On income averaging, the Finance Bill confirms that the stepping-out mechanism for income averaging will come into effect in respect of year of assessment 2016 and future years.
For farmers with income averaging, there were hopes that the mechanism allowing them to step out of averaging for one year (rather than a full blown exit from averaging) would have been available in respect of the returns just filed in October and November of this year.
In presenting the budget, the minister for finance had made the following comments: “To assist in the current difficult circumstances, I am allowing a farmer facing an exceptionally poor year to ‘step out’ of income averaging and, instead, pay only the tax due on a current year basis, with any deferred tax liability becoming payable over subsequent years.
“This facility will be available immediately and should provide cashflow assistance this year.”
The cashflow saving will clearly only be realised for returns filed for 2016, that is, in year 2017.
Looking at the opt-out in more detail, the mechanism lets a farmer who is in averaging opt to pay tax in any one year based on the actual profits of a year, rather than the five-year average.
The opt-out was designed to facilitate farmers experiencing cash flow difficulties (due for example to income volatility) to reduce their tax exposure to the actual liability for the year, rather than the averaged profit.
The opt-out is a temporary fix though, in that the tax saving delivered by the opt-out is repayable over the following four years.
The opt-out for one year has some advantages over a total exit from averaging.
Where a farmer chooses to no longer avail of averaging, that farmer can suffer a penalty for up to four years prior to the last year in averaging, and, as a result of exiting, will be precluded from opting back into averaging for at least five years.
In the majority of cases, the changes effected by the budgetary process take effect from January 1 of the following year.
Therefore, in the case of this year’s budget, the majority of tax measures are implemented from January 1, 2017.
The earlier commencement date of the new stepping-out measure is welcome, allowing farmers to take up this option one year earlier that would otherwise be the case.
Meanwhile, the committee stage of the Finance Bill has seen a major amendment to the capital acquisitions tax relief called “dwelling house exemption”.
This valuable relief from gift and inheritance tax allowed a beneficiary receive a dwelling house free from capital acquisitions tax.
Where relevant criteria are satisfied, the current regime caters for an effective exemption from capital acquisitions tax in instances of both gifts and inheritances of residential premises.
One of the criteria to be satisfied is that the successor must have resided in the dwelling for the three years prior to the date of the gift or inheritance.
Now, the proposed changes will see the relief heavily restricted.
Dwelling house relief will be available, in the case of lifetime transfers, only for transfers to a dependent relative, being a person permanently and totally incapacitated by reason of mental or physical infirmity from maintaining his or herself, or over the age of 65.
For capital acquisitions tax purposes, there is no definition of “permanently and totally incapacitated”, leading to fears that parents may not be able to provide for children experiencing genuine hardship.
From an income tax perspective, Revenue accepts acute autism, schizophrenia, blindness, and severe deafness affecting both ears as being conditions conducive to a total incapacity.
However, on a practical basis, there are many persons who may not necessarily be totally “incapacitated”, but still need high level support.
As always, professional advice should be obtained relevant to each individual’s circumstances.