Professional Level Options Module Advanced Taxation (Irish) Monday 7 June 2010 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 8 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
SUPPLEMENTARY INSTRUCTIONS 1. You should assume that the tax rates and allowances shown below, for the Finance Act 2009, 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 RATES AND ALLOWANCES The following rates, credits, formulae and allowances are based on the Finance Act 2009 and are to be used for all questions in this paper. Rates of income tax Tax Single/Widow(er) 36,400 at 20% 7,280 Balance at 41% Married couple (one income) 45,400 at 20% 9,080 Balance at 41% Married couple (dual income) 72,800 at 20% 14,560 Balance at 41% One parent family 40,400 at 20% 8,080 Balance at 41% Abbreviated list of personal tax credits Single person s credit 1,830 Married couple s credit 3,660 Widowed person s credit (without dependent children) 2,430 Home carer credit (maximum) 900 Single parent credit 1,830 Dependent relative credit 80 Age credit single/widowed 325 Age credit married 650 Employee/PAYE credit 1,830 Rates of PRSI/levies Self-employed PRSI Rate 3% Minimum contribution where income is below 26,000 253 Note: No PRSI where income is below 3,174 per annum Health contribution Lower exemption limit ( 500 per week) 26,000 Income Rate Up to 75,036 per annum 3 333% 75,036 to 100,100 per annum 4% Over 100,100 4 167% Note: No upper limit for PRSI or health contribution 2
Income levy The first 75,036 1 67% The next 25,064 3% The next 74,880 3 33% The next 75,140 4 67% Income over 250,120 5% Rates of PRSI/levies Employee Class A1 PRSI 1 January 2009 to 30 April 2009 Upper limit 52,000 Rate 4% 1 May 2009 to 31 December 2009 Upper limit 75,036 Rate 4% The first 127 per week (non-cumulative) is exempt from PRSI Note: No PRSI on income up to 18,304 per annum ( 352 per week) Health contribution 1 January 2009 to 30 April 2009 Lower exemption limit ( 500 per week) 26,000 Rate: First 1,925 per week ( 100,100 per annum) 2% Balance 2 5% 1 May 2009 to 31 December 2009 First 1,443 per week ( 75,036 per annum) 4% Balance 5% Note: No upper limit for health contribution Income levy 1 January 2009 to 30 April 2009 Income up to 100,100 1% 100,101 to 250,120 2% Over 250,120 3% The income levy will not apply where an individual s total income for a year does not exceed 18,304 1 May 2009 to 31 December 2009 Income up to 75,036 2% 75,037 to 174,980 4% Over 174,980 6% The income levy will not apply where an individual s total income for a year does not exceed 15,028 Rates of PRSI/levies Employer (for employees Class A1) PRSI Rate: 10 75% For salaries less than 18,980 ( 365 per week) the rate is 8 5% per annum Note: No upper limit for employer s contribution 3 [P.T.O.
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 earnings of 150,000 Corporation tax Standard rate 12 5% Higher rate 25% Manufacturing rate 10% Capital gains tax Rate 1 January 2009 to 7 April 2009 22% 8 April 2009 to 31 December 2009 25% Annual exemption 1,270 Rural/Urban renewal allowances Industrial and commercial buildings Owner occupier % Free depreciation 50 or Initial allowance 50 Annual allowance 4 Maximum 100 Lessor Initial allowance 50 Annual allowance 4 Maximum 100 Residential property Owner occupier Construction Refurbishment 5% per annum (10 years) 10% per annum (10 years) Lessor (Section 23 relief) Construction 100% Conversion 100% Refurbishment 100% 4
Motor cars limits on capital costs For cars purchased between 1 July 2007 and 30 June 2008: Capital allowances 24,000 Leasing charges 24,000 Running cost No limit For cars purchased on or after 1 July 2008: Capital allowances are based on the carbon dioxide emissions category of the car. The specified limit is 24,000. Carbon emissions table: Category A Category B/C Category D/E Category F/G 0 120g/km 121 155g/km 156 190g/km 190g/km+ Motor cars (all categories) benefit-in-kind rates Business travel Business travel Percentage of original lower limit upper limit market value of car Kilometres Kilometre % 0 24,000 30 24,001 32,000 24 32,001 40,000 18 40,001 48,000 12 48,001 upwards 6 The above table is to be applied to all categories of car as the new legislation is not examinable in 2010. 5 [P.T.O.
Indexation factors for capital gains tax Year expenditure incurred Multipliers for disposals in the year ending 31 December 2003 et seq 1974-75 7.528 1975-76 6.080 1976-77 5.238 1977-78 4.490 1978-79 4.148 1979-80 3.742 1980-81 3.240 1981-82 2.678 1982-83 2.253 1983-84 2.003 1984-85 1.819 1985-86 1.713 1986-87 1.637 1987-88 1.583 1988-89 1.553 1989-90 1.503 1990-91 1.442 1991-92 1.406 1992-93 1.356 1993-94 1.331 1994-95 1.309 1995-96 1.277 1996-97 1.251 1997-98 1.232 1998-99 1.212 1999-2000 1.193 2000-2001 1.144 2001 1.087 2002 1.049 2003 et seq 1.000 6
Capital acquisitions tax Class threshold 1 January to 8 April to 7 April 31 December 2009 2009 Class 1: Child or minor child of deceased child (or inheritance taken by parent): 542,544 434,000 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 54,254 43,400 Class 3: Any other person 27,127 21,700 Rate 20 November 2008 to 7 April 2009 22% 8 April 2009 onwards 25% Rates of stamp duty Non-residential property (effective 4 December 2002 to 14 October 2008) Value Rate % Up to 10,000 0 10,001 1 20,000 1 20,001 1 30,000 2 30,001 1 40,000 3 40,001 1 70,000 4 70,001 1 80,000 5 80,001 1 100,000 6 100,001 120,000 7 120,001 150,000 8 Over 150,000 9 Non-residential property (effective 15 October 2008 onwards) Aggregate consideration Rate of duty Up to 10,000 Exempt 10,001 20,000 1% 20,001 30,000 2% 30,001 40,000 3% 40,001 70,000 4% 70,001 80,000 5% Over 80,000 6% Residential property Owner occupiers and investors Value Rate % First 127,000 0 Next 875,000 7 Excess over 1,000,000 9 First time buyers who are owner occupiers of new or second-hand residential property are exempt. Note: where applicable VAT should be excluded from the chargeable consideration. 7 [P.T.O.
Stocks and marketable securities Where the aggregate consideration is less than 1,000 0% Where the aggregate consideration exceeds 1,000 1% 8
Section A BOTH questions are compulsory and MUST be attempted 1 You have received the following memorandum from your manager: To Taxation Senior From Taxation Manager Date 1 June 2010 Subject George Hanley and Finnerty Building Services Ltd. George Hanley, a new client, has met with me to discuss his tax planning requirements. He owns 60% of Finnerty Building Services Ltd (FBSL) with the balance of the shares being owned by his wife, Regina. Regina also runs a hair and beauty salon on a sole trade basis. The company builds residential units. To-date, George has held the residential land stocks personally to avail of the 20% income tax rate and trades in selling sites separately from the building services of the company. George understands that this 20% rate no longer applies and indeed that the use of any losses in this trade have been restricted. He is now considering ceasing his sole trade and transferring his land stocks, other than two sites, to FBSL. He estimates that if the land stocks are transferred to the company at market value, a loss is likely to arise in his sole trade of 345,000. George wishes to make the most efficient use of this loss in the current year and, if possible in previous years. Please prepare a note setting out the best use of the loss for George and Regina. Details of recent years trading results for George and Regina are: Year ending 30 June 2006 2007 2008 2009 Sale of sites Case I profit/(loss) 210,000 96,000 65,000 (345,000) Hair and beauty salon Case I profit/(loss) 58,000 60,000 48,500 85,000 FBSL s performance has been adversely affected by the economic downturn but George is confident that turnover will improve in the next year. In the meantime, George has agreed that the company will issue 5% of its shares free to Tom Walkin, a key employee. The share issue will be subject to the proviso that the shares cannot be sold by Tom for at least six years. George has heard that this restriction might have some tax advantage for Tom. George has two children aged 18 and 20, and he wishes to make a gift to each child of one of the sites retained by him on cessation of his sole trade. He also intends to contract FBSL to build a house on each site as a further gift to each child. He has agreed to pay FBSL the market value of the building services of 120,000 for each house. The market value of each site is 85,000. George estimates that on completion, each house will be worth 250,000. George and Regina have not previously made any gifts to either of their children. George and Regina are jointly assessed and have no other income. Required: Prepare a set of briefing notes for your manager s next meeting with George Hanley setting out the taxation implications of the following events: (i) (ii) George ceasing to trade. Your answer should include a clear summary showing the most efficient calculation of the available loss, the optimum use of these losses and the resultant tax liabilities arising, assuming an income tax rate of 41% for all relevant years; (16 marks) The issue of the free shares to Tom Walkin subject to the six year restriction on disposal, and its impact if any, on George and Regina; (5 marks) (iii) The gift of the sites and houses from George to the children. Note: computations are not required in either part (ii) or part (iii). (10 marks) Professional marks will be awarded in question 1 for the presentation and format of the notes and the clarity and effectiveness with which the information is communicated. (3 marks) (34 marks) 9 [P.T.O.
2 Assume today s date is 10 December 2010 Frank Sommers owns 100% of Bespoke Holdings Limited (BHL) which owns 100% of Arklow Ltd, a manufacturer of carpets and flooring, and 80% of Borrow Ltd, a property dealing company. In May 2010 BHL acquired 100% of Quilty Ltd, a competitor company on the basis that its main trade offered substantial synergies with Arklow Ltd. The purchase price was 1,300,000. Quilty Ltd s main trade is the manufacture of high value rugs and floor coverings. It also operates a separate commercial cleaning and maintenance trade. At the date of purchase, the assets of the company were comprised of factory premises with a market value of 1 2m, plant and machinery valued at 650,000 and net current assets of 560,000. The factory premises had cost 1 5m in 2003 and the outstanding debt on the premises was 1 1m. Quilty Ltd has made losses in its manufacturing trade in the past two years and unused losses brought forward at the date of purchase were 2 5m. Borrow Ltd holds a substantial commercial unit in stock which it built in 2009. The market value of this building is 2 5m and it is included in Borrow Ltd s trading stock at a cost of 750,000. Frank now wishes to reorganise Quilty Ltd as follows: Transfer the manufacturing trade together with the appropriate plant, machinery and liabilities to Arklow Ltd. The transfer is planned to take place on 31 December 2010 to coincide with Arklow Ltd s year-end. The consideration for the transfer is the issue of additional shares in Arklow Ltd to BHL. The value of the manufacturing trade is 900,000. The cleaning and maintenance trade will remain with Quilty Ltd. Following the transfer of the manufacturing trade, Quilty Ltd s factory premises will be surplus to the group s manufacturing needs and is to be sold. Frank has tentatively agreed the sale of this property by Quilty Ltd to a third party for 1 1m. Subsequent to the sale of the factory premises Frank plans to sell Quilty Ltd. A potential purchaser has been identified and is willing to acquire the shares for a consideration of 850,000. The sale is likely to be completed by January 2011. All of the companies are separately registered for value added tax (VAT). Required: (a) (b) Draft a memorandum to your tax manager in which you set out the taxation implications of: (i) (ii) The transfer of the trade from Quilty Ltd to Arklow Ltd. Your answer should address the capital gains tax, stamp duty and value added tax (VAT) issues arising in addition to the trading losses; (12 marks) The sale of the factory property in Quilty Ltd with particular reference as to how the resultant capital loss can be utilised, together with a recommendation as to how the tax position might be improved; (8 marks) (iii) The subsequent sale of the shareholding in Quilty Ltd by Bespoke Holdings Limited. Note: computations are not required for sub-part (iii). (5 marks) Professional marks will be awarded in part (a) for the presentation and format of the memorandum and the effectiveness with which the information is communicated. (2 marks) State, giving reasons, whether there would be any taxation benefits if the commercial unit were transferred from Borrow Ltd to Quilty Ltd prior to its sale, with a view to utilising any available capital losses. (3 marks) (30 marks) 10
Section B TWO questions ONLY to be attempted 3 Techfit Sports Ltd (Techfit), a UK resident company, manufactures high-end sportswear. In October 1997, the company purchased a factory in Cavan at a cost of 1 5m net of recovered value added tax (VAT) from which it traded as a branch. The building was substantially extended in 2005 at a cost of 800,000. Due to a fall in demand the company ceased operations in Ireland in January 2009 and the factory was then let on a short-term lease until November 2009, when it was sold for 2 75m. The specialised machinery used in the manufacturing process was returned to the UK in 2009 and subsequently sold at a small profit. Corporation tax has been correctly paid on all branch profits. In late 2009 the company was approached by a number of Irish sportswear retailers wishing to restock their products. As Techfit no longer has any permanent base or assets in the State it has engaged the services of Paul Walters to market and sell their products in Ireland. Techfit anticipates future annual profits from the sale of goods in Ireland to be approximately 85,000. Paul is Irish resident and domiciled. His job requires him to travel around the country agreeing orders for stock and arranging for payment and delivery. Paul lodges funds arising from these Irish sales directly into Techfit s UK bank account. He has been provided with an employment contract commencing January 2010 setting out his salary, terms of employment, holiday leave, sick leave, hours of work and entitlement to participate in the company pension scheme. His supervisor has advised Paul that as Techfit is not a registered employer in Ireland, he is responsible for his own tax filing and payment. Paul receives his salary gross on a monthly basis. Techfit has also provided him with a company car, for which it pays all the running expenses. Paul anticipates that his annual business mileage will exceed 30,000 kilometres. In March 2010 Techfit opened a fixed rate deposit account with the Bank of Ireland and lodged substantial excess funds from their UK activities in the account to avail of the high interest rates. Required: (a) (b) Set out the Irish tax implications of Techfit Sports Limited on the disposal of the property and assets of its Irish branch. (8 marks) Explain the Irish tax exposure of Techfit Sports Limited on its Irish source incomes of: (i) the profits arising from its Irish sales in 2009; (3 marks) (ii) the deposit interest arising on the Bank of Ireland account. (2 marks) (c) Advise on the tax treatment of Paul s salary and benefits. (5 marks) Notes: 1. You may base your answer either on the provisions of the Ireland/UK double tax treaty or the OECD Model Convention. 2. Capital allowances on the business property should be ignored. 3. Computations are not required. (18 marks) 11 [P.T.O.
4 Simon Harold is 55 years old and single with no children. He has a considerable portfolio of assets and, as he is in very poor health, has made the following provision for his family members. He gifted his farm to his sister s son, Joseph on 1 May 2009. The farm is a 60 acre dairy farm in Carlow. The market value of the farm and its assets at the date of transfer were: Farmlands 1,240,000 Livestock 220,000 Stock of trees 85,000 1,545,000 Four acres of the farmland was planted with trees valued at 85,000 and the land on which the trees are growing was valued at 124,000. Simon had inherited the farm from his father in March 1997 when the lands were valued at 400,000. All the farm machinery is leased. On the same date, Simon also gifted a cash lump sum of 250,000 to his grandnephew, David, subject to the condition that it be invested in agricultural property within two years. Simon is aware that a farm adjoining one of his fields will come on to the market in the next year and Simon has suggested to David that he purchase it. He has also spoken to Joseph regarding his wish that in the event that David purchases the neighbouring farm, this adjoining field be transferred to David in due course. Joseph is David s father. Joseph had worked with Simon on the farm for the six years up to June 2008. In July 2008 he moved to Germany when his marriage split up, but he returned to Dublin in January 2009 where he took up employment with the intention of living here permanently. Joseph s only asset is a house in Dublin valued at 250,000, with an outstanding mortgage of 112,000. Joseph has had difficulty in readjusting to life in Ireland and now plans to return to live in Germany in early 2011. He intends to sell the field to David prior to his departure at market value, estimated at 60,000. David has lived with Simon for the past two years, is currently completing a degree in agricultural science and plans to farm after college. He had no assets prior to the gift from Simon on 1 May 2009. Required: (a) (b) (c) Set out and compute the capital taxation implications for Simon and Joseph of the gift of the farm in May 2009 assuming that Joseph remains in Ireland indefinitely. (9 marks) In the event that Joseph returns to Germany permanently in 2011, explain what, if any impact this will have on any relief(s) claimed in (a). (4 marks) Explain the tax treatment for each party of: (i) the gift of the cash lump sum from Simon to David in May 2009; (3 marks) (ii) the sale of the field by Joseph to David in 2011. (2 marks) (18 marks) 12
5 Martha Gallagher runs a restaurant on a sole trade basis and has contacted you to discuss her general tax compliance position. Her brother, a carpenter, has recently been audited by the Revenue and the outcome was substantial penalties and publication. Martha is concerned that she may be next and wishes you to examine her business records to ensure that there are no contentious issues. During your inspection, the following issues were noted: Martha employs two staff and provides a meal to each daily. No payment is received and no adjustment is made in the value added tax (VAT) return. Martha purchased the property that houses the restaurant from an unconnected company, Keane Builders Ltd on 30 August 2008. VAT at 13 5% was paid on the purchase and subsequently reclaimed from the Revenue. Due to a fall-off in trade, the second floor of the property ceased to be used for the restaurant in early 2009. In an attempt to generate some income from this part of the building, Martha converted it into an office and one apartment. VAT was reclaimed on the redevelopment costs. She has leased both units with effect from 1 February 2010 and charges VAT at 13 5% on the monthly rents. This VAT is included in her bi-monthly VAT returns. The second floor accounts for 40% of the total building. Martha is currently promoting an early-bird food menu including a bottle of wine at the all-in price of 55 per couple. This has proved to be very popular. For VAT purposes, Martha applies the composite rule and returns VAT at 13 5% on both the food and drink. Required: (a) Set out the implications for tax of the various issues identified during the inspection. (8 marks) (b) In relation to any underpayment of taxes arising from these issues, explain to Martha: (i) (ii) her options now; (6 marks) in the event that she takes no action now, the options available to her if she subsequently receives notification of a Revenue audit. (4 marks) Your answer should include details of any conditions attaching to each option. (18 marks) End of Question Paper 13