Deputy McDowell is opposing this section which is related to section 13, to which I have tabled amendments. Can we take sections 12 and 13 together?
SECTION 12.
Question proposed: "That section 12 stand part of the Bill".
We can be reasonably flexible. Is that agreed? Agreed.
This is the whole area of covenants. As everyone is aware by now, the proposed restrictions in covenant tax relief and the changes mooted at the time of the budget and subsequently have given rise to a lot of comment and debate. I want to make my position absolutely clear in this regard. I regard it to be the job — and right — of the Government to decide any time what scheme they want to bring in. That being said, it was the Government's prerogative to decide that there was to be free third level education. This debate has gone on for some time and the merits of going the route the Government and Minister for Education have chosen have been praised by one side and criticised by others, including my party. It is certainly the right of the Government to decide whether we have free third level education. In selling the idea of free third level education, it was signalled some time ago that one of the methods by which the Exchequer could recoup the money would be the abolition of tax relief for education covenants. I knew for some time, while that debate was going on, that it was not possible for the Revenue Commissioners to be able to say — even with their vast sophisticated computerisation — how much of the total amount of tax lost through covenants related to education covenants.
As some of the officials pointed out in the briefing session this morning, to get tax relief for covenants it was not necessary to specify their purpose. Therefore, it would be impossible to calculate what amount related to education covenants. Various figures have been bandied about — not by the Minister for Finance — but the impression was given that, of the cost of abolishing fees for third level education, which would be in the order of £50 million, about £38 million would be met by the savings on covenants. Only a percentage of that related to education covenants. I understand the Revenue Commissioners took a sample to estimate what it would be.
It is not fair to change the tax legislation, as it relates to covenants, to pay for a Government decision which said they related to education. I tried, in my amendment, to limit the change in the tax legislation on covenants so that it would relate only to education covenants because that is the basis on which it was sold. Irrespective of what case people have made about changing the Government decision to give free third level education, it cannot be disputed that the Government has a right to do that.
This Bill makes major changes in the legislation on covenants which, perhaps, the Revenue Commissioners have wanted to do for a number of years but it is not fair to use the excuse of change in the education area to do it now. What I hope to do in sections 12 and 13 is to go back to the situation that existed prior to the changes: that whatever changes are made are in the covenanting of income for educational purposes. I have no quibble with that, since there will be free third level education. That is the area which should be changed. It is not fair or equitable to change the whole area of legislation on covenants. I am conscious that the Minister, since the budget, signalled his change of mind, on foot of strong representations, particularly from the Alzheimer Society of Ireland. The changes in sections 12 and 13 recognise that particular area but I am against what the Minister is trying to do in those sections. The sections are being used to throw the baby out with the bath water and that is not a good principle.
My amendment No. 16 to section 13 states:
In page 31, subsection (1) (a), line 8, after "assessment" to insert "or £3,000 whichever is the greater".
First, I oppose section 12. On section 13, the effect of my amendment would be that a limit of £3,000 would be established, up to which limit anybody could covenant in any given year. It may be that the figure of £3,000 is excessively generous; I will come back to that in a moment.
The earmarking of changes in relation to convenants is largely speaking an illusory exercise. The tax concession is tied to the bringing in of free third level education for all university students and is in my view a mistake. We had to look at the covenanting system and decide whether it was fair, whether it was being abused and whether it could have been reformed. In my view it could easily be reformed and the current proposals to effectively scrap it are unjustified.
I received a telephone call last week which made perfect sense to me. The individual who telephoned me asked why the limit on covenanted income should be related to 5 per cent of income. It is not a fair limit, because the more a person has the more that person can give away in covenants. Curiously, the greater the sacrifice one might be willing to make in favour of another, the more draconian the law is in that regard. I would much prefer to see some system which would put a ceiling and floor on covenants and which would, in absolute terms, make the system fairer. I suggest that if the Minister is to put a ceiling on income to be covenanted, so that the super rich cannot hand away £50,000 in covenants just because they have an income of £1 million, he should equally impose a floor so that people can breach the 5 per cent limit up to a certain amount. If he played around with figures like £2,000 for a notional floor and £3,000 or £5,000 for a notional ceiling, the Minister would achieve much greater fairness in the whole covenant system than is achieved by these two sections.
I wish to draw another matter to the Minister's attention. I have already drawn this matter to his attention in private correspondence but I shall put it on the record. Many people who are cohabiting because the law of this State prevents them from remarrying are using covenants at the moment to attempt to partially mimic the effect of a marriage allowance. It happens in the following circumstances and this is a true case. If a man and a woman marry and split up and both take their own separate tax allowances with them and if some time later the man meets a woman, cohabits with her and has a family with her, he is forced to bring that family up on his single person's tax allowances.
If he, as has been the case, uses covenants in support of his partner and their children, he gets some relief from hitting the top rate of tax at the figures we mentioned this morning, where his weekly take home pay is £169 or thereabouts. That is only fair and I ask the Minister to bear in mind that he could, even within the general framework of what he is attempting to do with these two sections, make a concession of the kind of which I am speaking. The concession could be along the lines of a subparagraph in the named list of categories to which it is permissible to make a covenant, up to whatever limit is permitted, in favour of persons in respect of whom the covenantor is in loco parentisor the parent of such persons. In respect of people to whom the covenantor is effectively a parent, that person should be entitled to make a covenant. The Minister could restrict it if he wished to exclude people who are members of a family in respect of whom the covenantor can claim double allowances.
Regarding what are now called non-marital children — they used to be called illegitimate children — or de factofamilies and people who are de factodependants, the Minister is aware of cases where, as I understand it, a man makes a covenant in respect of the maintenance of those children or their mother. This is a perfectly decent thing for a person to do, irrespective of their matrimonial circumstances or the circumstances of how the child came to exist.
It is perfectly legitimate for a person in those circumstances to seek to allocate a portion of his income on a permanent or a quasi permanent basis to support that child and its mother. It is not beyond the wit of the Minister's draftsmen, who are very clever, to establish a system whereby covenants can be made regarding non-marital children in respect of whom the covenantor is in some sense in loco parentis. I know of sad cases where families will be devastated by this change in the law. I ask the Minister to take this particular matter into account.
As we are all aware, the cost of keeping aged parents has risen enormously over the last number of years. Given the scarcity of beds in public nursing homes, many elderly people must be cared for in private nursing homes. As the Minister is aware, these places are quite expensive. I ask the Minister to consider covenants for the benefit of children who must place their parents or relatives in nursing homes. I do not want the 5 per cent limit to apply in those particular cases.
Covenanting is a very old concept, which does not distinguish between its purpose or motivation, as Deputies are aware. Covenanting has increased in very recent times, mainly as a result of the reduction in the age of majority from 21 years of age to 18 of age when people started to use it for educational purposes. The Deputies are aware of anecdotal and other information which became available regarding back to back covenants, which were unacceptable.
The approximate amount of money foregone by the Revenue was £2-3 million in 1983. This figure rose to £38 million and was continuing to increase rapidly. Irrespective of whether an intervention was made in respect of third level fees — such as that which was made — it would have been necessary to do something about what was perceived by the Revenue and others as an abuse of a provision which was included in the first instance. Some people will be adversely affected by this and Deputy McDowell has given an example. The answer is to change the law in relation to marriage and remarriage rather than to distort or make a provision in this instance. I accept, however, that in the short term that is of little or no comfort to the people referred to.
As regards the point made by Deputy Ahern, my understanding is that if an elderly parent is in need of hospitalisation or nursing care, that is a definition of being incapacitated and there is, therefore, no limit governing it.
Is there a 5 per cent limit?
No, not in that respect.
Is there a definition of being permanently incapacitated?
If a doctor provides you with a certificate, the Revenue Commissioners will not question it without good reason.
Very good. That is what I wanted to hear.
I will not go into the argument on the fees issue because we have already debated it. However, it is disappointing because, while I accept the point regarding marriage and remarriage, it is cold comfort for some of the cases that I have been asked to bring to the Minister's attention. One case in particular, which we all seem to know about, arose in my own city of Waterford.
I hoped that this section might apply beyond the passing, hopefully, of a referendum in the autumn and that these new changes could have applied beyond that time where there would not have been an adverse effect. In the situation to which I am referring, the likelihood is that this family will lose their home. The loss of £75 to £80 per week of net income for a family rearing four children in the way they are simply cannot be sustained — it is beyond their means to do so. That is a direct effect of limiting covenants to 5 per cent and their ultimate removal.
Given the information available to the Revenue, it should be possible to deal with some of these areas in the broadest sense because the funding lost to Revenue is not particularly great. In fact, it is very small in the sort of case to which I am referring. While I accept the broad argument on abuses aimed in large measure at third level education, I do not think there is any particular abuse in that specific area.
Given the sensitivity regarding the forthcoming referendum, this is a wrong move at the wrong time and will alienate and upset people. For the Minister to accept that they will be seriously affected by this and to say that there is nothing he can do about it, is a sad and unhelpful statement.
It is by no means certain that the people will pass the divorce referendum. We are now legislating for the law and the Constitution as it exists, not as we hope it may change. I am dealing with people who are trying to avoid the infamous two to one relationship that we were talking about this morning in circumstances where they find themselves, as Deputy Cullen says, very much at the receiving end of hardship. These covenants are long-standing agreements which are legally binding. Obviously, in a case like this the two cohabitants will not sue each other in court. Nonetheless, in the case which we are dealing with now, it was a long-standing agreement and a basis on which they decided to purchase their home.
It was the only way they could afford it.
The Minister did not scrap mortgage interest relief just like that and would not dare to do it because he knows that if there were sufficient people out there on the wrong end of that arrangement who had to sell their homes because their relief suddenly disappeared, he would be in trouble. There should be some hardship clause. I remember that in relation to the withholding tax for professional fees a hardship provision was put in place.
It should not be beyond the wit of man or woman to work out a formula to provide for cases where a covenant has been in place for three years prior to a certain day and where the Revenue Commissioners are satisfied ending the relief would cause genuine hardship to individuals. There can be as many restrictions as necessary but people who have arranged their lives based on a covenant must be treated fairly by the State. It is not enough to say it is hard luck for someone in those circumstances because the law has to change and hard cases make bad law.
It would be simple to put in a proviso that where the Revenue Commissioners are satisfied genuine hardship would arise from the introduction of this provision, and where the covenant has been in place for a number of years, the pre-existing situation would continue for a period not exceeding five years, perhaps. Those people should be left with a window of hope that their position would improve by the passing of the divorce referendum or by the law being changed to assist them in another way.
As Deputy Cullen said, it is tough to deal with a case where a decent family will be destroyed financially by this measure and there must be five cases one is not aware of for every case one knows. It must be possible to insert a hardship clause to provide the Revenue Commissioners can, subject to certain criteria, allow the covenant to apply for the rest of its natural life.
Deputy McDowell mentioned the passing of the referendum. Even if it is passed, it could be some time before these people have their new arrangements in place under law. Even in the best scenario, therefore, this will not happen between now and next year. I have spoken to this family in recent weeks and they are distraught at the impact of this provision on their children. I appeal to the Minister to find a mechanism because it will not be a cost burden on the State to deal with this issue.
I have a problem with covenants on the basis that someone can assign part of his income to another person with the intent of avoiding what would otherwise be his tax. Deputy McDowell mentioned a case where a man had a child outside his marriage or with a woman to whom he is not married and who is in another relationship. I think that individual is obliged to maintain that child anyway and should not necessarily get an additional tax break other than what an ordinary parent would get for a child.
Which is what?
Nothing.
That is correct. I would like to have a deeper look at the question of covenants because many anomalies have arisen. We addressed the matter reasonably satisfactorily in the context of this legislation.
I have listened to the unassailable points made by Deputies Cullen and McDowell about genuine hardship cases. I will look constructively at introducing an amendment on Report Stage. The question is, when is a case a hardship case? I will informally consult Deputies about the wording. I am thinking aloud at this point rather than giving the outline of any change but Deputies can contact me to give their views because I respect the bona fides of the points made.
Where someone is in a long term relationship, where there is a mortgage commitment and children, which are the circumstances the Deputies have in mind, natural justice would require a hardship case provision to be exercised with discretion. We do not want a notional provision which becomes a gap through which one could drive a coach and four.
We are not thinking of cases involving withholding tax, these are at the lower end of the scale.
I think the committee welcomes the Minister's openness to the amendments.
The tax foregone increased to nearly £40 million. This came about as a result of successive Ministers for Finance advising people to use the tax covenanting legislation as it related to education — they printed forms to hand out to people.
I have heard anecdotal information but I do not know of any case in which this happened. The amount of money foregone is very small in that regard and the bulk of the money relates to legitimate covenanting. Deputies Cullen and Michael McDowell made the point about separated people and I agree with them. I thank the Minister for agreeing to look at this for Report Stage.
I ask the Minister to look at covenanting as it relates to aged parents. I cannot understand — and this applies to successive Governments of all hues — why when private individuals are looking after their own affairs the State wants to interfere. Surely it is a nobler and better course for the State for people to look after their parents without any cost to the State, rather than change the law so that instead of people looking after their parents with tax relief the whole cost falls on the State. The idea of transferring people from looking after their own affairs to the State's care has been brought in under various sections even in the past couple of years, and the taxpayer ends up having to pay for the lot.
The Minister made a change to reflect the concerns of the Alzheimer's Association and that is reflected in the section which relates to permanent incapacity. There are aged parents who are not permanently incapacitated whose children are covenanting some part of their income and the 5 per cent rule will now apply to this. However, if a person is at present covenanting £5,000 they would have to have an income of £100,000 before they get any benefit under the new provisions.
People earning £100,000 are few and far between.
They are not in politics.
The Minister should take out this restriction as it relates to people's parents. It is good for the children of aged parents to remember that their parents looked after them and sent them to college, and that now when they have a good income it is their job to look after their parents. The parents may only have a small pension and their children can give them a proper standard of living in their twilight years. Why should the State interfere in that arrangement which involves only a minor tax break?
If it is changed what would happen if the aged parents are in a home or are not permanently incapacitated? I know how the Revenue Commissioners have interpreted "permanent incapacitation", but it is not as easy as just getting a letter from a doctor. The 5 per cent limit should not apply with regard to aged parents.
The proposed changes with regard to covenanting have brought many representations to the Department of Finance and the Revenue Commissioners, and it should now be possible to categorise the cases where an exemption may apply. Deputies Cullen and Michael McDowell referred to one case regarding separated people. Being separated I did not want to get involved in that argument as I have a vested interest. However, in the other areas, the whole range having been examined, it should be possible for the Minister to look at changes for Report Stage. The cost to the State is small. I would not like the Department officials to tell the Minister that he may be opening up another hornet's nest as this is a confined area.
When I spoke earlier, I wanted to refer specifically to people who are not permanently incapacitated but are put into nursing homes because there is no other place for them except maybe a district hospital. The latter costs the State money because while a person brings in their old age pension of £40 or £50 the balance is paid by the taxpayer. People are being put into nursing homes because the health boards deem families capable of paying for them. There should be a responsibility on children to help but in many cases it is causing hardship for those members of the family who are paying. Has any work been done by the State to ascertain the cost of continuing covenants?
The State is not interfering with the filial obligations of any person to their elderly parents whether those elderly parents are on low income or enjoying poor health but not incapacitated. We simply do not see why others should have to pay extra tax because they are getting a tax break to do that. There is no restriction. Deputy McCreevy argued that we were putting the big paw into the relationship. We are not putting any paw near that relationship. We are simply saying that one is not automatically entitled to a tax incentive for doing something that I would argue one is genetically programmed to do any way. That is not exactly social engineering.
With regard to Deputy Ahern's point, it is my understanding — I can get confirmation on it — that if an elderly parent is in receipt of nursing care, part of which involves medical expenses, there is provision under the Med 1 form and others for tax relief. An individual is not permanently incapacitated by reason only of the fact that he or she is elderly. However, it is accepted that elderly persons may be permanently incapacitated. For instance, Revenue will treat an elderly person who, because he or she is incapable of looking after themselves, requires to be maintained long term in a nursing home as being permanently incapacitated.
The temptation for abuse is strong in all of us. There is nothing to stop somebody going to their elderly mother, asking her to sign a form and saying they will covenant money to her on the basis that she gives them 50 per cent of the money which does not go to the Revenue Commissioners.
Is the Minister referring to a nursing home?
It does not apply to a home. I am talking about the provision for people in their own homes. Where a parent or an elderly person is in a home, they are deemed to qualify as being incapacitated.
I wish to clarify that. If they are in a home, they are deemed to be incapacitated?
Yes, they are incapable of looking after themselves and that is why they are in a nursing home.
What about a retirement village?
We will come back to that on Report Stage. It depends on the retirement village.
I accept the Minister is trying to be helpful but I want to be quite clear on this. Am I correct in saying that under the new provisions the 5 per cent income limit does not apply to people who will be permanently incapacitated?
That is correct.
In order to copper fasten this, could we include a subsection to the effect that aged parents living in a nursing home are deemed to be incapacitated and that the 5 per cent limit does not apply? I would be quite happy with that. The Minister has pointed out that some people could abuse this section. I am not suggesting that there is any level of abuse but we all fear there might be. I would have no problem if it was written into the section in some way.
Is the Minister saying it is already included?
That is our understanding of what the Bill intends and what it means.
Deputy McCreevy would prefer if it was clarified.
It was devised so that a person would covenant his income to his aged parents in a home who might have an old age pension of a few thousand pounds. The person may covenant an income of £6,000 which would go to their parents in the home who might then have an income of £10,000, for example. Their medical expenses would be considerable but that is how they get relief. However, I would be happy if that point was clarified in a subsection of the Bill and that the 5 per cent limit would not apply.
Will the Minister deal with my ceilings and floors argument? There is a lot of merit in that. If we are worried about abuses, to leave it at 5 per cent without a ceiling is foolish and it is inequitable to confine people to 5 per cent in circumstances where they are willing on low incomes to go above that.
We will look at whether the Bill needs to be reinforced and made explicit. I confirm that a person will qualify if they are in a supervised nursing home and in need of nursing care because they are deemed to be no longer capable of looking after themselves all the time. If somebody retires to a retirement home and is fully autonomus in a retirement flat——
There are halfway houses in Sandymount.
They automatically qualify because they are in Sandymount.
I will write to them to tell them that.
What is the difference between a retirement home and a nursing home?
I do not want to make up legislation. This needs to be addressed because we could take it to its absurd extreme, to use a Jesuitical form of argument. One could have a retirement villa somewhere in the State. That is clearly not in the same category as the intention for someone who is incapable of looking after themselves and who is in need of a degree of nursing and medical care. We will look at the section to see if it needs to be clarified. In addition to that, clear guidelines will be issued by the Revenue Commissioners in respect of its administration.
There are elderly people who are not in need of nursing care, but who are afraid to live alone and move to nursing homes. They may not be included. Would those who are afraid to live alone because they may be attacked, but not strictly speaking in need of nursing care, be covered?
The Minister will clarify that point also. I would be satisfied if a subsection was included which stated that. However, I trust those in the Revenue Commissioners who draw up practice rules and statements of practice. They adopt a businesslike and fair approach, but they are often prevented from doing something because the Act does not allow it. I would like the Minister to check that matter so that they would be able to interpret regulations as they wish. I would be happy if that was included in the Bill. Perhaps the Minister might consider it on Report Stage.
Deputy McDowell asked me about the £3,000 at 5 per cent. It would be too expensive to allow that figure.
I was a little on the generous side.
The average covenant figure — income foregone — was of the order of £2,000.
I meant some figure like that. Perhaps the figure I chose was too high.
The figure would be much lower than that.
Would the Minister consider it?
I would be misleading the Deputy if I said I would consider it as there would be a considerable tax revenue forfeiture.
I am not saying it is for £3,000, but for some basic amount so that people can always give £500 or £1,000; in other words, a basic minimum guarantee irrespective of percentages.
Perhaps the Deputy might elaborate in writing what he has in mind.
We have had a productive discussion on the section.
Question put and agreed to.