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FINANCE ACT 2013

Finance Act 2013 contains the legislative provisions for a number of changes to the Irish tax system under all the main tax heads including Income Tax, Corporation Tax, Capital Gains Tax, Excise, Value Added Tax, Stamp Duty and Capital Acquisitions Tax.

Due to the amount of changes it is not possible to detail each individual provision so I decided to focus on a cross section of amendments to give a general overview.  The legislative provisions I have selected will have an affect on most if not all Irish individuals whether resident and domiciled or resident and non-domiciled; employed or unemployed; retired or still working; self employed or PAYE workers; corporate structures or individuals, etc.:

1. Universal Social Charge
2. The Remittance Basis for Income Tax
3. The Remittance Basis for Capital Gains Tax
4. Taxation of certain Social Welfare Benefits
5. Mortgage Interest Relief
6. Donations to approved bodies
7. Farm Restructuring Relief
8. FATAC – The US Foreign Account Tax Compliance Act
9. Close Company Surcharge
10. Stamp Duty

1. UNIVERSAL SOCIAL CHARGE

Finance Act 2013 introduced legislation to eliminate the 4% rate of Universal Social Charge applicable to individuals aged seventy years and over where their aggregate or combined income exceeds €60,000.00.

According to Section 3 Finance Act 2013, individuals aged seventy years or over will be subject to the normal rates of Universal Social Charge where the individual’s aggregate income exceeds €60,000; in other words:

• 2% on first €10,036
• 4% on next €5,980
• 7% on the balance (10% where the relevant income exceeds €100,000.00)

No marginal relief will be available.  This means that in situations where the individual’s income exceeds the threshold amount, the higher rate of the Universal Social Charge will apply to the entire income and not just to the excess over €60,000.00.

How is “Aggregate Income” defined?

 “Aggregate Income” includes the aggregate of all “relevant emoluments” including pensions, employment income and benefit-in-kind if applicable and “relevant income” including rental income, dividend income, income from a trade or profession, etc.

It does not include:

• Social Welfare Payments or
• Deposit Interest subject to DIRT (Deposit Interest Retention Tax)

 What about the Medical Card holders?

 Previously medical card holders were entitled to avail of the special reduced Universal Social Charge rate of 4%.

According to this new amendment, individuals holding medical cards will be liable to pay Universal Social Charge at the normal rates if his/her aggregate income exceeds €60,000.00.

This will mainly affect individuals with high earnings from other E.U. member states who transfer to Ireland but have social security arrangements in their own country.  Under E.U. law these individuals qualified for medical cards in Ireland and prior to Finance Act 2013 they would have been entitled to the reduced USC rate of 4%.

 2. THE REMITTANCE BASIS FOR INCOME TAX

This legislative amendment was introduced as an anti-avoidance measure to ensure that an individual who is resident and/or ordinarily resident in Ireland but non-domiciled cannot avoid paying the correct tax on the remittance of income into Ireland.

Under the remittance basis an individual is only liable to Irish Tax on income he/she brings into Ireland.  If the income is from an “earned” source then Income Tax, Universal Social Charge and PRSI are levied.

The changes to the Taxes Consolidation Act are most easily explained in an example:

• Sean Murphy is Irish resident for the past three years but is U.S. domiciled.
• He earned €200,000 rental income from his investment properties located in the U.S. over a two year period.
• He did not remit any of this income into Ireland.
• Instead he invested this €200,000 in a property in Spain.
• In January 2013 he gave the Spanish property to his wife Mary, as a gift while on holiday there.
• Mary is also Irish resident but U.S. domiciled.
• On 1^st March 2013 Mary sold the property for €250,000.
• On 1^st May she lodged the proceeds into her Irish bank account which was opened in her sole name.
• The lodgement of €250,000 by Mary into her own bank account is treated as a remittance by Sean because it occurred after 13^th February 2013.
• John is liable to pay Income Tax on the remittance, being the lodgement of funds into Mary’s Irish bank account.
• Mary will also be liable to Capital Gains Tax on €50,000, being the gain in value on the Spanish property because she remitted the gain into Ireland in May 2013.

Summary of the main points

Where there is an application of income from foreign securities or possessions by an Irish resident or ordinarily resident individual who is non-domiciled who then:

a)      makes a loan to his/her spouse or civil partner or

b)      transfers money to his/her spouse or civil partner or

c)      acquires property that is subsequently transferred to his/her spouse or civil partner

It will be deemed to be a taxable remittance for Income Tax purposes for that Irish resident, non-domiciled individual where the sums are received in the state on or after 13^th February 2013 from any of the following sources:

a)      Remittances payable in the state

b)      Property imported

c)      Money or value arising from property not imported

d)      Money or value received on credit or account in relation to such remittances, property, money or value.

3. THE REMITTANCE BASIS FOR CAPITAL GAINS TAX

As with the Income Tax legislation, this new subsection provides that where an Irish resident, non-domiciled individual makes a transfer outside the state, of any chargeable gains, which would otherwise have been liable to Capital Gains Tax on the remittance basis, to his/her spouse or civil partner, any amounts remitted into Ireland on or after 13^th February 2013 deriving from that transfer will be treated as having been remitted by the individual who made the transfer to his/her spouse or civil partner.

It is important to remember that the provisions apply to a remittance by the spouse or civil partner on or after 13^th February 2013 which means that any chargeable gains historically transferred are within the scope of the new provisions of Finance Act 2013 where the remittance into Ireland occurs on or after 13^th February 2013.

 4. TAXATION OF CERTAIN SOCIAL WELFARE BENEFITS 

From 1^st July 2013 certain Social Welfare Benefits not previously chargeable to Income Tax will come into the Income Tax net including:

1. Maternity Benefit
2. Adoptive Benefit
3. Health & Safety Benefit

Revenue will now be permitted to amend tax credit certificates and standard rate cut off points to collect the tax arising on these benefits.

These benefits are not liable to the Universal Social Charge.

What happens if the salary is paid by the Employer during Maternity Leave?

Previously the employer paid the full salary to the employee less an amount representing the maternity benefit.  The net salary was liable to Income Tax, Universal Social Charge and PRSI while the employee received the Maternity Benefit tax free.

The employer received a tax saving on employer’s PRSI for the amount of the Maternity Benefit received by the employee.

From 1^st July 2013 onwards the employee will pay up to 41% Income Tax on the amount of the Maternity Benefit.

5. MORTGAGE INTEREST RELIEF

Prior to Finance Act 2013 Mortgage Interest Relief was due to expire at the end of 2012.

Section 9 Finance Act 2013 introduced transitional provisions in relation to mortgage interest relief which allows certain loans taken out in 2013 to be deemed to have been taken out in 2012.  These include:

• A loan taken out to purchase a site for which planning permission has been obtained on or before 31^st December 2012 and in respect of which a qualifying residence is built on that land or
• A loan taken out by an individual on/after 1^st January 2012 and on/before 31^st December 2012 which has been used for the construction of a residential premises on the site/land which the individual purchased on/after 1^st January 2012 and on/before 31^st December 2012.
• A facility agreement or loan agreement which was in place on/after 1^st January 2012 and on/before 31^st December 2012 to provide a loan to an individual which is partly drawn down in 2012 with the remainder being drawn down in 2013.  The loan must be for the repair, development or improvement of a residential premises which is the individual’s qualifying residence.

It is important to remember that where planning permission is required, it must have been granted prior to 31^st December 2012 for the relief to apply.

6. DONATIONS TO APPROVED BODIES

Prior to the Finance Act 2013, tax relief for donations was given in two ways:

1. The self employed individuals and companies received a tax deduction for donations made to approved bodies subject to certain conditions.
2. PAYE workers (employees paid through the PAYE system) did not obtain a tax deduction.  Instead the approved body applied to Revenue for a repayment as if the PAYE worker had made the donation net of tax at the individual’s marginal tax rate i.e. 41%.

The new provisions have resulted in:

1. The distinction between self employed individuals and PAYE workers has been removed.
2. The approved body (i.e. the Charity) can reclaim a specified amount of the donation rather than the self employed individual receiving a tax deduction for the donation through the self assessment system.
3. The specified rate is 31% now instead of the individual’s marginal tax rate of 41%.
4. There is a cap of €1,000,000 on the aggregate qualifying donations in any year of assessment from any individual donor to approved bodies.
5. There is still a 10% restriction for donations to approved bodies with which the individual donor is associated.
6. Certification by donors is being simplified.
7. Donors no longer need to provide “appropriate certificates” instead they will provide annual or enduring certificates that can be renewed.
8. Enduring Certificates will apply for five consecutive years of assessment and can be renewed.

What does this mean?

1. The net cost to a self-employed individual making the minimum donation of €250.00 has increased from €148.00 (i.e. €250 x 41%) to €250.00.
2. Since self employed individuals with earnings taxed at the marginal rate are more likely to make donations of €250.00 than self employed individuals taxed at the standard rate then this is likely to result in a significant shortfall in donations for approved bodies.

Final Points

1. Corporate donations are not affected by the new reclaim procedures for individuals or the annual cap of €1,000,000 on relevant donations.
2. The relief is only available in respect of donations made by Irish resident individuals.
3. Donations from non-resident individuals do not qualify regardless of the amount of tax paid by them in Ireland which doesn’t appear to make any sense especially since non resident companies can obtain a tax deduction for donations.

7. FARM RESTRUCTURING RELIEF

This new relief announced in the 2013 Budget enables individual farmers to obtain relief from CGT (Capital Gains Tax) where there is a sale or exchange of agricultural land where other agricultural land is being purchased or acquired under an exchange.

This is subject to Ministerial Order to take effect.

To qualify for the relief the following conditions must be fulfilled:

1. The sale / purchase and exchange of land is between farmers (i.e. both parties must be farmer) who spend not less than 50% of that individual’s normal working time farming and
2. A farm restructuring certificate must be issued by Teagasc making the agricultural land qualifying land and
3. Where the qualifying land is purchased / acquired / exchanged in joint names, each joint owner must be a farmer in his/her own right.  This excludes spouses and civil partners and
4. The first sale or purchase must occur in the relevant period (i.e. between 1^st January 2013 and 31^st December 2015) with the matching purchase or sale taking place within two years from that date or
5. Where there is an exchange both transfers under the exchange must take place between 1^st January 2013 and 31^st December 2015 and
6. The consideration for the qualifying land being purchased or exchanged must equal or exceed the proceeds from the sale of the qualifying land for the relief to be granted in full.  In other words, relief is given in full where the value of the land sold/exchanged is less than or equal to the value of the land purchased / acquired by exchange.
7. Where the consideration for the qualifying land purchased or exchanged is less than the consideration on the sale of the qualifying land then the relief is granted by reducing the chargeable gain by the same proportion that the acquisition costs bear to the sale/exchange proceeds for the qualifying land.

Can the Relief be clawed back?

1. The relief can be clawed back if the qualifying land is sold within five years from the date of purchase or exchange.
2. The clawback will not arise in the case of compulsory acquisition.

8. FATAC – US FOREIGN ACCOUNT TAX COMPLIANCE ACT

The US Foreign Account Tax Compliance Act 2010 comes into effect in 2014.

The aim of this legislation is to ensure that US citizens pay US tax on income arising from overseas investments.

The Finance Act 2013 introduced legislation which allows for the Irish Revenue Commissioners to make regulations for the purpose of implementing this Ireland US agreement.

The regulations will require that certain financial institutions register and provide a return of information on accounts held, managed or administered by the financial institution.  A return of information on payments must also be made.

The financial institutions will be required to obtain a US TIN from account holders.

Finance Act 2013 empowers Revenue officers to enter the premises of the financial institution at all reasonable times to ensure the correctness and completeness of a return and to examine the administrative procedures in place for the purposes of complying with the financial institution’s obligations under the regulations.

Section 891E(10) authorises Revenue to communicate the information obtained to the Secretary of the U.S. Treasury within nine months of the end of the year in which the return is received, notwithstanding Revenue’s obligation to maintain taxpayer confidentiality.

Section 32 of the Finance Act 2013 that introduced the new s.891 is enabling legislation.  The regulations will contain their own commencement provisions.

9. CLOSE COMPANY SURCHARGE

Finance Act 2013 increases the de minimis amount of undistributed investment and rental income from €635 to €2,000 which may be retained by a Close Company without giving rise to a surcharge.

A similar amendment is being made to increase the de minimis amount in respect of the surcharge on undistributed trading or professional income of certain service companies.

The aim of these changes is to improve cash flow of close companies by increasing the amount a company can retain for working capital purposes without incurring a surcharge.  Although it’s difficult to imagine how undistributed income of €2,000 could possibly make that much of a difference!

10. STAMP DUTY

Finance Act 2013 introduced anti-avoidance measures to target “resting in contract” and other structures used in relation to certain land transactions.

The main points are as follows:

1. Where a contract or agreement for the sale of land or an interest in land is entered into where (1) 25% or more of the consideration is paid under the contract or agreement and (2) an electronic or paper return along with the relevant stamp duty payable hasn’t been filed and paid within thirty days then the contract or agreement is chargeable to stamp duty as if it were a conveyance or transfer of interest in the land.
2. Where stamp duty is paid on a contract and a conveyance is ultimately completed there is a provision for crediting the stamp duty paid on the contract against any stamp duty that would be payable on the conveyance.  The conveyance must be made “in conformity with the contract.”
3. If the contract or agreement is rescinded or annulled, the stamp duty will be returned provided this is shown to the satisfaction of the Revenue.
4. There are no exclusions from the charge for tax incentive properties.
5. Where a landowner (1) enters into an agreement with another person that allows that individual to enter onto the land to carry out developments on the land and (2) 25% or more of the market value of the land is paid to the landowner other than as consideration for the sale or all or part of the land, then the agreement is chargeable with stamp duty as if it were a conveyance.
6. An agreement for land leases exceeding thirty five years will be stampable as if they were actual leases made for the term and consideration mentioned in the lease agreements where 25% or more of the consideration specified in the agreement for lease has been paid.
7. This legislation is applicable to all instruments executed on or after 13^th February 2013 with the exception of instruments executed solely “in pursuance of a binding contract or agreement entered into before 13^th February 2013.”
8. Where the agreement for lease has been stamped, stamp duty on the lease will be limited to €12.50.

What is meant by developments?

1. The construction, demolition, extension, alteration or reconstruction or any building on the land or
2. Any engineering or other operation in, on, over or under the land to adapt it for materially altered use.

CONCLUSION

This has been a very comprehensive Finance Act with many far reaching amendments. Over the next few weeks I will be focusing on areas significantly affected by the 2013 Finance Act as they deserve more detailed explanations to properly outline the changes to the Irish tax system: