| Development land targeted |
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The taxation of gains relating to development land is confused. Persons making gains from Development Land have been subject to more onerous taxation from as far back as1968. More recently and in the same vein, business property relief for CAT has largely been denied. It is now time for an overall review so that equitable treatment rather than an emotional response applies.
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Currently gains from development land may attract any (or more than one) of six tax rates. The profits from a trade of building on such land may be taxed at 40p.c. if they arise from an individual on the top tax rate or at 24p.c. from 1 January 2000 in the case of a company. The company rate will drop progressively to 12.5p.c. by 1 January 2003. However the profit arising to a dealer in such land by its mere holding can attract a 46p.c. tax rate for an individual or a 25p.c. tax rate for a company. In contrast, the gain from disposal of development land by an non trader can attract a 20p.c. CGT rate if it is a disposal to an unconnected person and has either residential planning permission or is zoned primarily for residential purposes, or is a disposal to a housing authority, or is outside the state. Absent these requirements, the disposal currently attracts a tax rate of 40p.c. but from 6 April 2002, a disposal by such a person of residential land will attract a 60p.c.
CGT rate.
Confused? Unfortunately it gets worse! Indexation relief (which exempts from CGT the effects of inflation) is available only in a modified way to development land. A number of CGT reliefs, such as that for principal private residence, and roll-over relief are restricted on a disposal of development land. A company is chargeable to CGT (and not corporation tax unlike on other capital disposals) on a sale of development land. As a result the dates for payment of tax and for making a tax return differ for a company on the disposal of development land as compared to any other asset, leading to an interest and penalty exposure if the correct payment or return date is overlooked.
Why is there such an obsession in the tax code with development land? Much of this can be traced to an obsolete political/economic dogma which saw taxation as a form of wealth redistribution together with a view that land appreciates through factors unrelated to skill of ownership such as scarcity, zoning, infrastructural spending etc. It may just about be credible to subject pure speculation to a higher tax rate but why is land only so treated?
Recently virtually every person in Ireland was presented with the opportunity to make a short term gain on Telecom shares. Those who sold realised a gain which was taxed at 20p.c. and this gain arose through factors unrelated to any skill of ownership.
It is accepted that currently some builders through long-term ownership of land banks are making higher profits than normal. However those profits result largely from State inactivity in granting planning permissions, and delays in servicing land and supplying infrastructural facilities even though builders contribute significantly to those costs. To a large extent these profits are illusionary as replacement land has to be purchased at current market prices.
In the same vein business property relief for CAT which reduces the value of business assets to 10p.c. of their current market value is substantially denied to persons carrying on land development trades. Again there is no good economic reason for this treatment. A developer could be forgiven for considering that he is being singled out for punishment through the tax regime for engaging in legitimate business activities but which is seen unfortunately by some as a type of anti social behaviour. Builders are unfairly berated for not building enough homes and when they do, they will suffer higher taxation.
Some of the bizarre range of CGT rates which can apply to disposal development land are explained by attempts to interfere in the housing market for the common good. A 20p.c. rate on certain residential land compared to a normal of 40p.c. is intended to encourage early disposals of development land and accelerate home building. The threat of a 60p.c. rate on such land from 2002 onwards is a stick which always accompanies a carrot. However is this 60p.c. rate really credible?. Arguably it will lead to complete freeze at all developments from that time and as such is unlikely to be long lasting.
Other taxes also seem to suffer from unusual features once they apply to land. A stamp duty rate of 1p.c. applies to shares but residential property where the value exceeds IR£500,000 attracts a 9p.c. rate (3p.c. in the UK). This rate was introduced for two reasons. Firstly to ‘cool the housing market’ and secondly to replace RPT. It seems to have achieved little in cooling the market but it has raised considerable tax for the government.
However a high stamp duty rate makes it difficult for home owners to move location. One of the objectives of current economic policy is to move jobs out of the Eastern region. It would assist if disposals of residential property linked with a change in employment location where exempted from stamp duty. Such a move would assist in the rebalancing of regional economic development.
A total overhaul of the inequitable taxation treatment of development land is overdue. Absent such an adjustment, a strong case appears to exist for builders to take a constitutional action on the grounds that they are being unfairly treated in tax legislation and no overall common good is being served by such treatment. |
Donall Gannon is a Partner in KPMG
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| Article appeared in the November 1999 issue.
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