Dáil Éireann díospóireacht -
Wednesday, 28 May 1975

Vol. 281 No. 6

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

Debate resumed on amendment No. 44a:

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

—(Deputy Colley).

Mr. P. Belton

Before the debate was adjourned I pointed out the circumstances in which capital gains tax would arise and how persons would be allowed interest against a capital gain. There are four main ways in which a person could make a capital gain. First, there is the property dealer who purchases property and without doing anything to it, sells it. That will not be regarded as a capital gain. He will be liable to tax under Schedule B and corporation profits tax. Secondly, a person purchases a site, pays architects and takes the risk of building on the site and sells the building to an institution. If the economics of the situation forced him to sell he would be liable to capital gains tax and not to Schedule B tax. If it were a trading company, it would be liable to Schedule B tax and corporation profits tax. That does not arise except where he can prove it was a forced sale. That is where there would have to be some examination.

Thirdly, there is the case where an extension is built to a business structure or works and interest charges in respect of that extension are allowed as a capital expenditure. It might be an hotel or manufacturing business that was extended. The interest charge would be allowed against the profits. If it were sold, interest charges would be allowed and it would be taxed as a capital gain.

The fourth case may be the reason the Minister is catching the whole lot. It is the case where a person gets in quickly and buys up property which is not his home or place of business and sells it at a huge profit. This transaction is liable to capital gains tax. If there is interest payable this would be allowed in the normal circumstances. At the moment the person would be able to get away with it. It is a once and once only profit.

I am not trying to create loopholes or to get the Minister to agree to things that are unfair. The fourth case that I have described is the one that any Minister for Finance would try to catch but in order to catch that case the other three legitimate cases are caught. In fact, the Minister will catch four or five cases instead of the one that he wants to catch. In doing so he will stop development and will create the position that tax of 65 per cent will be payable. This is very wrong. I am not speaking for companies only. There may be a private dealer who purchases property and sells it. He is in the property business. He has to pay income tax and corporation profits tax and sur-tax. I do not think it is right to penalise so many in order to catch one. If the person who moves in, buys property, sells it off and looks for interest charges on it were isolated the matter of allowing interest would be feasible. When I refer to property it can be flats or any type of building or construction. The Minister has promised to look at it. I would like to catch the Smart Alec who comes in and gets away with something but every other straightforward businessman, whether he be a property dealer or something else, who is engaging in this work in the course of his business, should not be victimised. The man who is engaging in this business, if he is a trading company, pays 49 per cent or if he is a property dealer, pays income tax, sur-tax and corporation profits tax. I would like the Minister to consider this very carefully. He is closing one gate and he may get another method of locking that gate without locking the gate to every businessman, property dealer or construction man in the business.

Minister for Finance (Mr. R. Ryan)

It is a fairly easy and cheap thing to form a company. I would, bearing in mind the kind of property deals Deputy Belton is talking about, consider that the outlay for the formation of a company is very small cheese compared with the advantage which a person could gain if a concession were given in respect of interest incurred by a company on capital borrowed for construction purposes. The reason for the distinction in Britain between the treatment given to companies and individuals is that in the case of companies the capitalisation of the interest is controlled by the fact that the company have charged the interest to capital account and therefore it cannot apply to income account.

Obviously the same control is not available and cannot be applied in the case of an individual who cannot be subjected to the same constraint in respect of interest paid. This is a significant administrative difference between a company and an individual. This is the reason why if we make an adjustment to the Schedule here that it will have to be confined, as it is in Britain, to companies and not be available to individuals. As I said in my opening remarks it is such an easy process to form a company that there would be no serious charge on anybody who is interested in availing of this concession to form a company but by so doing becoming subject to the disciplines which apply in respect of company accounts. If the House is good enough at this stage to accept my readiness to make an adjustment here I will consider what is the best way of doing it and bring in an appropriate amendment on Report Stage.

Mr. P. Belton

Could this not be done by having it substantiated that it was interest which was put to capital use by a recognised bank or institution? Would this not suffice in the case of an individual?

Mr. R. Ryan

It might be difficult for the bank to assess the use to which the money was put. Even an accountant, in furnishing accounts, has to rely on the accuracy of information received. A banking institution and an insurance company would also have to have the same reliance. It would not be appropriate to push the onus on to them. I am not too certain what the consequences of that might be either for them or for the Revenue Commissioners. Having regard to the fact that a person wanted to avail of any concession which may be given there is a fairly easy way of achieving it. It is not unreasonable to ask them to make that election. I suspect the cost of forming the company would at least be no greater than any premium which would have to be paid to an insurance company offering a bond or a certificate in the same position.

Mr. P. Belton

I accept that. A person engaged in any sizeable property deal will not get away with a shadow company. There will have to be some risk of capital involved. He might have to give his own personal guarantee. He might not want to go into a company. If he is to guarantee the thing he might as well guarantee it in his own name. Those people will not accept a sham company.

Mr. Colley

The same point made by Deputy Belton struck me. It is a valid point but he has been correctly describing the case for allowing interest in terms of property development such as flats, houses, office blocks or anything else. I would like to point out that this restriction on the allowance of interest applies to much more than property development. It applies to all transactions in which capital gains tax can arise.

There are certainly transactions which could attract capital gains tax and in which interest could be a substantial factor where a limited liability company would be quite inappropriate. While I appreciate the Minister is prepared to look at and has by implication—although I do not want to commit him to this—agreed he would accept that in the case of a company allowance should be made in respect of interest.

This does not meet all the case. There are a number of instances in which only an individual would be involved or in which, while there might be a company, as Deputy Belton has pointed out, the individual's role in the matter could be a crucial one in obtaining credit from the bank and so on. Although the company might be the nominal party involved the interest could well fall on the individual and not be allowable against the company's liability. This extends further than the situation of a company.

I want to put this matter a little further. There can be individuals as well as companies involved and any transaction, which could attract capital gains tax, is affected by this. Since the Schedule allows as expenses, which may be deducted, such things as I mentioned earlier as the payment of fees, commission or remuneration to professional advisers, the cost of sale and even the cost of advertising, is it not true that the cost of money should be allowed just the same as the cost of all the other items? The cost of money is, of course, the interest. The question of the interest, should in my view, on principle, leaving aside the practicalities of it, be allowed just the same as the cost of any of the other items.

I am assuming that the reason for the Minister's hesitation in this is that he sees considerable possibilities of evasion. He has not said this. I cannot think of any other reason. I should like to know if that is what the Minister's difficulty is and, if it is, is it not possible to control the interest which may be claimed by making the person claiming it establish to the satisfaction of the Revenue Commissioners that it was interest genuinely incurred as part of the cost of the acquisition of the particular asset. What is the principal difficulty the Minister sees in doing this?

Mr. P. Belton

I accept what the Minister says.

Major de Valera

I cannot see why interest should not be treated as a cost, as Deputy Colley says, in the same way as professional fees. The Minister is obviously prepared to look into the matter. He strikes me as somebody who has a problem.

Mr. P. Belton

Three problems.

Mr. O'Malley

This is not one of the bigger ones. He has a bankrupt country on his hands.

Major de Valera

He is a bit reticent about sharing his problem with us. Would I be forcing the pace if I suggested that the provisions of paragraph 4 are relevant: "Exclusion of expenditure by reference to income tax." In paragraph 4 deductions are allowable. In the case of a company there is a balance sheet and a profit and loss account. The interest is charged on the profit and loss account and there are allowances. On the other hand there are also capital allowances in regard to premises and so on. Possibly the Minister has something to tidy up so far as companies are concerned. Why the distinction as against an individual?

If the Minister has to deal with the matter in the case of companies, I cannot see why he cannot face the same principle in the case of individuals and why the simple fact cannot be faced in both cases, as a principle, that interest is a cost properly chargeable as such and traditionally allowable as such in trading. When you come to capital transactions, is there any real reason why you should depart from that principle? We suggest that there is a very simple way of preserving consistency by treating interest as cost. That would mean the deletion of this subsection as the amendment suggests. In view of the Minister's anxiety I am putting this in a neutral way rather than in an advocatory way. I cannot see why he cannot do this.

It seems to me in the net, that the complications of corporate body accounting are causing the Minister a dilemma and that he is seeking to find a solution within the framework or the terms of the conventions of corporate body accounting where he could drive right through cleanly by simply deciding that interest was a cost and applying it in a similar way to capital gains as it would be applied as a cost on the trading side of the enterprise. I do not know if such considerations are relevant to the Minister's thinking. I can certainly see that subparagraph (3) of paragraph 3 is intruding on the grounds, so to speak, of the provisions of paragraph 4.

Mr. R. Ryan

Having said how far I am thinking of going, that is, in giving a concession to companies but not individuals, the principal reason why we cannot go so far in relation to individuals is that the legal requirements for keeping accounts differ and are much tighter in respect of companies. Interest charged to capital account is clearly identifiable and cannot be confused with income charged to revenue. I doubt that individuals would welcome having applied to them the more severe regime in relation to keeping accounts which applies to companies. Maybe we could say that any individual wishing to avail of this concession would have to keep accounts in that form, but even that might create quite a number of complications administratively. I can see merit in the arguments which has been advanced from both sides of the House. I will endeavour to produce an amendment—I would like to go all the way if it were possible to do so—which will go some of the way to meet the main bulk of expenditures of this kind.

Mr. T.J. Fitzpatrick

(Dublin Central): I can see the Minister's point about tightening up the form of accounting in regard to companies, but I do not think he should victimise the independent businessman. Businessmen have to produce the same type of trading accounts for income tax as any company. When the Minister is making provision on Report Stage he should take into consideration the independent businessman who is not a company. There are thousands of business people to whom this section will apply. It would not be justice to give this concession to a company and to exclude the ordinary private businessman, or any private person.

Mr. R. Ryan

Most of the ordinary businessmen referred to by Deputy Fitzpatrick will be getting this concession on the income tax front.

Mr. Colley

And there is no problem.

Mr. R. Ryan

He cannot get it under both headings.

Major de Valera

I remember sitting on the committee which dealt with the Companies Act in 1963 or thereabouts. I remember facetiously remarking when we came to the title of the Bill that it should really be entitled an Act in aid of the Revenue Commissioners. What I meant by that was that all the accounting procedures, although dressed up with the appearance of being there to protect shareholders, were really all in aid of supervision by the State and particularly in regard to revenue information. We should not approach this or any other Bill on that basis. Let us try to do everything we can to facilitate the persons and agencies who have to assess and collect the revenues of the State. Whether it will be administratively convenient or will facilitate administrative action should not be a primary consideration in imposing liability on the taxpayer. Putting Deputy Fitzpatrick's point in more abstract terms, I do not think it right for us in this House to say that, because the accounts of companies will be nice and tidy and easier to get at, companies will get a concession that an ordinary, individual trader or person would not receive. I bring that consideration to the notice of the Minister and I shall not press the matter beyond that.

Mr. O'Malley

Unfortunately, I did not hear the earlier part of the debate on this amendment but the latter part centred round the cost of money, by way of interest, which is raised for the purpose of buying property or an asset. There is another form of interest which is not the cost of money raised for the purpose of buying an asset but is in the form of a penalty for non-completion of a sale or purchase at the stipulated time. I do not know whether that was referred to in the earlier part of the debate. On the assumption that it was not, I would draw the Minister's attention to the fact that subsection (3), which totally excludes interest as an allowable deduction, would be quite unfair in relation to the type of interest about which I speak because it is very much a cost of the acquisition.

As the Minister will know, that type of interest is shown on the apportionment account on the close of the purchase. From the point of view of the purchaser it is every bit as much an expense as are auctioneer's fees, solicitor's fees, stamp duty or anything else. Certainly any amendment the Minister makes to this subsection should take that penal type of interest into account rather than the cost of borrowed money and certainly should be an allowable deduction. The rates being fixed in contracts at present are very high, often as high as 18 per cent. No purchaser willingly involves himself in the payment of such a penal rate. Mentioning the 18 per cent brings to mind in fact that that is the penal rate the Revenue Commissioners have adopted for now themselves.

It strengthens the point I am making, that no purchaser willingly involves himself in that kind of situation, where he may have to pay a rate of interest as high as that on delay in closing the sale. Therefore, with the very high rates current nowadays no purchaser willingly delays the closing any longer than he need, or beyond the closing date specified in the contract. The delay may be due to problems of title or a variety of other matters but, if that interest does become payable, certainly it should be allowable as a deduction so far as capital gains are concerned because it is an expense of the purchase in the same way as are the various forms of fees, stamp duty, Land Registry fees, or anything else.

Therefore, in making the amendment he proposes on Report Stage the Minister should bear in mind that that type of interest, as opposed to the other, which is the cost of money borrowed, should certainly be allowable in full as a deduction. It is a capital form of interest in the sense that it is a once and for all capital payment on the closing of the purchase rather than an interest which will continue to run for as long as the money is borrowed.

Mr. R. Ryan

It raises an interesting point. I shall look at it.

Mr. O'Malley

The Minister could look at it and look away again.

Mr. R. Ryan

No, I will look at it——

Mr. O'Malley

Well, I remember when I would say I would look at it too, just to quieten the Opposition for a while, but then they began to cop on.

Mr. R. Ryan

The Deputy found it worked, did he?

Mr. O'Malley

That is why I am afraid the Minister might find it works too.

Mr. R. Ryan

When I say I will look at it, I would not do so in the same way as would Deputy O'Malley.

Mr. Colley

Lest the Minister be tempted to follow the apparent bad example given by Deputy O'Malley, when he was Minister, let me tell him that anything on which he does not produce an amendment on the next Stage is likely to have an amendment from this side. Therefore, he may as well look at it.

Mr. R. Ryan

I will look at that too, and bring it forward.

Acting Chairman (Mr. M. E. Dockrell)

Is the amendment withdrawn?

Mr. Colley

On the basis of the Minister's undertaking, it is withdrawn.

Amendment, by leave, withdrawn.

Mr. R. Ryan

I move amendment No. 45:

In page 52, paragraph 11, to delete subparagraph (b) and to substitute the following subparagraph:

"(b) for any contingent liability of the person making the disposal in respect of any covenant for quiet enjoyment or other obligation assumed—

(i) as vendor of land, or of any estate or interest in land,

(ii) as a lessor, or

(iii) as grantor of an option binding him to sell land or an interest in land or to grant a lease of land,".

Paragraph 11 provides that certain contingent liabilities normally of a type not likely to materialise will be disregarded in computing chargeable gains on the basis that an adjustment will be made subsequently if the liability should become enforceable. Among the contingent liabilities included was an obligation assumed as vendor of land but, as the provision could be avoided where the disposal is in the form of the grant of an option, the amendment widens the scope of the provision to include certain categories of option in transactions covered.

Mr. Colley

I do not think it mentions the word "option", does it?

Mr. R. Ryan

Paragraph (iii) of the amendment does, where it says "as grantor of an option binding him . . . "

Mr. Colley

Except that it is in a different form is the rest of it exactly the same as paragraph (b) which it is proposed to delete? I think the rest is the same except in a different form. Therefore, the only addition is paragraph (iii), is it?

Mr. R. Ryan

Yes, that is right, the third one.

Amendment agreed to.

Mr. R. Ryan

I move amendment No. 46:

In page 52, paragraph 12 (1), to delete "of the disposal" and to substitute "on the disposal".

This is purely correction of a printing error where the word "of" was used instead of the word "on" in page 52, paragraph 12 (1).

Amendment agreed to.

Mr. R. Ryan

I move amendment No. 47:

In page 54, paragraph 16 (1) (a), to delete "have quoted" and substitute "had quoted".

Again, this is a drafting amendment which involves a slight change of wording without altering the meaning of the provision. We are putting in the word "had" instead of the word "have" before "quoted market".

Amendment agreed to.

Mr. R. Ryan

I move amendment No. 48:

In page 54, paragraph 16 (1) (a), to delete "have had" and substitute "had".

This is similar to the last amendment. There is no change of meaning involved.

Amendment agreed to.

Question proposed: "That Schedule 1, as amended, be Schedule 1 of the Bill."

Mr. O'Malley

Are Parts I and II to be taken together because Part II does not seem to have any amendment and is a different matter altogether?

Mr. Colley

Although the question may have to be put, just on the Schedule as a whole, I think the best way to deal with it is to take it paragraph by paragraph with regard to any questions we have to raise on particular paragraphs and, if possible, pass on.

The first question I want to pose relates to paragraph (6). If anybody wants to raise anything before that, I will give way to him. Paragraph 1 (6) reads:

Paragraph 6 and all other provisions for apportioning on a part disposal expenditure which is deductible in computing a gain, are to be operated before the operation of, and without regard to . . .

and it then lists the sections and the provisions. What is the effect of the phrase "before the operation of, and without regard to" these particular sections and provisions?

Mr. R. Ryan

Subparagraph (6) deals with part disposals. You would have to make a calculation first as to the value of the part disposal before you could bring into operation the exemptions and benefits conferred by section 13. The purpose of subparagraph 6 (a), which deals with married persons, is to make it clear that the provision for the apportionment of costs of part disposal is to be operated before regard was had to the various considerations which secure in certain circumstances that no loss or gain is deemed to have arisen on a disposal.

Mr. Colley

Is this a relief to the taxpayer?

Mr. R. Ryan

It is to work out what is a part disposal. The reliefs are contained in section 13. You must calculate the part that is being disposed of and the undisposed part before you start thinking of relief.

Mr. Colley

If one assumes a part disposal and then an apportionment as between the whole and the part, that is done first and then the relief in, say, section 13 (5) is applied. On the face of it it seems that that would benefit the taxpayer rather than apply the relief of section 13 (5) to the whole and then apportion it.

Mr. R. Ryan

Accuracy helps everybody.

Mr. Colley

Apart from accuracy would it not work out mathematically more favourably to taxpayers since you would be applying a bigger relief to a smaller sum?

Mr. R. Ryan

Yes.

Mr. Colley

I was primarily concerned with the actual effect and the Minister has answered my question.

My question on section 2 (1) is a difficulty with the syntax. The section reads:

There shall be excluded from the consideration for a disposal of assets taken into account in the computation under this Schedule of the gain accruing on that disposal. . . .

I appear to have solved my own problem by reading it aloud. Does the Minister intend to operate this subsection in such a way that life assurance funds would be liable to capital gains tax? If it is so intended, that would appear to be contrary to paragraph 88 of the White Paper.

Mr. R. Ryan

Under the provison to subparagraph (1), where the life assurance company is not charged in respect of its life assurance business under Case I of Schedule D, the mere inclusion of profits from the realisation of investments in a computation of profits for the purpose of restricting management expenses reliefs will not prevent the charge of capital gains tax on gains on disposal of life fund investments.

Mr. Colley

I am not quite sure what that means. It seems that the capital gains tax liability will arise on life assurance funds if they are deemed to be a gain. Is that correct?

Mr. R. Ryan

Yes.

Mr. Colley

Is this not contrary to what was indicated in paragraph 88 of the White Paper? This is not just a charge on the assurance companies but also on the policy holders.

Mr. R. Ryan

We are dealing here with the computation of profits for the purpose of restricting management expenses relief.

Mr. Colley

It seems to me that subparagraph (1) provides that the gain accruing on any disposal of money or money's worth which is charged to income tax will be excluded from consideration for the purpose of assessing capital gains tax, and presumably losses, but the subparagraph goes on to say that despite that there will be taken into consideration for the purpose of assessing gains or losses such income as is dealt with under section 214 of the 1967 Act. Broadly speaking, is that not what it provides?

Mr. R. Ryan

They will be chargeable to capital gains tax because they have not in fact been charged to income tax.

Mr. Colley

Is that because under section 214 they will be charged to income tax but the income tax has been refunded?

Mr. R. Ryan

Yes.

Mr. Colley

They are picked out as a special case because of that, but that special provision in section 214 of the 1967 Act is because it is dealing specifically with relief. The effect of this proviso in subparagraph (1) is that it is subject to capital gains tax on gains accruing on the disposal by a life assurance company of investment funds. It is necessary from the point of view of policyholders that the insurance company should manage investment funds prudently and there would therefore be a number of instances in which disposals would take place. If each of these disposals which produces a gain is to be subjected to capital gains tax, this could seriously affect the profits available on what are called "with profits" policies. Probably the effect will be felt by Irish life assurance companies rather than foreign companies and it seems to be contrary to what was stated or indicated in paragraph 88 of the White Paper. If the effect of this is to reduce the amount of profits available in the context of "with profits" policies in the case of Irish life assurance companies as distinct from foreign companies operating here, this would seem to be a very retrograde step and I wonder why the Minister would propose to do it.

Mr. R. Ryan

Some of these profits are already being charged to Case I and if they are in that category no capital gains tax would be charged on them.

Mr. Colley

If they are charged to Case I, I think the effect of the proviso would be that even though they were so charged they would still be taken into account in assessing the gain for the purpose of capital gains tax on the basis that under section 214 of the 1967 Act they would be refunded though charged to Class I. The first part of it excludes from consideration for capital gains tax purposes gains that were subjected to income tax, but the proviso seems to include these considerations, though subject to income tax, when the income tax was refunded.

Mr. R. Ryan

Where the insurance company is assessed under Case I on its profits, the gain will not be taxed to capital gains tax. Where however the company is charged on investment income only, then the proviso operates and the mere computation under Case I will not operate to prevent a charge on gains which are not in fact assessed to income tax though chargeable under Case I.

Mr. Colley

The Minister is drawing a distinction between income which is computed for the purposes of Case I and income assessed for Case I.

Mr. R. Ryan

That is correct.

Mr. Colley

In practice, where tax is charged and where tax is not charged—and if tax is charged they will be excluded and if tax is not charged they will be included for capital gains——

Mr. R. Ryan

That is right. That is where we started from.

Mr. Colley

In a case where income tax has not been charged and therefore they are included for the purpose of assessment of capital gains tax, is that not, first, to the detriment of the policyholders, particularly in Irish companies, and two, is it not contrary to paragraph 88 of the White Paper?

Mr. R. Ryan

Of course capital gains tax will be broadly based and it will apply to a large number of companies and activities, and I do not think it would be appropriate to discriminate unduly against some and in favour of others. There may be some elements in insurance activity which will carry the capital gains tax but it will not significantly depreciate the value of insurance to policyholders.

Mr. Colley

Could the Minister say whether the effect of this subparagraph will be to operate in relation to Irish life assurance companies but not in relation to companies carrying on business here who have head offices outside the State?

Mr. R. Ryan

There will be no significant advantage gained by, say, a British based company over an Irish company because if, as a consequence of the double taxation agreement, an English-based company would be exempted from paying capital gains tax in Ireland, it would be paying a higher rate of capital gains tax in Britain, which would be 30 per cent instead of our 26 per cent, so that it would still be an advantage of 4 per cent so far as Irish companies are concerned.

Mr. Colley

That is one leg of the argument, but does the Minister know whether a British company would pay in precisely the same circumstances as an Irish company?

Mr. R. Ryan

Yes. There are, of course, variations. I would not be explicit but——

Mr. Colley

Substantially the same?

Mr. R. Ryan

——broadly speaking, their liability would be similar.

Mr. Colley

I agree that British companies would be the main competitors of the Irish companies, but the Minister will appreciate that there are also companies other than British and Irish operating here and, in fact, that is a trend that is likely to grow, particularly as a result of certain developments in the EEC. We ought to ensure at the very least that the Irish companies are at no disadvantage.

Mr. R. Ryan

When the Deputy considers that the following countries have a capital gains tax, he will see that the position will not be very different from that which will operate between Ireland and Britain: Belgium, Denmark, France, Germany, Italy, Luxembourg, the Netherlands, the United Kingdom, Austria, Finland, Greece, Iceland, India, Norway, Portugal, Spain, Sweden and the USA. I do not know the position about Canada.

Mr. Colley

The Minister knows that many of those capital gains taxes are quite different from ours.

Mr. R. Ryan

Some of them are more severe.

Mr. Colley

And some are much less severe, as the Minister knows very well. The Minister ought to examine this, first, to ensure that there is no disadvantage, at any rate, to the Irish companies and, secondly, to see whether or not this provision is in accordance with paragraph 88 of the White Paper.

Mr. R. Ryan

I have been looking at paragraph 88 and I cannot find any conflict.

Mr. Colley

Perhaps the Minister will get an opportunity to look at it more closely and he may find it. I think there is a conflict.

Mr. R. Ryan

Maybe the Deputy has quoted the wrong number, but I shall not make any point on that. I shall certainly look at it.

Mr. Colley

There is another matter on paragraph 2 that I want to raise. In general, this paragraph provides that any expenditure which is allowed as an expense for the purpose of income tax will not be allowed for the purpose of capital gains tax. I think that is the general proposition in it, but can the Minister state categorically the converse, that a profit or gain which is liable to income tax will not be chargeable for the purpose of capital gains tax?

Mr. R. Ryan

That is right.

Mr. Colley

Can the Minister state that categorically?

Mr. R. Ryan

Yes.

Mr. Colley

There is a provision in the Bill which purports to say that, but I do not think it does say it. At any rate, that is the Minister's intention?

Mr. R. Ryan

That is my intention, and I believe we have achieved it.

Mr. Colley

I have some doubts on that subject. I have to refer back a little to get this in context. Paragraph 1 (2) states:

Reference in this Schedule to sums taken into account as receipts or as expenditure in computing profits, gains or losses for the purposes of the Income Tax Acts shall include . . . .

It sets those out. Then paragraph 2 provides that any such sums taken into account will not be taken into account for the purposes of capital gains tax. However, subparagraph (2) of paragraph 1, which defines the references in the Income Tax Acts includes, and is said to include, "references to sums which would be so taken into account but for the fact that any profits or gains of a trade, profession or employment are, not chargeable to income tax or that losses are not allowable for those purposes."

Therefore, it would seem that Revenue receipts from export relief companies, Shannon relief companies, exempted artists, or golden handshake payments generally, as they are called, would be excluded from capital gains tax. I assume that is correct. If that is so, could the Minister say whether termination payments, which are not liable to income tax because they are excluded by section 115 of the 1967 Income Tax Act, are outside the scope of capital gains tax?

Mr. R. Ryan

The fact that certain profits may be relieved does not mean that they are not brought into charge. They are brought into charge under the Income Tax Acts; then they are relieved like the export profits. The technical process is to bring them into charge and then relieve them. They would not be caught by capital gains tax.

Mr. Colley

That is the practical effect?

Mr. R. Ryan

Yes.

Mr. Colley

I thought that was so, but I am wondering whether, in addition, the practical effect is that the termination payments, which, by virtue of section 115 of the Income Tax Act of 1967, are not liable, are excluded from capital gains tax. Section 114 makes them liable to tax, but section 115 sets out circumstances in which they are not liable. What I want is confirmation that those which are not liable under section 115 will also be excluded from capital gains tax.

Mr. R. Ryan

Yes, payments on retirement or removal from office or employment, which are in general, like the export tax, brought into charge under Schedule E in relation to retirement by virtue of section 114 of the 1967 Act, will not be chargeable to capital gains tax. Even where such amounts are exempted under section 115, they still come within the income tax net and thus they will be excluded from the charge of capital gains tax notwithstanding that they are paid for a surrender of contractual rights. The golden handshake of up to £3,000 on leaving employment is, therefore, exempt from both income tax and capital gains tax.

Mr. Colley

I wanted to get that clear. On paragraph 3 (2) there is a point which Deputy Fitzpatrick raised on an earlier section on which I would like to get clarification. I think it is true to say that the cost of insurance of an asset against risk is not allowed as an expense to be deducted from the gains?

Mr. R. Ryan

That is right.

Mr. Colley

I wonder if the principle there is correct, whether it is not, in fact, a normal expense undertaken by any prudent taxpayer in respect of an asset of real value and that the exclusion of this as a deduction will—admittedly to a small extent —to some extent contribute to inducing people not to effect such insurance, whereas it is only prudent that they should effect such insurance to preserve the asset. If they fail to do so and the asset is destroyed, the Exchequer will lose also if it is destroyed without compensation.

Mr. R. Ryan

The asset could be preserved without having insurance.

Mr. Colley

Provided you were lucky.

Mr. R. Ryan

It might be prudent to insure in case you are not lucky but it is not essential to the preservation of the asset that you have it insured. Insurance has always been treated as an ordinary revenue expense and not deductible against capital. I cannot see my way to allow insurance premiums to be a deductible item.

Mr. T.J. Fitzpatrick

(Dublin Central): This case is slightly different. The ordinary business insurance is chargeable against the profits of the business but suppose a person buys an antique or a picture and has no trading business. He takes out insurance of £100,000 or £200,000 and pays the premiums out of private income. Having held this antique or picture for ten years enhances the value of that object and this is how capital gains tax comes in. The money spent on insurance has been paid out of the owner's private means and is not set off against income tax as in a normal business. That is the difference between this type of insurance and the ordinary trade insurance which would automatically qualify for an allowance as a charge on the running of the business. Here the insurance is paid from some other income. During the time it is insured its value is enhanced and capital gains tax comes in. There is a case for an allowance in that situation.

Mr. R. Ryan

I think the Deputy supports my case that it is a payment out of income in order to maintain the asset and not out of capital.

Mr. T.J. Fitzpatrick

(Dublin Central): It is a payment out of another income, nothing to do with the item we are discussing.

Mr. R. Ryan

Any payment for insurance would not be reflected in the capital value of the asset at the time of disposal. The only expenses we can allow are those which are reflected in the value of the asset at the time of disposal.

Mr. T.J. Fitzpatrick

(Dublin Central): Would it not be normal practice for anybody acquiring something of this kind to insure it?

Mr. R. Ryan

It may be a prudent thing to do. Sometimes assets are uninsurable because they are priceless.

Mr. T.J. Fitzpatrick

(Dublin Central): During that ten-year period one could have spent £1,000 or £1,500 on insurance. Surely that should be allowed when assessing the capital gain on that article? Perhaps the Minister has a different view.

Ruairí Brugha

The Deputy is speaking of an asset that is not earning any income and, as the individual is paying a premium out of private income to protect that asset, there would seem to be a case for an allowance.

Mr. R. Ryan

It does not protect the asset; it provides compensation if the article is destroyed. It protects the owner.

Mr. Colley

And the money out of which the revenue may collect capital gains tax. Without it, the tax would be lost.

Mr. R. Ryan

The owner wants to make sure that he has something to dispose of.

Mr. Colley

In regard to paragraph 12 dealing with woodlands, is the principle involved here that there is a notional separation between the trees and the land and that they can be dealt with separately for the purpose of capital gains tax? Is that the thinking behind the paragraph?

Mr. R. Ryan

Yes.

Mr. T.J. Fitzpatrick

(Dublin Central): Will both be assessed separately in this tax situation?

Mr. R. Ryan

Timber does not come into charge for capital gains tax because each individual tree, when felled, becomes a chattel and would normally fetch less than £2,000 on disposal. It is essential, therefore, that when computing a gain accruing from the disposal of woodland, both the consideration received and the outlay attributable to trees on the land should not be taken into account. For example, where the cost price of the woodland is £10,000, £7,000 might be attributable to growing timber and attributable to land £3,000. The selling price of the woodland might be £12,000 of which £8,000 would be attributable to growing timber. The balance of £4,000 would be brought into account and the chargeable gain would be £1,000.

Ruairí Brugha

This is on the sale of the land with the timber standing?

Mr. R. Ryan

Yes.

Ruairí Brugha

What happens in the event of the timber being sold?

Mr. R. Ryan

If the timber is sold, each tree will be treated as a separate chattel.

Mr. Colley

I want to refer to Part II of the First Schedule. Some of the provisions are not entirely clear. What I am about to say may not represent a correct interpretation of the relevant part of the Schedule and, if so, no doubt the Minister will correct me. In view of the fact that the stock market was at a low level in April, 1974, and that subsequently share and property values fell very substantially—although there has been some upturn since—it would seem that some serious problems may well arise for persons who wish to take assets out of private companies. The assets may originally have cost more than their market value at 6th April, 1974, and, indeed, substantially more than their present market value. It would seem that on a transfer of the assets to the shareholders, the cost, as indicated in the Schedule, to the shareholders would be the market value at the date of transfer, and if the assets were subsequently to appreciate and to be sold, a very substantial chargeable gain could arise, even though the proceeds of that sale were less than either the April, 1974, market value or the original cost of the asset. Am I interpreting the provisions of Part II correctly when I say that situation could arise?

Mr. R. Ryan

Could the Deputy give me an example so that I can identify the problem he has in mind?

Mr. Colley

We can ignore individual shareholders and take it as one shareholder. Let us say that the assets in question when originally purchased cost £10,000.

Mr. R. Ryan

Prior to April, 1974.

Mr. Colley

Yes, and their value at 6th April, 1974, was £8,000, and that on the date of their transfer from the company to the shareholder, the market value was £6,000 and then when disposed of by the shareholder, they realised £7,000. There would appear, therefore, to be a gain of £1,000 by the shareholder, although the price realised was less than the original cost and less than the value at the date of transfer or at 6th April, 1974.

Mr. R. Ryan

The company has a loss on disposal of £2,000.

Mr. Colley

Yes, but that would be accured prior to April, 1974—most of it.

Mr. R. Ryan

No. Post-6th April. At 6th April it is £8,000, and it ultimately transfers assets worth £6,000.

Mr. Colley

Yes.

Mr. R. Ryan

And the company has lost £2,000 and can use those losses against future gains. Is the Deputy contemplating a break-up of the company?

Mr. Colley

The original cost was £10,000.

Mr. R. Ryan

Yes, but we are starting with 6th April, 1974.

Mr. Colley

This is the point I am coming at.

Mr. R. Ryan

There is a break-up, I take it the Deputy is suggesting, subsequent to April, 1974, when the assets are redistributed amongst the shareholders, who originally paid £10,000 and when they dispose of their shares, there is only £7,000. They are separate legal persons and I cannot see how we can deal with them as the same case.

Mr. Colley

Am I right in saying that in such circumstances capital gains tax would be charged on the £1,000, the difference between the £7,000 and the £6,000?

Mr. R. Ryan

Yes. There is only one shareholder.

Mr. Colley

And that would be so, even though the value of the assets on 6th April, 1974, was £8,000 and the value of the assets when originally acquired was £10,000.

Mr. R. Ryan

But they are two different people. You have a limited company and Mr. A—two different people.

Mr. Colley

Even if one approaches it on that basis and ignores the fact that one is being charged capital gains tax on an asset costing £10,000 and sold for £7,000, is it not ture that as far as the company is concerned, it has a capital loss at 6th April, 1974, of £2,000 which it cannot, I think, set off against any capital gain because it accrued prior to April, 1974?

Mr. R. Ryan

That is right.

Mr. Colley

That is £2,000 of a loss that is just written off, and then it has subsequently a capital loss of another £2,000 which it could set off.

Mr. R. Ryan

Yes.

Mr. Colley

And as far as the shareholder is concerned, he has, according to the provisions of the Schedule, a gain of £1,000 on which he is liable for tax of £260, but all of this is in respect of assets——

Mr. R. Ryan

Assuming that he has already used up his first £500.

Mr. Colley

Yes, that he has no other gains or losses, but I think the point about all this is that the provisions of this Part II of Schedule 1 are clearly going to produce, in many cases, what amounts to an inequity and to the charging of capital gains tax when in reality there is a loss, and it is not a case of a loss that can be set off against other capital gains tax. In reality, there is a loss. The Minister says that that is the company that lost the £4,000 and not the shareholder, but the reality is that capital gains tax is being charged on an artificial gain when on that particular asset there is a loss.

Mr. R. Ryan

I think a little bit of thoughtfulness, prudence, patience and rearrangement would allow most people in this situation to ensure that their own private companies which they control will disgorge their assets if they want to break up the company at an appropriate time which will yield its most significant financial benefit to the people themselves.

Mr. T.J. Fitzpatrick

(Dublin Central): The Minister does not recommend that type of dealing?

Mr. R. Ryan

I am neither recommending nor deploring it. I am simply stating what is a fact of life and Deputies opposite know as well as I do that that is precisely what will happen and it is perfectly permissible that it should. I know that there are many situations which have been created in the past—any professional man such as myself has been involved in the creation of many creatures of the law which had a purpose which conferred tax benefits on the people in question. Now the law is being changed and many of these creatures no longer have any purpose, and therefore they will be dissolved, but the pacing of their dissolution and redistribution can, in most cases, be appropriately arranged to confer most benefit and to ensure the least disadvantage to the people concerned.

I have been intrigued by the variety of hardship cases and anomalies that can be produced by people who are familiar with these problems in recent times, but there is scarcely any tax provision in respect of which you cannot produce some package of arrangements and circumstances which does not indicate some difficulty or anomaly. I am not saying we should brush these aside but very few of these ever exist in isolation and people can find ways—the law permits ways —to reduce losses and indeed also to adjust gains so that the least possible tax liability arises.

Major de Valera

Cowboys and indians.

Mr. Colley

The Minister knows the Schedule does not apply only to private companies; it applies all round. Substantially, what I was saying applies to any company and the Minister is assessing capital gains tax on an artificial gain when in reality there is a loss.

Mr. R. Ryan

We are conferring the greatest possible discretion by allowing people to take the cost or value on 6th April. There are likely to be as many cases of artificial or transient gain as there are to be of artificial or transient loss in this situation. We are bound to have at any time of change a number of cases which fall either side of the line of complete equity.

Mr. Colley

As the Minister knows on 6th April, 1974, the odds are that almost any stock or share was lower in market value than at its original cost.

Mr. R. Ryan

The Deputies are giving good conservative arguments for doing nothing.

Ruairí Brugha

They are good conservative arguments for a person who invested whatever money he had in order to be able to live on the interest from that investment when he retired.

Mr. R. Ryan

No day is ever the right day for doing anything.

Ruairí Brugha

April, 1974, was selected because the Minister announced it during his budget speech. It is quite reasonable as a means of defeating evasion but it can be unjust to people who have bought or invested in the previous two or three years.

Mr. R. Ryan

This date was announced almost 16 months ago.

Ruairí Brugha

I do not think it is just.

Major de Valera

In relation to quoted securities the Minister takes the 6th April, 1974, and it appears he allows one to assess one's whole gain but this is qualified by subparagraph (3) of paragraph (16). Apparently, the Minister will allow a gain in relation to 6th April, 1974, but he will not allow any greater gain or any greater loss though the loss or gain that will be allowed by relation to the earlier period will always be in favour of the revenue. Is that a fair statement?

Mr. R. Ryan

The option is exercised by the taxpayer.

Major de Valera

Subparagraph (2) of paragraph (16) states:

(2) For the purposes of this Act it shall be assumed, wherever relevant, that any assets to which this paragraph applies were sold, and immediately re-acquired, at their market value on the 6th day of April, 1974, by the person who held them on that date.

The effect of that general provision is that the assets were acquired on 6th April, 1974, as the base date and if that stood alone unqualified gains or losses would be calculated at any subsequent date by reference to that date. Is that correct?

Mr. R. Ryan

That is correct.

Major de Valera

That subparagraph is qualified by a conundrum provision which was prepared with official benediction. It takes one some time to read and understand it. The provision I am taking about is subparagraph (3) of paragraph (16) which reads:

Subparagraph (2) shall not apply in relation to a disposal of assets—

(a) if on the assumption in that subparagraph a gain would accrue on that disposal to the person making the disposal and either a smaller gain or a loss would so accrue (computed in accordance with the provisions of Part I of this Schedule) if subparagraph (2) did not apply, or

(b) if on the assumption in subparagraph (2) a loss would so accrue and either a smaller loss or a gain would accure if subparagraph (2) did not apply.

Even if there was a smaller loss or gain computed from the actual date of acquisition if there was not a base point, he must be content with a smaller loss or gain than would accrue if he took the base point of 6th April, 1974. Similarly, for subparagraph (b) of subparagraph (3) a loss would accrue. Although there is an alternative it is always in favour of the Revenue. There cannot be a greater gain in one case or a greater loss in the other. The answer is always in favour of the Revenue and any advantage from these subsections is accruing to the Revenue and not to the individual.

Mr. R. Ryan

No. I should like to give the Deputy an example which will show this not to be so. Suppose a person buys shares in July, 1972, for £500 and sells them in 1978 for £850 and that those shares on 6th April, 1974, had a value of £400, the gain would be computed as follows: proceeds of disposal £850, less the value on 6th April, 1974, £400, leaving a gain of £450. The alternative which is available to the taxpayer is: proceeds of disposal £850, cost £500 and overall gain £350. Therefore, so far as the taxpayer is concerned there is a benefit because the lesser figure would be chosen.

Major de Valera

The provisions of subparagraph (3) which I have quoted means a person cannot use a greater gain that might have accrued over the whole period of ownership and, in the same way, a person cannot take advantage of a greater loss over the period of ownership than what was produced on the base date of 6th April, 1974.

Mr. Colley

Of course, the example chosen by the Minister as the ultimate sale price was higher than the original cost. The problem arises where that position is reversed.

Major de Valera

Will the Minister state what is the position where there is a gain on the base date but where there is a loss over the whole period?

Mr. Colley

It means more tax.

Mr. R. Ryan

It is a case of being quits. There is neither a gain nor a loss.

Major de Valera

If a comparison with the base date shows a loss but if there is a gain over the whole period, what is the position? This could happen quite easily at the moment because of the catastrophic fall in the market since 1974.

Mr. R. Ryan

I will refer to the example I gave earlier where the cost was £500 and the value was £400 on 6th April, 1974. In that case there was a loss between the commencement date and the base date. Is the Deputy referring to that kind of situation?

Major de Valera

Is it not true that despite the provision about going back to the ownership position there is no great advantage, so far as quoted securities are concerned, in going back beyond the base date?

Mr. R. Ryan

There might be significant advantages. Where the cost was higher before the base date than the value on 6th April, 1974, there is an advantage in going back because the gain would be commensurately smaller.

Mr. Colley

On the other hand, there is a loss with which one can do nothing.

Mr. R. Ryan

I agree. The loss is calculated on a similar basis but having regard to what was said about the state of the market in April, 1974, it appears there is more gain than loss for the taxpayer in the situation.

Major de Valera

Paragraph (17) deals with the sales of land reflecting development value. Would the Minister state his policy consideration in regard to the charging of capital on such land? This is a matter of considerable public importance. There has been much uninformed talk about the acquisition of land for development value. Perhaps the Minister would spell out the effect of this paragraph?

Mr. R. Ryan

It provides that land in the State which has development value is to be taken at market value as at 6th April, 1974 and any capital gain on a subsequent disposal is to be calculated from that base. A time-apportionment formula is not considered appropriate to such land as its value might not be increasing at a uniform rate. Its rate of appreciation would depend largely on its becoming suitable for development. Its value could appreciate rapidly in a short space of time or it could remain relatively static for a long period. Valuation at 6th April, 1974, would eliminate any possibility of retrospection in the tax charged. However, where the land was acquired earlier at a price higher than the market value on 6th April, 1974, subparagraph (4) provides an alternative basis which takes into account that higher price.

I think it will be readily seen that by taking the land at development value on 6th April, 1974, the section operates to the relief of the taxpayer. I have no doubt my friends opposite will convey this to Deputy Lalor.

Ruairí Brugha

Will the Minister give an example of what could happen?

Mr. R. Ryan

It is fairly straightforward. If it has development value in April, 1974 then that is the value that will be taken as the acquisition value and obviously it will be very much higher if the land was of agricultural use value in 1974 and later sold as development land. There would be a very rapid escalation and a very substantial gain, but by taking into account, as it were, the development value existing in 1974 it operates to reduce any gains which may subsequently be calculated.

Ruairí Brugha

Does that mean all land would be taken as development land?

Mr. R. Ryan

No. It would have to have development value in April, 1974. It is a matter for assessment in each case as to whether it had development value as of that date.

Ruairí Brugha

How could one assess it? Would it be done by the planning authority zoning the land?

Mr. R. Ryan

Mere zoning would not decide it entirely because land contiguous to an area currently developed could be deemed to have development value. It is very difficult to generalise. Each case has to be looked at on its individual merits.

Ruairí Brugha

On the question of capital gains and losses, there is an allowance of £500 per person in each year. If an individual has a capital loss can it be carried forward to the following year?

Mr. R. Ryan

Yes.

Major de Valera

The Minister mentioned that the time apportionment rule would not apply to such land. Can he refer me to any provision that stipulates this?

Mr. R. Ryan

It is because paragraph 17 specifically says the value to be taken is the value at 6th April, 1974.

Major de Valera

It excludes the provisions of paragraph 18.

Mr. R. Ryan

Yes. It will be seen that paragraph 18 applies except to 16 and 17.

Major de Valera

The only comment I have to make on paragraph 18 is that the total gain is assumed to grow at a uniform rate over the whole period of ownership. How will this be calculated? You know the period of ownership and you know the amount of time before 6th April, 1974. In what way is the uniform gain computed? On what basis do you arrive at a uniform rate? Paragraph 18 provides:

Subject to the following provisions of this Schedule, the gain shall be assumed to have grown at a uniform rate from nothing at the beginning of the period of ownership to its full amount at the time of the disposal and the portion attributable to the period beginning on the 6th day of April, 1974, shall be determined accordingly.

Supposing we have a disposal in 1979 of an asset acquired in 1970 the total period of ownership would be nine years and there would be four years up to 1974. What is the proportion? Is it four over nine or five over nine?

Mr. R. Ryan

It is four over nine. The gain will be made in the period of five years.

Major de Valera

The proportion is four over nine. I must admit this is a combination of law and mathematics I have not met before. I will not delay by asking the Minister to give a detailed example.

Mr. R. Ryan

The tax in the case quoted by the Deputy would be on five-ninths of the gain.

Major de Valera

In paragraph 19 you come to election. My first reaction is, although I can see an equitable or other intention in it, to query whether an election is really any great advantage. An election is irrevocable. It gives an election to depart from the base date but election cannot be used to enhance a loss and it cannot turn a gain over the whole period into a loss. That is fair enough. It may not be used to get at what one might call a real loss. Supposing one bought property at £1,000 in 1972 and it appreciated to £1,500 in 1974 but depreciated again subsequently and was sold in 1976 for £1,200, the apportionment method of operating there would give a taxable gain of £100 and an election would, I think, give a taxable gain of £300.

Mr. R. Ryan

The property was sold for £1,200.

Major de Valera

I am sorry; I gave the wrong figure. The taxable gain would not be £300. On those figures what would an election give and what would a base rate calculation give?

Mr. R. Ryan

An election would give a loss of £300.

Major de Valera

Yes, that is right and the other would give a gain.

Mr. R. Ryan

There would be a quits position.

Major de Valera

So the result would be a quits position.

Mr. R. Ryan

Yes.

Major de Valera

Then, what is the point in the election? Is the election, after all, only a device? It does reduce a gain to a quits position in that case. I grant you that.

Mr. R. Ryan

Otherwise there could be a charge on £100.

Major de Valera

I do not want to delay the Minister or the House on this but considerable ingenuity has gone into this and I am just wondering what the real purpose was. In the normal transactions it will not make a great deal of difference. There is some purpose in this very ingenious combination of law and mathematics and I have a little bit of experience of both. I am intrigued to know why.

Mr. R. Ryan

Presumably, the intention was to be fair to the taxpayer.

Major de Valera

I hope the Minister will not take it amiss when I say that I do not know whether there would be any capital gains or losses on grains of salt.

Mr. R. Ryan

Commodities are included.

Mr. Colley

I should like to suggest to the Minister that the provision making the right of election irrevocable goes too far and that the right should be revocable. I say this for two reasons. First, it seems to me that in practice if the market value at 6th April, 1974 is to be determined it would have to be negotiated with the Revenue Commissioners and it would be necessary to know this value before you could make a decision on election and that it is possible, at least, that the Revenue Commissioners might not agree to negotiate a figure as market value until you made an election. So, you could be in a catch 22 situation. Furthermore, it seems to me that the election which you might make in all ignorance could produce a greater taxable gain than the time apportionment method and might even convert an overall loss into a gain. This would look like setting a trap for the taxpayer.

I would suggest that the right way to approach this is to give a right to the taxpayer to choose the lower of the two calculations and not to force him into the position of making a final decision which may turn out to be a trap. If this is, as the Minister says, in aid of the taxpayer, the right way to approach it is to give him the option between the two and that can be achieved by simply providing that the right of election shall be revocable rather than irrevocable.

Mr. R. Ryan

I am sure the Deputy understands the need to get finality. If the choice was one that could be varied from time to time the whole system would become unworkable. Indeed, I would say that the poor taxpayer would be driven to distraction wondering what his position would be.

Mr. Colley

Cut out the right of election altogether and provide that it can be assessed either way, whichever is the lower is the one which will be used by the Revenue Commissioners.

Mr. R. Ryan

The right to election operates in the best interests of the taxpayer. The taxpayer is free to exercise the free election. Surely, it is not doing a disservice to the taxpayer to give him that right?

Mr. Colley

The right of election has a time limit and in practice the taxpayer may not be able to exercise that choice with full knowledge of the facts. He first of all has to determine market value as at 6th April, 1974, something which he may have to negotiate with the Revenue Commissioners.

Mr. R. Ryan

I anticipate that if a case is being processed by the Revenue Commissioners a person will not be stopped from making an election at the appropriate time.

Mr. Colley

The Minister would accept that as a general principle— and indeed it has appeared in one or two places—where there are two ways of assessing liability for tax the Revenue Commissioners ought to apply the one which is more favourable to the taxpayer. What I am urging is that that is the approach which should be adopted here.

Mr. R. Ryan

There may be a question, as the Deputy says, certainly in relation to the valuation of an estate and the question of establishing the valuation on that estate is a matter in respect of which the taxpayer has a substantial interest——

Mr. Colley

So have the Revenue Commissioners.

Mr. R. Ryan

——an interest which combines with a certain amount of responsibility also. The taxpayer in most cases will be well advised.

Mr. Colley

Not by any means in all cases.

Mr. R. Ryan

They will be well advised. They will pick the date that suits them and gives them the best loss and the least gain in this situation. I am not making light of the importance of what is being argued opposite but the significance will get less and less as time passes.

Mr. Colley

I agree. That is all the more reason why the Minister would concede what we are urging on him. As a general principle, would the Minister not agree that where there are two ways of assessing the tax, giving different results, the taxpayer should get the benefit of the lower one?

Mr. R. Ryan

Human nature being what it is, people will elect to do that.

Mr. Colley

Where they can do so, of course they will but the point is that under the provision of this Bill, with a time limit, they may not be able to do so and all of them will not be well advised, as the Minister thinks.

Mr. R. Ryan

I take it the Deputy knows that inspectors of taxes are not inhumane and have been known on many occasions to come to the assistance of taxpayers.

Mr. Colley

By all means, and that is why I am urging that they have power to do so.

Mr. R. Ryan

It is highly desirable that some onus would lie on the taxpayers. We do not want the situation arising in which the Revenue Commissioners make a decision and it is then open to challenge years afterwards because somebody produces a different valuation for April, 1974.

Major de Valera

What would be the evidence in the case the Minister is talking about? What would the evidence of election be that could be challenged?

Mr. R. Ryan

A simple letter.

Major de Valera

In that case, if the evidence is there, is it not possible to include something to cover Deputy Colley's point? I completely agree with the Minister that once the matter is decided——

Mr. Colley

It should be final.

Major de Valera

——it should be final. Decision is not the same as election. Election is the process by which you proceed to decision. Surely the taxpayer should have the opportunity of finding out, before he makes an irrevocable election, what his options are? Surely it would not be too much to let the thing proceed to the stage of finality of decision, the letter or whatever it is, and then by all means make it irrevocable? Is it not possible to do that?

Deputy Colley pointed out that if the Revenue Commissioners sit back and leave it for election, without giving any indication about the matter, it may be that the elector makes a mistake, which he would correct if he knew what the answer would be. I am suggesting that there should be some loophole. I am pretty certain in many cases if the wrong course was adopted the inspector would probably be the first person to point out to the taxpayer that he was not being quite fair to himself. The way this paragraph is worded the inspector's discretion would be blocked from the word "go" and this is Deputy Colley's point. I quite agree that once the thing is decided with the inspector it is final and should be irrevocable.

Mr. R. Ryan

The Revenue Commissioners, by virtue of subparagraph (5) of paragraph 19, may extend the time within which a person must elect. That is sufficient to ensure that the two-year time limit will not be unreasonably enforced.

Major de Valera

It is not really a question of limit. It is a question of doing an act which cannot be changed even by the inspector. I believe a way could be found out of that dilemma.

Mr. Colley

Would the Minister be prepared to undertake, on behalf of the Revenue Commissioners, that they would at least indicate their view on the market value as at 6th April, 1974 before the election takes place and if they find themselves unable to do it within the time limit would automatically extend the time for election? That, at least, would enable the taxpayer to know what he was electing about.

Mr. R. Ryan

Of course, the Deputy will appreciate that the Revenue Commissioners might not be in possession of all the facts before the appropriate date. That is why I said there has to be a question of discharge of some onus on the part of the taxpayer. The Revenue Commissioners must be given such information as will enable them to make a proper assessment. These, in practice, are matters which best fall to be dealt with by the inspector of taxes and the relevant taxpayers. If there is a genuine effort on the part of both parties to achieve agreement and to arrive at the correct figure and the two years is up quite clearly the Revenue Commissioners will allow an extension. If there is a delay on the part of the Revenue Commissioners or they are unable to get to the root of the matter within the two years they will, of course, give the necessary extension time.

Major de Valera

I believe the Minister has given, in his own words, the key to the problem, which is assessment. It is the assessment, not the election, which is final. Once the assessment is made, the method by which it is arrived at is irrevocable. Let the assessment be final. As the Minister has pointed out, it has to come in at a certain time. If the assessment is final there is ample chance of finding out beforehand. I presume it would be possible, before that, as Deputy Colley says, for the Revenue Commissioners to give some indication of what is accepted. For instance, they would be able to get agreement on the market value on 6th April, 1974 and other relevant facts agreed before there was an actual election. I believe the point is worth pursuing.

Mr. R. Ryan

I do not mind pursuing it but I would not be disposed to remove certain responsibilities in these matters from the taxpayers. They have an obligation to pay the tax and to bring the information relating to the capital gains to the notice of the Revenue Commissioners. I believe, if we extend the period or if we move the onus entirely over to the Revenue Commissioners, it is making life a little too easy for those who have certain obligations.

Major de Valera

I agree with the Minister that the pendulum could go too far the other way. Paragraphs 20, 21 and 22 essentially relate to the matters in Schedule 2. We are in a debating dilemma here. We have agreed to take the Schedules, Schedule by Schedule and paragraph by paragraph but there are provisions in these paragraphs which deal with shares that cannot be fully appreciated until we have gone through Schedule 2. Paragraph 21 makes specific reference to Schedule 2. It is a bit difficult to follow the logic of this Part of the Bill.

As usual, the greatest clarity is to be found in these provisions relating to companies, principally because company accounting is a pretty definite thing. Paragraph 20 applies to securities and shares and makes the base date 6th April, 1974. Subparagraph (4) states:

Shares shall not be treated for the purposes of this paragraph as being of the same class unless if dealt with on a stock exchange in the State or elsewhere they would be so treated, but shall be treated in accordance with this paragraph notwithstanding that they are identified in a different way by a disposal or by the transfer or delivery giving effect to it.

That subparagraph is then extended by subparagraph (5) to other assets. It seems to me that what is intended there is to identify the individual asset from the beginning. Paragraph 21 (1) reads:

For the purposes of this Act, it shall be assumed that any shares or securities held by a person on the 6th day of April, 1974 (identified in accordance with paragraph 20), which, in accordance with paragraphs 2 to 5 of Schedule 2, are to be regarded as being or forming part of a new holding, were sold and immediately re-acquired by him on the 6th day of April, 1974, at their market value on that date.

The new metamorphosised shares are to be deemed to be disposed on 6th April, 1974. Is that right? Subparagraph (2) reads:

. . . the amount of any gain on a disposal of the new holding or any part of it shall be computed—

(a) by apportioning in accordance with paragraph 18 the gain or loss over a period ending at the said time, and

(b) by bringing into account the entire gain or loss over the period from that time to the date of the disposal.

Subparagraph (3) reads:

This paragraph shall not apply in relation to a reorganisation of a company's share capital if the new holding differs only from the original shares in being a different number, whether greater or less of shares of the same class as the original shares.

As I see this, a share that has not changed its nature from 6th April, 1974, to the date of actual disposal, may be treated as any other asset and a gain may be calculated with relation to the base date. Am I right in that?

Mr. R. Ryan

Yes.

Major de Valera

If I am right in that, where the circumstances visualised in Schedule 2 materialise, where there has been what I call a metamorphosis of the shares after that date, then we have to use the time apportionment method only. Where there is no change in the nature of the shares you have your election. Am I right?

Mr. R. Ryan

Yes.

Major de Valera

Where there was a change in the nature of the shares before 6th April, 1974, and you can ascertain the market value at that date, you still have your election, but where a metamorphosis occurs after that date it is mandatory to go back to the time apportionment procedure. Is that a fair reading of this part of Schedule 2? I am referring to the effect of subparagraph (2) of paragraph 21.

Mr. R. Ryan

I have an example here. Let us look at this and see if it answers the question. A has a holding of ordinary shares in B Limited which is an unquoted company acquired by him in April, 1970, for £10,000.

Mr. Colley

1970?

Mr. R. Ryan

Yes.

Major de Valera

What date?

Mr. R. Ryan

5th April, 1970. There was a bonus issue of one new preference share for every one ordinary share held on 5th April, 1975. The whole holding was sold on 5th October, 1984, for £15,000. It was estimated that the market value of the enlarged holding on 5th April, 1975, was £12,500, after the issue of the new preference shares. The holding is regarded as having been sold on 5th April, 1975, for £12,500 and reacquired by him on that date for the same amount.

The following is the way the chargeable gain is computed: Deemed consideration for the disposal on 5th April, 1975, £12,500; Cost of acquisition on 5th April, 1970, £10,000; Overall gain at 5th April, 1975, £2,500; Chargeable gain to 5th April, 1975, of £2,500 multiplied by one-fifth, £500. That is the year 1974-75. The consideration for disposal on 5th April, 1984, is £15,000. The deemed reacquisition cost on 5th April, 1975, is £12,500. The chargeable gain, therefore, from 5th April, 1975, to 5th April, 1984, is £2,500. Thus of the total gain of £5,000— £15,000 less the original acquisition cost of £10,000—the chargeable gain will be £3,000—£500 plus £2,500— which is deemed to arise on 5th April, 1984. No tax is payable on 5th April, 1975, when the bonus issue was made as the calculation producing a gain of £500 is only of significance when there is a realisable gain when the shares are sold on 5th April, 1984.

Major de Valera

I take it that example relates to paragraph 21 (2)?

Mr. R. Ryan

That is right.

Major de Valera

The Minister is taking into account not only the gain from the base date but also the notional gain to the base date. Is that correct? It would seem to be correct from the way the Minister expressed it.

Mr. R. Ryan

No, there is a time apportionment here from beginning to the changes.

Major de Valera

A time approtionment becomes necessary because——

Mr. R. Ryan

There is a time apportionment from April, 1974, to April, 1975.

Major de Valera

To April, 1975, and then after that you calculate your gains.

Mr. R. Ryan

Yes.

Major de Valera

In other words, that is the method of assessment of one's capital gains where there has been a subsequent change in what I might call, broadly, the nature or quality of the shares since the base date of the 6th April, 1974. Is that correct?

Mr. R. Ryan

Yes, there is a change by the acquisition of the preference shares.

Major de Valera

I am sorry to make heavy weather of this but it is important to have it clear before we proceed to the next section. As I shall point out when we come to the Schedule, quite clearly it does affect what, at first reading, would appear to be the effect of the Schedule Would the Minister not agree with me that from the point of view of interpretation—it will make no difference to lawyers who will go into the Act as a whole—and from a general tidy point of view at least paragraph 21 should have been transferred into the Second Schedule? Certainly, it makes our debate somewhat more difficult.

Mr. R. Ryan

Schedule I deals with computation. Schedule II deals with, among other things, distributions and reorganisations. It is different. We have sufficient Schedules as it is without having another to deal with companies only.

Major de Valera

All right, we shall settle on that.

Mr. Colley

There is just one final point I want to raise on this Schedule. It relates to subparagraph (3) of paragraph 22 which reads:

This paragraph shall not apply where a loss, and not a gain, accrues on the disposal.

There may be a good reason for this in the circumstances envisaged in paragraph 22. Nevertheless, is it not true that this is another breach of the principle on which the Minister was standing as we went through the Bill —that a transaction which could attract liability to capital gains tax could also attract the possibility of an allowable loss? This provides specifically for tax on a gain only and prohibits an allowable loss.

Mr. R. Ryan

Of course, the object of this measure is to make gains liable to tax. It is not a scheme designed to relieve losses.

Major de Valera

It might be described as an ingenious scheme designed to turn losses into gains.

Mr. R. Ryan

That is what I want to avoid.

Mr. Colley

In fairness to the Minister, I take it he is referring to paragraph 22 and not to the measure as a whole?

Mr. R. Ryan

Yes.

Mr. Colley

All right; I shall not pursue it.

Major de Valera

I am tempted to make a political remark about transferring losses into gains but I shall not; it is a very attractive pastime but not a profitable one.

Question put and agreed to.

SCHEDULE 2.

Mr. R. Ryan

I move amendment No. 49:

In page 62, paragraph 3 (2), to delete "specified in Schedule 4" and to substitute "falling within section 19".

Acting Chairman (Mr. Moore)

This amendment has been discussed already with amendment No. 13. Is it agreed?

Amendment agreed to.

Question proposed: "That Schedule 2 as amended, be Schedule 2 of the Bill."

Mr. Colley

On paragraph (1) of Schedule 2 a point arises which I raised on Second Stage and in respect of which I do not think the Minister has brought forward any amendment. Therefore, I am raising it again. It is raised in ease of the Revenue Commissioners. It appears that where a shareholder receives a capital distribution, no matter how small, in relation to the shareholding, a charge to capital gains tax arises, subject, of course, to the exemptions for individuals. This would seem to be a situation which could well involve a great deal of time wasting on trivial items by the Revenue Commissioners. I understand that in Britain, in cases of this kind, they treat distributions which are small in relation to the shares held as a reduction of the cost against future disposals. If this were done here the Minister would save a great deal of unnecessary work on the part of the staff of the Revenue Commissioners.

Mr. R. Ryan

Of course, we have the exemption of the first £500 of gains in this Bill which would eliminate quite an amount of those transactions coming under review by the Revenue Commissioners. They have not got that exemption of £500 in Britain which means they have to give specific relief in this area to avoid their being snowed under.

Mr. Colley

Of course, it is not exactly a relief; it may be a deferment but that is all it is.

Mr. R. Ryan

Well, it is relief from work, from bother. I agree it is a deferment, ultimately, yes.

Mr. Colley

I merely wish to draw the Minister's attention to it again because it seems to me that anything which can relieve the burden on the staff of the Revenue Commissioners deserves very serious consideration.

Major de Valera

Unless the Minister has been able to foresee all the administrative difficulties and provide accordingly, the burden being placed on them is by no means light. The latter part of the second paragraph of this Schedule reads:

. . . except a distribution which in the hands of the recipient constitutes income for the purposes of income tax.

I take it that is a simple way of saying "except dividends"? Is that correct?

Mr. R. Ryan

Yes.

Major de Valera

Is there anything else as well as dividends envisaged there?

Mr. R. Ryan

No, I do not think so. Sometimes some devices are used which are treated as income.

Major de Valera

In other words, dividends and similar things are taken in charge as current revenue and chargeable to income tax.

Mr. R. Ryan

As being chargeable to income tax.

Major de Valera

That is a fair definition. That clears the ground for paragraph 2. Paragraph 2 applies fairly widely to what is a reorganisation of a company. Incidentally, this paragraph is one of the traps of the Bill. In the Bill "controlled company" and "control" refer exclusively to private companies, I think. But "company" is any body corporate. Am I correct in that?

Mr. R. Ryan

Yes.

Major de Valera

When dealing with this Schedule it is important for us to understand that we are dealing with all companies, public as well as private? Is that correct?

Mr. R. Ryan

Yes.

Major de Valera

I am sorry to ask the Minister for reassurance on every point.

Mr. R. Ryan

I quite understand; I would look for it myself.

Major de Valera

Because it is very easy to go haring up the wrong road on this Bill. Reorganisation enters into any case where there is a reorganisation of capital. Subparagraph 2. (a) (ii) reads:

any case where there are more than one class of shares and the rights attached to shares of any class are altered;

Then, in subparagraph (b) "original shares" are defined. Paragraph 2 (2) reads:

Subject to the following subparagraphs, a reorganisation or reduction of a company's share capital shall not be treated as involving any disposal of the original shares or any acquisition of the new holding or any part of it but the original shares (taken as a single asset) and the new holding (taken as a single asset) shall be treated as the same asset acquired as the original shares were required.

Paragraph 2 (2) provides that such reorganisation does not involve a disposal. Paragraph 2 (1) (a) (ii) reads:

any case where there are more than one class of shares and the rights attached to shares of any class are altered;

If this stood alone, the effect would be to exempt shares in a company, whether public or private, from capital gains under those circumstances. Am I right in that approach? At first glance this seems to be a complete give away on the Minister's part.

Mr. R. Ryan

There is no disposal if a person, in a reorganisation, gets a new package of shares for the old package.

Major de Valera

But there is something more than that.

Mr. R. Ryan

If there is consideration other than shares, then that consideration is treated as a disposal.

Major de Valera

This has to be taken in conjunction with paragraph 2 (4) of this Schedule and with paragraph 21 (2) of the previous Schedule. In general terms, what is the effect of this? Clearly if one has a company, public or private, the company has two measures of its capital. It has its shares—and, if they are quoted, they are at a quoted value on the stock exchange—and its shareholders' assets.

A capital reorganisation is usually based on the latter, not the former. What is the Minister's intention in assessing gains where there is reorganisation, from the point of view of the shareholders because they will have made the gains? A company does not make a capital gain on reorganisation. Am I right?

Mr. R. Ryan

Yes.

Major de Valera

The gains that accrue, or the disposal deemed to take place in order that gains may accrue, are in relation to the persons holding the shares in these companies. These gains are measurable by market value, or notional market value, arrived at by, say, time apportionment but ultimately by the assessment of the stock exchange. On the other hand they are not unrelated to the actual capital assets of the concern. The entire matter needs a clear statement of the Minister's intention.

Mr. R. Ryan

We are dealing with reorganisation of companies where, for example, persons are allotted shares in a company in proportion to their existing shareholdings or when rights attaching to different classes of shares are altered. In the absence of any provision to the contrary, the reorganisation or reduction would represent disposal of the old shares and acquisition of the new shares with a consequent liability to capital gains tax. The central principle in the rule is that the mere exchange of one block of shares for another on a capital reorganisation by the company is not to be treated for capital gains tax as a disposal of the old shares and the acquisition of the new shares. Instead, the new holding is to be treated as if it had been acquired at the same time and cost as the original holding was acquired and a gain or loss on the old shares will not be regarded as accruing until the new holding is disposed of in whole or in part.

Paragraph 2 (2) also provides for the case where as part of the reorganisation scheme some consideration, other than the new shares, is given or received by the shareholder. When consideration is given, it is to be added to the cost of the shares. Where consideration is received the shareholder is to be charged with capital gains tax by reference to the amount of the consideration as if it were a disposal of part of the shares. Rules are given for apportionment of the cost of the original shares in computing a capital gain or loss on the disposal of any part of the new shares. There is also a special rule that where rights issues are not taken up but are disposed of, the cash received is treated as if it were a capital distribution received from the company and chargeable accordingly.

Major de Valera

I thank the Minister for his explanation. Two points arise on that. It seems clear that in the case of a reorganisation without any distribution, that is, a simple internal reorganisation where the rights from one class of share to another is transferred, or bonus shares are issued, we are applying the notional procedure to bring things to the base date and afterwards time apportionment and you calculate your claims on that in accordance with paragraph 21 of the foregoing Schedule. In the case of a rights issue, the Minister quite rightly considers that there has been a purchase of these rights enhancing the value of the holding accordingly. Am I right?

Suppose there is a distribution at that point. Why does one have to go to the trouble of regarding that as capital if the rights are sold for cash? To the seller, they are income, and to the purchaser they are capital gains.

Mr. R. Ryan

It is capital we are talking about.

Major de Valera

I know. If I owned shares in a company and there is a rights issue and I acquire these rights on payment of a consideration —an important company in this city did it recently—if instead of taking up my rights I sell them, perhaps the shares as well, the money is income to me.

Mr. R. Ryan

The Deputy has sold an asset and has got a reward for disposing of a capital asset.

Major de Valera

I have not made a capital gain.

Mr. R. Ryan

The Deputy has.

Progress reported; Committee to sit again.