Capital gains

As an expatriate living in Japan and investing in shares in, say, Telecom Eireann, could you tell me am I liable to pay capital gains tax, or can I avoid paying tax on the income made from those shares?

Mr O.S., e-mail

On capital gains the key question is residence and not where you are living. Confused? Well, when dealing with matters of taxation, the residence denotes the jurisdiction in which you are liable to pay tax rather than an indicator of where you physically reside.

In a case such as yours, where you are living in Japan, the determining factor is whether you are paying tax in Japan or whether you are still paying tax in the Republic and are simply residing in Japan for a period of time, say on secondment.

If you are paying income tax in the Republic, you would certainly be liable for capital gains tax here at the rate of 20 per cent on profits made on stocks and shares in Irish companies with a capital gains tax free allowance of £1,000 a (€1269.74) year.

On the assumption that you are, in fact, paying your tax in Japan, you do not have any liability to tax in the Republic on capital gains accruing from shares in Irish publicly listed companies.

The question remains whether you have a liability under the Japanese system. I am not conversant with Japanese taxation matters but if it were the other way around, tax residence in the Republic would leave you open to tax on world-wide income, including capital gains accruing abroad. I would assume much the same applies in reverse.

The fact that you are living in Japan, as against any other state outside of the Republic, has no bearing on the question.

Scrip dividends

My wife has been in receipt of scrip dividends from Irish Life for a number of years. We have declared these for income tax purposes and paid tax on them as if we had received cash dividends. In a recent reply to a question on Irish Life shares, you hinted that scrip dividends are more tax efficient. How is this and have we paid tax unnecessarily?

Mr J.F., e-mail

Your letter is one of many I have received following the detailing of the treatment of Irish Life shares for capital gains in the case of a shareholder who bought shares upon the group's privatisation, always took scrip dividends. There was also the effect of the group's merger with Irish Permanent.

But it has been the scrip dividend issue that has drawn most reaction. The information I received at the time on tax treatment indicated that scrip dividends should always be treated as having a nil cost. In such a situation, to calculate the capital gains liability on each of the shares in the enlarged shareholding, the scrip shares would be added to the original holding and the total divided by the original purchase price to reach a new base purchase price from which to calculate the capital gain. So, 1,000 shares bought at a price of, say, £1.50 (€1.91) would have cost £1,500. In the intervening period, the shareholder might receive 100 shares by way of scrip dividend. The holding, therefore, would now be 1,100 shares and the new base price would be 1,500 divided by 1,000 + 100 which is £1.36.

Basically this is true for scrip dividends up to 1997. However, at that time the rules were changed and since then such issues do have a value of their own. For instance, if a shareholder's total dividend due is, say €100 and the share price is, say, €11, the company will issue a scrip dividend of nine shares to the shareholder, carrying the one euro balance over to the following dividend date.

For capital gains purposes, I understand from the Office of the Revenue Commissioners, it is this €11 effective purchase price which counts from 1997 on, not the original purchase price of the stockholding.

One reader suggested the true current purchase price of the new shares be added to that of the original stake and the total divided by the number of shares in the enlarged holding to give a new base price. This does not appear to be the Revenue's view.

A related issue is the first in, first out protocol on share disposal. That is still the case with very few exceptions. So, if the investor sells part of their stake, it is assumed that the first shares to be sold are those which were bought earliest. The investor cannot chose to sell a particular group of shares within a holding on the basis that the net gain would be smaller because of the price at which they were bought compared with other shares in the holding and therefore keep the shareholder under the tax-free threshold.

I also said in the original answer that, in the past, scrips were considered to be a more efficient way to take dividends. That is so. Prior to 1997, when scrip dividends were considered to have no face value, there was no income tax liability while there was such a liability on cash dividends.

Since 1997, scrip issues received in lieu of a cash dividend do have a cash value - the price paid to purchase them - and this is liable for income tax. In the instance above, the sum liable for income tax would be €99. As a result, the previous benefit for the purposes of tax efficiency has disappeared.

In the case of your wife's Irish Life shareholding and scrip dividends thereon, you have been correct in declaring such dividends for income tax purposes from 1997 on, but not between 1991 and 1997. If you did pay income tax on such dividends before 1997, you should contact your local tax office.

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.