censuspro

It may come as a great disappointment to some readers to discover that I have decided to settle down and finally buy a house. This disappointment is further exacerbated on my part by the fact that estate agents have little or no interest in selling me a house! Just this weekend I viewed a house in Celbridge. The only house I viewed was one which was being sold by the home owner because none of the estate agents I contacted returned my calls or responded to my e-mails. This isn’t an isolated incident. A number of times I’ve contacted estate agents, large and small, about viewing houses in Lucan and they seem completely indifferent about selling me a house! When I call, either the agent who deals with the house is out of the office or I’m fobbed off and directed to the company website. I then try e-mailing the agent and make sure to mention that I’m a mortgage approved first time buyer, no reply. Another time I contacted an estate agent about a house in Harolds Cross. No sooner had I asked about the house the agent told me it was sold and the conversation was over. No attempt was made to sell me any other properties they had on their books that were in the same area and same price range.

This reminds me of a CPA seminar I was at earlier in the year, one of the speakers mentioned how Irish businesses had forgotten the art of selling because they had become so used to just taking sales orders. It appears that nowhere was this more prevalent than in selling property.

So if anyone knows any estate agents interested in selling houses in either Celbridge, Lucan or Harolds Cross for less than €400,000 tell them to give me a call and don’t forget to mention I’m a mortgage approved first time buyer.

This is an article I wrote the CPA magazine Accountancy Plus. Capital losses are losses on the sale of assets, this is a very topical issue at the moment due to falling house prices and share values. I’ve copied the text of the article below.

Introduction
Minister for Finance, Brian Lenihan, recently increased the rate of Capital Gains Tax (CGT) from 22% to 25% with effect from 7TH April 2009. Although in the current climate it’s difficult to see how this will benefit the Exchequer since most assets are falling in value and one wonders where these gains will come from. As a result, it is prudent to examine the general principles of CGT, primarily the area of losses and loss crystallisation.

Refresher
CGT is a tax on capital gains arising from the disposal of assets. The charge to CGT is made for a year of assessment in respect of gains which accrue to a person during that year on the disposal of assets. All persons who are resident or ordinarily resident in the State for a year of assessment are liable to the tax in respect of gains accruing in that year on the disposal of assets, wherever the assets are situated. This extends to individuals, companies and trustees. Individuals who are resident or ordinarily resident, but not domiciled, in the State are chargeable to CGT on gains on the disposals located outside the State and the UK, only to the extent that such gains are remitted to this country. Non-resident persons are chargeable to tax on gains made on the disposal of specified assets as defined in Section 29(3) TCA 1997. The annual exemption is €1,270 is available to individuals only. Although the exemption is very small it is still worth considering splitting a disposal into two transactions where the disposal is close to the end of a tax year to avail of the two years exemptions. Bed and Breakfast transactions should also be considered; this procedure involves selling and immediately repurchasing shares to utilise the annual exemption threshold which would otherwise be lost. Payment dates are, 15 December 2009 for disposals between 1 January 2009 and 30 November 2009 and 31 January 2010 on disposals between 01 December – 31 December 2009.

Rates
The standard rate of CGT was increased to 25% in respect of disposals made from midnight on 7th April 2009. Previous rates were 22% on disposals from 14 October 2008 and 20% on disposals prior to that date. A rate of 40% applies to disposals of certain foreign life assurance policies and foreign investment products. Where a company makes a gain on disposal of an asset the gain is regarded as profits of the company and subject to corporation tax at 12.5%.

Capital Losses
Loss planning and the utilisation of losses is a topic that tax planners should re-familiarise themselves with. Many taxpayers will be faced with the reality that their assets have fallen in value quite substantially. The general rule is that capital losses are offset against other gains in the year of assessment. Any unused losses are carried forward and must be offset in the earliest possible period against any net gains for that year. Capital losses cannot be offset against other income which means they are only of benefit if future or current gains are anticipated.

Taxpayers that find themselves in the predicament of owning assets that are falling in value ultimately will have to decide whether to hold onto their assets in the expectation that they will recover over time, or sell their assets and crystallise their losses. Therefore, when dealing with capital losses, there are a few areas and potential pitfalls to be aware of, the main provisions to watch out for when dealing with capital losses are as follows:

Indexation
Indexation is still available to expenditure incurred prior to 2003. However, indexation is restricted in that it cannot create or augment a loss. In a scenario where there is a gain on a disposal prior to indexation then the result is a no gain/no loss situation.

Negligible Value – Section 538(2) TCA1997
Where a clients asset values have diminished substantially, they should consider making a negligible value claim. This allows the client to create a “paper loss” while still retaining ownership of the asset. This may be a more palpable suggestion where the client is reluctant to sell their assets. A claim can be made to the inspector of taxes to create a paper loss for CGT purposes. If the inspector agrees that the assets have diminished in value, the asset is deemed to have been sold and reacquired at its market value. This deemed sale creates a loss which may be utilised in the current year in which the loss was created or can be carried until it is utilised. Remember that creating a paper loss is of no benefit unless future gains are anticipated.

Connected Persons – Section 549 TCA 1997
One of the potential pitfalls to be aware of when crystallising capital losses is the connected persons’ provisions. If a person decides to crystallise their losses now, it is important for them to make a disposal to an unconnected third party so that the loss can be used to shelter any future capital gains. If, for example, a parent crystallised a capital loss on the disposal of shares to a child, this capital loss is regarded as a connected party loss and can only be used against gains on other asset disposals to the same child. A more tax efficient option for the parent is to sell the shares in the open market and gifting the proceeds to the children on the condition that they use the proceeds to purchase shares. By doing this, the parent will not be restricted in utilising the loss generated and the children still effectively receive a gift of shares.

Death and losses – Section 546(5) TCA 1997
The general rule is that capital losses can only be utilised in the year of assessment and any balance is carried forward indefinitely until all of the loss is finally utilised. The exception to this rule is when a capital loss arises in the year of death. In this scenario, the loss can be offset against capital gains in the current year and any balance can be offset against chargeable gains in the three previous years of assessment. Such losses must be offset against gains in the later years first.

Losses at different tax rates – Section 546(6) TCA 1997
Another possible situation that taxpayers may find themselves in is the possibility of paying CGT at two or more different tax rates e.g. 22% and 25%. If the taxpayer has any allowable losses from previous years section 546(6) TCA1997 allows the taxpayer to offset those losses against chargeable gains from the higher of the two rates first with any balance being offset against gains at next highest rate and so on.

Losses and capital allowance – Section 555 TCA 1997
Special provisions exist for dealing with assets qualifying for capital allowances. In effect, capital allowances are not taken into account when arriving at a gain for CGT purposes. However, if there is a resulting loss then the loss is restricted by deducting any capital allowances granted in respect of the expenditure. Where the operation of the rule has the effect of transforming a loss into a gain then it is only applied to bring about a no gain/no loss situation. Remember that the rule only operates to restrict the loss it does not effect the computation.

Development land losses – Section 653 TCA 1997
Section 653 TCA 1997 imposes substantial restrictions on use of development land losses against development land gains. Only losses on disposals of development land can be offset against development land gains, other losses cannot be offset against such gains. Subject to that restriction, the normal rules apply. Development land losses may be offset against any gains chargeable at the highest rate of CGT and there is no rule that losses on development land are to be offset against development land gains first.

Crystallising Losses in Companies
Losses for the purposes of tax on capital gains may be offset against other gains arising in the company in the same period or may be carried forward for offset against capital gains in the company in later periods. Capital losses cannot be group relieved but assets can be transferred intra-group (in most cases) so as to crystallise the capital gain in a company having capital loss relief available.

Conclusion
Although the rate of CGT has increased, values of assets are decreasing. Capital losses is a very topical issue at the moment and tax planners would be wise to familiarise themselves with the general provisions. The decision whether to crystallise capital losses will ultimately come down to the taxpayers own personal circumstances, However the fundamental point to remember is that capital losses are of no benefit unless they can be offset against current or future gains.

If you have been made redundant, are about to be made redundant or you are an employer making redundancies this post will outline some of the tax implications of redundancy payments being made. The following post is a bit more technical than my previous ones however I feel it’s important to go into a bit more detail considering this is a very topical issue and the potential of overpaying income tax can exacerbate an already difficult situation.

Statutory Redundancy
The statutory redundancy payment that an employer is obliged to pay is:
 Two weeks pay for each year of employment capped at €600 per week, and
 A bonus weeks pay

If an employer refuses to or is unable to pay statutory redundancy the employee can apply to the Department of Enterprise Trade & Employment for direct payment from the social insurance fund.

Refunds to Employers
An employer who has paid his/her employee their correct statutory redundancy lump sum can apply to the Department for a 60% rebate within six months of payment. The employer must give the employee at least two weeks notice to qualify for the rebate.

Your statutory redundancy payment depends on your own personal circumstances. You can work out your statutory redundancy here.

Tax Relief
The payment of statutory redundancy is exempt from tax. In the event that your employer decides to pay in excess of the statutory redundancy or you are in a union that has negotiated a lump sum payment in excess of the statutory redundancy the excess is not exempt from tax and your employer is obliged to deduct tax on your lump sum payment. Don’t take for granted that the tax your employer has deducted is correct. You may be entitled to further tax relief which your employer is not obliged to give you and which you can only receive by submitting a tax return or by contacting revenue.

What are the reliefs?
There are four types of reliefs on redundancy payments
 Basic exemption
 Increased basic exemption
 SCSB (Standard Capital Superannuation Benefit)
 Top slicing relief

Basic Exemption
The basic exemption is €10,160 plus €765 for each full year of service.

Example
Joe gets a redundancy payment of €20,000. He has 10 years 11 months service. His basic exemption is as follows: €17,810 [€10,160 + (€765 x 10)]
The balance of €2,190 is taxable. If Joe had only received a payment of 17,000 then the entire amount would have been tax free.

Increased Basic Exemption
The basic exemption can be increased by €10,000 provided you have not made a similar claim within the last 10 years.

If you are not a member of a pension scheme, the basic exemption as outlined above can be increased by €10,000.
If you are a member of a pension scheme and you receive a tax free pension lump sum then the €10,000 is decreased by the tax free pension lump sum.

Example
Lucia gets a lump sum payment of €30,000 after 11 years and 10 months. She gets €11,000 from the pension scheme. She is only entitled to the basic exemption of €18,575 i.e. €10,160 + (€765 x 11). Lucia only received the basic exemption because she received €11,000 from the pension scheme. If Lucia had received €9,000 from the pension scheme then her basic exemption would be increased by €1,000.

Piaras gets €30,000 after 12 years and 10 months. He is not a member of a pension scheme. The increased exemption due to him is €29,340 (€10,160 + (€765 x 11) + €10,000)

SCSB (Standard Capital Superannuation Benefit)
This relief benefits those with higher earnings and longer service. This calculation can sometimes increase the amount an individual is entitled to receive tax free. It’s calculated by taking your average employment income for the three years up to the date of termination and the number of full years of service.

The calculation is as follows:

A x B/15 – C where

A = average employment income for previous 3 years
B = number of full years of service
C = any tax free pension lump sum received

Example
John is an aircraft technician. After 18 years full service he was made redundant by his employer. He received a termination payment of €50,000.
He also received a lump sum of €12,000 from an approved pension scheme.
His average pay for the last 3 years (36 months) to the date of leaving was €100,000.

The amount of the lump sum which is exempt from tax is the higher of the following

The basic exemption is €23,930 [10,160 + (€765 x 18 years)]

The increased exemption €10,000 does not apply because he received a tax free pension lump sum of €12,000.

SCSB is €28,000 [(€100,000/3 x 18/15) – 12,000]

As the SCSB is the most favourable John will get to deduct €28,000 against his lump sum payment of €50,000. This means that John is only taxed on €22,000 opposed to €50,000.

Top Slicing Relief
Top slicing relief can further reduce or exempt the amount of the lump sum to be taxed. Top slicing relief ensures that you are not taxed at a rate higher than your average rate for the previous three years. This may apply if you were on the 20% standard rate of tax in previous years and because of your redundancy payment you are now taxed on the marginal rate of 41%. The computation of top slicing relief is slightly more detailed that the previous examples so I’m not going to outline it here. However, if you contact me directly I can give you the details or alternatively you can contact your local revenue office.

One item to escape the budget unscathed was the Rent-A-Room relief. This is a nice way of earning an extra source of tax free income simply by renting out a room or rooms in your home.

The purpose of rent a room relief was to promote the availability of residential accommodation by incentivising home owners to take in lodgers.

Broadly speaking, the relief allows a home owner to rent a room (or rooms) in their home for €10,000 per year tax free. However, if you rent out a room and the rent you receive exceeds €10,000 then the entire amount is taxable. The relief no longer applies where a child pays rent to a parent.

Although residential accommodation is much more widely available today than in previous years, the relief is still available to home owners who may be looking for an extra source of income and with the Minister for Finance indicating that he will be revising exempt types of income in the next budget, the Rent-A-Room scheme may not be around for much longer.

The main criticism with the budget is the split between tax and spending. Despite almost every economist in the country advising the contrary, the government opted for a 55% to 45% split in favour of taxes.

It appears that the government could not pallet another go at public sector pay about 30% of gross spending and they also went easier then expected on social welfare, 40% of gross spending.

The consequence of the government’s policy is the doubling of the income tax and health levy which will result in households earning €50,000 to €100,000 take home pay reduced by 4% to 6%.

Given the fall in interest rates and house prices, mortgage interest relief was limited to first time buyers for 7 years only.

There have also been increases in the rates of CGT and CAT however it’s hard to see where capital gains are going to come from in the current climate.

The government decided to go easy on excises with only tobacco and diesel being hit. Although the decision to hit diesel instead of petrol seems unusual considering diesel is cleaner and greener than petrol is.

The pain is set to continue for the foreseeable future and don’t be surprised if supplementary budgets become the norm for the next few years. With the government set to continue with its policy of taxing over spending, it will be 2011 before spending cuts outweigh tax increases.

In light of the recent banking crisis and the international credit crunch, not a day goes by that we don’t hear about the banking crisis or the economy, but what does it all actually mean and how did it happen? This is a very good video from Jonathan Jarvis and The Crisis of Credit which explains the credit crunch and the cause of the current economic downturn in plain English.

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Life is My Movie Entertainment Company is currently working on a feature-length documentary film called “An Inconvenient Tax” which explores the U.S. tax regime and the history of Income Tax. Although Ireland and the U.S. have different tax regimes the basic principle of taxing income as a means of raising revenue remains the same and with Barack Obama introducing “tax credits” along with rumours that the U.S. will introduce the system of VAT just like we have in Ireland, the similarities between the two tax regimes cannot be overlooked.

For the film they have lined up some big name interviewees such as Noam Chomsky, Steve Forbes and Mike Huckabee along with some of America’s top economic experts. The issues that are being raised in the documentary are very similar to the tax concerns that we are facing in Ireland right now such as a “fairer tax system”. The film also deals with how people fundamentally don’t understand the tax system and with Irish PAYE workers paying an estimated €500 million more tax than they should, it appears that the Irish tax payer is not all that different from their American counterparts.

With the U.S. tax deadline on the 15th April and the Irish emergency budget on the 7th April, Obama and Cowen can be thankful that there is no scheduled release date for the film although they have released a few teaser clips which you can view below.

Documentary: An Inconvenient Tax – Film Teaser from Life Is My Movie Entertainment on Vimeo.

Documentary: An Inconvenient Tax – Noam Chomsky Interview clip from Life Is My Movie Entertainment on Vimeo.

Documentary: An Inconvenient Tax – Steve Forbes Interview clip from Life Is My Movie Entertainment on Vimeo.

Documentary: An Inconvenient Tax – Mike Huckabee Interview clip from Life Is My Movie Entertainment on Vimeo.

Documentary: An Inconvenient Tax – Charles Rossotti Interview clip from Life Is My Movie Entertainment on Vimeo.

I’m probably posting this video a few years too late but it’s still good to know all the same.  This is a very straight forward video from commoncraft which explains the basic principles of borrowing and repaying loans, a concept which alot of people did not take the time to understand during the boom years.

Despite the economic downturn new businesses are starting every day, the New York Times ran this article last week about laid off workers taking the opportunity to start their own business rather than sending out their CV’s. A redundancy payment may be the perfect opportunity to invest some start up capital into your business.

When first starting a new business you need to decide the type of status or entity that your business will become. You have two choices:

1. Sole trader
2. Limited company

The merits and demerits for both will ultimately come down to your own personal circumstances. The purpose of this post is to outline the general implications of each option.

Sole Trader
A sole trader means that you work for yourself. You and your business are the same and in turn you are personally responsible and liable for the business and its activities. As a sole trader you pay income tax on your profits at standard rate of 20% and if you are above the threshold, at the marginal rate of 41%.

Setting up as a sole trader is useful if you expect to incur losses in you first few years of trading as you can offset those losses against other income such as PAYE employment. It is not unusual for new businesses to incur losses in their first years of trading.

Limited Company
If you decide to incorporate a limited company, you become an owner of the company and are considered a separate legal entity. Provided the company is not an investment company it will pay tax on its profits at 12.5%, any salary you draw from the company would be subject to PAYE just like an employee being paid a salary from their employer.

If you are starting a new company and are investing your own money to kick start the business, you can invest your money in the company by way of a loan. When the company is in a position to repay you the loan, this will be tax free in your hands.

Summary
The decision you make as to whether you are a sole trader or a limited company will determine how you will be taxed as a business and as an individual the implications of each are not to be underestimated. Ultimately the decision will come down to your own personal circumstances but make sure you get professional advice before you decide. Most accountants and tax advisers will give you a free consultation and its no harm to speak to more than one accountant. You can also find information on running your own business on the revenue website.

Welcome to the CensusPro blog, which is Ireland’s first accountancy blog by the looks of things. On the site, I plan to discuss start-ups, general business, tax tips, and accountancy related news. All comments are welcome.

Brendan Brady