Dáil Éireann díospóireacht -
Tuesday, 27 May 1975

Vol. 281 No. 5

Private Members' Business. - Capital Gains Tax Bill, 1974: Committee Stage (Resumed).

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

Mr. Colley

I was pointing out to the Minister that the problem of inflation, as applied to capital gains tax, applies with particular relevance under this section. This section provides that in the event of the consideration for the particular transaction being payable over a period the Revenue Commissioners may agree to the payment of the tax by instalments over a period not exceeding five years. Before we adjourned the Minister was arguing that, in fact, if inflation were operating it would operate here to the benefit of the taxpayer. I suggest to the Minister that that is a mistake. If we assume the transaction in question was for a consideration of £5,000, payable by instalments of £1,000 per annum over five years, and that the amount of tax involved was £1,000 which the Revenue Commissioners agreed to be paid at the rate of £200 per annum over five years it is true to say that the last payment of £200 would be paid in deflated currency. To that extent the Minister is correct in saying that the taxpayer would benefit.

On the other hand, the gain is estimated at the beginning of the five year period and, having been assessed at the beginning of the transaction, is most likely to be received and on foot of the later instalments. That would be paid in deflated currency and the deflation would be greater on the gain than on the tax because the gain is bigger. Therefore, to say that the taxpayer is going to benefit on foot of inflation under this section is a mistake. Whatever argument the Minister may have advanced against providing for inflation generally in respect of capital gains tax in this section, where clearly it is contemplated that the consideration and possibly the tax would be payable over a period by instalments, there is every case for providing in these specific instances for inflation. Why does the Minister think there should not be provision for inflation in cases of this kind?

Mr. R. Ryan

When a person agrees to accept payment of a price by instalment the probability is that in agreeing to the price being paid by instalment a higher price is demanded because there is the element of postponement of receipt. Clearly, if one could expect to receive cash in the hand one might accept a lower price than if one is asked to accept payment over a period of up to five years as the section visualises. Any reasonable business person would adjust the price if the period of payment is longer, even if interest is not charged on any outstanding balance. That is the reason why the section is drawn in the way it is.

If we were to allow adjustments to be made because in five years' time the consideration would in real terms be of lesser value than in 1975 we would have to ensure that when the price was struck in 1975 there was no element of compensation in the price for depreciation in the value of currency. In one way it is unfortunate that we are dealing with these matters when we have such a high rate of inflation. It is running at a rate now which is unacceptable in the long term and which will not continue at its present rate.

Mr. Colley

It is unacceptable even in the short term.

Mr. R. Ryan

The factors which are accentuated by present circumstances will not exist in five years' time. One can reasonably assume that looking at the pattern of world behaviour at present. I am mentioning that as an aside and it does not affect the fundamental argument I mentioned earlier, that a price when paid by instalments over a long period will, undoubtedly, be adjusted to compensate for delay in receipt of portion of the consideration.

Major de Valera

Is the Minister saying that inflation is going to pass? Is he just brushing it aside?

Mr. R. Ryan

I am not.

Major de Valera

The Minister said it was unacceptable but surely the prospects are that it will continue out of control. I am not talking locally. I am talking about the matter in general.

Mr. R. Ryan

There is no reason for assuming that world inflation will continue at the rates of 1973 and 1974. In most economies the trend is in the opposite direction now, fortunately. Ours will also move in the same direction.

Major de Valera

We hope.

Mr. R. Ryan

We will hope and will arrange.

Mr. Colley

I do not wish to widen the scope of this debate unduly but I cannot let pass what the Minister said in regard to inflation. It is at an unacceptably high level not only in the long term but in the short term and to indicate that we may expect it will reduce because inflation in a number of economies around the world is reducing is something that cannot be accepted in the context of the argument being made. Nothing that has happened here indicates any likelihood of a reduction in inflation. Our inflation is running many times the rate of inflation in a number of other countries in Western Europe and in America. It is not reducing here. It is increasing. Any discussion we have on this Bill must take account of this fact. We cannot close our eyes to it and hope it will go away. The indications at the moment are that far from going away it will get worse in the short term. The longer term depends on quite a number of factors, possibly one being what Government are in power. However, leaving that aside, the fact is we are dealing with a situation of acute inflation. If the Minister says this section is drafted with the possibility that people striking bargains for payment of a consideration over five years will allow for inflation, that seems to me to be assuming a great deal. It is assuming much more than the Minister is prepared to concede in regard to the Bill generally. To be logical about it, he would have to say the section would be applied as it is drafted where the Revenue Commissioners are satisfied the consideration agreed on takes account of inflation. Where it does not take such account, he would have to say that he would build into the section a provision to allow for inflation.

In this section we are dealing specifically with cases where the consideration is payable by instalments over a period and where the tax may be payable by instalments over a period. Clearly it is a situation envisaged in which inflation is a relevant factor. It is not good enough for the Minister to say that it is assumed in all cases of that kind that account will be taken of the likely effect of inflation. Even if there were provision for payment of interest on the outstanding instalments, that does not necessarily take account of inflation except to a limited extent. At the moment people say that borrowing money and agreeing to pay interest, even where the rate of interest may be variable, do not take account of the current rate of inflation; otherwise the current interest rate would need to be at least 25 per cent, and possibly higher.

We may take it that the great bulk of cases dealt with under this section will not take account of inflation to anything like the extent at which it is running at the moment. If the happy day arrives when inflation ceases to be a problem a suitable provision in the section would adjust in line with that situation, and if there were no inflation there would be no need for adjustment. As long as there is inflation, and in particular as long as we have inflation at the rate we are experiencing at the moment, it is not good enough to stick our heads in the sand like the ostrich and pretend it is not there, or pretend it will not affect the kind of cases specifically envisaged under this section. The Minister is morally obliged to provide, in cases where inflation is not taken account of, that there should be a suitable adjustment in the tax.

That need not necessarily work to the detriment of the Revenue but it means taking a logical position on which one can stand. I do not think the position set out in section 44 is one that can be defended, either from the point of view of the Revenue or the taxpayer. It is ignoring the realities of the situation and, while it may make matters more simple from the point of view of administration and of drafting, those are not good enough reasons. There is a strong and specific case for providing for inflation in this section where we are dealing with consideration being paid by instalments over a period and tax being paid by instalments over a period.

Mr. R. Ryan

I do not think I can put the case any further.

Mr. Colley

May I put to the Minister that what he said was not correct? He said that cases of this kind would conclude bargains on the basis of accounting for inflation. Surely he cannot stand over that?

Mr. R. Ryan

I am quite certain that nobody but an idiot would accept the same price for an asset if payment were postponed over five years as he would accept if he got the total sum immediately. Even if inflation did not exist, a person would require compensation for the loss of the use of the money over five years and the capital price would, accordingly, be adjusted. That is the reality of the business world and it is the attitude anyone would have when disposing of an asset.

Mr. Colley

That may be the reality in some cases but not in all cases. I am putting it to the Minister that, even where provision is so made by payment of interest, the rate of interest being charged goes nowhere near the rate of inflation. In that case is there not a definite loss to the taxpayer arising directly out of inflation? Why is the Minister not prepared to make provision to cover that situation?

Mr. R. Ryan

Whatever losses a person has would be reflected in the amount of taxes paid——

Mr. Colley

It would not be done proportionately; it is 26 per cent against 100 per cent.

Mr. R. Ryan

I am sure anyone engaged in such a transaction would get professional advice and be advised on what factors should be taken into account. People who own assets are people of the world and they are able to assess these matters for themselves.

Mr. Colley

Is the Minister not aware that, if what he is saying were true and if people were to follow this out logically, nobody would invest in most of the things available for investment today? Banks would charge a rate of interest much in excess of what they are charging. The reality is that interest rates and returns on investments at the moment are not keeping pace with inflation. In the kind of transaction envisaged here, even where provision is made to take account of the fact that money is being paid over a period, it is extremely unlikely that account will be taken of inflation as it is running at the moment. Does the Minister not agree that is a fact?

Mr. R. Ryan

It is a possibility but nobody is being forced into any transaction. It is up to the parties involved to make their own arrangements in the light of existing circumstances and their assessment of future developments.

Mr. Colley

Should the law and the tax not be geared to the actual position and not to the tidy arrangement envisaged here?

Mr. R. Ryan

I have been faulted about the complexity of the law but I am now being faulted because we do not devise laws to deal with any and every possible situation, not only of the past and the present but also of the future. I do not think you can base taxation arrangements upon sophisticated clairvoyancy, as is suggested.

Mr. Colley

All that is needed is to add an additional subsection which would adjust the tax payable in line with the changes in the cost-of-living index. The Minister need not tell me that that is not a precise measure of inflation. I know it is not, but it is one anybody will settle for, as the Minister knows, and I rather suspect the Minister's problem is that he knows provision should be made for inflation, above all for inflation, but he does not want to admit the possibility of adjusting for inflation or he may find himself in difficulty in general in this and other Bills before the House.

Mr. R. Ryan

I think it is reasonable having regard to all the circumstances and the very unusual and infrequent nature of payments of consideration.

Mr. O'Malley

It is not at all unusual or infrequent. I have come across several cases of it recently because people have not got the cash to put down and payment has to be spread over a period. It is not at all unusual or infrequent and it may well give rise to the serious problems to which Deputy Colley has referred. In practice, it will give rise to these. I should like to know whether on acceptance of payment of this tax by instalments the Revenue Commissioners propose to charge the going penal rate of interest of 18 per cent on the instalments outstanding.

Mr. R. Ryan

I dealt with that when the Deputy was not here. The answer is in the negative.

Mr. Colley

I must pursue this a little further. It is not good enough for the Minister to say these cases will be rare. As Deputy O'Malley pointed out, they will not be all that rare. If they are sufficiently important to require special treatment and a special section why is it not possible to provide in that section for the reality of the situation that we know is all around us, the reality that we know will apply to these transactions? What is the major problem from the point of view of the Minister in providing an additional subsection which will adjust the actual tax in line with inflation according to the period involved in the particular transaction? That does not have to be specified in detail in the subsection. "In any case other than that in which the Revenue Commissioners establish that provision has already been made for inflation"—I do not see where provision has already been made for discounting the money or for interest on the outstanding instalments because, as I tried to point out to the Minister, even where that happens that is not adjusting for inflation. I do not understand why the Minister cannot agree in this case specifically where we are talking about payment by instalments. Why can he not provide a simple additional subsection which will adjust the tax in line with inflation? The Minister has not attempted to answer the case for this. As I said, difficulties of administration and convenience of drafting are not a good enough reason. There is possibly an important principle involved here and the Minister has not given any convincing reason why provision should not be made for inflation in these particular cases. I think we are entitled not only to press him to do this but also to press him to give us good reasons why it should not be done. I demonstrated reasonably clearly that, even in cases where some provision is made to take account of the fact that instalments are being paid rather than a lump sum, adequate provision for inflation is not being made. It is important in principle that adequate provision for inflation be made and I want to press the Minister now to give us a good reason why adequate provision for inflation should not be made or, alternatively, to make provision in this section.

Mr. R. Ryan

I have already answered. I cannot add anything.

Mr. Colley

The Minister has not answered.

Mr. R. Ryan

I consider I have. The Deputy considers I have not.

Mr. Colley

I asked the Minister did he not agree and, in fact, he did agree with me, or he did in some cases, but I am suggesting that in virtually all cases, even where interest is being charged, provision for inflation is not being incorporated.

Mr. R. Ryan

Interest rates reflect inflationary trends.

Mr. Colley

That is the very point I am making: they do not.

Mr. R. Ryan

They do in part. The Deputy knows well present interest rates are much higher than when inflation is running at a lower level.

Major de Valera

But the difference between 15 and 25 per cent is significant.

Mr. Colley

Very significant. That is the very point I am making. It is a fact, and the Minister has admitted it, that adequate provision is not made for inflation where interest rates are being charged at anything like the going rate. If there is any provision taking account of the fact that the money is not being paid in a lump sum the most likely thing to expect is that interest will be charged on the outstanding instalments and that is most likely to be the going rate of interest. The Minister has admitted— he certainly cannot deny—that interest in or about the going rate is very far from taking account of inflation and, that being so, the Minister has not answered the case I have made. I am anxious to hear the Minister's justification—there may be one though I am not aware of it— for saying that, even if there is that gap between the interest rate and inflation, we should not provide for it. That is what he is saying.

Mr. R. Ryan

The Deputy seems to be overlooking the fact that the State will be receiving this tax in a deflated currency. One of the fallacies with which one has to contend is that inflation is due entirely to the conduct of the Government. Apparently the suggestion now is that everybody is to be insured against inflation except the community who pay. The Exchequer belongs to the community and the community are apparently to make up the loss. This is getting into an economic and philosophical argument not directly related to the realities of the situation, which is that people voluntarily enter into a sale, make their own calculations as to what they want for what they are disposing of, or what they are prepared to pay for what they want to acquire and, if they are not receiving their consideration or the consideration is not passing instantly, adjustments are made to take account of postponement and those adjustments involve a calculation of the price of money, which is related to what is occurring today and, clairvoyantly, to what may happen over the next five years and it is also related to anticipated inflation. A multitude of different factors have to be taken into account and it would not be possible to produce any workable section in a Capital Gains Tax Bill to take account of this multitude of considerations in order to ensure perfect equity.

Mr. Colley

I do not want to follow the Minister's hare on the economic front, tempting though it is, but I do want to talk about this section as it will apply. I want to put it to the Minister now that, when he says I was suggesting the Exchequer should suffer and not the taxpayer, he missed the point of something I said earlier. He may recall that I said making this provision for inflation need not be to the detriment of the Exchquer. In my view if one is to make provision for inflation in regard to the tax the taxpayer will pay it should operate both ways. The adjustment for inflation should be made in the amount of the gain and the adjustment for inflation should be made in the amount of the tax the taxpayer will pay so that the Revenue Commissioners will not lose out as a result. Of course, as I pointed out to the Minister, it is a question of 100 per cent versus 26 per cent and it is too facile to suggest that these cancel out. Mathematically, of course, they do not. As the section is drafted it will certainly operate to the detriment of the taxpayer.

I suggest that an adjustment should be made for inflation, both in relation to the gain on which the tax is assessed and where instalments are paid over a period to the Revenue Commissioners. This is the right approach and takes account of the reality around us. It is not pretending that inflation does not exist or if it does will not affect the people operating under section 44.

We know it will affect them and we know that the section as drafted will affect them very seriously. I want to know what objection the Minister has in principle to adjusting for inflation, both in favour of the taxpayer and in favour of the Revenue Commissioners? Is that not a much fairer way to approach it then what is involved in the section which pretends inflation does not exist? The Minister surely must accept that that kind of adjustment on both sides is fair and equitable. If it is why should we not do it?

Mr. P. Belton

Would that mean if a customer gets money through a bank and is only charged 11 per cent that he must pay the bank something over the interest for inflation?

Mr. Colley

I am not talking about customers in banks. It is precisely because a customer does not have to pay 25 per cent, 32 per cent or 36 per cent, which was the annual rate of inflation on the basis of the last quarter, in interest that I am arguing that in a case, where somebody does a deal which involves the payment of instalments over five years and provides interest on the outstanding instalments, he will not get away with providing for interest at 36 per cent or 25 per cent on the outstanding instalment. The most he will get away with is something close to the banks going rate. That is precisely why I am making this case, that the kind of situation which arises will not take account of inflation. The Minister said it would and I say it will not. Therefore, there should be an adjustment both from the point of view of the gain, so that you can allow for inflation in that, and from the point of view of instalments of tax being paid to the Revenue Commissioners, so that they will not lose out as a result of inflation. Is that not a reasonable approach?

Mr. R. Ryan

I do not think it is.

Mr. Colley

Since the Minister is digging his heels in again on the question of inflation, on the principle involved in this, I will have to oppose the section.

Question put.

The Committee divided: Tá, 59; Níl, 54.

Tá

• Barry, Richard.
• Begley, Michael.
• Belton, Luke.
• Belton, Paddy.
• Bermingham, Joseph.
• Burke, Dick.
• Burke, Joan T.
• Burke, Liam.
• Byrne, Hugh.
• Collins, Edward.
• Conlan, John F.
• Coogan, Fintan.
• Cooney, Patrick M.
• Corish, Brendan.
• Cosgrave, Liam.
• Costello, Declan.
• Creed, Donal.
• Crotty, Kieran.
• Cruise-O'Brien, Conor.
• 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.
• Gillhawley, Eugene.
• Governey, Desmond.
• Griffin, Brendan.
• Hegarty, Patrick.
• Hogan O'Higgins, Brigid.
• Jones, Denis F.
• Keating, Justin.
• Kelly, John.
• Kenny, Henry.
• Kyne, Thomas A.
• L'Estrange, Gerald.
• Lynch, Gerard.
• McLaughlin, Joseph.
• Malone, Patrick.
• Murphy, Michael P.
• O'Brien, Fergus.
• O'Connell, John.
• O'Donnell, Tom.
• 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

• Allen, Lorcan.
• Andrews, David.
• Barrett, Sylvester.
• Brady, Philip A.
• Brennan, Joseph.
• Breslin, Cormac.
• Brosnan, Seán.
• Browne, Seán.
• Brugha, Ruairí.
• Burke, Raphael P.
• Callanan, John.
• Calleary, Seán.
• Carter, Frank.
• Colley, George.
• Collins, Gerard.
• Connolly, Gerard.
• Crinion, Brendan.
• Cronin, Jerry.
• Crowley, Flor.
• Cunningham, Liam.
• Daly, Brendan.
• Davern, Noel.
• de Valera, Vivion.
• 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.
• Meaney, Tom.
• 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 45.

Mr. R. Ryan

I move amendment No. 39:

In page 40, subsection (1), line 39, to delete "the following subsections" and to substitute "this section".

This amendment represents a change of wording only and does not affect the meaning of the provision. As Deputies will see, we are simply deleting the words "the following subsections" and substituting "this section".

Mr. Colley

On the face of it, it is merely tidying up the section. It could be correct to say that it does not change the meaning. On the other hand, it could change the meaning, as I am sure the Minister will accept, because "the following subsections" refer only to the subsections other than (1), whereas the amendment includes subsection (1). But, if the Minister says it does not make any practical difference, I am quite happy to accept that.

Mr. R. Ryan

It does not.

Amendment agreed to.

Question proposed: "That section 45, as amended, stand part of the Bill."

Major de Valera

I should like to ask the Minister a few questions about the application of this section. The section commences by saying: "Without prejudice to the generality of the provisions of this Act . . . "—that is, without prejudice to generality—

. . . any transaction which under the following subsections is to be treated as a disposal . . .

Then, in subsection (2) (a) it says:

If a person having control of a company exercises his control so that value passes out of shares in the company . . .

The section commences by saying: "Without prejudice to the generality of the provisions of this Act" and then proceeds, in effect, to limit it to a controlled company. Am I correct in that?

Mr. R. Ryan

Yes.

Major de Valera

Therefore, I take it that the saver of the generality of the Act is in respect of the rest but does not import those generalities into the section. If one goes back to the definition subsections, one finds a company defined as any body corporate, but a controlled company has the meaning assigned to it in section 35, subsection (4) and control—here is the point to which I want to draw attention—in relation to a company shall be construed accordingly. Subsection 2 (a) of section 45 provides:

If a person having control of a company exercises his control . . .

Again, there is reference to control and there is a further reference to connected persons which is defined also in an earlier section. Control is defined in section 35, subsection 4. A controlled company is one in which the number of persons holding shares is not more than 50, has not issued any of its shares as a result of a public invitation to subscribe for shares and which is under the control of not more than five persons. That is subsection (4) of section 35 which I have more or less paraphrased.

It seems to me that section 45 is restricted virtually to private companies. I forget what we said on the debate on section 35 but would the Minister agree with me that controlled companies virtually are private companies? Is that not so?

Mr. R. Ryan

Yes.

Major de Valera

Therefore, this section applies only to private companies. Is that correct?

Mr. R. Ryan

Generally, yes.

Major de Valera

"Generally, yes". This is the point I want to get clear. I want to know whether it applies generally or to private companies only. Subsection (1) of the section says:

Without prejudice to the generality of the provisions of this Act as to the transactions which are disposals of assets, any transaction which under the following subsections is to be treated as a disposal of an asset shall be so treated . . .

Then the subsection continues to deal with that. I should like the Minister to say that this section is restricted to the companies defined in subsection (4) of section 35 or to state otherwise.

Mr. R. Ryan

Of course, as the Deputy will appreciate, the section covers more than private companies. Subsection (3) deals with leases. There are three situations with which this section is concerned. The first is with the exercise of a power of control by a person in control of a company so that rights are transferred from shares owned by him, or a person connected with him, into other shares. The second situation is where the lessee of property, who has been the owner of the property, makes an arrangement by which there is an adjustment in the terms of the lease in favour of the lessor and the adjustment, in such a case, would be treated as a disposal of an asset by the lessee. Apparently this section deals with the situation where a person entitled to enforce a right over an asset extinguishes or abrogates that right. That also would be regarded as disposing of that right which he would be abrogating or extinguishing.

The section deals, I said, generally with private companies. At present I cannot contemplate a case where it could possibly apply to a public company. I would not presume to say that it could exclude a company that might be said to be a public company but such a company, of its nature, would not normally be a company which would be a controlled company because the control, in essence, is, in fact, a private control and that is what leads to its being described as a private company.

Major de Valera

The Minister would agree that subsections (1) and (2) are concerned particularly with private companies?

Mr. R. Ryan

Yes.

Major de Valera

In other words, the companies defined in subsections (2) and (4) of section 35?

Mr. R. Ryan

That is a controlled company.

Mr. O'Malley

With regard to subsection (4) of section 45, I would assume that the normal sort of situation to which it would apply—where a right of residence of support which was registered on lands was given up or where an inhibition which was registered on a folio in the form of the exclusive right to a room in a house, for example, was given up by the person entitled to that right— would be regarded as a disposal for the purposes of capital gains tax.

These are all the sort of small, everyday things that people generally in the country do not think this Bill affects at all. In every section that one goes through in this Bill one finds things of that type that quite unexpectedly seem to be subject to capital gains tax. For example, I doubt if there is a farmer in this country who realises that the rights of residence and support which he reserved at the time he made his land over to his son would be subject to capital gains tax if he were to give up those rights, as is done frequently for the purposes of a pension or something else. How they are valued is often very hard to establish. I suppose a right or support could be valued. An annuity can be valued. A right of residence is difficult to value but the most difficult of all to value would be the exclusive right to the use of a room. How that could ever be valued I do not know or whether the Revenue Commissioners have any method in mind for assessing the capital value of such restrictions or rights being given up. Invariably these rights will be given up without any consideration. The question of who is going to pay the duty and tax and how they are going to pay it may give rise to some difficulties.

Subparagraph (2) appears to apply to privately controlled companies and envisages the situation where a company's profits were often a great deal larger than the profits actually distributed in dividends. Shares and other rights in the company were given in lieu of the distribution of these profits as dividends. Subsection (2), as drafted, may well cover several situations which are, in effect, a form of distribution of profits. If so, they would be subject to income tax. because the Income Tax Acts are so amended to cover that situation where profit is capitalised and given out in shares or in some other way rather than in dividends. If we have a situation as envisaged in subsection (2) —that retained profits are being distributed in some form—this is to be regarded as a disposal for the purposes of the capital gains tax. It is also liable to income tax.

Would the Minister not consider inserting in that subsection an additional paragraph to the effect that if any such activity, as is envisaged in subsection (2) (a) takes place, the subject would be liable to income taxation and will not also be liable to capital gains taxation, or, if it is subject to capital gains taxation, it will not also be liable to income taxation? The two, of course, are mutually exclusive, even though in an earlier section the Minister tried to draw them together as being basically the same. They are not. Capital gains tax can only apply where income taxation does not apply. The possibility of that happening under subsection (2) (a) should be allowed for and provision should be made accordingly at the end of that subsection.

Mr. R. Ryan

Schedule 1, paragraph 1 (2), will ensure that any sum taken into account for income tax purposes cannot be taken into account for capital gains tax purposes.

Mr. Colley

What about subsection (4)? Deputy O'Malley referred to certain cases which would seem to come under that subsection. Would the Minister comment on this and give an example of what he had in mind when drafting this subsection?

Mr. R. Ryan

If a plot of land is subject to the right of occupation by another or to an easement or to a right-of-way which another person might have over it, its market value is reduced. If that right of occupation, easement or right-of-way is abolished or waived by another, then the value of the property increases. Accordingly, one must look at the consequences of the gain which the abolition of a specific right exercised by another may have on the property owned by another. That is what subsection (4) does, having regard to exemption of the first £500 in any year in the Bill generally. The subsection will not cause hardship or the difficulties illustrated here.

Under subparagraph (2) (a), if a person has a right of control over a company by virtue of certain shares and decides to transfer it to other shares, again there is a disposal of a right and a conferring of a right on another person or entity. This is clearly a disposal. It might be said that it is not necessary to spell out the situation in the Bill. We would find it very hard to argue that these are not disposals or abandonments of rights by one and an acquisition of rights by another and, therefore, an occasion for calculating again.

Major de Valera

How are they measured?

Mr. R. Ryan

They have been measured in the past under ordinary rules of valuation for assessing what is the right of occupation, the right-of-way and so forth. I do not hold myself to be a valuer, nor would I like to define the various rules.

Mr. Colley

The beginning of subsection (3) reads:

If, after a transaction which results in the owner of land or any other description of property becoming the lessee of the property. . . .

I suggest that there is a loophole here which the Minister should close. It should provide:

If, after a transaction which results in the owner of land or a person connected with the owner of land, becoming the lessee. . . .

Mr. R. Ryan

I thank the Deputy for drawing my attention to this matter. I will certainly look into it.

Mr. Colley

If the Minister wants to close loopholes that is one he should close.

Mr. O'Malley

Why does the converse of subsection (3) not apply if the lessee becomes the owner and the change is made in the lease more favourable to the lessee?

Mr. R. Ryan

Perhaps we might deal with this when we come to the Third Schedule.

Major de Valera

Is "owner" defined? The words "lessee" and "lessor" are very well-known legal technical terms but what does "owner" mean in this context? A lessee or a lessor is surely the owner. Does the Minister mean that the owner is the holder of the fee simple?

Mr. R. Ryan

The owner of the superior interest.

Major de Valera

That is a very novel definition. I do not wish to be facetious but on the Minister's definition a foreman would be the owner or a person working under him. What is the meaning of "owner"? The Minister says it means superior interest, but is that enough? Supposing you had a case involving the holder in fee, a lessor and a sub-lessor. The sub-lessor and his sub-lessee are lessees within the meaning of this section. So is the superior interest a lessor or a lessee. I suggest that there is a certain looseness. What happens if actually you have a sub-lease and if after a transaction which results in an owner of any description becoming the lessee and there is adjustment of rights or liabilities under the lease—I cannot think up a suitable example——

Mr. R. Ryan

"Owner" requires no definition in this statute as it is so generally understood. "Land" is defined in section 2 as any interest in land and that would cover the tripartite arrangements Deputy de Valera has mentioned. The ownership relates to any interest in land and "lease" is also defined in section 2. I am satisfied it is capable of only one interpretation, and if the lessor and lessee are clearly understood so, too, is an owner of an interest in land.

Major de Valera

I will read the word "lessee" into the subsection. If the owner is a lessee the subsection would read:

If, after a transaction which results in the lessee of land or of any other description of property becoming the lessee of the property there is any adjustment of the rights and liabilities under the lease . . .

He does not become the lessee. The transaction does not result in his becoming what he was before. The condition precedent at the beginning of the section excludes him because he cannot become what he is. If the Minister is right and he is already a lessee —let us read the word "lessee" in instead of "owner"—

after a transaction which results in the lessee of land or of any other description of property becoming the lessee of the property . . .

Mr. R. Ryan

There would be adjustment in that situation, if as a result of the transaction he only became what he was.

Major de Valera

It is a transaction in which the owner becomes the lessee of the property.

Mr. R. Ryan

There must be, as a consequence, an adjustment of the rights and liabilities. If there is no adjustment he simply becomes what he was.

Major de Valera

He is what he was.

Mr. R. Ryan

If there is a variation in the terms of the lease, that is the only situation in which this would be applicable. If there is an adjustment in the terms of the lease——

Mr. Colley

Supposing we read the subsection to state: "If, after a transaction which results in the lessor . . . " how does it work out?

Mr. O'Malley

In the list Deputy de Valera gave he stuck to "lessor" and "lessee" after fee simple. It might give rise to a great deal of confusion and doubt. The fee simple owner could turn out to be the fee farm grantor and the fee farm grantee under him could be a lessor to a lessee who in turn is a sub-lessor to a lessee who is a sub-lessee perhaps to a monthly tenant or something of that kind. All those interests seem to be covered by the definition of "lease" in section 2, but that does not leave us any wiser as to who the owner is for the purpose of the Bill.

Mr. R. Ryan

"The owner of any interest", and if that interest is affected in any way by a transaction, then there is a disposal. You might have a situation as described by Deputy O'Malley: you could have A, B, C, D and E who would have superior interests to F and G. If the interests of the superiors are not affected by what happens between F and G, then there is no disposal affecting the superior parties. However, some interesting points have been raised which we will examine between now and Report Stage.

Major de Valera

There is a further interesting point of interpretation. After a transaction, is the adjustment to be related to the transaction simply as a consequence in time?

Mr. R. Ryan

Subsequent in time rather than consequent.

Major de Valera

It is a connection of the transaction with the adjustment. After the situations which we have described, the question is whether it is consequent or subsequent. I think I know what the Minister means: he wants to see that where a lessor's interest has been acquired there is adjustment of rights and liabilities under the lease, but I am at a loss to know why the Minister in this section confines himself to leases, as Deputy O'Malley has said. Admittedly, you could have a fee simple but what about certain types of mortgages and other encumbrances? Why is it specifically leasehold interests the Minister has in mind here?

Mr. R. Ryan

"Lease" has a wide meaning under section 2. In relation to land it includes:

. . . an underlease, sublease or any tenancy or licence, and any agreement for a lease, underlease, sublease or tenancy or licence and, in the case of land outside the State, any interest corresponding to a lease as so defined.

Mr. O'Malley

Would it include fee farm?

Major de Valera

This is one of the great difficulties.

Mr. R. Ryan

An interest in land.

Major de Valera

We are having multiple definitions of the same word in different Acts.

Mr. R. Ryan

I am grateful to the Deputies for their comments.

Major de Valera

We want to be helpful to the Minister.

Mr. R. Ryan

I accept the suggestions that have been made, for consideration.

Major de Valera

May I suggest again that it would be much simpler to leave a certain discretion to the Revenue Commissioners? I know they would not wish to carry all the responsibility, but in the end they will have to carry it.

Mr. Colley

By the time we are finished everyone will agree with Deputy de Valera's suggestion.

Question put and agreed to.

SECTION 46.

Mr. R. Ryan

I move amendment No. 40:

In page 41, subsection (4), line 37, before "legatee" to insert "personal representative or".

This is a drafting amendment to make clear that the subsection applies not only to a debt acquired from the original creditor or the legatee of the creditor but also a debt acquired from the personal representative of the creditor. The provision is an extension of section 33, which deals with persons who are connected with one another.

Mr. O'Malley

The section seems to provide that the satisfaction of a debt held by a person other than the original creditor will be treated as a disposal by the creditor giving rise either to a charge as a gain or a loss. I assume that refers to a situation in which the original creditor sold the debt or the right to the debt and presumably for less than its face or nominal value and may have incurred either a gain or a loss by virtue of collecting more than he paid for it or less than he paid for it, as the case may be. Would the Minister confirm if that is so, because I want to get the principle on which the section relies clear?

Mr. R. Ryan

I take it the amendment is agreed to?

Mr. O'Malley

I am sorry. I forgot about the amendment. I thought it was agreed to.

Mr. R. Ryan

Then on the amendment, the section provides, as Deputy O'Malley anticipated, that an original creditor cannot make a chargeable gain or an allowable loss on the disposal of a debt. I think it therefore must follow that only debts which have been purchased from the original creditor or a personal representative or legatee are to be treated as chargeable assets.

Mr. O'Malley

I know that it provides that a debt will not be on a chargeable asset in the hands of an original creditor, his personal representative or legatee, but take the ordinary case of money being lent by a creditor, a banker or a private individual where he succeeds in recovering only part of that debt. Is it allowable for a capital loss in that situation, or does the fact that it is not a chargeable asset rule out the question of gains or losses on it, and, if so, does it not appear somewhat unfair that if a creditor is making gains on some debts and losses on others, he cannot set off his losses on his lending against the gains he may be making elsewhere in the course of his business?

Mr. R. Ryan

If a person is a banker or a trader, then such lending would occur in the ordinary course of trade and be dealt with under the income tax laws and not fall to be dealt with at all under capital gains.

Mr. O'Malley

Yes, but if he is a private individual who does not normally lend money?

Mr. R. Ryan

I cannot see how we could proceed to allow such a situation to be dealt with other than as we are dealing with it here.

Mr. O'Malley

Does the Minister realise that in that type of situation, so far as the capital side of it is concerned, the creditor could never make a gain unless he purchased someone else's debt, but he does stand to make a loss? I am not talking about people whose trade or business it is to lend money because, as the Minister said, they are covered by income tax, and that is all right.

Mr. Colley

The section can deal only with the non-trader. The section does not cover bankers and so on.

Mr. R. Ryan

No, the non-trader.

Mr. O'Malley

Take the case of a trader, not a banker, just an ordinary retail trader—for example, an auctioneer, publican or someone like that—who may occasionally lend money to people, to customers of his. If he suffers a capital loss there, does it not seem unfair not to allow him that? He cannot be allowed it for income tax purposes, because it is not part of his business to lend money, but he could lose several hundreds of pounds. That is bad enough, but assume that on some other transaction which he had in that year—for example, the sale of shares—he made a capital gain, is it not unfair not to allow him to set off his capital loss on the debt he had created, bearing in mind that he can never make a capital gain anyway? The best he can do is to get the money paid back to him with interest if he is charging interest on it. Therefore from the capital point of view he cannot get more than he lent but he can easily get less than he lent. In these circumstances, by not providing that such debts be chargeable as an asset in the hands of the original credit, is this not somewhat unfair?

Mr. R. Ryan

I do not think it is, and I do not think it would be appropriate that the Revenue Commissioners should have to make good any faults in the judgment of people who lend money to others. If a loan is made in the ordinary course of trade, that falls to be dealt with, as I have said, under the Income Tax Acts, but if people make private loans and do not enjoy the pleasure of having a refund, I think it would be unreasonable to expect that the Exchequer should allow such losses to be set off against gains which might be made on other transactions. I do not have to point out that if such were to be allowed it would become a not inconvenient and not very complicated avenue of avoidance to people who would generate losses for setting off against gains.

Mr. O'Malley

I know that this does not apply to loan stock in a company but does it apply to a debenture in a company or to an unsecured loan in a company? Does it apply, for example, to a mortgage?

Major de Valera

Debenture is of the same nature as mortgage really.

Mr. R. Ryan

If the Deputy goes to page 62——

Major de Valera

Paragraph 3.

Mr. R. Ryan

That is right, paragraph 3.

Major de Valera

It says here:

"security" includes any loan stock or similar security . . . but excluding securities specified in Schedule 4.

While the Minister is trying to collect his thoughts—they take a great deal of collection on a matter like this—I should like to make a general comment on the section. In the explanatory memorandum we have what appears to be a lucid paragraph in less than seven lines which reads:

Section 46 provides that a debt is not a chargeable asset in the hands of the original creditor, his personal representatives or his legatee. This exclusion will not apply to holdings of loan stock as, for example, in a company. The satisfaction of a debt held by a person other than the original creditor will be treated as a disposal by the creditor giving rise either to a chargeable gain or an allowable loss.

That seems to be plainly stated and I think any of us would understand it. I am back to the point about giving the Revenue Commissioners discretion to implement that intention but in order to make that into law we have a section of 46 lines—as against the seven lines I mentioned—of singular complexity which have to refer to two paragraphs in the Schedule which in turn has to refer to another Schedule.

The question has now arisen as to what "security" means because the proviso to paragraph 1 of section 46 says:

Provided that this subsection shall not apply in the case of the debt on a security as defined in paragraph 3 of Schedule 2.

Note the wording. Hopefully, one turns to paragraph 3 of Schedule 2 for a definition but I do not get a definition. I get an inclusion; what I read is:

"security" includes any loan stock or similar security whether of any government or of any public or local authority or of any company and whether secured or unsecured but excluding securities specified in Schedule 4.

That is merely an inclusion clause, not a definition. Turning to Schedule 4 I get a long list of Government securities.

Mr. Colley

That is being deleted.

Major de Valera

Should not Schedule 4 be deleted from this also?

Mr. R. Ryan

It is, yes.

Major de Valera

When it comes to paragraph 3 I take it we will delete the reference to Schedule 4 in paragraph 3 of Schedule 2. Frankly, I am becoming tied up.

Mr. Colley

I think there is not an amendment to cover that point.

Mr. R. Ryan

There is an amendment to Schedule 2 deleting the reference to Schedule 4—amendment No. 49.

Major de Valera

We see how difficult it is to discuss this Bill in sequence.

Mr. R. Ryan

It is easier in sequence than together.

Major de Valera

I agree, but my point is that the whole thing is so tied together. If anybody ever troubles to read the concatenation I have read out he will see the difficulty. Deputy O'Malley asked does security include a debenture? Does it include a land bond? What does it include? I think the section is an unnecessarily prolix and complicated effort to do what the Minister intends to do. I cannot understand the necessity for all its provisions. When you come to subsection (2) you find:

Subject to the provisions of the said paragraph 3 and of paragraph 4 of Schedule 2 (company amalgamations), and subject to the foregoing subsection, the satisfaction of a debt or part of it (including a debt on a security as defined in the said paragraph 3) shall be treated as a disposal of the debt or of that part by the creditor made at the time when the debt or that part is satisfied.

I should need the explanatory memorandum to tell me what the Minister means.

Mr. Colley

That is one of the simpler subsections.

Major de Valera

Certainly, the Bill does not tell me. Seriously, is there no possibility of getting straightforward, simple drafting even if at the end of it you have to say that the Revenue Commissioners, subject to appeal, shall be empowered to decide in the first instance as to what is what for the purposes of this section?

Mr. R. Ryan

I am sure the Deputy will support my assertion, which is a basic principle of law, that the taxpayer is entitled to know what the law is. Even though it may be difficult to interpret and may require the assistance of lawyers and accountants; when it is in statutory form, it is precise. If one were to adopt the Deputy's recommendations that these matters be left to the discretion of the Revenue Commissioners taxpayers would be imperilled; they would be uncertain; they would not know the law until the discretion was exercised. They are entitled to know the law and use whatever ingenuity they can muster or purchase in order to find ways of interpreting the law. I can give the House plenty of law to add to their store of knowledge. I will leave it to the Deputies to decide whether or not it makes them any the wiser. The definition includes loan stock, the holdings of which are transferable by purchase and sale.

There is a case of Cleveleys Investment Trust Limited and Falkirk and Company Ltd. This was an arrangement between Cleveleys Investment Trust Limited and the Falkirk Company Ltd. for a loan from Cleveleys to Falkirk, whereby on a capital reconstruction of the latter Cleveleys would get an allotment of 51 per cent of the share capital of Falkirk. Falkirk went into liquidation and the loan was written off, and the court decided that the arrangement gave rise to what it called a bundle of rights or a composite series of rights conferring on Cleveleys incorporeal property and that it was not possible to segregate the loan element from the other element. In such circumstances, section 46 would not apply and Cleveleys would be allowed a loss under section 12, subsection (3), incurred on the occasion of the entire loss, dissipation or extinction of an asset.

Mr. Colley

Could the Minister say why section 46 would not apply in such circumstances?

Mr. R. Ryan

Because the loss would be allowable under section 12 (3).

Mr. Colley

In the case described was it part of the trading operation?

Major de Valera

Subsection (3) refers to options.

Mr. R. Ryan

It was not a mere trading operation between Cleveleys and Falkirk; it was a capital arrangement whereby on a capital reconstruction of the Falkirk company, Cleveleys would get an allotment of 51 per cent of the share capital of Falkirk. In the case in question there was an obiter dictum that the debt on a security means a debt which is evidenced in a document as a security. It was also said that there was no similarity between the letter of acceptance or the bill of exchange in the case and loan stock or an unsecured debenture. A debt on a security does not include secured debts such as the debt secured by a charge on freehold property or the guarantee of a third party or a bill of sale over chattels.

Mr. Colley

Does not include those?

Mr. R. Ryan

No.

Mr. Colley

A charge on freehold property? I think the Minister would agree that on the face of it a debt on a security would seem to include a debt charged on freehold property.

Mr. R. Ryan

If there is a mortgage—if it is evidenced by documentation.

Mr. Colley

Does the Minister mean an equitable mortgage by deposit of title deeds or a freehold property?

Mr. R. Ryan

That would not be evidenced.

Mr. Colley

We are getting into a very technical area. Could I ask the Minister—I intended to ask him this but we perhaps tended to get lost in the definition of a security but let us assume we know what it means, a debt on a security—what is the thinking behind the proviso to subsection (1)? Why is it that a debt on a security is being excluded?

Mr. R. Ryan

With loan stock, the creditor may well be the original creditor, and if the subsection was not qualified as it is in the proviso, we could not charge a gain on the loan stock in that situation.

Mr. Colley

I am afraid I will have to ask the Minister to elaborate a little on that; I do not quite follow it.

The proviso seems to go much further than loan stock.

Mr. R. Ryan

I was quoting loan stock as an example in which the creditor may be the original creditor.

Mr. Colley

I am trying to get away from the complexities of this and trying to get the principle involved. Subsection (1) provides that where a person incurs a debt to another, no chargeable gain shall accrue to the creditor or his personal representative on a disposal of the debt. That is the principle laid down in subsection (1) and, as we said earlier, this section can only deal with debts arising other than in the course of trade in lending. Having laid down that principle, the proviso goes on to say that that principle, which is the basis for the whole section, will not apply in the case of a debt on a security which has all these complexities we have been talking about. I am still trying to understand why this distinction is being made. The general principle is laid down in subsection (1)—where a person incurs a debt to another, no chargeable gain shall accrue to the creditor or his personal representative on the disposal of the debt—and then we say that if the debt is on a security, a chargeable gain can arise on the disposal of it. I am sure there is a good reason for this but what I am trying to find out is what is the reason that one distinguishes between these two.

Mr. R. Ryan

In one case, you could have an investment which can be bought and sold. Loan stock is an investment which a person might acquire and then dispose of at a profit and it would be proper in such a case that there should be a charge.

Mr. Colley

But he would not be the original creditor in that case, would he?

Mr. R. Ryan

If he subscribed for it.

Mr. Colley

Originally, yes. I am sorry.

Mr. R. Ryan

He would be a creditor.

Mr. Colley

That is one case, but the Minister will agree that the proviso is much wider than loan stock. It is "any debt on a security". Agreed, the Minister indicated that there are decided cases which seem to exclude from the meaning of "debt on a security" some fairly surprising things, such as freehold property which is subject to a charge to secure a debt; but leaving aside those rather peculiar cases, nevertheless "a debt on a security" is clearly much wider than loan stock, which is the example the Minister has given us. It seems to be a general principle that where the debt is on a security, you exclude it, as though any debt on a security is something in which somebody would invest for the purpose of making a gain. I am trying to get the principle rather than the detail of it. Am I representing it correctly?

Mr. R. Ryan

Yes, I think the Deputy is. The case I have quoted is an example. I am sure there are others but they do not occur to me.

Mr. Colley

It is a very clear example, I agree, where there is a different consideration involved, but the proviso does not say "except in the case of loan stock". It says "except in the case of a debt on a security".

Major de Valera

Why is it necessary to go into this detail?

Mr. R. Ryan

The reasons have been given often. There are so many ingenious people around the place that if the detail was not spelled out in this way some other device would be used so as to escape from the intention of the Legislature. It is to catch these people.

Major de Valera

This is developing into a game of cowboys and Indians between the revenue collecting authority of the State on the one hand and the courts on the other. It seems that all that is needed is somebody to be the victim in distress to start the war. To approach this Bill on the basis of the Revenue Commissioners versus the law is wrong. Ultimately what is going to happen with our Constitution is that the courts will win this war in a simple way and cause great difficulty. It will not be the fault of the Revenue Commissioners. We will deal with that again on the Wealth Tax Bill. Then we will be thanking God for the Constitution. I am objecting to the assumption that the Revenue Commissioners are going to have their eye wiped and cannot protect themselves. I agree with the assumption that many efforts will be made to wipe their eyes but I do not accept the assumption that their eyes will be wiped. We are only making it more difficult for them by getting a complex about evasion at this stage. This section, taken in conjunction with the explanatory memorandum makes one point. The second point is: from the point of view of certainty of the taxpayer the Minister referred to and from the point of view of simplicity, is this provision necessary?

Mr. T.J. Fitzpatrick

(Dublin Central): I know this section does not apply to banks and trading companies but I can see a situation arising where a private individual who lends money and gets caught for it will not be permitted to classify this as a loss. I should like to give an example of a case. Mr. A owns a factory and has a wage bill of £4,000 a week. During a bank strike Mr. B who runs a retail business is prepared to give his takings of £4,000 a week to Mr. A in return for a cheque. This can go on for five weeks. At the end of that time Mr. A goes bankrupt. Mr. B then finds himself with a debt of £20,000 and decides to sell the following year. Can Mr. B write that £20,000 off as a chargeable loss?

Mr. R. Ryan

The Deputy is presenting a case which is not an ordinary trading debt?

Mr. T.J. Fitzpatrick

(Dublin Central): I know of a case where this happened.

Mr. R. Ryan

He is dealing with cash and cash is not a chargeable asset for capital gains tax purposes. Therefore, it is not available for loss purposes either.

Mr. T.J. Fitzpatrick

(Dublin Central): It is cash in the business.

Mr. R. Ryan

Whether it is cash in the business or not, unless he sells the business as an entity including the cash, which is not normal practice, it could not be regarded as an asset of the business for the purpose of calculating a capital gain or a loss.

Mr. T.J. Fitzpatrick

(Dublin Central): It is part of the overdraft for the business.

Mr. R. Ryan

For a person to sell a business cum overdraft or cum the bank account, as a person might in certain circumstances, is not the normal practice among sole traders, although it might happen if there was a company involved. A debt situation described by the Deputy is a cash transaction and therefore is outside the ambit of this Bill. Secondly, if it involves anything it is a case of one person trusting another too much and having to end up giving an involuntary gift to another. Thirdly, it strikes me that the most fundamental and important consideration is the 100 per cent loss of the money advanced and not, although it may be very sore to consider it, the addition of 26 per cent that might be involved if it were regarded as a wasting of the assets for some reason or another. The situation described by the Deputy would not fall for calculation at all under the capital gains administration.

Mr. T.J. Fitzpatrick

(Dublin Central): During the bank strike five years ago a trader changed cheques to the extent of £7,000. Those cheques bounced because they were forged and in his income tax return that year the trader showed a loss of £7,000. The Revenue Commissioners included that amount as a profit and billed the trader accordingly. It was not a trading loss. They assessed him on the £7,000 he cashed for a friend of his. That trader took the issue to court and I believe the case went against the Revenue Commissioners. In my view, the same would apply here.

Mr. R. Ryan

There is a case which is sub judice involving certain transactions in the course of the bank dispute which, as the Deputy will appreciate, I would not be free to comment on at present.

Major de Valera

But which the Minister is nevertheless anticipating? This brings out my point about cowboys and Indians. Can we not grow up? What is terribly wrong? I could understand it if there was a lot of money lost or if it cost the State a lot, but the State does not gain a penny out of this. The State would lose money in legal costs and everything else. I would be willing to bet that most decrees obtained by the State would be a net loss of revenue to the State when costs are taken into consideration. The Minister should not state that this is to safeguard the revenue of the State because the amount of money involved is small in proportion to the revenues collected. Can we not, in the interests of simplicity and of the Revenue itself, particularly those administering it, take the chance? What does it matter if an individual case goes against the Revenue Commissioners? There is no loss of face involved, it is simply a case where the courts decide something. We are getting into a state of mind with regard to the Bill that I can only describe as the cowboy-and-Indian mentality.

Mr. Colley

I asked the Minister if he could explain the principle involved here but his reply did not go far enough. Subsection (1) lays down the principle of the section, namely, that where a debt is incurred in the normal way no chargeable gain and, therefore, no allowable loss arises when the creditor disposes of the debt. That is a fairly simple, straightforward proposition, but then there is the proviso that it will not apply where the debt is on a security. I asked the Minister to explain the difference in approach in the two cases and he referred to loan stock. That is a clear example and I agree it should be treated differently. Can the Minister explain why other debts on a security are treated differently? What is the principle involved?

Mr. R. Ryan

If there is an identifiable asset there is evidence of the security. The ordinary rules of disposal are applicable where there is an identifiable property.

Mr. Colley

Is the Minister talking about the security being identifiable or the debt being identifiable?

Mr. R. Ryan

They are related. Where there is a security there is documentary evidence of the existence of the debt.

Mr. Colley

Perhaps I misunderstand the Minister but that seems to suggest that the only reason a normal debt, what is envisaged in subsection (1) without the proviso, is not made a chargeable gain is that it might be difficult to prove. However, in the case of a debt on a security it is easy enough to prove the existence of the debt and the security and, therefore, it is brought in as a chargeable gain or an allowable loss. I am trying to get to the principle behind this.

Mr. R. Ryan

If an ordinary bad debt which would not be evidenced because there would be no identifiable security, were dealt with in this way it could not be set off against gains——

Mr. T.J. Fitzpatrick

(Dublin Central): Why not?

Mr. R. Ryan

I could dispose of my bad debts to another person and he could dispose of his bad debts to me. If this happens occasionally it is our bad luck, and if they occur in the ordinary course of trade it will come into reckoning for the purpose of ascertaining profit and loss. Clearly it cannot be taken into account for capital gains purposes also.

Mr. T.J. Fitzpatrick

(Dublin Central): There are times when it is not possible to write off current losses against current accounts. Very often people have to go to capital gains if the loss is great and if there is no profit in the company.

Ruairí Brugha

If a company or agency take on the collection of debts and make a profit, is there a capital gains here?

Mr. R. Ryan

If the agency are in the business of collecting debts as a trade, it would be regarded as an ordinary trading profit.

Mr. Colley

At last I think I have some idea of the purpose of this section. Apparently it is an anti-avoidance measure but, as Deputy de Valera stated earlier, it is stated much more clearly in the explanatory memorandum. The explanatory memorandum states that a debt is not a chargeable asset in the hands of the original creditor, his personal representatives or his legatee. It states that this exclusion will not apply to holdings of loan stock as, for example, in a company. The satisfaction of a debt held by a person other than the original creditor will be treated as a disposal by the creditor, giving rise either to a chargeable gain or an allowable loss.

The explanatory memorandum puts it like that but I do not think it is stated in this way in the section. If it were expressed in those terms it would be far easier to deal with it. If what is said in the explanatory memorandum were carried through, would the section not provide that the original holder of a debt, whether secured or unsecured, would be in one position but the purchaser of a debt, whether secured or unsecured, would be in another position? Would that not meet the major problem of avoidance which the Minister has in mind? I am coming back to the question of the difference in principle between the debt that is secured and the one that is not secured. Is the Minister not concerned with whether the original creditor disposed of the debt and, therefore, where there was the situation where two people were juggling around with debts when it suited them in order to set them off against gains? If we confine one situation to the original creditor and deal with someone who purchases or obtains that debt from the original creditor, is that not the crucial point with which the Minister is concerned, rather than whether the debt is secured or unsecured?

Mr. R. Ryan

Capital gains tax is not chargeable on currency transactions as such and, therefore, no losses can arise in currency transactions. Where there is a debt on a security, it is the security that is the element worth something because it is the security that confers the right to repayment.

Mr. Colley

In other words, cash?

Mr. R. Ryan

It may be in kind.

Mr. Colley

The Minister is making the point of cash not being the subject but the security merely enables one to get cash.

Mr. R. Ryan

The security may be in different forms. It could contain rights to property in lieu of cash. If cash is not forthcoming there may be the right to acquire certain property.

Mr. Colley

I do not think the principle involved is clear. Apart from all the drafting points it is difficult to deal with this section unless the principle is clear. According to the explanatory memorandum, the principle involved is whether we deal with the original creditor or someone who gets the debt from the original creditor. I can see clearly that if a person is dealing with someone who has acquired the debt from the original creditor it is wide open to abuse. The Minister obviously has to be very careful in dealing with that kind of case; but, in the case of the original creditor, what difference does it make whether it is secured or unsecured?

Mr. R. Ryan

If it is an unsecured debt, it would be a cash transaction.

Mr. Colley

Not necessarily.

Mr. R. Ryan

In some cases it will be a cash transaction. If a person is transferring some other form of property, he invariably has a security covering it.

Mr. Colley

The Minister will recall he did tell us earlier a debt which is secured by a charge on freehold property is not, according to law, a debt on security.

Mr. R. Ryan

But it could be charged by way of an equitable deposit. If there is an equitable deposit, there might not be evidence of the charge, whereas there is if it is secured in an identifiable way. That would be a different kettle of fish.

Mr. Colley

Why should that make a difference—this is what I do not understand—to whether or not capital gain should be charged?

Mr. R. Ryan

Because in one case you have a disposable asset with the security and in the other, where you have not got a security, you have not got a disposable asset.

Mr. Colley

It would be true to say that in most cases where there is a security it is merely a security and, in fact, the debt is paid and the security is handed back and not disposed of so, therefore, the question of the security and its value, and whether or not it is an asset, really arises only if the security is realised. I must confess— maybe I am missing the whole point— I am mystified as to why this distinction is made where there is a security, not where there is a realised security but just where there is a security.

Mr. R. Ryan

Perhaps if we return to this when we come to the Schedule, there it is dealt with more specifically in regard to what is a secured and an unsecured security.

Mr. Colley

I am not asking the Minister to spell out the very complicated things that arise under the phrase "debt on a security" but I am asking him to spell out the principle. I am sorry if I am being dense but, on the basis of what the Minister has said, I do not understand why we should have this difference in approach between, on the one hand, a debt which is unsecured and, on the other, a debt which is secured, whether or not the security is realised. Can the Minister assist me?

Mr. R. Ryan

I might be able to assist by giving illustrations but I have not got them readily to hand now. I will undertake to have them when we come to discuss the Schedule.

Mr. Colley

Illustrations of what would be a debt on a security and what would not.

Mr. R. Ryan

On what would be a secured and an unsecured debt.

Mr. Colley

I appreciate that but it still does not answer my question. Why does the Minister draw a distinction between a secured and an unsecured debt in the hands of the original creditor? Whether it is secured or unsecured seem to me to make no difference in principle, especially where the security is merely security and not a realised asset on which possibly gain would accrue. It is that distinction I do not understand.

Major de Valera

Might I ask the Minister is this proviso a relief or is it an anti-avoidance provision? Which is it?

Mr. R. Ryan

It is a provision to ensure a creditor will not be able to dispose of an asset, make a capital gain and not be taxed?

Major de Valera

So it is anti-avoidance.

Mr. Colley

If you put loan stock in in respect of security on a debt there is no problem, but the Minister is doing much more than that?

Mr. R. Ryan

I will endeavour to find a description which will cover loan stock. I am sure the provision is wisely drawn but I will see if there is anything that can be done before we come to the Schedule.

Ruairí Brugha

Subsection (1) refers to " . . . Irish currency or in some other currency" and "no chargeable gain shall accrue to that creditor or his personal representative . . . ". What is the reason for introducing other currencies? Is this related to the possibility of a debt in another country and the possibility of the £ being devalued?

Mr. R. Ryan

No. Currency means money. It might be Irish currency only, but currency is legal tender and wherever it is legal tender in any country is what is meant by the phrase ". . . Irish currency or in some other currency . . . ".

Ruairí Brugha

But it does stipulate "no chargeable gain shall accrue . . . ". Does that mean it would not be a chargeable gain if one acquired a debt in French money, for example, and the £ was devalued and the debt became more valuable?

Major de Valera

Could the Minister not just delete the whole section and simply say: "The Revenue Commissioners may, in their absolute discretion, forego"et cetera the rights logically falling on the debtors and not raise the anti-avoidance problems by including this?

Mr. Colley

That suggestion would deprive the legal and accountancy professions of many years of lucrative work.

Mr. R. Ryan

On the point raised by Deputy Brugha, subsection (6) deals with currency speculation—foreign currency lodged to a bank account.

Ruairí Brugha

That is a debt owed by a bank, not by a person.

Mr. R. Ryan

The debt might be owed by a bank to the person who lodged the money.

Ruairí Brugha

But subsection (1) refers to a debt ". . . whether in Irish currency or in some other currency . . . " and the debt could be owed by a foreign firm, not by a bank.

Mr. R. Ryan

What is the point?

Ruairí Brugha

Subsection (1) relates to a debt "whether in Irish currency or in some other currency . . . " and ". . . no chargeable gain shall accrue . . ."

Mr. R. Ryan

On the disposal of a debt.

Ruairí Brugha

The Minister has referred us to a debt owed by a bank but I am talking about a debt owed by a person in another country. In the event of devaluation that debt becomes more valuable in terms of our money if our £ is devalued.

Mr. R. Ryan

The trouble is in dealing with these questions one has to read through the whole section——

Major de Valera

The Minister has my sympathy.

Mr. R. Ryan

——and maybe look at the Schedule as well.

Mr. Colley

I am in a little difficulty in that I think we have gone as far as we can go at the moment in getting at the principle of this and I am not going to press the Minister any further on it now. I will not press the Minister any further on it now. On the assumption that we have some idea of what the principle behind it is could he explain subsection (3) and, if possible, give an example of what is involved?

Mr. R. Ryan

Subsection (3) provides that when a debt is satisfied by the acquisition of property by a creditor the property will not be deemed to have been disposed of by the debtor or acquired by the creditor for an amount greater than its market value at the time of the acquisition in satisfaction of the debt, that is even if the debt is greater than the market value of the security. Where an original creditor acquires property in satisfaction of the debt and later disposes of it making a chargeable gain the amount of the chargeable gain is not to be greater than the gain which would have resulted if the base cost of his acquisition were the amount of the debt and not the market value of the property. This adjustment ensures that the original creditor will not be treated as making a chargeable gain on the debt itself.

An example is usually the best help. A owes £10,000 to a company. The company accepts freehold property having a market value of £9,000 in satisfaction of the debt of £10,000. A is treated as disposing of the property for £9,000 and his chargeable gain is calculated on that figure. The company's acquisition price is £9,000. If the company sells the property and makes a loss there is an allowable loss, but if the company sells for more than £9,000 the gain will be calculated not by reference to the £9,000 but by reference to the original debt of £10,000. It is thus allowed to recoup itself, without a capital gains tax charge, on as much as possible of the bad debt.

Mr. Colley

That is a fair enough principle and is a relieving subsection. Could the Minister do the same in relation to subsection (5)? If he has an example with regard to subsection (6), with which he has already dealt, it would help to clarify the matter.

Mr. R. Ryan

Subsection (6) speaks for itself. I have not got an example. Subsection (5) extends the exemption in subsection (1) and the loss provision in subsection (4) to cover the remainder man. Where the original creditor is a trustee and the debt is settled properly, a disposal by the remainder man or his representatives on becoming absolutely entitled as against the trustee to the debt, on its ceasing to be settled property, will, therefore, not be liable to charge nor can it give rise to a loss. I am afraid I have not an illustration available but the principle is the same as in the previous subsection.

Mr. Colley

The Minister indicated that when we come to the relevant portion of the Schedule he will give some examples of the kind of things that are debts on the security end and things that are not. Could he at that time also illustrate more clearly than he was able to do the principle involved on the lines of what I was discussing earlier?

Mr. R. Ryan

I will endeavour to do so.

Amendment agreed to.

Section 46, as amended, agreed to.

SECTION 47.

Question proposed: "That section 47 stand part of the Bill."

Mr. Colley

I think the Minister will agree that this is a most technical section.

Mr. R. Ryan

Yes, as distinct from any other.

Mr. Colley

It is one of the worst if not the worst in the Bill.

Mr. R. Ryan

The section gives a number of detailed rules for the treatment of options and option payments, whether options to buy or sell, and whether exercised or not, including double options. An option is to be treated as a separate chargeable asset in the hands of the grantor but not in the hands of the person to whom it is granted.

On the abandonment of an option by any form of non-exercise, the grantor is not put to any expense and the consideration he has received is a gain. With two exceptions, the abandonment of an option cannot give rise to an allowable loss by the grantee. The exceptions are an option to subscribe for shares in a company and an option to acquire assets exercisable by a person intending to use the assets, if acquired, in his trade. The abandonment of an option in these two cases will give the grantee the right to claim an allowable loss equal to the amount of his allowable expenditure on the option.

Where an option is exercised, the option and its exercise merge in a single transaction. If it is an option binding the grantor to sell, the option consideration is treated as part of the sale consideration in the hands of the grantor and for the grantee the cost of the option is treated as part of the cost of the acquisition of the assets sold. Also, if the option binds the grantor to buy, the grantor deducts the option consideration from the cost of acquisition while the grantee may deduct the cost of the option as an incidental cost of the disposal to the grantor.

In the case of a double option where the grantor is bound to sell and the grantee to buy the option consideration is to be divided equally and the rules in the section are to apply as if there were two separate options.

I think I should explain the subsections because it is difficult to grasp them without getting the full explanation. Subsection (1) provides that the grant of an option is the disposal of an asset even where the grantor does not own the asset but he binds himself to sell or, because the option is abandoned, he never has occasion to own. Similarly, where he binds himself to buy, the granting of such an option is a disposal of an asset even though he never acquires the asset because the option is abandoned.

Subsection (2) deals with the case where the grantor of an option meets his obligation under the option. The sale or purchase, as the case may be, is treated as one transaction with the option itself and the option consideration is added to the main consideration in computing a gain or a loss on the sale, or, if it is a purchase, deducted from the cost of acquisition.

Subsection (3) provides that the exercise or abandonment of an option is not the disposal of an asset by the person entitled to exercise it. There will not, therefore, be an allowable loss on an abandonment by him. If the option is exercised it is to be treated as a single transaction with the acquisition or sale of the asset so that where the grantor is bound to sell, the option consideration is added to the grantee's cost of acquiring the asset and where the grantor binds himself to buy, the option consideration is treated as an incidental cost of sale to the grantee.

Subsection (4) treats certain options as wasting assets the life of which ends when the right to exercise the option ends or when the option becomes valueless. This treatment applies where the option binding the grantor to buy or sell shares or securities quoted on a recognised stock exchange is disposed of by way of transfer as distinct to being surrendered or allowed to lapse.

Subsection (5) provides special treatment in two cases of options, namely, options to subscribe for shares in a company or to acquire assets for use in a trade. The abandonment of these types of options are to be treated as a disposal giving rise to a chargeable gain or allowable loss. If an option to subscribe shares is disposed of or abandoned, there will be no restriction of expenditure under the rules relating to wasting assets, if the option is quoted on a stock exchange at the time when it is disposed of, and dealt with on the stock exchange in the same manner as shares. If an option of this kind is quoted and dealt in within three months of a reorganisation, reduction, conversion or amalgamation falling under paragraphs 2, 3, 4 or 5 of Schedule 2 the option is treated in exactly the same way as the shares which could be acquired by the exercise of the option.

Subsection (6) treats options relating to shares or securities as constituting a single global asset, that is, a holding, and coming within the rule in paragraph 13 of Schedule 1 in relation to disposals of some of the options.

Subsection (7) provides that a double option—binding the grantor both to buy and sell—is to be treated as two options and half the consideration is attributed to each.

Subsection (8) states that the provisions described in relation to options extend to an option binding the grantor to give a lease or to enter any other transaction which is not a sale as such.

Subsection (9) applies the same treatment to forfeited deposits or other transactions which are abandoned as is applied to options.

Major de Valera

This section, in contradistinction to the previous one, has at least some logic to it. One can gather the intention from the form of the section. It is an interesting mathematical point that it takes seven times as many lines to express what the Minister wants to do as compared to what is in the explanatory memorandum. There are 12 lines in the explanatory memorandum and something like 85 lines in the section. However, that coincidence is neither here nor there.

This section is necessary. It deals with a type of transaction which could be used for tax evasion and it deals with a well-known commercial type of transaction which would result in capital gains. In contrast with the previous section this section is an intelligible piece of legislation. Paragraph (a) of subsection (1) deals with the case of a chancer who sells St. Stephen's Green and cons somebody into paying something for it. I suppose it is fair enough to get after him for revenue purposes but it seems to me to be conniving at a fraud. In other words, it is the grant of an option in a case where the grantor binds himself to sell an asset which he does not own and, because the option is abandoned, he never had occasion to own it. The possibilities under that are limitless. I understand the Minister's point that this is a compulsion of drafting. At least it is clear.

Mr. R. Ryan

There is no way out.

Major de Valera

Without mentioning names I can think of some famous cases in history where, apart from the Attorney General and the civil authorities being interested in apprehending a particular type of activist, the Revenue Commissioners would have a big interest also. It would raise the very interesting question as to when the Revenue Commissioners become receivers of profits on improperly gained goods. It is an interesting possibility—the profits of crime.

The wording of the section is necessary and, from the legal point of view, it is perfectly proper. I just mention the absurdities it can lead to, or are they absurdities? It is necessary to dissect the type of option that may be dealt with for the simple reason that dealing in options is a pretty widespread method of dealing with capital and capital transactions. I do not think anyone can object in this case to the Minister having special regard to it. Even I who have advocated simplicity and a little trustfulness on our part in legislation would agree that this is a necessary section. There are 85 lines in it and nine subsections and, like all sections of this nature, only time will tell where the loophole is or where a nexus can be made between something in this section and something somewhere else in this Bill, or some other Act, to find consequences which are not foreseen and which would not be considered desirable by us.

Mr. Colley

I agree with my colleague, Deputy de Valera, that the section is necessary but I find it a little more difficult to agree with him that it is clear. In an effort to make it somewhat clearer to myself, I have some questions I should like to ask the Minister. The first line of subsection (1) reads: "Without prejudice to the provisions of section 8 . . . ." What is the effect of that expression? What effect does that phrase have?

Mr. R. Ryan

Section 8 says what the disposal of an asset is and nothing in section 47 can be deemed to qualify what is in section 8.

Mr. Colley

If that phrase were not in the subsection, are there provisions in section 47 which would contradict or cut across section 8?

Mr. R. Ryan

Section 8 says what the disposal of an asset includes. There it does not spell out reference to options which, for the reasons I have illustrated already, are deserving of a section of their own because of their very complexity. Section 47 says:

Without prejudice to the provisions of section 8, the grant of an option, including . . .

What is described there is the disposal of an asset, namely, of the option.

Mr. Colley

I am always somewhat afraid that with a phrase like that "Without prejudice to the provisions of another section" one could get into unnecessary difficulty. If the section were to say simply "The grant of an option, including so and so and so and so is a disposal", would the Minister have some difficulty with section 8?

Mr. R. Ryan

To be frank with the Deputy, I do not know.

Mr. Colley

Would the Minister have it examined to see if that phrase is necessary because I want to suggest to him, that unless it is necessary, it is liable to cause a great deal of difficulty and confusion?

Mr. R. Ryan

I will, certainly.

Mr. Colley

Might I refer the Minister now to subsection (4) under which the disposal by way of transfer of an option binding the grantor to sell or buy shares or quoted securities is regarded as the disposal of a wasting asset and the life of the option is regarded as ending on the date on which the option is exercisable. Therefore, on the disposal of such an option its cost is written down over its life. This can result in a higher gain being charged to tax than was actually realised by a person who purchases it and subsequently sells it. On the face of it, there does not seem to be any equitable reason why an option should be regarded as depreciating over its lifetime like other consumable assets. I wonder what is the thinking behind that provision?

Mr. R. Ryan

It will be reflected in the example I give: A pays £1,200 for an option to purchase stocks and shares at a price of £100 a share. The option runs out after six months and the market price at different dates is as follows. The month before the option is exercised, £95; on the date of the option, £100 a share; the following month it would be £105 a share; the third month £107 a share; the fourth month £103 a share; the fifth month back down to £100 and at the sixth month, during which he can still exercise the option, down to £90 a share. At the fifth month the option has no value; he can buy at the price of £100 on the market if there is a downward trend. Therefore at that stage the option can be written off. If we did not have the rule he could sell the option at the fifth month for a nominal consideration and claim a loss of £200, consideration being nil, less an expenditure of £1,200 reduced to five-sixths. That will not affect genuine business transactions, such as options to subscribe for shares or for the purchase of business assets.

Mr. Colley

I take it the Minister is basing the five-sixths on the rule provided in the subsection about calculating it over the period of the option?

Mr. R. Ryan

Yes.

Mr. Colley

I thought what the Minister was explaining to us was what would happen in the circumstances he outlined if the rule did not apply.

Mr. R. Ryan

That is correct, yes.

Mr. Colley

Then, how do the five-sixths come into it? If the rule were not there, there would not be any question of five-sixths.

Mr. R. Ryan

If we had not got this particular section, then in the example I quoted the consideration would be nil, less expenditure of £1,200 reduced to five-sixths.

Mr. Colley

If the rule in the subsection were not there, at the fifth month, I think the Minister said the option was valueless; therefore, it would be sold at nil or, as the Minister said, for a nominal sum. Without the rule being there, is the Minister saying that the person concerned would claim a loss of £1,200 but, with the rule, he can claim a loss of five-sixths only? Have I got that correctly?

Mr. R. Ryan

No, his loss would be £200.

Mr. Colley

That is applying the rule, is it not?

Mr. R. Ryan

No.

Mr. Colley

Does not this whole question of the five-sixths arise because the Minister is treating the option as a wasting asset and, therefore, the question of the gain or loss is calculated in relation to the length of time involved? Am I correct in that? Whereas if it were not treated as a wasting asset but were treated as any other kind of asset, there would not be a question of calculating the length of time involved; it would be merely the amount of gain or loss.

Mr. R. Ryan

The test of when an option is wasted is when the option ends or when the option becomes valueless. The option is wasted away if it becomes valueless.

Major de Valera

It may be only devalued.

Mr. R. Ryan

It is also valueless when the right to exercise the option ends.

Mr. Colley

Or it may become temporarily valueless during the period of the option.

Major de Valera

Or it may become devalued. Talking about the subject of an option, what about a State loan? There are many of such which were issued at par, which were considered gilt. In the present inflationary situation, which for the purposes of this argument, we shall say was unforeseen, there are some such loans maturing at the end of the century that are down around 60 or 40, way down. Would an option to buy such a loan, let us say, when it was at a higher value——

Mr. R. Ryan

The Deputy will recall that Government loans are not chargeable.

Major de Valera

All right, take shares. It is a sad fact that Government securities are wasting assets.

Mr. R. Ryan

Not at all.

Mr. T.J. Fitzpatrick

(Dublin Central): When they mature.

Major de Valera

Well, inflation will take care of that when they mature. Let us take the case of an option to buy shares. The price is the market value at the date of the option and the shares continue to fall. This is a wasting option. At what stage is it recognised to be such? Do we have to wait until the option is out or is it wasting at the rate of its market depreciation?

Mr. R. Ryan

You have to calculate wastage or otherwise over the whole period while the option is running.

Major de Valera

How can you do that if you cannot foretell the price?

Mr. Colley

This is the point I was trying to make. Would the Minister accept that the application of the rule in subsection (4) can result in a person who buys an option and then sells it being taxed on a gain greater than he actually realised, given that the gain on which he is to be charged is calculated in the artificial way set out in the subsection? If the Minister accepts that this situation can arise, the subsection ought to contain a proviso limiting the amount of the chargeable gain to the gain actually realised. I am sure that would not present any problem in relation to what the Minister is trying to prevent, that is, people creating artificial losses.

Mr. R. Ryan

The genuine business transaction will be protected by subsection (5).

Mr. Colley

Nevertheless, if the subsection results in a person being charged on a gain greater than the actual gain he made, we ought to prevent this. It can be prevented by a simple proviso limiting the chargeable gain to the actual gain. This is necessary because there is an artificial method of calculating the gain provided in the subsection.

Mr. R. Ryan

The option price would merge with the price itself so that there should not be——

Mr. Colley

This is where a person buys an option and disposes of it. That is what is dealt with in this subsection—disposal of an option rather than exercising the option.

Major de Valera

Could you not dispose of the option at the value at which it stood?

Mr. R. Ryan

I can see the Deputy's point but it is a most unlikely event particularly in the ordinary——

Mr. Colley

It is a very possible event.

Mr. R. Ryan

I will look at it.

Major de Valera

On the other hand, it is a speculative event and I would not quarrel with the Minister too much if he did not——

Mr. R. Ryan

It could be a speculative or a contrived event.

Mr. Colley

If it is contrived that is one thing, but it is another if it is a question of speculation. We may not like speculators but they are citizens and have rights. We are not entitled to impose capital gains tax on them for gains they do not make. We must not lose sight of that fact.

Mr. R. Ryan

Particularly as we are not imposing capital gains on gambling.

Mr. Colley

That is one aspect.

Major de Valera

This could be like the selling of St. Stephen's Green. It could happen that somebody would have inside knowledge and I have an option to purchase shares that seem to be going down. That person could come to me and purchase my option knowing it will recover. That is the nature of a speculation. I wanted to know what the actual gains position was in that case. We can make any number of difficulties by probing this. However, this section is necessary. There is no doubt about that.

Mr. R. Ryan

Some valuable ideas have been thrown up for consideration and I will certainly consider them before the Final Stage.

Mr. Colley

Subsection (9) refers to a forfeited deposit of purchase money. In the event of a deposit of purchase money being forfeited, by whom is the disposal made and by whom is the gain made?

Mr. R. Ryan

The person to whom the deposit was forfeited will be deemed to have made a gain.

Mr. Colley

In the normal case where there is a vendor, a purchaser, a contract is entered into, and the would-be purchaser's deposit is forfeited. Would the purchaser be deemed to have made a disposal?

Mr. R. Ryan

This is similar to the position of a grantor and grantee of an option to a contract of sale.

Mr. Colley

Is this subsection an exception to what the Minister has been saying on a number of other sections, that capital gains tax does not apply to money or currency? We are talking here about a deposit of purchase money.

Mr. R. Ryan

It is on foot of a contract.

Mr. Colley

When we were talking about losses incurred on foot of a contract the Minister said they should not be allowed in the case described by Deputy T. J. Fitzpatrick earlier. One of the reasons he gave was that since gains were not chargeable on transactions in money, then similarly losses should not be allowable. Here is a case where a capital gains tax is being charged on what is effectively a transfer of money.

Mr. R. Ryan

A gain has been made by reason of a certain right which was sold to another, the other has not exercised that right but there was a right conferred on another to acquire property. When the deposit is forfeited, then benefit flows to the owner of the property over which another was given a right.

Mr. Colley

The Minister may be technically right but I think he will agree that he is stretching the meaning very far to try to include it in what he was saying earlier. It is provided in the Bill specifically that disposal of money or currency, whether Irish or otherwise, will not give rise to a chargeable gain or an allowable loss. Surely what is involved here is an actual transfer of money because it specifically says "a forfeited deposit of purchase money".

Mr. R. Ryan

There is more than money involved here. There is the question of one person giving another a right over his property.

Mr. Colley

That is where the contract is being carried on but if it is not?

Mr. R. Ryan

As practitioners, we know that once a contract for sale is signed the purchaser is deemed to have an insurable interest.

Progress reported; Committee to sit again.

The Dáil adjourned at 10.30 p.m. until 10.30 a.m. on Wednesday, 28th May, 1975.