respect of which he was being compensated for, he would have been liable to tax at a reasonably high rate. What one is doing is going back over the average of the previous five years. Exempting the £10,000 is a major step forward and one that has been welcomed. I have received, commendation is hardly too strong a word, from trade union representatives and workers in respect of this extension saying it was time it was done and that they saw it as being of very considerable benefit to them. Under the existing arrangements, because one could so arrange one's affairs as to have little or no income in a particular year, either by way of covenants or leasing arrangements or any other of the numerous devises that were used, we have had situations where people on golden handshakes, on figures of the order of £81,000, were not liable to any tax and paid no tax. That is the situation at the moment pending the introduction of this legislation. I am not suggesting that Senator FitzGerald is arguing that such a person should not pay tax but I am saying that under the provision of the order which Senator FitzGerald has rather enthusiastically suggested should be left intact, though he has made recommendations which he said were second best, a considerable number of cases, perhaps not quite of that order but certainly of a substantial order, because of the arrangements that have been made and are there to be made under existing arrangements, will be exempt from tax altogether. Many of them are, because of avoidance. I expressed my views on that elsewhere and I adhere to them. Where others are paying their share of tax, people who come into benefits of that kind are exempt totally from paying tax. That is the consequence of adhering to the present arrangements.
In relation to some of the examples that he has given—I would like to thank him for submitting them to us—he mentions that there appears to be a notional case looking at the wrong figures concerned, the married man with two children on a salary of £10,000 who retires on 31 March of next year, receives a lump sum payment of £20,000 and pays bank interest of £1,000. Senator FitzGerald says the tax payable under the old method of the top slicing relief would be £1,893 and tax payable under the proposed method of relief would be £6,437. The increase would be, on that basis, £4,544. I have had it examined in the meantime. The tax he refers to is the tax on the income for that year, it does not include any tax in respect of a lump sum of £20,000 or £25,000. The tax at the second example, which will be payable under the proposed method of relief, includes the tax which will not be chargeable in respect of the lump sum. In other words, it includes the tax on the figure of £10,000. The figures in the third element increase in the tax payable shows this tax which represents 22.7 per cent of the lump sum of £20,000 and 27 per cent of a lump sum of £25,000, but the important thing is that the lump sum is not included for tax purposes. Taking that into account, the Senator has also indicated that he has ignored the standard capital superannuation benefit which could also operate to reduce the tax bills below what is shown. This, too, means that the additional £4,000 that I referred to is £6,000 plus the £4,000 provided for, is also left out of account, so that the actual example given does not reflect the situation, though it is fair to say that it acknowledges that it does exclude the standard capital superannuation benefit.
Senator FitzGerald also mentioned that one should adopt the total income for the purpose of calculating the rate of tax to be applied to golden handshakes. To do that it might be appropriate if the total amount of the golden handshake were to be charged to tax. In fact, only the chargeable element of the payment is subject to tax and it is arrived at by deducting from the total payment the exempt part which will be £10,000 at least and in the case of many golden handshakes it may be considerably more. Since what is required is the average rate of tax to be applied to the taxable part of the lump sum, the rate obviously then must be the average rate applicable to the taxable income over the previous five years and that is what the section provides for.
What one is doing here is looking back over the average taxable income and the rate of tax over the previous five years and exempting £10,000 from the redundancy payment or whatever it might be. In many cases the amount of redundancy will not be as much as that and then, in respect of the balance, charging it at the average rate of tax liability over the previous five years.
I am making this sort of provision for two purposes, first of all, to deal with the blatant abuse which has been practised in this sector, the loopholes as they were on top slicing and golden handshakes, and also to increase the exemptions on lump sum redundancy payments which are very considerable. There is a very significant increase in this year from £3,000 to £10,000. Even in doing that there may be, as Senator FitzGerald said, some particular cases where people will be liable under this new arrangement to more than they would have been if the top slicing had remained in existence.
The case he mentions must have been an extreme example of someone liable to £40,000. It suggests to me that that particular person on the basis of the compensation arrangements that he referred to, nine weeks payable for each year's service, must have been fairly close to retirement anyway or else was being remunerated at a very healthy rate of income, if he was entitled to £40,000 on termination of employment and I do not think it is of any significance that one is white collar, blue collar or otherwise, he must certainly have been close enough to retirement or else was being remunerated at a very high level. It is fair to suggest that what I have already made is a reasonable approach and, incidentally, though Senator FitzGerald will not find much to reassure him in this, the Dáil certainly took the view that what was being done was in the right direction. It favourably supported the extension of the exemptions from £3,000 to £10,000 and also plugging the loopholes in respect of golden handshakes which were not liable to tax at all. That is what my proposal has effected. What Senator FitzGerald's first recommendation proposes is that the threshold in the first instance should be increased, for example, from £3,000 to £12,000. Whereas I made it £6,000, Senator FitzGerald doubles it to £12,000 and the £4,000 which I brought up to make it £10,000 in the first case would be £8,000. Therefore, the exempted threshold, instead of being £10,000 now would become £20,000.
If the main purpose of increasing the exemption limit under the section was to grant the exemption to the typical manual worker who receives a modest lump sum then we are not talking of such a case in the exemption limits that Senator FitzGerald's recommendation would introduce. I do not mind saying that, of course, the exemption limit is also available to directors, top executives of companies, including controlled companies in respect of what is known generally as the golden handshake but this is where the blatant tax avoidance has been introduced. I will give one example, for we have had many examples of cases up to £50,000 and £60,000 where no tax liabilty at all accrued. I would not feel justified, having closed the loophole, in opening it up immediately again because Senator FitzGerald suggests there may be some manual workers, or any other workers, who would have lump sum payments coming to them of the order of £40,000. With the exemption and the average arrangements that I referred to, what will emerge is that they will be at least not at a disadvantage by comparison with the situation that would have arisen had they remained in employment for what must be, it seems to me, a relatively short period in regard to the example he has given. Having said all that, my first experience in dealing with the Finance Bill has certainly made it quite clear that when you plug a gap or a loophole, perhaps another one is opened up. Certainly when you introduce something to plug it you may—I say may—affect some very exceptional cases in the way it was not intended. That is something I obviously will keep under review. I am satisfied that, having regard to the blatant avoidance that has been perpetrated under the existing arrangements and to the fact that, as I say, in Britain, though Senator FitzGerald does not seem to be aware of it, they too propose to change, and also having regard to the very equitable arrangement I am now introducing, that if there are some examples of people who would be badly done by at least we will have the opportunity of looking at them. If they are they will not be disadvantaged to an extent that they will be anywhere near suffering in the course of this year in which they will have a £10,000 exemption, anywhere near being taxed into penury, much less unable to support their dependants. This could not arise as a consequence of the exemptions.
Obviously this is not just a dialogue between Senator FitzGerald and myself. I hope not. My ears have been open and will remain open and, if some of the rather unrepresentative examples he mentioned do pose problems, we can have a look at them in the course of the year. It is not the intention to ensure that any of these payments should be totally exempt from tax. Yes, £10,000, but to suggest that someone who gets £40,000 because an industry is closing should not be liable to some tax could not be accepted, or that he should be exempt from tax. The exemptions which have been welcomed in the Dáil for the reasons I have mentioned should equally commend themselves to this House.