Irish Times article: "Why do some investors pay more tax than others?"

[Brendan Burgess]

Why do some investors pay more tax than others?

Some investors may avoid a liability on gains depending on the regime

www.irishtimes.com

It’s an issue that is often highlighted in the run-up to the budget, but one that continues to frustrate and perplex savers and investors alike; why is a higher rate of tax levied on the gains from [broken link removed] and [broken link removed] (ETFs) than on [broken link removed] or shares? And is it time for a change?

 

[Horatio]

Certainly a bug bear for those that are invested in products that are subject to roll ups & the notional 8 year disposal rule.

40%+ Urrgh!

According to the article the Department of Finance attributed the delta between DIRT Tax / CGT vs. Exit Tax on roll up type products to the cost (loss of tax revenue) in 2017, then they said it wasn't that in 2018 & then they said it was that in 2019.
So this flip flopping of positions year to year suggests to me that they're blowing in the wind depending on who's turning the screws on them year to year (read conversation to conversation) & havn't formulated a position that they're confident / capable of standing over.

The long & short of it is it's just too nice a slice of easy street pie to relinquish (in part). Why work hard to seek cost savings or efficiencies when you can just take easy street?

 

[GSheehy]

Because:

• The Deprtment of Finance is dead against it, but won't really say why. That report in 2018 was very poor.
• It's not brought up on the doorsteps when politicians call at election times and I doubt Paschal has any influence on this penal tax.
• You'll probably find only a handful of politicians and senators that have investments in life-wrapped funds. They're property heads, in the main.
• It's nothing like DIRT and everyone should stop using that comparison.
• It shoud be less than the CGT rate - it's not self-assessed, you can't offset losses aganst gains and there are no annual exemptions.
• In fact, we should have an equitable ISA type scheme
• The 1% levy is adding about 0.15% pa to the cost of the product (The Govt. Report in 2018 'forgot' to mention that in their costs analysis)
• The Life Offices calculate, collect and pay the taxes to Revenue - surely there's a cost saving to Revenue/Govt. in that Vs CGT
• Education costs through the roof - save for that over long term and Gov't take 41% of growth because you took the right risk?

€50,000 investment (from taxed income) 20/04/2013 in Equity Fund with 101% allocation.

12.64% pa returrn net of all charges (OCFs+PTCs+1% AMC) as at 21/04/2021

Value on 8th Anniversary €129,561

You get a letter from product provider to say that they've paid €32,620 to Government in Exit Tax, on your behalf.

Gerard

www.SaveAndInvest.ie

 

[joe sod]

The article says that US etfs which previously were subject to CGT regime from January 2022 will be subject to the exit tax regime.
However the thread on this site about the revenue e - brief on etfs comes down on the side that nothing has actually changed with regard to US etfs , all that has charged is that revenue have just removed their previous clarification. Therefore they are no longer definitive on how US etfs will be treated but they actually haven't changed anything. That's what I understood from the thread on this subject

 

[Zenith63]

I think it is profoundly unfair that I pay 40% tax on my income from labour every year, while others pay only 33% on their income from capital (or maybe never do if they die and pass it on). I think harmonizing all investment income to the same 40% every year (I'll settle for every 8) I pay is a great idea. That's what's being suggested right?

In all seriousness though, ETFs are a great equaliser for the average person to seek better returns on their savings, the way things are setup now pushes them away from ETFs into much riskier individual shares. I would strongly support an ISA type scheme as one possible solution.

 

[Sarenco]

I think the article's interpretation of the recent Revenue E Brief (discussed on this thread - https://www.askaboutmoney.com/threads/revenue-e-brief-on-etfs.224674/) is interesting:-

"And a recent amendment has brought further funds into the exit tax fold. Earlier this month, Revenue published a much awaited update on the tax treatment of ETFs. It stated that US ETFs, which had previously been understood to be subject to the CGT regime, will, from January 2022, be subject to exit tax."

I wonder did the IT clarify the point with Revenue?

 

[Steven Barrett]

The article says that US etfs which previously were subject to CGT regime from January 2022 will be subject to the exit tax regime.
However the thread on this site about the revenue e - brief on etfs comes down on the side that nothing has actually changed with regard to US etfs , all that has charged is that revenue have just removed their previous clarification. Therefore they are no longer definitive on how US etfs will be treated but they actually haven't changed anything. That's what I understood from the thread on this subject

It is really unclear. Marc had stated that on the original thread on that. He was in The Sunday Times last week:

We’ve gone from relative clarity to utter confusion in the blink of an eye,” said Marc Westlake of Global Wealth, a financial adviser. “ETFs will now have to be assessed forensically to determine how they should be taxed and at what rate.”

How many people are going to have their ETFs forensically assessed? The Revenue should make their position on this clear so everyone knows what the situation is and end the confusion.


Steven
www.bluewaterfp.ie

 

[Steven Barrett]

I think the article's interpretation of the recent Revenue E Brief (discussed on this thread - https://www.askaboutmoney.com/threads/revenue-e-brief-on-etfs.224674/) is interesting:-

"And a recent amendment has brought further funds into the exit tax fold. Earlier this month, Revenue published a much awaited update on the tax treatment of ETFs. It stated that US ETFs, which had previously been understood to be subject to the CGT regime, will, from January 2022, be subject to exit tax."

I'd been thinking of emailing Fiona Reddan to write an article about this and ask one of the tax specialists at one of the big firms for their opinion. It really is specialist expertise that is needed and most people (myself included) don't know the exact legal make up of all these different funds and accounts and what might make one liable to CGT instead of exit tax.

 

[Sarenco]

I'd been thinking of emailing Fiona Reddan to write an article about this and ask one of the tax specialists at one of the big firms for their opinion

I suspect it would be very difficult, if not impossible, for an advisor to be definitive one way or another. However, I think the safer approach would be to assume that, from January, US-domiciled ETFs will be treated by Revenue as falling within the (equivalent) offshore fund regime.

I always thought the original Revenue guidance that US-domiciled ETFs would not be regarded as having structures and regulation that would be similar to Irish ETFs was a bit surprising.

US ETFs are all open-ended investment companies or unit investment trusts registered with the SEC under the (US) Investment Companies Act 1940. While clearly not identical, I would have thought that most people would regard the legal structures and regulatory regime as being broadly "similar" to the legal structures and regulatory regime applicable to Irish ETFs.

 

[Steven Barrett]

I suspect it would be very difficult, if not impossible, for an advisor to be definitive one way or another. However, I think the safer approach would be to assume that, from January, US-domiciled ETFs will be treated by Revenue as falling within the (equivalent) offshore fund regime.

I always thought the original Revenue guidance that US-domiciled ETFs would not be regarded as having structures and regulation that would be similar to Irish ETFs was a bit surprising.

US ETFs are all open-ended investment companies or unit investment trusts registered with the SEC under the (US) Investment Companies Act 1940. While clearly not identical, I would have thought that most people would regard the legal structures and regulatory regime as being broadly "similar" to the legal structures and regulatory regime applicable to Irish ETFs.

Yes I agree. It would probably take a test case to properly clarify the position and even still, it might remain very confusing to most investors.

Their ebrief on offshore funds is CGT at 40% with income tax, USC and PRSI on dividends. Hardly worth it to avoid deemed disposal.

The whole thing is a mess and has been from the beginning. The Revenue claimed gross roll up was the reason for deemed disposal. well, there's plenty of distributing ETFs but they are taxed at 41%. Why not have 41% for accumulating and 33% for distributing? As with everything in this country, tax everything that moves (except for the large multinationals who pay nothing).

 

[Sarenco]

Hardly worth it to avoid deemed disposal.

Well, the deemed disposal rules also apply to equivalent offshore funds.

 

[kinnjohn]

Why do some investors pay more tax than others?

Some investors may avoid a liability on gains depending on the regime

www.irishtimes.com

It’s an issue that is often highlighted in the run-up to the budget, but one that continues to frustrate and perplex savers and investors alike; why is a higher rate of tax levied on the gains from [broken link removed] and [broken link removed] (ETFs) than on [broken link removed] or shares? And is it time for a change?

Looks like another stealth wealth tax increase using a broad net to catch people they want to raise more tax from without frightening the Horses or upsetting the lobby groups,

 

[ryaner]

Their ebrief on offshore funds is CGT at 40% with income tax, USC and PRSI on dividends. Hardly worth it to avoid deemed disposal.

Given how vague they are on deemed disposal and the conflicting guidance they've given, I'd happily that those numbers to avoid it. Hell I'd take it all under income tax if it meant getting rid of deemed disposal.

 

[joe sod]

Their ebrief on offshore funds is CGT at 40% with income tax, USC and PRSI on dividends. Hardly worth it to avoid deemed disposal.

what about loss relief though, you sell an offshore fund at a profit but sell another normal share (for example AIB) at a loss but you still are in profit by 1400 euros for example but you still have the yearly 1270 euro CGT exemption to use aswell. Do you pay tax at 33% or 40% ?

 

[Marc]

Sorry I’m late to this party.

So, the statutory basis of assessment is set out in Section 747B Taxes Consolidation Act 1997.

The tests for a fund as set out in tax legislation are:

· The investment must be similar in all material respects to an authorised investment company or authorised unit trust scheme, depending on which the investment is i.e. a company or unit trust

· The company/unit trust scheme must hold an authorisation issued by the authorities of the state where it is resident providing for the proper and orderly regulation of such companies/unit trust schemes and that authorisation has not ceased to have effect, and

· In the case of an investment company, it raises capital by promoting the sale of its shares to the public, or in the case of a unit trust scheme, it provides facilities for the participation by the public as beneficiaries under the trust in profits or income arising from the acquisition, holding, management or disposal of securities or any other property whatsoever.

So it is not the case that any particular ETF picked at random is or isn’t subject to CGT or exit tax unless it is assessed against these criteria and shown to be either materially different or essentially the same as an Irish fund.

The one clear exception to this is UCITs ETFs (although not necessarily ETPs or ETCs) which are all deemed automatically to fall under the gross roll up regime.

The second challenge for investors is that even if you are able to establish that say a particular non-Eu ETF is subject to capital gains tax the practical position for most investors is that due to the PRIIPs regulations you probably can’t buy it in practice because there is no KIID document.

This is the real sting in the tail coming down the line for U.K. investment trusts.

Currently in the U.K. OEICe have a 5 year exemption from producing a PRIIPs KIID document but this exemption didn’t apply to closed ended funds.

If they are able to successfully lobby the FCA to get the KIID document removed then EU investment platforms won’t be able to list them for retail investors and it will be game over for the Irish public.

I’m not one for forecasts but something like this seems probable

€100 billion on deposit with negative interest rates and rising inflation - not easy to invest prudently- ok lads let’s lash it into properly so - collapse of property market in yet another speculative orgy.

You couldn’t make it up



Marc Westlake
Chartered Certified and European Financial Planner
www.globalwealth.ie

 

[joe sod]

I suspect it would be very difficult, if not impossible, for an advisor to be definitive one way or another. However, I think the safer approach would be to assume that, from January, US-domiciled ETFs will be treated by Revenue as falling within the (equivalent) offshore fund regime.

E
So if you assume on January 2022 that these etfs are now offshore funds what do you do then ? What happens if you have held these etfs for say 16 years, does revenue then suddenly require the 16 years of gains and that all these gains are suddenly due in January. Surely the clock for deemed disposal on already owned us etfs can only begin on January 1 because that is when the clarification has changed ?
Also if every etf now must be examined individually, what happens if one person successfully argues that the etf is not an offshore fund and taxed under cgt but another investor has assumed that the very same etf is taxed under deemed disposal and paid this tax?
By the way I know you are similarly trying to make sense of all this

 

[Sarenco]

So if you assume on January 2022 that these etfs are now offshore funds what do you do then ?

Well, if I was currently holding a US ETF, I think I would be planning on liquidating my holding prior to year-end (assuming there is no further clarification in the upcoming budget, which seems unlikely).

There is just too much uncertainty regarding the tax treatment.

 

[Paul O Mahoney]

As with everything in this country, tax everything that moves (except for the large multinationals who pay nothing).

You know full well this isn't true, take our CT its nearly all multinationals and let's not forget the ER Prsi.

I understand that in relation to income and tax the CT appears small but its still substantial in terms of €uro. And without the Multinationals what would the rest of the economy look like? I would imagine like the 50s but with only a million living here.

 

[NoRegretsCoyote]

I understand that in relation to income and tax the CT appears small but its still substantial in terms of €uro.

It's a while since I checked, but something like 25% of PAYE is raised from employees of US multinationals.

Yes, that's a very big number.

 

[Paul O Mahoney]

It's a while since I checked, but something like 25% of PAYE is raised from employees of US multinationals.

Yes, that's a very big number.

Don't get me wrong I've worked for Multi nationals and know first hand the efforts and indeed the help they get to minimise CT and now later in life I do question the fairness of it.

But, without them we would not have an economy like we have , there are risks of having them contribute so much to CT but overall I think we've done alright out of them.

With 15% CT on the horizon itll be interesting to see where things level off.