The Gazette 1983

GAZETTE

JANUARY/FEBRUARY 1983

The Tax Implications of

Marital Breakdown

by Fergus Gannon A.C.A.*

*Mr Gannon is a chartered accountant practising in

Dublin.

N the U.K. case of

Lewis v. Lewis

[1977] 3 ALL

E.R. 922 the Court of Appeal emphasised that,

where a court is being requested to approve financial

provisions for inclusion in a Court Order, it is

essential that the tax implications of the proposals be

worked out and presented to it. The purpose of this

article is to outline the tax implications in the

Republic of Ireland that arise on Marital Breakdown.

There is no provision in the Income Tax Acts

whereby an individual is permitted to deduct from

his taxable income payments made for the support of

his spouse. However, where a Separation Agreement

provides for payments the payer (almost invariably

the husband) is entitled (subject to the use of the

correct form of words in the maintenance clause, as

considered below) to deduct the amount of the

payment from his taxable income in arriving at his tax

liability. In such circumstances the amount received

under the maintenance agreement is taxable in the

hands of the recipient.

Maintenance Clauses come within the ambit of

Sections 433 and 434 of the Income Tax Act 1967.

Under these Sections the payer is obliged to deduct

tax at the standard rate (35%) and account to the

Revenue for the tax deducted. The recipient will be

taxable on the gross amount and granted a credit

against tax liability for the tax deducted by the payer.

For example, if A agrees to pay Mrs. A. £10,000

per annum for the rest of her life under a Separation

Agreement the tax position will be as follows:

1. A will be allowed a deduction of £ 10,000 each year

from his taxable income.

2. A will deduct £3,500 from the £10,000 — paying

£6,500 to Mrs. A and £3,500 to the Revenue

Commissioners thus discharging his liability to his

wife in full.

3. Mrs. A will be taxable on the gross amount

(£10,000) less her allowances, etc. and she will be

entitled to deduct £3,500 from her tax liability. If

her liability is less than £3,500 she will be entitled

to a repayment.

For ease of administration for Mrs. A it would be

as well if she had incorporated in the Separation

Agreement an undertaking by her husband to supply

her with a Form R. 185 within, say, 21 days of the end

of each Income Year. A Form R. 185 is a Revenue

Form in which the husband sets out the gross amount

of the payment and the tax he has deducted.

Wording of Maintenance Clauses:

This brings us to the wording used in maintenance

clauses, which are of two types — one which provides

for payment of a gross amount from which tax will be

deducted, the other provides for a net amount. It is

important that the payer is aware of the implications

of and difference betweeen them.

In one type the payer agrees to pay a stated sum

without mention of tax. In the other the payer

convenants to pay "such sum as after deduction of tax

at the standard rate amounts to £x per annum."

The Agreement should not contain a provision

whereby the sum will be paid "free of tax" or any

similar wording.

If for example A agreed to pay Mrs. A £10,000

without mention of tax the position is as outlined in

the above example. If, however, A agrees to pay Mrs.

A (wife) such a sum as after deduction of tax (at the

standard rate) will amount to £10,000 per annum he

will have to pay £5,385 to the Revenue

Commissioners as well as £10,000 to Mrs. A (i.e., it is

construed as an agreement to pay £15,385 less tax at

the standard rate (35%) amounting to £5,385, leaving

a net £10,000 payable to Mrs. A).

In summary the situation is as follows:—

Agreement Type

Payable to Mrs. A

Payable to Revenue

Commissioners

Total Payable by A

6,500

3,500

10,000

5,385

£10,000

£15,385

A person considering making a "ne t" payment

should add on approximately 50% to arrive at the true

gross figure. In Agreement type 2, A will be allowed

write off £15,385 against his taxable income.