The Gazette 1988

sep T em BER 1988

GAZETTE

Tax Relief for Borrowings by Partners Sec t i on 36, Finance Act 1974

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. 6 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.

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

This article 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 of 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 has been reprinted 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 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

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