Paper P6 (IRL) Advanced Taxation (Irish) Thursday 10 December Professional Level Options Module

Transcription

1 Professional Level Options Module Advanced Taxation (Irish) Thursday 10 December 2015 Time allowed Reading and planning: Writing: 15 minutes 3 hours This question 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 9 Do NOT open this question paper until instructed by the supervisor. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall. Paper P6 (IRL) The Association of Chartered Certified Accountants

2 SUPPLEMENTARY INSTRUCTIONS 1. You should assume that the tax rates and credits shown below, for the Finance (No. 2) Act 2013, 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 REFERENCE MATERIAL The following rates, credits, formulae and allowances are based on the Finance (No. 2) Act 2013 and are to be used for all questions in this paper. Income tax rates Tax Single/widow(er)/surviving civil partner without qualifying children 32,800 at 20% 6,560 Balance at 41% Married or in a civil partnership (one income) 41,800 at 20% 8,360 Balance at 41% Married or in a civil partnership (dual income) 41,800 at 20% 8,360 23,800 at 20% 4,760 Balance at 41% Single/widow(er)/surviving civil partner qualifying for single person child carer credit 36,800 at 20% 7,360 Balance at 41% Tax credits Single person s credit 1,650 Married person s/civil partner s credit 3,300 Widowed person or surviving civil partner s credit (without dependent children) 2,190 Home carer credit (maximum) 810 Single person child carer credit 1,650 Incapacitated child credit 3,300 Dependent relative credit 70 Age credit single/widowed/surviving civil partner 245 Age credit married or in a civil partnership 490 Employee/PAYE credit 1,650 Third level tuition fees Upper limit 7,000 Full-time qualifying courses First 2,750 is ignored Part-time qualifying courses First 1,375 is ignored 2

3 Rates of PRSI Self-employed Rate 4% Where income is above 5,000 the rate is 4% of reckonable earnings or 500, whichever is greater. No PRSI where income is below 5,000 per annum. Rates of PRSI Employee Class A1 Rate 4% No PRSI on earnings of 352 or less per week Rates of PRSI Employer (for employees Class A1) Rate 10 75% Universal social charge (USC) for all taxpayers On the first 10,036 2% On the next 5,980 4% On the balance 7% For individuals, a surcharge of 3% applies in respect of relevant (non-paye) income that exceeds 100,000 per annum regardless of age. For individuals aged 70 and over, and individuals who hold a medical card regardless of age, the maximum rate is 4% on income up to 60,000, and 7% on income over 60,000. Exemptions: Individuals whose income does not exceed 10,036 per annum All social welfare payments and income subject to DIRT Retirement annuities Age Percentage of net relevant earnings Up to 30 years 15% 30 years but less than 40 years 20% 40 years but less than 50 years 25% 50 years but less than 55 years 30% 55 years but less than 60 years 35% 60 years and over 40% Cap on net relevant earnings of 115,000 Corporation tax Standard rate 12 5% Higher rate 25% 3 [P.T.O.

4 Value added tax (VAT) Registration limits Turnover from the supply of goods 75,000 Turnover from the supply of services 37,500 Rates: Standard rate 23% Lower rate 13 5% Additional lower rate 9% Capital gains tax (CGT) Rates: From 6 December 2012 to date 33% From 7 December 2011 to 5 December % From 8 April 2009 to 6 December % From 15 October 2008 to 7 April % From 1 December 1999 to 14 October % Annual exemption 1,270 Motor cars limits on capital costs Carbon emissions table: Category A Category B/C Category D/E Category F/G 0 120g/km g/km g/km 191g/km+ Category A/B/C vehicles capital allowances/leasing charges are based on the specified amount of 24,000 regardless of the cost of the car. Category D/E vehicles capital allowances/leasing charges are based on 50% of either 24,000 or the cost of the car, whichever is lower. Category F/G vehicles do not qualify for capital allowances/leasing charges. Motor cars Benefits in kind Business travel Business travel Percentage of original lower limit upper limit market value of car Kilometres Kilometres 0 24,000 30% 24,001 32,000 24% 32,001 40,000 18% 40,001 48,000 12% 48,001 Upwards 6% Preferential loan rates Loans used to fund the cost/repair of the employee s principal private residence 4% All other loans 13 5% 4

5 Local property tax Tax bands for valuation purposes 0 100, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,001 1,000,000 Properties worth up to and including a value of 1 million will be assessed at a rate of 0 18%. Properties worth more than 1 million will be assessed on their actual value at 0 18% on the first 1 million and at 0 25% of their actual value on the portion above 1 million. 5 [P.T.O.

6 Indexation factors for capital gains tax Year expenditure incurred Multipliers for disposals in the year ending 31 December 2004 et seq et seq

7 Capital acquisitions tax Class thresholds 2014 Class 1: Child or minor child of deceased child (or inheritance taken by parent): 225,000 Class 2: Lineal ancestor (other than inheritance taken by parent) Lineal descendant (other than a child or a minor child of a deceased child) Brother, sister, child of brother or sister 30,150 Class 3: Any other person 15,075 Rate 33% Life interest tables for capital acquisitions tax Value of an Value of an Value of an Value of an interest in a interest in a interest in a interest in a Years Joint capital of 1 capital of 1 Years Joint capital of 1 capital of 1 of age factor for a male for a female of age factor for a male for a female life aged as life aged as life aged as life aged as in column 1 in column 1 in column 1 in column [P.T.O.

8 Value of an Value of an Value of an Value of an interest in a interest in a interest in a interest in a Years Joint capital of 1 capital of 1 Years Joint capital of 1 capital of 1 of age factor for a male for a female of age factor for a male for a female life aged as life aged as life aged as life aged as in column 1 in column 1 in column 1 in column or over Interest for a period certain This table is used to determine a figure on the value of an interest in property for a period certain. Number of years Value Number of years Value and over

9 Stamp duty Non-residential property (regardless of value) 2% Residential property: Owner occupiers and investors First 1,000,000 1% Excess over 1,000,000 2% NB: Where applicable value added tax (VAT) should be excluded from the chargeable consideration. Stocks and marketable securities Where the aggregate consideration is less than 1,000 0% Where the aggregate consideration exceeds 1,000 1% Schedule of tax geared penalties Revenue audits Net penalty after reduction where there is: Category of Penalty as a % Cooperation Cooperation AND Cooperation AND tax default of tax underpaid only a prompted an unprompted qualifying qualifying disclosure disclosure Deliberate behaviour 100% 75% 50% 10% Careless behaviour with 40% 30% 20% 5% significant consequences Other careless behaviour 20% 15% 10% 3% Note: The mitigation (reduction) of penalties in the above table is available to taxpayers on their first default. In the case of a second or third default, if a taxpayer deliberately or carelessly makes incorrect returns within a five-year period of the first default they may not avail of full mitigation. 9 [P.T.O.

10 Section A BOTH questions are compulsory and MUST be attempted 1 You should assume that today s date is 15 April You have recently received the following memorandum from your tax manager: To: Tax senior From: Tax manager Date: 12 April 2014 Subject: Caroline Kelly I had a meeting with Caroline today. Caroline (single, aged 42, resident and domiciled in Ireland) is a product design engineer working with a large multinational company. Caroline s average annual salary for the last ten years has been 150,000. She has sought our advice on various matters, in respect of which the following information is relevant: Caroline purchased an apartment in Cork, Ireland on 1 July 2002 for 40,000 and lived in this apartment until 30 June 2004 when she was transferred to Dublin by her employer. She let her apartment in Cork to a tenant and rented an apartment in Dublin from 1 July 2004 until 30 June 2007, when she was transferred to Amsterdam in the Netherlands by her employer. She remained in Amsterdam until 30 June 2010 when she was transferred back to Dublin by her employer. She again rented an apartment in Dublin, where she has remained until now. Her apartment in Cork has been continually let since 1 July 2004 at an annual net rental profit of 5,000. Caroline plans to sell her Cork apartment on 30 June This apartment is currently valued at 280,000 and Caroline intends to use the proceeds to buy a house in Galway, Ireland when she moves there during July Caroline s only other investment is her holding of 10,000 shares in Bigcorp plc, a Canadian company quoted on the New York Stock Exchange. Caroline bought these shares in June 2007 at a cost of 8 each but they are currently only worth 3 each. She intends to retain these shares in the expectation that they will appreciate significantly in value over the next two years. Caroline s current employment will terminate on 30 June 2014 and she expects to receive a termination settlement. However, she has never been part of a pension scheme and regrets this. Caroline s friend, Isabel, is resident in the Netherlands and is in serious financial difficulty. Caroline intends to give her a cash gift of 25,000 in December Isabel has never received any other gifts or inheritances. Caroline is concerned about the Irish tax implications of this gift and requires your advice. Following her move to Galway during July 2014, Caroline intends to set up her own limited company, Suite Ltd, which will manufacture a new household product for sale to home improvement stores, initially in Ireland, the UK and Canada. Suite Ltd will require an equity investment in September 2014 of 50,000 (50,000 ordinary shares of 1 each). Caroline is willing to purchase 40% of the share capital for 20,000 and has enquired if there is any possibility that she could claim a refund of income tax paid in prior tax years as a result of this investment. Caroline has identified a second potential investor, Karen, who would invest in Suite Ltd through the medium of her company, Jazz Ltd. Karen owns 100% of the shares in Jazz Ltd which is a trading company providing information technology consultancy. The proposal is that Jazz Ltd would purchase 60% of the share capital of Suite Ltd for 30,000. Caroline also wants to know if Karen will be eligible to receive any tax relief based on the equity investment by Jazz Ltd in Suite Ltd. Suite Ltd will start trading with effect from 1 October 2014 and initially the company will have two employees, each earning an annual gross salary of 30,000. Suite Ltd s annual turnover for its first year of trading (to 30 September 2015) is expected to be approximately 250,000 and the business expenses (including the total cost of the employees salaries but excluding Caroline s salary as a director) will amount to 120,000 per annum. Caroline s salary as a director will be 50,000 per annum, and this is sufficient for her needs. She has heard about a corporation tax exemption for new companies and is interested in finding out if Suite Ltd could avail of this. Caroline has been advised by a friend that, because she is an engineer, Suite Ltd could be liable to additional taxation on retained or undistributed profits. 10

11 Write a letter to Caroline in which you: (a) (i) Explain the main conditions of a relief which may be available to Caroline in relation to the proposed disposal of her Cork apartment. (3 marks) (ii) Calculate Caroline s capital gains tax (CGT) liability on the proposed disposal of her Cork apartment on 30 June (3 marks) (iii) Recommend TWO ways in which Caroline s CGT liability (as calculated in (ii) above) could be reduced and provide recalculations of her CGT liability on the basis that your recommendations are implemented. (5 marks) (b) Explain, with the aid of supporting calculations, the Irish tax implications of Caroline s proposed cash gift to Isabel and advise her on how this tax can be minimised. (3 marks) (c) (i) Identify the relevant scheme whereby a previously employed individual, now investing in a company, may obtain a refund of tax paid in previous tax years. (ii) BRIEFLY state the main conditions of this scheme in relation to: the refund; the investor; and the company. (5 marks) Advise Caroline whether she will be eligible for the relief (as identified in (i) above) and, if so, calculate the amount of relief available and state the timing of such a refund. (2 marks) (iii) Advise whether it will be possible for Karen to obtain any tax relief for the proposed equity investment by Jazz Ltd. (1 mark) (d) Explain the conditions for and operation of the start-up companies exemption scheme and advise, with the aid of supporting calculations, how this would apply to Suite Ltd in its first year of trading. (4 marks) (e) Recommend how Caroline might further reduce Suite Ltd s corporation tax liability. (2 marks) (f) Advise Caroline in relation to the value added tax (VAT) treatment of the product sales to be made by Suite Ltd to the home improvement stores in the UK and Canada. (2 marks) (g) Advise Caroline in relation to the possible exposure of Suite Ltd to additional taxation on its retained profits. (1 mark) Professional marks will be awarded in question 1 for the appropriateness of the format and presentation of the letter and the effectiveness with which the information is communicated. (4 marks) (35 marks) 11 [P.T.O.

12 2 (a) Purple Ltd is an Irish resident company which is owned by the following Irish resident corporate shareholders: Company Shareholding Machine Ltd 15% Rock Ltd 60% Rainbow Ltd 25% In the year ended 31 December 2014, Purple Ltd incurred a Case I loss of 100,000 and had a Case III profit of 20,000. The shareholder companies had the following results: Machine Ltd Case I loss (14,000) Rock Ltd Case I profit 30,000 Rainbow Ltd Case I profit 66,000 (i) Identify and explain the loss relief available to Purple Ltd and its shareholders. (3 marks) (ii) Calculate the corporation tax payable for the year ended 31 December 2014 by Purple Ltd, Machine Ltd, Rock Ltd and Rainbow Ltd after making claims for the maximum amount of any available reliefs. Note: You should give explanations of the basis of your calculations and note any unused losses to be carried forward. (7 marks) (b) You should assume that today s date is 31 October Your client, Bob Harris, is the managing director of Grey Ltd and is also a part-time farmer. Grey Ltd is primarily a retailer of electrical goods with four branches in the Munster region of Ireland, but the company has recently diversified into insurance broking. Grey Ltd prepares its annual accounts to 31 December. The company s shares are owned as follows: Bob Harris 40% Maura Harris (wife of Bob) 20% Kevin Murphy 40% Bob has sought your taxation advice on the following matters: (i) Grey Ltd bought a new building in Limerick, Ireland for 1,000,000 (plus 13 5% value added tax (VAT)) on 30 November The company recovered all of the VAT on acquisition as it had intended to use the entire building as its Limerick electrical goods shop. At the end of the first 12 months following acquisition, the VAT recovery rate will be reviewed. Bob was advised that the new recovery rate is likely to be 80% because the building now includes an insurance broking department. Explain the value added tax (VAT) consequences of the expected change in the recovery rate. (3 marks) (ii) In January 2014, Grey Ltd bought ten tablet computers for use by its electrical sales staff at a total cost of 4,000 (including 23% VAT). The company reclaimed the VAT in full. On 1 March 2014, two of the tablet computers were transferred to the insurance broking department for use there, and a third tablet computer was given to Maura Harris for her private use. Maura is a shareholder in Grey Ltd but is not an employee or director of the company. Explain the VARIOUS tax consequences of the transfer of the three tablet computers for both Grey Ltd and Maura Harris. (6 marks) 12

13 (iii) Grey Ltd bought its old Tipperary premises on 1 January 2004 for 600,000 and did not incur any VAT. The company occupied the premises from 1 January 2004 onwards and used the building solely for its electrical retail trade until 31 December 2013, when it moved to new offices. The company spent 200,000 in March 2014 on preliminary work to convert the old building into six residential apartment units and has now agreed to sell the converted apartment building on 1 January 2015 for 1,000,000. Explain the VAT implications of the proposed sale of Grey Ltd s converted Tipperary premises. (2 marks) (iv) Bob bought 60 acres of agricultural land in January 2004 for 400,000. In March 2011, he spent 160,000 on agricultural works on the 60 acres, which included fencing, a drainage system, an access roadway and pipes under the land to provide drinking water to cattle. Bob has continued to farm the land thereafter but plans to sell 30 acres of the land in November 2014 for 300,000. The value of the remaining 30 acres of land on the day of sale is expected to be 220,000. Explain whether VAT will apply to the proposed sale of land and calculate the capital gains tax (CGT) payable (if any) on the sale. (4 marks) (25 marks) 13 [P.T.O.

14 Section B TWO questions ONLY to be attempted 3 (a) You should assume that today s date is 30 September Robert (aged 54, resident and domiciled in Ireland) has been a shareholder and director of Page Ltd since the company was incorporated in July Page Ltd has an issued share capital of 30,000 ordinary shares of 1 each and is a profitable food manufacturing company. Robert s original investment in July 1987 was of 20,000 ordinary shares issued at par. The market value of these shares is now 700,000. His brothers James (aged 39) and John-Paul (aged 41) each own 5,000 ordinary shares also issued at par. Both brothers are directors and full-time employees of the company. James and John-Paul are keen to expand the company into other products and market segments, but Robert is opposed to this strategy and in recent years has used his majority shareholding to block these plans. Robert has now decided to retire on 31 October 2014 and pass the management of the company over to his brothers. However, James and John-Paul are not in a position to raise the funds to buy his shares. It has been suggested that Page Ltd may be able to buy back the shares from Robert on the date of his retirement (31 October 2014). Robert will have no other chargeable disposals in (i) (ii) Set out the conditions which must be satisfied for an individual to avail of the capital gains treatment on a company buy-back of its own shares and give your opinion (with reasons) on whether the capital gains treatment will apply to a buy-back of Robert s shares. Note: Your opinion should focus on the condition(s) where there is uncertainty over whether or not they will be met in the proposed transaction. (4 marks) Explain, with the aid of supporting calculations, the tax implications for Robert and Page Ltd in relation to the proposed share buy-back if the capital gains treatment applies. (4 marks) (iii) Make recommendations regarding how the tax liabilities of both Robert and Page Ltd (as calculated in (ii) above) could be further reduced. (3 marks) (b) The directors of Jones Ltd (an Irish resident trading company) are currently planning to acquire the following businesses which trade in the same sector as Jones Ltd: Plant Ltd The principal assets of Plant Ltd are: a business premises which was bought in January 2003 for 100,000 and is for sale at its current market value of 250,000; and goodwill which has a nil base cost and is for sale at its current market value of 200,000. The value of Plant Ltd s equipment and inventory are not material. The owners of Plant Ltd will alternatively accept 400,000 for 100% of the share capital of Plant Ltd. The directors of Jones Ltd are unsure whether to purchase the assets of this company or the shares of this company. Outdoor Ltd Outdoor Ltd has incurred significant losses over the last five years but has continued to trade and retained all of its employees. Jones Ltd is interested in acquiring Outdoor Ltd (a share purchase) and is interested in the possibility of getting the benefit of Outdoor Ltd s tax losses carried forward in order to reduce the future taxable profits of both Outdoor Ltd and Jones Ltd. 14

15 (i) Set out the relative advantages of the alternative methods of purchase in relation to Plant Ltd and advise the directors of Jones Ltd whether they should buy the assets or the shares. Note: You should support your advice with calculations, where relevant. (6 marks) (ii) Explain whether, following its purchase by Jones Ltd, the tax losses carried forward of Outdoor Ltd may be used to reduce the future taxable profits of Outdoor Ltd and/or Jones Ltd. (3 marks) (20 marks) 4 (a) Fargo Ltd, an Irish resident company which is managed and controlled in Ireland, is engaged in the retail sale of computer accessories. The company has recently received a significant number of mail orders from customers in Italy and is considering expanding into that market. The directors currently plan to rent a warehouse and an office in Rome, Italy and to appoint a sales representative and an administration assistant. The administration assistant would be based in the office in Rome. The sales representative would assist Fargo Ltd in obtaining new customers in Italy, although the exact extent of their responsibilities has not yet been decided. The directors want to postpone for as long as possible Fargo Ltd s entry into the Italian corporation tax system. Applying the OECD model double tax treaty to this scenario, advise Fargo Ltd on how it can postpone its entry into the Italian corporation tax system. (6 marks) (b) Neil was born in London, UK in 1975 and moved to Ireland in 1993 to study business. He returned to London in 1997 and established his own marketing consultancy practice there, trading as a sole trader. Neil visits Ireland for holidays of approximately two months duration every year. He has sought your advice in relation to the following taxation issues: (i) Neil recently bought an apartment in Dublin, using his own savings. He intends to commence letting this apartment from September 2014 onwards. He is unsure whether to use an Irish letting agent to assist in the letting process. (ii) During his next (two-month) visit to Ireland, Neil intends to provide marketing consultancy services to a large retail business, based in Dublin. He will earn a total of 3,000 for this work. The work will involve three days on site in Dublin, following which he will return to London, where he will write a brief report which will take him about half a day. The job will be invoiced from Neil s London consultancy practice. (iii) Neil has been in receipt of Irish bank deposit interest from a non-resident account with a large Irish commercial bank since (iv) Neil intends to sell his shareholding in Super plc in December Super plc is a company quoted on the Dublin stock exchange and Neil expects to realise a gain of 12,000 on this transaction. Explain Neil s residence and domicile status and advise him on the Irish income tax implications of each of the transactions (i), (ii) and (iii) and the Irish capital gains tax implications of transaction (iv). Notes: 1. Your answer should make reference to the provisions of the Ireland/UK tax treaty, where relevant. 2. The following mark allocation is provided as guidance for this requirement: Residence and domicile status 2 5 marks (i) 5 marks (ii) 2 5 marks (iii) 2 marks (iv) 2 marks (14 marks) (20 marks) 15 [P.T.O.

16 5 Your client Kate is one of five (adult) children of Jack and Patricia Cleary. Patricia died in Jack (aged 78) has lived with his partner, Mary Smith (aged 75), in Mary s house since Jack and Mary are not married and are not registered civil partners. Mary has never been married and has one surviving brother. The house has always been in Mary s name and has been her principal private residence since she bought it in August 1977 for 40,000. The house is currently valued at 150,000. Mary has recently been diagnosed with a serious illness and wants to ensure, in the event of her predeceasing Jack, that he will be able to spend the rest of his life in her house. She has been advised by her solicitor that, to achieve this, she needs to either make a will or gift the house to Jack during her lifetime; otherwise it will go by default to her brother. Mary does not want her brother to inherit the house. The gross annual value of the property (i.e. rental value of the house) is 15,000 per annum and the gross annual value of Jack s right of residence is 5,000. Jack does not intend to move out of the house at any time in the future. Jack does not own any significant assets. Mary also intends that, on Jack s death, his five children (including Kate) will receive the house. None of the five children have ever received any prior inheritances. The children have all verbally assured Mary that if she gifts the house to them now, they will allow their father (Jack) to remain there for his lifetime. Mary is considering the following options which she has asked Kate to investigate on her behalf: Leaving the house to Jack in her will (option 1) Gifting the house unconditionally to Jack s five children equally now (option 2) Leaving the house to Jack s five children equally in her will but with a right of residence for Jack (option 3) (a) Calculate the taxes payable (if any) by Mary Smith, Jack Cleary and his five children in relation to each of the three options which Mary is considering regarding the transfer of the ownership of her house. Notes: 1. For the purposes of these calculations, you should assume that all of the property values stated in the question will remain unchanged. 2. Dwelling house relief is not available to Jack. 3. The following mark allocation is provided as guidance for this requirement: Option 1 3 marks Option 2 4 marks Option 3 7 marks (14 marks) (b) State (giving reasons) the option which you would recommend. (2 marks) (c) Suggest an alternative, more tax efficient, option for the transfer of the ownership of the house and advise on its taxation consequences. (3 marks) (d) Identify ONE ethical issue arising in this case. (1 mark) End of Question Paper (20 marks) 16