Taxation Incentives

for the Construction Needs of

Third Level Education

Name: Leonard O'Sullivan

Id No.: 9929894

Course: Batchelor of Business Studies

Major: Accounting & Finance

Minor: Financial Services

Supervisor: Mr Mel Kilkenny

This project has been submitted in part fulfilment of the Bachelor of Business Studies
Degree at the University of Limerick 2003.
 Dedication

~ To My Parents ~

For their Encouragement

And Financial Support

Throughout University

i
 Acknowledgements

~ I would like to thank ~

 Mel Kilkenny for his guidance

 Niall Murphy of Plassey Campus Centre for answering all of

my questions

 Louise Caffrey of PWC for all her assistance

 KPMG for sponsoring the Institute of Taxation’s Taxfind

service for the University of Limerick

 Catherine for proof-reading

ii
 Table of Contents

Page

Acknowledgements ii

Table of Contents iii

Introduction 1

Part I: Section 50 Student Accommodation Relief

Chapter 1: Operation of Section 50

1.1 Objective of Tax Incentive ……………………………………. 4

1.2 How the Relief Operates ……………………………………… 4
1.3 Common Structure ……………………………………………. 5
1.4 Amendments to the Tax Legislation ………………………….. 7
1.5 Development Guidelines ……………………………………… 8

Chapter 2: Calculation of Section 50 Relief

2.1 Stamp Duty ……………………………………………………. 10

2.2 Interest Deductibility ………………………………………….. 11
2.3 Treatment of VAT …………………………………………….. 12
2.4 Sample Calculation ……………………………………………. 13

Chapter 3: Evaluation of Section 50

3.1 Case Study of Dromroe Village ……………………………….. 15

3.2 The Success of the Tax Incentive ……………………………… 16
3.3 Criticisms of the Relief ………………………………………… 19

Part II: Section 843 Third Level Buildings Relief

Chapter 4: Operation of Section 843

4.1 Objective of Tax Incentive …………………………………….. 22

4.2 How Capital Allowances Operate ……………………………... 22
4.3 How the Relief Operates ………………………………………. 23

iii
4.4 Development Guidelines ………………………………………. 25

Chapter 5: Calculation of Section 843 Relief

5.1 Funding of the Development ………………………………….. 26

5.2 Leasing of the Building ……………………………………….. 27
5.3 Repurchase of the Building ……………………………………. 28
5.4 Substance of the Transaction ………………………………….. 28
5.5 Stamp Duty ……………………………………………………. 29

Chapter 6: Evaluation of Section 843

6.1 Case Study of MSSi Building …………………………………. 30

6.2 The Success of the Tax Incentive ……………………………... 31
6.3 Criticisms of the Relief ………………………………………... 32

Conclusion 34

Methodology 36

Bibliography 38

Appendices 40

iv
 Introduction

It has long been a policy of various Irish governments to use tax incentives to address

perceived needs in particular areas. These incentives often encourage construction of

new property and re-development of existing property. These reliefs tend to be quite

successful, and we have seen increased investment in dilapidated urban areas and

underdeveloped rural areas. From 1997 onwards, the government has extended the

use of tax incentives to promote construction for the benefit of third level educational

institutions.

The construction needs of third level education would traditionally have been funded

directly by the state. This new direction was part of a growing government policy that

the private sector could be utilised more effectively. We have already seen the

contracting out of government construction work to the private sector, and the use of

public-private partnerships.

Section 843 relief was introduced in 1997, offering attractive capital allowances to

investors who constructed buildings, which they would let to third level institutions.

Section 50 relief was then introduced in 1998, offering a 100% expense deduction for

the construction, refurbishment or conversion of student accommodation for a third

level institution. These reliefs are now due to expire on 31 December 2004.

In this project, I will evaluate the merits of using taxation incentives to meet the

construction needs of third level educational institutions. I will explain how the two

types of property tax incentives, capital allowances and expense deductions, operate.

1
I will examine the tax legislation, and explain how an investor avails of these tax

reliefs. I will also perform a case study of a development for both tax reliefs.

2
 Part I
Section 50 Student
Accommodation Relief

Dromroe Village in the University of Limerick

3
 Chapter 1 – Operation of Section 50

4.3 Objective of Tax Incentive

A tax relief for the construction of student accommodation was introduced in 1999.

The reason for this was to increase the supply of student-purpose accommodation in

the vicinity of third level colleges, without direct government spending. During the

1990s the number of Irish students increased dramatically due to changing Irish

demographics and the introduction of free tuition fees. Students were increasingly

being forced to seek accommodation in the more costly private rental sector. This

was contributing to the already high demand in the Irish property market.

At the time, the Union of Students in Ireland (USI) called for the government to invest

directly in on-campus accommodation1. Instead a tax relief was introduced to solve

the student accommodation shortage by means of the private sector, without public

spending. Section 50 of the Finance Act 1999 introduced a tax deduction for the

construction, refurbishment or conversion cost of student accommodation. This relief

was afterwards known as the ‘Section 50’ relief.

1
Campus.ie Article 2001

4
4.3 How the Relief Operates

For income tax purposes, Irish rental income is computed separately 2. An individual

can reduce his taxable rental income by deducting rental expenses. Rental expenses

include insurance, repairs and letting agents’ fees. The more rental expenses an

investor has, the less income tax he will pay on his rental income. Typically

construction, conversion or refurbishment expenditure on a property is considered a

capital investment, and cannot be deducted from rental income.

Of the two main types of property tax incentives, Section 50 is an expense deduction

relief. This relief allows investors to deduct qualifying construction, conversion and

refurbishment expenditure as an expense against all Irish rental income. This tax

break is very similar to other residential property tax breaks, which are termed

‘Section 23’ tax breaks.

The amount of taxable rental income of an investor can be reduced by the amount of

his expenditure on qualifying student accommodation. Any excess tax deduction can

be carried forward to subsequent tax years. The tax deduction is available in the year

that the property is first let, not from when the property is purchased. This tax relief is

very beneficial to an investor who already has significant Irish rental income. An

investor with enough taxable Irish rental income may be able to use 100% of his

Section 50 deduction in Year 1.

2
Schedule E Case V

5
4.3 Common Structure

The investor claiming the relief can either be the developer who constructed the

student accommodation, or a person who has purchased newly constructed student

accommodation units from the developer. In the latter scenario, the purchaser is

deemed to have incurred the expenditure for Section 50 purposes. When selling

newly constructed units, the developer can charge a premium price in respect of the

tax relief available on the units.

In order to avoid a clawback of the relief, the investor must continue to lease the

accommodation to students for 10 years. It is common for investors to arrange to sell

the student accommodation to the university once the 10-year holding period has

passed. Universities will generally only be interested in buying accommodation

which is on-campus or very near the campus. Generally, only larger colleges will be

interested in buying back the student accommodation.

After the 10 years, the student accommodation is less valuable to investors, as the tax

relief will be exhausted and the rents are usually lower than that of the private rental

sector. Depending on the development, it may be feasible for an investor to let the

accommodation to the private sector. It is possible that the universities will be in a

position to negotiate a favourable price from the investors once the tax relief has

expired. The investor will have sheltered a significant portion of his rental income

from tax, and will have no further use for the property.

Where the investor has constructed the student accommodation and intends to avail of

the Section 50 relief, it is possible for him to establish a separate company to maintain

and let the units. The use of such a management company is permitted in availing of

6
the Section 50 relief3. It is also possible for the investor to lease the units directly to

the educational institution, who in turn will manage the units and lease them to the

students. The educational institution will often act as agent between the investor and

the tenants. Such an arrangement will remove all management burdens from the

investor, while he receives an annual lease payment and the lucrative tax relief.

4.3 Amendments to the Tax Legislation

The original legislation was contained in Part 11A (s380A to s380F) of the Taxes

Consolidation Act (TCA) 1997. However, Section 24 of the Finance Act 2002

gathered together all of the different residential property tax incentives, including

student accommodation, into one piece of legislation. A new Chapter 11 (s372AK –

s372AV) was added to TCA 1997 to provide for these tax breaks.

The 2002 Finance Act also extended the student accommodation relief from its

original expiry date of 31 March 2003. The qualifying period was extended to 30

September 2005, where a planning application has been received by 30 September

2003. The initial up-take of this relief was slower than anticipated, and it was hoped

that this extension would lead to more construction of student-purpose

accommodation. The Finance Act 2003 has brought forward the deadline for student

accommodation relief to 31 December 2004. This brings the deadline in line with the

other property tax incentives.

3
The Revenue have indicated that they do not want companies accruing profits at lower corporation tax

rates. They are satisfied with ‘wash-through’ situations. This is outside the guidelines, so investor

should seek confirmation from the Revenue.

7
The Finance Bill 2003 has recently introduced new measures to close off a tax

avoidance loophole in the operation of the Section 50 relief. These measures apply to

expenditure on or after 18th July 2002, unless a contract was in place before then.

They state that the investor must take out any borrowings used, and that rent must

only be paid to the investor. Also management and lettings fees must not exceed 15%

of the gross rent.

4.3 Development Guidelines

The Legislation provides that the Minister for Education and Science 4 may issue the

‘relevant guidelines’ for this relief. These guidelines 5 are available on the website of

the Department of Education and Science6, and must be met by any developer wishing

to claim the Section 50 relief. The educational institution involved must certify the

proposed development, and the developer is required to engage in consultation with

the educational institution. A Certificate of Reasonable Cost must be provided to the

Revenue to ensure all conversion and refurbishment costs incurred are reasonable. A

Certificate of Cost must be provided for all new construction.

The property must be located within ‘qualifying areas’ to be eligible for the relief. It

can be located within the campus area of the educational institution. The property can

also be within an 8 km radius of the main campus, subject to the area being approved

by the educational institution for this development. Appendix 1 of the guidelines lists

all of the educational institutions that this relief applies to.

4
In consultation with the Minister for the Environment and Local Government, with the consent of the

Minister for Finance

5
Appendix 2
6
www.education.ie

8
The property owner is required to lease the accommodation units to students of that

particular educational institution. They can however, let the units to the educational

institution, who can then let the units on to their students. The property owner is free

to let to non-students during periods outside of the academic year, where planning

permission allows. The units will typically be let to tourists or foreign language

students during the summer months, but may also be left unoccupied. The property

owner is only obliged to let to students for ten years.

The guidelines give specific descriptions of how the accommodation must be

arranged. It must comprise of house-type units, which can have between 3 and 8

‘study bedrooms’. The units must have a gross floor area of between 55 and 160

square meters. The house units must contain a common entrance hall and

kitchen/living room. The houses must have basic kitchen units, a sink, a cooker, and a

fridge installed. The study bedrooms must have desk space and storage, and single

bedrooms must be at least 8 square meters. There must be a bathroom for every 3

bed-spaces.

The development should also be integrated into the surrounding community, not

isolated. Communal facilities must be provided, such as caretakers, security, laundry

rooms, and a seminar room. Expenditure on any profit-making business, such as

shops or pubs, within the development does not qualify for the relief. The guidelines

require that an Internet connection must be available for every bedspace. A minimum

of 1 out of every 50 bed-spaces in the development should be designed for students

with disabilities.

9
 Chapter 2 – Calculation of Section 50 Relief

4.3 Stamp Duty

Stamp Duty is a tax which is payable on the purchase of property. It is calculated as a

percentage of the market price of the property. These percentages increase as the

price of the property increases. For the purposes of the Section 50 relief, the stamp

duty paid doesn’t count as qualifying expenditure.

The stamp duty expense can be significant and can affect investors’ decisions whether

to purchase rental property or not. In order to take some pressure out of the rental

sector, the 1998 Finance Act raised stamp duty rates for all residential rental property

to 9%. The stamp duty rates for owner-occupied residential property remained at

lower levels. This increase in investors’ stamp duty was based on the

recommendation of the Bacon Report, which aimed to make property more accessible

to owner-occupiers, at the expense of investors.

These increased levels of stamp duty would have discouraged many investors from

purchasing rental property, including student accommodation property. The area of

student accommodation was an unintended victim of the Bacon Report. Amid intense

lobbying, the government reversed the Bacon Report measures in the 2002 Finance

Act. The new lower levels of stamp duty are available on properties purchased since

6th December 2001, and can be seen in the table below. Investors welcomed this

change in stamp duty rates, as rental properties are now more attractive to them. This

should also result in increased interest in the Section 50 scheme among investors.

10
 Investor Residential Investor Residential
Properties Properties
(Second Hand) (New or Second Hand)
Consideration Pre 6th Dec 2002 Since 6th Dec 2002

< €127,000 9% Exempt

€127,000 - €190,500 9% 3%

€190,501 - €254,000 9% 4%

€254,001 - €317,500 9% 5%

€317,501 - €381,000 9% 6%

€381,001 - €365,000 9% 7.5%

> €635,000 9% 9%

4.3 Interest Deductibility

Mortgage interest on loans taken out to finance the purchase of rental property, has

traditionally been allowed as an expense in the calculation of taxable rental income.

However, the Bacon Report recommended that mortgage interest should not be tax

deductible7. This recommendation was intended to make residential property less

attractive to investors, and therefore more accessible to owner-occupiers. This

measure would have discouraged all investment in rental property, including student

accommodation.

But this Bacon Report measure was also reversed in the 2002 Finance Act, and so

made rental property attractive to investors once more. This reversal should help to

7
Aggressive tax avoidance schemes were designed to contravene this measure, including arrangements

involving interest-free loans.

11
stimulate increased interest in student accommodation for the remainder of the

Section 50 scheme.

4.3 Treatment of VAT

The purchase price of new residential property will include VAT at 13.5%. Fixtures

and fittings for the property and legal fees will include VAT of 21%. Therefore, the

initial costs of an investor will include a significant proportion of VAT. The investor

must charge VAT to tenants if they hold a long-term lease, greater than 10 years 8. In

this case the investor will have to register for VAT, and make annual VAT returns.

The advantage is that he will be entitled to a VAT refund on his initial purchase of the

property.

Short term letting, less than 10 years, is exempt from VAT. The investor does not

charge VAT to the tenants, but cannot claim a VAT refund on his initial expenditure.

The investor does have the option to waive this VAT exemption, and this decision

will be based on a cost-benefit analysis. The VAT refund is similar to an interest-free

loan, but all implications must be considered.

On waiving his exemption, the investor must charge VAT on all of his short-term

rental properties. Student lettings are subject to 21% VAT, while tourist lettings are

subject to a more favourable 13.5%. Usually a landlord will be forced to incur this

VAT charge himself, as he will not be in a position to pass it onto the tenants.

However, the advantage is that he can claim a VAT refund on his initial expenditure.

8
Leases for between 10-20 years give rise to a self-supply for landlords, and are not efficient.

12
Where an investor isn’t registered for VAT, his Section 50 relief will be the VAT

inclusive purchase price. However, if an investor registers for VAT, his Section 50

relief will be the purchase price excluding VAT. There are many other VAT issues

regarding investing in rental property, but these are not examined here.

4.3 Sample Calculation

To demonstrate the calculation of the relief, lets take an example of such a

transaction. On 1st October 2002, Brendan Hurley purchased a dwelling in a student

accommodation development from a builder/developer. The development is situated

near Limerick Institute of Technology, and qualifies for the Section 50 student

accommodation relief.

Before investing in a Section 50 unit, the investor must consider whether a standard

property investment would be more beneficial. The price paid for a Section 50 unit is

likely to be inflated, in light of the tax break available. The rents are also likely to be

lower than those of the private sector. The investor must also consider what options

he will have after the 10-year holding period. He may receive a much lower price on

selling the unit.

Brendan purchased the dwelling for €100,000 by means of a loan. The builder’s

construction costs for the dwelling have been calculated at €60,000, and the site cost

to the builder for the dwelling has been calculated at €15,000. The purchase price of

€100,000 is exempt from stamp duty. The qualifying expenditure for the relief

doesn’t include the site cost or stamp duty, and is calculated as follows:

13
 Purchase Price X Construction Expenditure

Construction Expenditure + Site Cost

€100,000 X €60,000

€60,000 + €15,000 = €80,000

Brendan commences letting the property to LIT students on 1st December 2002, and

his monthly rent from the property is €1,000. Brendan has annual rents from other

Irish properties of €15,000. His calculation of taxable rental income would be as

follows:

Rental Income for Tax Year ending 31st December 2002

Student accommodation (1 month) €1,000

Other Irish Rental Income €15,000

Interest on Purchase of Rental Property -€7,000

Section 50 Relief for qualifying premises -€80,000

Taxable Income Nil

The unused tax relief of €71,000 can be carried forward for future tax years, against

all of Brendan’s Irish rental income, until it has diminished.

14
 Chapter 3 – Evaluation of Section 50

4.3 Case Study of Dromroe Village

Dromroe Village is the newest student accommodation development at the University

of Limerick. It opened to students in September 2001, located just north of the

campus near the Shannon River. The village can accommodate 457 students.

Accommodation is arranged in 4 and 6-bedroom apartments and a limited number of

2 bedroom apartments are provided for married students and families. All bedrooms

are ensuite. Quinn Savage Smith designed the unique architectural style of the

village9. The project manager for the development was Kerin Contract Management

Ltd.

Plassey Campus Centre, which is a part of the University of Limerick, acts as a letting

agent for the Dromroe investors. They collect the rent, pay the expenses and then

pass on the rental income to the investors. The college intends to purchase the student

village when the 10-year holding period has expired, and is setting funds aside to do

so. The university has an option to buy, and the investors have an option to sell. A

fixed price has already been agreed, which is understood to be a good deal for the

university.

The operation of the village is under the full control of the university, including the

rental price for the students. Over the summer months Dromroe is very busy, and the

higher quality of accommodation allows the university to charge a high price. The

summer rents are a major part of the annual rents. The college has been inundated

9
Winner of the Royal Institute of the Architects of Ireland Gold Medal in 2002

15
with requests from students for accommodation in Dromroe, despite the rents being

higher than most other accommodation.

With the success of Dromroe Village, the University of Limerick hopes to build 2 new

similar student villages under the Section 50 relief. Construction will start on

Thomond Village in April 2003. This development will be situated to the north of the

main campus, across the new bridge over the Shannon. It will accommodate 500

students in single ensuite rooms, similar to Dromroe Village. The university is hoping

to develop another 300-room village before the Section 50 relief expires. It is seeking

assurances from developers and contractors that construction will finish before certain

deadlines.

4.3 The Success of the Tax Incentive

The objective of this tax incentive was to increase the provision of student

accommodation without direct public spending. So what effect is the Section 50 relief

having on the provision of student accommodation? According to the Department of

Education and Science10, “Over 3,300 bed-spaces have been provided as a result of

the Section 50 provision and a further 14,500 bed-spaces are planned or underway

under the scheme”.

From these numbers, the initial slow up-take of the incentive is plain to see. One

reason for this may be the long planning process. Another of the reasons was the

provisions introduced by the Bacon Report. Property investors had to pay higher

levels of stamp duty, and mortgage interest was non-deductible. The Bacon Report

10
Department of Education Press Release, 14 October 2002

16
didn’t intend to impact student accommodation, it was an ‘innocent victim’. These

Bacon Report provisions were repealed in the 2001 Budget.

Given the initial slow up-take of the Section 50 tax relief, there were calls from

student interest groups to increase the incentives of the relief. As part of its pre-

budget submission in 2001, the Union of Students in Ireland (USI) said11, “What we

need is Section 50 to include mortgage interest relief”. The USI had to wait a year,

for their calls on interest relief to be listened to, as we have seen already. As early as

2001, the USI had deemed the Section 50 relief to be a failure, and called on the

government to invest directly in on-campus accommodation12.

But the government were determined to let the student accommodation shortage be

met by the private sector. The Finance Act 2002 extended the qualifying period for

the Section 50 relief from 31 March 2003 to 30 September 2005, where a planning

application has been received by 30 September 2003. It is hoped that this extension,

along with interest deductibility and less stamp duty, will increase the level of student

purpose accommodation. Also in 2002, many other ‘Section 23’ tax incentives

expired. It is expected that the reduction of alternative tax-break property schemes

will lead to increased interest in the Section 50 tax incentive.

The Finance Act 2003 has brought forward the deadline for the Section 50 relief to 31

December 2004, in line with all other ‘Section 23’ type relief. This might have the

effect of speeding up investment in student accommodation, as investors will want to

avail of the relief while it still remains.

11
USI Press Release, 27 November 2001
12
USI Press Release, 27 August 2001

17
Over the next year, I expect that students will start to see the benefits of the Section

50 relief. Projects that have already started will be completed, and be ready for

occupation by students in the academic year 2003. According to the website

‘Campus.ie’, approximately 2,200 student-purpose places were expected to be

completed for the 2001 academic year, while 5,390 places are expected to be

completed by 2003. The aforementioned Department of Education statistic 13 also

suggests that the majority of the Section 50 bed-spaces have yet to become available,

and will do so soon. It appears then, that the government have weathered the storm,

and will have increased the supply of student-purpose accommodation without direct

spending.

One of biggest winners of the Section 50 relief are the builders who construct these

developments to sell to investors. They are able to see the units for a higher price,

because of the relief available to the investors. The government also benefits from the

builders paying tax on the additional profits. The tax break given by the government

has a benefit over direct funding. The tax break is typically given ‘on the drip’ over

10 years, rather than all up-front. This could be considered an interest-free loan for

the government.

4.3 Criticisms of the Relief

The Euro Student Survey 200014 identified accommodation as being the largest single

item of expenditure for Irish students, with rents averaging at €213 per month.

Accommodation expenses account for 47% of the average student’s monthly

13
3,300 bed-spaces provided under Section 50, a further 14,500 are planned or underway
14
Higher Education Authority Press Release www.hea.ie

18
expenditure15, and rental costs are rising faster than student’s incomes. 10% of

students surveyed were unhappy with their accommodation and 17% expected to

graduate in debt. Many believe that for quality student accommodation to be

available at the right price, direct state investment is needed.

The guidelines for the Section 50 relief do not refer to the price of the rent, and

investors are free to charge what they like. In theory, owners of off-campus

accommodation could charge higher rents, but in most cases they would effectively

locked be into the going rate. Accommodation run by the universities would attempt

to keep the welfare of the students’ in mind, and could charge less rents than the

private sector.

Many developers are aware of the opportunity to rent the student accommodation to

the private sector, or even the tourism sector, over the summer months. As a result of

this many Section 50 units are being furnished to meet Bord Fáilte standards. It is

commonplace for these units to feature rooms with en-suite toilet and shower

facilities. Most students do not require these luxuries, but they add to the price of the

rent nonetheless. For example, Dromroe Village in the University of Limerick is

listed as a Bord Fáilte three star accommodation, available over the summer months at

€42 per person sharing per night. Investors may be giving the needs of the tourists’

priority over the needs of the students.

Many people take the view, that this relief benefits property investors more so than

students. The section 50 relief is extremely lucrative, investors can avail of tax free

rental income while adding to their portfolio of properties. In the March 2000 edition
15
Average monthly expenditure is €456

19
of An Phoblacht, a Sinn Fein spokesperson commented “It is a disgrace that the

government, far from helping students with accommodation problems, has created an

extremely lucrative investment opportunity”.

The Section 50 relief only guarantees the provision of student accommodation for 10

years. After that time, the owner is free to let the property to whomever he wants. It

is common for an investor to agree to sell the property to the educational institution

involved after the ten years. Although most properties will be best suited for students,

it will be possible for an investor to renovate premises for the purposes of letting to

the private sector. Just as many of these properties are designed to double as tourist

rental properties, they could be designed and situated for rental to the private sector

once the ten-year period is over. USI’s Deputy President, Cian O’Callaghan stated 16

“The government are not going to get value for money by giving 100% tax relief, for

which they get student accommodation for only 10 years”. I believe that on-campus

Section 50 accommodation is likely to be the most beneficial to students, as it will be

under the control of the college.

16
Campus.ie 2001

20
 Part II
Section 843 Third Level
Buildings Relief

The Materials Surface Science Institute Building in the University of Limerick

21
 Chapter 4 – Operation of Section 843

4.3 Objective of Tax Incentive

The government’s objective was to reduce direct spending in third level education in

Ireland. Historically most third level buildings would be constructed through direct

grant funding, with some private funding. The incentive they introduced offered

attractive capital allowances to investors who entered into contracts with third level

institutions to construct these buildings. The tax relief was introduced in 1997 as

Section 843 of the Taxes Consolidation Act 1997. It has since become known as the

‘Section 843’ relief.

4.2 How Capital Allowances Operate

For the calculation of taxable income, depreciation is not an allowable expense. This

is because the depreciation figure is so subjective, as its calculation varies among

different companies. However, in some cases the Revenue Commissioners allow

companies to use capital allowances, which can be deducted against income.

Typically for capital allowances to be available on a building, it must fall under the

definition of an industrial building. The rate of capital allowances vary, for example

expenditure on a factory building attracts capital allowances of 4% per year for 25

years.

The main attraction of a capital allowance as opposed to an expense deduction is that

it is possible to set-off any capital allowance excesses 17 against non-rental income.

The appeal of this ‘spill-over’ could persuade investors to make otherwise irrational

17
i.e. Any capital allowance surplus not utilised in the current year

22
investment decisions. However, the 1998 Finance Act restricted the ‘spill-over’ of

capital allowances to €31,750 for an individual passive investor. This has the effect

of making the Section 843 incentive of limited use to individual investors who do not

have significant rental income. But the ‘spill-over’ limit does not apply to companies,

who are free to offset all capital allowances against their taxable profits18.

4.3 How the Relief Operates

The Section 843 relief grants capital allowances on capital expenditure, incurred on

the construction of certain buildings and the provision of plant and machinery used for

the purposes of third level education. The relief also applies to sports buildings. 50%

of the funding must be provided by the private sector. The capital allowances are

available over a 7-year period. The rate of allowance is 15% for the first 6 years, and

10% in the last year.

This accelerated rate of capital allowances enables companies to offset all of their

Section 843 expenditure against their taxable profits within a very short space of time.

The capital allowances are available for qualifying expenditure incurred, where

certification has occurred between 1 July 1997 and 31 December 2004. The

allowances are available for expenditure after the deadline, where certification has

occurred before the deadline.

A balancing charge will occur when a building is sold for greater than it’s tax written

down value19. It occurs when a building’s tax life has not yet expired, and it is a

clawback of capital allowances granted. No balancing charge will occur where the
18
Companies get relief at 25% if used against rent, but at 12.5% if used against other income.
19
i.e. the cost of the building less any capital allowances deducted on it.

23
disposal of a qualifying third level building takes place more than 7 years after the

building was first used. After this time the tax life of the building will have expired,

and the investor is free to sell the building without suffering a clawback of the capital

allowances granted.

In order to receive the capital allowances, an application must be made by the third

level institution to the Minister for Education and Science. The Minister for

Education and Science seeks the advice of the Higher Education Authority, and

forwards the application to the Minister for Finance, with a recommendation on the

matter. The Department of Finance will assess the application and decide whether to

grant the relief on the basis of the following criteria20:

 The project helps to meet educational policy objectives and should be worthy

of support on this basis having regard to competing demands on the

Exchequer.

 The granting of the tax relief for the project represents value for money.

 The Exchequer cost of the tax relief is taken into account as part of the overall

budget for education.

 Satisfactory evidence is produced, prior to the issuance of a certificate, that

50% private source funding is in place and that it will be spent as intended.

4.4 Development Guidelines

Qualifying premises for this relief must be let to an approved third level institution. It

must be in use for the purposes of third level education or associated sporting or

leisure facilities provided by the approved institution. No part of the building or

structure may be used as a dwelling house. The building or structure may not be an

20
Department of Finance Guidelines

24
industrial building within the definition of Section 268 of TCA 1997. The legislation

also defines the criteria for an approved institution.

The capital allowance is only available in respect of qualifying expenditure on the

premises. The act defines qualifying expenditure as capital expenditure incurred on

the construction of qualifying premises or on the provision of plant and machinery

approved for that purpose by the Minister for Education and Science. Where the third

level institution involved provides health or social science education, approval for

qualifying expenditure must be granted by the Minister for Health and Children with

the consent of the Minister for Finance. Construction expenditure is commonly

understood to include refurbishment expenditure.

In order to qualify for the capital allowances, the Minister for Finance must certify the

project before construction commences. The certificate will be issued when certain

conditions have been met. The most notable of these conditions is that the third level

institution must have secured the finance of at least 50% of the qualifying expenditure

from the private sector. These funds must be used for certain specified purposes:

 To pay interest on money borrowed for construction purposes

 To pay rent during the period of the lease of the premises

 And to purchase the premises at the end of the letting period

25
 Chapter 5 – Structure of Section 843 Transaction

5.1 Funding of the Development

To illustrate how a building is funded under Section 843, we will take the example of

a building which a university wishes to develop, which will cost €10m. The college

must secure at least 50% of the funds from the private sector. This is typically made

up of donations from individuals and donations from companies. These donations are

tax-deductible expenses, and are therefore not as costly as they seem for the

individual or company.

In the absence of a tax relief, the government would usually provide the other 50% of

the cost through direct grant funding. With Section 843, the government will provide

between 30%-40% of the cost of the building in grant funding. The balance will be

made up through the tax benefit.

Taking the example of the building costing €10m, the college will have to secure €5m

from private sources, and will receive around €4m in grant funding. The college

cannot construct the building with only €9m, and the capital allowances are of no

benefit to it, as it does not pay tax. To avail of the capital allowances, the university

needs to enter into an arrangement with somebody who pays tax.

This is typically a financial institution such as a bank, as they have the large amount

of capital necessary for such big developments. There is no restriction in the

legislation that only financial institutions may be used, but it is the usual arrangement.

Most of the deals priced by the Higher Education Authority or the Dept of Finance

26
assume that the capital allowances will be taken up at corporation tax rates. The grant

funding for a project could be decreased, where the capital allowances are being used

at individual tax rates21.

The bank will provide the €10m capital for the construction of the building. Usually

the college will undertake the construction on behalf of the bank. The bank will

typically, set up a special purpose company to hold the property. The bank can then

avail of capital allowances on the full €10m over the next 7 years. The capital

allowances will be set against the banks trading income, providing relief at 12.5%.

5.2 Leasing of the Building

While the bank will provide the construction cost of €10m, the college will place its

fund of €9m into a deposit account. The college agrees to lease the building from the

bank for 7 years. All elements of the transaction, including the level of rent, are

agreed on from the start, and both parties know how things will progress. The bank

will require an annual cost of capital payment for the €10m, while the university is

leasing the building.

The bank will receive its cost of capital payment through the lease payment and the

capital allowances. This lease payment is less than it would be for €10m in capital, in

light of the annual capital allowances which the bank receives. It is this reduction in

lease payments which constitutes the additional 10% of the building’s funding. The

€9m in the government’s deposit account decreases by the lease payments, but rises

21
Individuals get relief at the marginal rate of 42%, while companies generally only get relief at 12.5%

27
by deposit interest. This fund will be calculated to equal the cost of repurchasing the

building from the bank in 7 years time.

5.3 Repurchase of the Building

The price paid for the building after the 7 years depends on the level of rent paid. The

rent will depend on many factors. If the rent is low, the purchase price will be higher

than the development costs of €10m. Alternatively, if the rent is high, the purchase

price will be lower than €10m. If the rent is exactly right, the college will buy the

building for €10m, or 100% of the cost.

Taking the latter scenario, the government’s deposit fund will have risen from €9m to

€10m over the 7 years. This is because the deposit interest was greater than the lease

payments every year. We have seen that the lower lease payments are a result of the

bank receiving capital allowances. The college has paid out €9m on day 1, for a

€10m building. It is evident therefore, that the Section 843 tax relief has funded the

remaining 10% of development costs.

4.3 Substance of the Transaction

The substance of a typical Section 843 transaction is that of the bank giving the

university a loan for the development costs of the building. The bank gives a loan of

€10m to the college to construct the building. It receives an annual interest payment,

or cost of capital payment, on the €10m. This interest payment is made up of the

value of the capital allowances, and the lease payment from the college. After 7

years, the college repays the bank the €10m. For the bank, this transaction is very

favourable. They are giving out a significant loan, which is backed by cash in a

28
sinking fund account, and is therefore virtually risk-free. From the college’s point of

view, they are paying out €9m on day 1, for a €10m building.

5.5 Stamp Duty

Where the financial institution undertakes a Section 843 development on behalf of a

university, the university will have to sell the site to the financial institution. In order

to minimise the cost of stamp duty on the sale, the university will try to sell the

Greenfield site to the bank prior to construction. By doing this, the site will be valued

at a lower cost, and stamp duty will be minimised. The stamp duty rates for non-

residential property are based on a sliding scale. For sites of a value greater than

€150,000, the rate of stamp duty is 9%.

At the end of the 7-year period, the university will have made arrangements to

repurchase the building from the financial institution. Due to the tax status of

universities, they are exempt from paying stamp duty. The college can buy the

building back from the financial institution without incurring stamp duty.

29
 Chapter 6 – Evaluation of Section 843

6.1 Case Study of MSSi Building

The Materials and Surface Science Institute building has recently been completed in

the University of Limerick. It will create an environment that will enable scientists

and engineers to investigate a wide range of material and surface science problems in

a multidisciplinary research environment. The building will have 3000m 2 of

laboratory and office space. The contractor for the building was PJ Moroney.

Before construction started, the college was instructed to fund the MSSi building

using the Section 843 relief22. The Higher Education Authority’s Programme for

Research23 provided £12m for the building, which was around 40% of the total cost of

the building. 50% of the cost came from private donations. The remaining 10% of

the funding will come from the Section 843 tax relief.

A bank will take up the capital allowances for the MSSi building. The bank provided

the capital for the construction of the building, but will not have an interest in its

running. The university pays an annual lease payment to the bank, which serves to

pay interest on the capital. As the bank call avail of the capital allowances, the

university’s repayments to the bank are reduced significantly. The college will

repurchase the building when its 7-year tax life has expired.

22
See Appendix 1 for interview transcript with Niall Murphy of UL
23
Programme for Research in Third Level Institutions (PRTLI)

30
The University of Limerick feels that the main benefit to them of the Section 843

relief is that it can speed up the development of planned buildings. The reason is that

roughly 20% less direct funding is required from the government on day 1. The

university does not construct all its buildings using this tax relief. Besides the MSSi

building, the most recent development under Section 843 was Phase 1 of the Arena

sports building24. No further developments are planned under the relief before it

expires.

6.2 The Success of the Tax Incentive

To a large extent, the use of the Section 843 relief is imposed on colleges. They are

instructed that certain building projects are to be funded in this manner. The relief

doesn’t allow buildings to be developed, that otherwise would not be. The college

views it merely as a source of funding, which substitutes direct funding. The college

does not actively seek to enter into a Section 843 transaction. The financial

institutions, on the other hand, are delighted to enter into Section 843 transactions, as

they are a low risk loan.

The one success of Section 843 is that it could speed up planned developments. This

is because less direct government funding is required to construct the building. In a

typical Section 843 development, grant funding will account for 40% of construction

costs. Without Section 843, 50% of the construction costs would be required in direct

funding. Using Section 843, it can be easier to get projects started.

24
i.e. the main building but not the National 50m Pool

31
6.3 Criticisms of the Relief

The main criticism of Section 843 is that there is arguably no net saving for the

government. Any money saved through a reduction in direct funding, is lost by the

exchequer through reduced corporation tax receipts. In calculating the deal, the bank

will insure that if any party makes a net gain from the transaction, it will be them and

not the government. The only benefit to the exchequer is that the portion of the

project financed through the tax relief, is spread over the next 7 years. This has a

‘time value of money’ saving for the government, which is similar to an interest-free

loan. But the portion of funding payable ‘on the drip’ is only around 10% of the total

construction costs. This saving is of limited significance.

It also must be kept in mind that the government is losing margins to the bank

throughout the 7 years. The college is simultaneously earning interest and paying

interest to the bank. The college’s fund, which is 90% of the cost, is earning deposit

interest from the bank. The college is paying interest on capital provided by the bank

for construction, which is 100% of the cost. The bank charges a higher interest rate

than it pays out, so the college is losing this margin to the bank.

Because this transaction is a tax deal, it must be done properly. There is a lot of

documentation involved in the complex arrangement between the bank and the

university. It has been suggested25 that by the time the resources are put into the deal,

and the legal and banking fees are paid, that an extra 1% has been added to the cost of

the project. Depending on the individual deal, it is possible that using the Section 843

relief might have no net savings for the government. This could occur where the

25
By Niall Murphy of UL. See Appendix 1

32
benefits of the transaction are wiped out by the extra costs of making the deal.

Indeed, it may be possible for the government to make a net loss on a Section 843

deal.

It appears that the main effect of the Section 843 relief is that the government is seen

to be providing less money to the universities. The universities are seen to be more

self-funding when the Section 843 relief is used. In reality, the balance of funding is

being made up through the loss of tax receipts, which isn’t really quantified. Niall

Murphy of the University of Limerick26 suggested to me that it would be far easier if

the government just gave 50% of the cost of these projects directly to the universities.

26
See Appendix 1

33
 Conclusion

After examining the two property taxation incentives for third level education

construction, I have found them to be contrasting. The Section 50 relief provides an

expense deduction to investors who construct student accommodation, which are let

to universities. The Section 843 relief provides attractive capital allowances to

investors who enter into arrangements with universities to construct third level

buildings.

The Section 50 relief has succeeded in providing a substantial amount of high quality

accommodation to students. The initial up-take of the incentive was unintentionally

hindered by the recommendations of the Bacon Report. The reversal of the Bacon

Report provisions in 2002 should attract more interest in the Section 50 relief. Over

3,300 new bed-spaces have been provided by the relief and a further 14,500 bed-

spaces are planned or underway27. The majority of Section 50 accommodation has yet

to become available to the students.

The Section 50 incentive is providing a large amount of accommodation that would

not be built without it. The University of Limerick has built one student village

already, and hopes to build 2 more before the relief expires. There is an inequity in

allowing wealthy investors to shelter their rental income from tax. However it is

worth it, as the students are getting quality accommodation, which they otherwise

wouldn’t have.

27
Department of Education Press Release 14th Oct 2002

34
The Section 843 relief is merely substituting direct funding for indirect funding.

What the exchequer saves in grant funding, it loses through reduced corporation tax

receipts. Where colleges utilise Section 843, they are usually instructed to do so, and

it is not used for every building. The standard transaction involves the college

entering into a complex arrangement with a financial institution, the substance of

which is a loan for the full cost of construction.

Section 843 can have the effect of speeding up planned developments, as less funding

is required initially. Ultimately, the main effect of Section 843 is that the government

is seen to be giving less money to universities. Colleges are also seen to be more self-

funding, whereas this is not the case. The extra costs of losing interest margins to the

bank, and paying legal and banking fees, may result in the Section 843 route costing

the government more.

A contrast between the two tax incentives is that Section 50 stimulates investment,

whereas Section 843 has little affect on investment. Also Section 50 is saving the

government money, while the benefits of Section 843 are questionable. The planning

of the University of Limerick is representative of the benefit of each incentive to

colleges. UL has no further developments planned under Section 843, while it is

hoping to construct two additional developments under Section 50 before the

incentive expires.

35
 Methodology

The starting point for my research of this area was the tax legislation. I obtained this

from the Institute of Taxation’s Taxfind service28. I examined the current state of the

legislation as found in the updated in Taxes Consolidation Acts 1997. It was also

necessary to examine the original legislation and the various amendments to it, as

found in the annual Finance Acts.

I then read various commentaries and explanations of the legislation. The most useful

of these were the Institute of Taxation’s books29 and the various guidelines and

explanations published by the Revenue. Many firms which provide tax advice publish

explanations of various tax reliefs on their websites.

In order to see the opinions of various interest groups on the tax reliefs, I performed a

general search of the Internet30. I found many articles and press releases from student

lobby groups such as the Union of Students in Ireland 31. My search also revealed

many archived articles from newspapers, magazines and academic publications. I

also found press releases from educational authorities.

After reading a particular article from the Sunday Business Post, I contacted the

author, Louise Caffrey of PriceWaterhouseCoopers, by e-mail. In a telephone

28
www.taxireland.ie
29
Also available on www.taxireland.ie
30
Using Yahoo! Search - http://search.yahoo.com/
31
www.usi.ie

36
conversation, she answered many of my questions regarding the operation of the tax

reliefs.

When I had developed a good understanding of the subject, I conducted an interview 32

with Niall Murphy of Plassey Campus Centre in the University of Limerick. This

interview was very helpful, and I obtained information regarding developments UL

have undertaken using the two tax reliefs.

32
Transcript is included here as Appendix 1

37
 Bibliography

Articles
Construction Industry Federation (2000). “Bed Push”. August 2000 Magazine.
http://www.cif.ie/

De Rosa, Roisin (2000). “Government allows developers to exploit students”. An

Phoblacht, March 2000. http://www.irlnet.com/aprn/

Campus.ie News (2001). “Student Housing in the Pipeline”. http://www.campus.ie/

Byrne, Dermot (2002). “Student Residential Accommodation Projects – The Law and
Practice”. Irish Tax Review, July 2002. http://www.taxireland.ie/

Ramsay, Ciaran (2000). “Property Investment: Tax Reliefs and Incentives”. McCann
Fitzgerald Website, September 2000. http://www.mccannfitzgerald.ie

Caffrey, Louise (2002). “The Merry Go Round of Property Taxation”. Sunday

Business Post, 10th Feb 2002.

Prima Finance Website. “Tax Break Investments”. http://www.primafinance.ie/

Books
Institute of Taxation in Ireland. Taxation Summary. Section 1.20.22, “Third Level
Institutions”. http://www.taxireland.ie/

Institute of Taxation in Ireland. Capital Allowances. Section 11.1, “Leased Third

Level Educational Buildings”. http://www.taxireland.ie/

Seminar Papers
Masterson, Lisa (1999). “Rental Accommodation for Third Level Students”.
Corporation Tax Update Seminar. Dublin, Institute of Taxation in Ireland.
http://www.taxireland.ie/

38
Cullen, Andrew (1999). “Property Investments”. Tax Based Property Investments
Seminar, 30th Nov 1999. Dublin, Institute of Taxation in Ireland.
http://www.taxireland.ie/

Campbell, Hugh & Caffrey, Louise (2002). “Property Investments”. Investing in

Property Seminar, 21st May 2002. Dublin, Institute of Taxation in Ireland.
http://www.taxireland.ie/

Press Releases
Higher Education Authority (2000). “Euro Student Survey 2000: Irish Report Social
and Living Conditions of Higher Education Students”. http://www.hea.ie/

Union of Students in Ireland (2001). “USI Calls on Government to Boost Ireland’s

Disgraceful Student Accommodation Levels”. 27th Nov 2001.
http://www.usi.ie/

Union of Students in Ireland (2001). “Student Housing Crisis – USI Calls for 3 Fs for
Students”. 27th Aug 2001. http://www.usi.ie/

Department of Education (2002). “Sile de Valera TD Opens Dromroe Village at

University of Limerick”. 4th Oct 2002. http://www.education.ie/

Publications
Department of Education (1999). “Guidelines on Student Residential Developments”.
http://www.education.ie/

Revenue Guidance Notes (1999). “Capital allowances for buildings used for third
level educational purposes”. http://www.taxireland.ie/

39
 Appendices

Appendix 1 – Transcript of Interview with Niall Murphy

Appendix 2 – Student Accommodation Development Guidelines

Appendix 3 – Section 843 Legislation

A1
 Appendix 1 – Interview Transcript

The following interview33 was conducted with Niall Murphy, the Financial Controller
of Plassey Campus Centre in UL, on 6th February 2003.

Q1 – Firstly regarding the Section 843 Third Level Buildings Relief, what buildings
in the University of Limerick have been constructed under this relief?
A1 – The first phase of the Arena sports building, that is the building but not the 50m
swimming pool. And the most recent building was the Materials Surface
Science Institute (MSSi) Building.

Q2 – Has this tax relief had any impact on decisions whether to undertake new
developments or not?
A2 – No, but it has speeded up the development of buildings which were being
planned.

Q3 – What do the private investors stand to gain from contributing funds to a Section
843 building? Is it just the capital allowances?
A3 – With any capital allowance scheme, the reason we go into it with investors is
because we don’t pay tax, and therefore we can get no allowance on it. In effect
we are selling our tax allowances to investors, who have the capacity to take
them up.

Q4 – Taking the new MSSi building, does the private investor have any interest in the
ongoing of the building?
A4 – No, the private investor here is a financial institution. The bank builds the
building. Then on completion it lets it for 7 years to the university, at a rent
which is agreed beforehand. That rent is used to pay the interest on the loan that
the bank has borrowed. The bank has to have the capital, so there is a cost of
capital there. So the university would pay the cost of capital over the 7 years.

Q5 – Does the college intend to buy back the building after the 7 years?

33
Edited for conciseness

A2
A5 – Yes, always.

Q6 – At what price would the building be bought back, at the market value or at a
discount?
A6 – Say if the development costs are €10m, then that is what the investor gets capital
allowances on. The price we buy it back at will depend on the rent we pay. If
it’s a high rent, we will buy it back lower. If it’s a low rent, we will buy it back
higher. The rent is determined by a number of factors. If we were to pay the
right amount of rent, we would buy it back for the €10m.

Q7 – If the university is prepared to pay the €10m in 7 years, why not just construct it
for the €10m now?
A7 – Very good question…

Q8 – Would it be the time value of money?

A8 – Yes there’s that. Basically the university is getting a €10m building in Year 1,
and the university might only have €9m. The university put the €9m into a
deposit account, which grows with interest, and it reduces by taking the rent
payments out of it. The plan is that the €9m will be €10m by Year 7. As you
say, it’s the time value of money.

The bank is getting tax relief which they factor into the loan. They use that as a
repayment of the loan. We’re paying them less interest, or rent, than we would
for a €10m loan, because they’re getting something off the tax as well.

Q9 – How lucrative would the capital allowances be for the bank?

A9 – They wouldn’t be very lucrative. The way it works out is the bank is only going
into it to give out a loan. Especially because of the low corporation tax rates. In
the past the corporation tax rate was 30% and showed no sign of falling rapidly.
In this case the benefit for the bank would have been much bigger, and
obviously we would have been looking for a bigger cut too.

Q10 – At day 1 how much funds would the college have on deposit?
A10 – It has to have at least 50% of the funds, which are private funded.

A3
Q11 – So colleges would approach financial institutions to make the deal?
A11 – Yes

Q12 – How much of the university’s buildings would be constructed under Section
843?
A12 – The reason the MSSi building is done under Section 843 is that it is funded
under the PRTLI research funding. Basically we were told to go do it with
Section 843. Now I’d argue that its costing the state more over time, but that’s
what they tell us do.

Q13 – Its just policy that this is the way they’re funded?
A13 – Yes.

Q14 – Is there any circumstances where direct funding would be preferable?

A14 – The way the MSSi works out is that private funders put in 50%, and the
government put in about 40%. And over the lifetime of the 7 years, the time
value of money is worth about 10%. So for us all it would have been a lot
handier, if the government gave us 50% up front. Obviously the state is losing
margins to the bank.

Q15 – So the government is giving less in grant funding, but it’s making it up through
the exchequer receipts?
A15 – Yes, its indirect funding I suppose.

Q16 – Would there be cases where the government is losing out, in net terms?
A16 – Yes, there are many ways of looking at it. I would argue that by the tie you set
it up, put the resources into it, and pay legal and banking fees, you’re down 1%
on the project already. It’s a lot of documentation, and it’s a tax deal too, so it’s
got to be done properly.

Q17 – Would the main advantage be that on the government books they’re giving less
money to colleges, and that colleges are seen to be more self-funding?

A4
A17 – Yes, where its really coming of their tax receipts, and that’s not really
quantified.

Q18 – Will the moving forward of the deadline to Dec 2004 have implications for the
college?
A18 – Well for us we don’t have any Section 843 projects starting, so no.

Q19 – How will projects be funded after the relief expires?

A19 – Well there is some buildings going on with direct funding. It isn’t as though
it’s all Section 843. The engineering research building going on has nothing to
do with Section 843; it’s just a direct building, a certain amount of private
money and a certain amount of state money.

Q20 – Are the capital allowances calculated on the investor’s expenditure or the total
expenditure?
A20 – The total expenditure, they would get capital allowances on the grants as well.
But you’ve got to remember that what they do with the direct funding, you just
keep it away from the deal, and put it into a deposit account, a sinking fund. It
isn’t a state grant from the point of view of the financial institution.

Q21 – Does the bank or the college organise the construction?

A21 – The bank isn’t into construction. We do it, we have our own company here,
Plassey Campus Development.

Q22 – Would the changing levels of stamp duty affect these transactions?
A22 – In any transaction we go into, we try to structure it to minimize costs. We try
to give a Greenfield site to the investor prior to construction. This means
valuing the site and the investor paying stamp duty on that, rather than paying
stamp duty on an actual development. We avoid not incurring additional stamp
duty, by not having work done on the site before it’s passed over.

Q23 – Looking at the Section 50 Student Accommodation Relief, did the college
approach investors for Dromroe Village, or vice versa?

A5
A23 – We were going building anyway. We went out to banks and big firms, asking
for their thinking on the new village. We then ran with the best proposal.

Q24 – Who are the investors for Dromroe Village?

A24 – The investors are private individuals. They wouldn’t be banks, they’d be
individuals or companies.

Q25 – Who manages the rental of Dromroe Village?

A25 – Plassey Campus Centre, which is a number of companies. So we run the
village, we act as agent for the investors.

Q26 – So does the college lease the village wholesale from the investor?
A26 – No, we’re just acting as agent. We collect their rents, disperse expenses, and
give them their rental income. We’re not guaranteeing their rents.

Q27 – Are there plans to buy back the Dromroe after the 10-year period?
A27 – Yes, there are funds being set aside to do that.

Q28 – And would the price be the market price, or would there be a discount to the
college?
A28 – There’s an option there for them to tell us to buy it. And we can tell them to
sell it to us. There’s a fixed price for it, we’ve worked out where things are
going with it. And we expect that we can buy it back for €x amount at that time.

Q29 – So you’re not disclosing any numbers then?

A29 – No, we wouldn’t be now. We’re in the late teens to early twenties, in €m.

Q30 – Would it be considered a good deal for the college then?

A30 – Yes it would.

Q31 – How successful has Dromroe been under Section 50, compared to the other
student villages which weren’t?
A31 – Well, Phase 2 and 3 of Plassey Village were actually done under Section 23,
which was the forerunner to Section 50. They ran very successfully; only last

A6
 June or so did we buy back the 3 rd phase of Plassey Village. We look at it
purely as a funding mechanism, there’s value in it for us.

It’s up to us to make sure that they stay qualified. Plassey Campus Centre will
undertake to issue qualifying leases, and makes sure that the investor’s tax relief
isn’t jeopardised. We undertake that, but we have full control over the whole
thing.

Q32 – Is it easier to get funding for buildings with Section 50 than without it?
A32 – Well it would have been much easier if the building inflation hadn’t happened.
It’s a vital funding source. It could be the difference between saying we will do
Phase 1 of a village, or a whole village.

Q33 – Was there any problem with developers not meeting the Dept of Education
guidelines?
A33 – From our point of view, that kind of guideline is given to the architect. We ask
them if everything is in place and correct. We also have the Dept of the
Environment inspectors, and I know things had to been rectified to satisfy them.

Q34 – Who sets the rental price for the students, do the college have a say?
A34 – Everything is under the control of the Plassey Campus Centre, which is part of
the college. So we’re not giving away control, we’re giving assurances that
we’ll run it in a particular manner.

Q35 – Is there any more student accommodation developments planned after

Dromroe?
A35 – Yes, I’m up to my eyes in it. There’s a 500-room village going just across
where the bridge is being built, Thomond Village it’s called.

Q36 – And will this be a Section 50 development?

A36 – Yes, that’s out for tender now, it will start construction in April. Then there’s
probably going to be another 300-room development going across the way.

Q37 – Section 50 again?

A7
A37 – Yeah, we’re cramming it now, we’re getting very tight on it. With this 5 th
village we’ve to get assurances from our developers and contractors that it will
be done before the deadline.

Q38 – How well is the student accommodation utilised during the summer months?
A38 – Plassey Campus Centre have a big team in terms of the summer business,
we’ve been doing very well over the years. We’ve found with the likes of
Dromroe, which is of a higher quality with ensuite rooms, that we can get a
higher price for it. Thomond Village will be the same. Now if you’ve 5
villages, you’d probably close down 1 for summer, whether it’s at the high end
or the lower end of the market. Last year we had the 3 villages going, but you
might have to shut down half a village.

Q39 – Would the summer rents tend to be a significant part of the annual rents?
A39 – It’d be a major part.

Q40 – Dromroe is of a great standard, but would the students be better served by more
plentiful and more affordable on-campus accommodation?
A40 – The planning behind the student accommodation here has always been to
provide a quality service, there is a premium in rent but we feel it’s worth it.
Dromroe has been inundated with requests for accommodation from the
students, especially over 1st years.

Q41 – There is a view that the main effect of Section 50 has been to provide wealthy
investors with an opportunity to increase their wealth. How do you feel about
this?
A41 – There is a truth in that, to the extent that people might be paying very
little tax on a huge rental role. But its only deferring their rental role,
eventually they’ll have to pay tax on it; it has to come out somewhere. The
incentive is there for a reason. You only have to look at the success of the
urban renewal schemes. The whole idea with Section 50 was to increase the
standard of student accommodation. You’ve study desks, Internet
connections, and minimum sized rooms; at least they can study at home now.

A8
It does seem inequitable that some people are paying very little tax on huge
amounts of money, but its providing bricks and mortar, at the end of the day.

A9
 Appendix 2 – Student Accommodation Development Guidelines

Guidelines on Student Residential Developments

Introduction
Section 50 of the Finance Act, 1999 provides for a scheme of tax relief for rented
residential accommodation for third level students. The relief is along the lines of
what is commonly referred to as section 23 relief. The Government attaches
significance to this initiative, the purpose of which is the provision of additional
rented accommodation to relieve current supply pressures in the private rented sector.

The legislation provides that ‘relevant guidelines’ may be issued by the Minister for
Education and Science, in consultation with the Minister for the Environment and
Local Government, with the consent of the Minister for Finance.

The following are the relevant guidelines. They are intended to assist developers and
designers in formulating proposals for student residential development. They are not
to be regarded as a substitute for appropriate professional advice on any project but
should be of assistance in briefing professional advisers engaged on such projects.

The guidelines have been prepared with a view to ensuring that the overall standard of
design and construction of accommodation being provided would promote the
objectives of the Student Residential Accommodation tax incentives. The guidelines
are issued without prejudice to the provisions of the Local Government (Planning and
Development) Acts 1963-1998, the Building Regulations Act, 1998, any regulations
made under those Acts, regulations under the Housing Acts relating to private rented
housing accommodation and the relevant statutory local authority development plan.

The design of student residential accommodation should also take into account the
following Guides: - Fire Safety in Flats (1994), and Fire Safety in Hostels (1998),
which have been published by the Minister for the Environment and Local
Government pursuant to the Fire Services Act, 1981.

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Planning authorities are asked to have regard to these guidelines in assessing
applications received on or after 1st April 1999.

Definitions
For the purpose of these Guidelines-

An "educational institution" means:

an institution in the State which provides courses to which a scheme approved by

the Minister for Education and Science under the Local Authorities (Higher
Education Grants) Acts 1968 to 1992 applies; or an institution which offers an
approved course for the purposes of tax relief under section 474 of the Taxes
Consolidation Act, 1997.
See appendix 1 for list of such educational institutions.

A "student" means a person who is a registered student of, and is pursuing a course of
study on a full-time basis at an educational institution.

A "qualifying development" means a development of at least 20 bed-spaces which

complies with the requirements of these guidelines, and in respect of which a letter
has been certified by an educational institution. Such a letter of certification will
include: -

a) the name of the individual/company which owns the development,

b) the number of units and bed-spaces to be provided for the use of students at the
certifying educational institution.

This letter of certification will be requested where any claim for relief is subject to a
Revenue audit.

"The scheme" means the scheme of tax relief for rented student accommodation
introduced by section 50 of the Finance Act, 1999.

Qualifying Areas

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Properties qualifying for relief under the scheme should be located within qualifying
areas. For the purposes the scheme qualifying areas are:

(1) Campus areas of the educational institutions, or

(2) Areas, within an 8 km radius of the main campus, which are approved by the
certifying educational institution as being an area within which a qualifying
development may take place.

Consultation
In order to ensure orderly development there should be early consultation with, and
approval by, an educational institution for any proposed development.

Qualifying Leases
A lease under the scheme shall comply with the following requirements:
Where the lease is for the whole of an academic year-

(a) the lease, in writing, governed by the provisions of the Landlord and Tenant code,
of a unit in a qualifying development shall be granted to students of the certifying
educational institution, or
(b) the lease shall be granted to the certifying educational institution which
subsequently on-lets the units in the qualifying development to students in accordance
with the institution’s normal policy for letting residential accommodation.

The academic year means the academic year of a course, including any examinations
in connection with a course being pursued by the student by whom the unit is
occupied.

Owners of qualifying developments should be in a position to provide evidence of

letting to students. This evidence will be requested where any claim for relief is
subject to a Revenue audit.

Such owners may let the units to non-students for periods outside of the academic
year of the certifying institution.

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These requirements apply for ten years from the date the property is first let to
students.

Total Floor Areas of Qualifying Premises

Accommodation under the scheme shall be provided by groupings of study bedrooms
in "house" units. Each unit shall consist of a minimum of 3 bed-spaces and an overall
minimum gross floor area of 55 sq. metres, up to a maximum of 8 bed-spaces and a
maximum of 160 sq. metres.

Study bedrooms shall be arranged in units sharing a common entrance hall and
kitchen/living room. Rooms shall have reasonable shapes and proportions and have
adequate space for normal living purposes. Accurate adult sized furniture shall be
indicated on layout plans.

Units shall in turn share common entrances, access stairs and corridors, and ancillary
facilities.

Kitchen/Living room
The provision of shared kitchen/dining/living room space shall be based on a
minimum of 4 sq. m per bedspace in the unit. This shall be in addition to any shared
circulation. At minimum, basic kitchen units, with sink, cooker and fridge shall be
installed.

Bedrooms
These will be used as study bedrooms requiring desk space, and storage. Therefore,
one of the following minimum areas shall apply depending on provision of bathroom
facilities: -

Single study bedroom 8 sq. metres

Single study bedroom with ensuite shower, toilet and basin 12 sq. metres
Twin study bedroom 15 sq. metres
Twin study bedroom with ensuite shower, toilet and basin 18 sq. metres
Single Disabled study bedroom, with ensuite disabled shower, toilet and basin 15
sq. metres

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Bathrooms
These shall be either ensuite with the study bedrooms or separately provided to serve
a maximum of 3 bed-spaces. Bathrooms shall have adult sized sanitary fittings,
consisting of wash hand basin, water closet, and shower/bath, with sufficient room to
ensure ergonomically adequate spacing in the layout.

Circulation and Storage

In addition to the above minimum requirements an adequate entrance hallway and
circulation space shall be provided within each unit. A hot press/store should also be
provided to facilitate use of the unit.

Site Planning
The planning and design of developments should take account of the nature and
character of the area in which they are located. The completed development should
make a positive contribution to the built environment and develop the integration of
students into the wider community where located off campus. Necessary security
arrangements should be planned in a way which avoids isolating developments from
the surrounding community.

The disposition of blocks of residential accommodation on the site and the layout of
accommodation within each block should be designed to give optimum orientation in
terms of daylight and sunlight to habitable rooms. Regard should be had to the likely
level of noise from adjoining sources in determining the optimum location and
detailed design of, in particular, study bedrooms within units.

Where not located on campus, adequate open space should be provided within
developments for the amenity of students. Where the limitations of sites do not allow
for small parks or gardens, alternative provisions should be incorporated in
developments through a combination of terraced open space/roof gardens, and/or
balconies with good landscaping where appropriate.

Densities should be in line with the draft residential density guidelines with due
regard to type of location and to the safeguards set out in the guidelines.

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Communal Facilities and Amenities
Communal facilities to service the needs of student residents should be provided for.
The definition of qualifying developments includes "house" units and ancillary spaces
including:- caretaker/security office and apartment; centralised storage; laundry
facilities; drying rooms and utility rooms; and a seminar room. The floor area of these
facilities shall not exceed 12% of the total area of the development, and their cost
shall not exceed 12% of the total qualifying expenditure.

Due consideration should be given to the needs of disabled students in the location,
layout and design of any communal facilities.

Developments should include reasonable provision for secure bicycle storage within
the site.

Facilities for the handling, storage and collection of refuse should be provided with
access for frequent collection. Such facilities should be conveniently located, well
ventilated and comply with all fire safety and public health requirements. As a general
guide in determining storage capacity required, an output of 0.1 cubic metres of refuse
per unit per week may be assumed.

Internal Design and Layout

Entrance hallways and corridors in developments should be well designed with good
lighting and ventilation. Vertical and horizontal circulation should be arranged so that
corridors do not extend more than 15 metres from a widened "landing" area which
should include natural lighting where possible. Corridors should be widened at
entrances to apartments.

Service ducts serving two or more apartments should as far as practicable be

accessible from common circulation areas for maintenance purposes.
The number of apartment units per lift/core in a development should not exceed a
maximum of 30.

Disabled Access and Provision of Accessible Bedrooms

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Developments should provide a minimum of one out of every fifty, or part thereof, of
the total number of bed-spaces in a development designed for students with
disabilities. These study bedrooms shall be fully wheelchair accessible complete with
ensuite bathroom facilities.

Part M of the Building Regulations, 1997, sets out the legal requirements in relation to
access to and use of building facilities by disabled persons. Part M of the regulations
applies to public buildings and the common areas of apartment blocks. It is proposed
to extend Part M to require new dwellings commencing on or after the 1st July 2000
to be visitable by the disabled. The design of residential accommodation for students
should take this pending development of Part M into account.

Data Connection
Internet services shall be made available to each student study bedspace, as a standard
Ethernet connection (10 BASET). A minimum bandwidth of 64kb/s shall be provided
by an Internet Service Provider (ISP) per each 30 student bed-spaces.

Certificate of Reasonable Cost

Anybody, other than in the case of a new unit purchased from a builder, wishing to
claim tax relief under the scheme will require a Certificate of Reasonable Cost in
relation to the particular development. The claimant may be required to provide this
certificate to the Revenue Commissioners in support of a claim.

A Certificate of Reasonable Cost certifies that the cost of providing the

accommodation is reasonable, that the accommodation is within the specified floor
area limits (55 to 160 square metres per unit), and that it complies with the standards
set out in these guidelines. In the case of refurbishment projects it also certifies that
the work was necessary to ensure the suitability as dwellings of the accommodation.

In the case of refurbishment, to obtain tax relief it is necessary that the Department of
the Environment and Local Government certifies that the work was necessary to
ensure the suitability as dwellings of the accommodation.

A16
Accordingly, application in respect of a refurbishment project should be made before
commencement of work so that a prior inspection of the building can be carried out.
Application

To apply for a Certificate of Reasonable Cost a completed form HPF/1 must be

returned, together with the appropriate documentation and fee, to the Department of
the Environment and Local Government, Housing Grants Section, Room F9/10,
Government Offices, Ballina, Co. Mayo.

Each application for a Certificate of Reasonable Cost must be accompanied by the

following: -

a) Drawings of student residential accommodation to scale 1:50 showing floor plans,

sections and elevations (fully dimensioned)
b) Site plan showing location of site, layout of site numbers and north point, with
accommodation units delineated
c) Detailed specification of construction
d) Copy of planning permission and fire safety certificate
e) Breakdown of costs:
1. Where works are executed by the applicant, details of materials and labour
cost plus any other expenses incurred.
2. Where work is carried out under contract, details of tender, design fees, etc.,
and copy of final account.

The Department of the Environment and Local Government, at all times, reserves the
right to request a Bill of Quantities.

Fees
A fee of £50 for unit 1 plus £20 for each additional unit is payable in respect of an
application for a Certificate of Reasonable Cost. A separate application is requested
for each different construction cost claimed and for each different dwelling type (i.e.
to which different plans and specifications apply).

A17
Appendix 134 - List of Educational Institutions

University College Cork - National University of Ireland Cork

University College Dublin, National University of Ireland Dublin
National University of Ireland, Galway
National University of Ireland, Maynooth
Trinity College Dublin
Dublin City University
University of Limerick
Pontifical University of Maynooth
National College of Art & Design, Dublin
National College of Ireland
Athlone Institute of Technology
Institute of Technology, Carlow
Cork Institute of Technology
Dundalk Institute of Technology
Galway-Mayo Institute of Technology
Letterkenny Institute of Technology
Limerick Institute of Technology
Institute of Technology, Sligo
Institute of Technology, Tallaght
Institute of Technology, Tralee
Waterford Institute of Technology
Dublin Institute of Technology
Dún Laoghaire Institute of Art, Design & Technology
Church of Ireland College of Education, Dublin
Coláiste Mhuire, Marino, Dublin
Mary Immaculate College, Limerick
St. Angela's College, Lough Gill, Sligo
St. Catherine's College, Sion Hill, Dublin
St. Patrick's College of Education, Drumcondra, Dublin.
Froebel College of Education, Sion Hill, Dublin.
Mater Dei Institute of Education
34
Of the Development Guidelines

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Milltown Institute of Theology and Philosophy, Dublin
All Hallows College, Drumcondra
St. Patrick's College, Carlow
Royal College of Surgeons in Ireland
The Law Society of Ireland, Blackhall Place
The Honourable Society of Kings Inns
Montessori College, (A.M.I.) Mount St. Mary's, Dundrum Road, Milltown, Dublin 14
Burren College of Art, Co. Clare
TRBDI, Co. Tipperary
Institute of Technology, Blanchardstown
Dublin Business School, Dublin 2
The American College, Dublin
Griffith College Dublin, Dublin 8
Clonliffe College, Dublin
Holy Ghost College, Kimmage Manor
HSI College, Limerick
Portobello College, Dublin 2
LSB College
Mid West Business Institute, Limerick
Montessori Education Centre (North Great George’s Street)
Shannon College of Hotel Management
Skerrys Business College, Cork
St. John’s College, Waterford
St. Nicholas Montessori College, Dun Laoghaire
St. Patrick’s College, Thurles
St. Peter’s College, Wexford

A19
 Appendix 3 – Section 843 Legislation

Section 843 - Capital allowances for buildings used for third level educational
purposes

FA97 s25; FA98 s44; FA99 s51; FA01 s76; FA02 s35

(1) In this section-

["approved institution" means-

(a) an institution of higher education within the meaning of section 1 of the Higher
Education Authority Act, 1971, or

(b) an institution in the State in receipt of public funding which provides courses to
which a scheme approved by the Minister for Education and Science under the
Local Authorities (Higher Education Grants) Acts, 1968 to 1992, [applies,
or]2;]1

[(c) any body engaged in the provision of third level health and social services
education or training which is approved by the Minister for Health and Children
for the purposes of this section and is in receipt of public funding in respect of
the provision of such education or training;]3

"qualifying expenditure" means capital expenditure incurred on-

(a) the construction of a qualifying premises, or

(b) the provision of machinery or plant,

[which-

(i) in the case of an institution referred to in paragraph (a) or (b) of the definition of
"approved institution", is, following the receipt of the advice of An tÚdarás,

A20
 approved for that purpose by the Minister for Education and Science with the
consent of the Minister for Finance, and

(ii) in the case of a body referred to in paragraph (c) of the definition of "approved
institution", is approved for that purpose by the Minister for Health and Children
with the consent of the Minister for Finance;]4

"qualifying premises" means a building or structure which-

(a) apart from this section is not an industrial building or structure within the
meaning of section 268 [Meaning of industrial building or structure], and

(b) (i) is in use for the purposes of third level education [or associated sporting or
leisure facilities]5 provided by an approved institution,

[(ii) is let to an approved institution,]6

but does not include any part of a building or structure in use as or as part of a
dwelling-house;

"An tÚdarás" means the Body established by section 2 of the Higher Education
Authority Act, 1971.

(2) Subject to subsections (3) to (7), the provisions of the Tax Acts (other than section
317(2) [Re: Treatment of grants]) relating to the making of allowances or charges in
respect of capital expenditure incurred on the construction of an industrial building or
structure shall, notwithstanding anything to the contrary in those provisions, apply in
relation to qualifying expenditure on a qualifying premises-

(a) as if the qualifying premises were, at all times at which it is a qualifying

premises, a building or structure in respect of which an allowance is to be made
for the purposes of income tax or corporation tax, as the case may be, under Part
9 [PRINCIPAL PROVISIONS RELATING TO RELIEF FOR CAPITAL

A21
 EXPENDITURE] by reason of its use for a purpose specified in section 268(1)
(a), and

(b) where any activity carried on in the qualifying premises is not a trade, as if it
were a trade.

(3) In relation to qualifying expenditure on a qualifying premises section 272

[Writing-down allowances] shall apply as if-

(a) in subsection (3)(a)(ii) of that section the reference to 4 per cent were a
reference to 15 per cent, and

(b) in subsection (4)(a)(ii) of that section the reference to 25 years were a

reference to 7 years.

(4) No allowance shall be made under subsection (2) unless, before the
commencement of construction of a qualifying premises, [or, in the case of the
construction of a qualifying premises which consists of a building or structure which
is to be used for the purposes of sporting or leisure activities associated with third
level education provided by an approved institution where in relation to that premises
an application for certification under this subsection was made, and the construction
of that premises commenced, prior to 15 February 2001, before 1 July 2001,]7 the
Minister for Finance certifies that-

(a) an approved institution has procured or otherwise secured a sum of money,

none of which has been met directly or indirectly by the State, which sum is
not less than 50 per cent of the qualifying expenditure to be incurred on the
qualifying premises, and

(b) such sum is to be used solely by the approved institution for the following
purposes-

(i) paying interest on money borrowed for the purpose of funding the
construction of the qualifying premises,

A22
 (ii) paying any rent on the qualifying premises during such times as the
qualifying premises is the subject of a letting on such terms as are referred
to in paragraph (b)(ii) of the definition of "qualifying premises", and

(iii) purchasing the qualifying premises following the termination of the letting
referred to in subparagraph (ii).

(5) Notwithstanding section 274(1) [Re: Balancing allowances and balancing

charges], no balancing charge shall be made in relation to a qualifying premises by
reason of any of the events specified in that section which occurs more than 7 years
after the qualifying premises was first used.

(6) This section shall come into operation on the 1st day of July, 1997.

(7) The Minister for Finance may not give a certificate under subsection (4) at any
time later than the [31 December 2004]8.

[(8) Notwithstanding the powers conferred and duties imposed-

(a) on the Minister for Education and Science and the Minister for Finance to
approve or give consent to the approval of, respectively, certain capital
expenditure by virtue of [paragraph (i) of the definition of "qualifying
expenditure"]10 in subsection (1), and

(b) [in so far as that expenditure is concerned]11 on the Minister for Finance-

(i) to certify compliance with the requirements of subsection (4), or

(ii) not to give a certificate under that subsection at any time later than a
particular day by virtue of subsection (7), the Minister for Education and
Science and the Minister for Finance may, [either generally in the case of
institutions referred to in paragraphs (a) and (b) of the definition of
''approved institution'' or in respect of capital expenditure to be incurred on

A23
 any particular type of qualifying premises to be used by any such
institution]12, and subject to such conditions, if any, which they may see fit
to impose, agree to delegate and may so delegate, in writing, to An tÚdarás
the authority to exercise the powers and carry out the duties referred to in
paragraphs (a) and (b) and where these Ministers of the Government so
delegate that authority[, then, as respects the matters so delegated]13

[(I) the definition of "qualifying expenditure" in subsection (1) shall apply as if the
reference in paragraph (i) of that definition to "is, following the receipt of the advice
of An tÚdarás, approved for that purpose by the Minister for Education and Science
with the consent of the Minister for Finance" were a reference to "is approved for that
purpose by An tÚdarás", and]14

(II) subsections (4) and (7) shall apply as if the references in those subsections to "the
Minister for Finance" were references to "An tÚdarás"]9

Amendments
1 Substituted by FA98 s44
2 Inserted by FA01 s76
3 Substituted by FA01 s76
4 Substituted by FA02 s35
6 Substituted by FA98 s44
5 Inserted by FA01 s76 and deemed to have effect as respects capital
expenditure incurred on or after 1 October 1999
7 Inserted by FA01 s76
8 Substituted by FA02 s35
9 Inserted by FA99 s51.
10,11,13 Inserted by FA01 s76
12, 14 Substituted by FA01 s76

Note on FA02 Amendments

The amendment provides for a 2 year extension of the deadline for third level
education projects qualifying for capital allowances from 31 December 2002 to 31
December 2004.

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Department of Finance Guidelines
Section 843,Taxes Consolidation Act, 1997 (formerly Section 25, Finance Act, 1997)
- Capital allowances for investment in third level education

Section 843, Taxes Consolidation Act, 1997 (formerly Section 25, Finance Act,
1997), as amended by Section 44, Finance Act, 1998, provides for the granting of
capital allowances at 15 per cent per annum (10 per cent in year 7) for capital
expenditure projects in third level education where at least half of the cost of the
project is to be met by private subscriptions.

Relief is granted on the basis of certification of the project by the Minister for
Finance, on the recommendation of the Minister for Education and Science. An
application for relief is made by a third-level institution to the Minister for Education
and Science who seeks the advice of the Higher Education Authority. The Minister
for Education and Science then forwards the application to the Minister for Finance
with a recommendation on the matter. Relief is granted only for projects where the
Minister for Finance is in a position to certify that the third-level institution has, prior
to the commencement of construction, procured or otherwise secured 50 per cent of
the cost of the project from private sources and that this money will be used for
certain specified purposes.

This Department assesses applications and advises the Minister as to whether relief
should be granted on the basis of the following criteria:

1. The project helps to meet educational policy objectives and should be worthy of
support on this basis having regard to competing demands on the Exchequer.

2. The granting of tax relief for the project represents value for money.

3. The Exchequer cost of the tax relief is taken into account as part of the overall
budget for education.

4. Satisfactory evidence is produced, prior to the issue of a certificate, that 50 per

cent private source funding is in place and that it will be spent as intended.

A25