On granting a decree of judicial separation, Irish Courts have the power to make an order for periodical, secured periodical and lump sum payments by one spouse to another.
Tax law provides an income tax deduction for maintenance payments which are properly structured. A recent case highlighted that this relief does not extend to lump sum payments whether made in one amount or by installment.
Tax law for 'maintenance arrangements'
Tax law provides an income tax deduction for maintenance payments made by a taxpayer for the benefit of a former spouse.
To access this relief the payments must be:-
annual or periodical, and
made at a time when the wife is not living with the husband, and
made under a legally enforceable "maintenance arrangement” is defined as any legally enforceable arrangement. The definition is wide enough to cover a court order, an arbitration award and a deed of separation including foreign orders and arrangements.
The tax issue with lump sum payments
The Family Law Act, 1995, draws a distinction between periodical payments (whether secured or otherwise) and lump sum payments. It expressly provides that a lump sum payment may be payable by a series of installments. The tax issue that arises is that lump sum payments (whether paid in one amount or by installments) do not qualify for relief.
In a recent tax case, the Revenue Commissioners successfully challenged entitlement to relief where a taxpayer consented to a decree of judicial separation, under which he would have to pay a lump sum maintenance payment to his wife in two parts.
Lawyers structuring separation agreements should have all asset and maintenance provisions reviewed by tax expert.