The Finance Bill 2000 (open to change through early March in its passage through the D?il) is a masterpiece of disguise in its treatment of land. It appears to propose two tax rates for companies dealing in land, 24% and one of 25%. In practical effect however, there will be three rates of tax on income, one of 25% and one of 20% and one of 24%.
This miracle is achieved by providing for the two tax rates as described (25% and 24%) and then introducing a special relief which reduces the tax bill of some of those taxed at the 25% rate, by one-fifth. That puts those who enjoy the reduction in the same position as if they had been taxed at a rate of 20%.
This peculiar approach to legislating for an effective 20% corporation tax rate on income from dealing in land involves an initially puzzling feature. That is a statutory right for a taxpayer who would otherwise be taxed on his land dealings at the standard corporation tax rate of 24%, to elect to be charged to tax at the 25% rate! At first sight this is like a turkey voting for Christmas.
However the one-fifth reduction in tax liability is available only to those taxed at the 25% rate, and not to those taxed at the 24% rate. So in practice, all eligible to make the election for the higher rate will do so. This is not a Finance Bill drafted for reading by the layman!
The election to be taxed at the 25% rate (and thus get the one-fifth reduction in tax liability to bring you down to an effective 20% rate) will not apply after 31 December 2000 because for the year 2001 the standard corporation tax rate will be 20% thus giving the same result as the election would give. In 2002 the standard corporation tax rate will be 16%, thus making any option to be taxed at the 25% rate, with a one-fifth reduction, completely irrelevant for those who can avail of the standard tax rate.
Residential development
In the year 2000 all forms of profits from developing residential land by a corporate owner of that land are taxed at an effective rate of 20%. However in 2002, when the standard rate of corporation tax will drop to 16%, a distinction will be made between different types of development profits for the purpose of charging them to tax.
A developer who acquires residential land, does all the site development including putting roads, sewers etc, and fully develops the site to the point where no further construction work is required, will, in 2002, be liable to tax at the rate only 16% on the sale of the houses. If however the developer merely bought the site and put in the basic infrastructure of roads, sewers etc and then sold off the sites ready for development to other developers, he would be taxed at the rate of 20% on that part of his profits attributed to the basic land, and at the rate of 16% on the part of his profits attributable to the site development work.
This will act as a disincentive for development companies who might wish to offload some of their partly developed landbank. They will instead find it attractive to carry out the full development themselves, even if that slows up the release of houses to the market.
It is equally the case that if a development company has a large landbank, beyond its immediate requirements, from 2002 onwards it will be more attractive from a tax viewpoint for it to fully develop that landbank itself, rather than releasing part of it to other developers. Full development by the company owning the landbank will attract only a 16% corporation tax rate, whereas a disposal of the developed, or only partly developed land will attract a 20% rate.
Contractors
Not all developers own land. There are many small contracting companies which provide their services to build houses on land owned by other people. Such contractors are taxed at the standard rate of corporation tax ie currently 24%, 20% in the year 2000, and dropping to 12.5% by 1 January 2003.
In a rural area where traditionally a would-be householder buys a site and brings in a contractor to build a house on the site, it would appear that there would be a tax saving for the contractor in having the contractor purchase the site and build the house and then sell it on to the would-be householder. The contractor’s tax rate would then be 20% rather than 24% in the current year. Paradoxically in 2002 however it would have the reverse effect - the contractor’s tax rate would be 20% compared to a 16% rate had he remained a pure contractor not owning the land!
Non-residential land
Sales of fully developed non-residential land and of foreign residential land will be taxed at 24% in the year 2000, dropping to 12.5% in 2003. Sales of land which is not fully developed will attract a 25% tax rate on the land element in all years, and a standard corporation tax rate on the construction profit element (24% in the year 2000 dropping to 12.5% in 2003). However a 20% tax rate will apply to profits attributable to site development costs on residential land sold partly developed in the year 2000. Simple, isn’t it?
Too complex to work?
It is understood that the purpose of the new regime is to encourage dealing companies to release landbanks early. Against that background the myriad complexities of the new structure of rates do not seem helpful. It may be argued that the attempt to fine-tune the market is overly complex and self-defeating. A more simple approach of treating land dealing as no different from any other trade, and taxing it from 2001 onwards at the standard corporation tax rate might be more sensible.
Such is the complexity of the new system that there must be some doubts as to whether it will survive unchanged in coming years. |
Brian Thornton is a resident patner in KPMG’s Galway Office
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| Article appeared in the March 2000 issue.
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