Paper P6 (IRL) Advanced Taxation (Irish) Thursday 7 December Professional Level Options Module

Transcription

1 Professional Level Options Module Advanced Taxation (Irish) Thursday 7 December 2017 Time allowed: 3 hours 15 minutes This question 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 8 Do NOT open this question paper 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 Act 2015, will continue to apply for the foreseeable future. 2. Calculations and workings need only be made to the nearest Euro. 2. All time apportionments should be made to the nearest month. 3. All workings should be shown. TAX REFERENCE MATERIAL The following rates, credits, formulae and allowances are based on the Finance Act 2015 and are to be used for all questions in this paper. Income tax rates Tax Single/widow(er)/surviving civil partner without qualifying children 33,800 at 20% 6,760 Balance at 40% Married or in a civil partnership (one income) 42,800 at 20% 8,560 Balance at 40% Married or in a civil partnership (dual income) 42,800 at 20% 8,560 24,800 at 20% 4,960 Balance at 40% Single/widow(er)/surviving civil partner qualifying for single person child carer credit 37,800 at 20% 7,560 Balance at 40% 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) 1,000 Single person child carer credit 1,650 Incapacitated child credit 3,300 Dependent relative credit 70 Age credit single/widowed/surviving civil partner 245 married or in a civil partnership 490 Employee/PAYE credit 1,650 Earned income tax credit 550 Third level tuition fees Upper limit 7,000 Full-time qualifying courses First 3,000 is ignored Part-time qualifying courses First 1,500 is ignored Rates of PRSI Self-employed Class S 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. 2

3 Rates of PRSI Employee Class A Rate 4% No PRSI on earnings of 352 or less per week. Employee Class K Rate 4% Rates of PRSI Employer (for employees Class A1) Rate 10 75% Universal social charge (USC) for all taxpayers On the first 12,012 1% On the next 6,656 3% On the next 51, % On the balance 8% 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, if aggregate income for the year is 60,000 or less, the maximum rate is 3%. Exemptions: Individuals whose income does not exceed 13,000 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 3 [P.T.O.

4 Corporation tax Standard rate 12 5% Higher rate 25% 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 (CGT) 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 Entrepreneur relief: Rate for disposals on or after 1 January % Lifetime limit on gains 1,000,000 Carbon emissions table: Motor cars limits on capital costs 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. Benefits in kind Motor cars 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% 4

5 Preferential loan rates Loans used to fund the cost/repair of the employee s principal private residence 4% All other loans 13 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. Indexation factors for capital gains tax Year Multipliers for Year Multipliers for expenditure disposals in the expenditure disposals in the incurred year ending incurred year ending 31 December 31 December 2004 et seq 2004 et seq et seq [P.T.O.

6 Capital acquisitions tax Class thresholds Class 1: Child or minor child of deceased child (or inheritance taken by parent): (with effect from 14 December 2015) 280,000 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

7 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 [P.T.O.

8 Stamp duty Non-residential property (regardless of value) 2% Residential property: Owner occupiers and investors First 31,000,000 1% Excess over 31,000,000 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 31,000 0% Where the aggregate consideration exceeds 31,000 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. 8

9 This is a blank page. Question 1 begins on page [P.T.O.

10 Section A BOTH questions are compulsory and MUST be attempted 1 You should assume today s date is 7 November 2017 You have recently taken the following notes from a meeting with a new client, Mary Yeats. Liffey Ltd Mary (aged 49) is the sole shareholder and managing director of Liffey Ltd, an Irish resident company, based in Sligo and involved in the manufacture of ceramic pottery. The business was set up in 2003 by Mary and has a workforce of ten people. The business has been consistently profitable and projections indicate that this trend will continue. Mary works full time in Liffey Ltd and earns an average annual salary of 120,000. Mary is married to Jack (aged 48). Jack has been a director of Liffey Ltd since He performs a design role in the business, working approximately two days per week, and receives a nominal remuneration of 2,000 per annum for these services. Jack does not have any other sources of income. Neither Mary nor Jack has a pension plan. Last week, Mary received the following offer from a large competitor, Ceramico plc: 750,000 for Mary s (100%) shareholding in Liffey Ltd; and 300,000 for the business premises. It is a condition of the offer that the sale be completed before 31 December Mary does not want to sell the company now, but she is curious to know what the net after-tax proceeds of the current offer would be. Her preferred option would be to sell to a company such as Ceramico plc in six years time. Mary s shareholding cost her 10,000 in The business premises is owned by Mary personally and rented to the company. Mary bought the premises for 125,000 in 2003 and no significant development has taken place since then. Disposal of land In April 2017 Mary had sold two acres of development land near her local town. The net proceeds (after disposal expenses) were 160,000. Mary had paid 200,000 for the land in The acquisition of the land was financed through a bank loan. Mary negotiated to have 30,000 of the bank loan written off at the time of sale. Mary has not sold any other assets either to date in 2017 or prior to Other share investments (1) Descent Ltd Mary is also the sole shareholder in Descent Ltd, a company which previously manufactured glassware. Mary invested 30,000 in the form of ordinary shares in Descent Ltd when the company was incorporated in Descent Ltd is insolvent and ceased trading in September 2013, following a period of heavy losses. The company has been kept in existence because it was not worth anybody s time to wind it up given the extent of its liabilities. (2) Hopeful plc Mary inherited a shareholding of 100 shares valued at 12,000 in Hopeful plc, an Irish publicly quoted company, from her mother in Hopeful plc made a one for two rights issue in 2007 and Mary bought a further 50 shares at a cost of 5,000. The company has not performed well recently and the current value of Mary s entire shareholding is 6,000. Mary is reluctant to sell her shares in Hopeful plc, as they are of sentimental value to her. New production line Mary requires the services of Gustav AG, a German equipment manufacturer in relation to setting up and implementing a new production line for Liffey Ltd. Gustav AG will supply equipment at a cost of 300,000 (excluding value added tax (VAT)). The production line will be installed, commissioned and supervised by Paul Klimt, an employee of Gustav AG, over a period of 15 months commencing on 1 January Paul will live in Ireland and work solely on the Liffey Ltd project for the full 15 months. Paul has been employed by Gustav AG since 2012 and will remain employed by Gustav AG for the duration of his work in Ireland. Paul s expected annual salary for 2018 is 140,000 gross, plus a benefit in kind valued at 5,000 (membership of an Irish golf club). The financial director of Gustav AG has asked Mary to confirm Paul s Irish income tax position. 10

11 Required: Write a letter to Mary Yeats which provides: (i) An explanation of the tax implications for Mary of accepting the current offer from Ceramico plc, after taking into account all reliefs available to her in the tax year Support your explanation with a calculation of the net after-tax proceeds which would be receivable by Mary. (6 marks) (ii) Details of TWO tax planning measures which could reduce the tax payable in (i) above. Note: You are not required to re-calculate the net after-tax proceeds if these measures are implemented. (5 marks) (iii) An explanation of the tax implications for Mary of selling her shares in Liffey Ltd and the business premises, to a company such as Ceramico plc in six years time, taking into account any reliefs available to her at that time. Note: Calculations are not required in this part. (4 marks) (iv) Assuming the shares in Liffey Ltd and the business premises are NOT sold in the tax year 2017, an explanation of TWO short to medium-term tax planning strategies which might be implemented in order to reduce the tax liabilities of Liffey Ltd and/or Mary and Jack in the years prior to the eventual sale of the company. (5 marks) (v) Details of any exit related tax planning opportunities which could be considered by Mary and Jack prior to the ultimate sale of the business. (6 marks) (vi) An explanation of the value added tax (VAT) treatment of the equipment to be acquired from Gustav AG. (2 marks) (vii) An explanation of why Paul Klimt will qualify for the special assignee relief programme (SARP) on his move to Ireland and a calculation of his expected taxable income for Irish income tax purposes in the tax year Note: You are not required to advise on any tax implications for Gustav AG. Notes: 1. The annual exemption for capital gains tax (CGT) may be ignored. 2. The payment dates for the various taxes are NOT required. (3 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 Elaine Robinson (aged 77) is a widow, who has no children. The current values of her assets are as follows: House in Galway 950,000 Office unit in Dublin 520,000 Painting 120,000 Cash 65,000 Elaine lives in the house in Galway and is the sole owner of the property, having inherited it from her late husband, Simon, on his death in March The house was valued at 150,000 in March The office unit was purchased by Elaine for 390,000 in May 1995 and is let to tenants. The unit has been maintained in its original condition and no further development or refurbishment has been undertaken. The painting was also inherited on the death of her late husband, Simon, when its market value was 5,000. Elaine s health started to deteriorate about two years ago and her unmarried niece, Cecilia, came to live with her and look after her. Cecilia (aged 51) works as teacher in a local school. Prior to coming to live with her aunt, Cecilia lived in her own apartment, which she bought in 1997 at a cost of 89,000. Cecilia has retained ownership of the apartment and let it to tenants. The apartment has a current value of 210,000. Elaine is in receipt of sufficient income to cover her current and expected future needs. She wishes to plan for the disposition of her estate in the most tax efficient manner possible. The potential beneficiaries of her estate are: her niece, Cecilia; her deceased husband s nephew, Joe; her own nephew, Ben. She wishes to leave her private house to Cecilia, after her death, together with the residue of her estate. She has identified the following assets to be left to Joe and Ben: Joe the office unit; and Ben the painting. Elaine s will currently provides for the identified assets to pass to Joe and Ben on her death. However, Elaine believes that Joe and Ben may have a greater need for cash now, rather than at some time in the future and she is now considering whether it would be appropriate to gift these assets to them during her lifetime. Previous inheritances Cecilia has received no prior gifts or inheritances. Joe received a previous inheritance of 15,000 cash from his uncle Simon (Elaine s late husband) on his death in March Ben received an inheritance of an architect s practice valued at 300,000 from his father in This inheritance qualified for 90% business property relief and consequently Ben paid no inheritance tax on it. Since Ben took it over, the architect s practice has performed well and the average Case I profit for the past two years has been 120,000 and Ben s average drawings 90,000 per annum. Ben considers that his income tax liability as a sole trader is excessive and he is considering incorporating the practice in order to avail of the 12 5% corporation tax rate on income. 12

13 Required: (a) Compute the capital acquisitions tax payable by each beneficiary in the event that Elaine Robinson s estate would pass to them on her death at today s values. (5 marks) (b) Advise Elaine of the various tax issues which would arise if she were to transfer the office unit and the painting to Joe and Ben respectively during her lifetime, and compute all the resultant tax liabilities. (10 marks) (c) Compare the taxes payable at (a) and (b) above and provide a reasoned recommendation from Elaine s perspective as to which alternative she should choose. (3 marks) (d) Advise on any action which could be taken to mitigate the capital acquisitions tax exposures on the transfer of the private house to Cecilia if it is passed to her as an inheritance. Note: Calculations are not required in this part. (3 marks) (e) Advise Ben on the income tax and corporation tax issues relevant to his view that the incorporation of the architect s practice will save him tax. (4 marks) (25 marks) 13 [P.T.O.

14 Section B TWO questions ONLY to be attempted 3 (a) Yellow Ltd is an Irish resident company, whose shares are held as follows: Big Ltd 45% Coyote Ltd 28% River Ltd 20% Trees Ltd 7% River Ltd is resident in Brazil but all the remaining shareholder companies are resident in Ireland. In the year to 31 December 2016 the five companies had the following results: Case I Case V profit/(loss) profit Yellow Ltd (400,000) 60,000 Big Ltd 210,000 Coyote Ltd 70,000 River Ltd 60,000 Trees Ltd (17,000) Required: Calculate the corporation tax payable for 2016 by Yellow Ltd, Big Ltd, Coyote Ltd and Trees Ltd, making maximum use of any available reliefs. Give explanations of the basis for your calculations and the treatment of any unused losses. (9 marks) (b) Hendrix Ltd acquired patents in relation to certain electronic products in February 2016 at a cost of 3,000,000. The acquisition was partly financed by a bank loan and interest of 100,000 was paid on this loan in the year ended 31 December In the statement of profit or loss the company s accountant has amortised these patents over a ten-year period on a straight-line basis, with a full year s amortisation in the year of acquisition. Hendrix Ltd s Case I income for the year ended 31 December 2016 is 520,000, comprising 380,000 from the trade of managing patents and 140,000 from other trading activities. The Case I income from the trade of managing patents is calculated after adding back the amortisation from the trade of managing these patents but before deduction of any capital allowances or related interest relief. Required: (i) Explain the tax reliefs available in relation to specified intangible assets. Include a description of the expenditure which may be relieved, the restrictions on the relief, both in relation to the nature of the trade and the amounts which may be claimed, and any clawback provisions. (7 marks) (ii) Calculate the taxable income of Hendrix Ltd for the year ended 31 December 2016 on the basis that the company wishes to write off the cost of the patents for tax purposes as quickly as possible. Clearly identify the intangible asset reliefs available and any unutilised amounts. (4 marks) (20 marks) 14

15 4 Tavares Ltd is a large manufacturing company, based in Galway, whose financial director requires advice in relation to the following issues: (1) Employee shares The company s senior management has identified eight key members of staff whom they wish to retain and reward. They propose to award shares valued at 15,000 to each of these eight key staff, free of charge. They do not want to award shares to all the company s employees. All eight key members of staff earn over 80,000 per annum. (2) Assignment abroad Tony, a senior marketing manager with the company, is required to travel extensively to meet overseas customers. Tony is resident and domiciled in Ireland, his basic salary is 150,000 per annum and he has a benefit in kind of 10,000. He is not one of the eight key members of staff referred to in (1) above in relation to the share awards. Tony s business travel schedule for the calendar year 2017 is summarised as follows: France Russia Austria China India 14 days 20 days 15 days 25 days 15 days Each of his business trips abroad are between four and six days in duration and he only visits one country on each trip. (3) Market expansion to Portugal Tavares Ltd recently decided to market its products in Portugal. The response to date has been encouraging and in 2018, the company plans to employ a Portugal-based salesperson to follow up with enquiries. It may also be necessary to rent some warehouse space in Portugal for product storage, but no office will be opened. The financial director is concerned that the company may come within the charge to Portuguese corporation tax, and would like to legitimately avoid this, if possible. Required: (a) (i) Explain the tax implications of the proposed share awards for both the eight employees and Tavares Ltd (as employer), including the tax implications of the subsequent disposal of the shares at a gain by the employees. (5 marks) (ii) Explain how the tax arising on the proposed share awards may be reduced and the conditions which must be adhered to by both the employer and employees in order to achieve this reduction. (4 marks) (b) Identify and explain the income tax relief available to Tony with regard to his foreign travel and calculate the tax refund which will be due to him in (6 marks) (c) Explain the circumstances in which a charge to Portuguese corporation tax could arise on any trading profits generated by Tavares Ltd in Portugal, together with your recommendation as to how Tavares Ltd might legitimately avoid such a charge. (5 marks) (20 marks) 15 [P.T.O.

16 5 Suresale Ltd, an Irish company with a financial year end of 31 December, is involved in the provision of auctioneering services in Dublin. Suresale Ltd used to own two offices (in North and South Dublin), but now just has one, recently acquired office in the city centre. Suresale Ltd s office manager has requested advice in relation to the following issues. Unless stated otherwise, all amounts are stated excluding any applicable value added tax (VAT). (i) Sale of North Dublin premises On 30 April 2016, Suresale Ltd sold its North Dublin office premises for 800,000.The premises had been purchased at a cost of 750,000 in April The purchase transaction was exempt from VAT and no joint option to tax was exercised. When purchased, the offices were in need of some repairs and decoration as they had last been developed in The repair and decoration work was completed on 30 June 2014 at a cost 160,000. Suresale Ltd occupied the premises for the purposes of its auctioneering business only from 1 July 2014 to the date of sale. (ii) Sale of South Dublin branch Suresale Ltd sold the South Dublin branch of its auctioneering business as a going concern, which included the transfer of equipment, goodwill and employees. The branch was sold to Southside Auctioneers Ltd, a VAT registered Irish company on 8 May 2016, for a total consideration of 500,000. Suresale Ltd did not charge VAT on this transaction. The consideration was analysed as follows: Equipment 100,000 Goodwill 400,000 Prior to the sale, the South Dublin branch was exclusively involved in the provision of auctioneering services. The premises from which the branch operated was subject to a short-term lease. VAT was not charged on the lease or the rents. It was agreed that Southside Auctioneers Ltd would enter into a separate arrangement with the landlord for the short-term lease of the property. (iii) Acquisition of city centre premises Suresale Ltd purchased premises in the centre of Dublin on 1 September 2015 for 1,000,000, exclusive of VAT. The seller charged VAT at 13 5% and Suresale Ltd claimed an input deduction for all of the VAT incurred in 2015, on the basis that they intended to put the property to a fully taxable use. However, during 2016 Suresale Ltd diversified into insurance broking and at the end of the initial interval, i.e. 31 August 2016, Suresale Ltd calculated that the use to which the premises had been put during the initial interval period was 75% auctioneering (taxable activity) and 25% insurance broking (non-taxable activity). (iv) Repairs to city centre premises Electrical repairs are required in the reception area of the city centre premises. An electrician has estimated that the cost will be 1,000 including VAT at 13 5%. The reception area is used by both the auctioneering and insurance broking activities. The office manager has raised the following queries with regards to this work: How much VAT will we be entitled to reclaim? The electrician has offered us a 40% reduction in his gross price if we pay him cash and don t expect an invoice. What are the VAT and other tax implications of this offer and should we accept it? (v) UK solicitor Suresale Ltd recently engaged a UK firm of solicitors to give specialist advice in relation to a potential claim for damages by a UK-based customer (in relation to an auctioneering transaction). The UK solicitor s invoice amounts to 6,000 and no UK VAT was charged. 16

17 Required: (a) Explain the operation of the capital goods scheme. (6 marks) (b) Advise Suresale Ltd in relation to the value added tax (VAT) implications of each of the items (i) to (v) above. Notes: 1. You are NOT required to consider the income tax or corporation tax aspects of the transactions, except as indicated in relation to item (iv). 2. The following mark allocation is provided as guidance for this requirement: (i) 2½ marks (ii) 2½ marks (iii) 3 marks (iv) 4 marks (v) 2 marks (14 marks) (20 marks) End of Question Paper 17