Income Tax

On 2^nd September 2013, Vodafone Group Plc. announced that it was disposing of its 45% interest in Verizon Wireless to Verizon Communications Inc.

At the same time, it also announced its intention to carry out a “Return of Value” to its shareholders, of which there are almost 400,000 in Ireland.  Many of these shareholders had acquired Vodafone shares in exchange for their Eircom shares in 2001.  The “Return of Value” would be partly in cash and partly in Verizon consideration shares.

On 14^th May 2014 the Irish Revenue Authorities issued a comprehensive Tax Briefing outlining the tax treatment of the Vodafone Return of Value to its shareholders which provides comprehensive guidance on the calculation of the base cost for Capital Gains Tax purposes.

 In what form will Vodafone return this value to the shareholders?

 Either by the issue of:

1. B Shares (The Capital Option) or
2. C Shares (The Income Option)

 What does that mean to the shareholder?

1. If the shareholder opts for B Shares or the Capital Option then the return of value will be liable under the Capital Gains Tax rules.  The C.G.T. rate is currently 33%.
2. If the shareholder opts for the C Shares or the Income Option then the return of value will be subject to the Irish Income Tax rules.  In other words the shareholder will be treated as having received a dividend and will be taxed as with previous Vodafone dividends.

What does the Shareholder actually get?

1. 6 new Vodafone Ordinary shares for every 11 Vodafone ordinary shares held.
2. 0.0263001 Verizon Shares for every Vodafone share
3. A cash amount of €0.3585437 for every Vodafone share

 What about the shareholders who exchanged their Eircom shares for Vodafone Shares in 2001?

 These shareholders will NOT have a Capital Gains Tax liability.

Instead they will have a capital loss to offset against other chargeable gains arising in the current tax year or if unused they can be carried forward against future capital gains.

No Capital Gains Tax charge will arise for these shareholders in the following situations:

1. Where the shareholder opted for the capital option and the sale of Verizon shares.
2. Where the shareholder opted for the capital option and held onto the Verizon shares.

What is the base cost of the Vodafone Ordinary Shares?

The base cost for those Vodafone shares acquired in exchange for Eircom shares in 2001 is €4.46 per share.

Where in legislation are the apportioning rules?

 Section 584(6) Taxes Consolidated Acts 1997 outlines the rule for calculating the apportionment of the original holding between the three elements of the new holding i.e. the cash element, the new Vodafone ordinary shares and the Verizon shares.

What about future disposals of these shares?

• €4.58 will be the base cost per share of the new Vodafone ordinary shares by former Eircom shareholders when they dispose of these shares in the future.  (This figure could be subject to future adjustments)
• €53.85 will be the base cost per share of the Verizon shares by former Eircom shareholders when they dispose of these shares in the future.  (This figure could be subject to future adjustments)

What is the Income Tax treatment for those opting for C Shares?

Individuals who opted for the C Shares have received a dividend from Vodafone which consisted of two elements:

1. A cash amount and
2. Shares in Verizon

The shareholder should include both amounts in his/her Income Tax Return i.e. the cash actually received and the market value of the Verizon Consideration Share Entitlement received.  He/she must then pay the Income Tax arising on this dividend.

How is the tax on these dividends paid?

• Employees or individuals who pay tax through the PAYE system and where their non-PAYE income does not exceed €3,174 can have any tax arising on these dividends collected and offset against their tax credits.
• Self employed individuals must file a Form 11 in which income from all sources must be included and correct taxes paid on or before the self assessment deadline.
• Employees or individuals who pay tax through the PAYE system and where their non-PAYE exceeds €3,174 must complete a Form 11 and include the amount of Vodafone income received.  They must comply with the pay and file requirements of the self assessment system.
  

Are there any exemptions?

Individuals aged 65 years and over are entitled to claim an exemption from Income Tax if their total income i.e. income combined from all sources including Vodafone and Verizon dividends is

• Less than €18,000 in the case of a single person, widowed individual or surviving civil partner or
• Less than €36,000 in the case of a married couple or civil partnership.

Will there be Dividend Withholding Tax on the Verizon Shares?

Dividends paid to shareholders of Verizon shares will, in general, be subject to US withholding tax, currently 30% of the gross dividend amount.

Irish resident shareholders can make a claim to the US Tax Authorities to be entitled to dividend withholding tax at the reduced rate of 15%.

This claim can be made by completing a Form W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and forwarding it to Computershare as stated on the form.

The Irish resident shareholder will be entitled to a credit for tax withheld against Income tax or Corporation tax on the dividends received.

 The credit will be the lower of:

1. The Irish effective tax rate on the dividends or
2. The rate provided by the U.S./Ireland Double Taxation Treaty

Please be aware that the information contained in this article is of a general nature.  It is not intended to address specific circumstances in relation to any individual or entity. All reasonable efforts have been made by Accounts Advice Centre to provide accurate and up-to-date information, however, there can be no guarantee that such information is accurate on the date it is received or that it will continue to remain so.. This information should not be acted upon without full and comprehensive, specialist professional tax advice.

Over the years I’ve been asked many times how court settlements should be taxed.  I’m still surprised by the number of people who are under the impression that a special tax for compensation and damages exists – it doesn’t.

In order to determine the correct tax treatment of damages and compensation it is essential to establish what the payment relates to.

There are several possibilities, the main ones being:

1. Personal Injury
2. Compensation for Revenue Loss
3. Compensation for Capital Loss

 1. Personal Injury Compensation

A total exemption from Income Tax and Capital Gains Tax may be available in the case of personal injury compensation payments and income arising from investments of such compensation payments provided the following conditions, as outlined in Revenue’s IT 13, are satisfied:

1. The compensation must be for personal injury.
2. It must have been received arising from the institution of a civil action for damages in the court (where such an action is initiated but settled out of court, the compensation will still qualify) or pursuant to the issue of an order to pay under Section 38 of the Personal Injuries Assessment Board Act 2003.
3. Payments awarded by the Criminal Injuries Compensation Tribunal also qualify.
4. The person receiving the compensation, must, as a result of the injury, be permanently and totally incapacitated, either physically or mentally, from maintaining himself/herself.
5. The income obtained from the investment of the compensation must be the individual’s sole/main income.

2. Compensation for Revenue Loss

If the compensation is for loss of earnings then the payment will be liable to Income Tax in the case of individuals and partnerships and Corporation Tax for companies.

Examples of compensation liable to Income Tax are as follows:

1. Compensation under an insurance policy for the destruction of trading stock, accidents to members of staff or loss of profits.
2. Losses arising as a result of a breach of contract, etc.

 3. Compensation for Capital Losses

The main examples under this heading are as follows:

1. Compensation for damage or loss of an asset including land, buildings, plant, machinery, etc.
2. Insurance payments as a result of loss, damage, depreciation or destruction of an asset.
3. Compensation for the surrender or forfeiture of rights.
4. Compensation for the exploitation or use of an asset.

These capital sums will be liable to Capital Gains Tax and treated as if there was a disposal of the asset.

INTERESTING STORY

I recently came across this situation:

• An individual aged in his sixties received a considerable payment through the Irish courts.

• It was held to be compensation as a result of a satisfactory settlement of a case for breach of a joint venture agreement.

• The settlement was deemed to be compensation of a capital nature and therefore liable to taxation under the Capital Gains Tax legislation.

• The reason it was to be taxed in this manner was because the payment represented damages for breaching a joint venture agreement which related to the entire structure of the company’s profit making apparatus as in Van den Berghs Ltd. v Clark (1935) 19 TC 390.

• The individual had been a director of a family company with a shareholding of 30% who retired from the company some years earlier and had disposed of his full shareholding to the other directors.

• When he sold his shares, the entire proceeds were exempt from Capital Gains Tax under Section 598 of the Taxes Consolidation Act 1997.

• The reason he was exempt from Capital Gains Tax on the proceeds of the sale of his shares was because he qualified for “Retirement Relief.”

• To be eligible for Retirement Relief the following conditions must be met: (a) The individual must be over 55 years, (b) He/She must have been a Director for at least ten years prior to the date of the disposal, (c) He/she must have been a full time working Director for at least five of those last ten years years, (d) He/She  must have held “qualifying” shares (i.e. he/she must have owned shares in the company for more than ten years, (e) it must have been a family company (the individual must have held at least 25% of the voting rights or at least 10% of the voting rights with not less than 75% being controlled by family members), (f) it must have been a trading, farming or holding company of a trading group and (g) the proceeds relating to the qualifying assets must not have exceeded €750,000.

• The compensation payment received by the individual was also deemed to qualify for Retirement Relief under Section 598.

• Why?

• At the time the individual disposed of his 30% shareholding to the other directors of the family company, the price he received was well below market value.

• The individual accepted this consideration, which was well below the threshold amount of €750,000, on the written agreement that if the company was successful in their claim for damages for breach of a joint venture agreement, that he would receive 30% of the compensation.

• It held that the individual’s 30% share of the compensation awarded was eligible for Retirement Relief (since he met all the conditions of Section 598 TCA 1997) as it related to the disposal of “qualifying assets,” being his 30% shareholding, some years earlier.

Recently I’ve received a number of queries relating to the Irish tax treatment of CFDs or Contracts for Difference.  Although the information available is plentiful and appears to be straight forward, it’s important to be aware that each situation is different and as a result the tax treatment may vary considerably.

Firstly, what is a Contract for Difference?

Essentially it’s a contract between two parties i.e. the investor and the CFD Provider. At the close of the contract, the parties exchange the difference between the opening and closing prices of a specified financial instrument, including individual equities, currencies, commodities, market indices, market sectors, etc.  In other words, two parties take opposing positions on the difference between the opening and closing value of a contract i.e. the price will rise versus the price will fall.

Contracts for Difference offer wide access to different financial instruments from a single account for a fraction of the cost of buying shares.  They do not carry voting rights like ordinary stock and CFD trades on certain Irish stocks are not liable to Stamp Duty.

CFDs can be traded ‘long’ or ‘short’ to speculate on rising or falling markets i.e. the investor speculates that an asset price will rise by buying (long position) or fall by selling (short position).

CFDs do not confer ownership of the investment.  Instead the investor has access to the price performance which includes any dividend or corporate action equivalent.

What is the Irish tax treatment for profits / gains?

Contracts for Difference are treated as Capital Assets liable to Capital Gains Tax UNLESS they are deemed to be held in the course of a financial trade in which case the profits are liable to Income Tax under Case I, Schedule D.

According to Revenue eBrief No. 36/2007:

“The contracts require two parties to take opposing positions on the future value of a particular asset or index. Investments are often made on a margin of 20% of the contract amount. As well as the difference in value of the asset from beginning to end of the contract period, certain other notional income flows are taken into account in calculating the overall gain or loss.

• The first of these is notional interest, calculated on the non-margined value of the underlying asset for the contract duration.
• The second is the notional income which would have been earned by the asset during the contract period.

Where the contract is long (expectation of a rise in price), notional interest is a deduction and notional income a credit in the calculation.

Where the contract is short (expectation of a fall in price), notional interest is a credit and notional income a deduction.

The chargeable gain will be calculated on the gain or loss resulting from the computations above and including a deduction for all necessary broker fees incurred in the full contract.

Actual interest paid, if any, on the margin amount put up will be chargeable under Case III  in the ordinary way and does not come into the CGT calculation.”

What’s the difference between holding Capital Assets and operating a financial trade?

The concept of a “trade” is a matter of interpretation and is usually determined by a number of factors known as “badges of trade.”

For example, a once off transaction would not normally be considered a “trade.”  Depending on the circumstances and the timing it may be liable to Capital Gains Tax or indeed may be exempt from tax.  If, on the other hand, the investor was involved in a large number of transactions throughout the year of assessment then this activity would be most likely be considered to be a trade and therefore liable to Income Tax.

What are the “Badges of Trade”?

There are a number of factors which will determine the existence of a “trade”. There is, however, no decisive test and no legislative definition.  There is considerable case law concerning this issue and in 1954 a Royal Commission was set up in the United Kingdom to consider what factors should be taken into account in deciding whether a trade exists.  A report was published outlining the “Badges of Trade” which are as follows:

1.      THE SUBJECT MATTER OF THE SALE.

While almost any form of property can be acquired to be dealt in, those forms of property, such as commodities or manufactured articles, which are normally the subject of trading, are only very exceptionally, the subjects of investment.

Again, property, which does not yield to its owner an income, or personal enjoyment merely by virtue of its ownership is more likely to have been acquired with the object of a deal than property that does

2.      THE LENGTH OF PERIOD OF OWNERSHIP.

Generally speaking, property meant to be dealt in is realised within a short time after acquisition. But there are many exceptions from this as a universal rule;

3.      THE FREQUENCY OF SIMILAR TRANSACTION.

If realisations of the same sort of property occur in succession over a period of years or there are several such realisations at about the same date a presumption arises that there has been dealing in respect of each;

4.      SUPPLEMENTARY WORK.

If the property is worked on in any way during the ownership so as to bring it into a more marketable condition, or if any special exertions are made to find or attract purchasers, such as the opening of an office or large-scale advertising, there is some evidence of dealing. When there is an organised effort to obtain profit there is a source of taxable income. But if nothing at all is done, the suggestion tends the other way;

5.      THE CIRCUMSTANCES THAT WERE RESPONSIBLE FOR THE REALISATION.

There may be some explanation, such as a sudden emergency or opportunity calling for ready money that negates the idea that any plan of dealing prompted the original purchase;

6.      MOTIVE.

There are cases in which the purpose of the transaction and sale is clearly discernible. Motive is never irrelevant in any of these cases and can be inferred from surrounding circumstances in the absence of direct evidence of the seller’s intentions.

In Summary

1. If goods or services are provided regularly with a commercial motive this will generally indicate the existence of a trade.
2. The length of ownership of the asset can be relevant but not conclusive in determining the existence of a trade.
3. The frequency and number of similar transactions by the same person should also be considered.
4. Making the items more marketable or improving them is generally considered to be an indication of a trade.
5. The intention of making a profit makes the transaction or transactions more likely to be a trade.
6. The nature of the asset may not be relevant in deciding whether or not trade is involved. The purchase/sale of land and/or shares can often be viewed as trading activities once the above factors have been taken into account.

Say an individual is employed in an investments role by day and makes considerable CFD profits in his/her spare time based on a significant number of transactions, how would this income be taxed?

Although opinions published by Revenue in the context of financial services are primarily concerned with group financing and treasury operations I believe they have direct relevance to this situation and should certainly be taken into consideration in ruling in favour of Income Tax Treatment.

In one such case, Revenue believed that the company was trading on the basis that the company was actively managing the business and making strategic decisions regarding financing and treasury operations. Despite the fact that the activities of the company were outsourced (i.e. no individuals were employed in the company), the outsourcing arrangement was managed and controlled by Irish resident directors with the appropriate level of specialized expertise in this area.

In this example, as the individual’s Irish PAYE employment relates to the area of financial services/investments, it would be difficult to see how Revenue could treat his/her C.F.D. activities as anything other than trading activities liable to Income Tax.

In summary, as the C.F.D. relates to a large number of transactions with a profit motive which requires a considerable amount of skill and expertise, it would be highly probable that this income would be liable to Income Tax and not Capital Gains Tax.

IN CONCLUSION

1. Capital Gains Tax will arise on CFD Gains.
2. Capital Gains Tax will arise on the difference between opening and closing values of an asset.
3. Income Tax will arise on deposit interest earned on margin.
4. The margin is the initial equity investment which is usually up to 20% to show the investor can complete the contract on closing.  If there are significantly negative market variations then additional capital will be required by investors so as to avoid forfeiting or losing the full margin deposit.
5. The ‘non-margin’ is defined as the balance which is leveraged or borrowed to purchase the position at the outset of the CFD.
6. Income Tax will arise on the accounting profits if the CFDs are held in the course of a trade.

Please be aware that the information contained in this article is of a general nature.  It is not intended to address specific circumstances in relation to any individual or entity. All reasonable efforts have been made by Accounts Advice Centre to provide accurate and up-to-date information, however, there can be no guarantee that such information is accurate on the date it is received or that it will continue to remain so.. This information should not be acted upon without full and comprehensive, specialist professional tax advice.

On 24^th October 2013 the Finance (No. 2) Bill 2013 was published which confirmed the measures introduced by the Budget.

As the main priorities in Ireland at the moment are job creation and enterprise growth the following tax packages were introduced:

I.            ENTERPRISE RELIEF– This is a new Capital Gains Tax relief which is aimed at entrepreneurs investing in assets used in new productive trading activities.  The purpose is to encourage individuals to reinvest the sales proceeds from the sale/disposal of a previous asset into new productive trading or a new company.  The main aspects of the relief are as follows:

(a)          It applies to an individual

(b)         who has paid Capital Gains Tax on the sale/disposal of an asset and

(c)          invests in a new business

(d)         at a cost of at least €10,000

(e)          between 1^st January 2014 and 31^st December 2018.

(f)           The investment cannot be disposed of earlier than three years after the investment date.

(g)          Once the new investment is sold the Capital Gains Tax arising with be reduced by the lower of:

• the C.G.T. paid by the individual on a previous disposal of assets from 1^st January 2010 onwards and
• 50% of the C.G.T. arising on the disposal of the new investment.

What type of assets are involved?

The assets must be chargeable business assets.  Goodwill is included in this definition as are new ordinary shares in micro, small or medium sized enterprises after 1^st January 2014.  The main conditions are:

• The investor has control of the company and is a full time working director and
• The company is carrying on a new business.

NOTE: Please be aware the commencement of this measure is subject to E.U. State Aid approval.

II       START YOUR OWN BUSINESS – This is an exemption from Income Tax but not from Universal Social Charge and PRSI for a long term unemployed individual who is starting up a new, unincorporated business.

What is meant by long term unemployed?

         It means some one who is continuously unemployed for the previous fifteen months.

What does this measure actually provide?

         The first €40,000 of profits earned per annum will be exempt from Income Tax for two years.

III     ENHANCEMENT OF EMPLOYMENT & INVESTMENT INCENTIVE – The main points of this new measure are:

• The initial 30% relief available for investments under the E.I.I. has been removed from the High Earners Restriction for three years.
• A maximum of €115,000 can be invested per individual per annum.
• The aim is to encourage individuals to invest more funds in the E.I.I. Scheme which focuses on job creation and expansion.

IV        STAMP DUTY – The transfer of shares listed on the ESM (Enterprise Securities Market) of the Irish Stock Exchange will be exempt from Stamp Duty.  The ESM is the ISE’s market for growth companies.

The current stamp duty rate is 1%.

NOTE:  Please be aware that this measure is subject to a commencement order.

V         RESEARCH & DEVELOPMENT TAX CREDIT – The aim of this change is to assist smaller companies to access the tax credit without reference to the base year.  The following changes have been made and will take place in the accounting periods starting on or after 1^st January 2014:

• The amount of expenditure eligible for the R&D Tax Credit (without reference to the 2003 base year) has increased from €200,000 to €300,000.
• In order to qualify for the R&D Tax Credit, the limit on the amount of expenditure on research and development outsourced to third parties has increased from 10% to 15%.
• With regard to existing clawback provisions, under Section 766(7B)(c), the Bill provides that the tax foregone can be recovered from the company instead of the employee.

VI        VAT – There have been two major VAT changes:

• The annual threshold for VAT on a cash receipts basis has increased from €1.25m to €2m.
• This comes into effect on 1^st May 2014.
• The 9% rate for Tourism related goods and services has been retained so as to encourage growth in small businesses within the Irish Tourism Sector.

PART II

The construction and building sectors saw the introduction of welcome changes:

I          LIVING CITY INITIATIVE – The urban regeneration initiative has been extended to include residential properties constructed up to and including 1914 and covers the cities of Cork, Dublin, Galway and Kilkenny.

The aim is to stimulate regeneration of retail and commercial districts as well as to encourage families to return to historic buildings in Irish city centres.

II          HOME RENOVATION INCENTIVE – This is a new incentive for home owners who:

1. carry out repair, renovation or improvement work on their principal private residence
2. from 25^th October 2013 to 31^st December 2015.
3. Qualifying expenditure carried between 1^st January 2016 and 31^st March 2016 can be treated as having been incurred in 2015 if planning permission was granted before 31^st December 2015.

What kind of relief is available?

Relief is available in the form of an Income Tax Credit of 13½% on qualifying expenditure between €5,000 (minimum) and €30,000 (maximum).

What does “Qualifying Work” mean?

Building extensions, window fittings, plumbing and tiling, plastering, etc. carried out by tax compliant builders.

How does the relief work?

1. The tax credit will be split over two years after the year in which the work was carried out.
2. Any grant aided compensation or tax relief received will reduce the relief available.
3. The home owner must be LPT (Local Property Tax) compliant.

Note: It is essential to keep in mind that the Revenue on-line system will track information on contractors involved and work carried out.

PART III

There were a number of other budget changes which will have a huge impact on our economy:

One Parent Family Tax Credit

• The One Parent Family Tax Credit was replace by a new Single Person Child Carer Tax Credit.
• This takes effect from 1^st January 2014.
• There is no change to the value of the credit or the additional standard rate band.
• The new credit will only be available to the principal carer of the child.

Medical Insurance Tax Relief

• The Bill restricted the Medical Insurance Tax Relief.
• The maximum amount of the Medical Insurance Premium which can qualify for relief at the standard tax rate will be €1,000 for an adult and €500 per child.
• No tax relief will be available on any excess amounts.
• This charge relates to contracts entered into or renewed on/after 16^th October 2013.

Top Slicing Relief

Top Slicing Relief has been abolished completely for all ex-gratia lump sums paid on or after 1^st January 2014.

D.I.R.T. (Deposit Interest Retention Tax)

• The standard D.I.R.T. rate has increased from 33% to 41%.
• The D.I.R.T. rate of 36% has been abolished.
• All deposit interest will be liable to tax at the 41% rate.
• These changes apply to payments made on or after 1^st January 2014.
• The exemption for interest on “Special Term Accounts” will be abolished for accounts opened after 15^th October 2013.
• Credit Union “Regular Share Accounts” will be subject to D.I.R.T. on interest and dividends paid on or after 1^st January 2014.

COMPANY TAX RESIDENCE

There were changes to the company tax residence rules.

The company will be regarded as Irish resident for tax purposes where an Irish incorporated company is managed and controlled in another E.U. member state or treaty state and is not regarded as tax resident in any territory.

This applies from 24^th October 2013 for companies incorporated after that date or 1^st January 2015 for companies incorporated before 24^th October 2013.

Rental Income

Rental income is calculated on the gross amount of rents receivable. A profit or a loss is calculated separately for each rental source. The rental income which is liable to Income Tax is the aggregate of the profits as reduced by the aggregate of the losses.

When completing an Income Tax Return, rental income from property situated in the Republic of Ireland is chargeable to tax under the provisions of Case V Schedule D while rental income from property situated outside the State is chargeable to tax under the provisions of Case III Schedule D.

It is important to remember that losses from one source cannot be written off against profits from the other. In particular, Irish rental losses cannot be written off against profits from foreign rental properties and vice versa.

Rental Income liable to Income Tax

The types of rental income liable to Income Tax can be more diverse than you might imagine. The following income is considered to be rental income, taxable under Case V, Schedule D:

• The letting or rental of residential, commercial and/or agricultural property.
• Easements.
• The granting of sporting rights and permits.
• Insurance payments received to compensate for non payment of rent.
• Certain Premiums.
• Improvements carried out by the tenant which is not required by the lease and for which he/she is not reimbursed, etc.

Deductible Rental Expenses

For rental expenses to be deductible there are three main rules:

1. It must be incurred by the landlord.
2. It cannot be of a capital nature.
3. It must be incurred during the period in which the landlord is entitled to receive rental income. In other words, it cannot be considered pre or post trading expenses.

Specific Expenses include:

• Rent, rates and insurance paid by the landlord.
• Repairs & Maintenance costs paid by the landlord including water charges, electricity, satellite/cable television, cleaning and maintenance services, painting and decorating, replacing tiles and slates, damp treatment, fixing broken showers, windows, doors, etc.
• Management Charges.
• Letting Expenses
• Advertising
• Legal Fees including the drawing up of leases or debt collection.
• Accountancy charges in relation to preparing rental income accounts and tax returns.
• Interest on money borrowed to purchase, improve or repair the rental property.
• Allowances for capital expenditure – These are known as Capital Allowances.

Please be aware you can never claim a deduction for your own labour. If you carry out repairs or gardening yourself, you cannot include this as a deductible expense against rental income.

The NPPR and Household charges are not allowable expenses against rental income.

Mortgage Interest

Broadly speaking, interest on money borrowed to purchase, improve or repair a rental property is deductible in calculating your rental income for tax purposes, subject to certain conditions.

The allowable deduction for interest accruing on loans used to purchase, improve or repair rented residential property is restricted to 75% of the total interest accruing.

This 75% restriction does not apply to non-residential property. In the case of offices, warehouses, etc. 100% of the interest is allowable against rents receivable.

A further restriction was introduced in 2006. Unless the landlord has complied with the registration and payment requirements of the PRTB (Private Residential Tenancies Board) in relation to each and all tenancies in the rented property then the interest on monies borrowed for the purchase, improvement or repair or rented residential properties will not be an allowable deduction against rents receivable.

If the loan to purchase the rental property includes stamp duty, legal fees, auctioneers’ fees, etc. then the interest on the loan must be apportioned. Only the interest relating to the actual cost of purchase, repair or renovation of the property is allowable.

Interest incurred prior to the first letting is not allowable (pre-letting expense) neither is the interest incurred after the final letting (post letting expense). Interest incurred during a period in which the landlord occupies the property is not allowable.

Capital Expenditure – Wear & Tear Allowance

Wear and tear allowances are available in respect of capital expenditure incurred on fixtures and fittings provided by the landlord for the rented residential property. This includes furniture, showers, kitchen appliances, etc.

The rate is 12½% over eight years.

What Expenditure is not allowable?

• Pre-letting expenses – expenses incurred prior to the date on which the premises was first let. There are exceptions to this rule and they include auctioneer’s letting fees, advertising fees and legal expenses incurred on first lettings.
• Interest on money borrowed incurred in the period following the purchase of the property up to the time the first tenant enters into a lease and after the final letting.
• Post-letting expenses – expenses incurred after the final letting,
• Capital expenditure incurred on additions, alterations or improvements to the premises unless allowable under an incentive scheme or incurred on fixtures and fittings.
• Expenses incurred on lettings that are exempt under the Rent-a-Room provisions.
• NPPR
• Household Charge
• The landlord’s own labour

Rent-a-Room Relief

If an individual rents out a room in his/her sole or main residence as residential accommodation and receives up to €10,000 per annum this amount will be exempt from Income Tax, PRSI and the Universal Social Charge providing conditions are met.

The €10,000 limit includes rent, utility bills, laundry, food, etc.

If the individual receives in excess of €10,000, the Rent-a-Room exemption will NOT apply and the entire rent receivable will be liable to income tax, PRSI and the Universal Social Charge

An individual cannot avail of rent-a-room relief in respect of payments for accommodation in the family home by a child of the landlord under any circumstances. There is no restriction where rent is paid by other family members, for example, nieces and nephews.

The relief does not affect an individual’s entitlement to mortgage interest relief i.e. Tax Relief at Source.

The relief does not affect the individual’s entitlement to Principal Private Residence Relief from capital gains tax on the sale or disposal of the property.

You can opt out of the relief for a year of assessment by making an election on or before the return filing date for the year of assessment concerned.

Non Resident Landlords

If your landlord resides outside theRepublicofIrelandand you pay rent directly to them or electronically transfer the money into their bank account either inIrelandor abroad, you must deduct income tax at the standard rate of tax (currently 20%) from the gross rents payable.

Failure to deduct tax may leave the tenant liable for the tax that should have been deducted.

At the end of the year you are obliged to complete a Form R185 showing the tax deducted from the gross rents which you should then give to your landlord. The landlord can then submit this form to the Revenue Commissioners and claim this amount as a credit.

If, on the other hand the non-resident landlord has an agent who is resident in the state, then there is no obligation for the tenant to deduct tax from the rent. Instead the tenant should pay the gross rent to the agent.

The agent is then liable to pay income tax on the rents received from the tenant in the capacity of Collection Agent for the landlord. The agent is then required to register as self employed and submit an annual tax return and account for the tax due.

Foreign Rental Income

In general, rental income from property located outsideIrelandis calculated on the full amount of rents receivable, irrespective of whether or not it has or will be remitted intoIreland.

Broadly speaking, the same deductions are available in calculating the taxable rental income as if the rents had been received inIreland.

Income tax on these rental profits is chargeable under Case III of Schedule D.

In the case of an individual who is not domiciled inIreland, the taxable rental income is computed on the full amount of the actual sums received in the State without any deductions or reliefs for expenditure incurred.

Rental losses from the letting of property outside the State cannot be offset against rental income from the letting of property in the State and vice versa. Such losses can only be offset against future rental income from property outside the State.

Introduction

Your residency affects your tax treatment in Ireland.

As an Irish resident, ordinarily resident and Irish domiciled individual you will be taxed on your worldwide income wherever it arises.

You will be taxed on all Irish and foreign source income in full and where possible you will be entitled to a tax credit for any foreign tax paid on foreign source income.

Residence

You will be considered to be Irish resident if you are present in the state for:

a) 183 days during the tax year in question or

b) 280 days or more over a period of two consecutive tax years.

Notwithstanding b), if you are present in Ireland for 30 days or less in a tax year you will not be treated as resident for that year unless you elect to be resident.

If you are not tax resident in the year of arrival under the above rules, you may elect to be tax resident for the year of arrival.

If you have any queries relating to whether or not you should elect to become Irish resident, please contact us on 01 872 8561

Ordinarily Resident

You will be considered ordinarily resident if you have been resident in the state for the previous three consecutive years.

Regardless of whether or not you are actually resident in the state in the fourth year, you will be considered ordinarily resident for the fourth year.

If you leave Ireland, you will cease to be ordinarily resident when you have been non resident for three consecutive years. You will not be considered to be ordinarily resident from the fourth year.

Domicile

Domicile is a general legal concept.

It is relevant to you in relation to how certain foreign source income will be taxed in Ireland.

Under Irish law, every person acquires a domicile of origin at birth. In most cases this is the father’s domicile, however, in situations where the parents are unmarried or the father has died prior to the individual’s birth, the domicile of the mother is taken.

Your domicile can change if you acquire a domicile of choice.

For more information, please contact us on 01 872 8561

Tax Treatment

As a non resident, but ordinarily resident and Irish domiciled individual you will be taxed on all Irish and foreign sourced income in full.

The following income is exempt:

a) Income from a trade or profession, all duties of which are exercised outside Ireland.

b) Income from an office or employment, all duties of which are performed outside the state.

c) Foreign income providing it does not exceed a threshold amount of €3,810 in a tax year.

As a non resident, non Irish domiciled but ordinarily resident individual, you will be taxed on all Irish source income in full and foreign source income to the extent that it has been remitted into Ireland.

Again, the following income is exempt:

a) Income from a trade or profession, all duties of which are exercised outside Ireland.

b) Income from an office or employment, all duties of which are performed outside the state.

c) Foreign income providing it does not exceed a threshold amount of €3,810 in a tax year.

As non resident, non domiciled and non ordinarily resident, you will be taxed on Irish source income in full and on foreign source income in respect of a trade, profession, employment or office where the duties are exercised in Ireland.

As an Irish resident and ordinarily resident but non Irish domiciled individual, you will be taxed on Irish source income in full and on remittances of foreign source income.

Should you have any queries in relation to residency, ordinary residency or domicile, we would be delighted to discuss them with you.

Please be aware that the information contained in this article is of a general nature.  It is not intended to address specific circumstances in relation to any individual or entity. All reasonable efforts have been made by Accounts Advice Centre to provide accurate and up-to-date information, however, there can be no guarantee that such information is accurate on the date it is received or that it will continue to remain so. This information should not be acted upon without full and comprehensive, specialist professional tax advice.