Property developers have been spared hundreds of millions of euro in stamp duty taxes following a decision by Minister for Finance Brian Cowen to abandon a tax change that was recommended to close a loophole.
Under a late amendment to the Finance Act in 2007, Mr Cowen created powers to tighten tax law so that developers could not reduce their stamp duty bills on land purchases by delaying taking formal ownership.
Instead, developers either contracted to purchase land without taking title, or else they obtained a licence from a landowner to build on the land without taking ownership, after a landowner had signed over power of attorney.
The loophole saved developers €250 million in stamp duty taxes alone in 2006, according to an expert's report given to Mr Cowen.
Under the Minister's original plans, developers would have had to pay the full stamp duty bill for any land sale where 25 per cent or more of the price was paid over immediately, or where leases for 35 years and more were signed between developer and landowner.
Mr Cowen rejected calls from Labour Party TD Joan Burton during 2007 to sign regulations to bring the change into force, before he eventually scrapped it altogether late last year.
The original decision had been fiercely opposed by developers, who argued that the property market was slowing dangerously, and that extra taxes would be passed on in higher charges to first-time buyers.
The Department of Finance was advised last November not to go ahead with the curbs by Goodbody consultants in a report, Study of the Potential Effects of Commencing the Section 110 Provisions of the Finance Act 2007 relating to stamp duty.
In the report, Goodbody found that "multiple layers of stamp duty are not paid by virtue of these mechanisms", though it claimed that this reduced "the cost of both bringing land to the market and of the supply of property and housing in particular".
In May 2007, Revenue Commissioners chairman Frank Daly told an Oireachtas committee that the loophole "had become common practice" among developers by 2006 and it had found 60 cases on a first trawl.
The Minister's decision not to go ahead with the curbs was disappointing but not entirely surprising, Ms Burton said last night, since Mr Cowen had initially denied that there was any loophole in the first place.
The significant tax savings for developers, she said, had occurred at a time when first-time buyers buying second-hand houses were heavily penalised, while those trading up to larger homes were also harshly treated.
In its report, Goodbody estimated that the tax curb would have raised €251 million if it had been in force during 2006.
"There is a very real prospect that house completions could fall to some 50,000 units in 2008. If this downward trend were to continue, market supply could drop below long-term housing demand," the report noted.
"The commencement of section 110 will give rise to increases in the costs of land purchase of about 10 per cent for those affected. There is also the possibility that developers will react more strongly to the stamp duty than to a general increase in land purchase costs. This is because stamp duty increases will tend to raise the equity financing requirements of developers very substantially."
