Dáil Éireann Debate, Tuesday - 7 November 2017
219. Deputy Willie Penrose asked the Minister for Finance if his attention has been drawn to the impact of the application of section 87B of the Taxes Consolidation Act 1997, as amended by section 18 of the Finance Act 2013, regarding debt release of land dealing and development (details supplied); if the legislation can now be amended to deal with this anomalous situation; and if he will make a statement on the matter. [46351/17]
View answerI am informed by Revenue that section 87B of the Taxes Consolidation Act 1997 (TCA) provides that gains arising from the release of loans, used to purchase land or property held as trading stock by individuals, are to be treated as the receipt of trading income and taxed accordingly. The amount of the debt released is to be treated as a receipt of the trade in the tax year in which the release is effected.
The purpose of the section is to ensure that individual land dealers/developers do not obtain the benefit of losses for tax purposes where no economic loss was incurred. Section 87B treats the amount of the loan written down as a trading receipt effectively clawing back any tax deduction that they may have received from a write down in the taxpayers books e.g. if land was acquired for €10m and the market value fell to €1m, the value of the closing stock of the land in the accounts of the developer would be €1m. The developer would have incurred a loss of €9m. However, where the acquisition was funded by borrowings and a debt of €9m was released by the lender, no economic loss was suffered by the developer. If the release of the debt was not treated as a trading receipt, a loss of €9m would be available for offset against other income even though no economic loss was actually incurred.
The legislation provides that, in a case involving a discharge from bankruptcy, or a discharge from debt under the Personal Insolvency Act 2012, the release of the debt is treated as having been effected on the date of discharge. Revenue has also confirmed that, in the case of bankruptcy, it will accept the date of final distribution as being the date of release where this falls after the date of discharge. As regards the date of release, it should be noted that the first occasion on which the amount of debt to be released can be fully quantified is the date of discharge or the date of the final distribution to creditors, if later than the date of discharge. It is only when amounts have been fully distributed to the creditors, that it is possible to know how much debt has been released and accordingly how much income is deemed to be received under section 87B TCA.
It should also be noted that in many instances no additional income tax liability should arise as a result of the application of section 87B TCA. A corresponding write-down in the cost of the trading stock should be available as a tax deduction where there is a debt release and therefore any taxable receipt arising as a result of the write down should be matched by the corresponding write down of the trading stock. If the taxpayer has previously written down his/her trading stock and has losses carried forward under section 382 TCA, this trading loss should be available to offset against the s87B income tax charge. It is only in those circumstances where taxpayers have already written down trading stock, taken the tax deduction and used the losses to shield other income from tax that any net charge to income tax can arise.
