Please send your queries to Dominic Coyle, Q&A, The Irish Times, 11-15 D'Olier Street, Dublin 2, or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.

Dividends

Eircom has just paid the final dividend on shares for the year to the end of March 2000. I notice they have deducted "withholding tax" of some 22 per cent from the dividend. Surely we should not be paying tax on dividends when the shares themselves lost so much in value?

Mr B.K., Drogheda

On an emotional level, one can certainly see why shareholders who have already seen the value of their holding drop by not far short of 40 per cent should feel somewhat aggrieved by having to pay tax on dividends on those shares. Unfortunately, the issue of dividend withholding tax is totally unrelated to the share price. Indeed, it is unrelated to the company.

Quite simply, withholding tax is a tax levied on share dividends of all companies. If the company pays a dividend, you will find it has been paid net of this tax. The state of the company or its share price does not affect the tax one whit. It is an instrument of the Revenue Commissioners and the companies merely act as Revenue agents in deducting the tax.

Before you get agitated about Eircom doing you down in one more area, bear in mind that neither it nor any other company has a choice in collecting the withholding tax.

The logic for the tax is that you are receiving income from your investment - the dividend - and income is taxable. Investment in equities encompasses two areas:

yield, or income, from dividends; and

capital gains or losses on the price of the share in the market.

It is important not to confuse the two areas. Some people choose their stocks because they are looking for an income on their investment and they will choose stocks which, historically, have paid high dividends, even though there is no guarantee that such companies can or will continue such a policy.

Others choose stocks on the basis of their likely capital gain. This is particularly the case with growth sectors such as technology and, ironically, telecoms, where most profits are reinvested in the business. Dividends are likely to be low but the investor is hoping to gain on the growth in the share price.

Depending on the investors' individual preferences or needs, they can adopt either policy or attempt to mix the two in the portfolio of stocks they put together.

The point is that the dividend has no set correlation with the price of the share. One is the income deriving from the investment and, unsurprisingly, is taxed in much the same way as other income; the second is a capital gain or loss and has no bearing on income.

If Eircom had paid no dividend and simply reinvested its profits in the company, it might have improved the prospects for the share; instead, it decided, probably wisely, that it would only antagonise frustrated shareholders further by paying no dividend.

The good news is that, if your income is not high enough for you to be liable to tax, you can claim a refund from the Revenue; conversely, if you are a higher margin taxpayer, I am afraid you can look forward to paying more tax on your dividend. It will have to be declared on your tax return as income and balance of tax due - the difference between the current marginal rate and the standard rate at which dividend withholding tax has been deducted - paid.

Dormant accounts

At present, there is a discussion going on about the possibility of the State sequestering dormant accounts in the banks, building societies etc. What is the definition of a dormant account? Are our savings in the Post Office etc. safe from the unparalleled greed of the State?

Ms J.R., Dublin

You are right that there is an intense debate going on at present on the issue of dormant accounts. And you are right when you surmise that the key will be how one defines such a dormant account. The problem is that, at the moment, we don't know.

The Minister for Finance, Mr McCreevy, has been mulling over the issue, particularly the amount of time an account should lie dormant before it can be determined to be dormant and the money transferred to the State.

Time is the key, as various studies have shown that the amount that might fall within the definition falls sharply for every five years the Government determines such accounts are not dormant.

Figures issued in July indicated that the amount that has lain untouched in bank and building society accounts over five years was £1.74 billion (€2.21 billion); 10 years, £469 million; 15 years, £139.5 million; and 20 years, £53.5 million.

Of the five-year figure, more than £700 million is accounted for by An Post savings which, given the nature of savings certificates, is hardly surprising.

Money forgotten in insurance policies is thought to amount to a further £25 million. All these sources are likely to come under the terms of any legislation on dormant policies. Only credit unions appear to fall outside the scope of the action.

Quite why such accounts lie unused is not certain. It appears to be a mixture of forgetfulness, death, emigration and, more prosaically, a change of address. One study in the US found large numbers of such accounts were those opened for children - where activity would be light - and subsequently forgotten.

At the moment the Government appears to be looking at a period somewhere between five and 15 years. There is little guidance to be had from abroad where, within Europe, a range of different limits are/will be in operation. In the US, many states report funds dormant for five years and take the money if such accounts are not activated within a further year.

You are, however, a little bit harsh on the Government by accusing it of "unparalleled greed" in its approach to such money. At present, the money is in a limbo where it benefits no-one - except of course the financial institutions, which continue to have use of it unless and until someone comes to claim it. Such dormant accounts have, according to reports, been at the heart of many instances of internal fraud at financial institutions.

Under the Government plan, any money brought in would be used for community purposes and charitable causes - a bit like the lottery in fact - monitored by a State-appointed board of trustees.

Those seeking to ensure their savings do not fall under any provisions of dormant account legislation should make sure they conduct at least one transaction every year. Beware, as interest paid or, unwelcome as they are, bank charges do not apparently qualify as transactions in this sense.

However, the best way to make sure you do not lose touch with your money is to ensure that financial institutions with which you deal have your current address. Whatever the Government does implement, it will include a "find the money's owner" clause and a correct address