Friday 20 July 2018

Budget will need more stick than carrot to fix the housing crisis

There has been speculation that Finance Minister Paschal Donohoe might use tax levers to help alleviate the housing crisis and speed up building. Photo: Conor McCabe Photography
There has been speculation that Finance Minister Paschal Donohoe might use tax levers to help alleviate the housing crisis and speed up building. Photo: Conor McCabe Photography
Richard Curran

Richard Curran

As Budget day approaches we have had lots of speculation that Finance Minister Paschal Donohoe might use some tax levers to get more houses built more quickly.

The most commonly cited possibility is some change to the seven-year rule on capital gains tax relief for commercial property which was introduced by Michael Noonan.

This applied from December 2011 until December 2014 and meant that anybody who bought commercial property during that period would not have to pay capital gains tax on the sale of the property once they held on to it for seven years.

This could be a contributing factor in the land hoarding going on where sites bought from the likes of Nama are not being built on because the owners want to wait and sell on tax-free after 2019. Why build anything at all, when you can hang on, sell after seven years and bag the capital gain tax free. It's a very low risk but high return.

Fianna Fail has suggested that the minister could waive the seven-year rule and allow them to sell on the land now, presumably tax-free, without having to wait the seven years.

The seven years seemed like a sensible idea at the time because it prevented "vultures" from buying Irish commercial property and then flipping it on at a tax-free gain as soon as the value went up. It meant the buyer had to show some kind of longer term commitment to the asset or at least investing in it.

It has also been suggested that retrospectively changing the measure would prompt investors to run to the courts. It is hard to see how this would happen, given that it would favour the owners by allowing them to avail of the tax relief earlier should they wish.

According to the Noonan budgetary measure, investors could sell on without paying CGT after seven years, but CGT would gradually be applied on a pro-rata basis after that. In a way it teed up a massive commercial property sale in 2019, but especially in 2020 and 2021, given that more property changed hands in 2013 and 2014. If Finance Minister Paschal Donohoe does amend the law in the budget, he would have to take a carrot and stick approach. Allowing investors to sell tax-free, earlier than envisaged, would have to be accompanied with a hefty vacant site tax.

The proposed vacant site tax of 3pc has been criticised as too low and it does seem like a very small stick. A change in the budget to the CGT rules would have to be very carefully worded. The tax break applied to every piece of commercial property, from an office block, to development land, to a three-bed semi purchased to be rented out.

Landlords engaged in rental price gouging are in line for a big CGT break if they sell after seven years. Equally, it applied to all commercial property bought by Irish people or companies in the EU. It was the only way the measure could get passed in Brussels.

So someone who bought five apartments in Spain in 2013 for cash, can sell them in 2020 without paying CGT. Fast-forwarding this particular tax break to 2018 won't do much to help house building in Ireland.

Funds that bought billions of euro worth of office building and hotels, are also in line to pay zero CGT if they sell them after seven years. Allowing them to sell early and retain the tax break won't do anything for house building either.

The minister will have to confine the amendment to residential development land, because that is where the hoarding and housing crisis is. How would Brussels feel about that? Could it even be done? I don't think so.

Diageo gets its timing right with St James's Gate property plans

I wonder did a vacant site tax enter the minds of Diageo executives when they decided to press ahead with a major property development at some 12-acres of their brewery lands in the heart of Dublin City.

Before the property crash, Diageo had plans to develop a sizeable chunk of its brewery lands, but it didn't get a chance because the property market collapsed. Since then it has been waiting and biding its time before taking the plunge on proposals to develop a major new urban quarter with offices, apartments, leisure facilities and a whole lot more.

It looks as if Diageo is about to get its timing right on this one. When we think of vacant sites we tend to think of property developers or investment funds sitting on empty land waiting for its value to go up, instead of building on it. Diageo does not fit that stereotype given that it is busy brewing beer and developing a new distillery on some of this land. Nevertheless it has seen a major housing crisis develop while it has a large chunk of land in the heart of the city. If these lands were to be classed as "vacant" under any new vacant site tax, imagine what the tax bill would be given the value of the land bank.

Diageo has waited for the right time to press the button on this development and appears to want to do something genuinely creative and innovative that will make a real addition to the Liberties area. It should make a shed load of money in the process too. I'm sure they'll drink to that at James's Gate.

Apple tax saga just got worse

Ireland Inc has suffered some damage by the ruling of the European Commission that Apple Inc owes us around €13bn in back taxes.

When the ruling was announced last year, it appeared to confirm suspicions widely held abroad that the Government has facilitated massive tax avoidance and was far too cosy with big tech giants.

The Government and Apple have every right to challenge this ruling in the courts and they are in the process of doing so. But for God's sake, collect the tax first.

The European Commission is now taking Ireland to the European Court of Justice for not collecting the tax it says is owed. Yes, moves were afoot in Ireland to deal with it. Yes, it is a complicated case and it involves a lot of money. And yes, advertisements were placed recently for somebody to act as trustee or fund manager for this money in case it goes back to Apple after the tax appeal.

But the process has moved far too slowly, much slower than it would with other taxpayers who have been told to pay up. It sends out the wrong message and appears to confirm a softly softly cosy relationship between the Irish State and Apple.

The Revenue needs to collect this money as soon as possible and Apple can have it back if the appeal is successful. The Government has made a bad situation worse.

Ryanair return scares Walsh more

Ryanair's pilot rostering debacle has been very damaging for the airline. In fact the crisis has prompted questions about whether the successful Ryanair model was cracking or about to break as pilots work closer together in bargaining with management. IAG chief executive Willie Walsh doesn't see it that way at all. He told a Fine Gael fund raiser this week that he was "s****ing" himself over Ryanair.

Walsh is clearly taking the view that Ryanair could emerge leaner and stronger from the crisis and could bounce back with massive seat sales and a renewed focus.

Walsh had a great chance to gloat over Ryanair's cock-up but chose not to.

Rather than have a go, he took a different view of what lies ahead for the low-cost airline warning that it will bounce back with a vengeance.

Sunday Indo Business

Business Newsletter

Read the leading stories from the world of Business.

Also in Business