Most people hear the adverts on the radio come October each year informing you that the Income Tax filing deadline is looming, and you have until 31 October to file your Income Tax return. A lot of individuals probably aren’t fully aware of their obligations to file a return, and what are the potential ramifications of they fail to do so.
A large percentage of the working population in Ireland would be regarded as ‘normal PAYE’ workers. That is, they are an employee of a company which they do not own, and they receive their pay cheque each month. They are not regarded as a ‘chargeable person’ for Income tax purposes i.e. they do not have a requirement to file an annual Income tax return as this is their only source of income.
However, there are undoubtedly numerous people out there who regard themselves as the standard PAYE worker, but also have an investment property which is rented out to a third party. Due to the fact that this otherwise standard worker is now in receipt of a second stream of income, then they are regarded as a ‘chargeable person’ for Income tax purposes, and they now are obliged to file an Income tax return. The taxable rental income must be calculated correctly and paid over to Revenue when filing the return. Preliminary tax for the following year must also be paid. An example may be the easiest way to illustrate this process.
Jim works as an employee for a large US multinational in Ireland. With the recent arrival of twins, and no bank loans available to purchase a new larger property, in March 2010 Jim and his wife were forced move into a larger, rented house in the town, and are now renting out their previous home. They are receiving €2,000 per month and incurring roughly €500 a month in allowable expenses.
An income tax return for the 2010 tax year has to be made for this rental income and any tax due on this income has to be paid by 31 October 2011. Also, preliminary tax has to be paid in respect of the 2011 tax year (essentially a down-payment on tax that will be due on the 2011 rental income – based on 100% of the 2010 tax due or 90% of your estimated 2011 tax). Therefore, Jim and his wife have taxable rental income of €1,500 for ten months of 2010. Thus, it is vital that they are aware of this from the outset and keep enough aside from the rental income in order to cover the tax that will be due.
With the recession and the jobs market in a very precarious state, many people are now setting up their own companies. They correctly regard themselves as employees of this new company. Yet, for tax purposes, if they own greater than 15% of the ordinary shares in this company and are a director of the company, then they are regarded as a ‘chargeable person’, and like the example above, now have an obligation to file an income tax return for any tax year in which they hold greater than 15% of the ordinary shares and the position of a director of the company.
If you were in receipt of ‘other income’ in 2010, and have a requirement to file an income tax return for 2010, then this must be done by 31 October 2011. (There is an extended deadline of 15 November 2011 where Revenue’s online filing system ROS is used to file the return and pay any tax due). Where the Income tax return is filed after the deadline, but within 2 months of the deadline, then an additional 5% surcharge is added to the tax liability. Where the return is filed more than 2 months late, these surcharges increases to 10%. Where preliminary tax for the following year is underpaid, then interest at roughly 1% a month can be sought by Revenue on the full amount that was due. Consequently, it is imperative to examine one’s tax affairs and ascertain whether one has an obligation to file an income tax return for the tax year. Then it is equally important to calculate the correct amount that is due and to ensure that the return is filed in a timely manner and the taxes all paid.
Simon Ball is the founder of SB Tax Consultants and an Associate of the Irish Taxation Institute. He worked for many years with tax firm BDO Simpson Xavier and specialises in the areas of corporate and personal tax planning work and the preparation and filing of returns for both companies and individuals. He can be found at www.sbtaxconsultants.com