What is the rationale for Revenue's tax treatment of ETFs?

My solution last year was to simply buy BRK.B (and some MKL) directly via E-Trade.
Given that US domiciled ETFs don't seem to be an option for me I may just keep buying BRK.B as a sort of proxy (primarily US) market tracker.
I am aware of certain risks that apply (e.g. less diversification than other options, exchange rates etc.) but am comfortable with them for this medium/long term investment.
I don't have the time, energy, interest or knowledge (does anybody really?!) to be picking individual shares or building my own tracker basket of shares.
As ever, this is not investment advice and what's right for any individual depends on their specific needs and circumstances etc.

P.S. I remember years ago (probably early to mid 90s) being able to buy QQQ on Datek no problem but maybe that predated more recent regulation or something?
 
ClubMan said:
My solution last year was to simply buy BRK.B (and some MKL) directly via E-Trade.
Given that US domiciled ETFs don't seem to be an option for me I may just keep buying BRK.B as a sort of proxy (primarily US) market tracker.
I am aware of certain risks that apply (e.g. less diversification than other options, exchange rates etc.) but am comfortable with them for this medium/long term investment.
I don't have the time, energy, interest or knowledge (does anybody really?!) to be picking individual shares or building my own tracker basket of shares.
As ever, this is not investment advice and what's right for any individual depends on their specific needs and circumstances etc.

P.S. I remember years ago (probably early to mid 90s) being able to buy QQQ on Datek no problem but maybe that predated more recent regulation or something?
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Thanks for your comments. I'd have a couple of concerns about Berkshire. The great Mr Buffet is 90 years old and cannot live forever. I would be concerned that when he eventually dies, it will trigger a major sell-off of BRK. The sell-off might not be based on the fundamentals of the stock, but more on the popular perception (whether or not it's accurate or warranted) that Warren Buffett IS BRK and that without him it just won't do as well. (As I type I realise that this may be veering into speculation about a specific stock so I'd better stop there.) I'd also be concerned that currency risk is simply adding another layer of risk.

As you say, each person must make their own choices that suit themselves. I'm still thinking that I might as well suck it up, pay the Exit Tax, and invest in big index-trackers. But very useful to hear what others are doing and why.
 
Yes, Buffett and Munger's ages are another potential risk alright. But, while BH are closely identified with them (and Buffett in particular), they're not actually the only people managing things at this stage.

Another relevant factor here is that I happened to have some cash (net/after tax proceeds of company stock incentive schemes over the years) lying idle in E-Trade for a while so the opportunity cost of doing nothing until last year was significant. So doing anything with it was probably better than continuing to do nothing! :D
 
ClubMan said:
Another relevant factor here is that I happened to have some cash (net/after tax proceeds of company stock incentive schemes over the years) lying idle in E-Trade for a while so the opportunity cost of doing nothing until last year was significant. So doing anything with it was probably better than continuing to do nothing! :D
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A very good point. I've been procrastinating about this and (sporadically) researching to see if I could come up with a "perfect" solution that would save me 8% of a gain - the difference between 41% Exit Tax and 33% CGT. Meanwhile, those who simply jumped into an Exit Tax vehicle are well ahead of me now. How many angels can dance on the head of a pin?
 
Dave Vanian said:
A very good point. I've been procrastinating about this and (sporadically) researching to see if I could come up with a "perfect" solution that would save me 8% of a gain - the difference between 41% Exit Tax and 33% CGT. Meanwhile, those who simply jumped into an Exit Tax vehicle are well ahead of me now. How many angels can dance on the head of a pin?
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My cash was lying idle for a few years so that was an opportunity lost through personal circumstances, inertia, lack of knowledge and nervousness at investing directly - all of which I found difficult to overcome until last year. But there's nothing that I can do about the "lost" time so no point in thinking about it now. :confused:
 
SBarrett said:
Another issue with deemed disposal is that if you cash in after the fist deemed disposal is deducted or have to pay again at year 16, you have to add the amount paid in deemed disposal at year 8 to the fund value, calculate the tax due and then offset the deemed disposal already paid. You are paying tax on an amount that has already been deducted.

I actually wrote to the revenue a few weeks ago about this as it is time that Ireland got up to date with how the investment world works. I understand the rationale behind deemed disposal and gross roll up but there are plenty of other options that operate in the same way as dividend paying US domiciled ETFs but are still subject to 41% tax but the US version isn't? It doesn't make sense.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
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Have you gotten confirmation from Revenue that they will allow this? Their docs and previous mails to many people have basically said that each investment in an ETF, even the same tracker, is treated as a separate investment. As in month1, month2, month3 are all separate investment calculations like they were in different stocks, with no loss relief between then, except when selling of course, as then they are subject to FIFO rules.
So if you are selling some shares to pay for the deemed disposal even on the ETF, that is again a separate transaction.

Maybe they will finally clarify things when they update 27-01a-02 as their correspondence sometimes contradicts their own documents. I have one telling me the cost of buying shares, aka cost of acquisition, isn't an allowable deduction.
 
I still don't feel like I have ever heard a clear explanation of the rationale for the tax treatment of ETFs or the deemed disposal rule in general. It not only doesn't make sense to me, but seems like it might cause undesirable behaviour. Pushing people to invest in US-based ETFs is one problem, but there are others. A well diversified ETF seems like a much safer place for most people to put their savings than trying to pick individual stocks, but I imagine that the tax treatment causes quite a few people to select the latter. I also wonder whether there would be less of a housing crisis if all forms of investment - houses, ETFs, stocks, etc. - all had the same tax treatment.
 
basilbrush said:
I still don't feel like I have ever heard a clear explanation of the rationale for the tax treatment of ETFs or the deemed disposal rule in general. It not only doesn't make sense to me, but seems like it might cause undesirable behaviour. Pushing people to invest in US-based ETFs is one problem, but there are others. A well diversified ETF seems like a much safer place for most people to put their savings than trying to pick individual stocks, but I imagine that the tax treatment causes quite a few people to select the latter. I also wonder whether there would be less of a housing crisis if all forms of investment - houses, ETFs, stocks, etc. - all had the same tax treatment.
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I think the rationale is sound - allowing capital increases and income to go untaxed in somebodies lifetime (and possibly beyond in the case of capital gains being written off at death) while most of society pay monthly on their income from labour is not fair.

However I completely agree that the way it has been implemented causes all those negative effects you mention, and perversely has made things even more unfair for the average person who is now more likely to just leave their capital in a bank account where it slowly depreciates.

Personally I'd be happy for Deemed Disposal to stay in-place and indeed be broadened out to more asset classes (the difference in treatment between ETFs and non-EU ETFs or individual company shares makes little sense), if something like the UK's ISA was introduced. So the only people having to worry about DD would be those who have accountants to look after their tax anyway and so it doesn't make a jot of difference to them, other than they now pay tax on capital growth/income in a more fair way.
 
I read that it's to protect the life and pensions brokers.
To stop people dumping unit fund products, switching to passive etf model.

Do you think its fair that people pay 41% income tax, regardless of tax band they are in?
 
fistophobia said:
Do you think its fair that people pay 41% income tax, regardless of tax band they are in?
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No. But I think it's even less fair that some people pay 33% (CGT) (or 0% if they pass on through a will) when the tax band they're in could be 55%.
 
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In my opinion capital gains and income are two different things. It makes sense to me that in other situations they are taxed differently, but deemed disposal seems to mix the two. Is it not possible to tax the dividends that the ETF receives as income (even when they are accumulated, just like when you use a dividend reinvestment plan for a normal individual share), and then charge capital gains tax when the ETF is sold? You say that it is not fair for people with ETFs to not pay tax on capital gains until it is sold, but many people are earning capital gains on houses without paying capital gains tax until it is sold (or at all if it is their primary residence). Should deemed disposal be applied to houses as well?

fistophobia: I can accept that there is a difference between earned and unearned income, which is presumably why DIRT is also a flat rate rather than being related to one's tax band.
 
basilbrush said:
In my opinion capital gains and income are two different things. It makes sense to me that in other situations they are taxed differently, but deemed disposal seems to mix the two. Is it not possible to tax the dividends that the ETF receives as income (even when they are accumulated, just like when you use a dividend reinvestment plan for a normal individual share),
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Dividend income is already tax'd like income. I'm not 100% but pretty sure USC and PRSI are due on it. I've never stopped to check the difference when adding to form 11.
 
Don't get me started on 'unearned' income.
The capital accumulated was earned, saved and invested.
Some people in Revenue seem to have a problem with that concept.

Dividend income from ucits etff is taxed at 41%
 
Zenith33: Isn't the capital gain reset to zero when the asset is inherited because you already pay CAT? Even if you don't agree with that, it seems like your belief in that being unfair is better addressed with changes to inheritance tax rather than something as inelegant as deemed disposal.

ryaner: Perhaps I misunderstand you, but my point was that I agree with treating dividends as a different type of income from capital gains, as is done for normal individual shares as you say (and US ETFs). I think that accumulating ETF dividends should be treated the same way, but I believe currently they are not, and you instead pay the tax on them through the deemed disposal rule, which mixes them with capital gains.
 
An accumulating ETF shouldn't have dividends? Non-accumulating ones that issue are taxed at the flat 41% as fistophobia mentioned above.

One proposal I've seen would be that distributing ETFs would be treated under CGT rules, since Revenue would get their cut from this regularly, and then simplify the whole deemed disposal mess that Revenue themselves can't answer simple questions on, and major providers of funds also do calculations that seem to contradict with the Revenue guidelines for it.
I know personally I'd be fine if they just simplified the whole thing, ditching deemed disposal and said that all money in, no matter the source, counted as income. Sure I'd pay more tax, but overall the whole thing would just be simpler and likely fairer for society in general.
 
Ah, apologies for being unclear. The accumulating ETF will still earn dividends from the shares that it holds, but they are reinvested rather than distributed (just like when you use a DRIP dividend reinvestment plan for shares in an individual company). I would like for those dividends to be treated like distributed dividends (as they are with a DRIP), and taxed each year as income, rather than being mixed with capital gains when taxed using deemed disposal.

I agree that my biggest objection is just that it makes things so complicated. Many people in Ireland, even those adventurous enough to consider something like an ETF, feel compelled to use investment funds rather than ETFs so that the deemed disposal mess will be handled for them, in return for far higher fees. As fistophobia said, it protects these funds and their brokers, but I would like to hope that there isn't quite that level of cronyism/corruption in the government.
 
(A close second in my list of objections being that it doesn't make sense to me to apply the deemed disposal rule to certain products like investment funds and ETFs but not to all other types of assets and investments.)
 
basilbrush said:
Zenith33: Isn't the capital gain reset to zero when the asset is inherited because you already pay CAT? Even if you don't agree with that, it seems like your belief in that being unfair is better addressed with changes to inheritance tax rather than something as inelegant as deemed disposal.
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If I invest €50k in my education and get a better job for it I pay income tax at say 55% every month on that extra income all my life, and then any savings I have left over my children pay CAT on. If I invest €50k in the stock market I will pay no tax on it in my lifetime and my children will pay CAT on it when they inherit it. So labour is being taxed much more onerously than capital. Doing away with 0% CGT at inheritance would help, but it doesn't solve the problem that labour is being taxed every week/month while capital gains are not - DD goes some way to resolving both.


basilbrush said:
You say that it is not fair for people with ETFs to not pay tax on capital gains until it is sold, but many people are earning capital gains on houses without paying capital gains tax until it is sold (or at all if it is their primary residence). Should deemed disposal be applied to houses as well?
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To be clear I don't think DD as it has been implemented is a good thing on many fronts, I'm just saying that the concept of taxing capital on a more regular basis is. So yes I think capital in the form of property should be taxed on a more regular basis, PPR should be excluded imo. Wealth taxes that include property are widely accepted as an appropriate and necessary tax by most economists, (understandable) political will is simply lacking to implement them, yet. They exist in other countries.
 
An interesting analogy. Wouldn't the income that you earned from your investment in education be closer to dividends, though? It feels like the growth in your earning ability over your life, due to your increasing experience with age, is more similar to capital appreciation. Dividends are taxed when received, and you do not pay capital gains tax on the increase in your earning ability, so it seems similar, except that you are not able to directly pass your earning ability to your children.

Doesn't excluding one's primary residence disadvantage those who rent, at least during this long period of rapid property value appreciation?
 
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basilbrush said:
Doesn't excluding one's primary residence disadvantage those who rent, at least during this long period of rapid property value appreciation?
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Possibly, but perfect being the enemy of the good, I think getting a wealth tax on all investment properties would be a huge step forward.

Wealth/CG tax on your PPR could have a very negative effect where people are forced from their homes to be able to afford the tax, or if you roll the tax up then your children have to pay it and have little hope of ever inheriting the family home. Some would argue that’s OK too, but I imagine the pushback would be fierce and probably prevent the whole thing getting through.
 
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