Tracker Bonds/Dirt exemption for older people

If a single person over 65 has an income of less than €20,000 in a year, they can have a DIRT exempt deposit account.

But what happens if they have a Deposit Based Tracker Bond (as distinct from a life policy tracker bond)?

Let's say that they invest €100k in a 5 year tracker bond and get a return of 10% per annum. They will get about €60k on maturity.

I presume that this is subject to tax in the year of maturity? In other words, most of it will be subject to DIRT at 20%.

Whereas if they had a series of Tracker Bonds maturing each year, they would get €12k a year, which would be entirely tax free if their other income was less than €8k.

Brendan

Is DIRT relevant at all to tracker bonds? I thought that if any tax was applied it was the same sort of tax as applied to unit linked funds etc. - i.e. standard rate income tax + 3% = 23% on any growth as things stand?

Clubbie I was presuming the Boss was referring to deposit based Tracker Bonds which are subject to DIRT albeit at 23% if they are longer than 1 year.

Of course, the point made is correct, and it would be particularly tax inefficient for the hypothetical individual to invest in a life assurance TB as s/he would have no facility to reclaim exit tax.

I think anyone over 65 who is earning less than 20K should maximise the DIRT exemption before considering any other investments.

Harchibald said:

Clubbie I was presuming the Boss was referring to deposit based Tracker Bonds

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I'm not with you. I presume you mean TBs where x% is stuck on deposit and y% is invested in some equity based (or derivative) instrument and x + y = 100? Is DIRT an issue for the x% on deposit? Even though this is an "internal" matter for the TB as opposed to being money on deposit that the individual can readily access?

which are subject to DIRT albeit at 23% if they are longer than 1 year.

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Surely if it's 23% then by definition it's not DIRT? I'm making the point because I have seen many cases of people talking about gross roll up unit linked fund or SSIA maturity exit taxes as DIRT when, as far as I know, they're not.

Ahhh Clubbie

TBs are always engineered in the way you describe but the underlying engineering is not relevant to the punter's tax. What matters is the actual legal instrument entered into by the punter. This is usually a bank deposit but, for example, with Irish Life it is a life assurance policy.

Deposits are by definition subject to DepositInterestRetentionTax. Life policies are s.t. Exit Tax.

There have been attempts at levelling the playing field, so that DIRT and Exit Tax are equal (23%) if the terms exceeds 1 year. However, DIRT still has two advantages over Exit Tax. It is only 20% for 1 year or less terms and there are certain exemptions e.g. certain persons over 65.

This is the taxation text taken from a recent offering from Global Reach Securities

Your investment is subject to Deposit Interest Retention Tax (“DIRT”) at the standard rate of income tax plus 3% from any interest added to your investment at maturity, before paying it to you. Under current legislation, the effective DIRT rate is 23%. This is subject to change without notice.
• You will be obliged to include the interest amount, before DIRT, in your income tax for the year in which the investment matures.
• You will have no further personal income tax liability on returns from this investment once DIRT has been deducted at maturity.
• Some investors, such as individuals over 65 and those who are permanently incapacitated, may be able to reclaim from the Revenue any DIRT deducted from the investment at maturity if maturity, they are not otherwise liable to tax on this investment.
• Companies, Pension Funds, Non-Resident Investors, individuals over 65 and Registered Charities may be entitled, in certain circumstances, to receive the interest on maturity, without deduction of DIRT.
• The interest may also be subject to the Health Levy in your hands in the year in which the Bond matures.
• The interest may also be subject to PRSI in your hands in the year in which the Bond matures.

The above information represents our understanding of the taxation treatment of the Bond. Investors should satisfy themselves independently of the taxation treatment of the Bond revenue reporting requirements and the implications of non‐disclosure in their own particular circumstances.

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Yes, Kruger, more or less as I said. A couple of further observations/clarifications.

Most Fixed Term Deposits in fact have DIRT paid over to Revenue on an annual basis and so are only subject to 20% DIRT at maturity even if over 1 year. With Tracker Bonds this annual payment of DIRT tax is not practicable and so these are subject to the surcharge rate of 23% at maturity.

A tax disadvantage of Deposits over Life Policies is that the income has to be declared and is therefore liable to 2% levies. The effective tax rate on deposit based Tracker Bonds is therefore 25%.

Harchi and F.

Maybe because I have not recommended tracker bonds, this issue has passed me by.

Has it been discussed before on AAM or elsewhere?

The Global Reach Securities wording is very clear and concise. I must check the wording of some other funds.

Harchi - would it not be simple enough to engineer a tracker bond for over 65's so that it matures over two separate tax years? Or maybe engineering is not needed. An investor should split their money across trackers so that it matures in different tax years?

I have not seen this tax planning point discussed anywhere.

Harchibald said:

Deposits are by definition subject to DepositInterestRetentionTax. Life policies are s.t. Exit Tax.

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Yes - so any reference to a 23% exit tax as DIRT (e.g. as in the snippet above) is surely erroneous and confusing?

At this stage I'm a bit lost as to the substantive point of the original post. I do believe that DIRT is 20% and exit tax is 23% and they are different taxes. Am I wrong?

ClubMan said:

Yes - so any reference to a 23% exit tax as DIRT (e.g. as in the snippet above) is surely erroneous and confusing?

At this stage I'm a bit lost as to the substantive point of the original post. I do believe that DIRT is 20% and exit tax is 23% and they are different taxes. Am I wrong?

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There are two types of Tracker Bonds - Life Assurance Company Tracker Bonds (subject to Exit Tax) and Deposit Tracker Bonds (subject to DIRT).

Thanks DV - much clearer.