The Minister was explaining the operation of paragraph (d) of subsection (1) in conjunction with subsection (2). I would ask him, in regard to paragraph (c) of subsection (2), if he could give an example of what is envisaged under that paragraph, which describes the situation in which the amount or value of the benefit could only be ascertained from time to time by the actual payment or application of property for the purpose of giving effect to the benefit. That is the kernel of that paragraph.
Private Members' Business. - Capital Acquisitions Tax Bill, 1975: Committee Stage (Resumed).
SECTION 3.
Question again proposed: "That section 3, as amended, stand part of the Bill."
This covers the case where a testator bequeaths a sum to a trustee and the trustee from time to time makes payments to the donee. The payments could vary both in amount and in time of payment.
I take it that what the Minister has in mind is a sum of money left to a trustee in trust for the cestui que trust, at the discretion of the trustee as to the amounts and dates of payment?
Yes.
In such circumstances how would this be treated? It would be an inheritance clearly, but would it be treated on the basis of the value of the total amount given to the trustee for the benefit of the cestui que trust or would each seperate payment be treated as a separate inheritance? What is the effect of the combination of paragraph (c) of subsection (2) with paragraph (d) of subsection (1) of section 3?
The trust property would not be in the possession of the beneficiary until such time as payment would be made to him, so he would not be required to pay the tax until such time as the benefit is received by him and he is in possession of it.
We are talking about payments made by the trustee from time to time. For argument's sake, let us suppose that 20 per cent of the total value was paid one year after the death and 30 per cent two years later, and so on. How would that be treated?
Assuming that it comes within the limits, the rate of tax would be probably lower at the earlier stage because it would be at the lower end. But as the benefit accumulated the property being taxed would move to a higher threshold and therefore be paid at a higher rate.
I take it in the situation envisaged here that, in order to bring the case within the terms of section 3, the first essential step is the cesser of an intervening life interest? Am I correct?
Yes.
We are talking here about a life interest ceasing and being followed by a situation in which the benefit might be paid over in part and from time to time. That is what is envisaged here as far as I can see from paragraph (c) of subsection (2) combined with paragraph (d) of subsection (1).
Yes.
Where there had not been the cesser of an intervening life interest but there had been a death, this would be a straight inheritance situation?
Yes.
What distinguishes this from the straightforward case, or in other words, why has special provision to be made in this way?
The Deputy will accept it is not an annuity, it is irregular——
Yes.
——not from the point of view of whether it is lawful or not, but the amount and timing of payments can vary. There is no regularity and it is considered desirable, therefore, to identify it as specific practice.
I appreciate that. But the point I am trying to put to the Minister—not very clearly I confess— is this. It would appear that in the circumstances the Minister described —the irregular payments and so on— they only come within the terms of subsection (2) if the benefit follows upon the cesser of an intervening life interest. Where it does not do so but follows on a death, what happens? This provision seems to cover a very limited number of cases, but is there a provision that covers the more ordinary cases where there is just a death and an arrangement arising out of it?
This is one of a number of possible arrangements. It could be said to be an explanatory subsection. If it were not there at all it would be covered by subsection (2) (d). That in fact is what is occurring in (c) —it helps to identify the point at which the beneficiary becomes beneficially entitled.
I am afraid I have not made myself clear. What happens if any of the things described in (a), (b), (c) or (d) occur following what I might call an ordinary death or in the event of cesser of an intervening life interest? The application seems to be very limited.
A simple straightforward death would be covered by (1) (a).
Has the Minister got in mind the wiping out of an intervening life interest without a death occurring, in other words, a resettlement?
An example is property settled on A for life, then to B for 21 years and then to C absolutely —that is the type of case this covers.
Can that not be done in a more general way?
I would say it could be done.
Would it not be safer to do it in a more general way?
The generality is preserved in (d). If we had not got (2) (c), I could see doubts as to how that situation could be handled.
What the Minister is doing is the well known trick, defining something to be on a death which is not on a death at all. It reminds me of the famous case during the war when there was urgent necessity to forbid the export of horses, but there was an order in being which forbade the export of scrap iron and an order came out to make the term "scrap iron" include "horse". It seems to me that the term "life" means "death".
They were talking about the iron horse. In this case there is a death but it may have been long before.
Entitlement in possession at a time would not be related to a death then occurring but perhaps a previous death during the sequence of events.
The Minister has to cover it but it seems to be only a legal need. It is not the English language.
Question put and agreed to.
SECTION 4.
Question proposed: "That section 4 stand part of the Bill."
There is just one small point. The Minister will note that there is a provision that the tax "shall be charged, levied and paid". Bearing in mind the amendment which the Minister moved earlier which "levied for charge" or "charged for levy"——
Charged for levy.
——that amendment would seem to have suggested there is a difference in meaning between "charged" and "levied". Would this wording here confirm such a difference or does the Minister distinguish between "charged" and "levied"?
Like many words, they can have different meanings in different contexts. In certain contexts they may have a limited meaning, but in order to confer the right on the Revenue Commissioners to enforce payment, I consider it necessary to use the three verbs in this section. The other changes were made because of the valuation date and we were saying the tax would be levied and payable but we did not want any unfair situation, and that is why we said it should be chargeable on a certain date and that the time of payment would arise when an assessment had been made.
I do not think the Minister will dispute that this section is the kernel of the Bill because it imposes a tax to be called a capital acquisitions tax. At this stage that cannot be divorced from section 10 which imposes a tax to be called an inheritance tax. This is the first section that imposes a capital acquisitions tax and we must keep in mind that this tax is essentially conceived as a gift tax which is, broadly speaking, a tax on gifts or voluntary transactions inter vivos, while the inheritance tax in section 10 is a tax on devolution. Here the Minister is making a substantial change in the law for which he can make a strong case. Before the passing of this Bill, the position was that you had death duties and because of the ease with which such a tax could be avoided it was necessary to provide in the legislation that all gifts—I am using the word broadly —within a period before the death were brought into account on the devolution and that the net effect on death was that the estate of the deceased embraced the free gifts which he made in his lifetime and within the statutory period before death. I trust the Minister will correct me if he considers that preliminary state of the prior situation to be not correct. The Minister is recognising the prior death problem and also avoiding by this mechanism the problem of having dates. He is providing separately for the taxation of gifts, subject to the exemptions and exceptions in the Bill.
I trust it is not irrelevant on the section to remark that the other part of the death duty substitution takes place in section 10 where the property that devolves on death is taxed, again subject to the exemption. This brings us to the question of the necessity for the section. As we have seen in the previous section, ingenuity can come into play on the border line between death and life. Consequently, there must be a consideration of both types of taxation. For the purpose of clarification I wish merely to know whether the gift tax to be charged under this section is to be taken in conjunction with the inheritance tax provided for in section 10. The Minister, logically, is doing all he can to keep them as separate as possible but there must be a certain amount of overlapping.
The regulations and the method of charging are provided for in other sections but it is right to draw attention to the fact that this section is, together with section 10, one of the essential charging sections in the whole Bill.
The question raised by Deputy Colley in relation to date brings in technical complications of various kinds which we will probably be confronted with throughout the Bill. However, it would be wrong to delay on this question now. From the point of view of homogeneity in our discussions later I should be glad to know whether the Minister would accept generally the premises on which I have based my approach to the Bill.
I can confirm that the Deputy's understanding is correct but I do not know whether he wishes me to say any more at this stage.
Therefore, we are on the same ground so far as further interpretation is concerned.
The philosophy behind the Bill was explained in the White Paper of March 28th, 1974. This was a philosophy which we considered to be just. It imposes a tax which will not apply within families except in cases of gifts to individuals exceeding £150,000 in value. The intention for which the Government sought and obtained a mandate was to exempt transfers of property within families. This has been achieved largely but not in toto. I would not consider it appropriate nor right socially to have total exemption because such a situation would lead merely to the concentration of increasing amounts of property in very privileged hands. Where the tax will operate it will be at a level less than what was the impact of death duties but it takes account of the fact that large accumulations of capital will be taxed during life and not only at times of transfer of property on death.
I do not wish to detain the House on this point but it might be appropriate for me to reiterate what I said earlier in drawing the attention of the House to the fact that on this side of the House we did not oppose the Second Reading of this Bill. We are in favour of the principle involved.
What this Bill does is to impose a gift tax and, at the same time, effectively to impose death duties substantially modified as against what were in operation. Fianna Fáil, in Government, were planning a modification of the death duty code but we knew, too, that the introduction of a gift tax was essential. As Minister for Finance I had preparations under way for the introduction of such a tax. There are aspects of this Bill with which we do not agree. During the debate we shall be pointing out areas in which we think there can be improvement but we are not opposed to the Bill. On the contrary, we consider it to be essential especially in the context of what in effect are substantial reliefs in regard to death duties. I cannot see any distinction between inheritance tax and death duties.
This section is a charging one. The taxes provided for in this Bill and in particular in this section are important. They should have come before the other capital taxation measures because they were far more relevant both to the Exchequer and to the economic circumstances of the country. However, I shall not go back over all that again except to say that in this Bill we are dealing with the real capital taxation measures which have relevance to the situation today and, in particular, to the economic situation and the requirements of the Exchequer. As far as we are concerned this particular section is quite acceptable.
I would just point out the total abolition of death duties for 95 per cent, or possibly more, would not come next or near the thresholds.
I do not want to become involved in a long argument but it is very difficult for the Minister to make that statement with absolute confidence that he is correct in what he is saying. I say that, first, because the proposed tax will be operating at a very low level in quite a number of cases and, secondly, it is impossible, if the Minister is talking about what is being done in relation to death duties, to confine oneself to what is in this Bill. One has to have regard to what is in other Bills, which are now Acts, in order to assess what is substituted for the suspension of the law on death duties which is, as the Minister knows, what is happening. Suspension of the law is not repeal. I doubt if it is possible for anybody, including the Revenue Commissioners, to assess accurately the total effect of the three Bills operating together in the light of the repeal of death duty legislation. I doubt if anybody can do that but, even if it could be done, it is certainly not accurate and not at all relevant to talk about the effect of this Bill alone.
Question put and agreed to.
SECTION 5.
I move amendment No. 12:
In page 10, to delete subsection (6) and to substitute the following subsection:
"(6) (a) Where, before the 28th day of February, 1974, a contract or agreement was entered into, under or as a consequence of which a person acquired the right, otherwise than for full consideration in money or money's worth, to have a benefit transferred to him, or to another in his right or on his behalf, and an act or acts is or are done, on or after that date, in pursuance of, or in performance or satisfaction, whether in whole or in part, of such contract or agreement, then the gift or inheritance, as the case may be, taken by or in right or on behalf of that person, shall be deemed to have been taken, not when the right was acquired as aforesaid, but either—
(i) when the benefit was transferred to him or to another in his right or on his behalf; or
(ii) when he or another in his right or on his behalf became beneficially entitled in possession to the benefit,
whichever is the later.
(b) In this subsection, a reference to a contract or agreement does not include a reference to a contract or agreement which is a complete grant, transfer, assignment or conveyance.".
It proved necessary to add paragraph (b) to remove doubts as to the liability on payments made under a contract entered into before the Act comes into operation. The matter contained in paragraph (a) of the amendment is the same as the section as originally introduced. It has been repeated in the amendment solely for renumbering purposes.
I was rather wondering about that.
Paragraph (b) is an addition. If, for instance, a contract entered into before 28th February, 1974, was a complete grant of the life interest in itself it was still possible to argue under the section as originally introduced that payment made after 28th February, 1974, on foot of income due to the life tenant must be taxed. The amendment seeks to ensure that such a payment would not be taxed.
I am glad the Minister has confirmed what I thought was so, namely, that the amendment is exactly the same as what is being replaced except that paragraph (b) is being added and this is being done solely for numbering purposes, presumably in order to insert paragraph (a) after (6) and then add paragraph (b). It seems a rather cumbersome way but it achieves what the Minister wants so we will not quarrel with that part of it.
The Minister has given an illustration. Where the actual transfer of the property had been completed prior to 28th February, 1974, a payment subsequent to that date in respect of the transaction would be or could be subject to tax but for the addition of paragraph (b), if I interpret the Minister correctly.
Put it this way: it was possible to argue. I am not saying it would have succeeded but I wanted to make sure it could not succeed.
Suppose there had been a contract entered into prior to 28th February, 1974, but that the completion of the transfer, assignment or whatever was involved on foot of that contract did not occur until after 28th February, 1974, are we to take it that in those circumstances liability for taxation under gift tax would arise?
Yes.
If that is so, what is the reasoning behind it? Why should such a transaction, entered into before there was any indication of gift tax, be liable to gift tax now? Is that not a form of retrospection?
Not anymore than an increase in income tax is retrospective simply because it applies to salary scales fixed prior to the imposition of the tax.
Surely there is a fallacy in that in the sense that a transaction entered into prior to 28th February, 1974, might well not have been entered into if it had been known it would be subject to gift tax. There was no way in which the parties could know it would be subject to gift tax and the fact the transaction was not completed on that date does not seem to me on the face of it to justify the application of gift tax to it. Putting it another way, I suggest to the Minister the correct approach would be to apply gift tax to any transaction for which the contract was entered into after 28th February, 1974, but any case in which a contract was entered into prior to that date, whenever completed, ought not to be subject to gift tax. Any other approach, if not introducing retrospection, is certainly going very close to it.
I do not think it is. There are plenty of arrangements made in the light of existing tax rates significantly altered subsequently because tax rates change. There may be a tendency to assume taxes will not change but there is no right to assume that. If that were the position, the Legislature would be frustrated in its efforts to amend the law or, improve the law and collect revenue.
If a shopkeeper anticipates the budget by purchasing commodities he believes may be subject to tax and they are not subject to tax, is he at a loss because he made a wrong anticipation? That kind of thing is not infrequently indulged in. Section 5 provides that where a gift is made on or after 28th February, 1974, pursuant to a binding contract made before that date it will be taxed as if made when completed and not on the time of the contract. In the ordinary way entering into a binding contract is a gift but it is necessary to make an exception in the type of case dealt with in sections 5 and 6 to counteract the temptation of drawing a deed of gift after 28th February, 1974, and stating it was in pursuance of a contract made before 28th February, 1974.
Now the light is being shed on it. Now we know.
That is one reason. Incidentally, there is a similar provision in the Australian gift tax code.
That may not be the best example for the Minister to quote.
There is nothing wrong with the tax legislation in Australia, whatever about other difficulties they may be experiencing there at present.
I rather suspected that this was what was behind this provision. I am glad the Minister has said it, so that we can talk the one language about what is involved. Is the Minister afraid either that people will produce contracts falsely dated or that they will allege verbal contracts made earlier? I would have thought that in the latter case they would not get much of a hearing from the Revenue Commissioners. The former case is a problem with which the Revenue Commissioners are faced all the time. I do not think it is soluble. In my view, it is not sufficient to justify the imposition of gift tax on a transaction entered into bona fide prior to 28th February, 1974, when the parties could not have anticipated the Minister's announcement in the White Paper.
As the Deputy knows, tax rates change from time to time. Very often they apply to arrangements made prior to the imposition of the tax. Income tax is a perfect example. A person enters into a contract of employment and is to be paid £X per year. The rate of tax could rise by 5, 10 or 20 per cent. Is it to be said that it may not apply to such employment contracts?
The Minister talked about the shopkeeper buying in goods in anticipation of a change in taxation rates. That is the reverse of this situation where people enter into a contract in good faith, not anticipating any change in the rates. If a shopkeeper anticipates a change in rates and finds there is not a change and he is left holding the baby, that is too bad. I certainly will not bleed for him. Where people enter into a contract of this kind in good faith on the basis of what the law is at the time, I suggest it is wrong and is retrospectively imposing taxation to apply gift tax to that transaction, which is what is being done here.
I suggest that the general principle involved should be that gift tax should be imposed on any such transaction which was not entered into prior to 28th February, 1974, but that it should not be applied where the transaction was genuinely entered into prior to that date. There could be many reasons why it was not completed. There could be many cases in which transactions entered into after the transaction in question were completed prior to 28th February, 1974, and no gift tax was imposed just because of the particular circumstances in a particular case holding up the completion of the transaction until after 28th February, 1974. This does not justify the imposition of gift tax. In reality what we are talking about here is a fear on the part of the Minister that there may be allegations of contracts having been entered into prior to 28th February, 1974, when, in fact, they were not.
The Revenue Commissioners are not without weapons in dealing with a situation like that. For instance, if people produced a contract dated prior to that date which was unstamped the Revenue Commissioners could express very grave doubts and reluctance, whatever the reasons given for the non-stamping. There are certain other weapons open to them too. In order to try to prevent any abuse the Minister should not impose what is in effect retrospective gift tax, the only justification really being the possibility that somebody might fiddle the date of a contract in order to get the benefit of this provision. The Minister should be slow to risk the imposition of any retrospective tax. The possibility of people producing a contract wrongly back-dated is not such as to justify the imposition of this retrospective taxation, which is what is being done here.
In addition to what Deputy Colley has said, I wonder would the Minister consider substituting "binding and enforceable" for the word "complete". As Deputy Colley said, the Revenue Commissioners are not without their resources. I do not know whether my suggestion would meet Deputy Colley's point fully but at least it would cover the case of a contract which was not perfected. Take the case where you have a preliminary contract which would be an enforceable contract subject only to certain defects on requisition or something like that. You would have an enforceable contract but it might not be completed by the ultimate conveyance. In that case it would be binding and enforceable.
I would not make this suggestion to the Minister were it not for the fact that I think—I am accepting what Deputy Colley said; I have not checked it—the contract would need to be stamped. As I say, the Revenue Commissioners have means of satisfying themselves as to the bona fides of the transaction. In certain ways you could fake a complete contract just as you could fake the initial contract. I do not expect the Minister to give me an answer off the cuff to my suggestion. The word “complete” seems to me to imply that everything must be wrapped up with the final conveyance and with absolute finality. I wonder whether a binding and enforceable contract is not what the Minister really has in mind. Perhaps he could satisfy himself that there could be no evasion in that.
The only argument I can see against the point I am making is the one the Minister made—and Deputy Colley has answered him to some extent—namely, that it might be easy to fake the earlier contract and it would not be so easy to fake the final contract. On analysis, I wonder does that argument have the force it appears to have at first blush. In any event I make that suggestion to the Minister.
Some years ago death duties were increased from a ceiling of 40 per cent to 55 per cent. I do not think anybody at that stage argued that gifts or inheritances that occurred after the change should pay tax at the lower rather than the higher rate.
Agreed. No, they did not.
Poor opposition, although Deputy Colley was there at the time. It is exactly the same point. The point Deputy Colley is making is that people entered into certain arrangements not anticipating and not knowing what the gift tax would be and that, therefore, they should not have to pay the tax at all. What I am saying is that if people made bequests when the top rate of death duty was 40 per cent—if there is validity in Deputy Colley's argument—such bequests when they became effective should not have carried the higher rate of 40 per cent.
But the death would have occurred after the imposition of the new rate.
The bequest would have been made. Supposing a person was unconscious on the day on which the Financial Resolution was passed here and died the following day, he would have paid at the new rate and would not have had an opportunity of making a change to conform to the change in the law. If it was the other way about, and relief was being given, nobody would suggest for one moment that relief should not be given because the relief was not known to the person at the time of making the gift. If it was going to move in one direction it would be logical that the argument would require that it be moved in the other as well.
There are many ways in which a case could be made that binding contracts existed before the appropriate date. For instance, the estate duty field disclosed from time to time cases where verbal promises were made on marriage which were not binding until they were put into the deed. They would have been binding enough. They would have been enforceable under the Statute of Frauds if they were recited in a later deed. If we had not this provision here, we might have a situation arising in which there could be recitals of agreements prior to 28th February, 1974, which would then get the exemption that Deputies opposite seem to suggest they should get.
We are doing no more here than applying the usual rules relating to taxation. If benefits accrue after the appropriate date, then they should bear the tax rate at the time the benefit accrues or when they enter into possession. That is the appropriate tax. If we do not do that, certainly we will provide plenty of temptations to engage in practices which would be wholly undesirable.
The Minister raised a very neat point on the Statute of Frauds which a lawyer would appreciate. It can be simply added to by what I suggested—binding and enforceable and in writing. This is the very reason why I said I did not expect the Minister—even though he was sympathetically inclined to the point—to accept the suggestion I made off the cuff because I can see that the executing contract would need to be reduced to certain forms to have sufficient evidence. Take the simple case where there was an intention to convey, shall we say land. Just for perfection of the title, the normal contract was written and executed. Then, merely to see that the title, conveyance and everything was in order, the rest of the procedures were adhered to—requisitions and so on. Finally, having investigated the title and made everything watertight from the legal point of view, there would be a final conveyance. In that case the original contract would not be sufficient to escape under this section. I fail to see that it is really in any different position from the completed transaction. It is really the word "complete" I am arguing with the Minister. I am taking that absolutely separately from the Minister's point. Deputy Colley made two points. I am on the second point he made with regard to retrospection. In so far as there is that element of retrospection and what that word "complete" means, a little thought would enable the Minister to capture the type of thing about which we are talking.
I will certainly look at that to see if it can be improved.
The Minister says —where before the 28th day of February, 1974.... I presume that date has to do with the publication of the White Paper.
That is correct.
How far back does "before" go?
Any time before.
In the last 50 years?
Yes. The only thing that will be taxed will be gifts now occurring.
Is the Minister seriously saying that in respect of somebody, at a time when no such tax existed ten years ago, made a gift, the Revenue Commissioners can come along now and impose that tax?
They will not tax a gift where a person comes into possession of the benefit before 28th February, 1974. But if, after that date, they take the benefit of a gift, then they would be taxed.
After the date?
Then it would be taxed, yes.
If the arrangement were made for the gift ten years ago but it was only to operate, say, in 1975 then it would become liable to gift tax?
Yes.
Is the amendment agreed?
Yes, on the basis that the Minister will have a look at the point put forward by Deputy de Valera.
Amendment agreed to.
Question proposed: "That section 5, as amended, stand part of the Bill."
There are a few points I want to raise on the section. First of all, might I refer the Minister to subsection (2), paragraph (b). There is a provision there to deal with the situation where an annuity or other periodic payment not charged on property can be valued by reference to Government——
I am not with the Deputy; to what is he referring?
To page 9, subsection (2), paragraph (b) beginning "if the benefit is an annuity or other periodic payment...". The effect of that paragraph is to provide a method by which annuities or other periodic payments not charged or secured by any property may be valued or measured for the purpose of assessing the tax by reference to the yield from the security of the Government which was issued last before the date in question for subscription in the State and is redeemable not less than ten years after the date of issue. Where it says: "The security of the Government which was issued last before that date..." does that refer to the last National Loan which was redeemable not less than ten years after the date of issue, or could it refer to the last tranche of an older loan? As the Minister knows, this is done from time to time; portion of an older loan is issued from time to time.
Yes, but one does not issue a new loan. One creates new tranches; I think that is the word.
Exactly, that is correct.
You issue a new loan but you create new tranches.
Perhaps the Minister is correct but he will appreciate the point I am making.
I do, yes.
We should have some certainty and, if there is any doubt, he might have a look at that point.
I will certainly.
The next matter I want to refer to is subsection (3) which reads:
For the purposes of section 6 (1) (c), the sum referred to in subsection (2) (b) shall be deemed not to be situate in the State at the date of the gift.
Would the Minister tell us what is the significance of that subsection?
If the disponer and the trust are foreign no tax will arise on the unsecured annuity. The sum referred to is a notional sum and, therefore, it has no real situation.
Did the Minister say "had been borrowed"?
No, I said no tax would arise on an unsecured annuity.
In order to deal with this, which defines for the purpose of section 6 (1) (c) what happens to the sum in question, I must refer to section 6 because the subsection refers to it. Section 6 (1) seems to me to provide in (a) where the disponer is domiciled in the State or the law of the disposition is the law of the State then the whole of the gift is taxable. Section 6 (1) (b) provides that if the disponer is domiciled in the State at the date of the gift or, in the case of a gift taken after death, was domiciled at the time of death, or where the proper law of the discretionary trust is the law of the State then the whole of the gift is taxable. Section 6 (1) (c) refers to: "in any other case, so much of the property of which the gift consists as is situate in the State at the date of the gift."
I am assuming that in interpreting section 5 (3) what we are being told is that the notional sum referred to in subsection (2) (b) is deemed to be situate outside the State only in any other case. In other words, if it came within (a) or (b), if it were a gift where the disponer is domiciled in the State or the proper law of the disposition is that of the State, or if it were within the terms related to a discretionary trust, then it is deemed to be within the State. It is only if those two cases are out that the notional sum is deemed to be situate outside the State. Am I interpreting that correctly?
Yes.
That is a help but it does not solve the problem completely. However, the problem really arises on section 6 and I will leave it until I come to that. At least it has disposed of that portion of it.
May I refer the Minister now to section 5 (4)? Will he explain what is involved there and explain the approach involved in subsection (4)?
It is axiomatic that a gift is the receipt of a benefit for which there is no consideration. If full value is paid there is no gift. Subsection (4) provides that if the donee is a relative of the disponer and gives the disponer a life interest in return for the gift, the life interest will not be a consideration for the purpose of deciding whether the transaction was a gift. Of course, an allowance will be given under section 18 for the life interest.
This applies only in the case of a relative, but if the reasoning is correct should it not apply even if the donee is not a relative?
I take the Deputy's point but I am sure he will accept that the kind of arrangement where a life interest is given is something that occurs within families.
I accept that.
If it goes beyond that it is possible that the arrangement might not be a genuine one. I do not cast aspersions on all of them but it is most unlikely to arise outside family arrangements.
In the case of a relative, what is the effect of not treating the life interest as a consideration for the grant of the benefit? I understood the Minister to say that under a later section credit would be given in respect of the life interest in assessing the value of the benefit for the purpose of tax. If that is so, what is the effect of this subsection in providing that the life interest shall not be treated for the purpose of the section as consideration for the grant of the benefit or any part of it? Does that mean that one has to show there was another consideration beside the life interest or else it is treated as a gift even though the life interest has a value? Is that the effect of the subsection?
If I understood the Deputy correctly, yes. In other words, it will be a gift and it will not lose that status merely because a life interest is given to the donor.
We may be at crosspurposes here. I should like to be clear on what is being provided. If we had an example it might help to clarify the matter and the Minister may correct me if I am wrong. For instance, suppose A gives a house to his son, B, and the latter gives a life interest in the house to A, as I understand this subsection it means that in such a case the granting of the life interest to A is ignored and unless it can be shown that B gave a consideration other than the life interest it will be treated as a gift and taxed accordingly. I also understand from what the Minister said earlier that if that happens in assessing the property for the purpose of tax credit would be given for the value of the life interest.
Yes.
It seems to me that approach may not be the correct one. If the value of the property is £30,000 and the value of the life interest is £10,000, in the absence of any other consideration would it not be more correct to say that the value of the property should be taxed on a figure of £20,000? It appears the subsection is saying if there is a life interest created that is to be ignored for the purpose of assessing whether there is a liability for this tax, which is not quite the same as saying it is to be taken into account and valued accordingly.
Section 18 will be the section that will allow the life interest to be taken into account. What happens if a property is given subject to a life interest is that the whole property is not given, as it were. A part of it is withheld, that part which is occupied or used for the life interest, for the gift, in fact, is the net. Just because a life interest is given you do not say that is a consideration and, therefore it is not a gift and it is not liable to tax. There is an element of gift and it is the difference between the full value and the life interest.
This is the point I am at. Is that not the correct approach, to say the value of the gift if given absolutely would be so much, but the value of the life interest which is retained is so much, therefore the net value of the gift is the difference? That would seem to me to be a straightforward approach to it, but what this subsection appears to be saying is, the fact that there is a life interest is not to be treated as if there were consideration. It does not say part consideration or anything else. In other words, do you really need this subsection at all? Why not just assess it on the basis of the value of the gift, value of the life interest retained, and whatever the net difference is? It seems there is a certain unnecessary complication being introduced by this subsection, and even if you did not have the subsection at all the situation would be adequately covered.
This section is not in itself imposing a charge. It is simply describing what the gift is, or it is simply providing that if the life interest exists that that would not be regarded as a consideration. Other sections have dealt with the actual charge, but the two taken together produce the net position which both Deputy Colley and I seem to want.
This is one of the complexities of this kind of legislation, and I approach this with a feeling of sympathy for the Minister and his advisers in dealing with it. Deputy Colley started by making the point about a relative. Would I be right in seeing it this way, that, if there are relatives involved—father and son say —then what the Minister is saying is that a gift between the relatives will be treated as a gift without reference to the life interest and that afterwards section 18 will operate to bring some relief? Am I right in thinking that?
That is right, yes.
That is the case of a relative. Deputy Colley threw out the intriguing point which I do not think he followed up, what happens in the case of a non-relative? The Minister disposed of the improbability. What is a relative? Would a mistress be a relative for instance? This is not altogether an improbable case. If, for instance, A were to give a gift of the property to B, the relationship being as I postulated, you are not involved with a relative. The very fact that you say that the life interest is not to be a consideration in the case of the relative suggests that it is a consideration in all other cases. My question is, therefore, in the case of the gift to the lady would the life interest be a consideration in part? It would not be a consideration in whole.
I have been trying to think of a plausible case, not, perhaps, in this country but certainly not very far away from us. Again, there may be another section like section 18 that covers the point I am making, but the Minister says, this is a descriptive and, perhaps, an unnecessary subsection; if it was not necessary and it does make a distinction between a relative and a non-relative, the consequences of that need examination. I am not very sure of my ground, I must admit, in regard to the case I have stated. There may be some other section analogous to section 18 that would give the Minister the answer to the case I have given. Nevertheless, that kind of thing can occur.
All I can usefully say at this stage is that I shall look at all the arguments that have been advanced.
I am thankful to the Minister for that. I think what the Minister is really anxious to see is that there would not be a double relief involved in section 18.
That is right.
That would be fair enough and I would go along with that, but whether the effect might not be unforeseen in the other direction should be considered.
You could have collusion between people who are close to one another. I accept there can also be collusion between strangers, but it is less likely to occur. The Revenue Commissioners might not know who the donor's mistress might be, so I take the point Deputy de Valera raises. We shall have to look very carefully at it and tread cautiously.
I suggest the Minister might look at it on the assumption that subsection (4) were not there at all and see how it would work out. Could I now ask the Minister if he could illustrate, if possible with an example, subsection (5)?
If the interest was such that the beneficiary does not get the whole income from property, only that slice of the property which produces the income he gets is taken into account. Subsection 5 describes how the slice is to be calculated. Whatever fraction of the income the beneficiary gets, the same fraction of the capital is the slice. Thus if a disponer grants property to a absolutely, subject to and charged an annuity of £X to B for life, B is taxed on the slice of the property which produced £X per annum and A is taxed on the balance of the property. In taxing B allowance is made for the fact that he gets less than an absolute interest. When B dies A is taxed on the slice under section 28.
If the appropriate part referred to in this subsection were, for example, one-fifth, the subsection appears to state towards the end of it that the gift shall be deemed to consist of one-fifth part of each and every item of property comprised in the entire property. As the Minister said, in this case we are dealing with where the gift is charged on or entitled to be charged on only part of the property. If that is so, why is there this provision to the effect that the gift shall be deemed to consist of the appropriate part, whatever proportion it is, of each and every item of property comprised in the entire property? I wonder if I am making my point clear?
The appropriate part means that part of the property on which the benefit is charged or secured as well as the same proportion to the entire property as the gross annual value of the benefit bears to the gross value of the entire property.
Let us say in a particular case that that appropriate part was one-fifth?
We take one-fifth of the capital.
Yes. The question I am asking is: in such case why should there be a provision to the effect that the gift shall be deemed to consist of one-fifth part of each and every item of property comprised in the entire property?
Suppose you have a number of investments, say a dozen, you take one-fifth of each investment. Investments could have different values. Therefore, in order to get a fair cross section of the values, you would have to take one-fifth of the separate elements in the property on which the gift is charged.
Question put and agreed to.
SECTION 6.
Amendment No. 15 seems to be related to amendment No. 13 and I suggest that amendments Nos. 13 and 15 be debated together. Is that satisfactory?
If you do not mind I would rather take them separately. It may be clearer to us when we reach them.
Certainly. This is quite in order.
I move amendment No. 13:
In pages 10 and 11, to delete subsection (3) and to substitute the following subsection:
"(3) Notwithstanding anything contained in subsection (1), no part of the property of which a gift consists shall be a taxable gift where—
(a) the gift is taken prior to the 1st day of April, 1975; and
(b) the disponer in relation to the gift dies prior to that date."
Section 6, subsection (3), and the proviso to section 9 of the Bill, as initiated, were inserted so that property which under the old law bore estate duty as a gift made within five years before the death of a person dying before 1st April, 1975, would not also be charged to or aggregated for capital acquisitions tax. The provisions, as originally inserted in the Bill, have turned out to be inadequate. For instance, if a man made a settlement in 1971 under which a person took a gift out of income in 1974, both taxes would be payable if the man died before 1st April, 1975. There was never any such intention. The provision has been rewritten, therefore, and that is why we are introducing these amendments.
The basis of the amendment to section 6 is that where the disponer died while death duties were still in force, so that any disposition he made in his lifetime would have been at risk for the five-year gift inter vivos period or the earlier three-year period, which applied before the 1965 Finance Act, there appears to be a good case for saying that gifts taken before the cut-off date for death duties should be ignored. They either pay estate duty or escape such payment because the death duty system did not provide for tax on them. In the case of a donor who dies on or after the 1st April, 1975, the death duty risk was gone and the gift will be a taxable gift. Are we taking amendment No. 15 with this amendment?
We are not taking amendment No. 15 at this stage.
At first glance I must say the amendment looks better than the draft of the Bill but I am not quite clear, and I would like to be, exactly what is being achieved here. The provision in the Bill, reference to the 28th February, 1974, is being deleted and the reference to the Estate Duty Acts is being deleted. I assume that the reason for the deletion of the reference to the estate duty legislation is that this would apply automatically in the case of a death occurring before the 1st April, 1975. I am not quite sure that the Minister has told us exactly what the effect of this amendment is as compared with what would have been the situation under the Bill as originally drafted. If one looks at the provision in the Bill there is a reference to where the disponer died after 28th February, 1974, and before the 1st April, 1975, and there is an exclusion then of a gift taken during that period, or part of it, if it were liable to death duty. Is the Minister now providing that whether such a gift was liable to death duty or not it will not now be liable to either gift or inheritance tax? Is that the effect of this amendment?
That is right.
I am not objecting to that. I am trying to be quite clear as to why that should be done. As I understood what the Minister said, he is trying to avoid a double liability, that is, a liability both to death duty and to inheritance tax. But the remedy for avoiding liability for double taxation seems to be to exempt it from taxation altogether. Is this the only way this problem can be solved, or should such gifts, if they would have been liable under the death duty code, now be exempt? That seems to be the effect of the amendment.
No. We are dealing with property which has actually been liable to estate duty. We are not exempting property from the new tax simply because it might have borne estate duty.
You are leaving a clear line between the two where you were trying to dovetail it before —is that not it?
Yes.
I wonder is that so.
If anybody escapes in between, the Minister is happy to let them escape?
Yes.
There must be very few chances of escape.
I suspect there is more to it than meets the eye if the Minister is prepared to allow anybody to escape. Could he throw some more light on it? He may say we are looking a gift horse in the mouth but I suspect there is more to it.
The Deputy has been in the Minister's seat; he should know.
As originally introduced, an actual estate duty liability was necessary. Now if the gift is taken and the donor dies before 1st April, 1975, the tax will not arise. I think this is in line with not having the tax on any inheritance which occurred before 1st April, 1975.
They will be paying estate duty rather than capital acquisitions tax.
Yes.
Is the explanation to be found in the fact that the Minister had this Bill drafted before he had the Finance Act drafted?
No.
I share Deputy Colley's suspicions.
If the Minister tells us that there is nothing else involved in it, we will accept it.
Amendment agreed to.
Question proposed: "That section 6, as amended, stand part of the Bill."
Could the Minister indicate, in relation to paragraph (a) (ii), which mentions "the proper law of the disposition under which the donee takes the gift..." broadly, what are the circumstances which determine the proper law of the disposition?
Proper law in relation to a disposition means the law of the territory whose laws govern the construction of the instrument and the rights and obligations arising out of the disposition. The term originates in the law of contract where the word "proper" indicates the law which the parties must be taken to have intended to apply or to have selected to govern the contract. The proper law of a will is normally the law of the testator's domicile but a foreign law may apply to foreign immovables while unsold even though they are subject to the trusts of a will of a testator domiciled in this country. For those who want to pursue the matter further the reference can be found in: Philipson-Stow v. I.R.C., 1961, A.C. 727. The law of the country of the situation of the property or the lex situs applies.
This is true but I think the important thing for the purpose of this section is that the subsection may have to act retrospectively in this sense that it is quite possible that the Revenue problem that could arise here could finally only be decided subsequent to a case involving a judicial decision not in a Revenue case and that that would rule in the section. You could have a case where something in the nature of a contract is involved and where it would be necessary to have the court decide on that contract per se as to what law governed it and only then would the Revenue authorities be in a position to apply the subsection or paragraph in question.
Although he may not have intended it, the Minister is covering—quite rightly—such an eventuality. He is not only covering prima facie cases but cases which are already determined and where it can be said unequivocally or agreed for Revenue purposes that it is this law that governs the position. The Revenue might have to wait in certain circumstances until that question were judicially decided in proceedings that had nothing to do with Revenue. Possibly this is an indirect way of appeal that might be invoked. Does the Minister understand?
Yes.
I do not want to put bad thoughts into anybody's head by being more explicit.
Subsection (1) defines taxable gifts in paragraph (a) in the case of a gift other than one under a discretionary trust (b) in the case of a discretionary trust and (c) any other case: (a) (i) deals with where the disponer is domiciled in the State at the date of the disposition but in (b) under the discretionary trust it deals with that situation and also with where the gift is taken after the death of the disponer, presumably, therefore, making it an inheritance. Why is there provision about a gift taken after the death in the case of a discretionary trust and not in the first case? Why the difference in approach in subsection (1) (a) from that in subsection (1) (b)?
The disposition takes effect in the first while the person is living and the disposition will take place in the second at the time of death.
Is that not an alternative? Subsection (1) (b) refers to where the disponer is domiciled in the State or was so domiciled at the time of his death. Is it not necessary to make a similar provision in subsection (1) (a)?
I take it the point the Deputy is making is that there could be in the case of a gift other than a gift under a discretionary trust a postponement of the taking of a gift?
Presumably there could be.
In the discretionary trust the disposition will take place whenever the power to appoint is exercised, whereas in the first case there not being a discretionary trust the disposition would take place when the gift is made.
In the event of the owner of a large estate who lives in Ireland giving a gift of shares in a foreign company or property or land in a country outside this State, do I take it this will be liable for tax because he is domiciled in Ireland?
Yes. The reasoning is that if he were not so liable there would be an encouragement to hold property outside the State.
I am sure there is an obvious reason for this but I have not seen it yet and, perhaps, the Minister will tell me. Subsection (2) of section 6 provides that for the purposes of subsection (1) (c) a right to the proceeds of sale of property shall be deemed to be situate in the State and so on. Subsection (3) of section 5 provides for this notional sum, which we referred to earlier being deemed not to be situate in the State. What is the reason for the difference in approach in these two? I know in each case it is just a question of their being deemed to be either situate in or situate outside the State and that can be altered depending on the circumstances, but why the difference in approach?
I will explain subsection (2). That provides that, if the property includes Irish property which is held on a trust for sale, the property will be regarded as situate in the State while it remains unsold instead of determining its situation by the rather artificial concept of a "chose in action".
The second part of my question relates to subsection (3) of section 5 where this notional sum related to the last Government security issue is deemed not to be situate in the State.
That subsection deals with a foreign disponer, a foreign trust and foreign property. Subsection (2) of section 6 deals with Irish property.
The structure of the Bill means that sections 5 and 6 have to be read together. The word "gift" is not explicitly defined, but in subsection (1) of section 5 "he shall be deemed to take a gift" is an implicit definition of a gift. That stands qualified and expanded by the following subsections in section 5. In section 6 "taxable gift" is defined. The word "taxable" is descriptive of the person and the transaction charged rather than the substance of the gift. The two sections have to be construed as descriptive of the gift until we come to the other sections. Does the Minister wish to make any comment about the two sections taken as a whole?
The Deputy has made a good job of filling in the time, if I may say so without disrespect, but I find it difficult to follow the several points he made, although I have made a brave effort to do so. All I can say is that section 5 sets out gifts deemed to be taken and section 6 specifies what a taxable gift really means.
Question put and agreed to.
SECTION 7.
Question proposed: "That section 7 stand part of the Bill."
Would the Minister tell us why section 7 should be included?
Obviously one has to measure what benefit the parties receive so that their respective tax liabilities may be determined. Therefore, where a gift is taken in common by two or more persons, unless the gift otherwise says, it is to be assumed that they take them in equal shares, that being the fairest way of dividing the gift and the liability. In some cases this could operate to relieve liability to tax and in other cases liability could arise.
The difference between a tenancy in common and a joint tenancy is essentially the right survivorship. If a gift is given jointly to two people, the one who survives gets the whole gift. If it is a tenancy in common it is severable—I do not want to go into technicalities of when it is not—and it is equitable to tax each of them because in a sense the property is being divided into two moieties. The two individual halves can be separated.
The Minister says it would be more equitable to tax each part straightaway but what happens when the succession falls in? Each half of the gift has already been taxed, but when succession falls in does it mean that it is deemed to be another gift? Leaving out exemptions, if two brothers inherit property jointly, or receive a gift jointly, then there is a tax notionally. If they were not brothers there would be tax paid on the whole gift by each of them. When the succession of the other part has fallen in, there will be a further tax payable, say, in the nature of an inheritance tax on the moiety. Is that what the Minister intends?
It could arise if a person has passed over the threshold. If the property is given to people as joint tenants they can sever the joint tenancy.
Yes, they can.
The Deputy knows the court leans against joint tenancies.
I agree. I purposely excepted that, but if they do not, there is the automatic inheritance. As long as it is not severed, there is the contingent right of reversion. Admittedly that is a defeasible right, but as long as the joint tenancy is not severed, there is still that expectancy. That is the only point I wanted to make.
Where that falls in it is taxed again.
It may or it may not. It all depends on the relationship between the parties.
But if it is taxable?
If they did not treat it as tenancy in common but as joint tenancy, it could happen that the person is entitled to full enjoyment because that is what joint tenancy is. You are the owner of the whole if you share with others rather than owning half.
Undivided moiety.
With brief reference to the Schedules, can I pose this question: suppose a disponer has twin sons and he donates—a somewhat similar situation would arise on a succession—the property to them jointly. There are certain exceptions on this joint tenancy. On the death of one, the survivor takes the whole but becomes taxable as a brother now. He is in a much less advantageous position. Is that right?
Yes.
Surely that would defeat the benefits that a parent should have in the giving? It seems hard that the case of two brothers, or a brother and a sister, where there is a joint tenancy and where the gift is given to them, would be exempt and when the survivorship happens of the one gift as a joint tenancy, a higher rate of tax will apply afterwards. The Minister can see no such anomalies occur if the gift is made in common: then the gift would be in that generation and the matter would be between brother and sister or brother and brother afterwards. It would be the natural thing in matters like this and that is why I emphasised the case of twins.
They can sever joint tenancies where such tenancies are arranged between father and where one son might get married. The likelihood then would be to sever the tenancy.
I am making a case for the situation where they do not sever.
So be it. They might well avoid liability to the tax, but it would be £150,000 in each case. If it were £300,000 jointly they would be better off.
Only the one who did not get married would be liable.
Question put and agreed to.
SECTION 8.
I move amendment No. 14:
In page 11, subsection 1 (b), line 21, to delete "the disposition was made" and to substitute "the date of the disposition was".
This change is made to secure the benefit of the definition in section 2 of "date of the disposition", in case paragraph (b) gave rise to doubt as to whether the disposition was made before or on or after 1st April, 1975. Elsewhere in the Bill, for example, sections 3 (1) (c) and 22 (b) (ii), the formula used is "where the date of the disposition is on or after 1st April, 1975". This formula enables one to avail of the definition of "date of the disposition" in section 2 (1) and removes any doubt about when the disposition was made.
The disposition may comprise a number of acts, including a binding promise, a formal transfer to trustees, payments by the trustees, an assent to vesting in a beneficiary, a beneficiary taking by default on the act of disclaimer by another, associated operations or reciprocal arrangements, and so forth. Having identified the true disponer, it may be necessary to identify the final act by which he provided, or is deemed to have provided, or bound himself to provide, the property.
What is taxable as a gift or inheritance taken under sections 5 and 11 is the act of becoming beneficially entitled in possession to a benefit without paying for it. Thus, if under a settlement of 1970, a life tenant becomes beneficially entitled in possession immediately, he is deemed then to have taken a gift. He has now a vested interest in possession in the trust funds. The later "disposition" by the trustee, which is by the definition of "disponer", a disposition by the settlor, when the trustee pays over income to the life tenant, gives rise to a benefit to the life tenant for which the latter pays full consideration by giving up his vested right to receive that income and no separate gift arises.
In the case of a binding covenant, say, in 1968, to pay £500 per annum, the payment in, say, 1975 of the £500 is one of the various acts in the disponer's disposition, but the date of the disposition would be 1968—the date of the act by which the disponer bound himself to provide the property—and the date of the gift would be the same, the donee then having become beneficially entitled in possession to the benefit, being the yearly income covenanted to him—a "limited interest".
In view of the wide definition of "disposition", the actual payment, say in 1975, is also a disposition, but it would be the view of the commissioners that the taking of that payment, like the taking of income by the life tenant mentioned above would be for full consideration in money or money's worth: the beneficiary could have sued on the original promise by releasing the disponer pro tanto from his promise, for example. “You pay me this year's payment and I release you from your promise to pay it,” and he gives full consideration.
There is a lot more to the amendment than I saw.
It seemed a very simple straightforward amendment until the Minister spoke.
I will keep my mouth shut in future. I was trying to help.
Amendment agreed to.
Question proposed: "That section 8, as amended, stand part of the Bill."
There are a few points I want to raise on the section and before I do so I should like to ask the Minister if he could explain the section, preferably by example. One point I am concerned with is the reference in subsection (2) to dispositions connected in the manner described in subsection (1). It seems to me on the face of it that subsection (1) does not describe dispositions which are connected and it might be better to begin by asking the Minister to explain it, preferably by example.
The section deals with the position where several gifts are made by successive donors to provide tax avoidance by gift-splitting. The gift is treated as having been made by the person who provided the property to the person who ultimately benefits. Relief is being provided in genuine cases. For example, A gives property to B, who gives it to C. This type of dealing would normally be for the purpose of tax avoidance because a person would not usually make a gift to a person who is himself making gifts to others, though it can happen and allowance is made for this possibility in subsection (2).
One possible form this could take would be where A, B and C would be people of great property. A owns £300,000, gives half of it to his wife B, and the other half to his son C. B then gives her £150,000, derived from A, to C. Without section 8 it could be claimed that there are two gifts here each of which is of £150,000 and no tax would be payable under the scale of rates in Table I in the Second Schedule. Section 8 looks at the reality which is that A has given £300,000 to C, and the section imposes tax accordingly. The section does not apply where the gifts are not made within three years of one another, nor does it apply when it can be shown that the first gift was not made with a view to making the second gift possible. The references to three years after the first gift and to recoupment are included because in the second example I have given B could first borrow £150,000 and give it to C and A could afterwards pay off B's loan and give a second £150,000 to C.
In the second example given, if A dies within two years after giving £150,000 to B and £150,000 to C, C's taking of £300,000 will be an inheritance instead of a gift. I trust that these illustrations of ingenious activities will be of assistance.
All I can say is that the Revenue Commissioners have my sympathy. I am aware of the type of ingenuity they have to defeat. However, I believe there are still some honest people so for the moment I shall deal with the question from a straightforward point of view.
I am not happy regarding the effect of subsection (2) in disconnecting the gifts. This subsection reads:
This section shall not apply in the case of any disposition (in this subsection referred to as the first-mentioned disposition) in so far as no other disposition, which was connected in the manner described in subsection (1) with such first-mentioned disposition was made with a view to enabling or facilitating the making of the first-mentioned disposition or the recoupment in any manner of the cost thereof.
That does not seem to overcome a difficulty that I see here. I see also the Minister's difficulty, but a serious anomaly could arise from the use of the word "the" before "gift" without identifying the subsequent gifts with the first one.
That is the point I was making earlier.
Regarding a second donee taking a gift, what in effect is meant is that if a father gives a gift to his son and the son gives a gift to somebody else—these are totally unrelated transactions—the second gift can be traced back to the gift of the father. Both parties may be sui juris. Is this not going too far? There could be the case of a son who by his own efforts has acquired capital before he receives the first gift, but on the wording of this section if he were to give that independent property to a third party that second gift could be traced back to the original gift from the father. Although there is merit in the Minister wanting to block a loophole, he has written in something here that is too wide.
The situation I am talking of can only be justified on the assumption that the second gift was made possible by the first gift, but this might be very far from the truth. How many cases are there, for instance, where a father living to 60 years or more has a son of, say, 40, who during 20 years or so has ploughed his own furrow? In law the son is sui juris. He, in turn may give that property to his son. If within the period specified the father makes a gift to his son's son, the transactions are interlinked according to this section. Is it not going too far to imply that everything will be in perpetual succession and that individual accumulation or creation of wealth is virtually ruled out? I can see the difficulty of identification but the Minister, very appropriately, shows the sum of money.
Subsection (2) provides for the circumstances the Deputy describes. We do not wish to tax unconnected gifts. By virtue of subsection (2) they would not be taxed if they were unconnected, but such cases will be few and far between. The Revenue Commissioners will raise a query in the event of identifying gifts between related persons, but it will be open to a person within the terms of this subsection to disprove the assumption that there were connections. The kind of people we are dealing with here are not people of small means or of incapacity to call on the aid of skilled people. We are not imposing any undue burden on people who are in the fortunate circumstances of being within the liability to tax because the liability arises when something is obtained for nothing and this something will be in the £150,000 plus range in order to be liable to tax.
In this respect I wish the Minister would forgo his habit of appealing to a point such as he has just made. We understand the force of that delenda est of the Minister. The difficulty here is in relation to the words “which was connected in the manner described in subsection (1)”. The manner described in subsection (1) is unequivocal and leaves no discretion in so far as no other disposition, which was connected in the manner described in subsection (1) with such first-mentioned disposition was made with a view to enabling or facilitating the making of the first-mentioned disposition or the recoupment in any manner of the cost thereof. Here I think the Minister is in difficulty. I sympathise with the Minister and I will go even further than the Minister did. This is a case where the Revenue Commissioners should have discretion. It is the type of case that can only be decided, as the Minister said, by a just discretion. I have on previous Bills pleaded this point. What I fear here is that we are removing discretion from the Revenue Commissioners. If the Minister insists on keeping subsection (1), I would far prefer to see subsection (2) couched in very wide terms of discretion to the Revenue Commissioners to decide whether (a) the transactions were bona fide and (b) whether they were connected or could be fairly considered to be connected in the case the Minister is seeking to cover. As things stand, even as subsection (2) is drafted, I feel the situation I have outlined can occur and, instead of having discretion, the Revenue Commissioners will have their hands tied.
My difficulty in this is like that of Deputy de Valera though I think mine goes further. I said earlier that it seems to me subsection (2) refers to dispositions connected in the manner described in subsection (1), but I cannot see the connection described in subsection (1). That subsection refers to a disposition made by a disponer within a certain time and the donee makes a disposition under which a second donee takes a gift and he may, perhaps, make another disposition under which a third donee takes a gift, and so on. There is no connection so described in that subsection.
That is the connection: A gives to B, B to C, C to D and so on.
But it is all very tenuous. It is not illustrated in the example the Minister gave. Deputy de Valera says it is money which is, of course, very hard to identify. The Minister's example gave the same figures passing on as if it were the same gift being handed on. But that is not what the subsection says. It seems to me to say that if A gives a gift to B, who is, we will say, a son of his and B happens to give a gift to C who, in the example given by Deputy de Valera earlier, is the son's mistress and she in turn happens to give a gift—these can be quite different gifts varying in size—to her neighbour's daughter, all of these, according to subsection (1), connect when really there is no connection at all. I do not think describing all these in subsection (2) as connected in the manner described in subsection (1) really meets the case at all. I know what the Minister's difficulty is but I do not think he is solving it in subsection (1) because it is so wide and so imprecise that I imagine it will probably turn out to be unenforceable. It can, of course, have quite serious consequences, too, because by deeming certain gifts given by somebody, who did not, in fact, give them, that could have a substantial effect on the rate of tax or on the level of tax. I think, therefore, it is important it should be clearly spelled out as to what exactly is being done in this subsection. I do not think the present wording is workable because it is so wide. This is an example of the kind of difficulty arising—only one of the difficulties; there are many others— because the Minister has not adopted the approach we recommended on Second Stage, namely, that in the case of gifts the liability for tax should be assessed on the basis of the gifts received by one donee, irrespective of the source from which he receives them, and all gifts should be accumulated and the rate of tax increased as they accumulate. That would get over all these difficulties here. It would not matter what connections or disconnections there were because one would be taxing the person on the gifts he receives, which is really what this is all about.
A man could not receive more than the £150,000.
That is right. You could allow for relief in the case of father and son or father and daughter and you would be at least applying the tax to the person. The more he received from whatever source the more he would be paying. Under the arrangement here a person could be paying a substantial amount of tax on a much smaller gift than his next door neighbour might be paying on a much larger gift. The point at issue here is this supposed connection in transactions in which there is no connection at all or the only connection being that one person made a gift to another. It is certainly conceivable that you could have a person deemed under this subsection to have received a gift from somebody else whom he did not know and had never heard of. That is very possible. The Minister will, I think, accept that because of the way the subsection is worded. I would strongly urge the Minister to reconsider the wording and the general approach to this. I am quite certain the subsection is not workable because it is so wide.
There are some other matters that arise to which the Minister referred when he was explaining the section. He referred to gifts taking place within a period of three years. The section says within a period commencing three years before and ending three years after and so it seems to me to be for all practical purposes a period of six years. Subsequently the section goes on to refer to a second donee making a disposition within the same period. Is the same period there referring to the six years or to the three years after the first gift was made? It is not clear to me. I think it is referring to the six-year period, but that is not absolutely clear. I wonder if the Minister could throw any light on what the position would have been in the kind of case envisaged here under the death duty system.
I do not understand the Deputy's question.
Under the death duty system if the kind of situation envisaged here occurred, how would it have been dealt with heretofore?
The only way it would have arisen under the death duty system would have been in relation to legacy and succession duties.
A gift, the donor of which died within five years.
Quick succession. That is a different matter. We are not dealing with the question of succession.
If the person concerned had made a gift to somebody else, no connection would have been deemed under the estate duty code. If there had been a gift from A to B and B had made a gift to C that would have been irrelevant under the death duty code.
That would be irrelevant.
The relationship did not matter.
Estate duty was paid on the whole estate. Legacy and succession duties were determined by the relationship. They were operating at very low rates and only above certain thresholds. The reality here is that people are not prone to making substantial gifts frequently, and particularly to strangers. Cases are being posed here where there could be a number of gifts by a person. We could take this mythical group of A, B, C, D and E. E might never have heard of A. The qualification in subsection (2) enables the consideration to be given so that such unconnected cases are not brought within the liability. There is agreement on both sides of the House that, where connected gifts are made for the purpose of avoiding tax, that should not be permitted.
Yes.
If cases of hardship or difficulty arise in practice I would look at them. I am sure I could bind any successor of mine on this, too. Amending legislation could be introduced if necessary. I think we are discussing unlikely situations having regard to the thresholds of exemption and the general pattern of human behaviour.
I should like the Minister to take a wider power of discretion for the Revenue Commissioners in subsection (2).
I will see if it can be looked at.
Otherwise subsection (1) is very dangerous.
We will have a look at it. We do not want to open it so wide in subsection (2) that subsection (1) will be ineffective.
Is not the aim that the donee should not receive more than the threshold through various devices?
Yes, a permitted sum from the donor.
That is clear enough.
Is the Minister not trying to achieve a situation in which a gift is made from A to B and B makes to C a gift of the same item or at least portion of the same item?
It need not be of the same value. What matters is that C or D has been enabled to make the gift to the other party by reason of having received the gift from another.
Effectively it is a gift from A to C rather than A to B?
Yes.
That is what we are seeking to deal with here. I suggest the Minister should give some further thought to trying to catch this type of transaction on the basis of identifying the gift to C in the case we are talking about as being the gift from A, or its equivalent. I know there are difficulties there, but at least if we could get over the question of its being a gift, which could be anything, we are getting closer to the objective of the section which is effectively to get at a situation where there is the gift from A to C but it goes from A to B and B to C. Effectively that is what the section is trying to do. I do not think the section is doing it and I strongly urge the Minister to re-examine the wording in the light of the objective, which is not contested on this side of the House, to see if it cannot be more effectively achieved by a different approach in the wording.
Could the Minister explain the reference to the two three-year periods? I am not very clear on that. Is it six years? If it is six years, what happens outside the six years in relation to a maximum transfer?
There would be no deeming once the period had passed. If the gifts occur within the six-year period, one would deem them to be connected.
Does that mean a donor could transfer the same amount again after six years?
Yes. Of course if the beneficiary, following the second distribution, were to go above the threshold they would be connected. Gifts received at any time by the one donee from the one donor will accumulate.
If the two together went above the threshold they would be taxable?
I agree that three years is an arbitrary figure. We do not want to look back over a life span of these matters. We have provided two years in another connection. It is not unusual in capital taxation to have an arbitrary period.
I do not want to waste time but I do not see why it is necessary to mention years if the gifts are subject to tax over the threshold.
One does not want to put undue brakes on family dispositions of property. A man might give a gift to his wife now and ten years later she might decide to distribute the money to the children. It would be unfair at that stage to say they were connected. It would be very far-sighted of people. They could do it. People of substantial means might do it.
The reason the number of years has to be provided for is that the Minister is trying to prevent gross abuse of the system by people pretending one donor is giving the gift when, in fact, it is another. The difficulty is that, under the Bill as drafted, the donor is very important for determining the liability of the donee. My suggestion is that the donor should be irrelevant except for the purpose of giving an additional allowance if it is within a certain degree of consanguinity. The real test should be that one donee receives gifts from any source. They are accumulated and taxed according as he gets more and more.
According to the source.
No, according to the amount he gets irrespective of where he gets it, except that there is an additional allowance in respect of a gifts straight from a father to a son, or a father to a daughter. If you could do that you could avoid the whole difficulty arising here because it would not matter whether it came from A to B or from Z to B.
He can do that because, if he has the money, the Commisisoners will not know where he got it.
We will make a careful study of all that has been said.
Question put and agreed to.
SECTION 9.
I move amendment No. 15:
In page 11, to delete the proviso in lines 40 to 47.
Amendments Nos. 13 and 15 are related. The same arguments would apply to both. I do not know whether Deputy Colley wants me to go through them.
If the Minister would not mind because I do not see this in quite the same light as the former.
The proviso in section 9, lines 40 to 47, is related to the estate duty provisions. It was inserted so that property which bore estate duty under the old law as a gift made within five years before the death of a person, dying before the 1st April, 1975, would not be charged to or aggregated for the purposes of capital acquisitions tax. Our further study convinced us that the original draft was not adequate. For instance, if a man made a settlement in 1971 under which a person took a gift out of income in 1974, both taxes would be payable if the man died before the 1st April, 1975. Therefore, the provision has been rewritten and, accordingly, these amendments introduced. This is a case of relief. The proviso in section 9 is no longer necessary since the gifts covered by that proviso are no longer taxable gifts because of the amendment we have already made to section 6.
Amendment agreed to.
Question proposed: "That section 9, as amended, stand part of the Bill."
I should like to know the reason behind the provision here for aggregation or taking into account any gift made after the 28th February, 1969, and prior to the 28th February, 1974, not for the purpose of making it liable to tax but, effectively, by taking it into account one can alter the rate of tax being charged. On the face of it, the five-year period would appear to be related to the death duty provision of a gift made more than five years before death not being deemed to be liable to death duty in respect of the estate of the deceased. But I should like confirmation that that is the reason why the five-year period is chosen. Also, I am not convinced at present that the effect of aggregating gifts arising between February, 1969, and February, 1974, is not, in practice, producing retrospection since gifts made during that period can substantially affect the liability to tax arising under this Bill.
We are including in the tax base gifts taken by a donee in the five years prior to the 28th February, 1974. These gifts will not themselves be liable to tax, as Deputy Colley acknowledges, but they are to be taken into account in order to determine the rate of tax payable on gifts taken on or after the 28th February, 1974, and inheritances after the 1st April, 1975. However, gifts which are deemed by the Acts relating to estate duty to pass on the disponer's death will not be aggregated where the disponer dies on or after the 28th February, 1969, and before the 1st April, 1975.
The section deals with gifts not inheritances taken on or after the 28th February, 1969 and before the 28th February, 1974. These gifts will have to be disclosed and valued as if they were liable to tax but they will not bear tax themselves. They will be taken into account in arriving at the rate of tax payable on gifts and inheritances which are liable to tax. Thus, if a donee gets a gift of £20,000 in March, 1973 and another gift of £30,000 in May, 1975 no tax would be charged on the £20,000 but tax would be charged on the £30,000. If the person was a brother, the tax would be £4,445. If the £20,000 was not aggregated for the purpose of measuring the tax, the tax on the £30,000 would be £2,085. If the disponer died before the 1st April, 1975 and the gift was within the charge to estate duty, it would not be aggregated for the purpose of capital acquisitions tax.
The purpose of including the earlier gifts for fixing the rate of tax is to protect the tax base. If we did not do so, very little tax would be paid for some time to come. Also, if we did not have this provision it would be treating taxpayers differently. Those who were lucky enough to get gifts before a fixed date would not have them brought into account in determining what would be their tax in the future, whereas people who had not anticipated, either voluntarily or involuntarily, the event would be paying a higher rate of tax on gifts.
I am afraid the Minister is losing me there.
How?
If I understand the Minister correctly, he is saying that people who did not anticipate this will be paying a higher rate of tax than those who did if he did not have this provision. Is that what the Minister said?
Yes, because the other people would be paying a lower rate if we did not aggregate the tax. Those who had received some gifts before the appropriate date would pay tax.
Why 1969? On that basis why not go back forever?
I would agree that the figure is an arbitrary one but one tries to temper justice with mercy.
Is it not retrospection?
There is no retrospection at all here. One is simply looking at the reality of what people have received from donors. If we had no cut-off point we would have to go back to the date of birth of every living person and maybe further still —because people might have received gifts before they were born—but that would be administratively difficult, to say the least, and would be an undue interference. It is proper that we should go back for some period to try to get a larger measure of equity in the system than we would have if we did not look at what has been happening over the past five years.
I should like to put this perspective on it. As far as the principle, the public and all accepted codes of taxation and parliamentary morality are concerned, whatever the speculation about capital taxation the document regarding capital taxation was produced on and dated 28th February, 1974. That is the base date.
So far as inheritance is concerned I can see there is a hiatus of five years in which a group might escape so far as a death is concerned. In the case of a death after the operative date one would go back five years from the death if the five years went anterior to 28th February, 1974. I can understand that argument and probably would subscribe to it but what the Minister appears to be doing is to be assuming a death and he has no right to do that.
There was no gift tax in force prior to the coming into effect of this legislation. If there was no gift tax in force before 28th February, 1974, I do not see why a gift tax should be contemplated in law except in so far as it applies in the extension of the death duty code. I wonder if I am making myself clear to the Minister?
I accept in the case of the death duty code that if there was a death where a benefit could accrue then by all means we could go anterior to 28th February but it seems the Minister is assuming a death here and I do not think that it is legitimate. Apart from that point I do not quite follow the Minister's argument about a base and the distinction between aggregating for the rate of taxation and the gift being taxable. I should like clarification on this.
On the more general grounds, I put it to the Minister that there was no such thing known to our law as a gift tax anterior to 28th February, 1974. There should not be such a provision unless we introduce what is positively retrospective legislation of the most objectionable type. On that ground I am suspicious of the section. I freely concede I may not have completely understood it because I do not follow the Minister's argument and I will have to study it again.
I thought the figures I gave showed exactly the consequences and I illustrated it with the case of a donee receiving a gift of £20,000 in March, 1973, and another gift of £30,000 in May, 1975. No tax is charged on the £20,000 but the tax on the £30,000 would be at a rate higher than it would otherwise be because we are aggregating the two gifts.
Why should the first gift be brought in?
It would be £4,455 in the case of a brother. If it were not aggregated the sum would be £2,085, a difference of £2,370.
Why should the first gift which was not taxable in law be brought in now to make a higher level of tax for the subsequent gift? On what legal or moral principle can that be justified?
When changes occur in tax law there is something to be said for phasing them in. This is a phasing-in process. It involves an element of concession as far as the past is concerned. No tax has been levied on the past gift but the rate for the current gift is slightly higher than it would be if it were an unconnected gift of £30,000——
It is an unconnected gift.
It is not. It is the same donee and the same donor.
One gift is before the operative date. I can understand the argument on inheritance.
The fact is that the donor and the donee have each only one life and they are connected.
Yes, but 28th February was the first notice that was given to any citizen of this taxation. Before that a gift was not taxable in any form except on succession.
In effect the Minister is taxing a gift before 28th February.
Deputy Colley has argued here in favour of an accessions tax, a tax on what the donee receives irrespective of the donor or the relationship between them.
No. I said with an allowance in respect of the relationship.
All right, I accept that. The Deputy has said that it is the accumulation by a donee that matters and not the relationship as such. The proposal in the Bill has the merits of an accession tax. We are not concerned with the mere relationship of donor and donee. We are looking at the amount the donee has received.
If the Minister does that after 28th February, 1974, we will go along with it.
We are only taxing accumulations after 1974. We are looking at the reality of the situation as to what that person may have received.
The Minister is so badly off he is a catchpenny now. He is not even doing it decently. It is a trick-o'-the-loop. I mean that in good humour.
I must admit I did not think the Deputy would sink to issuing catchcries.
I could not help it in this case. I hope it will be taken in the spirit given. I do not mean to be nasty about it.
The way we are dealing with the matter is treating the taxpayers more equitably as between one another, rather than not to look at accumulations and gifts which some people have received already.
There is another principle in law, one that I had stood on here.
What the Deputy is suggesting is that the certainty that should exist is the certainty of never having any changes in taxation. That is a recipe for the death of Parliament.
Is it not the purpose to cover transfers which have taken place during the five years by donors in anticipation of death? At least it reads like that.
Progress reported; Committee to sit again.
The Dáil adjourned at 10.30 p.m. until 10.30 a.m. on Wednesday, 19th November, 1975.