Seanad Éireann díospóireacht -
Thursday, 17 Jul 1975

Vol. 82 No. 6

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

Question again proposed: "That section 14 stand part of the Bill."

Mr. Alexis FitzGerald

This I think is probably the most important section in the whole Bill, that is to say the most important section which needs amendment. I shall describe my problem with regard to it in this way. A capital gain arises on the disposal by the owner of an asset. He is charged the rate of tax, which is to be imposed by this Bill, when enacted, on the difference between what it cost him to acquire it plus what expenditure he incurred on enhancing it, which still survives in the form of the asset. If it does not survive, if the enhancement has disappeared through an alteration, it is not allowed. He is allowed certain expenses as an individual but, strangely or somewhat obsessively, interest is not allowed. In the case of a person dying under the provisions of this section there will be no disposal and, therefore, no occasion arising for the charge to tax under the death but a charge to tax under the section or under the administration of the estate will arise only for smallish estates, or for illiquid ones whether small or large. There will then be a charge to tax.

Unlike the position in the United Kingdom, where there is a far more favourable treatment, the charge to tax will be in respect of the gain based on the owner's cost of acquisition, expense of enhancement and other allowable expenses. Now, let us forget about the fact that there is not a current problem, because we start at the base date of April, 1974 and we are thinking about the future. In the UK there is, again, not deemed to be a disposal but the legatee receives it at the market value at date of death and all the previous costs, all the previous lifetime gains, the inflationary effect of monetary depreciation on the value involved are wrapped up in the market value and it is only the post-death gain which then is taxed. That is the current position in the United Kingdom, the position which has existed since 1971.

The position which existed before 1971 was I think a better one than that proposed under this Bill. Under the previous position, in 1965, death was a disposal but there was only a taxation in respect of the gain over a specified figure, which in 1965 was the relatively modest one of £5,000. A fair amount of inflation in the last ten years might reasonably have increased that figure.

I am totally unaffected by being told that what exists in the United Kingdom now existed because of the change made by the Conservative Government and that at some time in the future the Labour Government will change it. From the point of view of the administration of estates this is the worst of all because of the obligation of the personal representative to go back and discover from the records, if there be any, what did the deceased pay for the thing. How much did he spend on it that would be allowable? If he retiled the roof that would be allowable, if the roof is still there. If there was a subsequent piece of damage done to the roof by a storm and he spent money on that, that would be disallowable, because the house and the exemption for private residence for the realisation of gain from private residence, does not apply to a sale by a personal representative. The house is deemed, for the point of view of discovering what is allowable, to have been a business asset although it never was. The personal representative has to investigate all of that, maybe during a period of 20 or 30 years, and we are legislating for the future.

The people who are now administering modest establishments will have to keep records—of course they will not because we are not a record-keeping people—for the benefit of the personal representative. The personal representative will have a duty if he does not sell the property whatever it may be. It may not be a house where you can easily discover from the title deeds what it cost. It might be an armchair. It might be a kitchen table. It might be a dining-room chair. It could be this, that or the other thing of which there is no record but this rule applies to the whole lot of them, whether sold or not. If sold there will be a gain immediately. The provision exempting gains of £500 a year does not apply to a sale by a personal representative. The provision exempting sales of chattels of no more than £2,000 does not apply to a personal representative. The provision enabling people making small gains with modest income to come under the half income rule does not apply to a personal representative. The position exempting or limiting the taxation of foreign domiciled persons to the amount that they actually remit to the country does not apply to a personal representative.

I very strongly urge the Minister, between now and the Report Stage, to make the required change in this section to enable the deemed acquisition to be at the market value at the date of death. If the personal representatives have the history of gain made by the deceased on which he paid tax and they incur losses in realising the assets in which he has reinvested these gains, these losses are not allowable against the previous capital gains tax. There is a distinction, which everyone involved in the administration of estates knows, between personal representatives and trustees. If the personal representative incurs losses having to realise part of the assets to pay debts to provide a cash legacy, and they are handed over to trustees or to a legatee, the losses are not available for either the trustees or the legatee.

If the property is settled on trust, say a young man dies leaving a widow and children and he establishes a trust for the loss, as he very often may do, then at some stage the property has to be taken out of the trust. If it is a discretionary trust it is almost compelled in certain circumstances to be taken out of the trust because the discretionary trust will be subject, unlike the British proposals, to a wealth tax. That taking out of the trust will itself be a disposal giving rise to a capital gain based not on the value at the time it was vested by the personal representatives, by their assent in the trustees, not at the value which could be determined as at date of death but at the cost to the deceased plus enhancement and other expenses. That is, in general, my case with regard to this extremely important section.

It needs amendment, not merely in relation to the question of the value at which the individual takes it. Could I anticipate what the Minister might say to me by way of response? This problem will not arise if the house is in the joint names of the husband and wife. Many houses are not. It may be desirable they should be. This problem will not arise if the property can be vested in a legatee and he can sit on it. This problem will not arise if there is advantage taken of sections 26 and 27 with regard to retirement or disposal outside the family.

I am talking about the kind of estates which do not have farms and businesses to settle, modest situations where you have a house subject to a mortgage and, hopefully, a life policy and some bit of speculation that the chap is trying to make for himself. His estate will be subjected to capital gains because of the exigencies of the situation with regard to indebtedness and making a proper position. With regard to the situation which so often exists when during the minority of children capital has to be realised to complete their education, each doling out of an asset for cash will give rise to capital gains and enormously complicated calculations. The costs of compliance with this are very considerable.

The real importance of this section is to be discovered if you set it against the pre-existing situation where you had a franking from estate duty if you had a widow and dependent children situation up what had become quite a decent provision. There is no provision of any kind for it here. At the very least, market value should be substituted and the provisions with regard to individuals contained in the various parts of this Bill, should be extended to the personal representatives of the individual in the course of the administration of the individual's estate.

I have one final remark to make. That relates to subsection (6) of this section, the provision with regard to a deed of family arrangement not being regarded as a dispossession. Of course, there will be family arrangements, hopefully if there is something to justify an arrangement, if there is enough property around to justify an arrangement. In very many cases, where you have minor children—this arises really under the next section but is relevant in this—you will have readjustments of settlements when children come of age and somebody is discovered to have the talent to run the place, if it be a business or a farm. Somebody else concedes this and takes cash and there is a variation of rights to deal with this. In a tragic case that cannot be done within two years because the children will be minors. That will be a disposal and give rise to capital gains tax on the basis not of the value at the date of the deceased husband's death or spouse's death but on the basis of what it originally cost him after complicated and expensive calculations have been made to discover what it is.

Anyone who knows anything about the business of administering estates knows the executor's year, which used to be talked about for administering an estate, is a piece of nonsense. It cannot be done in a year in most cases, unless it is all orderly. Who is so orderly as to sit down on the eve of his death getting his estate duty affidavit or its equivalent filled in for the benefit of his personal representatives? Letters will be sent all over to discover what the value is. Things will have to be valued. The calculations here requisite for a personal representative to do his duty to his beneficiary will take time.

Two years is far too short. There may be a will, there may be a probate suit about it and they will be lucky if it is heard in two years. There may be an application under the Succession Act. That is contemplated in the definition of a legacy, as amended, and rightly so. There are times given to the widow or the spouse to decide whether or not he or she will exercise his or her legal rights. There may be an incapacitated child and it may be necessary to bring such a child into wardship. It may be necessary to get the consent, if it is a minor child, apart from being handicapped.

Somebody may be abroad. Somebody may be feckless and refuse to join in. There should be some provision whereby at least somebody, like the Revenue Commissioners, could decide having regard to the facts submitted to them, that that period of two years could be given a certified extension so that advantage could be taken of this subsection. At least it ought to be two years after the attainment of the majority of an interested party whose consent may have been requisite to the arrangement.

There are things which I could say about a lot of this Bill which I do not propose to say. The rejection of indexation, which we have more or less had after the concession of the validity of the argument, is disappointing. Much of my criticism would fall to the ground if this section were amended because much of the injustice that I see, which could be done by this, would get removed. I recognise that we are here trying to reform the capital taxes. I favour the capital tax code. I believe it is right and I believe there is resentment. I resented being an income earner and not a capital gainer, seeing people getting capital gains that they did not pay tax on whereas I was paying tax on what I earned.

We should reform to achieve justice. The desire behind this is to collect revenue, irrespective of the impact in terms of justice on the people who will pay it. Let us face it, people of size and substance will not be affected. They can lock themselves in and not realise. They will take the advantage of postponement, which, in terms of inflation means that they will be paying a depreciated currency when they do pay. It is the people who will be compelled to sell, of which there are many, we should be concerned about. The most normal case is where the personal representative is to realise the family asset in the shape of which its most substantial one may be the residence, to move to a smaller place.

It is all very well if there is such complete confidence between husband and wife that the husband gives it to the wife and the wife does the same. Exemption is all right in that case, but that may not be the situation as there may not be a surviving spouse. There may be only orphans and there may be a compulsion to sell to get into more modest circumstance because of the premature death of the surviving spouse. In that case there will be capital gains tax based on the whole period of occupation of the deceased and any subsequent gain before realisation.

There is much good in the Bill. If this section were amended I would wear the absence of indexation though I think the argument which was offered here yesterday against it was completely unimpressive. The real argument against the absence of indexation is that without it you have a taking of part of the real property. It is a wealth tax not described as a wealth tax without any threshold payable by people without much money. Whether they have £100,000 or £10,000 they will pay this wealth tax without indexation. If they are in a position to hold on and if market value is given at the time of death, they can then avoid the impact of this selective wealth tax capable of selection only by the well-off who keep themselves liquid to avoid realisation. I recommend an amendment of this section.

Professor Quinlan

This section shows the frustration and the inefficiency of the Parliamentary approach as operated at present. There is a failure to have special committees dealing with topics like the one covered in this section. There is remarkable expertise available in the Seanad, on the Government side through Senator Alexis FitzGerald, who must be the premier adviser and lawyer on this task. We have also had some excellent contributions from the Opposition side. It is a pity that these contributions were not available and channelled into a committee of this House or a joint committee of both Houses impacted on the civil servants who were drafting this Bill.

Officially the Bill is credited to the Minister but in practice it is the product of the Minister's advisers. My contention is that what evolves is a very lopsided document depending only on the Minister's advisers while expertise available from another and wider section of the community, a section different from the Civil Service, is not channelled to the problem.

An Cathaoirleach

I am afraid I will have to ask the Senator to bring his prologue to a close.

Professor Quinlan

The prologue is simply that I am asking——

An Cathaoirleach

The prologue is simply out of order and has been admitted as a prologue in the hope that the Senator would come to the discussion on the section.

Professor Quinlan

The prologue is to implore the Government to heed the advice given by Senator FitzGerald on this. There can be no doubt whatsoever on the Government side of the bona fides of Senator FitzGerald on this. There can be no doubt of his standing as a legal luminary of whom the country is proud yet it seems that he has not been able to have the impact on this legislation that his expertise coupled with the expertise of the Opposition benches, who have given an excellent dissection of this, would entitle him to have. In short the failure to produce any measure of indexation or any commitment by the Government to the principle of indexation is just confiscation of assets. I know it is not the principle of the Government and I know the difficulties with indexation in a period of rapid inflation, but there can be no justification for this failure. I hope before this Bill leaves the Seanad that the Minister will be able to give on behalf of the Government a firm and unequivocable commitment to the principle of indexation because only with that can we get away from the fact that this Bill could become a Bill for the confiscation of capital.

An Cathaoirleach

The Senator is somewhat less out of order than he was but he is still out of order. He is going in the right direction if he could come to the section.

Professor Quinlan

I am getting to the core of the problem. While we were operating on higher figures last evening I want to operate at lower figures now. If we take an ordinary hard working member of our community who strives, rather than to demand that the council or corporation should provide his house, to provide his own house at a cost of £10,000. That is a very modest home. If such a person is stricken down after 15 years and his wife is left with five children, under the present system of death duties there would be no question of there being any death duty. The assets could be four times that amount, with the exemptions provided, before there would be any question of estate duty. Successive Governments were committed to updating the reliefs provided for a widow and dependent children in accordance with depreciation.

A man with a modest house costing £10,000, for which he saved hard and of which be became the owner at the end of 15 years, may die suddenly. Maybe there is an outstanding mortgage on the house, but the house has to be realised. What is your guess as to what the value of that house will be in 15 years' time at the present rates of inflation. I do not even want to contemplate the present rate because it is absolutely frightening. Take a rate that is half the present rate, 12 per cent. If 12 per cent persisted over that 15 years —it is a compound interest charge, it is not 12 times 15—the interest would be at least 400 per cent. The house bought for £10,000 would then cost £40,000. According to section 14 of the Bill, the surviving spouse will be credited with a capital gain, if she has to realise it, on the difference between £40,000, its value in 1990, and the £10,000 which is its value today, less any slight adjustments made for minor inputs. There is almost a £30,000 capital gain. But it is not a capital gain. It is the same house, but the inflationary spiral shows this capital gain of £30,000 and, according to the Bill, the unfortunate widow with her five children will be faced with a bill of 26 per cent of £30,000. Is that fair or just? I know it will not arise, as the Minister said, for five, ten or 15 years but the fact that it is not going to arise does not entitle us to enshrine that principle in the section.

We will have to press for a very solid commitment from the Government that, in the reckoning of capital gains, every effort will be made to ensure that the gains are real gains and not book gains based on inflation. As Senator FitzGerald pointed out, this situation arises only when the asset is realised and it is realised in circumstances that call for protection, not for crucifixion. I cannot think of anything more out of line with the genuine and legitimate concern of the present Government for the welfare of the weaker sections of our community than their countenancing in this section a principle whereby the reliefs for the widow brought in by the previous Government, and increased substantially by the present Government 12 months ago as an interim measure, are now being swept aside. That is wrong and I ask the Government for a firm commitment that this will be reviewed to ensure that genuine capital gains are only charged just as they have given a commitment— not as strong as we would wish, but yet a commitment—that threshold levels in the wealth tax, and so on, will be reviewed periodically. I cannot see why there is such reluctance to give the same open and unequivocal commitment on the proper calculation of capital gains. I cannot accept the section as it stands, and I will have to ask at a later stage that the Government will give a solid commitment to ensure what I have argued against does not happen.

Minister for Transport and Power (Mr. P. Barry)

I must apologise to the House for the absence of the Minister in charge of the Bill. I hope Senators will bear with me and understand that I am not a legal person. This is a Bill requiring very close study by legal people and Senator Alexis FitzGerald has a deep knowledge of it. I will attempt, as best I can, to give the House the Minister's and the Government's attitude to the Bill.

Taking the last point first, the Minister has on a number of occasions said very definitely that he will review the thresholds. He has given this undertaking privately, in the Dáil and, again in the Seanad last night, so that Senators need have no fear in that regard.

The Bill provides that death does not constitute a disposal and, therefore, is not chargeable to capital gains tax in respect of the gains which accrued up to the death. In the United Kingdom such a charge existed up to 1971 when the then Government amended the law and from that time assets passing at death do not attract capital gains tax. The assets are deemed to pass through the legatee at market value at the time of death. It is understood that the present Government have always maintained that death should be an occasion for charge but, so far, there has been no change in the United Kingdom.

The policy adopted in the White Paper not to treat death as a disposal was based on the view that on the death there was no cash source until the property was sold. To change capital gains tax might force sale and thus bring back some of the evils of the estate duty system, which of course was one of the reasons this package of taxation was introduced by the Government. The three taxes are to replace— Senator FitzGerald mentioned this a while ago—what was regarded by everybody as a most inequitable and very damaging system of taxation for business, farming and all sorts of people.

On the other hand, with the high exemption thresholds of capital acquisitions tax, it could happen with no charge on death for capital gains, that a legatee could go free from capital acquisitions tax and also from capital gains tax on a quick sale after the death of the person who owned the property. The policy behind the treatment in the White Paper was to provide for the great majority of cases—the farm, for instance, which passes from generation to generation or the small or moderately-sized business. In such circumstances there will never be a charge to capital gains tax but it is necessary to provide for taxation where someone breaks that link and opts for cash by the sale of the farm or business involved. It has been contended there will be hardship in some cases because we go back to the time of the testator's acquisition to get at the base cost. Because of the choice given to the owner of the property, at the moment this means going back to 6th April, 1974. The person selling the property has the choice to opt for the value of the property on that date or, if he considers the value had been higher at a date prior to that, he can choose that earlier date but he would have the option of not going back beyond the 6th April, 1974. Going back for, maybe, 20 or 30 years does not arise except where it is to the seller's advantage. In the median term there can be no question of going back for generations. For now, and for, say, the next ten years, in any case, there can be no real difficulty on this score.

It has been suggested that there could be cases, such as that of the widow with five children, where the Bill would result in more tax than under estate duty law. A farm or business worth £50,000 was mentioned which the young widow found it necessary to sell off and could not wait until she was 55 years of age to qualify for the relief given under section 26. This is more likely to be a theoretical rather than a real case. Most widows remain on, particularly in rural Ireland, on the farms and, indeed, in many of the businesses and, in some cases, they turn out to be much more successful farmwise and as business people than their husbands were.

Senator Quinlan referred to the escalation of costs and the fact that, when she disposes of the property, the real value might be different from the inflation value. Of course, this would be her principal private residence and would therefore not be liable to tax. There is not an issue really in this.

Mr. Alexis FitzGerald

I do not want to interrupt the Minister, but that is only true if it is sold by the widow. It is different where there is interposed a trustee for the widow and children.

Mr. P. Barry

I will check on that, but I think in that case the trustee is acting on her behalf.

Mr. Alexis FitzGerald

No, I am afraid not.

Mr. P. Barry

I was talking about the widow who is under 55 years of age. In the vast majority of cases she will keep the farm or business going until (a) she passes the age of 55 years or (b) one of her children comes of age. In case there should be anything in the arguments, the provisions of section 14 will be closely watched in the coming year or so and in the event of there being capital gains tax liability that will be compared with what would have had to be paid in death duties and, in the light of what comes up on that comparison, the whole matter will be fully examined again.

It is, therefore, not proposed to alter this provision at this stage. It would be clearly premature to do so until there is more experience. It would throw up all sorts of side problems, such as what should be done if the young widow remarries, and many other things of that nature. There does not seem to be any ground for thinking that there can be hardship in the foreseeable future but the special scrutiny I have mentioned will be done, and if undue hardship becomes obvious steps will be considered to remedy the position.

Senator FitzGerald raised the question of the administration of estates. For the foreseeable future in practice there will be no going back beyond the 6th April, 1974, because values at that date will be higher than they were, say, 20 years ago.

As regards sales by personal representatives, a point raised by Senator Alexis FitzGerald, the personal representative is selling on behalf of the legatee and the exemptions will therefore apply. I will ask the Minister to examine this in detail again before the next Stage. Again, in connection with losses incurred by personal representatives, Senator FitzGerald raised a number of points for consideration and I shall ask the Minister to examine these between now and Report Stage.

Senator FitzGerald also referred to subsection (6). This is a relief and it is considered that normally a period of two years is sufficient. Everything in legislation of this kind cannot be provided for or we would have a Bill ten times the size of the one we have at the moment. The Revenue Commissioners will look closely at the facts, especially with regard to cases of hardship.

Senator FitzGerald raised the point about the sale of a house where there is no surviving spouse and where the children are succeeding. If there are any of the children residing, it becomes a principal private dwelling, and it would therefore be eligible for relief. This is an area where a variety of circumstances could arise. The provisions in the Bill will be interpreted as liberally as possible in the type of cases that have been mentioned.

Senator Quinlan raised the point which I covered earlier about where the house appreciates in value between the time the person gets it and when it is disposed of. The point I made then was that the widow is the legatee of the deceased husband and the house becomes her principal residence and she would therefore not be liable to be taxed on that. That covers the points raised by Senators FitzGerald and Quinlan this morning.

Mr. Alexis FitzGerald

I am very satisfied indeed with what the Minister has said. My objections to this section are satisfied by his undertaking to recommend the suggestions made to the Minister for Finance for consideration between now and Report Stage.

I should like to refer briefly to a few points—not to repeat anything I have said—made by the Minister. When he said that if a personal representative sells for the legatee he will be selling on behalf of the legatee, this is correct but only if the legatee is entitled absolutely to the property at the time. It would not be so if, for example, the legatee were entitled to a cash legacy or something of that kind, or he was the beneficiary in a discretionary trust in which the whole property, after administration, has to be realised. I think that is a correct statement on the intent and meaning of the Bill.

The second point is in regard to the occupation of the house by one of those orphaned children, giving rise to freedom from taxation in the event of the trustee selling it. It is true only if one of the children is entitled to possession, entitled to occupy it. That can be discovered by looking at section 25 (9), which is a very good subsection and which is not in the UK Act. It is a very sensible recognition of our realities. However, the aid the Minister refers to does not seem to me to be available if one of the children is not entitled to occupy the house. He would only be entitled to occupy it if he is given a half share, a quarter share in it. That might not be so at all. It might be a trust for all the children until it was found out who should get what according to the good sense and intelligence of the children when they are grown to the age at which trustees can make judgment.

The third point is the special hardship cases arising under subsection (6). I should like to make my own judgment on that. The majority of cases of estates nowadays take more than three years to administer. It does not take a very special case to make it difficult to get this arrangement. On the business of the Bill being extended to two years, if we make an amendment to insert "on such extended period as the Revenue Commissioners approve", that makes for an enormous change. It gives the Revenue Commissioners statutory powers to do what the Minister has indicated they would be proposing to do in an extra-statutory way.

Question put and declared carried.

SECTION 15.

Question proposed: "That section 15 stand part of the Bill."

Mr. Alexis FitzGerald

There are one or two, not very important, points on this section. It seems in general to be a proper section to have in this code. One point is that where the life tenant dies, if there is a life tenant, where the interest rests with a remainder man, it is clear from the section that there is no chargeable gain arising from that. Where there might be three old sisters, where a life tenant succeeded a life tenant under this Bill—I do not think it is in the UK but I could be corrected on that—there will be chargeable gains on death of the first two where there are three, because the property will remain settled. This is the point at which it becomes absolutely vested. I do not think this is intended. I think a recommendation to deal with that should be there.

Under the Bill as drafted the capital gains tax rules apply if the beneficiary on settlement disposes of his rights even if he does not receive any payment. Say he is an old person and he wants to give it over to his nephew, this is deemed to be a disposal and capital gains will apply. This does not apply in the UK. If there is no consideration received by him, if he is surrendering a life interest, or any interest, remainder or otherwise, in the UK this is not a chargeable gain. It is only a chargeable gain in the UK if the interest being surrendered is by a person who had purchased the interest in question or had derived his title from somebody who had purchased it. In that case only is there a chargeable gain in the UK, but here there will be a chargeable gain. There are these varying situations where somebody wants to give up and settle for a modest return on his or her declining years and to provide for the children and so on. This sort of rearrangement arises to some extent, to a lesser extent in Ireland: because of the inadequate and insufficient wealth here, there are not as many settlements. But it does exist and I cannot see why there ought not be provision for it.

If they desire under the settlement to restructure their rights there could be a double charge, because the disposal of an interest held by one of them to the other of them would give rise to one charge. Then there would be a national charge, a charge arising by virtue of valuation, against the trustees as well, in relation to the same transaction. The existence of these provisions would, I think, prevent the sort of arrangements that are referred to in subsection (6) of section 14 if they cannot be entered into within two years but may be taking place 22 years later.

Mr. P. Barry

The points raised by Senator FitzGerald are very technical and of a detailed nature and I would not care to give an answer to them here. If he will bear with me, I will ask the Minister for Finance to have a look at them again between now and the Report Stage.

Question put and agreed to.

SECTION 16.

Mr. Yeats

I move recommendation No. 9:

In subsection (1), page 17, line 60, after "£500" to add "provided that where, by virtue of section 13 (1), gains accruing to a married woman during a year of assessment, or part of a year of assessment, are assessed on her husband he will not be chargeable to capital gains tax if the amount on which he is chargeable for that year of assessment does not exceed £1,000, and provided further that, where, by virtue of section 13 (2) a husband and wife are separately assessed for capital gains tax in any year of assessment, the husband shall not be charged to capital gains tax if the amount on which he is chargeable for that year does not exceed £500 and the wife shall not be chargeable to capital gains tax if the amount on which she is so chargeable for that year does not exceed £500".

We had discussion on this earlier so I am not going to say very much about it. This recommendation seeks to deal with the situation which, as I said on section 13, seems completely contrary to modern thinking, particularly in this International Women's Year. We have a situation that capital gains of £500 are allowed free of tax to every individual except in the case of husband and wife where the two combined only have £500 between them. This seems really quite outrageous in this day and age. Effectively, the wife is treated as if she did not exist. I would urge the Minister to accept this recommendation because it is very hard, in equity or in any other way to see why, where you have two individuals, who are living together as husband and wife, to justify a provision that they should not each have an allowance of £500. If a man was living with a woman who was not his wife they would each have £500, but as soon as he marries her £500 of that disappears and they have only £500 between them.

Mr. P. Barry

The husband and wife are treated as one and in fact what is interchange between the two or what passes from one to the other is not chargeable. I think what is sought to be done in the recommendation is that a double allowance should be given in the case of a husband and wife, but they are treated as one under section 13 and indeed in the whole Bill. They would then be in a more favourable position than other individuals because they would be getting double allowances. In fact they are favourably treated at the moment because they are treated as one and they are not charged for the transfer of assets from one to the other—they are not treated separately—whereas if what Senator Yeats suggested were done they would have to be treated separately. If you gave them separate allowances you should also in equity charge for a transfer from one to the other and that is the nett point.

Mr. Yeats

First of all one must stress that this so-called concession of not taxing gifts between husband and wife is no concession at all. It is simply a plain ordinary recognition of the facts of life. That is, it would be utterly impossible to trace them. If gifts from husband to wife or from wife to husband were to be taxed it would be impossible for the Revenue Commissioners to get any tax from this. The present of a diamond ring, or what have you, between husband and wife would simply never come to the notice of the Revenue Commissioners and they recognise the facts of life that they would not be able to tax such gifts. So it is not a concession but merely a recognition of an inability to deal with the matter. Indeed it would be quite improper to have a situation where the Revenue Commissioners were to delve into transactions of this kind between a married couple.

The basic point, since the Minister has entered this question of equity, would appear to be that if this £500 concession is to be given to an individual then a £1,000 is about right for a married couple, who have more expenses and so on. It is very hard to see the point of the Minister insisting on this provision because the amount of revenue involved would be comparatively small and the whole purpose of putting in this limit of £500 essentially is to avoid the Revenue Commissioners getting involved in endless small transactions.

Apart altogether from the question of evasion, you could never trace these transactions, Besides, it would cost far more to administer a capital gains tax on transactions this small than would be justified by the mount that came in. One of the effects of the recommendation would be simply to save the Revenue Commissioners money. On this main basis, I think it is only reasonable that where there are husband and wife they should each have £500. It is cheese paring, to put it mildly, to say that where they are married they can only have £500 between them. I am not going to press this thing much further because we have had this at some length.

The Minister for Finance when he was here yesterday was asked a question by Senator FitzGerald and I repeated the question a couple of times, so perhaps we might get the answer now: what happens if a husband and wife separate? In this case are gifts from husband to wife taxable or do they remain untaxable. Perhaps we would get a definite answer on that one.

Mr. P. Barry

The reason why only one allowance is given to a husband and wife living together is that they are treated as one person for all purposes, and therefore the transfer of an asset by a husband to a wife, or vice versa, no matter how great its value, does not constitute a disposal for capital gains tax. The acquisition by the one spouse is deemed to be the acquisition of the receiving spouse. In addition the losses of one may be set off against the gains of the other. There is complete identity between the husband and wife and to grant an allowance for the two would not be logical.

Mr. Yeats

Whatever about logic, I think the Minister might well give the plain ordinary concession to man and wife on the basis that there are two of them. No matter what the law might say, there are in fact two people involved. Their expenses are greater than one single individual and, just as in the income tax code a man and wife can now get double the single man or woman's allowance, it would seem reasonable also that this allowance should be doubled. I would point out that they are not treated in this capital tax code in all cases as one single individual because subsection (5) of section 13 says the disposal of trading stocks between husband and wife does in fact qualify for capital gains tax. When it suits the Revenue Commissioners, they are treated separately.

I repeat the question I asked several times. In the case of a man and wife who separate and live separate lives, as I understand it, in that case when they no longer live together each has a £500 allowance. Does it follow from this that a gift from then on between a man and a wife who are not living together will become liable to tax?

Mr. P. Barry

Yes.

Recommendation, by leave, withdrawn.

Question proposed: "That section 16 stand part of the Bill."

Mr. Alexis FitzGerald

I want to repeat that I think this should be extended to include a personal representative's realisation beyond the provisions of subsection (3). I do not think the Minister need devote any time to that. I have a general feeling that £500 is a small sum from the point of view of the Revenue Commissioners' administration of the whole code, of the cost of compliance and the calculations required. To prove that you have not realised £500 would be quite difficult.

Question put and agreed to.

SECTION 17.

Question proposed: "That section 17 stand part of the Bill."

Mr. Yeats

I should like to ask the Minister the precise meaning of subsection (2). As I understand it, subsection (2) would appear to mean, though I am not quite clear why it should mean this, that if, for example, I buy anything for £2,000 and sell it for £10,000, thereby making a capital gain of £8,000, on that £8,000 I am only charged 13 per cent. I should be glad if the Minister would tell me what exactly subsection (2) means.

Mr. Alexis FitzGerald

I am interested in the language expressed in all these sections. I share the view expressed by Senators Yeats that that is what it means—that the amount of capital gain in such a case is not to exceed half the difference between the consideration and £2,000, that is to say, the gain is not to exceed £4,000. The tax is flexible at 26 per cent, and therefore the tax is 13 per cent on tangible movable property. Antique dealers and picture galleries should do well out of this. If that is correct, the speculators ought to be speculating on tangible movable property trying to remember that they should remain individuals in their operations. This is the only point I wish to make except to repeat that this section ought to extend to personal representatives of an individual, realising in the course of administration that if they sell anything of the kind—it may be the very moment perhaps when the follies of the individual in making his collection can turn to the advantage of the family—it is dispersed to provide for them. Just at that point the gains are being made, gains that ought not to be taxed in respect of chattels of £2,000.

Incidentally by way of clarification, I take it a person could sell 50 such chattels in a year and get the exemption in relation to each of them. This figure of £2,000 refers to an asset, which is tangible movable property. If you have a series of such assets, no one of them in excess of £2,000, would you be taxable on it?

Mr. Yeats

Would it not become income?

Mr. Alexis FitzGerald

Assuming you just happen to be moving from the castle to the flat, you would not be doing so for the purposes of selling what happens to be in the castle.

Mr. Yeats

Sell your library books?

Mr. E. Ryan

I should be glad if the Minister could give an example of how this concession, and I presume it is a concession, would work to the benefit of the taxpayer, because I have done several sums here, which may be wrong, but no matter which figures you take none of them seems to work. If you take something bought for £1,000 and sold for £41,000, a capital gain of £40,000, the tax payable is £10,400. If you turn to this earned concession you take half the difference between the £2,000 and £41,000 and you end up with £19,000 in rough figures. That does not help you because you are well within that figure in any event, if the tax is £10,400.

Mr. Alexis FitzGerald

I think the Senator is right—that I miscalculated earlier.

Mr. E. Ryan

Take £10,000 and you sell at £100,000. The gain is £90,000 and the tax is £23,400. The difference between £2,000 and £100,000 is £98,000, half of that is £49,000. There is no benefit. Take again a much bigger one, £100,000, sell at £200,000, gain is £100,000, the tax is £26,000.

Mr. Alexis FitzGerald

Is there not marginal relief?

Mr. E. Ryan

I am wondering what kind of examples there are, as none of the examples I have taken seem in any way to be a concession, but there must be some examples.

Mr. P. Barry

The thinking behind this is in relation to somebody who makes a gain on a disposal for just over £2,000. He would be taxed then. If the full rate of tax were applied he would have less money left than somebody who was just marginally under £2,000, and goes free of tax. It is to prevent that situation arising, to prevent the person being caught in the margin over £2,000 until in fact a certain level is reached. The relief tapers off, and it disappears where the full rate of tax does not give rise to a disadvantage.

Mr. E. Ryan

Certainly the subsection was aimed at helping cases which are marginally over £2,000.

Mr. P. Barry

The provision is to help the person who is marginally over the £2,000. On an article sold for £2,500 that cost £500, the gain is £2,000 and the tax on that is £250 instead of the £520 which it would be at the full rate.

Question put and agreed to.

Section 18 agreed to.

SECTION 19.

Question proposed: "That section 19 stand part of the Bill."

Mr. Yeats

I should like to raise the question of paragraph (c) of the section dealing with Land Bonds. This excludes Land Bonds from the operation of the capital gains tax. Everybody knows that nobody will make such a profit on a Land Bond on which you would be liable to pay tax under this Bill. Equally, its inclusion in this section means that the loss that you will inevitably incur on holding cannot be used as a set off against other capital gains. This seems unreasonable. After all, nobody wants Land Bonds. They are, as it were, forced upon you.

On the face of it, it would appear that here is a case where Land Bonds, which nobody wants, are being foisted on somebody. One may suffer a loss and the State says: "We forced you to have this loss, and yet you are not entitled to use it against other gains you may make, for the purpose of capital gains tax." This seems wrong in equity, so I would like to ask the Minister what his justification is for it.

Mr. P. Barry

Like all other Government securities Land Bonds are not deemed to be chargeable assets for capital gains tax. Thus, those who make gains are not charged and those who make losses cannot get relief against other gains. The problems relating to the market price of Land Bonds is separate and distinct from any discussion on the Capital Gains Tax Bill. It is not intended that there should be any difference in treatment of Land Bonds for capital gains tax purposes and other Government securities. No amendment in this regard is proposed o be made in the Bill at this time.

Mr. Yeats

Land Bonds are not like other Government securities. They are unique in that they are foisted upon you whether you want them or not. You acquire any other Government security voluntarily, or you may inherit it involuntarily, but you make your own decision as to whether you are going to continue to hold them. Land Bonds are different in this way. I am not suggesting that one ought to reopen the whole issue of Land Bonds to see if their continued existence is justified, but it seems unreasonable that, under the circumstances, if one incurs a loss on them that one is not allowed to set it off against some other capital gain.

Mr. P. Barry

All Government securities are exempted, and that includes Land Bonds. The Minister made the point in the Dáil, and possibly in this House also, that the sale price of Land Bonds has nothing to do with the Capital Gains Tax Bill. The ones that have dropped most in value are those issued pre-April of last year. The losses or gains in that regard will not either (a) be available against other gains or (b) be chargeable for tax. The point is that all Government securities, including Land Bonds, are excluded.

Question put and agreed to.

Sections 20 to 22, inclusive, agreed to.

SECTION 23.

Question proposed: "That section 23 stand part of the Bill."

Mr. Alexis FitzGerald

Should not the Voluntary Health Insurance Board be included in this, and also bodies incorporated under that statute which was passed a few years ago for running health societies?

Mr. P. Barry

The Voluntary Health Insurance Board are chargeable to income tax in certain circumstances but health boards and so on are not chargeable. That is the difference.

Mr. Alexis FitzGerald

The Bodies Corporate Health Act—I think it was called—was passed under which they can get directly incorporated and are used for various purposes.

Mr. P. Barry

Could the Senator tell us where we would get the exact title and we will have a look and see just what it is.

Mr. Alexis FitzGerald

It was the last thing that the late Erskine Childers did in this House, about 1972. I am sorry I do not have the correct name but I can get it quite easily.

Mr. P. Barry

It should be easy to trace it. It would be the end of 1972. If they are similar to health boards, they would be exempted. I had better not commit the Minister on that until I know exactly what the Senator is talking about.

Question put and agreed to.

Section 24 agreed to.

SECTION 25.

Question proposed: "That section 25 stand part of the Bill."

Mr. Alexis FitzGerald

I have my troubles regarding section 25. Could I draw the Minister's attention to a particular case? As I understand the section which is a tremendous help to human situations throughout the country and I applaud the Minister for Finance for having included it and having got rid of the limitations in the White Paper on this point—does it take care of the case where the private residence is converted to a guesthouse or digs on the death of the person? Could a case be made for treating that as a continuation of use as a private residence, in other words, that use for such purposes shall not be deemed to be a business for the purposes of this section. Quite a number of people turn the residence into a place for farm holidays. A number of people I know were reared by their mother's ability to use the house for taking in university students. It would seem unfair if they wanted to sell the house that it would not be treated as a private residence.

Mr. P. Barry

The Senator mentions the case of a widow who inherits from her husband and converts the house into a guesthouse. He said that she should not be liable to tax on its disposal later on. At the time she makes the conversion, it changes from a private residence to a business or trade, and the date of that change becomes the date of acquisition. The gain she will be charged on will be calculated from the date she makes the acquisition up to the date of disposal of the house later on. She will not be charged on its pre-changed value.

Mr. Alexis FitzGerald

There is some contemplated treatment of that situation which would be just to the widow concerned. There is one other small point regarding the house and one acre. In the United Kingdom they say "or such additional amount as having regard to the circumstances of the case would be regarded as fair" simply to avoid the administrative trouble and cost of compliance of charging capital gains to somebody who has got one acre and three perches. Most cottages in the country are in that situation. It is not thought desirable to drag them in. Maybe they would be out under the £500 exemption. I do not understand why that was cut down to the one acre from what is the United Kingdom provision.

Mr. Yeats

I support Senator FitzGerald's point. I can see considerable problems in dealing with this acre. Supposing a house has five acres, of which some are valuable, perhaps would be eventually excellent sites for building houses. Others may be just scraggy or rocky acres of no value to anyone. How is it to be decided which acre is alloted to the house and which is to be charged for capital gains tax? Is it open to the owner of the house to decide this?

Mr. P. Barry

In the case quoted by Senator Yeats of a house standing on the corner of a five-acre site, to say that the acre furthest from the house, completely separated from it, should not be taxed but that the other four acres nearer to it should be taxed, would be totally impracticable. The practical thing is that the acre which surrounds the house will be free of tax. The other four, on their disposal, are charged.

Question put and agreed to.

Section 26 agreed to.

NEW SECTION.

Mr. E. Ryan

I move recommendation No. 10:

Before section 27 to insert the following new section:—

27.—Where a widow disposes of a farm or business which she acquired on the death of her husband, such disposal shall be free of capital gains tax in respect of so much of the consideration as does not exceed £50,000.

This recommendation is making another effort to deal with the problem which was dealt with in recommendation No. 8, that is, to deal with the situation where a widow or a widower wishes to dispose of a farm or business acquired on the death of a spouse. The situation could easily arise where the widow inherits a very good farm but knows nothing about farming and has no other member of the family to run it. She has no alternative but to sell it. Under section 14 if she sells the farm or business she will be liable to capital gains tax. As was pointed out, this means, in effect, that although under the recent legislation she no longer pays estate duty, she will be almost back in the position that she was before. The same could apply if a wife died and left her husband, perhaps, a flourishing hairdressing business which he found impossible to run. He would have to sell it. If the Minister is not prepared to give complete exemption to such situations, as proposed in recommendation No. 8, at least there should be a provision that he or she should be free of capital gains tax up to £50,000.

I make no secret of the fact that I would prefer to have seen the matter dealt with as proposed by recommendation No. 8 but, as that is not acceptable to the Minister, at least this would give some ease to the surviving spouse and ensure that, up to £50,000, the situation we have deplored, would not arise.

Mr. P. Barry

Under section 27, a widow, aged 55, who disposes of a farm or family business to her children for up to £150,000, and the farm or family business has between herself and her deceased husband been in their ownership for ten years or more, will be exempt from capital gains tax on the transaction. This seems to be a generous allowance on the part of the Minister and the Government and it is as far as we can go. I am sure the Seanad will agree that this will cover the majority of cases. If she is under the age of 55, all sorts of problems can arise—she may remarry and so on. The Government have been very generous in catering for widows. Generally speaking, a widow of 55 years has children of an age to whom she can dispose of her assets, whereas below that age, the children would still need her care and she would probably be actively involved in the farm or business. There will always be people left outside whatever age is chosen. That happens with all thresholds—somebody is just on the wrong side.

Mr. E. Ryan

This is not really relevant to section 27; it is more relevant to section 14. I have in mind the case where the widow would not be 55 years of age and would not be disposing of the business within her own family because no member of her family would be suitable to take over the business. This kind of case is not covered by somebody wishing to retire and hand their business over to their family. If a young widow with no family finds herself in possession of a farm or business which she has no capacity to run, no member of her family capable of running it, the only way she can take advantage of the property her husband has left is to sell it. If she does, she is liable to capital gains tax because she does not come within any exemptions mentioned in the Bill. This, presumably, is the very kind of situation which the Minister had in mind when he abolished death duties for members of the immediate family.

Mr. P. Barry

The suggestion goes much further because if accepted it would require no condition as to age or disposal to the family. The only condition would be widowhood. The relief in section 27 is very generous and is intended to encourage the keeping of fairly substantial farms and businesses within the family. Furthermore, the age limit has been set at a comparatively low level and the relief will be available at a time when the widow would normally be expected to have a son, daughter or relation, capable of taking over. As I said, any age chosen will cause hardship to people below that age level.

If the recommendation were to be accepted it would also encourage sales outside the family. Part of the philosophy behind all these taxes is to ensure that family businesses and farms can be continued after the death of the owner. Under the death tax this was frequently not possible because of the heavy demands made on the estate by death duties. There are no grounds, social or equitable, for doing this. There is no hardship in charging a widow to capital gains tax on the disposal of a farm or business outside the family for £150,000. Assuming there is a capital gains content of £50,000 on the sale, the amount of tax would be £13,000. Against this, she would have paid no inheritance tax and the husband's estate, under the old system, would have borne £67,500 if estate duty had not been abolished. The widow would then have about £137,000 left after the capital gains tax. Invested in an annuity this would yield something in the region of £15,000 to £20,000 per annum. This can hardly be called hardship.

In the case of a smaller farm or business up to the value of £50,000, a widow fulfilling the condition in section 26 as to the age and duration of ownership, the disposal, even outside the family, will be free of capital gains tax. Even if she sells outside the family before reaching 55 years of age, it does not follow there would be hardship. Assuming she sells at 35 years of age for £50,000, and that the gain content is £20,000, the capital gains tax would be £5,200. She has paid no inheritance tax, whereas the estate duty liability would have been £9,500 under the old system, assuming that she had no children. She has about £44,000 left after capital gains tax and at current interest rates this would earn her about £5,500 a year, while preserving the capital intact, or she could purchase a life annuity in excess of that figure. The reliefs provided in sections 26 and 27 go very far towards relieving most farmers and owners of reasonably small family businesses of any liability to capital gains tax. The reliefs are generous and the conditions required are very fair and reasonable.

Recommendation, by leave, withdrawn.

Section 27 agreed to.

Section 28 agreed to.

SECTION 29.

Question proposed: "That section 29 stand part of the Bill."

Mr. Yeats

If a painting, for example, was destroyed by fire, one pays capital gains tax on the insurance, as one would if one had sold the painting, except that there is a saving clause that if within a reasonable period one puts the insurance money into another painting or something similar one does not have to pay. It is counted as a gain, a somewhat involuntary gain, but nonetheless a gain, on which capital gains tax is payable. Just as this is counted as a gain when a painting is burnt, with the rest of the house, I wonder if a loss could be claimed also? Supposing one had bought a painting, one of the large Victorian paintings which at one time were very valuable and no longer are, and this was destroyed and one got a couple of hundred pounds insurance, can one claim as a capital loss the difference between what one paid and what one ultimately got?

Mr. P. Barry

If the painting was not worth £2,000, even though it was insured for £2,000——

Mr. Yeats

No, say I bought the painting for £5,000 and as the years go by—I am not a very good judge of art— it turns out that by the time it is destroyed it is only worth £1,000. The insurance company are not, I imagine, going to pay me more than what it is worth, so they pay me £1,000. I have lost £4,000 on the deal. Can I claim a capital loss on that?

Mr. P. Barry

You would insure the painting as to your assessment of its value and pay a premium in relation to that. Therefore, it is your value of the painting that would count. Is that not correct?

Mr. Yeats

I am afraid that is not the way insurance companies work, as I know to my cost. If you want to insure a painting, you can value it at anything you like, but the insurance company will require you to produce a certificate of an established expert who will certify the amount the painting is worth. I suspect that if the painting was destroyed, they might have another go at it. No insurance company will pay more than they think the object is worth. So if I buy a painting for £5,000 and the insurance company decide at the time it was destroyed that it was only worth £1,000, that is all they will pay. I will, then, in effect, have lost £4,000.

Mr. P. Barry

If you paid £20,000 for a painting last year and in the meantime the painting is proved to be worth much less, say it is now worth £2,000, if it is destroyed in a fire you will be able to claim a loss of £18,000.

Mr. Yeats

These things happen. Whether I sell it or it is destroyed, I can claim a capital gain or loss on a painting, the same as anything else?

Mr. P. Barry

That is right.

Question put and agreed to.

Sections 30 and 31 agreed to.

SECTION 32.

Question proposed: "That section 32 stand part of the Bill."

Mr. Alexis FitzGerald

Why is this limited to a registered unit trust? There are all sorts of unit trust schemes that are not registered here. Perhaps the Minister would like to consider this before the Report Stage. For example, there are very big charitable unit trusts which may come under the charitable section, but for a variety of reasons other substantial charities are not registered.

Mr. P. Barry

Charitable unit trusts are out, but all other unit trusts are in unless there is something which fits in between the charity class and the normal unit trust.

Mr. Alexis FitzGerald

For the information of the Minister, there are more unit trust schemes not registered than there are unit trust schemes registered.

Question put and agreed to.

Sections 33 to 36, inclusive, agreed to.

SECTION 37.

Question proposed: "That section 37 stand part of the Bill."

Mr. Alexis FitzGerald

On the remittance provisions with regard to individuals limiting the liability to gains that are remitted to the country, does this extend to a non-resident trust because I think it ought to?

Mr. P. Barry

The Minister will answer that on Report Stage.

Question put and agreed to.

Section 38 agreed to.

SECTION 39.

Question proposed: "That section 39 stand part of the Bill."

Mr. Yeats

I would like to return to my painting problems. Section 39 provides, and I accept that it is a reasonable provision, that if I were to hand over a painting or any other national treasure to named libraries or public galleries, I cannot claim a capital loss. I can quite see that that would be asking for trouble from the point of view of the Revenue Commissioners.

Business suspended at 12.30 p.m. and resumed at 2.30 p.m.

Mr. Yeats

This section deals, among other things, with the sale or disposal of works of art and so on to the State, charities or various national institutions, such as, for example, the National Gallery. The normal situation under this Bill, as set out in section 9, is, that if a person disposes of property or an article of some kind at less than full market value for the purpose of capital gains, then it is assessed at full market value even though the person may not have got that amount of money and may have sold it for less than its worth. I presume there would have to be a considerable difference before the Revenue Commissioners would come down on that person but if there was a considerable difference then they would be empowered to levy capital gains on the full market value of the article concerned.

If one disposes of a painting, for the sake of argument, to the National Gallery, under a bargain at arm's length as set out in this section, what is the market value? Is the market value in this case the full price which the National Gallery are able or willing to pay or is it the full value that person would get if he went to Sotheby's in London or sold it to some gallery in New York? What is the definition, in this case, of market value?

If a person is selling paintings or any other item of national interest to institutions in Ireland they cannot afford to pay anything near the market value. Under these circumstances, if a person sold a painting to some gallery in Ireland for some figure considerably less than he would get elsewhere, it would be unreasonable if he was charged capital gains on the full notional market value which he did not get. On the other hand, there is the question as to whether the person might be allowed to show a capital loss on this bargain. What is a bargain at arm's length under this section and what definition of market value would be made under it?

Mr. P. Barry

I think the point raised by Senator Yeats is that, suppose somebody acquired a painting for £1,000 and a private art gallery were willing to pay £10,000 for it and if that person sold that painting to the art gallery, yes, he would be charged to capital gains tax on £9,000. However, if the person sold it to any one of the institutions, the National Gallery, university, county council, for £5,000 then, even though the painting on an independent assessment was worth £10,000 he would only be charged capital gains tax on £4,000, that is the difference between the cost price and the price at which it was disposed of, £5,000.

Mr. Yeats

Equally, do I take it that a person could not claim a capital loss on this deal?

Mr. P. Barry

No. Is the Senator suggesting that the person should be able to claim losses on the difference between £10,000 and £5,000?

Mr. Yeats

No, I am not suggesting it. I am asking if it could be claimed?

Mr. P. Barry

No.

Question put and agreed to.

SECTION 40.

Question proposed: "That section 40 stand part of the Bill."

Mr. Alexis FitzGerald

This illustrates in a striking manner the absence of thresholds. Here is the case of somebody who has got nothing, is in a negative position and is paying capital gains tax.

Mr. Yeats

There is the problem of capital gains on bankruptcy. If an individual or company goes bankrupt and there are the usual lengthy proceedings to wind up all the affairs of the individual or company, collect all the assets, pay taxes due to the State and whatever modicum is left to the creditors. We have the position that if, during the period of the bankruptcy which can be quite long, the assets rise in value and are then sold, capital gains is payable to the State with priority. This seems to be unjust to the creditors. It is not a case of taxes incurred by the bankrupt before bankruptcy. This is a sort of fortuitous capital gain after bankruptcy. One would have thought that in equity this could be allowed to go to the creditors rather than that the State should take 26 per cent of capital gains and in advance of the creditors, so that the creditors would get still less than they normally would under a bankruptcy. It does not seem equitable.

Mr. P. Barry

I think the point here is that a bankrupt could have income and the income would be charged for tax. I suppose it is possible that when a bankrupt's assets are realised they could exceed the cost of acquiring those assets. Within that bracket there would be liability for capital gains tax.

Mr. E. Ryan

I am not sure if I am on the same point as Senator Yeats or even on the right section.

An Cathaoirleach

Section 40.

Mr. E. Ryan

I mean I am not if it arises under this section but a point has been put to me which is perhaps similar. It concerns the case of a builder who works on a building and improves it considerably. Obviously, after the disposal of the building, which comes about because of insolvency or bankruptcy there is a capital gain, perhaps a large one, but most of that capital gain was possible because the builder got materials from builders' providers whom he has not paid. It would be most unjust if the State were able to take priority to the man who supplied most of the material on which the capital gain is based but which has not been paid.

Mr. P. Barry

I think that in this case the State takes priority the same as in other taxes. It does not seem to be right that the State, because there are other claimants on the assets of the bankrupt, should forego its share because it has a claim for tax on the bankrupt the same as other creditors. The State takes priority in that regard with other taxes and the same would apply in this case.

Mr. E. Ryan

Does the Minister mean that the position is no worse than it is in regard to other taxes?

Mr. P. Barry

It is exactly the same.

Mr. Alexis FitzGerald

Could the Minister direct my attention to where actual priority is given to capital gains tax in the case of either a bankruptcy or where we are dealing with the liquidation of companies in the next section? I am sure it is somewhere here but I do not immediately see it.

Mr. P. Barry

It is in the Schedule.

Mr. Alexis FitzGerald

When we come to the Schedules the Minister might be able to indicate to me where it is written.

Mr. P. Barry

Page 69. There is reference to section 27 of the Finance (Miscellaneous Provisions) Act, 1968 where it states: "taking by Collector-General of proceedings in bankruptcy".

Mr. Alexis FitzGerald

This is legislation which is complicated enough without incorporating a lot of other laws that we do not see in front of us but I am sure that is correct. Does that section 27, which is described as "taking by Collector-General of proceedings in bankruptcy" inure to give priority, which I think it ought to give in the case of the liquidation of companies? One has some doubt about the definition of bankruptcy.

Mr. P. Barry

Could I interrupt the Senator for a moment? I have a more exact reference on page 76, paragraph 15 of Schedule 4.

Mr. Alexis FitzGerald

That seems to be it.

Question put and agreed to.

Sections 41 to 48, inclusive, agreed

SECTION 49.

Question proposed: "That section 49 stand part of the Bill."

Mr. Alexis FitzGerald

Senator Yeats raised a question about market value. Is there a problem left with him on that by virtue of the description of market value in subsection (1)?

Mr. Yeats

It is not for me to say what this Bill means but my interpretation of this would be the highest price you could reasonably get in Ireland. I do not think that the Revenue Commissioners would expect people to go to London or New York in order to get a higher price. It seems to be that the only way it could be workable would be if they would take the market value in Ireland. The problem I raised earlier was in the case of paintings where there is an international market and the market value there is international rather than Irish. For normal purposes one would hope that they would take the highest price that could be got here.

Mr. P. Barry

I think the basic rule in this regard is that the market value is the price which an asset might be reasonably expected to fetch on a sale on the open market. Stocks and shares can be related to an official list but we are talking here about something where there might be different opinions as to its worth. In assessing the value of a lot of things there are two different opinions but the Revenue Commissioners will be bound to see if they can get a fair estimate of what it might be expected to fetch on the open market. That would become the market value, as such.

Mr. Yeats

There are problems. Suppose I am selling a valuable antique piece of furniture. If I want to make the maximum gain on which I am liable to be taxed I will ship it to whatever county is giving the highest price at that moment. Alternatively, if I want to acquire a rapid and simple loss to set off against other gains I will send it to the local auctioneers and it may be sold for £25 to some dealer, I would then chalk up a very satisfactory loss. The estimation of market value could raise problems in cases like that.

Mr. P. Barry

If this valuable antique is shipped the price you would get for it if you sell it in the highest market, either by deal or auction, is its value.

If, because you do not know the value of something, and you bought this or inherited this for £1,000 and if the dealer only gave you £25 because you genuinely did not know the value of the goods, then that is a loss. If you did that as a method of evasion then obviously the Revenue Commissioners will put a fair market value on it and they will charge you on that.

Mr. Yeats

I would like to see the Revenue Commissioners proving that if I sent it down to auction and got my £25 from the local auctioneer that this was not the market value. There are large sections of this Bill introduced, according to the Minister, in order to allow people to chalk up losses. This seems to be a cast-iron system of getting a very satisfactory notional loss if you sell the item in the wrong place. Nobody would ever be in a position to prove that if I send my valuable antique furniture to the local auctioneers and have it sold by auction that I have not got the market value. I do not see how anybody could get around that one.

Mr. P. Barry

If, in the example that Senator Yeats gives where he sends the article to the local auction, it is a genuine auction it will fetch its highest value which will be its market value. If it is a mock auction—whatever a puffer auction in reverse is—then the Revenue Commissioners would say that the antique was being sold for £25 and it was worth £2,500. They would get their own valuation and say: "This is a false loss. This article is worth £2,500 and could have been sold for that. That is the disposable value of the article."

Mr. Yeats

The beauty of this method of evasion is that one need not do anything dishonest. I am not suggesting that it is necessary to have any kind of a mock auction. Everybody knows that if you are selling a valuable item, whether it is furniture, paintings or whatever, you have to sell it very carefully to get the highest price. You have got to sell it at an auction where the type of dealers who are interested in this particular type of article come. If you have an article that is not worth much you send it to the local place because it is simpler and you get more or less the going rate. If a man has something rare and particularly valuable it must be sent to an auction house which is used to dealing with these things, where the dealers who buy these things go, and you get then a higher price. Of course, if it is particularly valuable you may have to send it abroad, say to London, to get a higher price. To chalk up a loss you would not need to have any kind of a mock auction. You merely send it to an auction which is not suited to selling that type of thing and you will only get a fraction of the price.

Mr. P. Barry

Presumably you want to sell this article because you want the money for it. I think the argument is a bit unreal. If somebody is genuinely disposing of an article to a legitimate buyer through a legitimate auctioneering firm and yet the seller of that article wants to get the lowest possible price it does not seem to me to be a real situation.

Mr. Yeats

I agree, I would not do it. I was only pointing out that the Minister was terribly worried. At frequent intervals in this Bill he was saying that this, that and the other had to be put in in order to avoid people chalking up capital losses for whatever reason. It did not seem to me, when he was producing these arguments, that they were very good ones. They seemed to be highly theoretical. I am just pointing out that this is the case. Anyone who feels like having a loss can have it but I would not do it.

Mr. P. Barry

I think this is unrealistic. Somebody like that does not want the Revenue Commissioners after him. He needs a doctor.

Mr. Yeats

That is what I was saying about many of the people about whom the Minister was talking.

Mr. Alexis FitzGerald

Could I just ask a question regarding the relation of section 33 to section 49? If I was known to have something worth two pence and I decided that I needed the two pence to buy my fare into the Seanad and I wanted to sell it and I happened to mention it to my children or my in-laws would they become connected persons under section 33 if they bought it at Adam's auction, or whichever place the matter was being conducted? I think the disconnection should be established if there is a genuine market operation under section 49 so as to exclude the possibilities of their being treated as engaged in anti-avoidance under section 33. I just throw that in until we get on to the next section.

Mr. P. Barry

I am not sure of the value mentioned by Senator Yeats but if something is worth £10,000 and if he sells it to a connected person, say a son or somebody like that, for £10 the Revenue Commissioners will not accept that as being its value. They will say £10,000. If it is genuinely worth £10 and it goes into Adam's auction and only fetches £5 that would be accepted as the market value.

Question put and agreed to.

Section 50 agreed to.

SECTION 51.

Question proposed: "That section 51 stand part of the Bill."

Mr. Alexis FitzGerald

I wonder if it is convenient, appropriate or orderly— I am sure the third of the categories will be dealt with swiftly by you—if I mention on this section something that I could more appropriately, if not necessarily more orderly, have mentioned on an earlier section. There ought to be some encouragement here in this whole Bill to the giving by controllers of companies of shareholding interests to their employees. I am aware of a particular company at the moment, which is very successful, very progressive, with a fine open-minded person running it, who wants to give away shares to executives. He has already done that. He wants now to extend it to a permanent scheme for all his permanent employees. He is held up by the possibility that he will be paying capital gains tax on his gifts. It seems that there ought to be some sort of provision to facilitate or encourage this, subject to an overall kind of control in case this was being used as an anti-avoidance operation. In this particular case it is not. It is simply an obstacle.

Mr. P. Barry

I see the point the Senator is making and I think it is something that will be looked at to see if there would be a hardship on the man.

Mr. Kerrigan

I presume Senator FitzGerald is talking about all employees not executives only.

Mr. Alexis FitzGerald

Absolutely. The executives have been dealt with already. He is now thinking of the general body of employees and he is distinguishing those who are to be permanent and those who might be flitting.

Question put and agreed to.

SCHEDULE 1.

Mr. E. Ryan

I move recommendation No. 11.

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

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

The purpose of this recommendation is to protect a person from whom property has been compulsorily acquired from having to pay capital gains tax. The position is that one must make distinction between a person who disposes of assets in the normal way and the person who disposes of them because his property has been compulsorily acquired. In the ordinary way a person who wants to dispose of property in most cases he will be able to pick his own time, he will be able to decide if he wants to dispose of his property at all. Generally, he is in a much more favourable position in regard to the disposal of the property and in regard to replacing it.

A person from whom property has been compulsorily acquired may not want to get rid of it at all. Obviously he does not want to get rid of it. If he wanted to sell it in the ordinary way the situation would not be arrived at where it would be compulsorily acquired. He does not want to get rid of it, perhaps because it is a farm, house or something like that, that he is perfectly happy with. Very often the situation is that he does not want to get rid of his property to have it acquired because he knows it will be virtually impossible to get a property that has similar qualifications, similar attributes and certainly to do so at a reasonable sum. He is put in the position where, against his will, the asset is taken and he has to replace it. He may find difficulty in doing so and may have to pay, at least as much as he gets and maybe even a bit more, to get a similar type property.

It seems quite inequitable that he should have to pay capital gains on the increased value of his property where he is ending up with something that is exactly the same as what he had and where he had no ambition whatever to change his property from the one taken from him and to buy the new one. This is merely to say: "that in the case of an asset acquired by compulsory purchase powers the sum allowable as a deduction should not be less than the cost of replacement to the comparable asset at the date of disposal." Naturally, if he wants to buy a different kind of property the recommendation would not arise. That is to say that the sum allowable shall not be less than the cost of replacement with a comparable asset.

Some provision must be made for a person in this situation, a person who quite definitely does not want to sell, or in the second kind of situation I have mentioned where it is not that he has any great affection or regard for the property he has but he knows that it will be virtually impossible to get a similar one at any kind of a reasonable price. In all the circumstances, a special case can be made for a person in this situation. Something should be done for him along the lines of the recommendation I have put down.

Mr. P. Barry

If we were to accept this recommendation, it would mean no property would be sold to a local authority or anybody using a CPO except under CPO. Obviously people would wait to get the relief from tax by having the property compulsorily acquired and it would slow up enormously the work of local authorities. Besides that, it would also allow people to do something the Bill seeks to stop, that is, namely, living off gain. It would pay a man, who may have access to local authority files, and may know that a certain road is going in a certain direction, to acquire a property on that route so that, when he was forced to sell it under the CPO, he would be able to set off the amount of the replacement cost without paying any tax. It would be open to fairly wide abuse by people who could have access to that information and could afford the purchase price of acquiring properties before the CPO is put on them. This would lead to a great deal of abuse.

Mr. E. Ryan

I cannot deny that situation might arise, but I would say there would be 50 cases of people having their property acquired compulsorily against the one person who would have the foresight and the money to be able to buy a property and avoid capital gains tax. It is seldom this will happen. On the other hand, the person who has his property acquired compulsorily is put in the position of having to pay capital gains tax. He is in no better position after the transaction than he was before. He has some kind of farm, or house, or some kind of property and he has no ambition to get rid of it. Yet, he has to pay on a notional gain and it will be merely a notional gain. He will be no better off.

Mr. P. Barry

I would think the vast amount of property acquired by local authorities is acquired by agreement. If this recommendation were accepted, there would be no possibility of a local authority purchasing by agreement, because everybody would rightly insist on his or her property being acquired by CPO. That would enormously delay the work of the local authority and the loopholes it would create would be abused much more than Senator Ryan seems to think. There would be many people who, having the means of acquiring money through tax-free capital gains taken away from them, would be searching for other ways and this is one of the first things they would light on. It would destroy the philosophy behind the Bill. It would certainly mean every property acquired by a local authority would have to go through CPO and that would delay considerably the work of local authorities.

Mr. E. Ryan

That argument could be used the other way because the situation from now on will be that a person facing up to the existence of this legislation will say: "I am going to get X number of £'s but, if I do, and I am looking around for a similar property, I am going to have to pay capital gains so I am not going to sell it. I will refuse." This is the person who does not want to sell and, in this situation, he will dig his heels in because he knows that this will be a bad deal for him if he sells in these circumstances and has to pay capital gains. The local authority can go ahead and put the machinery into operation, but he will be damned if he is going to go ahead because he has nothing to gain. He just hopes the local authority will not go ahead with the compulsory acquisition.

Mr. P. Barry

Where a dwellinghouse is concerned, there would be no charge anyway. If what was involved was a business or a farm, if that money was reinvested in a business or a farm, provided it is not taken out altogether, the charge would be rolled over. That would be a deferred charge until the asset was actually disposed of by the owner without replacement. In practice, there would obviously be some people who would prefer, once they were coming against a CPO, to say: "There is no point in one putting in anything more, we are at an age when we do not have to do any more. We will just take the money and get out." That is a gain, of course, at that stage and they should be charged.

Mr. E. Ryan

If there is a roll-over, and that applies, it certainly meets my point to a large extent.

Mr. P. Barry

There is a roll-over, unless it is reinvested in a business or a farm.

Recommendation, by leave, withdrawn.

An Cathaoirleach

Recommendation No. 13 is consequential on recommendation No. 12 and, accordingly, they should be discussed together.

Mr. E. Ryan

I move recommendation No. 12:

In Part 1, page 47, paragraph 3 (3) (a), to delete the first line of subparagraph (i) and substitute:—

"(i) expenditure is incurred on the construction of".

Originally interest was not allowed on expenditure incurred "on the construction of any building, structure or works, being expenditure allowable under subparagraph (1) in computing a gain accruing to the company on the disposal of the building, structure or works, or of any asset comprising it". Now, as it stood originally interest was not allowed as part of the expense incurred in the construction of the building, but an amendment was accepted and, for some reason or other the amendment only included a company and did not include an individual. A company engaged in this kind of operation could claim interest against the gain in the value of the asset. My recommendation here is designed to ensure that an individual can get this concession as well as a company. That is the purpose of it and I see no reason why the concession given as a result of discussion in the Dáil should be to a company only and not to an individual.

Mr. Alexis FitzGerald

I would like to lend some support to this proposal of Senator Ryan. I cannot say I have considered it very deeply, but I can answer Senator Ryan as to why it took the form it did by way of amendment. It was an omission from the original Bill which would have been found in the UK legislation where it is in fact, limited to companies. I imagine it takes care of a great many cases. I do not know that one is opening the door for that kind of avoidance that led to the curbing of the interest availability in the case of income tax or sur tax. If the interest we are talking about here was payable by an individual it would only save him 26 per cent of it and there would be very little reason why he should incur a borrowing for that purpose. He would obviously be concerned to make a borrowing for the purposes of the venture he was engaged in as distinct from avoidance. In general, I would have thought this might have been extended. I think I am correct in understanding Senator Ryan's amendment as meaning that the effect of the amendment would be that this would be allowable for individuals as well as companies engaged in these operations.

The solid fact of the matter is that there are a great many somewhat tragic cases around the city at the moment of people who did over-borrow, taking advantage of the availability of interest for sur tax purposes. They took a view of the property market and engaged in ventures of one kind or another with interest rolling up around their ears. At the moment most of them are not even in the situation where they have got an asset which can produce a capital gain even disregarding interest. The rolling up effect of interest on a capital borrowing for the last two years is a multiplier of quite a remarkable kind.

Admittedly these people were engaging in legitimate avoidance and imprudent, I would think, activities because this type of thing is always closed-off eventually. It was unwise of them to over-stretch themselves. They were "too clever by half" and they are in serious trouble. I do not see that an alleviation or concession of this kind will help them in their difficulties, if the market gets ripe for them and they can produce a gain of any kind which they may not do for another year. I do not see this as opening the door to avoidance. Nobody is going to borrow money with a view to saving 26 per cent of the capital gains represented by the interest involved. That is my view of it.

Mr. P. Barry

The provision gives relief to the extent possible having regard to the need to preserve the anti-avoidance provision in relation to interest in the income tax code. In the case of a company, because of the requirement under the Companies Act, 1963, to prepare audited accounts, a clear distinction can be drawn between interest charged to income account and interest charged to capital account. It would not be possible to make such a distinction in relation to individuals. Accordingly, if relief in respect of interest charged to capital account were extended to individuals, the income tax anti-avoidance provisions in relation to interest could so far as individuals are concerned be circumvented to the extent that interest disallowed under these provisions could be represented as being charged to capital and, therefore, become eligible for relief at a capital gains tax rate. In the circumstances, I consider that relief in respect of interest charged to capital should be restricted to companies. This would not involve a significant degree of hardship to individuals such as those owning small amounts of property as these are catered for adequately within the £2,000 limit for relief fixed under the existing income tax anti-avoidance provisions. I think possibly the people Senator Alexis FitzGerald was talking about a minute ago will come into this category.

Mr. Alexis FitzGerald

You mean they are in companies already?

Mr. P. Barry

Yes. Even as an individual they could form themselves into companies, I am teaching my grandmother to suck eggs here when I tell Senator Alexis FitzGerald that this is a rather simple and not expensive way of doing it. The relief will, therefore, only apply in the case of a company which is not trading or has no income during the period when a building is being constructed. Where there is trading or other income the interest can be relieved under the income tax code.

Mr. E. Ryan

I take it the Minister is saying that, whatever the equity of the case, there are administrative difficulties because there might be a certain amount of avoidance if this concession was given to an individual. It seems to be a very poor argument for giving it to a company and not giving it to an individual. Exactly the same kind of operation may take place where expenditure is incurred on the construction of a building and where money has to be borrowed to do the work. Why make a distinction between a company and an individual? The argument that it might lead to certain loopholes and avoidance, if you give it to an individual and not to a company, is a very thin one. So many things have been done in this Bill to avoid a certain amount of trouble for the Revenue Commissioners, to save them the trouble of finding out what the circumstances of the individual's affairs are and whether he genuinely borrowed the money for this or for something else, this is really not an argument. It is an excuse for not doing something. The excuse is it would cause the Revenue Commissioners a certain amount of trouble. There are limits to the extent to which the Minister can press a distinction of this kind on the basis of administrative convenience, on the basis of the possibility of tax avoidance and so on. There must be some limit beyond which he should not go on that basis and this seems to me to be getting very near the limit. If it is permissible for a company to do this. If the individual is doing the same thing why should he not get the same concessions? The only argument is that it would be difficult to differentiate between interest paid by him for some other purpose and interest paid by him for this particular purpose. The Revenue Commissioners have a very big staff paid for doing this kind of thing and it is just not good enough to distinguish between a company and an individual on this basis.

The Minister said, in reply to the last recommendation I had down, that people would approach their affairs in a different way. They would never sell their property to the local authority or the State. They would sit around and wait until it was compulsorily acquired. If somebody wants to spend money on the construction of a building he can form a company and do so and get the benefit of this. It is really a very thin argument. It is pushing the question of administrative inconvenience and the possibility of loopholes and tax avoidance to an extent which is really outrageous. There must be some limit to how far the individual citizen is asked to suffer inequity merely on the basis that to do something different would cause inconvenience.

Mr. P. Barry

I think the class to whom Senator Ryan is referring are those rather big people engaged in borrowing for the construction of buildings and claiming interest on it who are not companies. The small people are catered for under this £2,000 limit. If the other class of people want it—and this applies also in the case of export sales relief—the solution to it is for individuals to form themselves into a company. They are reasonably well-off and are making an investment. The first thing for them to do is to form themselves into a company and claim this relief.

Recommendation, by leave, withdrawn.

Recommendation No. 13 not moved.

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

Mr. Alexis FitzGerald

I have very little to say on this. It is immensely complicated, as everybody who has had to try and master it understands. With regard to the words on page 47, paragraph 3, subparagraph 1 (b)—I know these have been copied intelligently from the UK legislation and, if I read the entire of 1 (b), it might enable me to underline the words about which I have questions. We are talking here about what is deductible:

The amount of any expenditure wholly and exclusively incurred on the asset by him or on his behalf for the purpose of enhancing the value of the asset...

It is the following words I question:

being expenditure reflected in the state or nature of the asset at the time of the disposal.

We are talking about the big people. Take the case of somebody who spent money on a tennis court, then got rid of the tennis court and turned it into a swimming pool; he was disallowed the cost of putting it into a tennis court because the tennis court had disappeared at the stage when he was selling the property with the swimming pool. He had incurred expenditure on his property. You could have the kind of case where a man had a patio at the end of the garden, then either got rid of it or decided to reconstruct it or put it somewhere else; from the human point of view this bit of property involved him in all this expenditure. Where is the damage in the chap being allowed to determine what was the true cost of living there or using the property before establishing what his gain was? Humanly speaking, from the point of view of the free citizen, is he not entitled to make his boob, his blunder, to spend his money and find it was a mistake and change it over to something else and not find himself disallowed from the point of view of capital gains on the expenditure? I fail to see how that could be regarded as an avoidance operation. If you make a muck of it, well it is your cost anyhow and, if it is part of your cost, it is part of your cost of being there. I know theoretically it is not the cost finally of what you are offering for sale to the public because it is not reflected in the state or nature at the time of the sale, but it is the cost of the acquisition for you and the maintenance by you of the property you are finally coming to sell. I should like if the Minister would have a look at the possibility of getting rid of this language. Are we talking about the entire of this Schedule?

An Cathaoirleach

Yes.

Mr. Alexis FitzGerald

The Schedule contains 22 paragraphs.

An Cathaoirleach

The Senator will remember that we are in Committee and he can make a single point of one part of the Schedule, have it dealt with, and then proceed to make a point on another part of the Schedule.

Mr. Alexis FitzGerald

That is what I will do.

Mr. P. Barry

In relation to the example given by Senator FitzGerald, if somebody buys a piece of land—this is outside his house, plus one acre— and suppose he buys it for £5,000 and lays out a tennis court for £1,000. Then he decides he does not like tennis but prefers swimming and he demolishes the tennis court and builds in its place a swimming pool for £3,000. He then sells the land and the swimming pool for £10,000. The £1,000 he spent on the tennis court would not be allowable as it is not reflected in the state of the land at disposal. The gain would be computed as follows: the cost of the land was £5,000 and the cost of the swimming pool was £3,000, making total expenses £8,000. He disposes of the whole lot for £10,000. He is charged on £2,000 but he is not allowed to deduct the cost of the tennis court, which he probably considers to be a loss, and thinks he should be assessed on only £1,000. He is assessed on £2,000 because the tennis court is not reflected in the state of the land when he disposes of the whole lot.

Mr. Alexis FitzGerald

I am sure if he were able to move from tennis to swimming he would be able to pay the capital gains tax.

Mr. P. Barry

I did not like to say that.

Mr. Lenihan

Par for the course.

Mr. Alexis FitzGerald

The second question is that there is reference in the Schedule to wasting assets. I have no observations on these which cannot be postponed until we deal with Schedule 3. I, therefore, reserve my right to make my points on Schedule 3.

I wondered about Part II—quoted securities. As I understand the position in regard to quoted securities, pre-1974 losses, if computed, are not allowable: In other words, you are established as having your valued securities from April, 1974. If you make a gain after that it is allowable. If you make a loss it is also allowable. If your position was that you made a substantial loss based on your date of acquisition, if it was prior to 1974, you would not be allowed this loss. Here we have just simply taken the whole structure from the UK. I wonder whether the Minister would find it convenient to have a look at the pattern of Stock Exchange prices pre-1965 and pre-1974. The pattern is very different. There were considerable gains to be made after 1965 and after 1974 there have been losses recovered to some degree, whether it is a fair thing introducing capital gains tax to disallow an actual loss being available on a realisation forced perhaps by the requirement to pay tax and so on to come currently into force.

As I understand the position, that is so. Senators will know better than I, but I should have thought that development land, for example, would have shown a steep decline from April, 1974, a rather similar pattern to the position in the case indicated by the share index thing. I can hand to the Minister the graph which has been made by the Financial Times index figures. I have marked the 1965 and 1974 figures.

Mr. P. Barry

Suppose somebody bought a share in 1970-71 for £3 and the stock market became depressed and by 6th April, 1974 it is only worth £1. If it subsequently recovers so that one share is now worth £2, the Senator is suggesting that the gain between April, 1974, to date of £1 on that share would under the Bill be charged to capital gains tax. There is a loss over the whole transaction which, in this case, would be £1 again, so that would be treated as no gain, no loss.

Mr. Alexis FitzGerald

I understood that fully, but there will be a loss over the period which is only available to the extent of the gain post-1974. It is not available as a loss overall if, for example, you made a gain. There is the odd thing which produces gains which you would be glad to get a loss to set against. I just wondered if there were not special circumstances based on the situation in 1965 which produced this. I know there is an old residue of prejudice about making part losses or making losses retrospective. I hope there is some element of this involved in it. It is a new tax and it is a bit hard if you hold two securities: you sell one at a profit and you have sold the other at a loss which is greater and you are not allowed to set off the greater loss against the profit and you pay capital gains on the gain. I should be glad to make the gain myself but I am only making the point in general. It does not seem to me that anybody could have been doing anything about this to produce these losses. These are solid facts and I cannot see any great objection in principle. It is conceded to some extent by saying that there is to be a no loss, no gain, situation overall. Why not go a little further and let the actual losses stretch back—limit the period of time, perhaps as a convenience.

Mr. P. Barry

The period of time is limited because the tax has to come in sometime, but if you were to do what Senator FitzGerald wants, to allow the losses over the whole transaction, then obviously somebody who bought the share for £1 in 1971 and it was valued at £3 in 1974 and it is now valued at £4, is only charged tax on the increase from £3 to £4. In justice, then, you should go back to when he purchased the share and charge him the whole gain from the £1 to the £4.

Question put and agreed to.

SCHEDULE 2.

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

Mr. Alexis FitzGerald

There is only one point I want to raise on this. I did not read the Dáil Official Report, but perhaps the Minister may have dealt with it already. We are going to shift over to the different basis of company taxation next year and presumably that will contain grouping relief in relation to company tax generally. I find it disturbing that we do not have grouping relief in this Schedule, the transactions between companies. There are all sorts of reasons. I do not want to gather them all together under one umbrella and ship them over to another. I am quite content to make the point, if I correctly understood what the Minister for Finance said in the Dáil, that this grouping relief which is available in income tax or corporation profits tax will be extended to capital gains tax when we get a particular piece of financial legislation on 10th July, 1976.

Mr. P. Barry

The Minister said in the Dáil that he would give group relief when he brings in the legislation, but he also said that pending the introduction of that legislation if there were cases of hardship and if those affected apply to him, the group relief would be given in the interim period, as a concession.

Question put and agreed to.

SCHEDULE 3.

Question proposed: "That Schedule 3 be Schedule 3 of the Bill."

Mr. Alexis FitzGerald

Very shortly, as I summarise the position as I understand it about leases, all sorts of different transactions arise. You can have signments of long leases—any lease over 50 years duration—and you can have a grant of a short lease out of a long lease. You can have a signment of a short lease. You can have a grant of a short lease out of a short lease.

It is not necessary for me to burden the House with the complexities of this. The principle lying behind these elaborate provisions, which daunt many men, is that you have a short lease, something less than 50 years, for which you paid, say, £10,000, and you come to sell it for, say, £12,000 at some stage—to take the simple case because there is only one point I want to make about it and there are many other things that could be said—you are not allowed the £10,000 which you paid by way of deduction in determining what is your gain. That is eroded by the application of the formulae in the Schedule on the basis that you use up some of the expenditure during your period of ownership or occupation, and if you are selling something it is not the same thing: you bought but you are selling something less than you bought. Then you should only be allowed a proportion of what you spent in acquiring it. Simply enough expressed, I think, but complicated enough to apply.

But you can have in this situation somebody who will actually sell for less than he bought and because what he acquired is eroded by the application of the formula he is subject to capital gains tax. It would be a wintry evening to be telling your client that when he has actually lost £1,000 he has made £1,000 and will have to pay £260 capital gains tax. The hopeful thing is that inflation will take care of that.

We have looked for indexation but have not got it. We should get it as it applies over all and not merely to wasting assets. I suggest to the Minister that the definition of a short lease which we have here and becomes eroded by the formulae set out in the Schedule which is a reflection of a short lease in the income tax code, where there ought to be special treatment for the premiums got under short lease, which were very often fraught with a form of concealing of rent wrapped up in the premium and shoved out of the income tax code. This ought not be the simple definition which is found in the Schedule.

I do not intend to read out a lengthy account of the statutory rights of Irish lessees. Under our law, if a person buys a house from someone who actually built it, then that person owns it, if he has been given a lease for 99 years. Then if the person wishes to sell it after 50 years' duration—this very often happens—the buyer's lawyer's first task is to find out has the man selling the house a building or proprietary interest, in other words, will the building be his. The position will be that under our law as it stands the land will belong to the person who developed it or made it available originally. Even if the duration is only of 30 or 40 years, if the person who buys it discovers there is a building or proprietary lease, he will be absolutely guaranteed statutory rights irrespective of his ability to buy out the ground rent—that is another matter—to get a new lease within the period provided by the Act, under very restricted terms as to the kind of rent which he will be required to pay for the ground.

However, when he goes off to buy something that is called a short lease under this Bill, it would be outrageous that his expenditure in acquiring that short lease—defined as a building or proprietary interest—should be eroded and reduced for the purpose of determining what his gain was, because he who bought and he who sold knew that although the thing was under a lease which had less than 50 years to run they were the owners of the house and that was all about it—somebody else owned the ground.

Talking about the general principle of the Bill in relation to wasting assets, it is probably the sale of these leases which presents a problem. Many leases described as short leases are being traded in Dublin at present. Under that description, people are paying £10,000, £15,000 and £20,000 for the interest. They will find, by the application of this Schedule, that when they come to sell the property they will not be allowed the full amount of money. Apart from inflation, assuming the monetary unit is stabilised here and now, if they sold hereafter at a profit, if it was a well-chosen place, or at a loss, the position is that their purchase price would be reduced by the application of the splendid formulae to be found, to my intellectual joy, in Schedule 3, containing four paragraphs. It is excellent justification for increasing the scale fees for solicitors, but that is not a serious point.

I suggest to the Minister that in the special situation in Ireland with regard to statutory rights of the lessee, the building or proprietary interest, the definition of short lease should be extended to include persons having an interest which is less than 50 years who have also a proprietary or building interest. Otherwise, a good deal of injustice will be done.

Mr. P. Barry

This is a very difficult technical, legal position and the Senator might prefer if we were to communicate with him afterwards or if he reintroduced it at Report Stage. I am willing to see that the Senator will be fully briefed on the thinking behind the provision. Then he could reintroduce the matter at Report Stage if he is still not satisfied with the explanation given.

Mr. Lenihan

That is very sensible.

Mr. P. Barry

I will brief Senator FitzGerald and anybody else who wants the information and if anybody is not satisfied he can refer to it at Report Stage.

Question put and agreed to.

SCHEDULE 4.

Mr. Lenihan

I move recommendation No. 14:

In page 69, before paragraph 2, to insert a new paragraph as follows:—

"2. Where—

(i) an amount of capital gains tax falls to be repaid to a taxpayer by the Revenue Commissioners, and

(ii) interest is due to the Revenue Commissioners by such taxpayer in respect of arrears of tax due by him,

he may set-off simple interest on the amount due to him under subparagraph (i) against interest due by him under subparagraph (ii).

Simple interest on an amount referred to in subparagraph (i) shall be calculated at the rate of 1.5 per cent per month or part of a month during which the amount remains unpaid."

This is a very straightforward recommendation and its purpose is quite evident. It is designed to ensure that there is a reasonable set-off as far as the taxpayer is concerned, the taxpayer who actually owes capital gains tax and who has money accuring to him—that the interest set-off be on a simple interest rate in regard to arrears. Its amount to elementary justice.

This is a reasonable recommendation and it ensures that at a certain interest rate the taxpayer will not be overburdened by the Revenue Commissioners and that there is a situation where a set-off on a specific simple interest rate exists to the benefit of the taxpayer. There is not much in from the taxpayer's point of view: the recommendation is solely motivated from the point of view of the very exceptional case which could arise from the Exchequer point of view or from the taxpayer's point of view. The recommendation is solely motivated from the point of view of the very exceptional cases which arise and where elementary justice seems to dictate that this should be done.

Mr. P. Barry

Two points in the recommendation require clarification, firstly, whether the repayment of capital gains tax is to carry a credit for interest and whether that credit may be set off against interest chargeable on any overdue tax, for instance income tax or corporation profits tax. Is that the sense that is behind it?

Mr. Lenihan

That is right.

Mr. P. Barry

Presumably what is intended is that it is immaterial whether the taxes are similar. The last words in the recommendation are "remain unpaid". What is meant here, I presume, is not repaid by the Revenue Commissioners. Is that right?

Mr. Lenihan

That is right.

Mr. P. Barry

The question of allowing interest on a repayment of tax even in this somewhat restricted form is of wider application than capital gains tax and it would not be appropriate to make a separate or special provision for it in the Capital Gains Tax Bill. The recommendation recognises this by linking it with any unpaid tax. The payment of interest on overpaid capital gains taxes will be made in the same circumstances as exist for income tax, that is, under section 419 of the Income Tax Act, 1967, on an excess payment of account, or, under section 511, on a refund of tax which had been paid with interest.

The reason for this is that for capital gains tax we will have the same assessment and collection procedures as for income tax, and capital gains tax is closely akin to income tax. Until the question has been fully examined in a wider context, it would be premature to make special provisions about refunds with interest or credit for interest in the case of capital gains tax.

Mr. Lenihan

I wonder is it premature, to use a phrase just used by the Minister. Surely there is an elementary equity principle involved here, vis-à-vis tax owing and tax to be paid. It would appear to me that the matter should merit investigation by the Minister and the Revenue Commissioners. Arrears are owed by a taxpayer and at the same time moneys are owed by the Exchequer to the taxpayer. In that type of situation there should be some sort of rationalised set-off situation. It would appear to be very elementary justice, to put it mildly, and I do not think it is premature to suggest that it might merit attention on the part of the Minister and the Revenue Commissioners.

Mr. P. Barry

Provision is made in Schedule 4, the reference is to sections 419, 550 and 551 of the Income Tax Act, in paragraph 2 for repayment with interest at 1.5 per cent per month in the same circumstances as for income tax, namely, excess payments on account pending the determination of an appeal and on a refund of tax which had been paid with interest. The reason the capital gains tax follows the income tax is that the capital gains are akin to income and the assessment and collection procedures of the two taxes are similar. We are adopting the income tax interest provisions contained in sections 419, 550 and 551 of the Income Tax Act, 1967.

Mr. Lenihan

Will the Minister look into it? I am not going to press it.

Mr. P. Barry

I certainly will look into it.

Recommendation, by leave, withdrawn.

Question proposed: "That Schedule 4 be Schedule 4 of the Bill."

Mr. Alexis FitzGerald

I have only one question. I must confess that I anticipated there might be a Ministerial amendment to deal with this. The provisions of paragraph (11) (1) (d) require that where the consideration involved is £50,000, the purchaser of shares in a company deriving value, or a greater part of value directly or indirectly from lands, minerals, or exploration or exploitation rights to deduct tax on one half of the consideration. It is a very strange obligation because if the company is not a quoted one there is no charge to tax. I made the point with regard to this on Second Reading and I thought it would have been dealt with. I do not find myself satisfied by being told that we could get a certificate from the Revenue Commissioners in relation to such transactions. I do not think it is the right way of going about it. There ought to be an amendment and if there is not an amendment we will have, apart from the problems raised by the requirements generally, a recommendation on the Report Stage to deal with it.

We can deal with the problems of how does a purchaser know, particularly if it is a quoted company, that the company is one which derives the greater part of its value from lands, minerals, exploration or exploitation rights. The poor maiden aunt does not know what she is putting her money into anyhow. It is hard on her to be required to know that "Shell" is supposed to be in petrol. It is a holding company engaged in other matters and nobody knows what the greater part of its value is derived from.

At the moment I am more concerned with the creation of a problem in relation to stock exchange transactions which seems to arise even though there is no charge to tax by virtue of the obligation under paragraph (11). It is not sufficient to be told that they are going to get a certificate because there are months such as July and August when everybody is not there all the time, the shares are sold, things have got to be delivered and so on. Are we to have an impediment of trading in the Dublin Stock Exchange, or indeed in the London Stock Exchange, if one has shares which happen to derive a greater part of their value from lands, minerals, exploration or exploitation rights in this country?

I would recommend to the Minister to consider between now and the Report Stage the adjustment of this. Let us recognise that an amendment was made at the very last part of the Report Stage in Dáil Éireann and it is understandable that in such circumstances the fact that this should only apply to non-quoted shares is just not incorporated. Let us correct it. Let us give the Seanad the enormous satisfaction of having corrected one subparagraph of a new enormous capital code.

Mr. P. Barry

I am not sure when the Report Stage is being taken on this Bill in the Seanad but I will certainly have this looked at and the Minister for Finance will be here to take it at the Report Stage. This again is a rather technical point and relates to a special group of people. Does that satisfy the Senator?

Mr. Alexis FitzGerald

Yes.

Question put and agreed to.

Title agreed to.

Bill reported without recommendation.

Report Stage ordered for Wednesday, 23rd July, 1975.

The Seanad adjourned at 4 p.m. until 3 p.m. on Tuesday, 22nd July, 1975.