The Gazette 1946-49

GAZETTE

sep

BER 1988

Tax Relief for

Borrowings by Partners

Sec t i on 36, Finance Act 1974

This article

has been reprinted

from

the

"Irish Tax Review",

Feb. 1988,

at the request

of the

Society's

Taxation

Committee.

The Insitute of Taxation in Ireland

wishes to express its thanks to the

Co n s u l t a t i ve

Comm i t t ee

Accountancy Bodies - Ireland for

permission to publish the following

agreed no te of a r r a n g eme nt

between that body and the Chief

Inspector of Taxes.

The Con s u l t a t i ve C omm i t t ee

of A c c o u n t a n cy Bod i es -

I r e l and

The Institute of Chartered

Accounts in Ireland

The Chartered Association of

Certified Accountants

The Chartered Institute of

Management Accountants

87 / 89 Pembroke Road

Dublin 4

Tel: 6 8 0 4 00

Telex: 3 0 5 67

Fax: 6 8 0 8 42

1 The Revenue have indicated to

the Taxation Committee the

terms on which claims in respect

of interest under Section 36,

Finance Act 1974, are being dealt

with. These are attached as an

Appendix to this note.

2 Discussions have taken place

between the Chief Inspector of

Taxes and the Taxation Com-

mittee on the operation of the

new terms. The purpose of this

note is to inform members of the

outcome of these discussions.

Paragraph references are to the

Appendix.

3 Pa r ag r aph (a)

The Revenue reiterated that con-

cessional treatment will be con-

tinued for borrowings deemed to

qualify up to 30 November 1985

only where tax relief in respect of

the interest is not available under

some other provisions of the

Income Tax Acts. However, the

Revenue will not insist on a claim

under Section 496 if the loan has

been used to purchase a principal

private residence and there is an

established claim under Section

36. Switching between a Section

496 claim and a Section 36 claim

will not be permitted and if a

Section 496 claim has been

made in respect of the loan or

any part of the loan, this will have

to be continued. Section 36 relief

will not be available in respect of

excess interest unallowed under

Section 496, because of the

limits imposed by that Section,

unless a claim under Section 36

has already been established.

4 Pa r ag r aph (b)

The Revenue do not accept that

overdrafts are loans for the pur-

poses of Section 36. However,

borrowings in the form of over-

drafts at 30 November 1985 will,

to the extent that they have not

since been repaid, continue to

qualify if by 31 January 1988

they are converted to term loans.

Tax relief will continue on these

term loans for a maximum of five

years.

Subject to verification, where

necessary, the overdraft figure at

30 November 1985 may be ad-

j us t ed to take a c c ount of

cheques drawn but not presented

at that date.

Where an overdraft has been

reduced since 30 November

1985, interest on the reduced

amount only can qualify for tax

relief on conversion to a term

loan. Thus, where an overdraft

has been repaid since 30

November 1985, it cannot be re-

instated now and qualify for

relief. However, when an over-

draft is substantially permanent,

save for short periods in credit

to avoid a bank surcharge, the

Revenue

wo u ld

cons i der

whether, having regard to the

source of the funds used to bring

the account into credit, a balance

of the overdraft equivalent to the

30 November 1985 balance (or

where the overdraft has been

reduced, the reduced balance)

can now be converted to a term

loan of up to five years and

qualify for relief under Section 36.

Relief in respect of interest on

t he ove r d r a ft b e t we en 30

November 1985 and 31 January

1988 w i ll be r es t r i c t ed by

reference to the level of the

overdraft (adjusted as above) at

30 November 1985.

Interest on borrowings at 30

November 1985 will have to be

adjusted for subsequent with-

drawals of capital.

5 Pa r ag r aph (d)

In response to a query from the

accountants, the Revenue said

" abuse" would have to be inter-

preted in the light of t he

Oireachtas Debates on the 1974

Finance Bill. The accountants

mentioned concern at the possi-

bility of a subjective approach to

" abuse" by the Revenue and

said a clearer indication would be

most desirable. The Revenue

considered a claim for relief for

interest on b o r r ow i n gs for

luxuries, speculation or tax

avoidance etc. to be an " abuse"

of the concessional treatment.

Pa r ag r aph (f)

The Revenue indicated the new

rules would operate on specific

loans, the funds from which are

directly invested in the partner-

ship. The new rules cannot

accommodate overdrafts.

7 Pa r ag r aph (h)

The accountants submitted that

the "2-year rule" which applies

to this paragraph (See note at

end of Appendix) should operate

on the basis of first-in first-out,

i.e. drawings in any year should

be set against the earliest

u n d r awn profits. Revenue's

app r oach is t h at d r aw i n gs

consist firstly of current profits.

They are prepared to accept,

however, that the profits of the

year before the preceding year

are drawn next and finally profits

of the preceding year. Thus,

drawings are to be set off

against undrawn profits on a

"3-1-2" basis where year 3 is the

year under review, year 2 is the

preceding year and year 1 is the

year before the preceding year.

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