There is a misprint in section 1 (4) on page 2, line 20. The word "references" should read "reference". Line 20 should read "reference to some other enactment is intended". I wish to draw the attention of the House to this misprint and the fact that it is intended to correct it on the next printing of the Bill.
Capital Gains Tax (Amendment) Bill, 1978: Committee Stage.
Question proposed: "That section 1 stand part of the Bill."
The second list of amendments was circulated this morning and I have not had time to study it. I presume the Minister will give an explanation as to why these amendments are necessary when we come to deal with them.
Yes. I am trying to check the position in response to what Deputy Barry said. There may be a few additional amendments, but it would be my intention to explain the reasoning behind them when we come to them.
Question put and agreed to.
Sections 2 and 3 agreed to.
SECTION 4.
Question proposed: "That section 4 stand part of the Bill."
This section provides for a progressive reduction in the rate of tax payable in respect of assets disposed of according to the length of the period of ownership. It exempts certain other items. Subsection (3) lists those exempted, such as development land, minerals and the exploration or exploitation rights in a designated area.
"Excluded" might be a better word than "exempted".
Yes. Section 4 (3) (i) reads:
land in the State the consideration for the disposal of which exceeds what the market value of the land would be if, immediately before the disposal, it had become unlawful to carry out any development (within the meaning of section 3 (1) of the Local Government (Planning and Development) Act, 1963) in relation to the land other than development land of the kinds specified in section 4 (1) of that Act;
The intention behind this subsection is that what is commonly called development land should not be given relief in the payment of capital gains tax. A great deal of property in Ireland is in rural towns. A house, shop and yard may be attached to a small piece of land which in the strict sense is not development land but it would always be open to the Revenue Commissioners to say that because there was no planning restriction on it, this land was more valuable. Could the Minister find some way of dealing with this? When we speak of development lands we are thinking of large tracts of land adjacent to towns. I am talking about pieces of land, attached to properties, which are disposed of but which, if they were held for 21 years, would not be liable to capital gains tax, unless the Revenue Commissioners decided that that piece of land, which might be as small as a quarter of an acre or even smaller, could be developed and termed as development land.
The definition of "development land" is taken from paragraph 17 (1) (b) of Schedule 1 to the Capital Gains Act, 1975 which excluded such land held on 6 April 1974 from the benefit of time apportionment. I will make inquiries but I am not aware of any difficulty having arisen heretofore under that definition on the basis indicated as a possibility by Deputy Barry.
I have a note here which might be of help to the Deputy in regard to the manner in which this operates. Where property, say a retail shop and residence with a yard and garden, is sold for continued use as a similar retail outlet, it will fetch no more than its open market price. In that event the disposal would be outside the scope of section 4 (3) (a) (i) and any gain made would get the benefit of the tapering rates of charge. If, however, the property was sold to, say a developer who in anticipation of obtaining planning permission for a new development, such as an office block, is prepared to pay, and does pay, an enhanced price for the property, then the disposal would be regarded as a disposal of land with development value and the gain would be charged at the rate of 30 per cent without any tapering.
However, in computing the chargeable gain the cost price of the property or its market value at 6 April 1974, if the disponer owned it at that date, would in common with other gains be adjusted for inflation. The Revenue Commissioners are not aware of any specific case where land has been treated as development land in the circumstances outlined in certain representations made to them on this matter. If any cases are brought to their attention where it would appear to Deputies that the operation of the section is contrary to what the intention was, the Revenue Commissioners would be pleased to look into the situation, but, as I said, they are not aware of any such case.
I am not referring to properties which are sold at enhanced values. If they were sold at the normal market value and if that represented a capital gain on the 1974 value and if the Revenue Commissioners decided that this property had been bought for development purposes, the person who had received the money would have to pay capital gains tax without getting the benefit of the profit the developer would get.
What the Deputy says would be correct except for this fact. If the price paid is the normal market value, then that does not arise and the tapering rates are available. I cannot visualise a situation in which the purchaser of the property intends to develop it and pays only the normal market price and there is a liability for capital gains without tapering rates. The real test for the Revenue Commissioners is whether the price paid is in excess of the normal market price.
If it is only a little in excess this would mean there would be full liability for the tax.
As I indicated we are not aware of any case in which this complaint has been made. If one takes a valuation of property in relation to its current value, there could be some room for argument above or below the figure the valuer puts on it. If the Revenue Commissioners were to say that because there was a slight increase over the valuation put on it and the value of the tapering rates was to be lost, this would not be in accordance with what is intended. I repeat that I have no evidence that any such case has happened.
On a point of clarification on reading the section: I understood the word "development" was the relevant word and settled the type of tax to be paid. Now the Minister mentioned the price of the house—if the price paid for this land, which was not developed, was over the normal price. Is that the relevant word now? I understood planning permission had to be got for development land. Nobody is foolish enough to sell land without finding out whether planning permission can be obtained for development of any kind. I should like further clarification. A person selling land in an area where development is likely to take place would get much more money for it if he could obtain permission for the building of houses or for industrial development.
I do not think there is any great problem regarding the sale of property in respect of which there is planning permission for development, although if it were sold in such a case at the ordinary market price there might be some room for argument; normally it would not be sold at the ordinary market price. The only case in which a difficulty arises is where the land is sold without planning permission and the purchaser intends to develop it. If he pays the ordinary market price a problem does not arise, although the price becomes very important. The test to be applied in identifying land which is development land within the meaning of the section will, in effect, require a comparison of the price received for the land with the ruling land values in the locality based on current use value. The mere fact that an abnormally high price is obtained will not necessarily mean that the subsection will apply. It must be clear that the price obtained would have been smaller if development had been prohibited by law. Prima facie the inspector will look closely at any case where a price in excess of current use value is obtained. In many cases it will be clear that the land has been sold for development purposes, an example being where farm land is sold to a developer for development purposes. Where it is not quite clear what is involved, then the price comes in and comparison is made with the going rate in the locality. Even if there is a substantial excess on the going rate it does not automatically mean that it is treated as the sale of development land, but a transaction of that kind would be looked at closely to determine whether or not it was to be treated as development land.
That clarifies it.
Let us take the case of a small country town in which a man has for eight or ten years owned a business to which a yard extending over a quarter of an acre is attached. Suppose some local person buys this business at a price somewhat in excess of market value with the intention of building an office block for an insurance company or building society. The person who then sells it above the market price becomes liable at a rate of tax depending on the length of time he has owned the property. The tapering rate applies. Is that correct? If the Revenue Commissioners decide that this is development land and has been sold without planning permission, there is no restriction on planning.
If the Revenue Commissioners decide that it is the sale of development land, then the tapering rate is not allowed but there is indexation for inflation. I find it difficult to visualise a situation of the kind described by Deputy Barry and the sale of the kind of yard he described where the purchaser intends to build an office block. In such a case it is very unlikely that the price paid would be simply in or about the price which would be given if the purchaser intended to continue the existing business.
The owner would not know that this was the intention of the purchaser and would be very pleased to get a price 10 per cent above the market price.
The case described is unlikely to arise but the Revenue Commissioners are extremely unlikely to treat it as the sale of development land.
I should like to know the position regarding the next of kin. If the owner of land does not make a will, the property passes on his death to his wife and family. Title may be complicated and there may be a dispute among the family, one member claiming his or her part of the property or its value in cash. There may be many legal difficulties and it could take up to three years before probate is taken out and the title is in order. The wife who may have helped to build up the farm or business is caught for gains during those three years, though if the original owner had disposed of the property he would not have had to pay anything at all. I am sure Deputy Callanan would agree that the farming community are very reluctant to hand over to younger members of the family. It is an old tradition and they like to hold on as long as they can. It is not fair that the members of the family should be caught in this net. Under the Family Home Protection Act a financial institution from whom a husband is seeking a loan will not grant any money unless the wife signifies her agreement. Even if he wants to dispose of the land, or the property, or the house, she must sign the deed. If she does not, there is no deal. I am not too happy with that.
I should like the Minister to have another look at this section to see if any provision could be made to cover the wife, the son and the daughter. I am excluding nieces, nephews and other next of kin. I have strong views on this. The wife who is a partner has equal rights to the place. If the husband disposes of the property after 21 years, he does not have to pay capital gains tax. If he does not make a will, and after his death there is a dispute in the family, and it takes three years or longer to decide on the title, and a son or daughter wants £10,000 or £20,000 which is not there in liquid assets, the property has to be disposed of and the wife, as the administrator, has no option but to dispose of the property. She has to pay capital gains tax from the date the husband died until the date of disposal of the property. I am not happy with that. I hope some provision can be made to cover the wife, the son and the daughter.
I have received representations on this matter from Deputy Connolly and from some other people as well. I want to give notice to the House that it is my intention on Report Stage, probably by way of recommital, to introduce an amendment that would do what Deputy Connolly is suggesting in respect of the surviving spouse. I am afraid I cannot agree to go beyond that to other members of the family. There is a good case to be made for the surviving spouse and I intend to introduce an amendment to that effect.
I am very grateful to the Minister. I do not want to be awkward but I should like the son and the daughter to be included with the wife. I have known men who worked with their parents for years. They may be 50 years of age before the father transfers anything to them. The fathers are afraid they would be put out on the road and have to go into a home. This was the great fear, and the father held on as long as he possibly could. I should like the Minister to give very serious consideration to including the daughter and the son as well as the wife. I think I have made a reasonable case. I am excluding nephews, brothers, brothers-in-law, and so on. The three people I mentioned should be covered in some way in this Bill.
I will not go over the ground covered by Deputy Connolly. Knowing the situation in the country, I am delighted the Minister has decided to provide for the wife. I appeal to him to include the son or the daughter. What Deputy Connolly referred to is quite common. The son could have worked with the father for 40 years and he would not get any relief. I would ask the Minister to give serious consideration to providing for the son or the daughter.
In regard to the son or the daughter, under this Bill if, as Deputy Connolly visualised, the property passed on the death of the father to the son or the daughter no liability for capital gains tax arises. Secondly, as far as the son or daughter is concerned, the value of the property they get—and this is one of the big changes in this Bill—is as at the date on which they get the property, not including any increase in value over the period the father held it. Therefore, the son or daughter will get it at whatever value is put on it when they get it. No charge for capital gains arises until they dispose of the property. Anything they have to pay is in respect of a gain in its value from the time they got it. It does not relate back to the father's time. It is a different case, and I do not think it is doing any injustice to a son or daughter in view of the other changes in the Bill which I mentioned.
The kernel of the matter is that the property may have to be disposed of due to unforeseen circumstances, or to the fact that there was no will or no agreement, and a number of the family are involved. They would have to pay capital gains on the difference between the value say three years ago and the value now. I hope I am making this clear. It is quite complicated. The son has worked with the father since he was four years old and carried a hammer and staples for his father to erect posts in the fields. The father died having made no will or no agreement and the son had to say reluctantly to the other members of the family that he did not want to sell. Because property and land are so valuable today the other members of the family wanted their share and the son had no option other than to put a mortgage around his neck which would choke him. I deal with business people, shopkeepers and farmers who worked hard and paid taxes. I believe they should get some little concession. I want to see the wife, the son and daughter covered. I exclude the rest.
What is relevant to this matter is inflation. If, say, a son inherited a farm four or five years ago but was forced by circumstances to sell it, on what does he pay tax? Very often title is held up for as long as five years. In such circumstances would he have to pay on the difference, having regard to inflation, between the time he sold and the time of the title going through?
He would pay on the increase in value between the date of the death of the father and the date on which the land was disposed of.
Deputy Connolly should allow Deputy Callanan to conclude his case.
The Minister made the point that there is no tax involved on a straightforward passing of land from father to son. But if the son finds subsequently that he must sell, is he taxed on the value of the land at the time he inherited it or on its value at the time of disposal? This is where the question of inflation arises because since 1974, for instance, the price of land has almost doubled.
He pays on the 1974 value.
In the case outlined by Deputy Callanan the base value is deemed to be that of 1974 and the difference between that and the price at which the land is disposed of subsequently is deemed to be the gain. Deputy Callanan put his finger on the matter when he referred to inflation. There is provision in the Bill to index for inflation so that in the case described by the Deputy the value of the holding between 1974 and 1978 would be adjusted to allow for inflation during those years.
I do not thing that would take care of the full problem. The figure mentioned in the Bill is 81.4 whereas land prices have increased far greater than the inflation level. A Member of this House who is an auctioneer told me the other day that he brought in five farmers nearest to a parcel of land of almost 60 acres that was being disposed of and that the price realised was £230,000 or almost £4,000 per acre. In 1974 the price per acre would probably have been less than £1,500.
About £1,000.
At £1,000 per acre the value in 1974 would have been £60,000. That would be increased now to about £107,000 but the person selling would be liable for capital gains on the difference between that amount and the £230,000 that was realised. In other words, he would have to pay tax on £123,000.
The relevant section indicates that the multiplier to be applied in the type of case outlined by Deputy Callanan is 1.8, that is, between 1974 and 1978. That means that the base cost—the value at 1974—would be almost double for the purpose of calculating the gain. If the value of the land has increased substantially in excess of that level all I can say is that the person disposing of the property is very lucky. He is doing very well on the deal and why should he not pay capital gains tax?
I do not think that is the point made by Deputy Callanan.
Four years ago the value of land was between £800 and £1,000 per acre. I am disposing of land now in the Laois-Offaly area for an average of £2,400 per acre.
The auctioneers are all millionaires.
Let us say we are surviving. Having regard to the figures I have quoted there is a gain per acre in those four years of £1,400. Let us take the case of a woman who was married for 40 years but who did not have a family. Under the Family Home Protection Act, she would have had to sign with her husband on any occasion on which he had dealings with his bank.
It was right that that should be the case.
I agree but the point I am making concerns the involvement of the wife in such matters during her husband's lifetime. She had a total commitment with him in such matters. In addition there is the other aspect whereby in the country, for instance, a wife works very hard with her husband. If they are farmers she may do such jobs as milk cows and if they have a business she usually works behind the counter. If a husband dies, whether suddenly or otherwise, I suggest the provision here be to exclude all other next-of-kin in order to protect the spouse. The Minister has indicated that he will give this matter sympathetic consideration.
That is correct but the provision should apply to a husband. It refers to the surviving spouse.
But would that not include sons and daughters?
It would not.
I am sure that would be against some commandment.
If, say, a father dies——
He is dying very often. The Deputy is repeating himself.
——and there are three sons in the family——
They would be protected under the Succession Act.
——if, say, the brothers disagreed and the only option left was to dispose of the land, would they not be caught for tax on the increased value of the land between the date of the father's death and the date of sale?
Supposing there were collusion between the three, what would the Deputy suggest should be the position?
I do not like the word "collusion".
It might be engaged in in order to avoid tax.
If one of the brothers in the case I am citing had remained at home all the time with the father and worked very hard to make a living, it would hardly be fair that he, too, be caught for tax in this way.
If, say, the son who has worked on a farm of 40 acres must sell out in order to divide the estate among his brothers, his livelihood is being taken away. It is all right to say that he will be lucky to get a high price for the land. It looks great coming into his hand but he has to give out so much of it. He must try and buy something again and he is stuck with inflation. It is the very same as selling a bullock at present, when one gets £300 or £400 but when one goes to replace him one has to pay perhaps within £50 of the price received. That man must seek some way of livelihood. He appears lucky on paper. But the point I am making is that he must make a living if, through unforeseen circumstances he must sell the farm and gets a big price for it. He earns on the gains on the period from, say, 1974 to 1978, excluding the amount taken care of by inflation. But that man is not selling his farm and saying "I am going to live on the few pounds I have for the rest of my life". He has to buy another farm, when he is again subject to inflation. Therefore, he is stuck with inflation all the time.
It is not quite clear to me what Deputy Connolly is seeking. Either he is seeking that the son or daughter should get the benefit of the period of ownership of the deceased father, or he is seeking a special indexation rate in respect of land because it has increased in value more than the consumer price index. I do not know if that is what he is seeking, but let me say it just would not be feasible—and I doubt if it would be justified—to apply a different indexation rate for different kinds of assets. The Deputy may not appreciate some of the problems that would rise even if I were to agree to what he is urging. For instance, if the son or daughter were to get the benefit of the father's period of ownership for the purpose of calculating the tapering rates then correspondingly, if they were getting the benefit, they would have to be taxed on the gain in the value of the land during the father's lifetime. This could be a serious imposition on them whereas now the only gain on which they can be taxed is the value at the date of death and then that gain is indexed, as I have indicated, in accordance with the movement in the consumer price index.
Leaving aside any other questions, on balance they would probably do better under the present arrangement than under the one Deputy Connolly is suggesting, although I know he was not suggesting the full taxation of the gains during the father's lifetime. I am sure if he thinks about it he will see that one cannot give them the benefit of the period of ownership and not attribute to them the gain in the value of the property during that period.
Did I not understand the Minister to say that he was bringing in an amendment on Report Stage that would give the spouse this benefit?
Yes.
Then why does not the same argument apply to the spouse of a son and daughter, which is the point Deputy Connolly was making?
I think they will be acquiring the liabilities too. There is this special tax status for a married couple. The existing position is that in the case of a gift the receiving spouse can obtain the benefit of the donor spouse's period of ownership. That is at present applicable only in the case of gifts, not in the case of inheritance. That provision in regard to gifts is a special concession. It seems to me logical to extend it from gifts to inheritances—if it is there in the case of gifts then it should apply in the case of inheritances—but it does not apply in the case of gifts to sons or daughters. I do not think an adequate case has been made for extending it to sons or daughters. A very cogently argued case has been made but it is not a sufficient case. I have to sound the warning note that it is not all entirely a benefit. It can be a disadvantage in some circumstances to give this concession.
That was not quite clear originally from what the Minister said. I hope Deputy Connolly gets that point.
I am satisfied that the spouse is cleared in regard to the 21 years. What I was concerned about were the circumstances in which a property had to be disposed of by a financial arrangement among, shall we say, the wife and children, that three years must have elapsed before the assets could be disposed of and that they would not have to pay on the three-year period.
They will get the indexation for that period, of course.
Yes, but they will still have to pay. I am asking the Minister to consider bringing in an amendment on Report Stage on the lines I have suggested.
If there is negligence on the part of their solicitor that causes the hold-up I am sure they could consider a claim in negligence against the solicitor for any liability incurred.
I want merely to throw out a suggestion; I do not know whether or not it would be workable. I can see the point about the son or daughter who was away and came back, coming in, selling the property, gaining by it and not spending any time on it. I wonder could there be any consideration given to the case of a person who died at, say, 60 years of age, who had been married at 20 years of age, whose eldest son lived all his life on the farm, worked it, who was there only a year short of the wife, and she is considered with the husband. Could there not be the same concession given for the person who had spent all his life on the land. Indeed, I must thank the Minister for bringing in the spouse. The case I am making is in respect of a person who had spent all his life in a business or on a farm. I am not advocating special concessions at all for farmers only, because inflation has affected businesses as well. I am taking everyone into consideration. Could there not be some concession given along those lines? I am not now referring to people who would have been away on business somewhere, who come back and get possession of their father or mother's place. I do not believe there should be any concession to those people because they had not spent their life there. I am speaking about the people who had spent their life either on a business or working a farm.
There is in this section reference to the reduction on a three-yearly basis up to a maximum of 21 years. What thinking led to the division into three-yearly intervals rather than in the reference earlier in the Bill to the consumer price index? I wonder has the Minister explained this division. What was the thinking behind that allocation of reductions over the 21-year period?
I am not quite sure I understand the Deputy's reference. I know what his question was, but he made a reference to some criterion other than the consumer price index.
Under section 3 we go for the February to February reduction on the consumer price index. What was the reason that the Minister did not go on an annual basis? Was it simply to get an average weighting over the three-year period or what?
If I might deal first with the point made by Deputy Callanan, I would say that in the case he described—and I agree with the kind of sentiments he expressed—normally the son who had been on the farm all his life would continue and intend to continue on the farm and no question of liability to capital gains tax would arise. It could only arise where he had to dispose of it. He would then get indexation. It is true that he would have to pay a higher price when he would have to buy somewhere else, but he would have got a higher price. If people are ever to be liable for capital gains tax it has to arise at the time when they make the gain.
On the question raised by Deputy O'Leary, the way in which the CPI has been operating is that we take the base adopted by the Central Statistics Office, 100, and we go on from there. The midFebruary figure is fixed because it is closest to the commencement of the tax year. It is worked on a yearly basis. The question of dividing the tapering into three-year periods rather than taking a one-year period or a six-year period is a matter largely for decision on what is the most equitable way to do it. The 21-year period is clearly designed to ensure exemption from capital gains tax in respect of somebody who has been building up a business or a farm during a working lifetime. How we divide it is a matter of trying to get a reasonable reflection in the division of the period during which the person owned the asset. One could argue for a division into smaller or larger periods, and perhaps one could make a tenable argument either way, but it seems to me that it is not unreasonable to do it on the basis of a three-year period.
I should like to put a point for clarification. On the sale of a property within the three or four year period, is the tax rate 30 per cent?
The short term rate, now the standard rate, is 30 per cent. After three years that would be reduced to 25.5 per cent. Therefore, in the case of a delay in administration, which is what Deputy Connolly apparently has in mind, if that delay exceeded three years, if it was between three years and six years, it would be 25.5 per cent, but if it were less than three years it would be 30 per cent.
I appreciate there are complications in regard to sons and daughters. Deputy Callanan referred to a son who might have been all his life in the business or on the farm. It will be complicated if we try to help him out. It might be open to all sorts of abuse if there are others in the family as well. However, the Minister might reduce the rate to about 10 per cent to cover the first three years.
I will consider it but I cannot hold out much hope.
Question put and agreed to.
SECTION 5.
Amendments Nos. 1 and 2 are related and may be discussed together.
I move amendment No. 1:
In page 5, subsection (2), line 44, after "those assets" to insert "and to the original assets".
Although this is purely a technical amendment, I am afraid the explanation is rather complex. Section 5 (1) concerns the disposal of the whole of the original assets under compulsory purchase procedures. If there is reinvestment in replacement assets, it is provided that the disposal of the original assets is to be disregarded and there is to be no acquisition of the replacement assets. The original assets and the replacement assets are to be treated as the same assets, having the same date of acquisition and the same base costs as the original assets.
Subsection (2) is concerned with a case where an amount in excess of the consideration received is invested in replacement assets. It provides in effect that relief is to be given only in respect of the part of the replacement assets represented by the amount of the consideration reinvested. The final part of the subsection, which is concerned with applying subsection (1), so that the part of the replacement assets referred to as the original assets will be treated as the same assets, does not contain any reference to the original assets. The purpose of the amendment is to remedy this defect by inserting a reference to the original assets at the end of subsection (2).
Amendment agreed to.
I move amendment No. 2:
In page 5, subsection (3), line 50, after "assets" to insert "and subsection (1) shall apply to the remainder of those assets and to the replacement assets".
Amendment agreed to.
Section 5, as amended, agreed to.
Sections 6 and 7 agreed to.
SECTION 8.
I move amendment No. 3:
In page 7, line 39, after "granted" to insert ", whether before or after the commencement of the Capital Gains Tax (Amendment) Act, 1978".
The purpose of the amendment is to ensure that where relief was granted under the existing version of section 27 of the 1975 Act in respect of a disposal made prior to 6 April 1978 by a parent aged 55 years or over to a child of his, the charging provisions in paragraph (a) (4) of the new version of section 27 will apply.
These provisions will come into play when the child, within the ten-year limit, makes a disposal on or after 6 April 1978 of the assets transferred to him by the parent. The text of the amendment makes it clear that the charging provisions of the new subsection will apply whether the original disposal was made before or after 6 April 1978, the proposed date of commencement of the new Act.
The charge is only on disposal by the child?
When it is a disposal on or after 6 April 1978 on the assets transferred by the parent, this will apply even though the original transfer might have been made before or after 6 April 1978.
In the case of an asset owned by a man over 55 for less than 10 years and its transfer to his child, is that not liable for tax?
Yes, that is so.
There is a little problem there because in the last ten years there has been considerable acquisition by farmers of additional pieces of land to give them bigger and more viable holdings. A farmer may have acquired about ten acres, which is not very valuable by itself, but added to the 40 or 50 acres makes a holding which is very much more valuable in total than the bits put together. So, when he decides to transfer his 60-acre holding to his son, the ten or the 30 acres—whatever has been added to make it a viable holding—becomes at a very enhanced value liable to capital gains tax if acquired in the last ten years. Does the Minister understand my point?
Yes, I think so.
It states here, if I am correct in my reading of it, that where the parent is over 55 and makes the transfer to the child, there is no tax—is that right?
If the asset is owned for over 10 years.
And he is over 55?
Yes.
What happens if he dies under 55 and he has not then had the asset for ten years—is he caught?
He will be subject to section 4.
If he transfers when he is under 55 and has the asset for over 10 years, he is still caught?
If he is under 55 this would not apply to him. It is a special provision for retirement. Deputy Barry is correct in saying that the gain on the additional portion of land which had not been held for 10 years would be liable. But of course the other portion in the case he described and I think in most cases, the main portion of the land, would have been held for more than ten years and would therefore be exempt.
The portion bought within the last ten years, because it is added to another 40 or 50 acres becomes very much enhanced in value over its real worth.
I think the kernel of this is that you would have to pay the tax where it would fall to the spouse inside the period you are on now. It would mean that the value of the property had gone up so high that payment of capital gains tax would be very high and it would be very hard for the spouse to meet that if, say, it was a farm of £150,000. Because of the way land and all property has gone up one would be heavily caught in that case.
I am not sure if we are talking about the same thing. If the Deputy is talking of the additional portion added on—the only part which would be liable—being worth £150.000 then the remainder of the farm must be worth a great deal of money. That would be a very significant value for "a small addition" to a farm which I think is what Deputy Barry is talking about.
I am talking about much more ordinary people than those in the rich midlands of Laois and Offaly. I am talking about the man who has 40 acres which obviously is not viable. In the last five years when land jumped in price he bought an additional 20 acres and he now has 60 acres. He is over 55 and wants to transfer the land to his son. He would have no capital gains tax liability on the 40 acres but because the 20 acres has been added to make 60 acres it becomes much more valuable and the 20 acres then has an enhanced value which, even with the allowance for inflation of 81 per cent, it has probably quadrupled in price rather than gone up by 1.8. The son then or the father is liable for the tax on the difference. This is another thing that may tend to discourage what Deputy Connolly and Deputy Callanan were advocating, the handing over of land.
I appreciate the problem but there are difficulties in all these matters. One that immediately strikes you is that if we were to make some kind of special provision for this it could be wide open to abuse.
Hard cases make bad law.
This is one of the problems. I shall give further consideration to it before Report Stage but my immediate reaction is to see tremendous possibilities in it for abuse. But I shall look at the situation.
Amendment agreed to.
Section, as amended, agreed to.
SECTION 9.
I move amendment No. 4:
In page 8, lines 5 and 6, to delete "sections 3 and 4 of the Capital Gains Tax (Amendment) Act, 1978" and to substitute "section 3 of the Capital Gains Tax (Amendment) Act, 1978, or for the purposes of determining the period of ownership under section 4 of that Act".
The purpose of section 9 is to ensure that where section 28, that is roll over relief, of the 1975 Act applies so that a chargeable gain is treated as accruing at a date later than the date of disposal on which it actually accrued, the deferment of the charge to tax will not provide any basis for a claim by the owner of assets that indexation under section 3 and tapering rates under section 4 should be applied by reference to the combined period of ownership of the old assets and the new assets, that is a period commencing with the date of acquisition of the old assets and ending with the date of cessor of use for trading purposes of the new assets. The reference to section 4 in the new subsection (2) (a) of section 28 inserted by this section, section 9, requires to be restricted so as to ensure that section 28 will be overridden only in so far as it might be held to extend the period of ownership of a rolled over asset for the purposes of section 4. It is not the intention that section 2 (a) of section 28 should have any effect as respects the rate of tax at which a deferred gain will be charged. In accordance with the general scheme of roll over relief contained in the 1975 Act this rate will be the rate appropriate to the actual period of ownership of the asset at the time when the deferred gain on the disposal of those assets accrued—that is, emerges for charging purposes under section 28 and not necessarily any of the tapering rates operative at the date of disposal of the old assets.
The proposed amendment removes any doubt on this score. It also secures that the amount of the chargeable gains computed in accordance with section 3 by reference to the date of disposal of the old assets, that is by reference to the actual period of ownership of those assets, will be frozen at that date. The overall effect of the proposed amendment is to freeze in relation to old assets both the amount of the chargeable gains on the disposal of those assets and the period of ownership of those assets but not the rate of tax at which those gains will ultimately be charged when the new assets into which the old assets were rolled over ceased to be used for trading purposes.
Will the new assets then be frozen at the price under which the old assets were acquired?
No, in respect of the old assets the amendment would freeze both the amount of the gain on disposal of the assets and the period of ownership of the assets. That is so that they could not be given the benefit in respect of the old assets when they are disposed of. But it would not freeze the rate of tax at which the gains would ultimately be charged when the new assets would cease to be used for trading purposes. That is when the tax becomes liable for payment. When the assets cease to be used for trading purposes then the liability for capital gains tax will arise.
Does the ownership roll back at this stage into the original asset?
In that situation with the old assets disposed of but the money invested in new assets—let us keep it simple and keep it to that situation and not mind any additional changes—the money which had been made on the old assets would be added to the gain which had been made on the new assets and both would be charged, but no charge would be made in respect of this until the new asset had ceased to be used for trading purposes.
If that was within a period of 21 years on the two sets of assets would there then be tax liability?
Each of the assets would be treated separately for the purpose of determining whether it was entitled to tax rates and if the ownership of each asset were less than 21 years then there would be a liability to tax at the appropriate rate depending on the period when they were held.
They do not become bulked, each asset is looked at separately.
That is right.
Amendment agreed to.
Section, as amended, agreed to.
SECTION 10.
I move amendment No. 5:
In page 8, line 30, after "person" to insert "in such circumstances that if a gain accrued on the later disposal it would be a chargeable gain".
This is a drafting amendment to prevent a charge being imposed on a genuine charity where they sell an asset which had been received by them as a gift or at a low cost. Under the existing version of section 39 of the 1975 Act, where a charity disposes of an asset—for example, an asset received as a gift or at a low cost in relation to which relief from capital gains tax was granted to the donor under the section—the charity's base cost is the donor's cost of acquisition. If the charity later disposed of the asset while remaining a genuine charity, the charity's base cost as thus fixed was immaterial because under section 22 of the 1975 Act no chargeable gain arose on the later disposal by the charity.
Under the new version of section 39—the relevant provision is subsection (1) (a) (ii)—where the charity dispose of the asset, the capital gains tax which would have been chargeable on the donor if the asset had been disposed of by him to the charity at full market value is to be assessed and charged on the charity even though their own gain on the later disposal would not be a chargeable gain under section 22 if the charity had retained charitable status.
The proposed amendment prevents an unintended charge in relation to the earlier disposal to the charity by providing that a charge on such disposal would arise only where, if a gain arose on the later disposal by the charity, that would be a chargeable gain because the charity had ceased to enjoy charitable status. Accordingly, if the charity continued to enjoy charitable status at the time of the later disposal by them, no charge can be imposed on them in relation to the earlier disposal by the donor to the charity. Therefore, it is to relieve charities, in effect.
Amendment agreed to.
I move amendment No. 6:
In page 8, between lines 38 and 39, to insert the following paragraph:
"(b) Where relief was given under this subsection in respect of a disposal to a person of an asset, being a disposal made before the commencement of the Capital Gains Tax (Amendment) Act, 1978, and there is a later disposal of the asset by the person after such commencement, paragraph (a) (II) shall have effect as if the firstmentioned disposal were the earlier disposal referred to in that paragraph."
This amendment is analogous to that contained in amendment No. 3 in relation to section 8. The purpose of this amendment is to ensure, where relief was given under the provisions of the existing version of section 39 of the 1975 Act on a disposal made to a charity prior to 6 April 1978, the proposed date of commencement of this Bill, and there is a disposal on or after that date by the recipient, that the changing provisions in subsection (1) (a) (ii) of the new version of section 39 will apply to withdraw the relief given on the first disposal.
Amendment agreed to.
Section, as amended, agreed to.
SECTION 11.
Question proposed: "That section 11 stand part of the Bill."
On section 11, I refer to the point I raised earlier regarding spouses. Maybe the Minister would consider this?
I have indicated that I would consider that.
Question put and agreed to.
Sections 12 to 14, inclusive, agreed to.
SECTION 15.
Question proposed: "That section 15 stand part of the Bill."
I am very glad of that part because it extends the days of appeal, which is very good.
It is bringing it into line with income tax and corporation tax.
Question put and agreed to.
Sections 16 to 18, inclusive, agreed to.
SCHEDULE 1.
Amendment No. 8 is consequential on amendment No. 7 and therefore these amendments may be debated together.
I move amendment No. 7:
In page 11, line 55, paragraph 2 (4) to delete "subsections (1) and (2) of section 3 apply" and to substitute "subsection (1) of section 3 applies".
Paragraph 2 of Schedule 1 contains provisions relating to the ascertainment of the rate or rates of tax which will apply to a chargeable gain made by a person to whom section 4 of the Bill regarding tapering rates applies. It provides for the apportionment of the chargeable gain computed in the normal way under section 3 where any enhancement expenditure was deducted in computing that chargeable gain. The apportionments so provided for are made for the purpose of assigning separate periods of ownership to separate parts represented by the apportioned parts of the chargeable gain of the assets disposed of so that the appropriate rate or rates of tax may be determined.
Subparagraph (4) to which this amendment relates provides that the required apportionments are to be made on the basis of relevant items of deductible expenditure as adjusted for inflation by the application of the provisions of section 3 (1) and (2) of the Bill—that is indexation and for assets owned on 6 April 1974 mandatory base evaluation at that date. As cases will increasingly arise where the assets were not owned on 6 April 1974 so that section 3 (2) will not be relevant it could be argued that subparagraph (4) would not apply to such cases because both subsections (1) and (2) of section 3 do not apply. To remove doubt the amendment substitutes a reference to subsection (1) alone. In a case to which subsection (2) does apply—that is, assets held on 6 April 1974—the reference to subsection (1) is sufficient because if subsection (1) applies then subsection (2) must also apply in such a case.
Amendment agreed to.
I move amendment No. 8:
In page 11, line 59, paragraph 2 (4), to delete "those subsections" and to substitute "that section".
Amendment agreed to.
Amendments Nos. 9 and 10 may be discussed together.
I move amendment No. 9:
In page 14, lines 24 and 25, paragraph 6 (3) (a) (i), to delete ", and immediately re-acquired,".
This is a technical amendment. The words being deleted are not required. The purpose of the assumption which is required to be made under clause (a) (i) is achieved by assuming a sale. In any event the next amendment, No. 10, with which this amendment is connected, requires the assumption that certain assets are put out of use by the company. That assumption would conflict with the assumption that the assets were re-acquired by the company.
I spoke earlier on the second list of amendments circulated this morning and this amendment on what I presume is the first list is exactly the same as that listed on the second list. Does the Minister know anything about the second list which came in my post this morning?
As far as the Chair is concerned, there is only one list of amendments. The second list is incorporated in the green print list we are using at the moment. Apparently the list to which the Deputy refers was late in arriving. The green list contains all the amendments.
Amendment agreed to.
I move amendment No. 10:
In page 14, line 27, paragraph 6 (3) (a) (i), after "securities" to insert "and that thereupon, in case those assets were used for the purposes of the company's trade, they ceased to be so used".
Amendment agreed to.
I move amendment No. 11:
In page 15, paragraph 6, lines 46 to 56, to delete subparagraph (5) and to substitute the following subparagraph:
"(5) This paragraph shall not have effect in relation to a disposal of shares or securities in a close company by a person who was not, at the date of the disposal or at any time within three years prior to that date, entitled to more than 50 per cent of the voting power in the company or would not, on a winding up of the company on that date or at any such time, have been entitled to more than 50 per cent of the assets of the company, unless—
(a) the disposal by that person (or, if there is a series of such disposals made by him to the same person, any such disposal) is to another person who, in consequence of that disposal (or of all or any of those disposals) would become entitled to more than 50 per cent of the voting power in the company or, on a winding up of the company, to more than 50 per cent of the assets of the company, or
(b) the disposal by that person is part of a series of disposals of shares or securities in the company, made by him and by persons who, in the terms of section 33 of the Principal Act, are connected with him, to another person who, in consequence of all or any of those disposals would become entitled to more than 50 per cent of the voting power in the company or, on a winding up of the company, to more than 50 per cent of the assets of the company.".
The purpose of this amendment is to take out of the ambit of paragraph 6 certain cases where tax avoidance by means of the device dealt with in paragraph 6 is unlikely to arise. The amendment substitutes a new subparagraph for subparagraph (5) of paragraph 6 and is in relief of taxpayers. It has the incidental advantage of reducing administrative costs. Subparagraph (5) of paragraph 6 provides that the paragraph as a whole is not to have effect where broadly the shareholder has no more than 10 per cent interest in the company unless he and the connected persons dispose of sufficient shares to another person to enable that other person to obtain control of the company.
The amendment raises the threshold where exclusion from paragraph 6 from 10 per cent to 50 per cent arises because it is considered that, in the absence of collusive arrangements which are negatived by clauses (a) and (b) of the proposed new subparagraph, it would be unlikely that a tax advantage would be obtained by manipulating the provisions of the Bill in relation to tapering rates on gains derived from the disposal of shares in close companies unless at least a 50 per cent interest in the close company were involved. It is considered the amendment will substantially reduce the number of cases in which it will be necessary to operate the procedures provided for in paragraph 6.
Amendment agreed to.
I move amendment No. 12:
In page 15, after line 62, to insert the following subparagraph:
"(7) (a) The reference in subparagraph (1) (a) (ii) and in subparagraph (3) (a) (i) to a company shall include a reference to a subsidiary of that company.
(b) The provisions of subparagraph (3) (a) shall apply for the purpose of determining the period of ownership of shares or securities in a subsidiary as they apply for the purpose of determining the period of ownership of assets owned by the person referred to in subparagraph (1) (b), and so much (if any) of those shares or securities as are shares or securities in relation to which those provisions determine the period of ownership shall be relevant assets; and the provisions of this clause shall apply where the shares or securities in the subsidiary are owned by another subsidiary of the company and so on through any number of subsidiaries of that company.
(c) In this subparagraph ‘subsidiary', in relation to a company, means a 75 per cent subsidiary of that company within the meaning of section 156 of the Corporation Tax Act, 1976.".
The anti-avoidance provisions of paragraph 6 as it now stands could be circumvented if assets, broadly relevant assets which are expected to appreciate in value, were acquired not by a close company owned by a shareholder eligible for tapering rates but by a subsidiary owned by the close company. In these circumstances the assets held by the close company would not be the relevant assets but rather shares in the subsidiary and paragraph 6 would be negatived.
The proposed amendment ensures that on the disposal by the shareholder of the shares in the close company the assets, including the relevant assets, held by the subsidiary will be deemed to have been sold. A period of ownership by reference to the period of ownership of the relevant assets can then be attributed to all or part of the shares in the subsidiary held by the close company. These shares will be deemed to be relevant assets of the close company. This, in turn, will enable a period of ownership for tapering rate purposes to be assigned to the whole or part of the shares of the close company which are disposed of by the controlling shareholder. The amendment is so worded as to achieve the effect I have outlined even if a chain of subsidiaries is interposed between the close company whose shares are being disposed of and the subsidiary which owns the relevant assets.
The assets controlled by one shareholder could include shares in public companies and the latter would then be treated as assets. Is that correct?
They could be assets. If the close company had acquired quoted shares, as the Deputy postulates, after 6 April 1978 they would be part of the relevant assets as defined in this. I do not think the fact that they are quoted shares really makes any difference to the procedure that should be used.
Amendment agreed to.
I move amendment No. 13:
In page 16, after line 36, to insert the following paragraph:
"Rate of capital gains tax applicable to chargeable gains accruing on the disposal of qualifying units
9. Section 32 (inserted by the Finance Act, 1977) of the Capital Gains Tax Act, 1975, is hereby amended, for the year 1978-79 and each subsequent year of assessment, by the substitution for subsection (3) of the following subsection:
‘(3) Chargeable gains which derive from the disposal of qualifying units and which accrue to a person who is chargeable to capital gains tax shall be chargeable to tax at one-half of the rate at which they would be chargeable under the Capital Gains Tax Acts apart from this subsection.'".
The purpose of this amendment which is a relieving amendment is to enable certain holders of units in registered unit trusts to obtain the full benefit of the provisions in the present Bill under which losses and the £500 exemption may be set off first against chargeable gains which attract the highest rate of tax, then against chargeable gains which attract the next highest rate of tax and so on. Under subsection (3) of section 32, inserted by section 35 of the Finance Act, 1977, of the Capital Gains Act, 1975, the chargeable gains of unit holders on disposals of their units in registered unit trusts are charged at one-half the normal rate. For technical reasons, namely, because losses in the £500 exemption had to be set off against the total amount of chargeable gains, the relief was given in terms of tax. The relief was given by computing the amount of tax at the normal rate and then reducing that amount by 50 per cent, in case the chargeable gains were solely unit gains, or by 50 per cent of the tax attributable to unit gains in case there were other chargeable gains. The formula adopted in the latter case to arrive at the tax attributable to unit gains is no longer appropriate because the existence of the half rate for unit gains is not recognised in the formula. Accordingly, losses and the £500 exemption fall to be deducted from unit gains chargeable under the formula at, say, 30 per cent before any balance is deducted from other gains chargeable at, say, 21 per cent. The reverse order should be adopted to give the unit holder maximum relief since the effective rate for unit gains is half the rate otherwise applicable, that is, 15 per cent and not 30 per cent. The proposed amendment terminates the formula and secures instead that all unit gains are to be charged to tax at one half of the rate whether it is the basic rate of 30 per cent or any of the tapering rates which would otherwise apply. As a consequence, losses and the £500 exemption can be set off in the correct order of priority by reference to the rates effectively chargeable on unit gains and other gains.
Amendment agreed to.
I move amendment No. 14:
In page 16, after line, 36, to insert the following paragraph:
"Part disposal before the 6th day of April, 1978.
10. (1) Where, on or after the 6th day of April, 1974, but before the 6th day of April, 1978, a person made a disposal, to which the provisions of paragraph 6 of Schedule 1 to the Principal Act applied, of an asset which was held by him on the 6th day of April, 1974, and—
(a) the amount of the chargeable gain which accrued on that disposal was determined under the provisions of paragraph 18 of that Schedule, and
(b) any property derived from that asset remained undisposed of on the 6th day of April, 1978,
then, for the purpose of determining the balance of the expenditure which, under the said paragraph 6, is to be attributed to the property which remains undisposed of, it shall be assumed that, on the disposal, the amount of the chargeable gain referred to in clause (a) had been determined, not under the provisions of the said paragraph 18, but on the assumption that the asset was disposed of and immediately reacquired by the person on the 6th day of April, 1974.
(2) Where, on or after the 6th day of April, 1974, but before the 6th day of April, 1978, a person made a disposal, to which the provisions of paragraph 6 of the Schedule 1 to the Principal Act applied, of an asset which was acquired by him on a death which occurred on or after the 6th day of April, 1974, and—
(a) the amount of the chargeable gain which accrued on that disposal was determined on the basis that the asset had been acquired by him on a date earlier than the date of that death, and
(b) any property derived from that asset remained undisposed of on the 6th day of April, 1978,
then, notwithstanding the provisions of subparagraph (1), for the purpose of determining the balance of the expenditure which, under the said paragraph 6, is to be attributed to the property which remains undisposed of, it shall be assumed that, on the disposal, the amount of the chargeable gain referred to in clause (a) had been determined as if section 14 (1) of the Principal Act, as amended by section 6, or, as the case may be, section 15 (4) (b) of that Act, as amended by section 7, had applied at the date of that disposal.
(3) Nothing in this paragraph shall affect any liability to capital gains tax or to corporation tax in respect of a disposal made prior to the 6th day of April, 1978.".
This is a technical amendment concerned with providing amended computational rules for the purpose of determining the base cost of the remainder of the assets, where there was a part disposal of the assets in the period from 6 April 1974 to 5 April 1978 and the remainder of the assets is disposed of on or after 6 April 1978. The present Bill does not disturb the general position established by the 1975 Act, that the base cost of assets disposed of on or after 6 April 1978 is to be the cost of acquisition, including enhancement costs, incurred by the disponer. However, the Bill introduces two exceptions to this rule. Any assets held on 6 April 1974 including assets acquired in consequence of a death before 6 April 1974, and therefore held by the successor on that date, are to have as their base cost market value on that date. Secondly, if the assets were acquired on a death on or after 6 April 1974 the base cost is to be the market value at date of death. The proposed amendment applies one or other of these two bases of valuation, whichever is appropriate, in relation to part disposals of assets in the period from 6 April 1974 to 5 April 1978 where the base cost of these disposals was determined by reference to cost of acquisition or, in the case of a death after 6 April 1974, by reference to market value on 6 April 1974. This will avoid the distortion which would arise if cost of acquisition, including the deceased's cost of acquisition, were used in relation to part disposals of assets prior to 6 April 1978 while, in relation to the disposal of the remainder of those assets on or after that date a different basis for determining the base costs, namely market value of 6 April 1974 or at date of death, is required to be used. This amendment does not contain an element of retrospection since it is expressly provided that it is not to affect liability to tax on part disposals effected before 6 April 1978. The notional recomputation of the base cost in relation to the part disposal is made solely for the purpose of determining the appropriate balance of the base cost which will be used in the computation of the gain on a disposal of the balance of the assets.
Amendment agreed to.
Schedule, as amended, agreed to.
SCHEDULE 2.
Amendments Nos. 15 and 16 are consequential.
I move amendment No. 15:
In page 17, in the reference to the Capital Gains Tax Act, 1975, column 3, to delete "Section 6".
On Second Reading I said that the Bill has been largely made ineffective as regards tax on capital gains and that the amount collected under it would be negligible. There was one exception to this that I could not understand. This amendment seeks to repeal something that was of use to the very small investor who made a small capital gain. My amendment seeks to ensure that this is not repealed, so that the half income relief will be available to the man who makes a small capital gain. A small investor who finds that within a relatively short period it is necessary to realise his asset so as to spend his capital will be brought under the normal terms of the Bill. He would be liable to 30 per cent if he disposes of the asset. I gave an example of a married man with an income of £1,800 per year who makes a capital gain of £5,100 in less than a year. On his income of £1,800 his income tax liability—he would have a married person's allowance of £1,730—would be £70 at 20 per cent which would be £14. His capital gains tax liability under the present Bill on the £5,100—he would have an exemption of £500—would be 30 per cent on £4,600 which is £1,380, giving him a total tax liability of £1,394. Under existing law his capital gains tax would be on half of the £5,000 which would be £2,500 with an excess of £100, plus his income of £1,800 which would give him a taxable income of £4,400. From that is deducted the married person's allowance of £1,730 leaving him with £2,670 taxable income. The first £500 would be at 20 per cent, the next £1,000 at 25 per cent and the balance at 35 per cent which would mean that under existing law his liability with an income of £1,800 and a capital gain in one year of £5,100 would be £760 as opposed to £1,394 when this Act becomes law, which would mean that this man would be £634 worse off. By definition he is a small investor. When replying to the Second Stage debate the Minister said at column 231 of the Official Report dated 12 October 1978:
Deputy Barry queried the abolition of the alternative charge provided for, I think, in section 6 of the 1975 Act. That section provided for an alternative basis of charge to income tax. With the introduction of indexation and tapering rates we consider that section 6 would produce an unnecessary additional complication necessitating additional complex calculations. That is the only reason for the change. I understand, for what it is worth, that in Britain they have also done away with this provision.
I am not closing my mind to it. Perhaps we could pursue it a little further on Committee Stage.
I had hoped that the Minister would have a change of heart about this and when I did not see an amendment down in his name I tabled my own. The point has been made that this has hardly been availed of but one of the reasons may be that it had to be claimed. The Revenue Commissioners did not automatically grant it and that could have been one of the reasons why it was not availed of. The Minister should reconsider his decision to repeal this section and allow the half-income relief to stand in the current Act.
The taxpayer in the kind of case visualised by Deputy Barry does not have to claim this relief. The Revenue Commissioners have to determine whether he is entitled to it or not. That is one of the reasons but not by any means the main one.
I understood that under the 1975 Act it had to be claimed.
No, the Revenue Commissioners have the obligation to apply it if it is applicable to the case. That means that there is very considerable administrative cost and difficulty involved when, as I believe to be the case, under the present Bill it is largely irrelevant. The Deputy will appreciate the relevance of what I am saying about the Revenue Commissioners being obliged to examine each case for this purpose.
Apart from this administrative difficulty adding considerably to cost because of the time spent in preparing computations very often without any ultimate advantage to the taxpayers concerned, and having regard to the introduction of indexation and tapering rates, the computation involved would be substantially increased for the Revenue Commissioners if we were to allow section 6 to stand. The computations would be more complicated if we allowed that section stand. In addition, the retention of this relief under section 6—I am referring to the old section 6—would be inconsistent with the principle underlying the tapering relief. For example, if an individual makes a chargeable gain of £5,000 which attracts the 30 per cent rate of tax the tax payable, taking into account the £500 exemption, will be £1,350. If section 6 were to apply and he had no income for tax purposes in the year of assessment in which the gain accrued he could set his income tax allowances against half the chargeable gains, that is £2,500, and reduce his tax liability to nil or to a negligible amount. An example of such a case would be a sole trader whose actual income is quite high but who in that year had no income for tax purposes due to accelerated capital allowances and stock relief.
A taxpayer, that is a married man with no allowances or reliefs other than the married allowance, will also benefit to some extent under section 6 with an income of up to about £7,000 or considerably higher if he is entitled to child allowances and relief for mortgage interest or bank interest. The retention of section 6 could lead to the wiping out or the reduction of the tax, the £1,350, payable on an individual gain of £5,000 which attracts a capital gains tax of 30 per cent. Such a gain would be either a gain on the disposal of land with development value or mineral assets or, in the case of other assets, a short-term gain, that is on a disposal within three years of acquisition.
Where the gain is considerably less than £5,000 or is liable to capital gains tax at one of the lower tabling rates section 6 would afford relief only where the taxpayer's income was comparatively small. For example, where there is a chargeable gain of £5,000 liable at 16.5 per cent so that capital gains tax after allowing the £500 exemption would amount to £742.50, a married man with no other relief than the married allowance would get no benefit from section 6 unless his income was less than £2,000 approximately. Accordingly, the principal beneficiary if section 6 was retained would be the individual in the middle-income bracket who realises a chargeable gain of about £5,000 which is liable to tax at 30 per cent or near it. This would mean that such short-term or speculative gains would fall to be relieved to a greater extent than some long-term gains and that would be at variance with the principle which we introduce here where by and large the shorter the period of ownership the greater is the charge to tax.
On Second Stage Deputy Barry quoted an example in support of his point. He was referring to a married man with an income of £1,800 making a gain of £5,100 having held the asset for less than one year. That person does not qualify for indexation or tapering rates because his period of ownership is too short. He would be charged £1,380 capital gains tax if section 6 was repealed as against only £746 if section 6 was retained. The example chosen by Deputy Barry is an extreme case and the retention of section 6 could not be justified on the basis of that kind of an example. If such an asset was acquired by way of a purchase the transaction might have been for speculative reasons and if obtained by way of gift or inheritance I do not think the owner can be considered to have been hard done by since he would have a net gain on the disposal of a windfall. While I kept an open mind on this matter and examined it, for the reasons I have outlined I cannot agree with the basic proposal contained in Deputy Barry's amendment.
I am sure the Minister will agree that the inclusion of the section in the original Act was in recognition of the fact that there are people—Deputy Connolly referred to such people earlier—who have small incomes and must sell assets occasionally to pay ordinary bills or because of sickness. The Minister said the example I gave was an extreme one but I am not so sure if that is true. If a husband has something which he purchased one year before he died and if his widow's income drops to something like £1,800 she will obviously have to dispose of assets, until the Minister brings in the amendment on Report Stage which will allow the property to be treated as one.
That would not be any good to her in the case the Deputy has in mind.
That is correct because he would not have owned it for the 21 years. This happens more frequently than we imagine. The Minister, as a solicitor, must understand that there are many such people, particularly around Dublin. One of the justifications the Minister gave for abolishing it was that it had been abolished in the United Kingdom but at the time it was abolished there the exemptions were raised from £500 to £1,000 and the half-rate applied then from £1,000 to £5,000. Considerable exemptions were given at that time in the United Kingdom and the same excuse, that it was administratively very difficult, was quoted there.
The Deputy may be right but I would remind him that they do not have either tapering or indexation in Britain.
I think this Bill may have gone too far in one direction. I am thinking particularly of old people, retired people and widows who may have to sell an asset and make a capital gain because they have to live. The State should not within three years take back 30 per cent of that gain which was necessary for them. There is not an enormous number of people in this category but section 6 certainly was of some help to quite a sizeable number of people according to some solicitors I have spoken to.
The only way to get over that is to limit the value of the asset. I would suggest a figure of less than £20,000. If it was a small amount and the person had to dispose of it owing to financial circumstances then it might be possible to limit the amount that would be free of capital gains tax. That suggestion might be open to consideration.
In a way Deputy Connolly may be getting close to what I was about to say. First of all, there is an exemption on the first £500 gain so that small cases of the kind visualised by Deputy Barry would be exempt anyway and that £500 is after indexation. It surely must be unusual to have a case to take the kind of thing Deputy Barry visualised, where a man dies and his widow has to dispose of the asset to live; the case where she is confined to disposing of assets which have been acquired by her husband less than 12 months before his death must be fairly unusual for a start.
I do not dispute that. It applies all the way up to the 21 years. Because it was an extremely easy example and easy to calculate I gave the first one.
It is important, if one is talking outside the range of acquisition within one year, to remember that the alterations being made in this Bill would have the effect of substantially increasing the value of the £500 exemption in most cases. Certainly, it would do so in cases where we are not talking about development land or mineral rights or if we exclude short-term gains. In such cases the effect of the Bill is to increase, fairly substantially in many cases, the value of the £500 exemption because it is the gain calculated by way of indexation and reduced to take account of the indexation that is the relevant figure in relation to the £500 exemption. There cannot be any substantial number of cases which would be as extreme as the example given by Deputy Barry. If one goes back to what I was saying about the kind of case that would be involved, takes account of the relief that is being given by way of indexation and tapering rates and considers the additional cost of administration that would be involved if section 6 were to be retained, it is difficult to sustain a case for the retention of section 6. I am not saying that there is no case to be made for it. I can see there is some case to be made for it but I am saying that on balance, when one takes account of the various factors involved, I must come down in favour of not retaining section 6.
The Minister says that one of the reasons for doing away with section 6 is because indexation has been introduced here but we all agreed on Second Stage that indexation was necessary because only real gains should be taxed and not illusory gains which were there because of inflation so that argument cancels itself out. Of course if the asset is disposed of within the three-year period the person, on a comparable basis between the existing position and after this Act is passed, will be 4 per cent worse off. I still think that there are a number of small people—I do not by any means pretend that they are a significant body—who would find a relief such as this an advantage if it were retained.
I think the £500 is a little on the small side.
The £500 exemption, as I pointed out, is effectively being increased where indexation applies.
But the Minister has not indexed £500.
But I have indexed the gain.
It is the same as the bands for income tax.
Let us suppose that there is a gain of £1,000 on some transaction. If one did not index it it would be £500 over the exemption limit. By indexing it it is possible, depending on the period concerned, that it is brought down to less than £500. So effectively, that figure of £500 is being increased where there is a long period of ownership.
If one accepts the principle of indexation for the value of goods on 1 April 1974 and on 5 April 1978, if on 5 April 1978 one accounts backwards the value of £500 there is obviously less than there was in 1974.
Surely the Deputy would not contend that I should index both the exemption limit and the gain.
Yes, I would.
That would be giving relief on the double. The mere fact that one indexes the gain is taking account of inflation and restoring the position to what it was in 1974 or whenever this was introduced. If one also indexes the £500 one is actually improving the position of the taxpayer. One would be doubling the benefit to the taxpayer as against what it was when the Bill was originally introduced.
But if there was a case for exemptions set at £500 in 1974, outside any other changes made in the Bill, the £500 should be indexed as well and it should be now about £900 or so.
I would accept that if there were not indexation of the gains but I certainly could not accept the proposition that one should index both the gain and the exemption.
I would say that the fact that the Minister indexes one is an argument in favour of indexing both because the Minister accepts the principle.
Question put: "That the words and figure proposed to be deleted stand."
The Dáil divided: Tá 66; Nil, 48.
Tá.
- Ahern, Bertie.
- Ahern, Kit.
- Allen, Lorcan.
- Brady, Gerard.
- Brady, Vincent.
- Briscoe, Ben.
- Browne, Seán.
- Burke, Raphael P.
- Callanan, John.
- Calleary, Seán.
- Cogan, Barry.
- Colley, George.
- Collins, Gerard.
- Conaghan, Hugh.
- Connolly, Gerard.
- Cowen, Bernard.
- Cronin, Jerry.
- Daly, Brendan.
- Davern, Noel.
- de Valera, Sile.
- Doherty, Seán.
- Fahey, Jackie.
- Farrell, Joe.
- Faulkner, Pádraig.
- Filgate, Eddie.
- Fitzgerald, Gene.
- Fitzsimons, James N.
- Flynn, Pádraig.
- Fox, Christopher J.
- French, Seán.
- Geoghegan-Quinn, Máire.
- Gibbons, Jim.
- Haughey, Charles J.
- Andrews, Niall.
- Aylward, Liam.
- Barrett, Sylvester.
- Hussey, Thomas.
- Kenneally, William.
- Killeen, Tim.
- Killilea, Mark.
- Lalor, Patrick J.
- Lawlor, Liam.
- Lemass, Eileen.
- Lenihan, Brian.
- Leonard, Jimmy.
- Leonard, Tom.
- Leyden, Terry.
- McCreevy, Charlie.
- MacSharry, Ray.
- Meaney, Tom.
- Molloy, Robert.
- Morley, P.J.
- Murphy, Ciarán P.
- Noonan, Michael.
- O'Connor, Timothy C.
- O'Hanlon, Rory.
- O'Kennedy, Michael.
- Power, Paddy.
- Reynolds, Albert.
- Smith, Michael.
- Tunney, Jim.
- Walsh, Joe.
- Walsh, Seán.
- Wilson, John P.
- Woods, Michael J.
- Wyse, Pearse.
Níl.
- Barry, Peter.
- Barry, Richard.
- Begley, Michael.
- Belton, Luke.
- Bermingham, Joseph.
- Boland, John.
- Burke, Joan.
- Byrne, Hugh.
- Clinton, Mark.
- Cluskey, Frank.
- Collins, Edward.
- Conlan, John F.
- Cosgrave, Michael J.
- Creed, Donal.
- Crotty, Kieran.
- D'Arcy, Michael J.
- Deasy, Martin A.
- Desmond, Barry.
- Desmond, Eileen.
- Donnellan, John F.
- Enright, Thomas W.
- FitzGerald, Garrett.
- Fitzpatrick, Tom. (Cavan-Monaghan).
- Flanagan, Oliver J.
- Gilhawley, Eugene.
- Harte, Patrick D.
- Hegarty, Paddy.
- Horgan, John.
- Keating, Michael.
- Kenny, Enda.
- Lipper, Mick.
- McMahon, Larry.
- Murphy, Michael P.
- O'Brien, Fergus.
- O'Brien, William.
- O'Connell, John.
- O'Keeffe, Jim.
- O'Leary, Michael.
- O'Toole, Paddy.
- Quinn, Ruairi.
- Ryan, John J.
- Ryan, Richie.
- Spring, Dan.
- Taylor, Frank.
- Timmins, Godfrey.
- Treacy, Seán.
- Tully, James.
- White, James.
Tellers: Tá, Deputies Lawlor and Briscoe; Níl, Deputies Creed and B. Desmond.
Question declared carried.
Amendment declared lost.
Amendment No. 16 not moved.
Schedule agreed to.
Title agreed to.
Bill reported with amendments.
Report Stage ordered for Tuesday, 28 November 1978, subject to agreement between the Whips.