What if you don't draw down 5% of an ARF?

[Brendan Burgess]

What are the specific rules relating to ARF drawdown?

A friend of mine set up an ARF during 2010, I think. He took no drawdown.

1) Must the drawdown be taken in the first calendar year?
2)Is it pro-rated for the length of the year? For example, if it was set up on 1 July, is it 2.5%?
3)Can he do anything about it now?
4) How is it calculated? 5% of the initial amount in the year in which it is set up?



General questions for an ongoing ARF
5) If he was obliged to drawdown,say €10,000 but didn't, then he should declare €10,000 income on his tax return for 2010?
6) Presumably there is never any case for not drawing down 5%?
7) Do the ARF providers have systems in place to automatically pay the 5% before the year end or at least write to the ARF holder advising him to draw down the money?

 

[Conan]

Brendan,
1 If you friend is over age 60, yes he must take a drawdown in 2010
2 No, he must take 5% of the value as at 31/12/2010
3. Whoever is managing his ARF (the QFM) must deduct the 5%, calculate the tax and forward to Revenue and pay the net out to the client
4 5% of value at year end
5 Generally QFMs have until end Feb to organise the payment. He can still include the payment in his 2010 tax returns
6 No. If one only paid the tax (but not actually draw down the net after tax amount) then the net after tax amount would be taxed again on drawdown. So generally it is best to take the full 5% out and keep the after tax amount outside the ARF,
7 Yes. They should be doing this.

 

[LDFerguson]

1) Must the drawdown be taken in the first calendar year?

Yes, unless he was 60 or under during 2010.

2)Is it pro-rated for the length of the year? For example, if it was set up on 1 July, is it 2.5%?

No. It's a full 5% even if he set up the ARF in December 2010.

3)Can he do anything about it now?

Assuming he just has the one ARF, it's the Qualifying Fund Manager (QFM) that should be paying the tax. They have until 14/3/2011 to pay the tax, having first deducted it from his ARF. He should contact his ARF provider about this.

4) How is it calculated? 5% of the initial amount in the year in which it is set up?

The imputed distribution is calculated as a percentage of the market value of assets in an ARF on 31 December each year. In the case of buildings, where a valuation is not readily obtainable as at 31 December, it is acceptable to use a valuation at any date within 3 months prior to 31 December.

5) If he was obliged to drawdown,say €10,000 but didn't, then he should declare €10,000 income on his tax return for 2010?

No. His QFM (ARF provider) calculates tax on a notional €10,000, deducts it from his ARF and remits it to Revenue.

6) Presumably there is never any case for not drawing down 5%?

For 99.9% of the population, no there isn't as by not taking your 5%, you get taxed on a notional 5% and then taxed twice on the same money when you eventually withdraw it.

7) Do the ARF providers have systems in place to automatically pay the 5% before the year end or at least write to the ARF holder advising him to draw down the money?

The ARF providers don't generally automatically pay out the 5% unless they have a standing instruction from the client for a monthly or annual withdrawal.

That said, last December's Budget caused a flurry of activity among ARF providers (and brokers!), as the Budget speech on 7th December brought in a change with effect from 31st December 2010. There was a few days when the industry sought clarification in case Brian Lenihan meant 2011. He didn't. So for every single ARF holder, they had to pay out 5% before the 31st December, or calculate and pay out 5% less whatever already had already been withdrawn in 2010. In this instance, most (all?) of them decided that they didn't have time to be writing to clients and then waiting for instructions, so they went ahead and made the withdrawal automatically, with the option that the client could send it back if they didn't want it. Off the top of my head, I know for a fact that Zurich Life, Standard Life, Irish Life and Canada Life did this. I'd imagine that others did too.

For this reason, I'm surprised that your friend didn't automatically receive a withdrawal in December 2010.

Regards,

Liam D. Ferguson

 

[Brendan Burgess]

Lads

Thank you very much. Very clear and definite answers.

Brendan

 

[Conan]

Liam,
It's wonderful when great minds think alike!!!!!

Conan

 

[LDFerguson]

Liam,
It's wonderful when great minds think alike!!!!!

Conan

Indeed it is. Now if I could only get over this OCD-like behaviour of being so particular over the appearance of my posts. You had presumably moved on to making another few grand by 9.30 a.m. while I was still proof-reading my post...again...and in the end we said the same things, but yours was shorter, quicker and more concise.