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Saturday, 27th April 2024 |
| CAT legislation has been consolidated. At the same time the Revenue have invited suggestions as to how the tax might be simplified. The present tax is complex, uneven in its application as between different taxpayers of equal means, and absorbs large amounts of Revenue resources to yield small amounts of tax. It could be better. |
Suggestions have been asked for. Here are a few!
Economic growth
The first thing to do is to undo the damage to inward investment caused by a rule due to come into effect on 1 December 2004. That rule brings within the ambit of the tax gifts and inheritances taken from, or received by, non-domiciled persons who have been resident here for five continuous years. In other words, the average expatriate executive is being brought within the tax net.
The extension of the tax to expatriates is an invitation to evasion. If a person is in Ireland on a temporary basis, is he likely to return gifts and inheritances received by him and gifts made by him? A tax which is an invitation to evasion is a bad tax. A tax which hinders inward investment is doubly bad.
Business property relief
Business property relief is the relief which can reduce the effective rate of tax from 20p.c. to 2p.c., in relation to trading assets. The legislation is amongst the most convoluted and unintelligible in the entire tax code.
It is capable of denying or reducing relief on an arbitrary basis. To take a crude example, if 51p.c. of the assets in a company are trading assets, the shares in the company will benefit from the relief more or less pro rata to the percentage of trading assets in the company. However if the trading assets represent only 49p.c. of the assets in the company, no relief whatever is available in relation to the trading assets.
The legislation also contains traps in the form of requirements that assets should be held for a minimum period prior to being gifted, or prior to death, in order that the relief should apply to them. This can have the arbitrary result that a businessman who starts a new business in a new company may find that whereas he is entitled to business property relief on his original business, he is not entitled to that relief on his second business unless he survives for two years after making the investment.
Agricultural relief
Agricultural relief has a somewhat similar impact to business property relief in that it can reduce the tax rate from 20p.c. to 2p.c.. It does so in relation to farming assets.
The tax confines the relief to a recipient of a gift or inheritance whose assets, after taking the gift or inheritance, are predominantly agricultural. There may be some notion behind this that the relief should be confined to ‘genuine farmers’ whatever they may be in these days when farmers are urged to go into mixed enterprises.
If a donee is well advised it is possible to organize his affairs so that he qualifies for agricultural relief, even if he has never stepped into a pair of wellingtons in his life. If he is not well advised he may fail to get the relief due to some circumstance such as having the year before inherited a valuable house in Dublin!
Clawbacks
There are a number of situations where events many years after a gift or inheritance has been received that may require the donee to make further returns, and pay further tax.
One example is the claw back where a person who availed of business property relief sells the assets on which he got the relief within six years of having obtained them.
Similar claw back rules exist for agricultural relief. The only effect is to force people to hang on to agricultural assets for longer than they may wish, and to deprive potential purchasers of those assets.
A third situation where CAT has a long tail relates to ‘rights of residence’. Some gifts or inheritances are taken subject to the disadvantage that another person has claims on the item. A typical example is where a house is left to a child but subject to a right of residence for a relative. Where that occurs the value of the gift or inheritance taken is reduced to reflect the right of residence. When the right of residence ceases, typically on the death of the relative, the person is treated as taking a further gift or inheritance of the same house.
Under rules introduced in the Finance Bill 2003 there is a normal limit of four years for the raising of CAT assessments, or obtaining repayments of overpaid CAT. A sensible solution might be to confine all claw backs, whether of business property relief, agricultural relief, or gifts taken subject to a clog or liability, to a period of four years after the date on which they are taken.
Discretionary trust tax
Because CAT is payable only when people actually receive a gift or inheritance, passing an estate to a discretionary trust defers payment date. This so aroused the ire of the designers of the CAT code that severe penalties were imposed on discretionary trusts. They are subject to initial levies on assets entering them, and annual levies thereafter. The principal exception to this is where the children of the person whose estate is passed to the trust are still aged under 21 years.
Few parents would regard a child of 21 years as being sufficiently mature to directly inherit a family trading company, or large bank deposits and investments. The point is so obvious that it is incredible that any D?il could have enacted this legislation.
Interaction with income tax
When a person receives a limited interest in assets (eg a life interest in the assets of a trust) their entitlement is solely to receive the income. They may not spend the capital. The income they receive will be subjected to income tax. It seems entirely perverse that they are also subjected to capital acquisitions tax on a notional sum computed as being the value of the right to receive the future income. The taxation of limited interests where the receipts will be subject to income tax should be abolished.
Reformer
The present Minister has been one of the great reforming ministers in the area of taxation. The number of ministers who have been reforming ministers in this area is not large. No minister lasts forever. Let us hope the present minister grasps his remaining opportunity to restructure one of the oddest taxes we possess. |
Pat McDaid is a partner in KPMG.
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| Article appeared in the March 2003 issue.
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