Uncertainty hangs over Section 23 tax relief
23 January 2011The controversial proposal to end tax relief on Section 23 properties is likely to be scrapped in its current form, according to tax and property specialists.
However, the Green Party has insisted that the reliefs must be ended this year in some form this year and have said amendments will be introduced to the bill.
It remains to be seen how the uncertainty over Green participation in government will influence the passage of the bill.
In last Friday’s Finance Bill, finance minister Brian Lenihan said an economic impact assessment would be carried out to examine the effect of the move.
This means the tax relief changes would have been deferred for at least one year.
However, it is understood that the stipulation that any removal of reliefs cannot come into effect until the year after the review will be removed, at the Greens’ insistence.
In theory, this means the measure could come into effect this year, but in practice this still looks unlikely, as introducing such a restriction in the middle of the year would be complicated.
The move would have affected people who bought properties using Section 23 tax breaks, which allowed them to reduce their tax bill on income from investment properties.
The change was expected to achieve €60 million in extra taxes.
Ernst & Young tax partner John Heffernan said he believed the proposal could not be ‘‘binned altogether’’.
‘‘The original proposals would have pushed more investors to bankruptcy and added to the problems of the banks.
There are a number of properties in Nama whose loans are only being serviced because investors can divert earnings from Section 23 and don’t have to pay tax on these.
As time goes on, the amount earned from the tax reliefs will reduce," said Heffernan.
Martin Phelan, head of tax advisory at law firm William Fry, said the government had shelved the legislation until at least 2012, but that ‘‘it may never happen’’.
He said the legislation could be enacted in its current form, but the next government might not sign the ministerial order.
Kersten Mehl, president of the Irish Auctioneers and Valuers Institute (IAVI), said it was probably a political decision, rather than an economic one, to leave it up to the next government.
Mehl said that if the proposed measures were implemented, thousands of investors would have faced bankruptcy.
‘‘It would have led to a surge in distressed sales, an increase in the number of properties on the market and prices would have fallen further," he said.
‘‘Investors would not be able to make the repayments and that would have had a knock on effect on mortgage repayments and jobs. It would lead to a whole avalanche of properties on top of the properties already there."
Liam Clancy, chief executive of real estate firm Capel Abbey Property, said the government’s decision to carry out a full assessment showed that ‘‘the massive financial losses and implications for investors were recognised’’.
‘‘Hopefully the effects will be analysed and the next government will act in a responsible way," he said.
Monday, January 24, 2011
Uncertainty hangs over Section 23 tax relief | The Post