Am I correct in understanding that section 4, which states: by the substitution for "All penalties under this section" of "All penalties for failure to comply with any provision of regulations under this Chapter" is an extension of the application of the penalties under section 128, which requires the sending of returns and so on, under regulations, to breaches of other sections of the same chapter which is quite an extensive chapter in the Income Tax Act? If I am correct in my understanding of that, which quite simply seems to facilitate the proof by the Revenue Commissioners what other failures are caught by the provisions for proof which are in the subsection which are deficient at the moment? In relation to what other breaches or matters of penalty is the facility of proof which is to be provided by this amendment?
Finance Bill, 1981 [Certified Money Bill]: Committee and Final Stages.
The main purpose of this section is to amend section 128 of the Income Tax Act, 1967. It provides, in relation to monetary penalties for non-compliance with PAYE regulations, that certificates will be admissible as prima facie evidence in certain proceedings for the recovery of a penalty under the section and not, as has been decided in the District Court, solely in proceedings under the section involving failure to send a return, statement, notification or certificate. In other words, what you are basically doing here is replacing people with certificates because of a District Court decision regarding some of the requirements under the Act, certificates not being accepted as prima facie evidence. That is basically what is involved here. There was a case in the District Court in which it was held that it was not sufficient just to have a certificate and it meant, in other words, the presence of an official. This merely inserts an amendment which changes the Income Tax Act to provide the necessary authority for evidence by certificate.
I am very anxious to facilitate what I understand to be intended. I know about the case to which the Minister has referred but the existing section provides for this certificate in relation to the proceedings for penalties under the section and I take it, without knowing it, that there are breaches other than breaches of the section which are now enforceable by the signed certificate and the substitution of the signed certificate for the persons in question. I do not know, because I just have not had enough time to read all the sections in the chapter what other kind of breaches there are in the chapter as distinct from the section which will now be facilitated. It may be that there is something in some section other than this section which ought to require proof by a person and to which this facilitation ought not to be extended. To encourage the Minister, I would expect that there are not, I just want to know.
By virtue of the court decision which I referred to and of which the Senator is aware, areas of the PAYE regulations in respect of which penalties are imposed are failure to (1) send a return, statement, notification or certificate, (2) produce wages sheets or other records or documents to the Collector-General, (3) remit tax to the Collector-General, and (4) make certain deductions or repayments of tax. Subsection 4 (a) of section 128 provides that in proceedings for a penalty under the section, oral evidence of the failure to comply with the requirements at (1) is not required. Instead a certificate as to the facts signed by an officer of the Revenue Commissioners is to be evidence of the facts until the contrary is proved. This obviates the necessity for an officer to attend the court in person in order to present the evidence. The defaults listed at (2), (3) and (4) are not expressly mentioned in subsection (4) (a) of section 128. The District Court decided in May 1980 that the absence of the express mention of the default, in respect of remitting taxes to the Collector-General, meant that oral evidence was necessary.
I thought so.
My apologies, in regard to the four items that were not covered. The first one is covered but the third is not. The District Court case that I referred to related to failure to remit taxes to the Collector-General. The requirement was there for an official to attend to give evidence. What we are endeavouring to do here is to replace personal attendance of an official by a certificate which will be admissible as prime facie evidence.
I am entirely happy with the answer the Minister has given. I agree with the amendment. Looking at the printing of the Committee Stage of the section I could not make head nor tail of it because paragraph (b) was out of line with paragraph (a) so that it became almost impossible to read, at least it was so in what I have here. A helpful table is provided at the end of the section to make clear what is the revised subsection (2). We are also proposing to revise subsections (3) and (4) of the Income Tax Act, 1967. We have no helpful table about subsection (3), as revised, and subsection (4), as revised. Why have we not? I know that the Revenue Commissioners try — indeed I would not be able to talk here at all if they had not succeeded in their effort to make half dead creatures like myself understand the effect of all this legislation by producing green volumes every year with substitute pages and so on — but even at that, it is an exceedingly difficult business. I will be referring, for example—to give advance notice to the Minister — to a section which it is proposed to amend here today for the Nth time and which leaves one totally ludicrous subsection of the original section standing. One discovers this only by a process of elemination, by drawing a pen through all sorts of pieces of paper that one may be looking at for another purpose another time and through which one does not want to draw a pen. In relation to understanding what we are doing in this section — and praising the draftsmen for the helpfulness in providing us with a table for the revised subsection (2) — is it just simply lack of time that explains why we have not got a table for the revised subsections (3) and (4)? If it be lack of time, honestly I think time should be taken, in the processes of enacting laws, to see that appropriate tables of the same kind as that provided in relation to subsection (2), are prepared in relation to all other subsections which are revised by sections which are being enacted.
In reply, the Senator says that there is no table in respect of (3) and (4) but in effect if he looks at page 9 of the Bill and the table that he referred to and go on to (a) in the table he will find that paragraph (a) of (4) as amended is set out. The different items are there, and they refer to subsection (4):
a certificate signed by an officer of the Revenue Commissioners which certifies that he has inspected the relevant records of the Revenue Commissioners and that it appears from them that, during a stated period, a stated return, statement, notification or certificate was not received from the defendant.
Then it goes on to refer to wages sheets and that the defendant did not during that period send that return, statement, notification or certificate, or whatever it was, and there is a final one, "did not produce those wages sheets or other records or documents..." In fact you have the reference there to subsection (4).
With respect, if that is so it is exceedingly badly done because there is a table which brings together a revised subsection (2) and a revised paragraph of another subsection, which I take to be subsection (3), but we have no table showing the position about paragraph (c) of subsection (3). We have a paragraph which tells us what is the new paragraph (a) of subsection (4). There are two tables, one table should obviously be set forth immediately following the amendments to the subsection, the effect of which amendments would be indicated as completed by the tables which would follow. Then there should be another table indicating the effects of the other amendments. Speaking as one practitioner, if you like, I find it difficult to take that table up to divide in two, as it is not made clear to me — if I did not have the earlier part of the section to look at — as to where I should make the division and paste the two things in. I am still left with something else done in another subsection, that is to say subsection (3). Am I right in thinking that the table does not contain a revision of subsection (3)?
The Senator is correct.
Well then we will leave it at that.
It would be somewhat absurd to have a table referring to subsection (3). If the Senator reads the reference to subsection (3) at the top of the page merely to have a table would be a repetition of paragraphs (a) and (c). Obviously there is no need for a table in that situation.
I totally disagree with the Minister. I do not think it is absurd.
Perhaps I should not have used the word "absurd". "Unnecessary" perhaps would have been a more appropriate word.
May I speak to the gentlemen who have the duty to look after these affairs as they continue? To take this section up and to understand it is all very well and all very simple to those who drafted it — and presumably they have their master copies with the amendments written in — but it is exceedingly difficult for other people to understand. They go back to the Income Tax Act and they do not know what to substitute for what.
This section is an amendment to the section which requires deductions to be made where builders are making payments to subcontractors, and it extends beyond the definition of the original section the persons who are subject to the obligation to make the deduction in the absence of approprivate certificates to "persons carrying on businesses which include the erection of buildings or the manufacture, treatment or extraction of materials for use, whether used or not, in a construction operation". The essential extension here is to people whose business includes the manufacture, treatment or extraction of materials for use in a construction operation. I take it, from the fact that we are faced with this amendment that the Revenue Commissioners have had experience of payments being made without deductions by people who were not builders but who, by virtue of the business they were carrying on, ought to have known that the people were subcontractors. Because of the definition of the persons who were obliged to make the deduction in the original section, they were not making any deductions and payments were being made to subcontractors which were escaping the tax net. If that is the intention of the section and if that is the experience of the Revenue Commissioners, the proposed amendment has my full support, but perhaps we should have that point clarified.
Yes.
If I have got it right that is as much as I will ask the Minister to say.
That is true. It is ensuring that subcontractors carrying on some activities that seem to be outside the scope are now covered by this section.
Is it subcontractors or the payers to whose activities this is extended? Is it to the contractor who is making the payments or the business being carried on by the subcontractor?
Both are involved. Section 17 (2) of the Finance Act, 1970 provided for the deduction of tax at source from payments made to a subcontractor under a construction contract where "the principal is himself the contractor under another construction contract or is a person carrying on a business which includes the erection of buildings". Firms engaged in the extraction of raw materials for buildings, for example, sand and gravel, or in the manufacturing or processing of building requisites like concrete blocks, tar or whatever it may be, have as a matter of practice been treated as coming within the scope of the legislation, particularly in respect of hauliers engaged in the haulage of those materials. A strict interpretation of section 17 (2) of the 1970 Act might not support such treatment which, however, gave the Revenue Commissioners control over a large number of hauliers who might otherwise escape tax. Until recently no objection was raised by the principal contractors or the hauliers. As a result of representations made by some hauliers to their principals it has recently emerged that some large firms in the business have become aware that they may not come within the scope of the legislation in that, while the construction contract as defined exists between them and their subcontractors, they themselves are not operating under the construction contract as required by section 17 (2) (a) — they would be operating under contract for the sale of goods — nor are they carrying on a business which includes the erection of buildings as required by section 17 (2) (b).
That is pretty well what I understood. I want to go a little further. I am concerned about further extension at (bb). I have not in front of me the insertion by the Finance Act, 1976, of section 17 (2) and I am not clear where I can find it. Therefore, I do not know if section 17 (2) as it stands, in relation to builders as they are defined at present, includes the provisions of paragraph (bb) with regard to such builders. If somebody is connected under the definition of the Finance (Miscellaneous Provisions) Act, 1968, with a builder, is that builder's connected person at the moment subject to the obligation to make the deductions? I am not referring to the builder as extended by this definition.
The simple answer there is "No".
I express some apprehensions and put the matter no further than that. Because of the extensive definition of persons connected with a company carrying on business which is to be found in the Finance (Miscellaneous Provisions) Act, 1968, this country contains a great deal of activity which does not get recorded in statistics establishing the gross national product. A great deal of work is done by people engaged in building operations of one kind or another for one citizen or another who pay them perfectly legitimately and who find that the sums for which they are being billed are rather less than if they went to one of the building contractors. Let us look at the persons who would be brought within and subjected to the obligation of this amended section to make deductions. A builder's wife can make a payment and that is fair enough if the wife is carrying on the building business. Let us say we are trying to find the person connected with the building company, and we have a person connected by marriage, within the definition of the controlled company, who controls that company. Then we have a brother or a sister of the person who dominates the building company or a company engaged in any of these activities, a wife, a husband, a brother or sister, or an ancestor or descendant of the person. Am I correct in understanding that the husband or wife or relative, or husband or wife of relative of the person who has the dominant position in a close company is now caught by the requirement to make a deduction and will be liable for the tax on the bills he is paying if the person who receives the tax does not pay tax on the sums he receives?
Take the position of someone who has the control, under the extent of the definition of "control" in that Act. He has a relative, which is extensively defined in the Finance (Miscellaneous Provisions Act), 1969, or a husband or wife of such a relative. He may not know anything at all about the position of the person to whom he is making the payment. His wife may be getting the paintwork done without the husband knowing it, least of all without either knowing anything about the position of the brother-in-law, who may be the person connected with the person making the payment who has, in effect, the control of a company, which includes the erection of buildings, the manufacture, treatment or extraction of the materials they use. He may not know that his relative's business includes any of these activities. It may be that the person is totally innocent of knowledge of the connection. As "connection" is defined, he may, by this extended definition, be caught by the obligation to make the deduction. Am I wrong?
No, we are not catching outsiders in this. We are catching insiders. It is an anti-avoidance provision. It brings within the scope of section 17 of the 1970 Act persons entering into contracts on behalf of companies within the new paragraph (b) where those persons are connected with such companies. This will include the common case of a selling company which markets the products of an associated company in a group since such a selling company would not be a builder or a manufacturer within paragraph (b) but would be the principal in relation, for example, to a contract with a haulier to deliver the products of an associated manufacturing company.
To establish whether a person is connected with the company, paragraph (bb) avails of section 16 of the Finance (Miscellaneous Provisions) Act, 1968, which provides that a company is connected with a person if that person has control of it or if that person and persons connected with him — broadly speaking, spouses, relatives, partners, trustees of settlements vis-à-vis settlers — together have control of it. It is not considered desirable that the scope of the new paragraph (bb) should be extended to cover individual to individual connections since the situation could then arise in which, for example, the owner of a hardware store could fall to be regarded as a principal contractor because, coincidentally, his brother was a builder. Company to company connections are covered by the new paragraph (bb) since “person” includes body of persons, that is section 11 of the 1937 Interpretation Act, and “body of persons” includes a company in the definition in section 1 of the Income Tax Act, 1967.
The anti-avoidance provision relating to connected persons is being introduced in relation to all categories of contractor mentioned in the new paragraph (b) including those involved in the erection of buildings. As I said to the Senator, this is an anti-avoidance provision. It is merely to prevent schemes being used as avoidance measures. The Senator can rest assured that it is something that will not be used freely by the Revenue Commissioners except where an obviously deliberate scheme is being used as a means of avoiding the payment of tax.
I certainly accept the Minister's assurance about the intention of the section and, further, take note of what the Minister said with regard to the fact that it is only persons who are connected with companies who are required to make the deduction. Perhaps the Minister could help me further. Objectively, subsection (2) of section 16 contains the definition of the matter that there should be any knowledge by the person of the connection. It says here that any person connected with another shall be determined in accordance with the following paragraphs of this subsection.
With regard to the definition of "relative", the relationship only arises where there is a connection. Is the Minister saying that the words "a person" in (bb) does not include an individual?
I am not.
Does the question of a relationship only arise where there are individuals involved in the connection and, where we have a company on one side of the affair, as in this case, the question of the relationship of individuals who have control of the company to individuals outside the company? Is that not affected?
That is not affected.
Perhaps I should explain the section. This section continues for a further year the relief in respect of the labour cost element in expenditure by householders.
It makes no change except it continues the relief for a year. How many persons have taken advantage of this section since it was first introduced?
This seems to have gathered much more interest in recent times. At mid-July 1979 the number of claims received was only 63; by the end of that year there were 293 claims; at the end of December 1980, there were 3,741 claims received and at the end of March 1981, 5,639.
These are interesting and useful figures. Are they the entire number of claims received during the period?
Cumulative totals. The Senator will see the growth.
I do indeed.
I understand this section provides an option for assessments on an average which is an option only open to individual full-time farmers and they can exercise the option only when they have been paying tax on a preceding year basis for two years.
For the two years prior to the year of assessment.
The farmer can then exercise his option and he can only go back to a preceding year basis and get off the averaging for the three years if he remains on it for a minimum period of three years after he has exercised his option and he gives notice of the fact within a period of six months before 6 July in the year of assessment. When are the farm accounts normally made up? Are they made up on a calendar year basis? Do farmers fiddle around? I want to know why a day in July has been picked.
First of all, when there is not a specific year the Senator will appreciate normally the experience is that either the calendar year or the income tax year is selected. The date 6 July is the date chosen for the making of applications for separate assessments in the six months prior to that. I had quite a number of meetings with the farming organisations. Long discussions were held between the farming organisations and the Revenue Commissioners in order to reach a measure of agreement on income averaging. It was only after these discussions had been carried on for quite a considerable period that this arrangement was reached. The date selected is one that will be looked at again in the light of experience of the operation of the averaging scheme. The application of the section has been reached by agreement, and experience will indicate to us how it works and what problems may be created. I believe that the measure of agreement reached has helped tremendously and I would like to express my gratitude for the co-operation.
I imagine there are other signs in the Bill that the farming organisations have been consulted as to the general ideas. If we are engaging in an operation generally of encouraging farmers with large holdings to pass on some of their land to younger people — there seems to be general agreement as to the desirability of that — we may have situations where this arrangement could be an obstacle for somebody who is making disposal which would reduce his holding of land, thereby reducing his profit from farming, because he is not giving up all the land he has but is continuing as an individual farmer. To get back on to the preceding year basis may be a distinct advantage to him despite the protective provisions which are in the section enabling the Revenue to reopen the previous two years and it may be a discouragement to him or to his advisers to find that they have mucked up the thing, that they did not make election within the six months before the statute by date, and because of the short time, the transaction may not go through. Farming in his name may continue because somebody has to come back from abroad or come from an agricultural college. I should have thought that within the year of assessment would be sufficient, particularly when the Minister is able to tell the House that the normal experience of the Revenue is to get farming accounts either on a calendar year basis or on the tax year basis. In either case, 6 July does not give a great deal of time. We were talking about an individual full-time farmer on a separate assessment basis. The date does not seem to be very relevant. Perhaps I am wrong in that. As the Minister has indicated that a revenue mind on this will be open to watch it, I would see this as something that it is desirable to change.
We have an open mind on that because a period was agreed with the farmers' representatives as being likely to allow sufficient time to decide whether he wishes to continue under the averaging scheme or to opt out. But if difficulties do arise or are shown to arise regarding the time for giving notice, it has been agreed that consideration will be given to that.
The trouble about these notice matters is human goodwill attaches to human beings and human beings change. Individual human beings change and are substituted for by other human beings. I have two further questions and I will then move on the the next one. Subsection (2) of the new section inserted by this section provides for the determination on a fair and just average. Is this on a time basis?
Yes.
Any objection to accepting it at some future time? I take it to be beyond human power that it should be dealt with in this Finance Bill.
As a point of historical information, I understand that this form of words is there since an Act in 1842 covered an averaging situation at that time.
I am glad to get it. But, as we are moving on to history, could I get an historical explanation of why different languages with regard to the aggregations are used in sections 81 and 89 of the Income Tax Act where there is provision for aggregating of profits and aggregation of losses and subtracting one from the other? The answer can be left to some future date.
I was referring on some of the earlier sections to the effect of amendments. It would have been rather nice if we had a table here with regard to this. First of all, I very much welcome the amendment. There are many cases of many charities that have been embarrassed by the matter of the application of the section to their activities which were producing profits which were in fact being applied solely to the purposes of the charity but these profits were not receiving the benefit of this exemption because they could not come under either limb of the section's requirement. I think the amendment is entirely right and I welcome also its retrospective effect. I welcome beneficial retrospective legislation, as this is.
There are this exemption and the limitations which are now lifted. The signs I could see came in in 1981. I do not know whether 1981 was in some part a consolidating Act or whether it is very extensive, but the limiting bit is there still. I would like to direct the Minister's attention to this. The farming lobby will not be interested in this, but the charity lobby perhaps are unaware of the limitation on their position. As it stands, I wonder is there still merit in retaining the restriction that is there requiring in cases other than farming the trade in question to be exercised in the course of the "actual carrying out of the primary purpose of the charity or the work may be carried on by the beneficiary of the charity". I will give one example and that is enough for my purpose. Say there is a charitable trust which involves showing pictures to the public. Say there is a trade which consists of selling postcards of the pictures that are being shown to the public. That trade is not going to be carried on by the beneficiaries of the charity involved in showing the pictures to the public. But the beneficiaries of that charity are the people who go into the picture gallery in question, the people who see the pictures they would not otherwise see. They do not do the work of selling the postcards; they do the business of buying the postcards and providing the profits of the trade in postcards. And you can have more than postcards: you can have catalogues. Would it not be a useful thing to examine the historical reason for the restriction on the charitable exemption which requires compliance with either of these other requirements than the first one which still remains, that is, that the profit is applied solely to the purposes of the charity?
If we have a case where profits are applied solely to the charity, what embarrassments are opened by exempting profits of trading carried on for a charity?
I do not think I will ask the Minister for a quick answer. I do not think I am interested in getting the Minister's quick answer, if the Minister does not mind. I just want to record here my view that the necessity for restrictions on the operation of charities being used as devices to get people to avoid income tax may not exist. If they no longer are necessary in the cases of farming profits, I ask whether the particular restrictions we have are the kind of restrictions we require to prevent the abuses we all have in mind. While I am one, part of whose duty is coming forward to protect laudable traditions enshrined in ancient texts, I would still think it desirable if the Revenue Commissioners did find time to have a look at this restriction. Could I give one case of trading where profits are still caught because they do not comply with the second leg of the requirement and although the object and the sale possible application of the moneys received in profit from the operations in question will be for the public benefit of those who see the pictures?
I could go on and give another illustration. I was myself concerned years ago with the matter of raising money for certain purposes. It was not the love of music that was inspiring me to the exercise, but it was a question of a flaw in my own skills. At any rate, I found that there were quite a number of ideas promoted from the charitable organisation which could not comply with the requirements of one or other of these sections. It is worth while making that point.
Having made that point, I should like to know if the Minister will tell me what is the position of the definition contained in subsection (3) which remains in section 334 of the Act. In section 334 exemption is granted to various charities and then there is a definition at the end to the effect that in this section "charity" means any body of persons or trust established for charitable purposes only. That, of course, was in the original section 30 of the 1921 Act and remains in its original language. We in the Oireachtas amended our charity law and in section 49 (1) of the Charities Act, 1961, it was provided that where any of the purposes of a gift includes or could be deemed to include both charitable and non-charitable objects its terms shall be so construed and given effect so as to exclude the non-charitable objects and the purposes shall, accordingly, be treated as charitable.
Do the Revenue interpret charities which get the exemption as including charities which include, or could be deemed to include, both charitable and non-charitable objects? The terms of the gift have now to be construed under the Charities Act and given effect to as to exclude the non-charitable objects and the purposes shall, accordingly, be treated as charitable. Jersey's Act made this amendment and in this State — incidentally, a like amendment was made in Northern Ireland — I am aware that charities have been included as objects in quite a number of trusts which have been established over the years and apportionment has been made under provisions for apportionment contained in subsection (2) of the Charities Act. I note that the language used in subsection (2) of the original section which this section has amended means any body of persons or trusts established for charitable purposes only. If we have a charity which the Charities Act, 1961, deems to be a charity, despite that Act, it could not be regarded as a trust established for charitable purposes only because when it was established it was for charitable and non-charitable purposes which have been subsequently excluded by virtue of the Charities Act provisions.
I do not know whether, having regard to the extension which is now being made of the relief where the profits of farming are carried on solely for the purposes of a charity, we do not need now a clarification of subsection (3) rather more urgently that we would need it tomorrow night or whenever the President signs this Bill.
The Senator made a point on the definition of charity. One could say that the legal and technical meaning of "charity" is laid out in the case of the Commissioners of Income Tax v Pemsel and I am sure the Senator is familiar with it. That decision stated that charity in its legal sense comprised four principle divisions, trusts for the relief of poverty, trusts for the advancement of education, trusts for the advancement of religion, trusts for other purposes beneficial to the community not falling under any of the preceding heads. That definition of charity is one that has stood and has been used for a long time.
Regarding the extension or the easing of restrictions in other activities of charities, I should like to remind him that there are some dangers in the competition area. There would certainly be some risk in allowing a charity perhaps to operate in competition against some business or business organisation and aid them with special tax exemptions or tax benefits. We are aware, for example, of one charity running a travel agency and that indicates to the Senator that this risk is there. That would be the major obstacle, in fact, to those restrictions being eased.
I do not know if I have had an answer from the Minister on my charitable purposes only question, but I will not be bothering him with regard to it any more, having made my point.
With regard to what the Minister has just said, I find it difficult to think that it is public policy not to encourage people to organise their affairs and provide money to establish for the benefit of the education or general welfare of the community trading activities whose profits are solely and exclusively so applied. I find it difficult to see that there should be a requirement to comply with one of the other limiting restrictions. Surely public policy ought to be to encourage people to apply their profits to take up positions in Irish life, to take on the obligation to apply their profits exclusively for the purpose of the charity, however one defines it? I agree with the Minister's statement on the law with regard to it. It is perfectly clear that the public benefit, construed as widely as that can be, means education, the help of people in need, the handicapped, the disabled, and all those kinds of objects. Surely it should be public policy to encourage people to do these things when we are encouraging people in other sections of this Bill to put in their money and take their rewards out of providing multi-storey car parking facilities, not to speak about unfair competition because if they do not make profits the profits will not be available for the benefit of the objects of charity.
The only reply I would make is that of course the encouragement is there. But the Senator must also accept that there could be a risk to the ordinary trader and perhaps to employment by giving an unfair advantage in some areas. I am not even sure exactly what all these areas might be but there could well be difficulties in that respect.
This is an odd section. Everybody else engaged in trading activities of one kind or another, business and professional activities, have all got to pay their tax now in one instalment, and that is that, for this year and all subsequent years. I note with regard to farmers that they have an opportunity of paying it by two instalments but it is only for this year and we have to enact a new section next year if the privilege which they have enjoyed for the last year and which by this section we are retaining for this year is, by will of the then administration, to be extended for a further year. But in relation to the single payment, that applies, without further amendment; it rolls over into all subsequent years, unless that is amended and that subtracted from it. I take it that is the position.
The attitude is — and I think it is a sensible one whichever administration be there — that some flexibility could be extremely important in the case of the difficulties that were experienced by that section of the community during the past year. It is merely doing what the Senator suggested it is doing. It is continuing for 1981-82 the special treatment regarding dates of payment in the case of full-time farmers provided for last year in relation to 1980-81. It is doing that. It is interesting to hear the Senator's reservations.
I made no reservations at all. I asked the question whether my understanding of the matter is correct.
My understanding of what the Senator said was that it was strange that this provision was there considering that——
I did not say it was strange. I wanted to know was I correct in understanding that this was an isolated and separate treatment for farmers. Is that correct?
I am comparing it with other sections of the community. I think it was a wise decision by the Government in a year that was extremely difficult for that section of our community.
Would the Senator like me to explain it in advance or will we carry on as we are?
If the Minister wants to say something about it he should not let me stop him.
An Leas-Chathaoirleach
Is the section agreed?
It is not agreed. A Leas-Chathaoirleach, if you would listen to the debate you would know that things were not agreed, with great respect to the Chair. I will agree with everything once I have been allowed to talk about them, if I want to and if it is relevant that I should. The provision for stock relief in relation to farming is on a different basis from the provision for a stock relief for others who are entitled to stock relief. If there is an increase in the closing stock over stock with which the year opened, the profits which the farmer has to pay tax on are reduced by that increase, which increase itself is reduced by a percentage of the profits of the farmer. But the reduction of the increase effected by this year's subsection is more than the reduction on last year's. There is a decrease of 20 per cent of the portion of the profits which is taken off the stock increase which is reduced from the profits which are taxable. So, if this amendment was not made, am I correct in thinking that there would be less stock relief available to the farmer? I take it to be that the proportion of the profit which is to be taken off the stock increase is 20 per cent of the profit instead of 10 per cent of the profit. Or is it the reverse?
The position is that as an incentive to farmers to build up the national herd, the restriction of the relief in relation to stock value is being removed; in other words, 10 per cent is there at present and now it is being reduced to zero.
Perhaps I should have let the Minister explain. I have understood the position to be that, in determining what the taxable profits of a farmer were or are for the year we have just ended, let us say, 1980-81, one took off the profits less capital allowances, that figure which would be taxable — not all of the stock increase in the year which is just ended but the stock increase less 10 per cent of the profit was taken off. Is that correct?
The position at the moment is that the increase in stock value will now be allowed against profits. As it stood, it was a total increase less 10 per cent of farming profits. This section removes the remaining 10 per cent and there is a 100 per cent allowance against profits.
I do not think the Minister has quite stated this correctly. I think it was not 90 per cent of the stock increase that was allowed but the stock increase less a proportion of the profit which is a different matter. Does this section stand as it was in the Bill as initiated?
As introduced in the House, yes.
There was greater proportion of profit taken off the stock increase. Obviously I misconstrued the section and I am sorry for bothering the Minister but I take the point that all the stock increase is now taken off the profit figure which itself is arrived at after the capital allowances and that that leaves what is the taxable profit.
I have only one question on this. Is there any reason for the words used in subsection (1) —"disregarded for all the purposes of the Tax Acts other than exemption"?
I am advised that this is a technical way of providing for this, that it is a question of this type of payment, as the Senator is aware, the type of payments that were made under the Employers' Temporary Subvention Fund. They would be disregarded as profits. I am informed that there is a specific reason for the use of the words referred to by the Senator, "shall be disregarded"—"a payment to which this section applies shall be disregarded for the purposes of the Tax Acts". In other words, these payments made under the fund would not be regarded for tax purposes, or for taxation on profits of such companies.
Would the word "exemption" secure that objective? Is there anything else secured by using the word "disregarded for all the purposes"? What other purposes are there apart from giving the recipient, in this case the employer, the exemption which it is intended, I understand, to give him in relation to the payments to him in respect of persons employed? We are supposed to know what we are doing here. What we think we are doing is striving to ensure that payments made to an employer in respect of employment given by him should not be taxable in advance. Are there any other purposes which are achieved when not using the word "exemptions"? If there are, the Supreme Court might change the law some day and decide to read our debates in order to discover what we intended. There has been some hint of that possibility in the recent observations of one of the judges when he hinted that judges should be in a position to leave themselves free from this idiotic and ancient British practice of disregarding the profound words of legislators. If they ever did read what we said perhaps they would find out from this debate what we intended when we used the words "shall be disregarded for all the purposes of the Tax Acts" than the word "exemption"— not that my answer should be looked at but the reply of the Minister should be considered.
This seems very clear to me. I am not sure of the technical reasons for the Senator raising this particular idea. It is a question of the payment or the fund that was made available to the vulnerable sections of industry and it would seem appropriate that if such funds helped to maintain jobs that the income, if it be regarded as income, or the assistance given, should be disregarded for the purposes of the Tax Acts. It is the sensible way of presenting it, even removed from the legal aspects, to which of course obviously the Senator is referring. Basically it is a very straightforward section here referring to the Employers' Temporary Subvention Fund. The Senator is aware that later today there will be a Bill before the House to replace that particular fund. We are relating back specifically to the aid given to those industries and disregarding that particular money for the purposes of the Tax Acts. I might refer the Senator to its use in section 27 of the 1979 Finance Act: "The following sections will be substituted for section 25 of the 1976 Finance Act. A payment to which this section applies shall be disregarded for all the purposes of the Tax Acts."
What payment was that?
I was referring to the previous scheme — the Government scheme. That was the Employment Maintenance Scheme.
For which this is a substitute.
Yes. Actually this is its successor. The position was that the Employment Maintenance Scheme was a direct Government contribution that lasted for 1979 and 1980.
It was started in 1975?
It started in 1979. There was a scheme in 1975, the Employment Premium Scheme. Then these new schemes were introduced in 1978-1979.
In other words, we are using the language of the 1975 Act, brought forward.
I would like to know whether this is a limitation of an exemption which is found not to be providing the opportunities it was originally intended to do but is being used, in fact, to obtain rewards, regardless of where the intervention was developed. It is to restrict an exemption to the persons for whom it was intended——
And where the development is being done.
It is allowing rewards to be got because of the definition of patent being insufficient in Ireland.
And its development at home. That is correct. The exemption is granted where work in connection with the devising of the relevant patent and invention was carried out in the State. The purpose of the provision was to encourage research and development in the country.
This is the relief in relation to the increase in stock values. I note the extension is on a year-to-year basis. I think I am correct in understanding that stock relief was introduced in 1975. According to the formula originally designed, where stock relief applies and where the company is engaged in manufacturing, construction or farming or the sale of machinery or plant other than the sale of motor cars, relief is confined to 75 per cent of the profit. Am I correct in that?
In the case of manufacturing and construction there is a stock relief but not all of the stock increase in value is allowed as a deduction from the taxable profit. What I am not so clear about, and I would like to hear, is whether the restriction is to a relationship of the stock increase to the profit figure or is the stock increase reduced to some proportion determined by the profit figure? I would like to query the desirability of having such a relief on a year-to-year basis only. Originally when this was introduced there was an inflation rate which seemed to be coming down but it increased again. Is it desirable that people engaged in business should be looking from one Finance Bill to another to know whether they are going to get stock relief? I just ask the question to understand if that is the situation and, secondly, to understand the original theory behind the restriction on the stock increase. I would see that there ought to be some restriction on it because presumably it will reflect some of the actual profit affordable by the cash flow. Is the concept, originally applied in 1975, still considered appropriate six years later?
The Senator is right in saying that it is temporary relief which has been in operation for some years. It has been reviewed in each of those years during that period in the light of the budgetary situation, CPI problems and so on. It is temporary because of its nature. It appears to me to be a sensible arrangement. As the Senator knows, it is restricted to certain areas of activity. The temporary relief applies to Irish resident persons engaged wholly or mainly in specified trades such as the manufacture of goods, construction operations, farming, the sale of plant and machinery used mainly for the foregoing trades. The reason for the confinement of the relief and not extending it to other trades and professions is of course, a budgetary one. Regarding the point of renewing it each year, it is as well that it is looked at each time in the light of the budgetary situation. The theory is still the same, that the relief is designed to assist in the light of inflation.
There is no change in the thinking as to the basis for restriction?
In announcing the incentive 10 per cent rate of corporation tax by manufacturing companies on 20 December 1978, I understand the Minister for Finance said that "dividends paid to foreign shareholders out of profits benefiting under the new scheme will, in general, be exempt from Irish taxation".
The section of the Corporation Tax Act which applies in relation to distributions received by a company which is not resident is made, by this amendment, to apply in relation to distributions received by an individual. There is no withholding tax as such in Ireland. Withholding tax is imported effectively into tax law in respect of particular payments such as annual payments and royalties, rents and yearly interest, but not in respect of dividends. Whatever may be the machinery of the matter, am I correct in understanding that, when this section is enacted, individual recipients of dividends paid out of profits generated under the 10 per cent scheme will be liable, although non-resident, at the progressive rates of our individual taxation?
I understand that there will be differences in the treatment depending on whether we are dealing with a treaty or a non-treaty country. Concentrating entirely on the purpose of this section, and not taking any overview of the matter, the position will be that, notwithstanding the statement made to investors by the Minister for Finance in December 1978, these investors will, in fact, be liable to Irish tax on the dividends they receive. The Minister stated the intention behind the new code which is a substitute for the old export tax relief code. Obviously this had to be cleared in Brussels. How is it proposed to implement and give legal effect to the declared intention of the then Minister for Finance when announcing the scheme in December 1978? This is the third Finance Bill introduced since that ministerial statement.
It would be useful if the Minister would place on the record of this House a firm statement on the position as he sees it with regard to individual foreign investors in Irish manufacturing companies who pay dividends out of profits subject to 10 per cent manufacturing tax. That would be useful for existing investors who receive such dividends and also for those who have to advise prospective investors in such companies. Investors who are resident in countries with tax treaties with us can easily enough discover their position. I should like to know what the position is seen to be with regard to investors from countries with whom we have got any such treaties.
Is the Senator referring to the statement by the Minister for Industry, Commerce and Energy rather than the Minister for Finance in December 1978?
I think the Minister is right. It was the Minister, Deputy O'Malley.
He probably said at the time that in general such investors would continue to be exempt, or words to that effect.
I saw a number of documents which were widely circulated and stated that dividends paid to foreign shareholders out of profits under the new scheme in general would be exempt from Irish taxation.
The Senator is well aware of the scheme we talk about here which is replacing the export sales relief scheme. It is a feature of this scheme that the relief should not flow through to the shareholder. It was decided that, given the much wider scope of the new scheme compared with the old export sales relief scheme, it should discriminate in favour of retained earnings of the companies gaining from the relief, and thus directing the cost of the relief towards reinvestment rather than towards distribution to shareholders.
To favour non-residents over residents by allowing relief to be passed through to non-resident shareholders would be inconsistent with the intention that the relief should not flow through to any shareholders. I have no doubt that the Senator is well aware that we have tax arrangements with some countries and not with others. He referred to that position himself. In the absence of any withholding tax on dividends paid by Irish resident companies and their non-resident shareholders, the only means available to the Revenue Commissioners for collecting income tax which may be chargeable on such dividends is through an assessment of the Irish agent or of the non-resident to whom such dividends are paid, or on a branch or permanent establishment in this country with which such a non-resident is associated. Where the non-resident has no connection with a person in this country it would not be possible to enforce collection of any income tax which may be due from him. The Senator is well aware of the situation as I have outlined it.
In this connection we are talking basically about a new tax provision which has become known as the 10 per cent scheme, the intentions of which were to devote the distribution towards retained earnings where at all possible rather than to any distribution, or a very limited one, to shareholders.
I do not want to press the Minister on this. The general policy of encouraging the actual enterprise engaged in the activity by providing the relief if that itself is right, the general policy of not extending it to shareholders is right. I accept that within our own community but we have foreign investors who will not be entitled to any of the existing personal allowances in most cases unless there may be proportions available under tax treaties for citizens of Ireland and the United Kingdom. At present rates of taxation, quite heavy tax liabilities would be involved. It does not seem to be desirable that we have this liability with defective machinery for making the assessment. It would be better to have a straight witholding tax.
There may be all sorts of considerations to which I have not given sufficient assessment. I want to establish what the position is. The greater the amount of uncollected tax the more that mounts up. It would be more difficult for the Revenue Commissioners to maintain the present position which is to say theoretically tax is liable, but of course we have no appropriate section for collecting it. When that develops into a large figure it is not desirable. The existence, tolerance and the non-solution of the problem will not advance the attraction of foreign investors to Ireland for what is said to be Ireland's principal tax incentive for the period up to the year 2000anno Domini. Such potential investors may not be happy with the position that while, strictly speaking, they are subject to income tax on dividends they probably will not be asked to pay it. I understand the divergence between our law and practice at the moment creates many problems for foreign investors in respect of their domestic tax affairs, for example, where there are credits for tax due but not assessed. If it is not intended to collect this tax and if freedom from this tax is one of the important incentives, as is claimed, why do we not avoid the problem by bringing the law into line with practice? What is the objection to adopting that course? I may be telling the Minister something that maybe he did not know. I do not try to do that sort of thing but I know that this divergence between our law and our practice is raising an increasing number of problems for investors in the country.
The Senator is aware that section 45(4) of last year's Act provides that income tax charged under section 83 of the Corporation Tax Act 1976 on dividends paid to any non-resident out of profits relieved under the 10 per cent scheme is to be reduced by one nineteenth of the dividend. This relief is the same proportion of the dividend as the tax credit of one-eighteenth available to a resident is of the sum of the dividend and the tax credit that is of the taxable amount. There is not, therefore, any discrimination between non-resident individuals and non-resident companies as a result of the way in which Irish income tax is charged and reduced under section 83(4) on dividends paid out of income relieved under the 10 per cent scheme. This is an important point. To discriminate in favour of non-residents in this area could render the 10 per cent scheme unacceptable to the EEC and would create the kind of anomaly which the new section 21 is designed to eliminate.
Foreign investment which is made in Irish manufacturing industries is mainly made by foreign corporations based in countries with which we have treaties and which are direct investors in Irish companies. They are not liable to Irish tax on their dividends. My colleague, Deputy Desmond O'Malley, referred to such companies.
I do not want to be churlish about this section which, with the next section, represents a new concept in so far as it encourages investment in the supply while at the same time attention has been given to making provision for repairing deficiency on the demand side for accommodation. The direction of the section appears correct, and I am happy with it. It encourages people to make provision for the reconstruction or development of more accommodation rather than for investment in improving office accommodation. It is certainly very encouraging, at a time when not merely is there inflation but peculiarly — and this is not just true of Ireland, it is true of all economies — when there is a period of inflation, to see a tendency for the value of investment in real property to inflate at a higher rate than the inflation of prices.
It seems a good thing from the point of view of an investor to get his money into the provision of rented accommodation with 100 per cent allowance against the rents for a period of ten years — I speak loosely, as one must, speaking of a long technical section — free of clawback, where he is investing in an asset which, if normal inflationary provisions apply, is going to increase in value. He is being allowed his rent tax-free to the extent that his allowance is there to absorb any rent or rents generated from the building, and I understand the limitations on the use of the allowance which is restricted to rents coming from the particular work of construction financed by the section, or other rents in the State, but not against other source income. It seems a good thing for somebody who can organise his money to get in on such a thing, because all the chances are, if all he is thinking about is himself and his money, that he is going to be better off by the time the period has passed. Of course, the code runs completely against what remains as a survivor of the old rent restriction code. This code has survived the observation of our Judiciary, which is still an open question.
I do not want, on Committee Stage, to express any more than the desire not to be churlish about a new idea, to reserve myself a little about the lack of any tie-up of the relief of any other socially beneficial purpose in the direct provision of the accommodation in question. Having made that general observation I ask a couple of questions. I notice, with regard to the qualifying premises, that one of the criteria is that the house be used solely as a dwelling — without having been used either as a dwelling or anything else, presumably, because it does not say so. It is first let in its entirety under a qualifying lease and thereafter, for the remainder of the relative period, continues to be let under such a lease. But there is a curious saving for reasonable periods of temporary use between the ending of one qualifying lease and the commencement of another such lease. The premises will qualify only if it is first let in its entirety under a qualifying lease and thereafter continues to be let under such a lease. I cannot find any criterion for occupation as such and it seems that one can have qualifying leases which, provided they continue without expiring and being replaced by a period of inoccupancy between — the Minister has something important to tell me.
No. The Senator has a number of questions. If the Senator could take them one or two at a time, I will try to help him.
That is a very kind approach. It seems that premises qualify if they are first let under a qualifying lease — let us forget about the definition of qualifying lease for a moment, because it is not relevant to my point — and thereafter continues to be let under such a lease. Where is the requirement that anybody should be in it?
Does the Senator mean no occupier in the dwelling?
There would not be an income then.
Suppose the late Shah of Persia or anybody else, were to take possession, is it not desirable that the question of occupation by the lessee should be some fashion of criterion, or is that just simply taken as covered by the provisions of the lease and it is up to the lessor to safeguard the terms of the lease? If, for example, someone heard that there were 200 millionaires here who would like to have chalets somewhere or other and puts his money into creating property, with leases to these people, they could come over for a week-end every year under their lease and provided they were paying for it, the recipient of the rents from them would qualify for his special allowance and get all his rent tax-free. Is that what is intended? I know that is not primarily intended, let me make that very clear. Is it possible that there is nothing to prevent such being done? Someone may be prepared to pay an occupational rent on the basis that there is no premium of more than 10 per cent. After that, the legislature is not concerned about the occupation of the dwelling. I am merely thinking of that place in London that created such a scandal because it was empty and its value rocketed over the years and when the lease was made, the recipient of the rent would get his rent tax-free?
Understandably, the point raised by the Senator was something to which we devoted a lot of attention and we have come up with what we believe is a suitable answer. The types of apartment the Senator has in mind I now believe are not covered. We spent a lot of time trying to establish what really was moderate cost accommodation. It serves a very important social need and, with reservations, I appreciate the Senator's welcome of the whole principle of this scheme. First of all, it should be a good contributor to generating activity in the construction industry generally. Secondly, particularly in urban areas, we have lengthy housing lists and I would hope that the provision of this rented accommodation would help to reduce the size of those lists.
To get down to the finer details of the Senator's question regarding the type of persons he sees renting such apartments——
Let us forget about the examples given. Is this section complied with if there is a lease made and the rent is paid whether it is occupied or not? Is that to be accepted as being the position?
Yes, but I would see that as an unlikely eventuality because the size of a flat is 75 square metres which is about 800 square feet. The certificate of reasonable cost is of importance and is controlled by the Department of the Environment in that respect. That covers the facility that is being provided. The question the Senator asked concerned the lease. It is true to say that there is not a question of occupation. On the other hand, the lessor or the builder cannot get an income unless there is a lease or at least a payment in respect of lease of the property.
That leads me to the question of an empty apartment block. I would expect that the type of case raised by the Senator would be very rare and would apply to an apartment within a complex rather than to a complex itself. The type of apartment building that is covered is reserved to a certain size and to moderate cost and we are using the Department of the Environment to certify a reasonable cost. Within all those strictures there is reasonable control.
Earlier the Senator raised the question of standards. It is important that standards be adequate and that there should not be shoddy buildings. We believe that is covered in subsection (9). The Senator is right in saying that the income is the income from the rental derived from that complex. His concern is the unoccupied apartment which——
I am not really concerned about anything except to have the section drafted as it is intended that it should be. I wanted to know whether this was intended.
It is not intended nor would I like to see it being the end result. We have taken all the reasonable measures to ensure that the moderate cost type accommodation we are covering here will relate to certain groups of people looking for rented accommodation.
I was led on to the question by the curious language used in the reference to qualified premises at section 23(1)(iv). A "qualifying premises" means a house which, without having been used, is first let in its entirety under a qualifying lease and thereafter through the remainder of the relevant period save for reasonable periods of temporary disuse. I do not know what "use" has to do with it. However, that has already been dealt with by the Minister. "Relevant period." in relation to qualifying premises, means the period of ten years beginning with the date of the first letting of the premises under a qualifying lease. Do we have a definition of the date of the first letting? Would I find it if I had enough time to go through Chapter 6 of Part 4 of the Income Tax Act, 1967? It is normal to refer to the date of commencement of the tenancy, which may be a date after the commencement of the agreement to create the tenancy. A document dated 27 May may run from 1 July. Do the ten years begin on 27 May or 1 July? Unless we have a definition of the first letting I am not sure if the first letting would be 27 May or 1 July. If there is any doubt, it shows the desirability of coming up here earlier.
I understand that the date of first letting is the date the lease is signed and the ten years would date from that date.
The lease could be signed three months after the tenancy commenced.
Surely it would then be signed in respect of a particular date of first letting and the income, whatever date the lease was signed, would derive from the date of first letting. In other words, the date when the income begins to be derived from those premises is the date from which the ten years would have to be taken. It is just a matter of fact as to the date of first letting.
I do not think it is at all a matter of fact; it is a matter of construction. I take it that the net rent after deduction of outgoings such as care and management, service, provisions, caretaker or interest on mortgage is payable only in respect of the period after the letting. Some Act introduced that restriction on the interest available. He spends his money, £200,000 or whatever it is, then he gets a rent, although he may have borrowed the whole lot of it and before he determines the rent against which the allowance is to be given, the appropriate interest charge is also deducted. Is that correct?
That is correct.
This is another new idea. The reading of the section does not screw out what it means and what rates we are talking about. We are talking about the 50 per cent initial allowance, is that correct?
Fifty per cent initial and an annual allowance of 4 per cent.
That is what I thought. Somebody made a point about "wholly in use" as to whether it would make the multi-storey car parks with a building infrastructure not a multi-storey car park. Would it cease to be "wholly in use" if it incorporated a kiosk in the structure for the provision of a service which might be independently provided by somebody other than the operator of car park provisions?
When we say that the building must be wholly a car park, this excludes a building part of which would be a car park — in other words, a supermarket structure provided miles outside of towns or cities with very substantial car parking facilities provided for the supermarket that would be a benefit opposite to the type of benefit we would like to see.
In respect of the other types of development they provide car parking space in city centres, town centres and urban areas as a benefit to the central city or central town car parking problems that exist and those car parks do not form part of some other type venture such as the supermarket provided away from heavy traffic areas.
What the Minister has just stated is wholly desirable. It is just one facet of something like a policy with regard to our appalling town problems. Where in this section is there any requirement that it should be in the centre of the city? I presume that the determination of the operation would be purely commercial. It would be determined entirely by the question of whether or not the operator thinks he will get a return so it could be anywhere the market tells him to go.
Of course. But the most likely place would be where there is heavy density of car parking requirements. If the structure was not wholly a car park somebody could create a parking need in a rural area or far removed from the city. There is a need for this type of structure in our towns and cities to help to relieve traffic congestion. There is no such need in the rural areas so I could not see a developer carrying out such a venture in a rural area. If it was possible to carry out some other type of business and relief was available in respect of a car park forming part of a building, then obviously we would be setting up a type of development that we do not need or want to relieve from tax.
I am unhappy about the language of the section and whether it incorporates the ideas expressed by the Minister. It seems extraordinary that we should reward somebody for providing parking space for mechanically propelled vehicles and not for providing human beings with space to put their heads down at night. The market alone will determine this. There seems to be no requirement other than whatever there may be by way of a planning code as to what kind of quality it is and whether it looks absolutely ghastly. There seems to be no connection such as there is in the last two sections with public policy, social policy or environmental policy. This is not connected with any environmental requirement as such.
The Senator will be well aware that this is the type of development that would be covered under our planning laws and it is extremely important that it should be. It is not true to say it is divorced from other legislation because such a development cannot take place without required planning permission. So the Department of the Environment have strict control there. Here we are endeavouring to encourage people to provide for a need which exists in the towns and city centres.
I have said enough on that, probably too much.
Am I correct in understanding that this provides a 50 per cent allowance in respect of the capital expenditure on roads, bridges and so on? Where do I get the roads, bridges and so on in the Bill? I do not get it at all unless I have the Local Government Toll Roads Act. It is unfortunate that we do not integrate legislation a bit better. Would I be right in thinking that the allowance here is only capable of being set off against income of this or a like kind and is not capable of being set off against other incomes.
That is right, yes.
It is not an easy task to read these sections when one has to go back to the Income Tax Act of 1967 to locate what is inserted by the Corporation Tax Act of 1976 and then find what we are dealing with here.
In relation to the industrial building initial allowance, at present I think I am correct in saying that where there is a lease to somebody who carries on an industrial activity the allowance arises in that case where the lease is made to the lessee who is using the building and paying his rent for it or occupies it, on whatever are the terms. The man, or the company, builds it and is given the allowance against income, if there is a letting made to a manufacturer, in simple and loose terms. Is the present position that there is doubt, notwithstanding the language of the code — which I can if necessary refer to here — or perhaps more than doubt that the allowance would be available in a case where the letting is made to the IDA, SFADCo or Údarás na Gaeltachta? This is to encourage people to put up their factories, presumably after discussions with the authorities on questions as to the potentiality of interest in a development there and on the basis that when the factory is completed a lease which will generate the allowance will be made to the authority in question, whichever one of them it is. That allowance will arrive on the granting of the lease and will not await the arrival of the occupying subtenant or lessee who is in fact going to carry on the business. That is the problem which we are here solving.
That is right, Senator, that is exactly the position.
That is extremely welcome. Could I just ask again about the set-off provisions? Incidentally, the section here does not mention annual allowances. Does that follow from one of these necessary references?
It does not have to because the normal law comes into operation. What we are doing here is exactly what the Senator said. You can get your capital allowances for buildings for direct lease but not for indirect lease — in other words, not through one of the agencies to which the Senator referred. There is no difference in the case of the annual allowance.
You mean the annual allowance is already there?
Of course the allowance would be given when the industrial user uses it, because it would not——
It is he who gets the annual allowance? I would like to have the matter clarified.
It is the builder who leases it. Of course the builder would get it if he were the person concerned who was leasing it to whatever agency. But the only difference existing at present is that the builder, developer or whoever it be who leases the factory directly to the industrialist gets his 50 per cent capital allowance. If he does it in an indirect way, in other words, if he builds and leases an advance factory to the IDA, and they on-lease to the industrialist as the third person, then he does not qualify. There is no difference where the annual allowance is concerned.
The annual allowance is available in both cases or is not available at all?
It is available in both cases.
And the set-off position?
It is the same. It is against the income from leasing activity.
Is that correct? Does the Minister mean to say that, assuming I have another income, assuming nobody will lend me the money to do it and assuming I put up a building, I would not get the allowance against other income? Surely that is one of the reasons I would be building the building?
I beg the Senator's pardon, yes, he may.
And without restriction as to any other income, or is it other Schedule D income?
Generally speaking it is other income, income in general.
I think I should explain to the House the reasons for this section and section 29. These were introduced in the Dáil on Report Stage. I explained at that time that it was a matter of urgency that these provisions should be enacted in order to counter tax avoidance schemes which, if unchecked, would obviously cause the Exchequer considerable losses. The new provisions are very complex as they are designed to counter sophisticated tax avoidance schemes involving multiple and quite artificial transactions in land between connected companies. These transactions have no basis in commercial reality but are designed for the sole purpose of avoiding tax on profits derived from land dealing and land development.
The Revenue Commissioners have been aware for some time that these schemes were being prepared. It will, however, be appreciated that the drafting of effective anti-avoidance measures required the most intensive investigation of the nature of the schemes and the devising of legislation which would not be defeated by the operation of variations in these schemes. While these investigations have not been finalised the examination has identified abuses on such a scale that the Government felt obliged to move against them in this year's Finance Bill rather than allow them go unchecked for a further year. This decision was made in the interests of the Exchequer and of the general body of taxpayers. Schemes identified to date if unchecked could cost the Exchequer about £30 million and a further year's delay would allow the setting up of artificial transactions resulting in a total potential Exchequer loss of £14 million.
I want to emphasise a number of points. First of all, the legislation is not intended to hit any genuine case or to inhibit any genuine commercial structure. It is not intended to do other than to secure the proper tax charge on actual profits. If in any case it transpires that the new provisions operate in practice so as to impose a charge where it would not be just or reasonable that such a charge should be imposed, I assure this House that such an unintended consequence will be avoided either in the administration of the provision by the Revenue Commissioners or, if this is not possible, by the introduction of amending legislation. The new measures will apply only to periods ending on or after 6 April 1981. However, it may be that tax planners will be astute enough to find further ways to get round the new provisions and for this reason I must emphasise, as I did in the Dáil, that if any amendment to the present legislation is found to be necessary next year or the year after, consideration will be given to making its provisions operational perhaps from the commencement date that we are talking about now.
That is the position as introduced on Report Stage simply because of the seriousness and urgency of it. I am putting it to the House, and want to assure the House, that the amendment of these sections is not designed in any way to inhibit the genuine commercial structure but is designed to prevent a practice that was developing which obviously would cost the Exchequer a considerable sum.
I hope that the pleasantness of the debate we have been having so far will not be marred by anything I may now say. The delay of the Government in dealing with this problem has been absolutely unjustified. It has been perfectly well known to the Revenue Commissioners that the existing legislation, which is being repaired in this hasty, ill-considered and last-minute way, has been needed since the judgment of the Supreme Court delivered on 6 December 1977, almost three-and-a-half years ago. For three-and-a-half years it has been known to the advisers of the Ministers for Finance during that period that the legislation directed at taxing in the proper way the profits made from speculation in development of building was defective. I will read the words of Mr. Justice Kenny in the Supreme Court in the case of James Mara and Hummingbird Limited in a judgment delivered on 6 December 1977:
I think it is reasonably clear (though there is no finding of fact on this in the Case Stated) that at the date of sale of the property in Baggot Street the taxpayers were engaged in the activity of developing land. One effect of the Section is that when a person is carrying on a business of dealing in or developing land which is not regarded as being an activity in the course of trade within Schedule D, then if every disposal of land by him was regarded as a disposal of the full interest which he had acquired, and if the interest had been acquired by him in the course of business, the profits of the activity are deemed to be profits of a trade and chargeable to tax. The activity which is brought within the tax net by Section 17 is one in which the taxpayer has disposed of a lesser interest than he had.
In this case the taxpayer had disposed of the whole of his interest and therefore was not within the section. Since 6 December 1977 it has been known that all of these transactions being put through were not within the law, that is to say were not caught by the provisions of the law. The transactions which came before the Supreme Court then were put through in the form that the profits made out of them would not be taxable under the law. We can talk later about what ought to be the law. For the moment I am merely making the point that since 6 December 1977 it has been known to Government — or ought to have been known to Government — that the law did not catch for taxation these transactions about which the Minister spoke in his introduction. When did we get for consideration the proposed amendment? We got it on Report Stage in Dáil Éireann. There suddenly appeared ten-anda-half pages of print circulated on 13 May and, incidentally, additional ministerial amendments, there already having been other ministerial amendments. I do not think that the case for the delay has been justified nor that the case for cutting short the time for the consideration of the proposal has been justified either.
For people concerned to get the thing right it is a very difficult field indeed and there are people with duties in these matters who will be sued maybe if they do not perform their duties. They have to know what is the law, and in this particular field there is a long history. There was a decision in 1936 that a whole series of operations which avoided tax because of devices, which I need not bother to explain to the House, could circumvent the provisions of the Finance Act of 1935. These were made clear by the decision of the Supreme Court in 1964 which were, it was thought, elaborately dealt with in the Finance Act, 1965, in which the same judgment of the same Supreme Court said "The way they have done it this time is to include a provision in the tax net which will make almost everyone who buys a building or a house and makes any alterations in it liable to income tax if he make a profit on it." In his judgment in this case in December 1977, which the Minister calls "recent", he referred to this earlier case and this earlier Act. He said there was an outcry from the entire accountancy profession and from all sorts of individuals who found themselves liable to tax.
Then we had in 1967 in the budget statement a heralding of the Finance (Miscellaneous Provisions) Act, 1968. It was not included in the Finance Act because of the complications. They had to deal with this in a separate Finance measure in the autumn of 1967 and passed it through in 1968. We are now expected to take this as two sections of a Finance Bill introduced on Report Stage. Who are we fooling about what we are doing?
I have a few modest queries about what this section may mean. I have much more I could say on the question of avoidance and the question of evasion. I do not know whether to say what I want to say with regard to these matters and waste time if the positon is that we will have to enact these two sections which are introduced into a field of enormous controversy which has gone on for 40 years. There was no debate on these sections in Dáil Éireann. There was a protest, which was more muted and perhaps more sensible than mine. There was no real debate about the language of the sections. How could there have been when we know the circumstances in which the Finance Bill was on the Report Stage. We know our circumstances of the Finance Bill on this Committee Stage debate. Would the Minister like to comment on what I have said?
I would love to. I also hope that the cordial tone of the afternoon's debate will not be affected by anything I say. The Senator qualified his remarks, but I want to explain to the Senator that he is not aware that we are discussing two sections, sections 28 and 29, together. I do not accept from the learned Senator that the Supreme Court decision he mentions, the 1977 decision, has any connection whatsoever with what I said at the opening of the debate. I do not want to disturb the cordiality of the debate either, but I want to point out to the Senator that he has gone completely on the wrong track when he refers to a delay from that Supreme Court decision of 1977 up to this Finance Bill.
There is in section 28 an amendment to section 17 of the 1968 Act but we are taking advantage of putting that in because of section 29. In other words, section 29 is really the one I have been telling the Senator about, and the reasons for its urgency, but those reasons do not in any way relate to the court case. I would expect the Senator to accept from me that what he says in relation to the unnecessary delay is absolutely incorrect.
I will explain to him what section 28 seeks to do and what is its relevance. I want to assure him and the House that section 29 refers to the evasion measures, the loopholes that need to be closed in the Exchequer interest, and which have been discovered only very recently. Hence the urgency, hence the rush. I offer no apologies to this House that on behalf of the Irish Exchequer I rushed in amendments on Report Stage to prevent an evasion method that had just been found. I think I was justified and the people of Ireland welcome that. I want to put the record straight for this House.
I accept that section 28 is one of two sections introduced in the Dáil on Report Stage to provide for a number of amendments to the provisions of Part IV of the Finance (Miscellaneous Provisions) Act, 1968. That contained the special legislation dealing with the taxation of profits or gains from dealing in or developing land. The principal new anti-avoidance measures are contained in the next section, section 29, but the opportunity is also been taken in section 28 to effect a minor amendment of section 17 of the 1968 Act. The present section, accordingly, provides for a technical amendment which is necessary in order to clarify the intended scope of section 17 of the 1968 Act as originally enacted. The range of activities intended to be embraced by section 17 had been narrowed by an interpretation by the Supreme Court of subsection (1) of the section. The present section, by substituting a new subsection (1) in section 17, ensures that section 17 will have its intended effect. The section provides for the substitution of a new subsection (1) for the existing subsection (1) of section 17 of the Finance (Miscellaneous Provisions) Act, 1968.
The new provision will apply in relation to periods of account ending on or after 6 April 1981. Broadly the intention underlying section 17 of the 1968 Act was to bring within the charge to tax in the case of Schedule D profits arising in a business of dealing in or developing land which would not be regarded as trading profits because of the decisions in two previous Irish court cases. That is the position. That is merely a technical amendment that has no relation to the evasion measures——
Avoidance measures.
——avoidance measures which I have tried to arrest in section 29. The urgency of it was realised by the Revenue Commissioners. I felt I was absolutely correct in availing of the first possible chance, even though I accept the sections were inserted on the Report Stage of the Bill. But it was far more desirable to do that than, as I said earlier, allow as much as £14 million to be lost to the Irish economy between now and next year's Finance Bill.
I hope it is not improper that I should intervene in a duet of such excellence.
Not at all.
It might help the interest of cordiality which has been canvassed by the Minister. The Minister and Senator FitzGerald will probably find what I have to say disgustingly oblique to their particular obsession at the moment. It seems to me that profits or gains from dealing in or developing land raise a question to which I wonder if the Minister has applied his mind.
This is not about technicalities. It is about an environmental matter. It is about the fact that property which is used for gain, particularly in our urban areas, has become property which is an offence against the environment. If I may put that in more practical terms, all over the city of Dublin and other cities one sees property bought — it could be a house in Ballsbridge, and then a year later you see another house in Ballsbridge adjoining it bought and then another one adjoining. The windows are shuttered up and that piece of property is left there and it becomes an eyesore. If you ask people what is happening to it they will say the people who bought the property are going to build an office block there eventually when they get enough of these houses. In the meantime these houses are allowed to fall into decrepitude. They are sometimes occupied by derelict and desperate people. They become dumping grounds for people who want to get rid of their refuse and the developers continue to sit on such a property and allow it to get worse and worse. Our environment becomes polluted and disfigured and there is no doubt that in the city at the moment the whole skyline is gapped and mutilated by the efforts of developers in this line.
Taxation is part of what we are talking about today. I recall that last year the Minister for the Environment was presented with a report from some committee which I have been trying to track down, but alas time has played me false in the matter. I remember that among their recommendations to the Minister for the Environment was a recommendation that anybody who bought property in this time within the city and who did not develop it within a reasonable time should be punitively taxed as long as he did not develop. I will take a simple model, an elegant suburb where some developers buy a house and then wait to buy another one and wait to buy another one. We the citizenry of the city would like to see our city prosper and be beautiful and a pleasure to the eye, or at least be an adequate utility to our private citizens. Instead, we see buildings allowed to fall into a state of disrepair in the interests of long-term avarice on the part of developers, and our planners do not seem to have any recourse in law to bring such people to book and to arrest such development.
I am asking the Minister now would he consider the possibility of saying that, when any property is bought within the city, particularly property that has been used for housing, there is an immediate concomitant responsibility on the buyer to develop that property and that there will be punishment for such a developer if he allows that property to fall into disrepair. It seems to me that the criteria by which you could bring him to book are not difficult to find. I am sure the Arts Council could provide criteria, or the Department of the Environment——
I would like the Senator to try to relate to section 28 of the Bill.
I am dealing in development land. These houses are built on land.
You must relate to the text of the section.
Could we not construe the word "land" as meaning that substance upon which a house is built?
We are talking about taxation.
I am suggesting there should be a punitive tax on developers who buy land or property like house property which by any definition is situated on land as distinct from the other three elements——
So long as you relate your remarks to taxation.
I am suggesting punitive taxation. I am sorry, I do not wish to appear to be cavalier in my attitude towards the order of the House, but I think the point I am making relates to what this chapter of the Bill is called, profits or gains from dealing in or developing land. I do not think I have said a word that did not profoundly deal with profits or gains. I would say that, comparing my remarks to the remarks of other Senators, mine would come out on the favourable side in terms of relevance. I do not wish to cast any aspersions on my friends to the left or to the right. What I am putting to the Minister is the following——
The Chair is only concerned that you relate your remarks to the text of section 28.
I will not argue with the Chair. The Chair's reputation for impartiality is such that it would be an impertinence even to question it. Taxation should be applied in a punitive way to developers of land who buy buildings within a city and allow them to fall into decrepitude and disrepair while waiting for their value to rise with a view ultimately to making large profits at the expense of the environment.
I am not sure whether the Senator was dealing with section 28 or 29 of the Bill. Although I have sympathy with the points expressed by him and share some of the concern he expressed, I do not think that we can deal with such a topic on section 28 or section 29. The suggestion is a difficult one to implement in the taxation system. The Senator raised a valid point.
The last thing I want is to be knowingly wrong in anything I should say in this place, but I do not think that the Minister will disagree with me that the Hummingbird case, as I told the House when giving the words of the Supreme Court judge who pronounced the judgment in December of 1977——
This has no connection with section 29 which is the main section——
We are dealing with sections 28 and 29.
We agreed at the beginning we would take sections 28 and 29 together.
So I presumed. Then I have nothing to repent me of because my words are pertinent to one or other of the sections. I have not finished. FitzGerald only finishes before he becomes irrelevant. At least let us listen to each other.
I do not want to introduce past history to those who do not have to learn it, about the history of legislation in this area. If there be a man among you who doubts that this is complex legislation and if he has power as a Minister, God help him. If he thinks he can solve the problem in this area by producing a rushed amendment that has taken him time, by what I understood from his introductory remarks, to have carefully prepared, then it is a sorry situation that such should be. In general, the position is not merely was there a pronouncement of the Supreme Court in what is commonly known in a number of tawdry professions as "The Hummingbird Case" but there is to be dug out from section 29 a counterpart of sections which were debated in the House of Commons in 1969 and which were enacted in the Finance Act, 1970. It is the subject of two well-reported cases in the last year. There is nobody in this area advising the Minister who has not known all about them. The fact of the matter is that it is a very difficult area. Why did we have, in this case, to rush in on Report Stage when there was no possibility of getting the advice of people who actually know about these things, and who have to deal with them every day and who like to think they are honourable people who are not concerned to engage in miserable, tax-avoidance schemes of a kind they cannot stand honourably over? Why is the position that it was introduced so late that we humble legislators who depend upon their expertise have not the time to get their expertise to improve in the matter of tax avoidance, the very sections we are now debating?
We are in difficulty in this country not merely through having had experience that I told you about but we have also a Constitution which provides for a right of property. You may be surprised to hear that the Queen can do no wrong is still the law of England. The Queen enacting laws that pass through the Houses of Parliament can legislate what she likes and no courts can go beyond that. We have a written Constitution which allows us only to regulate the rights of property in a manner which we may be hazarding. The Supreme Court may decide that it is not a proper regulation. This is all the more reason for our taking time about doing these things.
May I ask the Minister in regard to this, if we are being slightly rancorous for a few minutes, why could he not have adopted in regard to this section what was adopted in 1967 when there were many property transactions? And in 1968 there was an announcement made in the budget statement of 1967 which emerged as law in the Finance (Miscellaneous Provisions) Act, 1968, so that everybody knew immediately from the announcement of the Minister that was going to be the law but that it was not going to be pushed through Parliament in 1967 because it would have taken up too much time and might be improperly, not wisely done and it required a special Bill which it got. Even then it was not right. Why is there not a better provision for the protection of the Irish taxpayer when tax avoidance sections go wrong and the Minister or the Revenue Commissioners intend to put them right? Why do we not give power by enacting a section in some other Finance Bill author-ising the Minister to make an announcement and publish it in Iris Oifigiúil or in three daily newspapers, of his intention to amend the law just as he does when he makes his budget statement as regards dates such as are in this Finance Bill when certain transactions are all right? If you are building under a section we have just passed and spend money providing multi-storey car parks or creating dwelling houses and if it is after 29 January you are all right; if it is before 29 January you are not all right, why could the Minister not say in his budget that as and from 29 January if anybody wants to do certain things the position will be as stated? Why does he not ask us for power to have a prescribed way of telling the public about things so that nobody should take offence?
If we are serious about getting our laws into proper order and of a kind that gives us satisfaction in administering them and feeling that they are just, this should be done. People conducting their affairs should know what their rights are. They are not without rights, whatever the needs of Revenue may be. People who provide money for any purpose and who make decisions about what to do with it have rights. One such right is to know what their position is. Their position can only be advised to them by their advisers on the basis of the law that is enacted or at least the law that we are told is going to be enacted. We had a reference earlier today to an announcement by the Minister for Industry, Commerce and Tourism in regard to manufacturing tax relief, made in December 1978. We are giving effect to some of his statements today. That at least told everyone who invested in Ireland about that date about the 10 per cent manufacturing tax. That was pretty well adhered to and anyone who conducted his affairs on that basis has not found himself in funny street. He is reasonably all right because the ministerial statement could be relied on. Why cannot other ministerial statements be relied on rather than be adjusting into a situation where there is a written Constitution, provisions of the Finance Act of 1970 in the UK replacing three existing sections of our Finance (Miscellaneous Provisions) Act 1968, and who knows anything about them? I am supposed to know it because I shoved it into my head in the last 30 hours or so and I may have it wrong. The Minister is a busy man; the Revenue Commissioners are busy and the people who know things about all this are not here. They have been writing me letters. I presume they have been protesting to other people. They are not money men; they are not speculators but they are professional people. They are extremely annoyed that for the third year in succession an important amendment in the Revenue code should be introduced on Report Stage. This year the justification is that it is property speculators and you can apparently screw them and do what you like with them.
Last year it was not people like that at all; it was people who were made redundant who were getting lump sum payments. Last year on Report Stage we had introduced an entirely new method of taxing lump sum payments and I had the experience in this House of having the closure applied to a Finance Bill debate. That was the position when I was still arguing about the payment of the lump sum, which effectively changed the law. It was introduced on Report Stage in the Dáil; there was no time to talk about it and it was rammed through the Houses of Parliament. It has been the law for the taxpayers involved who are modest and relatively humble people since that time.
The year before it was the right of the Revenue people to go into business houses and dwellinghouses and so on; all that came into it if my memory is correct. I think there was a Report Stage amendment of an important kind introduced in 1979. I do not think there is any ill intent: I do not accuse anybody of that. I merely say that the system should be made to work properly. The Minister's advisers inevitably know more about these matters than any occupier of the office knows and more than anybody likely to be a Member of either House of Parliament knows. The two sets of minds to be brought together to get the matter right are the minds of the Revenue Commissioners in the revenue area and the minds of those whose business it is to advise institutions, individuals to dispose of their money in the light of existing law.
These minds should in some fashion be brought together to produce something that we could have some useful function for. I find very little reality in this debate. I want to make the protest. There has been a delay in dealing with something which it was protested to us was important and I would accept the protest as being correct. I do not agree, however, that, despite the time involved, the Minister was necessarily justified ramrodding through this House something which emerged only on Report Stage in the Dáil. There are defects in what we have and it is perfectly clear that we can do nothing at all about it except, perhaps, note them when we get further detail about the section.
Very briefly, I should like to say that in my budget speech I devoted a substantial number of paragraphs to the whole question of tax evasion and avoidance. I regard it as a very important area. I regard it as an area which must be constantly reviewed, updated and controlled. I could, if I were to go on at length, give several quotations from that budget speech on the various tax avoidance measures. I do not think it is necessary for me to do that. Of course I would prefer to have introduced these amendments earlier but it was desirable not only in the interest of Revenue, but in the interests of the Irish taxpayer. The Irish taxpayer should not be at a loss because of artificial activities being created by people. Section 28 is a technical amendment while section 29 is a major amendment. In fact, it provides for considerable amendments of Part IV of the 1968 Act, but these were not things that came to light from the Supreme Court in 1977. Section 28, through a technical amendment, puts that situation right. The recent discovery of what it could have cost the Exchequer if these amendments were not introduced on Report Stage was debated. It would have been more desirable to have introduced them earlier. I would have preferred it but they are not designed in any way to inhibit the genuine company or the genuine transaction. Where schemes are discovered which are deliberately being used to circumvent a system it is desirable that, even though it is late in the day it should be done to counter such avoidance in the interests of the Irish taxpayer other than not take any steps at all.
I fear the Minister may be mucking it up in what he is doing. It is much better to do it properly rather than to do it in a way which may be of doubtful use and damaging to innocent people.
Perhaps the Senator would like some examples of the type of person that he is showing a lot of sympathy for?
I have endeavoured — in fact I am determined — not to attribute any motivation to the Minister or anyone else. I would ask the Minister not to ask me to discover in myself any other sympathy than it is proper for me to have in legislating in this House. I am concerned to have, if the Minister wants to know, just legislation. I am perfectly well aware of the fact that probably more money is lost to the Revenue through tax avoidance than through evasion even though the evasion method is more dishonourable and is illegal. The legality of the tax avoidance may, in fact, mean that more money is lost to Revenue. But that does not dispose of the problem because it is hypocritical to say that only substantial transactions or large money men are involved in tax avoidance. That is quite untrue. We have just passed a few sections which deliberately create situations into which people are invited to put their money so that they will get an exemption from tax. It is absolutely the duty of people who are aware of these sections to tell people with any money to invest that these sections are there to be operated. It is their duty to do that. They will be liable if they do not do it. Unless they personally as professional men find the whole thing in some way dishonourable they should do it. The question is a purely personal one for the person or profession involved. I do not think it is as simple as the Minister concludes. The courts have in recent decisions in the United Kingdom, for example, in a capital gains tax case held that where there was a prearranged, pre-drafted tax avoidance scheme, the court was entitled to look at the plan as a whole without disregarding the legal, formal nature of the transaction carried out.
In another case a package tax plan which was offered for sale by the promoters to any taxpayer who realised a large capital gain, the judge said on these facts it would be quite wrong and a faulty analysis to pick out and stop at the one step in the combination which produced the loss, that was entirely dependent on and merely a reflection of the gain. "The true view regarding the scheme as a whole is to find there was neither gain nor loss and I so conclude," said the judge.
That was an attempt where the scheme was designed to invent an artificial loss. There was no genuine commercial transaction operated at all. But do not ignore the fact that despite those decisions, despite the opinions of the Minister the law here still is that form over substance doctrine is still looked on as one of the distinguishing features of our tax codes. If it is desired to set aside that form over substance doctrine as a matter of law, let us have a Bill setting it aside and let us see where that will lead us. Let us consider that Bill and see if it is constitutional. I just want to look at the commentary on one subsection the language of which is set forth in one of these two sections here. I have a photostat of the document which is called British Tax Review, page 474, and the heading of the page is Multiple Taxation or a Dispensing Power? It relates to the language we are using in this section. That states:
Given this wide interpretation, it will be apparent that more than one person can potentially be taxed under the section —
That is to say, under the section which we are now proposing to amend there may be different people subject to the tax which we are proposing to impose.
— and indeed more than one person can even be said to have provided the opportunity, if only because the opportunity might be provided by one person directly and the other indirectly.
In that case on this question of leaving it all to the Revenue Commissioners in their great wisdom to decide everything, whom to charge and whom not to charge, Lord Wilberforce said in a case last year — and it may be known that Lord Wilberforce is not always saying things that the taxpayers like——
Taxes are imposed on subjects by Parliament. A citizen cannot be taxed unless he is designated in clear terms by a taxing Act as a taxpayer, and the amount of his liability is clearly defined. A proposition that whether a subject is to be taxed or not, or that, if he is, the amount is to be decided (even though within a limit) by an administrative body, represents a radical departure from constitutional principle. It may be that the Revenue could persuade Parliament to enact such a proposition in such terms that the courts would have to give effect to it; but unless it has done so, the courts, acting on constitutional principles, not only should not, but cannot validate it.
That is his view merely on the terms of an Act of Parliament passed in a country where there is no written constitution with a thing about property rights. Maybe I am wrong, but I would have said a fortiori.
I will get back to the precise terms of the section, having said all these things about them. The Minister will have to make himself aware of the possibility of a constitutional question with regard to section 29. The subsections are so difficult to hold on to. In relation to subsection (6) of the substituted section 29 on page 37 of the Bill as passed by the Dáil, which provides that where, whether by premature sale or otherwise, a person directly or indirectly makes available to another person the opportunity of realising a gain, the gain of that other person should be seen as having been obtained for him by the person first mentioned in the subsection, I think the Minister will have to ask himself whether that particular provision is in accordance with the article of the Constitution providing for regulations. I am not one given to howling "Constitution" at every moment; I am very much the reverse. That comment applies also to paragraphs (a) and (b) of the proposed subsection of the proposed new section. Subsection (7) of the substituted section 29 which is on page 38, line 15 provides that in applying this section account should be taken of any method by which the value of any property is enhanced and the occasion when the value of any property is enhanced may be treated as an occasion on which tax becomes chargeable. The grant of a planning permission generally enhances the value of a property. It would seem that if that was an occasion which enhanced the right in question it would do violence to the principle that tax is charged when profit is earned and not before.
In section 29 I think that what is called subsection (2) should be subsection (1). The words in subsection (1) should be the introductory words of the new section 29 substituted by subsection (3). Take the words "this section is enacted to prevent the avoidance of tax by persons concerned in dealing in or developing land". These words should be the introductory words in opening up subsection (3) of section 29. They should introduce the new section 29 which is substituted by what is in subsection (3). I imagine all of that makes Greek to more than myself and we can read all about it if it all comes off the record in such a way that, at our leisure, which we will all be happily spending correcting the proofs tomorrow, we can get it in order. Any ideas I may have about these sections have been expressed to the Minister.
This section is intended to be beneficial from the point of view of the taxpayer. This is the section which provides for a special 3 per cent relief where there is building. I notice that the section giving this lower rate of value-added tax operates for a period of eight-and-a-half years back to 1 November 1972. I should like the Minister to tell me what is the kind of thinking behind this.
The Senator is right when he says it is the extension to certain structures of the prefabricated type of the 3 per cent effective rate which applies to ordinary building work. The section is intended to remove doubts as to whether some structures constructed on the land are within the meaning of building work as normally understood. This is the reason for the retrospection. The provision confirms what has in fact largely been the practice since 1972 and, therefore, will not mean any appreciable cost to the Exchequer. Basically what we are doing is removing a doubt as to whether the 3 per cent effective rate applied to prefabricated building work.
And there are no refunds?
The question of refund does not arise, because in effect this confirms what has been happening. We are removing a doubt.
Effectively, I think this amendment of the Capital Acquisitions Tax Act moves the threshold from £30,000 to £150,000, in the case of dispositions which were made prior to 1 April 1975, and where the disponer was a grandparent and the marriage of the parents of the donee or successor was expressed to be the consideration and where there was a life interest given to the son or daughter which was being passed on. The children of the marriage then came in to receive it and provided the disposition was made before 1 April 1975 and therefore is not a "gotten-up" operation, this seems to be a welcome and a just provision.
I must confess that it has been some time since I have looked at marriage settlements. Consequently, I am not in a position to make observations on their contents. However, it has been passed on to me by a distinguished member of the Bar that there are a number of documents in existence — I do not know why this might be so — which indicate the position to be that although the marriage is expressed to be the consideration, it is not the only consideration that is expressed to be there. In the particular case cited to me in a letter dated this month — this is not an avoidance scene because it happened back before 1975 — the consideration for the marriage was expressed to be the marriage of the parties and a named sum. The question is whether the unhappy insertion of the truth about a lump of money going from a father or mother to a son or daughter would wipe out the threshold which would otherwise emerge from the adoption of the section which we have before us, where the threshold would seem to be increased in the grandchild's case only where the consideration is the marriage. If I read correctly the section before me, it provides that "specified disposition" means a disposition "in which the marriage of the parents or successor was at the date of the disposition expressed to be the consideration". Does that prevent it from being a specified disposition — the fact that apart from the marriage which is expressed to be the consideration, there was a sum of money as well? In other words, does an inheriting grandchild now find under this that he is in an entirely different position from his neighbour where the sum of money was not mentioned under this section and where he is paying capital acquisitions tax on £120,000 more?
The Senator can be assured that any other consideration along with the marriage consideration will not prevent the section from working. In other words, the money aspect will pass on.
It will not make the disposition not conform?
No. There is a reason for this extension to certain issues of marriage. With regard to land, apparently in some parts of the country prior to the introduction of the Capital Acquisitions Tax Act, 1976, difficulties arose in relation to certain marriage settlements. These settlements were entered into prior to the Act by the father of the intended husband: property was settled by the father on his son for life and thereafter on the son's wife for her life and on her death to some issue or some person of that family. Of course, it was a question of Table 2 applying to the issue of that marriage because it was a transfer from grandfather to grandchild. Basically that is the reason for it. Strangely enough, it appears to have been confined to just a particular part of the country but extreme hardship cases were brought to notice by some of the organisations concerned.
I think the Institute of Taxation made the point that the provision should be extended to where there is a deemed child situation such as arises for a nephew or niece who is working for five years with an uncle or aunt. However, that does not seem to be taking account of what is in the section.
This is removing the anomaly that appears to have arisen in parts of the country. The approach was a joint one after some time by both the farming organisations and the Law Society who had discovered that this applied to a particular part of the country.
I have nothing to say against this section or the next two sections which seem to me to be perfectly right. I should like to take the opportunity to point out with regard to this section an example of the kind of avoidance that will arise naturally in commercial affairs to which authority ought to be attentive and which if it judges should be stopped it should have an adequate procedure for stopping. Here is a case, an original relief where there was a contract for the sale of lands and then a sub-contract to a new purchaser. The original relief scheme was that there was stamp duty payable only on the consideration passing from the new purchaser: in other words, no stamp duty was payable on the immediate transaction. Because of heavy taxation, inflation or whatever one calls it, attention was directed to the possibility of reducing the value of what the sub-purchaser would purchase under the transaction, which would have to be documented and stamped by, for example in a share transaction, reducing the value of the shares but creating rights attaching to other shares in the same company, so that what came down to the sub-purchaser was a very much smaller sum than was being paid under that transaction by the vendor to the original seller. Perhaps there could be a system under the stamp code whereby an order could be made making this change and a scheme whereby we substitute a section for the ministerial order. We could then revoke the order which has been made. I would like to see it considered that similar operations should be made outside the stamp duty code, that there would be some system to provide for temporary transitional provisions of some kind which would at once make it a defensible position for a Minister to come afterwards and bring in legislation which might extend and expand whatever had been done by his ministerial order. The original code would have to provide authority for doing something of that kind.
Everyone talks about tax avoiders. If any of us is involved in a transaction and somebody tells us there is a way to avoid stamp duty at the rate of 6 per cent on £50,000 and £3,000 is involved, we would be regarded as out of our minds by our friends if we did not tell them how to save that amount. It is all very well for people to say that tax avoidance is worse than tax evasion but tax avoidance cannot be worse in the sense where, in some instances, tax avoidance requires the spelling out to the people concerned of their rights and of their opportunities. Avoidance may be the right thing. For example, people may have high incomes with very little capital, or perhaps nothing at all in the way of capital, and they may have a handicapped child or handicapped children. Do you mean to say that their best well wishers should not try under the existing law to get them to avoid as much tax as possible to accumulate for the handicapped children or for the people without substance? It is a howling hypocrisy to say that they should not do this. I do not say it. If I am on record as saying here today that there may be more money lost through tax avoidance than tax evasion, I certainly do not claim that there is some moral equivalent between the two.
Tax avoidance is a moral duty in many cases and is certainly a citizen's right under the law as it stands at the moment. The courts are developing their view of these rights so that when they smell sham transactions without commercial reality they can knock them as not being in accordance with the law and the avoidance in question fails to avoid in the courts. Then, the people engaged in the operation of avoidance run the risk of being wrong and at a cost, sometimes, of multiple taxation.
I used this section to make the point that people in my trade would have found it their duty to take advantage of section 44 if they were engaged in commercial transactions. Before the order was made it was a perfectly proper and indeed an expected thing that agents involved in commercial business should know such matters and they would be giving poor service to their customers if they did not know about it. So those who give down the banks to people for tax avoidance should remember that there are many other sides to these difficult questions. That goes for this section and the next two sections as far as I am concerned.
The Senator had valid suggestions to make on the extension to other areas of the operations of the Revenue Commissioners. I accept them as something that should be considered seriously and I will bear his observations in mind.
Has the Minister any comments to make on the section?
Mr. G. FitzGerald
The purpose of the section is to secure that certain provisions in the legislation relating to taxation which impose secrecy obligations on the Revenue Commissioners will not apply so as to preclude disclosure by the commissioners of information to the ombudsman for the purposes of the Ombudsman Act, 1980. That is basically the purpose of the section.
I presume the ombudsman cannot disclose anything that is not relevant to his conclusions.
He is controlled in that.