I. Second Stage

The Second Stage debate of the Finance Bill 2009 took place on Tuesday 12 May and Wednesday 13 May. The Minister for Finance outlined the measures in the Bill. His comments provide insight into the motivations for some measures which have been introduced.

The following are some of the Minister's comments, together with the section to which the comments refer:

Income Levy

“The composite rate provision, applying to 2009, included in this section is intended as an anti-avoidance measure which prevents individuals who can control their income from front-loading their yearly income to avoid the higher rates.”

Restriction on Interest Relief for Rented Residential Property

“I am introducing this measure at a time when mortgage interest rates are at historical lows and the repayment burden on investors has been reduced significantly. The interest component of repayments is now less than 50% of the levels that obtained as recently as two years ago. I am aware that rents are falling after a number of years of strong growth. This fact was taken into consideration when I framed the supplementary budget and decided to reduce rather than abolish this relief.”

Dealing in Residential Development Land

“The incentive rate is being abolished in recognition of the fact that the relief has served its stated purpose of releasing development land. The measure also introduces new arrangements for dealing with losses which ensures that where profits were taxed at 20%, losses cannot be relieved at 41%. Any such loss will now be converted into a tax credit valued at 20% of the loss and can be offset sideways against income tax which would otherwise be payable on the person's other income.”

Mid-Shannon Tourism Infrastructure Scheme

“It is my understanding that a number of significant projects are in the pipeline which have not yet been submitted formally to the board for approval. A feature of the projects identified is that they are nearly all being promoted by experienced tourism operators who have the capacity to create sustainable businesses with a clear customer focus, rather than being solely driven by investors. If the existing deadline for submission of projects to the board for certification is retained, none of these projects will be able to proceed.”

Stamp Duty – Trade-In Houses

“The purpose of the scheme is to give impetus to the residential property market by freeing up the overhang of completed but unsold new property, with consequential impact on employment.”

Decrease in CAT Thresholds

“Although this is the first time that the CAT tax-free thresholds have been reduced, I consider this reduction is justified in light of recent economic conditions. The tax-free thresholds remain generous.”

General Comment on Tax Rates

“The rates of deposit interest retention tax, capital gains tax and capital acquisitions tax are all now 25%. This is part of the Government's base broadening measures and ensuring that all forms of income contribute to the fiscal correction. The increases in the taxation of capital and savings will ease the taxes which would otherwise have to be imposed on labour and consumption.”

II. Committee Stage Amendments

A list of Committee Stage Amendments became generally available on 21 May. There were only two completely new provisions to the Bill as initiated – one dealing with Betting Duty and the other dealing with the waiver of exemption in VAT. The existing provisions for dealing in residential land (for both income tax and corporation tax) and the new intangibles relief are slightly revised.

It is disappointing to note that the opportunity to amend the retrospective nature of the Income Levy has not been taken.

The substantial amendments are noted below:

Dealing in Residential Development Land

Income Tax Treatment

Two new definitions have been introduced, “adjusted income” and “adjusted profits or gains”. The purpose of the new definitions is to ensure that the restriction on the offset of such losses works consistently. The carry forward losses to the tax year 2009 and onwards from dealing in residential development land (which would have been subject to tax at 20%) can be offset against profits but are only available on a value basis.

For example, take the situation where a residential land trader has losses forward of €1m at 31 December 2008 and makes a €1m profit in 2009. The 2009 profit cannot be fully offset by the carried forward loss and is only relievable on a value basis. The tax on the profits is reduced by, in effect, a tax credit of €200k (i.e. €1m@20%).

Corporation Tax Treatment

The purpose of the amendment in relation to Corporation Tax is to ensure that losses from dealing in residential development land in one group company cannot be relieved against the total profits of another group company – the losses are available on a value basis.

Intangible Assets

The amendment in this area deals with the interaction of the new relief with the specific capital gains tax relief in section 615 of the Taxes Consolidation Act 1997. Section 615 deals with the transfer of assets in a company reconstruction or amalgamation. Previously, the intangibles relief had only dealt with the interaction with the capital gains tax group relieving provisions of section 617.

Now the provision works in the case of transfers of specified intangible assets between group companies or in situations involving company reconstructions or amalgamations by the acquiring company being able to claim capital allowances on the assets acquired where both companies jointly elect to opt out of the existing capital gains tax group relief provisions (under section 617) or the reconstruction/amalgamation provisions (under section 615).

Betting Duty

Section 53 of Finance (No. 2) Act 2008 provided for the increase in betting duty from 1% to 2% with effect from 1 May 2009.

This Committee Stage amendment provides that the Finance (No. 2) Act 2008 change is to be disregarded. The increase in the betting duty to 2% will now occur on the making of an order by the Minister.

VAT – Waiver of Exemption

The Committee Stage Amendments provide for the deemed cancellation of a waiver of exemption where the landlord sells the property without cancelling the waiver. This will result in the landlord being liable to the cancellation amount.

In addition, section 7, which relates to waiver of exemption, is to be amended to ensure no unjustified entitlement to VAT credit arises under the capital goods scheme for VAT on certain types of properties.

The following is an explanation of the use of waivers (taken from Tax Briefing No. 64):

Prior to the change in VAT on Property rules, short-term lettings were exempt from VAT. The effect of exemption was that the landlord was not liable for VAT on the rents and had no entitlement to deduct VAT incurred on the acquisition and/or development of the property being let. However, the landlord could waive his/her exemption. This meant that he/she was electing to be taxable on the rents and entitled to deduct the relevant VAT incurred. The landlord could subsequently cancel the waiver of exemption but on doing so, he/she was obliged to repay a ‘cancellation amount’. The cancellation amount represented any excess of VAT deducted over VAT payments made during the period of the waiver.

eBrief No. 33/09 advises of the above change. It notes the following:

“Upon enactment of the Finance Bill 2009 by the Oireachtas, the effect of the amendments will be to ensure that the VAT consequences of the sale, disposal or ending of a landlord's interest in a property, which was subject to a waiver of exemption, are not deferred indefinitely.”