Stephen Donnelly (Wicklow, Social Democrats) | Oireachtas source

I move amendment No. 71:

In page 30, between lines 26 and 27, to insert the following:“(3) Where an individual has rented their primary residence and is also renting another property, to apply full deductibility of rent paid on rent received, for the purpose of calculating tax liability.”.

One does not like being the last amendment after a four hour session. This amendment is about accidental landlords and I shall just take a moment to lay out the case. The Minister and I have spoken about this before when I submitted a proposal in 2014. I spoke with the Minister and his officials and they came back with various reasons why they did not feel was the way to go at the time. Most of those reasons have been dealt with or can be dealt with. The reason I am moving this amendment is because we have a situation, and we have spoken about this on a previous amendment yesterday, whereby there are many people who bought small apartments during the bubble and they went on to have kids. They may have bought a small apartment on their own or as a couple they have gone from being a one-person or a two-person household to being a four or five-person household. They find themselves trapped in that situation. It is an unintended consequence of the crash where there are a considerable number of people of a particular age group who have one of five options available to them. They are sitting in a small one or two-bed apartment, with two or three children. It is not a situation in which anyone would want to bring up their children. Option one is to sell the apartment and buy a small home, a two or three-bedroom semi detached house. They cannot do that because they cannot save the deposit, which goes back to the conversation this committee had yesterday about first-time buyers who are in the same situation. The people whose mortgages are in negative equity, I would argue, are in a worse situation in that not only are they paying the high rents that the first-time buyers have but, because of the age difference of some ten years, they tend to have more children at that time. Therefore they are also dealing with very high child care costs. Option one which is to sell the apartment and buy a two or three-bedroom semi-detached house further out is not available to most of these people because they cannot save the deposit to do this.

Option two is to keep the apartment that they have and try to get another mortgage with which to buy a two or three-bedroom house.

Given that the Central Bank's rules on how the negative equity apartment has to be dealt with, the banks essentially will not lend them any money. We do not need to get into the detail, but I am happy to do so if the Minister wants. Basically the Central Bank rules are such that virtually nobody in negative equity can keep a one or two bed apartment and rent it out and get another mortgage. The third option is to rent out the small apartment and rent a two or three bed semi-detached house somewhere else that is more appropriate to raise the children. They cannot do this because they are hit with double taxation, which is the purpose of the amendment and I will come back to it. The only other two options available are to stay in the apartment, which is what many of them are doing and I imagine we would all agree this is not what anyone wants, or to rent out the apartment and not declare the income to Revenue, which obviously is not a situation anyone wants to be in either.

What I want to try to address here is giving these people a reasonable chance. While they cannot sell the apartment and get another mortgage, they cannot save a deposit and they cannot keep the apartment and get another mortgage, what they can do is rent it out and rent themselves a three bed semi-detached in which to raise the children. This is what I am trying to achieve.

At present, the tax system does something which I believe is double taxation and is an unintended consequence. I do not believe the negative equity trap was ever envisaged by the tax rules. It applies full PRSI, USC and income tax to the rental income people in this situation receive and gives no consideration to the rent they pay out. We have a household whose net income and disposable cash have not changed. Perhaps the people receive €12,000 in rent and pay €12,000 out in rent, but they still pay a mortgage. Their income position is no different to that of a family who owns and is paying down a two or three bedroom semi-detached house, but their tax position is changed radically.

Let us assume people are taking in rent of €1,500 a month and paying rent in a new place of €1,500 a month. Let us assume €500 is used to pay down the interest on the apartment they own, so this is tax deductible. What they are left with is a taxable income coming in as rent of €1,000 a month. This, on the basis the household comprises two people who are both out working, is taxed at the marginal rate. They are hit with a tax bill of €5,000 to €6000. This is not a marginal impact, it is a very material change in a situation. Given that it is so marginal, the people are trapped. They are faced with doing one of two things. They can either break the law and hope they do not get caught by Revenue or they can stay in the apartment. Some people in this situation are renting out the apartment, moving to a three bed semi-detached house and paying the €6,000 extra in tax every year, but on that basis they are stuffed. They pay rent, child care and an additional €5,000 to €6,000 a year payment. This is the situation I am trying to avoid.

When I brought this to the Minister and his officials attention, part of the response I got was that it would be administratively very difficult to do because we would have to get valuations on whether people are in negative equity and whether this is changing on an annual basis. Perhaps they are not in negative equity any more. I agree this would be administratively very difficult to do. In the discussions I had on this with the officials two years ago, it occurred to me that from a pure labour market mobility perspective we should not need to constrain it to negative equity. Let us say somebody in the private, public or social sector who owns a house in Dublin is posted to Galway for three years. That person would rent out the house in Dublin and rent a house in Galway. As the tax law stands, this person would be hit with a €5,000 or €6,000 additional tax liability. I do not believe this is intended either.

The amendment I propose, and I appreciate it probably needs to be checked by the Department and Revenue, is targeted at these accidental landlords, is to state that we do not want them hiding from Revenue or trapped in a one bedroom apartment with three children, so we will make the move tax neutral. The way to keep it very simple is to state it applies across the board. This would mean someone who owns a home in Cork and gets a job in Donegal will not be taxed for renting out the house and living somewhere else. The way I have tried to structure the amendment is so that if someone were profiting from renting out one place and paying rent somewhere else, any profit would still be taxable income. For example, if someone rents out a house in Dublin for €1,500 and moves to Cork where the person only pays €1,000 it means that person's net income has increased by €500 a month. The amendment states this is taxable income, because the person is better off with new income coming into the household. However, if someone rents out his or her place for €1,000 and pays rent in a new place of €1,000, be that person in negative equity or posted from Galway to Cork for work for two or three years, that person will not be hit with what is a very substantial tax bill, which I believe is unintended. Not only would this help many people trapped in negative equity, it would improve labour mobility throughout the country. While I imagine there may be technical reasons the Minister cannot accept the amendment as I have drafted it, I would very much like agreement from the Minister that this is what we would implement. I would be very happy to work with the Minister and his officials between now and Report Stage to try to put something together.