Thursday, 19 June 1975
Dáil Eireann Debate
Mr. Colley: I apologise to the House and to the Minister. I was proposing another amendment. I was pointing out that under this section the charge in relation to a discretionary trust is defined in subsection (1) (a) as follows:
Perhaps for reasons of drafting it does not refer to property to which the individual is beneficially entitled in possession on the valuation date. There is a danger of double taxation arising here because the trust can be taxed on property which is in possession or is not in possession. If it is not in the possession of the trust it may be in the possession of an individual or a company who would be assessable. This amendment is designed to ensure that if the trust is taxed that it will be taxed only on property for which somebody else is not liable.
Minister for Lands (Mr. T.J. Fitzpatrick,: (Cavan): I regret I do not follow what Deputy Colley has in mind in this amendment. The section imposes wealth tax on the property of a discretionary trust which is defined in section 1 along the lines of what is generally understood as the meaning of that term. One of the features of these trusts is that, as has been judicially  held, the objects are not beneficially entitled to any share or interest in the trust property, either individually or as a class. In view of this lack of beneficial entitlement in the case of the discretionary trust the exclusion sought appears to be somewhat in the nature of a contradiction in terms. It might be that the Deputy has in mind a case where some individual or company has in interest in possession in a specific share of the income of capital of such a trust under an appointment while the balance of the trust funds are held on discretionary trusts and that he considers this would give rise to a double charge to tax, the specific share being liable to tax in the hands of the individual. In these circumstances, only the balance of the property in the discretionary trust would be regarded as being comprised in the discretionary trust. That is all that would be under the control of the trustees of the discretionary trust on such trusts and, therefore, liable as an entity. No question of a double charge to tax arises.
Nobody could have a beneficial interest in the property that is comprised in the discretionary trust because if they had it would not be a discretionary trust. The essence of a discretionary trust is that the property is in a vacuum and is not owned by anyone beneficially. That is as I understand a discretionary trust.
Mr. T.J. Fitzpatrick: (Cavan): As I understand it, if there is a trust consisting of £40,000 and the trustees appoint £10,000 to A, that is immediately excluded from the trust. It ceases to be subject to a discretionary trust and becomes the property of A and £30,000 is the property comprised in the discretionary trust.
Mr. Colley: If the Minister can assure me that in no circumstances can any property be deemed to be comprised in the trust and, at the same time, be deemed to be part of the taxable wealth of any individual or company, I will be happy with that.
This is a matter to which I referred on Second Stage. It arises in a few places but I have only referred to it once in an amendment because obviously the same thing applies and, if the point I am making is valid, the Minister will deal with it in the other places.
The point I am at is that, in circumstances in which the shares may not be equal in fact, they are deemed to be in equal shares in the section. I do not quite know why this should be so. It seems clear to me that in practice cases can be covered by the provision in paragraph (c) in which the shares are not equal and, nevertheless, according to paragraph (c) they will be deemed to be held in  equal shares, or the income payable in equal shares. I do not know what the reason is for that. Perhaps the Minister can explain to me why it should be so.
Mr. T.J. Fitzpatrick: (Cavan): I am having some difficulty in seeing the point in these amendments to section 5. The purpose of the subsections as drafted is to provide a measure of relief in the case of certain discretionary trusts by treating the objects of such trusts as being beneficially entitled in possession to the trust funds, rather than treating the trusts themselves as entities.
Subsection (2) deals with discretionary trusts where (1) the sole objects are a child or children of a marriage either with or without his or their parent or parents and (2) a minor child is living on the valuation date. Subsection (2) (c), in the context of such a trust, deals with the situation where, on the valuation date, neither spouse is an object of the trust or both spouses are deceased. In such a case, the trust funds are deemed to be taxable wealth of the minor children of the marriage in equal shares.
Subsection (3) deals with discretionary trusts which exist on a valuation date for the exclusive benefit of one or both parties to a marriage, or one or more named individuals for special reasons; age, incapacity, improvidence, and so on. In such a case, the trust funds are deemed to be taxable wealth of such person, or persons if more than one person, in equal shares. To exclude in equal shares, as suggested, in each of the amendments would render it impossible to pinpoint the beneficial entitlement in possession to the trust property. Legally, neither the individual objects, as such, nor the class of objects as a whole, have any beneficial interest in the property comprised in the discretionary trust.
The subsections as drafted meet this difficulty by deeming the trust funds to be the taxable wealth of the relevant objects of the trust in equal shares. The result is that a share of the trust funds is related to each individual and he then gets the benefit  of the appropriate threshold to which as an individual he is entitled. It is arguable that the amendment would have the effect of treating each individual as being entitled to the entire trust fund and, presumably, that is not what is intended.
There is a maxim in equity, equality is equity. The subsections as drafted meet, I submit, this admirable concept in that they should in the majority of cases have the effect of mitigating the tax by dividing the taxable property between the individuals, thus lessening the possibility of any individual reaching the taxable thresholds. If in the trust there is more than one object and no appointment is made, none of the objects have any beneficial interest in it. The reasonable thing is to deem them entitled to it in equal shares.
Mr. T.J. Fitzpatrick: (Cavan): No. In a discretionary trust the funds, as I understand it, are in a vacuum. If one person was entitled to 90 per cent and another to 10 per cent, it would no longer be a discretionary trust. The shares would be vested as to 90 per cent in one and 10 per cent in the other.
Mr. T.J. Fitzpatrick: (Cavan): It is only where no appointment has been made and the property is not belonging to anybody that we are bringing in this provision to deem all the objects equally entitled.
Mr. T.J. Fitzpatrick: (Cavan): The trustees could apply the income any way they liked for the benefit of minor children according to the requirements of the minor children and the corpus of the fund would still be in a vacuum until there was an appointment.
Mr. Colley: That is one possible reading. Another possible reading is that, under one of the provisions we dealt with earlier, the payment of the income in certain proportions would be deemed to constitute ownership of the relevant slice of the capital.
Mr. T.J. Fitzpatrick: (Cavan): The whole essence of this is that there is a discretion vested in the trustees. They are the bosses. I do not put myself forward as a lawyer skilled in trusts. “I leave such and such property to my trustees with power to apply the income of the capital of the trust fund in such manner as they think fit for the benefit of my infant children”. You get a statement like that and that entitles the trustees to give all of the income from the fund to one child because he required it. The education of the other children could be completed. When it came to dividing up the capital of the fund they might divide it in an entirely different way. Discretion is the thing.
Mr. T.J. Fitzpatrick: (Cavan): No, it is in ease of the object. I could not agree with the Deputy in his argument that we are doing anything unusual or hard to comprehend. Nobody is entitled to the trust fund or its income until an appointment is made by the trustees. If the trustees have not discretion, it is not a discretionary trust and we are not dealing with it. If I leave my property to my wife until my eldest child is 21 and then to my eldest child, that is not a discretionary trust. That is creating a  limited interest. But if I leave all my property to my trustees in trust to apply the income thereof to my wife and children during their lives in such way as they think fit and, on the death of my wife, to apply the capital to my children in such shares as they in their absolute discretion think fit, the trustees have complete discretion and that is a full-blown discretionary trust.
Mr. T.J. Fitzpatrick: (Cavan): No. It is very likely that this is all the wealth that the objects of the trust will have and we are giving each of them the benefit of a threshold and only crediting each of them with one-third of the fund. If we were to do otherwise each of them might be deemed to be entitled to the entire trust fund and that would not be in ease of the objects of the trust.
Mr. Colley: I agree with that. On the other hand the Minister is artificially creating a situation in which the Revenue Commissioners deem each of the objects entitled to a certain amount which they may never get and assess them for tax on wealth they may never get?
Mr. T.J. Fitzpatrick: (Cavan): No, I am conferring a relief on them. Most trusts would also contain the added provision “and in default of appointment, to my children in equal shares”. We assume that is there until the discretion is exercised.
Mr. T.J. Fitzpatrick: (Cavan): What is the alternative? What does the Deputy suggest? He merely cuts out “equal shares” and leaves it there. If nothing were said, even if “in equal shares” went out, the reasonable interpretation of the clause would be to hold them entitled to equal shares. If Deputy Colley excludes “in equal shares” what does he propose?
Mr. Colley: The onus is on the Minister to justify this. He proposes to impose tax on somebody in respect of property which that person may never have. The Minister should justify that rather than ask me what I would suggest.
Mr. T.J. Fitzpatrick: (Cavan): I am justifying it to the hilt and I am inserting a subsection in ease of the objects of the trust, and I am not imposing any burden on them, because other sections of the Bill would enable them to recover any wealth tax they have to pay under this provision from the corpus of the trust fund.
Mr. Esmonde: “and section 3 shall, in lieu of subsection (1), apply to such property...” Those people can go back to the subsection that we have gone through on the basis of a like limited interest and once back to that position, they have a right over against the corpus of the trust.
Mr. Colley: No. I am not at all satisfied with the provision the Minister  has made, even with the amendments he has introduced, in regard to the position of objects of a discretionary trust, their position in relation to tax assessed on them and their right to recover from the corpus of the fund. The Minister may think that is a satisfactory position. I do not think so. I think you can find somebody who is a theoretical object of a discretionary trust being assessed and billed for wealth tax and, perhaps, forced to pay it without having the right to one penny capital in the trust and then being put to a great deal of trouble and difficulty in trying to recover the money.
Mr. Colley: That is the position as it arises, and the Minister had to introduce amendments providing machinery to do this, for raising money and charging it on the fund. That is very well in theory, but if the Minister were a possible object under one of these funds and found himself assessed for wealth tax when he had not a penny of the trust fund under his control and had to go to the trouble of forcing the raising of money from the trust fund and charging it in order to get the money back to pay the Revenue Commissioners, he would not think it a very pleasant position or that the Minister and the Oireachtas were justified in placing somebody in that position.
Mr. Colley: I should much prefer— although I recognise the difficulties— that the tax payable on the property comprised in the trust should be attributed to the individuals concerned. In the case of the discretionary trust it should be assessed on and chargeable to the trustees.
Mr. Colley: That raises the question of whether there should be a threshold in the case of discretionary  trusts. If the Minister were to accept a situation in the amendment which is coming up later, in other words give the opportunity to people to transfer, if they wish, the property comprised in the discretionary trust to individuals or companies and after the given date had expired, assess the discretionary trust through the trustees he could avoid all this imaginary allocation between possible objects who may get nothing under the trust fund.
Mr. Colley: That is one view and it is true, but it is not the whole view. The other view is that you may be imposing on somebody who does not get one penny, liability for the whole paraphernalia of one of the Minister's later amendments.
Mr. T.J. Fitzpatrick: (Cavan): The Deputy knows that most discretionary trusts are set up to avail of a legal way of avoiding taxation. Here we propose to impose a wealth tax on discretionary trusts but we have realised that there are cases where it is unreasonable to do that without a threshold and this section deals with those hardship cases—to give the ordinary threshold to what I would describe as a family discretionary trust. If we were not to do that the discretionary trust would be taxed on every penny in it.
Mr. T.J. Fitzpatrick: (Cavan): I am satisfied there is adequate machinery in the Bill to enable the object of the trust to recover the amount of the tax paid from the corpus of the discretionary trust.
Mr. Colley: What does the Minister think of the proposal that a discretionary trust would be treated in the way I have suggested—to give a reasonable period for people to adjust and after that to tax the discretionary trust through the trustees?
Mr. T.J. Fitzpatrick: (Cavan): The Deputy will be dealing with that in the next amendment which proposes that in the case of a person who dismantles a discretionary trust before 4th April next the property shall be deemed as of 5th April last to be the property of the person who got it. I presume that is only a once and for all operation in regard to trusts that have been created or set up before the Bill was introduced. These discretionary trusts will presumably be ongoing operations.
Mr. T.J. Fitzpatrick: (Cavan): I am applying the old phrase that we are all accustomed to in wills “and in default of appointment to the objects in equal shares”. That is the position as on the valuation date—the appointment has not been made, the trustees were dead on that date or the person who was entitled to appoint disappeared on that date permanently and all the objects would be paid equally. I am implying that that is to be the position on the valuation date.
Major de Valera: The only difficulty is that when you make a notional appointment, or an appointment in default of appointment, you apportion. Deputy Colley is probably right that one of the objects would be omitted. Generally following up that approach, I am prompted to ask the question if what the Minister is doing is to make this apportionment in default of appointment and thereafter applying two things: he gives the threshold benefit to each of the appointees and there is a provision by which somebody for whom the benefit fails can recover against the trust fund.
Major de Valera: Why not do it as Deputy Colley suggested? Why not go in bulk for the trust fund and having regard to the number of objects, correspondingly apply the reliefs jointly? There may be a perfectly good answer to that. Supposing there are A, B and C, the objects of a discretionary trust. We have dealt with a case where the trust will fail as far as C is concerned, but if A, B and C, as the Minister has said, are to have the benefit of one-third and to have assessment on one-third each, of the trust fund, following on that there will be certain threshold reliefs, and why not add the thirds together to make one and add the reliefs that A, B and C would have and lump that too? You would then have a mass subtraction instead of a local one. The Minister may say there would be difficulty where there is artificial use of discretionary trusts, but it seems to be a very straightforward affair whereas the Minister spoke about cases of genuine family settlements. The Minister may say I am leaving the road wide open for evasion.
Major de Valera: Then why not do it? It would avoid the necessity for the recovery action, say in the case of C. What I would be afraid of is that the point I am making would leave the road open to evasion.
Mr. T.J. Fitzpatrick: (Cavan): I am quite convinced that there is nothing unreasonable in what I am doing. It is in ease of the objects of the trust, in ease of the genuine discretionary trust under consideration.
Major de Valera: The Minister intrigued me when he said my proposal was equivalent to his. If my proposal were to stand up it would have the merits of the Minister's proposal and obviate the recovery procedure later envisaged. I have a fear that there is something deeper here, and perhaps the Minister may be able to enlighten me on it.
Mr. T.J. Fitzpatrick: (Cavan): I would not think there would be any necessity for the objects of the trust to go hunting to recover. Surely the trustees would behave in a reasonable way and surely they would refund the amount.
Mr. P. Belton: Surely, in a discretionary trust where two, three or four trustees are appointed, they run it. There may be a letter from a person who has passed on or has gone some place saying that is roughly the way he wants it. He collects all the wealth tax, passes it on and takes the thresholds. Those who are the object of the trust have no say in stopping him doing that because they are minors. It is the trustees who have the right to do anything they like with it.
There is a relieving provision where the trust is for the benefit of one or more named individuals for the reason only that such individual, or all such individuals, is or are, because of age, incapacity or improvidence, incapable of managing his or their affairs. The object of the amendment is to delete the word “only”. The reason I am putting the amendment forward is that it seems to me, on a strict interpretation, the inclusion of this word could defeat the whole object of the paragraphs. The object here is to give relief where there is a trust for the benefit of people who, as it says, “because of age, incapacity or improvidence are incapable of managing their affairs”.
Surely it is possible to say that the reason for the trust is age, when we are dealing with a child who cannot look after himself. Another reason is that the settlor has natural love and affection for the child. I am just taking one case. The other cases mentioned make it perhaps more obvious. In that simple case the father creates a discretionary trust in favour of his infant children. He makes them objects of the trust. One of the reasons he does it is because they are infant children and cannot look after themselves. Another reason could be the natural love  and affection he bears them or there could be a number of other reasons why he would do it. A strict interpretation of this with the word “only” in it might preclude the benefit of the paragraph in the cases where it is intended to benefit.
I am satisfied that once that element comes into it those people qualify for the relief. I do not believe the exclusion of the word “only” will do any harm to the subsection. I feel it may clarify the position and I am, accordingly, prepared to accept the amendment.
In page 7, subsection (3) (b), line 24, after “affairs” to add “or for any other analogous reason which, in the opinion of the Commissioners, is sufficient to justify the benefits conferred by this subsection”.
This is a matter to which I referred at a previous stage. I understood the Minister for Finance to indicate that he was sympathetic to the idea involved in it and would probably bring in an amendment but there does not seem to be one from him to this effect. It may be that the amendment I have drafted does not meet the Minister's requirements but I hope he will be able to agree with the objective. I pointed out in the previous discussion to the Minister for Finance that this provision in paragraph (b) was excellent as far as it went but that there were other cases not covered by it which were equally deserving of consideration.
I gave as one example, although by no means an exclusive one, of the  kind of things that need to be covered, the situation in which parents made a daughter of theirs, who was a deserted wife, the object of a discretionary trust. They did it that way deliberately so that the husband could not get his hands on the money. I said that kind of situation did not appear to be covered in this paragraph. There are a number of other possible ones I could develop but I do not want to delay the House doing that. I suggested in this amendment that discretion should be given to the Revenue Commissioners to decide if it was a genuine case. I have suggested to add to the subsection “or for any other analogous reason”. That is designed, as far as possible, to try to tie it in with what the Minister is doing in the paragraph. This is very wide but the kind of cases the subsection is trying to cover are very wide and it is hard to spell it out with any degree of clarity. If anything is to be done about it it has to be a fairly wide provision. There may be objections to the actual wording from the Minister's point of view but I hope the aim of the amendment will commend itself to him.
(b) one or more named individuals, for the reason only that such individual, or all such individiuals, is or are, because of age, incapacity or improvidence, incapable of managing his or their affairs,
I believe that is wide enough for practically any situation I can think of. Deputy Colley, in putting forward the amendment, gives one example, that is the deserted wife. The deserted wife is covered in paragraph (a) because even if she is deserted she is still one of the parties to a marriage. I cannot  think of any situation which would arise that is not covered by paragraph (b).
I am not closing my mind completely to this and I do not want to prolong a discussion on it. I believe the Deputy would have great difficulty in getting some type of case, which he says is analogous, but which is not covered by paragraph (b) if he accepts the deserted wife's situation is covered by paragraph (a).
Mr. Colley: If (a) covers one or both parties to any marriage the Minister is correct, although that makes it much wider than it should be. However, it is not my business to point that out at this stage. My fertile imagination suggests to me now as a possible example, the case of a daughter of reasonably wealthy parents who may be living with a ne'er-do-well. Would the Minister fit that one into (b)?
Deputy Colley expressed the opinion during the course of the Second Stage debate that the words “person” and “persons” in lines 27 and 28, respectively, of subsection (3) were ambiguous. While it is arguable that there is, in the general context of the subsection, no ambiguity, it is conceded that the drafting might be improved. The subsection allows property comprised in a discretionary trust which exists for the benefit of the parties to a marriage or of certain named individuals to be treated as property to which the parties or the named individuals are beneficially entitled in possession. The property in this type of discretionary trust may thus get the benefit of the threshold reliefs to which the individual is entitled. In order that the subsection may apply, no other person must have benefited from the trust.
The word “person” first occurs in the subsection in line 25. It again occurs in lines 27 and 28. Taken literally the “person aforesaid” in line 27 refers to “person” in line 25. This would make nonsense of the subsection as it would result, for example, in deeming the property in a discretionary trust which was set up for a named individual to be property to which “no other person benefited from the trust” was entitled. The first amendment substitutes “party or individual” for “person” in line 27. The result is that the property comprised in the trust is deemed to be property to which “the party or individual aforesaid” is beneficially entitled in possession. Both in context and literally “the party or individual aforesaid” is a party or individual referred to in paragraphs (a) and (b) of the subsection.
Mr. Colley: This is an improvement and I am glad the Minister accepted  the suggestion I made. It clarifies the meaning of the subsection. It may be that by making the amendment suggested the Minister for Finance has been saved a great deal of trouble. One person's interpretation of the subsection as it stood was that if a discretionary trust was set up, the objects of which included the infant children of the Minister for Finance, the Minister for Finance might find himself liable for their wealth tax. It is unlikely, but this amendment will ensure that it does not happen.
“(4) Where it is shown to the satisfaction of the Commissioners that property comprised in a discretionary trust on the 5th April, 1975 was transferred to an individual on or before the 4th April, 1976 that property shall be deemed to be property to which the individual was entitled in possession on the 5th April, 1975 and section 3 shall, in lieu of subsection (1), apply to such property”.
The object here is on foot of the Government's undertaking in the White Paper. People who had arranged their affairs in accordance with the law should, if there is going to be a substantial change in the law as there will be, be given the opportunity to rearrange their affairs in accordance with the new law. The amendment proposes to provide that where it is shown to the satisfaction of the Commissioners that property comprised in a discretionary trust on 5th April, 1975, was transferred to an individual on or before 4th April,  1976, that property should be deemed to be property to which the individual was entitled in possession on 5th April, 1975 and thereby covered by section 3.
In practice that means that in respect of property as comprised in a discretionary trust on valuation this year the persons concerned would have the option of having it transferred to individuals and if it is shown that it has been transferred that they would be assessed on that property, with the benefit of the thresholds.
An Leas-Cheann Comhairle: The Chair would like to draw the attention of the House to the fact that amendment No. 6 (a) would seem to be cognate. Perhaps it could be discussed with amendment No. 5 (b).
The effect would be that the individuals to whom the property was transferred would be assessed for wealth tax on that property but would get the benefit of the thresholds. This should operate in respect of their position as at the valuation date this year. I agree that it is not a satisfactory situation but it is reasonable. It would be reasonable in normal circumstances, without any undertaking by the Government, but in view of what was stated in the White Paper this, or some similar provision, is necessary if the Government are to honour the White Paper.
Mr. T.J. Fitzpatrick: (Cavan): I do not want to get into an argument about the White Paper but I am told that any assurance given in the White Paper was not in connection with wealth tax, it was in connection with inheritance tax. No assurance  was given that what the Deputy suggests would be done.
As I said, I am not prepared to accept these amendments. They are concerned with two assessable persons —the discretionary trust (section 5) and the private non-trading company (section 6) which are taxable as entities. The purpose of the amendments is to exclude from the charge to tax on the 5th April last discretionary trusts and private non-trading companies which are wound up before the 5th April next year. The amendments are not acceptable for the following reasons: The matter is academic for those persons who are interested in such entities and whose wealth exceeds £100,000—the property would be liable at 1 per cent whether or not it was comprised in the entity.
Mr. T.J. Fitzpatrick: (Cavan): The amendments therefore affect only those cases where the individuals interested in these entities would not themselves be liable to tax. In such cases not all persons will be willing or in a position, for a variety of reasons, to wind up the trusts or companies. Those persons would be discriminated against by the amendments. Those persons for whom the amendments cater would suffer no great hardship by having to pay wealth tax on one occasion only at 1 per cent from 5th April, 1975.
 The majority of these entities were set up for fiscal reasons. Their promoters could hardly have expected that tax laws would remain immutable and that, where any change arose that might affect them, they should be given time to reassess the position. If that argument were conceded similar provisions would have to be included in many Finance Acts.
Mr. Colley: I want to suggest to the Minister that this is different in kind from closing a gap in a Finance Act. This is a major change and it is not just contained in this Bill but in the other Bills. From the point of view of the people who are involved in this, you have to look at the effect of the whole lot of the legislation. While I have no innate sympathy for persons who so arrange their affairs through discretionary trusts or private non-trading companies that they would avoid liability for death duties, nevertheless, such persons have rights. If they have acted in accordance with the law they should not be treated as criminals.
There are a number of cases of discretionary trusts and private non-trading companies set up for perfectly good and valid reasons other than anti-avoidance, and no consideration has been given here to them. The practical effect of what is being done is that all of these people become liable for wealth tax on the first £1 of wealth. Therefore, when we are talking about 1 per cent we are talking about a great deal more money than in the case of people who may be much more wealthy than they are but who, as individuals or married couples, have a threshold laid down in the Bill.
I think it is a wrong principle to say: “These people acted in accordance with the law but we are going to catch them out. We will give them no time to adjust their affairs in accordance with the new law”—the new law about which nobody knows how the final package will come out. There is an element of sharp practice involved in treatment of this kind, particularly  in the case of either discretionary trust or private non-trading companies which were set up for reasons other than avoidance.
I shall not run away from the situation of those which were set up for avoidance. I might not applaud them and the Minister might not applaud them, but if they are lawful they are entitled to be treated as lawful operations and those involved are entitled to demand treatment at least as good as that given to criminals, and I do not think one could attempt to perpetrate this kind of thing on criminals and get away with it. I do not think it is an unreasonable proposition that having determined that the law is going to be different, substantially different, in this way, the Minister should give people the option of arranging their affairs in accordance with that law and, as in cases where the property that is involved here is transferred to individuals and those individuals become liable to wealth tax but with the benefit of thresholds. In particular where cases exist—and the Minister knows such cases exist—of the setting up of discretionary trusts and private non-trading companies for good reasons other than anti-avoidance, is it not unreasonable to treat them in this way, to tax them for wealth tax on the first £1 of their assets because you will not allow them the opportunity to change arrangements in accordance with the new law?
Mr. Colley: Sometimes they can be connected with business reasons in a partnership situation. It would not be a family situation as is envisaged in the provision we have been debating in relation to the discretionary trust.
Mr. Colley: Not necessarily. There are discretionary powers set up in respect of which the whole income has been paid out year after year. In such cases there is no saving at all as regards death duties. Income tax would have been paid on the amounts paid out. The fact that income is paid out renders them liable to death duties, so there is no anti-avoidance in it, but done for good reasons in relation to the circumstances——
Mr. Esmonde: It is not quite correct to say they are definitely liable for death duties because it would depend on who was paid income from the discretionary trust in the five years before the death of one of the beneficiaries. They still avoid death duties.
Mr. Colley: There are many discretionary trusts which were set up and which effectively have provided an income for a widow, and the income has been paid out each year to the widow of the settlor. In that case what will happen here is that there will be a liability for wealth tax from the first £1 of wealth. I do not think that is a reasonable proposition.
Mr. T.J. Fitzpatrick: (Cavan): It is agreed that most of these discretionary trusts are set up in order to deal with death duties, income tax, et cetera. Some of them may find it possible to unscramble or wind up; others may not and, if we were to allow in this Bill those who can wind up to do so, we would be discriminating against those who cannot.
Deputy Colley referred to the White Paper. The White Paper was published in February of last year. It gave fair warning in regard to the treatment of discretionary trusts and private non-trading companies at page 45 where it says:
In special circumstances it may be found essential to treat certain entities as taxable units, e.g., private non-trading companies and discretionary trusts with, perhaps, the elimination of any initial exclusion applicable to individuals. The wealth of the family—that is, husband, wife, and minor children— would be added together to form one taxable unit.
There was fair warning that, when the legislation was introduced, it would contain these provisions and the evidence is that the warning was heeded by quite a few people because private non-trading companies have been wound up, quite a few of them, in the last 12 months, and that has added to the number of liquidations: I know there were quite a few genuine liquidations but, when we get statistics, these are also thrown in. It will not be any severe hardship on anyone to pay 1 per cent wealth tax for one year. Those who can unscramble will have no option but to do so and to pay it for the duration of the discretionary trust.
Mr. Colley: I do not know if I have an amendment down, but I intended to urge specific legal provision here, if they are tied by law, that they  be given statutory permission to unscramble where there is a difficulty.
Mr. T.J. Fitzpatrick: (Cavan): A great deal of consideration was given to the point made by Deputy Colley on the Second Stage and to the amendment he has put down. I am sorry I cannot accept it for the reasons I have given.
Mr. Colley: Does the Minister think it is reasonable to say that there was notice given in the White Paper having regard to the fact that such notice as was given in the White Paper related to an outline of approach, some of which has been changed? In one particular instance there was a fundamental change. Contrary to what was in the White Paper, there is now provision whereby certain transactions can be liable both to gift tax and capital gains tax, although the White Paper specifically said this would not happen. I give this as an example to show that people really cannot know what is likely to occur until the law is enacted. As a general proposition, would the Minister not accept that people should be entitled to know the law and, accordingly, could not and should not be expected to act on the basis of the White Paper, or even the published Bill, with all the possibilities of change involved? Is it not a bad principle to say that people should have to operate a kind of Russian roulette, which is, in fact, what the Minister is saying, and take their chance on how the legislation will turn out? I particularly want to urge the Minister that some provision should be made in the kind of case  I mentioned where there is clearly no effort at avoidance involved at all. I would suggest that, even in the case where there was avoidance, those involved were acting in accordance with the law and are entitled at least to know what the new law is going to be and arrange their affairs accordingly. I am particularly concerned about the kind of case I mentioned in which there was clearly no avoidance involved, the kind of case where there is a discretionary trust under which an income has been paid out year by year to the widow of the settlor. There are many such trusts in existence. In these cases there is no avoidance. Income tax is paid and there is liability for death duties. There is no avoidance. Why should such people be penalised in this way?
Mr. Esmonde: On that point, Deputy Colley's Finance Act made inroads in bringing discretionary trusts within the death duty code; this is on the basis of the average income taken over a period of years of any particular beneficiary. It would be a bit naïve to take it that all the income was paid to the widow in circumstances like that. What was done was that, by virtue of the fact there were other named beneficiaries, who were not likely to die, much younger people, it was paid to them and some was given over to the widow. That was quite standard practice to get over the difficulty raised by the Deputy's Bill when he was Minister for Finance. This is the  way it was managed and one did avoid death duties.
Mr. Colley: Presumably because the intention was, in general, that the widow would get the benefit of the total income and, after her death, there would be other objects but that it could be that at an early stage, perhaps after the husband's death, there might have been some of the children who might have been nearly grown up and there was a possibility that it might be necessary to pay money to them—presumably that was the reason but, in practice, the money was paid to the widow all the time.
Mr. Colley: What the Deputy must not forget is there have been many cases of discretionary trusts in which there was no question of trying to avoid duty. There have been such for reasons related to the particular cases. Taking these cases, which were not avoiding death duties, how do you justify taxing them on the first £1 of the wealth? How do you justify taxing them on the first £1 of wealth? I am taking that as the best case I can put forward but I am not running away from the other cases. I want to repeat it. Even where it was done for the purpose of avoiding duty, I may  not have sympathy for the people concerned, but they have rights. Their basic right is to be able to arrange their affairs in accordance with law. The Minister, I suggest, is taking away that right in this Bill, unless he accepts something on the lines of this amendment.
Mr. Colley: Is it not true that such cases are not covered in relation to private non-trading companies? The Minister said earlier that we would take the two amendments together because he was taking the same line.
Mr. T.J. Fitzpatrick: (Cavan): That is true. They are covered here in the discretionary trusts. Deputy Colley seeks very strongly to make the case that people are entitled to warning. That is not so. The essence of taxation law is a certain element of surprise. You do not give advance warnings to all and sundry that the laws are going to be changed and you are going to impose a tax whether it be on beer or——
Mr. T.J. Fitzpatrick: (Cavan): Yes, a general kind of notice. If Deputy Colley cast his mind back to 1965—I do not know who was Minister for Finance then—but the Finance Act of that year dealt with discretionary trusts and took away some of the benefits they had secured for themselves with regard to estate duties without any notice. I know the Opposition are right to make these points, but it is my business to point  out from this side of the House, that there are precedents for this, and that is the way our fiscal laws have operated. We change them where we think they should be changed, and we do not feel it necessary to give advance warning, although in this case a general warning was given.
Mr. Colley: Surely the Minister agrees that the situation is somewhat different in this sense. We are not merely changing, as was done in 1965, the conditions applicable for death duty purposes to discretionary trusts. We are changing the conditions in so far as we are imposing a wealth tax in certain circumstances but, at the same time, we are imposing a capital acquisitions tax, particularly relating to inheritance tax and to some extent gift tax, and this. They are all being imposed on the property in lieu of death duties. The imposition being made and the terms of the law under which it is being done is not clear to anybody and cannot be clear yet because the laws are not enacted. Surely that is a different situation from the one in which existing forms of tax, such as death duties, are changed, as can happen under any tax from time to time.
At the moment no taxpayer is in a position to know what the law is. He is, at least, entitled to this. He should be able so to arrange his affairs as to comply with the law and hopefully, from his point of view, to his best advantage. He cannot do that now because the law is in a state of flux and he does not know what it will be.
Mr. T.J. Fitzpatrick: (Cavan): I do not think any useful purpose will be served by discussing this all night. Deputy Colley makes the case that these discretionary trusts are entitled to an opportunity of changing their structure to avail of the new law. In 1963-64 discretionary trusts were set up to deal with the law, as it then stood, for the purpose of death duties. If Deputy Colley's argument is correct, they are entitled to assume that they knew the law then and that law would remain that way indefinitely.
 One of Deputy Colley's predecessors introduced a provision in the 1965 Finance Act which brought into the estate duty net the wealth comprised in these discretionary trusts and took a rake-off of, maybe, 50 per cent. All we are doing here is saying that all discretionary trusts and private non-trading companies affected, whether they can be unscrambled or not, will be liable to this tax for one year. The ones that cannot unscramble are liable to wealth tax at 1 per cent. Deputy Colley has plenty of courage to put forward his argument in view of the precedent established in 1965. I am sure many other Finance Acts, besides that of 1965, caught people, without notice.
Mr. Colley: I will not prolong this unnecessarily. First, I do not accept for one moment that what the Minister is talking about is a precedent for this situation. I have already expressed that view and I just want to put it on the record again. I want to put two questions to the Minister. The first deals with discretionary trusts. In a case where it can be shown that there was no avoidance of death duty, does he think it reasonable to treat that case in such a way as to apply 1 per cent wealth tax on the first £1 and every £1 above it?
Mr. T.J. Fitzpatrick: (Cavan):——and that it would be the intention of the Revenue Commissioners to extend the reliefs given in those subsections to genuine cases. I do not think it is an extremely severe hardship to impose a tax of 1 per cent right across the board, to ensure that all these trusts and non-trading companies will be treated equally for the first year—those who cannot get out of the net as well as those who can.
Mr. Colley: I do not want to pursue that here about treating them equally. That is an inverted argument  from the Revenue Commissioners. My second question is this: in the case of discretionary trusts he has provided reasonable provision for dealing with genuine cases but, as far as I can see, he has not provided that in relation to a private non-trading company. How does he suggest that that case should be dealt with? If it is entitled to consideration as a discretionary trust, why not as a private non-trading company?
Mr. Esmonde: I find it very difficult to understand how a private non-trading company would come into the circumstances which the Deputy describes. It is usually in conjunction with a trust. It is usual for the purpose of avoiding the succession. It has very often been used for the purpose of avoiding surtax and income tax. Beyond that I do not see the relevance of it.
Mr. Colley: May I suggest that it is hardly unknown to Deputy Esmonde that there might be a private non-trading company in which the bulk of the shares were held by or for the benefit of the kind of person we are giving relief to under a discretionary trust, say, minor children? If the shares are held for the benefit of minor children, as the simple example, unless something is done on the lines of what is done in the discretionary trust, is not the benefit sought to be conferred under this relief provision going to be denied in the case of the private non-trading company?
Mr. Esmonde: All I can say is that I was always averse to using the non-trading company for tax avoidance schemes. I was aware that it was used for those purposes, but it was mainly an accountant's invention, an easy method of managing a tax avoidance scheme. I always used the discretionary trust, and I do not know of a non-trading company being used in the circumstances suggested  by Deputy Colley, other than where there is a tax planning operation.
Mr. Colley: If there are private non-trading companies which are operated for the benefit of the kind of people we have been relieving in regard to a discretionary trust—if there are such, whether the Deputy knows of them or not, should not they get the same treatment and if not, why not?
Major de Valera: Could one put it this way to Deputy Esmonde? I do concede that both a discretionary trust and a non-trading company applied the device to avoid the succession, for the purpose of defeating the liability to tax, but even if that were the case, what case is there when you have a new tax like the capital gains tax for penalising people? There is a little confusion in our thinking here. I would go a lot of the way possibly with Deputy Esmonde if he were talking in terms of the capital acquisitions tax, if he were talking of capturing what was envisaged when the device was set up. I am facing frankly the case where the device was used, and incidentally I am not quite sure that the Deputy is correct in blaming the accountants for the principal opertion of the device. I think the principal progenitor of this scheme did not belong to that profession.
Major de Valera: That is an aside, however. Personally I have never liked the non-trading company device. It appeared to me to savour too much of a direct tax avoidance measure, but let us remember that it was the avoidance of succession taxation that was involved here, and I would not therefore cavil with the Minister on the corresponding provisions in the Capital Acquisitions Tax Bill, but here you have a wealth tax and this is a new tax. I think it savours of penalty for past performance in attaching the incidence to a non-trading company and not giving the reliefs given here to a discretionary trust.
The thinking here is that there may be genuine discretionary trusts so we have made allowances for them in sections 2 and 3, but it seems to be assumed, and Deputy Esmonde has practically said so, that in the case of the non-trading company, there were no merits. We are here on the double amendment and I think it confuses things to do a double amendment in a matter such as this, but we are doing it. In the case of the non-trading companies it savours very much of a penalty. As Deputy Colley says, it may not have been very laudable from the point of view of the community as a whole to think of such a device and I have no doubt that were I a member of the revenue gathering organisation I would go out to get my hands on the operator. That is one thing, and by all means where the evaded tax in question can be captured, this is all right, but to make my net point to the Minister, this is a new tax. To give the benefits given to the discretionary trust, whatever the reasons may be, and deny them to non-trading companies suggests very strongly that we are imposing a penalty for something that was perfectly lawful and on that ground I would ask the Minister if he would not treat them pari passu.
Mr. T.J. Fitzpatrick: (Cavan): There is a difference here between the discretionary trust and the private non-trading company to this extent, that we have given reliefs to the discretionary trust in genuine cases and  I am asked now to go on and do something similar for the private non-trading company.
Mr. T.J. Fitzpatrick: (Cavan): Yes. First of all, it is not likely that you will have the same type of beneficiary, for want of a better word, in the private non-trading company as in the discretionary trust. The discretionary trust is much more of a family matter, where you are dealing with a wife and children and people who are improvident and for other analogous reasons.
Mr. T.J. Fitzpatrick: (Cavan): It is possible but not likely. The difference is that it may be impossible to unscramble the discretionary trust but there is no trouble about winding up a private non-trading company. It can be done immediately.
Mr. T.J. Fitzpatrick: (Cavan): All that is at stake is 1 per cent for one year in the case of the private non-trading company. In the case of the discretionary trust that could not be wound up, there might be payment of wealth tax involved for many years. I want to have uniformity as far as possible between all discretionary trusts and private non-trading companies. There is very little involved for the genuine private non-trading company and I understand they are more likely to be pure tax avoidance entities than the other. When I put this to the opposite side earlier this evening I understood the vast majority of discretionary trusts and private non-trading companies were tax avoidance operations. I do not want to go back to the 1965 Act because I do not think it will lead to an earlier disposal of this business. I am satisfied there are precedents in many Finance Acts for what we are doing. We gave  a general warning in the White Paper and, to my knowledge, it has been availed of.
Major de Valera: I take the Minister's point about the possibility of winding up and I admit the cogency of his argument. At the moment I cannot think how it could be defeated in the same way as coping with a discretionary trust might be. Nevertheless, I do not go the whole way with the Minister in saying that the objects could not be the same. Where there are minors or those who would be entitled to threshold benefits where a non-trading company is concerned I would urge the Minister to consider them.
Most of the non-trading companies were formed for the avoidance of tax but I repeat this is a new tax and we should not impose a penalty. There were at least one or two cases where there was a positive reason for adopting this device rather than a settlement or where the immediate reason was a settlement but the advantages of using the company device caused it to be used in a perfectly legal way. As a practitioner, the Minister will realise that if a case is referred to him which he refers to counsel and if the latter points out the alternatives and finally advises that one of the alternatives is chosen, that choice will be made. That sequence of events was not altogether unknown to private non-trading companies. I knew of one instance in a casual way where something like that happened. The case I am thinking of was so long ago that there would not be any beneficiary but there would be a surviving spouse.
The Minister may be right that the majority of cases were for the purpose of tax avoidance but he should provide equal provision unless that would mean facilitating future tax avoidance. No matter how bloody-minded we may feel that someone has got away with murder for many years in the past, it is not proper justice if we consider only such cases. Unless there is a danger of tax avoidance in the future and considering that the object under a non-trading company may be a surviving spouse who would be entitled  to threshold relief, I do not see why that should not be allowed to continue. The provisions will continue to operate to prevent tax avoidance in the future. If there is an argument about this that is all right, but if it is merely to get our own back for what happened in the past that would be a very reprehensible approach for the House to adopt. I am not saying it would be deliberate because many of these things are subconscious. The reason I mentioned it is to bring these matters to the level of consciousness so that we may do the right thing. The Minister has been very co-operative and helpful and we thank him for accepting amendments. We wish to reciprocate. I urge on the Minister to consider the point I have made, without putting him to the trouble of replying. We can trust the Minister and his advisers to administer justice and equity.
Mr. Colley: I accept the point the Minister has made about the possibility of winding up. I assume that where the shares were held in trust for the kind of objects we want to assist that the proceeds of the winding up would form part of the trust property. In the circumstances I am prepared to withdraw the amendment.
Major de Valera: The difficulty about a section to which a large number of amendments have been proposed is that it is a boring anti-climax to come back and consider the section on the whole. At the same time the fragmentary considerations of points may cause one to lose sight of some broader aspect of the section.
Subsection (1) (a) captures all property in the State. That does not cause any difficulty. I wonder how parts of paragraph (b) of subsection (1) will be operated. It is visualised that one could have a corpus that is completely extra-territorial, that is that the body of the trust is completely situated outside the State. That is a possibility. There is no great difficulty if the settlor is ordinarily resident in the State on that date. There is no more difficulty about that than there is in getting after any other person for his extra-territorial property. It is somewhat similar where the living settlor has disposed of the trust. One could get after it if the trust was created by will and the settlor was domiciled in the State. Suppose a discretionary trust was established outside the State?
Major de Valera: I quite agree. One can have a discretionary trust and the objects receive a discretionary appointed income in the State. How does one get after wealth tax there? How does one measure wealth tax? The Minister has neatly parried me by referring me to section 14. If the answer is to be found there I will not delay the House any longer. It is a question which definitely arises.
Mr. T.J. Fitzpatrick: (Cavan): If the objects are here it is likely that the trustees will be here. It is likely but it is not essential. The trustees would be liable and the objects would be liable.
Mr. T.J. Fitzpatrick: (Cavan): There are people in the State who should be paying income tax, who never heard of the inspector of taxes or have never come in contact with him. They will go merrily along until we hear about them and then he will get after them.
Major de Valera: I am raising this as a matter of curiosity. I could see an ingenious parent arranging something like this. Something has been suggested to me but I do not think I will blow it. The beneficiaries would not know where their cheque was coming from. It would be drawn on a bank outside.
Mr. Esmonde: If the Deputy does not know where it is coming from how does he know it is in a discretionary trust? Therefore, he puts himself back to section 3 and it might be treated as an annuity or limited interest.
Major de Valera: The essence of a discretionary trust is that it can be irregular and so disguised as to be well short of falling within the description of a limited interest or an annuity. I am exercising my imagination for the purposes of the section.
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