Dáil Éireann díospóireacht -
Tuesday, 27 May 1975

Vol. 281 No. 5

Capital Gains Tax Bill, 1974: Committee Stage (Resumed).

Question again proposed: "That section 40 stand part of the Bill".

Mr. O'Malley

I pointed out on the last occasion this measure was being discussed the unfairness of the situation which arises under this section by virtue of the fact that, if a trustee or an assignee in bankruptcy or under a deed of arrangement, disposes of the assets of the bankrupt capital gains tax will be chargeable on those assets in the same way as if the man had never become bankrupt and the considerable gain which, in some circumstances, might accrue to the assignee in bankruptcy, much or all of it accruing after the bankruptcy took place, becomes liable to tax. Now the only people who suffer by that are the creditors of the bankrupt and it seems very unfair that where the creditors were fortunate enough that there was some gain in the value of the bankrupt's assets after the bankruptcy the State should come in and take 26 per cent of that gain from them.

The Minister on the last occasion made the point that payments due to the State, such as income tax, or due locally, such as rates, were entitled to priority of payment before the ordinary creditors. I am aware this is so but this is a totally different situation because the income tax that might be due, or the value-added tax, or the rates, would only have accrued due before the bankruptcy took place. In those circumstances much of the gain might well have taken place after the bankruptcy and it seems very unfair that the creditors' dividend, which might already be a small one, is further diminished by the assets being reduced by a further 26 per cent due to the State stepping in.

This is a wrong principle. If the bankrupt owed capital gains tax before his bankruptcy, fair enough, let the State take that in the same way as income tax, value-added tax, or anything else due but, in the normal way, no income tax would accrue due between the time of bankruptcy and the time of the realisation or disposal of the assets by the assignee or the trustee. I think, therefore, the same principle should apply so far as capital gains tax is concerned, namely, any gain made on the assets by the assignee should go to the people for whose benefit he is there. The creditors, and the State should not step in and seek to take 26 per cent of that gain from creditors who already may be getting a very small payment in the pound. As well as the creditors being affected in some cases the bankrupt himself may well be affected because he may be endeavouring to discharge his liabilities in full and it seems very unfair to him if, after he became bankrupt and when his assets were in the hands of the assignee, some capital gain arose the State should claim 26 per cent of that capital gain to the detriment of the creditors and to the ultimate detriment of the bankrupt himself. The Minister should amend this section to meet that kind of situation and not put the creditors at a disadvantage vis-à-vis the State which is coming in to take more than a quarter of something that should in fact be for the benefit of the creditors.

Minister for Finance (Mr. R. Ryan)

Deputy O'Malley touched on one aspect in his final remarks but he did not mention that the creditors will have the benefit of 74 per cent of any gain. That is nearly three times greater than what the State may get. The essence of capital gains is that it is treated for tax purposes as similar to income and income earned by an official assignee on a bankrupt's assets may, under existing law, be liable to income tax. If that is a valid treatment under existing law, and I believe it is proper treatment of assets under existing law and income tax liability arises, then the same principle must be applicable to capital gains. It does not necessarily operate to the detriment, as Deputy O'Malley suggests, of creditors because there could be many cases in which the assets when realised would yield more than the total debts. These situations have to be borne in mind just as much as those in which the dividends might be less than the full amount of the indebtedness.

Mr. Colley

Could I suggest that the Minister might look further at this? In the case he has just mentioned, where on the realisation of the assets there is, in fact, a surplus it is clearly a different position from that described by Deputy O'Malley. In that case it would seem to me that, subject to something I want to say in a moment, what would happen is that the creditors should be paid in full and that the capital gains tax should be levied then on whatever balance is available over and above the amount needed to discharge all the debts.

I believe there is a case for saying that this kind of treatment might require that one would not make any concession if the disposal, which produces the capital gain, is to an individual or a company connected with the bankrupt or the debtor as the case may be. Obviously, there could be abuse if that were allowed. There would not be any great difficulty in excluding cases of that kind. Therefore, confining it to genuine cases of bankruptcy and of creditors who are losing out—in some cases the loss for the creditors can be very serious—I believe there is a distinction between the collection and the giving of preferential treatment to debts due to the State for tax in respect of debts which have accrued to the State prior to the bankruptcy or the arrangement with the creditors.

I consider this is different. While the Minister says that income tax may be payable on income earned by, for example, the assignee in bankruptcy during the course of bankruptcy, I doubt if he can point to any cases where such has happened. It seems to me to be a most unusual and most unlikely occurrence. I urge the Minister to consider this matter strongly. I am quite sure he is aware, from his personal experience in practice, that there is a certain amount of resentment at the fact that when a bankruptcy occurs there is a preference given to the State in regard to debts due. That is the position as it is.

Resentment would be very much greater if, as a result of the provision in this section, gains accruing after the bankruptcy become liable to capital gains tax so that either creditors are not paid in full or they are paid even less than they would be paid in respect of a tax liability, which arose after the bankruptcy took place, in cases of genuine claims, excluding disposals to persons connected with the bankrupt or the debtor. I fully accept they must be excluded to avoid creating a loophole here. In the genuine cases we are trying to discuss I expect the Minister to see that there is a case for saying that the State should not collect capital gains tax on a gain which occurs after the bankruptcy to the detriment of the creditors, unless, as a result of the gain, there is solvency so that the creditors are paid in full. Then, of course, the State should get its share of the gains. I urge the Minister to consider this matter very seriously.

Major de Valera

I would like to add my voice to that of Deputy Colley and Deputy O'Malley on this. The Minister must advert to the importance of principle here. Let us go back to the root of the matter. You have a bankruptcy. A bankruptcy or a liquidation nearly always means that you have a position where there is a failure. The whole idea of the operation is to try to gather in salvage for the people who are entitled to something. If a person or a company goes into bankruptcy or liquidation and there are not funds to meet all the debts, then the trustee, assignee, liquidator or whoever it is, becomes a trustee for the debtors. The person who went into debt, the person or company responsible, ceases at that stage to have rights. There has been failure of some person who owes something to meet commitments. After that the principle is to salvage what is to be salvaged for the benefit of those creditors who are entitled to get the proceeds and who are likely to get only part of what is justly owing to them.

I emphasise this point because in all other cases like this it is important to grasp what is the principle. The principle is that there are a number of people who are in justice and in right entitled to certain payments which cannot be met because of the default of the person or concern which got into the position of being unable to meet its commitments and consequently brought about the operations appertaining to bankruptcy or liquidation. If that is so, these creditors are on a par with anybody else. The probability is that they are making a loss but if that is the case they are entitled to be treated in regard to that loss the same as anybody else. If they are making a gain, they are entitled to be treated like anybody else in that regard also. It brings up, at this point, the question of capital gains. The Minister cannot in this case, as I will show in a moment, confuse income tax with capital gains. In this Bill and in this section we are dealing with the question whether there is a gain or loss on an operation. Remember, the creditors in the case— and collectively they are to be regarded as the assignee, the trustee or the liquidator—either collectively or individually will either make a loss, break even, or make a gain.

I submit on this principle that if a loss is made on the overall—that is the aggregation of the loss—they are entitled to the benefit of the loss and, on a partial transaction which still leaves the realisation of the asset in a debt position, that does not justify the charging of capital gains on specific operations. Put it this way. If, for instance, an individual goes into bankruptcy, if he owes £100,000, and amongst his assets there are some stocks and shares which he sells at a profit, or his trustee or assignee sells them at a profit, even if there is a profit on those stocks and shares— let us say arbitrarily amounting to £50,000—if through the failure of other parts of these assets the net realisable value of the estate is below the £100,000 which he owes, a loss is being made and it is unfair to aggravate that loss by charging a capital gain on portion of the process of realisation.

I think that is what my colleagues have been pointing out. We are dealing here with capital gains. I support the point made by Deputy Colley that, in the case of this man who owes £100,000, if through the realisation of his assets there is a gain for the creditors, or a gain for anybody beyond what was owed, by all means let the State get its capital gain, pro rata. If there is a loss, it is unjust and inequitable and contrary to the whole tenor of what the Minister is doing elsewhere in the Bill to charge gains on a portion and so aggravate the loss.

The Minister has argued with us throughout the debate on this Bill on the question of setting off losses and gains at many points. I may be wrong in this, but this is the first point which strikes me very forcibly as a case where it is a question of not just setting off but using gains positively to increase a loss. I join with Deputy Colley in making the point about solvency. If there is solvency the question does not arise. Let there be equality for all. If there is insolvency the argument may stand.

I realise that this is a practical difficulty for the Minister, and all my colleagues realise it too. I am sure the Revenue Commissioners and the Minister's advisers would be apprehensive on this point. One can easily think up possibilities of evasive tactics. All I will say at this point is that there should be a specific examination of that problem. Deputy Colley has said that he would accept transactions to the parties interested. In other words, what he is saying is that it should be a transaction in the open market and for the benefit of creditors who are strangers. If there is solvency, well and good. There must be protection against evasion. Anti-avoidance comes in here.

I want to take the Minister up on a point about income tax. As Deputy Colley said, quite rightly, there has been a certain amount of resentment about the priority given to State debts. If the State is the creditor in the case and the State is owed a debt, it has become traditional that the State gets preferential treatment and income tax ranks to such a degree that income tax would be payable. Income tax is a totally different tax from the tax determined by a gain or a profit on a transaction. There is a fundamental distinction in principle.

Perhaps I could argue with the Minister that, in such a case, income tax may be preferentially treated. I freely concede to the Minister that income tax is a debt to the State and that the State is a creditor in the whole transaction just as much as anybody else. I do not seek to suggest at this point that the State should forego its claim on the assets.

Whether it is a question of the priority of the State claim, or whether the State claim should be there at all is beside the point on this section. With due respect to the Minister—and I hope he will take it in the spirit in which I say it—to advance that argument is specious. In principle it is a totally different thing. Here we are dealing with gains or losses on capital in a transaction. Surely the charging of gains without offsetting the losses otherwise would be wrong, if the debtors, individually or collectively, through the assignee or the trustee are at a loss overall.

I shall advance a little further on that argument. It is this: if I have opened up an argument now as to the charging of losses and gains in the hands of the assignee by the example I gave of, say, the selling of a large number of shares at an enhanced value as a capital gain and still not realising the full debt owed, I was careful not to expand in any detail as to what would be the nature of the loss concerned. At this stage anyway I do not want to confuse the issue on the question of setting off capital gains and capital losses within the meaning of this section. I want to focus attention finally on the fact of justice. Whatever are the technicalities of the Bill, as long as there is made an overall loss, as long as there is a settlement of the claim of the creditor of less than £1 in the £1, then the charging of a tax on capital gains in partial transactions within the overall process is indefensible.

Mr. T.J. Fitzpatrick

(Dublin Central): I should like to support Deputy Colley and Deputy de Valera in this matter. I go a long way with what Deputy Colley has said in regard to a situation in which the State must always come in first and take its full pound of flesh in a bankruptcy case. I would separate the questions of income tax and capital gains tax on a liquidation property. Anyone who has studied how manufacturers and wholesalers give extended credit will know that they do so quite often on the collateral of the person to whom they are granting it. If one stretches one's mind back over the past seven or eight years in this city to circumstances in which people have gone bankrupt, if one looks at their creditors, one will see the circumstances in which credit was granted. Take the example of a man who, say, buys a property for £50,000. He has creditors of £200,000 and he goes bankrupt. That property is then sold for £150,000, leaving a capital gain of £100,000. On such an occasion if the State entered in, it would take £26,000. I could visualise the case of, say, a builders' suppliers who would give extended credit in the building up a company, to one of their creditors, be it a hotel or any other type of business. Naturally they extend such credit on the collateral of the person to whom they were granting it. They will not give extended credit unless they are fairly sure that collateral exists where they are giving it. If that person having received extended credit, goes bankrupt—whether the credit be granted by a builders' suppliers or anybody else—the capital gain built up on that property was done at the expense of somebody else. Indeed, credit that might have been given by many other manufacturers and wholesalers may have been built up along the same lines. The State has no justification for coming in there and taking 26 per cent of a liquidation sale. The State entering in and taking 26 per cent before the assets are distributed is totally unjust.

Nobody need tell me that there is not a distinct difference between that type of money due to the State and income tax. Income tax is money earned during the time the business was in operation, and I can see a case for that, although I do not agree that the State should always get its 100 per cent and that other unfortunate creditors— as happens at present—get only 10p or 15p in the £. That being the case, we can do nothing about it but I have always thought it to be an unjust law.

But in the situation where creditors are investigating the assets of a man who has gone into liquidation, they can assess him fairly accurately—if one is owed £20,000 or £30,000, perhaps assessing it so that they will get at least 50p in the £. Such people will receive a very rude awakening if this section is passed because, if there is any capital gain on the sale, the State will come in and take its pound of flesh first. The Minister should take a further look at this section because there is no justice in it, when one thinks of the unfortunate situation in which creditors will now find themselves. The majority of companies investigate the assets of their creditors—they have to to guarantee the extent of their credit—and get a fairly shrewd idea of whether their money is safe. Now they will have to reduce their assessment by 26 per cent of what will be the collateral if this situation materialises under the Bill. I know there are possibilities of evasion but they can be overcome. This section if passed, would penalise many innocent people.

Major de Valera

May I just add this point? Once the thing gets into the hands of the trustees, the assignee or the liquidator, there will be a net result—there will be a loss, a breakeven or a gain. In the first two cases I suggest the simple and correct thing to do is to leave it as it is; if there is a gain take the tax. I am pointing out that, in doing this, the State is at an advantage. In most other cases there would be the possibility of setting off capital losses against capital gains. But if one approaches it in the simple method advocated by Deputy Colley—because, in essence, that is what he said—taking precautions against evasion by interested parties, in the end there will be one of three results—a loss where no gain is made; a breakdown where no gain is made; a profit where a gain is made, which may be taxed. There is no other possibility of any compensating loss which the Minister has to consider unless there were a series of bankruptcies, and I will leave it to the ingenuity of lawyers and others to think out the possibilities of that. I grant it is an evasion tactic which might be worthy of consideration.

Let us take the principle again. Wait for the overall result. If there is a loss, there is no gain, no tax; if there is a breakeven no gain, no tax; if it is a profit, there is a gain, then tax, but there will be no complications about the setting off of losses or anything else. In fact waiting until the end and taking it in that simple way would be one of the very best ways of defeating the possibility of subtle and sophisticated operations to manipulate losses and gains in bankruptcy. The implications of the section, treating it as completely part of the code, creates certain suggestions on which I shall not elaborate here. I should hate to spoil the chances there may be in the section.

Mr. R. Ryan

The Deputy has made a case which amounts to saying that the State should forgo tax in any case in which there are creditors——

Major de Valera

No.

Mr. R. Ryan

——who otherwise would not be paid in full. If that principle were to be universally applied there could be a situation where annual income tax might be reduced by the amount by which at the end of a financial year a debtor owed money to his creditors. The community is entitled to a certain income under certain taxes, because that is what the State's revenue is. It is wrong that the revenue should be surrendered in part. It is possible that many bankrupts in the past might not have suffered bankruptcy if they had not to pay income tax, but I have never heard it argued that the State should forego its right to be paid income tax in order to make more money available for creditors. I would ask Deputies to look very carefully at what they are arguing and they will see they are making a proposition which is not open to serious consideration because it amounts to using the public purse to meet a private debt. That situation applies as much before bankruptcy as after. If there are assets which yield an income after bankruptcy, an income which is liable to income tax, at the moment that tax is payable before the dividend is paid to creditors.

Although Deputies have sought to make a distinction between income from capital assets and assets which have a capital gain, there is in principle no difference. I could not see my way to accepting those arguments unless they were to be universally applied. I do not think that one should seriously entertain that suggestion. We are taxing capital gains because capital gains are considered to be not dissimilar to income, something which is occurring and growing all the time. It is paid only at the time of disposal because it is convenient for the taxpayer to pay at that time.

The National Economic and Social Council considered that the most appropriate capital gains tax might be one which would be payable, irrespective of whether gains were realised. They accepted that that might be difficult to operate in practice. Indeed, I know of no country where such a capital gains tax operates. We are not proposing that it should be paid until the capital gain is realised. Suppose the principle as recommended were to be applied, then the capital gains tax would be payable on such gains as would be calculated as occurring in a specific year. It is a recurring tax.

Mr. T.J. Fitzpatrick

(Dublin Central): The Minister is doing that with the wealth tax.

Mr. R. Ryan

Above certain levels, yes. While I can understand the reasons advanced for the argument, I cannot accept them unless I am prepared to say that no tax is payable from the moment of bankruptcy until all creditors are paid in full.

Mr. T.J. Fitzpatrick

(Dublin Central): That is justice.

Mr. R. Ryan

It could be said that it should also apply to the income of the bankrupt, even if he goes to another job because he has incurred a debt towards his creditors, and he ought to discharge that debt before he pays the State.

Mr. O'Malley

That is his income; it is not the assignee's.

Mr. R. Ryan

Nevertheless, it is income by a person——

Mr. O'Malley

He is entitled to earn an income.

Mr. R. Ryan

Yes, but he owes money to others.

Mr. O'Malley

He is entitled to earn money under the bankruptcy law.

Mr. R. Ryan

Nobody is saying he is not entitled to earn an income. If I accept the argument in relation to capital assets, then I should apply the argument also to a person's income and say that he should not pay income tax but use that portion of his salary which would otherwise be payable in income tax to clear all his creditors. Where do you end if you start to apply——

Major de Valera

That is a non sequiter.

Mr. R. Ryan

It seems to be. It follows logically and unavoidably if one applies the argument advanced by Deputies opposite.

Major de Valera

I understand the Minister's arguments and accept them in the spirit in which he made them. First, there is a non sequiter where his argument in regard to income tax is concerned. Income tax is a totally different thing and I was very careful to say I accepted that. Here we are dealing with an ultimate capital gain. In principle when we come to a bankruptcy or a liquidation we are dealing with a capital matter. It has come to the stage that the capital status of the person or the concern comes into question. It is fundamentally a question of a capital transaction. The analogy with income tax is wrong. I made no point about the State's priority on its claims for income tax. Whether it is that of the debtor himself, or the income tax of the creditors or the income tax appropriate at any other point of the transaction concerned is not in issue. What is in issue here is the gain or loss on a capital transaction. In the nature of the situation we are considering this is a capital transaction.

The Minister used the phrase "the public purse to meet private debts". That is not the whole answer, if it is an answer at all, and for this reason: when one gets down to the basic reality one realises that debts are not an abstract thing unfortunately; they are tangible, owed to persons ascertainable. There are a number of persons to whom money is owing. If they get their full entitlement there is no question. If they do not, then there is a loss. Therefore, it is not a question of the public paying for private debts. In principle under this Act if a man is engaged in any transaction of a capital nature and makes a gain, that gain is taxable. If he makes a loss he will not have to pay. Here the Minister may again join issue with me.

I say that the nature of the transactions, the basic circumstances considered in sections 40 and 41, are such as to make the whole thing a capital transaction. I will go along with the Minister initially as far as examination is concerned if he suggests that all payments arising out of bankruptcy and liquidation are to be regarded as capital payments. I am going further along Deputy Colley's path in saying I would be in favour of blocking the loophole if the Minister were to take the approach we are advocating where somebody could say that part of a debt paid afterwards was not of a capital nature. If the Minister sticks to his point of view it would be only just to say that when the compounding of fractions in the payment to the creditor took place it should be treated as a capital loss in his hands.

We could go on arguing this forever and I do not want to delay either the House or the Minister or to develop details unnecessarily. Income tax is different and if the Minister is to be too specious in sweeping our arguments aside we will not have a good Bill. My net point is that if there is a gain let the Minister have the gain but if there is a loss let it be treated as a loss. I do not think that in the end the State would lose anything but if the State attempts to put partial gains in a loss position it is defrauding creditors.

I can understand the Minister's natural caution in this and the apprehension of his advisers. If this House is to be of any use at all in the legislative process, it is if new ideas emerge or a different approach to that of the Minister and his advisers emerges, and it is no reflection on the Minister or on the advice he has received. What often happens in this House is that between us, tossing the ball and the argument across, ideas emerge that clarify a situation which at the beginning was difficult, and simplicity emerges. Simplicity would emerge here if we were to say that at the end of the transaction it were to be treated, when the result was known, as a capital one and assessed accordingly. In such a situation the Minister would have no trouble with losses.

Mr. Colley

I should like the Minister to comment on the case made by Deputy Fitzpatrick, which seems to me to be true in many cases, particularly in the case of trade creditors— the credit was extended in contemplation of the asset. If that is so, is it not wrong for the State to step in and collect the tax before the benefit of that capital gain has been applied in respect of the creditor who extends his credit in contemplation of that gain?

Mr. R. Ryan

One could ask why do people extend credit. Credit is usually extended only where the creditor is satisfied that the debtor is in good financial standing. The debtor's assets are only one part of that. Obviously his liability is another thing. Which creditor knows in detail the totality of the debtor's liability? Usually a creditor does not, and his judgment is made simply on the reputation of the debtor, because he is recognised as a person who customarily pays his debts as he goes along.

It is from such assessment as that, which includes several different factors, that a decision is made whether a creditor would extend credit to a would-be debtor. Even at the moment of the creation of bankruptcy under the law as it stands, creditors are frequently not in a position to know what the debtor's position is and it is only after some time, when the official assignee has gone in and made his inquiries, that the true picture is revealed of the debts and liabilities. Even then there are uncertainties as to whether valuations made will ultimately be realised on disposal and this can only be ascertained in the light of administration of the bankrupt estate.

I would accept that Deputy Fitzpatrick is right in saying that creditors take into account the value of debtors' assets, but as I have said, that is only one thing to be taken into account. Even inquiries from other traders will not reveal the full position because, while one may have friends in the trade, that will not reveal a bankrupt's tax position. Unfortunately, all too often in bankruptcy the Revenue Commissioners are creditors and not infrequently they can be the most substantial creditors not merely in regard to income tax but nowadays in regard to VAT and PAYE tax which is neither the property of the debtor nor his employees. There are a multitude of different things that have to be looked into.

I am not unsympathetic with the argument put forward but I would not think it proper to give an undertaking to bring in an amendment to meet the argument without looking into all the other considerations I have mentioned. I will certainly look at it having regard to the obligations which I must discharge, which every Minister for Finance must discharge—that is, to protect the public purse. It is the community who benefit.

Major de Valera

Will the Minister accept that liquidation or bankruptcy is essentially a capital transaction?

Mr. R. Ryan

I will accept that the usual reason for the process is to realise the assets and to distribute them.

Major de Valera

Then, having regard to his definition of assets in section 7, does he not feel there is some substance in the case we have made? If one starts thinking on those lines it is difficult to see that one does not conclude as Deputy Colley did.

Mr. Colley

Could the Minister explain the effect of subsection (3) as envisaged? If it were possible to give an example it would be appreciated.

The Minister may not have an example handy.

Major de Valera

Is this a case of going from one Act to another?

Mr. R. Ryan

This deals with the case where the assets of a deceased person are vested in a trustee in bankruptcy after death. In that case the trustee takes the assets as if he were the personal representative of the deceased.

Major de Valera

And he goes from the Capital Gains Bill to the Capital Acquisitions Act—is that what it is?

Mr. R. Ryan

The consequences will be the same as in subsection (2). The kind of case which could arise would be where on a petition by creditors the bankruptcy would be created after the death of the trader in question and there the official assignee being trustee would step into the shoes of the personal representative.

Mr. Colley

What is the effect of "subsection (1) shall not apply," which is the last provision of subsection (3)? Perhaps on closer analysis it might be different but on the face of it it looks to me as though the effect of subsection (1) is that where the assets vest in the trustee or assignee then any transaction by the trustee or assignee which produces a gain is subject to capital gains tax. Is the effect of providing that subsection (1) shall not apply that in the case envisaged in subsection (3) a gain arising in those circumstances would not be subject to capital gains tax or what is the effect of saying "subsection (1) shall not apply"?

Mr. R. Ryan

Of course, the personal representative on the disposal of property may well have a liability to pay capital gains tax on an asset. It seems to me that the interpretation of this subsection is simply that the trustee in bankruptcy takes on the personality of the personal representative of the deceased.

Mr. Colley

Yes, but could I draw the Minister's attention to the provision at the end of subsection (1), which is to the effect that tax in respect of any chargeable gain which accrues to any trustee or assignee shall be assessable on and recoverable from him? In subsection (3) it says that subsection (1) shall not apply in those circumstances. In circumstances envisaged in subsection (3) if there is a disposal producing a gain will the gain be subject to tax which will be assessable on and recoverable from the person who will be regarded as the personal representative?

Mr. O'Malley

Section 14 subsection (1) applies.

Mr. R. Ryan

It is subsection (2) which will apply in respect of bankruptcy after death and not subsection (1). You will notice that subsection (2) says that subsection (1) shall not apply after death either. The Deputy raises an interesting question. I will look at the meaning.

Mr. O'Malley

Do I take it that section 14 subsection (1), which applies to ordinary deaths, would apply?

Mr. R. Ryan

Yes, that is right.

Major de Valera

Could I ask a further question on the wording of that subsection? The subsection says that assets vesting in a trustee in bankruptcy after death of the bankrupt or debtor shall for the purposes of this Act be regarded as held by the personal representative of the deceased. Does that mean that for the purposes of this Act they are to be regarded as held by the personal representative? Does it mean that the personal representative is going to take the liability of the assignee? You have cut out subsection (1). Subsection (2) for the moment appears to me to be fairly neutral in this regard. The assets vested are to be regarded as held by a personal representative of the deceased. It is "a personal representative", I grant you, but could that be construed as meaning that the whole thing was transferred to the deceased's personal representative? Suppose I have a personal representative and I happen to be bankrupt as well; there is an assignee in my bankruptcy and there is a personal representative. Suppose I try to set up the case, if I were the assignee, that having regard to the impact of subsection (1) I could turn to the personal representative and say "Over to you, boy".

Mr. R. Ryan

A personal representative can be liable only to the extent of the property received by him. Therefore, you cannot say that the personal representative will have to carry a greater liability than the assets he has.

Major de Valera

"Shall be regarded as held by him".

Mr. R. Ryan

The assets held by a trustee or assignee shall be regarded as held by a personal representative.

Major de Valera

Which is it? The words "vesting in" suggest an interesting time factor as to when the vesting takes place. Even assuming that the vesting takes place after death the drafting of the section might attract a little attention.

Mr. R. Ryan

It is to bring into play section 14 subsection (1) which states how the assets of a deceased person are to be dealt with on death.

Mr. O'Malley

I suggested that to the Minister some few minutes ago. The effect of section 14 subsection (1) is to provide that death shall not constitute a disposal for the purposes of capital gains tax. I am quoting now from the explanatory memorandum, page 5, relating to section 14. It goes on to say that the legatee is deemed to acquire the assets at their cost to the deceased and any gain on a later disposal shall be calculated by reference to that cost. You have there a totally different situation.

Mr. Colley

That is precisely why I raised this question. It seems peculiar.

Mr. O'Malley

Deputy Colley is very much justified in raising this as a serious anomaly because where the debtor dies while he is in bankruptcy and while his assets are in the possession of the assignee a completely new set of rules apply. Why should they be allowed to apply there and not apply just because the man happens to be fortunate enough not to die? The situation therefore is that if the debtor can survive his period in bankruptcy his creditors will not get the full benefit of any capital gain; but if he should die before he is discharged and while there are assets still in the possession of his assignee, the assignee then comes into the position of a personal representative. Under section 14 (1), the death of the debtor should not be regarded as a disposal for the purposes of capital gains tax and the asset in question would be liable to capital gains tax in the hands of the transferee of it only on a later disposal, and the gain would then be calculated by reference to the cost to the deceased debtor.

In other words, where the man dies there is a completely new set of rules, and the very arguments we were advancing in regard to the State coming in to take 26 per cent of the gain as against the creditors seem to be recognised in the case where the man dies. Of course, in the great majority of cases the debtor does not die in the course of his bankruptcy proceedings, but if he does die why should the creditors be in this much stronger position? If the principle is wrong when he is alive, why is it right when he is dead? If the Minister's arguments in connection with what happens when the debtor is alive are valid, why are they invalid when he is dead?

Mr. R. Ryan

It does not affect at all the position of creditors. All we are doing here is to ensure that the transition on death which is provided for in section 14 will apply notwithstanding the presence, as it were, of the assignee in bankruptcy. We are saying that even though that person is there, the position provided for in section 14 (1) which arises on death will apply. If we did not have this provision here, then the provisions in section 14 could not apply.

Mr. Colley

When you do apply section 14 (1), are the consequences not as outlined by Deputy O'Malley?

Mr. R. Ryan

No, there will be no charges arising out of the death.

Mr. Colley

Is the intention—I say "intention" because I am not sure if the subsection achieves it—that where assets are vested in a trustee in bankruptcy after the death of the bankrupt, they will continue to be vested in that trustee but that he will be regarded for the purpose of this Bill as a personal representative of the deceased in so far as that causes section 14 (1) to be applied? That is the intention?

Mr. R. Ryan

Yes, that is right.

Mr. Colley

I am not quite sure that the subsection achieves it but I assume that is the intention.

Mr. R. Ryan

Yes, but as the doubt has been raised, we shall look at it again to make sure that it does.

Mr. Colley

Quite apart from subsection (3) and not wishing to re-open the other matters we have been discussing on the section, I understood the Minister to say he would look again at the point we were raising but that he could not undertake at this time to accept the principle we were putting forward. Have I understood him correctly in saying that?

Mr. R. Ryan

If I find it is a principle which should be applied in respect of capital gains and not in other cases, then I might be able to bring in an appropriate amendment on Report Stage, but it would be very difficult to justify applying the principle in one case and not applying it in another. I think it has to be universally applied or not at all.

Mr. T.J. Fitzpatrick

(Dublin Central): Can you visualise a case where a creditor contributed to the building up of a capital gain of a man who has gone bankrupt? I can so visualise it.

Mr. R. Ryan

Not only that but he could also have built up the profits, the income of the debtor.

Mr. T.J. Fitzpatrick

(Dublin Central): The profit is passed and gone, but I can visualise cases where people supply the building trade, hotels and so on. How many times have we seen a builder go bankrupt half way through the building of a scheme of houses? How many times have we seen this in relation to hotels that have been developed considerably? I have known cases where it has happened to an hotel, and there would be a big capital gain on the sale of that hotel, but there could be extensive credit from builders' suppliers. That outstanding credit that was given contributed to the building of the capital gain. It is totally unjust that the man who supplied those goods should not get the amount due to him on that hotel before the State comes in for the capital gain. I cannot see any logic in that if that type of operation works, and according to this section, it will.

Mr. Colley

I could understand the Minister's attitude if it were that he wanted to have a look at the section with a view possibly to closing loopholes of the kind I mentioned earlier, perhaps providing that a disposal to a connected person or company would be excluded; or the other thing we mentioned, that if the result of the liquidation is to make the estate solvent, there should be a claim on the surplus involved. However, I am concerned about the principle involved here which I think the Minister has not, at the moment, accepted. I think Deputy de Valera earlier summarised the matter fairly when he said that not to accept this principle is in effect, to have the State defrauding creditors in cases of bankruptcy. I do not want to prolong this, but I am trying to establish whether or not the Minister accepts what we are saying. I think he has left open the possibility that he might accept the principle—I am not talking about the details but the principle. Is the position as far as the Minister is concerned still the same, that he wishes to review the position to see if he can accept the principle?

Mr. R. Ryan

I am prepared to review the position.

Mr. Colley

I want to urge that he should now accept the principle, because I think failure to accept it is to agree to the State defrauding creditors.

Mr. R. Ryan

No. I cannot accept that there is any question of the State defrauding creditors, unless the State is defrauding creditors also in charging income tax on assets in a similar situation. Assets, when taken over, have not only their realisable value but also their earning value. The State is charging and has always charged tax on earnings of such capital.

Major de Valera

This is the fundamental point of difference. Deputy Colley has asked that this be recognised as a capital transaction and the Minister has gone a certain distance with us in recognising that there is validity in the point. I am not seeking to commit the Minister to anything even on the words he used. But the Minister sticks to his point that this is on all-fours with income tax. There we fundamentally and absolutely disagree. The Minister is perfectly right in saying that income tax is chargeable on the earnings of the capital asset but it is chargeable on earnings: this tax is charged on the gains of capital which are carefully distinguished from earnings. If the Minister's point was right there would be no need for any capital taxation; it would all be captured by the Income Tax Acts. That is the point of fundamental disagreement. We can disagree calmly but fundamentally. This is a point of principle, as far as I am concerned. If the Minister is right in his contention in equating income tax with what is here, all this capital legislation is an unnecessary futility. He could have captured the whole lot under the income tax code. Quite clearly, he cannot do so; neither could it be caught anywhere else because we have capital gains and capital taxation provided for otherwise.

Therefore, we are at the crunch point; either this is a capital matter or an income matter. We cannot have it both ways. That summarises in principle our position with complete understanding and appreciation of the Minister's argument and, I repeat, appreciation of his apprehension and of the reluctance of people who have worked very hard—and this Bill has the sign of hard work on it—to get a consistent code. I am not to be taken as giving any—to use the Irish word— masla in this matter but I think a matter of fundamental principle has arisen between us. I am strongly of opinion, and I think so are my colleagues, that this, being a capital matter, the arguments put forward initially by Deputy O'Malley and Deputy Colley are valid.

Mr. R. Ryan

I have promised to review it; I cannot do any more.

Acting Chairman (Mrs. Hogan O'Higgins)

Is section 40 agreed to?

Mr. Colley

No. In view of the Minister's unwillingness to commit himself on the principle we cannot agree.

Question put.

The Committee divi ded: Tá, 60; Níl, 54.

Tá

• Barry, Richard.
• Begley, Michael.
• Belton, Luke.
• Belton, Paddy.
• Bermingham, Joseph.
• Burke, Dick.
• Burke, Joan T.
• Byrne, Hugh.
• Cluskey, Frank.
• Collins, Edward.
• Conlan, John F.
• Coogan, Fintan.
• Cooney, Patrick M.
• Corish, Brendan.
• Cosgrave, Liam.
• Costello, Declan.
• Creed, Donal.
• Crotty, Kieran.
• Cruise-O'Brien, Conor.
• Kenny, Henry.
• Kyne, Thomas A.
• L'Estrange, Gerald.
• Lynch, Gerard.
• McDonald, Charles B.
• McLaughlin, Joseph.
• Malone, Patrick.
• Murphy, Michael P.
• O'Brien, Fergus.
• O'Connell, John.
• O'Donnell, Tom.
• Desmond, Barry.
• Desmond, Eileen.
• Dockrell, Henry P.
• Dockrell, Maurice.
• Donegan, Patrick S.
• Dunne, Thomas.
• Enright, Thomas.
• Esmonde, John G.
• Finn, Martin.
• Fitzpatrick, Tom (Cavan).
• Flanagan, Oliver J.
• Gilhawley, Eugene.
• Governey, Desmond.
• Griffin, Brendan.
• Hegarty, Patrick.
• Hogan O'Higgins, Brigid.
• Jones, Denis F.
• Keating, Justin.
• Kelly, John.
• O'Sullivan, John L.
• Pattison, Seamus.
• Ryan, John J.
• Ryan, Richie.
• Staunton, Myles.
• Taylor, Frank.
• Thornley, David.
• Timmins, Godfrey.
• Toal, Brendan.
• Tully, James.
• White, James.

Níl

• Andrews, David.
• Barrett, Sylvester.
• Blaney, Neil T.
• Brady, Philip A.
• Brennan, Joseph.
• Breslin, Cormac.
• Briscoe, Ben.
• Brosnan, Seán.
• Browne, Seán.
• Brugha, Ruairí.
• Burke Raphael P.
• Callanan, John.
• Calleary, Seán.
• Colley, George.
• Collins, Gerard.
• Connolly, Gerard.
• Crinion, Brendan.
• Cronin, Jerry.
• Crowley, Flor.
• Cunningham, Liam.
• Daly, Brendan.
• Davern, Noel.
• de Valera, Vivion.
• Dowling, Joe.
• Fahey, Jackie.
• Farrell, Joseph.
• Faulkner, Pádraig.
• Fitzgerald, Gene.
• Fitzpatrick Tom. (Dublin Central).
• Flanagan, Seán.
• French, Seán.
• Gallagher, Denis.
• Geoghegan-Quinn, Máire.
• Gibbons, James.
• Gogan, Richard P.
• Haughey, Charles.
• Healy, Augustine A.
• Hussey, Thomas.
• Kenneally, William.
• Lalor, Patrick J.
• Lemass, Noel T.
• Leonard, James.
• Lynch, Jack.
• MacSharry, Ray.
• Molloy, Robert.
• Moore, Seán.
• Murphy, Ciarán.
• O'Malley, Desmond.
• Power, Patrick.
• Smith, Patrick.
• Timmons, Eugene.
• Walsh, Seán.
• Wilson, John P.
• Wyse, Pearse.

Tellers: Tá, Deputies Kelly and B. Desmond; Níl, Deputies Lalor and Browne.

Question declared carried.

SECTION 41.

Question proposed: "That section 41 stand part of the Bill."

Mr. R. Ryan

This section is self-explanatory.

Mr. Colley

The same objection in principle which we have expressed to section 40 applies to section 41 and I should like to place that on record. I assume that apart from the principles we were discussing, the question of detail and drafting of subsection (3) will still be looked at by the Minister on section 40. The same provision is not in section 41 but I assume that he will look at the drafting.

Mr. R. Ryan

Certainly I will do so. What this really means is that if the assets of the company are vested in the liquidator, that in itself will not be deemed to be a disposal by the company of the assets.

An Cheann Comhairle

Section 41 agreed to?

Mr. Colley

Agreed, subject to the reservation we have expressed.

Question put and agreed to.

SECTION 42.

Question proposed: "That section 42 stand part of the Bill."

Mr. Colley

In relation to the definition of "funds in court", towards the end there is a reference to "the books of the Bank of Ireland or any company . . . ". What is the reason for that phrase there?

Mr. R. Ryan

They are held at present in the Bank of Ireland and "or any company" is being put into the Bill in case there should be at any time a change. I am not aware that any is contemplated at the moment but it simply allows the Bill to be applied without further amendment if there should be any change as to the quarter in which the money might be held.

Mr. Colley

It is with something like this in mind that I raise this question. The Minister will be aware that some years ago the account in respect of national loans was transferred from the Bank of Ireland to the Central Bank, not because of any dissatisfaction with the manner in which the Bank of Ireland conducted that business but because it was felt to be more appropriate that the Central Bank should handle that kind of business. If a change was made at some time in the future in regard to funds in court the most likely change would be to the Central Bank and I do not know whether the phrase, "or any company", would cover the Central Bank.

Mr. R. Ryan

The Central Bank is a company.

Mr. Colley

Is it incorporated under the Companies Act?

Mr. R. Ryan

It is a body corporate but it is created under a special Act.

Mr. Colley

Is it a company in the sense of the phrase in the section?

Mr. R. Ryan

Offhand I could not say whether a company will necessarily include a body corporate but my recollection is that it will.

Major de Valera

The definition section, section 2, defines company as, "any body corporate".

Mr. R. Ryan

That is fair enough.

Mr. Colley

I take it the Minister agrees that if there was to be a change it is likely the Central Bank might be the body charged with this responsibility?

Mr. R. Ryan

It is somewhat outside the realm of taxation we are dealing with now; it is a matter for courts to deal with the particular location of funds in court. I would not like to express a view as to whether the Central Bank would be the likely location of funds in future. As the Deputy knows, it is not a bank engaged in the ordinary daily commercial transactions. As funds in court can sometimes be quite small and may cover a large number of people it might not be the best equipped to handle it. At the same time I am not speaking ex cathedra on this matter. It might be, and “company” would include a body corporate. The Central Bank is a body corporate.

Mr. Colley

Would the Minister make sure that the phrase in use here would leave it open to use the Central Bank if that were thought to be desirable at some time in the future so that it would not be necessary to amend the Bill in order to do that?

Mr. R. Ryan

We are satisfied that it does. As Deputy de Valera pointed out, section 2 defined "company" as being a body corporate and that would include the Central Bank.

Mr. Colley

Would the Minister explain subsection (3)?

Mr. R. Ryan

Subsection (3) provides that if the accountant in the course of administration of the funds under his control makes transfers of investment from one account to another, the owner of the investment and not the accountant will be liable for tax on any gains.

Mr. Colley

What is the necessity for the provision towards the end of this subsection:

—notwithstanding that the investment of funds in court standing to an account in the books of the Accountant, or the realisation of funds which have been so invested, is effected by setting off, in the Accountant's accounts, investment in one account against realisation of investment in another.

Can we take it that the wording in that is not such as to prevent the treatment of gains and losses in the normal way as envisaged under the other sections?

Mr. R. Ryan

There is a constant movement of funds into and out of court. That subsection is intended to cover a situation where, as in the case of moneys received for a new suit, the accountant might, instead of investing these moneys directly transfer their equivalent in investments from another account from which moneys are due to be paid out. Under the subsection the transfer of the investments to credit of the new account would be regarded as the acquisition of an asset by the beneficiary of the new account and he would be liable to tax on any gain of a subsequent sale of the investment. On the other hand, the transfer of the moneys to the other account would be regarded as a disposal by the beneficiary of the other account with a resultant charge to capital gains tax when necessary.

Mr. Colley

Are we talking about the same person? Are we talking about the transfer of moneys to two accounts of the same person?

Mr. R. Ryan

They could be separate persons.

Mr. Colley

Would the kind of transfers the Minister has in mind in each case be made by the accountant for the benefit of a particular individual from whose account or to whose account he was making the transfer?

Mr. R. Ryan

Yes. They would be identifiable persons on whose behalf he would be making or conducting the transaction.

Mr. Colley

Presumably they would be done because of the needs or for the benefit of the individual in whose name the account was.

Mr. R. Ryan

Yes.

Mr. Colley

Did the Minister say there could be a case in which in order to pay for one thing the accountant might transfer funds from one account to another? I am not clear what the Minister had in mind. It seemed there was an implication that the accountant might transfer to the account of somebody without reference to that person and, as a result, that person would be deemed to have made a disposal and, therefore, possibly become liable to tax.

Mr. R. Ryan

No. I am dealing with the case where moneys are received by the accountant. The accountant might, instead of investing the money directly, transfer their equivalent in investments from another account from which moneys are due to be paid out. The transfer of the investments to credit of a new account would be regarded as the acquisition of an asset by the beneficiary of the new account, by the person on whose behalf the moneys have just been received. He would be liable to tax on any gain of a subsequent sale of the investments.

Mr. Colley

Would the position then arise that disposal and acquisitions are deemed to have taken place in these different accounts by different persons who had nothing to do with the transactions or did not decide on the transactions and subsequent disposal? If it resulted in a taxable gain it would render them liable to tax based on a base charge arising at the time of the transaction the Minister spoke of. In the case of an account of Mr. A. the accountant might transfer securities to Mr. A's account in place of money which is coming in because money was about to be paid out from Mr. B's account. Would the effect be that because the transfer of securities to Mr. A's account was deemed to be an acquisition by him that would determine the value of these securities for the purpose of assessment of capital gains at some time in the future?

Mr. R. Ryan

Yes.

Mr. Colley

Could Mr. A. lose out as a result of this because the acquisition was deemed to have occurred at a particular date when the securities had a certain value? Such a person may not know anything about that transaction or certainly may not have consented to it.

Mr. R. Ryan

As the Deputy knows, the accountant makes the investment in whatever to him appears to be the most appropriate stock at any time. Seldom if ever is the beneficiary a participant in the decision-making regarding where the money is lodged. The process I am talking about is one that is engaged in to avoid the costs, delays and the extra work involved in sales and purchases. If various accounts can be credited it can be a straightforward business.

Mr. Colley

I agree with that. What I am questioning is whether such a transaction should be deemed to be a disposal or acquisition.

Mr. R. Ryan

There is an acquisition when the account is put in the name of Mr. A. If a market transaction took place on that day it would be at the appropriate price as of that day. That is the value that is put on the account on the day it is acquired and it is taken as the starting point to assess the capital gain or loss thereafter. What we are doing is applying the rules of the market-place for what are book transactions which are engaged in because they save the people concerned the trouble and cost of a multitude of transactions in the market.

Question put and agreed to.

SECTION 43.

Question proposed: "That section 43 stand part of the Bill."

Mr. R. Ryan

This section enables a person to obtain permission from the Revenue Commissioners to postpone payment of capital gains tax where a gain is made on assets situated abroad but the proceeds cannot be remitted to the State due to restrictions in force in the country where the gain is made. The provisions are similar to those in section 549 of the Income Tax Act, 1967, under which income tax may be deferred in similar conditions.

Mr. T.J. Fitzpatrick

(Dublin Central): I should like to know how the Revenue Commissioners will assess capital gains on some foreign assets. This will be very difficult. Sometime ago the Minister spoke about increasing thresholds. I should like to know how he will adjust the thresholds in view of the different rates of inflation obtaining in each country. How will he decide on the capital gain made in Japan, California or Germany. The Revenue Commissioners will have a difficult job to implement this section. It will be damaging for the economy.

Mr. R. Ryan

This section provides relief.

Mr. T.J. Fitzpatrick

(Dublin Central): It provides relief in that the country may not allow the money out for the Revenue Commissioners. Does the section not mean this? Is it not the case that if the gain is made abroad it cannot be repatriated?

Mr. R. Ryan

Yes. However, we are not asking them to meet the liability——

Mr. T.J. Fitzpatrick

(Dublin Central): I know what is in the section. It will be very difficult to implement. There is the same provision in the Wealth Tax Bill regarding the assessment of gains made outside the country by people residing here. It is a disincentive for people to live here and it is regrettable that the same kind of provision is embodied in the Wealth Tax Bill. Under the section the Revenue Commissioners are giving people a certain permission but money cannot be got back from some States. Can the Minister inform the House if there is a time limit during which the money may be got back? Will the Revenue Commissioners insist that it be paid in some given time from assets held in Ireland?

Major de Valera

The measure is the difficulty here.

Mr. R. Ryan

Subsection (3) states:

. . . the Revenue Commissioners may, for the purposes of collection, treat the assessment as if the said amount did not include the particular gains, but such treatment shall terminate on the Revenue Commissioners ceasing to be satisfied as aforesaid.

That means when the Revenue Commissioners cease to be satisfied that the particular gains cannot be remitted to this country.

Ruairí Brugha

Would that go on for ever?

Mr. R. Ryan

It could.

Mr. Colley

I take it there is not and cannot be any question of the Revenue Commissioners deciding at some point to collect the outstanding tax on gains made on other assets within the State?

Mr. R. Ryan

No. It will relate to the assets abroad on which the gains are made.

Mr. Colley

If there is outstanding tax on that and, because the gain cannot be repatriated, is it not the case that there will be no question of that tax being payable until that gain can be repatriated?

Mr. R. Ryan

So long as the proof is given to the Revenue Commissioners and they are satisfied they will issue the certificate. There will be no liability until the repatriation takes place. Of course, it will be up to the taxpayer to furnish the necessary proof.

Mr. Colley

I appreciate that.

Mr. T.J. Fitzpatrick

(Dublin Central): Can the Minister state how a check will be kept of foreign investments? There are people living in this country from Japan, Germany and America, who own vast properties throughout the world. Is it really practicable to assess their assets? We should be frank about this.

Mr. R. Ryan

International conventions ensure there will be better returns than formerly.

Question put and agreed to.

SECTION 44.

Question proposed: "That section 44 stand part of the Bill."

Mr. R. Ryan

This section provides that where the purchase price of an asset is payable by instalments over a period exceeding 18 months, the Revenue Commissioners may allow payment of capital gains tax to be spread over the instalment period or for a period of five years, whichever is the shorter. To obtain this concession the taxpayer must satisfy the Revenue Commissioners that to pay the tax in one sum would cause him undue hardship.

Mr. Colley

There is a provision in the section which states that in computing the gain no discount on future instalments may be allowed. Is the Minister satisfied that, in principle, that provision should be there?

Mr. R. Ryan

I think it is correct. Interest will not be chargeable on the tax until the appropriate instalment is due. There will not be outstanding interest simply because the transaction is completed in one year and the balance is not payable until four years later. There will not be interest accumulating for four years.

Mr. Colley

We argued the whole principle of inflation as it applies to the capital gains tax generally. I am not trying to go back over that but where it is envisaged that the receipt of money which is to constitute the gain would be payable by instalment and where there is provision for up to five years, is this not a specific case where inflation should be considered? This is why I raised the question about not allowing any discounting in respect of future payments. In this case the gain would be assessed in advance on present values and, as a result of the provisions here, in five years time a substantial portion of the gain would be paid. Clearly, in five years time the value will be much less than it is now.

Mr. R. Ryan

If inflation exists this will work to the advantage of the taxpayer because presumably, in year 1, the property will be valued at current valuations and, if it is, the price will not be paid for a number of years and that should operate to the advantage of the taxpayer. It is the value fixed in year 1 which will apply, not that fixed in year 5.

Mr. Colley

But it will be based on the gain in year 1.

Mr. R. Ryan

Yes.

Mr. Colley

But the money to be paid, which will constitute the gain, may not be paid for five years.

Progress reported; Committee to sit again.