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A number of budgetary measures have detailed aspects which seem either unwise or unreasonable. Hopefully these will have been corrected before the Minister publishes the first draft of his Finance Bill, probably on February 6.
Stamp duty

The Minister has introduced a stamp duty rate of 9 per cent, which is likely to be the effective rate on most commercial transactions which are subject to stamp duty. These include transfers of land and buildings, of goodwill, of debts, patents and trade marks, to name but a few, when effected by a document.

The new rate of 9 per cent is a 50 per cent increase on the 6 per cent rate that generally would previously have applied. A 50 per cent increase in tax rates is, by any standards, a draconian increase.

The new rates will not apply where a purchaser has a binding contract in place before 4 December and where the conveyance is executed before 1 March 2003. In some cases the time period permitted between contract and conveyance will be as little as three months. There can be valid commercial reasons why a closing cannot occur in such a time frame eg problems with title, obligations to get vacant possession, necessity to arrange finance, and the mutual convenience of the parties regarding transfer of the assets.

It seems harsh not to grant a more realistic time frame in which to close existing contracts, on the basis of the 6 per cent rate.

Stamp duty on the purchase of assets is a dead cost. The property must grow in value by an equivalent amount before the purchaser can even break even. That has always been the case with stamp duty but the gap between purchase cost (being purchase price, professional fees, and stamp duty) and market value on a resale has now been widened to a point where it must be an obstacle to transactions. It may also make it more difficult to give adequate security to a financial institution lending on the security of property to be acquired in a transaction.

Paper for paper

The Minister ended the deferral of capital gains tax which was available where shares were disposed of for debentures. He did so with effect to disposals on or after budget day.

The existing deferral was available only in relation to a transaction where tax avoidance was not one of the main purposes of the transaction. It is difficult therefore to see that there were any tax avoidance reasons why the Minister should have changed a long-standing tax relief, widely availed of, with so little notice. There were many transactions in negotiation but not yet at the point of unconditional contract.

Some transactions may have been the subject matter of contract prior to budget day and yet still be affected by the denial of the deferral. If the contract was conditional, the date of disposal would be regarded as occurring when the condition is fulfilled rather than when the contract was entered into.

Equity would suggest that the Minister should permit the old rules to apply not only to unconditional contracts entered into before budget day, but also at least to conditional contracts entered into prior to that date. The Minister should also consider not applying the new rules to transactions where there was evidence that they were approaching contract stage on budget date. Such evidence might take the form of the fact that Revenue clearances had been obtained for the transaction in advance of budget date.

CGT payment date

Prior to the budget CGT fell to be paid on 31 October in the year following the year in which the gain was realised by entering into an unconditional contract for its disposal (usually). In some cases the payment date would have been ten months after the date of disposal, and in other instances up to 22 months after that date. The Minister need not be criticised for shortening the gap between disposal and payment of tax on the disposal.

Where the Minister’s proposals are open to question is the manner in which he shortened the gap. He has provided for a payment of capital gains tax on 31 October in a year in respect of disposals (ie unconditional contracts signed) up to 30 September in that year, and a further payment of capital gains tax on 31 January in the following year in relation to disposals in the last three months of the year.

Capital gains tax is a tax paid by individuals. That alone must put a question mark over the wisdom of introducing two payment dates in place of one, and of introducing payment dates which follow so closely on the signing of a contract.

The payment dates can easily arise before any cash has passed hands on the transaction giving rise to the gain. In some instances the payment date for the tax is only one month after the date of signing of the contract.
Where the asset being disposed of is land and buildings, the cash consideration may not change hands for two or three months after the date of the contract. In such a case the taxpayer who has disposed of the asset is left to finance the tax payment without having the proceeds of sale to hand.

Where assets have been obtained from relatives, or where they were held on 5 April 1974, or in a variety of other circumstances, the base cost of the asset (ie the cost which is deductible in computing a capital gain) is not the sum paid to acquire the asset but rather its open market value at the date of acquisition, or, where relevant, on 5 April 1974. It is common experience that it can take several weeks to obtain a reliable valuation of property for this purpose and it is not uncommon for that valuation to be contested by the Revenue subsequently. A valuation is also required where the disposal is to a relative or other connected party. It is therefore foreseeable that the payment date for tax which some individuals will face will arise before they will be in possession of the necessary information to compute that tax.

The payment dates selected by the Minister are simply ‘too tight’. It is more reasonable that payment should be determined by reference to the closing date of a transaction rather than by reference to the contract date as is the present case. As the proposal stands at present, some taxpayers will predictably find themselves without the information needed to compute their tax, and without the cash needed to pay it.

There was also a missed opportunity here for the Minister. Companies are subject to corporation tax both on their income and on their capital gains with one exception. That exception relates to a disposal of development land. If a company makes a disposal of development land it will not only have to pay corporation tax on two occasions in relation to each accounting period, but will additionally have to make a separate payment (on a third occasion) of capital gains tax. This complexity (which yields the Minister nothing) could have been avoided by making all company gains subject to corporation tax.

Exit charge

The Minister has imposed a new charge to capital gains tax which broadly will affect persons who leave the State for less than six consecutive years, and who while abroad dispose of shares held at the date of their departure.

The proposal appears to be an attempt to tax individuals in those circumstances without affording them the benefit of the protection of double tax agreements, where we have a double tax agreement with the state to which they transferred residence. The Minister’s proposal technically seems to achieve this by deeming the disposal (after the event) to have occurred prior to departure from the state.

The proposal also appears to open the prospect of double taxation. The Minister made no reference to giving a credit against Irish tax for any tax suffered by the individual in another stat, in relation to the same gain. This is a matter which the Minister should clarify.

Ending indexation

When CGT was originally introduced in 1975, it was rightly criticised at the time by the late Mr George Colley for taxing gains that were created purely by inflation and which had no economic substance. Mr Colley (in 1978, when Minister for Finance) later had the pleasure of amending the legislation to bring in relief for indexation.

If inflation were indeed as much a part of history as the facts just related, the Minister’s proposal might not be unreasonable. But inflation during the period the Minister has been in office amounts to approximately 20 per cent. If an asset acquired on 1 January 2003 for E100 were subsequently disposed of for E120, having suffered a similar rate of inflation, the Minister would seek capital gains tax of E4 under his budget proposal. The unfortunate taxpayer would pay tax on a transaction that in real terms yielded no gain whatever.

There are other proposals of the Minister to which inflation is relevant. He has extended to employee occupational pension scheme contributions the same cap as he introduced in 1999 for self-employed persons principally. That cap has not been adjusted for inflation since it was introduced. Had it been adjusted in line with the increase in national average earnings over the period (29 per cent) the E250,000 cap would now be a cap of E330,000.

The minister has not fully adjusted tax credits (allowances are they were known in the past) thus increasing the effective burden of income tax including on the lower paid. It is almost as if the Minister is looking to inflation to deliver his tax revenues to him.

Capital allowances

The Minister’s extension of the tax life of plant from five years to eight years reverses a decision made in 2000 to reduce the tax life from seven years to five years. The move will create severe problems for leasing of short life assets in Ireland. The effect will be that the leasing companies will be paying tax on what is the equivalent of capital repayments rather than income over much of the life of the lease.

Since the proposal is to introduce the new tax life by reference to the date payments in relation to plant are made, it may also mean that a single item of plant may attract two different rates of capital allowances on different parts of the payment for the plant. That is not much of a stab at simplification.

The Minister is a reasonable man. It is to be hoped that where the rough edges of his budget proposals can be smoothed over in the Finance Bill without significant loss of revenues, he will take the appropriate action.

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