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