Q & A

My wife left work last year and went back to college full time. She is currently working for the summer on a contract basis. As she will only be working for three months, she will not avail of her full tax-free allowance this tax year. We have been informed that, as we married in this tax year, I cannot avail of her excess tax-free allowance. Can you tell me is this correct and does she need to inform the revenue of her earnings?

Mr B. McI., email

The information you have been given is correct but only to a degree. In the year of marriage both you and your wife are treated as two single people for the whole of the tax year. At first sight this would seem to preclude your benefiting from that portion of your wife's tax-free allowance of which she cannot avail.

However, there is provision in the tax code for you to claim a refund at the end of the year if, as a couple, you pay more tax in the year than you would if you had been treated as a married couple for the entire tax year. The Revenue Commissioners will refund the amount of tax paid over and above what would have been the case had you been married at the start of the tax year. To take account of the fact that you married during the year, this refund will be reduced by the proportion of the year during which you were not married.

A final twist is that the tax refund will be paid to each of you in proportion to the amount of tax each of you paid in the relevant tax year.

It is probably easier to see clearly what this means by way of an example. For the purposes of the example, let us assume that both the parties are PAYE workers and that they got married on August 1st; this might be slightly artificial but being the first day of a month makes it easier to calculate that portion of the year for which they are entitled to a refund. In making the calculations, let us allot the husband a salary of £30,000 and the wife £12,000. Both are entitled to a personal allowance of £3,150 and a PAYE allowance of £800. They rent an apartment and therefore have no mortgage interest relief.

The taxable income of the husband will be: £30,000 (£3,150 + £800) = £26,050. Of this, the first £10,000 is taxed at the lower rate of 24 per cent with the balance charged at the upper rate of 46 per cent. This gives us £10,000 [X] 24% = £2,400 and £16,050 [X] 46% = £7,383 - a total tax bill for the husband of £9,783. The wife has the same allowances and this leaves her with taxable income of £8,050, all of which is taxed at the lower 24 per cent rate as it is within the £10,000 band. This leaves her with a tax bill of £1,932.

Adding these together, the tax bill for the couple when assessed separately is £11,715.

If they were taxed under joint assessment the bill would be lower. Their combined salaries (£42,000) less their combined allowances (£7,900) would leave £34,100 of taxable income. Under joint assessment, the first £20,000 falls within the lower 24 per cent income tax band with the balance (£14,100) being liable at 46 per cent. Taking £20,000 [X] 24% = £4,800 and £14,100 [X] 46% = £6,486 produces a total tax liability of £11,286.

As you can see the difference in this example is £429, which is what the tax refund would be over the whole year. The Revenue then reduces this to take account of that period of time when the couple was not married in this case four months (April 1st to July 31st). Working this out, £429 [X] 4/12 = £286.

To check what each spouse is entitled to by way of refund, you need to go back to the original tax bill under separate assessment and calculate each person's burden. Of the initial £11,715 bill, £9,783 or 83.5 per cent was paid by the husband. It follows that he will receive that proportion of the refund, in this case £238.81, with the wife receiving the balance of £47.19. On the second part of the question, your wife does have to inform the Revenue of earnings, unless her employer has already done so. Ultimately, her tax affairs are her responsibility, nobody else's.

When the Australian company, Colonial Mutual, went public in 1996, I received a free allotment of shares and options, and subsequently purchased further stock in the company as well as exercising the options. The group, now called Colonial, is to acquire a rival by way of a rights issue and placement. Australian shareholders can subscribe for the rights issue but non-residents, including myself, will have their entitlement sold and the proceeds forwarded.

I had intended to hold the shares I possess long term and want to know what are the tax implications for me. Will the proceeds of the rights issue be treated as income or a capital gain? Do you feel it worthwhile to reinvest the monies in the new Colonial shares?

Mr L.McD., Dublin

As far as the proceeds of the rights issue are concerned, they appear to be income rather than capital gain as nothing has been bought or given except cash. That income would be treated under Case III of Schedule D of the Income Tax provisions. This covers interest which is not taxed at source and all foreign income.

In relation to the existing shares, a capital gains liability might well arise if you did decide to sell, although you say that is not your plan at present.

I am afraid I can give no advice regarding the wisdom of reinvesting the proceeds of the rights issue in the company, except to say that this would not obviate the income tax liability on the money. Beyond that, this column is not in a position to give specialist financial advice on investments in one product as against another.

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