The prudent economic and fiscal policies implemented over recent years have placed Ireland in a much stronger financial position. In particular the recovery in the public finances of recent years is testament to our resilience. I made the point in my Budget Statement that we must get away from, forever, the boom and bust cycles that have caused so much grief in the past. We must not forget the lessons of a challenging period in our very recent history. There is a need to manage the public finances effectively and fairly for the benefit of all. In the programme for Government, and indeed in this budget, we decided to favour investment in public services over tax changes. As we begin our debate here this afternoon on the Finance Bill I must emphasise that as a consequence of the decision to focus on improved public services there are less resources available for taxation changes, but we have sought to make progress where possible.
We are moving into a time of both challenge and opportunity for the State as Britain prepares to leave the EU, so we must ensure that Ireland continues to be an attractive location for investment and job creation. Indeed, a number of measures were adopted in the budget to commence dealing with the reality of Brexit. These include changes to the universal social charge, USC, where we continue the progress made over the last two budgets in reducing the USC, with a particular focus on low and middle-income earners. For the third year in a row, the measures introduced in section 2 of the Finance Bill will reduce the top marginal rate of tax on income up to €70,044 per year. Subject to the passing of this Finance Bill, this marginal rate will stand at 49% from January 2017. From 1 January next year, this Bill will reduce the three lowest rates of USC by 0.5% each. That will decrease the rate of USC applying on all income up to €70,044 in a year.
Section 4 provides for an increase in the earned income credit from €550 to €950 per year. This credit is available to self-employed individuals who do not have access to the PAYE credit, and provides support to entrepreneurs and small business owners generating employment and economic activity across the country including farmers, publicans, retailers and tradesmen.
Section 5 provides for an increase to the home carer tax credit to €1,100 per annum, to support families where one spouse works primarily in the home to care for children or other dependents. This credit is of benefit to over 80,000 families annually.
Section 6 provides for a new tax credit for fishermen to assist the viability of the fishing sector. This will allow those who spend at least 80 days fishing at sea in a tax year to claim an additional income tax credit of €1,270 per annum.
The help-to-buy initiative takes the form of a rebate of income tax paid over the previous four tax years as a contribution to the deposit needed to fund the purchase of a new home. The amount rebated will be up to a maximum of 5% of the purchase price of a new home, with the maximum rebate available being €20,000. The amount of rebate available to an applicant is calculated based on his or her total income tax paid over the previous four years. Section 9 gives effect to this incentive.
Section 10 extends the special assignee relief programme until the end of 2020. This programme was due to expire at the end of 2017, but its extension is being provided for at this point to remove any uncertainty for the foreign direct investment sector in the context of Brexit. Also in that context, section 11 provides for the extension of the foreign earnings deduction until the end of 2020. This incentive is designed to assist businesses to diversify into non-traditional export markets for Irish goods and services.
Section 12 extends the start your own business tax relief for new applicants for an additional two years until the end of 2018. This scheme assists long-term unemployed individuals to start a business by giving them an exemption from income tax on profits of up to €40,000 for two years and mirrors that available for corporate start-ups.
An increase in the ceiling for tax free income under the rent-a-room scheme from €12,000 to €14,000 is provided for in section 13. This incentive aims to encourage homeowners to rent out additional vacant rooms, thereby providing extra residential accommodation.
Section 14 relates to personal retirement savings accounts, PRSAs, and retirement annuity contracts, RACs. Revenue has brought to my attention certain tax-planning opportunities entailing PRSAs and RACs that were not envisaged by the legislation. This section will close off these opportunities by amending the legislation to ensure that if such pension arrangements do not vest, that is, mature or come into payment, by the date of the owner’s 75th birthday, they are deemed to vest on that date, or where the owner is 75 before the date on which Finance Act 2016 is passed, on the date that Act is passed, subject to transitional measures.
Section 15 amends the living city initiative to encourage an increase in the take-up of the scheme. The changes include the removal of the restriction on the maximum floor size of properties that can qualify, the removal of the requirement for the residential element of the initiative, that the property must have been previously used as a dwelling and changes to the minimum amount of expenditure needed to qualify. It also extends the availability of the initiative to landlords in respect of the renovation of rental accommodation in the special regeneration areas.
An amendment to the income averaging regime that allows a farmer’s taxable profits to be averaged out over a five year period is provided for in section 18. I announced in budget 2017 that I will gradually reduce the deposit income retention tax, DIRT, rate to 33% over the course of the next four years, starting with a 2% cut in this budget, and further 2% cuts in the following three budgets, these changes are provided for in the Bill. The first reduction of the rate of DIRT to 39%, will apply from 1 January 2017 and this is set out in section 21.
Concerns were raised about the section 110 regime being used by investors in a manner which was never intended. I am therefore moving to restrict the use of the regime where transactions involve loans secured on and deriving their value from Irish land. This measure reinforces our taxing rights and ensures that the Irish tax base is appropriately protected whilst simultaneously ensuring the section 110 regime is maintained for bona fide securitisations. Accordingly, section 22 makes a number of amendments to exclude businesses with loans which are secured over, or derive their value from, an interest in Irish land from using the provisions of section 110 to avoid payment of Irish tax on profits made on Irish property transactions. The amendments ensure that certain persons who are already subject to Irish corporation tax can continue to avail of the existing regime and exclude certain bona fide securitisation transactions. They do not permit the companies to mark to market and they apply to accounting periods beginning on or after 6 September 2016.
In a further move to asserting our taxing rights over Irish property, I am introducing a new tax regime for Irish funds holding Irish real estate. The proposal will ensure that the Irish tax base will be protected where Irish property transactions are taking place within collective investment vehicles. We are confident that the legislation strikes the appropriate balance between attracting long-term sustainable capital to the Irish property market whilst ensuring, in so far as possible, that the taxing rights from Irish real estate is retained in the Irish tax base.
Section 23 provides for the introduction of a tax regime for Irish real estate funds, IREFs, by inserting a new Chapter 1 B into Part 27 of the Taxes Consolidation Act 1997. The objective of these provisions is to provide for a taxation regime for investment undertakings, where 25% of the value of that undertaking is made up of Irish real estate assets. The IREF must deduct a 20% withholding tax on certain property distributions. The withholding tax will not apply to certain specific categories of investors as set out in the legislation; including pension funds, life assurance companies and other collective investment undertakings. The section applies to accounting periods commencing on or after 1 January 2017.
I announced in budget 2017 that the applicable rate of capital gains tax relief, CGT, which applied to gains from business disposals by entrepreneurs is being further reduced to 10% while retaining the €1 million lifetime limit. This measure, in section 26, is intended to encourage entrepreneurship and to send a message that the State is strongly supportive of entrepreneurs.
The EU Commission requires Ireland to carry out restoration works on raised bog special areas of conservation and raised bog natural heritage areas. Payments under the protected raised bog restoration scheme will be exempt from CGT in order to encourage co-operation with the scheme and this is covered in section 30.
Section 36 underpins the budget day announcement to increase the excise duty on tobacco products. The excise duty on a pack of 20 cigarettes has been increased by 50 cent, including VAT, with a pro rata increase for other tobacco products. This public health measure is estimated to raise €65 million in a full year. To further assist the development of the micro-brewing industry, the qualifying ceiling is being increased from 30,000 hectolitres to 40,000 hectolitres for export markets and this is set out in section 37.
Section 44 provides for the extension of vehicle registration tax, VRT, reliefs available for electric vehicles to 31 December 2021 and hybrid electric vehicles to 31 December 2018. Section 47 increases the farmers’ flat-rate addition from 5.2% to 5.4% with effect from 1 January 2017, as announced in the Budget. In addition, a new measure is being introduced into the flat-rate farmer scheme to avoid over-compensation.
Section 50 concerns an extension of the bank levy out to 2021, as announced in the Budget Statement. Between 2017 and 2021 this is expected to raise €750 million. Senators may recall that I introduced an amendment to the capital acquisitions tax relief known as the dwelling house exemption to this Bill on Committee Stage in the Dáil. The purpose of this change, set out in section 52, is to realign the exemption with its original policy objective, that is, to alleviate the hardship of an inheritance tax liability faced by a person who inherits a house which he or she had been sharing as a principal place of residence from the person he or she had been sharing it with, and to ensure that the person did not have to sell the house to pay the tax liability.
Finally, this year I announced I am further increasing the group A tax free threshold which applies to gifts and inheritance from a parent to his or her son or daughter to €310,000. I am also raising the group B threshold which applies to other close family members to €32,500 and the group C threshold which applies to all others to €16,250. These increased thresholds are provided for in section 53 and will be made effective from 12 October, inclusive.
I have endeavoured to give House an overview of the Bill today. I look forward to hearing the views of Senators. Of course, we will deal with Committee and Report Stages where we will have an opportunity to discuss these matters in more depth. I commend the Bill to the Seanad.