Advanced Taxation Republic of Ireland Sample Paper 1 Questions & Suggested Solutions
NOTES TO USERS ABOUT SAMPLE PAPERS Sample papers are published by Accounting Technicians Ireland. They are intended to provide guidance to students and their teachers regarding the style and type of question, and their suggested solutions, in our examinations. They are not intended to provide an exhaustive list of all possible questions that may be asked and both students and teachers alike are reminded to consult our published syllabus (see www.accountingtechniciansireland.ie) for a comprehensive list of examinable topics. There are often many possible approaches to the solution of questions in professional examinations. It should not be assumed that the approach adopted in these solutions is the only correct approach, particularly with discursive answers. Alternative answers will be marked on their own merits. This publication is copyright 2013 and may not be reproduced without permission of Accounting Technicians Ireland. Accounting Technicians Ireland, 2013. Page 2 of 33
INSTRUCTIONS TO CANDIDATES PLEASE READ CAREFULLY SECTION A Answer Question 1, 2, 3 in this section. ALL QUESTIONS ARE COMPULSORY SECTION B Answer any TWO of the four questions in this section Page 3 of 33
SECTION A Answer Question 1, 2, 3 in this section. All questions are compulsory. QUESTION 1 Compulsory David and Susan Brady have been married for ten years. They have opted for joint assessment and David is the assessable person. David runs his own legal practice; he set this up many years ago. His tax adjusted profits before capital allowances for the last two years were as follows:- Year ended 30 th June 2013 90,000. Year ended 30 th June 2014 100,000. His capital allowances are:- 2012... 6,000 2013... 8,000 David is 44 years of age and has decided to set up a retirement annuity in 2013. He paid his first premium of 10,000 in May 2013. He inherited a warehouse from his father in September 2013. He let it out on a ten year on lease on 1 st November 2013 at a yearly rental income of 24,000 and a premium of 40,000. His only other income was deposit interest from the Allied Irish Bank. He opened the account in May 2013. He received interest of 2,680 net of D.I.R.T. Susan stays at home to look after their three children. She has a part time job and earns 5,000 in 2013. P.A.Y.E deducted was 950. She also received a dividend of 2,560 from an Irish company in November 2013. David and Susan have the following outgoings in 2013. 1. College fees for Susan for an approved part time course 2,200. 2. David paid permanent health insurance of 850. Page 4 of 33
QUESTION 1 (Cont d) Requirement (i) Calculate David and Susan s Income tax liability for 2013. You may assume joint assessment applies. 15 Marks (ii) Calculate David s PRSI, and Universal Social Charge for 2013. 3 Marks (iii) What is the payment date for David s preliminary tax for 2013? 1 Mark (iv) What is the filing date for David s Form II for 2013? 1 Mark Total 20 Marks Page 5 of 33
QUESTION 2 Compulsory Blayney Limited is an Irish resident company. It is a non close company. Its year end is the 30 th September each year. The profit and loss account for the year ended 30 th September 2013 is set out below:- Notes Sales... 1,200,000 Cost of Sales... 680,550 Gross Profit... 519,450 Other Income... 1 120,000 Less: Expenses Wages & Salaries... 280,480 Directors remuneration... 80,000 Depreciation... 10,510 Legal Fees... 2 6,500 Bad Debts... 3 3,800 Entertainment... 4 5,000 Motor Expenses and Lease Rental... 5 17,400 Audit Fee... 3,625 Insurance... 4,150 Interest on Late Payment of Corporation Tax 1,510 Telephone, Light, Heat... 6,500 419,475 Net Profit... 219,975 NOTES (1) Other Income Bank interest received gross 10,000 Gain on sale of warehouse 90,500 Irish dividends received 19,500... 120,000 The company sold the warehouse in May 2013 for 350,000. Legal fees on disposal were 3,800. The company purchased this warehouse in March 1998 for 255,700. (2) Legal Fees Parking fines... 450 Defending title to stock... 1,200 Disposal of warehouse... 3,800 Recovery of Bad Debts... 1,050... 6,500 Page 6 of 33
QUESTION 2 (Cont d) (3) The bad debts account is as follows:- Increase in general provision 800 Increase in specific provision 1,100 Bad debts written off 2,550 Bad debts recovered (650) 3,800 (4) The entertainment expenses include 1,580 for the staff Christmas party. The balance was incurred entertaining customers and potential customers. (5) Motor Expenses and Lease rental Vehicle Cost/Rental Value Emissions Running Expenses Lease Rental Van 26,000 130g/km 3,800 - Car for Managing Director 32,000 175g/km 4,100 5,100 Car for Sales Director 27,500 135g/km 4,400-12,300 5,100 All vehicles were acquired in August 2012. (6) Trading Loss The company has an allowable trading loss of 10,000 brought forward from 30 th September 2012. (7) Fixed Assets Machinery Car Van TWDV 1/10/2012 12,750 21,000 22,750 The machine was purchased in August 2011 for 18,000. A grant of 1,000 was received. Page 7 of 33
QUESTION 2 (Cont d) Requirement: In respect of the accounting year ended 30 th September 2013 for Blayney Limited:- (i) Prepare the adjusted case I trading profits before capital allowances. 10 Marks (ii) Prepare the capital allowances computation. Show the tax written down value at 30 th September 2013. 4 Marks (iii) Prepare the corporation tax liability computation. Show clearly the appropriate schedule each category of income is assessed under and show the amount for Total Income and Total Profits as calculated for corporation tax purposes. 6 Marks Total 20 Marks Page 8 of 33
QUESTION 3 Compulsory (a) State the factors which a trader should take into account in deciding whether to register for V.A.T. 5 Marks (b) Explain the two-thirds rule. 3 Marks (c) Explain briefly the V.A.T. treatment of suppliers making exempt supplies. 2 Marks (d) (i). Aíne Taylor has been carrying on in business for many years. She accounts for V.A.T. on the sales basis. Details of her sales, receipt and payments for the two month period March/April 2013 were as follows:- Sales exclusive of V.A.T at 23% 300,000 Cash receipts exclusive of V.A.T. at 23% 295,000 Expenses inclusive of V.A.T. at 23% Goods for re-sale 184,500 Entertaining customers 615 Petrol 968 Diesel 1,107 Telephone 492 Expenses inclusive of V.A.T at 13.5% Electricity 681 Compute Aíne s V.A.T. liability for the two month period March/April 2013. 8 Marks (ii) State the date by which the V.A.T. liability in (i) should have been paid. 2 Marks Total 20 Marks Page 9 of 33
QUESTION 4 SECTION B Answer any TWO of the four questions in this section Gary and his wife Sandra are resident and domiciled in Ireland. During 2013 they had the following disposals:- (i) In June 2013, Gary sold 10,000 shares in Delta Limited for 35,000. Details of Gary s acquisitions are as follows:- Date of Purchase Number of Shares Cost 1 st March 1999 5,000 8,400 15 th September 2002 12,000 25,500 (ii) In August 2013, Sandra sold a painting her husband had given to her in October 2000 for 10,000. The market value of the painting in October 2000 was 4,000. Gary had originally purchased the painting in May 1980 for 800 at a car boot sale. (iii) Gary inherited from his father 50 acres of farm land in January 1988. Its market value at that date was 21,000. His father had originally purchased the 50 acres in January 1980 for 5,000. In October 2013, Gary sold 10 acres for 8,000. The market value of the 40 acres remaining is 45,000. (iv) Gary and Sandra sold a house they owned jointly for 300,000 net of disposal costs in December 2013. This house was not their principal private residence. They had originally purchased the house in March 1998 for 56,500. Legal costs of acquisition were 4,000. They spent 40,000 on an extension in August 2001. In February 2002, they spent 5,000 on repairing the roof. Requirement a) You are required to calculate Gary and Sandra s capital gains tax for 2013. (You may assume joint assessment applies). 18 Marks b) State the date(s) by which any capital gains tax is payable. (You are not required to calculate the tax payable at any given date). 2 Marks Total 20 Marks Page 10 of 33
QUESTION 5 a) Sarah Murray commenced as a florist on 1 st June 2011. Her tax adjusted profits for her first three years are as follows:- Year ended 31 st May 2012 9,600 Year ended 31 st May 2013 6,000 Year ended 31 st May 2014 12,000 Requirement You are required to calculate Sarah s Case I Income for her first three tax years exercising any options available to her. 10 Marks b) John White has been in business for many years. His year end is September each year. His tax written down value at 1 st January 2013 is as follows:- Machinery 11,250 Motor Car 18,000 The machine was purchased in May 2011 for 15,000. The car was purchased in March 2011 for 30,000. John uses the car 25% for private use. The emissions for this car were 140g/km. During his year ended 30 th September 2013, John had the following transactions with regard to his fixed assets:- Date Transaction Cost/Sales Proceeds Grant Received 1/11/2012 Purchase of Machine 10,000 1,000 10/07/2013 Sale of Car 19,200-10/07/2013 Purchase of new car 35,000 - The emissions of the new car purchased on the 10 th July 2013 are 165 g/km. The private use by John White remains at 25%. Requirement You are required to calculate John White s capital allowances for 2013. 10 Marks Total 20 Marks Page 11 of 33
QUESTION 6 The following multiple choice questions consist of TEN parts, each of which is followed by four possible answers. There is only one correct answer. Requirement Indicate the correct answer to each of the following TEN parts. [1] Green Ltd provides Mark with a company car on 1 st October 2011. The car cost Green Ltd 20,000. Its original market value was 26,000. Mark travels 26,500 business kilometres in 2013 and reimburses his employer 1,000 in 2013 for the use of the car. What is Mark s taxable Benefit in Kind for 2013: - a) 6,000 b) 5,000 c) 6,240 d) 5,240 [2] Mark Byrne ceased business on the 30 th June 2013. He made up accounts to 30 th June each year. Profits as adjusted for tax purposes were as follows:- Year ended 30 th June 2012 10,000 Year ended 30 th June 2013 12,000 The Schedule D, Case I profit assessed for 2013 is:- a) 12,000 b) 10,000 c) 6,000 d) 11,000 [3] The rate of withholding tax a principal contractor is required to deduct from a sub-contractor who are not registered with the Revenue Commissioners. a) 20% b) 35% c) 15% d) 41% [4] Seamus owns his own business. He is registered for V.A.T. He supplies goods to a registered trader on 18 th June 2013. He must issue a V.A.T. invoice to the registered trader by: - a) 10 th July 2013 b) 19 th July 2013 c) 15 th July 2013 d) 30 th June 2013 Page 12 of 33
QUESTION 6 (Cont d) [5] Wise Limited had an accounting period year ended 31 st October 2012. The company paid a dividend to its shareholders on 18 th June 2013. Dividend withholding tax must be paid by Wise Limited by: - a) 23 rd September 2013 b) 31 st December 2013 c) 23 rd July 2014 d) 14 th July 2013 [6] To account for V.A.T. on a cash receipts basis you must supply 90% of your turnover to a non-registered person or your annual turnover must be below: - a) 37,500 b) 75,000 c) 1,250,000 d) 1,000,000 [7] Lorraine borrowed 100,000 from her employer on 1 st July 2013. She used the money to purchase her main residence. Her employer charged her interest of 3.25%. What is Lorraine s Benefit-in-Kind for 2013: - a) 875 b) 1,750 c) 375 d) 750 [8] Susan a single person purchased a house for 50,000 on 1 st July 2002. On 1 st July 2013 she sold the house for 350,000. Susan lived in this house as her principal private residence for the period 1 st July 2002 to 30 th June 2007. She made no other disposals in 2013. Her capital gains tax for 2013 and her payment date for this gain is: - a) 44,633 15 th December 2013 b) 44,633 31 st October 2013 c) 53,140 15 th December 2013 d) 44,213 15 th December 2013 [9] Joe sold a painting for 10,000 in May 2013. He was given the painting by his Aunt in July 1999 for 1,000. The market value of the painting in July 1999 was 2,200. Joe s chargeable capital gain before annual exemption is: - a) Nil as exempt b) 9,000 c) 8,807 d) 7,375 Page 13 of 33
QUESTION 6 (Cont d) [10] Acorn Ltd commenced trading on 1 st July 2012 and incurred a trade loss of 10,000 in the year ended 30 th June 2013. Acorn Ltd. also had the following income during the year ended 30 th June 2013: Rental Income 6,000 Capital Gain - Adjusted for corporation tax 4,000 Calculate Acorn Limited s corporation tax for the accounting period 30 th June 2013 assuming maximum loss relief was claimed by Acorn Ltd. a) Nil b) 2,000 c) 750 d) 1,250 Total 20 Marks Page 14 of 33
QUESTION 7 (a) List the six badges of trade which were identified by the Royal Commission of Taxation in 1954 and write a brief note on each. 10 Marks (b) Summers Limited is a trading company with an accounting period to the 30 th June each year. The company is owned by: Joan Summers 80% Fiona Summers (Joan s daughter) 20% 100% During the year ended the 30 th June 2013 the company had the following information:- Trading income 50,000 Rental income 15,000 Dividend received from an Irish company 2,000 The company paid a dividend of 8,000 on the 30 th September 2013. Required: (1) Calculate the surcharge liability, if any, for Summers Limited for the year ended 30 th June 2013. 6 Marks (2) State when the surcharge liability, if any, is due for payment. 2 Marks (3) How can Summers Limited avoid paying the surcharge liability, if any? 2 Marks Total 20 Marks Page 15 of 33
Advanced Taxation (Republic of Ireland) Sample Paper 1 Suggested Solutions Page 16 of 33
Solution 1 David and Susan Income Tax Liability 2013 (i) Notes Schedule D Case II 1 82,000 Schedule D Case IV 2,680 x 100 4,000 67 Schedule D Case V 2 36,800 Schedule E 5,000 Schedule F 2,560 x 100 3,200 80 131,000 Less: Charges Retirement Annuity 3 (10,000) Statutory Income 121,000 Allowances Permanent Health Insurance 4 (850) Taxable Income 120,150 50,000 at 20% = 10,000 (Note 5) 4,000 at 33% = 1,320 (Note 6) 66,150 at 41% = 27,122 120,150 38,442 Page 17 of 33
Solution 1 (Cont d) Less: Tax Credits Married 3,300 P.A.Y.E. (Note 7) 1,000 Carers (Note 8) Nil College Fees (Note 9) 190 4,490 Tax Liability 33,952 Less: Tax Paid P.A.Y.E. Paid 950 D.I.R.T. 4,000 at 33% 1,320 DWT 3,200 at 20% 640 2,910 31,042 (ii) David Total Income Schedule D Case I 82,000 Schedule D Case IV 4,000 Schedule D Case V 36,800 122,800 P.R.S.I and Universal Social Charge PRSI 122,800 at 4% = 4,912 Universal Social Charge Schedule D Case I 82,000 Schedule D Case IV exempt Schedule D Case V 36,800 118,800 10,036 at 2% = 201 5,980 at 4% = 239 83,984 at 7% = 5,879 18,800 at 10% = 1,880 118,800 8,199 Page 18 of 33
Solution 1 (Cont d) (iii) The payment date for David s preliminary tax for 2013 is 31 st October 2013. (iv) The filing date for David s form 11 for 2013 is 31 st October 2014. Notes 1. Schedule D Case II As David is not in commencement or cessation the basis of assessment is current year. 2013 c/y 30th June 2013 90,000 Less capital allowances 8,000 Schedule D Case II 82,000 2. Schedule D Case V Rent 24,000 x 2/12 = 4,000 Premium 40,000 (40,000 x 10 1) = 32,800 50 Schedule D Case V 36,800 3. Retirement Annuity Schedule D Case II 82,000 Maximum tax relief 82,000 x 25% = 20,500 Relief restricted to amount paid 10,000 Page 19 of 33
Solution 1 (Cont d) 4. Permanent Health Insurance Maximum 10% of Statutory Income 82,000 + 4,000 + 36,800-10,000 = 112,800 at 10% = 11,280 Limited to premium paid of 850. 5. The married band for one income is 41,800, this will be increased by Susan s income of 8,200. This gives a married band of 50,000. 6. The maximum tax that deposit interest is assessed on is 33%. 7. The P.A.Y.E credit is restricted as Susan s Schedule E income is only 5,000. Therefore, the P.A.Y.E. credit is limited to 5,000 x 20% = 1,000. 8. The carer s credit does not apply as Susan s income exceeds 6,700. 9. College fees 2,200-1,250 = 950 at 20% = 190. Page 20 of 33
Solution 2 (a) Blayney Limited Case I Computation Year ended 30 th September 2013 Notes Net profit 219,975 Add backs Depreciation 10,510 Interest on late payment of corporation tax 1,510 Legal Fees (1) 4,250 Increase in general provision for bad debts 800 Entertainment ( 5,000 1,580) 3,420 Motor expenses and lease rental (2) 3,188 23,678 243,653 Deductions Other income 120,000 Case I excluding capital allowances 123,653 NOTES (1) Legal Fees Parking Fines 450 Disposal of warehouse 3,800 4,250 (2) Motor expenses and lease rental. There is no addback for expenses only lease rental for cars. Car for managing director Limit lower of: (i) 24,000 x 50% = 12,000 or (ii) 32,000 x 50% = 16,000 5,100 x 32,000-12,000 = 3,188 32,000
Solution 2 (Cont d) (b) Blayney Limited Capital Allowances computation Machinery Car Van TWDV 1 st October 2012 12,750 21,000 22,750 Wear & Tear (Note 1) (2,125) (3,000) (3,250) TWDV 30 th Sept 2013 10,625 18,000 19,500 Note 1 Wear and Tear Machine Cost 18,000 Less: grant 1,000 17,000 at 12 ½ % = 2,125 Car 27,500 Limit 24,000 at 12 ½ % = 3,000 (c) Van 26,000 at 12 ½% = 3,250 8,375 Blayney Limited Corporation Tax Computation Year ended 30 th September 2013 Notes Schedule D Case I 123,653-8,375 = 115,278 Less: Trade loss carried forward 10,000 105,278 Schedule D Case III 10,000 Income 115,278 Gain 1 82,310 Profits 197,588 Corporation Tax Case I 105,278 at 12 ½% = 13,160 Case III 10,000 at 25% = 2,500 Gain 82,310 at 12 ½% = 10,289 25,949 Page 22 of 33
Solution 2 (Cont d) NOTES 1. Sales proceeds 350,000 Less Disposal Costs (3,800) Less: acquisition costs 97/98 255,700 x 1.232 (315,022) Capital Gain 31,178 Adjusted for corporation tax 31,178 x 33 = 82,310 12.5 2. Dividends received from other Irish companies is exempt from corporation tax. Page 23 of 33
Solution 3 (a) Where there is no obligation on a person to register for V.A.T., the issues to be considered are as follows: (i) The percentage of the customers or potential customers who are registered or likely to be registered for V.A.T. (ii) Whether the V.A.T element of the purchase/input costs are significant. (iii) The additional work involved in having to issue V.A.T. invoices and lodging of V.A.T. returns with the revenue. (iv) The possibility of a V.A.T audit and the danger of penalty/interest exposures if the V.A.T. returns are not correct and/or V.A.T. due for a period is not paid on time. (b) The rate of V.A.T. applying to a service which is supplied with goods is dependent on the rule. This is a rule, which provides that a transaction is liable for V.A.T. as a sale of goods at the rate of V.A.T. applicable to the goods supplied, and not at a rate applicable to the service if the value of goods used in providing the service exceeds two thirds of the consideration charged to the customer. (c) Where a supply is made of an exempt item it is not regarded as a taxable supply for V.A.T. purposes and the trader therefore cannot register for VAT or obtain credit in respect of input V.A.T. Page 24 of 33
Solution 3 (Cont d) (d) (i) Aíne Taylor V.A.T. Computation - March/April 2013 V.A.T. on sales 300,000 at 23% 69,000 V.A.T. on expenses Goods for resale 184,500 x 23 (34,500) 123 Entertaining customer Petrol Not allowed Not allowed Diesel 1107 x 23 (207) 123 Telephone 492 x 23 (92) 123 Electricity 681 x 13.5 (81) (34,880) 113.5 V.A.T. Due 34,120 (ii) The V.A.T. due must be paid between 10 th and 19 th of May 2013. Page 25 of 33
Solution 4 (a) (i) Number Cost 1 st March 1999 5,000 8,400 15 th September 2002 12,000 25,500 As shares are sold on a FIFO basis, Gary has sold all his holding purchased on 1 st March 1999 and 5,000 of the 12,000 shares he purchased on 15 th September 2002. Holding purchased 1 st March 1999 Sales proceeds 35,000 x 5,000 = 17,500 10,000 98/99 8,400 x 1.212 (10,181) Gain 7,319 Holding purchased 15 th September 2002 Sales proceeds 35,000 x 5,000 = 17,500 10,000 2002 25,500 x 5,000 = 10,625 12,000 10,625 x 1.049 = 11,146 Gain 6,354 (ii) Sales Proceeds 10,000 80/81 800 x 3.240 2,592 Gain 7,408 (iii) Sales Proceeds 8,000 Cost 87/88 21,000 21,000 x 8,000 8,000 + 45,000 3,170 x 1.583 ( 5,018) Gain 2,982 Page 26 of 33
Solution 4 (Cont d) ( iv) Sales Proceeds 300,000 Cost 97/98 56,500 Add: acquisition costs 4,000 60,500 60,500 x 1.232 74,536 Enhancement expenditure 2001 40,000 x 1.087 43,480 Gain 181,984 The repairs are not allowed in capital gains tax as they are not capital expenditure. Gary and Sandra Capital Gains Tax Computation 2013 Gary Sandra (i) 7,319 + 6,354 13,673 (ii) 7,408 (iii) 2,982 (iv) 181,984 / 2 90,992 90,992 107,647 98,400 Less: annual exemption (1,270) (1,270) 106,377 97,130 Capital Gains Tax at 33% 35,104 32,053 Total Capital Gains Tax for 2013 35,104 + 32,053 = 67,157. (b) The tax on the sale of the shares, painting and the land must be paid by 15 th December 2013. The tax on the sale of the house must be paid by the 31 st January 2014. Page 27 of 33
Solution 5 (a) Tax year Basis of Assessment Amount 2011 Actual 1 st June 2011 to 31 st December 2011 9,600 x 7/12 5,600 2012 Year ended 31 st May 2012 9,600 2013 C/y 31 st May 2013 6,000 Section 66 TCA 1997 This option is available in the third year. Original assessment for year 2 9,600 Actual for year 2 2012 1 st January 2012 to 31 st December 2012 9,600 x 5/12 = 4,000 6,000 x 7/12 = 3,500 7,500 Excess 2,100 2013 original assessment 6,000 Less: Section 66 2,100 Final assessment 3,900 Final Assessments 2011 5,600 2012 9,600 2013 3,900 (as revised) Page 28 of 33
Solution 5 (Cont d) (b) John White Capital Allowances Computation 2013 Machinery Motor Car TWDV 1 st January 2013 11,250 18,000 Disposal (18,000) Additions 9,000 12,000 Note 1 20,250 12,000 Wear and Tear (3,000) Note 2 (1,500) TWDV 31 st December 2013 17,250 10,500 Balancing charge / allowance computation Sales Proceeds 19,200 x 24,000 = 15,360 30,000 TWDV 18,000 Balancing allowance 2,640 Restricted to business use 2,640 x 75% = 1,980 Summary Wear and Tear Machinery 3,000 Car 1,500 x 75% 1,125 4,125 Balancing allowance 1,980 Total Capital allowances for 2013 6,105 NOTES 1. As the car s emissions are 165g/km, the cost of the car (for capital allowances) is restricted to the lower of:- (i) 35,000 x 50% = 17,500 or (ii) 24,000 x 50% = 12,000 2. Wear and Tear for Machinery Opening cost 15,000 Cost of addition less grant 9,000 24,000 Wear and Tear at 12 ½ % = 3,000 Page 29 of 33
Solution 6 (1) (d) 26,000 x 24% = 6,240-1,000-5,240 (2) (c) Actual 1/1/13 to 30/06/13 12,000 x 6/12 = 6,000 (3) (b) (4) (c) (5) (d) (6) (c) (7) (c) 100,000 x (4 % - 3 ¼ %) = 750 750 x 6/12 = 375 (8) (d) Sales proceeds 350,000 2002 50,000 x 1.049 52,450 297,550 Total ownership 1/7/02 to 1/7/13 = 11 years Non occupation 1/7/07 to 1/7/12 = 5 years Last 12 months of ownership is deemed occupation. 297,550 x 5/11 = 135,250 Less: annual exemption 1,270 133,980 Tax 33% 44,213 Sold in July 2013: Payment date 15 th December 2013 (9) (d) Sales proceeds 10,000 99/00 2,200 x 1.193 2,625 Gain 7,375 Page 30 of 33
Solution 6 (Cont d) (10) (c) Acorn Ltd Corporation Tax Computation Schedule D Case I Nil Schedule D Case V 6,000 Income 6,000 Gain 4,000 Profits 10,000 Corporation tax 6,000 x 25% = 1,500 4,000 x 12 ½ % = 500 2,000 Less: Trade loss 10,000 x 12 ½ % = ( 1,250) 750 Page 31 of 33
Solution 7 (a) The six badges of trade as identified by the Royal Commission of Taxation in 1954 were as follows: 1. Subject matter; 2. Frequency of transactions; 3. Length of ownership; 4. Supplementary work and marketing; 5. Circumstances in which the asset is realised; 6. Profit motive. 1. Subject Matter The question as to whether a person is trading or not sometimes can be decided by examining the subject matter of the transaction under review. Assets, such as painting are quite often held as an investment for their intrinsic value. Consequently, a subsequent disposal at a profit may produce a gain of a capital nature rather than a trading profit. On the other hand, a profit arising from the sale of articles such as clothing stock, cosmetics and so forth are more likely classified as a trading profit. 2. Frequency of Transactions A gain arising from a once off transaction could indicate that it is of a capital rather than a trading nature. Whereas, gain/profit arising from the frequent sale of assets would indicate a trading profit. 3. Length of ownership Here, the courts infer that the sale of items shortly after their purchase indicate an adventure in the nature of a trade. 4. Supplementary work and marketing In a case where work is done to convert, or create an asset, rather than simply making it more marketable, the courts will almost certainly ascribe a trading motive. 5. Circumstances in which the asset is realised Where a taxpayer can show that the reason why the asset was sold was in response to an emergency or a sudden opportunity to realise a windfall gain, rather than as part of an organised scheme for making profit, he could go a long way to establishing that the gain was capital rather than trading in nature. Page 32 of 33
Solution 7 (Cont d) 6. Profit Motive While the absence of a profit motive does not necessarily mean that a trade was not carried on and indeed there is abundance of case law to prove this point, it is nevertheless a strong indication that trading is carried on. (b) (1) Summers Limited Surcharge calculation year ended 30 th June 2013 Investment income Case V 15,000 Less: Corporation tax (3,750) 11,250 Add: Franked investment income 2,000 13,250 Less: Trading deduction: 13,250 x 7½% = 994 12,256 Less: All distributions made during the period And within 18 months 8,000 4,256 Close company surcharge 4,256 at 20% = 851 (2) The surcharge is paid with the following year s corporation tax. Thus, for Summers Limited the surcharge is paid with the corporation tax of the year ended 30 th June 2014. (3) The surcharge can be avoided if Summers Limited paid a distribution of 4,256 within 18 months of its accounting period the 30 th June 2013. Page 33 of 33