| There are a number of areas where the tax code could be simplified so as to make it sensible and user-friendly for individuals and small companies. The cost of cutting away needless complexities would not be large in the context of overall tax revenues. |
The tax code is enormous and encompasses several taxes. The Minister made a good start by abolishing one entire tax in his budget – capital duty. The remaining taxes have bureaucratic complexities build up over history, often for reasons long forgotten. Their simplification would be especially beneficial to individuals, who cannot be expected to be closely acquainted with the tax code, and also for small businesses for whom the tax code is so burdensome as to discourage their existence. Here are a few areas which deserve attention. | | Conor O'Brien |
Capital gains tax
A company is charged to corporation tax not only on its income but also on its capital gains. However there is one exception which is gains on the disposal of ‘development land’. Such gains are charged to capital gains tax rather than to corporation tax. In consequence the tax becomes payable at a different time to the due dates for corporation tax and capital losses arising to the company (other than on development land) cannot be relieved against the capital gain on the development land, as they can against any other asset.
Any land or buildings whose value would be increased by the ability to obtain planning permissions for a change in use or development constitute development land. The concept is so vague that it could extend to all land in the country. The concept of ‘development land’ is past its sell by date and should be removed from the tax code.
The cost of collecting small amounts of CGT from a large number of persons outweighs the benefits. For that reason, and in a realistic acknowledgement that many individuals would not report small gains to the Revenue, there are two reliefs from CGT available in respect of small gains. The first €1,270 of chargeable gains of an individual are exempt from tax. This exemption cannot be transferred between spouses so that if one spouse disposes of an asset and realises a gain of, say, €2,540, he will have to pay tax on €1,270 of that gain. Had he first transferred half the asset to his spouse, so that they each disposed of half of the asset, no tax would be payable. It seems obvious that the exemption should be computed on a joint basis for the two spouses, making it unnecessary to first transfer an asset between the two spouses prior to sale to a third party, in order to maximise the exemption. This exemption is unchanged for several years notwithstanding intervening inflation.
There is a separate relief that is expressed by reference to the sales proceeds rather than the gain. Gains are exempt on the disposal of tangible moveable property which is not a wasting asset where a consideration does not exceed €2,540. Again, this total has not been adjusted for inflation for many years. It would seem sensible if these two reliefs were combined, and the amounts updated so that, say, any disposal of any sort of asset for a consideration of less than €15,000 were exempted from CGT.
Capital acquisitions tax
Where a deceased person creates a discretionary trust in their Will, penal levies are applied once the youngest child of the deceased person who is a potential beneficiary under the trust, reaches the age of 21 years, if the trust has not been brought to an end by that date. The principal purpose of a discretionary trust is to ensure that young people do not receive assets at a time when they have not the wit or experience to handle them sensibly.
It might have been expected that the State would encourage the use of discretionary trusts so as to avoid people inheriting large wealth while they are young. Instead, a 6p.c. levy is imposed when the youngest child of the deceased reaches 21 years, and a 1p.c. per annum levy arises thereafter. None of these levies are creditable against inheritance tax, when the trust is finally dismantled.
From a public policy viewpoint would it not be more sensible to defer the imposition of levies until the 25th birthday of the youngest beneficiary? It would cost little tax to do so and would take the pressure off trustees to make what might be imprudently early advances of trust assets.
A substantial part of the total revenue from capital acquisitions tax arises not from the tax itself, but from interest on late payments of the tax. In part this is because the payment date for capital acquisitions tax is based on ‘the valuation date’. The valuation date is the earliest date on which the personal representative could have retained the assets for the benefit of the beneficiary. Since it is not necessarily the actual date upon which the beneficiary actually receives the assets, it is a fertile source of dispute between taxpayers and the Revenue as to what actually is ‘the valuation date’. It would simplify the administration of CAT if the valuation date were taken to be simply the date on which the personal representative hands over assets to the beneficiary, no matter when that may be.
Income tax
If an individual receives a bonus in 2006 in respect of work done in 2005 they will have an income tax liability for the year 2005. Unfortunately because PAYE would not have been operated in 2005 (the bonus not having been paid until 2006) they will owe tax to the Revenue. The fact that they have already effectively paid the tax in early 2006 through the PAYE system will not be taken into account. The taxpayer ends up having to make an additional tax payment for 2005, and then claiming a refund of his overpaid PAYE for 2006.
This procedure causes annoyance to the taxpayer and adds to the cost of administering tax collection, for the Revenue. It doesn’t make sense.
One of the few benefits of illness is that you may be able to get tax relief on your medical expenses. Unlike any other form of tax relief, this takes the form of a payment from the Revenue to the taxpayer. In other words it doesn’t operate as a tax relief at all but as a form of grant aid. It involves the taxpayer in making a separate claim for the medical expenses, and having to receive a repayment from the Revenue of the tax he has already paid without the benefit of the relief. Would it not be more sensible all round to handle this like any other tax relief and code it onto a tax free allowance certificate?
Residential property tax
Remember it? It was abolished from 5 April 1997, almost nine years ago. But its ghost lingers on in Dublin Castle. Where a person sells residential property and the proceeds €1,400,000, they must apply to the Revenue Commissioners for a clearance certificate to enable the purchaser to pay gross, without withholding a sum in respect of this long abolished tax.
It may be harsh on public servants who have built up expertise in this tax, but perhaps the time has come to ask them to ‘let go’ and let the tax rest in peace. But don’t hold your breath, there were officials charged with collection with estate duty almost 20 yeas after the tax was abolished.
Full coffers
These are not big problems. They are irritants to taxpayers. It is bad enough to have to pay tax but that is inevitable. But it is infuriating to not only have to pay the tax, but do so subject to petty and arbitrary rules and procedures which are of no benefit to the State or to anybody else. |
Conor O’Brien is a Tax Partner in KPMG.
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| Article appeared in the February 2006 issue.
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