Dáil Éireann díospóireacht -
Wednesday, 7 Oct 1992

Vol. 423 No. 1

Written Answers. - Deeds of Covenant.

Ruairí Quinn

Ceist:

120 Mr. Quinn asked the Minister for Finance if he has any plans to change the legislation and regulations governing Deeds of Covenant so as to make their operation more equitable, especially where the income of a donor, normally the parent of the donee, is just above the threshold of eligibility for a higher education grant, with a view to providing a greater level of assistance to donors on comparatively low incomes which would enable them to help their children/donees to attend third level education; and if he will make a statement on the matter.

Brendan Howlin

Ceist:

121 Mr. Howlin asked the Minister for Finance if he will outline the basis on which a taxpayer may covenant only 5 per cent of taxable income to his or her own child and only then when the child reaches 18 years of age, while these limits on age and proportion of income do not apply to other covenants; his views on whether this affords equity of treatment to the children of taxpayers; and if he will make a statement on the matter.

Brendan Howlin

Ceist:

122 Mr. Howlin asked the Minister for Finance if his attention has been drawn to the fact that, because income which may be covenanted by taxpayers to their children is limited to a percentage of income rather than to a fixed amount, the present arrangement provides the greatest financial advantage to those earning high incomes rather than to those in middle and low income groups; his views on whether this affords equity of treatment to all taxpayers; and if he will make a statement on the matter.

Minister for Finance (Mr. B. Ahern)

I propose to take Questions Nos. 120, 121 and 122 together.

Section 439 of the Income Tax Act 1967, which is an anti-avoidance provision, provides that, subject to certain exceptions, income covenanted by one person to another is to be treated for tax purposes as the income of the disponer rather than of the recipient. One of the exceptions is where income is covenanted to an individual for a period which is capable of exceeding six years. In the case of income covenanted to a child of the disponer, the child must have attained his/her majority.

The Finance Act, 1979 introduced the condition that income in excess of 5 per cent of the total income of the disponer, covenanted to a child or grandchild, would continue to be regarded as the income of the disponer. This restriction, and the non-recognition of covenants in favour of minor children of the disponer, protect the Exchequer from the very large tax avoidance potential if these types of covenant were permitted without limit. The Finance Act 1986, by applying to the tax code the provisions of the age of Majority Act 1985, reducing the age of majority to 18 years, made the provision of relevance to parents of children in third level education. I would point out in this context that since that development, the cost of tax relief on covenants rose from some £3.9 million in the 1985-86 tax year to an estimated £26 million in the 1991-92 tax year. The great bulk of this increased cost is accounted for by covenants in favour of third-level students.

As regards the question of providing greater assistance to certain parents, it should be noted that direct State assistance to third-level education already amounts to some £271 million, while the higher education grants scheme costs a further £38 million. In addition, the income limits applying under the scheme have recently been significantly increased and other aspects of it improved. Any further expenditure in this area would have to be considered in the context of the high levels of expenditure already being incurred and the many other pressures on the Exchequer.

The fact that a percentage limit applies to covenants from parents to an eligible child or eligible children means that higher-income parents can benefit more than middle — or lower — income parents. It should of course be recalled that children of higher-income parents are unlikely to be in receipt of higher education grants. Finally, I would point out to the Deputies that the Review of the Programme for Government promises a radical overhaul of the entire tax code, involving a systematic curtailment of exemptions, shelters, allowances and concessionary tax rates, with a view to reducing marginal income tax rates.