I move amendment No. 51:
In page 70, subsection (1), to delete lines 17 to 29 and substitute the following:
"(4) Where in an accounting period a company incurs a loss on the disposal (hereafter in this subsection referred to as the "first-mentioned disposal") of an asset the gain or loss in respect of a deemed disposal of which was included in a net amount to which subsection (1)(b) applied for any preceding accounting period, then so much of the allowable loss on the first-mentioned disposal as is equal to the excess of the amount of the loss over the amount which, if section 46A had not been enacted, would have been the allowable loss on the first-mentioned disposal shall be treated for the purposes of this section as an allowable loss which would otherwise accrue on disposals deemed by virtue of section 46A to have been made in the company's accounting period.".
This amendment seeks to close a weakness identified in existing legislation which has been exploited in certain cases. The tax regime for life assurance companies was amended in a number of respects in 1993 following a review. One of the changes involved life assurance companies being taxed on the unrealised increase in the value of their non-gilt investment assets. Unrealised losses — that is, any fall in value of the assets — were allowable. Because the gains and losses concerned were unrealised they were not taxed or allowed immediately but were spread forward over a seven year period and taxed or allowed at one seventh of the amounts over each of those years. Realised gains or losses continued to be taxed immediately.
If an asset increased in value in year one from £1,000 to £1,700 but was not sold, the increase would be taxed at the rate of £100 a year in each of the seven years. If in year two the value of the asset fell to £1,350 the reduction in the value would be allowable in years two to eight at the rate of £50 per year. There is some evidence that in such circumstances certain companies sold the investments and bought them back at the same price with the principal motivation of realising the loss of £350 for immediate offset for tax purposes. The outcome was that a loss of £350 was crystallised for immediate offset against other gains while the original increase in value would not be taxed for a further six years. This was in circumstances when there was no net loss, the asset cost £1,000 and was sold for £1,350.
Accordingly, section 41 provides that, where an asset is sold and the spreading approach had been applied to gains or losses arising from earlier increases or decreases in the value of the asset, the whole spreading process in relation to future years is to be unwound. As a result, the full gain or loss arising in buying or selling the asset will have been taxed or allowed by the end of the accounting period in which the asset was sold.
The amendment is necessary to deal with Irish Insurance Federation concerns that the section in the Bill as published will present them with considerable administrative difficulties. The amendment focuses on losses, the area which gave rise to the problem. It provides that where a loss computed by reference to the latest valuation is incurred on an asset, the part of the loss attributable to the revaluation would be spread forward and would not be available for immediate offset. The balance of the loss, which would not exceed the actual loss, will be available for immediate offset. In the example above, no part of the loss would be available for immediate offset because there was no actual loss.