Written answers

Wednesday, 2 December 2015

Photo of Dominic HanniganDominic Hannigan (Meath East, Labour)
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62. To ask the Minister for Finance given that budget 2016 will allow a €550 earned income tax credit for self-employed persons and that persons receiving maintenance payments could be deemed as self-employed by the Revenue Commissioners, if he will extend this tax credit to maintenance payments; and if he will make a statement on the matter. [43192/15]

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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Maintenance payments can relate to maintenance in respect of a former spouse and/or children. The tax treatment of separated spouses depends on the circumstances which apply in each case.  In broad terms the position with regard to the tax treatment of separated persons is as follows.

While in general separated couples are treated for tax purposes as if unmarried, they may, where a legally binding maintenance arrangement is in place, elect to be treated for tax purposes as if the separation had not taken place.  However, the election to be treated for tax purposes as if still married is not a right of one spouse alone but rather is a joint election of both spouses. 

The general position in the case of legally enforceable maintenance agreements is that, where the couple are treated for tax purposes as if unmarried, a tax deduction for maintenance payments for the benefit of his/her spouse is granted to the paying spouse, and the payments are taxable income in the hands of the receiving spouse. If an individual's sole income is from maintenance payments, this is taxed under the self-assessment system.  However, if the couple jointly elect to be treated for tax purposes as if the separation had not taken place, then the payer does not receive a tax deduction for the maintenance payments and the receiving spouse is not taxable on them. 

On the other hand, non-legally binding maintenance payments are not taxable in the hands of the receiving spouse and the paying spouse cannot claim a tax deduction for them.

Maintenance payments in respect of children are not taxable in the hands of the children or the receiving spouse, and the paying spouse cannot claim a tax deduction for the payments.  The effect of this is that the payments are treated the same way as if the taxpayer was providing for the child out of his/her after-tax income. This is in line with the tax treatment of all other parents, where the cost of maintaining their children is not tax deductible.

The Finance Bill 2015 provides for a new tax credit known as the Earned Income Tax Credit.  The tax credit is available in respect of earned income other than earned income which already qualifies for the Employee (PAYE) Tax Credit. The credit will be given at 20% of qualifying earned income subject to a maximum credit of €550 for 2016.

The definition of earned income is set out in section 3 of the Taxes Consolidation Act 1997.  This includes income arising from the exercise of an office or employment and income arising from the carrying on of a trade or profession.

Maintenance payments do not fall within the scope of the definition of earned income and, as such, will not be taken into account in determining an individual's entitlement to the Earned Income Tax Credit. The credit introduced in Budget 2016 is specifically targeted at active income, to support small business-owners across the country such as retailers, publicans, farmers and tradesmen who have an active trade or profession, and who do not have access to the PAYE credit.

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