Learning about deeds of covenants, very confused - help!

April O Neill II

So I'm learning about personal taxation at the moment, I understand about deeds of covenant towards incapacitated individuals but not not incapacitated - dear god. It is really poorly explained in my lecturer's notes and in the ITI literature.

Here is an example to attempt to explain it in the booklet we got in college:

Gerry, a single man, pays his 79 year old father 2,000 euro per annum under a seven year deed of covenant. His statutory income is 30,000 per annum.

Income 30,000
Max. deduction for
deed of covenant
(5/105 x 30000) 1,429
Total income 28, 571


Income 30,000
Max deduction 1,500
(5% of 30,000) 28500

I can't reconcile the second part with the first part. The first part makes more sense to me, as the max deduction is supposed to be 5% of total income, not statutory income. But the second part is how it's been calculated in every example I've seen and problem I've done. I suppose I could just accept that that's how it's calculated, but I'd like to actually understand it and not just learn by rote. Why bother going through the faff of the first part if that's not how you calculate it?

It's driving me daft!

Thanks!

phormium

Where did the first bit come from? Is that in the Revenue guidelines?

I have been doing DOC's for years for family and have never seen mention of that first calculation.

April O Neill II

phormium wrote: »

Where did the first bit come from? Is that in the Revenue guidelines?

I have been doing DOC's for years for family and have never seen mention of that first calculation.

Thanks for your response!

It's in my lecturer's manual. It's very confusing. The second part is how it is done in every problem I have tried and every other example bar this one that I have looked at (it's her main example of deed of covenants towards individuals who aren't incapacitated). My course gives me Part 1 and some part 2 ITI exemptions, and we are generally following their curriculum and it really, really isn't a Mickey Mouse course but this example from my lecturer's manual has really thrown me, and I can't find anything like it anywhere else. I've wasted hours trying to figure this example, and going by her printed notes that state that the deduction is 5% of total income.

So, phormium, when you are doing the calculations to figure out the max deductions, you take it to be 5% of statutory, yeah?

Howjoe1

April O Neill II wrote: »

Thanks for your response!

It's in my lecturer's manual. It's very confusing. The second part is how it is done in every problem I have tried and every other example bar this one that I have looked at (it's her main example of deed of covenants towards individuals who aren't incapacitated). My course gives me Part 1 and some part 2 ITI exemptions, and we are generally following their curriculum and it really, really isn't a Mickey Mouse course but this example from my lecturer's manual has really thrown me, and I can't find anything like it anywhere else. I've wasted hours trying to figure this example, and going by her printed notes that state that the deduction is 5% of total income.

So, phormium, when you are doing the calculations to figure out the max deductions, you take it to be 5% of statutory, yeah?

You seem to be making it complicated.

He can Covenant to his father (based on old age, infirmary, i.e. incapacitated).

THe max is 5%of his Income.

SO if his income is €30,000

the max is €1,500, which is a charge that he can reduce his income by before working out his tax. and you then add back the tax on the covenant.

hope that helps rather than confuses more, if not ask away.

April O Neill II

Howjoe1 wrote: »

You seem to be making it complicated.

That's not me complicating it myself, that's the main example in our printed notes! It does rather seem to have been made unnecessarily complicated it, doesn't it? So, it's 5% of statutory income, not total income?

Howjoe1

April O Neill II wrote: »

That's not me complicating it myself, that's the main example in our printed notes! It does rather seem to have been made unnecessarily complicated it, doesn't it? So, it's 5% of statutory income, not total income?

Sorry Anne, I meant the example is complicated.

The first example is misleading and of little help imho.

I think for them figures to work, the example would have to say, he is giving a covenant to his father for the max allowable of 5% and his total income including the 5% covenant is €30K. But never seen it explained like that.

Query example 1 with your lecturer tomorrow;)

April O Neill II

Howjoe1 wrote: »

Sorry Anne, I meant the example is complicated.

The first example is misleading and of little help imho.

I think for them figures to work, the example would have to say, he is giving a covenant to his father for the max allowable of 5% and his total income including the 5% covenant is €30K. But never seen it explained like that.

Query example 1 with your lecturer tomorrow;)

Definitely. Can't understand what she was at!

Had such a busy schedule of study today and wasted sooooo much time on this. Should have stuck a pin in it and moved on. Live and learn!

Howjoe1

April O Neill II wrote: »

Definitely. Can't understand what she was at!

Had such a busy schedule of study today and wasted sooooo much time on this. Should have stuck a pin in it and moved on. Live and learn!

yep. frustrating. and the covenant part is probably only worth 1 mark:D

April O Neill II

Howjoe1 wrote: »

yep. frustrating. and the covenant part is probably only worth 1 mark:D

I'm a perfectionist, unfortunately!

And we have an online quiz worth 10% of the module in a few weeks, so why I got so het up is that unlike a pen and paper exam, I'm worried that we won't get to show any workings at all, that there'll just be a choice of figures, so any part wrong would have the whole answer wrong, hence no marks. At least with workings shown, you can pick up marks for the bits you get right...

Howjoe1

April O Neill II wrote: »

I'm a perfectionist, unfortunately!

I'm like that myself. And have wasted hours in the past only to discover the solution in the book was wrong:mad:

A few glasses of wine helps afterwards:)

April O Neill II

One more q. If a wife and husband are going for separate assessment and one of them pays a deed of covenant, but their individual income isn't enough for the whole covenant to fall within 5% of his/her income, can the other's income be included so that it's all deductible?

Mr. Incognito

April O Neill II wrote: »

One more q. If a wife and husband are going for separate assessment and one of them pays a deed of covenant, but their individual income isn't enough for the whole covenant to fall within 5% of his/her income, can the other's income be included so that it's all deductible?

Not in that example in theory. You would be making up facts outside of the question. For the purpose of exam computations the contributions would be capped at 5% of their income as given. You would not know the wifes income. (if any)

In reality however interspousal transfers are free of all taxes so you would advise the husband to take a tax free gift from the wife to boost his income to take advantage of the relief and if it was an annual payment to elect for joint assessment. I would make that comment in the exam for a one marker.

April O Neill II

Mr. Incognito wrote: »

Not in that example in theory. You would be making up facts outside of the question. For the purpose of exam computations the contributions would be capped at 5% of their income as given. You would not know the wifes income. (if any)

Oh, well the problems I'm looking at give both incomes - work out their single and joint assessment liabilities type thing. I'm just wondering what would happen if extended to what their separate assessment liabilities would be.

So, if given both incomes in a question, if you were to work out separate assessment, you can use both incomes to work out the deduction?

Howjoe1

April O Neill II wrote: »

One more q. If a wife and husband are going for separate assessment and one of them pays a deed of covenant, but their individual income isn't enough for the whole covenant to fall within 5% of his/her income, can the other's income be included so that it's all deductible?

I stand open to correction, but I would have assumed that the amount is restricted to 5% of the Coventor's income only, and whether joint assessment or separate assessment would be irrelevant.

April O Neill II

Howjoe1 wrote: »

I stand open to correction, but I would have assumed that the amount is restricted to 5% of the Coventor's income only, and whether joint assessment or separate assessment would be irrelevant.

Me too, but looking at some solutions, both incomes seem to have been taken into account. I'm going to have a look at the TCA to see what it says.

April O Neill II

I've since very much got my head around it, thanks to all who replied to this thread, it really helped a lot!

dogsears

April O Neill II wrote: »

I'm going to have a look at the TCA to see what it says.

Always a good idea!:D

That's where the law is after all. It can be easy to rely on lecture notes, or textbooks, or even Guidance notes from Revenue, but at the end of the day, you always have to go back to the legislation and case law.

bilbot79

Sorry to rehash an old thread but I'm a bit confused on these deeds of covenant.

Is it that you can give away 5% of your total income to an elderly parent and then claim 41% tax relief on that?

Revenue says the covenantee must have a ppsn so I guess a northern Irish parent covenantee couldn't participate.

phormium

I don't know about the NI situation.

Other than that you can 'give away' as you put it a percentage of your income to an elderly parent, the money that you give is then no longer considered as part of your income so the person who gets it can claim back the 20% tax you paid on it initially and you can claim back the excess 21% if you were in the 41% bracket.

The person who gets it can only claim back the 20% assuming their existing income is not liable to tax, otherwise they would just be paying tax on it anyway so no gain to them other than the money itself but the doner if on higher rate can still claim back the excess over basic rate.

This works best if the parent has no tax liability, they have the gift money, they have the 20% back and you have the 21%

If the parent has taxable income and in the 20% bracket then they have the gift money, no tax rebate for them and you have the 21% rebate.

If the parent is in the 41% bracket then I couldn't see any benefit to doing a DOC, may as well just hand them the cash! You could probably still claim back the 21% but they would have to pay the 21% extra on it.

It's a system that works very well in the right situation, best scenario is parent on state pension only and children on higher tax brackets top that up to just below tax exemption limit. Everyone gets tax rebate then as the money given is no longer considered belonging to person giving so they can get the rebate of the excess tax and the receiver who has no tax liability can claim back the basic tax paid.