This section, together with section 85 and also sections 96 and 97, relating to additional matters to be treated as distributions in relation to close companies, defines " distributions " for the purpose of corporation tax. Briefly, a distribution will comprise any dividend including a capital dividend, any distribution in respect of shares except a bona fide repayment of capital or a distribution in respect of share capital on a winding up, the redemption of bonus securities, certain interest which is in the nature of a distribution, the value of assets or liabilities of a company transferred to its members in so far as it exceeds any consideration given for the transfer and, in the case of a close company, certain payments to participators or directors which are distributions by virtue of sections 96 or 97.
SECTION 84.
You mentioned there somewhere where there is an excess of the consideration given to the person who gets the distribution—is that to be made on monetary terms? There might be a benefit to the company from the person who gets the distribution, say, in the way of a covenant or something. Would that be taken into consideration?
Yes. If there is a contract for value, and the value is a comparable value, then it would be taken into consideration.
It could be a partly in kind type of thing and partly monetary. That is taken into consideration?
Yes.
I am thinking of some thing like the person who enters into a restrictive covenant to trade or something like that in a certain area.
Yes.
Do I take it that, if a company makes a capital gain before April, 1974, it is only apart from that that they are going to be taxed on this?
This is the point submitted by the Dublin Chamber of Commerce. The Minister referred to that argument.
They described it as a brute of a section. The suggestion has been made that dividends paid out of capital profits which were realised prior to November 27th, 1975, should be exempt from income tax in the hands of the recipients. At present a company may pay a dividend out of capital profits in respect of which it is not charged to income tax because the profits are not in the nature of income. In the hands of the recipient this dividend is exempt from income tax because it is regarded as being in the nature of a capital receipt. A dividend, irrespective of the nature of the underlying profits, and when those profits were realised is essentially in the nature of income in the hands of the shareholder. It is the fruits of his investment represented by the shares, the continued existence of which is not affected by the dividend. I might refer the Committee to the findings of the United Kingdom Royal Commission on taxation of profits and incomes, 1965, which dealt with this matter.
It is still taxable? Is that right?
Yes.
Why? Say it was an individual and he had made a profit which was not a profit and there is nothing he can do about it and, therefore it is in a company and the company, because they needed money, because of inflation, because they had to buy dear goods and kept them in the company, and therefore they have the capital without corporation profits tax or income tax.
On Deputy Belton's point, the Minister spoke about dividends. The complaint here is capital dividends. Was the Royal Commission talking of capital dividends?
Yes. The new position is there is not sufficient ground for treating these capital profit dividends as if their nature was different from that of other dividends. The argument is that the dividend arises out of the investment made by the dividend holder and whether that arises out of a trading operation or a capital profit made as a result of the working of the investment makes no essential difference to the recipient of the distributed profits.
The position is if a man in 1973 sold property and made £100,000 profit he has no tax to pay on the £100,000. He can put it in his pocket. The company can put it into their company. If they reinvest it they will make more profit and more tax will be paid on that. The position is the same as if it was in the hands of the individual at that time. I think this was argued during the Capital Gains Tax Bill debate. You were liable from 27th April, 1974, but before that you were not liable and I do not see why any money made then should be liable now.
Sometimes representations are urged to achieve changes in legislation which are lacking consistency. Representations have been urged that amendments should be made here which, in effect, would ask us to ignore the existence of what is called the corporate vein, to ignore the existence of the company, whereas, in relation to other sections, we are urged to take full cognisance of the existence of the company. It is unreasonable to expect us to treat such representations as being entirely objective when people are looking for different treatment under different sections. I suggest that many of the objections, if I was to quote this file and say something else about this British Royal Commission on taxation of profits——
They were in 1965.
Yes.
A great deal has happened since then.
They had capital gains on taxation and we did not until 1974.
They had capital gains and we did not. Deputy Haughey is right in saying that many things have happened since then. What has happened since then is that in Britain they have brought it in for reasons similar to the ones for which we are bringing it in here. They brought it in 11 years ago in 1965. This commission pointed out that there seemed to be a prevailing theory that a limited company could pay a special kind of dividend to its shareholders which was exempt from being included in the income of the recipient either for the purpose of income tax or for the purpose of surtax. The condition of exemption appears to be that the company had made capital profits which were not so charged with tax in its hands. It was then assumed that these profits could, still preserving the title of capital profits which they bore as profits of the company, be passed on to the shareholders in the form of dividends. While not questioning that a company might make a profit which, in arising from the receipts of its trading operations, was not a part of its taxable income they nevertheless regarded this theory as to the dividends with misgivings and some surprise. They concluded that these special capital profits dividends must be regarded as cash dividends if the company concerned was in a position to distribute after making a general review of the current value of its assets and satisfying itself that they would be sufficient to meet the various claims upon them including the claims of the share capital of the company. From this point of view these dividends did not appear to differ substantially from other dividends. As I mentioned earlier, the commission's view was that there was not sufficient ground to treat these capital profit dividends as if their nature was different from that of other dividends. All represented benefits accruing from time to time upon the shares which were the source of the dividends. All arose while the company was a going concern. None involved any reduction of the capital paid up on the shares. The Royal Commission recommended accordingly that they should, by an amendment of the law, be regarded as taxable income.
Has capital gains anything to do with it? The Minister is talking about capital dividends paid out which will be treated as distributed. Whether or not the company was liable for capital gains on them is irrelevant.
Suppose a company stood to make £100,000 and they paid out a special dividend before that? Would they get away with it if it is paid to the shareholders?
Income tax is not deducted from it.
That is where capital gains comes into it. That was set out on page 11 as a charge.
It is considered that a distribution which is made out of capital is the equivalent of a distribution which is made out of income.
In 1973 the person could have paid it out of his own tax.
Not because of capital gains.
Capital gains tax has nothing to do with the matter. It is proposed to treat capital dividends in the same way as income dividends.
It is irrelevant whether or not the capital profits out of which these capital dividends can now be paid attracted capital gains tax?
Yes.
It may not come from capital gains at all.
We are dealing here with distributions to shareholders.
My point is if they had paid prior to that they would not be taxed if they had a capital gain. Now they will be because it is a capital payment instead of a capital gain. It is a dividend now and it is going to be taxed. It applies to an individual rather than a company.
We are effecting a change here. We are bringing our law into conformity with that of other countries.
You are effecting a change not because of capital gains but because you are bringing in a new system of corporation tax.
It has nothing to do with capital gains tax at all. Even if we had not got a capital gains tax we would still be effecting this change here.
Mr. Chairman, may I interrupt for a moment? In your capacity as a member of the EEC Committee there is a problem about this afternoon. I would like to know if this committee is determined and insistent on meeting this afternoon.
It is. I regret the situation that has arisen but we are on a very tight time schedule in relation to this Bill. That is my difficulty.
The amount of time spent on this Bill is enormous.
It is an enormous Bill and we are on a very tight time schedule.
What would happen if it had to go through the Dáil?
Possibly we would be sitting non-stop on it.
If the EEC Committee meets today as well as this committee, the question of pairing would arise because if I attend the EEC Committee I cannot be here. If I have to be there I cannot vote here.
I am in the same position.
There are other hours in the day. We finish at 6.30 p.m. The House will be sitting until 8.30 p.m.
I think it is a bit unreasonable to insist that this committee sit this morning and this afternoon, while the EEC Committee has one hour this afternoon. The EEC Committee is dealing with something which is very urgent, namely, the matter of agricultural prices.
You would have two hours after this is finished, from 6.30 p.m. to 8.30 p.m. when the Deputies will be in the House.
They might have other business.
We discussed this at the last session and we fixed these hours.
I have a certain sympathy with Deputy Haughey in that the EEC Committee, with all due respects to this committee, is of more importance from the point of view of Parliament. I think some arrangement will have to be arrived at.
Here we are dealing with technical difficulties while the other is a matter of urgent policy.
I know, but we are told by the Minister that 5th March is the deadline to get this Bill completed.
I do not think that we are being very obstructive.
I am not saying that. It is a question of the material that has got to be got through.
I had several appointments this afternoon and evening but I had to put them off.
It was arranged last week and we agreed on this. We had a full discussion about it.
I did not agree. In fact I gave adequate notice that the EEC Committee must meet today.
We discussed the time schedule for this.
The amount of time we are sitting on this committee is enormous. There are other things that have to be done.
It is the size of the Bill, unfortunately.
The problem is that we have to get it through the Dáil and then to the Seanad and to have it signed by the President before the commencement of the 1976 tax year. There are also problems in relation to double taxation agreements between ourselves and our immediate neighbour which are of immense significance. All persons concerned with this and practitioners of all kinds have urged us to complete the legislative process before the end of this year. It is of critical importance that we do so.
Would Deputy Haughey have time this evening after we finish here? He would have from 6.30 p.m. to 8.30 p.m., that is two hours, for the EEC Committee.
I suggest this committee could just as easily do that. If the EEC Committee does not meet to discuss these agricultural prices this afternoon it cannot meet before the end of March. Next week the European parliamentarians will not be here. The following week is the 17th March and we could not have a meeting of the joint committee before the end of March. I think we will just have to go ahead with the EEC Committee.
Would it be any help if we finished at 6 o'clock? You would have 2½ hours then for it.
I think we will just have to go ahead with our EEC Committee and I understand if we do it cannot be reported. For some reason the Ceann Comhairle has decided that this committee takes precedence. I find that hard to understand.
What are we to do?
Very well. We will just have to continue on. It was done by arrangement here and everybody knew the times we fixed. The Deputy may not have been here at the time but everybody else was here and the spokesman for his party who was sitting here on this committee agreed to the time.
Deputy de Valera also warned that the EEC Committee would be sitting on Wednesday afternoon. I am quite certain he did.
I think we suggested Thursday—I may be wrong—and Deputy de Valera said he could not be here and Friday was suggested.
I think we had better get on with this.
I am still unhappy about this. A person who had a capital gain pre-6th April, 1974, gets off scot-free and a company does not. A company will be victimised in this.
There is always a cut-off point in changing the law.
I suppose all legislation must be retrospective but must it be selectively retrospective?
Tax liability will only arise if and when there is a distribution. The distribution will take place after the 27th November, 1975, and there is no question of retrospection.
There were five pages in the Capital Gains Act, 1975, of detailed legislation designed to remove any injustice under capital gains arising before 6th April and somebody will come along who belongs to a company and he will be hammered while the individual will not be hammered. He has his capital gains and the company may be depending on somebody and they are caught and I think that is wrong.
This raises a point that was discussed earlier. If a company exists you have to recognise the existence of that company. It is not a private individual. You cannot say the private individual is the company. The private individuals have chosen to create a company, which is a different legal entity. It operates in its own environment and the fact is it has advantages and disadvantages. There is no charge to capital gains tax on the company in respect of the capital profits which it made before 6th April, 1974. Liability for tax will fall on the person receiving the distribution.
This legislation is not passed yet.
But 27th November, 1975, which is the date on which the Bill was circulated is the operative date. Otherwise it would have been capital distributions, between then and the passing of the Act.
I read the submission of the Chamber of Commerce and, on the face of it it seemed to be persuasive but, having heard the Minister's explanations, there seems now to be quite a difference between the profit made by the company and treating the dividend as a distribution in the hands of the recipient. That is the test. Is it income in his hands. Whether or not it was the sort of income that would or would not attract capital gains at any time, is not the legitimate test?
No.
It would not have attracted capital gains at the time.
This section is not related to capital gains. That is irrelevant.
I am afraid we are caught on it. There is nothing irrelevant about that.