Gary McGann verdict shows taking on Revenue can be a taxing business
Former Smurfit Kappa boss Gary McGann has been hit with a hefty tax bill after the Appeals Commission ruled against him on the taxation of the €2.3m "gift" he received from the company's private equity shareholders in 2011.
The McGann decision is merely the latest episode in the long-running battle between the Revenue Commissioners and high earners on how income is taxed. Depending on the decision a taxpayer can end up hundreds of thousand or even millions of euro better or worse off.
Please log in or register with Independent.ie for free access to this article.
At the heart of many such disputes is the difference between the top rate of income tax (currently 40pc) and the rates of capital acquisitions tax (sometimes called gift or inheritance tax) and capital gains tax (both 33pc).
Further strengthening the incentive to categorise any cash received from one's employer as a gift or capital gains rather than income is the fact that, unlike either gifts or capital gains, income is also subject to both USC and PRSI. The top rate of USC is a whopping 8pc while the standard rate of employees' PRSI is a further 4pc.
Add these to the mix and the effective marginal rate of income tax isn't 40pc but a penal 52pc.
In 2011 McGann received €1.223m from Smurfit Kappa shareholders Cinven and CVC and a further €1.076m from another shareholder, Madison Dearborn. The money was categorised as a "gift" for McGann's work on Smurfit Kappa's IPO in March 2007.
In September 2011 McGann filed a capital acquisitions tax return and paid €596,000 tax on the money, which works out at an effective tax rate of just under 26pc. However, if he had paid income tax on the money he would have had to hand over at least an extra €448,500 to bring his total tax bill to a minimum of €1.044m. Now that he has lost his battle with the Revenue Commissioners, McGann will have to write the taxman a cheque for the additional amount.
The McGann case has highlighted once again the vexed question of how much tax should be paid by high earners. According to the CSO, taxpayers earning more than €100,000 a year paid more than 46pc of all income tax in 2017 while, within this group, those earning over €275,000 a year forked out 15.2pc of total income tax receipts.
By comparison those earning less than €40,000 a year - the average private sector wage is €37,000 a year - contributed just over 10pc of the total income tax take.
McGann may have lost his battle with the Revenue Commissioners but the war goes on.
There are, of course, many ways in which high-earners can shelter at least some of their money from the taxman. If their employer has a Revenue-approved profit-sharing scheme, they can receive shares worth up to €12,700 a year. If these shares are retained for at least three years, the employee pays no income tax. However, these shares are liable for both USC and PRSI, an effective 12pc tax rate, up front and, when they are sold after three or more years, any gain over the original price is liable to 33pc capital gains tax.
The taxation of larger, so-called unapproved, share option schemes is far less benign. While no tax is paid when the options are granted, income tax, USC and PRSI are payable on the difference between the option price and sale price when the options are exercised.
So if an individual is granted options to purchase 100,000 shares in company A at €5 per share and, when he exercises the options three years later, the share price has risen to €15 - a gain of €10 per share or €1m - he must pay 52pc or €520,000 to the taxman within 30 days.
Then, if two years further down the road, he decides to sell the shares and the price has risen to €25 a share, he must pay 33pc capital gains tax on the additional €1m gain between the market price on the date he exercised his options, €15, and the eventual sale price of €25 a share or €2.5m, another €330,000.
So are there other ways in which income can be legally sheltered from Revenue. What happens if my employer decides to pay me a bonus? Is there any way I can avoid paying 52pc tax on it? One possible route is to top up your pension through additional voluntary pension contributions (AVCs). Someone aged between 50 and 54 can contribute up to 30pc of their income tax-free to their pension. This rises to 35pc for those aged between 55 and 59 and to 40pc for those aged 60 or over. For anyone coming up to retirement in the next decade or so, that's an absolute no-brainer.
If you commute to work by public transport it might be a good idea to persuade your employer to purchase your bus or train ticket and to reduce your salary by the price of the ticket. Under the Taxsave scheme the employee pays no income tax, PRSI of USC on the price of the ticket while the employer doesn't have to pay employer's PRSI on the ticket price. As Dublin's commuter zone expands ever outward and the Government strives to get more us out of cars and into public transport, expect to hear a lot more about this scheme in the months and years ahead.
For those who want to get fit on their journey to and from work there is the Cycle to Work scheme. This allows your employer to reduce your salary and buy a bike and associated safety equipment up to a value of €1,000 instead. Once again, the employee pays no income tax, PRSI or USC while the employer pays no employer's PRSI.
However, with the exception of pension contributions, and even they are capped at an earnings limit of €115,000 per year, most Irish tax breaks are relatively minor and tightly hedged with conditions and restrictions.
While this might seem harsh, it is surely better than the US situation where the super-wealthy have been able to channel their income into capital gains, which are taxed at a maximum rate of 20pc, rather than income, the top rate of income tax in the US in 37pc. This situation has led Warren Buffett, one of the world's wealthiest men with an estimated net worth of $83bn, to observe that he pays a lower effective tax rate than his secretary.
Given the huge amounts at stake, the McGann case will not be the last such dispute between high-earners and Revenue.
Sunday Indo Business