Professional Level Options Module, Paper P6 (IRL)

Transcription

1 Answers

2 Professional Level Options Module, Paper P6 (IRL) Advanced Taxation (Irish) December 2012 Answers 1 ABC & Co Chartered Certified Accountants Any Street Any Town 1 September 2011 James Smart Any Street Any Town Re: Proposed transfer of your business to a limited company. Dear James, I refer to our recent meeting and am writing to give you my advice on the following issues: (i) The tax costs of transferring your business assets to the company and my recommendation as to whether or not you should transfer the premises and claim incorporation relief. (ii) The company s eligibility for the start-up exemption from corporation tax. (iii) Tax planning strategies to be implemented in the short to medium term. (iv) The tax implications of selling your shares in ten years time and exit related tax planning opportunities. (i) The relief from capital gains tax (CGT) on incorporation and the conditions which must be complied with before the relief applies. The transfer of assets from a sole trade to a company constitutes a disposal for CGT purposes and if gains arise, they will be taxable. However, there is a relief (incorporation relief) which defers the tax payable to the extent that the consideration is taken in the form of shares in the company. The following conditions must be complied with before incorporation relief applies: there must be a transfer of a business by a person to a company; the transfer must occur for bona fide commercial reasons; the business must be transferred as a going concern; the whole of the assets of the business or all of those assets other than cash must be transferred; and the transferor must receive shares in the new company in return for the business. Based on the information received, it is possible for you to avail of incorporation relief, provided all of the assets of the business (including the premises) are transferred to the company. The following analysis provides a comparison of the tax costs of transferring the relevant assets under two scenarios: Option 1: Taxes payable on the transfer of all assets (excluding cash). (Incorporation relief applies.) Option 2: Taxes payable on the transfer of all assets excluding the premises and cash. (Incorporation relief does not apply.) Option 1: Taxes payable if incorporation relief applies. Please refer to the attached Appendix 1 which contains our calculations of the CGT and stamp duty arising under this option. 1. Capital gains tax CGT of 7,010 is payable on the transfer. The relief provides for a deferral of gains amounting to 141,959 until such time as the shares in the company are sold. 2. Stamp duty Stamp duty at 6% will apply to the transfer of the premises and goodwill. Stamp duty at 6% will also apply on the transfer of the equipment, because it is being transferred in return for shares. On this occasion it cannot pass by delivery. The contract/memorandum for the transfer of assets for shares will include the equipment. This document is filed with the Registrar of Companies and is therefore deemed to be an instrument for the purposes of stamp duty. Stamp duty at a rate of 6% will apply to the receivables being transferred and they must be transferred to the company for the relief on incorporation to apply. It is recommended that every effort should be made to collect the receivables from your debtors before the transfer but for the purposes of our calculations, we have assumed an amount of 130,000 (as per the projected statement of financial position) will be transferred to the company. On this basis, the total stamp duty liability arising under option 1 amounts to 58, Value added tax (VAT) If both parties are registered for VAT, the transfer is exempt. It is, therefore, essential that the new company is registered for VAT before the transfer takes place. 19

3 With regard to the Capital Goods Scheme, where the property is considered old (i.e. outside the five-year period), then the transferee steps into the shoes of the transferor. The capital goods record must be maintained and passed over. The transferee (Smartelec Ltd) effectively inherits the adjustment period of the property. The transferor (you) is obliged to provide a copy of the Capital Goods Record to the transferee. The transferee must then comply with the scheme for the remaining intervals in the normal way and account for any change of use or any possible adjustments required when the property is sold. 4. Capital allowances The equipment has a current market value of 170,000, with a tax written down value of 120,000. The transfer would potentially trigger a balancing charge of 50,000. However, it is possible to jointly elect to transfer the assets at their tax written down value to avoid this charge. Option 2: Taxes payable if incorporation relief does NOT apply. In the event that the premises are not transferred to the company, incorporation relief would not apply and there would be no requirement to transfer all of the other business assets (excluding cash). It is suggested that: the premises would be retained in your personal ownership and rented to the company; the receivables would be left to be collected by the sole trade business and the proceeds used to pay off the creditors; and the equipment would be transferred by delivery in consideration for a director s loan to the company. If these suggestions are adopted, a stamp duty saving could be achieved by transferring the equipment by delivery if the proceeds for such a transfer are not shares in the company (but instead are a loan from the company to yourself). Further, assuming the same recommendations as those given for Option 1 apply in relation to the VAT registration of the company, and electing to transfer the equipment at their tax written down value, the only taxes arising under option 2 would be on the transfer of the goodwill which is valued at 150,000. The amounts payable would therefore be: CGT of 25% on 150,000 of 37,500 and stamp duty of 6%, amounting to 9,000, i.e. a total of 46,500. Recommendation Option 2 is recommended (i.e. the incorporation relief is not availed of) for the following reasons: 1. The tax payable is actually lower by 18,710, if incorporation relief is not claimed. The total tax costs of both options are summarised below. It can be seen that the additional CGT payable when the relief is not claimed is offset by the stamp duty savings associated with not transferring the premises and a portion of the receivables. CGT Stamp duty Total Option 1: Claiming incorporation relief 7,010 58,200 65,210 Option 2: Not claiming incorporation relief 37,500 9,000 46,500 Difference 18, In addition to the above, it should be noted that the CGT relieved under incorporation relief is only a deferral (i.e. the base cost of the shares in Smartelec Ltd will be reduced by the deferred gain in the event of a future disposal), whereas the stamp duty costs are a permanent cost. Therefore, the long-term tax cost of claiming incorporation relief is substantially more than the cost of not claiming it. 3. It is generally preferable to retain assets (such as premises) which have the potential to appreciate in private hands rather than transferring them to a company, as this avoids the double charge to CGT on a subsequent disposal of the asset by the company. 4. In the event that the company were to experience trading difficulties in the future, the premises asset would be safely retained in private hands. (ii) (iii) Eligibility for start-up company relief from corporation tax. Unfortunately, the new company will not qualify for this exemption as the relief specifically excludes any trade which was previously carried on by another person. Tax planning strategies to be implemented in the short to medium term. (1) Employment of spouse It is recommended that your wife, Anna, takes a salary of up to 23,800 per annum, to avail of her 20% tax band. You can take a lower gross salary to compensate for the proposed salary to be paid to Anna. As she has a clear role within the organisation, the payment of this amount of salary to her should not cause a problem with the Revenue. The tax saving arising from this recommendation will amount to 4,998 per annum ( 23,800 x (41% 20%)). 20

4 (2) Corporate pension scheme There are significant benefits in setting up a Revenue approved corporate pension scheme. This is a tax efficient method of extracting funds from a company. This option should be considered in relation to both yourself and Anna. The contributions paid by the company (as employer) are fully tax deductible (subject to a restriction where the contributions are excessive). The company s tax deduction is calculated by reference to the pension payments made in the accounting period. The contributions made by the company are not subject to the same restrictions as those for personal contributions made by the employee or director. Contributions made by an employer do not give rise to a benefit in kind for the employee/director. (iv) The tax implications of selling your shares in ten years time and exit related tax planning opportunities. (1) When an individual aged 55 years or over disposes of shares in a family company, the gains on such disposals may be exempt from CGT. There is a limit of 750,000 on the sales proceeds, if the disposal is to a third party (not a child of the vendor). The key requirements are that the vendor owned the shares for at least ten years prior to disposal and that the individual selling the shares must have been a director of the company for at least ten years and a full-time working director for at least five years. If you dispose of your shares in the company in ten years time when you are 55 years old, you will meet the above conditions, but if the company continues to be profitable, the proceeds from the sale of all the shares may well exceed 750,000 (even if the premises are not part of the assets of the company), in which case retirement relief would not be available. (2) Exit related tax planning opportunities Maximisation of retirement relief In view of the limit applied to retirement relief, it would be advisable to issue your wife Anna with 50% of the share capital of the company, to appoint her as a director immediately and to ensure that she is a full-time working director for five years prior to the disposal. This can be any five years. The implementation of the above would allow for sale proceeds of up to 1,500,000 to be received on the future sale of the business to a third party. However, in order for Anna to qualify for retirement relief, it will be necessary to wait at least until she reaches the age of 55 (i.e. 12 years from now) before selling her shares. It would also be advisable to transfer the premises into joint names, as it is possible that the sale of the premises would also qualify for retirement relief if it were to be sold at the same time as the shares in the company. It is very important that no business assets are transferred by you to Anna after you reach the age of 55 or vice-versa, as these assets will then be counted for the purposes of the 750,000 limit. Tutorial note: The Finance Bill 2012 (not examinable in this session) made amendments to retirement relief such that a new lower threshold of 500,000 applies to individuals aged 66 and over for disposals after 1 January Termination payments There would be scope for the company to pay a tax free lump sum termination payment to both yourself and Anna prior to the proposed disposal of the shares in 12 years time. The amount of the tax free lump sum would be based on the number of years of service with the company. The tax free amount of the lump sum would, however, be reduced by any lump sum payable from a pension fund (see below). Pension lump sum There is an opportunity to maximise the pension lump sum payable to you and Anna on your retirement. You would both be proprietary directors and your final pensionable remuneration must be the average of any three consecutive years in the last ten years. A lump sum of one and a half times final pensionable remuneration is payable to employees with 20 years of service with the company. This figure will be reduced in situations where there is less than 20 years of service (as is proposed in this case). I hope that the above is of assistance and look forward to working with you on this project. Please do not hesitate to contact me if you have any further queries. Yours sincerely A Tax Manager ABC & Co 21

5 Appendix 1: Calculation of tax liabilities arising under Option 1 1. Capital gains tax (CGT) Firstly, the value of the assets immediately after the transfer is calculated and the proportion of the gain to be deferred is given by the fraction (value of shares/value of assets). Premises 520,000 Goodwill 150,000 Equipment 170,000 Receivables 130,000 Value of assets 970,000 Payables 110,000 Director s loan 50,000 (160,000) Net assets (value of shares) 810,000 Value of shares/value of assets = 810/970 Secondly, the CGT payable is calculated in the normal way and the percentage deferral is applied to the gain, leaving the remainder taxable. Gains Premises ( 520, ,000) 20,000 Goodwill ( 150,000 0) 150,000 Total gains 170,000 Deferred gain 170,000 x 810/970 (141,959) Taxable gains 28,041 CGT at 25% 7, Stamp duty Premises 520,000 Rate 6% 31,200 Goodwill 150,000 Rate 6% 9,000 Equipment 170,000 Rate 6% 10,200 Receivables 130,000 Rate 6% 7,800 Total stamp duty payable 58,200 2 Carlos Murphy (a) (b) Concerns as professional advisor Accountants and tax professionals must never allow themselves to facilitate tax evasion. Otherwise they run the risk of serious legal sanctions and loss of their professional reputation. The following professional and ethical issues are apparent: Non-cooperation with the Revenue auditor is being contemplated. The bookkeeper has suggested that the books and records could be adjusted and forged documentation could be used. Some of the tax defaults are in the deliberate behaviour category. At the client meeting, it is essential that the professional advisor is satisfied that: the client will cooperate fully with the Revenue auditor and be present for the audit at the appointed time; the books and records to be presented to the auditor will be complete and accurate; and the voluntary disclosure (which will later be recommended) will be a complete one. If the professional advisor is not satisfied with regard to the above, she/he should resign as advisor with immediate effect. Strategy for minimising penalties arising from the Revenue audit (i) Prior to the commencement of the audit, the taxpayer has an opportunity to make a complete qualifying disclosure of irregular tax issues to the Revenue. In this case, the disclosure would be a prompted disclosure, as the business has 22

6 (ii) (iii) been notified of a revenue audit. It is important that the disclosure is complete insofar as it must state the amounts of all liabilities to tax and interest in respect of the relevant tax heads and periods within the scope of the proposed audit, including all prior periods in the case of deliberate behaviour. The qualifying disclosure must be in writing, signed by or on behalf of the taxpayer, and accompanied by a settlement of the tax and interest, but not the penalties. If more time is required, the taxpayer may request a 60 day postponement of the audit, if made within 14 days of receiving the audit notice. Cooperation includes: having all the books and records and linking papers ready at the start of the audit, responding promptly to all requests for information and prompt payment of the audit settlement liability. The benefits to the taxpayer of making a qualifying disclosure and cooperating are: Reduced rates of penalty as follows: Careless behaviour 10% (otherwise 20%) Careless behaviour with significant consequences 20% (otherwise 40%) Deliberate behaviour 50% (otherwise 100%) Non-publication of the default No prosecution (c) Tax underpayments and penalties 1. Undeclared cash sales Value added tax (VAT) Underpayment of output tax ( 18,000 x 13 5/113 5) 2,141 Income tax, including PRSI and USC at the combined rate of 52% (41% + 4% + 7%) Underpayment ( 15,859 x 52%) 8, Disposal of free shares Capital gains tax (CGT) Proceeds 3,000 Less: Cost 0 Gain 3,000 Less: Annual exemption (1,270) Taxable gain 1,730 CGT at 25% Sub-contractor invoice Relevant contracts tax (RCT) RCT deduction on gross payment ( 10,000 x 35%) 3,500 Principal contractors are obliged to deduct tax at 35% from payments to sub-contractors, if they do not have a payments card for that sub-contractor. Tutorial note: Significant changes were made to the RCT system (including the reduction of the standard rate to 20%) with effect from 1 January 2012 (following the signing of a commencement order in December 2011). These changes are not examinable in this session. 4. Cash bonus Net bonus paid (2 x 10,000) 20,000 Marginal tax rate (including PRSI and USC) 52% Grossed up bonus (x 100/48) 41,667 Tax underpayment Employee payroll taxes ( 41,667 x 52%) 21,667 Employer s PRSI ( 41,667 x 10 75%) 4,479 26,146 The cash payments represent additional net wages and must be grossed up at the marginal tax rate of 52%. Employer s PRSI is also payable on the gross wages at 10 75%. 23

7 5. Contract for safe installation services VAT Price per job (excluding VAT) 1,000 Underpayment per job (21% 13 5%) 75 Total VAT underpayment (x 50) 3,750 The two- thirds rule has not been properly applied in this case, resulting in an underpayment of VAT. The VAT exclusive cost of the goods ( 750) in the contract for the supply of the service exceeded two-thirds of the contract price, and therefore the rate of VAT applicable to the supply of goods (21%) is applicable to the entire contract. Income tax Overpayment ( 3,750 x 52%) (1,950) An income tax adjustment arises in relation to the VAT underpayment (in favour of the business), as less net proceeds are received as a result of the VAT now due. 6. House extension VAT Underpayment on self-supply ( 20,000 x 21%) 4,200 The use of building materials for a personal house extension is an appropriation of goods for a private use and represents a self-supply for VAT purposes. Income tax Expenses overclaimed Materials 20,000 Labour 10,000 Understatement of profit 30,000 Underpayment of liability (at 52%) 15,600 The consequence of including the materials and labour expenses in the income statement of the business is that taxable profit has been understated. Total tax underpaid 62,067 Summary of the tax and penalties payable Tax Reduced Amount underpaid rate of of penalty penalty 1. VAT 2,141 50% 1,071 Income tax, PRSI, USC 8,247 50% 4, CGT % RCT 3,500 50% 1, Income tax, PRSI, USC 26,146 50% 13, VAT 3,750 10% 375 Income tax, PRSI, USC (overpayment) (1,950) 6. VAT 4,200 50% 2,100 Income tax, PRSI, USC 15,600 50% 7,800 62,067 30,380 From the above, the expected total liability for tax and penalties is 92,447. There are three categories of default: Careless behaviour. The penalty is 20% of the tax due, reduced to 10% on disclosure. For this category to apply, the tax shortfall must be less than 15% of the tax liability due in respect of the particular tax. Only item 5 would appear to come within this category, as there was carelessness, but the VAT underpayment is almost certainly less than 15% of the total VAT liability for the year. 24

8 Careless behaviour with significant consequences. The penalty is 40% of the tax due, reduced to 20% on disclosure. This category applies where there has been a lack of due care, with the result that the tax paid is substantially incorrect and exceeds the 15% test described above. Item 2 will come within this category on the basis that there was no deliberate intent to avoid tax but there was carelessness and this omission constitutes more than 15% of the capital gains tax liability due for the period. Deliberate behaviour. The penalty is 100% of the tax due, reduced to 50% on disclosure. Deliberate behaviour has indicators consistent with intent and includes tax evasion and the non-operation of fiduciary taxes such as PAYE. Items 1, 3, 4 and 6 are all likely to come within this category. Carlos Murphy s behaviour in relation to items 1 and 4 is quite clearly deliberate, with an intent to evade tax. In relation to item 3, no tax was deducted whatsoever and it can be assumed that the rules relating to RCT are well-known to a building contractor, such as Carlos; and in the case of item 6, it would be difficult for an experienced builder to plead ignorance of the relevant rules and claim that it was just careless behaviour. 3 The Strings group (i) (ii) Venture capital investment in Banjo Ltd The consequence of the proposed reduction of Strings Ltd s interest in Banjo Ltd to 51% on 30 November 2012 is that Banjo Ltd would leave the capital gains tax (CGT) group with effect from that date. The legislation provides for a claw-back of group relief on assets transferred to Banjo Ltd in the ten-year period prior to Banjo Ltd leaving the group. The time period from 1 January 2003 to 15 December 2012 is 9 years and 11 months, and as this is less than ten years, there will be a claw-back of group relief in Banjo Ltd, which is calculated as follows: Sales proceeds ( deemed) 400,000 Less: Cost 100,000 Indexation factor 1998/ (121,200) Taxable gain 278,800 CGT at 25% 69,700 The claw-back gives rise to corporation tax on the adjusted chargeable gain amounting to 69,700 and this will be payable on 31 January However, if the venture capital investment is postponed until after the ten-year period has elapsed, then no claw-back of CGT group relief will occur. It is therefore recommended that the venture capital deal is postponed until a date on or after 1 January Acquisition of Tune Ltd s business The major advantage of purchasing the shares in Tune Ltd is the 1% rate of stamp duty applicable to the transaction, compared to the 6% rate on the purchase of assets. The savings in this case are illustrated as follows: Consideration Stamp duty Purchase of shares 600,000 1% 6,000 Purchase of assets 650,000 6% 39,000 Stamp duty saving 33,000 Other reasons in favour of buying the shares would include: the possible use of losses in the target company (subject to the loss buying restrictions); and the fact that value added tax (VAT) is not chargeable on the purchase of shares, whereas it may arise as an issue in the purchase of certain assets. However, in many cases the purchaser may wish only to acquire the trade and/or assets of a company. The following are the main reasons why this may be the case: The assets are bought at their market value rather than at their base cost, as with a share purchase, so the issue of latent gains is not relevant. In this case, there are latent gains in relation to both goodwill and the business premises, the tax implications of which are calculated as follows: 25

9 Goodwill ( 300,000 nil base cost) 300,000 Potential CGT at 25% 75,000 Premises Proceeds (market value) 350,000 Cost 50,000 Indexation 1985/ ,650 Gain 264,350 Potential CGT at 25% 66, ,088 Therefore, the potential tax liabilities arising on a subsequent sale of the assets by the company amount to 141,088. Capital allowances may be claimed on the (higher) purchase price of plant, machinery and equipment. Issues such as claw-back of CGT group relief, or associated company stamp duty relief are not relevant. The purchaser need not worry about hidden contingent liabilities, either of a taxation nature or non-taxation related, in the company. Conclusion The total cost (including stamp duty) of purchasing the shares is 606,000, whereas the total cost of purchasing the assets amounts to 689,000. Thus, there is an immediate saving of 83,000 on the transaction if the shares are purchased. However, there are other reasons why a purchase of assets may be advisable, in particular, if the company is considering reselling the relevant assets in the short to medium term, then a potential tax bill of 141,088 could arise. Tutorial note: Other non-tax issues in favour of buying assets rather than shares include: cost savings in relation to the due diligence process; the process may be more straightforward; a purchaser can choose which assets to acquire; the requirement for warranties and indemnities may not arise. (iii) (iv) Acquisition of Flat Ltd In this case, it is likely that the tax losses carried forward would be disallowed. Losses are disallowed where at any time after the scale of activities in a trade carried on by a company has become small or negligible and before any significant revival of the trade there is a change in ownership of the company. The fact that Flat Ltd had ceased trading in September 2010 would, therefore, prevent any purchaser, including the Strings group, from claiming the tax losses carried forward. Loans between Strings Ltd and its directors Strings Ltd is clearly owned by five or fewer participators and is, therefore, a close company, as defined. Hugh McKenna is a shareholder and therefore a participator in Strings Ltd. When a close company makes a loan to an individual who is a participator, the company is required to pay income tax in respect of the loan re-grossed at the standard rate (i.e. 20%). In this case, tax of 12,500 ( 50,000 x 20/80) is payable. The income tax due cannot be set against String Ltd s corporation tax liability. The due date for the payment is the same date as the company s preliminary corporation tax for the year in question. When the loan is repaid, the tax paid will be refunded to the company provided a claim is made within ten years of the year of assessment in which the loan is repaid. As the loan remained outstanding on 31 December 2011, the payment of the income tax by the company is now overdue. The loan to Hugh would also give rise to benefit in kind (BIK) issues and Strings Ltd would also be responsible for operating the payroll taxes thereon. The BIK will be 6,250 ( 50,000 x 12 5%) and the additional tax payable (including PRSI and USC) will amount to 3,250 (52% x 6,250). Mary McKenna is also a director of Strings Ltd and holds a material interest in the company. As such, there is a prescribed limit of interest which can be paid to her, and if this limit is exceeded, the excess is treated as a distribution. The prescribed limit per annum is 13% of the lower of: the total of all loans on which interest to directors (or their associates) with a material interest was paid by the company in the accounting period, i.e. 13,000 (13% x 100,000); or the nominal amount of the issued share capital of the close company plus the amount of any share premium account taken at the beginning of the accounting period, i.e. 13 (13% x 100). The excess of 1,987 paid to Mary ( 2,000 13) is treated as a distribution and added back in the company s tax adjusted Case I profit computation. 26

10 Strings Ltd must also account for dividend withholding tax (DWT) at the standard rate of income tax (20%) on the excess amount treated as a distribution. This amounts to 397 and is payable in January 2012 (the month following the distribution). Income tax at 20% is also payable on the allowable interest of 13, but this is immaterial in this case. Mary would be subject to tax under Schedule F on the distribution element and Schedule D Case IV on the interest element. It is recommended that the payment of interest to Mary McKenna should be discontinued, also that significant tax benefits would accrue if Mary were to lend 50,000 to Hugh, thereby enabling him to repay his company loan to Strings Ltd. 4 Leah Frank (a) Capital acquisitions tax on inheritance The first issue is to determine whether or not Leah is a farmer. Her total assets after taking the inheritance will be as follows: Agricultural Non-agricultural Total Farm and farmhouse 950,000 Cattle 120,000 Cash at bank 30,000 Sheep 30,000 Investment property 90,000 Farm machinery 100,000 Quoted shares 20,000 Crops 24,000 Car 5,000 Apartment (Leah) 130,000 Cash at bank (Leah) 3,000 1,224, ,000 1,502,000 After taking the inheritance, Leah s agricultural assets as a percentage of her total assets is (1,224/1,502) x 100 = 81%. As this exceeds the requirement of 80%, Leah qualifies as a farmer. Tutorial note: It is not necessary that an individual ever actually farms the land, only that 80% or more of their assets, after taking the inheritance, consists of agricultural property. The debts and funeral expenses of 25,000 need to be apportioned between the agricultural property and non-agricultural property elements of the inheritance. Proportion of costs allocated to agricultural property 25,000 x (1,224/1,369) 22,352 Remaining costs to be allocated to other property 2,648 Taxable value of the property inherited (before applying the life interest factor) is: Market value of agricultural property 1,224,000 Less: Agricultural relief (90%) (1,101,600) Agricultural value 122,400 Less: Agricultural value of costs (10% x 22,352) (2,235) 120,165 Market value of non-agricultural property 145,000 Less: Proportion of costs (2,648) 142,352 27

11 Capital acquisitions tax (CAT) liability 2011 Value of life interest in property inherited Agricultural property ( 120,165 x ) 38,429 Non-agricultural property ( 142,352 x ) 45,524 Taxable value 83,953 Class 2 threshold: 33,208 at nil 0 Balance: 50,745 at 25% 12,686 CAT liability 12,686 Tutorial note: As the wife of Ben s deceased brother, Leah can use the Class 2 threshold for CAT purposes. (b) (i) Luke s inheritance from Leah Luke s inheritance from his mother would be tax free as the total value of Leah s assets amount to 133,000 which is substantially less than the Class 1 threshold of 332,084. Luke s inheritance from Ben The liability depends on whether or not Luke would be eligible to claim either agricultural relief or business property relief. Agricultural relief In relation to agricultural relief, it must be determined whether or not Luke will qualify as a farmer. For this purpose, Luke is allowed to deduct the amount of the mortgage on his principal private residence. If Luke were to inherit all of the property from Ben and Leah at their values as at 30 June 2011, his assets would be as follows: Agricultural property 1,224,000 Non-agricultural property ( 278,000 + ( 250, ,000)) 428,000 Total 1,652,000 Based on June 2011 values, Luke s percentage of agricultural assets would be 74% (1,224/1,652), and he would not qualify as a farmer. Business property relief As Luke has not qualified for agricultural relief, the feasibility of claiming business property relief can be examined. To avoid a claw-back of the relief, it is essential that the business property must be retained in ownership for at least six years AND used for the purposes of carrying on a business. As Luke has stated that he will never actively farm the land, it is not recommended that business property relief is claimed. Luke s CAT liability will therefore be: Total assets 1,369,000 Tax payable Class 2 threshold 33,208 at nil 0 1,335,792 at 25% 333, ,948 (ii) Advice on mitigating the CAT on Luke s inheritance from Ben If possible, prior to the valuation date of the inheritance from Ben, Luke should seek to qualify as a farmer, as agricultural relief would effectively reduce the taxable value of the agricultural property by 90%. Unlike business property relief, it is not a condition of agricultural relief that Luke actually carries on a farming business after he receives the agricultural property. He could rent the property to a third party. Luke might qualify as a farmer by taking one or a combination of both of the following: 1. Transfering his apartment into his wife s ownership, which would reduce his percentage of non-qualifying assets and thereby increase his percentage of agricultural assets to 81%, so he would then qualify as a farmer. 2. Taking out a loan and buying enough agricultural property to bring his relevant percentage of agricultural assets to over 80%. As the farmer test is a gross assets test, the loan will not be counted in the assessment of assets. It is essential that the property subject to agricultural relief be retained for a minimum period of six years, to avoid a claw-back of the relief. 28

12 (c) (i) Proposal to disclaim the inheritance from Ben in favour of Michael If Luke disclaims the property in favour of a named beneficiary (in this case his friend Michael), then he is deemed first to have inherited the property and then to have made a gift of the property to the named person (Michael). This would result in a substantial tax liability for Luke without the benefit of owning the asset. (ii) Proposal to sell the land etc If Luke does not qualify as a farmer (CAT liability as in (b)(i) above), there will be no additional CAT consequences from a disposal of the land immediately after the inheritance. If Luke takes the actions recommended in (b)(ii) above and does qualify as a farmer, then it is a condition of agricultural relief that the agricultural property must be held for a minimum period of six years. If this ownership period is not satisfied, the benefit of the agricultural relief will be clawed back by the Revenue and the effect of the previous tax planning will be nullified. 5 Mary Green (a) (b) (c) (d) Split year relief Where an individual who is resident in the State leaves the State with the intention that they will not be resident in the State in the following year, then they will be treated as not being resident in Ireland after the date of departure with regard to employment income. In effect, this means that the individual will not be liable to Irish income tax in respect of any foreign employment income arising after the date of departure. A similar treatment applies to individuals arriving in the State following a period abroad. In this case, if the individual was not resident in the State for the tax year prior to the year of arrival and if they satisfy the Revenue Commissioners that they are in the State with the intention of being resident in Ireland for the following tax year, then they will be treated as being resident in Ireland only from the date of arrival. Split year relief applies only to income from employment (excluding directors) and does not affect the liability of the taxpayer in respect of other sources of income. The key point is that, for split year relief to apply, Mary must be non-resident in This means that: (i) she cannot be in Ireland for 183 days or more in 2013; and also (ii) she cannot be in Ireland for 280 days or more in aggregate in 2012 and The secondment ends on 31 July 2013 and therefore she will only spend 153 days in Ireland in 2013, which is in accordance with test (i) above. If she commences the secondment on 1 April 2012, she will have spent 91 days in Ireland in 2012, and the aggregate days would be 244, which is in accordance with test (ii) above. However, if she postpones her departure until 1 August 2012, the aggregate days would be 366 and this would make her resident in Ireland in 2013 and split year relief would not apply. Mary should therefore arrange to start her secondment on 1 April She will then qualify for split year relief and be treated as non-resident from her date of departure to the date of her return and not subject to Irish income tax on her employment income earned during that period. It is clear that there would be a gain arising on the sale of the house in Dublin. Principal private residence relief grants an exemption from capital gains by reference to the period of occupation out of the total period of ownership. Therefore, in the absence of careful planning, it is possible that (a small) part of the gain on disposal could be taxable because Mary will not occupy the house while on secondment. Although Mary will not physically occupy the property while she is abroad, she could qualify for a deemed period of occupation which applies when an individual works in an office or employment, all the duties of which are performed outside the State. For this deemed period of occupation to apply, the taxpayer must physically occupy the premises both before and after the overseas assignment and the taxpayer should have no other residence eligible for the relief at the time. Therefore, if the full 16-month period of the assignment is to qualify as a deemed period of residence and the gain on the disposal to be fully exempt from capital gains tax, Mary must (1) occupy the house in Dublin on her return prior to selling it and (2) not buy the apartment in Carribea. Alternatively, the last 12 months of ownership are always a deemed period of occupation regardless of where the taxpayer is situated, so if Mary sells the house before 1 April 2013, the gain will be fully exempt. If this option is chosen, she can purchase the apartment in Carribea without affecting her entitlement to principal private residence relief. (Note: There will be no need to arrange to reoccupy the house on her return as it will already be sold.) An employer can give an employee shares in the employer company with a value of up to 12,700 in any tax year. There is no tax payable by the employee, provided the employee retains the shares for at least three years. 29

13 The proposed value of Mary s free shares is within the annual limit, however, if Mary were to dispose of the shares within the three year holding period, she would be deemed to have earned Schedule E income in the year in which the disposal takes place, on the lower of the following two amounts: (i) the amount of the sales proceeds; or (ii) the market value of the shares when they were acquired by her. 30

14 Professional Level Options Module, Paper P6 (IRL) Advanced Taxation (Irish) December 2012 Marking Scheme This marking scheme is given as a guide to markers in the context of the suggested answer. Scope is given to markers to award marks for alternative approaches to a question, including relevant comment, and where well reasoned conclusions are provided. This is particularly the case for essay based questions where there will often be more than one definitive solution. Available Maximum 1 (i) Incorporation of business Identification of relief and application of conditions to be satisfied 2 5 Option 1: Claiming the relief Capital gains tax Calculation of proportion of gain to be deferred 2 5 Calculation of the CGT 2 0 Stamp duty Explanation of liabilities 3 0 Calculation of stamp duty 1 0 Value added tax Requirement to register the company 1 0 Capital Goods Scheme (record) 1 0 Capital allowances Balancing charge and joint election 1 5 Option 2: Not claiming the relief Stamp duty savings No requirement to transfer all of the business assets 1 0 Premises remains in personal ownership 1 0 Receivables not transferred 1 0 Equipment transferred by delivery etc 1 0 VAT and capital allowances Applicability of recommendations under Option Taxes payable CGT on goodwill 0 5 Stamp duty on goodwill 0 5 Recommendation Choose Option 2 do not claim incorporation relief 0 5 Reasons Summary of taxes showing less tax payable under Option Clarification that incorporation relief is only a deferral 1 0 Retention of premises to avoid future double charge to tax 1 0 Retention of premises to protect the asset (ii) Non-eligibility for start-up company relief 1 0 (iii) Tax strategies Employment of spouse 2 5 Company pension scheme

15 Available Maximum (iv) Future exit strategies (1) CGT implications of selling shares in ten years Availability of retirement relief and applicability of conditions 2 5 Risk that proceeds may exceed 750, (2) Tax exit strategies Anna to become a shareholder and director 1 5 Need to delay the sale of shares until Anna reaches Transfer premises into joint names 1 0 Do not transfer between spouses after age Planning for pension lump sum/termination payment lump sum Professional marks Format and presentation of the letter 1 0 Effectiveness of written communication 1 0 Appropriate use of support schedules/appendix 1 0 Logical flow of calculations (a) Should not facilitate tax evasion 0 5 Identification of the ethical/professional issues (3 x 0 5) 1 5 Undertakings required from the client (3 x 0 5) 1 5 Resignation option (b) Opportunity to make a qualifying disclosure 0 5 Explanation of nature and process for qualifying disclosure 2 5 Explanation of cooperation 1 0 Benefits of making a qualifying disclosure Reduced penalties 0 5 Non-publication 0 5 No prosecution (c) Tax underpaid, including explanations Item Item Item Item Item Item Explanation of three categories of default 3 0 Penalties for each scenario

16 Available 3 (i) Leaving the group 1 0 Ten-year claw-back period 1 0 Calculation of claw-back 1 5 Date of payment 0 5 Recommendation to postpone the investment 1 0 Maximum 5 0 (ii) Identify differences in stamp duty rates 1 0 Calculation of potential stamp duty saving 1 0 Other reasons for buying shares (2 x 0 5) 1 0 Issue of latent gains, including calculation 2 5 Other reasons for buying assets 0 5 each, maximum 1 0 Conclusion (iii) Explanation and application of loss buying rules 2 0 (iv) Strings Ltd is a close company 0 5 Hugh McKenna loan to a participator 3 0 Mary McKenna loan by a director/shareholder 3 5 Recommendation (a) Determination of whether Leah is a farmer 2 5 Apportionment of liabilities 1 0 Taxable value of property prior to limited interest factor 1 0 Use interest factor to determine taxable value of life interest 1 0 Use of Class 2 threshold, as the wife of a deceased brother 1 0 CAT computation (b) (i) Inheritance from Leah 1 0 Inheritance from Ben Deductibility of mortgage 1 0 Calculation of farmer percentage 1 5 Consideration of business property relief 0 5 Non-eligibility for business property relief 1 0 Calculation of CAT payable (without agricultural relief) (ii) Seek to qualify for agricultural relief 1 0 Suggested actions (2 x 1 5) 3 0 Retain for six years (c) (i) Effect of disclaimer 2 0 (ii) No CAT consequences if agricultural relief is not claimed 1 0 Claw-back effect if agricultural relief claimed

17 Available Maximum 5 (a) Identify split relief as relevant relief 1 0 Year of leaving explanation 1 5 Year of arrival explanation 1 5 Limitation to income from employment (b) Essential requirement to be non-resident in State the two tests for non-residence 1 0 Calculation of scenarios based on both starting dates 3 0 Conclude April start date necessary to avail of relief (c) Why potential gain on sale not covered by PPR 1 5 Deemed occupation while abroad 1 0 Need to occupy before and after 1 0 Cannot have another residence 1 0 Last 12 months always deemed occupation 1 0 Sell before 1 April Flexibility to purchase apartment in Carribea (d) Value of shares within the annual limit 1 0 Three year holding period requirement 1 0 Consequences of disposal within three years