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JUNE CLIENT NEWSLETTER 2011

DONAL CASHMAN, PLUNKETT AWARD WINNER 2011

Donal Cashman, the founding father in 1975 of the Irish Farm Accounts Co-Operative Society (IFAC Accountants) was awarded the 2011 Plunkett Award by ICOS in recognition of his unflinching belief in and commitment to the ideals of the Co- Operative Movement.

In pursuit of furthering the interests of Irish farming families and the Co-Operative Movement, amongst the myriad of national and international offices and positions he has held are:

Grassland Association President (1978)
IFA President (1980-1984)
Board Member Central Bank of Ireland (1980-1983)
European Union Economic & Social Committee (1982-1988)
ICOS President (2003-2005)
COGECA President (2006-2007)
National Chairman of Enable Ireland (Current)

He served on the Board of IFAC Accountants for 36 years from 1975 to 2010 being Chairman of the Board from 1975 to 2006.

2011 – YEAR OF OPPORTUNITY FOR FARM TRANSFERS

The current Government did not draw up the National Recovery Plan 2011-2014 nor did they deliver the 2011 Budget Speech. However, since taking office they have not distanced themselves from those changes signposted by the previous Government.

OF ALL THE TAXATION PROPOSALS IMPACTING THE FARMING SECTOR THE LANGUAGE USED IN THE CAPITAL TAXATION PROPOSALS CAUSES THE GREATEST APPREHENSION.

The National Recovery Plan 2011-2014 and the 2011 Budget Speech states that the structures and thresholds in the Gift, Inheritance and Capital Gains Tax systems will be reformed in 2012. In addition, it signposts that reliefs and exemptions from Capital Gains Tax, Gift Tax, Inheritance Tax and Stamp Duty will either be abolished or greatly restricted.

IF THE CHANGES SIGNPOSTED ARE TO BE INTRODUCED IN 2012, THEN 2011 REPRESENTS A BRIEF WINDOW OF OPPORTUNITY FOR THOSE FARMERS CONTEMPLATING FARM TRANSFERS IN THE SHORT TERM.

CAN YOU AVAIL OF LOWER LABOUR COST RELIEFS?

The 8.5% Employers' PRSI rate which applies where earnings of an employee do not exceed €356 per week will be halved to 4.25% with effect from 1st July 2011 until 31st December 2013. It is helpful that this will apply to existing employments and will also apply to engaging part-time staff.

This change is in addition to the current PRSI exemption from Employers PRSI where a person who has been unemployed for at least 6 months is taken on in a full-time job. This will continue to operate until the 31st of December 2011.

CASH FLOW PLANNING FOR OCTOBER 2011 TAX PAYMENTS

HIGHER OCTOBER 2011 TAX BILLS WILL HAVE A NEGATIVE IMPACT ON CASH FLOW.

In October/November next you will be required to submit your 2010 Income Tax and Capital Gains Tax Return and pay:

(A) THE BALANCE OF YOUR 2010 TAX BILL

In October/November 2010 you made a payment on account of your 2010 tax bill most probably based on 100% of your 2009 tax bill to avoid an interest penalty. In general 2009 farming profits were lower than 2010 so it is likely there may be a significant balance due, plus,

(B) A PAYMENT ON ACCOUNT OF YOUR 2011 TAX BILL.

As the 2011 tax year has not yet finished you will probably opt to pay 100% of your 2010 tax bill as a payment on account in order to avoid interest penalty.

Example

John Farmer's 2009 tax bill was €5,000 and in October/November 2010, in order to avoid an interest penalty, he made a payment of €5,000 on account of his 2010 tax bill based on 100% of his 2009 tax i.e. €5,000.

Now John's accounts have been finalised for 2010 and his tax bill based on the higher profits in 2010 is €7,500. John is now required to pay

Balance of 2010 tax bill (€7,500 - €5,000)	€2,500
(B) Payment on account of 2011 tax bill based on 100% of the 2010 tax bill of €7,500.	€7,500
Payment required	€10,000

In the example, if you are availing of Income Averaging the variation may not be as great.

Can I do anything to reduce my October tax payment?

If you are taxable at 31% (incl. PRSI & Levies) or higher you may wish to speak with your local IFAC office regarding the suitability of farming through a Limited Company to avail of the 121/2% Corporation Tax rate on trading profits.
You may be able to reduce the 2011 payment on account if:

(a) You think your 2011 tax bill will be less than your 2010 tax bill. In that situation your payment on account of the 2011 tax bill will be reduced to that figure but to avoid an interest penalty it must be 100% of what the 2011 tax bill turns out to be.

(b) If you pay your income tax bill by ongoing direct debit, your 2011 income tax payment on account could be reduced to 105% of the 2009 tax bill. This could be significant, if you are not on Income Averaging, as 2009 tax bills were relatively low. This is only a deferral or postponement of tax giving a cash flow advantage, as the balance will be payable in October/November 2012. To avail of this option to defer tax, your direct debit must be in place before September 2011 next.

DO YOU HAVE A FOREIGN DEPOSIT ACCOUNT?

The Irish tax position on interest earned on deposit accounts outside the State depends on whether the country in which the money has been deposited

(a) operates a withholding tax akin to our Deposit Interest Retention Tax (DIRT), and,

(b) If the country has a double taxation treaty with Ireland.

Ireland has Double Taxation Treaties with many countries and most of the Double Taxation Agreements provide that deposit interest income is only taxable in the country in which the individual is resident. This is true of deposits in United Kingdom banks.

You should check with your foreign Financial Institution to establish whether interest on your deposit account with them can be paid without foreign withholding tax being deducted at source.

If the foreign withholding tax is unavoidable and nonrefundable and Ireland has a Double Taxation Treaty with that country and it has a right to tax deposit interest, you will receive credit for the withholding tax suffered against the Irish income tax payable on that interest. However, where the foreign withholding tax credit exceeds the Irish tax liability on that income the difference is not refundable by the Irish Revenue.

If Ireland has no Double Taxation Agreement with the foreign country?

If no Double Taxation Agreement exists, and the withholding tax is non-refundable, a reduction in the deposit interest taxable in Ireland equal to the withholding tax will be allowed in calculating the tax but not as a credit against the tax bill.

What rate of tax applies in Ireland on my foreign deposit interest?

DEPOSITS IN OTHER EU MEMBER STATES

The rate of tax varies depending on the location of the Financial Institution. If the Financial Institution is located in another EU country, tax on the gross interest earned is due at the same rate as tax on Irish deposit interest income i.e. 25%. In order to avail of this tax treatment an accurate Tax Return must be filed and tax paid on time.

DEPOSITS IN NON-EU MEMBER STATES

If the interest is earned from a financial institution outside the EU, Irish tax is due at the marginal (highest) rate of tax including PRSI and the Universal Social Charge.

Can there be a second foreign withholding tax?

Yes, there can be a second withholding tax under the EU Savings Directive. The rate of withholding tax is currently 20% but will increase to 35% in July 2011.

Most EU Member States exchange information regarding the interest payments made by banks in other jurisdictions. However, Austria, Belgium and Luxembourg apply withholding tax instead of exchanging information.

By providing some basic information to your local Irish tax district a "Certificate of non-deduction of withholding tax" will be issued. This certificate should be forwarded to the foreign financial institution and withholding tax should not then be deducted.

If I die, will my successors have problems getting the money?

If you have a deposit in a foreign bank you should check with the Financial Institution as to how your successors can access the cash after your death as follows;

Will an Irish Grant of Probate be sufficient for the banking institution to release the funds to the Personal Representative?, and,
Is the financial institution required to withhold any capital tax/duties?

AM I PAYING TOO MUCH BANK INTEREST?

In June 2010 we introduced the IFAC Accountants Interest Rate Evaluator. The purpose of the interest rate evaluator is to give you an indication as to the costings used by banks in determining interest rates, highlight the fact that rates can be negotiated and give an indicator as to target interest rates. Some farmers are securing rates below the target rates because of their own circumstances, their very favourable credit rating and their ability to negotiate. Unfortunately the vast majority of farmers are still suffering rates in excess of the target rates.

EVALUATING THE TRENDS

Bank Overdraft

Since February 2010 the target interest rate has increased from 5% to 9% i.e. a dramatic 80% increase. This is due to the Euro Inter Bank Offered Rate (EURIBOR) increasing from 0.7% to 1.44% with the minimum bank margin indicator rate increasing from 4% in February 2010 to 7% in June 2011.

Term Loan

Since 2010 the target interest rate has increased from 31/2% to 5% i.e. a 43% increase. The increase is due to the Euro Inter Bank Offered Rate (EURIBOR) increasing from 0.7% to 1.44% and the minimum bank margin indicator rate increasing from 21/2% to 3%.

The above graphs also indicate clearly the difference between the cost of bank overdraft financing compared with term loan i.e. 5% for term loan compared with 9% for overdrafts.

Bank overdraft money is expensive money and borrowers should look at credit line facilities and smarter use of flexible term loan facilities.

How do I set my target interest rate?

This evaluator gives you an indication of the target bank overdraft and term loan rate you can negotiate with your bank. Some farmers are securing rates below the target rates because of their own circumstances, high credit rating and their ability to negotiate.

STEP 1

Find out the current 3 month Euribor rate (Euro Inter Bank Offered Rate) i.e. the rate at which banks borrow money.
www.finfacts.ie (1.443% on June 7th 2011)

STEP 2

To the EURIBOR Rate add the current bank profit margin of 3% to 4.5% for Term Loans, and 7% to 8.5% for Overdrafts. Note the higher margin on overdrafts - it is expensive money. Your aim is to negotiate a bank margin closer to the lower figures of 3% for Term Loans and 7% for Overdrafts plus the EURIBOR Rate. (See IFAC Interest Rate Evaluator). Now you are in a position to evaluate and set your target interest rate in advance of the meeting with your Bank Manager.

Some farmers are paying the banks in excess of the target rate of 9% on overdrafts which reflects either badly managed overdrafts, lack of ongoing communication with the banks or simply accepting the rate offered and not negotiating. If you fall into one of these categories - act now to manage your finances better. The IFAC Accountants/Irish Farmers Journal publication "Financial Planning" sets out how you can get to grips with your finances (copy available free of charge on request from your local IFAC office).

INCOME TAX

CHANGES TO THE UNIVERSAL SOCIAL CHARGE

The Universal Social Charge was introduced to replace income levies and health levies. Two welcome changes were made to the original proposals following strong IFA representations. Normal capital allowances of the farming trade and income tax losses carried forward from previous years will be allowed as a deduction from income before the Universal Social Charge is levied.

An unwelcome change to the original proposals is that for farmers and self-employed with income in excess of €100,000 the levy has been increased by 3% on the excess.

HOME ENERGY EFFICIENCY TAX INCENTIVE

To encourage individuals to make their homes more energy efficient a new tax relief has been introduced on expenditure up to €10,000 at the 20% standard rate of income tax. A credit will be given in the tax year following the year of expenditure e.g. for expenditure in 2011 a tax credit will be given in 2012.

STAMP DUTY CONSOLIDATION RELIEF ENDING THIS MONTH

The Stamp Duty Relief for land sales and purchases resulting in consolidation of a farmers holding in the period commencing July 1st 2007 to June 30th 2011 has not been renewed.

NEW FILING DEADLINE FOR GIFTS & INHERITANCES

The gift & inheritance tax year will now be year ending 31st August. The new filing and payment date for gifts and inheritances taken in any year to 31st August is one month after the year end i.e. 30th September.

Click here for December 2010