Professional Level Options Module Advanced Taxation (Irish) Monday 7 December 2009 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 6. Paper P6 (IRL) 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. The Association of Chartered Certified Accountants
SUPPLEMENTARY INSTRUCTIONS 1. You should assume that the tax rates and allowances shown below, for the Finance Act 2008, 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 2008 and are to be used for all questions in this paper. Rates of income tax Tax Single/Widow(er) 35,400 at 20%, 7,080 Balance at 41% Married couple (one income) 44,400 at 20%, 8,880 Balance at 41% Married couple (dual income) 70,800 at 20%, 14,160 Balance at 41% One parent family 39,400 at 20%, 7,880 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 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 No PRSI where income is below 3,174 per annum Health contribution Lower exemption limit ( 500 per week) 26,000 Rate: First 1,925 per week ( 100,100 per annum) 2% Balance 2 5% Note: No upper limit for PRSI or health contribution 2
Rates of PRSI/levies Employee Class A1 PRSI Upper limit 50,700 Rate 4% The fi rst 127 per week (non-cumulative) is exempt from PRSI No PRSI on income up to 18,304 per annum ( 352 per week) Health contribution Lower exemption limit ( 500 per week) 26,000 Rate: First 1,925 per week ( 100,100 per annum) 2% Balance 2 5% Note: No upper limit for health contribution 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 Retirement annuities Percentage of net Age 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 275,238 Corporation tax Standard rate 12 1 / 2 % Higher rate 25% Manufacturing rate 10% Capital gains tax Rate 20% Annual exemption 1,270 3 [P.T.O.
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 (s.23 relief) Construction 100% Conversion 100% Refurbishment 100% 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 specifi ed limit is 24,000. Carbon emissions table: Category A Category B/C Category D/E CategoryF/G Vehicles Vehicles Vehicles Vehicles 0 120g/km 121 155g/km 156 190g/km 190g/km+ Motor cars benefit-in-kind rates Lower limit Upper limit Percentage of original business miles business miles market value of car % Up to 15,000 30 15,001 20,000 24 20,001 25,000 18 25,001 30,000 12 30,001 upwards 6 4
Indexation factors for capital gains tax Year Multipliers for disposals in expenditure year ending 31 December incurred 2004 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 Class threshold Capital acquisitions tax Class 1: Child or minor child of deceased child (or inheritance taken by parent): 521,208 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 52,121 Class 3: Any other person 26,060 Rate 20% 5 [P.T.O.
Rates of stamp duty Non residential property Value Rate % Up to 10,000 0 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 80,001 100,000 6 100,001 120,000 7 120,001 150,000 8 Over 150,000 9 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. N.B Where applicable VAT should be excluded from the chargeable consideration. Stocks and marketable securities 1% 6
This is a blank page. Question 1 begins on page 8. 7 [P.T.O.
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 October 2009 Subject: Niall Golden I spoke to Niall Golden earlier today and have arranged to meet with him next Wednesday to review a number of taxation issues and fi le his 2008 income tax return. I need you to prepare some working papers setting out the issues and implications arising from the information provided below. Background Niall Golden is aged 60 and has worked as an industrial engineer with Mullary Construction Company Limited (MCCL) since 1 March 1981. In addition to his employment, Niall has an interest personally in engineering R&D and over the years has patented a number of innovative processes. He has licensed the use of two such patents to local and multinational companies. Arising from the economic recession Niall was made redundant from MCCL on 30 November 2008. The details of his termination package are as follows: a cash lump sum of three weeks fi nal salary for each year of employment, his company car, valued at 32,000 was transferred to him, statutory redundancy of 33,924, pay in lieu of notice in accordance with Niall s employment contract, of 4,807, provision of a re-training course. Niall opted for a self-employment course at a cost of 4,800 and completed this course in March 2009. Niall paid 10% of his salary annually into the company s occupational pension scheme through the payroll and had never previously received a lump sum. Under the terms of the occupational pension scheme, Niall was entitled to a pension lump sum of 156,000. He drew down 80,000 in December 2008 and deferred the balance until he reaches 65. The actuarial valuation of this deferred lump sum in November 2008 was 36,500. His pension commenced on 1 December 2008 and he received 5,780 for the month of December from which PAYE of 2,108 was deducted. Additional information: Niall is an existing client and the following information is available from our fi les: Salary and benefits in kind Patent Gross deposit PAYE per P60/P45 income interest paid Period ended 30 November 2008 103,209 180,000 7,200 39,219 Tax year 2007 94,875 150,000 6,980 36,053 Tax year 2006 86,625 135,000 5,870 32,918 Tax year 2005 78,375 121,000 5,500 29,783 During 2008 Niall made an additional voluntary contribution (AVC) payment directly to his pension of 15,000. Tax relief has not been granted on this payment through the payroll. He also made a charitable donation of 30,000 in 2008. Niall is married to Caroline and they are jointly assessed. Caroline had no earnings in the year 2008. 8
Required: Prepare a report for your manager setting out the taxation issues arising from the termination package as follows: (i) The income tax exposure of each part of the termination package; (7 marks) (ii) Niall s income tax computation for 2008, incorporating the termination payment and the effect of the restriction on reliefs for high earners as introduced in the Finance Act 2006; (18 marks) (iii) Any measures that Niall may consider taking in order to minimise the impact of the high earners restriction, assuming he will have similar income levels for future years. (3 marks) Notes: 1. You should ignore top slicing relief. 2. You are not required to consider PRSI or health contribution. Professional marks will be awarded in question 1 for the appropriateness and format of the report and the effectiveness with which the information is communicated. (3 marks) (31 marks) 9 [P.T.O.
2 Helen Finley and her husband Trevor own 100% of Christie Limited (CL), an Irish incorporated and resident holding company. Helen has arranged to meet you regarding a number of corporate issues and in anticipation of the meeting has emailed you the following information: CL owns: 75% of Bain Marie Limited (BML); 100% of Toast Makers Limited (TML); and 100% of Kettle Wood Limited (KWL). BML is an Irish resident trading company that manufactures stainless steel catering equipment. 100% of the turnover of BML is from manufacturing activities and 75% of its production is exported annually. In June 2008, BML signed a royalty agreement for a licence with a UK company, Rexin Limited. Rexin Limited purchased 25% of BML Limited in January 2007. BML paid 150,000 in patent royalties to Rexin Limited in June 2008. TML is tax resident in Spain and operates a chain of wholesale and retail outlets for electrical goods in Malaga. The company was acquired by CL in 2004 at a cost of 2m. The economy in Spain has been severely affected by the recent downturn and TML has not performed as well as hoped, however it is expected to make a modest profi t in 2009. The local management of TML have contacted CL with an offer to buy the shares of TML for 4m which represents market value. CL is interested in selling the company and wishes to clarify the taxation implications. KWL is an Irish resident property dealing company. The breakdown of its turnover has been as follows: Sale of Sale of Year ended 31 December developed units commercial sites 2008 2,400,000 2007 5,200,000 960,000 Recent results for all three companies have been: Year ended 31 December BML TML KWL 2008 Case I 150,000 (145,000) (720,000) Case V 7,000 2007 Case I (12,200) 42,000 350,000 Case V 5,000 Required: Draft a memorandum to your tax manager in which you set out the taxation implications of the following issues as queried by Christie Limited: (i) Whether Bain Marie Limited is required to pay withholding tax on the royalty payments to Rexin Ltd; (4 marks) (ii) Whether the losses arising in Toast Makers Limited can be used by Bain Marie Limited in the current year; (5 marks) (iii) The corporation tax exposure of both Bain Marie Limited and Kettle Wood Limited for the year ended 31 December 2008. Your computation should use all allowances and reliefs available; (13 marks) (iv) The tax implications for Christie Limited of selling the shares in Toast Makers Limited. (5 marks) Professional marks will be awarded in question 2 for the appropriateness and format of the memorandum and the effectiveness with which the information is communicated. (2 marks) (29 marks) 10
Section B TWO questions ONLY to be attempted 3 George Meehan retired on 1 July 2007 and gifted his 100% shareholding in Lacie Manufacturing Limited (LML) to his two sons, Michael and Seán equally. The company specialises in educational software development. In recent years the company has diversifi ed into a second trade of in-house training and consulting in the telecommunications market. George s shareholding was valued at 1,560,000 on the date of transfer. He had purchased the shares in 1986 and the capital gain arising on the disposal amounted to 228,000. George qualifi ed for retirement relief on the transfer and his sons qualifi ed for business relief for capital acquisitions tax purposes. In the past year, Michael and Seán have had diffi culties in working together. Their vision for the company s future is fundamentally different. Michael feels that the company should focus on the educational software development while Seán is only interested in developing the training and consulting functions. Following a number of serious disagreements, it has become obvious that both of them cannot continue to jointly run the company. Michael and Seán are considering the following possible options: Michael will buy out Seán s shares in the company personally. Michael does not have suffi cient personal funds and would need to borrow to pursue this course of action. The company would buy back Seán s shares. The consideration for the shares would be paid out of company s reserves. The company would transfer the training and consulting trade to a new company to be managed by Seán. Ideally, Seán would own the shares in this company. The most recent set of accounts indicate that the value of the educational software and the training and consulting trades are roughly equal. The value of the shares in LML has not changed since 1 July 2007. Required: (a) Set out the taxation consequences of each of the three options being considered by Michael and Seán as follows: (i) Michael to purchase the shares from Seán; (2 marks) (ii) Lacie Manufacturing Limited to buy back Seán s shares; (iii) The transfer of the training and consulting trade to a separate company. Note: you may assume that any company law requirements will be satisfied. (5 marks) (7 marks) (b) Identify the impact of each course of action in (a) on the capital gains tax and capital acquisitions tax reliefs previously granted to George, Michael and Seán. (6 marks) (20 marks) 11 [P.T.O.
4 Martina O Byrne, aged 61, retired as general manager of a multinational company, MN Ltd, on 1 March 2009. At retirement, she received a tax free lump sum from her pension scheme and transferred the balance of the fund to an approved retirement fund (ARF). In June 2009 Martina sold all the shares she held in MN Ltd generating a gain of 1 1m. This resulted in a capital gains tax liability of 202,400, which was paid by 31 October 2009. Martina immediately reinvested some of the proceeds of this sale into a portfolio of shares on the Irish stock market. The portfolio consists of: fi nancial shares costing 350,000, now valued at 55,000, and pharmaceutical shares costing 200,000, now valued at 249,000. Martina feels that the portfolio will recover in the medium term and has decided to retain the shares. However, a recent conversation with a colleague has suggested that she could sell and reacquire her portfolio immediately and use the loss generated to offset against the gain on the sale of the MN Ltd shares. Martina and her second husband, Brian separated on 10 January 2009. They both expect the separation to be permanent, but no formal separation agreement has been put in place to date. There are no children to the marriage. Brian is an Australian, who moved to Ireland after their marriage in August 2007 to work as a hotel manager. On 31 January 2009 he terminated his employment and returned to Australia and he intends to remain there. The following division of assets has been provisionally agreed: Brian will transfer his 50% of both their family home in Cork and a holiday home in France to Martina. The family home was purchased in 2007 for 250,000 and is now valued at 450,000. The French holiday home was purchased in 2007 for 325,000 and is currently valued at 195,000. Martina will pay Brian a lump sum of 400,000 and ongoing maintenance of 2,000 per month. Martina has two children by her fi rst marriage, Mary, aged 32 and Clare aged 20. She now wishes to transfer some of her assets to them equally. She is considering transferring either her ARF fund or some of her investment properties. The investment properties are all commercial units acquired in June 1994 at a cost of 430,000; they are now valued at 3 million. The properties generate an annual income of 120,000. Martina s ARF fund was valued at 3 million at the time of her retirement and she has not made any withdrawals from the fund since retirement. There is no change to the value of the fund to date. Mary has lived in Germany for the past 10 years. She plans to return to live in Ireland in 2010. Clare is training as a primary school teacher. Both daughters previously inherited 40,000 each from their father s estate in 1993. Required: (a) Examine the options available to Martina to minimise her realised capital gains tax exposure. Your answer should include consideration of negligible value claims and the sale and buyback of shares. (4 marks) (b) Set out the capital taxes arising on the proposed division of assets were Martina and Brian to obtain either a legal separation or a divorce. (7 marks) (c) Explain and compute the tax consequences for both Martina and her daughters of the transfer of: (i) the approved retirement fund (ARF); (5 marks) (ii) the investment properties. (4 marks) (20 marks) 12
5 Pinewood Properties Developments Limited (PPDL) was incorporated in June 2001 and has traded successfully as a property builder ever since. The company is owned by Jane and Joseph Porter equally. In the past two years the economic slowdown has resulted in poor sales and the company now fi nds that it has a stock of 10 apartments that cannot be sold. The company is considering renting out the apartments in the short term to generate income until such time as they can be sold. Value added tax (VAT) of 241,000 was fully recovered on the development of the apartments during construction. PPDL also owns a substantial offi ce complex, currently used as the company s head offi ce. The shareholders anticipate that the company will wind down in the next few years and, as the market value of this property has recently plummeted, they transferred this offi ce block on 1 December 2008 from the company to their children, Carol and Jack, free of consideration. The offi ce block was built six years ago; its current market value is 2,600,000 which is substantially greater than its original cost. VAT on its construction of 108,000 was reclaimed at the time of its acquisition. Carol and Jack have leased back 60% of the building to PPDL on a three-year lease, which commenced on 1 August 2009. They have started to refurbish the remaining 40% of the building and have an agreement to lease this part to an unconnected company, Bank of Jersey Limited for 20 years, commencing on 1 December 2009. The refurbishment is expected to cost 780,000 net of VAT at 13 5%. Required: (a) Outline the corporation tax, capital gains tax, value added tax (VAT) and stamp duty implications for Pinewood Property Developments Limited of the proposed letting of the apartments. (6 marks) (b) Explain the tax consequences for Pinewood Property Developments Limited of transferring the office complex to Carol and Jack Porter. (5 marks) (c) Set out the VAT implications of: (i) The transfer of the property from Pinewood Property Developments Limited to Carol and Jack Porter; (5 marks) (ii) The 20-year lease from Carol and Jack Porter to Bank of Jersey Limited. (4 marks) (20 marks) End of Question Paper 13