Dáil Éireann díospóireacht -
Wednesday, 28 May 1975

Vol. 281 No. 6

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

SCHEDULE 1.

Mr. Colley

I move amendment No. 44:

In Part 1, page 47, to add to paragraph 3 (1) the following:

"Provided always that in the case of an asset acquired by compulsory purchase powers the sum allowable as a deduction shall not be less than the cost of replacement with a comparable asset at the date of disposal."

I understand that before we adjourned there was some discussion and I do not know if it was finally decided whether we could deal with the Schedule by way of the numbered paragraphs or whether we would have to deal with the whole Schedule together. The normal practice is to deal with the whole Schedule together, but it might assist the discussion if we were to deal with it by way of the numbered paragraphs. I should like your ruling on that, Sir.

An Ceann Comhairle

I understand that we must deal with the Schedule in its entirety. The paragraphs may be debated.

Mr. Colley

Separately?

An Ceann Comhairle

Separately— in the same manner as the subsections to each section are debated.

Mr. Colley

If there is a particular paragraph on which we do not find it possible to agree, would it be necessary for us to vote against the whole Schedule rather than against the paragraph?

An Ceann Comhairle

The normal procedure would be to vote against the Schedule. The question will be put on the Schedule or the Schedule as amended as the case may be.

Mr. Colley

This amendment is self-explanatory. The Minister will recall that we raised the question of compulsory purchase on the Second Stage discussion. The point involved here is that, when there is a compulsory purchase, it seems to us to be in quite a different category from a voluntary disposition or acquisition as the case might be. This is something which takes place compulsorily without the taxpayer, who may be subject to capital gains tax on the transaction, having any choice in the matter. First of all it might strike one that one should exempt completely compulsory purchase transactions from capital gains tax. This would present a great deal of difficulty for the local authorities and for their operations.

This amendment is designed as what I hope is a reasonable compromise which would not interfere with the operations of the local authorities but would, at the same time, take account of the fact, from the point of view of the taxpayer, that a compulsory purchase is not a voluntary transaction on the part of the taxpayer. The effect of the amendment, if accepted, would be that where compulsory purchase powers were exercised by a local authority, say, as a result of which, let us assume, property was acquired, which from the point of view of his ordinary requirements the taxpayer wanted to replace, he would not be assessed for capital gains tax on the basis of what the asset had originally cost him deducted from the price he received on foot of the compensation assessed under the compulsory purchase machinery, but would be based on that, less the cost of acquiring a comparable asset.

This is a reasonable proposition. It ensures that account is taken of the fact that in this case the transaction is not a voluntary one but one which is forced on the taxpayer by virtue of power given on foot of legislation passed by Parliament in the interests of the common good, but, nevertheless, takes account of the position of the taxpayer. It provides that, if the asset in question is compulsorily acquired, he will be allowed—before any question of his liability to capital gains tax arises—to replace the asset with a comparable one. Of course, if after doing so he still has a gain then, by all means, one can, and perhaps should, apply capital gains tax to that surplus. But to apply capital gains tax to the alleged gain the taxpayer has, without taking account of the cost of providing himself with a comparable asset, would be quite unjust, having regard to the fact that he had no choice in the matter but had it forced on him by compulsory purchase powers. I would hope the Minister would find it possible to accept at least the principle involved in this amendment.

Minister for Finance (Mr. R. Ryan)

I am not quite centain what the Deputy is hoping to get at here. If a person is in trade, there will be roll-over relief if the proceeds are reinvested in a trade or business. If it is a private dwelling and an acre around it, there will be no liability and, of course, no allowable loss either. Therefore, I am not quite certain what would be the kind of cases in which the Deputy visualises it would be necessary to give additional relief. If the Deputy's amendment were one which would provide additional relief where compulsory purchase occurs, then it would seem to me that the real, social effect of his recommendation would be to encourage people to oblige local authorities or the State to proceed to compulsory purchase. If they are going to get additional relief as a consequence of compulsory purchase, why should anybody agree to a reasonable price? Why not force compulsory purchase? The social and economic effects might well be to slow up the process of acquiring land for public use. Where compulsory purchase occurs, it does so because statutory powers are given to the State or the local authority for the public good and for that purpose only. It would seem to me to be very inadvisable, indeed, to provide any scheme in this or in any other Bill which would have the effect of encouraging people to hold out for compulsory purchase procedures in order to get a benefit which would not be available to them if they agreed to sell a property. Perhaps the Deputy has in mind that once a public authority was endeavouring to acquire it, these provisions should apply. But I do not think there should be any difference between the handling of purchases whether it be a public or private interest making the purchase.

I am convinced that acceptance of the amendment would result in a slowing down of procedures very necessary for the public good. For that reason alone I feel I cannot accept it. But I should like to hear from Deputy Colley where he feels the provisions relating to trading or business assets and private housing would not ensure that a person would not be caught for such gains anyway.

Mr. Colley

In regard to trading assets, I think the Minister by dint of repetition of something appears to have convinced himself that what he has been saying in this House repeatedly is fully accurate. Of course, it is not. Roll-over relief in the case of trading assets is merely a postponement; it is not an exemption from capital gains tax. As time progresses and the assets are replaced, time after time, the potential liability to capital gains tax grows, so that one could easily end up with a situation in which, when assets were being finally disposed of by a trader, he could have a liability to capital gains tax which had increased practically year by year and stretched back for a period of a generation or longer with a very substantial liability to capital gains tax arising at that stage.

Therefore, to say that this amendment would provide no relief in the case of people involved in trading is not correct. Of course, it would provide such relief. I should like to stress and I should like the Minister to remember, that roll-over relief is not exemption from capital gains tax; it is merely postponement. Of course, it is true that in the case of a principal dwelling house and one acre surrounding it there is exemption. But other kinds of assets can be involved than a principal private dwelling house and an acre around it, other than trading assets. In that case, relief would also be provided under this amendment.

As to the question of whether acceptance of this amendment would hold up or interfere with the operation of compulsory purchase machinery by local authorities, it was precisely because of the danger of that happening that this amendment was not designed to exempt such transactions from capital gains tax. It does not do that. The only benefit that would arise here would be if the gain resulting from the amount of compensation was such that, having replaced the asset compulsorily acquired with a comparable one, there was still a surplus gain which could be liable to capital gains tax. That is what is envisaged under this amendment. In that case, in order to give somebody, if you like, a built-in inducement to compel a local authority to resort to compulsory acquisition, as distinct from agreement between the parties, it would be necessary for the owner of the asset to be sure that the compensation he would receive on foot of compulsory purchase would be such as to ensure he did not pay capital gains tax.

The Minister might say: "Ah, yes, but as long as he is allowed the deduction of the cost of a comparable asset, there is a gain and a benefit for him in this". That may be true but I want to put it to the Minister that the position of a person whose asset is acquired compulsorily is not the same as, or comparable with, the position of a person who voluntarily enters into a transaction to dispose of some asset he possesses. To try to compare the two and pretend they are the same is to ignore the realities. There are many people who have assets acquired compulsorily, say, by local authorities, who have no wish whatsoever to part with them and, indeed, who would oppose the compulsory purchase order as strongly as they can not merely in an effort to try to get higher compensation but because they do not wish to part with the asset, because it does not suit them; it does not suit their way of life; it does not suit the manner in which they intend to conduct the rest of their lives. Some people are very seriously upset on foot of compulsory purchase acquisition. To ignore that is to ignore realities. To treat a person in that position as being in the same position as somebody who voluntarily enters into an agreement to sell part of his property is not in accordance with reality. We in this House, and the Minister in particular, have an obligation to take that reality into account in a practical way by providing that where a person is forced to part with an asset, on foot of powers given by this Parliament, he is not put in a position that not alone is the asset he wants to retain taken from him, but he is assessed for capital gains tax on the alleged gain arising.

If a person were allowed to keep his asset, he might not want to part with it. If and when liability for tax arose, it would arise with his successor after his death. In this way, with the operation of the compulsory purchase powers, the asset is taken from him and he is made liable for capital gains tax at a time when he does not wish to be disturbed in the enjoyment of that asset. It seems unreasonable that the exercise of compulsory powers should result not only in his being forced to give up the asset, but also in being, willy-nilly, subject to capital gains tax on what is in many cases an imaginary gain. This gain is imaginary in many cases because he will effectively be obliged to find the money to replace the asset. If he is not allowed the cost of replacing it, then it is an imaginary gain. If he has been assessed for capital gains on the alleged gain, he may not even have enough money to replace it with a comparable asset. This savours of the exercise of statutory powers gone mad and producing a grave injustice for many taxpayers.

I do not say that this situation would arise in every case of compulsory purchase because that obviously could not be true. The situation I have described could arise in many cases on foot of a compulsory purchase order. We cannot escape our obligation to take account of the occurrence of such a situation and make provision for easing the difficulties which may arise. I believe we can do that by the acceptance of this amendment.

Major de Valera

I want to add my voice to my colleagues in this amendment. The Minister gave his answer in two ways. First, he said that it would encourage compulsory acquisition procedures. That is not necessarily so. In any event, a simple drafting adjustment would get over that. The essence of the transaction is not the compulsory acquisition proceedings but the fact that the acquisition has taken place in consequence of powers vested in the public authority or any other authority who are in a position to acquire, whether the vendor consents or not.

The essence of the word "compulsory" is not that one must go through a procedure and get a judgment, it means that there is a statutory provision here which enables the authority to acquire that asset and a compulsion arises from that. There is no change in that element. If the seller and the local authority agree on the purchase price and the terms of the acquisition, or if they get an arbitrator or judge to decide, the method by which the compulsion is implemented is relatively immaterial. The compulsion itself is the governing factor and the dictating condition, whether compulsory legal procedures are invoked or not. For that reason, I submit that the Minister's objection on these grounds can easily be met by appropriate drafting. I am sure Deputy Colley would not object to his amendment being modified if his intention is carried out.

The second point goes very deeply into this legislation and obviously influences the Minister: It is difficult to discuss this point especially on Committee Stage since it ranges over at least three Bills and we are on Committee Stage discussing one part of a Schedule. Since the Minister mentioned what he called "social factors" perhaps I might be allowed reply.

I certainly agree that any interference in any tax or other statute that is not directly concerned with established legal procedures under another Act, is undesirable. I also agree that from a social point of view to stimulate fractiousness and the invocation of compulsory procedures or legal processes of that nature unnecessarily, are socially to be discouraged. I wholeheartedly take his point on these ideas.

In my view the Minister is in danger of falling into a different social view than the legislative occasion demands. I would have been more convinced of his social point if he had said that Deputy Colley's amendment would tend to keep wealth concentrated rather than distributed. He made that point on other sections of the Bill. When he mentioned "social considerations" I thought that was the point he was coming to. Even though he has not mentioned it I feel I should deal with it. The point made on compulsory acquisition can be got over.

Is the point I have made now in contravention of the social policy? Frankly I do not think so—quite the reverse. What would tend to happen, as is happening these days, is that when there is a compulsory purchase the cases Deputy Colley has mentioned occur often, but there are cases where people are quite glad of compulsory acquisition and are able to concentrate the proceeds in a way that would not fit in with the philosophy I believe the Minister believes in.

The only safeguard against erring from the straight and narrow here is to do the simple, just thing. Therefore, it seems to me that the acquisition of a comparable asset is merely a replacement, in many cases at a loss. I will not repeat Deputy Colley's argument on this but I am in wholehearted support of the cases he has made.

I want to put an additional case, additional in the sense that it is a different type of case. It could happen that it would be hardly desirable socially that an asset be replaced. The Minister brushed that aside and instanced a dwelling house. It is not as simple as that. As Deputy Colley said, the owner may not want to part with an asset, parting might be a loss and a hardship though the loss may not be measurable by the same standards as we have measured gains in other parts of the Bill. I can think of a case where a person has an office or small business on a corner site. He might employ a number of people—it might even be a factory. In other words, the asset involves employment of others. If Deputy Colley's amendment is accepted it will be an encouragement to such a person whose property has been acquired compulsorily to replace it with a comparable asset—in other words, to continue the business on comparable terms. Here I am diverging for social reasons and here I contrast the point with the Minister's case about conglomeration of business and so on.

Deputy Colley is probably right in many or perhaps most cases of compulsory acquisition. There are many people who do not wish to part with an office or business. That is the case Deputy Colley has made on the amendment but there are the other cases to which I referred which are completely different from and in strong contrast to the cases Deputy Colley had in mind, namely cases where people may be just as glad to have the asset acquired or at worst will be willing to make the best of a bad job.

I come again to the case of the corner office or small business. The purchase price goes to the proprietor who has the choice of carrying on but with a change of place, or he may be very glad to get out of business. There are people in such cases who would put their wealth and their profits away in areas which are socially unproductive. Surely the giving of employment in the office or factory I have spoken about would be socially desirable and probably productive.

Perhaps it may be possible for Deputy Colley and the Minister to modify the drafting of the amendment so that there would be a direct incentive in the type of case I have mentioned, so that the person in the conditions I have spoken of would be inclined to reinvest the proceeds of compulsory acquisition in a comparable asset. I should like to know what the Minister thinks of that point. It is not a case of merely looking to see if somebody got a few pounds more profit or something like that. It is a matter of equity and social desirability. The Minister may say: "This does not happen every day of the week." It can happen, particularly in Dublin.

Mr. R. Ryan

It seems to me that Deputies opposite are trying to make up for some sense of guilt about the operations of the Compulsory Purchase Acts.

Major de Valera

We are talking about justice.

Mr. R. Ryan

If the Compulsory Purchase Acts are operated fairly, people will get appropriate compensation.

Major de Valera

I do not controvert that at all.

Mr. R. Ryan

It seems to me that if people are looking for an extra bonus for people in a CPO situation they are of the view that the Compulsory Purchase Acts are not fair and that they do not compensate people who sell property. I cannot accept that.

Major de Valera

They do not, in the sense that Deputy Colley said.

Mr. R. Ryan

They do not because there is supposed to be this involuntary element. There are many decisions made by people over much of their lives which are involuntary and they do not receive compensation because the decisions are not to their own liking. There are many decisions which are forced upon people through failure in business, through family circumstances, through family poverty, none of which are deserving of any lesser treatment than that towards those who receive total compensation under the Compulsory Purchase Acts.

What is the difference? Why should the one be treated differently from the other? The poverty which forces somebody to sell is far more agonising than the upset and inconvenience which somebody else suffers because he is obliged to sell to answer a community need but receives adequate compensation when he does so. There are many people who are forced to sell because of their own impoverished circumstances and who receive less than they might receive if they were able to hold on or force the matter to compulsory purchase arbitration. There is a suggestion here once again that I have to deprecate and it is forever rearing its ugly head in this House, that the State is always wrong, that the State can do no good, that the State acts against the common good. The notion here is that an evil State is grabbing hold of somebody's property.

Mr. Colley

No. That is the Minister's version, not ours.

Mr. R. Ryan

That is the notion, and that is the notion that will be taken up from the argument here, that there is something evil about compulsory purchase. Compulsory purchase arises where the public need requires it, where the public need is superior to private need, and the Acts provide for adequate compensation in those cases.

Deputy de Valera has been talking about the man with his business on the corner. If he reinvests the proceeds in a business on another corner or somewhere up the street, he will not be involved; there will be no charge on that occasion. What has been suggested here in this amendment will encourage the speculator, who is not in ownership because he is running a business, who is not in a private dwelling with an acre around it, to keep his eye out for land that is likely to be subject to compulsory purchase.

Major de Valera

That is an old one.

Mr. R. Ryan

Yes, but the Deputy suspects there are a certain number of people engaging in that practice already, and it is not done for the public good. They do not do it in order to be benefactors or philanthropists but in order hopefully to extract a quick gain because the public need requires the sale. If, in addition to whatever incentives are there already, they would see additional advantage in this amendment, as they would——

Mr. Colley

Nobody in his sane senses gets himself involved in compulsory acquisition proceedings if he can avoid it.

Mr. T.J. Fitzpatrick

(Dublin Central): It is much better on the public market.

Mr. R. Ryan

There are some people who keep their ears to the ground.

Mr. Colley

Does the Minister know how long compulsory acquisition takes and, when it has taken place, does he know how long it takes to get paid even when you are out of the property? You could be waiting years before you get your money.

Mr. R. Ryan

Like the Deputy, I have acted on behalf of people who have been involved in compulsory purchase orders, and I have been a member of a local authority for years and I am aware of the operation of compulsory purchase procedures. If those procedures are wrong, then correct them. Correct them in their own right and in their own field. Do not try to put a provision in a capital gains tax Bill which will incite people to speculate in land in anticipation of public need which has to be answered by compulsory purchase orders, notwithstanding any inconvenience that may arise. Those who go into that field in order to make a profit do not mind the inconvenience or the delay.

Mr. Colley

What percentage of cases would the Minister think——

Mr. R. Ryan

The kind of people that would be interested are the big boys.

Mr. Colley

So the small boys have to suffer.

Mr. R. Ryan

No. The small boys are not called upon to suffer at all. The person who is in business, the person who is in a private dwelling, who is the small person that Deputy Colley says he is concerned about, is protected by the exemptions that are there already, and it does not need additional exemptions here.

I would ask the Deputies to consider seriously what they are suggesting and I would illustrate this with an example: a person could acquire an asset worth £5,000 and it could be compulsorily acquired at £10,000. The Opposition are suggesting that that £10,000 should not then be considered for capital gains tax purposes and that a person could get a new asset for £10,000. That £10,000 might be invested in a new asset which might later be compulsorily acquired for £20,000, and so the lucky person then has a new asset at a starting price of £20,000.

Mr. Colley

Which might be compulsorily acquired again.

Mr. R. Ryan

Yes, exactly, and the very amendment that has been suggested is designed to encourage people —I am not saying it is designed intentionally—to look out for property that might be compulsorily purchased, because the longer they held their asset in that way the greater could be their tax-free gain. Ultimately, they could arrive at a situation where the asset might be worth £100,000, and it might be then reinvested in a comparable asset and then immediately resold on the open market without waiting for compulsory purchase. In that situation a person would have made a tax-free gain of £95,000.

Mr. Colley

What proportion of cases would the Minister think that would represent? Can he visualise any real case like that?

Mr. R. Ryan

I am fairly satisfied that these are the kinds of cases that would develop if special treatment were to be given to compulsory purchase cases. I do not think it would be possible to sign any amendment to prevent the situation where people would invariably force local authorities to make a compulsory purchase order. Even if this amendment were to be accepted, it would either have the effect I described or else it would affect the purchase price. It might, of course, affect the purchase price to the advantage of the community in that the price demanded on compulsory purchase might be less than the reserve, if it was a private sale, because if it was on a public purchase one would know that the gain was going to be made without any liability to tax, whereas if it was a private sale there would be liability to tax. But that is only a book-keeping transaction. The public interest will lose out anyway if the tax has to be foregone because of a compulsory purchase situation. Therefore, we are back to square one in any event, and all we have done is to build into the Act a new calculation, a new exemption, which only the people of substantial means and leisure and the capacity for intrigue and speculation will be able to make any money out of. If the small man is the person to be considered, that is the person who has a house.

Mr. Colley

What about a small shop?

Mr. R. Ryan

He has lost nothing.

Mr. Colley

He has postponed tax.

Mr. R. Ryan

Yes.

Mr. Colley

That is all.

Mr. R. Ryan

But he would no have had any tax to pay if the compulsory purchase order did not apply if he had not sold.

Mr. Colley

That is right.

Mr. R. Ryan

That would be deferred tax, too. Any non-realised gain is deferred tax. Every year that goes by in which a person does not realise his property, if it is gaining, creates deferred tax. There is absolutely no difference.

Mr. Colley

He did not choose to do this. He was forced into it.

Mr. R. Ryan

But he is not charged the tax at the time. His situation is exactly as it was beforehand. This comes back to the fundamental issue I raised earlier that if there is something wrong with compulsory purchase procedures they should be tackled in their own right but we should not be trying to remedy them through the tax system.

Mr. T.J. Fitzpatrick

(Dublin Central): I intend to talk about the average person. Evidently the Minister is far removed from the operations of the average businessman and has spent his whole day as far as this Bill is concerned witch hunting regarding tax evasion. He thinks of the average businessmen as being out to make an easy profit. I am not questioning the authority of public acquisition but what Deputy Colley is trying to do in this amendment is to deal with the case of the average person caught by public acquisition. I know many business people in Dublin Central where urban renewal is going on and main roads are being run right through the city and major parts of it are being acquired, drapers, grocers, publicans and so on and they know they will be acquired in the very near future. Acquisition can come at different times of life and this is important. If a man's property is acquired at age 35 he may have the initiative and drive to reinvest in the suburbs but the view put to me is that the amount of money he gets as a result of acquisition will not be sufficient to acquire a suburban property because the price level is so high. These people have no desire to leave their present places of business.

This is the type of person I am talking about, not the super-speculator the Minister is trying to catch in this Bill. I have no doubt I shall meet many decent, honest traders in the next five or six years in my constituency who will be caught by this Bill. One can visualise a man of 55 who has every intention of spending the remainer of his life in his property and who has a compulsory acquisition order served on him. He will have no hope of acquiring property or reinvesting the money. I know the value of suburban property: it is impossible to get sites in the suburbs. Suburban development is almost completely in the direction of shopping centres and the amount of available investment business is negligible. It would be impossible for many of those I am talking about to invest in business in the suburbs when their property is acquired. How will the Minister deal with this type of operation? I know how the Bill will deal with it. When a man, through no fault of his own, fails to avail of the roll-over provision the Minister will come in under this Bill, after compulsory acquisition has put a man and his family out of business, and take 26 per cent of the capital gain. That is socially wrong.

The Minister may say that he is not concerned about that type of person but rather about the professional speculator. There are more of the people about whom I am speaking, genuine traders and businessmen who may have an office block or a factory or any type of shop, than the other type. Compulsory orders are being made right across the city and I know several businessmen who are under acquisition orders at present. They know what their future is. They know that with the amount they get when their property is compulsorily acquired, perhaps in seven or eight years' time, they will have no hope of replacing it in the suburbs. That is the injustice we will cause when we operate this Bill. We also know there is a time limit as regards reinvestment. In the amendment introduced by the Minister if they reinvest outside the business in which they were engaged, he allows them two years to invest. The Minister knows that in the case of the person we are dealing with coming under a compulsory purchase order, such a person has no hope of complying with that regulation as regards reinvesting within the two years allowed by a previous section.

I sincerely believe that Deputy Colley's amendment should be accepted because if not, the Minister will be taking money from people whose property has been acquired compulsorily and who have no way of engaging in any type of business. We know the rate of inflation. If a property is compulsorily purchased now and a purchase sum is fixed it can be a considerable time before that money is paid before the owner would be in a position to reinvest. With inflation running at 25 per cent and every possibility that it will go to 30 per cent, you can visualise what the money will be worth as regards reinvestment in two years' time. Assuming the man failed to get back into business—this can happen—and if he does not avail of the roll-over clause, capital gains tax will take 26 per cent. If he gets £100,000 for his property and fails to reinvest the State will take 26 per cent and, with inflation at 25 or 30 per cent, one can see how this capital is eroded in a very short time. It would be reduced to about 50 per cent. Surely there is no justice in that.

I ask the Minister to consider this amendment seriously. There is much merit in it. If the Minister does not accept it he will be treating the average businessman unjustly under this Bill. When I first saw this section in the Bill—although we changed our minds later—I thought that a man whose property was compulsorily acquired should not be subject to any capital gains tax. We found this might create certain problems that we could foresee. But I think Deputy Colley's amendment deserves serious consideration.

Major de Valera

I was a little surprised at the vehemence of the Minister when he rose to answer me. First, I took it as a compliment and that my argument had, so to speak, gone home. I hope I did not sound as aggressive as I was made to think I had been.

Mr. R. Ryan

My argument was impersonal.

Major de Valera

I was saying that I took that as an indication that there was some weight behind the arguments which Deputy Colley and I were advancing. We do appreciate that it is a prolonged and difficult task to be in the Minister's seat at the moment with this stack of legislation, but it is not easy for us either. We are not doing it just for fun and I would like him to take what we are saying as a serious contribution. I give full weight to the substantive things the Minister said in reply. He did cause me to understand the weight of his argument in regard to the speculator and particularly—and I am sure my colleagues, too, will appreciate it— the possibility of a series of quick purchases which, quite frankly is something I had not been adverting to. Let us take that in its due course.

There are three things I should like to say in reply to the Minister. First, nobody on this side is approaching the State as a tyrant. I think that is an uncalled-for accusation and in the circumstances not quite fair to us, but that is not the point. The point is that certain individuals are, because of the action of the community, put into a certain situation and this is why we were taking particular pains to reinforce the personal equity argument by a social and community argument. Whether you take the points made by Deputy Colley, by Deputy Fitzpatrick or myself, there is a community aspect in support of this amendment. In respect of Deputy Colley, there is the social argument as to the replacement of an asset compulsorily acquired by an asset of comparable value and it is most likely to be in regard to the acquisition of property, lands and buildings for development by the public authority. In that case, quite apart from the equity to the individual, there will usually be a strong public argument for the reinvesting of the money in a comparable asset, its replacement as a comparable asset.

Deputy Colley has spoken in terms of the compulsion bringing about a psychological attitude, and in fact it is taken from the person without any willingness on his part and the natural reaction of a person in that position is to pack up and get out—"Let me give the Revenue a few more pence"—but it is an attitude of mind which does not do the community any good. Take the point I made of the acquisition of an office or small industry. If the proprietor simply takes the cash in hand and waives the rest, there are social factors and particularly, as I mentioned, employment factors. This ties up rather closely with Deputy Fitzpatrick, who made the very concrete and important case which all of us city Deputies know about——

Mr. Colley

Including the Minister.

Major de Valera

——that there are big developments being pushed forward by local authorities; and although I do not subscribe at all to the idea that the State is a big bully, sometimes some of these schemes are rather grandiose and they are very ruthless, and if no more than the employment issue which I have mentioned as a social one, the very fact that you are stifling trade and small trade by disencouraging people to keep small businesses going, is that not a social aim that would justify this amendment? If it is the Government policy, the policy of the House and public policy to wipe out the small man and go further towards State socialism, let us say so; but do not let us pay lipservice to the idea of trying to keep the small man in business if we are not going to take the opportunities that offer to help him.

Quite apart from that consideration, there is the actual stimulation of trade. I can think of a village not very far from where I am which has stagnated because of compulsory acquisition, or incidentally to that, because the main road was driven another way. It is highly desirable that something should be done in that area to stimulate the businesses which have closed down. I want to reinforce Deputy Fitzpatrick's point that the maintenance of trade, the maintenance of economic activity, of the very business that is required to give the revenue in any way the Minister is seeking, the maintenance of economic trade in community which is the basis on which we are all living—let that die and we can argue away about taxes because there will be nothing to collect and nothing to support the tax collecting and administrative elements of the State. We must be aware of legislation—but I am going too far; I will keep it for the Fifth Stage. I am sorry if I was waxing away on a tangent. What I want to say is that we were not as unreasonable as the Minister seems to think.

To come to his point on the acquisition tax, the Minister suggested to me a point which is not quite the amendment. He made the point that this would stimulate compulsory acquisition proceedings and told us to stick to the Planning Acts. Unfortunately in the way legislation here is, all Acts are getting very much tied together and I put it to the Minister like this. Supposing the people sponsoring the Planning Acts wanted to build in an incentive to avoid compulsory acquisition by putting in an amendment to give exactly what Deputy Colley wants to give in the case where the parties arrive at an agreement and as an incentive to avoiding compulsory acquisition proceedings.

Suppose the Government came to the conclusion that in order to discourage waste of time in legal proceedings and delay in compulsory acquisition and to encourage the parties involved to agree a price they would bring in Deputy Colley's deduction would it be in the Planning Act or in one of the Minister's Acts. I believe we would find it in a Finance Act or have some Minister coming in making a great point about it. I freely concede the weight of the force of some of the Minister's arguments and any reasonable person would but will the Minister concede the weight of the force of our argument and let us, between us, see if we can get an answer? On this amendment we have an opportunity of doing something socially desirable as well as equitable. Section 28, the section which gives roll-over and reliefs of that nature, is hedged in. I urge on the Minister the force of the approach of Deputy Colley's amendment in relation to that section.

Mr. Colley

The social case made by Deputy de Valera for the encouragement and reinvestment of moneys received on foot of compulsory acquisition in business is so compelling that I would be prepared to amend my amendment so as to provide that the relief proposed would be available only when a comparable asset had been acquired. The amendment does not provide that but I would have no objection to it being amended in that way so as to ensure that the inducement Deputy de Valera spoke of is there. With all due respect to the Minister, when he finds himself reduced to the position of having to produce an imaginary case of a kind that I do not believe could ever occur to argue against this amendment he ought to examine his position again.

The case the Minister gave us against this amendment was somebody who starts off by deliberately acquiring premises which he expects to be compulsorily acquired. The Minister put the case that that person would then invest the proceeds he receives in compensation in other premises which he anticipates would be compulsorily acquired. He then reinvests the compensation he gets from those premises in premises to be compulsorily acquired and so on. The Minister cannot seriously be putting that forward against the reality described by Deputy Fitzpatrick of what is taking place in many parts of the country but, specifically, in the city of Dublin. In my constituency, and I would say in the Minister's constituency, small traders are becoming the subject of compulsory acquisition by the local authority. All of the problems attendant on that described by Deputy Fitzpatrick are the reality of what is happening. The Minister has not given a sufficient answer to the effect that these people can get roll-over relief if they invest again in another business.

It is not a sufficient answer because roll-over relief is merely postponement. As Deputy Fitzpatrick cogently pointed out, many of these people will find themselves in the position where they cannot acquire another business and where the compensation they get, even though assessed in accordance with law, is not sufficient to enable them to acquire another business in the suburbs even if such were available. These are the realities of the situation we are trying to deal with in this amendment and not the situation envisaged by the Minister of a person deliberately investing to get compulsory acquisition and compensation and then doing the same again. There is no reality to that situation and the Minister must know it.

The Minister should have regard to the realities of the situation. If the Minister fears that there would be a loophole in this for the kind of person he has described, it is probable that his advisers could produce an amendment which would achieve what we are trying to achieve and still close the loophole.

Let us suppose that is impossible and that the loophole has to be left. I would take serious issue with the Minister if he attempted to justify doing what is proposed to be done here to the various small people whose assets may be acquired compulsorily and justifying that on the basis that if he does not do that somebody is going to get away with the kind of operation he has described. That operation is so far removed from reality as to lack all credibility. If that loophole cannot be closed, are we justified in inflicting a deduction of 26 per cent from the gain on a compulsory acquisition, a gain calculated in a very artificial way in many cases, and not allowing for the person concerned having and trying to reinvest in a comparable asset?

I take issue with the Minister also on the basic principle involved in this. When I was moving this amendment originally and talking about the difference between the position of a person subject to compulsory acquisition and the person who voluntarily engages in a transaction for disposal of his assets, I thought of the situation of the person who fails in business and is compelled then to dispose of his assets. However, I did not feel it was worth mentioning it because it was so self-evidently different. I could hardly believe my ears when I heard the Minister say that he could not see any difference between the position of a person who fails in business and, therefore, has to dispose of his assets and somebody who is subjected to compulsory acquisition of his assets on foot of the authority vested in a local authority by Parliament.

There is a major difference in the position of somebody who is subjected to compulsory acquisition of his property, against his wishes in many cases, and has no choice and the person who voluntarily enters into an agreement to sell his property. To try to compare these positions and say they are the same is, I suggest, getting far removed from life as it is here. I am afraid the Minister is becoming so indoctrinated with certain theories that he is losing touch with the reality of life as it is lived by the Irish people around us. The case described by Deputy Fitzpatrick is the one which will be seriously damaged unless an amendment is accepted on the lines of the one I put forward. It is not good enough for the Minister to sweep all that aside on the basis that some smart-aleck will keep on having his property compulsorily acquired in order to evade liability for capital gains tax. The arguments put forward for this amendment deserve a better answer than that. If that is the best answer the Minister has, it should be an indication to him that he should examine more closely the principle involved in this amendment. I am quite convinced there is substance in the case put forward for this amendment. I freely accept that it may be necessary to do some re-drafting; I reiterate I will be quite happy to re-draft it to ensure that the relief proposed is available only if and when a person actually reinvests in a comparable asset to achieve the incentive referred to by Deputy de Valera. However, the principle involved, which acknowledges there is a difference in the position of someone who is forced, whether or not he wishes, to give up his property as compared with a person who voluntarily enters into an agreement is important and should be recognised by the House. I do not think the Minister is doing justice to himself or to his party if he refuses to recognise that.

Mr. R. Ryan

I cannot advance any more. I have given reasons why the amendment is not acceptable.

Major de Valera

Does the Minister appreciate that we feel strongly about this?

Mr. R. Ryan

I am sure of that but I should like Deputies opposite to know that I have equally strong views.

Major de Valera

We will have to get our social priorities right before we finish with this legislation.

Mr. T.J. Fitzpatrick

(Dublin Central): It is most unfair for a public authority to put a businessman out of business. If he fails to get in again the State will take 26 per cent of the asset. That is morally wrong and nothing will convince me otherwise.

Mr. R. Ryan

The State will take only 26 per cent of the capital gains if the person realises the capital asset, and does make a gain.

Major de Valera

To put Deputy Fitzpatrick's point in plain language: a man has his property taken from him for whatever purpose and he is paid what is considered to be a fair price. However, the point is it is taken from him because he did not want to part with it. In addition, the State takes more than one-quarter of the capital gains——

Mr. R. Ryan

Is the amendment not proposing to do that?

Major de Valera

That is not the case. The Minister is proposing to tax a person who is forced to realise an asset at the high rate of 26 per cent.

Mr. T.J. Fitzpatrick

(Dublin Central): Would the Minister not agree that the two years he proposed in his amendment yesterday is too short in the case of a man whose property is acquired?

Mr. R. Ryan

It will be three years if that person is going back into a similar business and two years if he is going back into another business.

Mr. T.J. Fitzpatrick

(Dublin Central): For which period will a person qualify?

Mr. R. Ryan

It depends on the nature of the reinvestment. If he goes into a different type of business he must make up his mind more quickly although he has a wider range of choice. When a concession is given it is necessary to put a limitation on it to ensure that it is not abused. We must ensure the assets are still there so that the tax will be paid if the option is not exercised.

Major de Valera

We have disposed of that part already. I had not intended to base my argument on equity. There is a principle involved and it will not be long before we get to the stage where it will be applied on a wider basis. We are on a slippery slope.

Amendment put.

The Committee divided: Tá, 55; Níl, 64.

Tá

• Allen, Lorcan.
• Andrews, David.
• Barrett, Sylvester.
• Brady, Philip A.
• Brennan, Joseph.
• Breslin, Cormac.
• Briscoe, Ben.
• Brosnan, Seán.
• Browne, Seán.
• Brugha, Ruairí.
• Burke, Raphael P.
• 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.
• Dowling, Joe.
• Fahey, Jackie.
• Farrell, Joseph.
• Faulkner, Pádraig.
• Fitzgerald, Gene.
• Fitzpatrick, Tom (Dublin Central).
• Flanagan, Seán.
• French, Seán.
• Gallagher, Denis.
• Geoghegan-Quinn, Máire.
• Gibbons, Hugh.
• Gogan, Richard P.
• Healy, Augustine A.
• Hussey, Thomas.
• Kenneally, William.
• Lalor, Patrick J.
• Leonard, James.
• Lynch, Jack.
• McEllistrim, Thomas.
• MacSharry, Ray.
• Meaney, Tom.
• Molloy, Robert.
• Moore, Seán.
• Murphy, Ciarán.
• O'Connor, Timothy.
• O'Leary, John.
• O'Malley, Desmond.
• Power, Patrick.
• Smith, Patrick.
• Timmons, Eugene.
• Walsh, Seán.
• Wyse, Pearse.

Níl

• Barry, Peter.
• Barry, Richard.
• Begley, Michael.
• Belton, Luke.
• Belton, Paddy.
• Bermingham, Joseph.
• Burke, Dick.
• Burke, Joan T.
• Burke, Liam.
• Byrne, Hugh.
• Clinton, Mark A.
• Cluskey, Frank.
• Collins, Edward.
• Conlan, John F.
• Coogan, Fintan.
• Cooney, Patrick M.
• Corish, Brendan.
• Governey, Desmond.
• Griffin, Brendan.
• Harte, Patrick D.
• Hegarty, Patrick.
• Hogan O'Higgins, Brigid.
• Keating, Justin.
• Kelly, John.
• Kenny, Henry.
• Kyne, Thomas A.
• L'Estrange, Gerald.
• Lynch, Gerard.
• McDonald, Charles B.
• McLaughlin, Joseph.
• Malone, Patrick.
• Murphy, Michael P.
• Costello, Declan.
• Coughlan, Stephen.
• 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.
• Gilhawley, Eugene.
• O'Brien, Fergus.
• O'Connell, John.
• O'Donnell, Tom.
• O'Sullivan, John L.
• Pattison, Seamus.
• Reynolds, Patrick J.
• Ryan, John J.
• Ryan, Richie.
• Spring, Dan.
• Staunton, Myles.
• Taylor, Frank.
• Timmins, Godfrey.
• Toal, Brendan.
• Tully, James.
• White, James.

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

Amendment declared lost.

Mr. Colley

I move amendment No. 44a:

In Part I, page 47, to delete paragraph 3 (3).

Paragraph 3 (3) is very short. It reads:

No payment of interest shall be allowable as a deduction under this paragraph.

I do not know what is the reasoning behind this provision. I have no doubt the Minister will throw some light on it when he replies but on the face of it it appears to be a most unreasonable provision. As far as my inquiries go, I believe that there is provision for a deduction in respect of interest in certain circumstances under the capital gains tax legislation in Britain but whether there is or not does not seem to me to be particularly relevant, not only because the circumstances here are different from those in Britain but also because we should be concerned with doing what we believe to be right rather than just what is done in Britain.

The Schedule allows expenses of disposal such as the fees, commission or remuneration of professional advisers and the cost of sale including even the cost of advertising to find a buyer for the property and the cost of obtaining advice as to the market value of the asset. In those circumstances it is very difficult to understand why interest should be singled out as an expense which would not be allowed as a deduction.

All sorts of different transactions are covered by this but one where the matter would be of considerable importance would be property development where, I understand, interest payments frequently amount to as high as 25 to 30 per cent of the overall expense and consequently where a loss or even a small profit may be made on the final development a calculation of capital gains tax could bring about a further considerable loss overall.

I should also like to pose the question as to whether the non-allowance of interest is in accordance with the Constitution because where a person has genuinely incurred interest related only to the cost of acquisition of the asset and subsequently sold the asset the non-allowance of the interest will result in taxation on a profit which was never made. The taxation of a profit which the individual did not make is very likely to be unconstitutional and for that reason I have moved this amendment to delete the provision which prohibits the deduction of interest as an expenditure in calculating the gain on which the tax should be assessed.

I would also point out that this provision in paragraph 3 (3) is not confined to what we might call private assets but appears to extend to business assets as well, which makes it even more reprehensible. I can see no justification for this approach and I will be interested to hear the Minister's reasons for including this provision in the Bill.

Mr. R. Ryan

Deputy Colley has referred to the position in Britain. The position there is that the relief in respect of interest applies only to companies and it applies where a company has defrayed out of borrowed funds the cost of the construction of the building structure or works and has earmarked the expenditure in the accounts as capital expenditure. There the interest is payable only in respect of capital tax liability and not in respect of any income tax liability.

I will be giving consideration to this matter later this year in dealing with our own corporation tax position and having regard to the fact that a company may, in fact, have this capital expense and incur this interest it might be appropriate to do something. Whether I should leave it over until the corporation tax Bill or deal with it in this Bill, I am not too sure. I would be prepared to consider the matter between now and the next Stage to see if pending the corporation tax Bill I should do something about it in this Bill.

Mr. Colley

Could I just clarify something? Do I take it from what the Minister has said that what he is considering is the allowance of interest in respect of trade assets but not in respect of non-trade assets?

Mr. R. Ryan

I am considering it in relation to construction works by a company. It would not be possible to give this concession to an individual but only to a company.

Mr. Colley

Could the Minister dwell on that?

Mr. R. Ryan

Of course, if it is an ordinary stock-in trade, and so on, it would come under the income tax code.

Mr. Colley

If an individual expends interest solely in relation to the acquisition of a particular asset, what is the difference in principle between the individual and the company in this case?

Mr. R. Ryan

In Britain, it applies only to companies and does not extend to individuals. The Deputy is aware that in last year's Finance Act we took steps to prevent the use of credit facilities to individuals for tax avoidance purposes. It would not be possible effectively to control the situation if unlimited interest was to be allowed to individuals and I consider that if the concession is to be given to companies who are trading companies, that is the limit of what would be tolerable. It is interesting to find our neighbours have found it necessary to restrict the concession in the same way.

Mr. P. Belton

If a person is in property business or any business where a large amount of money is involved, he purchases and the bank reckons a two- or three-year period in which to finish the operation and they usually sign for that period. They let the interest roll over and they treat it as a capital charge. It is the same if you pay for an architect, an engineer or a quantity surveyor. It is an expense.

Mr. Colley

It is the cost of money.

Mr. P. Belton

You pay it out. It is like bricks and mortar. A person can have everything lined up to finish on a certain day and because of economic circumstances, delay in planning or a particular planner out sick at a time when a decision cannot be made, you have to wait up to four months. You have to pay for this delay, which is no fault of the developer or company. If there is a scarcity of property the interest rate will not be that important. There is always a period, such as when there is an economic boom, where certain property may take six months to get rid of. You have to pay interest on this and you pay more in extra costs. Instead of paying income tax and corporation profits tax at 49 per cent you could end up paying 60 per cent if you were not allowed on your interest. This will stop employment, I feel interest must be allowed. If you buy a premises for so much and you go to your local bank in the morning and ask for a loan for £X you repay it at so much plus the interest. You pay capital plus interest and your costs are added in. Your local bank or merchant banker will tell you the amount you must pay back to him per year. I cannot see interest as anything else but part of the costs.

In another Bill the Minister allowed no more than £2,000 interest but this is a different matter. Here it is part of paying out. If a person bought a bulldozer to do a job he would have to write that off against the cost of building shops, an office block or whatever it is. The interest is the charge on it. If you are on a very tight margin there is no profit at all and we will be back to what we were discussing earlier, where you will have a capital loss rather than a capital gain.

Let us take a reasonably sized business where you borrow from 50 per cent to 70 per cent of the money required. If it is an office block you can borrow up to 90 per cent. Your interest charge on this is greater than the costs of all the professional people you employ. It can be as much as 50 per cent of total costs, including the land. If there is any delay in finishing the building you could end up with no profit at all.

Mr. R. Ryan

I think the House understands that if a company or an individual is trading in this way then interest on money borrowed is set off against income. Under our law, interest is treated as being a revenue item. It has not been treated until now as a capital item. I know we are changing the law in relation to capital taxation and that is why I said I am prepared to look at this. It is a new treatment of interest which until now has been set off against income. It is one of the outgoings of a company or business. Interest has been allowed on personal loans too and was unlimited until last year when we considered it was necessary to impose a restriction unless an individual was borrowing for the purpose of a business, in which case if it was for the improvement of the business or the purchase of a business, there was no limit to the amount of borrowing which could be made.

We have been asked to deal now with a separate situation, where a person is not in the business of developing, if I understand Deputy Belton rightly. That is a situation I want to look at very carefully. I would not want to rush into giving any undertaking now as to what precise amendments might be made to this Bill or to say if I would deal with it in this Bill or later in the year in the corporation tax Bill.

Mr. P. Belton

The Minister mentioned interest not being treated as capital. About eight years ago I went into a bank manager and this was the first time I ever used the words "cash flow", which all the whiz kids use. The bank manager told me there was no such thing as a cash flow. "It is a bigger overdraft or a smaller overdraft you are looking for" he told me. Interest to me was always capital. You were worth £100,000, for instance. You owed £50,000 plus interest. You took all that off your £100,000 and the remainder is what you were worth. This is as basic as bricks and mortar. You have it or you have not got it. Cash flow is an overdraft and interest is capital. It is a capital sum which you owe and you must pay it. If you cannot do so you must sell out and pay it and you are left with a net figure.

The one thing I can agree with the Minister on is the case of a person who might have done a deal with an insurance company and he might have a fixed interest rate of about 6½ per cent. This man could sit back and need not let the place. He is making capital profit every day of the week and with inflation going up he is sure to make a large profit. The best example of that is Centre Point in London where the individual who owned it had a fixed rate of 6½ per cent and the going rate was 15 per cent. He sat back and the insurance company, which gave him the fixed rate, had to give a large sum of money to buy him out because he made such a large amount of capital. The Minister should stop that.

I am speaking of the case of an individual or a company paying £100,000 for property. The cost of vending is £100,000 but he may borrow £150,000. He is paying 15 per cent or 13? per cent interest on that. That means the total cost is £200,000 plus 15 per cent or 13? per cent of the £150,000. He should get something for his own £50,000 but he will let that go towards the profit. That is his risk capital in it. Surely that man must get the interest allowance, which is really part of his capital. If I thought people were getting away with it and doing something wrong I would be all in favour of doing something about it. If this happens the Minister and the Government will get their cut out of it.

I am afraid there will be less building and, if there is not less building, the charges will be a lot higher. If a person has flats, office blocks, shops, or whatever you like, he gets a rent and sells at a certain number of years' purchase. He then takes off his costs. The interest rates will be very high and they will not be allowable. This means he will lose money. If he is to make money he must charge a greater amount. This means that there will be a scarcity of buildings and whoever has a few buildings will make money. In my opinion we are upping the price artificially. I do not think anybody can deny that an interest charge is a capital charge.

Progress reported; Committee to sit again.