The Finance Bill contains the legislative proposals to implement the tax changes I announced in the budget last December. This year, in addition to the significant improvements in tax credits, allowances and bands, the changes I am bringing forward include a significant measure of reform of the taxation system. A large part of this reform is based on the review of tax schemes I had carried out over the past year. The relevant extensive reports on this were published last month.
This Bill continues and builds on the successful policies of recent years that have delivered a personal tax environment that fosters and supports effort and enterprise. For those on average pay, these policies have delivered one of the lowest tax wedges in the OECD, as well as taking many taxpayers out of the tax net altogether. The provisions of the Bill will also ensure that, from 2007, the small number of high income individuals who up to now have been able to reduce or eliminate their tax liability through the use of tax incentives and reliefs will generally have an average tax rate of about 20% each year. On foot of the Bill, therefore, a higher percentage of the tax take will be paid by high earners; a lesser percentage is being paid by lower earners; the tax changes being implemented favour low income groups; and there are new limits on the use of tax reliefs by the very well off.
I believe this year's Finance Bill will bring about real change and reform of our tax system. The budget on which it is based has been described by the Economic and Social Research Institute as "perhaps the most progressive budget package for many years — poorer households did proportionately better than rich ones". The reforms in the area of tax incentives, pensions tax arrangements, the tax liabilities of high earners and the measures to close off potential tax loopholes are evidence of the Government's commitment to a tax system that is fair and equitable and that underpins the country's continued economic and social progress.
Before outlining the main provisions in the Bill in a moment I wish to highlight for the House the main measures it contains. The Bill proposes the following: to remove all of those on the minimum wage from the tax net; exclude workers on the average industrial wage from the higher tax rate; confirm the restrictions on the use of tax reliefs by high income taxpayers to secure greater equity in the tax system; phase out various existing tax schemes and exemptions and amend other schemes to secure better value for the Exchequer; end the current unfair remittance basis of taxation; continue the stamp duty exemption for young trained farmers for a further three years; increase the tax exemption limits for income from farm leasing for over five years; and extend certain existing reliefs to cover the EU single farm payment entitlement in appropriate circumstances.
The Bill also proposes to introduce a new scheme of tax relief for heritage property donated to the proposed Irish Heritage Trust; provide for the €10,000 income tax disregard for certain persons minding children in their own home as announced in the budget; prevent the use of certain pension investments to cut one's tax bill enormously; increase VAT registration thresholds to help small business; and exempt biofuels from excise duties and reduce excise duties on certain home heating oils, namely, kerosene and LPG. These measures were all announced in the budget.
In addition to these, the Bill proposes to introduce a new initiative aimed at encouraging low income earners who hold SSIA accounts to transfer funds into pension schemes; provide significant improvements in the film tax relief aimed at enhancing Ireland's competitive position as a film location; provide for automatic reporting by financial institutions and Departments of interest and certain other payments made to taxpayers; get more notice and information on certain tax avoidance schemes; ensure that landlords will have to meet their statutory registration requirements as a condition of getting generous tax relief; tighten up the relevant contracts tax to combat fraud and tax evasion; include a range of provisions to facilitate business in maintaining lreland's competitiveness; and close off a series of abusive tax loopholes in the areas of film leasing, transfer of Irish assets into a foreign company, potential misuse on interest relief, capital gains tax and certain corporate VAT reliefs.
I will now deal with some of the main provisions in the Bill in more detail. I will listen carefully to the contributions of Senators and try to respond to the points they make when I reply to the debate.
On income tax, the various income tax measures and reliefs announced in the budget are dealt with in sections 2 to 7. These widen the tax bands and increase various credits, including the basic personal credit and employee tax credit. The effect will be a reduction in average tax rates and the removal of those on the current minimum wage from the tax net.
Section 8 revises the tax relief provisions in respect of local authority waste charges to maintain the value of the relief for taxpayers following the introduction of the pay by use principle. The existing provisions governing the relief require adjustment to take account of the revised charges structure at local level. Section 9 confirms the budget day announcement and Financial Resolution abolishing the loophole whereby relief could be claimed for interest on loans taken out for property speculation with effect from 7 December 2005.
Section 11 links mortgage interest relief on rental properties to the registration requirements of the Private Residential Tenancies Board so as to encourage compliance with the registration requirement. Section 13 confirms the budget day announcement of a childminding relief for individuals minding up to three children in their own home provided the income in question does not exceed €10,000 in the tax year.
Section 14 contains a number of important changes to the tax treatment of pension provision. First, the rate of age-based tax relief applying to all pension products is being increased where the contributor was 55 years or over at any time during the tax year to 35% of net earnings or remuneration for those aged 55 and over and to 40% for those aged 60 and over. This is aimed at incentivising individuals who have underfunded their pension over the years and now wish to improve their position as they approach retirement. The overall benefit limit of two thirds final salary will still apply.
Second, an annual taxable 3% imputed distribution is being applied to the value of assets in approved retirement funds. This will be phased in over a number of years. Third, the maximum tax free lump sum for draw-downs from a pension fund made on or after 7 December 2005 will be €1.25 million. Fourth, a cap is placed on the maximum allowable pension fund on retirement for tax purposes at €5 million or, if higher, the value of the fund on 7 December 2005. Finally, the current annual earnings limit of €254,000 for certain contributions to pension schemes is to be indexed from the tax year 2007 to maintain its value in the future, as will the €5 million and €1.25 million amounts just mentioned.
Section 15 provides for the discontinuance of the remittance basis of taxation with effect from 1 January 2006 in respect of employment income in so far as the employment is exercised in the State. This will ensure that all employees are treated alike in respect of income earned in the State. Section 16 contains a number of provisions which are designed to ensure that tax that should be deducted under the PAYE system is in fact deducted. These provisions deal with the use of intermediaries and non-resident employers, situations where foreign and domestic employment are involved, and the position of mobile workers. Sections 15 and 16 reflect the changed profile of the labour market here as a result of significant and welcome immigration.
Section 17 provides for the measure announced in the budget which will place a limit on the use of tax reliefs by those on high incomes. The measure will ensure that such taxpayers will not be able to use specified tax reliefs to reduce their tax bill in any year below approximately 20%. A full list of the reliefs which are covered is included in the Bill. Broadly, these are the various property based reliefs and other incentive reliefs such as film relief, the business expansion scheme and donations. However, the normal expenses of business, including standard depreciation allowances and losses, will still be allowed in the normal way.
Section 18 provides for a major improvement in the relief for investment in film production. The percentage of expenditure that is eligible for tax relief is being raised to 80% for all films, up from the existing levels of 55% or 66% depending on the film budget. In addition, the ceiling on qualifying expenditure for any one film is being increased from €15 million to €35 million. These changes are subject, as before, to EU Commission approval.
Section 19 increases the annual cap on the amount that can be claimed for expenditure on farm pollution control measures to the lesser of €50,000 or 50% of qualifying expenditure, with effect from 1 January 2006. Section 20 extends the scheme of tax relief for donations to approved bodies to include the donation of publicly quoted securities, which will be treated in much the same way as cash donations of equivalent value.
In line with my Budget Statement, section 22 abolishes the stallion and greyhound tax exemptions from 31 July 2008. Discussions are to take place with the industry and the EU Commission on a replacement scheme.
Section 23 includes the proposed Irish Heritage Trust in the list of approved bodies for the purpose of the tax relief on donations scheme. This will facilitate the trust in building up an endowment fund for the maintenance of its heritage properties. Three other provisions relating to the trust are contained in sections 73, 115 and 122, to which I will turn in due course.
Section 24 amends section 817 of the Taxes Consolidation Act 1997 and is designed to counter certain tax avoidance schemes that involve shareholders taking money out of companies as capital receipts rather than income in order that they can benefit from the lower 20% capital gains tax rate. This change to section 817 will reinforce the original provisions in the light of more recent versions of these avoidance schemes.
Sections 25 to 34, inclusive, set out the termination dates and transitional arrangements with regard to various tax relieved property schemes, the details of which were announced on budget day. Sections 35 to 39, inclusive, deal with capital allowances for private hospitals, psychiatric hospitals, nursing homes and child care facilities. I am extending the clawback period for such facilities from ten to 15 years and what are known as the "tax life" rules will be revised to facilitate investors in transferring their interests to other investors within the 15 year clawback period. These provisions will apply to facilities commencing in use after 1 February 2007.
The tax relief for residential units linked with nursing homes, which was due to expire on 24 March 2007, is being extended to 31 July 2008 on a transitional basis in line with the phasing out of other property incentive schemes. I intend to examine this tax relief in more detail for next year's budget and Finance Bill.
Section 40 amends section 812 of the Taxes Consolidation Act 1997 to ensure that interest on securities, including dividends, remain subject to tax in all cases. Sections 41 and 42 set out requirements for those who wish to invest some or all of their SSIA funds in a pension product. The purpose of this initiative is to encourage holders of special savings incentive accounts, SSIAs, on the lower end of the income scale to provide themselves with improved retirement arrangements by transferring moneys from their SSIA accounts into pensions. A sum of €1 will be added for every €3 transferred from an eligible SSIA account into a personal retirement savings account, PRSA, a retirement annuity contract or an additional voluntary contribution, AVC, subject to a maximum bonus of €2,500. In addition, the exit tax to be paid on the SSIA moneys so transferred into individuals' pension accounts will be refunded.
The scheme is aimed at lower earners and will not be available to taxpayers who pay at a rate of 42%, who already have access to very considerable incentives. This bonus is available for those making additional new contributions to their pension. It should be emphasised that this is a once-off special pensions initiative relating to lower earners with SSIA funds. The wider issues relating to improving global pension coverage as discussed in the recent report of the Pensions Board will be examined by the Government over the coming months.
Section 43 seeks to put beyond doubt the obligation on persons who are resident outside the State to apply relevant contracts tax, RCT, when they operate as building or other relevant contractors in the State. Section 44 amends the law relating to relevant contracts tax which principal contractors are obliged to deduct from payments made to certain subcontractors in the construction, meat processing and forestry areas in order to tighten controls and to discourage fraud and evasion. Applicants for C2 certificates will face more stringent application criteria and the payment limit that Revenue operates for some subcontractors in respect of C2 payments is being put on a statutory basis.
Sections 45 to 47, inclusive, 49, 53 and 107 provide for measures of a substantive, clarificatory and technical nature to assist in the development of the funds industry in Ireland, which is an important part of the international financial services sector. Section 48 amends legislative changes included in the Finance Act 2005 to ensure that the 23% exit tax on the proceeds of a life assurance policy cannot be deferred indefinitely by the continual rolling over of a policy without it becoming chargeable to the tax. While the changes are in response to certain points made to me by the industry, I am determined to ensure that the tax deferral available to investors is kept at reasonable levels and is not deferred indefinitely.
Section 52 amends Chapter 1A of Part 27 of the Taxes Consolidation Act 1997, which deals with the taxation of investment undertakings covered by the "gross roll-up" regime that was introduced in the Finance Act 2000. The amendment clarifies that in common with other companies, securitisation companies which invest in money market funds may receive payments from such funds without the imposition of an exit tax, provided the necessary conditions, such as the completion of a declaration procedure are adhered to.
Section 54 ensures that life assurance companies only benefit from group losses and certain other loss reliefs at the corporation tax rate of 12.5%, as opposed to the standard income tax rate of 20%, which applies for the income and gains of policyholders from such policies. Section 55 is aimed at preventing abuses of the patent income exemption through re-categorising franchise licence fees as patent royalty payments. It also limits the amount of exempt patent royalty distributions that may be made by a company in certain circumstances to the aggregate of its research and development spend over a three year period.
Section 57 removes the requirement to deduct withholding tax on interest paid on quoted registered eurobonds, bringing the treatment of such bonds in line with that of those in bearer form. Section 58 extends the termination date for the ring-fencing of losses and capital allowances in qualifying shipping trades to 2010.
Section 65 is the next major section and gives effect to the budget announcement on the restriction of interest relief under section 247 of the Taxes Consolidation Act 1997 in the context of transactions between related companies. This is an important anti-avoidance measure. However, I appreciate that this section is being used by many firms in a perfectly appropriate way and it is not my intention to cut off genuine use of this section.
Section 66 deals with the research and development tax credit which is just one of the Government's actions in incentivising the development of research and development in Ireland. The section provides that a proportion of expenditure on machinery or plant which is to be used partly for research and development will qualify for the tax credit. Where plant and machinery is included in the incremental spending calculation, but is in dual use, that is, both research and development and production, there will be a proportionate allocation of the expenditure for the purposes of the credit. Section 67 improves the legislation on the taxation of shipping-related profits by providing for a clearer, more streamlined process for applicant companies electing for the tonnage tax regime.
With regard to capital gains tax, section 70 gives effect to the budget proposal that the EU single farm payment entitlement will qualify as an asset for the purposes of the capital gains tax retirement relief, provided the farmer in question fulfils the ten year rule in respect of the ownership and usage of the land which is disposed of at the same time as that entitlement. The section also caters for when a husband and wife are co-owners of land but only one of them becomes a partner in a milk production partnership.
Section 73 deals with relief from capital gains tax on the disposal of certain works of art where prior to the disposal they were on loan to, or displayed in, an approved gallery or museum. The minimum period of loan is being increased from six to ten years and the section is being extended to apply also to such loans made to the proposed Irish Heritage Trust. Section 75 is an anti-avoidance measure dealing with capital gains tax in certain circumstances of a disposal of a chargeable asset to a spouse, a separated spouse or a former spouse. Section 76 and 77 provides that the Revenue Commissioners can obtain information for capital gains tax purposes regarding the issue of shares to the members of a mutual life assurance company or a mutual building society on the occasion of these ceasing to be mutual companies.
Parts 2 and 3 deal with excise duties and VAT. Sections 78 to 91, inclusive, set out a range of changes with regard to excise duties, including confirmation of the budget day reduction in excise duty on kerosene and LPG used for heating, and the reduction of betting duty from 2% to 1% with the industry bearing the liability. In recognition of the environmental issues we face, the House will welcome the large-scale scheme I have provided for in the Bill to promote biofuels. The new scheme will assist biofuels in achieving an initial target of 2% penetration of the transport fuel market by 2008. This relief, when fully operational in 2008, is expected to support the use and production of some 163 million litres of biofuels per year. The scheme will help to limit our dependence on conventional fossil fuels, reduce our CO2 emissions and stimulate activity in the agricultural sector. This is complemented by providing a new vehicle registration tax relief to promote new flexible fuel vehicles and the extension of the existing relief to dual electric or petrol vehicles.
Sections 92 to 101, inclusive, contain a number of important revisions to the VAT code. Sections 95 and 101 confirm the increases in the VAT registration thresholds for small businesses from 1 May 2006. The revised thresholds are €27,500 for services and €55,000 for goods. Sections 94 and 96 amend the VAT Act to provide for the taxation of the private use of deductible and non-deductible business services. Section 95 also contains an anti-avoidance measure designed to strengthen the VAT grouping provisions in order to ensure the related companies are appropriately treated for VAT purposes without loss of tax revenue. Sections 93, 97 and 99 replace the existing rules on the VAT treatment of the supply of a package of services composed of two or more elements which attract VAT at different rates. Sections 98 and 99 provide for the granting of deductibility for VAT incurred on costs associated with the issue of new stocks, shares, debentures and other securities made to raise capital, where that person is entitled to VAT deductibility.
Part 4 of the Bill deals with stamp duties. Section 103 extends to a foster child the stamp duty reliefs available to a natural or an adopted child. Section 104 provides for an amendment to the exemption from stamp duty on any instrument made for the purposes of, or in connection with, the demutualisation of an assurance company which carries on a mutual life business. Section 105 gives effect to the budget announcement extending the exemption from stamp duty for transfers of land to young trained farmers for another three years until 31 December 2008.
Section 106 will exempt from stamp duty donations of publicly-quoted securities to approved bodies that come within the scheme of tax relief for charitable and other donations. Section 109 provides for an exemption from stamp duty on the sale, transfer or other disposition of an EU single farm payment entitlement. Section 110 gives effect to the budget announcement regarding the abolition of companies' capital duty for transactions effected on or after 7 December 2005. Section 111 ensures that where a combined ATM and debit card is used solely as an ATM or debit card, the charge will be €10, whereas if it is used for both functions, the existing €20 charge will apply.
Part 5 of the Bill deals with capital acquisition tax and section 115 is concerned with the clawback of the exemption granted to heritage objects contained in a gift or inheritance if such objects are sold within six years after the valuation date of the gift or inheritance. This clawback does not apply if the objects are sold by private treaty to one of the qualifying bodies referred to in section 77(3) of the Act and the proposed Irish heritage trust is now being added to the list of qualifying bodies. Section 118 gives effect to the budget proposal that the EU single farm payment entitlement will qualify as agricultural property for the purposes of agricultural relief under capital acquisitions tax rules. Where land which qualified for agricultural relief or business relief is disposed of in the period commencing six years after the date of the gift or inheritance and ending ten years after that date, the section provides that the relief granted will be clawed back in respect of the development value of the land at the date of the gift or inheritance.
Section 122 provides a new scheme of tax relief for heritage property donated to the proposed Irish heritage trust as announced in the budget. To qualify for relief, the heritage property will have to be approved by the Minister for the Environment, Heritage and Local Government by reference to the criteria set out in the section. There will be a ceiling of €6 million on the aggregate value of the heritage properties that can be approved in any one year. Allowing the proposed trust to avail of this scheme will be important to its successful launch.
Section 125 and 126 are important tax administration provisions. The first of these will allow the Revenue Commissioners, with the consent of the Minister for Finance, to introduce regulations governing the automatic reporting to the Revenue Commissioners by financial institutions of interest and other profit payments made to customers as well as certain payments made by Departments. The Revenue Commissioners and my Department will consult the financial institutions before implementing this reporting system.
Section 126 addresses the use of tax avoidance schemes by way of a surcharge of 10% on undisclosed transactions that are ultimately determined to be tax avoidance transactions. The surcharge will not apply where full details of the transaction are disclosed in a protective notification process to the Revenue Commissioners within a specified time limit. People who are open about their tax planning arrangements will be able to show them to the Revenue Commissioners and will not be surcharged if the arrangements concerned are later determined to be in breach of anti-avoidance rules.
There are many important provisions in the Bill to stimulate the economy, reward effort and to promote enterprise, while at the same time seeking to safeguard what must be at the core of any proper tax system, which is the fair treatment of all taxpayers by reference to their ability to pay. I hope that Senators agree with these principles and I commend the Bill to the House.