Monday 18 December 2017

It makes no sense to penalise our judges for agreeing to serve State

Judges' massive tax liabilities risk causing an open rift between key institutions of state, says Michael McDowell

I am not a champion of the judiciary. I have crossed swords with them individually and collectively when in office as a minister. I took on the chin a few ill-judged judicial swipes in my time.

And I would be the first to acknowledge that sometimes they have shot themselves in the foot as far as public opinion is concerned. Even though I practice before many of them, I am not interested in currying favour with them by what I write here -- and the thought that I might be seen to be attempting to do so made me hesitate from saying what I am about to say. But it needs to be said.

A few weeks ago, the Sunday Independent carried an opinion survey to the effect that a narrow enough majority of those surveyed believed that the Chief Justice has been correct to raise the effect of the Finance Act 2011 on certain judges during a private meeting with the Taoiseach.

One national newspaper, however, had described the meeting in question as "secret". And an anonymous "coalition source" was also quoted in the same article as saying that it was "highly inappropriate" for the Chief Justice to have raised the matter in the manner he did. It was reported that the Taoiseach had told the Chief Justice at the meeting that nothing would be done to address the concerns he raised. This I very much doubt. No Taoiseach would be that discourteous.

Well, I am on the side of the majority of people who told this paper they believed that there was nothing inappropriate in what happened. I believe, on the contrary, that it was "highly inappropriate" for the "coalition source" to characterise the meeting as "secret", and to accuse the Chief Justice of impropriety, under the veil of anonymity. There is an unexplained problem here which the Government is going to have to address.

It is this. We, along with the rest of the common law world, have a judicial system in which judges are chosen for appointment from among the best barristers and solicitors in private practice. We do not have a system in which the judiciary are selected from a cadre of career state lawyers who depend on the "system" to promote state-friendly persons to hold high office.

Typically, a solicitor or barrister in her or his mid-fifties is chosen on the basis that he or she has demonstrated intellectual capacity, independence of mind, and temperamental suitability to serve for 15 years with a retirement age of 70 (previously 72).

In most cases, appointees take a steep drop in earnings. In exchange they were traditionally paid roughly the same as a Government minister.

Because they were appointed late in their professional life, they qualify for a pension over 15 years. They are prohibited from practising in the courts if they retire -- for obvious reasons. Appointment to the bench signals the end of their earning capacity as lawyers.

The immediate problem is this. The Finance Act 2011, which was not properly debated at all, but was rushed through to enable the general election to take place early, results in certain judges now being faced with colossal tax liabilities. Some judges will face a lump sum tax liability on the day they retire, of between €750,000 and €1,200,000 to be paid from money they haven't got.

This arises because every year they serve from now on will add to a notional personal pension fund, and bring many of them further and further past the maximum allowable pension threshold. Because of their accelerated pension entitlements, some of them will find that the longer they serve, the worse their tax liability will become.

It is by no means unusual for a reasonably successful self-employed person (including lawyers who can never know if they will be appointed as judges) to have accumulated a personal private pension fund, accumulated over 25 years , of €1.1 million.

That may sound a lot. But remember that many self- employed persons could never afford a senior civil servant's pension deal. And a lot of self- employed people provide for their pensions in a totally different way -- e.g. buying a rental property.

If such a person takes a tax-free lump sum on retirement, the yearly retirement pension entitlement from such a fund would typically be €40,000 and, say, €20,000 for a widowed spouse. This is less than many senior public servants are entitled to on retirement in terms of pension.

By the way, self-employed lawyers are not, and never were, entitled to the very questionable pension arrangements available to company directors.

But if that person was appointed in the past to become a High Court judge, he or she will reach the maximum pension threshold after seven years. At retirement, under the terms of the Finance Act 2011, he or she may face a retirement tax bill of €743,201 or, if they have been appointed to the Supreme Court, €822,930. These are massive sums. Each year of service as a judge for the following eight years will accrue an additional tax liability of €90,524 per annum (or €103,500 if he or she reaches the Supreme Court).

Nobody could claim that the result is fair. And some suspect that it is unconstitutional.

If such a judge had put his or her savings directly into purchasing an investment rental property, or buying shares or on deposit, instead of payment into a retirement fund, this colossal tax liability would not have happened.

Yes, it is true that self-employed pension funds are tax exempt "on the way in", but the income from them is taxed as such "on the way out".

Quite apart from the gross unfairness of this result for some sitting judges, there is another very serious question. What reasonably successful lawyer will, from now on, be willing to be subject to such a colossal tax liability on retirement? Will they be expected to kiss goodbye to their retirement savings on appointment from now on?

The same kind of tax arrangements involving pension thresholds were introduced in the UK, but their government saw the unfairness for senior judges, and made specific arrangements to avoid the colossal tax bills that now confront some Irish judges.

I do not believe that the senior civil servants in the Department of Finance would have proposed these changes, if they themselves could have suffered the same colossal tax consequences. Cynics only have to remember how the BIK on car parking spaces died a mysterious death some years ago.

I do believe that the Taoiseach and the Minister for Finance will, as decent people, look again at the grossly unfair result for some judges of what was intended as a tax measure for millionaire fat cats who were dodging huge sums by using massive pension pots to stow away tax free multi-million sums. They know the Finance Act was rushed through without proper consideration by the outgoing government.

I hope they will not force some judge to bring a constitutional case before other judges to obtain basic justice.

On a different issue, the judiciary in the High and Supreme Courts took a voluntary cut in pay when asked. Despite the impression given in the media, they were never asked to take a statutory wage cut and they never refused to do so. Because a small minority in other courts declined to do so voluntarily, we are now being promised a referendum.

Whether that is constitutionally necessary is, in any event, something I very much doubt. I would have thought that a financial crisis would justify a general reduction in state remuneration of public servants and office holders including judges without contravening the provision in the constitution designed to protect the independence of the serving judiciary from punitive retribution in their pockets. State action, by allowing inflation or imposing income tax, often diminishes the real value of judicial pay without creating any constitutional issue.

Personally, I do not believe that the constitutional safeguards for the independence of the judiciary can or do require that the Irish State should borrow money we have not got to maintain the nominal level of judicial salaries when all other public salaries are being reduced. I think that a Bill to apply general measures to reduce state salaries and/or to increase the funding of pensions to judges would not be found unconstitutional. I do not believe that any referendum on the issue is needed to achieve that end.

As someone who has held Ministerial office, and who has found myself in that capacity at odds with the judiciary in different ways, I have to say that I have the gravest doubts about the wisdom of provoking or exploiting an open rift between the institutions of our state. It may make for good tabloid political "shape-throwing", but it is not statesmanship or good authority in action.

Michael McDowell is a senior counsel, former Attorney-General and former leader of the Progressive Democrats

Sunday Independent

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