Terence Flanagan (Dublin North East, Independent)
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298. To ask the Minister for Finance further to Parliamentary Question No. 282 of 12 May 2015, his further views on tax on rental income (details supplied); and if he will make a statement on the matter. [20389/15]

Michael Noonan (Limerick City, Fine Gael)
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As I advised the Deputy in my reply to Parliamentary Question No. 282 of 12 May 2015, the extent to which expenses incurred in earning rental income are deductible in computing taxable rents is specified in section 97(2) of the Taxes Consolidation Act (TCA) 1997.

This question relates, inter alia, to the restriction on the deductibility of interest and the non-deductibility of local property tax (LPT) in computing taxable income from residential property. In the case of interest accruing on or after 7 April 2009 (in so far as it would otherwise be allowable) the deduction available to the landlord is limited to 75% of such interest. A deduction is not allowed in respect of LPT as it is not one of the specified deductions provided for in section 97(2) of the TCA.

The Deputy suggests that the restriction, or non-deductibility, of both interest and LPT can result in taxable rental profits arising in situations where a comparison of rents and all rent-related expenditure can result in an apparent loss. This conclusion appears to be based on an assumption that in the case of income from investment assets (expected to produce income and capital gains) the taxable amount should inherently be computed after allowing a deduction for all costs incurred in earning that income. However, there is no such general principle in the tax code, and there are many examples of situations where interest deductibility is not allowed in the context of investment assets. For example, the funding costs of quoted shares are not generally deductible against dividend income from those shares. The Deputy should also note that while the deductions specified in section 97(2) have generally included interest on borrowed money to purchase, improve or repair the rented premises, that entitlement has been removed or restricted on a number of occasions. An example was the interest restriction imposed between 1998 and 2002 in respect of certain rented residential property borrowings (following the Bacon reports).

I am further advised by the Revenue Commissioners that LPT is an annual self-assessed tax on residential properties in the State and is administered by them in accordance with the Finance (Local Property Tax) 2012. LPT is not a rate levied by a local authority and is, therefore, not deductible from gross rents under section 97(2) of the TCA. As a consequence of the abolition of local authority rates on domestic property in the late 1970s the reference to "any rate levied by a local authority" in section 97(2) of the TCA is now only relevant to commercial property. 

On the question of whether LPT should be a deductible expense in calculating a landlord's taxable rental income, as I have stated in response to previous Parliamentary Questions on the matter, this was considered in the Thornhill Report, which recommended that LPT should be deductible. The report, however, recognised the considerable pressures on the public finances and the need to bridge the gap between expenditure and revenue, and, for this reason, suggested that consideration be given to phasing in deductibility over a period of years. The report also considered that it was for Government, having regard to the prevailing budgetary situation, to decide on the timespan for phasing-in deductibility and on what percentage of LPT to allow as a deduction from gross rents for tax purposes. The Government has agreed in principle to accept this recommendation but has not, as yet, decided on the manner in which this will happen or its timing.