BUDGET LEAKS OR EDUCATED GUESSWORK?

The government is committed to raising almost €5 billion in additional taxes over the next four years and it is becoming increasingly clear where they intend to get it, according to The Sunday Business Post. The headings below outline the grim scenario we face:

• Reduction in pension tax reliefs
• Property taxes
• Abolition of certain tax reliefs
• Reform of Capital Gains Tax (CGT) and Capital Acquisitions Tax (CAT)
• Increase in Carbon Tax
• Lowering of personal income tax bands and credits
• Indirect taxes

Pensions

The current cost to the public purse of tax reliefs on pensions is estimated to be around €2 billion a year – with the reality that those earning more, benefit more.

The previous government promised a progressive cut in reliefs for higher earners and an increase for the lower-paid to merge into a single 30% relief.

“It remains to be seen what this government will promise but, given the commitment in the programme for government, it looks likely there will be some cut for higher earners,” the article states. “This will leave taxpayers with a choice – cut contributions or keep them up and face lower take-home pay.”

Property

The flat-rate annual household charge will cost €100 from next year and is expected to raise €160m for the exchequer. There is little doubt it is only the beginning – and the traffic is all one way.

It is believed its successors will attempt to bring in between €200 and €250 a year from 2014, depending on the valuation band your property falls into. Owners of high-end properties can expect to pay around €600, although these figures are still described as “merely speculative”.

“The Commission on Taxation report provided a good indicator of how the property tax might pan out,” the newspaper says. “It made detailed recommendations on property taxation, including a suggested system of eight valuation bands, with charges ranging from €188 for small houses to more than €3,000 for multi-million euro houses.”

Householders also face water charges from 2014. Prior to 1997, local authorities typically charged between €65 and €184 a year per household for water.

Reliefs

Tax reliefs – also known as tax expenditures – are another area likely to be hit. Relief on domestic waste charges is already gone from January 1, 2012, and there is increasing speculation child benefit might be taxed or means-tested, although the potential timeframe is still unclear.

CGT & CAT

The newspaper notes it is “most unlikely the rule which says that one spouse can give a gift or inheritance to another tax-free will be changed”. However, other tax-free allowances benefiting transfers to children and relations could come under scrutiny.

“For example, the tax-free threshold for gifts or inheritances to children has been cut from €500,000 to €300,000 and could be cut further,” the article states. “CGT reform may also be considered, including issues such as the current rules which allow people to carry forward tax losses under certain restrictions to reduce the CGT on gains made in future.”

Separately, tax advisers are reporting a huge increase in the number of businesses being transferred from parents to children ahead of “significant changes in capital taxes expected in December’s budget”, the same newspaper reports.

At present, the system is “highly favourable” to business transfers, according to the Sunday Business Post’s editor, Cliff Taylor.

“For children taking on a family business, the taxable valuation of the business is currently reduced by 90% for CAT purposes, subsequent to certain restrictions,” he notes. “For adults who pass on a business to children, there is a general exemption from CGT when the parent is over 55 years of age, which generally allows the transfer to happen tax-free.”

Taylor notes under the EU/IMF strictures, reform of both CAT and CGT will begin in the upcoming budget.

“There is some speculation that the rates paid on these taxes – currently 25% – could be increased or that general exemption limits could be reduced further,” he says. “However, business owners and their families fear a bigger impact from the restriction of current reliefs that apply to business transfers. The Commission on Taxation … recommended that CAT relief be reduced and that a reduction of no more than 75% of the value of the business be allowed before tax is calculated, down from 90%.”

The commission also advises a €3m limit on the relief, which means any assets valued above this would attract tax at the full prevailing rate. It has also recommended a €3m limit for CGT relief, translating to a possible exposure to CGT for anyone passing on a bigger business.

Carbon

This additional excise charge on fuels first imposed in 2009 is certain to increase in the near future on every energy source – including petrol and diesel. It is already responsible for an 8.4% increase in the cost of home heating oil and 6% in natural gas prices.

Tax Bands/Credits

The government has given a commitment not to increase income taxes but this is contingent on it reaching its targets elsewhere – including economic growth and the self-employed and corporate tax takes. With many accountants already indicating a shortfall in self-employed returns compared with last year, this might be a promise in its programme for government it will find difficult to honour.  Regardless, it could decide to abolish or reduce the current PRSI exemption enjoyed by occupational pension income.

Indirect Tax

The government is considering an increase in the top rate of Vat from 21% by at least a point.  Third-level fees may also rise as may health charges and insurance premiums.