We are pleased to enclose our commentary on Finance (No. 2) Act 2013. The Act is shorter than recent Acts being only 103 pages compared with over 170 pages for Finance Act 2013.
The Act contains a number of pro-business measures announced by the Minister in his Budget speech as follows:
As announced in the Budget, there have been no changes in the personal rates of tax, the standard rate tax bands or personal tax credits. The Act does however contain a number of significant penal measures, announced in the Budget, which will adversely impact on an individual’s personal tax position as follows:
Please do not hesitate to speak with your PMQ contact if you would like to discuss any aspect of the commentary.
The above is intended as a general guide to the measures announced in Finance (No.2) Act 2013. No action should be taken on the basis of the above without obtaining professional taxation advice.
Standard Fund Threshold
Reduction in Standard Fund Threshold
The Act makes a number of technical amendments to the pension provisions. The most significant change is the lowering of the Standard Fund Threshold (SFT) from €2.3m to €2m with effect from 1 January 2014. When the capital value of an individual’s pension fund exceeds the SFT at the time the individual becomes entitled to receive pension benefits, a tax charge of 41% is immediately payable by the pension administrator in respect of the excess value over the SFT. This tax charge is in addition to any further taxes which may be payable when the pension benefits are actually paid. The SFT was originally set at €5m when it was introduced from 7 December 2005 and was reduced to €2.3m from 7 December 2010. An individual who has not drawn down their pension by 1 January 2014 and whose fund is valued in excess of €2m can apply for a higher threshold called the Personal Fund Threshold (PFT). Clearly this threshold cannot exceed the current SFT of €2.3m. For example if an individual aged 50, who has not drawn their pension has a current pension fund valued at €2.6m on 1 January 2014, he can apply to Revenue for a PFT of €2.3m.
With effect from 1 January 2011 the maximum tax free pension lump sum an individual can receive is €200,000. Where the pension lump sum exceeds €200,000, up to 25% of the SFT less the tax free amount of €200,000 is liable to tax at the standard rate with the balance being liable at 41%. The reduction in the SFT means that the maximum amount of any pension lump sum which will be liable at the standard rate is being reduced from €375,000 (€2.3m x 25% – €200,000) to €300,000 (€2m x 25% – €200,000). Any tax paid at the standard rate on a pension lump sum may be used to reduce tax at 41% payable by the pension administrator on any excess over the SFT. As the amount chargeable at 20% is being reduced this will also reduce the amount of the credit available for offset.
Electronic application process for Personal Fund Threshold
A new electronic based process for making an application for a PFT is being developed by Revenue. The time limit for making the application is 12 months after the date that the electronic system is made available. The exception to this is where a person is retiring after 1 January but before the electronic system is available. In that case a paper application must be made in advance of retirement, otherwise the administrator of the fund is required to apply the reduced SFT of €2m.
Calculation of capital value of pensions entitlements under defined benefit schemes
There are special rules for calculating the capital value of an individual’s pension entitlements for defined benefit schemes. Up to 1 January 2014 the capital value was arrived at by multiplying the gross annual pension to which an individual was entitled to by a factor of 20. For example the capital value of the pension rights of an individual entitled to a gross annual pension of €80,000, before taking into account any commutation for a lump sum, would be €1.6m (€80,000 x 20). It is now provided that the capital value of a pension drawn down on or after 1 January 2014 will be the gross annual pension before commutation of part of the pension for a lump sum by the appropriated age related valuation factor. The earlier an individual retires the higher the valuation factor. For example if an individual retires at 50 the factor is 37 while if he retires at 65 the factor is 26. Transitional arrangements apply to pensions which accrue pre and post 1 January 2014. The part prior to 1 January 2014 known as the accrued pension amount will be valued at a factor of 20 and the part which accrues after that date valued at the appropriate higher aged related factor.
Deferral of payment of tax for public sector defined benefit pension schemes
Where 41% tax is payable by a public sector pension administrator in circumstances where the capital value of the individual’s pension entitlements exceed the SFT, this tax may be recovered by the administrator either by direct reimbursement from the individual or, prior to Finance Act 2012, by deducting the amount due from the individual’s pension entitlements. Finance Act 2012 provided in the case of public sector schemes that such tax could be recovered by deducting the amount from the individual’s pension lump sum where the tax due was not greater than 50% of the pension lump sum net of tax. Where the 41% tax payable exceeds 50% of the pension lump sum net of tax the pension administrator could only deduct a maximum of 50% of the net of tax lump sum from the lump sum payable. The balance of the tax due could be recovered over a 10 year period.
Finance (No. 2) Act 2013 provides that only where the tax payable does not exceed 20% (previously 50%) of the net of tax pension lump sum can the pension administrator recover the full amount of the tax due by deducting the amount from the pension lump sum due. In addition it is now provided that the tax may be recovered solely by reducing the gross pension payable to the individual over a period not exceeding 20 years. Where the tax payable exceeds 20% of the net of tax lump sum this amount can be deducted by the administrator from the pension lump sum and the balance may be recovered over a 20 year period (previously 10 years). Again in such circumstances it is now provided that the tax may be recovered solely by reducing the gross pension payable to the individual over a period not exceeding 20 years.
A fixed penalty of €3,000 has been introduced for each failure to comply with any obligations imposed by the legislation or regulations relating to the SFT and the payment of tax on the excess.
Access to AVCs
Finance Act 2013 provided that individuals would be allowed a once-off option to withdraw up to 30% of the value of funded Additional Voluntary Contributions (AVCs). The option is available for a three-year period ending on 27 March 2016. To date the number of individuals who have availed of this option is far less than was expected. It was thought that one reason for this was that legally it was felt that schemes may not allow pre-retirement access to funds. It is now provided that notwithstanding the rules of a pension scheme an individual may instruct the administrator of his pension fund to allow the once-off option to withdraw AVCs.
The levy on pension schemes was introduced in 2011 and was due to apply only for 2011, 2012, 2013 and 2014. It has now been extended to 2015. The rate of the levy has also been increased from 0.6% to 0.75% for 2014 but will be reduced to 0.15% for 2015.
Start Your Own Business (SYOB)
An income tax exemption has been introduced for the long term unemployed. Where a qualifying individual has been unemployed for at least 12 months prior to establishing a new business they can avail of an income tax exemption on the business profits up to a maximum of €40,000 per annum for the first two years. The section applies to new businesses set up in the period 25 October 2013 to 31 December 2016.
Tax Relief for Acquiring an Interest in a Partnership
With effect for loans taken out from 15 October 2013 relief will no longer be given for interest on a loan taken out by individuals to acquire a share in or lend to a partnership other than certain farming partnerships.
With regard to existing loans, relief for interest is being phased out and will no longer be available after 2016. In the next four years the relief will be at a reduced level as follows:
|Tax Year||Level of Relief|
Where an existing loan is refinanced then the relief can continue provided the amount of the new loan does not exceed the balance on the existing loan and the term of the new loan does not exceed the balance of the term of the existing loan.
High Earners Restriction
Investments made under the Employment and Investment Incentive (EII) scheme will not be subject to the high earners restriction where the shares are subscribed for in the period 16 October 2013 to 31 December 2016. This three-year break is in order to stimulate investment in small to medium businesses.
In addition capital allowances claimed by non-active traders (passive investors) in a leasing trade in respect of plant and machinery used in manufacturing trades will be subject to the high earners restriction with effect from 1 January 2014.
Professional Services Withholding Tax
Accountable persons (i.e. broadly state bodies, semi-state bodies and holders of public offices) are required to deduct professional services withholding tax (PSWT) from payments for professional services. The definition of accountable persons includes subsidiaries of accountable persons. The definition is now extended to body corporates who have one or more members who are themselves accountable persons provided the accountable person controls the composition of the board of directors, holds more than 50% of the nominal share capital or holds more than 50% of the voting share capital of the company.
Research and Development Tax Credit
Following a review of the research and development tax credit system a number of changes have been made. The first €300,000 of qualifying R&D expenditure will qualify for the credit without reference to the base year. Previously the limit was €200,000. It has also been indicated that the base year will be phased out in the coming years. Qualifying expenditure on research and development for accounting periods commencing on or after 1 January 2014 will therefore be €300,000 plus the excess of expenditure in the current accounting period over expenditure in 2003 subject to the proviso that qualifying expenditure cannot exceed expenditure in the current accounting period.
(300,000 + 400,000)*
*Restricted to amount of expenditure incurred in 2014
The amount of qualifying expenditure which can be outsourced to third parties has been increased from 10% to 15%. These changes will apply to accounting periods commencing on or after 1 January 2014.
Where certain conditions are satisfied the benefit of research and development tax credits can be surrendered to employees who can use the credits to reduce their income tax liabilities. It is now provided that a reduction in the employee’s income tax liability will not be given unless the employer has paid all PAYE deducted from the employee’s emoluments for the year in respect of which relief is claimed. In addition the requirement for an employee to repay any relief from income tax claimed where it transpires that the relief was not due has been deleted.
Living City Initiative
The living city initiative was provided for in Finance Act 2013 and provides tax incentives to encourage the regeneration of Georgian areas of towns and cities. The reliefs are subject to EU approval and will come in to operation by way of a Ministerial Order. It is now provided that the incentives will apply to any building constructed prior to 1915 and not only to Georgian Houses. The Minister also announced in his Budget speech that areas of Cork, Dublin, Galway and Kilkenny will be designated to add to cities previously announced (Limerick and Waterford).
Definition of eligible individual
In order for funds raised to qualify for film relief the funds must be spent on the employment of eligible individuals and on the provision of certain goods, services and facilities. The definition of eligible individual has been amended to delete the requirement that the individual must be a citizen of, domiciled in, resident in or ordinarily resident in Ireland or another EU country.
Withholding tax on payments to artistes
Provision is made for the deduction of tax at the standard rate from payments made by companies qualifying for film relief to “artistes” who are not resident in the State or in another EU Member State. An artiste is defined as someone who provides services in giving a performance in audio-visual works of any kind, including films and television.
Both of the above provisions will not come into operation until the issue of a Commencement Order.
A company is tax resident in Ireland if it is incorporated in Ireland or centrally managed and controlled in Ireland. However, a company is not tax resident in Ireland only because it is Irish incorporated provided it:
• carries on a trade in Ireland or is related to a company that carries on a trade in Ireland; and
• is ultimately controlled by persons resident in an EU or treaty country, or is related to a company listed on a Stock Exchange in the EU or a treaty country.
In addition, a company which is regarded as tax resident in another country under the terms of the tax treaty with that country is not regarded as tax resident in Ireland.
The circumstances in which an Irish incorporated company will now be regarded as Irish tax resident are to be extended. In the future an Irish incorporated company will be regarded as Irish tax resident if:
• it is managed and controlled in an EU Member State or in a country with which Ireland has a tax treaty; and
• that country has a place of incorporation test for determining residence and does not have a central management and control test.
As the new rules only apply to a company which is centrally managed and controlled in an EU or DTA country, they are likely to be of limited significance. We understand that companies that are managed and controlled in the US will be affected by this change. The change is effective from 24 October 2013 for companies incorporated on or after that date and 1 January 2015 for companies incorporated before 24 October 2013.
Where a company ceases to be tax resident in Ireland it is deemed to dispose of all its assets at market value potentially giving rise to a capital gains tax charge. Recent cases brought before the European Court of Justice held that the lack of an option for companies to defer the payment of exit taxes breaches the freedom of establishment provided for under EU law. Under Irish law there are only limited circumstances in which the payment of exit taxes may be deferred. In order to bring Ireland’s legislation into line with these decisions, the circumstances in which Irelands’ capital gains tax exit charge may be deferred is being extended.
With effect from 1 January 2014, a company which ceases to be resident in Ireland and becomes resident in another EU or EEA (i.e. EU countries plus Norway, Liechtenstein and Iceland) may elect to pay exit tax in equal instalments over 6 years or within 60 days of the actual disposal of the assets subject to the proviso that all of the tax must be paid within 10 years of the company ceasing to be Irish resident. Interest is payable when the tax is deferred.
There are certain circumstances which will result in an immediate requirement to make a payment of the deferred tax, such as if a liquidator is appointed to the company or if the company ceases to be resident in an EU or EEA state.
The company is obliged to make an annual return to the Revenue containing specific information as to whether any amount of the tax has fallen due, the amount of interest payable and any other information specified by the Revenue.
The group relief provisions were amended by Finance Act 2012 to provide that in determining whether companies are part of a group, shareholdings could be traced through companies resident in treaty countries and through certain quoted companies (previously only shareholdings through companies resident in the EU or EEA could be taken into account). There has been a technical amendment to the group relief provisions to clarify that that a shareholding through a quoted company can only be taken into account where the quoted company is the direct or indirect parent of the subsidiary in question.
Home Renovation Incentive
Finance (No. 2) Act 2013 introduces an incentive scheme for homeowners who carry out repair, renovation or improvement work on their principal private residence. The Home Renovation Incentive provides for a tax credit of 13.5% of qualifying expenditure on residential premises situated in Ireland. A minimum expenditure of €5,000 excluding VAT must be incurred. The tax credit is capped at €4,050 (i.e. €30,000 x 13.5%). The relief is granted over the two tax years following the year in which payments for the work are made.
The scheme runs from 25 October 2013 to 31 December 2015. Payments for qualifying expenditure in 2013 are deemed to be made in 2014. Payments for qualifying expenditure in the period 1 January 2016 to 31 March 2016 will qualify for relief provided the payments are for work for which planning permission was granted prior to 31 December 2015. Such payments made in 2016 will be treated as qualifying expenditure in 2015.
In order to avail of the tax credit, individuals filed a Local Property tax return and paid any Local Property tax due in respect of all residential properties for which they are the liable person.
Single Person Child Carer Tax Credit
With effect for the tax year 2014 and subsequent years the One-Parent Family tax credit has been abolished and replaced by the Single Person Child Carer tax credit.
An individual was entitled to the One-Parent Family tax credit where the individual had a qualifying child (broadly speaking a child under 18 or in full time education) living with them for the whole or a part of the year. Both parents of a child could potentially qualify for a One-Parent Family Tax Credit.
The new Single Person Child Carer credit will only be available to the primary carer of the qualifying child except in instances where the primary carer has disclaimed their right to the credit directly with Revenue. Where the primary carer has disclaimed their right to the credit it may be available to the non-primary carer (secondary carer). The primary carer is the individual who proves that a qualifying child resides with them for the whole or greater part of the year of assessment. The secondary carer is the individual who proves for the year of assessment that a qualifying child resides with them for not less than 100 days in total. In practice, the carers need to agree who will claim the credit and make an arrangement with Revenue accordingly. The credit cannot be apportioned between carers.
Entitlement to an increased single rate tax band of €36,800, compared with €32,800 for single individuals, is dependent on the individual being entitled to a Single Person Child Carer tax credit. Pre 2014 two parents of a child who each qualified for the One-Parent Family Tax Credit could also both qualify for the increased standard rate tax band which between both of them could amount to up to €73,600 compared with €65,600 for a married couple. From 2014, as only one parent can qualify for the Single Person Child Carer tax credit, only one can also qualify for the increased standard rate tax band.
Tax Relief at Source on Medical Insurance
A cap has been placed on the level of tax relief at source available on medical insurance premiums. For policies entered into or renewed on or after 16 October 2013, relief is only available on the first €1,000 of a premium for an adult and the first €500 of a premium for a child.
In instances where a qualifying student is charged a full adult premium the adult ceiling for the relief will apply.
The definition of a relevant insurance contract has been widened to cover any contract of insurance for reimbursement or discharge of health expenses or non-routine dental costs. Previously the definition was confined to a contract in relation to an individual, the spouse, civil partner, child or dependant of the individual or the spouse or civil partner of the individual.
Currently, certain sportspersons are entitled to claim a relief on retirement. The relief is given by allowing sportspersons to claim a deduction for tax purposes of 40% of their income from the sport in question for any previous ten years. Up until now, it has been a requirement that the individual be resident in Ireland in the year in which they retire.
It is now provided that for retirements on or after 1 January 2014 the deduction must be based on any ten of the last fifteen years including the year of retirement. In addition, the relief will also be available to individuals who are resident in EEA (i.e. EU countries plus Norway, Liechtenstein and Iceland) or EFTA (i.e. EU and EEA countries plus Switzerland) countries in the year of retirement.
Tax on Savings and Investment Income
The rate of DIRT has been increased to 41% with effect for interest paid on or after 1 January 2014. Prior to 1 January 2014 there were two rates of DIRT, the 33% rate which applied to interest paid annually or more frequently and the 36% rate where interest is paid less frequently than annually. From 1 January 2014 there will be a single rate of DIRT of 41%.
The DIRT exemption which applies to interest up to a certain level paid in respect of Special Term Accounts and Credit Union Special Share Accounts will not apply to accounts opened on or after 16 October 2013. The exemption will continue to apply to accounts opened before that date for three or five years from the date the account was opened, depending on the type of account.
With effect from 1 January 2014 all dividends paid in respect of Credit Union Shares will be treated as payments of interest and subject to DIRT, except as noted above where the exemption continues for certain Special Share Accounts.
The rate of tax applicable to certain domestic life assurance products and investment funds and certain offshore funds and life products is also increased to 41% for income distributions, gains and other payments with effect from 1 January 2014. Prior to 1 January 2014, a 33% rate of tax applied to income distributions from such products and a 36% rate applied to non-income distributions and to disposals of interests in such products.
With effect from 1 July 2013, JobsPlus replaced the Revenue Job Assist and Employer Job (PRSI) Exemption Scheme. Under the JobsPlus scheme employers are given payments for each person recruited who had been unemployed for at least 12 months. Finance (No. 2) Act 2013 provides that payments to employers under the JobsPlus scheme are exempt from tax.
Top Slicing Relief
Up to the tax year 2012, top slicing relief was available to an individual who received a taxable lump sum on the termination of their employment. This ensured that the individual did not suffer income tax on the lump sum at a rate in excess of their average income tax rate over the previous three tax years prior to the year of termination. Finance Act 2013 provided that top slicing relief would not apply where an individual received an ex gratia lump sum in excess of €200,000 or more, either on termination or retirement. Finance (No. 2) Act 2013 abolishes top slicing relief for all payments made on or after 1 January 2014.
Capital Gains Tax (CGT)
There has been no change in the CGT rate of 33%
Remittance Based Assessment for Capital Gains Tax
Non-domiciled individuals are liable to CGT on foreign gains only to the extent that such gains are remitted to the State. Finance Act 2013 introduced anti-avoidance provisions to treat as foreign gains remitted to the State by the non-domiciled individual sums received in the State which derive from foreign gains transferred to a spouse or civil partner outside the State. This provision has now been amended to provide that the anti-avoidance provisions will apply where the individual transfers to a spouse or civil partner the proceeds, rather than the gains, from the disposal of any assets outside the State. Any amounts received in the State on or after 24 October 2013 which derive from such transfer of proceeds outside the State will be treated as gains remitted to the State by the non-domiciled individual.
Retirement Relief has been extended to the disposal of leased farmland to third parties provided the land was let to a person for the purpose of farming and each letting of the land was for a period of not less than five consecutive years. Previously, this relief was only available on a disposal to a child. As for such disposals to a child, the land must have been used for the purpose of farming before it was first let by the vendor.
The Finance Act 2012 introduced a relief from CGT for property purchased between 7 December 2011 and the end of 2013. Property purchased in this period and retained for at least seven years is relieved from CGT for the seven years. For example a gain arising on the disposal of a property owned for seven years will be fully exempt from CGT, while 7/8ths of a gain arising on the disposal of a property held for eight years will be exempt from CGT. The relief has been extended to properties acquired up to the end of 2014.
The Act provides for CGT relief for individuals described as ‘serial entrepreneurs’. The relief applies where an individual has paid CGT on the disposal of an asset on or after 1 January 2