Dáil Éireann Debate, Wednesday - 10 April 2024
8. Deputy Pearse Doherty asked the Minister for Finance if he is concerned that the benefit-in-kind exemption for employer contributions to PRSAs, legislated through section 22 of Finance Act 2022, is facilitating aggressive tax planning; if his Department received recommendations from an organisation (details supplied) in June 2022 warning that such a risk would materialise; and if he will make a statement on the matter. [15232/24]
Amharc ar fhreagraThis is in relation to the benefit-in-kind, BIK, exemption for employer contributions to PRSA legislation that was introduced in the Finance Act 2022. It appears to me that this is facilitating aggressive tax planning. It also appears to me that the Department was warned this was happening, probably on more than one occasion. It was also warned prior to its introduction that it would or could happen. I ask the Minister to make a statement on this very serious matter.
Section 22 of the Finance Act 2022 removed the difference in treatment between PRSAs and occupational pension schemes in relation to the funding rules, by abolishing the BIK charge on employer contributions to an employee's PRSA. In addition, employer contributions to an employee's PRSA are no longer counted towards an employee's age related and salary percentage limits on tax deductible contributions.
These changes were recommended by the interdepartmental pension reform and taxation group, IDPRTG, with a view to improving and simplifying the pension landscape in Ireland. In discussing the possible impacts of its implementation, the report acknowledges such a change would also likely result in a change in behaviour, encouraging increased PRSA contributions. However, it also states that this is likely to be a displacement of contributions that otherwise would have been made to new single member schemes.
I can confirm that my Department did receive a paper from the Society of Actuaries in Ireland in summer 2022 which related to this recommendation. When considering the appropriate way to implement the IDPRTG recommendation, removing the BIK limits for PRSAs was examined in detail, and the submission referred to above fed into these considerations. A decision was made to proceed with a proposal to fully remove the BIK charge for employer contributions to a PRSA in order to continue to work towards the overall goal of simplifying and harmonising the pension landscape.
In relation to tax planning, I am informed by Revenue that there is a continuous focus on compliance across pensions, identifying and confronting non-compliant behaviour across schemes. This is in line with Revenue's Corporate Priorities 2024 commitment to comprehensively use the full suite of interventions set out in its compliance intervention framework to assist voluntary compliance and to provide an appropriate response to non-compliance. As with all measures, my officials and I will continue to keep this change under review and, should any necessary changes be identified, they will be considered in the context of future finance Bills.
This is a massive tax loophole that was created by his predecessor as Minister, Deputy Donohoe. It remains in our tax code despite it being pointed out to Ministers. Limiting the amount that can be contributed to a pension with full tax relief in a single year is crucial to ensure equity in our tax system, to control revenue and to prevent abuse. The changes made by the Minister, Deputy Donohoe, undermined all of those objectives. Previously, employer contributions to PRSAs were subject to income tax and USC. While a portion of those contributions could receive tax relief under the age-related percentage limit – something the Minister, Deputy Donohoe, wrongly denied at the time, this is no longer the case. Now a company director can put more than €2 million into a PRSA pension without incurring any tax whatsoever. Company directors can even avail of corporation tax relief on this contribution, providing what is being widely advertised in the industry as a tax-efficient way of extracting profits from the company and converting it into personal wealth. They can game this loophole further by employing a relative on a low salary and transferring up to €2 million from the company tax free to a PRSA on their behalf.
I thank the Deputy.
Does the Minister accept this represents a radical departure from pension policy and creates a significant loophole in our tax code?
This was a policy decision that was taken following careful examination by the interdepartmental group. The final conclusion of the report was that the differential treatment of the PRSAs for funding purposes should be abolished and employer contributions to PRSAs should not be subject to BIK.
The interdepartmental report was subject to a public consultation. The responses to the consultation showed general support for the removal of the BIK charge on employer contributions to PRSAs. Section 22 of the Act aimed to level the playing field by abolishing the BIK charge on employer contributions to an employee's PRSA and not counting employer contributions to an employee's PRSA towards that employee's age related and salary percentage limits on tax-deductible contributions. All of this continues to be subject to the overall tax relief limit, as set out in the standard fund threshold.
The Minister claims this was done on the recommendation of the interdepartmental group on pensions and tax reform but it is a clear misunderstanding of the reading of the group's recommendation, which was to abolish the differential treatment of the PRSA for funding purposes compared to occupational schemes. That was not done. Occupational schemes are benefit-limited. The changes made to PRSAs has totally reversed the position rather than equalised it, with PRSAs now providing a far higher level of free and tax deductible pension funding than under occupational pension schemes. This is a massive amount of money we are talking about. Not everybody is going to be able to do it, but some people are already doing it. The industry is telling people this is how you get your money out of your company. We have a situation now whereby even for somebody drawing a minimum wage, a company owner will be allowed to pump €2 million tax free into a pension pot and to get a tax deduction against their profits in doing so. Before this change was made in June of 2022, the Society of Actuaries warned the Department of the risk and put forward concrete proposals to avoid it materialising. The Minister, Deputy Donohoe, rejected these proposals. My question is, why?
I am aware of the proposal made by the society at the time. That was considered. A number of alternative options were explored, including an additional separate BIK limit for employer contributions to PRSAs and the new PRSA product mimicking the salary-based limits on occupational pension schemes to be used where an employer wished to make contributions to an employees PRSA.
However, both of these options were ultimately rejected. While an additional BIK-free limit for employer and employee contributions could result in an effective equalisation for most individuals, given the low levels of contributions, the rules for tax treatment of contributions would not be equalised. It was considered unlikely to be seen by stakeholders as meeting the recommendation of abolishing differential treatment of PRSAs. It would introduce new rules into an already complex and legal regulatory framework.
On the suggestion that the interdepartmental report was misinterpreted, the officials from the Department of Finance would have been part of that interdepartmental group, would have had an understanding of the intention behind the recommendation and would have fed that into the decision that was made at a policy level at the time.
