Paper P6 (IRL) Advanced Taxation (Irish) Friday 5 June Professional Level Options Module. The Association of Chartered Certified Accountants

Transcription

1 Professional Level Options Module Advanced Taxation (Irish) Friday 5 June 2015 Time allowed Reading and planning: Writing: 15 minutes 3 hours This paper is divided into two sections: Section A BOTH questions are compulsory and MUST be attempted Section B TWO questions ONLY to be attempted Tax rates and allowances are on pages 2 9 Do NOT open this paper until instructed by the supervisor. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall. Paper P6 (IRL) The Association of Chartered Certified Accountants

2 SUPPLEMENTARY INSTRUCTIONS 1. You should assume that the tax rates and credits shown below, for the Finance (No. 2) Act 2013, will continue to apply for the foreseeable future. 2. Calculations and workings need only be made to the nearest Euro. 3. All time apportionments should be made to the nearest month. 4. All workings should be shown. TAX REFERENCE MATERIAL The following rates, credits, formulae and allowances are based on the Finance (No. 2) Act 2013 and are to be used for all questions in this paper. Income tax rates Tax Single/widow(er)/surviving civil partner without qualifying children 32,800 at 20% 6,560 Balance at 41% Married or in a civil partnership (one income) 41,800 at 20% 8,360 Balance at 41% Married or in a civil partnership (dual income) 41,800 at 20% 8,360 23,800 at 20% 4,760 Balance at 41% Single/widow(er)/surviving civil partner qualifying for single person child carer credit 36,800 at 20% 7,360 Balance at 41% Tax credits Single person s credit 1,650 Married person s/civil partner s credit 3,300 Widowed person or surviving civil partner s credit (without dependent children) 2,190 Home carer credit (maximum) 810 Single person child carer credit 1,650 Incapacitated child credit 3,300 Dependent relative credit 70 Age credit single/widowed/surviving civil partner 245 Age credit married or in a civil partnership 490 Employee/PAYE credit 1,650 Third level tuition fees Upper limit 7,000 Full-time qualifying courses First 2,750 is ignored Part-time qualifying courses First 1,375 is ignored 2

3 Rates of PRSI Self-employed Rate 4% Where income is above 5,000 the rate is 4% of reckonable earnings or 500, whichever is greater. No PRSI where income is below 5,000 per annum. Rates of PRSI Employee Class A1 Rate 4% No PRSI on earnings of 352 or less per week Rates of PRSI Employer (for employees Class A1) Rate 10 75% Universal social charge (USC) for all taxpayers On the first 10,036 2% On the next 5,980 4% On the balance 7% For individuals, a surcharge of 3% applies in respect of relevant (non-paye) income that exceeds 100,000 per annum regardless of age. For individuals aged 70 and over, and individuals who hold a medical card regardless of age, the maximum rate is 4% on income up to 60,000, and 7% on income over 60,000. Exemptions: Individuals whose income does not exceed 10,036 per annum All social welfare payments and income subject to DIRT Retirement annuities Age Percentage of net relevant earnings Up to 30 years 15% 30 years but less than 40 years 20% 40 years but less than 50 years 25% 50 years but less than 55 years 30% 55 years but less than 60 years 35% 60 years and over 40% Cap on net relevant earnings of 115,000 Corporation tax Standard rate 12 5% Higher rate 25% 3 [P.T.O.

4 Value added tax (VAT) Registration limits Turnover from the supply of goods 75,000 Turnover from the supply of services 37,500 Rates: Standard rate 23% Lower rate 13 5% Additional lower rate 9% Capital gains tax Rates: From 6 December 2012 to date 33% From 7 December 2011 to 5 December % From 8 April 2009 to 6 December % From 15 October 2008 to 7 April % From 1 December 1999 to 14 October % Annual exemption 1,270 Motor cars limits on capital costs Carbon emissions table: Category A Category B/C Category D/E Category F/G 0 120g/km g/km g/km 191g/km+ Category A/B/C vehicles capital allowances/leasing charges are based on the specified amount of 24,000 regardless of the cost of the car. Category D/E vehicles capital allowances/leasing charges are based on 50% of either 24,000 or the cost of the car, whichever is lower. Category F/G vehicles do not qualify for capital allowances/leasing charges. Motor cars Benefits in kind Business travel Business travel Percentage of original lower limit upper limit market value of car Kilometres Kilometres 0 24,000 30% 24,001 32,000 24% 32,001 40,000 18% 40,001 48,000 12% 48,001 Upwards 6% Preferential loan rates Loans used to fund the cost/repair of the employee s principal private residence 4% All other loans 13 5% 4

5 Local property tax Tax bands for valuation purposes 0 100, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,001 1,000,000 Properties worth up to and including a value of 1 million will be assessed at a rate of 0 18%. Properties worth more than 1 million will be assessed on their actual value at 0 18% on the first 1 million and at 0 25% of their actual value on the portion above 1 million. 5 [P.T.O.

6 Indexation factors for capital gains tax Year expenditure incurred Multipliers for disposals in the year ending 31 December 2004 et seq et seq

7 Capital acquisitions tax Class thresholds 2014 Class 1: Child or minor child of deceased child (or inheritance taken by parent): 225,000 Class 2: Lineal ancestor (other than inheritance taken by parent) Lineal descendant (other than a child or a minor child of a deceased child) Brother, sister, child of brother or sister 30,150 Class 3: Any other person 15,075 Rate 33% Life interest tables for capital acquisitions tax Value of an Value of an Value of an Value of an interest in a interest in a interest in a interest in a Years Joint capital of 1 capital of 1 Years Joint capital of 1 capital of 1 of age factor for a male for a female of age factor for a male for a female life aged as life aged as life aged as life aged as in column 1 in column 1 in column 1 in column [P.T.O.

8 Value of an Value of an Value of an Value of an interest in a interest in a interest in a interest in a Years Joint capital of 1 capital of 1 Years Joint capital of 1 capital of 1 of age factor for a male for a female of age factor for a male for a female life aged as life aged as life aged as life aged as in column 1 in column 1 in column 1 in column or over Interest for a period certain This table is used to determine a figure on the value of an interest in property for a period certain. Number of years Value Number of years Value and over

9 Stamp duty Non-residential property (regardless of value) 2% Residential property: Owner occupiers and investors First 1,000,000 1% Excess over 1,000,000 2% NB: Where applicable value added tax (VAT) should be excluded from the chargeable consideration. Stocks and marketable securities Where the aggregate consideration is less than 1,000 0% Where the aggregate consideration exceeds 1,000 1% Schedule of tax geared penalties Revenue audits Net penalty after reduction where there is: Category of Penalty as a % Cooperation Cooperation AND Cooperation AND tax default of tax underpaid only a prompted an unprompted qualifying qualifying disclosure disclosure Deliberate behaviour 100% 75% 50% 10% Careless behaviour with 40% 30% 20% 5% significant consequences Other careless behaviour 20% 15% 10% 3% Note: The mitigation (reduction) of penalties in the above table is available to taxpayers on their first default. In the case of a second or third default, if a taxpayer deliberately or carelessly makes incorrect returns within a five-year period of the first default they may not avail of full mitigation. 9 [P.T.O.

10 Section A BOTH questions are compulsory and MUST be attempted 1 For the purposes of this question, you should assume that today s date is 2 June You have received the following memorandum from your tax manager: To: Tax senior From: Tax manager Date: 2 June 2014 Subject: Anthony Manero I had a meeting with Anthony Manero earlier today. Anthony (who became 64 on 25 April 2014) is a widower with no surviving children. He is Irish resident and domiciled. He owns 100% of the ordinary share capital of Tony s Paints Ltd which operates a paint shop in Dublin. He is considering retiring from the business with effect from 31 July Tony s Paints Ltd (TPL) Anthony has been a director and worked full time in TPL since he bought his shareholding in May 1976 for 50,000. He would like to transfer his shares in the company to his nephew, John Manero (aged 30), who has been employed full time in the business since Anthony is unsure as to whether he should transfer the shares to John by way of lifetime gift or inheritance. Anthony has provided you with an extract from a projected statement of financial position for TPL as at 31 July 2014, together with some additional information as follows: Non-current assets Premises (at net book value (NBV)) 600,000 Equipment (at NBV) 50,000 Shares in Tavares Ltd (at cost) 250, ,000 Current assets Inventory (stock) 40,000 Trade receivables (debtors) 30,000 Cash at bank 10,000 80,000 Trade payables (creditors) (50,000) Net current assets 30,000 Total net assets 930,000 The premises are currently valued at 800,000 and the equipment has a current value of 60,000. The company s goodwill is valued at 340,000. TPL owns 30% of the shares in Tavares Ltd and this holding is currently valued at 300,000. Tavares Ltd trades as a dance studio in Dublin. Other assets and investments Anthony also owns the following other assets and investments: Current market Cost Date of value acquisition Quoted shares 180,000 90,000 May 2009 Government securities 100,000 85,000 July 2011 Cash at bank 200,000 n/a n/a Private residence 320, ,000 February 1995 Anthony has contributed to a personal pension scheme throughout his working life and the value of the fund is expected to be 1,000,000 on the date of his retirement (31 July 2014). He has been advised that he can take up to 25% of the fund as a tax-free lump sum and can buy an annuity with the remainder of the fund. However, he has enquired if there is any other option available to him with regard to the use of his pension fund. 10

11 Anthony also wishes to make provision for his granddaughter, Olivia Manero (who became 17 on 30 November 2013). Olivia is the daughter of Anthony s deceased son, Alfredo. Anthony wants to transfer his holding of quoted shares to Olivia at some time within the next two years and leave the remainder of his other assets and investments (as listed above) to her on his death. Olivia currently resides with her mother in Dublin. Both John and Olivia are Irish resident and domiciled and neither has received any gift or inheritance in the past. Required: Write a letter to Anthony Manero in which you: (i) (ii) Compare the total taxes payable by both parties in the event that Anthony transfers his shareholding in Tony s Paints Ltd to John: (1) by way of gift on 31 July 2014, or (2) by way of inheritance; and advise Anthony regarding which route to follow, taking account of the tax liabilities calculated above and any other relevant factors. Note: You may assume that the value of the assets and liabilities of the company at the valuation date of the inheritance in option (2) is the same as the value at 31 July (17 marks) Outline any other option available to Anthony with regard to the use of his retirement fund and the benefits of that option. (4 marks) (iii) Calculate the taxes payable by both parties in the event that Anthony transfers the quoted shares by way of gift to Olivia in the year (3 marks) (iv) Advise on a more tax efficient alternative gift to the proposed transfer of the quoted shares to Olivia (as in (iii)). (3 marks) (v) On the assumption that your advice in (iv) is implemented, outline the potential tax liabilities expected to arise on Anthony s death as a result of the transfer of his remaining other assets and investments to Olivia, and suggest how this liability might be reduced. Note: You may assume that the value of the remaining other assets and investments at the valuation date of the inheritance is the same as the current value. (4 marks) Professional marks will be awarded in question 1 for the appropriateness of the format and presentation of the letter and the effectiveness with which the information is communicated. (4 marks) (35 marks) 11 [P.T.O.

12 2 For the purposes of this question, you should assume that today s date is 30 November The Gourmet group is based in Ireland and is structured as follows: Gourmet Ltd Pasta Ltd Bread Ltd New Ltd Pizza Ltd Idle Ltd Gourmet Ltd owns: 90% of the share capital of Pasta Ltd; 80% of the share capital of Bread Ltd; and 75% of the share capital of New Ltd. Pasta Ltd owns 90% of the share capital of Pizza Ltd. Bread Ltd owns 80% of the share capital of Idle Ltd. All the companies (except Idle Ltd) are involved in the manufacture and sale of various food products. Idle Ltd is a property holding company. All of the companies are resident in Ireland. During the year ended 30 September 2014, the group companies had the following trading results: Gourmet Ltd had a (Schedule D) Case I profit of 180,000. Pasta Ltd had a Case I profit of 45,000. The company also had Case I losses of 360,000 brought forward. Pizza Ltd had a Case I profit of 60,000 and a capital gain of 100,000. Bread Ltd incurred Case I losses of 640,000 during the year. The company also had capital losses brought forward of 60,000. Idle Ltd had nil Case I profits and a Case V profit of 15,000. New Ltd had a Case I profit of 120,000. The shareholding in New Ltd was acquired by Gourmet Ltd on 1 April Your advice has been sought in relation to the tax implications of the following capital transactions: (1) Bread Ltd sold its shareholding in Idle Ltd to an unconnected third party on 31 October 2014 and realised a chargeable gain on the disposal of the shares of 200,000. The directors believe that this gain is tax free, because of the holding company (participation) exemption. Idle Ltd s only asset is a building with a current value of 250,000. The building, which was originally bought by Bread Ltd in July 2003 for 50,000, had been transferred to Idle Ltd in November 2008 when it was worth 160,000. No improvements or changes were made to the building between July 2003 and October The building has no development potential. (2) Pizza Ltd has received an offer of 1,000,000 (excluding value added tax (VAT)) for one of its manufacturing units. The deal is scheduled to be closed on 31 January The unit had been transferred to Pizza Ltd from Pasta Ltd on 20 January 2010 when its market value was 1,250,000 (excluding VAT at 13 5%). The VAT charged on the transfer was recovered in full by Pizza Ltd. Pasta Ltd had bought the unit new for 700,000 (excluding VAT at 13 5%) in January 2009 and reclaimed VAT on the purchase. 12

13 Required: (a) (b) (c) (d) State the main condition for membership of a loss group for corporation tax purposes and list the members of the loss group(s) comprised within the Gourmet group of companies. (3 marks) State the main condition for membership of a capital gains group for corporation tax purposes and list the members of the capital gains group(s) comprised within the Gourmet group of companies. (2 marks) Calculate the corporation tax liability of each of the Gourmet group companies for the year ended 30 September 2014, on the assumption that all claims and elections are made to minimise the overall tax position of the group. Prepare the relevant loss memoranda. (7 marks) Advise on the corporation tax, value added tax (VAT) and stamp duty implications (if any) for Bread Ltd and Idle Ltd of the sale by Bread Ltd of its shareholding in Idle Ltd. (7 marks) (e) Advise on the corporation tax and VAT implications (if any) of the proposed sale of the manufacturing unit by Pizza Ltd and suggest how the tax payable may be reduced. Note: You are not required to consider the impact of any balancing adjustments for industrial buildings allowance purposes. (6 marks) Note: You are not required to comment on any of the tax filing or payment deadlines. (25 marks) 13 [P.T.O.

14 Section B TWO questions ONLY to be attempted 3 (a) For the purposes of this question, you should assume that today s date is 1 May Your client, Kevin O Reilly (aged 46), is a value added tax (VAT) registered solicitor who has operated his practice as a sole trader since he commenced in practice in Kevin prepares his accounts to 31 March annually. His practice has been consistently profitable. Kevin now wishes to admit an experienced employee, Marie Clarke (aged 36), as an equity partner in the practice, with effect from 1 June The profit sharing ratio between Kevin and Marie will be 2:1. An independent valuation of Kevin s practice (including goodwill and other relevant assets) will be obtained and Marie will pay the appropriate amount to Kevin for her share of the partnership. Marie will borrow the required amount from her local bank. On 1 January 2005, Kevin purchased a new office building for 250,000 (excluding VAT at 13 5%). Kevin reclaimed the VAT on the purchase. The office building has been used entirely for Kevin s trade as a solicitor and has not been developed since its purchase. The sole trade had 100% VAT deductibility and it is expected that the partnership will also have 100% VAT deductibility. It is proposed that, with effect from 1 June 2014, Kevin will lease the building to the partnership for a five-year term, at a rent of 1,000 per month. Kevin has been advised that VAT does not apply to lettings and therefore does not propose to charge VAT on the lease rentals. Equipment with a tax written down value of 4,000 and an original cost of 16,000 is currently used in Kevin s sole trade. It is proposed that this equipment is transferred to the partnership on 1 June 2014, at its market value of 10,000. It is also currently proposed that all of the practice s work in progress and receivables (debtors) are transferred to the partnership at that date. Required: (i) (ii) Advise Kevin on the value added tax (VAT) issues associated with the proposed lease of the office building to the partnership. (5 marks) Outline briefly the other potential tax issues for Kevin and Marie arising in relation to the changeover from a sole trade to a partnership and the subsequent operation of the solicitor practice as a partnership. (10 marks) (iii) Identify ONE ethical issue associated with your role as adviser in the above case. (1 mark) (b) Garcia SRL is a Spanish retailer of exclusive jewellery to private individual customers. It accepts orders by telephone, fax and . In 2014, Garcia SRL made the following three sales of jewellery to customers in Ireland: January ,000 June ,000 October ,000 Required: Advise Garcia SRL on its Irish value added tax (VAT) obligations in respect of each of the above sales. Note: The annual EU distance selling threshold for Ireland is 35,000. (2 marks) 14

15 (c) Bathrite Ltd is a newly formed Irish company, specialising in the installation of bathrooms for domestic (non-vat registered) customers. The selling price for a standard installation is 7,000 (excluding VAT). Bathrite Ltd calculates this selling price as follows: Materials cost 4,000 Labour 1,500 Overheads 500 Profit 1,000 7,000 Required: State the rule applicable to Bathrite Ltd s supply of bathroom installations and determine the correct value added tax (VAT) rate applicable. (2 marks) (20 marks) 15 [P.T.O.

16 4 (a) For the purposes of this question, you should assume that today s date is 31 May Clearwater Ltd is an Irish consulting engineering company whose shares are held as follows: John Fogerty 48 Marie Fogerty 10 Mark Murphy John and Marie are married and are both directors of the company. Mark Murphy is not related to the Fogertys and is neither a director nor an employee of the company. Clearwater Ltd s results for the year ended 31 December 2014 were a Case II tax adjusted profit of 200,000 and a Case V profit of 30,000. Clearwater Ltd has no trading losses or capital losses brought forward from prior years. No dividends were declared or paid by Clearwater Ltd in 2014 or in 2015 to date. On 28 February 2014, Clearwater Ltd sold a surplus warehouse to Mark Murphy for 300,000. The market value of the building on that date was 400,000. The building had been bought by the company in 2004 for 320,000 and had no development potential. The accounting loss on disposal of 20,000 has been added back in arriving at the Case II tax adjusted profit of 200,000 (as above). On 31 March 2014, Clearwater Ltd made a payment of 10,000 in respect of the personal legal expenses of Anne Fogerty. This amount has been deducted as an expense in arriving at the Case II profit of 200,000 (as above). Anne is John Fogerty s sister and is an employee of Clearwater Ltd. All four individuals referred to in the question (John, Marie and Anne Fogerty, and Mark Murphy) have a marginal rate of tax of 52%. Required: Explain the tax consequences of the above transactions for both Clearwater Ltd and the various individuals and calculate the company s liability to corporation tax and surcharges (if applicable) for the year ended 31 December Note: You are not required to consider any value added tax (VAT) or capital acquisition tax (CAT) implications of the transactions. (11 marks) (b) Softco plc is a large publicly quoted company based in Cork. Softco plc s senior management has identified six key staff who they wish to retain and reward and has asked you for advice in relation to a proposal to award shares valued at 10,000 to each of these six key staff, free of charge. Softco plc does not intend to offer the scheme to all employees. All six key staff pay income tax at the higher rate. Required: (i) (ii) Explain the tax implications of the proposed share awards for both the employees and Softco plc (as employer), including the tax implications of a subsequent disposal of the shares at a gain by the employees. (6 marks) Explain how the tax arising on the share awards may be reduced and the conditions which must be adhered to by the employer and employees in order to achieve this reduction. (3 marks) (20 marks) 16

17 5 For the purposes of this question, you should assume that today s date is 15 June Cavern Ltd is an Irish resident company which specialises in the provision of production services to the music industry. Cavern Ltd was established in 1990 and is owned and managed by Jim Brown and his sister Pauline, each of whom owns 50% of the share capital. Cavern Ltd expects to generate profits from its Irish operations for the foreseeable future. The Browns have sought your advice on the following issues: (1) Cavern Ltd plans to expand its business into Germany. To achieve this, it will be necessary to rent and equip an office premises in Germany and to employ five new local staff. Financial projections indicate that the German business will incur losses for the first two years but is then expected to make substantial profits from the third year onwards. The Browns are unsure of whether to operate the German business as a branch or a subsidiary of Cavern Ltd. (2) Cavern Ltd has decided to terminate the employment of its Irish office manager, Percy Bright, on 30 June Percy, who is single, commenced his employment with Cavern Ltd on 1 April Percy s severance package will comprise: an ex-gratia payment of 65,000; a company car with a market value of 20,000; and statutory redundancy amounting to 35,000. In addition, Percy will be entitled to a tax free pension lump sum which has a present value of 12,500. Details of Percy s salary and benefits in kind (BIK) are as follows: Year ended Salary BIK 30 June ,000 4, June ,000 5, June ,000 6, ,000 15,000 (3) Cavern Ltd is currently agreeing terms with Geoffrey March who will perform administrative duties in the Irish office during normal office hours every Monday and Wednesday from July It is proposed that Geoffrey will be paid 400 per week on a consultancy basis. Geoffrey will provide an invoice to Cavern Ltd for his services and will be responsible for the payment of his own income tax. Required: (a) Compare the taxation implications of the TWO alternative trading structures (branch and subsidiary) available in respect of the German office and recommend the most appropriate structure to use in this case. Note: You should assume that the OECD model tax treaty provisions apply to Germany and that the rate of corporation tax in Germany is 30%. (10 marks) (b) Advise Percy Bright in relation to the taxes which will be deducted from his severance package. (5 marks) (c) Evaluate the potential taxation exposures arising from the proposal to engage Geoffrey March on a part-time basis. (5 marks) (20 marks) End of Question Paper 17