The Supreme Court ruled on June 6, 2024, in five cases following the so-called "Christmas Judgment of Dec. 24, 2021.
These Supreme Court rulings show that for savers and investors, if the actual return is lower than the flat rate return calculated by the Tax Administration under the Recovery Act or the Transition Act, no more tax is due than on the actual return achieved. The Supreme Court has expressly ruled that it is up to the Taxpayer itself to prove this.
The above applies to the assessments still outstanding for the period from 2017 to 2022 to which the Recovery Act applied, but also to the assessments imposed for the period from 2023 to which the Bridging Act applies, until the introduction of the new system the "Actual Return Box 3 Act. (approx. as of 2027).
To summarize, taxpayers may have over the period 2017- 2022 choose from three systems.
- Levy under the statutory system, as it was at the time with the asset mix.
- Levy under the Recovery Act with three categories; bank deposits, other assets and debts.
- Levy on actual return.
For the period starting in 2023 until the introduction of the new Box 3 Actual Return Act, taxpayers can choose between two systems. However, this choice cannot be made until the objection is filed.
- Levy under the Recovery Act with the three categories; bank deposits, other assets and debts
- Levy on actual return
For tax partners, each of the partners may choose their own system. However, it remains to be seen what the new model for the system of taxation based on actual return will look like, which makes optimization complex.
Principles of calculating actual return
- When determining the actual return, the taxpayer's entire assets including bank balances in Box 3 must be included. This is therefore a comparison between the actual rate of return and the standard rate of return for all assets together and not for each asset separately.
- The tax is on nominal Box 3 assets. Inflation may not be taken into account.
- No tax-free assets may be taken into account.
- Unlike in corporate taxation, the positive or negative return in other years may not be taken into account. In other words, no loss offset applies. It may happen that you can have a negative income in year 1 and a positive income in year 2. Thus, the income of year 2 may not be reduced by the negative income of year 1.
- Actual returns consider not only direct benefits derived from assets such as rent, interest and dividends, but also indirect unrealized changes in value, positive and negative.
- Expenses are not deductible, which dogmatically in the wealth equation system is not entirely pure. However, interest on debts belonging to assets in Box 3 may be taken into account.
The above clarifies a number of issues but also raises questions, however. For example, how do you determine the value development of real estate? If the design of Box 3 is adhered to as much as possible, for homes this would be the development of the value of the WOZ value. Then the increase in the WOZ constitutes the unrealized return. If the home were purchased at a purchase price higher than the WOZ value, which is not inconceivable in this day and age, or if the home is improved, does a deductible claim arise?
Questions to be answered
Although the Supreme Court was quite clear in the June 6, 2024 ruling, a number of questions remain open, which will hopefully be answered later this year.
- Is the use of a second home, which is not rented out, also income that is taxed in Box 3?
- For example, should interest paid for 2023 that is received on Jan. 1, 2024, be considered actual returns for the year 2023 or 2024?
- How to deal with the annual determination of unrealized changes in value for obsolete items such as holdings in companies of less than 5%, real estate and investment art.
Mass objection procedure
We are still awaiting the outcome of the Mass Objection Plus proceedings on the answer to the question of whether those who failed to file or filed late objections on the IB assessments for the years 2017-2020 with a box 3 element, may still be eligible for restoration of rights under the Christmas ruling.
It is certainly going to take months before there are any judgments in these proceedings.
Interest
The Supreme Court has ruled that there is no entitlement to interest compensation, neither tax interest nor statutory interest, if a taxpayer gets money back through application of the restoration of rights. This is different only if the statutory interest exceeds the Box 3 tax credit.
Steps to take
When a taxpayer receive a final assessment in which tax has been levied on the lump-sum income and the actual return is lower, then there must be objections.
It is also recommended that the taxpayer who has received a final assessment and whose assets consist only of savings in Box 3 and whose actual return is lower than the flat rate return, object. Indeed, the Supreme Court has ruled that the entire Recovery Act is incorrect. However, the Secretary of State believes that this does not apply to savers. For the years 2021 and 2022, these savers have a flat rate return of zero, given or the rate that applied to bank deposits. For these years, in case of a negative actual return, nothing needs to be done.
The ministry announced that it would respond within eight weeks of the ruling.
An online form is being developed at the ministry in which the actual return can be declared. It is expected that this form will be available in the last quarter of 2024 or the first quarter of 2025. It is therefore not necessary to compare the actual return with the standard return. However, it is important to object as soon as the final assessment is issued.
Action items (summary).
- Objections can be made only after the assessment is final.
We ask you to provide your final assessment yourself. Then we make pro forma objections. - It is now waiting to see how the Tax Office crystallizes the format regarding the calculation of the actual return.
- In addition, we are awaiting another important ruling from the Supreme Court regarding whether taxpayers who later formally objected will be included.
- Based on the information we receive from clients, it is not always easy to determine what the actual return has been in any year. With regard to investments in listed companies, deposits and withdrawals do not count in determining the actual return. But also for investments in investment properties, the value development of obsolete shares, capital insurance, etc. This information is generally not available to us. Therefore, in order to make an overall design for taxation based on the actual return compared to the lump-sum return, we need additional information.
For more information and the publication, consult the Supreme Court's website.
Author: mr. Joey S. Spaans
This Blog is written as of June 2024.
