Dáil Éireann Debate, Wednesday - 17 September 2014
209. Deputy Stephen S. Donnelly asked the Minister for Finance in relation to section 18 of the Finance Act 2013 which amends section 87B of the Taxes Consolidation Act 1997, in the case of sole traders who receive a write-down on development loans or go bankrupt, if it is intentional that the full amount of the write-off now becomes taxable at 55% in the year of the write-off; and if he will make a statement on the matter. [33302/14]
View answerOne of the main purposes of section 18 of the Finance Act 2013 is to correct an anomaly which, up until that time, allowed land dealers and developers to potentially obtain a tax deduction in circumstances where they suffered no real economic loss. The provision applies only in very specific circumstances by effectively clawing back a tax deduction, which the taxpayer obtained, arising from the decline in land and property values where the loans taken out to acquire this land and property have been written down by the lending institution and are no longer required to be repaid. This debt write down may have arisen through negotiation with the taxpayer, as a result of bankruptcy or personal insolvency or by virtue of the terms of the loan agreement itself. In these circumstances, it is the lending institution, not the borrower, who has actually suffered the loss.
The provision only applies to those engaged in the trade of dealing in or developing land. It has no relevance to loans used to purchase a person's principal private residence or to landlords, in respect of rental properties, because no tax deduction was available to these people in the first place. It only applies to loans used to acquire land held as trading stock. Where a land dealer acquires land with borrowed money and the land subsequently falls in value, the land dealer is entitled to a deduction equal to the fall in value, in computing the profits of the landing dealing trade. This deduction can reduce the taxable profits of the trade. Where it results in a tax loss, that loss can be carried forward against future profits of the same trade or set off for tax purposes against other income in the year the loss arises. However, where the land has been purchased with borrowed money and the loan is subsequently written off, the trader has not suffered any economic loss. Section 18 deals with this by treating the dealer as having received an income equal to the write down. The effect of this is to cancel out the deduction already claimed. This is not an additional charge but a clawback of a relief which is no longer justified. Where the fall in the value of the land has resulted in a trading loss which has been carried forward by the taxpayer, the loss will cancel the charge imposed by section 18 and no further tax should arise. However, if the deduction has been used to reduce tax on other income of the taxpayer in previous years, then tax will arise. This represents a clawback of a relief granted in respect of a tax loss where there is no economic loss. The rate of tax which will apply will depend on the person's level of income in that year.
