This section counters an avoidance device, that is, the " manufacture " of artificial capital losses within a group of companies. This could be done by draining one group company of its assets by transferring them to another group company for nominal consideration. These transfers would be treated under the preceding sections of this part relating to groups of companies as giving rise to neither gain nor loss. The company which had been drained of its assets would then be liquidated when its shares would show a loss, notwithstanding that nothing had left the group as a whole. The section counters this device by providing that if the value of the shares or securities of a group has been materially reduced by transfers of assets at other than market value from one member of a group of companies to another—that is by " depreciatory transactions "—any loss claimed in respect of the disposal of such shares is disallowed to the extent that is just and reasonable having regard to the depreciatory transactions. An artificial loss could also be manufactured by a " reverse " takeover bid.
SECTION 138.
What is the position in relation to pre-existing contracts that have been entered into say, six years ago, of the transfer of assets? Does it come within the capital acquisition tax code? It was there before this section came into effect. Would that be covered by this section?
What matters is the date on which the transaction takes place. If it was on a date subsequent to 6th April, 1974, it would come——
In other words, if the contract had been entered into prior to the Capital Acquisitions Bill, capital gains take effect. This section would not apply to that, because it would be related to the date of the contract.
There might be room for argument as to when the gain arose—the date on which the contract was signed or when the actual transfer took place.
That is not the point I am raising. There is a pre-existing contract prior to that date.
If it was a contract which did not require the fulfilment of a condition, then the gain would occur before April, 1974, but if it was depending on some future event, the benefit might not pass——
I take it you accept the principle that, once a contract has been entered into the beneficial interest transfers under the contract, though it may require a deed to implement the final. That would not be a new event; it would be related to the original contract.
Speaking from memory, not ex cathedra, that is my understanding of the position here under the Capital Gains Tax Act which is the one that will govern that situation.
I think I and perhaps employers might be a little bit concerned about things that we did in the past, and suddenly find this sort of section coming in on something that had been part of a commercial transaction prior to the days of legislation of this kind.
The impact will arise out of the Capital Gains Tax Act and not as a consequence of this Bill. There are appeal provisions in sub-sections (4), (5) and (6) of the section.
I hope the Deputy has done nothing in the past which would make him unfit to preside over our deliberations.
What I am dealing with is not an uncommon transaction in property companies. It is partly tied up with the provision of finance. It would be unfair if there was something done before that it would be prejudiced by a section such as this.
Well, capital gains tax cannot apply until disposal actually takes place. That is a matter for determination——
The Minister is not prepared to answer my question on that, naturally enough, because there might be something in the contract——
Just the general principle.
I am dealing with the property that is transferred by the contract but it is not implemented until a certain date.
I should refer you to section 10, subsection (1) of the Capital Gains Tax Act, 1975:
(1) (a) Subject to subsection (3) and paragraph (b), where an asset is disposed of and acquired under a contract, the time at which the disposal and acquisition is made is the time the contract is made, (and not, if different, the time at which the asset is conveyed or transferred);
(b) if the contract is conditional (and, in particular, if it is conditional on the exercise of an option), the time at which the disposal and acquisition is made is the time when the condition is satisfied;.
Section 138 adopts a device. I am sure that tax relief could be denied in respect of certain losses to manufacturers within a group of companies. In what way would that tax relief have been procured by the company if not stopped in this way?
Company A could generate a loss in the value of its shares by transferring assets to company B——
And then liquidate?
Yes.
In what way would that loss redound to the benefit of the group?
Company C which owned the shares in company A could claim the loss on the shares.
For capital gains?
Yes. For example, company A wishes to own an office block costing £1 million. For this purpose it sets up a subsidiary company, B, with a capital of one million £1 shares, all of which are taken up by company A. Company B builds or buys an office block for £1 million. Company A then sets up another wholly-owned subsidiary company, C, with a capital of 1,000 £1 shares and causes company B to sell the office block to company C for £1,000. Company A's shares in company B are now worth £1,000 only. Company B is liquidated and company A has now incurred a capital loss of £999,000 which it can set against capital gains on other transactions.
That is my point—capital gains.
Yes, it would involve gains only.
Capital gains tax relief is what it involves?
Yes.