Financial Resolution No. 7: Income Tax

(1) THAT section 261A of the Taxes Consolidation Act 1997 (No. 39 of 1997) shall only apply as respects interest paid by a relevant deposit taker in respect of a relevant deposit held in a special term account that is opened before 16 October 2013.
(2) THAT section 267C of the Taxes Consolidation Act 1997 (No. 39 of 1997) shall not apply to dividends paid by a credit union in respect of shares held in a special term share account that is opened on or after 16 October 2013 unless those dividends are paid in respect of shares held in a long term account that was converted from a medium term account that was opened before 16 October 2013.
(3) THAT for the purposes of paragraphs (1) and (2) of this Resolution, “interest”, “relevant deposit taker”, “relevant deposit”, “special term account”, “dividends”, “medium term account”, “long term account” and “special term share account” have the same meaning, respectively, as in Part 8 of the Taxes Consolidation Act 1997.
(4) IT is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the provisions of the Provisional Collection of Taxes Act 1927 (No. 7 of 1927).

Current tax law provides for an exemption for a part of the interest paid on special term accounts offered by banks and special term share accounts offered by credit unions. In the case of a medium term account, where the money is held on deposit for at least three years, the first €480 of interest earned on the account is exempt while, in the case of a deposit held in a long-term account, where the minimum holding period is five years, the exemption limit is €635.

Financial Resolution No. 7 removes these exemptions from special term accounts that are opened on or after 16 October. This is to ensure that such accounts cannot be used to avoid payment of deposit interest retention tax, or DIRT as it is commonly referred to.

I thank the Minister for his comments. I wish to ask a few questions to clarify the position. First, why is there not any anticipated yield from this measure? The Minister said it is to prevent persons using these accounts to avoid paying DIRT and as a consequence, why is there not any yield from it?

On the overall issue of increasing DIRT to 41%, could the Minister clarify whether that it is a matter that will be dealt with in the finance Bill? An associated issue is PRSI on unearned income which was announced in last year's budget. Will that also apply to deposit interest earned, which is separate to DIRT? Could the Minister confirm that the change does not in any way affect the various State savings products?

I presume the reason there is no yield is because it is an anti-evasion measure to avoid people shifting money. In that sense, it is not designed to generate revenue.

The Minister should have put it in the Department of Health in that case.

I beg the Deputy's pardon.

The provision for the increase in the deposit interest retention tax to 41% will be contained in the finance Bill. That would be normal. I will confirm the position with PRSI-----

The Minister could allow the official to answer all the questions.

The permanent government.

The Minister has the floor.

I am trying to provide the House with accurate information. The information has been provided already and it is just confirmed by the note to be accurate. That might be reassuring for the Deputy.

Deputy McGrath would like it to be correct.

That is the situation.

Deputy Healy-Rae would know a lot about it.

My question is on PRSI.

I would know as much as Deputy Butler anyway.

Dumb and dumber.

PRSI is a matter for the Minister for Social Protection who will bring forward legislation shortly to deal with the situation for 2014. It is my understanding that PRSI will be charged on DIRT income that is subject to assessment by the Revenue Commissioners. The income will be included in the tax return of chargeable persons and subject to self assessment. Chargeable persons are individuals who are in receipt of income which has not been fully subject to tax under the PAYE system. The Revenue Commissioners allow individuals in receipt of PAYE income who also have insignificant non-PAYE income that has been notified to Revenue to have that income coded in the PAYE system and, as such, they are not chargeable persons and will not have a PRSI liability. PRSI is not payable by individuals over 66 years of age and, as such, pensioners are not liable to pay PRSI on deposit interest income. There is an income threshold for pensioners, those aged over 65, in the tax code. It is €36,000 for a couple and €18,000 for a single person. DIRT would not be collected from people whose income is below that level.

Certain State saving accounts are tax free and are not subject to DIRT. They are savings certificates, savings bonds, instalment savings, final payment on national solidarity bonds and prize bond winnings. The annual interest on national solidarity bonds and interest on normal post office saving bank accounts are subject to DIRT.

I seek clarification on the resolution. I have no difficulty whatsoever, and in fact am positively in favour of increased taxes on large amounts of accumulated wealth in deposit accounts or anywhere else, but I would not be in favour of anything that would hit relatively modest savers, in particular older people - this seems to be a theme of the budget - who might have built up a modest amount of savings for their old age, but that might come into the net for the planned increase in DIRT.

If I understand correctly the Minister's officials, whom I questioned on this earlier, while this resolution does not deal with the substantive issue of the increase in DIRT that the Minister is proposing, it is essentially facilitating it by removing exemptions that he believes could be used by people trying to escape the increase. This is a pre-emptive move to ensure that as many people as possible, if not everybody, can be hit with the DIRT increase the Minister is proposing in the finance Bill. That is my concern and suspicion. I would like the Minister to elaborate on it. If what I contend is untrue, he should assure us that this measure will not essentially assist him in another grab at the modest savings or nest eggs of ordinary people, particularly the elderly, who may have spent a lifetime acquiring them. These sums are already subject to DIRT but the Minister now wants to make them subject to an even higher rate.

I have one or two questions. The Minister mentioned a number of exemptions. Will he confirm that, for everybody other than those exempt, the DIRT, at 41%, represents a quite indiscriminate tax hit, including on a young person or partners saving desperately to buy a home and who might have €10,000 or €15,000 accumulated and who might be trying to accumulate more. The Minister mentioned two types of accounts, one of which is related to the credit union. He mentioned two interest thresholds under which DIRT would not apply. One was €650. Could he repeat his point? The Deputies who have been here for hours should really have received briefing notes on the seven financial resolutions, which are very technical. We should have had a briefing note on the measure on health insurance, giving us more detail. The approach is not acceptable. Could the Minister repeat the two types of accounts and the two figures up to which interest would be exempt from taxation? What amount would have to be in an account to reach the threshold of €650?

Like Deputy Boyd Barrett, I would not have any problem whatsoever with a wealth tax. We have been calling for it. I am referring to large accumulated deposits. However, the few thousand euros or even the €10,000 or €12,000 that many elderly people have put together over many years or that ill people have put together to have a few bob to bury themselves, as they say in the country, should not be hit, nor should the savings of small depositors who might be in rude good health. These people are in a different category completely from those who hold the real wealth that we demand should be hit but which has not been hit by this Government.

Following on from Deputy Michael McGrath's question, I did not hear the full exchange but would like the Minister to clarify whether PRSI will apply to savings such that DIRT and PRSI combined will result in a tax rate of 45% on savings.

I agree that the approach is wholly unsatisfactory as a means of dealing with very significant budgetary proposals. No briefing at all has been provided. There is no explanatory memorandum for the seven Financial Resolutions. I agree with the point made by Deputy Joe Higgins that we need clarification on the exemption limits. Will they apply to the PRSI element that will now be applied to savings?

I thank the Deputies. Let me work backwards. I read out the note, which basically states PRSI will not apply in respect of PAYE and where one's PAYE-related income is insignificant in amount. The measure will apply only where a self-employed person is making a return in respect of which he is obliged to include all his income, which would include interest. He would then be required by the Revenue Commissioners to make return as a chargeable person subject to self-assessment. However, PAYE workers would not normally have a PRSI liability.

For self-employed people, is that 45%?

For self-employed people who would be chargeable, PRSI would apply.

Let me deal with the point that Deputy Higgins made. There are two categories subject to an exemption, one of which is a three-year deposit account. The first €480 in interest earned on the account per annum is exempt. The other category is a five-year account, in respect of which the exemption limit is €635 per annum. I suppose the interest rates on such accounts would be approximately 3%. A three-year account will earn interest of approximately 3%. Therefore, one is talking about approximately €15,000.

Twenty thousand euro.

There is the man who knows how to calculate the odds.

On Deputy Richard Boyd Barrett's point, those who already have the accounts in question will continue to be subject to the exemption. Therefore, if someone has just bought a three-year product, the exemption will apply until the end of the lifetime of that product. The same applies to a five-year product. There will be a deduction before DIRT kicks in. That provision will not apply to new products issued. That is basically the position.

What the Minister is trying achieve is completely unacceptable. He stated that up to €650 per annum in interest will be exempt on a five-year account. At a rate of 3%, €650 would involve a deposit of up to €21,300. That is the relief that has obtained to date. The deposit could easily be that of young people or working people trying to put a house deposit together. It is not real or massive wealth. What is occurring is completely unacceptable. The Minister stated the figure pertaining to a three-year deposit account is €480. This would be associated with a deposit of €16,000 at a rate of 3%. These are very modest amounts of money in the present context, in which people require relatively large deposits to purchase a home, if they want a home of their own, or to start a family.

In my view, removing these exemptions is another blow to people who are not wealthy by any means.

The information I just gave is inaccurate. These are figures for the end of the account, so the €480 figure is for three years rolled up and the €635 figure is for five years rolled up. Therefore, they are smaller concessions than previously indicated. They are very small and are roughly one third of the sum calculated. These are exemptions that were in place for longer-term products and those exemptions will no longer be provided. In compensation, people who invest in longer-term products obviously get a much higher rate of interest. At the moment, on ordinary bank deposit accounts, the interest rate available is tiny. Therefore, people investing in longer-term products are not doing badly relative to others. Essentially this is a measure to shore up the DIRT system and to avoid people switching to these accounts. Over the long term, such accounts will not have the concessions they hitherto enjoyed. People will not have additional concessions if they are saving by way of longer-term accounts rather than by way of ordinary deposit accounts. That is the intention of the change.

I ask the Minister to clarify that. Is it not the case that self-employed people already pay PRSI on their savings and that the intention is to impose 4% PRSI on employees savings?

My understanding is that what has been introduced is PRSI on unearned income but PAYE workers who have money coming from a non-PAYE source that is of an insignificant amount do not pay PRSI on that money. That is the arrangement with the Revenue Commissioners. If a person has unearned income which is a significant source of income and makes a return, then in the normal course, as a chargeable person, he or she would be subject to PRSI on that income. However, as I said in the original reply, the Minister for Social Protection will be bringing forward measures in the legislation dealing with this element. It has been flagged that changes are forthcoming in 2014.

I would like a bit more clarity on that. What is an insignificant amount? If a PAYE employee has savings and he or she earns interest on those savings, that interest is actually unearned income. Will that interest now be subject to 41% DIRT and PRSI, giving an effective rate of 45% tax on those savings? I ask the Minister to clarify that point because that is my understanding of these changes.

The note I have refers to Revenue Commissioner practice. Obviously interest rates are very low at the moment. On €10,000 in an ordinary deposit account for example, one might only earn €100 in interest in a year. Obviously, we will have to get information from the Revenue Commissioners as to the figure they use but they have an arrangement in place whereby if the non-PAYE source of income is insignificant relative to the PAYE source, they do not require such persons to make tax returns and they are not subjected to PRSI.

A sum of €100 in interest can be significant to people. Is the Government now intending to take €45 out of that €100 in tax?

No. That is the point. It would not be taken out in the case of a PAYE worker. In that case, a PAYE worker is not a chargeable person and will not have a PRSI liability.

We are trying to get our heads around what is quite a technical motion and a change designed to impose a higher level of tax on savings but the explanations and assurances being given to us by the Minister are not really satisfactory. We have no examples whatsoever in front of us and there is a legitimate concern that small savers and ordinary people could be hit. This underlines the point that it is utterly unacceptable that we should even be discussing this without proper examples and briefings and we have no choice but to vote against it on that basis. We cannot support something that is not being properly explained, with examples provided and assurances given as to who and how many it will affect and so forth. We have no choice but to oppose this resolution.

The budget booklet from the Department of Finance states as follows:

The rate of retention tax that applies to deposit interest, together with the rates of exit tax that apply to life assurance policies and investment funds, is being increased and will now be 41% whether payments are made annually or more frequently (previously 33%) or are made less frequently than annually (previously 36%). The increased rates will apply to payments, including deemed payments, made on or after 1 January 2014.

Following on from what the last speaker said, we need to see examples here. Otherwise we are supporting, not supporting or abstaining on an issue that is not clearly understood. I do not like making decisions without seeing how something works. I like to see underneath the bonnet of the car before I buy it. In the case of life assurance policies and investment funds, I have an example which is pertinent here. About 25 or 26 years ago my wife and I started a life assurance savings fund with New Ireland. The purpose of the fund was to provide for fees for university or whatever might arise in 20 years time. Is that one of the life assurance policies and investment funds referred to by the Minister? What sort of exit tax would apply? The idea of those funds was that one saved up in the early years, accumulating with growth to a point where one could start drawing down money to pay fees or to support one's child in college and so forth. If I thought there would be an exit tax on any savings I made at anything resembling the level being proposed here, I would never have set up that fund. In that sense, the Government is discouraging people from being prudent. However, I could be wrong here. Maybe that is not the sort of fund that is being identified for this purpose. I would like an explanation and I would like a few examples so that the people outside can know what is involved. Otherwise it is voodoo land that we are in.

I will give my interpretation of this resolution. Much of the debate we have just heard is straying into areas that will be part of the Finance Bill, which will provide for the increase in DIRT to 41%. The issue raised by Deputy Mathews concerning exit taxes applying to life assurance policies and investment funds will be part of the Finance Bill. My understanding of Financial Resolution No. 7 is that it relates to very specific special term accounts within financial institutions that hitherto have been exempt from DIRT tax. The Government is removing that exemption and such accounts will be treated in line with all other accounts in financial institutions. That is the change we are making here.

Some of the answers on PRSI have not been satisfactory, to be frank but that is a matter for debate when the relevant legislation is brought forward. We can then discuss the issue of the treatment of PRSI on unearned income for PAYE earners and the self-employed.

The whole debate about DIRT at 41% is a debate for the Finance Bill. Is my interpretation correct that Financial Resolution No. 7 concerns specific accounts from which the Government is removing an exemption?

Technically, we are only debating the narrow point, as Deputy Michael McGrath stated, of closing off the possibility of opening such accounts and the thresholds of €480 and €635. Some Deputies asked whether the tax that will apply under the finance and social welfare Bills will be additive. The position is that a PAYE worker with only DIRT income, in addition to his or her PAYE income, would not be a chargeable person and would not be subject to PRSI on that interest. As Deputy Michael McGrath rightly said, the PRSI element will be the subject of debate in the Social Welfare and Pensions Bill while the 41% rate for DIRT will be discussed in the Finance Bill.

In respect of Deputy Mathews’s concerns, there are several products that are not subject to DIRT. These include savings certificates, savings bonds, instalment savings, final payment on the national solidarity bond and prize bond winnings.

And life assurance policies.

The change we are making with this Financial Resolution is that these products cannot be opened with a deductible end from now on. It is an anti-avoidance measure.

Question, "That Financial Resolution No. 7 be agreed to", put and declared carried.