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McGrath may be missing the point on ETF tax changes

Minister sees deposits as potential source of business funding while investors just want reform of punitive tax system

Minister for Finance Michael McGrath appears to be focused on channelling funds to businesses rather than helping investors. Photograph: Sam Boal/Collins Photos

Proinsias O'Mahony's face
Proinsias O'Mahony
Mon May 20 2024 - 10:48

Is Minister for Finance Michael McGrath missing the point when it comes to tax treatment of exchange-traded funds (ETFs)?

Last year, McGrath announced a review into Ireland’s funds sector. Currently, Ireland’s eight-year deemed disposal rule forces investors (including lower-rate taxpayers) to pay a 41 per cent exit tax even if they have not sold their fund.

Deemed disposal was introduced so Revenue could collect investment taxes sooner. However, Revenue already taxes dividends from distributing ETFs, but distributing ETFs are, like accumulating ETFs that reinvest dividends, still subject to deemed disposal.

Additionally, ETF losses cannot be offset against ETF gains.

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Mr McGrath recently indicated that Budget 2025 could include tax changes to encourage investment. Over €150 billion is sitting in deposit accounts, he noted, earning little return. A “significant share of those funds” could be “put to more productive use in the economy”, he added, investing in structures that help fund “early-stage and innovative businesses”.

[ Tax treatment of exchange-traded funds has to change ]

However, ordinary investors are completely uninterested in funding such businesses. Long-term investors want simple tax reforms to a penal, irrational and needlessly complex system. They want easy access to cheap, diversified funds, instead of feeling forced to buy individual stocks.

[ Tax rules mean Irish investors don’t care if Buffett’s best days are over ]

The minister may well ultimately deliver such changes. Still, it would be helpful if there was less focus on channelling funds to businesses, and more on ordinary investors’ needs.

Michael McGrathtaxBudget