The Finance Act presented no unforeseen changes to the income tax platform. The more significant changes deal with a new property surcharge and the rules governing the carrying forward of capital allowances. These were well flagged in the Minister’s Budget Statement in December 2011. Further details in relation to these changes are set out below.
A number of changes were made to the Universal Social Charge (USC) to address some anomalies which arose following the application of the USC to shares and share options. These include the provision that a gain on the exercise, release or assignment of a share option will not be subject to the higher rate of USC i.e. 10%, which applies to self-employed individuals on income above €100,000. This will bring the legislation in line with the Revenue’s stated position that the increased rate of USC does not apply to share option income.
The USC applies to the market value of shares appropriated under an Approved Profit Sharing Scheme (APSS). Previously the USC was payable on the early release of the shares from the APSS and also on the receipt of a capital receipt prior to release which would, for example, arise on a right’s issue. The Act provides that where the USC is payable on the appropriation of the shares it will not apply on the early release of the shares or on a capital receipt prior to release. This removes a potential double charge to the USC.
The Act provides that the USC will not be payable on shares appropriated under an APSS where the shares were held by an employee under an Employee Share Ownership Trust (ESOT) prior to 1 January 2011. These changes have effect from 1 January 2011.
The Act provides that an employer will be permitted to sell sufficient shares to cover the USC, or part of the USC, due on share remuneration where it is not possible to collect it from the payments to the employee or the employee has not paid the amount due to the employer. This addresses a practical issue for employers although many unapproved share plans provide that shares can be sold to cover any withholdings the employer is legally obliged to apply.
The Revenue stated in Tax Briefing 2/2011 issued in March 2011, that the USC is payable by the individual within 30 days of the exercise of a share option. The Act includes an amendment to copper fasten this position.
When a landlord sells a rental property on which he/she received S.23 relief, there can in certain circumstances, be a claw back of the relief which is treated as rental income in that year. Excluded from the definition of income to which the USC applies is this “deemed” rental income.
The Act provides for a refund of income levy and USC, as appropriate, where forfeitable shares are forfeited. This is similar to the income tax refund available when such shares are forfeited.
The Act amends the PAYE legislation to provide that an employer can withhold, and sell, sufficient shares to cover the PAYE applicable to share remuneration. This is permitted where the employee does not otherwise provide the employer with the funds to pay the PAYE due. Many share plans provide that the employer can withhold shares to cover withholding which the employer is legally obliged to apply. However this amendment is a welcome one for those companies where the plans may not have included such a provision.
The Act re-introduces, in a limited form, the Foreign Earnings Deduction. A deduction will be available for employees working temporarily overseas in the BRICS countries (Brazil, Russia, India, China and South Africa). The deduction is subject to a maximum claim of €35,000 and shall apply for the tax years 2012, 2013 and 2014.
In order to receive this deduction the employee must spend at least 60 days working in a BRICS country in a tax year or in a continuous 12 month period. These “qualifying days” must form part of a period of at least 4 consecutive days spent working in the BRICS country.
The deduction does not apply to employees paid out of the public revenue of the State e.g. civil servants, Gardaí and members of the defence forces or individuals employed with any board, authority or similar body established by or under statute.
The deduction is calculated based on the amount of time spent working in the BRICS country and is calculated according to the following formula:
An example of how this deduction works is as follows. An individual who is tax resident in Ireland spends 120 qualifying days working in Brazil. The employment income for the year amounts to €100,000. The Foreign Earnings Deduction is calculated as follows:
|Total employment earnings||€100,000|
|Less: Specified Amount (120*X €100,000) / 365||€32,877|
The deduction is claimed at the end of the tax year when making an annual return of income for that year. A deduction will not however be claimable where another relief is claimed by the employee e.g. split year relief, Trans-border Relief, Special Assignment Relief Programme, R&D Incentive and the limited remittance basis that still exists.
The Act provides for tax relief for employees engaged in R&D activities referred to by the Minister in the Budget. Key employees will be able to claim a relief for R&D tax credits surrendered to them by their employer.
Where the employer surrenders an amount to a key employee the employee can have the income tax charged on their employment income reduced by the amount surrendered. The relief can be claimed for the tax year following the accounting period to which the amount surrendered relates. However, the employee’s effective income tax rate on their total income, including that of their spouse or civil partner where relevant, cannot be reduced to less than 23%.
If the amount surrendered cannot be claimed in one year due to the 23% rate restriction the excess can be carried forward and offset against the income tax charged on the employee’s emoluments in the next or future years. The relief can be carried forward until it is fully claimed or until the individual ceases to be an employee of the company which surrendered the R&D credit.
A key employee is one who:
The employer will also have to satisfy a number of conditions. Details of these conditions can be found in the Corporation tax analysis of the Act (Include link to corporation tax section)
The relief could generate income tax savings of up to 18% for individuals and may be an effective method of incentivising key employees in the R&D space.
During the Budget statement last December specific reference was made to a new Special Assignment Relief Programme to attract key personnel to Ireland. The first step in this process covered in the Act is the removal of an existing relief which had been available over the last few years to certain foreign employees working in Ireland. The existing relief which partially re-introduced a limited remittance basis of taxation for certain foreign employees, is removed for new employees with effect from 1 January 2012. For employees engaged before this date, the old relief will continue to be available for a maximum of 5 years as follows:
The new relief is available for those arriving between 2012 and 2014 and is welcomed in that it will encourage new workers (or returning workers who have been outside Ireland for at least 5 tax years) to come to or return to Ireland. Specifically while a number of conditions apply in order to obtain the relief it is not limited to either foreign employments or non-Irish domiciles. Clearly this is designed to encourage the Irish Diaspora to return home and help the economic recovery.
Subject to conditions the relief is available for 5 consecutive tax years. In its basic form the relief will allow a relevant amount of compensation otherwise liable to tax in Ireland to be excluded from tax. The relevant amount is valued at 30% of compensation between upper and lower thresholds (€500,000 upper and €75,000 lower).
In determining whether an individual is entitled to the relief, the amount of compensation excluding:
For example an individual coming to Ireland for the first time with a basic salary of €200,000 and assuming all other conditions are met would be entitled to have their taxable income reduced for that first year by an amount of €37,500 (€200,000 minus €75,000 @ 30%) thereby generating a tax saving of €15,375 i.e. €37,500 @ 41%.
The relief is however only for income tax and does not apply for the Universal Social Charge. Additional conditions apply for both the employee and the employer in order to obtain the relief and care will need to be taken to ensure that the detailed conditions are adhered to including the tax residence position of both the employee and employer (or associated employer) at various points. The relief is specifically designed to complement Ireland’s Double Taxation network and countries with which Ireland has a tax information exchange agreement.
On a positive note it is possible for employees and employers to obtain relief through the PAYE system so that the relief can have an immediate impact rather than waiting until the tax year end to make a claim. Employees making a claim however will automatically become chargeable persons for the year of claim which will result in a requirement to file tax returns.
Employers will also have a reporting requirement to Revenue for various details surrounding such employee claims.
Employees will however have to take care before making a claim to ensure the relief provides the best tax answer for them as making a claim will negate other possible claims which may reduce tax e.g. a Foreign Earnings Deduction, Trans-border Relief, R&D incentive and possibly the limited remittance basis that still exists.
Finally, in addition to the exclusion of a relevant amount from tax an employer will also be able to bear the cost of certain items for a relevant employee without creating an addition tax cost.
These include the cost of one return trip for the employee and family to the overseas country they are connected with as well as Primary and/or Post Primary School fees of up to €5,000 per annum per child where the school has been approved by the Minister of Education.
Overall the new relief has to be seen as a positive step in encouraging new employees to move to Ireland and specifically to encourage the Irish Diaspora to return.
The Act introduces a new property surcharge from 2012 onwards, by means of an extension of the Universal Social Charge. It applies once certain conditions are satisfied:
The definition of “specified property reliefs” is extensive, but in broad terms captures certain area based capital allowance schemes (e.g. Custom House Dock, Temple Bar, Designated areas, Enterprise areas etc) where allowances were granted on an accelerated basis (i.e. generally an initial allowance of 50% of the capital expenditure was granted in year 1). It also includes capital allowances granted on the construction of holiday camps, third level institutions, childcare facilities, and tourist facilities. It includes capital allowances claimed in a particular tax year, and also any unused capital allowances carried forward from earlier tax years.
Once the above conditions are fulfilled, the 5% additional USC applies to the amount of the specified reliefs that an individual uses to shelter his/her income.
In addition, where this additional 5% USC applies to an individual in 2012, his/her preliminary tax for 2012 must be calculated as if this additional surcharge applied in 2011.
The tax credits available for individuals on health insurance premiums has changed over the last number of years, with the introduction of age related enhanced credits which heretofore were increased at 10 year intervals. The Act amends the credit system so that the increased credits will be given at 5 year intervals.
In previous years, when an individual was receiving illness benefit, the first 36 days payment from the Department of Social Protection was exempt from tax. From 2012 onwards, this exemption has been abolished.
As was announced in the Budget in a move that was welcomed at that time, the Act confirms an enhanced rate of interest relief of 30% for individuals who purchased their homes between 2004 and 2008.
As was previously alluded to, mortgage interest relief will no longer be available for individuals who take out loan after 31 December 2012, and will be completely abolished from 2018.
Individuals who have been long term unemployed and subsequently return to the workforce are entitled to tax deductions from their income for the first three years. The basic deduction is €3,810 in the first year, €2,540 in the second year and €1,270 in the third year. This relief has been broadened to include individuals who sign on to claim for PRSI credits.
Tax relief for third level fees has been modified over the last number of years. The Act provides that the first €2,250 and €1,125 of fees are to be disregarded for full time and part time courses respectively.
The Minister announced in his Budget speech that he intended to revisit the operation of the “High Earners Restriction” in Budget 2013. As expected there are no fundamental changes to the mechanics of the restriction in the Act. In broad terms one of the conditions of the restriction was that an individual’s income was above certain limits. Under the current rules individuals who suffered a claw back of S.23 relief, or a claw back of capital allowances on the disposal of a property (i.e. in both cases the claw back is treated as additional income) may have been classified as a High Earner.
New provisions in the Act , ensure that this “deemed” income does not cause an individual outside the scope of the restriction to be brought within its parameters.
An Economic Impact Assessment dealing with the proposed changes to legacy property reliefs has been completed . Previous Finance Acts had provided that S.23 relief and certain capital allowances be significantly curtailed. However, as alluded to in the Ministers Budget speech, the conclusions drawn by the Impact Assessment ensure that the proposed curtailments are revoked in the Act. This will be welcomed by many investors who are currently vulnerable to insolvency.
The second element of the Act, deals with the carry forward of capital allowances in respect of property incentives. The rules prior to this Act allowed, individuals with a pool of unclaimed capital allowances arising from a particular investment to carry these allowances forward against future rental income indefinitely until fully utilised.
However, the Act introduces a number of measures with regards to the carrying forward of such capital allowances for “passive investors”. These new measure will not apply to a trade in which the individual is an active partner/trader.
The allowances that are impacted are as follows:
The restriction applies by basically applying a “guillotine” to the carry forward of unused capital allowances. No unused capital allowances can be carried forward beyond the tax life of a building. Where the tax life of a building has already ended, or is due to end before 31 December 2014, then any unused capital allowances can be brought forward for relief until 31 December 2014.
A number of welcomed measures as highlighted in the Budget have been introduced in the Act. Farmers will now be entitled to a double deduction when calculating their taxable profits for the increase in the rate of carbon tax on farming diesel. This will be effective from 1 May 2012.
In addition, for individuals who farm through a farming partnership, enhanced stock relief of 50% is available. For young trained farmers, this relief is increased to 100%. This is subject to EU approval under State Aid rules and will come into effect from a date to be determined by the Minister for Finance.
A Domicile Levy was introduced by Finance Act 2010 and ensured that certain individuals who are domiciled in and a citizen of Ireland, with worldwide income exceeding €1 million, Irish property with a market value of more than €5 million and an Irish tax liability of less than €200,000 are subject to an additional domicile levy of €200,000. Credit is given against the levy for any income tax paid at the same time as or before the Domicile Levy is paid.
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, hence ensuring that individuals cannot renounce their citizenship to avoid the levy.
The Act has increased the rate of tax on gifts and inheritances has increased from 25% to 30% with effect from 7 December 2011. While this was a significant increase it is still one of the lowest rates of gift/inheritance tax in Western Europe and there is concern that the Government may seek to increase this rate further in future years. Although widely anticipated, no significant changes have been introduced to various CAT reliefs such as business and agricultural relief. This is to be welcomed as these reliefs, coupled with the relatively attractive CAT rate of 30% should continue to encourage transfers of assets to the next generation.
Tax free thresholds
The Group A lifetime tax free threshold applicable to gifts and inheritances from parent to child was reduced by a quarter to €250,000 and, surprisingly, the Act has not significantly amended the remaining thresholds applicable to gifts and inheritances between all other categories of persons. This new threshold comes on the back of significant reductions in the tax free amounts over the last number of years and the new Group A threshold is in line with the applicable threshold for 1999.
Filings and payments
The pay and file dates for CAT have been extended from 30 September to 31 October. This will mean that any CAT arising in relation to any gifts or inheritances received between 1 September 2011 and 31 August 2012 must be returned and the tax paid by 31 October 2012.
There has been a slight alteration of the agricultural relief provisions. Any debt attaching to the principal private residence of the claimant may not be allowed for the purposes of calculating the farmer test unless the debt has been incurred to “purchase, repair or improve” the house. Also, the requirement for the ‘farmer’ to continue to be Irish resident for the three consecutive years following receipt of the agricultural property has been abolished. This latter amendment should be welcomed by the agricultural community as it may allow younger farmers who have claimed the relief to go travelling for extended periods of time without triggering a clawback of the relief.
Significant changes have been introduced in relation to the treatment of discretionary trusts for CAT purposes including the broadening of the definition of a discretionary trust to include a foundation and where a discretionary trust is created by will the charge to discretionary trust tax will arise on the date of death of the disponer. Effectively, this means that both the once off 6% and the 1% annual discretionary trust tax charges may apply to the value of assets in a discretionary trust or foundation as and from the date of death of the person who establishes such a structure under their will. From a practical perspective this will allow the Revenue to collect the discretionary trust tax earlier than was previously the case.
The Act has increased the rate of capital gains tax by 5% from 25% to 30% applicable to disposals as and from 7 December 2011.
Capital gains tax holiday
The Act has provided greater insight into the details of the capital gains tax holiday announced in the Budget in December. Following lobbying of the Department of Finance since the announcement of the scheme last December, we welcome the legislation as introduced.
Effectively, any land or buildings situated in Ireland or a member of the European Economic Area which is acquired between 7 December 2011 and 31 December 2013 which is owned by the same person for a period of at least 7 years will be exempt from capital gains tax on any gain arising in the seven year period following the date of acquisition. If the property is held for more than 7 years then partial relief is available, e.g. if a property is owned for 10 years then 70% of the gain would be exempt from capital gains tax. To avail of the exemption the land and buildings must be acquired at market value. Where they are acquired from a relative, consideration of at least 75% of the market value must have been given by the purchaser.
This incentive has been warmly welcomed and, in combination with the reduction in the commercial stamp duty rate, is anticipated to help stem the rejuvenation of the ailing property market.
During his Budget statement, the Minister announced the modification of retirement relief from capital gains tax to encourage a timely transfer of farms and businesses to the next generation. The Act has clarified these measures and will affect persons aged 66 or over disposing of their farm or business. Where an individual fulfils the conditions necessary to claim retirement relief the following will apply to disposals made on or after 1 January 2014:
It will be noted that these rules apply to disposals on or after 1 January, 2014. The existing rules continue to apply to disposals before this date except where a person aged 66 or over disposes a farm or business to a third party. In this instance the exemption from CGT applies where the consideration for the disposal does not exceed €750,000. Where the consideration exceeds €750,000 marginal relief will apply.
Where a person is aged 55 to 65, the existing rules will continue to apply as follows:
In light of the fact that Ireland is increasing the retirement age for State pensions from 65 to 68 by 2014 it would not appear unreasonable that a similar age be included for the purposes of retirement relief. The reduction in retirement relief is not effective until 1 January 2014 in each case. The objective appears to be to allow taxpayers sufficient time to secure a sale or to transition the transfer of the business to a child.
Whilst these changes are attempting to encourage an early transfer of assets it may in fact have the opposite effect after 1 January 2014 particularly in the context of family transfers. Typically a parent will only transfer a business to the next generation when they are comfortable that the children are in a position to take over the running of the business. The tax cost of such a transition is an important but often not critical factor in determining the optimum time to transfer a business to the next generation.
Therefore, if the parent is of the view that the child is not ready to take responsibility for the running of the business until after the 1 January 2014 deadline then they may well decide to retain ownership of the business and leave the assets pass to the next generation on their death at which time no capital gains tax would arise. This would appear to be a more tax efficient option than paying a significant capital gains tax Act during their lifetime.
The Act has reduced the stamp duty rate applicable to all forms of non-residential property to a flat 2% rate. This reduction, effective from 7 December 2011, applies to the transfer of all non-residential property including business assets such as stock, goodwill and debtors which may be liable to stamp duty when transferred.
The reduction was welcomed and, in conjunction with the capital gains tax holiday applicable to properties purchased between 7 December 2011 and 31 December 2013, it is hoped that these incentives will assist in generating activity in the property sector.
It has been confirmed that the half rate of stamp duty on transfers between blood relatives i.e. consanguinity relief will be abolished on all non-residential property transfers executed on or after 1 January 2015. As a result the relief will apply to non-residential property for a further three years.
There has been a small amendment which now provides confirmation that relief from stamp duty on share transfers between clearing houses applies.
There has been a welcome introduction of a stamp duty exemption on certain company mergers including cross border mergers under certain EU regulations. The new exemption is welcome. Prior to this, mergers of this nature did not fall within the other relieving provisions applying to corporate reorganisations and amalgamations.
The Act addresses a number of other issues:
The levy on health insurance contracts has been increased. For 2011, the levy applied at €66 in respect of each minor covered by the policy and €205 in respect of those over 18 who were covered under a policy. This has been increased from 1 January 2012 to €95 for each minor and €285 for each adult covered under a health insurance policy.
The Act confirms the VAT rate changes announced in the budget with the standard rate increasing to 23% from 1 January 2012.
The Act amends the legislation which imposes penalties for deliberately or carelessly making incorrect tax returns and extends the penalty provisions so that they will now apply to returns that are required in respect of the Domicile levy and the Universal Social Charge.
Additional sections empower the Collector General to request a Statement of Affairs from persons who have outstanding tax liabilities. Such a Statement of Affairs must contain details of all assets and liabilities of the person. In relation to assets, the Statement of Affairs must contain details, such as a full description of the asset, its location, and the cost of acquisition to the person beneficially entitled to the asset. Certain assets of minor children and trustees must also be included in the Statement of Affairs. In addition, the Spouse or Civil Partner of the tax payer may be required to provide a Statement of Affairs. All Statements of Affairs submitted to Revenue under this provision must be signed by the person completing it to the effect that it is correct to the best of the person’s knowledge and belief.
The Collect General is also empowered to require a person carrying on a business to give security to the Collector General in relation to fiduciary taxes such as PAYE / PRSI, VAT, Relevant Contracts Tax (RCT), where the Collector General is of the view that such security is necessary in order to protect Exchequer receipts. Any person required by the Collector General to provide such security may not carry on business until such security is provided to the Collector General. There is a right of appeal to the Appeal Commissioners against a requirement by the Collector General to provide security.
Revenue’s powers have also been increased to allow Revenue to access documents for the purpose of investigating serious Revenue offences. An authorised officer of the Revenue Commissioners may apply to the District Court for an Order requiring a person to produce documents or to provide information required by Revenue in carrying out an investigation. Any person who fails to comply with an Order under this Section, or who supplies false or misleading information may be liable to a “Class A” fine, or imprisonment for a term not exceeding 12 months, or both, on summary conviction, or on conviction on indictment, to a fine or imprisonment for a term not exceeding 2 years, or both. There is provision for documents subject to legal professional privilege not to be delivered to Revenue.
A number of the sections in the Act contain technical provisions designed to modernise and simplify assessing rules for direct taxes, i.e. income tax, corporation tax and capital gains tax. The principal feature of these provisions, which run to over 75 pages of the Act, to introduce a system of full self-assessment for direct taxes from 2013. This change requires tax payers to submit a calculation of the tax due when filing their tax return and paying their tax for a particular year.