Standard Life payment must be a capital one

Irrespective of postal delays or whatever other reasons give rise to various similar situations, it seems to me that the Standard Life payment is a capital one, no matter what Standard Life calls it. Even if there is a logic in having an option to call it either income or capital, I cannot understand why the default option should be income. The payment is capital by nature.

If the payment has all the traits of being capital, I do not understand why the Irish Revenue would just take its designation as income from a source outside the Irish jurisdiction and not recognise it for what it is: the sale of a capital asset by the company, a payment to shareholders that reduced the value of the company and the value of shareholders’ holdings, including holding fewer shares.

Could you quote the wording of the the Vodafone amendment in the last budget so I can get a better understanding of what is involved?

Mr MH, Waterford

Companies have fairly wide discretion as to how they distribute payments to shareholders, should they choose to do so at all. There is, for instance, no obligation on the company to distribute the proceeds of a sale of an asset. The company could retain the cash for future reinvestment or investment in other existing businesses.

So just because they sold an asset, it does not make it a capital payment.

Assuming they are paying money out to shareholders, they also have fairly wide discretion to propose how that be done, and a special dividend (an income payment) is by no means unusual. What does happen, however, as in this case, is that such major payments tend to be subject to shareholder vote. With Standard Life, that vote was passed comfortably.

The governing legislation on this is the 2006 Companies Act in the UK, and companies must also comply with the listing rules of the stock exchange.

I asked Standard Life about the income default position. They said the standard practice under returns of value offering income and capital options is for the default option to be income. It set the default option as income as “we believed it would be the preferred choice for the majority of our Irish shareholders, based on the taxation system in Ireland”.

Standard Life makes the point that Irish taxpayers who fall within the standard rate of income tax and whose payment will exceed the annual capital gains tax allowance would be better advised to select the default income option in this case. They are correct. More surprisingly to me was that – even including the 4,000 or so delayed forms – Standard Life tells me that just 17 per cent of Irish shareholders opted for the capital option, at least for part of their payment. That is fewer than 10,000 Irish shareholders who returned forms at all, including 4,215 who did so online.

So more than 50,000 Irish shareholders did not bother replying at all, effectively choosing to receive their money as a special dividend subject to income tax, universal social charge and PRSI.

In relation to Revenue, notwithstanding the annoyance on how the Standard Life issue has worked out, it cannot just arbitrarily decide how to tax issues. It can operate only within the law, which means it must tax payments made as income.

Of course, it is not entirely without influence. I’m guessing that the decision to provide in last year’s budget for an exemption for Vodafone shareholders on their payout would have had some input from Revenue.

Finally, on your point about the Vodafone “amendment”, section 48 of the Finance Act 2014 inserted a new section (848AA) into the Taxes Consolidation Act 1997, under the section for Miscellaneous Special Provisions. Section 48 (2) states:

“Notwithstanding any other provision of this Act, the receipt by an individual who is a shareholder in the company of a return of value in an amount of not more than €1,000, shall be deemed, for the purposes of capital gains tax, to be the receipt of a capital sum derived from the individual’s ordinary shares in the company and not to be income, unless the individual elects to have that return of value treated as income.”

Two things arise. First, the section refers to “the company” which section 48 (1) specifies to be Vodafone plc; and, the return of value covered by the section is limited to €1,000. That covers most of the Vodafone shareholders here but may not be sufficient in the case of Standard Life – although the average Irish payout is around €700, I gather.

Tax obligations on Vodafone payout I have a query regarding the Vodafone share payout in March 2014. I am one of those who had opted for the "capital" option but was informed that I had missed the deadline.

I understand from an article that you wrote in October 2014 that, under the proposed Finance Bill 2015, Revenue would treat the windfall as “capital” provided the windfall was less than €1,000.

(1) Do you know if this Bill has been passed into law?

(2) At that time I received the following amounts:

– €508.41 return of value: income payment;

– €9.95 return of value: Verizon fraction payment;

– €1,268.64 for sale of 37 Verizon shares.

I’m just not sure what my tax obligations are in relation to these payments in light of the fact that Revenue are going to treat the windfall as “capital” provided the windfall is less than €1,000.

Ms MS, email The good news for you is that you have no tax liability.

The Finance Bill – and, most importantly, the measure relating to the Vodafone return of value – was passed and is now law. That means that everyone like you who received a cash sum of less than €1,000 will automatically have that figure treated as capital (and therefore subject to capital gains tax rules) rather than income, where it would have been potentially liable to income tax, USC and PRSI. The only exception is those few who expressly chose to receive the money as income.

The sale of the Verizon shares also comes under the capital gains legislation.

Revenue put out a note at the time explaining its assessment of the tax position for Vodafone shareholders whose Vodafone holdings dated back to the original flotation of Eircom. It is at http://iti.ms/OQNq4w. Like many tax matters, it can be a little complex to read. But the bottom line is that Revenue has determined that, under capital gains tax rules, the payments made during the return of value, including for the sale of the Verizon shares, still leave you at a loss on that portion of the original Eircom investment accounted for by the payments.

As you are nursing a loss on the cash payment and on the share sale, there is no tax issue for you. That’s why it was so important for the cash sum to be treated as capital, not income.

Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara St, D2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.