Covenants and Cash
Author:
Gerald Murphy
There was a time when the use of covenants provided an effective albeit complex tax-beneficial means of making donations to various individuals and trusts.Covenants may still be used though at present the beneficiaries are generally limited to those are incapacitated or who are over 65 years of age.
They were particularly useful in the past to parents of children attending third level educational institutions as a means of subsidising the cost of fees and the expenses of living at college.
At the time, the present restrictions were largely put in place, I had an 18 year old attending college. A covenant had been made which provided for a payment for a period expiring after a period of years or on the event of the ‘child’ passing relevant exams.
The covenant of course created a legal obligation which existed independently of the tax relief which might apply.
At the time the tax advantage only lasted so far as my son was concerned for another two years; that is until he was 20. The covenant might of course continue until he passed his exams so I would still have to pay him even though I no longer received tax relief.
Interestingly, when my son reaches 65 years of age, covenants in his favour can again carry tax relief for the payer. Hopefully he would have passed his exams long before and my covenant would have lapsed.
Had the covenant continued, no doubt the relief would have been challenged by Revenue under their present notion that unintended consequences should not apply to tax!
Back then, no alternatives were put in place.
EDUCATIONAL MATTERS
Approved bodies
Tax relief in respect of payments in connection with educational matters now has a different approach.
Firstly, there are payments directly to approved educational bodies including primary and second level institutions. It is interesting that these are all in the State and the law makes no provision for payments to institutions outside the State, even in the EU. Schedule 26A part 1 TCA 1997 sets out the main approval requirements.
As with other approved bodies, the minimum annual donation is €250 though there is an upper limit of 10% of total income if the donor is associated, i.e. is an employee or member of the body in question.
In some respects, the rules applicable to payment under deed are reflected in the current system. A donation must also satisfy the following conditions:
4It must be in the form of money
4It must not be repayable
4It must not confer any benefit on the donor or any person connected with the donor
4It must not be conditional on, or associated with, any arrangement involving the acquisition of property from the donor by the approved body.
There is obviously a potential problem where a parent makes a donation to a school attended by a child since a benefit might be assumed to arise. But the system provides a useful basis for encouraging gifts of money from former pupils who have no prospect of getting a benefit from it.
The relief for the donation is unnecessarily complicated by a distinction between the treatment of PAYE taxpayers (a direct claim for an effective subsidy by the approved body) and that of self employed individuals and companies (deductions from the donors taxable income).
One wonders how much of the tax subvention actually gets to the donee from PAYE donations not least because of complications with the concept of ‘accountable person’ for self assessment purposes.
In our pre-Budget submission the Institute of Chartered Accountants in Ireland (ICAI) sought greater clarity as to the concept of ‘accountable person’.
Third level fees
The other leg of providing tax relief is in relation to third level fees meaning the amount charged for tuition only.
We know there is a problem here with the abolition of fees in the State and the consequent move by parents into fee-paying second level schools for which there is no direct statutory relief.
Interestingly, the colleges generating such fees to not have to be in the State. The relief is extended to EU and non-EU institutions. There is an upper limit of allowable fees which at the time of writing must not exceed €5000 p.a.
Relief is given to the payer of the fees where the tuition is provided for him/ herself, for a spouse or for a dependant, the last condition extending the relief beyond the confines of parents and children, to the relationship of legal guardian.
Before the 1 July each year the Minister for Education & Science provides Revenue with lists of approved colleges and courses for the purposes of the relief.
Training courses fees
Other tax deductible fees relate to FÁS approved courses. These exclude postgraduate courses and cannot exceed 2 years duration. The subjects are limited to approved elements of IT and approved foreign languages, the approval being by the Minister for Enterprise, Trade & Employment.
As above, relief is given for tuition provided to the payer, their spouse or their dependant but up to a maximum of €1270.
Section 437A of the Act does not limit the course providers to bodies in the State. The approved lists suggest that they are all based here though overseas bodies issue many of the diplomas and or certificates of competence which are an essential feature of the scheme.
CHARITIES
In the past, charities were commonly beneficiaries of payments under covenant. The abolition of tax relief in this regard cannot have helped their fund raising efforts.
Whether the replacement system has significantly improved the position, perhaps only the charities can tell. That said, the Revenue, with its greater powers of information gathering as well as its approval powers should be in a position to inform the community at large as to many aspects of Charities’ finances. This could include, for example, the gross income of charities, as a whole or sector by sector, and the net payments to the beneficiaries.
Notwithstanding the Celtic Tiger and the fall-off in religious attendance, this State continues to maintain a high charitable sense. It would be useful to know the impact of that alongside the reports by Revenue of our tendency to put money off-shore in a more selfish manner.
Revenue publishes lists of approved charities. As with approved educational bodies, relief requires a minimum payment of €250 and is complicated by the different treatment for PAYE donors as compared with others.
Again, ICAI’s pre-Budget submission is relevant in this area.
SPORTS BODIES
The Act provides tax relief for donations to approved sports bodies for funding approved projects. The minimum qualifying total donation amount by a single donor in any year to an individual sports body is €250. Where the cost of an approved project exceeds €40 million relief may only be claimed on donations up to that threshold.
If a club or organisation is acquiring land or a building, developing facilities or purchasing fixed, non-personal equipment for sports activities, or repaying a loan for these purposes, the provision provides an incentive to individuals or companies to make a donation towards the cost of the project.
An approved sports body is one which holds a certificate from Revenue:
4that it is established and exists for the sole purpose of promoting an athletic or amateur game or sport, and
4that its income is exempt from income/corporation tax.
The Revenue website www.revenue.ie (under the heading of publications) contains information on this subject particularly as regards lists of approved bodies. The law and practice could however do with some streamlining especially with regard to off-shore bodies.
Gerald Murphy is Taxation Executive with the Institute of Chartered Accountants in Ireland.