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Funds lobby needs to target message carefully on tax changes

There are reasons why investment funds are taxed at a higher headline rate even if 41% is too big a share for the exchequer

Business surveys are funny things. Badly done, they can tell you pretty much what the group behind them wants to hear. But the message they bring can be so heavy-handed that they end up undermining the case they hope to make, or at least of holding it up to intense scrutiny.

A survey carried out for investment group Aviva Life and Pensions unsurprisingly found that more than two-thirds of the 1,000 people surveyed thought it was unfair that people should pay 41 per cent in exit tax on their fund investments when they could pay just 33 per cent deposit interest retention tax (Dirt) if they left those same funds in a bank savings account.

Aviva chief executive Barry Cudmore said the position was “grossly unfair” and the issue had long been a “bone of contention... stymying investment funds”.

All of which is muddying the waters a little bit.


The current regime on taxing of investment funds was introduced in 2001 at the behest of the investment industry. Up to that time, investment returns were taxed annually by Revenue. The industry argued this was unfair. They also said allowing the returns to roll over from year to year would tap the power of compounding – improving both the return for investors and the eventual tax take by Revenue.

So was born the “gross roll-up” regime. To compensate Revenue for missing out on its annual tax take, the rate of exit tax was set three points higher than under the annual taxation regime, at 23 per cent.

Concern at possible abuse of the scheme to simply avoid paying tax altogether saw the government introduce “deemed disposal” in 2006 where returns would be taxed on maturity or every eight years if left invested.

The issue for the industry is that there is no logic or incentive for Revenue to charge the same on rolled-over investments as it does annually on deposit interest when it has to wait eight years for its tax.

The proper bone of contention, if we are looking at what dissuades investors, is not how one tax compares to another but that the rate of exit tax is now close to double what it was back in 2001 – at 41 per cent. That is a crazy figure if you hope to persuade investors to assume an element of risk in pursuit of return.

Even the Minister for Finance Michael McGrath seems to agree. The industry would do well to focus on that rather than risk Revenue returning to annual taxation, albeit at a lower rate.