Joe Higgins
Question:184. Deputy Joe Higgins asked the Minister for Finance the impact of treating capital tax gains the same as other source of incomes subjected to income tax, universal social charge and PRSI. [46355/12]
View answerTuesday, 23 October 2012
Questions (184)
Written answers
A schedular system of taxation operates in Ireland, as in many other countries, under which income is grouped into separate schedules for tax assessment purposes. Different rules apply for calculating taxable income under each schedule and for determining the timing of the charge to tax. Any change to treat capital gains on asset disposals as income subject to income tax would have fundamental implications for the schedular system. In the case of income tax, for example, a system of allowances, rate bands and tax credits are in place, the extent of the availability of which depends on the personal circumstances of each taxpayer. Income is charged to tax on a graduated basis at rates of 20% and/or 41% depending on whether an individual is single, married, a single earner couple or a two earner couple. The result is a highly progressive system with individuals paying more tax as they earn more income.
Capital Gains Tax (CGT) is chargeable on gains made on the disposal of assets. Persons are chargeable to CGT on such gains for a year depending on their residence and domicile. Gains subject to CGT are generally less recurring events for the majority of individuals than annual income chargeable to income tax. The first €1,270 of an individual’s net gains for a year (that is gains minus current year losses and losses brought forward from earlier years) is exempt from CGT with the balance taxed at a standard rate of 30%. The standard rate of CGT has increased from 20% to 30% in recent years. The non-recurring nature of many capital gains and the equitable treatment, under an income tax system which taxes income as it arises in a single year, of gains accrued over a number of years from the periodic disposal of capital assets are some of the considerations inherent in the Deputy’s question.
It should also be noted that income earned from capital assets (e.g. rental income from property or dividend income from investments) is liable to income tax and USC etc in the hands of an individual. The taxation system therefore imposes a charge to income tax, and consequently imposes PRSI and USC, where any income arises, whether that income is in the form of pay or emoluments of an individual or profits from an investment.
Any decision to apply higher taxes to gains from asset disposals would have to consider, among other things, the negative implications for ongoing investment in productive assets. To impose a charge equivalent to income tax, USC and PRSI on capital disposals is also likely to lead to other behavioural impacts with an effect on the transfer of ownership of assets, possibly leading to stagnation in the market in terms of such transfers, as assets will pass on death rather than by disposal. Charging capital gains to income tax will raise the question of when relief would be granted for capital losses.
Finally, I am informed by the Revenue Commissioners that the yield from applying income tax, USC and PRSI to capital gains would depend on the individual circumstances of each affected taxpayer such as the amount of each gain, the amount of other income, the marital status and the PRSI class. There would also be an uncertainty about the behavioural changes on the part of taxpayers, as outlined above, where a significant increase in the tax rate on gains may not produce a corresponding increase in tax yield. In current economic conditions any estimate of additional yield would have to be treated with caution.