Deloitte analysis - income tax and Budget 2012

Over the last few consecutive Budgets, we have seen the marginal rate of income tax rise to 55% for individuals with non-employment income in excess of €100,000.  

It is welcomed that in a Budget which promised to raise €1.6bn through tax increases and additional charges, the rates of income tax have not been changed. This, combined with no reduction in tax bands or personal tax credits, ensures that in times when efforts to encourage employment are paramount, such efforts are adequately supported.

Legacy property incentives 

Finance Act 2011 saw a number of significant reforms to legacy property incentives being proposed.  Due to significant lobbying by a number of groups, it was proposed that such reforms would be subject to an Economic Impact Assessment. The Minister announced in today’s Budget that such an impact assessment has been undertaken. In a welcomed conclusion it was determined that such proposals were unworkable and would impact significantly on investors who are currently vulnerable to insolvency.  

However, whilst the all encompassing changes to such reliefs introduced in Finance Act 2011 will not be implemented, certain reforms have been introduced for certain “high income investors” only so as not to impact on smaller scale investors.

• A property relief surcharge of 5% will be charged on investors with gross income over €100,000. This will apply to the amount of income sheltered by such property reliefs in a tax year.
• The Section 23 relief will not be restricted or terminated for investors with gross income of less than €100,000.
•  Under current rules, individuals with a pool of unclaimed accelerated capital allowances arising from a particular investment could carry these allowances forward against future rental income indefinitely until fully utilised.  
• Where the tax life ends on or after 1 January 2015, going forward accelerated capital allowances may only be claimed within the tax life of the particular property.  Where the tax life has ended before 1 January 2015, no unused accelerated capital allowances can be carried forward into 2015.

We await the Finance Bill for full details on the above.

High earners restriction 

Various changes to the High Earners Restriction regime have seen the introduction of a minimum effective income tax rate of 30% for certain “high earners” claiming particular reliefs since its introduction in 2007.
In today’s Budget speech, the Minister acknowledged the fact that the restriction combined with PRSI and USC ensured that in reality such individuals had a marginal income tax rate of 44%. However, no further immediate amendments have been introduced to the restriction, but he alluded to a possible revisit to the matter in Budget 2013 depending on the outcome of the Revenue Report.

Deposit interest retention tax (DIRT) 

There is no doubt that the retention of deposits in Irish financial institutions is increasing with the amount of Euro on deposit at an all time high.  

In moves specifically targeting savings, the rate of DIRT has increased progressively over the last number of years from 20% to the current rate of 27%.  Today’s Budget has seen a further increase in the rate of DIRT to 30% from 2012. 

 It will remain to be seen if such changes will have any significant impact on the retention of cash deposits in Ireland.

In line with previous years, the rate of tax on income and gains on various life assurance policies, foreign life policies and offshore funds has increased by a further 3%.

Domicile Levy

A domicile levy was introduced by Finance Act 2010 and ensured that certain individuals who are domiciled in or are citizens of Ireland, with worldwide income below €1 million, Irish property with a market value of  more than €5 million, and an Irish tax liability of less than €200,000, were subject to an additional domicile levy of €200,000.

The conditions for the application of the Domicile Levy have been amended to ensure that it will no longer be a condition that an individual is a citizen of Ireland for the levy to apply.  This is to counteract a perceived loop hole whereby an individual could renounce his or her Irish citizenship and thus avoid the domicile levy charge.

Pensions 

The Minister has recognised that significant taxes have already been raised on pension funds through measures introduced in the last Budget and the subsequent pension levy. He has now elected to take the necessary time to form a considered view of what further contribution pension funds can make, including greater investment in Ireland, rather than further reducing tax reliefs as originally laid out. The Minister has stated that he wants the pension system to be both sustainable and more equitable over the long run and will engage with various stakeholders to this end during 2012.

That said, based on the Government's projections, there were two important strands of change that will see pensions contribute an extra €57m in 2012 and €95m in subsequent years. 

These are:

1. Removal of the remaining 50% relief on PRSI that employers benefit from where employees make pension contributions; and
2. Increasing the imputed income distribution on individuals with ARF holdings greater than €2m from 5% to 6%, introducing imputed income distribution liabilities on vested PRSAs consistent with ARFs, and taxing ARF proceeds paid on death to a child over age 21 at 30% in place of 20%.

The vast bulk of the additional revenue payable to the Government will fall as additional cost on employers.

Applying consistent treatment between ARFs and PRSAs seems broadly appropriate. The higher 6% rate of imputed income on larger ARFs (e.g. ARFs >€2million) may see some individuals taking a once off additional withdrawal from their ARF to bring it below €2m, and therefore back into the 5% imputed income level. That of course will depend on the size of the ARF and the extent to which it is considered as a wealth transfer mechanism for the children of the beneficiary.

PRSI / USC

The social insurance system has seen significant changes over recent years through the introduction of the Universal Social Charge (USC) to replace the combined health contribution and income levy regimes in addition to the increase of the rate of PRSI from 3% to 4%.
Today’s Budget sees a welcome measure for those individuals on the minimum wage, and part time workers with the entry level being increased from €4,004 to €10,036 in 2012, and should contribute somewhat to easing the financial burden on such individuals.  

Heretofore, employees with other sources of income such as rental income and investment income were exempt from PRSI on this income, whereas self employed individuals were subject to PRSI on such sources of income.  This Budget has addressed this apparent discrepancy in that it is proposed that from 2013 employees will now be subject to PRSI on non-PAYE income.  

Farming 

The farming sector received significant focus in today’s Budget in a number of welcomed measures:

• Retirement Relief (a relief from capital gains tax) is to be modified for individuals transferring farms and businesses to the next generation, to incentivise such transfers to take place before the individual reaches the age of 66.  The details of the modifications to the relief will be introduced in the Finance Bill.
• For farmers operating through a farming partnership, the rate of stock relief is to be enhanced to 50% for all registered partnerships, and to 100% for certain young trained farmers forming such partnerships.
• The top rate of stamp duty on farm lands (and also to commercial and industrial buildings) has been reduced from 6% to 2%.

Mortgage interest relief 

In a move surely to be welcomed by individuals who purchased their homes between 2004 and 2008, the rate of mortgage interest relief will be increased to 30% for first time buyers who purchased their homes in that period.

For individuals who purchase a home in 2012, enhanced rates of mortgage interest relief will be applied as follows:

• First time buyers: 25%
• Non first time buyers: 15%

As confirmed in previous Budgets, mortgage interest relief will no longer be available for individuals who purchase a home after 2012, and will be completely abolished from 2018.

Mobility

Two specific measures targeting the taxation of internationally mobile individuals were announced in the Budget. 

These measures seek to encourage the movement of people in relation to two of the key areas affecting Ireland’s road to recovery - the encouragement of a skilled workforce to come to Ireland and to assist the export sector which has performed well over recent times.

A Special Assignment Relief programme was announced by the Minister although specific details of the relief are expected in the Finance Bill. This programme is welcomed following the various changes in taxation on foreign income introduced in prior Budgets which have negatively impacted not only foreign employees working in Ireland but also Irish domiciles returning home.

While some specific reliefs for foreign employments were introduced in 2009 and subsequently extended in 2010, these had only a limited benefit. They proved complicated to operate and did not compare competitively with regimes elsewhere in Europe.  Irish domiciles were also excluded from these reliefs.

Following the announcement of this new relief programme it is hoped that, when details are published, the program will provide a significant incentive to encourage a skilled workforce to come to Ireland without introducing overly complicated conditions.

To assist in the export sector,  the Minister announced a new Foreign Earnings Deduction for employees working temporarily (more than 60 days a year) overseas in certain developing countries including Brazil, Russia, India, China and South Africa. Again, specific details are expected in the Finance Bill. However, it should be noted that a Foreign Earnings Deduction relief programme has existed previously in Ireland before being removed at the end of 2003. This may give an insight into the intentions of the Minister.  

Under the previous regime, a proportion of employment income relating to workdays spent overseas could be excluded from taxation and the tax paid on this portion of income via the PAYE system could then be reclaimed by filing an appropriate tax return.

Reward

An innovative announcement relating to R&D tax credits may have beneficial impact on certain key employees with confirmation that R&D credits may be used to reward employees in the form of a bonus.  Exact details are eagerly awaited although this again points to the move to encourage a skilled workforce to locate/stay in Ireland.

Employer Taxes

More significant however was the announcement from the previous day from Minister Howlin that an Employers Statutory Redundancy Rebate from the Government is to be reduced not to 30% as expected but to 15%.  This reduction in rebate is expected to affect a redundancy which takes place with effect from 1 January 2012. 

No transitional details have been announced which may ease the situation where a redundancy has already been initiated, budgeted for but which may not itself be complete before the turn of the year.