Rate change to 38% - Exit Tax is still really stupid!

[AJAM]

In the budget Pascal changed the Exit Tax rate from 41% to 38%.
But critically the Nonsensical 8 year Deemed Disposal nonsense remains in place.

Lets see how it effects the tax outcome for the government and for the Investor.
I'm assuming 100K initial investment and 7% annual growth rate for both funds. And no dividends.
I'm assuming after 20 years you cash in the investment.

Previously (under these assumptions but with Exit Tax at 41%) after 20 years the Investor had 52.4K less money and Government had 2.5K extra in tax.
A monumentally stupid situation.
Now (with 38% tax) the Investor has 43K less money and Government had 3.3K less in tax
Yes you're reading that right, the government will now get 3.3K less tax (vs the CGT system) and the investor gets 43K less in their pocket.
Everybody Loses! You lose. She loses! They lose! I lose.

Total CGT Tax after 20 years 94,700 Total Exit Tax after 20 years 91,404

Fund Type	CGT				Fund Type	Exit Tax
Growth Rate	7%				Growth Rate	7%
Tax Rate	33.0%				Tax Rate	38.0%
	CGT Fund Balance	CGT Tax	CGT Fund After Tax			Exit Fund Balance	Exit Tax	Exit Fund After Tax		Govt Tax Dif	Punter Diff
Opening Balance	100,000				Opening Balance	100,000
Year 1	107,000	2,310	104,690		Year 1	107,000	490	106,510		(1,820)	1,820
Year 2	114,490	4,782	109,708		Year 2	114,490	5,506	108,984		725	(725)
Year 3	122,504	7,426	115,078		Year 3	122,504	8,552	113,953		1,125	(1,125)
Year 4	131,080	10,256	120,823		Year 4	131,080	11,810	119,269		1,554	(1,554)
Year 5	140,255	13,284	126,971		Year 5	140,255	15,297	124,958		2,013	(2,013)
Year 6	150,073	16,524	133,549		Year 6	150,073	19,028	131,045		2,504	(2,504)
Year 7	160,578	19,991	140,587		Year 7	160,578	23,020	137,558		3,029	(3,029)
Year 8	171,819	23,700	148,118		Year 8	171,819	27,291	144,528		3,591	(3,591)
Year 9	183,846	27,669	156,177		Year 9	154,644	3,844	150,800		3,466	(5,377)
Year 10	196,715	31,916	164,799		Year 10	165,470	7,958	157,512		3,333	(7,288)
Year 11	210,485	36,460	174,025		Year 11	177,052	12,359	164,693		3,190	(9,332)
Year 12	225,219	41,322	183,897		Year 12	189,446	17,069	172,377		3,038	(11,520)
Year 13	240,985	46,525	194,460		Year 13	202,707	22,108	180,599		2,875	(13,861)
Year 14	257,853	52,092	205,762		Year 14	216,897	27,500	189,397		2,700	(16,365)
Year 15	275,903	58,048	217,855		Year 15	232,080	33,270	198,810		2,513	(19,045)
Year 16	295,216	64,421	230,795		Year 16	248,325	39,443	208,882		2,313	(21,913)
Year 17	315,882	71,241	244,641		Year 17	223,504	5,556	217,948		1,050	(26,693)
Year 18	337,993	78,538	259,455		Year 18	239,149	11,501	227,648		(302)	(31,808)
Year 19	361,653	86,345	275,307		Year 19	255,890	17,863	238,027		(1,748)	(37,281)
Year 20	386,968	94,700	292,269		Year 20	273,802	24,669	249,132		(3,296)	(43,137)

 

[AJAM]

By the way if Pascal equalized the rate to 33%.
The punter would still be 27.2K worse off.
And the government would collect 13.4K less tax.
Same assumptions as above.

Scrap this monumentally stupid tax!

 

[jpd]

I don't understand your table so I have no confidence in your calculations and statement

Why is there an exit tax of 490 in year 1 ?
Exit Tax only arise on disposal of units in the fund and/or deemed disposals?
There are other issues as well but we will start with that one

 

[Duke of Marmalade]

@AJAM Are you still at this?
This apparent contradiction is all down to the time value of money.
Why are you not arguing dividends should not be taxed until final encashment, instead of annually? Your approach would show that the Revenue would be far better off doing this as they would earn 7% p.a. on the deferral.
In short you are arguing that the Revenue are being stupid in using DD to tax the punter early, much better leave it "as a loan" to the punter who can earn 7% p.a. on it.

 

[Corola]

And the Government isn't seeking to maximize long-term investment return. It can use the tax collected to pay for services.

 

[Zenith63]

Your modelling in the other thread was really fascinating @Duke of Marmalade, if you were up for taking another stab at what AJAM has started here it would be really useful to see?

My view is that AAM should be directing typical retail punters towards a single ETF (FTSE All World Index for example) but others feel a basket of shares taxed under CGT is better for tax reasons. It would be great to have somebody who understands how to model it more accurately show how the two scenarios play out.

I think we’d be assuming something like 7% CAGR with 14% SD, 1.5% average annual dividend taxed at 52%. I’m not sure if CGT annual exemption harvesting should be included, I suspect most average punters would not bother. Bonus points for figuring out a way to model the early CGT payable for rebalancing the portfolio periodically. Further bonus points (you’re really racking them up now ;-) ) for factoring in index tracking error, which I think I saw a paper before suggesting it could be -0.6% for ETFs that do not buy a full index, so that would be the minimum for a basket of 10-20 shares.

 

[nest egg]

I agree with what others have mentioned, it's naïve to think Revenue would allow the abolishment of DD on the likes of non-distributing ETFs without there being a mechanism in place to ensure tax isn't deferred indefinitely.

However Revenue should stop trying to find an Irish solution to an Irish problem, when other countries have already solved this. I've mentioned it in another thread, the Swiss for instance provide their tax payers with a simple online tool, you fill in the ISIN of your non-distributing ETF, and it will tell you the corresponding dividend to apply. You then enter that figure into your income tax return, and pay the tax due. This is the way forward.

 

[Duke of Marmalade]

And the Government isn't seeking to maximize long-term investment return. It can use the tax collected to pay for services

Or even invest in @AJAM's ETF at 7% p.a. (No tax!)

 

[Duke of Marmalade]

Irish solution to an Irish problem,

But the Irish problem is that the life companies want a composite tax rate at source, none of this filling out tax forms and paying higher rate taxes. ETFs are being wagged by the life company tail.

 

[Duke of Marmalade]

Ah Jayz! @Zenith63 it's a long time since I did my A-Levels.

 

[Duke of Marmalade]

@Zenith63
I attach work in progress. It calculates the situation assuming encashment after 40 years. The inputs include a extra "leakage" factor which can be a finger in the air for things such as rebalancing CGT and tracking error. I assume divies are reinvested in the same asset. The summary of the results are:

 

[Zenith63]

Just trying to wrap my head around that @Duke of Marmalade but I noticed the CGT Tax formulas reference Main!$E$7 which is a blank field.

PS. Thanks for the work so far though, love it!

 

[Duke of Marmalade]

Just trying to wrap my head around that @Duke of Marmalade but I noticed the CGT Tax formulas reference Main!$E$7 which is a blank field.

Will have a look. As I say, work in progress.

Yes, you were right! I have PM'd you a corrected version but I fear that there are other shortcomings which would be difficult to correct.

 

[faketales]

.

 

[Zenith63]

Is it fair to say that DD is not design to make the government "rich" but to keep people "poor"?

I wonder if there is any chance we can keep this thread on topic, there are plenty of other threads for diving off down that rabbit hole.