Finance Act 2010: Income tax
The Finance Bill as expected very much reflects the tone expressed in the Minister’s Budget speech last December. We welcome the fact that there have been no increases in tax rates, or significant abolition of tax reliefs. Those in higher income categories are significantly impacted by the changes introduced in relation to the High Earners Income Restriction. This will have a significant cash flow impact for example on individuals who have borrowed to invest in certain trading companies.
High earners income restriction
Finance Act 2006 introduced a High Earners Income Restriction (HEIR) which took effect from 2007. The aim of the restriction was to limit the amount of certain reliefs the “high net worth” individuals could claim to broadly the greater of €250,000 or half of their income per annum, ensuring that they had a minimum effective tax rate of c.20%. Any reliefs not claimed due to the restriction could be carried forward and claimed in future years. The restriction not only impacted on the more prevalent reliefs such as property incentives, where the deferral of the reliefs greatly impacted on the IRR of such investment, but also on charitable donations, interest relief for investment in certain companies, and the artist and patent exemptions.
The Finance Bill gives effect to the announcement by the Minister on Budget Day of an increase in the effective rate of income tax to c.30%. From 2010 onwards, those individuals who have income in excess of €400,000 and are claiming reliefs in excess of €80,000 will be subject to the restriction. The amount of reliefs that such individuals will be able to claim will be limited to the greater of €80,000 or 20% of their income. The changes, together with the Income Levy introduced last year mean that those individuals with significant income will have an overall effective tax rate of c.36%.
The workings of the original HEIR formula inadvertently brought certain individuals into its remit, who on first glance may not appear to have been affected. In particular, individuals with significant amounts of deposit interest were affected, as deposit interest erodes the €250,000 limit. Therefore, the greater the deposit interest, the less reliefs that could be claimed. It is regrettable that the Finance Bill does not rectify this, particularly given the increase in savings levels.
Please see high earners income restriction overview attached.
Remittance basis
Remittance basis removal for Irish Citizens – not ordinarily resident in the State
The remittance basis for income tax for non Irish income is being removed with effect from 1 January 2010. For the last number of years the remittance basis had been restricted specifically in respect of foreign employment income where the duties were performed in the State. It was however still available to:
- Non Irish domiciles OR
- Irish Citizens who were not ordinarily resident in the State
in respect of their:
- Foreign Employment income relating to non-Irish duties AND
- Other foreign (non employment) income.
As from 1 January 2010 this beneficial tax regime has been removed for Irish citizens irrespective of their ordinary residence status in the State. Although a full removal of the remittance basis was recommended in the Commission of Tax report, this amendment remains disappointing in that it removes one of the few attractive points for any Irish entrepreneur seeking to return home. The relief itself was typically only available for a period of 3 years following an individual’s return to Ireland, until ordinary residence was regained, and, as such, it is unfortunate that such a short term benefit has been removed.
Extension of the remittance basis to EU countries
Some welcome news for non-Irish domiciles with foreign employments, and ultimately good news for Ireland in general, is the extension of the tax repayment available for unremitted employment income designed to compensate for the removal of the original remittance basis.
Introduced in Finance Act (No.2) 2008, this repayment claim was available only in very limited circumstances where Ireland had a Double Taxation Agreement with a country outside the EU. Additional restrictions also applied to the employee such that a repayment claim was not always available.
The amendment, which applies to non Irish domiciled individuals who become resident in and working Ireland for first time during 2010 or thereafter, makes a repayment claim more widely available. Specifically, the amendment provides that being an EU national or having an EU employer, no longer excludes an employee from making a repayment claim.
Additionally, a claim can be made in respect of 2010 and future years where an employee has only been working in Ireland for one year, whereas for 2009 an employee has to work in Ireland for 3 years.
Where all conditions are satisfied, an employee may make a claim on their tax return for the appropriate year for their taxable income to be determined based on the higher of:
- The actual amount attributable to Irish duties that was remitted in that year; or
- €100,000 plus 50% of the balance attributable to Irish duties
While the repayment claim is not available to Irish domiciles even if they have a foreign employment, this measure is likely to increase Ireland’s attractiveness to foreign multinational companies considering investing into Ireland.
Domicile levy
The “Domicile Levy” is introduced as indicated in the Ministers budget speech. The domicile levy is designed to ensure that certain individuals who continue to have close ties to the State will pay a minimum amount to the Department of Finance irrespective of their residence position here. The domicile levy itself is a maximum annual amount per tax year of €200,000 which can be reduced to the extent that income taxes which are due for that tax year and have been paid by or on the due date of the domicile levy. The due date for the domicile levy is the 31 October following the end of the tax year in question. As such the first domicile levy due will be payable on 31 October 2011 at which time a return must also be made to the Revenue Commissioners with all the particulars. Any income taxes due for 2010 and paid before 31 October 2011 will therefore reduce the level of domicile levy payable.
The domicile levy will be due in respect of:
- An individual who is domiciled in, and is a citizen of, the State AND
- Whose worldwide income for that tax year is more than €1,000,000 AND
- Whose liability to income tax in the State for that tax year is less than €200,000 AND
- The market value of whose Irish property on the valuation date in the tax year is in excess of €5,000,000
The valuation date is 31 December of the tax year in question. As currently drafted it appears that Revenue will be taking a strict line with the new levy, in that they must be satisfied with the valuation of the property on the return otherwise they can use their own estimate which would then have to be appealed by the tax payer if disputed. Revenue would appear to have been granted a great deal of latitude in this regard, while it is acknowledged that they may utilise qualified persons to determine the appropriate valuation and thankfully not at the taxpayers’ expense, at least not directly. Irish property relates to all property situate in the State at the 31 December in question but specifically excludes;
- Shares in a company which exists wholly or mainly for the purpose of carrying on a trade or trades and
- Shares in a holding company which derive the greater part of their value from subsidiaries which wholly or mainly carry on a trade or trades.
Worldwide income will also come under close scrutiny with the valuation to be made on the basis of an individual being resident in the State even if not otherwise resident here. Following the trend set by the income levy, certain deductions normally available for income tax are disregarded when considering worldwide income for the purpose of the domicile levy. The removal of the remittance basis for Irish citizens who are not ordinarily resident may also increase the level of worldwide income for the domicile levy.
The Committee Stages of the Bill have been used to at an early stage apply anti-avoidance provisions surrounding the disposal/transfer of Irish property to a spouse/minor child or through the use of a discretionary trust or other vehicle. The provisions only apply to disposals/transfers on or after 18 February 2010 for less than market value, and result in the property remaining under the beneficial ownership of the transferor for the purpose of the domicile levy.
The potential negative impact of the Domicile Levy on investment into Ireland is also acknowledged in the Committee Stage amendments. An individual may now request an opinion from Revenue, when considering making a significant investment in the state, whether such an investment would bring them within the Domicile Levy net. Revenue are not, however, obliged to give such an opinion.
Preferential loans
Certain changes were introduced to ensure that in the cases of preferential loans where the loan no longer qualifies for interest relief, the individual remains liable to tax on the benefit-in-kind arising on the difference between 5% and the interest rate charged.
Mortgage interest relief
The Finance Bill provides for the measures announced in the Budget, as follows:
- An extension until 2017 of mortgage interest relief at current rates and levels of relief for qualifying loans taken out on or before 31 December 2011
- The extension of the relief, albeit at reduced levels and duration, for those who take out qualifying loans between 1 January 2012 and 31 December 2012
- Mortgage interest relief will cease to be available for 2018 and onwards
Service charges
As was recommended in the Commission on Taxation Report, relief for service charges paid in 2011 and onwards has been discontinued. Relief will be available in 2011 for service charges paid in 2010.
Rent-a-room relief
Rent-a-Room is a valuable relief for homeowners looking to supplement income, whereby income up to €10,000 per annum can be earned free of tax. The relief was restricted in previous Finance Acts to counteract parent/child tenancy situations. This Finance Bill further extends the restrictions to cases where in certain circumstances, rents are received by an employee from their employer.
Age related relief for health insurance premiums
The Bill provides for a further increase in tax relief for medical insurance premiums entered into or renewed on or after 1 January 2010, for those aged 60 and over. This further enhances the increased relief for the elderly introduced with effect from 2009 onwards.
Equity awards
Restricted shares
The Bill contains two technical amendments to the rules regarding the taxation of shares acquired by directors and employees which are subject to certain restrictions.
The first amendment provides that the trust in which the restricted shares are held, must be established in the State or in another EEA State and that the trustees must also be resident in the State or in another EEA State. Employers seeking to provide such restricted shares to directors/employees will need to ensure that the employee benefit trusts which are established to hold the shares during the restricted period fulfill these conditions. The amendment applies to restricted shares acquired on or after 4 February 2010.
The second amendment clarifies that it is the amount of income chargeable to tax on the acquisition of the restricted shares that is reduced and not the amount of income tax payable. This definition has been back dated to 20 November 2008, the day the restricted shares legislation was originally introduced. This is a welcome move as there had been a lack of clarity in the language of this section.
The amount of income chargeable to tax on the acquisition of the restricted shares can be reduced by up to 60%, depending on the length of the restricted period.
Share scheme reporting
The Minister has announced a new section which makes it mandatory for employers to automatically file returns of information to the Revenue Commissioners regarding shares and other securities awarded to directors and employees. The filing deadline is 31 March in the year of assessment following the year in which the award was made.
While the new section applies to all awards of shares to directors and employees, it is aimed at the reporting of “free” shares awarded to directors and employees which employers have not previously been automatically obliged to report to the Revenue Commissioners. The new section will not apply where employers have an obligation to report specific types of share awards (e.g. unapproved share options, restricted shares, forfeitable shares, convertible securities) to the Revenue Commissioners under other income tax provisions.
While this new reporting section applies on or from 1 January 2010, employers will need to file a return detailing the shares awarded to employees and directors in the 2009 tax year by 31 March 2010. This reporting requirement will add more strain to employers whose administrative burden regarding share scheme reporting has increased significantly in recent years.
It also remains to be seen how this new reporting obligation will interact with the Form P11D on which employers are required to report employee benefits (including free shares) when notified by Revenue to do so.
Broadly, as a result of this provision, employers are now required to report all equity awards to Revenue.
The Bill also provides for penalties where employers fail to make the required returns of information and where they fraudulently or negligently make incorrect returns.
Approved profit sharing schemes
The Bill provides for amendments to the legislation regarding Revenue approved profit sharing schemes which are designed to counteract tax avoidance schemes which have arisen in this area.
The first amendment provides that with effect from 4 February 2010, the Revenue Commissioners will not approve a profit sharing scheme unless they are satisfied that there are no arrangements in place that provide for loans to be made to employees eligible to participate in the scheme.
The second specifies that shares appropriated to employees on or after 4 February 2010 cannot be shares in certain service companies.
Income levy
Following the introduction of and subsequent increase in the income levy in 2009 the Bill looks to clarify a number of issues previously discussed in the Revenue’s Income Levy Guide. The amendments primarily relate to the clarification of certain exemptions from the income levy in relation to payments provided on cessation of an employment and also the interaction of the income levy and the various double taxation agreements Ireland has in place with its treaty partners.
Benefit in kind
The Commission on Taxation recommended that some tax reliefs should be withdrawn and the Finance Bill has implemented two changes:
- An exemption from a Benefit in Kind charge on the provision of qualifying art objects to certain employees or directors by an employer is no longer available from 1 January 2010
- Income tax relief on the premiums paid under long term care policies has ceased from 1 January 2010
Relief for health expenses
The Revenue has previously provided a list of the hospitals, nursing homes etc. which were approved for the purposes of claiming tax relief for health expenses incurred as a patient. Unless the institution was on the list no tax relief was available.
Hospitals no longer need to be approved by the Minister for Finance before a claim for expenses is made, subject to some conditions. Nursing home fees will also qualify for relief provided it supplies 24 hour qualified nursing care.
The Minister has disallowed general cosmetic surgery costs and has the power to deem some treatments ineligible for the relief where they are considered contrary to public policy.
Cross border workers relief
This relief applies to an individual who is employed where the employment is held in a country outside the state and in a country with which Ireland has a double taxation agreement and provided other conditions are met the income may not be subject to tax in Ireland. One of the conditions is that the person must spend one day per week in the state.
The definition of a day for the purpose of this relief has been brought in line with the definition of a day for tax residency purposes and therefore a day counts if the person is in Ireland for any part of the day. The requirement to be present in the State at midnight no longer applies to this relief.
Qualifying farmer and stock relief
A “qualifying farmer” can obtain stock relief equal to 100% of the increase in stock values during the accounting period. Such a farmer would have commenced farming in 2007 or later, be under 35 years of age and be suitably qualified by completing certain training courses.
The Bill adds the Bachelor of Agricultural Science - Agri-Environmental Science awarded by UCD degree to the list of training courses.
Rental losses and capital allowances
The Bill clarifies the order of utilisation of certain rental losses and capital allowances in computing an individual’s taxable income, stating that rental capital allowances arising in a year are to be deducted in priority to Case V losses brought forward from prior years. While this has been Revenue practice, the legislation was not clear and it was arguable that losses forward could have been used first.
Significant buildings and garden schemes
Tax relief has been available for up to €31,750 on expenditure of significant buildings and gardens where the person is a “passive investor”. A passive investor is in broad terms a person who has acquired an interest in the building or garden in order to het the relief and title will pass back to the original owner or a person connected with him. The relief is unlimited for other investors.
As recommended in the Report by the Commission on Taxation, the Bill has abolished the relief available to ‘passive’ investors with effect from the tax year 2010. The relief will continue to be available for 2010 and 2011 in respect of work which was underway or contracted for on or before 4 February, 2010.
Professional services withholding tax
The Bill has increased the scope of accountable persons who must now operate professional services withholding tax. The list of bodies now includes:
- Pobal
- Commission for Energy Regulation
- Digital Hub Development Agency
- National Transport Authority
- The Medical Council
- Anglo Irish Bank Corporation Limited
- Central Bank and Financial Services Authority of Ireland
- Financial Services Ombudsman’s Bureau
- Broadcasting Authority of Ireland
Approved charities and donations
In order to bring Irish legislation in line with certain provisions of EU Treaties, the Bill introduces a number of provisions relating to charities. The Bill provides that charities established in any state which is a member of the European Economic Area or the European Free Trade Association will be entitled to apply for a tax exemption in respect of any qualifying income arising in the State. The exemption is currently only available to Irish charities. The Bill also provides that where such a charity is granted charitable status, it may apply for the donations relief scheme after a period of two years so that tax relief would be available for donations made, provided certain conditions are satisfied.
The Bill also includes provisions to assist Revenue in administering the extension of the schemes.
Tax treatment of Government securities
The Bill provides that the tax exemption which currently applies to income arising on Government Savings Certificates will apply to interest in respect of similar products issued by governments of other EU Member States.
The Bill also provides that the tax exemption for certain Government securities is extended to apply to non-resident individuals. Currently, there is a requirement for the person to be non-ordinarily resident and/or non-domiciled.
Donations of gifts to the State
Current tax legislation results in no tax payable where a person donates property to the State in certain cases. In line with the Commission on Taxation Report, the Bill proposes that this exemption will cease to be available for gifts donated on or after 4 February 2010.
Voluntary gift scheme
The Bill effects a voluntary gift scheme for members of the judiciary and military judges, whereby tax relief will be available for certain gifts to the State made by members of the judiciary and accepted by Revenue.
Tax clearance certificates
The Bill seeks to expand the taxes with which a taxpayer must be compliant before a tax clearance certificate will be issued to include custom duties and excise duties.
Co-operation to combat tax evasion
The Bill includes provisions which will allow the Government to enter into double-taxation agreements with other countries which facilitate the recovery of Irish taxation in the foreign treaty jurisdiction and vice versa. Provisions are also included to facilitate the Convention on Mutual Administrative Assistance in Tax Matters being incorporated into Irish law. This convention provides for co-operation between signing countries in relation to recovering foreign tax and exchanging information in order to combat tax avoidance and evasion.
New tax treaties
The Bill ratifies new double-taxation agreements with Bahrain, Belarus, Bosnia and Herzegovina, Georgia, Moldova and Serbia.
It also provides for the ratification of information exchange agreements with eight other countries/territories, which are Anguilla, Bermuda, the Cayman Islands, Gibraltar, Guernsey, Jersey, Liechtenstein, and the Turks and Caicos Islands.
Relief for childcare facilities
The Bill proposes the abolition of the scheme of capital allowances in respect of childcare facilities/crèches on 30 September 2010. The Bill provides for transitional measures for projects already in the pipe-line. Therefore, where certain conditions are satisfied, relief may continue to be available for expenditure incurred by 31 March 2012.
Mandatory disclosure of certain transactions
In what is described as an anti-avoidance measure the Minister for Finance introduced a very late amendment to the Finance Bill 2010 at committee stage providing for the mandatory reporting of certain transactions.
Broadly speaking the proposed amendment provides that either promoters (which will include accountants, tax advisors and banks) or tax payers contemplating or implementing certain transactions will be obliged to provide details of those transactions to Revenue. The transactions are described as disclosable transactions and are broadly defined as any transaction or any proposal for a transaction which might result in the obtaining of a tax advantage for any person.
Apart from broad policy concerns mentioned below in relation to the proposed legislation an unsatisfactory feature of the amendment as presented is that it is vague on precisely what type of transactions will require to be reported to Revenue and when they must be reported. This detail is to be contained in regulations made by the Revenue Commissioners with the consent of the Minister for Finance. Among the matters to be contained in the regulations are:
- The type of transactions which are to be “disclosable transactions”
- The type of information to be provided to the Revenue Commissioners in relation to disclosable transactions
- The time period within which information must be provided to the Revenue Commissioners
Therefore, while clearly signalling that there will be compulsory reporting of certain transactions, the draft legislation does not set out precisely what those transactions will be, how they are to be reported to Revenue or when. Given that the provisions if enacted will apply to transactions falling after the date of the passing of the Act, which is likely to be before the publication of the detailed regulations, there will be a period of uncertainty during which persons contemplating transactions will not know whether those transactions will be included as “disclosable transactions” when the detailed regulations are published. This is most unsatisfactory.
The Minister has stated that his officials and officials of the Revenue Commissioners will engage in a consultative process with practitioners and other interested parties in the drawing up of the detailed regulations. In these difficult economic times the regulations when drafted must ensure:
- Certainty for tax payers engaging in normal commercial transactions
- The regulations are clear on what transactions are reportable, what information is to be provided and when
- Compliance with regulations must not lead to burdensome tax administration impositions and compliance costs
The manner in which this very significant amendment was introduced by the Minister without consultation is to be regretted. The vagueness of the legislation creates uncertainty at a time when business needs it least. Hopefully the consultative process which the Minister has promised leading to the detailed regulations will remove any uncertainties.