Two appeals before the Tax Appeals Commission concerned the entitlement to the employee tax credit against tax arising on the increased old age contributory pension payment on behalf of the taxpayer’s spouse.

Appeal ref: 17TACD2017

Background

The taxpayer was entitled to an increase in the amount of his old age pension (“the increase amount”) on the basis that he had living with him a “qualified adult dependent”, his spouse, as required by social welfare legislation6. Both the increase amount and his pension were paid directly to his bank account up until June 2011.

Although a statutory change to the social welfare legislation7 effective from 24 September 2007 provided that the increase payment was to be made directly to the spouse, for the period September 2007 to June 2011 the payment was made directly to the taxpayer through a domestic mutual agreement. After June 2011, the increase amount was paid directly to his spouse.

Submissions

The taxpayer claimed that the increase amount paid on behalf of his spouse meant that his spouse was in receipt of emoluments in accordance with section 472 TCA 1997. Therefore, the taxpayer was entitled to claim the employee tax credit against the tax arising on the increase amount of the pension payment.

Revenue’s argument centred on the following points:

• The taxpayer was the beneficiary of the increase amount, the income derived from his entitlement to the increase in his pension
• The change to the social welfare legislation appropriated part of his income to his spouse
• A new pension entitlement was not created
• When the taxpayer dies the entitlement to the increase amount also ceases. If his spouse qualifies for a window’s pension that is a separate and different pension
• The increase amount was dependent on the taxpayer having made the required contributions and having reached the relevant age

Analysis

It was necessary to establish the identity of the beneficial owner of the increase amount for the purpose of applying the appropriate tax provisions and entitlement to the employee tax credit.

The relevant provision, the amendment made by the Social Welfare and Pensions Act 2007 to section 112 of the Social Welfare and Pensions Act 2005, which inserted subsection (1A), reads as follows:

“The amount of the increase of pension referred to in subsection (1), in respect of any claim for State pension (contributory) made after 24 September 2007, shall be paid—

1. directly to the qualified adult concerned, or
2. to such other person as may be nominated by the qualified adult for the purpose of receiving the increase of pension referred to in subsection (1) on behalf of the qualified adult.”

Revenue submitted that the taxpayer’s interpretation of the social welfare statutory provisions was at odds with the judgement in O’Siocháin (Inspector of Taxes) —v- Neenan [1999] 1 IR 533. According to Revenue, the O’Siochain case had direct application in this appeal. However, the Commissioner noted the O’Siocháin case had distinct differences to the facts of the matter under appeal. In the O’Siochain case, the increased pension was paid directly to the widow with no statutory obligation to expend such monies on the welfare of her children. In that case it was held that:

“a widow or any other parent would be expected to make provision for his or her children and the Oireachtas was satisfied in enacting the Act of 1981 to rely on the moral obligations which that relationship imposes.”

However, in the matter under appeal, the Commissioner stated that “it would appear that the Oireachtas was not satisfied to rely on the moral obligation of the Principal Recipient but rather created a statutory entitlement vesting beneficial ownership of the Increased pension in the “qualified adult” with effect from 24 September 2007”.

“Although the Increased pension is directly associated with the old age (contributory) pension, the entitlement to such a payment vests in the “qualified adult” to the extent that the increase is paid directly to that person. There are no statutory conditions imposed on the “qualified adult” to account for such monies or how such funds should be expended. Such income is not held in trust for the Principal Recipient nor has the Principal Recipient any legal right to the increased pension.”

It was further noted that “the effect of the amendment in the Social Welfare and Pensions Act 2007 mandated that the payment be made directly to the “qualified adult” therefore entitling that person to the exclusive right to such income with effect from 24 September 2007.”

Prior to 2007, the Department of Social and Family Affairs took administrative actions to pay the “qualified adult” the increased pension. In such circumstances, there can be no issue that while there was a moral obligation on the Principal Recipient to provide for the “qualified adult”, the entitlement to the Increased pension, in accordance with the clarification of the law in O’Siocháin, vested in the Principal Recipient.

As such, the “qualified adult” had no beneficial entitlement to such income but rather had to rely on the natural love and affection, discretion or indeed goodwill of the Principal Recipient to provide adequate financial support.

However, the Social Welfare and Pensions Act 2007 changed that discretionary aspect by making, in effect, a separate pension arrangement for the “qualified adult”. Such a legislative action created a legal and beneficial entitlement for the “qualified adult” to the Increased pension

Finance (No.2) Act 2013 amended section 126 of the Taxes Consolidation Act (TCA)1997 which provides for the tax treatment of certain benefits payable under Social Welfare Acts by inserting the following subsection 2B into that section:

“Notwithstanding the provisions of section 112(1), where an increase in the amount of a pension to which section 112, 113, 117 or 157, as the case may be, of the Social Welfare Consolidation Act 2005 applies is paid in respect of a qualified adult (within the meaning of the Acts), that increase shall be treated for all the purposes of the Income Tax Acts as if it arises to and is payable to the beneficiary referred to in those sections of that Act.”

According to the determination “it is clear that the 2013 amendment to TCA, section 126 recognises that the beneficial entitlement to the Increased pension vests in the “qualified adult” but treats such income “for all the purposes of the Income Tax Acts as if it arises to and is payable to the” Principal Recipient.”

The legislative change effective from 24 September 2007 provided a statutory requirement to pay the increased pension directly to the “qualified adult”, in this case, the spouse of the taxpayer. The Commissioner determined that the taxpayer’s spouse had the beneficial entitlement to such income in respect of the period commencing after 24 September 2007.

Entitlement to employee tax credit

The Increased pension is emoluments under section 126 TCA 1997. Section 472(4)(b) TCA 1997 provides an entitlement to the employee tax credit where the emoluments “arise to the claimant’s spouse” in cases where an election has been made for joint assessment. Joint assessment is provided for under section 1017 TCA 1997.

In this appeal, the taxpayer and his spouse were jointly assessed in accordance with section 1017 TCA 1997. Therefore, as the beneficial entitlement to the Increased pension, constituting emoluments, arose to the taxpayer’s spouse by virtue of her beneficial entitlement to such income, the Commissioner determined that the taxpayer was entitled to the employee tax credit with reference to that income.

The entitlement to the employee tax credit should be applied to the tax arising on such income in respect of the period from 24 September 2007, the date from which the taxpayer’s spouse was beneficially entitled to the Increased pension.

A similar appeal case (ref 18TAC2017) brought before the TAC concerned the taxpayer’s entitlement to the employee tax credit and the increase in the standard rate band in respect of the Increased pension paid on behalf of the taxpayer’s spouse. In that appeal the Commissioner determined that:

“The amendment to the Principal Act (Social Welfare and Pensions Act 2005), section 112 by section 14 of the Social Welfare and Pensions Act 2007 mandating that the Increased pension be paid directly to the “qualified adult” has the effect of bestowing the beneficial entitlement of such income to the “qualified adult”. As a consequence, the standard rate band should be increased with reference to that income and a corresponding entitlement to the employee tax credit should be applied to the tax arising on such income.”

The Commissioner determined in favour of the taxpayer. It is noted in the determination that Revenue has appealed the decision to the High Court. It is not known at this stage Revenue’s position with respect to potential claims from taxpayers based on this determination.

In both appeals the Commissioner determined in favour of the taxpayer. At the request of Revenue, both decisions have been stated for the opinion of the High Court.

At the time of writing there was no published response from Revenue. Until such time that the final decision of the courts is made, any claims for tax repayment will not be processed by Revenue.

At a TALC meeting, we discussed with Revenue members’ particular concerns for claims in respect of the 2013 tax year which, due to the four year limitation period, must be made before the end of 2017. The advice from that meeting is to submit a protective claim for amendments to the income tax return and consequently a tax repayment along with details of the case to Revenue via MyEnquiries.

While MyEnquiries is the preferable route, alternatively, a letter can be sent to the relevant Tax District which should clearly state that it concerns a protective claim on the basis of the determinations and details of the case.

The determinations are available to read on the Tax Appeals Commission website www.taxappeals.ie

6. Social Welfare Consolidation Act 2005

7. Social Welfare and Pensions Act 2007