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Tax Appeals Commission Determination | Capital Gains Tax: Retirement Relief Claim

retirement relief claim

The Tax Appeals Commission’s (TAC) objective is to fulfil the obligations placed on it by the Finance (Tax Appeals) Act 2015 and the Taxes Consolidation Act 1997 (“TCA 1997”). To fulfil these, the TAC facilitates taxpayers in exercising, where appropriate, their right of appeal to an independent body against decisions and assessments of the Revenue Commissioners and the Criminal Assets Bureau.

The Issue for Determination

Recently, the TAC issued a determination addressing an Appellant’s (taxpayer’s) assertion that a Notice of Assessment to Capital Gain Tax (CGT) for 2011, issued by the Respondent (Revenue Commissioners) on 4 December 2018, should not have disallowed his claim for retirement relief (S598 TCA 1997) and Company Amalgamations/exchange of shares relief (S586 TCA 1997) which he had claimed in his income tax return for 2013.  The Revenue Commissioners had also issued a (related) Notice of Amended assessment to Income Tax for 2011 on the 5 December 2018.

The Background

In 1990, after many years of construction industry experience, the taxpayer set-up a building contracting company (the company) serving mainly local authorities and councils. He and his wife were the directors of the company. In 1997, his son started working for the company. 10 years later, with the taxpayer’s health in decline, he started the process of getting his son (the taxpayer’s son) to take over more of the running of the company. The taxpayer’s son’s wife also worked for the company in an administrative capacity. By 2011, the taxpayer contended that he wished to retire. A company was formed (HoldCo) of which the taxpayer’s son and his wife were the directors. The taxpayer sold some of his shares in the building company to HoldCo for €700,000. The balance of his shares and his wife’s share were transferred to HoldCo, for which they were issued 50% of the shares in HoldCo.

The €700,000 was not paid to the taxpayer until 2013. The taxpayer did not resign at any time as a director of the company nor was the taxpayer’s son ever appointed. The taxpayer and his wife continued to take undiminished salaries from the company until 2013.

In 2018, the company was audited by the Revenue Commissioners (with a view to examining the transaction now subject of this appeal) and it was the taxpayer who attended the audit meeting along with the taxpayer’s son’s wife.

Opposing Arguments

The Revenue Commissioners contended that at the audit meeting, the taxpayer said that nothing had really changed in the running of the business in 2011 compared to 2018. He also confirmed that the company’s office was in his house, he still effected payments from the company, but was only an adviser/mentor to his son since 2011.  The Revenue Commissioners contended that they did not get a clear answer as to why the €700,000 payment was not made until 2013 but they believed that the company was not in a financial position to do so in 2011.  While acknowledging that someone does not have to actually retire nor retire as a director in order to avail of retirement relief, it felt that on the “basket of evidence” the transaction was not entered into for bona fide commercial reasons.

On examination at the hearing, the taxpayer (and his son) outlined that the delay in the payment for the shares was to support bonds required for their construction contracts. They did not have any reason why the taxpayer’s son was not appointed as a director nor why the contact details on national websites, etc. were not updated.  They also outlined that the taxpayer attended the Revenue audit meeting as he was the person familiar with the audit period being looked at.

Findings

The TAC in its determination considered all the information and oral evidence, and found as material facts that:

  • The payment of €700,000, if it had been made in 2011, would not have been in the company’s interests
  • The taxpayer retained effective control of the company post-2011 through his ownership and directorship
  • In particular, the taxpayer retained financial and strategic control of the company
  • The transaction was not made for a bona fide commercial reason and that it did form part of a scheme of arrangement with the main purpose to avoid tax (S586 (3)(b) and S598 (8) TCA 1997)
  • Whilst the Revenue Commissioners were entitled to have issued their alternative Income tax assessment (per S817 TCA 1997), it was not necessary to consider it as the CGT assessment should be upheld in this case.

Determination

The Commissioner determined that the Revenue Commissioners assessment to CGT for 2011 in the amount of €348,112 should stand.

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Tax Appeals Commission Determination | Income Tax: Treatment of an IQA Allowance

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The Tax Appeals Commission’s (TAC) objective is to fulfil the obligations placed on it by the Finance (Tax Appeals) Act 2015 and the Taxes Consolidation Act 1997 (“TCA 1997”). To fulfil these, the TAC facilitates taxpayers in exercising, where appropriate, their right of appeal to an independent body against decisions and assessments of the Revenue Commissioners and the Criminal Assets Bureau.

The Issue for Determination

Recently, the TAC issued a determination regarding an Appellant’s complaint about the treatment of an IQA allowance he received in respect of his contributory pension for the years 2019 and 2020. The Appellant was dissatisfied with how he was assessed in relation to his contributory pension, in respect of which he received an increase for his spouse as a Qualifying Adult (Increase for a Qualifying Adult, or “IQA”).

The Background

The Appellant’s complaint related to how the Revenue Commissioners had interpreted an IQA allowance he received in respect of his contributory pension. According to the appellant, “this allowance [was] paid directly to his spouse”, who had “full and sole discretion over how it [was] expended”. In the appellant’s opinion, “whoever actually receives the money should pay the Tax on it. To expect someone else, who received none of that money, to pay the tax on it is unbelievable and very unfair”.

On 30 November 2021 and 6 December 2021, the Appellant received P21 Balancing Statements for the years 2019 and 2020. These indicated underpayments of income tax in the amounts of €3,660.36 and €3,810.69 respectively. On 16 December 2021, the Appellant duly appealed the P21 Assessments to the Commission, arguing that:

“Revenue’s position is that I am deemed to be the beneficiary of the Pension, plus the Increase for a Qualified Adult. They are clearly wrong in that stance. I am the beneficiary of the Pension only and my Wife is the beneficiary of the Qualified Adult Increase. Surely, the beneficiary has to be the person who actually receives the money and not somebody else? Regardless of what way the Government tricks around with the wording of the Acts, it cannot change that fact, which should override everything else.”

By contrast, the Revenue Commissioners’ position was that the IQA allowance was deemed to be the Appellant’s income for tax purposes, pursuant to section 126(2B) of the TCA 1997.

Opposing Arguments

The Revenue Commissioners submitted that “…it is incumbent upon [the Appellant] to demonstrate that Revenue has erred in the way he was taxed with regard to the QAD portion of his pension. Respectfully, the Respondent would argue that the assertion that Revenue is ‘clearly wrong’ does not meet that burden in a matter where the wording of the legislation is quite clear.”

For the Revenue Commissioners, that the appellant claimed “the government has tricked around with the wording of the Acts” implied dissatisfaction with the legislation itself, rather than with the Revenue Commissioners’ interpretation of the legislation.

Determination

The TAC in its determination considered all the facts and information presented, paying particular attention to the following:

  • Past case law examples – Lee v Revenue Commissioners [IECA] 2021 18 & Stanley v The Revenue Commissioners [2017] IECA 279.

The Commissioner determined that the Appellant had failed in his appeal and had not succeeded in demonstrating that the tax was not payable. It was noted that there is no discretion as regards the application of section 126(2B) of the TCA 1997 and the Revenue Commissioners were correct in their approach to the IQA income for the years under appeal.

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Tax Appeals Commission Determination | Income Tax: Payments Received Following a Termination of Employment

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Success Fees

The Tax Appeals Commission’s (TAC) objective is to fulfil the obligations placed on it by the Finance (Tax Appeals) Act 2015 and the Taxes Consolidation Act 1997 (“TCA 1997”). To fulfil these, the TAC facilitates taxpayers in exercising, where appropriate, their right of appeal to an independent body against decisions and assessments of the Revenue Commissioners and the Criminal Assets Bureau.

The Issue for Determination

Recently, the TAC issued a determination addressing a taxpayer’s assertion that their amended assessment for tax year 2016, issued by Revenue Commissioners in January 2018, was incorrect. The taxpayer’s assertion related to certain payments received following the termination of his employment. The taxpayer contended that this payment – “success fees” – was a payment linked to the termination of his employment, taxable under S123 TCA 1997 (to which certain reliefs can be applied via S201 and Schedule 3 of TCA 1997). The amended assessment, however, had treated the payment as being a payment made in connection with his employment and therefore liable to income tax under S112 TCA 1997 (Schedule E).

The Background

Prior to the above complications, the taxpayer had been a senior employee of a company, (“his Employer”) by way of employment contract, since 2010, holding an annual salary of €150,000 and certain conditional share option entitlements.  In July 2015, having had differences of opinion with the Chairman regarding the future strategic direction of the company, the taxpayer and his employer entered a further written agreement (“termination agreement”). The termination agreement included dates for the earliest termination of the employment. While the potential date of termination was dependent on certain deliverables, the final date for this was to be no later in any event than March 2016. The termination agreement stated that “your salary and other contractual benefits will be paid up to the Termination Date less tax, employee PRSI, USC and any other deductions required by law”.

The termination agreement set out various types of payments to be made on termination. These included payments in excess of €500,000 (“success fees”), on the successful raising of finance by the taxpayer for the employer.

Opposing Arguments

The taxpayer argued that the “success fees” were not contingent in fact on the raising of finance for the company as this work was already substantially completed. The taxpayer argued that the termination agreement in this respect was drafted to give the Board of the company a belief that they were getting most value for money for the large termination payment.

The Revenue Commissioners argued that the “success fees” were intrinsically linked to the performance of the taxpayer’s employment and were not termination-related payment.

Both sides quoted differing Irish and UK cases and indeed the Revenue Taxes and Duties Manual (part 05-09-19) to aid their respective positions.

Determination

The TAC in its determination considered all the facts and information presented, paying particular attention to the following:

  • The termination agreement expressly stated that all payments were conditional upon the taxpayer agreeing to all the terms of the agreement. These terms included the termination of his employment and no future right to sue his employer
  • The termination agreement drew a distinction between the taxpayer’s entitlements in connection with the termination and those from his employment contract
  • The taxpayer’s circumstances within in the company gave the taxpayer no option but to leave the company

The TAC determined that the taxpayer was entitled to succeed in his appeal, that he was overcharged to income tax, and that the Notice of Assessment be reduced accordingly.

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