Any mention of tax returns and tax compliance naturally brings to mind the familiar rules and requirements relating to income tax and corporation tax compliance. Understandably, the compliance requirements around these tax heads are well known, and practitioners are extremely well versed in these matters, with most able to reel off filing dates as easily as their multiplication tables when they were in primary school.
This article reviews some of the lesser known but equally important requirements when it comes to personal tax compliance and inclusions in tax returns for the capital tax heads. For the purposes of the article, the discussion is limited to capital acquisitions tax (CAT) and capital gains tax (CGT), and also included is a review of one of the most important returns in the context of CAT – the Statement of Affairs (Probate) (SA2). A review of the SA2 is timely as it “celebrated” its first birthday on 14 September, having replaced the Inland Revenue Affidavit (CA24) on 14 September 2020. The article is divided into three sections.
In the first part the filing requirements are examined in respect of each of the tax heads, including additional information under each tax head that is relevant to a tax return. The second part reviews the implications for the taxpayer of not filing a tax return or not disclosing the requisite information in the relevant tax return. The final part of the article reviews the SA2 since its inception in September last year.
Capital Gains Tax
Filing requirements and filing dates
Where a person sells, disposes or gifts an asset during the year, CGT applies at the current rate of 33% on any gain that arises. With respect to disposals made on or between 1 January in a calendar year and 31 December in a calendar year, a return should be filed as follows:
- Where a person files an income tax return (Form 11), they should include the relevant details of the CGT disposal on this return, which must be filed by 31 October after the year in which the disposal was made. For example, any disposals made between 1 January 2020 and 31 December 2020 must be filed by 31 October 2021, or if filing on ROS, the due date is extended to 17 November 2021.1
- Where a person is not obliged to file an income tax return, they must instead file a Form CG1, which must be filed by 31 October in the year after the year the disposal was made. For disposals between 1 January 2020 and 31 December 2020, the CG1 must be filed by 31 October 2021.
There are a number of sections and panels in the Form 11 that are relevant to disposals and acquisitions of capital assets and CGT during the relevant tax year. Section L relates to CGT, and there are a number of disclosures required in this Section, that are discussed below.
|Form 11: Section L Panels|
|802-804||Panels 802 to 804 require disclosures on connected-party acquisitions and disposals, and details on connected-party transactions should be included. Connected-party transactions have particular rules that apply in relation to the calculation of CGT, and it may materially affect a CGT computation where those rules are misapplied. This disclosure also performs the function of notifying Revenue of a connected-party transaction that otherwise may not have been known nor have been, on the face of it, an obvious connected-party transaction (e.g. a disposal to an in-law).|
|805||Panel 805 relates to the principal reliefs2 from CGT. It is worth noting that it is the consideration on the disposal of the qualifying assets that is the required figure in this section. Retirement relief is divided into disposals “outside the family” and disposals “within the family”.3 Retirement relief has lifetime thresholds, and it is useful to be aware of those thresholds4 when completing this section to ensure that they are not breached.|
It is important that the correct figure is inserted as, again, it may have a material influence on the calculation of a tax liability. For instance, a miscalculation of the proportion of chargeable business assets to sales proceeds in respect of a share disposal may mean that the disposal does not qualify for retirement relief as the lifetime threshold is breached. This disclosure also performs the function of notifying Revenue that a relief has been claimed on a disposal in the relevant tax year. Where no liability arises, this disclosure may be the only notification that a transaction has occurred on which relief is claimed.
|809||Panel 809 requires a disclosure of connected-party losses, including the name and tax reference number of the relevant connected party and the amount of the loss. As connected-party losses are restricted (s549 TCA 1997), it is important that this information is accurate as it may be relevant to a future disposal.|
|810||Panel 810 relates to the four/seven-year exemption from CGT under s604A TCA 1997. The information sought in this disclosure is the amount of the gain relieved by the application of the section. This may not correlate to the sales proceeds or chargeable gain where there has been a proportionate reduction of relief as the asset was held for longer than four/seven years from acquisition.|
|815||Panel 815 provides for the annual exemption, and it is important that the rules relating to the annual exemption are correctly applied. For example, there is no entitlement to the annual exemption where retirement relief is claimed, and there is no ability to transfer unused annual exemption between spouses.|
|818||To minimise the scope for queries, panel 818 sets out the amount of the net unused losses carried forward to 2021, and this figure should be accurately calculated.|
|Form 11: Section M Panels|
|Section M of the Form 11 relates to the acquisition of chargeable assets in the relevant tax year and provides for different asset classifications. Care should be taken to classify an asset correctly as this may be relevant for the purposes of qualifying for relief in the future.|
1 Revenue eBrief No. 088/21. To qualify for this extension, one must both pay and file through ROS.
2 E.g., Retirement relief, s604A TCA 1997, principal private residence relief and disposal of a site to a child.
3 Please see commentary below on the recent Tax Appeals Commission determination 140TACD2020.
4 For disposals outside the family, €750,000 if the disponer is under 66 and €500,000 if 66 or older. For disposals within the family, €3m if the disponer is 66 or older (there is no threshold if the disponer is aged between 55 and 65).
Form CG1, although a slightly different format, requires the exact same content in the disclosures as the Form 11, as discussed above.
Spouse/civil partner losses
Where a spouse has a surplus capital loss in a year of assessment, this can be deducted from the capital gains of another spouse where the spouses are living together (s1028(3) TCA 1997). The same treatment also applies in the case of civil partners. This provision is automatic, so if a spouse/civil partner does not wish to use this provision for disposals in any year, an application can be made to Revenue before 1 April of the following year to disapply this treatment. Where a spouse has made a disposal at a lower tax rate (e.g. a disposal that qualifies for entrepreneur relief), an application to be separately assessed should be considered as it may be more efficient to carry forward the capital losses of the other spouse to be used against a higher-taxed gain in the future (i.e. in the example, the value of the loss is only 10% instead of 33%).
Capital Acquisitions Tax
Filing requirements, filing dates and payment dates
Where a person receives a gift or inheritance, CAT applies to the beneficiary at the current rate of 33% on the taxable value of the gift/inheritance. The IT38 is the relevant CAT return and must be filed online in the following circumstances:
- when the total taxable value of all gifts/inheritances received by the beneficiary exceeds 80% of the relevant group threshold and
- where a beneficiary is claiming agricultural or business relief, irrespective of whether the 80% group threshold is breached.
The latter condition is important as it was introduced by s55 Finance Act 2020 and may be missed by anyone who is not dealing with CAT filings on a regular or more recent basis. Instead of filing an IT38, there is also the option to file a simplified version known as an IT38S, which can be filed online or by post. This may be filed only where the following conditions are satisfied:
- there is no claim for reliefs, exemptions or credits, apart from the small gift exemption, and
- the benefit received has no conditions or restrictions and is received from one person only, as opposed to forming part of a larger benefit.
Section K of the Form 11 relates to CAT, and a disclosure is required by a taxpayer regarding whether they have received a gift or inheritance in the relevant tax year. This disclosure will allow Revenue to cross-check whether an IT38 has been filed.
All gifts or inheritances with a valuation date in the 12-month period ending on the previous 31 August must file a CAT return and pay the tax by 31 October of that year. For example, in respect of a valuation date of 3 November 2020, a return must be filed and the tax paid by 31 October 2021.5
Discretionary trust tax (DTT) applies to discretionary trusts on the latest date of:
- the date the property becomes subject to the trust,
- the date of death of the disponer,
- the date when the youngest of the principal objects of the trust reaches 21 years –principal objects include the disponer’s:
– spouse/civil partner,
– children and
– predeceased child’s children.
The following DTT charges will apply to the trust property:
- an initial once-off 6% charge (on the occurrence of the latest date listed above) and
- an annual 1% charge on 31 December in each year that the trust is in place (but not levied until the 31 December in the year after the initial 6% charge).
The initial 6% charge is payable within four months of the relevant valuation date of the inheritance that was deemed to be taken by the trustees. Where a residuary estate passes into a discretionary trust under a person’s will, the date of the ascertainment of the residue of the estate will be the valuation date, and the 6% initial charge will be payable within four months of that date.
The following returns must be made by the accountable person (the trustee):
- Form IT4 for the 6% once-off charge and
- Form IT32 for the 1% annual DTT.
CGT and CAT: Late Filings and Payments
Where a return is filed late, the taxpayer is subject to certain surcharge provisions. The surcharge provisions for the late filing of a tax return have been streamlined across most of the tax heads over recent years.
A surcharge applies on the final CGT, CAT or DTT liability of 5% (to a maximum of €12,695) where the return is filed within two months of the filing deadline. Where the return is more than two months late, the surcharge is 10% (to a maximum of €63,485).
Implications of Non-disclosure or Non-filing of Tax Return
Denial of relief Retirement relief
A recent Tax Appeals Commission (TAC) determination, 140TACD2020, examined the interaction between s598 and s599 TCA 1997 and the implications of identifying a transaction as “within the family” or “outside the family” on the Form 11/CG1. It is difficult to see why this description is used in the tax return, as although it correlates to the heading of the relevant sections, it does not reflect the operation of the relief itself. Relief under s599 applies only to disposals to a child. The definition of “family” has far broader reach and includes spouse, brother, sister, ancestor and lineal descendant.
The case considered whether relief under s599 is automatic or must be claimed and whether selecting “Retirement Relief – Within the Family” on the Form 11 amounts to a claim for relief under this section. The Appeal Commissioner found that the selection of “Retirement Relief – Within the Family” on
the Form 11 does not represent a claim for relief under s599 on the basis of the statutory definition of “family” in s598 and s599 and in the absence of a specific reference to the legislative provisions on the prescribed form (i.e. Form 11). The Appeal Commissioner went on to find that the taxpayer had filed a fully and correctly completed tax return.
The case also found that relief under s598 TCA 1997 automatically applies due to the language and terminology used in the section.6 Relief under s599, however, must be claimed.7 In summary, where relief is claimed under s599, it is given if the conditions therein are met. Relief is given under s598 if the conditions therein are met.8
Four/Seven-year exemption and principal private residence relief
The four/seven-year exemption is provided for in s604A TCA 1997, and principal private residence relief in s604 TCA 1997. The language for these reliefs appears to follow the same line of reasoning as in the foregoing analysis of retirement relief, whereby they appear to apply automatically when the conditions for the relief are met. Therefore in the authors’ opinion, the non-disclosure of the relief in a tax return should not result in a scenario where the relief is denied. There is a specific panel in the tax return for s604A and the amount of relief claimed. As the section is specifically referenced, there is an argument that the decision by the Appeal Commissioner in 140TACD2020 may not necessarily be followed.
Seemingly small misdemeanours, such as not disclosing a transaction or not filing a CAT return where there is no associated tax liability, can have potentially serious implications for a taxpayer. Broadly, there is a four-year time limit in relation to Revenue’s ability to make enquiries or raise or amend assessments in relation to a taxpayer’s historical tax affairs. Under the self-assessment regime (s959AA TCA 1997), Revenue does not have the right to raise an assessment or amend an assessment to tax for any chargeable period more than four years after the end of the chargeable period for which the chargeable person has filed a tax return and has made in that return a “full and true disclosure of all material facts necessary for the making of an assessment for the chargeable period” (s959AA(1)). A Revenue officer can carry out enquiries into a return at any point up to the end of the fourth year after the return was filed (s959Z(3)). In the case of an amended assessment, the four-year period runs from the end of the year in which the amended return is filed.
This protection guarding a taxpayer’s right to prevent historical tax matters being revisited by Revenue can be severely compromised where incorrect or incomplete tax returns are filed or, worse still, where no tax return is filed at all.
Where a taxpayer has failed to submit a Form 11, CG1 or CT1, as appropriate, in addition to the penalties (ss1052 and 1054 TCA 1997) and surcharges (s1084 TCA 1997) that may be levied (s959O), the four-year time limit for making enquiries (s959Z(4)) or raising an assessment (s959AC(2)) does not apply.
This is extremely relevant where, for example, a taxpayer does not usually file a Form 11 and makes a disposal of a capital asset in a tax year. There is a requirement to file a CG1, and if it is not filed, there is no four-year time limit protection. Another example relates to the changes to the requirement to file CAT returns where either business or agricultural relief has been claimed. This may not be commonly known, and the failure to file a return in this instance means that that there is no four-year time limit protection.
The Irish Tax Review article “Is There a Time Limit for Historical Revenue Queries?”,9 which provides an extremely informative review of the various aspects of time limits and detailed consideration of each of the relevant sections, is recommended reading in this area. The present article repeats the definitions contained in that article of the wording employed in s959AA TCA 1997:
“For a return to be ‘full and true’, it must disclose all items of income in respect of which the person is chargeable to tax in the year and, to the extent that any deductions are claimed, it must contain full and correct details of the facts in relation to those deductions… Disclosure means to reveal or make apparent that which (so far as the
‘discloser’ knows) was previously unknown to the person to whom
the statement was made. Where the word ‘disclose’ is used with reference to information to be provided, it is understood as requiring a statement of the relevant information that is in the possession of the person who is required to make the disclosure for a particular purpose…
It is necessary to determine whether the item in question is a ‘material fact’ for the making of an assessment.”
Where a taxpayer has made a disposal or used a relief to reduce a CAT or CGT liability, regardless of the existence of a corresponding tax liability, there is usually a requirement to disclose the event on the relevant tax return (i.e. Form IT38, 11 or CG1), as detailed above.
As the taxpayer making the disposal, receiving the proceeds, or receiving the gift or inheritance is clearly in possession of the relevant information – and, arguably, would find it extremely difficult to claim that they were not – they are required to disclose those details to Revenue. The question is whether the non-disclosure of such an event in the relevant tax return is sufficient to render the return incomplete and the taxpayer incapable of relying on the protections afforded under s959AA.
The legislation goes some steps further to provide for no time limit on Revenue making enquiries or raising or amending assessments where a Revenue officer has “reasonable grounds” for believing that a return delivered by a taxpayer does not contain a full and true disclosure of all material facts necessary for the making of an assessment (ss959AC and 959Z TCA 1997). This is a far lower threshold than the predecessor provisions (ss955 and 956), which required the Revenue officer to have “reasonable grounds”10 for believing that the return was insufficient as it had been completed in a “fraudulent or negligent manner”. Fraud and negligence are notoriously difficult to prove.
On an initial read, this would appear to suggest that Revenue can bypass the four-year time limit where there is non-disclosure of an event as a matter of fact or where the Revenue official has “reasonable grounds” for believing that the return is not a full and true disclosure (e.g. some part of the event has not been disclosed, a disclosure of the application of a relevant relief is not included, the chargeable gain to be relieved is not included or the chargeable gain is inserted instead of the consideration).
However, it is arguable – and certainly there is historical case law11 that could be relied on to support the approach – that the following three elements must exist:
- a tax consequence arose
- out of the non-disclosure, omission or inclusion of the material fact
- that caused the return not to be full or true.
There must be a tax liability to raise an assessment. It would seem reasonable to consider that where the deficiency in the tax return does not result in a tax liability or an increase in a tax liability, it is immaterial to the making of an assessment. Where this is the case, it should not amount to a situation where there has been a failure to make a “full and true disclosure of all material facts necessary for the making of the assessment” and result in the removal of the four-year time limit.
It is in situations where, for example, a relief has not been correctly applied or has been claimed in error and a tax liability arises or increases therefrom, the foregoing provisions may have grave implications. Where said relief should have been disclosed on a tax return or a tax return should have been filed in the first instance, a taxpayer may find themselves in a scenario where the four-year time limit for raising enquiries and raising or amending assessments is not available as a protection and Revenue is entitled to raise an assessment in respect of a historical transaction.
Taxpayers and their professional advisers need to pay attention to the requirements for the filing of capital tax returns. There is a very strong suggestion that all disclosures should be included, and care should be taken to check what information is required. It is also recommended to check whether there have been any changes to the legislation in recent Finance Acts that alter the previous rules on filing tax returns, dates of filings and information to be included in tax returns.
5 Revenue eBrief No. 088/21 extended the ROS return filing and tax payment date to 17 November 2021 for beneficiaries who received gifts or inheritances with valuation dates in the year ended 31 August 2021. To qualify for this extension, one must both pay and file through ROS.
6 Section 598(2)(b)(i) TCA 1997 provides that “relief shall be given…”.
7 Section 599(6) TCA 1997 provides that “[r]elief under this section may be claimed…”.
8 Paragraph 20 of TAC determination 140TACD2020.
9 Stephen Ruane and Paul Wallace, “Is There a Time Limit for Historical Revenue Queries?”, Irish Tax Review, 30/1 (2017).
10 See Ronan Furlong, “The New Self-Assessment Regime: Plus Ça Change…?”, Irish Tax Review, 26/3 (2013), for discussion of the meaning of the term “reasonable belief”. In summary, case law would suggest that, for “reasonable grounds” to exist, the grounds must not be absurd, irrational or ridiculous and there must be some firm basis for the belief.
11 O’Rourke v The Appeal Commissioners & another  IESC 28.