Financial Resolutions, 1995. - Financial Resolution No. 2: Income Tax.

Wednesday, 8 February 1995

Dáil Éireann Debate
Vol. 448 No. 7

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[1916] The Taoiseach: I move Financial Resolution No. 2:

(1) THAT Part XXVIII of the Income Tax Act, 1967 (No. 6 of 1967), be amended—

(a) in section 439, by the substitution of the following subsection for subsection (1A) (inserted by the Finance Act, 1979 (No. 11 of 1979):

“(1A) (a) This subsection applies to a disposition or dispositions of a kind or kinds referred to in paragraphs (ii) to (iv) of subsection (1) made, directly or indirectly, by a person being an individual (in this subsection referred to as the `disponer') except in so far as, by virtue or in consequence thereof, income is payable or applicable in a year of assessment, in the manner referred to in paragraph (iii) or (iv) of the said subsection (1), to or for the benefit of a descendant of the disponer who is permanently incapacitated by reason of mental or physical infirmity.

(b) Notwithstanding the provisions of subsection (1), in relation to a disponer, any income which—

(i) is payable or applicable in a year of assessment by virtue or in consequence of a disposition or dispositions to which this subsection applies, and

(ii) is in excess of 5 per cent. of the total income of the disponer for the year of assessment,

shall be deemed for the purposes of this Act to be the income of the disponer, if living, and not to be the income of any other person.

[1917] (c) In a case where this sub-section has effect, in relation to any disponer, for the purpose of determining, for income tax purposes, the amount of income which remains the income of persons other than the disponer for the year of assessment by virtue or in consequence of a disposition or dispositions to which this subsection applies, the aggregate of the income so remaining shall be apportioned amongst those other persons in proportion to their entitlements under such disposition or dispositions for that year.

(d) In this subsection, `descendant' means a child or a child of a child.”,

(b) in section 443—

(i) in subsection (1), including the proviso thereto (inserted by the Finance Act, 1971 (No. 23 of 1971)—

(I) by the substitution of “a child” for “a child of the settlor”, in both places where it occurs, and

(II) by the substitution of “child or children” for “child or children of the settlor”,

and

(ii) by the insertion of the following subsection after subsection (4):

“(4A) This Chapter shall not apply to any income which, by virtue or in consequence of a settlement and during the life of the settlor, is in any year of assessment paid to or for the benefit of a child, not being a child of the settlor, if such child is permanently incapacitated by reason of mental or physical infirmity.”,

(c) in section 444, other than in the definition of “property”, by the [1918] deletion of “of the settlor”, in each place where it occurs, and

(d) in section 445—

(i) by the substitution of “a child” for “a child of the settlor”, in both places where it occurs, and

(ii) by the substitution of “such child as aforesaid” for “such child as aforesaid of the settlor” in each place where it occurs.

(2) THAT the amendments to Part XXVIII of the Income Tax Act, 1967, provided for in this Resolution—

(a) shall apply in respect of every disposition and settlement (within the meaning of Chapters I and II, respectively, of Part XXVIII of the said Act) made on or after the 8th day of February, 1995, and

(b) shall also apply, as on and from the 6th day of April, 1995, in respect of every disposition and settlement (within the said meaning) which was made before the 8th day of February, 1995.

(3) IT is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the provisions of the Provisional Collection of Taxes Act, 1927 (No. 7 of 1927).

I am sure it will come as no surprise to those who are familiar with the way in which covenant tax relief has been used that the Government has come to a decision to curb its use. It has become apparent from the growth of the cost of tax relief on covenants in recent years that they are in fact being promoted actively as a tax shelter. Financial Resolution No. 2 will have the effect of restricting the cost of covenant tax relief by curbing their use as a tax planning device. It will restrict the use of covenants in two ways: first, it will abolish relief for covenants to minor children other than those in favour of incapacitated minor children; second, it will limit [1919] the total amount of tax relief that any one individual can get from the covenants provision. This is being done by extending the 5 per cent limit, which already applies to the parent-adult child covenant to all covenants made by all individuals in favour of all other individuals.

The change will apply to all new covenants taken out on or after today and to all existing covenants from 6 April next. It is estimated that these changes will yield approximately £6 million in 1995 and £10 million in a full year.

These changes have been brought in to curb the use of covenants as tax planning devices and to curb the cost of covenant tax relief. It will also help fund, as the Minister for Finance has announced, the phasing out of third level fees. I will give an example of the type of tax planning; it usually involves covenants to minor children by adults who are not their parents. From what one can judge from the data available, the average size of a covenant to nephews and nieces — strangely, not to one's own children — is well in excess of those from parents to their own adult children and the amount seems to be set just at the level to maximise the tax saving and not for any other purpose. It has also been regarded as unfair that some taxpayers can reduce their income tax bill substantially by having very large covenants. The size of covenants from parents to their adult children is limited to 5 per cent of the covenanter's total income but this is not the case with other covenants.

Finally there is one current exemption from the 5 per cent limit, that is in respect of covenants by parents to incapacitated adult children. It is proposed to allow this exemption to continue on an exceptional basis in the case of parents only in view of the long standing recognition of the role and duty of parents to care for incapacitated children. It is interesting to note that the average income of those making covenants to non-related persons is somewhere in the [1920] region of £40,000 per annum, a substantial income. If £40,000 is the average one can imagine that some of those who engage in this practice have very large incomes.

Mr. B. Ahern: Information on Bertie Ahern  Zoom on Bertie Ahern  This issue has been rerun for some considerable time and much of the data on it has been in the newspapers in recent days. Before we discuss this in detail, we wish to give the Taoiseach an opportunity to state whether he intends to take any action in regard to the Minister for State.

There has been a great deal of pressure on the Opposition parties to back up the statement made by the Ceann Comhairle at 3.50 p.m. today. I raised the issue this morning and notwithstanding what I said then I understand the Taoiseach could not acknowledge what was in the papers was fact but it is a bit more serious than that now. I am reluctant to do what is being advised in the resolutions. It would be helpful if the Taoiseach would give some indication — I do not expect him to make a statement without preparation — of when he proposes to deal with this matter.

An Ceann Comhairle: Information on Seán Treacy  Zoom on Seán Treacy  It is clear to me and to the House that the Deputy is raising quite a separate matter. The matter before the House is Financial Resolutions Nos. 2 and 3 in respect of the budget proposals.

The Taoiseach: Information on John Bruton  Zoom on John Bruton  I am quite happy to deal with the matter that Deputy Bertie Ahern has raised if it would be of assistance to the House.

An Ceann Comhairle: Information on Seán Treacy  Zoom on Seán Treacy  I rather expected that the Taoiseach when responding would deal with Financial Resolutions Nos. 2 and 3.

The Taoiseach: Information on John Bruton  Zoom on John Bruton  Yes.

An Ceann Comhairle: Information on Seán Treacy  Zoom on Seán Treacy  But it is a separate matter that has been raised by Deputy Ahern.

[1921]The Taoiseach: Information on John Bruton  Zoom on John Bruton  I will deal with Financial Resolutions Nos. 2 and 3 but I will deal first with the matter that Deputy Ahern has just raised. I appreciate the way in which it has been raised.

It has come to my attention that a press statement was issued today about noon on behalf of Deputy Phil Hogan, Minister of State at the Department of Finance. This statement contained some material on the budget. Immediately on hearing of the issuing of this statement I personally initiated inquiries and I spoke to Deputy Hogan. It appears that the statement in question was intended for release by the Minister of State, Deputy Hogan, and was prepared on the basis that it would be issued after the Minister for Finance had concluded his speech but, unfortunately, the statement which was prepared for issue at that time was issued inadvertently, unintentionally and prematurely at about noon by the Minister of State's office. It was furthermore accidentally accompanied by one page of budget material intended for limited background briefing purposes following the Minister for Finance making his Budget Statement. It is fair to say that neither document contained market sensitive information.

Although the issue of both documents was done entirely in error and without malice — there are some mitigating circumstances — I am satisfied that it was entirely inappropriate and wrong that a statement of this kind should have been issued in the way it was done. I wish to apologise without reservation to the House for what has happened. I regret the disrespect that issuing it shows to Members of the House and Deputy Hogan deeply regrets what has happened. He has conveyed his deep concern to me on the matter and I am convinced having spoken to him that it was purely accidental inadvertence in his office, for which of course as Minister of State he is responsible. I very much regret what happened and the disrespect issuing in this manner of any [1922] material concerning the budget constitutes to this House. That is all I can say about it at this stage.

Mr. O'Malley: Information on Desmond J. O'Malley  Zoom on Desmond J. O'Malley  Will the Taoiseach fire him?

The Taoiseach: Information on John Bruton  Zoom on John Bruton  No.

Mr. O'Malley: Information on Desmond J. O'Malley  Zoom on Desmond J. O'Malley  Some of your predecessors would.

Question put and agreed to.


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