TAXATION FORMATION 2 EXAMINATION - AUGUST 2012 NOTES: You are required to answer a total of five questions. Questions 1, 2, 3 and 4 are compulsory. You are also required to answer either Question 5 or 6. (If you provide answers to both Questions 5 and 6, you must draw a clearly distinguishable line through the answer not to be marked. Otherwise, only the first answer to hand for Questions 5 or 6 will be marked.) TAXATION TABLES ARE PROVIDED TIME ALLOWED: 3 hours, plus 10 minutes to read the paper. INSTRUCTIONS: During the reading time you may write notes on the examination paper but you may not commence writing in your answer book. Please read each Question carefully. Marks for each question are shown. The pass mark required is 50% in total over the whole paper. Start your answer to each question on a new page. You are reminded to pay particular attention to your 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 your 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 2012 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. AIF Ltd. is an Irish resident company engaged in the financial services industry. The following is the Statement of Comprehensive Income of AIF Ltd. for the year ended 31 December 2011: Notes Revenue 1,878,500 Costs of sales (1,465,300) Gross profit 413,200 Other income 2 67,100 Distribution costs 3 (398,800) Administrative expenses 4 (122,950) Finance costs 5 (29,875) Loss before tax (71,325) Note 1: Losses forward There were losses carried forward of 22,000 at 31 December 2010. Note 2: Other income Dividend received from UK company 3,800 Dividends received from Irish resident companies 6,100 Profit on disposal of shares 6 57,200 Total 67,100 Note 3: Distribution costs Depreciation 35,000 Bad debts 7 88,000 Directors remuneration and staff salaries 8 258,750 Motor expenses 9 17,050 Total 398,800 Note 4: Administrative expenses Professional fees 10 13,400 Entertainment 11 8,900 Subscriptions and donations 12 8,100 Repairs and replacements 13 49,000 Balance - all deductible 43,550 Total 122,950 Note 5: Finance costs Interest on bank overdraft 5,600 Finance lease charges (non-motor vehicles) 14 7,950 Interest on loan to purchase shares in plc 16,325 Total 29,875 Note 6: Profit on disposal of shares The company sold shares in May 2011 for 192,200.The shares had been purchased in March 1996 for 135,000. Note 7: Bad debts Bad debts written off 46,000 Bad debts recovered (11,000) Specific bad debt provision - opening 14,000 Specific bad debt provision - closing 67,000 53,000 Total 88,000 Page 1
Note 8: Directors remuneration and staff salaries Directors remuneration and staff salaries 223,750 Contributions to Pension scheme (paid 15 January 2012) 35,000 Total 258,750 Note 9: Motor expenses Category C vehicle, leased. Cost 32,000 Running expenses 2,800 Operating lease payments 5,000 Category F vehicle, leased Cost 50,000 Running expenses 3,600 Operating lease payments 5,650 Note 10: Professional fees Costs relating to disposal of shares 5,600 Debt collection 2,100 Audit and tax 5,700 Total 13,400 Note 11: Entertainment Staff Christmas party 4,700 Cost of taking suppliers to lunch 4,200 Total 8,900 Note 12: Subscriptions and donations Donation to an approved sports body 6,700 Provision of sports kit for local rugby club showing company logo 1,400 Total 8,100 Note 13: Repairs and replacements New computer software 8,000 Installation of new fire alarm 41,000 Loss on disposal of motor vehicle (see note 15) 2,750 Profit on disposal of machine (see note 15) (2,750) Total 49,000 Note 14: Finance leases (extract from Balance Sheet/ Statement of Financial Position of AIF Ltd. as at 31 December 2011) Opening leasing obligations at 1 January 2011 41,000 Finance lease charges 7,950 Finance lease repayments for 2011 (30,000) Closing leasing obligations at 31 December 2011 18,950 Note 15: Details of capital allowances Cost TWDV at 31/12/10 Plant & machinery 190,500 95,250 Motor vehicles (purchased 2007) 44,000 12,000 Vans (purchased 2007) 35,000 17,500 The loss on disposal of a motor vehicle relates to the car which was purchased on 1 June 2007 for 44,000 and sold on 30 June 2011 for 14,000. The net book value of the car at 31 December 2010 was 16,750. The profit on disposal of machine arose on the sale of a computer for 6,000 on 31 August 2011.The machine was purchased on 1 January 2009 for 10,500 and the net book value of the machine at 31 December 2010 was 3,250. REQUIREMENT: Compute the corporation tax liability of AIF Ltd. for the year ended 31 December 2011, on the basis that any loss relief available is claimed at the earliest opportunity. [Total: 25 marks] Page 2
2. Joseph is a widower with three children aged 10, 15 & 16. His wife Saoirse died in August 2008. He decided to take a redundancy package offered by his employer, A Ltd., and was made redundant on 30 June 2011. Joseph had worked for A Ltd. for twelve years and nine months. The following details relate to Joseph s redundancy: Statutory redundancy 13,600 Pay in lieu of notice (contractual) 3,400 Holiday pay 600 Ex gratia compensation payment 29,750 Joseph also purchased a car from A Ltd. for 3,000. The car originally cost 15,000 and had a market value of 6,000 when purchased by Joseph. Joseph did, on average, 12,000km a year. Details of Joseph s taxable salary (excluding benefits in kind) are as follows: Salary 1 January 2011 to 30 June 2011 15,300 Year ended 31 December 2010 31,200 Year ended 31 December 2009 29,800 Year ended 31 December 2008 27,600 Joseph s employer, A Ltd., deducted PAYE of 2,890 in 2011. Joseph s average rate of tax for the last three years was 21%. On 1 August 2011, Joseph commenced a business as a management consultant. He has prepared the following projections: Accounting period Adjusted Case II income Ten months to 31 May 2012 14,500 12 months to 31 May 2013 31,500 12 months to 31 May 2014 11,000 On 1 August 2011 Joseph purchased a new, Category C, motor car at a cost of 29,000. This car will be used 50% for business purposes. Details of Joseph s other income for 2011is as follows: Pension from Saoirse s former employment 20,000 Dividends (net) received from an Irish plc 900 Deposit interest received gross from a UK bank 800 Deposit interest received (net) from an Irish bank 1200 REQUIREMENT: (a) Compute Joseph s taxable lump sum on the termination of his employment, clearly stating the tax treatment of each element of his redundancy package. (7 marks) (b) Prepare Joseph s income tax computation for 2011. (13 marks) [Total: 20 marks] Page 3
3. Brady Ltd. is a company operating a wholesale business in Ireland. The following transactions were recorded for the two month VAT period ended 30 June 2011. Vat Exclusive Vat Inclusive Amount VAT Amount Sales to Irish Customers 300,000 63,000 363,000 Expenditure incurred Purchase of goods for re-sale 120,000 25,200 145,200 Purchase of computer equipment 6,000 1,260 7,260 Lease of motor car 1,800 378 2,178 Business entertainment 1,200 252 1,452 Light and Heat 1,000 125 1,125 In addition, the company imported goods for resale costing 50,000 (excluding VAT) from a UK based supplier who was registered for UK VAT. REQUIREMENT: (a) Calculate the amount of VAT payable by (or repayable to) Brady Ltd. for the month VAT period ended 30 June 2011. (8 marks) (b) State the date that the VAT 3 form has to be returned. (2 marks) (c) List five items that must appear on a valid VAT invoice. (5 marks) (d) List 5 VAT registration limits. (5 marks) [Total: 20 marks] Page 4
4. (a) A relief, known as retirement relief, is given to an individual on the sale of all or part of the qualifying assets of a business. The relief takes the form of a reduction in the capital gains tax payable on gains accruing on the disposal of the qualifying assets. REQUIREMENT: The Tax Partner in your office has asked you to prepare a Memo outlining how this relief is operated. (10 Marks) (b) Tom Jones is aged 64. He formed a company in January 1975 and the shares have been held by him since then. Tom sold the shares in the company to an unconnected person for 525,000 on 31 August 2011. The Statement of Financial Position of the company at 31 August 2011, showing market values, was as follows: Statement of Financial Position of Tom Jones Limited as at 31 August 2011 Fixed Assets Land & Buildings 320,000 Motor Vehicles 66,000 Shares in a Listed Company 13,000 399,000 Current Assets Debtors 27,000 Stock 25,000 52,000 Current Liabilities Bank Overdraft 18,000 Net Current Assets 34,000 Net Assets 433,000 Ordinary Share Capital 8,000 P&L Reserves 425,000 433,000 REQUIREMENT: Compute the capital gains tax liability of Tom showing the retirement relief due to him. (10 marks) [Total: 20 marks] Page 5
5. (i) Answer either Question 5 OR Question 6 A company resident in France has the following income: Income type Source of income Amount Trading income France 100,000 Trading income Ireland 35,000 Profit on sale of investments Ireland 20,000 Dividends Ireland 6,000 State whether or not the above income/gains will be chargeable to tax in Ireland. (4 marks) (ii) (iii) Set out the obligations of a company, that is not a small company, with regard to the paying of corporation tax and the filing of tax returns. (5 marks) Mary was forced to retire due to ill health on 31 March 2011. Her Case I profits for the period leading up to her retirement were as follows: Year ended 31 August 2009 111,000 Year ended 31 August 2010 87,000 Period ended 31 March 2011 51,000 REQUIREMENT: (a) (b) State the basis period for the taxation of Mary s Case I profits for the year of assessment 2011 and the Case I profits that should be included in her income tax return for 2011. (3 marks) Show, with calculations, whether or not an adjustment must be made to Mary s assessable Case I profits because of her retirement. (3 marks) [Total: 15 marks] OR Page 6
6. (a) Johnny prepares his accounts to 31st October each year. He decides to bring his accounting year in line with the income tax year and changes his accounting date to 31 December. His Case I profits for the period ended 31 December 2011 are as follows: Year ended 31 October 2010 38,000 14-month period ended 31 December 2011 79,000 Year ended 31 December 2012 38,000 REQUIREMENT: (i) State the basis period for the taxation of Johnny s Case I profits for the years of assessment 2010 and 2011 and the Case I profits that should be included in his income tax return for 2010 and 2011. (5 marks) (ii) Outline how Johnny should inform the Revenue Commissioners of any adjustment arising from his change in accounting date and the date by which any additional tax arising from the adjustment should be paid. (2 marks) (b) What is the payment date for 2011 Preliminary Income Tax? What is the filing date for your 2011 Income Tax return? (2 marks) (c) What are the three ways a married couple can be assessed for tax? (3 marks) (d) A company sold a building in March 2011 for 275,000. It had purchased the building in May 1998 for 110,000, stamp duty paid was 2,000. What amount will the company include in its Corporation Tax return for 2011? (3 marks) END OF PAPER [Total: 15 marks] Page 7
SUGGESTED SOLUTIONS THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND TAXATION FORMATION 2 EXAMINATION - AUGUST 2012 SOLUTION 1 (i) Workings Adjusted Profit Computation Loss before tax (71,325) ½ mark Addbacks Depreciation 35,000 ½ mark Pension Accrual 35,000 1 mark Motor Lease 5,000*32-24 1,250 2 marks 32 5,650 1 mark Legal fees disposal of shares 5,600 ½ mark Entertainment 4,200 ½ mark Repairs 8,000 ½ mark New Alarm 41,000 ½ mark Loss on disposal 2,750 ½ mark Profit on disposal (2,750) ½ mark Finance Lease charges 7,950 1 mark Interest on loan to buy shares 16,325 1 mark 159,975 88,650 Deductions Other Income 67,100 1 mark Finance Lease payments 30,000 1 mark (97,100) Adjusted Loss (8,450) Capital Allowances New Plant 49,000 * 12.5% 6,125 1 mark Existing P&M Cost 190,500 Disposal (10,500) 180,000 * 12.5% 22,500 1 mark Motor Vehicle 44,000 Disposal (44,000) NIL 1 mark Vans 35,000 * 12.5% 4,375 1 mark 33,000 Disposals Machine Cost 10,500 TWDV 7,875 Disposal 6,000 Balancing Allowance 1,875 1½ mark Motor Vehicle Cost 44,000 but restricted to 24,000 TWDV 12,000 Proceeds 14,000*24/44 7,636 Balancing Allowance 4,364 2 marks Page 8
Summary Capital Allowances Capital Gains W&T 33,000 Bal allow 6,239 39,239 Disposal of shares 192,200 Costs of disposal (5,600) Cost 135,000 * 1.277 (172,395) Gain 14,205 Adjust gain 14,205*25/12.5 = 28,410 2 marks Loss Summary Loss c/f s396(1) 22,000 not utilised Current year loss 8,450 Capital allow 39,239 47,689 @ 12.5% = 5,961 Corporation Tax Computation for the year ended 31st December 2011 Case I nil Case III 3,800 ½ mark Total Income 3,800 Adj gain 28,410 ½ mark 32,210 Taxable at 12.5% 4,026 S396B (4,026) 2 marks Tax payable nil ½ mark Page 9
SOLUTION 2 (a) Statutory Redundancy 13,600 Exempt ½ mark Pay In Lieu 3,400 Taxable termination ½ mark Holiday pay 600 Taxable as salary ½ mark Ex gratia 29,750 Taxable termination ½ mark Car 3,000 Taxable termination ½ mark Total termination payment taxable 36,150 Standard exemption 10,160 + (765*12) + 10,000 = 29,340 1 mark SCSB Average salary BIK 15,000 * 30% = 4,500 per year Salary 2011 6 months 15,300 2010 12 months 31,200 2009 12 months 29,800 2008 6 months 13,800 90,100/3 = 30,033 BIK 4,500 34,533 1 1/2 marks 34,533 *12/15 0 = 27,626 1 mark As the standards exemption is higher we will use it. Therefore taxable 36,150 29,340 = 6,810 1 mark (b) (i) Workings 2011 Basis of assessment from date of commencement to 31st December 14,500 * 5/10 = 7,250 1 ½ marks (ii) 2011 Car Max allowable 24,000 * 12.5% * 5/12 * 50% = 625 1½ marks Page 10
Income tax computation for 2011 Sch E Salary 15,300 BIK 4,500 * 6/12 2,250 1 mark Holiday pay 600 ½ mark Lump sum 6,810 ½ mark Pension from wife s employer 20,000 ½ mark Case II Taxable profits 7,250 Cap Allow 625 6,625 ½ mark Case III UK bank interest 800 ½ mark Case IV Irish bank interest 1200/73% 1,644 ½ mark Sch F Irish dividend 900/80% 1,125 ½ mark 55,154 36,800 * 20% 7,360 ½ mark 1,644 * 27% 444 ½ mark 16,710 * 41% 6,851 ½ mark 14,655 Widowed person 1,650 ½ mark SPA 1,650 ½ mark PAYE 1,650 ½ mark DIRT 444 ½ mark TSR 6810 *41% 2792 6810 * 21% 1430 1,362 1 mark PAYE 2,890 ½ mark SCH F 225 ½ mark Widow 3yrs after death 2,700 1 mark 12,571 Tax payable 2,084 Page11
SOLUTION 3 (i) Vat on Sales 63,000 1 Intra EU purchases 10,500 11/2 73,500 Purchases 25,200 1 Notional 10,500 11/2 Equip 1,260 1 L&H 125 37,085 1 VAT due 36,415 1 (ii) 19th July 2011 2 (iii) 1. Name of Business 2. Address 3. VAT No 4. Name of Customer 5. Address of Customer 6. VAT rates 7. Amount of VAT 8. any other valid ones 1 mark each (iv) 1. 37,500 2. 75,000 3. Zero 4. 41,000 5. 35,000 1 mark each Page 12
SOLUTION 4 (a) 2 marks for memo Relief is given to an individual on the sale of all or part of the quali1)ring assets of their business if certain conditions are met. The relief involves the deferral of all or part of the CGT which arises on the disposal of quali1)ring assets. No formal claim is necessary and the relief applies automatically where the conditions are met. The following conditions apply: - the disposal must be made by an individual - the individual must be aged 55 years or more at the time of disposal - the disposal must include qualifying assets - the assets must have been owned by the individual for the qualifying period - where the disposal is to one or more of the individuals children, which as defined includes nephews or nieces who have worked substantially on a full time basis for a period of five years ending at the time of the disposal of the business. 4 marks The terms qualifying assets and chargeable business assets mean: - chargeable business assets of the individual which the person has owned for at least a ten year period ending with the date of disposal - the ten year rule does not apply to tangible moveable property - the assets must have been used for the purposes of a trade, farming, profession, an office or an employment - goodwill is a qualifying asset but assets held as investments are not - shares or securities owned by an individual for a period of at least ten years ending with the disposal - the shares must have been in a trading or farming company or in a member of a trading group of which the holding company is the family company and in which the individual has been a full time director - the family company conditions must have been complied with for the ten year period - the individual must have been a working director for ten years, but need only of been a full-time working director for five of those years profession, an office or an employment Chargeable Business Assets An asset, which is or is an interest in an asset, used for the purposes of a trade, farming, profession, office or employment carried on by: the individual, or the individual's family company, or a company which is a member of a trading group of which the holding company is the individual family company, other than an asset on the disposal of which no gain accruing would be a chargeable gain, for example debtors and stock-in-trade. 4 marks Page 13
(b) Disposal of shares 525,000 1 mark Cost 8000*7.528 60,224 1 mark 464,776 1,270 ½ mark 463,506 CGT @ 25% 115,877 ½ mark Need to value Goodwill Net assets per balance sheet 433,000 Proceeds 525,000 Goodwill 92,000 1 mark Total Value of the Chargeable assets Land & Buildings 320,000 Motor 66,000 G/will 92,000 Shares 13,000 491,000 1 mark Total Value of Chargeable Business Assets - 478,000 1 mark Need to check if the sale proceeds qualify for Retirement Relief 525,000*478 491 511,100 1 mark Full retirement relief available on the portion relating to chargeable business assets 1 mark Gain 464,776 * 478 491 452,470 exempt 1 mark taxable gain is 464,776 452,470 = 12,306 * 25% = 3077 1 mark Page 14
SOLUTION 5 (i) Trading Income in France not liable to Irish Tax 1 mark Trading Income in Ireland liable to Irish tax 1 mark Profit on sale of investments liable to Irish Tax 1 mark Dividends not liable to Irish Tax 1 mark (ii) Pay Preliminary tax of 45% of current year or 50% of last year s tax by the 5 months and 21 days of the current financial year. 1 ½ marks Pay 90% of current year s tax by 10months and 21 days of the financial year. Pay 10% and file tax return 8 months and 21 days after financial year end. 1 ½ marks 2 marks (iii) (a) The basis of assessment for 2011 is actual basis ie from 1st January 2011 to 31st March 2011 51,000 * 3/7 = 21,857 3 marks (b) Mary s 2010 income tax may have to be adjusted to an actual basis Original assessment CYB 31/08/2010 87,000 Actual basis 2010 (8/12 * 87,000) + (4/7 * 51000) 87,143 Therefore the adjustment of 143 would have to be made 3 marks SOLUTION 6 (a) (i) This is a change of accounting date therefore the 2011 year will be assessed on an actual basis and the 2010 will have to be assessed on a similar basis if it results in a higher assessable figure. 2011 12 months to 31st December 2011 79,000 * 12/14 = 67,714 2 marks 2010 Original assessment CYB 38,000 1 mark Revised to actual (10/12*38,000) + (2/14*79000) 42,953 2 marks Therefore the assessment will be revised (ii) He would include the adjustment in his 2011 tax return which has to be filed by 31st October 2012. 2 marks (b) 2011 Preliminary Tax 31st October 2011 1 mark 2011 Filing 31st October 2012 1 mark (c) Single, Joint and Separate 1 mark each (d) Sale Proceeds 275,000 ½ mark Cost 112,000 * 1.212 135,744 1 mark 139,256 139,256 * 25/12.5 = 278,512 1 ½ marks Page 15