TAXATION FORMATION 2 EXAMINATION - APRIL 2009

Transcription

1 TAXATION FORMATION 2 EXAMINATION - APRIL 2009 NOTES: You are required to answer a total of five questions. Questions 1, 2, 3 and 4 are compulsory. You are also required to answer either Question 5 or 6. (If you provide answers to both Questions 5 and 6, you must draw a clearly distinguishable line through the answer not to be marked. Otherwise, only the first answer to hand for Questions 5 or 6 will be marked.) TAXATION TABLES ARE PROVIDED TIME ALLOWED: 3 hours, plus 10 minutes to read the paper. INSTRUCTIONS: During the reading time you may write notes on the examination paper but you may not commence writing in your answer book. Marks for each question are shown. The pass mark required is 50% in total over the whole paper. Start your answer to each question on a new page. You are reminded that candidates are expected to pay particular attention to their 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 the candidates' answers and the extent to which answers are supported with relevant legislation, case law or examples where appropriate. List on the cover of each answer booklet, in the space provided, the number of each question(s) attempted. The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.

2 THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND TAXATION FORMATION 2 EXAMINATION - APRIL 2009 Time Allowed: 3 hours, plus 10 minutes to read the paper. Answer Questions 1 to 4 and Question 5 OR 6. (Five questions in total to be attempted). 1. (a) Lossco Ltd. is an Irish resident trading company. Results in recent periods have been as follows: Year ended 6 months end Year end 30/4/ /10/ /10/2008 Case I 90,000 (110,000) 70,000 Case V 8,000 6,000 Nil Case V Capital allowances (i) 5,000 5,000 5,000 Chargeable gains (ii) 4,000 Capital gain (iii) 15,000 (i) (ii) Case V capital allowances have not been deducted in arriving at the figures for income and losses. The gains arose from the sale of shares held as an investment by Lossco Ltd. and have already been adjusted for corporation tax purposes. (iii) This gain arose as a result of the sale of development land by Lossco Ltd. on the 1st October You are required to: (a) Calculate the corporation tax liability, if any, for each accounting period on assumption that full relief was claimed for all available losses at the earliest opportunity. (12 marks) (b) (i) What is the maximum time available to the company to lodge a claim for relief for the trading loss suffered by Lossco Ltd.? (2 marks) (ii) What are the dates for payment of all taxes arising in year ended 31st October 2008? (3 marks) (c) Big-Supplies Ltd. supplied goods to Lossco Ltd. in September Lossco Ltd. have received an invoice from Big-Supplies Ltd. but there is no VAT number shown on the invoice. Big-Supplies Ltd. advised that they have lodged an application to register for VAT and are currently awaiting their VAT number. What are the implications for BOTH Lossco Ltd. and Big-Supplies Ltd.? (3 marks) [Total: 20 marks] Page 1

3 2. In August 2007, Raymond and Bernadette Smyth were made redundant. On 1st October 2007, using the proceeds of his redundancy, Raymond started a business making bridal gowns. He traded as RS Sewing. He set up operations from the large garage behind the house, which had been converted into a small workshop. Bernadette works four days per week in the business. Raymond s accounts for the 15 months to the period ended the 31st December 2008 are as follows: Notes DR. CR. Gross Profit 93,514 Bank deposit interest 1 2,900 Dividends received 2 2,060 Depreciation of machines 6,000 Salaries 3 28,990 Bad debt provisions 4 6,000 Business telephone and fax rental 520 Mobile phone 5 2,600 Motor expenses 6 8,720 Professional Indemnity Insurance 1,175 Stationery 575 Overdraft interest 7 5,000 Repairs to machines 400 Advertising 300 Insurance 8 2,450 Legal Fees 9 1,210 Accountancy Fees 1,150 Entertainment Net Profit 32,693 98,474 98,474 Notes: 1. Bank interest: Year ended Ireland Banks plc 31st December st December ,400 The above are the amounts actually credited to Raymond s account. 2. Dividends received: From Irish resident companies 2,060 net 3. Raymond paid himself 1,000 per month since he commenced. Bernadette is paid an annual salary of 12,000 from which PAYE of 2,500 was deducted in Raymond has taken a prudent view and allowed 4,000 for non-payment of expensive weddingdresses, which may possibly arise if a wedding order is cancelled. The balance is in respect of a specific order where the customer was declared bankrupt and has advised he will be unable to pay. 5. It has been agreed with the Inspector of Taxes that private use of Raymond s phone is 10%. Raymond s phone costs were 1,900. Bernadette s phone is used exclusively for business. 6. Parking charges incurred while visiting clients and delivering dresses were 170. Parking fines totalled 80. The remainder of the expenses relate to the van and are fully allowable. 7. 4,000 of the overdraft interest was incurred on the business bank account. The remainder was charged on Raymond s personal account. 8. The insurance premium is in respect of the workshop contents and 450 is for Raymond and Bernadette s private dwelling house. Page 2

4 of the legal fees were in respect of the formation and registration of the business. The balance were incurred on a domestic matter. 10. Raymond entertained local businesses people and has managed to secure some worthwhile referrals from them. 11. Business purchases made by Raymond were as follows: 2007: Two industrial sewing machines 7,500 each Workbench and shelving 1,790 Office fixtures and fittings 4,600 Computer equipment 2,445* * Included in this figure is 695 for a printer / copier that was ordered in December 2007 but not received until January : Van 26,200 Fireproof safe 2,400 Other income: (i) (ii) Bernadette invested her redundancy money placing it on deposit with a UK bank. 1,800 interest was paid into her account in December She received rental income of 18,000 from a Section 23 apartment during The property was financed with an Irish Bank loan of 240,000, taken out in Interest charged on the loan in 2008 was 12,500. Insurance and repairs totalled 1,500 for the year. The property was bought for 265,000 in February You ascertain the following cost breakdown: Construction 155,000 Site 30,000 Site clearance 15,000 The net profit rent on the property in 2006 and 2007 was 2,500 and 3,800 respectively. The property is registered with the Property Registration Tenancy Board. On the 1st June 2008, Raymond rented a vacant property in Donegal for 9,120 per annum, payable monthly. He inherited the property on the 1st January Under the terms of the 4 year lease, the tenant is responsible for furnishing and decorating the property. Raymond is responsible for the property insurance and for all structural repairs. Raymond incurred expenditure of 4,900 during April and May bringing the property to a rentable condition and 70 registration with the Property Residential Tenancy Board in June The annual insurance premium paid on the 1st April 2008 was 630. You are required to: a) Show Raymond s taxable Case I profits for 2007 & (13 marks) b) Calculate the taxes due by Raymond and Bernadette for 2008 on the basis that they are jointly assessed. (8 marks) c) What is the remaining S.23 relief being carried forward into 2009? (4 marks) All workings to be clearly shown. [Total : 25 marks] Page 3

5 3. (a) Jim Jones is a stationery retailer and has been trading since 01/03/1995. On 01/01/2008 he incorporated his business, transferring the business as a going concern, to the newly formed company JJ & Co. Ltd. All of the assets, except cash, were transferred to the company. In return the company issued Jim with: (i) (ii) (iii) 200,000 1 ordinary shares in JJ & Co. Ltd., Paid off the trade creditors, 100,000 cash of which 40,000 was left outstanding as a loan to the company by Jim. 9% interest on the loan was to be paid annually to Jim by the company for the duration of the loan. Extracts from the balance sheet as at 31st December 2007 and from the supporting notes to the accounts reveal the following: Cost/ Accumulated revaluation depreciation Shop (i) 155,000 34, ,200 Warehouse (ii) 20,000 7,800 12,200 Fixtures (iii) 26,933 16,833 10,100 Cash at bank 23,700 Stock 80,000 Trade Receivables 30,300 Trade Payables payable within one year (16,500) Total Net assets 260,000 Capital and retained reserves 260,000 (i) The shop was purchased in February (ii) The Warehouse was purchased in September 1995 for 8,000 and revalued in January 2001 to 20,000. (iii) The fixtures were purchased in The agreed market values of the assets transferred were as follows: Shop 500,000 Warehouse 128,000 Fixtures 10,100 Note Goodwill 120,000 Stock 70,000 Trade Receivables 18,000 Note: The tax written down values of the fixtures equal the Net Book Value. An election was made to transfer the fixtures to the Company at this figure for the purpose of capital allowance calculations. Jim did not have any other disposals in the year ended 31 December You are required to: (b) (a) (b) Compute the amount of capital gains tax, if any, payable by Jim Jones arising on the transfer of the business to the company. (12 marks) Show how the cost of the shares issued to Jim will be calculated for capital gains tax purposes in the event of a future disposal. (2 marks) (c) State the due date for payment. (2 marks) (d) JJ & Co Ltd. want to change to the cash basis of accounting for VAT purposes. What are the conditions necessary to change? (2 marks) (18 marks) A trader is undecided whether or not to register for VAT. What are the main factors to be taken into account to arrive at a final decision? (2 marks) Page 4

6 [Total : 20 marks] 4. Assume an accounting year end of the 31st December each year for parts (a) and (b). (a) Calculate the capital allowances available in the following circumstances: (i) A car was purchased for use in a business on the 1st August Category C car costing 29,000 new. (2 marks) (ii) The same business purchased another car for 20,000 for use in the business, on 1st October Carbon emissions rating 140g/km. (2 marks) (iii) A different business purchased a car in April This car was traded in on the 1st March 2008 against a Category B car costing 25,000. The car that was purchased in April 2006 had originally cost 33,000 and had a carbon emission level of 160g/km (Category D). Only 8,000 was allowed on this car as a trade-in. (4 marks) (iv) A van was leased on 1st October The retail cost was 27,000. The lease expenses were 4,100 and the diesel cost was 3,400. Private mileage was incidental. (1 mark) (b) Quantify any VAT input credits that are available in parts (a) (i) (iv) above, on the basis that all of the figures shown include VAT. (3 marks) (c) (i) A car can be leased on either the 1st February or the 1st August 2008 for use in the business. The value of the car when bought new is 58,000. The carbon emission level is 200g/km. The total motor expenses would be: 12,500, of which running expenses would be 9,500, if leased on the 1st February OR 10,000, of which running expenses would be 7,000, if leased on the 1st August. Calculate the add-back that would appear in the Case I assessment for each of the proposed dates. (2 marks) (ii) Calculate the adjustments necessary to derive the Case I taxable income: Mary leased a small car for use in her business on the 1st September The retail value of the car is 15,000. Lease rental is 2,340 and running expenses are 3,200. The carbon emissions level is 125g/km. (3 marks) (d) (e) What is the latest date for filing the Corporation Tax return in a company where the accounting year ends on the 31st May 2008? (1 mark) What is the latest date for filing the Income Tax return for a sole trader with an accounting year end of the 31st May 2008? (2 marks) [Total: 20 marks] Page 5

7 5. (a) What is the tax position for Capital Gains Tax, if a person is neither resident nor ordinary resident, in the year of assessment? (4 marks) (b) Explain the concept of Domicile. (3 marks) (c) Mary Murphy is 48 and single. On the 31st December 2008, she accepted a voluntary redundancy package from the company where she had worked for the last 14 years. Under the redundancy package agreed between Management and the Union, Mary received an ex-gratia lump sum of 55,000, together with a payment of 5 weeks basic salary for each complete year of service. She also received 6,000 statutory redundancy pay. She was allowed to keep the company car she had received on the 1st June It is a 2007 car that originally cost 13,000. They agreed market value of the car at the date of leaving was 9,000. Mary spent four full days of each week visiting specific clients in the Dublin region. Due to traffic congestion, the log book recording of distances driven by Mary recorded only Mary s 1335 business kilometres each month. Mary Murphy s salary in recent years is as follows: , , ,000 Her average rate of tax for the last three years was 24.55%. Mary is single. You are required to: (i) Calculate the exempt portion of the redundancy sum received by Mary. (3 marks) (ii) Calculate the amount of Top Slice Relief that Mary can claim. (5 marks) [Total : 15 marks] Page 6

8 6. Jennifer Whyte has been reading about the provision of pensions for retirement. Although she is only 34 years old, Jennifer is concerned and wants to put away as much as possible for her retirement. Jennifer is not yet eligible to join her employer s pension scheme but she is in a position to use up to 10,000 from the proceeds of a small inheritance that she received, towards a pension. Jennifer has been told that in order to obtain tax relief on her pension contributions, the maximum she can set aside in a retirement plan is 20% of her Net Relevant Earnings. She is unsure what this means and has come to you for advice. You establish that she has a salary of 37,047, Credit union savings of 5% interest and a small rental income of 2,900 before deductions, from her apartment in Portugal. Jennifer s only outgoings are: (i) (ii) (iii) Monthly rent of 1,175 for a house that she shares with three other girls. Loan repayment of 800 per month on loan taken out in 2004 to purchase the apartment in Portugal. The total interest paid on this loan for 2008 was 2,000. Fixed monthly repayment of 675 with Allied Banks Ltd. Jennifer took out the loan last year to purchase shares in the company where she works. The certificate of interest for the year ended 31st December 2008 is for 7,200. You are required to write to Jennifer to explain: (a) What is meant by the term Net Relevant Earnings? (5 marks) (b) Calculate the maximum pension contribution on which Jennifer can obtain relief in (7 marks) (c) (d) What is the position regarding any premium payments that Jennifer makes that are in excess of the amount you have identified in part (b) above? (1 mark) What is the latest date by which Jennifer must make her pension payment to be entitled to claim relief in 2008? (2 marks) [Total: 15 marks] END OF PAPER Page 7

9 SUGGESTED SOLUTIONS THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND TAXATION FORMATION 2 EXAMINATION - APRIL 2009 S.396 TCA 1997 is the relieving section for corporation tax losses. Candidates are frequently unsure where to begin when faced with a loss question that spans several years. Initially remember how a company s losses travel: Case I: Case V: Adjusted gains: Carry back / carry forward / carry back / carry forward i.e. in a Zig-Zag fashion. Carry back / carry forward. Carry forward. Thereafter, the correct offset procedure is as follows: 1) BEGIN in the accounting period where the loss arose. 2) Work out the corporation tax due on other income in that period. 3) Carry the loss back against Case I profits in an accounting period of a corresponding length i.e. if the loss arose in a 6 month period, carry it back against 6 months Case I profits in previous period ; similarly if the loss arose in a 9 month period, carry back against 9 prior Case I in previous period etc. 4) Next work out the corporation tax for this prior period. 5) Return to the accounting period where the loss arose and relieve, on a value basis, the corporation tax you already calculated at Step 2) above. 6) In the previous accounting period of the same length, relieve, again on a value basis, the corporation tax you calculated at Step 4) above. 7) If any loss remains after this zig-zag relief, carry it forward on a for basis against future Case I profits arising from profits from the same trade. 8) Finally, remember to maintain a loss memo until the loss is depleted, recording the relief attributed at all stages. Page 8

10 SOLUTION 1 Note: (Solution is laid out horizontally to facilitate viewing alongside stepped tutorial.) Year ended 6 months ended Year ended 30/4/ /10/ /10/2008 Case I 90,000 nil 70,000 S.396A x 6/12 (45,000) (33,496) S.396(1) forward 45,000 36,504 Case V 8,000 6,000 nil Case V Capital Allowances (5,000) ( 5,000) (below) 3,000 1,000 nil Income 48,000 1,000 36,504 Gain 4,000 Profits 48,000 5,000 36,504 Excess Case V capital allowances ( 5,000) 31,504 Taxed: 45,000 x 12.5% = 5,625 4,000 x 12.5% = ,504 x 12.5% = 3,938 3,000 x 25% = 750 1,000 x 25% = 250 6, ,000 x 20% = 3,000 S.396B x 6/12 = (3,188) S.396B (750) 3,187 nil LOSS MEMO 110,000 31/10/07 S.396A (45,000) 30/ 4/07 65,000 S.396B (6,000) 31/10/07 59,000 S.396B (25,504) 30/ 4/07 33,496 S.396(1) (33,496) 31/10/08 - Page 9

11 (b) (i) The claim for loss relief must be lodged within two years from the end of the accounting period where the loss arose i.e. by 31/10/09. (ii) Corporation tax 3,938: Not less than 90% of the corporation tax is payable by 21st September The balance is payable by return filing date 21st July Capital Gains Tax 3,000: As the gain arose on 1st October 2008, the tax is payable on the 31st January (c) Big Supplies Ltd: The invoice issued by Big-Supplies Ltd. should state PRO-FORMA and AWAITED in place of the number. When Big-Supplies Ltd. receive the VAT number they should issue a corrected invoice stating the VAT number. Lossco Ltd: Lossco Ltd. cannot claim an input credit until such time as the VAT number is advised to them. Once they have received the corrected invoice stating the VAT number, they can then claim the input credit. SOLUTION 2 (a) RS Sewing Ltd 15 months ended 31st December 2008 Notes Net profit per accounts 32,693 Add Back: Depreciation 6,000 Salaries 1 15,000 Bad debt general provision 2 4,000 Mobile phones Overdraft interest 4 1,000 Legal Fees Insurance private 450 Motor 6 80 Entertainment ,911 Deduct: Bank deposit interest received 2,900 Dividends received 2,060 (4,960) 55,644 b) Year 1: 1st October 31st December 2007 i.e. 55,644 x 3/15 11,129 Year 2: 1st January 31st December 2008 i.e. 55,644 x 12/15 44,515 Page 10

12 Raymond & Bernadette Smyth Income Tax Computation 2008 Raymond Schedule D Case I 44,515 Capital allowances (6,554) 37,961 Schedule D Case IV (2,400 x 100/80) 3,000 Schedule F (2,060 x 100/80) 2,575 Bernadette Schedule D Case III UK Bank 1,800 Schedule D Case V Note 8 Nil Schedule E 12,000 Total income 57,336 Taxed as follows: 20% = 11, Less Tax Credits: Married (3,660.00) PAYE Note 9 Nil Deduct DIRT (600.00) PAYE deducted (2,500.00) DWT (515.00) 4, (c) S.23 qualifying expenditure: 265,000 x 155, ,000 = 225, , , ,000 The balance of S.23 carried forward to 2009 is 225,250 (2,500) 2006 (3,800) 2007 (8,812) 2008 (3, ,882) 210,138 Notes: 1 Salary to Raymond is added back 1,000 x 15 2 Add back increase in bad debt general provision: Opening Nil Profit & Loss 4,000 Closing balance 4,000 3 Add back private use of mobile phone. 4 The non-business overdraft is added back. 5 Add back domestic legal fees. 6 Parking fines added back 80 Page 11

13 7 Capital allowances Plant & machinery 2007 Additions 23,140 (i) 2008 Additions 29,295 (ii) 52,435 W & 12.5% (6,554) (i) Machines 15,000 Workbench & Shelving 1,790 Fixtures & fittings 4,600 Computer equipment 1,750 (2, ) 23,140 (ii) Printer / copier 695 delivered January 2008 Van 26,200 Van not restricted to 24,000. Safe 2,400 29,295 8 Rental Income: S.23 property Rent Received 18,000 Interest (12,500) Insurance (1,500) PRTB (70) Profit rent 3,930 S.23 (3,930) Nil Donegal property No deduction is possible for the 4,900 pre-letting expenditure incurred in April and May. Rental income 5,320 (9,120 x 7/12) Insurance (368) ( 630 x 7/12) PRTB (70) 4,882 S.23 (4,882) Nil 9 PAYE tax credit is not available as Bernadette is employed by her husband. Page 12

14 SOLUTION 3 (A) (a) Transfer business to Co: Assets taken over Shop 500,000 Warehouse 128,000 Fixtures 10,100 Goodwill 120,000 Stock 70,000 Debtors 18,000 Total 846,100 Consideration received Creditors paid 16,500 Cash 100, ,500 + Shares balancing figure Capital gains Shop Warehouse Fixtures Goodwill Total Proceeds 500, ,000 10, ,000 Cost 155,000 8,000 (10,100) (Nil) x (202,895) x (10,216) Gain 297, ,784 Nil 120, ,889 Share value: Assets taken over 846,100 (Consideration) (116,500) Shares value 729,600 Deferred gain: 534,889 x 729,600 = 461, ,100 Taxable now: 534,889 Deferred (461,240) 73,649 Annual exemption (1,270) Taxable 20% = 14, Page 13

15 (b) (c) The gain arose in the period 1st January-30th September Tax falls due for payment on the 31st October The base cost of the shares in the event of a future disposal is: Share value 729,600 Deferred gain (461,240) 268,360 (d) Conditions necessary to adopt the Cash basis of accounting for VAT are: At least 90% of turnover is from sales to non-registered persons. OR Turnover is not likely to exceed 1,000,000 in a continuous twelve month period. (B) Factors relevant to the decision to register for VAT are: Have the VAT thresh-hold registration limits have been exceeded? Are the customers (or a significant proportion of them) registered for VAT? Is the VAT element of the purchases / input costs significant? The additional work involved in issuing VAT invoices and lodging returns The possibility of a VAT audit, once registered. Possible interest / penalty exposure if the VAT return is incorrect or VAT is not paid on time. Page 14

16 SOLUTION 4 (a) (i) Capital allowances restricted to 24, capital allowances: 24,000 x 12.5% = 3,000 (ii) Category A car. Capital allowances calculated by reference to the specified amount of 24,000, even though the car cost less. 24,000 x 12.5% = 3,000. (iii) The change of car occurred prior to the 1st July ) New car restricted to specified amount: 24,000 x 12.5% = 3,000 2) TWDV of car traded in: 23,000 less 23,000 x 12.5% for 2006 and 2007 = 17,250 3) Balancing allowance on trade in: 17,250 less [8,000 x 23,000 / 33,000 = 5,576] = 11,674 4) Total capital allowances: 3, ,674 = 14,674 (iv) There are no capital allowances available to the lessor of a leased van. (b) No VAT input credits available on either petrol or car costs. VAT input credits available on cost of diesel and motor leasing. Diesel: 3,400 x 21/121 = 590. Leasing: 4,100 x 21/121 = 712. (c) (i) The car is category F. There is no deduction available for the lease expenses incurred if leased on or after the 1st July /2/2008: Lease expenses 12,500-9,500 = 3,000. Add-back: 3,000 x 58,000-24,000 = 1,759 58,000 1/8/2008: Lease expenses 10,000-7,000 = 3,000. Addback 3,000 (ii) The car is category B. 1/9/ /12/2008: There is no add-back in the period to the 1st Sept 31st Dec 2008 as the car cost is below the limit of 24,000 and the charge of 2,340 is allowed as a deduction in full. However, an additional tax deduction is allowed due to the fact that the car is below the 24,000 limit, calculated as follows: 2,340 x 15,000-24,000 = 1,404 15,000 Total deductions allowed: 2, ,404 = 3,744 Alternative formula: 2,340 x 24 = 3, (d) The Corporation Tax return must be filed by the 21st February (e) The Income Tax return must be filed is the 31st October An extension of 2-3 weeks is allowed when filing by ROS. Page 15

17 SOLUTION 5 (a) If a taxpayer is domiciled only, he will be liable to Capital Gains Tax on the disposal of one of the Irish Specified assets i.e. (i) (ii) (iii) (iv) (v) Land or Buildings in the State, Minerals in the State, Exploration and extraction rights on the Irish Continental Shelf, Unquoted shares deriving the greater part of their value from the above, Assets of a business carried on in the State. (b) Domicile: Domicile: An individual s domicile is determined at birth. The domicile will be that of the person s father or mother if the parents are not married. This is domicile of origin. An individual can change the domicile of origin. It is not easily done and involves severing ties with Ireland and developing closer ties with another country. This is domicile of choice. Domicile is the place an individual considers to be their home and to where he will eventually return. (c) Lump sum received by Mary: Statutory redundancy is exempt. Lump sum 55,000 Ex-gratia payment: 56,000-41,600 / 52 x 5 x 14 Company Car 9,000 Total received: 120,000 (i) The exempt portion of the lump sum is the greater of: Basic exemption: 10, x 14 = 20,870 Or Increased basic: 20, ,000 0 = 30,870 Or SCSB: 40,253 x 14-0 = 37, * ,600 Note: 30% 3,900 BIK 3,120 Note Less 20% abatement (780) ,220 3,120 BIK 3,120 x 7/12 = 1, , ,760 / 3 = 40,253 Choose SCSB as it gives the highest figure. (ii) The amount of Mary s redundancy payment that is taxable is: 120,000 Less SCSB (37,569) Taxable: 82,431 This will fall to be taxed at 41%. Tax on taxable part of lump sum: 41% = 33, Maximum tax payable: 24.55% = (20,236.81) Top Slice Relief claimable: 13, Page 16

18 Solution 6 Ms. J. Whyte, CPA Accountants, 1111 River Street, 124 Long Road, Dublin 90. Dublin 99. Dear Ms. Whyte, Dd/mm/yyyy Following our recent discussion, I wish to confirm as follows: (a) The term Relevant Earnings describes income derived from a self-employed trade or profession. It also includes non-pensionable employment income. Net Relevant Earnings are relevant earnings less excess charges such as a covenant payment, certain interest paid, a royalty payment made or a maintenance payment made, if applicable. The maximum amount of premiums eligible for relief are calculated as a % of net relevant earnings. 20% is the rate applicable for the age bracket Excess Charges refers to the balance remaining after other income such as rental income, interest or dividend income has been deducted from the total amount of charges paid. (b) Your relevant earnings are your non-pensionable salary: 37,047 Charges paid: Interest on loan to purchase shares in your company 7,200 Less other income Credit union interest 5% (178) Rental income (900) Excess charges (6,122) Net Relevant earnings 30,925 Maximum contribution 20% = 6,185 (c) (d) Any payments made in excess of 6,185 will be carried forward and can be relieved in 2009, and future years, together with any premiums paid in the ensuing tax years in question. Relief will be restricted to the overall 20% of your net relevant earnings up to age 39. Thereafter the allowable % increases per Revenue pre-determined limits. You can make additional payments anytime before the 2008 return is due to be filed. The due date is the 31st October Please contact me if you have further queries. Yours sincerely, Page 17