Do you think the reduced apartment tax will lead to more affordable apartments or is this just an incentive to build them
Mr R.D.
That’s really the big question of a budget that pretty much focused all its efforts on VAT and spending in infrastructure.
The stated purpose of the 4.5 percentage point cut in VAT – from 13.5 per cent to 9 per cent – is to make apartment building affordable. But affordable for whom? Is it for the developers who can use this windfall to make their costs stack up better, or for the consumers who will be better able to buy an apartment?
If you take a €400,000 apartment, the reduction in VAT should mean the buyer is now looking to pay €384,140, assuming the full VAT cut is passed on – a saving of €15,860.
However, the history of housing incentives in Ireland is that they somehow end up in the developer’s pocket – either because they simply do not pass on the benefit or because they raise the property price to offset the benefit.
We’ve yet to see what happens in this case but as it applied from the following day, Wednesday of last week, and a number of people are currently in the process of buying apartments, it should not be too long before we find out.
The Finance Act, due out this week, may also provide some clarity, not least as buyers are charged stamp duty on the price of their new home, minus VAT.
Going back to our €400,000 apartment, the 13.5 per cent VAT on that currently amounts to €47,577. You pay 1 per cent stamp duty on the balance of the €400,000, which is €352,423. And 1 per cent of that is €3,524 – that’s your current stamp duty bill.
Now, with VAT falling to 9 per cent, if the developer does not bring down the price accordingly, the 9 per cent rate means just €36,000 of the price tag is accounted for by VAT and you will be charged stamp duty on the remaining €364,000. That will be a stamp duty bill of €3,640.
Yes, I know that’s just €116 more, which is tiny in the scheme of things with a €400,000 apartment but, politically, the notion that the consumer is actually going to pay more for their apartment so that developers can pockets tens of thousands of additional profit margin per unit is not going to play very well with the electorate.
Why hasn’t this Government scrapped deemed disposal, the most egregious taxation policy on investment opportunities outside of a private pension? We are alone in Europe in our treatment of investment funds, despite the number of Ireland-domiciled funds.
My frustration aside, an explanation on why deemed disposal has not been removed would be enlightening.
Mr F.M.
The Government did make a move on the taxation of investments but to say it falls short of what been hoped for is an understatement.
There was a logic in deemed disposal when it first came in. Back in the day, funds were taxed each year. Then Revenue agreed to funds-industry pressure to allow profits to be rolled up within funds to improve outcome, taxing them only when people sold their investments and charging a three-percentage-point premium for having bided their time to collect the tax.
However, canny investors (and their equally canny and well paid advisers) discovered you could effectively avoid the tax altogether simply by leaving the money in the funds.
Revenue, unsurprisingly, countered that, to tackle tax avoidance, they would tax the funds every eight years – deeming that a disposal had taken place for tax purposes, hence deemed disposal.
Initially, the rate of exit tax was 23 per cent compared with a capital gains tax rate of 20 per cent. However, governments quickly got greedy, ramping the tax up to 26 per cent, then 28, 30, 33, 36 and now 41 per cent – way above the capital gains tax (CGT) rate since elevated to 33 per cent.
Understandably, the prospect of losing more than €4 out of every €10 earned every eight years has been a big disincentive for people to invest in such products.
A major report of the Funds Sector 2030 Review suggested a host of changes to the investment tax regime. And, at a minimum, the sector was hoping to see the rate of exit tax come back to the CGT rate this year.
In the event, all we got was a three-percentage-point cut in the exit tax rate, with everything else put on the long finger.
“Reflecting the complexity of the tax framework for retail investment, and to facilitate due consideration of the Funds Sector 2030 Report,” Minister Paschal Donohoe said, “I intend to publish a roadmap early next year, setting out my intended approach to simplify and adapt the tax framework to encourage retail investment. It will take into account the European Commission’s recommendation on savings and investment accounts.”
So, we are now going to get a roadmap of a report of a review – 2½ years after this report was commissioned and a full year after it landed on ministers’ desks. You can see where this is going.
I think the bottom line is that the Government parties ill-advisedly got themselves caught making a commitment to bale out the hospitality sector that will cost it €681 million in a full year, well over €300 million more than any other tax measure and severely limiting the capacity for other changes, despite very modest public support for the measure.
The exit tax measures, by comparison, will cost the State fractionally under €19 million.
[ ETF investing anomaly endures as deemed disposal left untouched in budgetOpens in new window ]
In relation to fuel allowance being extended to the recipients of the working family payment, will this be straight payment of the allowance or will it be means-tested?
Ms U.M.
In a budget where there was very little cheer for ordinary consumers, there was a lot of interest in the fuel allowance, which is paid for 28 weeks every winter – from September to April.
The allowance is rising by €5 from €33 a week to €38. That’s an increase of more than 15 per cent. The rise will come into effect in January.
As you say, that wasn’t the only change in fuel allowance. The Minister announced that people in receipt of the working family payment will, from next March, also be eligible for the fuel allowance. And, in their case, it will be backdated to January.
The payment will not be means-tested above and beyond the limits already in place for the working family payment. It sets an income limit for any family looking to apply. Those limits depend on how many children are in the family.
A family with one child has a weekly income cap of €705. If you have two children, you can earn up to €806, rising to €907 for a family with three children. The limit rises per child up to €1,472 if you have eight or more kids.
You get 60 per cent of the difference between your income and the relevant limit.
The budget will, from January, add €60 to each of those limits.
As people on the working family payment have to reapply for the payment every year, they will only continue to be eligible for the fuel allowance as long as their income limits meet the rules and their children do not pass their 18th birthday.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice
