Making a Pre-Budget Submission on the taxation of investments

I am thinking of making a Pre-Budget Submission on a number of issues.

I would like to make one on the taxation of investments but don't know enough about it to word it properly.

This is my rough idea:

People should be encouraged to invest in collective investments as it reduces the risks.

A small scale investor should be able to invest in the low cost international Exchange Traded Funds
1) without suffering tax penalties compared to other investments
2) without running the risk of penalties for non-compliance with a complicated system through ignorance
3) without the need to pay for professional advice to do it tax efficiently.

US domiciled ETFs should not have an advantage over EU domiciled ETFs

There should be no difference in the tax treatment of collective investments from direct investment in shares or property so these anomalies should be reduced or removed and the taxation simplified.

Deposit interest and Capital Gains are taxed at 33%.
Dividends are taxed at one's marginal tax, PRSI and USC rates.
Unit Linked funds and many ETFs are subject to a 41% Exit Tax.

A direct investor can set their loss on one investment against their gain on another investment when calculating the taxable capital gain. But a gross roll up investor can pay exit tax on one product while carrying a loss on another.

Death is not a disposal for CGT purposes. So any capital gains on directly owned shares or properties disappear on death, while a unit-linked fund or any other gross-roll up produce is subject to the 41% exit tax.

The CGT and Income Tax regime is preferable in most cases to the Gross Roll-up regime.

As a result, many invest in American ETFs which could leave them with a substantial tax liability in America if they still own the ETF when they die.

Experts differ on how different ETFs are taxed and Revenue has issued guidance on it which only made matters more complicated. As a result, they subsequently withdrew their guidance.

There is a significant risk that many normally compliant ETF investors might not be tax compliant with the deemed disposal rules through ignorance.

Ordinary investors should be able to understand the tax treatment of investments without paying the very high fees of tax consultants.

Coming up with a solution is more difficult.

1) There is no rationale for the difference in the tax treatment of investments on death.
Either abolish the exemption from CGT on death or apply it also to gross roll up investments.

2) There is no rationale for allowing the losses on CGT investments to be set off against gains , but not allowing the losses on gross roll-up products to be set against gains. Allow the losses on all investment products to be set off against the gains on all investment products.

3) There is no rationale for the difference in the tax treatment of ETFs based on their domicile. Treat them all the same. And make that the same as unit-linked funds.

4) Have a deemed disposal every 4 years and treat it as a capital gain. Reduce the exit tax rate to the CGT rate.

The problem is that with a direct investment in property or shares, one pays income taxes on the dividends or rent but pays CGT on capital gains.

How can you replicate that with a gross roll up regime?

If exit tax was set at the same level as DIRT that would solve a lot of problems.

The ETF issue with the 8 year deemed disposal rule and near complete lack of clear guidance is a timebomb. It isn't even a case of doing it tax efficiently, it is doing it tax compliant. As the low cost brokers continue to gain popularity, the numbers invested in ETFs will just continue. Even just adding loss relief across ETFs, exactly the same as with shares, could help solve some of it as people could gross up monthly investments for tax calculations.

ryaner said:

It isn't even a case of doing it tax efficiently, it is doing it tax compliant.

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Good point. I have added the following:

A small scale investor should be able to invest in the low cost international Exchange Traded Funds
1) without suffering tax penalties compared to other investments
2) without running the risk of penalties for non-compliance with a complicated system through ignorance
3) without the need to pay for professional advice to do it tax efficiently.

and

There is a significant risk that many normally compliant ETF investors might not be tax compliant with the deemed disposal rules through ignorance.

Sarenco said:

If exit tax was set at the same level as DIRT that would solve a lot of problems.

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Rather than make a concrete proposal, I might make a range of suggestions.

I was hoping to focus on making it simpler and to remove anomalies, rather than the usual submissions which call for tax cuts or tax increases.

But a single tax rate does make it simpler and remove anomalies.

Brendan

One big improvement would be the reintroduction of indexation for CGT so that you are taxed on the real change in the value of your investments, not the nominal change.

This would make a big difference now that inflation is back. It's a bit more complexity for a lot of extra fairness.

Tangential to your objective I presume but the introduction of a UK style ISA would do wonders to increase broader financial literacy and now would seem to be an opportune time given the introduction of auto-enrolment.

Excerpt from a previous post on Exit Tax

• It's nothing like DIRT and everyone should stop using that comparison for rate purposes.
• 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% Government Levy on unit-linked investments is adding about 0.15% pa to the cost of the product
• The Life Offices calculate, collect and pay the taxes to Revenue - surely there's a cost saving to Revenue/Govt. in that Vs CGT

Life Assurance Exit Tax (and DIRT) receipts here

Gerard

www.bond.ie

GSheehy said:

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.

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What about income tax?

In the US, mutual funds are required to distribute all income and realised capital gains, which are then subject to income tax.

That’s not the case here.

I would have thought that reducing exit tax so that it aligns with DIRT (and CGT) is a proposal with a realistic prospect of success.

The 1% levy is only applicable to unit linked products - no relevance to mutual funds/ETFs.

An ISA-type arrangement would be nice but I can’t see it happening any time soon.

Itchy said:

Tangential to your objective I presume but the introduction of a UK style ISA would do wonders to increase broader financial literacy and now would seem to be an opportune time given the introduction of auto-enrolment.

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Hi Itchy

Not sure I want to get into the ideas of financial literacy and auto-enrolment.

But it could make sense to allow small investors have a simple fund which is either tax-free or taxed at a low rate.

So you could hold shares, any ETF and maybe deposits in it. It would accumulate tax-free and be taxed at 0% or 20% on exit.

The problem would be that if you set a maximum size of, say, €20,000 on it, the cost of administering it would be high and would be on top of any charges on the underlying investments.

Brendan

A fundamental problem for ISAs and reasonable taxation for ETFs is Revenue want people to invest only through pensions - where they're "giving" generous tax relief.

Revenue don't want a parallel ISA system or, even worse, large amounts of PAYE workers privately investing in ETFs with a increase in self-declared taxation.

Policy is decided by politicians, but Revenue have a big say and they're perfectly happy with ETFs being effectively ruled out by many as an investment option.

So the various tax rates on investment income and gains are as follows:

Deposit interest: 33% paid as interest is paid
Unit linked funds and EU ETFs : 41% on deemed disposal every 8 years or on exit.
Shares and property: 52% Income tax on dividends and 33% CGT on gains
US ETFs: 52% Income tax on dividends and 33% CGT on gains

41% seems to be a reasonable mid way between the 52% on dividends and the 33% on Capital Gains.

How about the following simple changes:
1) Abolish the deemed disposal every 8 years.
1A) Consider increasing the 41% rate to 42% to compensate, although I don't think it's necessary
2) Allow losses on any investment to be set off against gains on any investment
3) Abolish the CGT exemption on death
4) Reintroduce indexation, so only real gains are subject to CGT
5) While deposit interest is likely to be below the rate of inflation for some time, make it exempt from tax so that only real interest is taxed.

Brendan Burgess said:

How about the following simple changes:
1) Abolish the deemed disposal every 8 years.
1A) Consider increasing the 41% rate to 42% to compensate, although I don't think it's necessary
2) Allow losses on any investment to be set off against gains on any investment
3) Abolish the CGT exemption on death
4) Reintroduce indexation, so only real gains are subject to CGT
5) While deposit interest is likely to be below the rate of inflation for some time, make it exempt from tax so that only real interest is taxed.

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Far from a simple change Brendan, as we've discussed elsewhere.

My thoughts on what issues to include in a pre-Budget submission and which ones to leave out are crystallising.

At this stage I have got just too many issues. So , I will probably focus on housing issues. I probably won't make this submission on the taxation of investments.

But I think it's an important submission, so if anyone else wants to make it, go right ahead.

Brendan