Throughout the years, I’ve let my investments keep growing, experiencing both gains and losses. I haven’t cashed out on any of them yet. It is my understanding that the investment company is responsible for paying the due amount to the Revenue upon cashing these investments in. However, I’m unsure if I need to report my investment sum to Revenue during my annual taxation.
The taxation on investment funds is currently undergoing an examination by a team, spearheaded by the Minister for Finance Michael McGrath. The current taxing system has been a matter of debate for many in the industry, arguing that it is detrimental to investors and shrinks their returns. The Minister is considering alterations but his staff are cautious of how any radical modifications might impact the tax revenue received from investment funds by the exchequer.
Currently, we function under a method known as the gross roll-up regime, brought into action in 2001 by the very same investment industry that is now challenging it. Before this system, Ireland’s investment fund industry operated on a “net basis”, where Revenue claimed any outstanding taxes on fund profits annually.
The gross roll-up regime is based on the principle that gains would remain untaxed within the fund year on year, with the investor only settling taxes upon drawing their investment or upon maturity. As explained by Revenue, “an Irish fund’s profits and gains are tax-exempt until a chargeable event comes to pass”.
However, the definition of a chargeable event can evolve over time. Recognising that the current system was exploited by some affluent investors to avoid taxes, Revenue advocated for a change. This lead to the introduction of the “deemed disposal” concept to the new framework.
The “deemed disposal”, instates that, upon reaching the eighth anniversary of the investment and every subsequent eighth anniversary, tax must be paid on the any gains made by an individual’s investments. This is managed and paid to Revenue by the fund manager under the “exit tax” if your investment has achieved a profit.
The Irish Revenue implements an exit tax on local funds, creating a conclusive obligation for unit holders who are individuals, obviating any additional duties related to that tax, which presently stands at 41 per cent. Notably, this percentage is applicable irrespective of whether income tax is paid at the superior or regular rate.
The rationale behind the established rate is linked to the fact that Revenue refrains from interfering with the funds for an eight-year duration to optimise investor profits, subsequently resulting in exchequer expenses within this period. Thus, by the fund accounting for the exit tax, it, in turn, finalises your obligations, negating any future concerns.
Nevertheless, unlike capital gains, any profits from one investment fund cannot duly be offset by losses from another, in order to only tax the net profit. This causes some disputes within the industry. The moment at which you recover your investment is the instance wherein the Revenue will establish if any tax refund is due, in the event that the fund’s performance has waned and your profit is lesser than the taxable amount.
Certain complexities arise as not all funds undergo tax at the origin, making it your responsibility. These funds typically include those offshore, wherein it becomes vital to account for tax on the basis of the same deemed disposal. In such a scenario, this necessitates management through your relevant year’s tax return.
Even domestic funds can evoke similar implications, in which your fund manager would need to relay the necessary information to Revenue to aid you in accurately completing your tax return upon either the investment’s maturity or on its eighth anniversary. Besides that, your return filing period corresponds with your investment withdrawal, facilitating Revenue to reconcile the record with the tax previously paid on the fund during these years.
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