Personal finance: your questions answered

Are ARF withdrawals subject to the USC?

Q

Prior to my retirement I built up a pot of AVCs to optimise my tax-free lump-sum entitlement. I subsequently put the balance into an approved retirement fund (ARF). In 2007 the Government opted to deduct income tax on 1 per cent of funds held in ARFs, rising to 2 per cent in 2008, and 3 per cent thereafter. In the last Budget this figure was increased to 5 per cent to take effect from tax year 2010.

As AVCs were, in the first instance, salary saved free of tax, it is not unreasonable for any withdrawals to be subject to tax, albeit that the Government is in effect forcing annual withdrawals to be made. It appears that the Government is now also treating these withdrawals as current income and subjecting them to the new universal social charge (USC). Surely these funds are savings based on old previous income earned when the levy did not apply and, as such, should not now be liable? – Mr FB, Dublin

A

The Government introduced the notion of “imputed distribution” to counter the perception that some people were using ARFs simply to stockpile cash tax-free.

Before the last Budget, retired holders of ARFs had to draw down at least 3 per cent of the fund during the year or face being taxed on the basis that they had done so anyway.

The Budget raised the level of this imputed distribution, or taxable drawdown, to a minimum of 5 per cent. The trouble is that although the measures were announced in December’s Budget, for tax purposes the 5 per cent threshold applies to 2010 drawdowns. And as this imputed distribution is taxed in 2011 the new USC does apply.

However, if you actually did physically draw down 3 per cent of the fund in 2010 – as per industry advice – you would have been taxed on this money as it was drawn down. In such an event, the USC only becomes an issue for the remaining “imputed distribution” of 2 per cent of the value of the fund. Check with your adviser, as I am told that many would have actually drawn down the extra 2 per cent of the fund between the Budget and year-end precisely to avoid imputed distribution and, by definition, the USC.

What should the tax be on deposit interest?

Q

In your reply to Mr HC regarding the higher rate of Dirt for 2011, you did not say whether gross deposit interest is subject to any further taxes such as the USC. If Mr HC was credited with the interest last year he would also have had to pay PRSI on it, of at least 2 per cent. Am I right? – Mr LMcQ, Dublin

A

You refer to the correspondent who was anxious that, by virtue of interest on his one-year investment being paid after January 1st, he would find himself paying Dirt at the new higher rate of 27 per cent. As you say, if the interest had been paid in 2010 he could also be liable to an additional 2 per cent charge as a result of the health levy, not PRSI. However, in the case of people whose income comes solely through the PAYE system – apart from Dirt – it is likely that no tax return would be filed and therefore no balancing 2 per cent charge levied. Under the new regime in 2011, deposit interest is liable to no charge other than Dirt. Deposit income is excluded from the remit of the USC in the legislation.

This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into.

Please send your queries to Dominic Coyle, QA, The Irish Times, 24-28 Tara Street, Dublin 2. E-mail: dcoyle@irishtimes.com