Tax Treatment of Married Persons: Time to Dust off the Murphy Case


The Murphy case was a seminal 1980 income tax case in which the Supreme Court held that under the Constitution a married couple should not pay more tax than a cohabiting couple. The plaintiffs were Francis and Mary Murphy, who were both primary school teachers employed in different schools. At the time, if a married woman was working, her income was added to her husband’s income and taxed as if it was his. While there were some additional allowances to which a married man was entitled but a single person was not, the net effect was that a married couple living together would pay more tax than a cohabiting couple. In essence, because they were married they paid an additional IR£250 in tax.

Under the system in place at the time, a married woman could not elect for single assessment, and the husband was automati-cally the assessable person. The offending provisions of the Income Tax 1967 were ruled to be repugnant to the Constitution. Subsequently, each spouse was permitted allowances and rate bands equivalent to single person’s, which were transferable between spouses. The system was subsequently modified in Finance Act 1999, which introduced the current system of tax credits and individualisation.

The purpose of this article is to illustrate some aspects of the tax code where married couples are at a disadvantage compared to a cohabiting couple in similar circumstances. Each of these instances of discrimination applies regardless of whether the couple is jointly, separately or singly assessed.

PAYE Tax Credit: Proprietary Director
The employee tax credit (or the PAYE tax credit) is available to individuals in receipt of emoluments taxed under the PAYE system. Emoluments of a proprietary director and/or the spouse/ civil partner of the director that are paid by the company are excluded from the credit. Many Irish individuals are employed by companies in which their spouse is a proprietary director in circumstances where if they were not married they would benefit from the credit. Likewise, the emoluments paid by self-employed persons to their spouses/civil partners are excluded from the credit. Again, it would not be unusual for traders, either sole or in partnership, to employ their spouse. In each of these cases the credit would be available to a cohabiting partner in similar circumstances. It is difficult to reconcile the Murphy case with operation of the PAYE credit.

Company Buyback of Shares: Substantial-Reduction Requirement and Connection Test

The company buyback of shares provisions essentially enable a qualifying individual to avail of CGT treatment on the repurchase of his or her shares. There are many conditions to be met by both the company and the individual to obtain CGT treatment.

One condition is that the individual and his or her associates must have substantially reduced shareholding in the company after the buyback. The definition of associate includes a husband and wife living together. This provision may potentially preclude one spouse from obtaining CGT treatment where the combined marital shareholding is not reduced to 75% of the pre-buyback holding. Take the example of a company that is owned 75%:25% by a husband and wife, respectively, where the latter wishes to retire and have her shares bought back by the company. She intends to claim retirement relief on the redemption proceeds, for which all of the other conditions are met. In this instance, however, the substantial-reduction test would not be met as the wife’s associate’s shareholding, that of the husband, would be aggregated with hers to determine whether the 75% substantial reduction had occurred. Before the buyback the married couple own 100% of the company, and after it they still own 100%, on the basis that the wife’s associate’s shareholding is included. This would not be an issue/difficulty for a cohabiting couple.

The loss of retirement relief on the buyback proceeds could represent a considerable amount of tax, dwarfing the amounts involved in the Murphy case, even with inflation taken into account. With the prevalence of family-owned businesses in Ireland, such a situation would not be unusual. This provision may have the effect of deferring the passing on of a corporate family business to the next generation. In this example it would be only the acquisition of greater than 25% of the combined shareholding of the husband and wife, subject to the connected rule considered below, that would satisfy the substantial-reduction test after the granting of a shareholding to an adult child. This may not be commercially viable on either business or financial grounds.

An additional requirement for CGT buyback treatment is contained in s180 TCA 1997, which states that a vendor cannot be connected with the company after the buyback. Defined in s186 TCA 1997, a connected person is one who has more than a 30% interest in the capital, the voting power or the assets of the company. The powers and rights of a person’s associates are aggregated to determine whether the person is connected. Similar to the substantial-reduction test, a husband and wife living together are treated as associated with one another, and thus their collective shareholding must be below 30%.

Take, as an example, Company X, which has three shareholders – A, B, C – who own 50, 30 and 20 shares in the company, respectively. B and C are married to each other, and C wishes to have his shares bought back by the company. In this instance the substantial-reduction test is met, as B now holds 37.5% of the company (30 shares out of 80) and the collective shareholding of B and C has been reduced to 75% of its pre-buyback holding. However, C is still connected with the company because C is associated with B, who holds more than 30% of the shares. Again, this would not be an issue for a cohabiting couple. If B and C were merely cohabiting, they would not be associated, and the CGT treatment on redemption would be satisfied.

Section 817 TCA 1997: Avoidance Provision to Counter Cash Extraction

Section 817 of TCA 1997 is a complex anti-avoidance provision that seeks to prevent schemes that extract cash from close companies from availing of CGT treatment. It has the effect of treating the disposal proceeds from the sale of shares as an income distribution unless the disponer shareholder has significantly reduced his or her shareholding.

Take, as an example, A and B, who are married and equally own a trading company. B wants to retire from the company and have his shareholding acquired with the resources of the company. The company share buyback route may not be available for some reason (e.g. the trade-benefit test is not satisfied). Although the company has sufficient distributable reserves and cash to acquire the shares indirectly, in order to avoid distribution treatment B must ensure that his shareholding is sufficiently reduced for the s817 substantial-reduction test. This test aggregates the shares of the disponer shareholder and those connected with him or her. Connected persons include spouses. Because A and B are married, their shareholdings are aggregated, and B does not pass the test. This is another clear example where a married couple may end up having a significantly higher tax burden than a cohabiting couple in similar circumstances.

Interest Relief Restriction: Married Couples

The Case V rental-income provisions contain a restriction on interest deduction where the funds are borrowed to acquire a rental property from a spouse18 There is no similar restriction on interest deductibility where the property is acquired from one member of a cohabiting couple.

Close Company: Associate of Participator

The close-company rules contain, inter alia, provisions on how shareholders and others may interact with their companies. Because the majority of Irish companies are family-held close companies, these rules have a potentially significant impact on the Irish business landscape.

The close-company rules contain restrictions on participators’ expenses, interest paid to directors and loans to participators. Section 436 TCA 1997 treats certain expenses paid to a partici-pator as a distribution. Section 437 treats most interest paid to a person with a material interest (greater than 5%) as a distribution. Section 438 treats a loan made to a participator as an annual payment and requires income tax at the standard rate to be deducted and paid over to the Revenue Commissioners. In each of these instances these provisions are extended to associates of partici-pators/those with a material interest. An associate, in relation to a participator, is defined in s433(3) and includes a relative or partner of the participator. A relative includes a husband, wife or civil partner.

Each of these close-company provisions therefore has the potential to apply to a spouse of a participator but would not apply to a person who is cohabiting with a participator. This is another clear example where tax provisions are being applied to a spouse purely because they are married to a participator.

To Put This in Perspective

It is worthwhile putting this in perspective, especially now that we are coming up to an election and there would appear to be indicators about putting the self-employed on a more equal footing with employed persons for tax purposes. This is despite the fact that there are so many features (some listed above) that discriminate against married couples (who have constitutional protection) in the tax code and that there is no constitutional protection per se for self-employed persons.

In many micro-enterprises, both spouses are employed by the business, so this is a very practical issue rather than a hypothetical one. Ireland has 185,000 20 small and medium-sized enterprises, meaning that businesses with 250 or fewer employees employ 68% of the workforce, or 1.2m people. Approximately 90% of these businesses are micro-enterprises, with 10 or fewer employees, which equates to 168,000 businesses employing 323,500 people. On average, 47%21 of the population aged over 15 are married, and applying this average to the business owners equates to 79,000 married micro-enterprise owners. This means that there are 79,000 spouses of owners of micro-enterprises who are affected by the (arguably unconstitutional) tax provisions restrictions (e.g. no PAYE credit) that apply solely because of the taxpayers’ married status. Legally and logically, as well as economically, it would seem to make more sense to address the discrimination in the tax code between married and cohabiting persons rather than employed and self-employed persons.