Revenue Note for Guidance

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Revenue Note for Guidance

261 Taxation of relevant interest, etc

Summary

This section sets out the general framework for the tax treatment of relevant interest in the hands of depositors. It ensures that dividends on building society share accounts are treated as normal deposit interest. It provides the basis for raising assessments in certain cases on interest receivable under deduction of DIRT. It also provides that no repayments of DIRT are to be made except to —

  • companies within the charge to corporation tax in respect of the interest,
  • charities, and
  • individuals who are aged 65 years or over or who are permanently incapacitated.

Details

(a) Because most building society deposits are in the form of share accounts, it is necessary to provide that the dividends (that is, interest) on such accounts should not be treated as distributions (which, as such, would be liable to dividend withholding tax in the hands of Irish resident individuals and be exempt from tax in the hands of an Irish-resident company as franked investment income). Such dividends are accordingly regarded as normal deposit interest (which in reality they are) and brought within the ambit of DIRT.

(b) A person who is not liable to tax cannot normally get a repayment of DIRT deducted from relevant interest paid. Exceptions apply, however, in the case of charities, individuals aged 65 years and over and individuals who are permanently incapacitated (see section 267). The bar on repayment of DIRT also does not apply to a company which is liable to corporation tax on the interest. Under section 24(2) such a company can offset the income tax deducted at source (that is, the DIRT) against its corporation tax liability (if any) and obtain a repayment if it has trading losses to offset against its investment income liable to corporation tax. In addition, it is to be noted that, in any event, deposits made by companies can be excluded from the DIRT scheme (see section 256(1)(f)).

(c) & (d) Any amount of relevant interest (that is, the “gross” interest, as provided for in section 256(2)(b)) is taxable under Case IV of Schedule D and, except in the case of Special Savings Accounts, is to be taken into account in computing the recipient’s total income. However, except for the purposes of a claim for repayment of DIRT under section 267(3), in charging the recipient of the interest to tax, the various exemption limits in section 188 are increased by the amount of the interest received. The individual is entitled to a credit under section 59 in respect of the DIRT deducted from the interest. The rate of income tax to be applied to relevant interest income when the individual’s total income is taxed, is to be the same as the rate at which DIRT is deducted from that interest income. This procedure effectively ensures that DIRT deducted from interest on relevant deposits is a final liability tax.

In the event of a claim for repayment of DIRT under section 267(3) the normal exemption limits under section 188 apply. The purpose of this is to prevent a low income person with small deposit interest being exposed to a marginal relief rate of tax (40 per cent) on the interest.

Where the appropriate exemption limit in section 188 is increased by the amount of relevant interest, the references in that section to —

  • “income tax payable” are to be construed as references to “income tax payable after a credit is given, by virtue of section 59, for DIRT deducted from the relevant interest”, and
  • “a sum equal to twice the specified amount” are to be construed as references to “a sum equal to the aggregate of twice the specified amount and the amount of the relevant interest”.

This procedure ensures that the credit for DIRT is, in cases where the exemption limits are increased by the amount of relevant interest received, given before marginal relief is calculated. The purpose of this is to ensure that the credit for DIRT is set against relevant interest and not other income and to limit the cut-off point for marginal relief to twice the appropriate exemption limit plus the amount of the relevant interest.

In the case of DIRT deducted from Special Savings Accounts, section 264(4) effectively substitutes paragraph (c) of this section with a new provision which ensures that DIRT on Special Savings Accounts is treated as being paid in full settlement of all tax liability in respect of that interest. However, such DIRT is still eligible for repayment under section 267(3) (see note on section 264).

Relevant Date: Finance Act 2019