Revenue Note for Guidance

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Revenue Note for Guidance

201 Exemptions and reliefs in respect of tax under section 123

Summary

This section provides that in certain circumstances all or part of a payment to which section 123 (payments on retirement or removal from office or employment) applies is exempt from income tax. Schedule 3 also provides certain relief from the charge to tax under section 123 which relief is supplementary to the reliefs provided by this section. The section also provides an exemption of up to €5000 of the cost of retraining, subject to conditions, where the retraining is provided as part of a redundancy package.

Details

Definitions

(1)(a) “the basic exemption” is €10,160 plus €765 for each complete year of service of the person in the office or employment in respect of which the payment is made up to the relevant date.

“foreign service” is service in an office or employment —

  • where tax was not charged in respect of the emoluments of that office or employment,
  • within the charge to tax under Schedule E, but where tax was not fully chargeable in respect of the emoluments of that office or employment, or
  • within the charge to tax under Case III of Schedule D, but where tax was not computed on the full amount of income arising in the year of assessment in accordance with section 71(1).

“the relevant date” is the date of the termination of the employment or the change in the conditions of employment in respect of which the payment is made.

(1)(b) In relation to a company, “control” is the power of a person to secure —

  • through the holding of shares or voting rights in the company or any other company, or
  • by virtue of any power conferred by the articles of association or any other document regulating the company or any other company,

that the company’s affairs are conducted in accordance with the wishes of that person.

In the case of a partnership, “control” is the right to a share of more than 50 per cent of the assets, or of more than 50 per cent of the income, of the partnership.

Associated persons

(1)(c) For the purposes of this section and Schedule 3, employers making payments to which section 123 applies are associated if, on the date the payment is made, one of those employers is under the control of the other or both are under the control of a third person.

Cost of Retraining

(1A)(a) “eligible employee” is a person who has more than 2 years continuous full time service or is deemed for the purposes of the redundancy acts to have 2 years continuous service.

“retraining” is a training course made available as part of a redundancy package, which is designed to improve knowledge or skills to be used in obtaining gainful employment or in starting a business. The course must be completed within 6 months of the employee being made redundant.

“redundancy package” is any scheme of compensation offered to an eligible employee when he ceases his employment.

(1A)(b) The first €5,000, of the cost of retraining an eligible employee, is exempt from tax where, as part of a redundancy package, an employer makes retraining available to all eligible employees.

(1A)(c) The exemption is not available on the cost of training a spouse, civil partner or dependant of an employer.

(1A)(d) The exemption is not available if an employee receives the cash or money’s worth in lieu of the employer providing the retraining.

Exemption

(2) Excluded from the charge to tax under section 123 are payments —

  • (2)(a)(i) of an amount not exceeding €200,000 –
    • arising on the termination of an office or employment by the death of the holder, or
    • made on account of the injury or disability of the holder (“disability” is to be taken as meaning a specified physical disability or mental disorder as distinct from a decline of powers due to advanced age),
  • (2)(a)(ii) in respect of restrictive covenants (chargeable under section 127),
  • (2)(a)(iii) made under any retirement benefits scheme where the employee has been charged to tax under section 777 in respect of the payment, and
  • (2)(a)(iv) made under a Revenue approved pension scheme or a statutory scheme or under a scheme set up by a foreign government for the benefit of its employees.

(2)(b) Where subparagraph (2)(a)(i) applies to any payment, or part of a payment, the other exemption provisions of this section and Schedule 3, including any deduction for Standard Capital Superannuation Benefit, shall not apply. A specific provision allowing for the making of a retraining payment, as provided for in subsection (1A), is included.

(2)(c)(i) The €200,000 limit referred to in subparagraph (2)(a)(i) shall be reduced by the amount of the aggregate of all previously exempted payments, and any exempt payments made at the same time, to which that subparagraph applies.

(2)(c)(ii) Where two or more payments are made in respect of the same person, or in respect of the same office, or in respect of different office or employments, for the purposes of determining whether the limit set out in subparagraph (2)(a)(i) has been exceeded, the aggregate of all such payments will be treated as if it was a single payment.

Reporting of exempt lump sums

(2A) It is obligatory to report to the Revenue Commissioners, within 46 days of the end of the tax year, details of the lump sum payments in that year and treated as exempt by reference to subsection (2)(a), that is, payments, or parts of such payments, made on the termination of an employment by the death of the employee or made on account of injury or disability of the employee. The particulars to be furnished are —

  • the name and address of the person to whom the payment was made,
  • that person’s personal public service number (PPS No.),
  • the amount of the payment made, and
  • the basis on which the payment, or part of the payment, is not chargeable to tax under section 123, and, where the payment is on account of injury or disability, the extent of the injury or disability, as the case may be.

Exceptions to the full exemption

(3) Certain payments made to former Members of the Oireachtas and public servants are not eligible for the full exemption provided in subsection (2)(a)(iv). Instead, such payments qualify for the other exemptions provided for in this section and in Schedule 3. The payments in question are —

  • a termination allowance payable to a former member of the Oireachtas,
  • a severance allowance payable to former Ministers or a special allowance payable to former Taoisigh,
  • special severance gratuities payable under section 7 of the Superannuation and Pensions Act 1963 or other analogous statutory payments,
  • any benefit paid in pursuance of a statutory retirement benefits scheme, other than normal retirement benefits, which are payable to an individual in circumstances of —
    • redundancy or abolition of office, or
    • for facilitating improvements in the organisation of the employer.
    For this purpose “normal retirement benefits” are recognised superannuation benefits customarily payable at normal retirement date under the relevant statutory scheme. Accordingly, normal retirement benefits may include benefits which are —
    • payable earlier than the normal specified retirement date,
    • calculated by reference to a period greater than actual service (for example, where an early retiree is granted added years), or
    • described as short service gratuities which are calculated on a basis approved by the Minister for Finance.

Exemption for foreign service

(4) This subsection excludes from the charge to tax on termination payments (under section 123) any payment in respect of an office or employment in which the holder’s service included a period of foreign service, and where that foreign service was —

  • three quarters of the whole period of service,
  • where the period of service up to the termination date exceeded 10 years, the whole of the last 10 years, or
  • where the period of service up to the termination date exceeded 20 years, one-half of that period, including any 10 of the last 20 years.

(4A) The exemption for foreign service under subsection (4) ceased to have effect from 27 March 2013, the date of passing of the Finance Act 2013.

Basic exemption

(5)(a) A charge to tax under section 123 only arises where the amount of the payment exceeds the basis exemption limit (that is, €10,160 plus €765 for each complete year of service).

(5)(b) Where 2 or more payments are made to or in respect of the same person in respect of the same office or employment, or in respect of different offices or employments held under the same employer or under associated employers the payments must be aggregated and the basic exemption is applied as if the holder had received a single payment. Where such payments are treated as income of different years of assessments, the basic exemption is deducted from the payment treated as income of the earlier year.

Additional relief

(6) A person may, within 4 years of the end of the year of assessment in which the payment is treated as income chargeable under section 123, make a claim in writing to have any relief provided in Schedule 3 applied to the payment.

Supplementary

(7) Payments chargeable to tax under section 123 are ignored where any provision of the Income Tax Acts requires income to be treated as the highest part of a person’s income.

Restriction of relief

(8)(a) With effect from 1 January 2011 the amount of the chargeable lump sum in accordance with section 123 shall be restricted to the lesser of —

  1. the taxable lump sum computed in accordance with the provisions of this section and Schedule 3, or
  2. €200,000.

(b) The amount of €200,000 is reduced by any previous exempt payments which the individual may have received to which section 123 applied and also any deduction granted under paragraph 6 of Schedule 3.

(c) The limit of €200,000 is exclusive of payments made in accordance with subsection (1A) i.e. retraining payments up to €5,000 and subsection (2) i.e. payments made on account of the death of the employee or injury or disability of the holder of an office or employment.

(d) Where 2 or more payments are made to an individual in respect of the same office or employment, or in respect of different offices or employments, the aggregate amount of the tax-free lump sums shall be restricted to a lifetime limit of €200,000.

Relevant Date: Finance Act 2021