Budget 2012

Expectation Management

The key theme of this year’s budget has been “EXPECTATION MANAGEMENT”.

What was normally a 3 hour event has been converted into a 3 day saga. Key features of this exercise have been:

to prepare the population for bad news (through an unprecedented level of kite flying as well as assistance from the German Parliament), and
to ensure the previous government could clearly be shown to be responsible for the current crisis and that this government will “retrieve our economic sovereignty”.

Initial impressions are that the government has achieved some success in regard to damage limitation – “not as bad as we thought” seems to be the most common response.

Our economic sovereignty is more uncertain: the fact that we need to hear from the Germans probably emphasises where we are on this point.

Whilst the Budget is generally bleak and everyone will be a little worse off, there are some small points of hope – the increase in mortgage interest relief for first time buyers, the reduction on stamp duty on commercial property, the adjustment of the Universal Social Charge.

Equally there will be relief as regards changes that didn’t happen: tax relief for pension contributions and loss relief for capital taxes are two areas where audible sighs of relief were heard.

People will be glad to be still surviving, but the end line is still a long way off. Without offending the present government I would suggest the clear theme is perhaps “a lot done, more to do”.

Pensions

The key changes implemented for pensions are:

The PRSI Exemption enjoyed by employers on employee contributions is removed entirely (last year’s Budget had reduced it by 50%). Note that relief for Employer contributions remains unchanged.
From 2012 on the ARF Drawdown is increased to 6% for ARFs in excess of €2m.
At the same time Vested PRSAs become subject to the same drawdown requirements as ARFs (a vested PRSA is one where the tax free lump sum has been taken).
The tax on ARF exit for child beneficiaries is increased from 20% to 30%.

The overall cost is €100 million with the PRSI change representing 90% of this.

An initial impression is one of relief: the reduction in tax relief heralded by the 4 year plan hasn’t proceeded. Also the threatened reduction in pension fund thresholds has been avoided.

However, the Minister stated that the government will discuss ways to reduce the level of tax relief available on pension deductions with the pensions industry.

This could be a worrying prospect as:

The Minister previously regarded Insurers as the Pensions Industry and
His last discussion with them led to the Pensions Levy,

The more optimistic perspective to take on this is:

The Minister has learned from the pension levy that the pensions industry consists of more than Insurers.
The desire to consult suggests that the message on the damage to pensions is beginning to be heard.
The Minister acknowledged that the current contribution by Pension Funds is sizeable - €750m (this includes last year’s Budget changes and the levy).
The Minster has also indicated a desire to look at investment by Pension Funds in Ireland.

Through the Pensions Committee of the Irish Brokers Association, ITC has already been to the forefront in developing this alternative strategy for Pensions. This has involved making presentations to the NTMA, the Department of Finance and the Oireachtas Committee on Finance.

In our normal business activities we are seeing more investment in Irish Businesses than ever before. Along with our clients we are frustrated by the range of existing impractical rules that seek to curb this activity. Given the suggestion by the Minister that the Revenue Commissioners will be involved in this discussion we would believe that real positive changes could be achieved in this area.

Non Pensions Savings:

DIRT and life assurance policy tax increased by 3%
Tax rate is now 30% for annual and 33% for longer term arrangements
Applies from 01/01/12

Capital Taxes

As expected the focus of the Budget was on indirect and capital tax rates rather than income tax. These changes will have a significant impact on estate and succession planning.

The headline changes were:

The increase in the capital acquisitions tax (CAT) and capital gains tax (CGT) rates to 30% from 25%.
For CAT purposes the group A threshold will decrease from €332,804 to €250,000.
The tax liability on the transfer of ARF assets to a child over 21 is being increased to 30% from 20%.

It is worth remembering that only three short years ago the group A threshold was around €520,000 and the rate was 20%. To illustrate the changes, using a simple example, if a child inherited an asset worth €600,000 in 2008, there would have been a CAT liability of around €16,000. Under the new regime with the same facts, the CAT liability would be €105,000.

We have been expecting significant changes to CGT retirement relief and CAT business property relief. These facilitate the tax efficient transfer of business and farming assets from one generation to the next and the sale to third parties on retirement. These reliefs had been widely expected to be restricted in the light of the Commission on Taxation Report of 2009 and the Four Year Plan which stated that CGT, CAT and stamp duty reliefs were to be abolished or greatly restricted from 2012.

However, the only reference to restrictions on these reliefs in the Budget speech is in the context of farming and business assets where there are restrictions on CGT retirement relief:

The amount available for relief will be limited to €500,000 rather than €750,000 on sales to third parties where the person making the disposal is over 66.
On transfers within the family the amount available for relief will be limited to €3 million (as opposed to an unlimited amount) where the person making the disposal is over 66.
Some transitional relief will apply for people who reach 66 before 31 December 2013.

These changes are in line with part of the proposals in the Commission on Taxation report. The details are to be introduced in the Finance Bill.

Because of the changes now and to come, capital tax planning is of critical importance. Reliefs are still available but they may be restricted significantly in the Finance Act in the New Year. If you (or your clients) could be affected by these changes, you should get advice and, if action is required, it should be taken as quickly as possible.

Property Measures

Investor Measures

Everyone will recall the panic in 2010 when the then government announced its plans to bring the property incentive schemes it had extended to a swift and unhappy end. Well, swift for the government and unhappy for the investors anyway. Thankfully, some sense prevailed and an EIA, no not an Environmental Impact Assessment, but an Economic one was ordered (although it’s all the same in this case). Cue very good reason for government of the day to delay any further action, especially until after the election.

This government has decided not to proceed with any part of the Fianna Fail / Green plan in this area. Given that 42% of all claims were made by people with incomes less than €100,000 and 37,000 investor loans are in arrears by more than 90 days, many will breathe a sigh of relief.

There are some downsides:

If you earn over €100,000 and avail of property incentives, then that part of your income relieved from tax will be subject to 5% surcharge.
If you are a PAYE worker, then your rental income will be subject to PRSI from 2013 onwards.
If you have invested in accelerated allowance schemes like crèches, hotels or multi-storey car-parks, then the carry forward of these reliefs beyond the tax-life of the building concerned is abolished. This has the potential to impact more on those with lower income levels, but the schemes were generally targeted in a more focused way at high earners so potential impact is minimal, i.e. €25 million (after 2015) according to Budget estimates.

There is some good news, or maybe a case of no news is good news, as there are no further restrictions on mortgage interest relief for investors. Maybe the Minister has actually taken note of the number of mortgages in arrears and decided to ease off on residential property investors for the time being.

In fact, if you are interested in investing in property, there is some really good news here:

Rates of stamp duty on commercial property have now been reduced to a flat rate of 2%, effective from tomorrow. The Minister believes this will cost the State €64 million, but if there are more sales now than when a top rate of 6% applied, then surely this is income-generating? How can you generate stamp duty income if there are no sales?
Any property bought between now and the end of 2013 which is held for 7 years will be exempt from capital gains tax. No reference has been made to the residence of the purchaser, potentially leaving this open to the non-resident market as well as major property investment funds.
These are two significant advantages for those prepared to invest in property now. Will this drive a larger number of transactions, and generate some stamp duty and potentially some VAT revenue in 2013, or will the Minister have to provide further inducements next year???

Given that property is considered by many to be the root of all our current economic woes, and property investors in particular, kick-starting this sector is certainly an unexpected move in the right direction. However, with the banks still reluctant to lend, these changes will benefit those who have cash available to buy, severely limiting the potential upside.

Occupier Measures

The 5% surcharge applying to those with incomes over €100,000 who avail of property incentives will not apply where the incentive is based on occupation of the property. 18% of all claims made related to owner-occupiers. This is for clarification and cannot be expected to provide any real benefit.
Mortgage interest relief is increased to 30% for First-Time Buyers who bought their homes between 2004 and 2008. This is estimated to cost in the region of €52 million.
Current rates of mortgage interest relief will be extended into 2012 both for first-time (at 25%) and non first-time (at 15%) buyers. The abolition of mortgage interest relief from 2018 has also been confirmed.

This will provide some relief for home-owners who are paying their mortgages. For those in difficulty, the Minister has promised a formal announcement ‘shortly’. We’ll wait and see. There is one further small piece of good news. Consanguinity relief still applies on transfers of non-residential property making them subject to a rate of only 1%. This should help with family asset transfers in the coming years.

Business and Miscellaneous

The Minister for Finance’s Budget speech led with the importance of both international and indigenous industry to our economic recovery. Various tax measures were announced to support that recovery:

A special assignee relief programme is to be introduced to allow multinational and indigenous companies to employ talent from abroad. There is no detail.
A foreign earnings deduction is to support the export drive where an individual spends 60 days a year in the developing markets of BRICS. Again, there is no detail on this yet.
The tax relief for corporate investment in certain renewable energy projects is being extended for three years to the end of 2014.
There are also a few more minor VAT changes that will not make an appreciable difference to the public coffers.
The zero corporation tax rate for start-up companies has been extended to cover start-ups commencing a new trade in 2012, 2013 and 2014.
A number of changes are being made to the R&D tax credit regime, principally to assist SMEs, although the amounts involved (€5m in a full year) are not huge.
On the farming side, enhanced stock relief of 50% (or 100% for certain young trained farmers) is being introduced.

While there is little detail on some of these measures, a total of €23.25 million in savings for businesses are projected from these measures. Set against this are the tax-raising measures.

The relief of 50% of employer PRSI for employee contributions to occupational pension schemes will go from 1st January.
And we all know, of course, that the standard VAT rate is going up to 23%.

The pension contribution change for employer PRSI is projected to raise €90 million in a full year and the well-flagged/leaked increase in the standard VAT rate is reckoned to raise a whopping €670 million for the public coffers. The latter assumes, of course, that the Minister is right in his assertion that the increased rate will not cause a flight of shoppers to the North given that the rate differential will be just 3% or, perhaps more pertinently, that it will not depress demand more generally here.

Other tax changes, some of considerable importance, included the following:

The much-flagged €100 household charge to fund local services pending implementation of a full property tax, which is to apply in 2014. This is projected to raise €160 million in a full year, although presumably the full property tax will raise rather more.
Excise duties are, somewhat predictably, being increased with €216.5 million projected to be raised from increases in tobacco, carbon, betting and motor taxes. Still, we can, apparently, all drink to our hearts’ content since there is no change to taxes on alcohol.
The lower exemption threshold for the universal social charge (USC) has been increased, so taking the lower paid out of the system, but there is a move to a cumulative system (as with PRSI) that is due to raise €50 million in a full year.
The condition that only Irish citizens will be liable to the domicile levy is being removed to broaden the base of the levy. Not something that applies to most of us.

What themes can we take from all this? Clearly, indirect taxes (VAT, the household charge and excise duties) have been targeted rather than direct taxes on businesses. And the Minister firmly nailed his colours to the mast in his assertion that there will be no change to the 12.5% corporation tax rate.

Some tax benefits have been bestowed on businesses, but it is difficult to see how the changes can confirm the Minister’s statement that the “domestic sector will be the real engine for job creation across the country”. He did not, for example, take the opportunity to “de-couple” the BES replacement, the new Employment and Investment Incentive scheme, from the high earners’ restriction, which can only limit the amount raised by businesses seeking fresh capital.

Main tax points arising from the Minister's budget speech:

INCOME TAX

Deposit Interest Retention Tax (DIRT) increased to 30% (previously 25%).

25% mortgage interest relief for first-time buyers extended to 2012.

PRSI

Extended to previously exempt income (2013).

UNIVERSAL SOCIAL CHARGE (USC)

Applies to first €10,036 of earnings (previously €4,004).
Property relief surcharge of 5% will apply to investors with gross income above €100,000.

CAPITAL GAINS TAX

Increased to 30% (previously 25%). Exemption for properties bought by 2013 and held for 7 years.

CAPITAL ACQUISITIONS TAX

Increased to 30% (previously 25%). Parent-child threshold reduced to €250,000.

STAMP DUTIES

Rate on transfers of commercial property (including farmland) reduced to 2% (previously 6%).

VAT

Standard rate increased to 23% (previously 21%). Effective 1 January 2012.

HOUSEHOLD CHARGE

€100

CORPORATION TAX

Exemption for start-up companies extended.