Professional Level Options Module, Paper P6 (IRL)

Transcription

1 Answers

2 Professional Level Options Module, Paper P6 (IRL) Advanced Taxation (Irish) December 2009 Answers 1 Report to: Taxation Manager on issues relating to Niall and Caroline Golden Prepared by: Taxation Senior Date: 1 October 2009 As requested this report sets out the taxation issues arising on the various matters for discussion at your forthcoming meeting with Niall and Caroline Golden. Termination package (i) The redundancy package received by Niall is taxable under Schedule E for tax purposes subject to a tax free element. The amount of the payment that can be considered tax free depends on whether the recipient had ever previously received a tax free lump sum, the entitlement to a lump sum from their occupational pension, the number of year s service and their income at retirement. In Niall s case, he has never previously received a tax free lump sum therefore it is likely that some part of his termination payment may be exempt from tax. His termination payment is comprised of: 1. A cash lump sum based on three weeks salary for each year of employment. Niall was employed from 1 March 1981 until 30 November On this basis, his lump sum is 200,283 (Schedule 1). 2. The company car, valued at 32,000 is taxable under Schedule E as part of the termination payment. 3. The statutory redundancy of 33,924 is exempt from income tax. 4. Pay in lieu of notice is normally included as part of the termination payment except where the contract of employment provides for a payment of this kind on the termination of the contract. Where this provision is made, any pay in lieu of notice payment is chargeable to income tax in the normal way. 5. Where a re-training programme is offered as part of the termination payment, it is exempt from income tax provided that it is carried on within six months from the date of termination and does not exceed 5,000. In this case, the retraining course fees will be exempt from income tax. Therefore, the total taxable termination payment is 232,283 (200, ,000). (ii) In calculating Niall s income tax for 2008, the taxable element of the termination payment must be included subject to any tax free element. The calculation of the tax free element is set out in Schedule 2 and results in the following options: Exemption Tax free amount Basic exemption 30,815 Increased basic exemption 0 Standard capital superannuation benefi t (SCSB) 77,660 The SCSB is based on the average salary for the past 36 months prior to termination and is based on gross salary, inclusive of pension contributions. The SCSB offers the highest tax free lump sum. This tax free element is restricted by the pension lump sum entitlement. Where a pension lump sum is taken or deferred, the actual or actuarial entitlement must be set against the tax free element in calculating the SCSB. In Niall s case, the amount he drew down of 80,000 together with the actuarial value of the deferred amount of 36,500 is deducted in arriving at the tax free amount. Where the pension lump sum is forfeited, no deduction occurs. The income tax computation shows a refund of 539 (Schedule 3). Restriction of Relief for High Earners The Finance Act 2006 introduced limitation on certain reliefs used by high income individuals. This provision applies where specifi c reliefs are claimed. These reliefs include patent royalties exemption, donations to charities and property based capital allowances. The restriction only applies to individuals where their adjusted income exceeds 250,000 per annum and provides that the total amount of reliefs claimed in any one year is restricted to 50% of adjusted income or 250,000, whichever is greater. Where an individual has a ring fenced income source such as deposit interest, and the adjusted income for the year is less than 500,000, the threshold is also reduced (Schedule 3). In Niall s case, his specifi ed reliefs of 180,000 patent royalty and 30,000 charitable donation are not restricted as they do not exceed 50% of his adjusted income (433,419 x 50%). (iii) Considerations: In respect of the restriction on reliefs for high earners Niall could consider: (a) ensuring that he does not generate ring fenced sources of income for future years for example he could ensure that he does not generate deposit interest. This would mean that his adjusted income would remain below the threshold of 250,000 and no restriction would apply, or 17

3 (b) setting up a company and transferring the patent royalties to the company as the restriction does not apply to companies. Schedule 1 APPENDIX Redundancy payment Salary for 2008 (annualised) 125,102 Lump sum: Number of years service years Lump sum per year of service 3 weeks Lump sum entitlement 200,283 Schedule 2 Basic exemption 10, per complete year service 10,160 + (765 x 27 years) 30,815 Increased basic exemption 30, ,000 40,815 Less: pension lump sum entitlement 80, , ,500 0 Standard capital superannuation benefi t (SCSB) Average remuneration over previous 36 months of employment Gross salary 1 December 2007 to 30 November ,461 1 December 2006 to 30 November ,653 1 December 2005 to 30 November ,486 Total remuneration over past three years 323,600 Average remuneration 107,867 SCSB ,867 x = ,160 Less: pension lump sum entitlement 116,500 Net tax free termination payment 77,660 Tutorial notes: 1. The salary for 2008 of 125,102 is made up of: Salary for 11 months to 30 November 2008 per P45/P60 103,209 Grossed up by 10% for pension contributions 114,676 Annualised to 12 months to arrive at a weekly salary fi gure (12/11) 125, The lump sum entitlement of 200,283 is made up of: Weekly fi nal salary (125,102/52) 2, Weekly salary x 3 weeks x years 200,283 18

4 Schedule 3 Income tax computation 2008 Schedule E Salary 103,209 Pension 5,780 Pay in lieu of notice 4,807 Termination payment 154, ,419 Schedule D Case IV Deposit interest 7,200 Total income 275,619 Less: Pension contribution 15,000 Charitable income 30,000 (45,000) Taxable income 230,619 Tax 7,200 x 20% 1,440 44,400 x 20% 8, ,019 x 41% 73,398 83,718 Less: non-refundable credits Personal credit 3,660 DIRT credit 1,440 PAYE credit 1,830 (6,930) 76,788 Less: refundable credits Patent royalty withholding tax 36,000 PAYE paid 39,219 PAYE paid on pension 2,108 (77,327) Net refund due 539 Adjusted income Taxable income 230,619 Plus: Patent income 180,000 Charitable donation 30, ,619 Less ring fenced income Deposit interest (7,200) 433,419 2 Memorandum To: Tax Manager From: Tax Assistant Subject: Christie Limited and associated companies Date: 7 December 2009 A group structure exists for corporation tax and capital gains tax purposes as Bain Marie Limited (BML), Kettle Wood Limited (KWL) and Toast Makers Limited (TML) are each 75% subsidiaries of Christie Limited (CL). (i) Withholding tax on patent royalty An exemption from withholding tax is allowed in accordance with the EU Interest and Royalties Directive where a royalty payment is made by an Irish resident company to an associated EU resident company. An associated company is one that holds at least 25% of the voting power of the other company for an uninterrupted period of two years. However, as Rexin Limited has only owned the shares in BML since January 2007, it does not meet the two-year ownership requirement and therefore the withholding provisions apply and BML will be required to withhold tax on the patent royalties paid in June 2008 at the rate of 20%. 19

5 (ii) Use of losses in Toast Makers Limited TML is a non-resident company with losses arising in the year ending 31 December Arising from the Marks & Spencer case, s.48 Finance Act 2007 amends the loss relieving provisions by allowing losses arising in an EU resident subsidiary to be utilised by its Irish parent company where the following conditions are met: the surrendering company (TML) is a 75% vertical subsidiary of the claimant company; the losses of TML must not be available for offset against profi ts in another jurisdiction; the losses of TML must not be used at any time by way of offset against profi ts in the country where the losses arose either by current year claim, group relief claim, preceding years claim or a carry forward of losses; the losses are calculated in accordance with Spanish laws; and the losses must not be attributable to a trade carried on in the State through a branch or agency. Therefore, the losses arising in TML will not be available to BML because (1) it is not the parent of the loss-making company and (2) TML may be able to utilise these losses against its profi ts arising in 2009 and future years. (iii) Corporation tax computations KWL s profi ts in 2007 arose from both the sale of developed units liable to corporation tax at 12 5%, and the sale of commercial development sites. The sale of commercial development sites is defi ned as profi ts arising from dealing in development land (s.21(a) TCA 97). This is an excepted trade and requires the company to treat this income stream as a separate trade for corporation tax purposes. Such a trade is liable to corporation tax at 25%. The losses arising in 2008 are all from the sale of developed units. Under the group relief provisions, KWL can group relieve its losses to BML, however, BML will not have any taxable profi ts in the current year after deducting the trade charges of 150,000 patent royalties. The available loss claims are as follows: Kettle Wood Limited Year ending 31 December 2007 Case I Relevant trading profi t 350,000 x 5 2m/6 16m 295,455 Less: s.396a losses carried back (295,455) nil Case I Excepted trade 350,000 x 0 96m/6 16m 54,545 Case III Deposit interest 5,000 Taxable profi t 59,545 Corporation tax at 25% 14,886 Less: s.396b carried back 119,088 x 12 5% (14,886) Corporation tax payable nil Year ending 31 December 2008 Case III Deposit interest 7,000 Corporation tax at 25% 1,750 Less: s.396b current year 14,000 x 12 5% (1,750) Corporation tax payable nil Loss Summary Case I Relevant trading losses 2008 (720,000) 2008 Non-trade income (s.396b) 14, Trade income (s.396a) 295, Non-trade income (s.396b) 119,088 (291,457) Available loss to carry forward (291,455) 20

6 Bain Marie Limited Year ending 31 December 2008 Case I profi t 150,000 Less: trade charges patent royalties (150,000) Nil S.396 losses available to carry forward (12,200) (iv) Sale of shares in Toast Makers Limited CL is liable to capital gains tax on its worldwide disposals. However, there is an exemption from capital gains tax on a disposal of shares by an Irish resident company under s.626b TCA, where the following conditions are met: the investor company (CL) owns at least 5% of the issued shares, assets on a winding up and right to profi ts of the investee company (TML); the investee company (TML) is resident in the EU or a country with a double tax agreement; the investor company (CL) has held the shares for at least 12 months prior to disposal; the acquiring company is resident in the EU or a country with a double tax agreement; and the investee company (TML) is a trading company. The disposal of the TML shares satisfi es these conditions and will thus be exempt from capital gains tax. It should however be noted that where a group structure exists, any transfer of assets between the group companies results in an exempt chargeable gain. The disposal of the shares will break the capital gains tax group and thus, will cause the gain to crystallise on any intra-group transfer of assets made to TML within the past 10 years. 3 (a) Restructuring of shareholding in Lacie Manufacturing Limited (LML) (i) Michael to buy out Seán s shares personally As Michael does not have suffi cient personal funds to purchase the shares, he would need to borrow to pursue this course of action. Tax relief will be available on this loan as it is used to purchase shares in a company in which he is an employee and in which he has a material interest (s.248). Seán would not have any capital gains tax exposure on this sale as the value of the shares in the company has not changed since 1 July The sale of shares from Seán to Michael will not have any adverse tax consequences on the company. (ii) Buyback of Seán s shares by Lacie Manufacturing Limited There are two possible tax treatments of this buyback: the distribution treatment and the capital gains tax treatment. Under the distribution treatment, any amount in excess of the par value of the shares is treated as a distribution by the company. Dividend withholding tax is payable by the company and Seán is treated as if he had received a dividend with the corresponding tax credit. The grossed up amount is liable to income tax at Seán s marginal rate. The capital gains tax treatment is only available where certain conditions are met: The purchase must be from an individual who is resident and ordinarily resident in Ireland for the tax year in which the purchase is made. It must be for the benefi t of the company s trade. He must have owned the shares for at least fi ve years. His interest in the company must be substantially reduced by the purchase. The Revenue generally accepts that a buyback in the case of family disputes or differences is for the benefi t of the company s trade. However, Seán will not have held the shares inherited from George for the requisite fi ve years, therefore the capital gains tax treatment will not apply to the buyback of these shares. (iii) Division of trades into two separate companies Where two individual trades in a family company are separated into two separate companies, this is in effect, a de-merger. While the normal rules for amalgamation and reconstruction do not apply to this, Revenue concession (precedent 701) allows relief where the following conditions are met: There is no exchange of cash. The relief is only available where the undertaking being transferred is a trade. There is no value shift between the shareholders arising from the partition of the family company. The company and its shareholders are all tax resident in Ireland. 21

7 The steps required to qualify for this treatment are as follows: LML must reorganise its existing shares into two classes of shares to refl ect the individual trades so that Seán s class of share would refl ect the activities of the training and consulting trades. A new company (Newco) is set up and the training and consulting trades are transferred to Newco in return for Newco issuing shares to Seán in respect of his shares in LML. Seán s shares in LML will then be cancelled. The effect of this is that Seán owns 100% of Newco and Michael owns 100% of LML. Where the conditions are met the taxation implications are: The transaction will be treated as an exchange of shares. The shares in Newco held by Seán will be treated as if they had been acquired at the original price and date of his shares in LML. No capital gains tax liability will arise until the ultimate sale of the shares in Newco (s.587 TCA 1997) The transfer of the trade to Newco may necessitate the transfer of relevant properties and other chargeable assets. s.615 exempts LML from corporation tax on the chargeable gain accruing to it. Newco is treated as if it had acquired the chargeable assets at a time and price at which they were acquired by LML. LML is deemed to have disposed of the properties with no gain/no loss arising. Stamp duty will arise on the transfer of assets on the partition of a company. The de-merger of a company does not qualify for reconstruction relief from stamp duty under s.80 SDCA (b) Capital gains tax and capital acquisitions tax clawback Retirement relief clawback The disposal by Seán of his shares in the company, either by sale to Michael or company buyback will give rise to a clawback of the retirement relief granted to George in July George claimed retirement relief on the full value of the shares as transferred to Seán and Michael under the disposal to a child provisions as set out in s.599(1). This relief provides that where the shares are disposed of within a six-year period, any relief claimed is clawed back. The clawback is calculated on the capital gains tax, which, if s.599(1) had not applied, would have been charged on the individual i.e. George, and this is assessed and charged on the child i.e. Seán. If the disposal to a child provisions had not applied the capital gains would have been calculated under the provisions of s.598 relief, which allows an exemption from capital gains tax under retirement relief where the consideration does not exceed 750,000. In such a case marginal relief restricts the gain to 50% of the excess of the consideration over the limit. On that basis, the capital gains that would have arisen on George will be clawed back based on the provisions of s.598 and collected from Seán. The amount of the clawback is as follows: Clawback of retirement relief Gain arising on transfer to Seán (50%) 114,000 CGT payable at 20% 22,800 Marginal relief: Capital gain payable restricted to: (780, ,000) x 50% 15,000 Where a re-organisation of the share capital of the company is by share for share exchange, revenue precedent states that a share for share transaction will not trigger a clawback of retirement relief for capital gains tax purposes. Business relief clawback Seán qualifi ed for business relief for capital acquisitions tax purposes on the gift of shares from his father in The relief will also be clawed back if, within that six year period, the shares are sold, redeemed or compulsorily acquired and are not replaced within one year by other relevant business property. A disposal of his shares either by a sale to Michael or company buyback will cause a clawback of this relief as follows: Clawback of business relief Medium Market value of shares at date of transfer 780,000 Less: small gift exemption (3,000) 777,000 Less: Group A threshold (521,208) Taxable value 255,792 Tax at 20% 51,158 The re-organisation will not cause a clawback to arise. 22

8 4 (a) Offset of realised loss A loss on the disposal of another asset arising in the tax year 2009 can be used to offset the gain made by Martina on the MN Ltd shares and a refund will be made of any capital gains tax overpaid once the return is submitted and a notice of assessment issued. Negligible value claim Loss relief is available where the owner of an asset satisfi es the inspector of taxes that its value has become negligible (s.538 TCA 1997). The loss is calculated as if the asset had been sold and bought back at its market value. However, the Revenue has stated (Tax briefi ng 52) that a dramatic fall in the value of shares would not give rise to a negligible value claim where the company continues to operate and its shares continue to be traded. A negligible value claim will not be allowed where there is a ready mechanism available to the shareholder to dispose of the shares. Therefore, this option is not available to Martina. Sale and buyback of shares Martina could crystallise the unrealised loss on the shares in the fi nancial sector and the loss arising can be offset against any earlier capital gain. In terms of reacquiring the shares, Martina needs to be aware that to repurchase the shares within a four-week period will mean that the loss arising on the original disposal will be restricted to use against the future gain from the disposal of the repurchased shares. This is known as the bed and breakfast provision. In this case, Martina would be taking a risk that the shares may recover in value during the four-week period prior to any buyback. (b) Separation of Martina and Brian A couple are treated as living together unless they are separated under a Court Order or by Deed of Separation or in such circumstances as are likely to be permanent. A separation is likely to be permanent if the couple is living apart. In this case, Martina and Brian would be considered to be separated for tax purposes. The exemption from CGT on the transfer of assets between spouses only applies between separated spouses under a legal obligation. In this case, where there is no legal separation or divorce, then any disposal of assets between them will be liable to CGT and will not benefi t from the exemption (s.1030). If Martina and Brian were to put a legal separation agreement in place, the exemption would still not apply as Brian will be non-resident and non-ordinarily resident in Ireland in the year of asset transfer (s.1030(2a)). Therefore, the transfer of assets will be liable to capital gains tax in the normal manner. Brian would be liable to capital gains tax on the transfer of his share of the family home, subject to principal private residence relief. The disposal of the French property will result in a loss, however, as Brian is not Irish domiciled, he is taxable on a remittance basis and as such, losses arising on the disposal of a foreign asset cannot be offset against Irish capital gains tax. In respect of the lump sum payable by Martina to Brian of 400,000, 322,500 (50% of market value of both properties) of this would be dealt with as consideration for the assets transferred leaving a balance of 77,500. While this is a gift for capital acquisitions tax purposes, it is exempt from tax under s.88 CATA. The maintenance payment from Martina will not be deductible for tax purposes unless under a legal obligation. In the event of a legal separation, Brian would be liable to Irish income tax on this payment and Martina would obtain a deduction. (c) (i) Taxation implications for Martina arising from gifting the ARF If Martina gifts the ARF to her daughters during her lifetime, the following implications arise: Martina is deemed to have withdrawn the funds from the ARF and is liable to income tax at her marginal rate on this fund. Mary and Clare are treated as having received a cash benefi t from Martina of the net of income tax proceeds from the ARF and are liable to capital acquisitions tax (CAT) on this benefi t of 72,658 as follows: (1) Net benefi t Market value of ARF 3,000,000 Less: income tax at 41% (1,230,000) Health contribution at 2 5% (75,000) Net fund available for gift 1,695,000 23

9 (2) Benefi t each to Mary and Clare 50% of net ARF fund 847,500 Plus prior benefi t from father 40, ,500 Less: small gift exemption (3,000) Taxable benefi t 884,500 Group A threshold (521,208) 363,292 Tax at 20% 72,658 Even though Mary has lived in Germany for the past 10 years and is non-resident and non-ordinary resident in the State, she will still be liable to CAT in the normal manner on this gift as any gift or inheritance is taxable in Ireland where either: the benefi ciary is resident or ordinarily resident in the State at the date of the gift/inheritance; or the disponer is resident in the State at the date of the gift. The benefi t taken under their father s Will is accumulated to compute the tax arising on this benefi t. By gifting the ARF during her lifetime, the total tax cost in terms of income tax and CAT amounts to: Income tax and levies Martina 1,305,000 CAT Mary and Clare 145,316 1,450,316 (ii) Taxation implications for Martina arising from gifting the investment properties If Martina were to gift the investment properties to her daughters during her lifetime, she would be liable to capital gains tax on the difference between the original cost and their market value at the date of transfer. This amounts to 487,177 computed as follows: Market value 3,000,000 Less: original cost 430,000 Indexed by ,870 2,437,130 Less annual exemption 1,270 2,435,860 Tax at 20% 487,172 Stamp duty would also arise at the rate of 9%, however consanguinity relief reduces this rate to 4 5% giving a cost of 135,000. This is payable by Mary and Clare. While Mary and Clare are also liable to CAT, both capital gains tax and CAT arise on the one event and therefore the CAT can be offset against Martina s capital gains tax resulting in no additional liability. The total tax cost of this option is therefore: Capital gains tax Martina 487,177 Stamp duty at 4 5% 135,000 CAT Mary and Clare (offset) 622,177 Tutorial note: the CAT liability would be 406,316 (2 x 20% (1,500, ,000 3, ,208)) 5 (a) The tax implications of retaining and renting out the apartments in the short term Corporation tax The rental income derived from the letting of trading stock will be deemed to be taxable as a Case V source income and liable to corporation tax at 25%. Any relevant expenses are normally set against the Case V source income, and reduce the gross rents. In this case, the interest on the loans used to build the apartments is likely to have been charged to the profi t and loss account as a trading expense and therefore is not available as a Case V deduction. While the losses arising on the Case I trade can be offset against the Case V income, the offset is on a value basis only. 24

10 Surcharge Pinewood Properties Developments Limited (PPDL) is a close company for tax purposes as it is controlled by fi ve or fewer participators. The company will therefore be liable to a surcharge of 20% on any after-tax undistributed rental income. Sale of apartments The subsequent sale of the apartments will give rise to corporation tax under Case I as the apartments will still be considered trading stock. Value added tax (VAT) VAT of 241,000 was reclaimed on the construction and development costs of the apartments. The short-term letting of these apartments is an exempt transaction. As the option to waive the VAT exemption on short-term lettings no longer applies after 2 April 2007, a clawback of the VAT reclaimed will arise under the Capital Goods Scheme. Normally, at the end of the interval period, an adjustment is performed whereby the actual use of the property is considered and where it is used for non-vatable activities. This would have the effect of requiring a full repayment of the VAT previously claimed to the Revenue. However, where a property developer rents out residential properties then there is no obligation to carry out the adjustment at the end of the initial interval. The clawback of the VAT will then occur on the basis of 1/20th (12,050) of the initial refund for each year that the apartments are let. On the subsequent sale of the apartments, VAT of 13 5% must be charged notwithstanding the fact that a clawback had occurred. Stamp duty Where a new apartment is sold to an owner occupier, regardless of whether the purchaser is a fi rst time buyer or not, the stamp duty exemption applies. However, where the apartments have been let by the company prior to sale, stamp duty will arise on the sale where the proceeds exceed 127,000, with the exception of where the purchaser is a fi rst time buyer or where the purchaser was the tenant. (b) Tax consequences of the transfer of the office block free of consideration The transfer of the offi ce complex to the shareholders children will be deemed to be the transfer of an asset at undervalue. Under the close company provisions, Carol and Jack do not own shares or work in the company however, they are considered to be associates of participators and therefore, the transfer of the property at no consideration is deemed to be a distribution for tax purposes. The impact of this is: 1. The disposal of the property will give rise to a chargeable gain in the company. 2. Stamp duty will be payable by Carol and Jack on the market value of the property at 9%. No consanguinity relief will be available as they are not related to the company. 3. The company will also be liable to dividend withholding tax (DWT) on the market value of the property at 20%. 4. Carol and Jack will be liable to income tax on the deemed distribution of 50% each of the property at their marginal rate. They can each claim the DWT credit against this liability. 5. The deemed distribution of 2,600,000 will be treated as a reduction in the shareholders share base cost for future disposal purposes. 6. While the gift of the property is deemed to be from the shareholders, Revenue do not pursue the potential gift tax where income tax has been paid on the same event. (c) Value added tax (VAT) issues (i) The transfer of the property to Carol and Jack The transfer of the property to Carol and Jack is deemed to be a supply of a freehold property. Such a supply is exempt from VAT where the following conditions are met: the supply occurs more than fi ve years after the building has been completed; the building has not been redeveloped; and the supply is the fi rst supply of the building after its construction. PPDL will suffer a clawback of the VAT previously claimed under the capital goods scheme (CGS). The clawback is calculated based on the remaining life of the building and will be 14/20ths of the 108,000 originally reclaimed amounting to 75,600. This amount is payable to the Revenue as a lump sum. PPDL may, with the agreement of Carol and Jack, elect to tax the transfer. The option may be exercised only where the person making the supply and the purchaser are taxable persons and both are VAT registered. In this case the purchaser, and not the seller, is responsible for accounting to the Revenue for the VAT payable, under the reverse charge system. VAT will be charged at 13 5% of the market value of the property at the date of transfer of 2 6m, i.e. 351,000. This will commence a new 20-year CGS life for the building. (ii) 20-year lease to Bank of Jersey Limited This part of the building will be redeveloped by Carol and Jack. As the redevelopment cost exceeds 25% of the market value of the building, the redevelopment itself causes a CGS life of 10 years to arise in addition to the existing 20-year life on the original construction. 25

11 The creation of the 20-year lease is exempt from VAT and Carol and Jack will suffer a clawback under the CGS as follows: 1. Clawback of the original VAT on construction 333,450 (351,000 x 19/20), and 2. Clawback of the development of 94,770 (780,000 x 13.5% x 9/10). Carol and Jack may opt to tax the lease to avoid the CGS clawback. In this case, they must have a clause in the letting agreement stating that VAT is to apply or issue a document to the tenant giving notifi cation that tax is chargeable. VAT is due at 21% on the rent. Where this option arises, the bank, being VAT exempt, will not be able to reclaim the VAT on the rent. Tutorial note: in practice it may be benefi cial for the bank to pay the CGS clawback amount to Carol and Jack in order to avoid the VAT on rent. 26

12 Professional Level Options Module, Paper P6 (IRL) Advanced Taxation (Irish) December 2009 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 defi nitive solution. Marks 1 (i) Termination package liable to Schedule E 1 Calculation of lump sum from salary: annualising salary 1 lump sum amount 1 Company car liable to Schedule E 1 Statutory redundancy exempt 1 Pay in lieu of notice taxable under PAYE 1 Retraining course exempt 1 7 (ii) Calculation of basic exemption 1 Calculation of increased basic exemption 1 Calculation of SCSB 4 Pension deduction from SCSB 1 Restriction of reliefs for high earners outline 2 Calculation of total income 3 Calculation of adjusted income 2 Calculation of income tax 4 18 (iii) Eliminate ring fenced deposit interest 1 1 / 2 Set up a company 1 1 / 2 3 Format and presentation of report 1 Effectiveness of written communication 1 Appropriate use of support schedules

13 Marks 2 (i) Withholding tax on royalty payments Group structure exists 1 EU directive Associated EU resident company defi nition 1 1 / 2 Rexin does not meet two-year ownership requirement 1 BML required to withhold tax at 20% 1 / 2 4 (ii) Use of non-resident company losses FA 2007 new provisions allowing use of losses 1 / 2 Conditions in which losses may be utilised 2 1 / 2 Losses not allowed as not parent company and may be used by non-resident company 2 5 (iii) Corporation tax computations KWL losses arising from relevant and excepted trade 2 Group relief available but not needed in the current year 2 Calculation of KWL 2007 and 2008 corporation tax 5 Calculation of BML 2008 corporation tax computation 2 Loss relief summary 2 13 (iv) Sale of shares in TML CL liable to CGT on worldwide disposals 1 / 2 s.626b exemption conditions 2 1 / 2 CL will qualify for exemption 1 Any previously exempted transfer of assets will now crystallise 1 5 Format and presentation of the memorandum 1 Effectiveness of written communication

14 Marks 3 (a) (i) No tax relief on borrowings for Michael 1 No CGT on Seán as no change of value 1 2 (ii) Distribution treatment: Excess over par value treated as distribution 1 / 2 DWT payable by company 1 / 2 Seán treated as receiving dividend with DWT credit 1 / 2 CGT treatment: Conditions (4 x 1 / 2 ) 2 Revenue practice re family disputes 1 / 2 CGT treatment will not apply, not held for fi ve years 1 5 (iii) Revenue concession for de-mergers 1 / 2 Conditions for share for share relief to apply (4 x 1 / 2 ) 2 Steps for re-structuring (3 x 1 / 2 ) 1 1 / 2 Transaction is an exchange of shares 1 / 2 Shares in Newco take original date and price of shares 1 / 2 Stamp duty payable/no consanguinity relief 1 Transfer of assets qualifi es for no gain/no loss treatment 1 / 2 CGT deferred until ultimate sale of shares in Newco 1 / 2 7 (b) Clawback of retirement relief, disposal within six years 1 / 2 Calculation on George and payable by Seán 1 / 2 Marginal relief would have applied 1 / 2 Calculation of clawback 1 1 / 2 No clawback where re-organisation of share capital is share for share 1 Clawback of business relief, disposal within six years 1 / 2 Calculation of clawback 1 1 /

15 4 (a) Principle of loss set off and refund 1 / 2 Negligible value claim is not available 2 Loss on sale of shares available but bed and breakfast provisions 1 1 / 2 4 Marks (b) Couple deemed separated 1 No CGT exemption as no legal obligation for transfer 1 No CGT exemption due to Brian s residency status 1 Brian entitled to PPR relief on disposal of principal residence 1 Loss on French property not allowed as remittance basis applies 1 Balance of consideration from Martina exempt gift for CAT 1 Maintenance payment not deductible, no legal obligation 1 / 2 If legal obligation/deduction Brian liable to Irish tax 1 / 2 7 (c) (i) Approved retirement fund Martina deemed to have withdrawn funds from ARF 1 / 2 Funds liable to income tax at marginal rate 1 / 2 Mary liable to CAT despite non-resident status 1 Benefi t from father aggregated 1 / 2 Calculation of tax cost of ARF 2 Summary of total tax cost 1 / 2 5 (ii) Investment properties CGT on disposal of investment properties 1 / 2 Computation of CGT 1 Stamp duty 1 CGT/CAT offset 1 Summary of total tax cost 1 /

16 Marks 5 (a) Company rents out apartments Case V income taxed at 25% 1 / 2 Offset of trading losses on value basis 1 / 2 Close company surcharge on undistributed income 1 / 2 Sale of apartment remains Case I 1 VAT short-term lettings exempt 1 / 2 Capital goods scheme adjustment not needed for builders in initial period 1 Clawback of VAT annually 1 / 2 VAT chargeable at 13 5% on subsequent sale 1 / 2 Stamp duty 1 6 (b) Transfer of offi ce block to children Deemed transfer at undervalue 1 / 2 Children considered associates of participators 1 / 2 Transfer of property a deemed distribution 1 Disposal gives rise to chargeable gain in company 1 / 2 ` Stamp duty payable, no consanguinity relief 1 Company liable to DWT 1 / 2 Children liable to income tax with DWT credit 1 / 2 Distribution reduces shareholders base cost 1 / 2 5 (c) VAT issues (i) Transfer of property is supply of freehold property 1 / 2 Supply exempt as conditions met 1 1 / 2 Clawback under CGS 1 Payable as lump sum 1 / 2 Elect to tax and reverse charge payment 1 New CGS life commences 1 / 2 5 (ii) Redeveloped element exceeds 25% new CGS life of 10 years 1 Creation of lease exempt, 1 / 2 Calculation of clawback 1 Option to tax 1 / 2 Clause in letting agreement 1 / 2 Bank cannot recover VAT 1 /