Ken O’Brien CHARTERED TAX CONSULTANT APPLIED TAX MODULE 3 Income Tax 25th & 26th January 2013 www.charteredaccountants.ie EDUCATING SUPPORTING REPRESENTING Categories of Income • Income sources are divided into categories • Trade/Profession; Rental; Employment; Investment income • Each category comes under a Schedule • Basis of Assessment for each category Schedule D Sec 18 TCA 1997 • Cases I and II • Case III • Case IV • Case V • Trades and professions • Investments/foreign source income • Broad category, DIRT interest, taxed income, other • Rental Other Income Schedules • Schedule E • Sec 19 TCA 1997 • Irish offices and employments • Directors’ Fees • Salaries, Wages, BIKs, Pensions • Schedule F • Sec 20 TCA 1997 • Distributions from Irish companies Schedule D Case 111 • • • • Section 18(2) TCA 1997 Interest, annuities, annual payments Foreign securities eg deposit int and divs Foreign possessions eg rent, trading or employment income • Where no Irish tax deducted at source Case III • Are deductions or Losses allowable? • Yes: – Foreign tax where credit not allowed – Allowable expenses for foreign rental income – Losses allowed for foreign trade by concession Case III Loss • Foreign Trade Loss (€15,000) • Foreign Rents €5,000 • Foreign Trade Losses carried forward • Foreign Rents taxable of €5,000 Sch D Case IV • • • • Sec 74 TCA 1997 “Catch all” Case Post Cessation Receipts Income under deduction of tax – Irish encashment tax eg US divs – Irish Deposit Interest - DIRT Case IV Deposit Interest • Sec 74 TCA 1997 taxed on an arising basis • Interest taxed in year it is credited to account • DIRT @30% = full income tax liability • EU Deposits Sec 267M TCA -Case III Sch D Case V • • • • Chapter 8 Part 4 TCA 1997 Section 97 TCA 1997 Rental income from Irish property Taxed on rental income receivable – relief for rents not paid Case V Deductions Not Allowable: Allowable: • Capital Expenditure • Rates/Rents • Maintenance/Repairs • Pre-letting expenses except for IT 70, legal • Goods and Services and auctioneers • Interest - Residential 75% and PRTB paid • Management Fees • Advertising etc between lettings • Negotiating a Lease Case V Losses • • • • Sec 384 TCA 1997 Carry forward against future Case V FA 2010 “clarification” re order of set off Current year Capital Allowances must be used in priority to Case V losses forward • No longer possible to maximise currentyear capital allowances against non Case V income Case V Losses-Order of Set Off • 2012 Case V profit • Rental losses fwd • Capital Allowances €50,000 €75,000 €31,750 Nursing Home • Salary €40,000 Case V Losses-Order of Set Off Case V Case V Losses fwd Taxable Rental Income Case V CA Case V Losses fwd Taxable Rental Income Salary CA Taxable Salary Case V Losses fwd Pre FA 2010 €50,000 (€75,000) €0 €0 €40,000 (€31,750) €8,250 €25,000 Post FA 2010 €50,000 €0 €50,000 (€31,750) (€18,250) €0 €40,000 €0 €40,000 €56,750 Rent a Room Relief • • • • Sec 216A TCA 1997 Tax Free rent if rent <= €10,000 pa No deductions for expenses Qualifying Residence = principal residence • No effect on mortgage interest relief Rent a Room Relief • Jo Clegg lets a room in her home in 2012: – Rental income per month €400, plus – Meals and Laundry per month €200 • Relief applies as total rent is €7,200 • If total rent > €10,000 full amount is taxable as per “normal” Case V rules Schedule E • • • • Part 5 TCA 1997 -Sec 112 TCA 1997 Employment and public offices Salaries, fees, benefits, pensions PAYE Chap 4 Part 42 Employed v Self Employed • • • • • Revenue looking closely at this area Locum GPs and Pharmacists Building Industry Impact on PRSI Covered in detail in Integrated Tax Employed or Self Employed? • Case Law – tax, social security and employment law • Employment Status Group updated 2010 • No simple “checklist solution” • Consideration of all facts Employed or Self Employed? • Cooke J in Market Investigation case • Has a person engaged himself to perform the services “as a person in business on his own account” • “Yes” Contract for Service = Self Employed • “No” Contract of Service = Employed Likely to be an Employee • • • • • • • Under the control of another Supplies labour only Works a set number of hours per week Cannot sub-contract Fixed Rate of payment No financial risk taken Receives expense payments to cover subsistence Schedule E • Taxable Amount • Anything assessable under Sch E • Convertible into money/money’s worth • Higher of cost to ER or realisable value to EE • Share Schemes • Sec 128A-E TCA 1997 • Emoluments • Perquisites Sec 112 TCA 1997 Schedule E • Benefits in Kind • Specific valuation rules • Sec 118 TCA 1997 • Sec 121, 121A and 122 TCA 1997 • Schedule E • Liable to PAYE • Accommodation, entertainment, other services • Co cars, vans and pref loans Termination Payments • Schedule E • Sec 123 TCA ,Sec 201and Sch 3 TCA 1997 • Reliefs where payment not taxable under Sec 112 • No contractual entitlement – pay in lieu? Termination Payments • • • • Basic Exemption Increased Exemption Standard Capital Superannuation Benefit Exemptions – Death, injury or disability – Foreign service payments Lifetime Limit • • • • Sec 201(8) TCA 1997 Inserted by FA 2011 Lifetime tax free limit of €200,000 Limit does not apply to exempt payment on account of death or disability PAYE • Chapter 4 Part 42 TCA 1997 • Employer accountable for PAYE, PRSI, USC • PAYE not applied to – Share options (RTSO applies) – ER PRSA contribution (Self Assessment) Can deductions be Claimed? • Sch E deductions • Wholly, exclusively and necessarily incurred • In the performance of the duties • Sec 117 and Sec 114 TCA 1997 Professional Body Fees • Revenue eBrief 19/11 • Employer not obliged to deduct PAYE/PRSI/USC where: – Employee/director entitled to deduction under Sec 114 TCA 1997 • FA 2011 removed exemption from BIK – Sec 118(5E) TCA 1997 • Applies to fees paid or reimbursed by employer Approved Pension Schemes • Part 30 Chapter 1 TCA 1997 • Employee exempted from charge to tax • Employer pension contribution to a Revenue-approved pension scheme • Deductions for employee contributions, subject to limits Foreign Earnings Deduction • • • • • • • Sec 823A TCA 1997 FA 2012 BRICS Countries Applies for 2012-2014 – 3 years Employment duties in BRICS Maximum deduction €35,000 No USC/PRSI Relief Foreign Earnings Deduction • Qualifying Days • One of 4 consecutive days • Includes non working days – part of business trip • 60 Qualifying Days in 12 months • State employments excluded Foreign Earnings Deduction • • • • Deduction D x E/F D= No of qualifying days in tax year E= Employment Income* – includes share option gains and before personal pension • F= No of Employment Days in Tax Year *Excludes BIK, Termination Payment, Expenses, Restrictive Covenant Schedule F • • • • • Section 20 TCA 1997 Irish Dividends and distributions Distributions Sec 130 TCA 1997 Scrip dividends taxable under Sch F Married couples – shareholding in joint names • Apportion income 50:50 • Standard Rate Band and Home Carer Credit Dividend Withholding Tax • Sec 172A TCA 1997 imposes DWT • Secs172C and 172D TCA 1997 exempt – Divs to Irish companies or pension funds – Non Irish EU/DTA residents – ESOTs (Employee Share Ownership Trusts) – Declaration – Schedule 2A TCA 1997 Sch F Example • John receives the following from CRH plc in 2012 on his shareholding of 1,000 Ord Shares • Shares in lieu 12 Ord • Equiv gross div €200 • Gross Div from 1,000 ord Tullow Oil €220 • • • • Sch F 2012 CRH Tullow Gross €200 €220 €420 Tax @41% = €172.20 DWT @ 20% = €84.00 €88.20 Income Tax Exemptions • Part 17 TCA 1997 • Exemptions are subject to “High Earner Restrictions” • Effective Rate of at least 30% Artists Exemption • • • • • • • Sec 195 TCA 1997 FA 2011 limit of €40,000 from 1st January 2011 Writers, composers, sculptors, artists Original and Creative Work Exemption must be claimed Guidelines – Arts Council and Minister Resident or ord res in Ireland and not elsewhere Other Exemptions • Section 216 TCA 216 – Lottery Wins • Sec 43(1) Government Securities owned by individuals not resident • Sec 141/234 TCA 1997 Patent Exemptions abolished • Exemption does not apply to dividends paid or income from a qualifying patent on or after 24th November 2010 Calculation of Income Tax • Income Tax Rates • Reliefs and Deductions • Personal tax credits Income Tax Rates Sec 15 TCA 1997 2011 Rate Bands and Rates Single Rate Band Rate €32,800 20% One Parent Families €36,800 20% Married Couples one €41,800 earner Married Couple two €65,600 earners All taxpayers Amounts > SRB 20% 20% 41% Joint Assessment – Rate Bands • SRB can be transferred • Increase by lower of €23,800 or amt of lower income • Max joint increased SRB €65,600 • Ex Hus €60,000 Wife €10,000 • • • • 2012 Rate Bands €60,000 €10,000 €70,000 > Max Max €65,600 SRB Tax Rates and DIRT • • • • 2012 rate of DIRT is 30% This is the full income tax due Additional rate band @ 30% included Credit given for DIRT Tax Reliefs and Credits Relief v Credit Reduction in liability Relief @ Marginal Rate 41% @ Standard Rate 20% Credit Claiming Credits and Deductions • Sec 458 TCA 1997 • Individual to make a claim • Submit a Return of total income unless – Operation of PAYE – Repayment of tax deducted under PAYE • Self employed person with PAYE income must submit a Tax Return Deductions • • • • • Section 458 TCA - Part 1 of Table Pension contributions Charitable Donations Film/BES EIIS Pension Contributions • • • • Revenue Approved Schemes/RAC/PRSA Deductible from relevant income Employment income inc BIKs Net relevant earnings e.g. Case I/II profits less losses and CA • Sec 787 TCA 1997 – maximum deductions • 2012 Cap of €115,000 Pension Contributions • 2012Earnings Cap €115,000 Age % Earnings Up to 30 30 -39 40 -49 50 -54 55 -59 60 + 15% 20% 25% 30% 35% 40% Pension Contributions Example • • • • • • Self employed Age 56 Case 11 €250,000 CA €5,000 RAC €60,000 Tax Relief 2012? • Age = 35% • Earning Cap applies • €115,000 x 35% =€40,250 • Tax Relief €40,250 x 41% = €16,502 • C/fwd €19,750 to 2013 Charitable Donations • • • • • Sec 848A(7) TCA 1997 Self Assessed individuals Donations of €250 or more (per charity) Tax Relief at marginal rate Tax Relief for PAYE taxpayer claimed by charity • Sec 848A(9) TCA 1997 EIIS Relief • • • • • • • • Replaces BES 3 year holding period – BES 5 years Sec 488-492 TCA 1997 Purchase of shares in Qualifying company Max relief €150,000 pa up to 2013 Wide range of Qualifying companies 30% relief in Year 1 11% relief at end of 3 years Film Relief • • • • Sec 481 TCA 1997 Max deduction €50,000 pa Film 3 cert Allowed as a relief Medical Expenses • Sec 469 TCA 1997 • Standard Rate relief from 2009 • Nursing Home expenses at Marginal Rate – Doctor and hospital fees – Drugs and medicines – Non routine dental and optical Tax Credits • Sec 458 TCA 1997 -Part 2 Table • Tax Credits cannot be refunded Example • Earnings €20,000 • Tax @ 20% = €4,000 • Credits (Married+PAYE) €4,950 • Tax Liability/Refund NIL Personal Tax Credits 2012 • Single • Married • Widowed year of bereavement • Widowed with children • Widowed other • Single Parent • €1,650 • €3,300 • €3,300 • €3,300 • €2,190 • €3,300 Personal Tax Credits 2012 • Employee Tax Credit • Age Tax Credit • Home Carer Credit* • Sec 472 €1,650 • Sec 464 €245/€490 • Sec 466A €810 • Tax Credits at Source • Sec 470 Med Insce • Sec 244 PPR Interest *Jointly Assessed where income<€,5080 High Earner Restrictions • Chapter 2A Part 15 TCA 1997 • Simple aim – 30% min rate of tax for high earners • Complex conditions and calculations • List of specified restricted reliefs Sch 25B • Revenue Guidance Document Restricted Specified Reliefs • EIIS/Film Relief • Donations to Charities/approved bodies • Capital Allowances for Urban/Rural Renewal/Park and Ride/Student Acc etc • Hotel/holiday cottages/nursing homes/hospitals/childcare facilities Restricted Specified Reliefs • • • • • Trading Losses from CA schemes Patent Royalty and dividend income Interest Relief for purchasing shares etc Stallions/Greyhound /woodlands/mining Relief for restoration of Significant Heritage Buildings and Gardens • Artists Exemption • Amounts of Restricted Reliefs carried fwd Reliefs not Restricted • • • • • • Normal business expenses Personal tax credits and exemptions Pension contributions Medical Expenses CA on plant and machinery Trading Losses High Earner Restriction • Applies where 3 criteria met 1. “Adjusted Income” > €125,000* 2. Spec Reliefs for year => €80,000 3. Spec Reliefs for year > 20% of Adjusted Income * Threshold Amount = €125,000 High Earners Restriction • • • • • Recalculated Income T + (S-Y) T = Taxable Income before restriction S = Specified Reliefs for year Y = Greater of €80,000 or 20% Adjusted Income High Earners Restriction • Taxable income 2012 €100,000 • Section 23 type Relief for 2012 €200,000 • Adj Inc = €300,000 • Spec Rel > €80,000 • €300k * 20% = €60k • 3 Criteria apply T = €100,000 S = €200,000 Y = €80,000 • T+(S-Y) = €220,000 2012 Relief €80,000 Carry forward €120,000 Amt C/F = Spec Relief PRSI and Universal Social Charge • PRSI • USC • Full study in Integrated Tax PRSI Employees • Reckonable Earnings • Emoluments inc BIKs – Sch E • Deduction for employee pension contributions and PHI abolished from 2011 PRSI Overview • • • • • • • • Social Welfare Consolidated Act 2005 Social Welfare Regulations and Orders EU Regulations Regulation No 883/2001 Employed v Self Employed Class A v Class S Case Law Covered in Integrated Tax PRSI – Exclusions • • • • < 16 years of age 66+ years of age Employment by spouse Payments from Department of Social Protection eg State Pension, Benefits • Private Pensions Employee PRSI Rates 2012 Employee Income Employee PRSI Rate ALL 4% First €127 per week exempt Employer Rate 10.75%* •Lower Employer PRSI rate of 4.25% where earnings < €365 per week PRSI Rates 2012 Self Employed Income PRSI Rate ALL 4% PRSI Employed – Investment Income • Individual with Reckonable Earnings • No PRSI on investment income • Unless individual has income under Sch D Case 1 / 11 – trading / professional income or proprietary / non-executive director’s income • NB – Class S PRSI will apply from 2014 PRSI Self Employed • Self employed trading, professional income • Investment income • Proprietary and non Executive Directors Class S1 USC • Sections 531AL-AAD TCA 1997 • Replaced Health Contribution and Income Levy from 2011 • Payable on Relevant Emoluments and Relevant Income – Sec 531AM TCA 1997 USC • Relevant Emoluments – All income subject to PAYE – No deduction for personal pension contributions • Relevant Income – All non PAYE Income – Investment income and self employment income USC Deductions allowed • Trading and professional losses forward • Capital Allowances – excluding accelerated CAs USC Exemptions • • • • • Income < €10,036 DIRT deposit interest Tax Free Termination Payments Statutory Redundancy First €375,000 of taxable pension lumpsum payments > €200,000 (> €575,000 liable to USC) • Department of Social Protection payments USC Rates 2012 Aggregate Income First €10,036 Under 70 Under 70 No Medical Medical Card Card 2% 2% Over 70 No Medical Card 2% Over 70 Medical Card 2% Next €5,980 4% 4% 4% 4% Remainder 7% 4% 4% 4% “Relevant Income” > €100,000 10% 7% 7% 7% USC Special Rates • 45% USC on certain Bank Bonuses • Financial Institutions with State support • 45 + 41 + 4 = 90% USC Special Rates • 5% Property Surcharge – FA 2012 – 5% Surcharge on income sheltered by property reliefs – in the year – Sec 531EE TCA 1997 – Income > €100,000 – Properties in designated areas – similar to High Earners – Calculate High Earner’s restriction first Methods of Assessment • Sec 1017/1031C TCA – Joint Assessment • Automatic for married couples/Civil Partners • Opt out under Sec 1080 /1031D TCA 1997 • Chargeable spouse/civil partner • Rate Bands transferrable CPCROC Act 2010 • Finance Act (No 3) 2011 • Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010 • Legal relationship for same sex couples who register the partnership • Provides property, financial and other rights similar to married couples, for civil partners Finance Act (No 3) 2011 • Inserts new Part 44A TCA 1997 • Same tax treatment for civil partners as for married couples • Registered civil partnership • Revenue FAQ on CPCROC Act 2010 • Cohabitants (not married or in civil partnership) continue to be taxed as single persons Single Assessment • Sec 1016/1031B TCA 97 – election by married couple/civil partners • Each spouse/civil partner treated as single • Not advantageous financially • No sharing of unused credits/rate bands Single Assessment • Aoife’s liability • David’s liability • Total single asst • €900 • €10,312 • €11,212 • Total joint asst • Saving under j/a • • €9,322 €1,890 Separate Assessment • • • • Sec 1023/1031H TCA 1997 Claim before 1st April Benefits of joint assessment Each spouse dealt with separately High Income Earner Restriction • Sec 485F TCA 1997 • Jointly or separately assessed couples • High Earner Restriction applied separately to each spouse/civil partner • Recalculated income of spouse/civil partner added to taxable income of the other High Income Earner Restriction 2012 2012 2012 Pat Alice Joint Adjusted Income €270,000 €210,000 Specified Reliefs (€80,000) €0 Taxable Income €65,600 @ 20% €334,300 @ 41% €190,000 €210,000 Total Tax before credits €400,000 €13,120 €137,104 €150,224 Pro Forma Computation 1 Case I/II X Case III X Case IV X Case V X Sch E X Sch F X Total Income X Pension Contributions (Marg rate) Charitable Donations (Marg Rate) Taxable Income (X) (X) X Pro Forma Computation 2 €Y @ 20% X €Z @ 41% X Tax Liability X LESS NON REFUNDABLE CREDITS: •Reliefs @ standard rate e.g. non TRS medical insurance (X) •Personal; Employee; Age Credits Tax Liability (X) X LESS REFUNDABLE TAX CREDITS: •Tax Paid DIRT; DWT, PAYE (X) Tax Payable X
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