Revenue Note for Guidance

CHAPTER 2A

Limitation on amount of certain reliefs used by certain high income individuals

Overview

This Chapter provides for a limit on the use of specified tax reliefs (including exemptions) by certain high-income individuals who, by the cumulative use of those reliefs, could otherwise reduce their income tax liability to very low levels or to zero. The limit on the use of reliefs ensures that individuals who are fully subject to a restriction will have an effective rate of income tax of about 30 per cent on the sheltered income.

The Chapter limits the total amount of “specified reliefs” (that is, the reliefs to be restricted as listed in Schedule 25B) that an individual can use to reduce his or her tax li-ability in a tax year to €80,000 or, if greater, to 20 per cent of the individual’s “adjusted income”. Adjusted income is calculated by adding back the specified reliefs used by the individual in the tax year to his or her taxable income for the year and then excluding certain “ring-fenced” income that is already liable to taxation at specific rates. The amount of relief that is disallowed for a tax year is added to the individual’s taxable income for the year to give an increased (recalculated) taxable income figure for the year. The recalculated taxable income figure is taxed in accordance with normal income tax rates and bands and the individual is entitled to normal tax credits.

Specified reliefs disallowed in a tax year are carried forward (as “excess relief”) to the next tax year and deducted in computing the individual’s taxable income in the same way as normal tax reliefs. However, the excess relief allowed in this way is treated as a specified relief and is taken into account in deciding whether the restriction applies in the later year.

In general, the restriction applies to individuals whose adjusted income is €125,000 or more in the tax year involved but it can apply at a lower level where the individual has ring-fenced income. The restriction applies on an incremental basis with the full restriction, and a 30 per cent effective rate, applying at €400,000.

Married couples or civil partners that are jointly or separately assessed are looked at individually in deciding whether the restriction applies. Where the restriction applies to one or both spouses or civil partners, income is aggregated at the level of taxable income rather than at the level of total income in joint assessment cases.

The specified reliefs that are subject to the restriction include:

various sectoral and area-based property tax incentives,
certain exemptions including those relating to artistic income,
reliefs for donations, and
certain investment incentive reliefs (e.g. film relief) and interest relief for investment in companies and partnerships.

Normal items claimed by taxpayers, such as medical expenses and personal tax credits, and exemptions such as that for child benefit, are not restricted. In addition, normal business expenses and deductions for capital allowances on plant and machinery, genuine business related trading losses and genuine losses from a rental activity are not restricted.

485C Interpretation (Chapter 2A)

Summary

This is the interpretation section for the Chapter. It contains the definition and construction provisions required for the Chapter. It also provides rules that are generally applicable for the purposes of the Tax Acts. These rules indicate that priority is to be given to reliefs that are not subject to the restriction over specified reliefs that are subject to the restriction. Finally, the section gives effect to Schedules 25B and 25C.

Details

Definitions

(1) “adjusted income” is calculated by firstly adding the total amount of the specified reliefs actually used by an individual for a tax year to his or her taxable income for that year and then deducting any ring-fenced income of the individual for the year.

The formula (T + S) – R is used to calculate adjusted income

where-

T = the individual’s taxable income (before the restriction),

S = the aggregate amount of specified reliefs used in the year, and

R = the amount of the individual’s ring-fenced income for the year.

The figure for adjusted income is used for the purposes of calculating the amount of specified reliefs that may be allowed to an individual for a tax year. [An individual may, without restriction, use reliefs of up to €80,000 or, if greater, reliefs to the value of 20 per cent of adjusted income].

“aggregate of the specified reliefs” is the total amount of tax reliefs, which are liable to be restricted, that are actually used in a tax year,

“amount of specified relief” in relation to a relief, is the amount of the relief that is actually used in respect of the tax year. It does not include any part of a relief made to an individual for a tax year for which he or she cannot get relief because of any other restriction in the Taxes Acts or because of an insufficiency of income. The amount of the specified relief which is used is, subject to subsection (1A), to be determined on the basis set out in column (3) of Schedule 25B.

“excess relief” is the difference between what the person’s taxable income would have been under the normal income tax computation and what the individual’s taxable income is after the increase provided for by section 485E. While the excess relief is calculated by reference to an increase in taxable income, the excess relief effectively arises from the reduction of a relief or exemption that the individual would otherwise have obtained.

“income threshold amount” is the income level at which the restriction may apply. If adjusted income is less than this amount there will be no restriction of reliefs. The threshold amount is €125,000 where the individual has no ring-fenced income. Where the individual has ring-fenced income, a downward adjustment is made to that amount where the adjusted income is less than €400,000 by using the formula:

€125,000 ×

where-

A = is the individual’s adjusted income for the tax year, and

B = is the sum of T + S (these have the same meaning as in the definition of “adjusted income”).

“relief threshold amount” in relation to a tax year and an individual is set at €80,000.

“Revenue officer” means an officer of the Revenue Commissioners.

“ring-fenced income” is deposit interest that is subject to DIRT (including some interest paid without deduction of DIRT) and EU deposit interest.

“specified relief” is a relief listed in Schedule 25B. These are the reliefs that are subject to the restriction.

“tax year” is a year of assessment.

Capital allowances forward and balancing charges

(1A)(a) Provision is made to ensure that, in the context of balancing charges under section 274, where unused capital allowances are carried forward under section 304 or section 305 in respect of a particular building and are used to reduce a balancing charge arising from the disposal of the building in a tax year, the amount of the allowances carried forward shall not be treated as a specified relief for the purposes of the restriction.

(1A)(b) To the extent that the balancing charge has been reduced by unused capital allowances coming forward from previous years, then the amount of the reduction in the charge will not be taken into account in determining the amount of “adjusted income” for the purposes of this section.

These provisions ensure that, just as in the context of section 23-type relief, there is a netting-off between charges and unused allowances from previous years referable to the same property, before either income or the use of reliefs is recognised for the purposes of the restriction.

Capital allowances on leased assets

(1B)(a) The restrictions set out at items 15C and 15D in Schedule 25B only apply to plant and machinery which is leased to a manufacturing trade, being ‘specified plant and machinery’.

(b) Wear and tear allowances are only a restricted relief where they relate to specified plant and machinery.

(d) 15C and 15D in Schedule 25B shall only apply where they are being claimed by someone who is not an active trader nor an active partner.

Construction

(2)(a) Rules are set out for interpreting the references in the section to ‘specified reliefs used by an individual in respect of the tax year’. Essentially, this term refers to all expressions used in the Tax Acts to convey the fact that various tax reliefs (including exemptions) were given effect to, either in full or in part, in the particular year in question. However, tax relief given for a tax year but not given full effect in that tax year is only taken into account to the extent that effect was actually given to the relief concerned – see the definition of “amount of specified relief”.

(2)(b) For the purposes of the definition of “amount of specified relief”, the provisions of the Tax Acts for determining the amount of profits or gains to be charged to tax apply to income covered by an exemption. This allows the amount of the exemption used (i.e. to cover the exempt income) to be computed.

Priority in giving effect to reliefs

(3) Provision is made for an order of priority as between reliefs to be restricted and reliefs which are not to be restricted where the method of giving relief is the same. In general, reliefs that are not subject to the restriction are allowed before specified reliefs (i.e. reliefs to be restricted). It should be noted that these provisions have general application for the purposes of the Tax Acts and individuals are required to apply these rules for a tax year even where the restriction does not apply to them for that year.

Schedules 25B and 25C

(4) Effect is given to the provisions of Schedules 25B and 25C.

Relevant Date: Finance Act 2019