Deemed Exit Tax Calculation Formula

[Corola]

Is there a difference method to use when calculating Deemed Disposal tax depending on if it's through a Life Insurance product or if bought directly via a trading platform yourself?

There is no notion of "adding back the tax" if you buy directly via a trading platform. You either:

1) Pay the tax from your other cash funds and your ETF remains untouched, so there is no tax deducted from it to add back in.

2) Raise money by selling specific shares of the ETF (on a FIFO basis), which creates realised gains or losses, and you have fewer shares remaining at the next disposal. A realised gain creates its own tax liability.

In both cases you claim a credit for the tax already paid on the remaining shares, but you don't add anything back because the calculation for each share is distinct and is relative to its purchase price.

 

[Racrus]

There is no notion of "adding back the tax" if you buy directly via a trading platform.

You either pay the tax from your other cash funds and your ETF remains untouched, so there is no tax deducted from it to add back in.

Or you raise money by selling specific shares of the ETF (on a FIFO basis), which creates realised gains or losses, and you have fewer shares remaining at the next disposal. A realised gain creates another tax liability.

In both cases you claim a credit for the tax already paid on the remaining shares, but you don't add anything back because each share is distinct and its gain is relative to its purchase price.

Thanks for clarifying, just when I thought I had deemed disposal tax sussed I came upon this thread and it threw it all up in the air for me again, haha. So there is a different method used to calculate the tax on an insurance policy fund.

The way I see it is there are 2 disadvantages regarding buying a insurance policy fund over an ETF on a trading platform:

1 - You can't pay the tax out of non-fund money. (Regards Zurich anyway, I assume it's the same with other Insurance companies?

2 - The actual method used to calculate the DD tax by adding the previous tax back to the fund value results in a higher overall tax bill compared with the method used on a trading platform ETF.

Well if the link below is only in relation to an insurance policy fund you'd think they'd have said that in the article, the way that article is is portrayed it makes it sound as though their example calculation is applicable to retail ETF investors.

Calculating Deemed Disposal on a long term investment - Bluewater Financial Planning

Deemed disposal is a pain for many investors. Having to pay tax on an investment that they have not cashed in. The issue is the whole “gross roll up” system where dividends and profits are reinvested tax free with no income to the Revenue. If the Irish Revenue allowed some alternatives where...

www.bluewaterfp.ie

 

[joe sod]

Hopefully it will be changed summer time when review is complete. The interim report said that the tax is too complex for most investors to work out and many people may inadvertently not pay the tax correctly. The central bank said in its submission that too much money is sitting on deposit earning little because people are frightened away from investing in funds like ETFS and we are way out of line with our EU compatriots

 

[jpd]

In my experience the Revenue do not know how to calculate the Exit Tax correctly on Deemed Disposals for the 16th, 24th etc anniversary

I had an ETF I purchased in 2005 for € 10,000
In 2013, on the 8th anniversary, the value of the ETF had risen to € 12,000 so on my "gain" of € 2,000 I paid 36% x € 2,000 = € 720. I did not sell any shares in the ETF but paid this from other funds

In 2021, on the 16th anniversary, the ETF value had risen to € 17,000. The "gain" was now € 7,000 and the Exit tax was now 41% x € 7,000 =€ 2,870 less the tax I paid in 2013, so € 2,870 - € 720 = € 2,150

As I filed using a Form 11, I asked Revenue where I could enter the tax paid in 2013 so that the correct tax was paid. There was no box to enter this as far as I could see.

The answer I got back, in writing, was that the Exit tax was calculated on the gain since 2013. When I queried this, I was categorically told, in writing, that this was the case.

So I filed a gain of € 5,000 and paid 41% x € 5,000 = € 2,050

I am pretty sure that this is wrong, but ...

 

[Corola]

So you only paid 36% on the 2005-2013 gain, even though it subsequently rose to 41%?

In this case you've benefitted because the tax rate was rising, but if the tax rate were to fall in the future (more likely) using this method you would be penalised if you had already paid 41% on a deemed disposal.

 

[jpd]

Don't worry, if the rate falls, I will definitely be challenging the Revenue's calculation. In the meantime, I'm happy to leave it as it is

 

[Corola]

2 - The actual method used to calculate the DD tax by adding the previous tax back to the fund value results in a higher overall tax bill compared with the method used on a trading platform ETF.

It's not the case that adding the tax back results in a higher overall tax bill. It's just that the example in the link only works for ETFs under unrealistic circumstances. If you sell shares of the ETF on exactly the Year 8 and Year 16 anniversaries, for exactly the same amount as you need to pay in tax, then you will have the same result.

But the realistic scenario is:
- in Year 8 the deemed disposal anniversary comes due at a price of €X per share
- your tax return isn't due until the following Year 9 when the price has moved to €Y per share
- you sell a number of shares Z at price €Y to raise enough money for the deemed disposal tax
- which creates an actual disposal (on top of the deemed disposal) of those shares that has another amount of tax due in Year 10
- which leaves you with fewer shares than you started with
- and possibly some residual cash if (Y x Z) doesn't exactly match the tax due

The main difference is with ETFs the tax is never paid directly from the fund, it's always paid separately by you. Either with cash you already had on the side, or cash you received by selling shares of the ETF.

 

[Racrus]

But the realistic scenario is:
- in Year 8 the deemed disposal anniversary comes due at a price of €X per share
- your tax return isn't due until the following Year 9 when the price has moved to €Y per share
- you sell a number of shares Z at price €Y to raise enough money for the deemed disposal tax
- which creates an actual disposal (on top of the deemed disposal) of those shares that has another amount of tax due
- which leaves you with fewer shares than you started with
- and possibly some residual cash if (Y x Z) doesn't exactly match the tax due

The main difference is with ETFs the tax is never paid directly from the fund, it's always paid separately by you. Either with cash you already had on the side, or cash you received by selling shares of the ETF.

That's a very interesting scenario you describe in your realistic description. I hadn't thought of that, almost seems funny, the way if one was to sell some of the ETF shares to raise money to pay the Deemed Disposal tax it creates an actual tax event in itself. Then realise you need to raise more money to pay that tax, lol. So you'd want to calculate exactly how many shares of the ETF to sell in order to pay both the original Deemed Disposal and the subsequent Actual Exit Tax of those few shares. Such hassle, that might actually take a bit of calculating to sell the exact amount of shares!

I think the easier option, if you can afford to obviously, would be to just pay the Deemed Disposal tax from your own cash and avoid that extra complexity.

 

[Corola]

I think the easier option, if you can afford to obviously, would be to just pay the Deemed Disposal tax from your own cash and avoid that extra complexity.

Yes it's much easier to leave the fund intact. But as long as you consider each tranche of shares you've sold as a separate calculation it's not insurmountable.

 

[PoundMan]

Is there any realistic chance of the tax situation in Ireland becoming less complex anytime soon? At times it is so frustrating and makes me miss living in Northern Ireland where I could invest directly with Vanguard for low fees. It feels like the people of Ireland are forced into investing in property & pension AVC's as the only way of building wealth. I was thinking about investing in Vanguard V60A ETF through Trade Republic's monthly savings plan, but the complicated tax system has totally put me off.

 

[franc82]

Yes it's much easier to leave the fund intact. But as long as you consider each tranche of shares you've sold as a separate calculation it's not insurmountable.

Exactly, that's the point that I made here recently but people argued that money is fungible (it isn't). The other advantage of paying your due tax separately is to maximize compounding. It is one of the many reasons why I wouldn't recommend investing in actively managed funds as they deduct money from the fund to pay for the tax.

 

[jpd]

I agree Poundman, but this was a sop to the life assurance investment companies when Revenue bought in the deemed disposal rule - by deliberately making it complicated, they assured that a lot of investors would give up DIY and instead use the life assurance investment products along with the fees associated

There was no concern about treating investors fairly - the Irish life assurance investment industry has more clout than any number of individual investors, unfortunately

 

[Corola]

The industry agrees that it's too complex, there's a post here with the responses from the public consulation.

Funds Sector 2030: A Framework for Open, Resilient & Developing Markets

Progress Update: Responses to the Public Consultation December 2023 193 submissions - 140 of them from individuals.

www.askaboutmoney.com

 

[joe sod]

Is there any realistic chance of the tax situation in Ireland becoming less complex anytime soon? At times it is so frustrating and makes me miss living in Northern Ireland where I could invest directly with Vanguard for low fees. It feels like the people of Ireland are forced into investing in property & pension AVC's as the only way of building wealth. I was thinking about investing in Vanguard V60A ETF through Trade Republic's monthly savings plan, but the complicated tax system has totally put me off.

I know alot of people like to give out about "brexit Britain " but I the areas of personal investment and personal wealth generation it is way ahead of us. 12000 pounds per year CGT tax free and tax free ISAs, we can only dream of such products. So if you are a worker looking to rent a reasonably priced apartment and build up savings, the UK or NI is the place to be. However if you are unemployed and have no intention of working, welfare Ireland is the place to be.

 

[Corola]

12000 pounds per year CGT tax free

That's being cut to £3,000 this year. It's already cut to £6,000 since last year.

That's mostly irrelevant for everyday investors due to ISAs though.

 

[franc82]

Is there any realistic chance of the tax situation in Ireland becoming less complex anytime soon? At times it is so frustrating and makes me miss living in Northern Ireland where I could invest directly with Vanguard for low fees. It feels like the people of Ireland are forced into investing in property & pension AVC's as the only way of building wealth. I was thinking about investing in Vanguard V60A ETF through Trade Republic's monthly savings plan, but the complicated tax system has totally put me off.

From what I see and hear, there isn't any political appetite to change the tax system for ETF investors. The tax is complicated on purpose in order to deter people who could be tempted to look elsewhere for potential gains.

The Irish system is geared towards property investing and pensions. Also, the lack of competition between investment platforms makes it easy for the government to penalize investors. Although, the Finance Minister has promised a review of this tax system until the summer, I don't expect any change if I am being honest. I also don't think a change of government will fix that issue too. Remember that politics is done by the rich not the poor. You just have to look at the speed at which banks are willing to pass on interest rates to their customers.

So, my advice would be just to get on with it and invest straight away in the index you will feel comfortable, just make sure it is Irish domiciled. If you set up a monthly saving plan in it, you probably won't have to do anything tax wise until the 8th year or when you decide the cash in.

 

[GSheehy]

but this was a sop to the life assurance investment companies when Revenue bought in the deemed disposal rule - by deliberately making it complicated, they assured that a lot of investors would give up DIY and instead use the life assurance investment products along with the fees associated

There was no concern about treating investors fairly - the Irish life assurance investment industry has more clout than any number of individual investors, unfortunately

Maybe I'm misinterpreting what you're saying, but in 2006 there was €4,891,694,000 transacted in Single Premium Life Assurance business (Premium Income). In 2020 (latest year that figures are available) that figure was €1,431,793,000. I doubt they lobbied for that or the 1% Life Assurance Levy in 2009.

 

[joe sod]

So 2006 was the year the "deemed disposal " regime was introduced, so there has been am almost 4 fold reduction in assets in invested in these life products since then.
Also the perverseness of the Irish taxation regime, over 1 trillion euros, that's a thousand billion euros now invested in irish domiciled etfs, that's 68% of the total eu investment in ETFs. The central bank actually drew attention to this in their submission
To put that into context as of 2019 (most recent year I could get a figure for) only 24 billion euros were invested in ETFS by both irish retail and institutional investors. So irish people are effectively denied this global asset class.

 

[jpd]

2006 was the year before The Crash so people were flush with money

Exit tax only applies to Irish resident taxpayers - the rest of the world pay tax in their country of residence

There are no votes in reducing Exit tax or simplifying the Exit tax regime - in fact, you would probably lose votes by catering to the "rich"

 

[joe sod]

2006 was the year before The Crash so people were flush with money

Exit tax only applies to Irish resident taxpayers - the rest of the world pay tax in their country of residence

There is alot more money sitting on deposit today doing nothing than there was in 2006, people arguably have alot more cash today, so that does not explain anything.

I am well aware that irish people only pay exit tax, the issue is that ireland has long been viewed as a tax haven by our European colleagues, this is another example of it with regard to taxation of etfs for fund providers. But by inordinately penalising irish people who also want to buy these very ETFS the state is drawing attention to this discrepancy and to ireland as a tax haven. Surely they should be more cognisant of that than the relatively small tax take they are getting from Irish people who own them