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Do I have to declare ongoing investments to Revenue?

Different tax and reporting regimes apply depending on the nature of the investment fund

Most people dealing with unit fund investments will see the fund manager deduct tax on gains every eight years and return the details to Revenue.

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Dominic Coyle
Sun Jun 23 2024 - 10:00

My investments have had some growth and some losses over the years. I have not cashed in any of them, I just let them roll on.

I gather the investment company will pay whatever amount is due to Revenue whenever I cash them in.

What I need to know, please, is do I need to declare my investment amount to Revenue when I am doing my annual tax returns?

Ms R.C.

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The whole area of investment funds and taxation is under review by a team commissioned by Minister for Finance Michael McGrath.

It has long been a bone of contention with the industry which argues that the existing tax regime is inimical to investors and cuts into their returns. The Minister has indicated that he is open to change but his officials will no doubt be mindful of any dramatic change on the current tax revenue that investment funds deliver for the exchequer.

As of now, we operate under what is called a gross roll-up regime. This was introduced back in 2001 — ironically at the behest of the same investment industry now objecting to it. Before that time, Ireland’s investment funds industry operated on what is known as a “net basis” under which Revenue took any tax owing on fund gains every year.

Under gross roll-up, the idea was the gains would remain untaxed within the fund from year to year with the investor only paying tax when they draw down their investment or it otherwise matures. As Revenue puts it, “the profits and gains arising to an Irish fund are exempt from tax until the happening of a chargeable event”.

But chargeable event is one of those phrases whose meaning can change over time. And, citing evidence that the new regime was being used by some wealthy investors for tax avoidance, Revenue lobbied for change. That led to the concept of “deemed disposal” being added to the new regime.

This provides for the payment of tax to Revenue on any individual’s gains by the fund managers on the eighth anniversary of the investment, and every subsequent eighth anniversary.

At that point, assuming your investment has made a profit, it is subject to what is called “exit tax”, which is accounted for by your fund manager and paid over by them to the Revenue.

“Where exit tax is deducted by an Irish fund, the deduction represents a final liability to Irish tax for unit holders who are individuals. There are generally no further obligations on the unit holder with respect to that tax,” Revenue says. Hardly surprising really as that exit tax rate is 41 per cent — regardless of whether you pay income tax at the higher rate or the standard rate.

That rate has changed over the years but Revenue’s justification has always been that the rate is set to account for the fact that Revenue leaves the money untouched for that eight-year period to maximise investor returns at a cost to the exchequer over that time.

That exit tax is your full and final liability and that it is done by the fund and not something you have to worry about is the good news. However, unlike capital gains, if you have gains in one investment fund and losses in another, you cannot offset the losses and pay tax only on your net gains. This is one of the bones of contention in the industry.

Only when you actually retrieve your investment does Revenue determine whether any refund of tax already paid is owing should the fund performance have faltered and the gain you make be less than that already taxed.

To further complicate things, some funds are not taxed at source and these will be your responsibility. These include offshore funds where you may have an obligation to account for tax on the same deemed disposal basis. In this case, you would do that through your tax return in the relevant year.

The same can apply in certain cases even with domestic funds but, if that is the case, your fund manager would have to let you know the information that it is passing to Revenue so that you can accurately fill out your tax return when the investment matures or on the eighth anniversary of the investment.

Otherwise, as far as returns are concerned, you will file when you withdraw the investment and Revenue will balance the figures with tax already paid on the fund over the years.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice

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