How spouses can apply for and file a separate tax return?

Introduction

The Commissioner for Revenue (CfR) has recently published a manual of how spouses may apply for a separate tax return in terms of Article 49A of the Income Tax Act (‘ITA’).  The manual may be accessed from the CfR’s website by clicking here.

Article 49A of the ITA provides for the possibility for a married couple living together to opt to file a separate tax return if one of the following conditions are met:

1. Each spouse must be in receipt of income consisting of gains or income consisting of one of the following :

(i) gains or profits from a trade or business, profession or vocation

(ii) gains or profits from employment or office (excluding directors’ fees)

(iii) pension income received in respect of past employment

OR

2. The spouses have entered into a public deed outlining that the property they acquire during their marriage will be governed by the system of separate property or community of residue with separate administration, or the equivalent if entered into in a foreign jurisdiction.

How to submit an application?

Aan aplication to submit a separate tax return can be made by one of the spouses by using his or her E-ID.   The election will start to apply as from 1^st January of the year in which the election is made.  The election will cease to apply if revoked by means of a notice in writing signed by both spouses or if deemed necessary by the CfR.  A spouse may not apply for a separate tax return unless a minimum of 4 years of assessment have elapsed from the year of cancellation.

Tax rates

When an election for a separate tax return has been made, individual spouses may only use the single or the parent tax rates and the use of the married tax rates is prohibited.  The income of each spouse would be charged to tax in the name of the respective spouse and each spouse shall be held responsible for compliance with all the provisions of the ITAs including the timely submission of the tax return and the payment of the tax due.

Deductions

Deductions against chargeable income can only be claimed by the spouse in whose name the receipt has been issued.  Spouses may claim such deductions in equal proportions in cases where receipts are issued in both  names.  Examples of deductions include fees paid in respect of schools, child care, sports, school transport, cultural activities and fees paid in respect of homes for the elderly and disabled.

Unabsorbed capital allowances, losses or tax credits

Any unabsorbed capital allowances, credits or losses brought forward from years prior to the election for a separate tax return will be accounted for by the spouse in whose name the income was declared.  Where losses are jointly incurred (for example in the case of a capital loss incurred on the transfer of a capital asset jointly owned by both spouses) will be divided between the spouses in the same proportion in which they each owned an undivided share of the said asset.  Upon cancellation of the election to file separate tax returns, unabsorbed capital and trading losses of one spouse can be set off against the income of the other spouse.   Unabsorbed capital allowances can only be claimed against income from the relative source.

Rental and investment income

Spouses opting for a separate tax return and whose income excluding rental income is less than €9,100 in the case of single tax rates or €10,500 in the case of parents’ tax rates will lose their right to opt out of the final tax system and must pay tax of 15% on the gross rental income by filing the form TA 24.

The final tax system wherein one can opt to pay a final tax of 15% on all investment income will continue to apply.  Where spouses do not elect to have a final withholding tax deducted at source on their investment income, such income must be declared in the personal tax return.  Spouses opting for a separate tax return, who did not elect to have a final withholding tax deducted at source and whose income excluding investment income is less than €9,100 in the case of single tax rates or €10,500 in the case of parents’ tax, they will be required to pay tax at the rate of 15% on all the investment income which they will declare in their personal tax return.  The same will apply if the spouses earn more than the above-mentioned thresholds.  This means that in such cases, the taxpayer must declare the investment income in his or her personal tax return, but the tax rate will remain 15%.