Credit Union savers to face large tax bills?

Why would anyone want to deposit in a non-DIRT account when they could face income tax at their marginal rate?

Revenue are to insist credit unions return the names of people who have been paid dividends (interest) on their non DIRT accounts. The current rate is 20%. Once paid, the taxpayer has no further liability. But where a person has a non-taxable account, interest earned is subject to their marginal tax rate which is between 0% and 41% depending on their income.

In 2000, in the run up to a general election, Bertie Ahern forced Charlie McCreevy to shelve his plans to tax credit union dividend payments – he did so as credit union activists threatened to run candidates in the election. The solution cobbled together permitted credit unions to continue offering non-DIRT accounts. Political captivity created a new Irish phenomena of the “credit union mattress” in which new Tiger wealth would be subsequently squirreled away from the prying eyes of the taxman.

Today it is reckoned that billions sit un-taxed in these accounts. Most of this money is not held by the over 65’s and certainly not by the under 18’s.

Of course the ILCU is now quite exercised saying credit unions will not be havens for tax evasion – well it could hardly say anything else could it? But its statement comes with a typical ILCU rider – it says that retrospective application of Irish Revenue demand for names back to 2005 wouldn’t be fair on the elderly saver and would lead to an administration nightmare.

Such a position could be seen as unwittingly providing cover for those who used credit unions to evade the taxman. Many consider it to be a regressive and poorly thought through position and one which the ILCU should immediately stand down. Whatever the outcome of this regressive stance, public expectation is that financial institutions do not provide safe havens for tax evasion. This is all the more acute as credit unions enjoy two significant state fiscal subsidies – credit union profits are tax free and DIRT free savers accounts.

As the cosy comfort of the “credit union mattress” is removed, many may well shift savings out their credit unions. Many more may be very angry indeed if their credit union did not explain the taxation implications of non-DIRT accounts.

Kaplan

Kaplan

I agree with what you say about tax evasion. I would comment however on these assertions:

This is all the more acute as credit unions enjoy two significant state fiscal subsidies – credit union profits are tax free and DIRT free savers accounts.

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Firstly, CUs do not make profits, rather surpluses which are either returned to members as dividend/deposit interest/loan interest rebates or retained in reserves. Secondly, other financial institutions can offer DIRT free deposits account.

Any CU which has not advised its members as to their tax responsibilities if they hold non DIRT accounts have acted irresponsibly, in my opinion.

Slim

Slim

The use of the language of "surplus" is a credit unionist deflection. Credit unions generate a profit. What they do with it, is pay a dividend and retain reserves. Whichever way you look at it, CU tax status is a fiscal subsidy deliberately afforded by Government. Australian credit unions lost their tax free status and it has been under sustained attack in the US by the banking fraternity etc. Thus tax free status is a discretionary status afforded by Government. It is not an automatic CU entitlement.

Whilst other deposit takers may offer a limited form of non-dirt time deposits but not on demand type accounts such as the CU share account.

Kaplan

Kaplan

Surely you would concede that there is a significant structural difference between CUs and banks, nature of shareholding, structure of management(boards). co-operative nature of the movement etc. They do not simply make profits and escape tax. They are a co-operative movement, unique in financial services. Directors are, with exception of the Treasurer, completely un-remunerated, unlike banks. As deposit interest is booked as an expense, I'm sure CUs could switch quite quickly from share dividend to deposit payment to return surpluses to members, and avoid most profit tax.

Whilst other deposit takers may offer a limited form of non-dirt time deposits but not on demand type accounts such as the CU share account.

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Whilst many CU members have opted to be responsible for their own tax issues, the Fixed Term DIRT free accounts are regulated same as in the banks. They are not 'on demand' share accounts. Same T&Cs.

slim

Slim

There are many forms of co-operative financial firms that are taxed. The taxation status of credit union is rooted in their societal purpose rather than ownership structure. This societal purpose is the provision of (a) a safe place to save and (b) personal credit to an underserved population. The key question arising is, do credit unions continue to fulfil this purpose to the extent that tax-free status should continue?

Today this societal purpose largely irrelevant save for those who are socially excluded which amounts to less than 200,000 of the adult population. Millions of people have long had access to basic banking services (savings, loans and transactional accounts).

Credit unions however only provide for savings and loans. They do not provide for transactional accounts nor do they provide 24/7 access to cash accounts or participate in the national money transmission system.

More recently credit unionists argue they provide “social finance”. But their argument is based on defining “social finance” as lending to the individual. They claim this amounts to €700m or about 10% of total credit union lending. This figure has never been independently verified and is likely to be a guesstimate. The figure, provided by the ILCU, seems quite odd as MABS says it has c18,000 clients with about €68m in loans out.

Should tax free status be afforded on the basis that only 10% of the credit union loan book is “social finance” by the ILCU definition? Should the status continue if less than 5% of credit union members are social finance borrowers by ILCU definition?

The case for tax free status collapses altogether with employer credit unions, most of which are either state or semi-state employee based. This population have secure pensionable employment and enjoy reasonable levels of income. There is no argument that appears to support their continuing tax free status.

Still again hundreds of credit unions lend less than 40% of savings with many as low as 20%. Their purpose is more the provision of savings accounts and some over the counter bill payment services – of course many open only a few evenings a week which calls into question service convenience and availability. Should tax free status be afforded these credit unions simply because they provide non-unique local services?

The largest and most successful credit unions are located in what have become solidly middle class common bond areas. It is remarkable how few credit unions exist within socially deprived areas. It is also quite remarkable that many credit unions have created “social fund reserves” that remain unused.

Many would argue the Tiger economy has solved for the purpose of credit unions. They may be right but only if the purpose remains rooted in credit unionists ill-conceived arguments. If middle class credit unionists do not define and deliver on a societal purpose for a modern Ireland then tax free status may become a thing of no value at all.

Kaplan