Written answers

Tuesday, 11 June 2013

Photo of Robert DowdsRobert Dowds (Dublin Mid West, Labour)
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144. To ask the Minister for Finance the rules governing the amount each director of a company may take out of a company's reserves as a lump sum at retirement, without attracting capital gains tax, income tax or universal social charge; and if he will consider amending the legislation which covers same. [27118/13]

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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I assume the Deputy is referring to a gratuitous or ex-gratia lump sum which might be awarded out of company funds to a director on ending employment with a company and not a pension lump sum paid out of the director’s pension fund. In the first instance, ex-gratia payments made by an employer to an employee or office holder at the date of cessation or retirement are not subject to Capital Gains Tax.

Section 123 of the Taxes Consolidation Act 1997 imposes (subject to a number of exemptions and reliefs provided under section 201 and Schedule 3 of that Act) a charge to income tax in respect of ex-gratia or gratuitous payments made by employers on the termination of an employment, where the payment would not otherwise be chargeable to income tax under general income tax law.

Statutory redundancy payments are exempt from income tax. In addition, ex-gratia redundancy payments or retirement gratuities in excess of the statutory redundancy amount are exempt from income tax up to certain limits as set out (i) a basic exemption of €10,160 plus €765 per complete year of actual service; (ii) a further exemption of up to €10,000 where the individual is not a member of an occupational pension scheme or irrevocably gives up the right to receive a lump sum from that scheme. If a lump sum is paid from such an occupational pension scheme then the exemption of €10,000 is reduced by the amount of that sum. This additional exemption is only available where 10 years have elapsed since any previous claim for this exemption was made; or (iii) Standard Capital Superannuation Benefit i.e. 1/15th of the person’s annual income (average of the last three years) for each year of employment less any tax-free lump sum which is received or receivable under any approved or statutory pension scheme.

It is open to the taxpayer to choose whichever tax treatment is most beneficial. In addition to the exemptions at (i) and (ii), or (iii) above, where an individual is liable to tax on any part of his or her ex-gratia payment, Top Slicing Relief (TSR) may also be claimed. This effectively applies the average effective rate of tax which applied for the previous 3 years of assessment in place of the marginal rate of tax on the taxable element of any ex-gratia payment. Finance Act 2013 abolished TSR from 1 January 2013 where the gross ex-gratia payment made is €200,000 or more.

A Commission on Taxation recommendation that a limit of €200,000 be placed on the maximum tax-free element of an ex-gratia payment made in respect of termination or change in conditions of an employment or office was implemented in Finance Act 2011. This limit is a lifetime cap and applies to all exemptions or reliefs claimed in respect of termination payments. This cap however, did not apply to ex-gratia payments made on death or disability which are provided for separately. As regards such payments a maximum lifetime tax-free limit of €200,000 where the payment is made solely on account of disability of, or injury to an employee or director, was implemented in Finance Act 2013.

The amount that can be paid as a tax-free ex-gratia payment is affected by a number of different factors including length of service, remuneration levels in the 36 months prior to the cessation date and the recipient’s entitlements under the terms of their approved pension scheme. Since 2011, the overall maximum of tax-free entitlements is capped at €200,000.

As demonstrated, there have been a number of changes to the tax code in this area in recent years. As with all tax reliefs and exemptions, they will continue to be subject to review as part of the annual Budget and Finance Bill process.

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