I move amendment No. 2:
In page 9, before section 8, to insert the following section:
(1) Section 246 of the Income Tax Act, 1967, shall not apply to any expenditure incurred on or after the 24th day of July, 1973, and before the 1st day of April, 1975, on the purchase of a new ship.
(2) This section shall not apply to any expenditure incurred under a contract entered into before the 24th day of July, 1973.
—An tAire Airgeadais.
This amendment is intended to suspend operation of the 40 per cent investment allowance in favour of ships during the period when free depreciation and the 100 per cent initial allowance is available. Under sections 8 and 16 this period has been extended to 31st March, 1975. The date as and from which expenditure will be affected will be 24th July, 1973—this should now be 26th July—that is, the date on which the amendment is being moved. The special benefit of an investment allowance, by contrast with the initial allowance, is that the investment allowance is not taken into account for the purpose of wear and tear deductions so that 140 per cent of the capital expenditure is written off against profits. This special provision was made available in respect of the purchase of new ships because of the particular needs of shipping companies which operate in a highly competitive field.
Since shipping companies generally are not in a profit-making position there are no or insufficient profits against which the generous capital allowances available can be set off. This situation has led to the development of arrangements under which one of the banks buys a ship and then leases it to the shipping company. The bank will then claim the benefit of the capital allowances on the grounds that it has incurred capital expenditure on the provision of the ship. It has been argued that the shipping company set a benefit from the allowances by way of lower leasing charges but it cannot be denied that a substantial part of the benefit of these allowances goes to the bank. The statutory provisions governing initial allowance and wear and tear deductions provide specifically for the granting of those allowances to a lessor of plant and machinery, which would include a ship, but there is no corresponding provision relating to shipping investment allowance.
It has been argued, however, that notwithstanding the absence of a special provision to this effect, the allowances can be claimed. It has been decided now that the shipping investment allowances should not be granted during the period when free depreciation and the 100 per cent initial allowance is available since the full cost of the ship can be set off against profits in the first year if there are sufficient profits for this purpose.
The period of operation of these reliefs has been extended to the 31st March, 1975 by sections 8 and 16 of the Bill and the amendment provides that shipping investment allowance will not be available in respect of capital expenditure incurred up to that date in the provision of a ship. There is a saver in subsection (2) for expenditure incurred already under a contract entered into before the 26th July, 1973. This protects the position of a large shipping company, for instance, the B & I, who have entered into a contract already with one of the banks for the financing of two ships, the expenditure in relation to them extending over the period July, 1972, to March, 1974, on £1 million investment, and in the period October, 1972, to June, 1974, on £2 million investment.
Under section 246 (2) expenditure is regarded as having been incurred on the day when it becomes payable. But for the saver now provided the amounts payable between 24th July, 1973, and the 31st March, 1975, would lose the benefit of the investment allowance. As the financial arrangements agreed between the two parties were based on the understanding that the investment allowance would be available, their position is being protected. Of course, the saver will apply in any other case where a contract has been made already.
Briefly, the purpose of this is to ensure that what was intended as a tax benefit to shipping companies will not be availed of by others to give a tax benefit to them. If shipping companies require State assistance our view is that State assistance ought to be given openly for the purpose of shipping rather than that we should continue to have a tax provision which can be used by people outside the shipping industry to give a tax benefit to themselves, a benefit that was never intended in the legislation, which was introduced to assist the shipping industry but not financial institutions.