ADVANCED TAXATION PROFESSIONAL 2 EXAMINATION - APRIL 2012

Transcription

1 ADVANCED TAXATION PROFESSIONAL 2 EXAMINATION - APRIL 2012 NOTES: You are required to answer Question 1 and any three from Questions 2,3,4 and 5. (If you provide answers to all questions, you must draw a clearly distinguishable line through the answer not to be marked. Otherwise, only the first three answers to Questions 2,3,4 and 5 will be marked.) TAX TABLES ARE PROVIDED NOTE IF YOU MAKE AN ASSUMPTION IN ANY QUESTION PLEASE STATE YOUR ASSUMPTION CLEARLY Time Allowed 3.5 hours plus 20 minutes to read the paper. Examination Format This is an open book examination. Hard copy material may be consulted during this examination subject to the limitations advised on the Institute s website. Reading Time During the reading time you may write notes on the examination paper but you may not commence writing in your answer booklet. Marks Marks for each question are shown. A mark of 50 or more is required to achieve a pass in this paper. Answers Start your answer to each question on a new page. You are reminded to pay particular attention to your communication skills and care must be taken regarding the format and literacy of the solutions. The marking system will take into account the content of your answers and the extent to which answers are supported with relevant legislation, case law or examples where appropriate. Answer Booklets List on the cover of each answer booklet, in the space provided the number of each question attempted. Additional instructions are shown on the front cover of each answer booklet. The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.

2 THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND ADVANCED TAXATION PROFESSIONAL 2 EXAMINATION - APRIL 2012 Time Allowed: 3.5 hours, plus 20 minutes to read the paper. You are required to answer Question 1 and any three from Questions 2,3,4 and 5. Note: You should ignore PRSI and USC in ALL questions. If you make an assumption in any question, please state your assumption clearly. Case Study 1. Deirdre Buckley, who is married and was born on 6 August 1957 acquired 50% of the issued share capital of Jaune Ltd., an unquoted Irish trading company, for a consideration equivalent to 184,000 from an unconnected third party on 14 June The other 50% was acquired at the same time by her brother, Denis, also for consideration equivalent to 184,000. On 6 May 2002, Deirdre s and Denis shareholdings in Jaune Ltd. were each acquired by Rouge Ltd., an unquoted Irish trading company, in exchange for cash consideration of 70,000 and 12,000 ordinary shares in Rouge Ltd. with a market value of 180,000. Following the takeover, Rouge Ltd. had 30,000 ordinary shares in issue. Deirdre was appointed a full-time working director at that date. Denis has never taken any part in the management of the company. On 9 August 2008, Deirdre received a further 1,200 ordinary shares in Rouge Ltd. following a 1:10 Bonus Issue. Following the Bonus Issue, Rouge Ltd. had 33,000 ordinary shares in issue; there were no other classes of share in issue and the company has issued no further shares since that date. On 3 January 2011, Denis sold all of his 13,200 shares in Rouge Ltd. to Deirdre for a consideration of 42,000. Deirdre had received no other assets from any family members prior to that date apart from a gift of 27,000 cash from her sister Sylvia in July Deirdre and Denis are not related to any of the other shareholders in the company. At that date, the open market value of the ordinary shares in the company, based on the size of the shareholding concerned, was as follows: Open Market Value per share As part of a 40% shareholding 20 As part of a 80% shareholding 27 As part of a 100% shareholding 30 It was agreed that 25% of the value of the company at that date was attributable to non-trading investments. At today s date, which you should assume is 1 April 2012, the market values of the assets and liabilities of Rouge Ltd. are as follows: Market Value Note Fixed Assets: Buildings 280,000 Plant 44,000 1 Goodwill 500,000 2 Investments 156,000 3 Net Working Capital 132,000 1,112, The plant has a tax written down value of 31, The goodwill has no acquisition cost. 3. The investments, which represent surplus liquid funds, consist of Irish-quoted shares which originally cost 171,500. Deirdre and the other shareholders in Rouge Ltd. would now like to convert their interests in the company into cash in the relatively short-term future. A third party has indicated that it would be willing to buy Rouge s trade for 1,112,000 or, alternatively, the entire issued share capital of the company at a price of 990,000. All the shareholders have agreed that they would prefer to sell the shares and they are confident that they will be able to obtain the indicated price at any time within the next 12 months. Deirdre wishes to invest the after-tax proceeds from the sale in a new trading opportunity which may either take the form of an investment in a trading company or may be carried on by her as a sole trader. Page 1

3 REQUIREMENT: Prepare a formal report for Deirdre covering the following matters: (a) (b) (c) (d) A brief discussion of the variation between the valuations of shares in Rouge Ltd. at the different size of shareholdings cited in the table on Page 1. (4 marks) An analysis of the various tax consequences which arose on the sale of shares by Denis to Deirdre. (18 marks) An explanation of the factors which might have led the prospective purchaser to offer a lower price for the shares in Rouge Ltd. than for its underlying trade. (3 marks) Advice to Deirdre in relation to any relevant timing or other planning issues which she should take into account if she wishes to minimise her potential tax liabilities on a disposal of her shares in Rouge Ltd. You should show any supporting calculations. (11 marks) Format and Presentation (4 marks) [Total: 40 Marks] 2. George and Carmel Dawson, who are both aged 59, became tax resident in Ireland from 2011 onwards. George continued to remain in his employment with Koala Ltd., an Australian company, but also took up a position as a director of its Irish subsidiary Koala (Ireland) Ltd. with effect from 1 January George does not own any shares in either company. Carmel was born in Ireland and lived there until she emigrated to Australia in 1980 for work purposes. She married George, who is an Australian citizen, in Carmel wishes to remain in Ireland until she dies while George wishes to return eventually to Australia and will definitely do so if Carmel were to predecease him. The couple have retained a cottage in Australia which is owned jointly and intend to return there for holidays on an annual basis. The couple s income was as follows for 2011 (using the appropriate exchange rates): George: Employment with Koala Ltd: 120,000 Directorship with Koala (Ireland) Ltd: 32,000 Net Interest on Australian Deposit Account: 7,000 Carmel: Net Rents from UK residential investment property: 14,000 The sum of 120,000 includes a bonus of 10,000 for exceptional performance in the year ended 31 December In addition to his director s remuneration from Koala (Ireland) Ltd., the company also provided George and his family with the use of a car in Ireland from 1 March 2011, which cost 42,000. The discounted list price of the car when new was 58,300. George is required to bear the cost of his private petrol and the cost of servicing the car, which amounted in total to 1,900 in George s total business travel for 2011 was 21,000 kilometres. Koala (Ireland) Ltd. also provides a private gym for the use of directors and senior employees at an annual cost of 2,107. The company also provides George with a free annual medical check-up under the terms of his contract at an annual cost of 710. George performs 30% of his duties for Koala Ltd. outside Ireland. The company pays all of his salary directly into his Australian deposit account. In 2011 all of this income was then subsequently remitted to Ireland. George performs 10% of his duties for Koala (Ireland) Ltd. outside Ireland. His director s remuneration is paid directly into his Irish bank account. No overseas tax was incurred in relation to any of George s non-irish duties in either case. The interest on George s deposit account is subject to withholding tax of 10%. No further reduction is available under the Ireland-Australia Double Tax Treaty. In 2011, all of this income was remitted to Ireland. The figure for Carmel s UK rents (using the appropriate exchange rate) is net of the letting agent s fees of 900 and interest on UK borrowings to purchase the property of 12,000; UK tax of 570 was payable in relation to these rents for All of the income was paid into Carmel s UK bank account and then subsequently remitted to Ireland. Page 2

4 George and Carmel rented an apartment in Dublin with effect from 1 January 2011, at a cost of 800 per month, since they were uncertain about the direction of the housing market. They incurred net non-routine opthalmic expenses of 6,400 in The values of their respective assets are as follows: Australian Deposit Account 890,000 Australian property 190,000 UK Investment Property (net of mortgage) 450,000 The balance on the deposit account represents savings accumulated prior to 1 January The UK property has fallen in value since it was first acquired. George and Carmel have one adult child, Natalie, who resides in Australia. They would like to gift the Australian property and cash of 120,000 to her within the next few years. The couple intend that their assets will pass to Natalie after they have both died. REQUIREMENT: (a) Calculate George and Carmel s income tax liability (disregarding any PAYE deductions) for (9 marks) (b) (c) (d) Advise George and Carmel, respectively, of their likely domicile status, giving brief reasons for your conclusions. (2 marks) Assuming that Carmel, but not George, was Irish domiciled, advise the couple as to how they then might minimise their Irish income tax liabilities, including, if appropriate, any proposals to transfer assets between them. You should disregard any potential overseas tax issues. (5 marks) Assuming that Carmel, but not George, was Irish domiciled, advise the couple on how they should best structure the proposed gifts to Natalie, taking into account any relevant timing issues. (4 marks) [Total: 20 Marks] Page 3

5 3. Thomas Grinch, who is aged 43 and single, has operated as a sole trader in the beauty treatment business for many years. He does not make any exempt supplies for VAT purposes. He has received an offer form Barry Ltd. to purchase his business as a going concern. Barry Ltd. is a trading company, which operates a number of diverse businesses. All of the assets of the business will be transferred to Barry Ltd. other than fittings and fixtures, trading stock and cash, which will be used to pay off business creditors. Thomas taxable profits for the last three years ending 31 March are as follows: Year ended 31 March ,000 Year ended 31 March ,000 Year ended 31 March ,000 (per management accounts) The sale of the business can be deferred for a maximum of three months if required (you should assume that today s date is 1 April 2012). Thomas would expect to break even in each month from April 2012 onwards. Thomas acquired his present premises in June 2011 from Newport Ltd., an unconnected company, which had acquired the premises new from a builder in August 2009 at a cost of 310,000. It occupied the premises for its trade until they were sold to Thomas for 400,000. During 2011, Thomas undertook a number of minor improvements to the premises at a total cost of 80,000. As a result of adverse economic conditions, the current market value of the premises is 390,000. The other assets which would be transferred by Thomas are as follows: Goodwill - Nothing was paid for this. Trademark - This was acquired for 10,000 by Thomas when he originally took over the business. Barry Ltd. believes that it can generate worthwhile revenues from exploiting the trademark in the future. The total consideration for goodwill and the trademark will be 160,000; there is considerable latitude in allocating this amount between these two elements since this is primarily a subjective matter for negotiation between the parties. Barry Ltd. has offered Thomas two alternative methods of paying him the consideration for the transfer of his business. Under the first method he would receive the full price of 550,000 in cash; under the second he would receive 4,300 ordinary shares in Barry Ltd. valued at 550,000 as at today s date, which would represent 4% of the total issued share capital of the company. Thomas is confident that the shares in Barry Ltd., while they do not currently pay dividends, offer good prospects for capital growth in the future. Should Barry Ltd. pay cash, it will take a loan from an Irish bank in order to finance the transaction. Barry Ltd. is considering whether or not to use the premises in the future to provide optician s services. It estimates that if it does so 55% of total sales there would be exempt for VAT purposes. Alternatively, it could locate these activities in another smaller premises which were built in 1988 and which have not been subsequently developed. It estimates that if the company does so, 65% of total sales there would be exempt for VAT purposes. REQUIREMENT: (a) (b) (c) (d) Advise Thomas on the income tax implications of deferring the sale, showing any supporting calculations (4 marks) Discuss the VAT implications of the transfer of the business premises to Barry Ltd. and advise Barry Ltd. in relation to the choice of premises in which to locate optician s services. (7 marks) Advise Thomas on the tax implications of the sale of the business if he accepts (i) cash or (ii) shares. (4 marks) Advise Barry Ltd. as to the tax factors which should be taken into account when negotiating the respective valuations of the goodwill and the trademark, referring to any tax reliefs which could be claimed in relation to both or either. (5 marks) [Total: 20 Marks] Page 4

6 4. Gargle Ltd., an Irish resident company with 11 unconnected shareholders, issued ordinary share capital of 1,000 shares. 9 of the shareholders (4 of whom are directors of the company) each own 102 shares; the remaining 2 shareholders (both of whom are directors of the company) each own 41 shares. The company s directors are currently debating the possibility of issuing a further 200 ordinary shares in the near future to one or more new shareholders, all of whom would be unconnected with each other and the existing shareholders. They have not decided if any or all of the new shareholders will be granted directorships. The company has two wholly-owned trading subsidiaries, Hoarse Ltd. and Rasp Ltd.. Hoarse Ltd. has reinvested most of its surplus funds in an Irish investment property and Irish quoted shares. Rasp Ltd. has no non-trading sources of income. Gargle Ltd. s only source of income is dividends paid by its subsidiary companies. All three companies make up accounts to 31 December. The Income Statement for Hoarse Ltd. for the year to 31 December 2011 is as follows: Sales 1,095,367 Cost of sales (799,720) Gross profit 295,647 Sundry income 33, ,097 Less: Expenses Wages and salaries 59,266 Rent, rates and insurance 23,429 Administration expenses 11,150 Repairs & renewals 14,781 Professional fees 14,075 Sundry expenses 11,950 Bad debts 5,247 Depreciation 26,500 Patent royalties 8,800 (175,198) Profit before taxation 153,899 The following additional information is also available: 1. Directors bonuses of 20,000 were accrued at 31 December 2011 and are expected to be paid on 30 June Repairs and renewals: Addition of new stud walls in office 6,456 Replacement of filing cabinets 1,125 Interior decoration 1,765 Replacement of worn floor tiles 5,435 14, Professional fees: Legal fees re debt collecting 600 Audit and accountancy fees 7,500 Fees in connection with successful tax appeal 650 Legal fees re purchase of investment property 5,325 14, Sundry expenses: Staff annual outing 5,050 Gifts of bottles of wine to customers 600 Trade association subscriptions 350 Expenses re: investment property rented out 3,450 Subscriptions: political party 2,500 11,950 Page 5

7 5. The nominal ledger account for bad debts showed the following: Dr Cr Balance B/F - general provision 1,600 Trade debts written off 2,750 Trade debts recovered 610 Staff Loan Written off 757 Journal - Income Statement 5,247 Balance C/F - general provision 3,950 7,457 7, The nominal ledger account for Patent Royalties Payable showed the following: Dr Cr Balance B/F 2,000 Payments to licensor 7,600 Income Tax A/C 1,900 Journal - Income Statement 8,800 Balance C/F 1,300 10,800 10, Sundry income consists of: Rental income from investment property 20,950 Bank interest receivable 2,500 Dividend from Irish quoted company 10,000 33, Capital Allowances claimed for the accounting period were 1,100. Hoarse Ltd. did not make any distributions in the accounting period. Rasp Ltd. made a loss of 27,300, as computed for Corporation Tax purposes in the accounting period to 31 December It had unused trading losses of 7,100 to carry forward as at 1 January On 1 July 2011, Gargle Ltd. made a loan of 32,000 to Jenny Burke who owns 102 shares in the company, to help finance the purchase of a holiday home. Ms. Burke is a non-executive director of the company, and in fact never attends board meetings. REQUIREMENT: (a) (b) (c) Discuss why Gargle Ltd. is currently a close company and the basis on which the new shares should be issued if the company wishes to cease to be regarded as close. (4 marks) Assess Hoarse Ltd. s Corporation Tax liability for the accounting period ended 31 December 2011, including the close company surcharge, assuming that all favourable claims are made. You should advise Hoarse Ltd. as to how the surcharge might possibly be mitigated. (13 marks) Advise on the tax implications of the loan made to Ms. Burke and what steps might be taken to reduce or eliminate any tax liabilities arising therefrom. (3 marks) [Total: 20 Marks] Page 6

8 5. Georgina McGraw is a single person aged 44 who carries on a trade as a business consultant, making her accounts up to 31 December. In 2010, she made tax-adjusted profits of 64,600 and claimed capital allowances of 7,200. In 2011, she made a tax-adjusted loss of 21,262, before taking into account any capital allowances. In 2011 Georgina sold a software package, which had cost 12,000 and had a tax written down value of 9,600, for 12,700; she replaced it with a state-of-the art package costing 14,000. She had acquired fixtures in 2009 at a total cost of 5,600; the cost of installing the fixtures was 700. During 2011, she acquired a new car costing 28,000 with a CO2 emission level of 184g/km. The car is used 1/3 for business travel. On 6 July 2011, Georgina commenced paying contributions into a retirement annuity scheme, amounting to 3,500 in total for the year. Georgina expects that her total income from 2012 onwards will not exceed 32,000 p.a. In 2011, Georgina subscribed 84,500 for shares in Xenon Ltd., which are eligible for relief under the Business Expansion Scheme. She was unable to relieve an amount of 2,500 in respect of a subscription for shares qualifying under the Scheme in 2010 due to an insufficiency of income for that year. She pays maintenance of 5,538 to her ex-husband, of which 2,000 refers to her two children, aged 11 and 13 respectively. Georgina received a net dividend of 1,100 from an unquoted patent-holding company and a net dividend of 630 from an Irish-quoted company. She also received a net amount of 840 on the redemption of bonus shares which had been issued to her by an unquoted Irish trading company. Georgina received rental income of 19,638 from a residential property in a designated area; there were Section 23 allowances carried forward from previous years of 6,300. In June 2011, Georgina received a one-off distribution of 120,000 from a foreign trust which it is agreed has to be included as taxable income in her computation for 2011; no tax was withheld at source from the payment. Georgina has recently received a notice from the Revenue Commissioners advising her of their intention to conduct an audit at her premises. Georgina s brother, who has no formal training in accounting or tax, looks after her record-keeping and returns. In the course of reviewing her records, it emerges that the following treatment has been applied for VAT purposes in relation to advice supplied to overseas customers: VAT Charged German Business Customer re Marketing Strategy Australian Business Customer re internal layout of Irish office development Chinese Business Customer re Marketing Strategy French Non-Business Customer re Marketing Strategy US Non-Business Customer re Marketing Strategy No No No Yes Yes Georgina had claimed input VAT on the purchase of her new car. REQUIREMENT: (a) Recommend to Georgina what claims she should make in order to minimise her taxable income for 2011, providing all relevant supporting calculations. You are not required to calculate her income tax liability for (14 marks) (b) Advise Georgina as to whether or not she has treated the supplies of services to overseas customers and the purchase of her new car correctly. You should explain the implications of any under-payments of VAT which she has made, what her best course of action will be in relation to the forthcoming audit, and the potential benefits of adopting that course. (6 marks) [Total: 20 Marks] END OF PAPER Page 7

9 SUGGESTED SOLUTIONS THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND ADVANCED TAXATION PROFESSIONAL 2 EXAMINATION - APRIL 2012 SOLUTION 1 DEIRDRE BUCKLEY, LONG ROAD, BIG CITY. TOLAND & CO., CERTIFIED PUBLIC ACCOUNTANTS, NEW BUSINESS PARK, TOWN ROAD, XX April 2012 Dear Ms. Buckley, Following our meeting last week I am pleased to attach a report addressing each of the four areas that you raised. (a) (b) (c) (d) the variations in the valuations in the shares of Rouge Ltd. the tax consequences that arose on the sale of shares by Denis to Deirdre. an explanation of the factors which (straight from might have led the prospective purchaser to offer a lower price for the shares in Rouge Ltd. than for its underlying trade. advise regarding timing or other issues that you should consider in order to minimise your potential tax liabilities on the disposal of you shares in Rouge Ltd. These are addressed in sections (a) to (d) of the attached report. I will be pleased to discuss with you any questions that you may have in these or any other matters. Yours sincerely, Jerry Toland REPORT FOR DEIRDRE BUCKLEY APRIL 2012 (a) An important element in the valuation of any investment is its marketability or liquidity. In the case of an unquoted company, it is generally the case that the smaller the size of the holding the less control and influence it carries and the less marketable it is deemed to be. Typically, a 50%+ holding normally enables the holder to pass ordinary resolutions and to appoint the board of directors which in turn gives the shareholder control over the management of the company and such matters as dividend policy (subject to statutory protections for minorities and also the terms of any shareholders agreements, whose status in relation to share valuations is not wholly clear). A 75%+ shareholding normally enables the holder to pass special resolutions (which may be relevant in terms of overturning restrictive share transfer provisions or selling the undertaking of the company, liquidating it etc) again subject to the statutory protections etc. Conversely, a 25%+ shareholding possesses a negative blocking power which is likely to increase its value relative to shareholdings below that threshold. In determining open market value, other factors such as the spread of shareholdings, dividend policy etc may be relevant. (4 Marks) Page 8

10 (b) CGT Deirdre Denis Marks 1998-Cost- Jaune Ltd 184, ,000 Less: Part-Disposal 70,000/ (70, ,000) (51,520) (51,520) 1.5 Shares in Rouge Ltd 12, , ,480 Bonus Shares 1, , , ,480 Add: Indexation 132,480 x 0.212* 28,086 28,086 2 Indexed Base Cost 160, ,566 Denis-Sale Jan 2011 At MV for 40% Shareholding: 13,200 x 20= 13, ,000 1 Gain 103,434 Exempt -1,270 Taxable 102,164 CGT= 102,164 x 25%= 25, *Expenditure deemed to be incurred in (6 Marks) For CAT purposes, Denis has transferred shares in Rouge Ltd (clearly a private company as defined) for manifestly less than full consideration, so that the transaction will be treated as a gift, with a deduction for the consideration paid by Deirdre in computing the taxable value. In arriving at the market value of the benefit received by Deirdre, the shares transferred will be deemed to form part of an 80% shareholding (since Denis and Deirdre are related), requiring their shareholdings to be aggregated for valuation purposes. As the shares transferred confer more than 25% voting power and have been owned for more than 5 years by Denis (including the bonus shares which are related back to the original shares acquired) they are eligible for Business Property Relief. The relief will be restricted by reference to the proportion of the market value of the shares referable to excepted (non-business) assets (viz. 25%). Deirdre will be liable to pay Stamp Duty of 2,640 as the transfer will rank as a voluntary disposition, since it confers a substantial benefit on Deirdre (open market value as ascertained for CGT purposes will apply in practice).consanguinity relief does not apply to transfers of shares. (4 Marks) The final CAT computation would have been as follows: Marks Market Value 13,200 x 27= 356,400 1 Less: Consideration -42,000 Stamp Duty 2, ,760 1 Less: BPR 311,760 x 75% x 90%= -210, ,322 Less: SGE -3, ,322 Less: Group Threshold [33,208-(27,000-3,000)]= -9, Taxable 89,114 CAT@ 25%= 22, Less: CGT on same event- to cover Paid- 25,541 22,279 1 Liability - (8 Marks) (c) The purchaser is likely to pay less for shares in the company because the company will be liable for any preacquisition liabilities, including those arising from litigation or tax liabilities arising following a Revenue audit or investigation. While these may be the subject of tax warranties or indemnities, these do not provide absolute protection and might be time-consuming and even costly to enforce. The purchaser may also be reluctant to undertake the due diligence process necessary to ensure that these can be put in place. In addition, the purchaser will inherit latent CGT liabilities in relation to the goodwill (net of any loss realised on a disposal of the investments) and possibly the buildings, as well as possibly balancing charges on the plant which have not been reflected in the balance sheet. Against this, there will be a stamp duty saving as a transfer of shares attracts duty of only 1% while a transfer of the buildings and Goodwill will attract duty of 6% (the plant and working capital will normally pass by delivery). (3 Marks) Page 9

11 (d) If Deirdre sells her shares immediately, she will not be entitled to retirement relief, as she will not have yet reached age 55, and the disposal will trigger a liability to CGT as follows: Shares Deemed Shares Marks Acquired 1998 Acquired 2011 Indexed Base Cost-as above 160,566 Acquired at MV-as above 264,000 1 Stamp Duty 2,640 Sub-Total 266,640 Sale Proceeds 13,200/33,000 x 990, , ,000 1 Gains 235, , ,794 Exemption -1, ,524 CGT 363,524 x 25%= 90, (3 Marks) If Deirdre waits until at least she has reached age 55, she will be entitled to retirement relief in relation to the shares deemed to have been acquired in 1998 (i.e, date on which her original holding acquired in Jaune Ltd was acquired). She will satisfy the condition that she holds more than 25% voting rights in the company and she will have held the shares for 10 years and been a full-time working director throughout that period. The ratio of Chargeable Business Assets/Chargeable Assets is as follows: Market Value Chargeable Chargeable Business Assets Non-Business Assets Fixed Assets: Buildings 280, ,000 Plant 44,000 44,000 Goodwill 500, ,000 Investments 156, ,000 Net Working Capital 132, ,112, , , , ,000/980,000= 84.08% The investments are classed as chargeable non-business assets, notwithstanding that a disposal thereof would currently generate a capital loss. If the investments were sold and the proceeds held on deposit, this would eliminate all chargeable non-business assets and there would be no consequent restriction of Retirement Relief. The CGT liability would be reduced to 132,000 x 25%= 33,000. (5 Marks) Any sale of the shares within 6 years from the date of the gift from Denis will potentially trigger off a clawback of Business Property Relief, unless and to the extent that Deirdre reinvests the sale proceeds in qualifying replacement property, ie property which itself would qualify for business property relief if it were the subject of a transfer (disregarding the stipulation re minimum period of 5 years ownership).the replacement property need not represent like for like, so investment in an unincorporated trade potentially ranks as replacement property. As the CGT credit is almost fully used even with the benefit of BPR, this implies a tax charge of 25% on the amount of any relief clawed back. Any sale within 2 years from the date of the gift from Denis would result in clawback of the credit for CGT. (3 Marks) Format &Presentation (4 Marks) [Total: 40 Marks] Page 10

12 SOLUTION 2 (a) George Marks Koala Ltd Salary-Bonus (120,000-10,000) 110,000 Koala (I)Ltd Salary 32,000 1 Benefit- Car (Note 1) 11,660 2 Benefit- Gym(restricted availability) 2, Medical Check-exempt Australian Interest 7,000 x 10/9= 7,777 DTR Carmel UK Rents 14,000 DTR 570 Add Back: 25% Interest 3,000 17,000 1 Total Income 180,544 (41,800+17,000) 58,800 X 20%= 11, ,744 X 41%= 49, ,544 61,675 Personal Tax Credit-Married 3,300 PAYE credit 1,650 Medical Exes Credit 6,400 x 20%= 1,280 (6,230) [no credit for rental payments since new tenancy in 2011] 1 55,445 Double Tax Relief = (1,347) 1 Tax Liability 54,098 (9 Marks) Note 1 List Price 58,300 x 24*% = 13,992 x 10/12 = 11,660 No deduction for costs borne by employee * Annualised Mileage (Kms) 21,000 x 12/10 = 5,200 Given that Carmel had a domicile of origin in Ireland, it is likely that even if she had acquired a domicile of choice in Australia, her domicile of origin in Ireland revived on leaving Australia permanently, particularly so as she apparently intends to remain in Ireland for the duration of her life. George has a domicile of origin in Australia and there is a realistic prospect of his returning there permanently; it would appear that he is also maintaining family ties there. Accordingly, there are substantive grounds for considering him to have retained his Australian domicile (although further information would be required). (2 Marks) In order to maximise the benefits of the remittance basis, George should retain all his foreign income in a separate account. All remittances should then be made from pre-residence savings (any interest arising thereon being transferred immediately to the new income account). The income from Koala (Australia) Ltd will be a mixture of Schedule D3 income (to the extent earnings refer to non-irish duties) and Schedule E/PAYE income (the balance).the Revenue have stated that they will regard the PAYE income PAYE as being remitted in priority to the Schedule D3 income and George could also avail of this practice. The couple might also be able to transfer the UK property to George who could then avail of the remittance basis in relation to the rental income; the DTR is negligible and currently still leaves a significant Irish tax exposure. The transfer of the property would take place on a nil gain/nil loss basis (the anti-avoidance rule withdrawing this treatment for transfers to tax-exempt spouses does not seem in point as George is resident in Ireland, albeit taxable on the remittance basis) so this transaction would not generate an allowable capital loss in relation to the fall in value of the property. There are no CAT implications in terms of the gift by Carmel to George as they are spouses. (5 Marks) George will not be regarded as resident and ordinarily resident for CAT purposes until and unless he has been resident in Ireland for the previous five consecutive years. If he were to make gifts of non-irish assets to Natalie (who is non-irish resident these would be outside the territorial scope of CAT and would avoid eroding the Parent-Child exempt threshold. This will be pertinent given that all of the ultimate inheritance received by Natalie may be within the scope of CAT (if eg George predeceases Carmel who, if she remains in Ireland as intended, will be resident there for all tax purposes).the transfer of cash is straightforward. Because the cottage is owned jointly, it would be Page 11

13 necessary for Carmel firstly to transfer her share to George (again, as discussed under (c) this should be on a nil gain/ nil loss basis). There will need to be a three-year interval before George passes on the benefit of Carmel s share in view of the gift-splitting rules, which would have the effect of treating Carmel as the disponer. There are again no CAT implications in terms of the gift by Carmel to George. George s disposal of the cottage would generate no proceeds so if a gain arose there would by definition be no question of any remittances being made to Ireland. (4 Marks) [Total: 20 Marks] Page 12

14 SOLUTION 3 (a) Thomas may consider deferring the sale, since this results in part of his trading income being shifted into 2012 when he will pay tax at 20% rather than 41%(given that he will not receive any dividends if he takes the shares in Barry Ltd and any interest on the cash proceeds if he opts for this alternative will be taxed at the DIRT rate) Against this, he will lose the benefit of enjoying receipt of the consideration immediately -not necessarily an issue if he takes the shares in Barry Ltd, since these do not pay dividends and Thomas believes that their value will trend upwards. Cease 31 March 2012: Marks Final Year 80,000 x 3/12= 20,000 Prior Year - Accounts Year 60,000 -Actual (60,000 x 3/12) + (80,000 x 9/12)= 75,000 75,000 95, Cease 30 June 2012: Final Year (80,000+0) x 6/15= 32,000 Prior Year - Accounts Year 60,000 - Actual (60,000 x 3/12) + (80,000 x 9/15)= 63,000 63,000 95, (4 Marks) (b) The premises were acquired following their completion by Newport which occupied them for less than 24 months; since the sale took place within 5 years of completion, the premises were new for VAT purposes, so Thomas would have incurred VAT of 400,000 x 13.5%= 54,000, which would have been fully recoverable since he makes no exempt supplies. Newport and Thomas between them have occupied the premises for an aggregate period in excess of 24 months, notwithstanding that the sale to Barry Ltd will take place less than 5 years after completion; the subsequent works by Thomas being minor in nature will not affect the status of the property. Accordingly the property will be old for VAT purposes, and a sale would be exempt. Because the sale of the property forms part of a transfer of a going concern, no VAT will be charged. However, Barry Ltd will step into the shoes of Thomas for the purposes of the Capital Goods scheme and will be subject to potential clawbacks of Thomas s original input VAT of 54,000 on acquisition of the premises (though not the cost of the minor development) over the remainder of the adjustment period. If Barry Ltd uses the premises in the future for activities which are exempt to the extent of 55%, this will trigger off the big swing provisions and will result in a clawback of the input tax equal to 54,000/20= 2700 x (number of full intervals remaining in adjustment period +1); this is subject to any further adjustments in relation to subsequent changes of use. Since the Capital Goods Scheme clearly will not apply to the alternative property (on the basis that there has been no development in the previous twenty years) then, all things being equal, it would be preferable to locate the VAT-exempt activities in that property. The relatively higher percentage of exempt use in the smaller property is irrelevant for these purposes. (7 Marks) The sale of the business will generate a net gain of 60,000, as set out below: Cost Cost Sale Price Gain/(Loss) Marks Goodwill - -? Trade Mark - 10,000? 10, , ,000 Premises-Acquisition 400,000 -Enhancement 80, , ,000 (90,000) Net Gain 550,000 60,000 2 (2 Marks) (c) Thomas will not be able to defer the net gain by taking shares in Barry Ltd since he will not be transferring all of the assets of the business to the company. He would incur Stamp Duty at 1% on the value of the shares received by him. (2 Marks) Page 13

15 (d) From Barry Ltd s perspective, it will probably make sense to weight the consideration of 160,000 towards the trademark, since this will potentially qualify as a specified intangible asset on the basis that Barry Ltd will generate revenues from exploiting it. The annual allowance will be calculated at a rate of 7% p.a. (2% in Year 15) or at an amount equivalent to the depreciation charged in the accounts. The relief will be capped at an amount equivalent to 80% of the income generated by exploitation of the trademark. If Barry Ltd borrows in order to finance the acquisition of the business the 80% cap will apply to the aggregate amount of the interest on the borrowings to the extent they refer to the acquisition of the trademark plus the annual allowance; the interest on the balance of the borrowings should be an allowable deduction from the company s trading income under general principles. The acquisition of the trademark will be exempt from Stamp Duty. An issue of shares will avoid the necessity of incurring interest. (5 Marks) [Total: 20 Marks] Page 14

16 SOLUTION 4 (a) A close company is an Irish resident company where inter alia 5 or fewer shareholders (together with their associates) own more than 50% of the shares of the company (assuming, as here, only one class of issued share). Currently there are any 5 out of 9 major shareholders holding 102 shares each, i.e 510 shares in total, i.e. 51% of the shares in the company. The alternative test is that the company s directors between them own more than 50% of the company s share capital; this test is not met in this case as the directors only own [(4 x 102)+ (2 x 41)]=490 shares between them, If a further 200 shares are issued, then there will be 1,200 shares in issue. If all the shares are issued to a single shareholder, then that shareholder together with any 4/9 of the existing major shareholders will hold [200 +(4 x 102)]=608/1200= 50.6%.Accordingly, if the company wants to shed its close status it will need to issue shares to more than one shareholder. Further it should not appoint new shareholders as directors if they hold more than 110 shares between them as this would bring the directors aggregate shareholding to at least ( )=601/1200 shares (alternatively they could obtain flexibility by asking some existing directors to step down). (4 Marks) (b) MARKS Profit per accounts 153,949 Add: Additional walls (capital) 6, Filing cabinets (capital) 1, Proff fees- Tax appeal (non-trade) Proff fees re purchase of property (capital) 5, Sundry- Gifts of drink (entertainment) Rental expenses (Schedule D5) 3, Political sub. (non-trade) 2, Bad debts- increase in general provision(appropriation) 2, Bad Debts- staff loan written off (non-trade) Depreciation (capital) 26, Patent royalty- charge 8, ,513 Deduct: Rents(Schedule D5) 20,950 Bank interest (Schedule D3) 2,500 Dividends (Schedule F/exempt FII) 10,000-33, Less: Capital allowances -1, Schedule DI 177,912 Less: Trading Charge (Gross) (7,600+ 1,900)= -9, ,412 Less: Group Trading Loss Relief Claim -27, ,112 Schedule D5 (20,950-3,450) 17, Schedule D3 2, ,112 Corporation Tax Payable 141,112 x 12.5%= 17, ,000 x 25% = 5,000 Income Tax on Patent Royalties 1,900 24, (9 Marks) Page 15

17 Surcharge Computation Total Income for accounting period (177, ,000)= 197,912 Income for accounting Period (as above) (197,912-9,500)= 188,412 Estate and Investment Income (17,500+ 2,500)= 20,000 Fractional Income 20,000 x 188,412/197,912= 19,040 Add: FII 10,000 29,040 Less: CT on Estate and Investment Income 19,040 x 25%= -4,760 24,280 Deduction for trading company 24,280 x 7.5%= -1,821 Distributable estate &investment income 22,459 Surcharge 22,459 x 20%= 4,492 Marks (2.5 marks) Hoarse Ltd should consider declaring a dividend for the year to 31 December 2011 and paying it prior by 30 June A dividend of (22, ) = 21,824 would eliminate the surcharge. If Gargle Ltd had ceased to be a close company by the time that the dividend was paid it would not incur the surcharge on its receipt. If it remains a close company, then any potential surcharge may be eliminated if sufficient dividends or other distributions were paid/made by Gargle Ltd to its individual shareholders. (1.5 Marks) (c) A notional amount of income tax must be paid over to the Revenue as if the loan were an annual payment, ie 32,000 x 20/80= 8,000. In addition, a benefit-in-kind will be assessed on Ms. Burke at a rate of 12.5% p.a. This latter charge could be eliminated if Ms. Burke stepped down as a director. The payment of 8,000 will only be refunded if the loan is repaid or perhaps discharged out of the proceeds of a distribution made to Ms. Burke (although this would generate a potential liability to income tax in her hands). (3 Marks) [Total: 20 Marks] Page 16

18 SOLUTION 5 (a) If Loss Relief not claimed If Loss Relief Claimed Marks Schedule D3 120, , Schedule D5 19,638 Less: S 23 (6,300) 13,338 13,338 1 Schedule F (1, )= 2,570 x 100/80= 3,213 3,213 1 Loss Relief 21,262+2,738= -24,000 1 Maintenance Payments (Spouse only) -3,538-3, , ,013 BES investment 84,500 +2,500= -87,000-87,000 1 Taxable Income 46,013 22, Adjusted Income Add back Specified Reliefs 6, ,000= 93,300 93, , ,313 HNW restriction applies- Specified Reliefs limited to 80,000,ie effectively add back (93,300-80,000)= 13,300 HNW restriction N/A 1 Taxable income 59,313 22,013 1 (9 Marks) Capital Allowances Marks Sale of old package Proceeds effectively restricted to cost 12,000 Less TWDV (9,600) Bal Charge-rolled over (2,400) 1 New Package 14,000 Net reinvestment (14,000-2,400) x 12.5%= 1,450 1 Fixtures etc At cost (5, )=6,300 x 12.5%= Car 24,000 x 50% x 12.5%x 1/3= ,738 (4 Marks) Students might note that the retirement annuity premiums can be backdated to 2010; as this will reduce Georgina s net relevant earnings (the amount paid would seem to be less than 25% of her Net Relevant Earnings on the information available), presumably this will in turn increase the unused BES relief carried forward to (1 Mark) (b) Georgina failed to charge output VAT on the services supplied in relation to Irish immoveable property; she also charged VAT incorrectly on the supply of services to the US customer but this amount cannot be netted off against the underpayments of VAT. None of the input tax in respect of the new car is recoverable. Georgina should make a prompted voluntary disclosure of the under-declared VAT. The disclosure will result in the mitigation of penalties. Given the apparent lack of deliberate intent, then depending on the scale of the underpayment it may be classed as careless behaviour or careless behaviour with serious consequences. It will also protect her from having her name published as a tax defaulter, ie which generally would otherwise apply if it were the case that the amount of under-declared tax, interest and penalties in total exceeded 33,000.She will still be liable for interest on the underpaid amounts. (6 Marks) [Total: 20 Marks] Page 17