No country for old taxpayers
Actor Josh Brolin carries a case full of money back to his car in a scene from No Country For Old Men. Meanwhile, in recent years, soon-to-be pensioners in Ireland have been finding the need to innovate within their financial options to help bridge the gap between their expected retirement age and the age at which they can access their State pension.
Significant financial obstacles stand between the elderly and their desire to retire, writes , Group Managing Director, Independent Trustee Company (ITC)
Recently, controversy arose about a letter sent by Revenue to some 68,000 pensioners about their tax affairs. Online discussion forums were abuzz with discussion about the causes and the impact they would have on the elderly.
Revenue insisted it was simply part of a larger review of the 2022 tax year and did not specifically target pensioners.
However, the recent controversy revived memories of a similar incident in 2012 when controversy arose about “insensitive” letters sent to some 115 pensioners. At that time, Revenue apologised for the confusion caused.
In relation to the most recent incident online forums indicated that:
The initial cause of the problem for pensioners was the failure by the Department of Social Protection to apply PAYE to the pensions they paid. Many commentators made the point that micro, small, medium and large private sector enterprises across the country were routinely expected to apply this tax. It seemed ludicrous that one of the largest government departments in the country was unable to do so and was allowed get away with it. A poor reflection on the Department of Social Protection, but not a matter to be laid at the door of Revenue.
Some commentators pointed out that the initial problem was compounded by the fact that Revenue were in fact supplied with all the relevant information to correctly apply this tax. It came straight from the Department of Social Protection and thus had the advantage of being fully verified. And also that Revenue’s website indicated that they could and would collect this tax by adjusting the tax credits of the relevant taxpayers. The fact that tax was now owed suggests that this process had failed and that pensioners were the victims of this failure. It looks like Revenue have a case to answer here.
Commentators also pointed out that, if PAYE was incorrectly applied in the private sector, it was typically to the employer that Revenue went to sort it out. It did not, as a rule, target the taxpayer directly. Those in employment would thus hear about the matter from a non-threatening organization, within months of it arising and would typically be provided with technical information and support in resolving matters. Pensioners, however, were subjected to the terror of the brown envelope without the support of an employer. Again, Revenue doesn’t look so good in that context.
None of these points shows that Revenue is biased against older people. Certain aspects of their operations could be improved and pensioners were among the victims of those inefficiencies.
However, this led me to consider if there were other ways I had encountered in practice, in which Revenue had deliberately acted in a way that made life difficult, specifically for elderly people.
Three examples quickly came to mind.
Payments from pension arrangements are typically subject to PAYE on the same basis as it applies to employees with the pension provider substituted for the employer. Where employees are tax resident outside Ireland, Revenue operate a PAYE Exclusion Order. This is of enormous benefit to the employee as it avoids double tax being applied to their income with the significant cashflow consequences that would otherwise arise.
This benefit is denied to pensioners. This clearly puts a huge cashflow burden on pensioners who are generally recognized as being in the lower income segment of the population anyway.
Revenues rather dubious justification for this difference is that the 'distributions' 'are not payment of pensions'. This completely ignores the fact that the tax code treats them exactly the same as pensions in all other respects and that PAYE is simply an administrative structure for collecting tax. The Revenues argument is also completely undermined by the fact that Revenue applies the same restriction to PRSAs – an arrangement created under the Pensions Act and regulated by the Pension Authority. Clearly, discrimination is taking place, older people are the only ones affected, and the reasons given by Revenue do not seem to be objectively justified.
My second example is an extension of the first. Based on the dubious assertion by Revenue that income from an ARF, PRSA etc. isn’t a pension, Revenue decided to deny such payments access to the pension clauses of double tax treaties. This results in a mismatch between how the income is treated in the country of residence and how it is treated in Ireland, thereby ensuring that pensioners are subject to double tax.
Apart from the dubious rationale, there are a couple of other aspects of Revenue’s behaviour that merit comment. Firstly, this interpretation was implemented without notice, consultation or debate in December 2017 after Revenue had previously treated ARFs as pensions for 18 years.
Secondly, this approach requires the application of a completely fictional set of rules to determine what is income and capital within the ARF. The complexity involved is horrendous, leading the Tax Appeal Commissioner to accept in a recent case that an “experienced practitioner” having spent many weeks and considerable sums on external expertise was unable to do the calculations. Revenue however believe it is reasonable to ask a segment of the population without that expertise or resources to do so.
This entire process specifically targets older people. The rationale for doing so is dubious. (The recent Interdepartmental Group set up to examine pensions devoted a whole chapter to ARFs – strange behaviour when Revenue thinks it isn’t a pension). The method by which Revenue implemented it is clearly calculated to cause pain and distress – a change to long-standing practice, no advance notice or consultation and a calculation system that is not contained in any legislation and has defeated experienced practitioners and tax experts.
My third example relates to the options available to an individual at retirement. More and more individuals are choosing to continue working beyond their Normal Retirement Age, either because it aids their quality of life or it is an economic necessity.
Most also choose to defer receipt of their pension to allow it to continue to grow and will hopefully lead to a better standard of living when retirement finally occurs. This approach is encouraged by the State in a number of ways. It has extended the date at which Social Welfare pension arises, thereby providing a (negative) economic incentive for people to continue working. It is also seeking to supplement that in a positive way by giving the right to employees to continue in employment until they reach the date social welfare pensions begin.
Revenue is going in the opposite direction. On the 15th of August this year, Revenue stated that, unless you exercised your rights to transfer your pension before NRA, you would lose your right to do so. Again, this was done without warning, without consultation and seems calculated to cause the maximum amount of grief for the unsuspecting would-be pensioners.
Similar to the previous change, the actual Revenue rules don’t make any sense. As the vast majority of people will derive their benefits from defined contributions arrangements, the only way they can get those benefits paid is to transfer them elsewhere (to an annuity, ARF, PRSA etc). In this context, Revenue’s statement that a transfer isn’t allowed is nonsense.
Nonetheless, pension schemes up and down the country are now suspending transfers, throwing the retirement planning of would-be pensioners into turmoil.
Clearly, Revenue’s approach is in conflict with government policy. As before it represents an announced change to a long-standing practice. And the only victims are those aged at least 60.
In these three examples, Revenue clearly discriminates against older people. The dubious rationale for these steps, the abrupt manner in which they were introduced, the complexity and lack of clarity in their application do not seem to have any objective justification. In each instance, it is clear that Revenue have not administered the law Fairly Or Reasonably OR Consistently – each of which they commit to do in their Customer Charter. As they specifically target older people it also means they have also failed to respect Equality.
And as their processes and procedures have defeated experienced practitioners aided by weeks of external expertise, it is fair to say they have utterly failed “to give the necessary information and all reasonable assistance”.
- The opinions expressed in this article are those of the author and do not reflect the views of Independent Trustee Company Ltd.
