TAXATION FORMATION 2 EXAMINATION - APRIL 2010

Transcription

1 TAXATION FORMATION 2 EXAMINATION - APRIL 2010 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. Please read each Question carefully. 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 2010 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. Avoca Ltd. carries out business as a principal contractor in the construction industry specialising in the installation of manufacturing plant for high technology industries. It also has a number of other sources of income and profits. Results in recent years have been as follows: Notes Year Ended Nine Months Year Ended 30/6/07 ended 31/3/08 31/3/09 Schedule D Case I Income/(Loss) 58,000 (75,000) 25,000 Schedule D Case III Income 4,000 4,000 6,000 Schedule D Case V Income/(Loss) 7,000 3,500 (1,500) Schedule D Case V Capital Allowances (5,000) (5,000) (5,000) Chargeable Gains/(Losses) (1) 11,000 (15,000) Capital Gain (2) 17,000 Dividend Income (3) 1,900 1,900 1,900 Patent Royalty Paid (4) (7,000) (8,000) (9,000) Notes: (1) Chargeable gains and losses have been adjusted for corporation tax purposes. REQUIRED: (2) The capital gain relates to the disposal of development land. (3) Dividend income is shown inclusive of tax credits. (4) The patent royalty is paid in respect of testing equipment which the company uses in the course of it s plant installation work. (a) Compute the profits of Avoca Ltd. assessable to corporation tax for each accounting period. (12 Marks) (b) State the deadlines for making any appropriate loss relief claims. (2 Marks) (c) Explain how relief may be obtained for any losses that remain unutilised. (3 Marks) (d) Explain the restrictions imposed by Revenue when returns are not filed on time. (2 Marks) (e) (f) Outline the obligations on Avoca Ltd. to deduct tax from any of the payments made by them in relation to property construction. (3 Marks) Outline the procedure on how principal contractors and sub-contractors account for VAT in the construction industry. (3 Marks) [Total: 25 Marks] Page 1

3 2. Philip Long is 27 and married with three children. He is a solicitor practicing as Long Solicitors whose accounting year end is 30 June. Accounts for the year ended 30 June 2009 show the following results: Gross Fees 153,738 Operating Expenses Wages 31,200 Rent & Rates 5,500 Phone, Postage and Stationery 3,125 Insurance 2,650 Entertainment of clients 1,500 Depreciation 2,390 (46,365) 107,691 Financial Income and Expenses Interest Income (net of 23%) 3,080 Overdraft Interest (5,650) Bank Charges (1,112) (3,682) Net Income 103,691 Details of Assets qualifying for capital allowances were: Office Furniture and Equipment Cost ,000 Tax WDV 1 January ,500 Philip is also a Director of Media Supplies Ltd., a company which distributes stationery and computer accessories. He owns 25% of the share capital of this company and receives Directors fees in respect of his services as a Director. His P60 for 2009 shows the following: Gross Pay 22,500 Tax Deducted (2,750) In addition the company provides Philip with a motor car and pays all of his motoring costs. The original market value of the car is 28,000 and he drove 18,400 business kilometeres out of total of 73,600 during Philip is also in partnership with his wife Angela Long in a ladies fashion shop called Angela s Boutique. Profits are shared as follows: Angela Long 75% Philip Long 25% The boutique incurred a trading loss of 25,000 for the year ended 30 April 2009 and agreed capital allowances for 2009 were 8,000. Philip & Angela had the following additional income in 2009: Philip Angela Bank Deposit Interest net of 23% 1,540 Irish Dividend Income net of dividend withholding tax 1,560 2,800 Philip had the following outgoings for 2009: Mortgage interest paid to purchase principle private residence 6,680 Interest paid on loan to acquire shares in Media Supplies Ltd 4,500 Medical insurance 600 Medical expenses for orthodental treatment of eldest child 800 Philip & Angela paid a local authority service charge of 120 in the year ended 31 December 2008 and 150 in the year ended 31 December Page 2

4 Due to trading difficulties experienced by Angela s Boutique, Philip & Angela were forced to raise bank loans to invest in the partnership. Details if the amounts borrowed and interest paid in 2009 were as follows: Philip Angela Borrowings 10,000 40,000 Interest Paid (1,110) (4,400) REQUIRED: Philip has also become involved in the management of the partnership. (a) Compute Philip s Case II income for 2009 net of capital allowances. (2 Marks) (b) Outline how the loss incurred by Angela may be utilised. (2 Marks) (c) (d) (e) Compute the income tax payable by direct assessment (excluding PRSI and levies) by Philip & Angela for the year of assessment 2009 on the basis that they are jointly assessed. (11 Marks) State the conditions which Philip must satisfy in order to be permitted to use the cash receipts basis of accounting for VAT. Advise him of the implications of electing for this basis of accounting for VAT and whether it would be beneficial for him to do so. (3 Marks) State the date by which Philip must: (i) (ii) Make his VAT return; and pay his VAT due for November/December 2009, assuming he is not on annual accounting or the direct debit system. (2 Marks) [Total: 20 Marks] Page 3

5 3. John Ruane, a married man who is resident and ordinarily resident in the State entered into the following transactions in year ended 31 December 2009: (a) On 15 April 2009 he sold 5,000 1 ordinary shares in Jones PLC. for 35,000. His previous dealings with these shares were as follows: 6 June Purchased 1,700 for 2, April Purchased 4,000 for 8, May The company made a bonus 1 for 2 issue. 10 June He sold 3,000 shares for 3, October The company made a 1 for 3 rights issue at 3 per share. (b) (c) (d) John sold two paintings (not part of a set). On 1 October 2009 he received 1,900 for one painting (cost 1,000 in June 1994). He sold the other painting on 12 December 2009 for 14,000. This was purchased on 10 December 1996 for 5,000. On 1 May 2009, John sold his entire holding of 25% of the ordinary share capital in Howard Ltd., to Electra Ltd. for 75,000. Howard Ltd. carries out business as a retailer of electrical goods solely in the Republic of Ireland. The remaining 75% is owned by Arthur Jones. John was not a Director of the company and never worked for it in any capacity. He subscribed 25,000 for his 25% share in June 2000 when Arthur had approached him for financial assistance for the company. On 25 March 2009, John sold his holding of Irish Government Exchequer stock for 11,500. He had acquired this stock for 6,750 in June REQUIRED: (e) John has unutilised development land sale losses carried forward from 2006 of 1,560. (a) Compute John s capital gains tax liability for (15 Marks) (b) State how and when John must make his capital gains tax return for 2009 and the due date or dates for payment of the capital gains tax due. (2 Marks) (c) Explain how John might have deferred capital gains tax on the disposal of the shares in Howard Ltd. (3 Marks) [Total: 20 Marks] Page 4

6 4. (a) Joan is an art and antique dealer and has a number of retail outlets. She also owns a number of valuable paintings which she purchased for display in her own private house. She has now received a very attractive offer for these paintings. The question arises as to whether the gains arising from the sale of these paintings come within the ambit of income tax or capital gains tax. REQUIRED: (i) (ii) List the six badges of trade which were identified by the Royal Commission of Taxation in 1955 and provide a brief explanation of each. (9 Marks) State, giving reasons, whether Joan would be liable to income tax or capital gains tax in respect of the gains arising from the sale of the paintings. (3 Marks) (b) Emma intends to start carrying on a trade of selling household utensils. She has been studying various VAT literature and is confused by the following terms: Taxable supply of goods Taxable supply of services Exempt goods and services Zero rating goods and services (i) Explain to Emma each of the above terms. (6 Marks) (ii) In addition, Emma is confused by the VAT rule that, in certain circumstances, the provision of a service can be regarded as a supply of goods for VAT purposes. State the circumstances in which the supply of a service can be regarded as a supply of goods for VAT purposes and why such a distinction might be important. (2 Marks) [Total: 20 Marks] Page 5

7 5. It is February 2009 and Europa Ltd. is a German company engaged in the printing business throughout Europe. Its Managing Director, Helmut Schultz, has contacted you regarding setting up an Irish entity. He is considering setting up a branch of Europa Ltd. in Dublin. Helmut will need to send German citizen, Hans Gunter, to Ireland to establish the Irish operation and it is important that he is paid in a tax efficient manner. Hans will take up residence in Ireland on 31st March During 2009 he will have the following income and gains: Salary (1st January to 31st March 2009) - 30,000 ( 20,000 remitted) Salary (1st April to 31st December 2009) - 120,000 ( 35,000 remitted) (The salary will continue to be paid in Germany) Deposit interest paid in Ireland - 3,000 Rental profit from apartment in Germany - 12,000 ( 5,000 remitted) Sale of investment apartment in Germany - Gain 35,000 (remitted 20,000) REQUIRED: (a) Outline the tests that must be met for a company to be tax resident in Ireland. (4 Marks) (b) Explain the terms residence, ordinary residency and domicile and how these concepts would affect Hans liability to income tax and capital gains tax in (6 Marks) (c) Briefly outline the income and gains (if any) liable to Irish income tax and capital gains tax during Computations are not necessary. (5 Marks) OR [Total: 15 Marks] 6. You have just been transferred to the audit section of your Certified Public Accountancy firm. A client, Dave Clarke, has been selected for a Revenue audit. He has raised a number of questions. You are required to briefly answer the questions raised by Dave. (i) What is a Revenue Audit? (2 Marks) (ii) Outline three methods Revenue use for audit selection? (3 Marks) (iii) Where will the audit take place? (1 Mark) (iv) Outline the records to be retained for audit purposes? (2 Marks) (v) Outline the circumstances where penalties will not apply? (4 Marks) (vi) In what circumstance may penalties be payable? (3 Marks) [Total: 15 Marks] END OF PAPER Page 6

8 SUGGESTED SOLUTIONS SOLUTION 1 AVOCA LTD (a) THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND TAXATION FORMATION 2 EXAMINATION - APRIL 2010 Avoca Ltd Corporation Tax for year ended 30 June 2007 Schedule D Case I income 58,000 Less: Loss relief S. 396 (W1) (43,500) Charges Patent Royalty (7,000) 7,500 Schedule D Case III income 4,000 Schedule D Case V 7,000 Less: Capital Allowances (5,000) 2,000 Total Income 6,750 Chargeable Gain 11,000 Total Profit 17,750 Corporation tax 938 Case I - 7,500 x 12.5% 1,500 Case III & V 6,000 x 25% 1,375 Chg. Gain 11,000 x 12.5% 3,813 Less: Case I loss C/B value basis (17,250 x 12.5%) (2,156) Corporation tax payable 1,657 Avoca Ltd Corporation Tax nine months ended 31 March 2008 Schedule D Case I income Nil Schedule D Case III income 4,000 Schedule D Case V 3,500 Less: Case V loss C/B (1,500) Less: Capital Allowances (5,000) Excess Capital Allowances (3,000) Nil Total Income 4,000 Less: Schedule D Case V Capital Allowances (3,000) Taxable income 1,000 Corporation 25% 250 Less: Case I loss value basis - 2,000 x 12.5% (250) Corporation tax Nil Avoca Ltd Corporation Tax year ended 31 March 2009 Schedule D Case I Income 25,000 Less: Loss Relief S396 (20,250) Charges Patent Royalty (4,750) 0 Schedule D Case III Income 6,000 Schedule D Case V Income - Total Income 6,000 Less: Excess Schedule D Case V Capital Allowances (5,000) Taxable income 1,000 Corporation 25% 250 Less: Charges Patent Royalty value basis 2,000 x 12.5% (250) Corporation Tax Nil Page 7

9 (b) (i) (ii) (iii) Claims to set off excess Case V capital allowances against total profits must be made within 2 years of the end of the accounting period in which the excess arises. In this case the claims must be made by the following deadlines: Period Excess Arises Deadline for Claim Period Ended 31/3/ /3/2010 Period Ended 31/3/ /3/2011 A claim to carry back trading losses for relief against total profits of the previous accounting period must be made within 2 years of the end of the accounting period in which the loss was incurred i.e. 31 March The unutilised trade charges in year ended 31 March 2009 is carried forward as a Case I loss (c) Losses in respect of which relief has not yet been granted are: (i) Chargeable loss of 15,000 incurred in the period ended 31 March This may be carried forward for relief against future chargeable gains only. Note that it may not be set off against gains arising on disposal of development land which is separately chargeable to capital gains tax rather then corporation tax on chargeable gains. (ii) Schedule D Case V loss of 1,500 incurred in the year ended 31 March This may be carried back for relief against Schedule D Case V income only. (d) (e) (f) If the relevant corporation tax returns are not filed on time then the relief set out above could in certain circumstances by reduced by 25% where filed less than two months late and 50% when filed over 2 months late. Where a principal contractor makes a payment to a subcontractor, the principal contractor is required to deduct tax at the rate of 35% on such payments. Where the subcontractor produces a valid C2 certificate the principal contractor applies to Revenue for a payments card and on receipt of the payments card payments are made without deduction of tax. The subcontractor does not charge VAT to the principal contractor and will issue an invoice which contains their VAT registered number. The invoice contains the statement VAT on this supply to be accounted for by the principal contractor. The principal will account for the VAT directly for this VAT in their VAT return. Workings 1. Loss Memo: Schedule D Case I loss for 9 months ended 31/3/08 (75,000) Carried back to year ended 30/6/07 restricted to 9/12 x 58,000 43,000 Set off Against other profits year ended 31/3/08 2,000 Carried back to year ended 3/6/07 value basis 17,250 Unused trade charges (8,000) Claimed for year ended 31/3/09 (20,250) Page 8

10 SOLUTION 2 - MR & MRS LONG (a) Schedule D Case II income: Net Income Per Accounts 103,691 Add: Entertainment of clients 1,500 Depreciation 2,390 Deduct: Interest income (3,080) Schedule D Case II income 104,501 (b) The loss incurred by Mrs Long in her retail business may be offset against total income of Mr. and Mrs Long during The loss may be augmented by any capital allowances incurred in the trade. (c) Income tax Computation 2009 Income: Schedule D Case II: 104,501 Less Capital Allowances (W1) (3,750) 100,751 Schedule D Case IV: Mr. (W2) 4,000 Mrs. (W2) 2,000 6,000 Schedule E: Salary Media Supplies Ltd. 22,500 BIK (W3) 8,400 30,900 Schedule F: Mr (W4) 1,950 Mrs (W4) 3,500 5,450 Gross Income: 143,101 Charges and Outgoings Loss Relief S. 381 : Angela s Boutique (25,000) Capital Allowance (8,000) Qualifying interest: Mr (W5) (5,610) Mrs (4,400) (43,010) Income: 100,091 Taxable Income: 100,091 Income Tax: 20% 9,080 23% 1,380 41% 19,963 98,314 30,423 Less Tax Credits: Married (3,660) PAYE ( 0) Service Charges ( 20%) ( 24) Schedule F DWT (1,090) Less: DIRT (1,380) PAYE deducted (2,750) Medical expenses (W6) ( 160) Net Income Tax Payable 21,359 (d) Mr. Long can apply for authorisation to use the cash receipts basis of accounting for VAT if 90% of his sales are to unregistered persons and his turnover from taxable supplies (i.e. supplies which are subject to VAT) has not exceeded or is not likely to exceed 1,000,000 in any continuous period of 12 months. The cash receipts basis would be beneficial as it would allow him to account for VAT on receipt of payment rather than when he issues his invoice which in general is 60 days later. The cash receipts basis does not affect the timing of entitlement to claim credit in respect of input VAT. This can still be claimed on the invoice basis. Page 9

11 (e) VAT returns must be made by 19th of the month following each bi-monthly VAT period and the VAT must be paid with the return. Workings: 1. Capital Allowances W & T % 3, Schedule D Case IV Income Mr Long Mrs Long Net Interest 3,080 1,560 Add DIRT ,000 2, BIK Original Market value 28,000 30% 8, Schedule F Income Mr Long Mrs Long Dividend Income Net 1,560 2,800 Tax Credits ,950 3, Qualifying Interest Mr Long Mrs Long To invest in Media Supplies 4,500 - Angela s Boutique 1,110 4,400 5,610 4, Medical Expenses Amount Incurred 800 x 20% 160 Page 10

12 SOLUTION 3 - JOHN RUANE (a) Shares in Jones Plc Block 1- June 88 Block 2 - April 90 Shares Cost Shares Cost 1,700 2,500 4,000 8,000 Bonus 850-2,000-2,550 2,500 6,000 8,000 Disp. 94/95 (2,550) (2,500) (450) (600) Balance - - 5,550 7,400 Rights Oct97 1,850 5,550 Balance 7,400 12,950 Disp.2009 (5,000) (8,750) Balance 2,400 4,200 Note the disposal of 5,000 shares in A ratio of 3:1 based on original purchase and enhancement purchase (the rights issue) will apply. Therefore 2,500 will come from purchased, 1,250 from bonus issue and 1,250 from the rights issue. Final computation: Sale Proceeds 35,000 Cost 89/90 5,000 x (7,515) Cost 97/98 3,750 x (4,620) Gain 22,865 (b) Paintings The consideration for one of the paintings was only 1,900. Consequently, it is not liable to capital gains tax. (Chattel disposed for less than 2,540). Other Painting Proceeds (2009) 14,000 96/97 Cost 5,000 x (6,255) Net gain 7,745 (c) Shares in Howard Ltd. Proceeds (2009) 75,000 Cost 1988/98 25,000 Indexation (28,600) Gain 46,400 (d) Government Stock Exempt from Capital Gains Capital Gains Tax Computation: Shares 22,865 Paintings 7,745 Shares 46,400 Government stock 0 Losses C/F (1,560) Personal exemption (1,270) 74,180 25% 18,545 Page 11

13 b) The capital gains tax return forms part of the income tax return for 2009 and must be filed by 31 October Capital gains tax for 2009 must be paid as follows: Disposals between 1 January 2009 to 30 November 2009 payable by 15 December Disposals between 1 December 2009 to 31 December 2009 payable by 31 January 2010 To avoid interest on late payment the tax must amount to 100% of the final liability. (c) Mr Ruane could have deferred capital gains tax on the disposal of his shares by accepting shares in Electra Ltd. in lieu of cash. The new shares issued would have acquired the original cost and date of acquisition of his old shares and the capital gain tax would only be payable when Mr. Ruane sold the new shares for cash. Page 12

14 SOLUTION 4 - JOAN (a) The badges of trade identified by the Commission of Taxation in 1995, which incidentally were largely distilled from case law prior to this period, as follows: Subject Matter Frequency of Transactions Length of Ownership Supplementary Work Circumstances in which the asset is realised Motive Subject Matter The question as to whether a person carrying on a trade may sometimes be decided by examining the subject matter of the transactions under review. Some items are commonly held as an investment while others are held for their intrinsic value, e.g.: (a) (b) a person buying shares in order to obtain an income stream; an individual who holds a painting to enjoy the work of art. The sale if such assets at a profit could be regarded as producing a gain of a capital nature rather than a trading profit. On the other hand the gain arising from the sale of cardboard boxes is more likely to be regarded as arising from an adventure in the nature of trade. Frequency of Transaction The carrying on a similar number of transactions on a number of occasions indicates the carrying on of a trade whereas a once off transaction could indicate that any profit was capital in nature. Length of Ownership This is not a cast iron rule by a court could infer an adventure in the nature of a trade when the item purchased is sold shortly after acquisition. Supplementary Work and Marketing When work is done to convert or create an asset as opposed to simply making an existing asset more Marketable. This could indicate an adventure in the nature of trade. A person buying a building, developing it and then selling it, is likely to be assessed on a trading profit. On the other hand the purchase and sale of a building with no supplementary work could be regarded as a capital transaction. Circumstances in which the asset is realised Where a person can show that the reason an asset was sold due to an unexpected emergency or an opportunity to realise a windfall gain rather than an organised scheme for profit making, the profit on the disposal is in general regarded as capital in nature. Profit Motive The presence of a profit motive is a strong indication (although not conclusive) that the person is trading. The absence of a profit motive (while not conclusive) is a strong indication that a person is not trading. General Point The facts of each case need to be reviewed to determine whether or not a person is carrying on an adventure in the nature of a trade. (b) While Joan is an art and antique dealer the motive for purchasing the relevant paintings was to enable her to enjoy the works of art (intrinsic values) as evidenced by the fact by the fact that they were used/displayed in her private house. In addition it would appear that a sudden opportunity had arisen to realise a windfall gain. In other words, bearing in mind subject matter, circumstances in which the asset is realised and motive gain could be regarded as capital rather than trading in nature. Page 13

15 However, one also must look at the background here, namely, that Joan is an art and antique dealer. If the sale was regarded as an adventure in the nature of a trade Joan could be regarded, for capital gains and purposes, as appropriating these paintings at market value to trading stock. On assumption that she sells these paintings almost immediately after their appropriation to trading stock she will not have an income tax exposure as she is deemed, for trading purposes, to have acquired them at market value. In other words the tax exposure here would be capital gains tax at the current rate of 25%. QUESTION 4 (b) - EMMA Taxable Supply of Goods This is a supply of goods effected within the State for consideration by a taxable person in the course of furtherance of business. Essentially a supply in relation to goods means the transfer of ownership by agreement. Taxable Supply of Services This is a supply of services effected within the State for consideration by a taxable person in the course or furtherance of business. Essentially a supply in relation to a service means the performance or omission of any act or the toleration of any situation than a supply of goods. Exempt Goods and Services These are goods and services on which VAT is not levied as opposed to goods and services on which VAT is levied as the rate of zero percent. Persons making exempt supplies are not taxable persons for VAT purposes. Therefore they cannot register or obtain credit for VAT incurred on their purchases. Zero Rate Goods and Services These are goods and services on which VAT is actually levied but at the rate of zero percent. Persons making zero rated supplies are taxable persons for VAT purposes and must register if their turnover exceeds the appropriate threshold. Such persons can of course obtain a refund of VAT incurred on their taxable inputs. A supply of a service is regarded as a supply of goods if the value (cost to the supplier) of goods provided to the customer exceeds 2/3 of the price charged. This has important implications of the goods concerned are chargeable at a different rate to the service. For example, building services are charged at 13.5% while many materials used by builders are charged at 21.5%. If the cost of materials to the builder exceeds 2/3 of the total price to the builder s customer, the supply will be regarded as a supply of materials and VAT may be levied at 21.5% rather than a supply of building services chargeable at 13.5%. Page 14

16 SOLUTION 5 - EUROPA LTD A company is considered tax resident in Ireland if its centre of management and control is located inthe State. This is determined mainly by where the directors hold their meetings. Other factors considered are: - Place where important decisions are made. - Where bank accounts and company records are kept. - Where the majority of directors reside. - Where the company seal is kept. A company will considered be resident if incorporated in Ireland. The incorporation test will not apply to a company incorporated in the State if that company is controlled by persons not resident in Ireland. (b) Residence, domicile and their implications Your exposure to Irish taxation will depend on whether you are regarded as resident, ordinary resident and/or domiciled in Ireland. These terms are defined as follows: Resident Under Irish domestic law an individual is resident in Ireland if present in the State for 183 days or more during a tax year or if present for 280 days or more during the tax year and the preceding tax year. However, when applying this test one can ignore any year in which an individual spends less than 30 days in total in Ireland The tax year coincides with the calendar year and an individual is treated as present for tax purposes if present at any time of the day. You will be resident in Ireland for 2009 because you will be present for 183 days in that year. Ordinary resident An individual will be considered ordinarily resident for a year of assessment if they have been resident for each of the three preceding tax years. An individual will not cease to be ordinarily resident until they have been not resident for each of the preceding three tax years. You will be considered non-ordinary resident in Ireland for Domicile Domicile is a common law concept based on the notion of an individual s permanent home. Generally a person is domiciled in the country which they regard as their natural home and to which they intend to return. However, it is not always possible to relate domicile to home, as in certain circumstances an individual may be domiciled in a country which is not and has never been his home. A person may have two homes but they may only have one domicile. There are three general principles in relation to domicile. No person can be without a domicile No person can, at the same time, have more than one domicile An existing domicile is presumed to continue unless it is proved that a new domicile has been acquired Domicile of origin An individual is born with a domicile known as the domicile of origin. Normally a person acquires the domicile of their father. Domicile of choice Domicile of choice is the domicile which any independent person can acquire by a combination of residence and intention. Once an individual has reached the age of 18 years they can abandon their domicile of origin and acquire a domicile of choice. In order to acquire a domicile of choice the individual must prove conclusively that they have severed all links with the country in which their domicile of origin lies. There must also be a positive acquisition of a new domicile of choice. To acquire a domicile of choice an individual must establish a physical presence in the new jurisdiction and have the intention to reside there indefinitely. Page 15

17 Your domicile status Based on the information available you will retain your German domicile of origin during your assignment to Ireland. Income Tax Under Irish domestic law an individual who is resident but not domiciled in Ireland is liable to Irish income tax on: Irish source income and foreign employment income where the employment duties are exercised in Ireland Other foreign income to the extent that it is remitted into Ireland Capital gain tax An individual who is resident, non-ordinarily resident in Ireland but not domiciled is liable to Irish capital gains tax on: The disposal of Irish assets The disposal of foreign assets to the extent that the proceeds are remitted to Ireland in which case the gain will become taxable. (c) Hans liability to Irish tax during 2009 will be as follows: Salary (1st January to 31st March 2009) not liable as split year relief will apply Salary (1st April to 31st December 2009) fully taxable as employment duties are exercised in Ireland Deposit interest paid in Ireland fully taxable Rental profit from apartment in Germany taxable on remittance Sale of investment apartment in Germany taxable on remittance Page 16

18 SOLUTION 6 - DAVE CLARKE (1) What is a Revenue Audit A Revenue audit is an examination of the information and figures shown by a taxpayer in their tax returns against those shown in their business records. It is normally concerned with the review of the taxpayer's return of income for one year, but where significant discrepancies arise during the audit, the Revenue may extend the examination for prior or subsequent years. (2) Methods of Selection The vast majority of audits are selected by screening tax returns. This process involves examining the returns of taxpayers and reviewing their tax compliance history. The figures in the returns may be evaluated in the light of trends in particular businesses or profession and analysed against available information. Revenue may receive information from third parties in relation to particular taxpayers Occasionally audits are conducted to examine tax compliance levels in particular trades or professions. The tax returns of a large number of taxpayers in a particular sector are examined in detail and a proportion are then selected for audit. A small number are carried out on a random basis giving the possibility of all taxpayers being audited. (3) Location of Audit In general, audits take place at the principal place of business. Where there is more than one place of business, the auditors may visit each location. In the case of companies, the audit will generally take place at the principal place of business, irrespective of where the registered office is located. (4) Records to be retained by a taxpayer for audit purposes Records include accounts, books of account, documents and other data, either maintained manually, electronically, or by other processes, relating to the following activities of the trade or profession: Money received and expended; Sales and purchases of goods and services; Assets and liabilities; Acquisitions and disposals of assets. Linking documents, that is documents which are drawn up in the preparation of accounts and which show details of the calculations linking the records to the accounts, (i.e. accountant s working papers) and any other record relating to the business must also be retained. The records must be kept on a continuous and consistent basis as will enable true returns of the profits and gains to be made and must be retained for a period of six years. (5) No penalties will apply where: The aggregate of the tax due does not exceed 3,000; OR A mistake was made through innocent error. Innocent error can be described as a tax default which was not a deliberate tax default and was not attributable in any way to the failure by the taxpayer to take reasonable care to comply with tax obligations; OR A difference arises through a technical adjustment. Technical adjustments are essentially conflicts that arise as a result, from differences in the interpretation or application of legislation. OR A self-correction is made. Revenue allows a period of grace generally 12 months from the date of return for taxpayers to self-correct errors on tax returns. Page 17

19 (6) Penalties Where they arise, penalties are payable in the following circumstances: A return for tax was not submitted on time. This type of penalty is usually a fixed figure for each unsubmitted tax return. An incorrect tax return was made and it can be shown that the inaccuracies arose because of the taxpayer's neglect. In this circumstance, the legislation provides for substantial penalties linked to the amount of tax underpaid. The maximum amounts of the penalties range from 20% (of the unpaid tax) for insufficient care category, 40% for gross carelessness and 100% for deliberate default category. Page 18