The Gazette 1983

GAZETTE

JANUARY/FEBRUARY 1983

The Tax Implications of Marital Breakdown

by Fergus Gannon A.C.A.*

*Mr Gannon is a chartered accountant practising in Dublin. I N the U.K. case of Lewis v. Lewis [1977] 3 ALL E.R. 922 the Court of Appeal emphasised that, where a court is being requested to approve financial provisions for inclusion in a Court Order, it is essential that the tax implications of the proposals be worked out and presented to it. The purpose of this article is to outline the tax implications in the Republic of Ireland that arise on Marital Breakdown. There is no provision in the Income Tax Acts whereby an individual is permitted to deduct from his taxable income payments made for the support of his spouse. However, where a Separation Agreement provides for payments the payer (almost invariably the husband) is entitled (subject to the use of the correct form of words in the maintenance clause, as considered below) to deduct the amount of the payment from his taxable income in arriving at his tax liability. In such circumstances the amount received under the maintenance agreement is taxable in the hands of the recipient. Maintenance Clauses come within the ambit of Sections 433 and 434 of the Income Tax Act 1967. Under these Sections the payer is obliged to deduct tax at the standard rate (35%) and account to the Revenue for the tax deducted. The recipient will be taxable on the gross amount and granted a credit against tax liability for the tax deducted by the payer. For example, if A agrees to pay Mrs. A. £10,000 per annum for the rest of her life under a Separation Agreement the tax position will be as follows: 1. A will be allowed a deduction of £ 10,000 each year from his taxable income. 2. A will deduct £3,500 from the £10,000 — paying £6,500 to Mrs. A and £3,500 to the Revenue Commissioners thus discharging his liability to his wife in full. 3. Mrs. A will be taxable on the gross amount (£10,000) less her allowances, etc. and she will be entitled to deduct £3,500 from her tax liability. If her liability is less than £3,500 she will be entitled to a repayment. For ease of administration for Mrs. A it would be as well if she had incorporated in the Separation Agreement an undertaking by her husband to supply her with a Form R. 185 within, say, 21 days of the end of each Income Year. A Form R. 185 is a Revenue

Form in which the husband sets out the gross amount of the payment and the tax he has deducted.

Wording of Maintenance Clauses: This brings us to the wording used in maintenance clauses, which are of two types — one which provides for payment of a gross amount from which tax will be deducted, the other provides for a net amount. It is important that the payer is aware of the implications of and difference betweeen them. In one type the payer agrees to pay a stated sum without mention of tax. In the other the payer convenants to pay "such sum as after deduction of tax at the standard rate amounts to £x per annum." The Agreement should not contain a provision whereby the sum will be paid "free of tax" or any similar wording. If for example A agreed to pay Mrs. A £10,000 without mention of tax the position is as outlined in the above example. If, however, A agrees to pay Mrs. A (wife) such a sum as after deduction of tax (at the standard rate) will amount to £10,000 per annum he will have to pay £5,385 to the Revenue Commissioners as well as £10,000 to Mrs. A (i.e., it is construed as an agreement to pay £15,385 less tax at the standard rate (35%) amounting to £5,385, leaving a net £10,000 payable to Mrs. A). In summary the situation is as follows:—

Agreement Type

1

2 £

£

Payable to Mrs. A Payable to Revenue Commissioners

6,500

10,000

3,500

5,385

Total Payable by A

£10,000

£15,385

A person considering making a "ne t" payment should add on approximately 50% to arrive at the true gross figure. In Agreement type 2, A will be allowed write off £15,385 against his taxable income. 15