TAXATION FORMATION 2 EXAMINATION - AUGUST 2008 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. 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.
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND TAXATION FORMATION 2 EXAMINATION - AUGUST 2008 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. XYZ Ltd is an Irish resident company. It was incorporated in 1995. Due to a downturn in demand the company reported lower turnover figures than in recent years while maintaining an increased workforce. An extract from the results for the year ended 31st October 2007 shows the following: Notes Revenue 3,080,820 Administration costs (1) (1,440,000) Overheads (2) (1,754,000) (113,180) Other income (3) 432,000 Net profit before taxation 318,820 Notes: (1) Administration costs include: Depreciation 82,000 Bad debts 33,500 The Bad debts account is as follows: Opening provision General 32,000 Specific 18,000 50,000 Bad debts written off (26,500) Closing provision General 35,000 Specific 22,000 (57,000) Charged to profit and loss 33,500 (2) Overheads include: Directors salaries 150,000 Travel & Entertainment (a) 17,700 Audit fees 11,000 Legal and Professional expenses (b) 17,000 Directors pension contributions 120,000 Motor expenses (c) 22,530 Repairs (d) 132,000 (a) Travel & Entertainment: Entertaining customers 2,000 Attending 3-day household exhibitions in UK and France: Air fares 2,300 Hotel costs 3,900 Daily expenses 1,800 8,000 Entertaining suppliers 1,900 Staff Christmas Party 1,750 Visiting suppliers and customers 4,050 17,700 Page 1
(b) Legal and Professional expenses: Legal expenses: Renew short-term leasehold interest of shop outlet 1,500 Disposal of site 3,000 Pursuing Bad Debts 2,500 Defend faulty workmanship claim by customer 2,000 Purchase of new retail unit 2,000 Professional expenses: Auctioneers fees 6,000 17,000 (c) Motor expenses: Parking charges ( 800), parking fines ( 730) and Port Tunnel charges ( 1,100) 2,630 Regional Sales Managerʼs car (05G 123): Retail value 25,500. First leased 1/4/2005. Lease charges 4,600 Running expenses 6,050 Managing Directorʼs car (06G 456): Retail value 30,000. First leased 1/2/2006. Lease charges 5,150 Running expenses 4,100 22,530 (d) Repairs: Extension to new retail unit 80,000 General maintenance 15,000 Replace leaking flat roof on stores. (This was extensively damaged during heavy storm). 37,000 132,000 (3) Other income comprises: Rental income (e) 90,000 Gain from disposal of site (f) 334,000 Dividends from Irish companies 8,000 (e) (f) The rental income is stated after all allowable deductions but before capital allowances. It is in respect of a commercial premises in an urban renewal area. This was first let on 1st April 1999 on a 15 year lease to an unconnected third party. The premises were initially purchased from a builder for 1,260,000. The site and development costs to the builder were 237,500 and 712,500 respectively. The site was sold on 1st September 2007 for 340,000 with a current use value 250,000. It was purchased on 1st August 2000, for 120,000, current use value. The costs on acquisition were 1,720. The original intention was to build a new factory. Planning permission was obtained in February 2003, at an overall cost of 18,000. The plan has been abandoned in the light of recent results and the site is now sold. The company has a loss forward of 8,000 from the sale of pharmaceutical shares in July 2006. (4) Details of fixed assets are as follows: Plant and Machinery: Tax written down value 31/10/2006: 112,500. This equipment was originally purchased 1 December 2004. During the year to the 31/10/2007, an item of the equipment that had cost 24,000 in December 2004 was scrapped. REQUIREMENT: (a) Calculate the taxes payable by the company for the year ended 31 October 2007. (22 marks) (b) When is payment due of the taxes calculated at (a)? (2 marks) (c) What is the latest date by which the company must file the corporation tax return? (1 mark) Page 2 [Total: 25 marks]
2. Gillianʼs husband died on the 5th February 2007. He had been sick for many years and unable to work. Gillian had been the only earner in the family and the assessable spouse, for some time. She has two children at school. They are 13 and 15 years of age. In May 2007, Gillianʼs company wished to let a number of staff go and were seeking voluntary redundancies. Gillian seized the opportunity. She has many years of service with the company 17 1 /2 in total. She would like to spend more time at home with her children. Up to the date she left, Gillianʼs main source of income was her salary. She left on the 31st May 2007, receiving in total 83,380. (PAYE deducted was 14,400.) This payment was made up as follows: Salary for the month of May 4,600 Statutory redundancy 6,300 Voluntary lump sum 72,480 As part of her severance package, Gillian was allowed to keep the company car she had received in January 2006. It was a second-hand Ford Focus. The retail value new was 21,000. The agreed market value of the car at the date of Gillian leaving was 8,000. Gillianʼs business mileage was 12,000 per annum in 2006 and 4,140 in 2007. The present value of the pension lump sum that Gillian will receive at retirement age is 9,000. Details of Gillianʼs previous earnings are as follows: Tax Year Employment income Tax deducted 2004 47,000 (9,400) 2005 48,200 (10,500) 2006 49,000 (16,700) 1/1/2007-30/4/2007 15,500 (3,875) Gillianʼs average rate of tax for the previous three tax years was 25.38%. Six months later, Gillian found she had too much free time. She returned to work on 1st November 2007, on a part-time basis, working 2 1 /2 days per week for a local Doctor. She was paid 800 p.m. PAYE deducted 208 p.m. Outgoings: MRI scans 600 Gillianʼs husband. Specialist 3,700 Mainly due to Gillianʼs husband. Orthodontist 1,500 Gillianʼs youngest child needed braces fitted on his teeth. Laser eye surgery 2,500 Gillian. Dentist 1,150 All of the family, 450 was for routine dental treatment. These costs were not covered by the VHI as Gillian attended a private clinic and the cover did not extend to include them. Other Income: 1. Deposit interest from Safeway Building Society of 1,820, was credited to the account on the 30th September 2007. 2. A dividend of 4,788 (net) was received on the 30th September 2007 from an Irish resident company. Gillian feels that in the light of her circumstances, she has paid too much tax in 2007. She has come to you to see if she is entitled to a refund of taxes paid? REQUIREMENT: Compute Gillianʼs tax refund, if any, for 2007. [Total: 20 marks] Page 3
3. (a) (b) (c) In what instance is a taxpayer who is neither Resident nor Ordinary Resident in the State for a year of assessment liable to Capital Gains tax on his disposals? (3 marks) What is the Capital Gains Tax position if the Taxpayer is Resident/Ordinary Resident and Domiciled in the State for a year of assessment? (1 mark) William sold Irish Government securities on 1st June 2007, for 15,000. He had originally bought these for 6,000 on 31st May 2003. William had a development loss forward of 5,500. Calculate Williamʼs Capital Gains tax for 2007. (2 marks) (d) On 1 October 2007 John, aged 57, sold his total shareholdings in his company PROBLEM SOLVERS LTD for 1.8m. He acquired these shares when he incorporated his business on 1/1/1997. He originally founded the business in January 1990. The agreed shareholding was as follows: - 10,000 1 ordinary shares were issued for 8,000 on 1/1/1997. John was involved full time in running the business until the date of incorporation. After incorporation, John worked as a full-time Director until 1/7/2001 when he suffered a mild heart attack. He remained a Director but only worked part-time for the next twelve months. Thereafter, he resumed working full-time again. The breakdown of the underlying assets of the business on the 1/10/2007 were as follows: Buildings, plant and machinery and business goodwill 52% Debtors, cash and trading stock 35% Shares in quoted companies 13% REQUIREMENT: (i) State the conditions that must be fulfilled before an individual can qualify for capital gains tax retirement relief in respect of shares sold in a company. (4 marks) (ii) Compute Johnʼs capital gains tax liabilities, if any, in 2007. (5 marks) (iii) When is any tax calculated at (ii) above due for payment? (1 mark) (e) PROBLEM SOLVERS LTD was engaged in a VAT exempt activity. The new owners of the company have asked you to explain in detail whether this is the same as a Zero rated activity? (4 marks) [Total: 20 marks] Page 4
4. (a) Eric is 38 and single. He ceased trading as a publisher on 31st March 2007. The trading results, adjusted for tax purposes, for the last three years of the business were as follows: Year ended 30/04/2005 50,000 Year ended 30/04/2006 48,000 Period ended 31/03/2007 56,000 All assets were leased from 2001 onwards. Eric commenced working for a large publishing company on 1st September 2007 at an annual salary of 84,000. PAYE deducted was 7,000. He received a staff loan of 194,000 at 3% on 1st October 2007. He used 94,000 of this loan towards the purchase of a holiday home in the West of Ireland and 100,000 in the purchase of his new home. (The balance of the monies required for this house came from the profit he made on the sale of his old house). Eric has paid 820 per month into a Revenue approved personal pension plan. He took out this pension policy 10 years ago. He ceased contributions upon commencing work as he joined his employerʼs pension plan from that date. REQUIREMENT: (i) Show Ericʼs publishing profit assessments for the years 2005, 2006 and 2007. (6 marks) (ii) Compute Ericʼs net income tax, PRSI and levies payable by direct assessment for the income tax year 2007. (8 marks) (b) Capital allowances are available to either an individual or to a company. REQUIREMENT: (i) (ii) What proportion of allowance will be given for an asset that is bought half-way through an accounting year? (2 marks) What proportion of allowance will be given in Income Tax, on commencement of the business? (2 marks) (iii) How is Wear and Tear calculated in the year of cessation? (2 marks) Note: Answer Question 5 or 6 [Total: 20 marks] 5. (a) List the six badges of trade which were identified by the Royal Commission of Taxation in 1955 AND give a brief explanation of each. (6 marks) (b) (c) A Capital Gains Tax clearance certificate is required in certain circumstances. Outline the circumstances AND state when it can be obtained. (6 marks) A new factory was purchased on 31 January 2003. Capital allowances were available to the original purchaser by reference to the building construction costs of 900,000. The factory was sold for 1.6m on 1 February 2007. What are the capital allowances available to: (i) The original purchaser in 2006? (ii) The new purchaser in 2007? (3 marks) [Total: 15 marks] Page 5
6. ABC is a small firm of solicitors, comprising three partners and 15 staff. The accounting year end is the 30th June annually. Profits are shared equally. The partnership is registered for VAT. The recently promoted Assistant Accountant, Sheila, is unsure how to process the following items and has come to you with the following queries: 1. When doing the VAT return, she is unsure what items are deductible input credits, specifically, the VAT content on: (i) (ii) (iii) (iv) (v) (vi) Diesel. Petrol. Advertising. Postage. Staff Christmas Party. Office hoover. Advise Sheila which items qualify for deductible input credit. (3 marks) 2. Sheila has asked you to show her the entries that must be recorded for capital allowance purposes, AND calculate the capital allowances for 2007 with respect to the following information: A new Opel Astra was purchased on 1st December 2006 for 26,490. This car replaces an existing car that was stolen and burnt out earlier in the year. The stolen car was originally purchased in April 2004 for 23,000. The insurance company only paid 8,000 scrap value on the claim. The other two cars owned by the partnership were bought in January 2006 for 25,000 each. Show Sheila the capital allowance entries that must be made to reflect the above. (4 marks) 3. The firm employs a Marketing Director. His salary is 55,000 p.a. He stays in Dublin City from Monday to Friday, when he returns to his family home in Cork. He is provided with a house in Dublin with a rental value of 2,750 per month. He has the exclusive use of the house and does not pay any rent. The firm is responsible for all repairs, insurance etc. Cleaning services are provided once-a-week at a cost of 45.00 per week. The current market value of the house is 1.2m. What are the Income Tax, PRSI and health contribution implications for the Marketing Director that arise from the information above? (3 marks) 4. Sheila has been told that she will get a company car from the 1st September. She can have a VW Beetle convertible regitered in 2006, which was the car of the previous Assistant Accountant. The market value now is only 24,750 even though it cost 31,000 when it was bought new in 2006. Alternatively, she can have a new Skoda with a retail value 25,000. She is tempted to take the VW Beetle convertible. Although it is an older car, she considers it to be more sports-like than the Skoda. Sheila has on average, business mileage of 300 miles per week. Her private mileage is incidental and she earns 39,000 p.a. Sheila has asked your opinion on her choice of car in order to minimise her tax obligations for the remainder of the year. Note: Your opinion should be supported by calculations, including PRSI and health contribution, relevant to assist in a final decision. (3 marks) Page 6
5. Sheila is thinking of buying goods via mail order from a large company based in the U.K. Will she be charged VAT based on: (i) Irish rates? (ii) U.K. rates? (iii) None at all? (2 marks) [Total: 15 marks] END OF PAPER Page 7
SUGGESTED SOLUTIONS THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND TAXATION FORMATION 2 EXAMINATION - AUGUST 2008 SOLUTION 1 (a) Notes Net Profit before taxation 318,820 Add Back: Depreciation 82,000 Bad debts general provision increase 3,000 Travel & Entertainment 1 3,900 Legal expenses 2 11,000 Motor expenses 3 2,030 Repairs 4 80,000 181,930 Deduct: Other Income 432,000 Capital Allowances 5 33,750 (465,750) 35,000 Adjusted Case I 35,000 Case V 6 52,200 Total Income 87,200 Taxed: DI 35,000 @ 12.5% = 4,375 DV 52,200 @ 25% = 13,050 Corporation tax due: 17,425 Capital Gain 173,752 7 @ 20% = 34,750 (b) (i) Payment of preliminary corporation tax is due on 21st September 2007. The balance is due on 21st July 2008. (ii) Payment of Capital Gains Tax is due on 31st October 2007. (c) The corporation tax return must be filed on the 21st July 2008. Notes 1 Travel & Entertainment: Entertaining suppliers 1,900 Entertaining customers 2,000 3,900 2 Legal and Professional expenses: Disposal of site 3,000 Purchase of new retail unit 2,000 Auctioneers fees 6,000 11,000 Page 9
Notes 3 Motor Expenses: The parking fines are disallowed 730 Leasing restriction: 05 X 123: 4,600 x 25,500-24,000 = 270 25,500 06 X 456: 5,150 x 30,000-24,000 = 1,030 30,000 2,030 4 Repairs: Add back new extension costs 30,000 5 Capital Allowances: Plant and Machinery Tax written down value 31/10/2006: 12,500 Disposals scrapped equipment (18,000)(a) 94,500 Wear & Tear 2007 (15,750)(b) 78,750 Balancing Allowance/Charge computation: Proceeds Nil TWDV (18,000) Balancing Allowance (18,000) Summary: Wear & Tear 15,750 Balancing Allowance 18,000 33,750 (a) The equipment was purchased for 24,000 in year ending 31/10/2005. Wear and Tear @ 12.5% already claimed in 2005 and 2006 = 6,000 in total. (b) Wear & Tear in 2005 and 2006 has been claimed @ 12.5% on the equipment purchased on 1 December 2004. The original cost is therefore 112,500 x 100/75 = 150,000. Wear and Tear in 2007 is 150,000 less 24,000 @ 12.5% = 15,750. 6 Rental income: Rent received 90,000 Capital Allowances (37,800)* 52,200 Qualifying expenditure: 1,260,000 x 712,500 = 945,000 950,000 * 945,000 x 4% = 37,800 Page 10
7 Capital Gain: Sales Proceeds 340,000 Legal expenses (3,000) Auctioneer (6,000) 331,000 00/01 Cost 120,000 x 1.144 (137,280) Costs on acquisition 1,720 X 1.144 (1,968) Planning permission (18,000) 173,752 Note: (i) This gain is not adjusted as it is in respect of development land. (ii) The loss on shares cannot be used to reduce the development land gain. SOLUTION 2 The statutory redundancy pay of 6,300 is ignored The exempt portion of the lump sum is the greater of:- 1) Basic exemption 10,160 2) Increased basic exemption 10,160 + (17 x 765) 23,165 Additional 10,000 Less: Tax free lump sum (9,000) 1,000 24,165 OR 3) Standard capital superannuation benefit: Average remuneration over last three calendar years, up to the date of leaving: 2004 47,000 x 7/12 = 27,417 2005 48,200 2006 55,300 ( 49,000 + BIK note 1-6,300) 2007-Jan. 1st April 30th 17,600 ( 15,500 + BIK 2,100 ( 6,300 x 4/12)) 1st 31st May 5,125 ( 4,600 + BIK 525 ( 6,300 x 1/12)) 153,642 = 51,214 3 Apply formula: 51,214 x 17-9,000 = 49,042 15 SCSB is taken as it gives a higher figure Lump sum ( 72,480 + car 8,000) 80,480 Exempt (49,042) Taxable 31,438 Page 11
Gillian Income Tax Computation 2007 Notes Schedule D Case IV 2 2,275 Schedule E Salary 1/1 to 31/5 20,100 BIK 2,625 Taxable Lump Sum 31,438 November/December 1,600 3 55,763 Schedule F 4 5,985 64,023 Medical Expenses 5 (6,500) 57,523 Taxed: 43,000 @ 20% 6 8,600.00 2,275 @ 20% 455.00 12,248 @ 41% 5,021.68 57,523 14,076.68 Less Tax Credits: Personal - Married 6 (3,520.00) Home Carer 7 (770.00) PAYE (1,760.00) DIRT 3 (455.00) 7,571.68 DWT 4 (1,197.00) Less PAYE paid ( 14,400 + 3,875 + 416) (18,691.00) Income Tax repayable (12,316.32) Top Slice Relief 8 (880.72) Total refund due (13,197.04) Less: Health levy due 2,275 + 985 @ 2% 65.20 Notes 1 2006 mileage < 15,000 use 30%. 2007 annualise mileage: 4,140 x 365 / 151 = 10,007. Use 30%. 21,000 x 30% = 6,300. 2 1,820 x 100/80 = 2,275. DIRT: 455 3 800 x 2 = Earnings 1,600 PAYE 208 x 2 = 416. 4 4,788 x 100/80 = 5,985. Dividend Withholding Tax: 1,197 5 Gillian will also be entitled to relief at her marginal rate, on medical expenses paid. Laser eye surgery and routine dental treatment are excluded: Medical expenses: MRI scans 600 - Husband. Specialist.. 3,700 - Husband Orthodontist. 1,500 - Child. Dentist 700 - Non routine. 6,500 6 Gillian is the assessable spouse. She is entitled to the married tax band and the married personal tax credit for the entire year, in the year of her husband s death. 7 Gillian will qualify for the Home Carer tax credit in her new employment for 2007. Page 12
8 Top Slice Relief: 12,248 @ 41% = 5,021.68 19,190 @ 20% = 3,838.00 31,438 8,859.68 31,438 @ 25.38% = (7,978.96) Relief: 880.72 SOLUTION 3 (a) (b) (c) (d) (i) (ii) A taxpayer who is neither Resident or Ordinarly Resident in the State for a year of assessment will be liable to Capital Gains tax on his disposals of: (i) Land or Buildings in the State, (ii) Minerals in the State, (iii) Exploration and extraction rights on the Irish Continental Shelf, (iv) Unquoted shares deriving the greater part of their value from the above, (v) Assets of a business carried on in the State. A Taxpayer who is Resident/Ordinary Resident and Domiciled in the State for a year of Assessment will be liable to Capital Gains Tax on his disposals wherever situate. The sale of Irish Government securities is exempt. The following conditions must be satisfied before an individual can qualify for capital gains tax retirement relief in respect of SHARES sold in a company: The individual must be 55 years of age. He does not need to actually retire to qualify for the relief. The shares must be in a family company and have been owned for at least 10 years. The individual must have been a working director for at least 10 years up to the date of disposal. 5 of these 10 years must have been spent as a full time working director. A family company is a company in which the individual exercises not less than 25% of the voting rights, OR the individual exercises at least 10% of the voting rights, AND 75% of the voting rights are held by his family. (Family includes the individual, his spouse, his brothers/sisters and linear descendants). Shareholdings held by John: 10,000 shares held since 1st January 1997 at a cost of 8,000. Retirement relief will apply: 1) John satisfies both the working Director and full time working Director. Requirements - Note 1 2) The shares are held in a family company as defined above. 3) The consideration received for the chargeable business assets is below the exemption threshold of 750,000, for disposals on or after 1st January 2007 i.e. Chargeable business assets of the company = 52 or 80% Total chargeable business assets of the company 65 Consideration received 900,000 x 52 65 = 720,000 The sale of the business assets is therefore exempt. Page 13
John will qualify for capital gains tax retirement relief on 80% of the consideration received for his shareholdings i.e. Chargeable business assets of the company = 52 or 80% Total chargeable assets of the company 65 * * Debtors, cash and trading stock are excluded as they are neither chargeable business assets nor chargeable assets. Capital Gains Tax Computation John Consideration 900,000 96/97 - Cost 8,000 x 1.251 (10,008) Capital gain 889,992 Retirement relief = 889,992 x 52 (711,994) 65 = 177,998 Tax @ 20% Note 1 = 35,599.60 Notes: 1 John: Full Time Working Director: 1/1/1997 30/6/2001 = 4 1 /2 years Working Director: 1/7/2001 30/6/2002 = 1 year Full Time Working Director: 1/7/2002 1/10/2007 = 5 1 /4 years 2 The Annual exemption is not available when retirement relief is claimed. (iii) Capital Gains Tax is due for payment on 31st January 2008. (e) A company engaged in Exempt activities is not the same as a company engaged in Zero rated activities. When a company is engaged in Exempt activities the company cannot register for VAT when supplying goods. Because the company is not registered, it cannot claim VAT back on inputs and so must pass this VAT on to customers. A company must register for VAT when supplying goods that are considered to be zero- rated. Once registered, the company must keep VAT records, charge VAT at 0% and make bi-monthly returns. The company is entitled to claim a refund of the VAT tax suffered on all inputs and purchases. Page 14
SOLUTION 4 (a) ( i) Eric is in cessation: 2007 1st January to date of cessation 31st March. 56,000 x 3/11 = 15,273 2006: Original assessment accounts year end 30/4/06 48,000 Penultimate year review by Revenue. Actual: 1/1/06 31/12/06 48,000 x 4/12 + 56,000 x 8/11 = 56,727 Revenue will revise upwards. 2005: Accounts year ended 30/4/05 = 50,000 (ii) Eric Income tax computation 2007 Schedule D Case I 15,273 Schedule E: Salary 84,000 x 4/12 = 28,000 Loan note 1 1,660 29,660 Total income: 44,933 Less charges: Retirement Annuity note 2 (3,055) Taxable income: 41,878 Tax due: 34,000 @ 20% = 6,800.00 7,878 @ 41% = 3,229.98 10,029.98 Less tax credits: Single (1,760.00) PAYE (1,760.00) Mortgage interest note 3 (100.00) 6,409.98 Less PAYE deducted (7,000.00) Income Tax refund due: (590.02) PRSI: 15,273 x 3% 458.19 Health levy note 4 Nil Notes: 1 Benefit on interest is calculated using two different rates: Holiday home: 94,000 @ 9% (12% - 3%) = 8,460 x 2/12 = 1,410 Own home: 100,000 @1.5% (4.5% 3% ) = 1,500 x 2/12 = 250 1,660 2 Premiums paid: 820 x 8 = 6,560 Limit: 15,273 x 20% = ( 3,055) Maximum relief Carry forward: 3,505 3 A tax credit x 20% is only available on the interest paid on Eric s own home. As the employer is not a relevant deposit taker, TRS will not apply on the repayments made. 100,000 @ 3% = 3,000 Benefit @ 1.5% = 1,500 4,500 This interest is restricted however to 3,000 for the purpose of obtaining a tax credit as Eric is not a firsttime buyer. 3,000 x 2/12 = 500 @ 20% = 100 Page 15
4 Self Employed income is less than 24,960 and therefore exempt from the Health Contribution levy. (b) (i) Once the asset is in use in the business at the last day of the basis period, a full 12 months capital allowances will be given as long as the basis period or the accounting period is 12 months in length. (ii) (iii) Capital allowances are restricted in year one to the same number of months as are in the year one basis period i.e. date of commencement to the 31st December. In the year of cessation, the calculation of Wear and Tear depends on whether or not the assets are in use at the end of the final basis period. (a) If the assets are in use, Wear and Tear is calculated but restricted by n, where n is the 12 number of months in the final basis period i.e. 1st January to the date of cessation. (b) If the assets are not in use at the end of the basis period, Wear and Tear is not given. Balancing allowances/charges will be calculated. SOLUTION 5 (a) The badges of trade are used to determine whether income should be assessed to Income Tax or to Capital Gains Tax. No one badge is conclusive alone and all six tests are applied and the results weighted. They were originally identified by the Commission of Taxation in 1955, as follows: Subject matter By examining the subject matter, the question of whether a person is carrying on a trade can sometimes be decided. The sale of loaves of bread, tins of soup or bags of potatoes is usually the trade of a shopkeeper. Sales of antiques are usually made by an antique dealer but it can also be a once-off transaction, indicating a capital transaction. Supplementary work and marketing When work is done to enhance or create an asset, it is usually indicative of trading. An artist selling pictures he has painted is likely to be considered as trading. This is different to a person who buys a picture, cleans and re-frames the picture, holds it and then sells it later for a profit. He is more likely to be assessed on a capital transaction. Frequency of transaction The number of times the same/similar transactions repeatedly occurs can indicate that a trade is being carried on. A once-off transaction is more likely to indicate that the transaction was of a capital nature. Length of ownership When the item purchased is sold shortly after it has been acquired it usually indicates trading. However, it is not conclusive. A wine merchant will hold some of his wines for many years before selling them. Circumstances in which the asset is realised Where a person can show that the reason an asset was sold to realise a windfall gain, or that it was sold due to an unexpected emergency, then any profit on the disposal is usually regarded as capital in nature. Profit motive The presence of a profit motive is highly indicative (although not conclusive) of trading. Page 16
(b) A capital gains tax clearance certificate is required if the consideration in money / monies worth exceeds 500,000 and the asset being sold is: Land and buildings in the State. Minerals in the State. Rights on the Irish Continental Shelf. Shares deriving their value from the assets listed above. Assets of a trade carried on in the State. A capital gains tax clearance certificate can be obtained if the vendor is: Resident in the State,OR Is non-resident and there is no capital gains tax liability, OR Is non-resident and the capital gains tax liability has been paid. (c) (i) 900,000 x 4% = 36,000 (ii) The new purchaser claims capital allowances calculated over the remaining tax life of 21 years (25 4), by reference to the original expenditure that qualified i.e. 900,000 21 = 42,857 Page 17
SOLUTION 6 1. VAT may be claimed as follows: (i) Diesel yes. (ii) Petrol no. Specifically disallowed. (iii) Advertising yes. (iv) Postage yes. (v) Staff Christmas Party no. (vi) Office hoover yes. 2. The information that must be recorded is: (i) The original cost of the car that was stolen. (ii) The tax written down value of the car. The car that was stolen was restricted to 22,000 for capital allowance purposes. (iii) The cost of the new car. (iv) The Wear and Tear for the year: The wear and tear for the new replacement car will be calculated by reference to a cost restriction of 24,000. The wear and tear on the other two cars will be calculated by reference to a cost restriction of 23,000. (v) A balancing allowance/charge computation should also be calculated in respect of the stolen car. The disposal proceeds will be pro-rated by 22/23 reflecting the original cost restriction of the car for capital allowances. M.V. Opening TWDV 54,000 ( 23,000 x 2 less 12.5%, 22,000 less 12.5% 2004, 2005 & 2006) Disposal (13,750) 40,250 Addition 24,000 64,250 Wear & Tear (8,750) ( 23,000 x 2 @ 12.5% + 24,000 @ 12.5%) TWDV 55,500 Balancing allowance/charge computation: Disposal proceeds 8,000 x 22,000/ 23,000 7,652 Tax written down value (13,750) Balancing Allowance 6,098 Wear & Tear: 8,750 Balancing allowance: 6,098 Total: 14,848 3. The provision of the house will be valued at the annual value* of the use of the house PLUS any expenses incurred by the employer in the provision of the house. * 8% of the house value may be used as a rule of thumb OR the annual market rental value if lower. Rental value 2,750 x 12 = 33,000 Cleaning services 45 x 52 = 2,340 35,340 This is part of the marketing director s total remuneration and as a result, income tax, and the health contribution are due on the benefit. This is collected by the employer and remitted to Revenue. There is no PRSI due on this part of his remuneration as his salary in excess of 48,800. 41% + Nil PRSI + 2% health contribution = 43%. 35,340 @ 43% = 15,196.20 Page 18
4. Sheila will have a benefit-in-kind due to the provision of the company car as follows: The annualised mileage is 300 x 52 = 15,600. Use 24%. VW Beetle New Skoda 31,000 x 24% = 7,440 25,000 x 24% = 6,000 x 4/12 = 2,480 x 4/12 = 2,000 Sheila s salary at 39,000 is not over the limit for PRSI of 48,800. Income tax at Sheila s top rate, PRSI and the health contribution will be due on the benefit. i.e. 41% + 4% + 2% = 47% VW Beetle New Skoda 2,480 @ 47% = 1,165.60 2,000 @ 47% = 940 From a financial viewpoint, choosing the new Skoda would make sense. Sheila would save over 56 per month, for the remainder of the year. 5. The rate of VAT charged to Sheila will depend on the turnover of the vendor on sales to Irish non-registered persons. If this limit exceeds 35,000 in Ireland per calendar year, then the company must register in Ireland and charge Irish VAT - answer (i). Otherwise the company will charge U.K. VAT - answer (ii) Page 19