Analysis of High Income Individuals’ Restriction 2007

1. General

The 2006 and 2007 Finance Acts introduced, with effect from 1 January 2007, measures to limit the use of certain tax reliefs and exemptions by high-income individuals. Such individuals, by means of the cumulative use of various tax incentive reliefs, had in previous years substantially reduced their tax liabilities.

The overall objective was to ensure that, from 2007, individuals with an adjusted income ¹ exceeding €500,000 (i.e. where the full restriction applies) would pay an effective rate of approximately 20 per cent on a combination of adjusted income and ring-fenced income. That objective has been achieved. Where adjusted income is less than €500,000, a tapering approach ensures that there is a graduated introduction of the restriction, with the effective rate of tax increasing towards 20 per cent as adjusted income increases towards €500,000.

Further details of the operation of the restriction and the specified tax reliefs covered by the restriction are set out in Annex 1.

2. Results for 2007

Results showing the effect of the restriction for the first year of its operation (2007) are set out in tabular form in Annex 2. These result are based on actual returns received.²

Cases where full restriction applies — Adjusted Income of €500,000 or more

Table1A shows that the 214 high-income individuals with an adjusted income of €500,000 or more (i.e. where the full restriction applies) paid an average effective tax rate of 20.08% per cent on the combination of adjusted income and ring-fenced income.

This meets the objective set out for the measure. The additional tax involved was €34.153m, representing a 129% increase on the tax that would otherwise have been paid if the restriction had not applied. An important outcome of the restriction is that 20 individuals with adjusted income of €500,000 or more, who would not otherwise have paid tax in 2007, were brought into the tax net for that year. Many of these individuals are in receipt of exempt income (e.g. patent income or artists income).

Table1B summarises the distribution of the effective tax rates, in bands of 5%, for the 214 cases with adjusted income of €500,000 or more. It shows that all of the high-income individuals within this category fall into the effective rate bands of 15% to 20% (166 cases) or 20% to 25% (48 cases).

Cases where restriction partly applies — Adjusted Income of up to €500,000

Table2A shows that the 225 high-income individuals with an adjusted income of up to €500,000 (i.e. where the restriction applies on a graduated basis) paid an average effective tax rate of 13.63% per cent on the combination of adjusted income and ring-fenced income. The additional tax involved was €5.842m, representing an 88.3% increase on the tax that would otherwise have been paid if the restriction had not applied. Again, 56 individuals with adjusted income of up to €500,000, who would not otherwise have paid tax in 2007, were brought into the tax net for that year.

Table2B summarises the distribution of the effective tax rates, in bands of 5%, for the 225 cases with adjusted income of up to €500,000. The spread reflects the graduated nature of application of the restriction for cases in this category.

3. Schedule of Declared Use of Different Reliefs Table3, in relation to each specified relief, shows:

the overall number of individuals subject to the restriction, who declared that they used the relief, and
the total combined amount of the relief declared as used by those individuals.

ANNEX 1

Operation of the Restriction

The restriction works by limiting the total amount of “specified reliefs” that a high-income individual can use to reduce his or her tax liability in any one tax year.

In summary, the restriction applies only where:

the adjusted income of an individual is equal to or greater than a “threshold amount”,
the aggregate of specified reliefs used by the individual is equal to or greater than the “threshold amount”, and
the aggregate of specified reliefs used by an individual is greater than 50 per cent of the individual’s adjusted income.

In general, the “threshold amount” is €250,000 but a lower threshold can apply where the individual has ring-fenced income.

In the case of a married couple, application of the restriction to each spouse is determined separately. Therefore, the restriction will apply to each individual spouse only where these three circumstances apply to that spouse.

Specified Reliefs

Broadly speaking, the reliefs that are restricted include:

the various sectoral and area-based property tax incentives,
certain exemptions e.g. relating to artists’ income, patent royalties etc.,
certain investment incentive reliefs such as BES relief and film relief,
relief for interest paid on loans used to acquire an interest in a company or in a partnership.

Normal business-related expenses, deductions for capital allowances on plant and machinery, genuine business-related trading losses, and genuine losses from a rental activity that do not arise from the use of specified reliefs are not restricted. In addition, personal tax credits are not affected.

Source: Department of Finance Website www.finance.gov.ie

Department of Finance Copyright is acknowledged

ANNEX 2

Table 1A: Ranges of Adjusted Income – Cases with Adjusted Income of €500,000 or More

		Tax Before Restriction		Tax After Restriction	Additional Tax after Application of Restriction	Average Effective Rate before Application of Restriction	Average Effective Rate after Application of Restriction
Adjusted Income	No. of Cases	No. of Cases	Amount	Amount	Amount	Rate	Rate
500,001	55	50	2,819,922	6,134,261	3,314,339	8.96%	19.49%
650,000
650,001	39	36	3,248,732	6,171,006	2,922,274	10.58%	20.10%
800,000
800,001	35	30	2,751,789	6,349,635	3,597,846	8.38%	19.33%
1,000,000
1,000,001	48	43	5,625,594	13,275,655	7,650,061	8.59%	20.27%
1,500,000
1,500,001	12	12	1,247,124	4,024,338	2,777,214	6.02%	19.44%
2,000,000
Over	25	23	10,863,089	24,754,333	13,891,244	8.97%	20.45%
2,000,000
Totals	214	194	26,556,250	60,709,228	34,152,978	8.79%	20.08%

Table 1B: Effective Tax Rates– Cases with Adjusted

Income of €500,000 or More
Effective Rate	No of Cases	% of Cases in Table
0% < 5%	0	0%
5% < 10%	0	0%
10% < 15%	0	0%
15% < 20%	166	77.6%
20% < 25%	48	22.4%
25% < 30%	0	0%
30% < 35%	0	0%
35% < 40%	0	0%
> 40%	0	0%
*Totals*	*214*	*100%*

Table 2A: Ranges of Adjusted Income – Cases with Adjusted Income of up to €500,000

		Tax Before Restriction		Tax After Restriction	Additional Tax after Application of Restriction	AverageEffective Rate before Application of Restriction	Average Effective Rate after Application of Restriction
Adjusted Income	No. of Cases	No. of Cases	Amount	Amount	Amount	Rate	Rate
Under	32	22	912,674	1,533,062	620,388	8.52%	14.32%
250,000
250,000	42	24	231,820	594,876	363,056	1.99%	5.10%
300,000
300,001	32	22	683,427	1,472,857	788,930	5.51%	11.88%
350,000
350,001	64	55	1,987,549	3,949,963	1,962,414	7.12%	14.15%
425,000
425,001	55	46	2,801,286	4,908,860	2,107,575	9.75%	17.09%
500,000
Totals	225	169	6,616,756	12,459,618	5,842,363	7.24%	13.63%

Table 2B: Effective Tax Rates – Cases with Adjusted

Income of up to €500,000
Effective Rate	No of Cases	% of Cases in Table
0% < 5%	44	19.6%
5% < 10%	33	14.7%
10% < 15%	61	27.1%
15% < 20%	87	38.6%
20% < 25%	0	0%
25% < 30%	0	0%
30% < 35%	0	0%
35% < 40%	0	0%
> 40%	0	0%
*Totals*	*225*	*100%*

Table 3–Schedule of Declared Use of Different Reliefs (for Publication Purposes, Some Categories have been Amalgamated)

Ref Number	Specified Relief	Number of Cases	Amount of Relief Used in 2007 by those Affected by the Restriction
1	Sect 140 – dividends and distributions out of exempt income from stallion fees, stud greyhounds and woodlands.	5	1,472,470
2	Sect 141 – dividends and distributions out of exempt patent income.	41	45,611,966
3/4	Sect 142 and 143 – dividends and distributions out of exempt income from certain mines and other mining operations.	–	–
5	Sect 195 – Exempt income, profits or gains of artists, writers or composers.	40	24,401,019
6	Sect 231 – Exempt stallion fees.	6	1,123,267
7	Sect 232 – Exempt woodland income.	3	173,361
8	Sect 233 – Exempt stud greyhound fees.	–	–
9	Sect 234 – Exempt patent royalty income.	16	8,677,717
10	Sect 248 – relief for interest paid on loans to acquire an interest in a company.	40	7,487,381
11	Sect 248 – relief for interest paid on loans to acquire an interest in a company as extended by sect 250.	39	11,420,723
12	Sect 253 – relief for interest paid on loans to acquire an interest in a partnership.	21	1,460,770
13	Sect 272 – writing down allowances in respect of capital expenditure on:
	• hotels	124	52,053,438
	• nursing homes, residential units attached to nursing homes and convalescent homes	16	2,416,299
	• hospitals, sports injury clinics and mental health centres	10	1,986,502
	• holiday camps	15	1,850,322
14	Sect 273 – acceleration of writing down allowances in respect of certain expenditure on certain industrial buildings or structures	13	2,996,448
15	Sect 274 – balancing allowances in respect of capital expenditure on:
	• hotels	26	8,147,827
	• nursing homes, residential units attached to nursing homes and convalescent homes	3	194,653
	• hospitals, sports injury clinics and mental health centres	4	2,324,846
	• holiday camps	–	–
15A	Sect 304(4) – Carry forward of capital allowances in trading situations which are unused in a particular year.	22	7,120,974
15B	Sect 305(1) – Set off and carry forward of capital allowances in rental situations.	109	38,511,554
16/17	Sect 323 and 324 – Custom House Docks Area: capital allowances for commercial premises and double rent allowance in respect of rent paid for certain business premises	5	301,814
18/19/20	Sect 331, 332 and 333 – Temple Bar Area: capital allowances for industrial buildings, commercial premises and double rent allowance in respect of rent paid for certain business premises	4	692,499
21	Sect 341 – Urban Renewal Scheme: capital allowances for industrial buildings.	7	1,526,677
22	Sect 342 – Urban Renewal Scheme: capital allowances for commercial buildings	14	5,945,519
23	Sect 343 – Enterprise Area: capital allowances for certain buildings.	17	1,400,120
24	Sect 344 – Multi Story Car Park capital allowances	16	1,434,487
25	Sect 345 – Urban Renewal, Enterprise Area, Multi Story Car Park: double rent allowance in respect of rent paid for certain business premises	18	2,764,778
26	Sect 352 – Qualifying Resort Area: capital allowances for certain industrial buildings	5	219,754
27	Sect 353 – Qualifying Resort Area: capital allowances for certain commercial buildings	3	34,199
28	Sect 354 – Qualifying Resort Area: double rent allowance in respect of rent paid for	3	1,017,523
29	Sect 372C – Qualifying (Urban) Areas: capital allowances for certain industrial buildings	37	6,543,542
30	Sect 372D – Qualifying (Urban) Area and Living over the shop scheme: capital allowances for certain commercial buildings	4	153,019
31/32	Sect 372M and Sect 372N – Qualifying Rural Areas: capital allowances for certain industrial and commercial buildings	6	934,774
33/34	Sect 372V and 372W – Park and Ride Scheme: Capital allowances for Park and Ride Facilities and for certain commercial buildings	–	–
35	Sect 372AC – Town Renewal Area: capital allowances for certain industrial buildings	5	351,215
36	Sect 372AD – Town Renewal Area: capital allowances for certain commercial buildings	5	359,414
36A/36B	Sect 372AX and 372AY – Mid Shannon Corridor Tourism Scheme: capital allowances for certain registered holiday camps and tourism infrastructure facilities	–	–
37	Sect 372AP – Relief for lessors of residential premises	28	8,446,472
38	Sect 372AU(1) – Relief for lessors of residential premises: old schemes	–	–
39	Sect 381 – Repayment of tax due to losses	7	571,944
40	Sect 381 – Repayment of tax due to losses, as extended by Sect 392	3	59,671
41	Sect 382 – Carry forward of losses to future years	7	4,698,616
42/43	Sect 383 and Sect 384 – Relief under Case IV and Case V for losses	47	15,079,980
44	Sect 385 – Terminal loss relief	–	–
45	Sect 481 – Relief for investment in Films	5	158,750
46	Sect 482 – Relief for investment on significant buildings and gardens	13	5,204,426
47	Sect 485F – Carry forward of excess relief	–	–
48	Sect 489(3) – BES relief	29	2,645,708
49	Sect 843 – Capital allowances for buildings used for third level education purposes	5	2,733,767
50	Sect 843A – Capital allowances for certain child-care facilities	13	2,400,389
51	Sect 847A – Donations to certain sports bodies	4	362,400
52	Sect 848A – Donations to approved bodies	95	3,354,169
53	Paragraph 11 of Schedule 32, Urban Renewal Scheme 1986: Capital allowances for certain commercial premises in designated areas	3	64,374
54	Paragraph 13 of Schedule 32, Urban Renewal Scheme 1986: Double rent allowances in relation to certain premises in designated areas	5	773,698

1. Adjusted income is the taxable income of an individual before the restriction is applied, to which is added the amount of income sheltered in the year through the use of the specified reliefs. It excludes “ring-fenced income” which is already chargeable to tax at a rate of 20% or more on a final liability basis (e.g. where an individual has income from deposit interest).

2. Further analysis of returns received in joint assessment cases is ongoing to ensure that the results properly reflect application of the restriction to individual spouses.

TaxSource Total

Analysis of High Income Individuals’ Restriction 2007

1. General

2. Results for 2007

ANNEX 1

ANNEX 2