ADVANCED TAXATION PROFESSIONAL 2 EXAMINATION - APRIL 2011 NOTES: You are required to answer Question 1 and any and any three from three from Questions 2,3,4 and 5. (If you provide answers to all questions, you must draw a clearly distinguishable line through the answer not to be marked. Otherwise, only the first three answers to Questions 2,3,4 and 5 will be marked.) TAX TABLES ARE PROVIDED NOTE IF YOU MAKE AN ASSUMPTION IN ANY QUESTION PLEASE STATE YOUR ASSUMPTION CLEARL CLEARLY Y
Time Allowed 3.5 hours plus 20 minutes to minutes to read the paper. Examination Format This is an open book examination. Hard copy material may be consulted during this examination subject to the limitations advised on the Institute’s website. Reading Time During the reading time you may write notes on the examination paper but you may not commence writing in your answer booklet. Marks Marks for each question are shown. A mark of 50 or more is required to achieve a pass in this paper. Answers 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. 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 the answers are supported with relevant legislation, case law or examples where appropriate. Answer Booklets List on the cover of each answer booklet, in the space provided the number of each question attempted. Additional instructions are shown on the front cover of each answer booklet. The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND
ADVANCED TAXATION PROFESSIONAL 2 EXAMINATION - APRIL 2011 Time Allowed: 3.5 hours, plus 20 minutes to read the paper. You are required to answer Question 1 and any three from Questions 2,3,4 and 5. If you make an assumption in any question, please state your assumption clearly.
1.
The shares in Brannings Ltd. are held as follows: Teresa Brannings -100 shares @ €1 each. Harry Lacey-100 shares @ €1 each. Molly Brindle (Teresa’s mother) -50 shares @ €1 each. All shares were acquired at par value in December 1997. Teresa and Molly are Directors and Harry is neither a Director or an employee. Teresa and Molly have prepared draft accounts for y/e 31/12/2010 and want to speak to you before they are finalised. The draft results are as follows: Draft Statement of Comprehensive Income for y/e 31/12/2010 Sales Cost of sales Administrative expenses Interest income Net profit
€
15,000,000 10,000,000 4,000,000 200,000 1,200,000
Draft Statement of Financial Position at 31/12/2010 Fixed Assets Buildings Plant & Machinery
1,000,000 500,000
1,500,000
Current Assets Inventory Trade Receivables Bank
200,000 200,000 3,000,000
3,400,0000
Total Assets
€
4,900,000
Current Liabilities Trade Payables
100,000
Long-term Liabilities Directors’ Loan
100,000
Share Capital & Reserves
4,700,000
Total Equity & Liabilities
Page 1
4,900,000
Notes: 1. Administrative expenses include the following: €30,000 to pay for a holiday for the three shareholders ( €10,000 each). Interest of €100,000 paid to the Directors. Depreciation €200,000. Trade royalty €60,000. 2. Assets are shown on the Draft Statement of Financial Position at NBV (NBV equals WDV for tax purposes). 3. The Plant & Machinery cost €800,000 on 1/1/2006. 4. The buildings are not Industrial Buildings. 5. Teresa and Molly believe that there is excess capacity in the business property. Harry believes that he has not been properly rewarded for the business that he has put Brannings Ltd’s way and the expertise that he has brought to the board. As recompense, he wants to take over one of the properties into personal ownership. He would lease part of the premises back to Brannings Ltd at a rent of €2,500 per month. The remaining half of the premises would be let to Primrose Ltd, an unrelated company, on a 31 year lease. The lease would be subject to a premium of €15,000 and an annual rent of €20,000. The market value of the property is €400,000. Harry cannot afford that price and it has been agreed that it will be transferred to him by way of a distribution in specie. 6. The property Harry wants to acquire from the company was acquired by Brannings Ltd. in January 1999 for €200,000 plus VAT @13.5%. It has been used exclusively for the purposes of the business since its acquisition. 7. Harry also carries on a trade which made a loss of €350,000 for the year of assessment 2010. 8. M&T Ltd. was a subsidiary of Brannings Ltd. It’s shares were acquired by Brannings Ltd. in 1998 for €250,000. M&T Ltd. had made significant un-relieved losses over many years and was sold to Browning Ltd., an unrelated company, for €50,000. REQUIREMENT: (a)
Molly, Harry and Teresa have requested you to prepare a report for them. The report should contain the following information: (i)
A computation of corporation tax due for y/e 31/12/10.
(8 Marks)
(ii)
An outline of how the property can be taken into ownership by Harry in a tax efficient manner. The report should detail the consequences of each step. (14 Marks)
(iii)
The tax consequences for Harry of the proposed leases to Brannings Ltd. and Primrose Ltd. (8 marks) (Format & Presentation 4 Marks)
(b)
Discuss the circumstances in which the losses incurred by M&T Ltd. may not be available for carry forward against its future trading profits following its disposal to Brownings Ltd. (6 Marks)
[Total: 40 marks]
Page 2
2.
Catherine O’Leary’s father, a widower, died on 6 June 2010. Catherine inherited all of his assets. These assets comprised of the family home, the proceeds of a life insurance policy and cash of €750,000 in a bank deposit account. The house is valued at €550,000. The proceeds of the life policy are €150,000. Catherine who is aged 53 moved into the house after her own husband died. She has lived there for 5 years. Catherine inherited €100,000 from her husband on his death. Her only previous inheritance was €50,000 on the death of her mother. Catherine wants to move to Spain. Her aunt Mary, who is 71, had her house repossessed and now has nowhere to live. Mary has no savings and only a small pension income.
REQUIREMENT: (a)
Evaluate Catherine’s CAT liability arising from the death of her father and any implications of her subsequently emigrating to Spain. (7 marks)
(b)
Catherine wants Mary to occupy the house but does not wish to receive any rent. Advise Catherine of the options open to her in this respect and the tax consequences (including Stamp Duty) for both Catherine and Mary of each option. Note: The
life index factor for a woman of Mary’s age is 0.448. The gross annual value of the right of residence is 11,000 and the gross annual value of the property is 60,000. (13 marks) [Total: 20 marks]
Page 3
3.
Biskit Ltd. is a confectionery manufacturer. The company built a factory in January 2002 and used it for the purposes of its business immediately. The site cost was €750,000 and the building cost was €1m. The company paid VAT of €135,000 on the construction costs and claimed an input credit. In January 2008, the company decided to move to a larger premises and decided to convert the factory into a block of apartments with retail units. Work began immediately but stalled several times because various building contractors went out of business. Ultimately the conversion was completed by the end of 2009. The total cost was €2m. Biskit Ltd. also incurred VAT @13.5%. Biskit Ltd claimed an input credit for this amount. The block is divided into 30 apartments of equal size, with 3 retail units. The sale price of each apartment is €150,000 (gross). Bernie Biskit, the Managing Director of the company, decided to take one of the apartments and to give another to her eldest son at the beginning of 2010.
As a result of the property downturn, she did not believe that the company could sell all the apartments. Biskit Ltd rented 10 of the apartments for €1,000 per month each on annual leases at the beginning of 2010. Two further apartments were let to Brannigan Ltd. (an unconnected manufacturing company) at the beginning of 2010, which rented the apartments for two of their executives for the same price. The first retail unit was sold for €250,000. The other was rented on an 18 month lease for €2,000 per month. Bernie placed all of the remaining apartments on the market for €150,000 each. At the end of 2010 only 2 of the apartments had been sold. The third retail unit was also unsold and remained unoccupied. Biskit Ltd accounted for the sales but no other transactions in relation to the property in its VAT returns for 2010.
REQUIREMENT:
Bernie has just received a notification that Biskit Ltd. will be the subject of an audit. She is satisfied that the manufacturing business is fully tax compliant but is uncertain that all aspects of the VAT on the property have been dealt with correctly. You have not yet been able to ascertain whether all available options to tax have in fact been exercised. (a)
Advise Bernie on the VAT position for 2010.
(10 Marks).
(b)
Advise Bernie on the steps required in relation to preparation for the forthcoming Revenue Audit and the likely consequences of any understatement of VAT. (6 marks)
(c)
Bernie is of the opinion that she can let a further 8 properties, including the remaining retail unit during 2011. Advise her of the VAT consequences of any understatement of VAT in relation to these properties, including the retail units. (4 Marks) [Total: 20 marks]
Page 4
4.
Aimee Browne and her partner Serge Bouffant acquired their home in Carlow for €180,000 in 1999. Aimee is Irish domiciled and Serge is Belgian domiciled. Aimee has been employed by Bilditt Ltd. as an engineer since her return. Serge is a self-employed mechanic. Aimee has been asked to relocate to the Bahamas. She will leave the country on 31 December. Serge will stay with their child in Ireland for all of the following tax year (“Year 1”). Aimee’s contract will be for 4 years and her annual salary will be €200,000. Serge has annual profits of €25,000. Aimee and Serge have other income as follows: €
Dividends received on jointly-owned preference shares in an Irish PLC (paid on 1/6 and 1/12 each year) Joint rental income from apartment in Trinidad (currently paid into their joint Irish deposit account) Interest from their joint Irish deposit account Joint rental income from house in Wexford (currently paid into their joint Irish deposit account)
12,000 15,000 per annum 2,000 per annum 9,000 per annum
Aimee and Serge are anxious to save money from Year 1 onwards. They will be able to save a large part of Aimee’s salary. Aimee wants to pay her salary into their Irish bank account. Interest rates in Ireland and the Bahamas are the same. They estimate that interest arising will be €800 in Year 1, €1,000 in Year 2 and will double each year after that. They will rent their house in Carlow for €11,000 per annum after Serge moves to the Bahamas at the end of Year 1. Serge expects to earn €35,000 per annum in the Bahamas. Aimee and Serge are also of the opnion that they may at some stage sell their home in Carlow for €240,000. There are no personal taxes in the Bahamas. Neither the Bahamas nor Trinidad has a Double Tax Treaty with Ireland. REQUIREMENT: (a)
Draft a letter to Aimee and Serge analysing their tax position with respect to the above. In it you should include advice as to the most appropriate time (from a tax perspective) for them to sell their Carlow home, calculating the tax due, if any. (15 Marks)
(b)
Aimee and Serge think that they may sell both the apartment in Trinidad and the house in Wexford at some stage. Assuming there is no CGT on the sale in either the Bahamas or Trinidad, advise them of an appropriate time (from a tax perspective) to sell both and advise of any pitfalls of selling at another time. (5 marks) [Total: 20 marks]
Page 5
5.
Hammers & Nails Ltd. has been trading as a hardware shop for many years. The Hammers & Nails Ltd. are held as follows:
€10
ordinary shares in
€
George Fleming David Curtis Pierce Fleming (George's son)
15,000 5,000 10,000
George is single and aged 60. He has been a Director since 1980 and has always worked full time for the company. He decided to retire on 31/3/11. The value of assets and liabilities at that date were: Fixed Assets Land and Buildings Plant and Machinery Goodwill Current Assets Inventories Trade Receivables Cash
€
€
900,000 300,000 200,000 1,400.00 50,000 51,000 2,000,000
2,101,000
Less: Current Liabilities Creditors Net Assets
€
51,000
3,450,000
Share capital & Reserves
2,050,000
3,450,000
George inherited his shares on the death of his father, Christy, in August 1994. Christy had acquired the shares for €20,000 in 1970. Their value at 5/4/74 was €35,000. The value of the shares at the date of Christy s death was €500,000. It is accepted that the current value of George’s share reflects 50% of the net asset value of the company. ʼ
George has been in ill health for some time and wants to sell his shares and retire. George’s doesn’t want control of the company to pass out of the family. George needs to realise the market value of his shares to provide for his retirement and thus cannot afford to gift his shares to Pierce. Pierce, however, cannot afford to pay anything to acquire George’s shares. David Curtis, the minority shareholder, has indicated he will oppose any attempt by the company to make an ex gratia payment on George’s retirement.
REQUIRED:
You have been approached by George to see if there is a solution to his problem. Provide a report for him outlining your proposed solution and prepare a computation of any tax due as a result. [Total: 20 marks]
END OF PAPER
Page 6
SUGGESTED SOLUTIONS THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND
ADVANCED TAXATION PROFESSIONAL 2 EXAMINATION - APRIL 2011 SOLUTION 1 (a) (i) Tax Computation Profit per accounts Less: Interest Income add: Director's holiday Interest Depreciation Royalty
1,200,000 200,000 10,000 99,968 200,000 60,000
Capital Allowances Case I Case III Trade Charge Corporation tax
800,000 X 12.5%
(1,269,968 – 60,000) X 12.5% 200,000 X 25%
369,968 1,369,968 100,000 1,269,968 200,000 60,000 1,409,968 151,246 50,000 201,246
Surcharge
1,409,968X (200,000/1,469,968) X 75% Discount 7.5%
143,877 10,790 133,087 109,968 23,119 4,264
Distribution (10,000 + 99,968) @20%
DWT Company must deduct Interest Holiday (assume reimbursed)
99,968 10,000 109,968 21,994
@ 20%
2. Tax Deducted From Interest (100,000 - 99,968) X 20% = 6
(ii)
The most straightforward way for the property to be transferred is by distribution in specie. Effectively the company declares a dividend but instead of paying cash, it transfers assets to the value of that dividend. In this case the transfer would consist of the property. The immediate tax implications of this are as follows: 1. 2. 3. 4.
Brannings Ltd. is liable to corporation tax on chargeable gains on the disposal of the property. Harry is liable to schedule F on the receipt of a distribution. Brannings Ltd. is liable to dividend withholding tax on the distribution made. An adjustment under the capital goods scheme may arise to Brannings Ltd., since Harry is not registered for VAT. Page 7
Gain on disposal Proceeds Cost 200,000 X 1.212 Gain CT on Chargeable gain amount 157,600 X 20/12.5
252,160
Schedule F Income Chargeable on Harry 400,000 X 100/80
500,000
Dividend Withholding tax
100,000
400,000 242,400 157600
Capital Goods Scheme Adjustment 200,000 X 13.5% X (8 + 1)/20 • •
• •
(iii)
12,150
The loss on the disposal of shares can be used against the gain on the disposal of property. This is a capital loss which would not be available to cover profits or capital losses in other group companies. Harry made a loss in his partnership trade. This loss can only be set sideways in 2010 (the year of loss). Schedule F is taxable when received, not on the basis of which accounting period’s profits the distribution is paid. Therefore no loss can be set off against this. However if the partnership continues to make losses, its 2011 loss can be set sidewards against the Schedule F. In any event, the DWT paid by Brannings Ltd is available as a credit against the tax on the Schedule F income. DWT is payable by Brannings Ltd but the distribution will eliminate the surcharge on undistributed income. A condition of any agreement should be that Harry must opt to tax his lettings. Accordingly Harry must either agree this with the tenant or issue a document to the tenant stating that the letting is taxable. Since the property is not residential this is possible. Brannings are registered for VAT and presumably so is Primrose Ltd. Consequently there will be no loss to either. Brannings can tax the supply of property and Harry can deduct input tax.
Lease to Brannings CGT - there is no premium payable so CGT does not arise. VAT – The rent is chargeable @21% Lease to Primrose Premium Less Chargeable Case V [15,000 X (31-1)]/50
15,000 9,000
Gain
6,000
Cost 400,000 X ½ X 6,000/(114,000* + 6,000)
10,000
Loss
4,000
This is the part remaining or B in the part disposal formula. Assume a value of 114,000. Therefore— • a loss arises for CGT purposes • 9,000 is chargeable to income tax under case V • The letting income is chargeable to VAT @21% as is the premium. (b)
Brownings would need to ensure that it does not fall foul of a provision to counter the tax-avoidance device known as "lossbuying". The provision denies the carry-forward of unrelieved trading losses of a company where1. there is a change in ownership of the company, and 2. there is a major change in the activities of its trade or, at the time of the change of ownership, the company's trade is near dormant. An example is a change in the type of goods, services or facilities dealt in or provided, and or a change in customers, outlets or markets. Page 8
SOLUTION 2 CAT on inheritance House Life Assurance Cash at Bank
(Note 1)
Nil 150,000 750,000 900,000 50,000 850,000 414,799 435,201 108,800
Previous inheritance Threshold CAT @25%
Note 1 Catherine, as you occupied the house as your only/main residence for more than 3 years immediately prior to the date of your inheritance and you were not, at the date of the inheritance, entitled to any other dwelling- house, your inheritance is exempt from CAT. However, as you were not aged 55 years or more at the date of the inheritance, you must occupy that dwelling- house as your only or main residence for a period of 6 years commencing on the date of the inheritance, otherwise the relief will be withdrawn. The relief is (550,000@25%) 137,500.
Position regarding your aunt Mary CGT A gift of the entire interest or any other interest in the property would normally constitute a disposal for CGT purposes. However, since the value of the property will not have increased there will be no CGT implication for you. CAT If like yourself, your Aunt occupies the dwelling house as her main residence for 3 years before any gift (whether of the entire or a subsidiary interest) to her, no CAT will arise. Otherwise, the position is as follows: Gift: CAT (550,000 – 20,740 – 3,000) X 25% = 131,565 Stamp Duty (550,000 - 125,000) X 7% = 29,750 CGT Life Interest Gift: CAT {(550,000 X 0.4488) – 20,740 – 3,000)} X 25% = 55,775 Stamp Duty (550,000 - 125,000) X 7% = 29,750 Right of Residence CAT {(550,000 X 11,000/60,000 X 0.4488) – 20,740 – 3,000} X 25% = 5,378
Stamp Duty (550,000 - 125,000) X 7% = 29,750 Rent free occupation (no formal agreement) CAT Technically a charge would arise. The charge would be 25% on the annual rent as it arises, less the threshold until it is used up. In practice, it is highly unlikely that a charge would be pursued.
Stamp Duty No Charge Consanguity relief will apply in both instances if your aunt is your father’s or mother’s sister and not the spouse of your parents’ sibling. The relief provides for payment of 50% of the normal amount of stamp duty. Catherine, you should seriously consider whether you should move out of the dwelling house at this time. As you see from the clawback outlined above this would prove to be very expensive.
Page 9
SOLUTION 3
Bernie, The following is the VAT position of Biskit Ltd for 2010. SALES OF PROPERTY A "new" building is a building that has been developed in the previous five years or an existing building that has been redeveloped in the last five years where the redevelopment materially altered the use of the building and cost 25% or more of the VAT exclusive sales price of the building. Excluded from the definition of a "new" building is a building, newly developed or redeveloped, that was previously sold and occupied for an aggregate of at least two of the five years. Development in relation to land is defined as 1. the construction, demolition, extension, alteration or reconstruction of any building on the land in question, or 2. the carrying out of any engineering or other operation in, on, over or under the land in question to adapt it for materially altered use. Development other than minor development, essentially makes a property 'new' for VAT purposes. For example, where an undeveloped property or an 'old' property is developed the properties are considered 'new' for VAT purposes following the completion of that development. A property is regarded as developed when an existing building is extended, altered or reconstructed. Biskit Ltd's redevelopment of its factory falls into this category. Therefore the supply of any of the properties in the new development is subject to VAT. CAPITAL GOODS SCHEME In general there will be VAT implications under the capital goods scheme where either there is a change in the taxable use of the property during its VAT life or there is an exempt sale during that period. Where a property is owned by the same person without any adjustment in the VAT use as regards taxable or exempt purposes there is no adjustment required. The purpose of the Capital Goods scheme is to allow for the deduction of VAT in accordance with the taxable use of the property over its VAT life. Where there is a change in the taxable use of a property there will be an adjustment under the capital goods scheme.
CGS is a mechanism whereby the initial VAT claimed is adjusted to reflect the taxable use of the property over that period. Therefore, if, subsequent to the initial deduction, the taxable use increases, a further amount of input VAT can be claimed and if the taxable use decreases, part of the input tax already claimed must be repaid to Revenue. CGS ensures that a person's VAT deductibility in relation to a property is proportionate to the person's taxable use of the property. The adjustment period for properties is generally 20 "intervals" except in the case of refurbishment in which case it is 10 "intervals". The initial interval is the first 12 months, the second interval is from the first day after the end of the initial interval to the person's accounting year-end and subsequent intervals are based on accounting years. Consequently, other than the first two adjustment intervals subsequent adjustment intervals will be measured in accounting years.
Page 10
Apartments transferred to Bernie Biskit and her eldest son.
Both transfers constitute supplies of property and should have been returned. (Note 1)
10 apartments rented for 1,000 per month each on annual lease.
Since the lettings are residential there is no landlord's option to tax available. (Note 2)
Two apartments let to Brannigan Ltd.
Since the lettings are residential there is no landlord's option to tax available. (Note 2)
Retail unit sold of the 250,000.
This supply was correctly returned.
Retail unit rented on an 18 month lease for 2,000 per month.
The landlord may now opt to tax each letting separately. Where such an option is exercised in respect of a property, the rental payments will be subject to the standard rate of VAT. The option can be exercised either by entering a written agreement with the tenant to tax the rent or by issuing a notice to the tenant. (Note 3)
2 of the apartments were sold for 200,000 each.
This supply was correctly returned.
The third retail unit and remaining apartments were unsold and remained unoccupied.
No adjustment
Note 1 This is a supply of developed property between connected persons. Market value rules apply (note it is not a self supply since Bernie Biskit does not hold an interest in the property). The Vat due is 300,000 X 13.5%. Note 2 This is a letting of residential property and the landlord's option to tax does not apply. There are, however capital goods scheme implications. The original development and the redevelopment are treated separately. The original development has an adjustment period of 20 years while the redevelopment has an adjustment period of 10 years.
In respect of the redevelopment, the adjustment is not taken into account for the first interval. The VAT due is therefore: 135,000 X 12/33 X (*11 + 1)/20 = 29,455 *no of full intervals remaining + 1 [Note this is a well publicised extra statutory concession available from Revenue. If However, students who answer on the strict statutory basis and make the adjustment accordingly marks will be awarded marks] Note 3 Provided Biskit Ltd. either entered a written agreement with the tenant to tax the rent or by issued a notice to the tenant, the landlord may opt to tax each letting separately. This is preferable to a capital goods scheme adjustment. The VAT due for 2010 is: 2,000 X 12 X 21% = 5,040 Audit Making a qualifying disclosure entitles the taxpayer to a significant reduction in the penalty applying to any tax settlement.
Bernie, you should make a qualifying disclosure to Revenue. Since you have been notified of the audit commencement date, this will be a prompted qualifying disclosure.
Page 11
Qualifying Disclosure A full disclosure of all matters giving rise to a liability to tax that give rise to a penalty. The disclosure must be made in writing and signed by or on behalf of the taxpayer and is accompanied by:
1. 2.
A declaration, to the best of that person's knowledge, that all matters contained in the disclosure are correct and complete A payment of the tax or duty and interest on late payment of that tax or duty.
All qualifying disclosures (prompted and unprompted) • in the case of deliberate behaviour/deliberate default category of tax default must state the amounts of all liabilities to tax and interest, in respect of all taxheads and periods, where liabilities arise, as a result of deliberate behaviour, that were previously undisclosed • in the case of a prompted qualifying disclosure in the careless behaviour/gross carelessness/insufficient care category of tax default, the qualifying disclosure must state the amounts of all liabilities to tax and interest in respect of the relevant taxhead and periods within the scope of the proposed audit • in the case of an unprompted qualifying disclosure in the careless behaviour/gross carelessness/insufficient care category of tax default, the qualifying disclosure must state the amounts of all liabilities to tax and interest in respect of the taxhead and periods that are the subject of the unprompted qualifying disclosure. A 'prompted qualifying disclosure' is a qualifying disclosure that has been made to Revenue in the period between the audit notification date and the date that the audit starts. Tax default is divided into the following categories; • Deliberate behaviour • Careless behaviour with significant tax consequences and • Careless behaviour without significant tax consequences. It is likely that the omission from Biskit Ltd's VAT returns would fall into the category of "careless behaviour with significant tax consequences". Careless behaviour is distinguished from deliberate behaviour by the absence of indicators, in the facts and circumstances of the default, which are consistent with intent. Significant consequences: this phrase is not defined in the Acts but is used to describe the statutory penalty applicable where the tax underpaid exceeds 15% of the tax correctly payable. Consequently, you should include with your disclosure a cheque for the VAT outstanding, together with statutory interest and a penalty of 20% which is appropriate to your default. 2011 An option to tax will not be available in respect of a further letting of residential property. This will result in a Capital Goods Scheme (CGS) adjustment in respect of both the initial development and the redevelopment. Unless the residential properties currently let are sold, there will be a CGS adjustment in respect of VAT on redevelopment.
Where a retail unit is let, Biskit Ltd should exercise its option to tax either by entering into a written agreement with the tenant to tax the rent or by issuing a notice to the tenant.
Page 12
SOLUTION 4
1.
Aimee is domiciled, non resident and ordinarily resident. She is thus taxable in Ireland on her worldwide income less foreign employment income, trading income (the duties of which are exercised in the State). Foreign income (other than specifically is not chargeable provided it is less than 3,810. Aimee will remain ordinarily resident for years 2 & 3. Serge is not domiciled, resident and ordinarily resident. He is taxable on Irish & UK income and Irish income attributable to foreign employment. Serge will be ordinarily resident for years 2, 3 & 4. Wherever they decide to Bank will not be relevant for Aimee, since she will not be taxable on foreign employment income and her other foreign income is taxable since it exceeds 3,810. However, if it is a joint account and Serge is entitled to half the interest, he will only be liable here if he remits that interest, if that interest arises outside the State.
Year 2 Year 3 Year 4 2.
Interest 3,000 4,000 6,000
Aimee 1,500 2,000 3,000
Serge 1,500 2,000 3,000
Aimee Nil
Serge 25,000
7,500 1,500 4,500 7,500
Nil Nil 4,500 7,2500
Year 1 Year 1 Schedule E Case III Trinidad Rent (note 1) Interest (note 2) Case V (note 3) Schedule F (note 4)
Aimee is only entitled to a portion of the personal tax credit based on the formula Personal tax credit X Irish Income/Worldwide Income
Note 1 Aimee is domiciled, non resident and ordinarily resident. She is taxable in Ireland on her worldwide income less foreign employment income, trading income and foreign income if it is less than 3,810.
Serge is not domiciled, resident and ordinarily resident. He is taxable on Irish & UK income and remittances. He is not chargeable on foreign income which is not remitted. Note 2 Since interest income is from outside the State, Serge will not be taxable unless he remits the income.
Note 3 Irish rental income is taxable. Note 4 Irish source dividend income is taxable. 12,000 is the net amount. The distribution income is the dividend + the tax credit. 3.
Year 2 Year 2 Schedule E Case III Trinidad Rent (note 1) Interest (note 2) Case V (note 3) Schedule F (note 4)
Aimee Nil Nil 7,500 2,000 4,500 7,500
Serge Nil Nil Nil Nil 4,500 7,500
Both Serge and Aimee are only entitled to a portion of the personal tax credit based on the formula Personal tax credit X Irish Income/Worldwide Income Page 13
Note 1 Aimee is domiciled, non resident and ordinarily resident. She is taxable in Ireland on her worldwide income less foreign employment income, trading income and foreign interest provided it is less than 3,810.
Serge is not domiciled, not resident but ordinarily resident. He is taxable on Irish income and remittances (other than trade or employment income remitted). He is not chargeable on foreign income which is not remitted. Note 2 Since interest income is from outside the State, Serge will not be taxable unless he remits the income. Note 3 Irish rental income is taxable. Note 4 Irish source dividend income is taxable. 12,000 is the net amount. The distribution income is the dividend + the tax credit.
4.
CGT
Property in Ireland is a specified asset. They are liable to Irish CGT regardless of when they sell. However Serge and Aimee may claim principal private residence relief on any capital gain arising from the sale of the house provided: (i) (ii)
They occupy the house as a residence following the period of absence. They do not have another residence qualifying for the relief.
Therefore: (i) If the sell house while in the Bahamas then the period spent working in the Bahamas will not count as a period of occupation. (ii) If they move back into their house when they return and it is regarded as their principal private residence, then because they were both absent abroad by reason of their employment the entire period abroad should count as a period of occupation and this should result in the gain being exempt. The exemption is: Gain X (period occupied or deemed occupied)/ period of ownership Deemed occupied includes the last 12 months of ownership plus periods spent working abroad. 5.
Other Property
Property in Trinidad They should sell this in a year when neither are resident or ordinarily resident in Ireland. Ordinary residence is sufficient to bring them within the charge to CGT in Ireland. As Serge is non domiciled, he is only liable on remitted gains in any event. Property in Wexford Property in Ireland is a specified asset. They are liable to Irish CGT regardless of when they sell.
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SOLUTION 5
George is anxious that the control of the company does not fall outside the family. If he sells his shares to a third party then that party together with David Curtis will control the company. While it might be ideal to sell his shares to his son Pierce, he cannot afford to buy the shares at market value. Even if George could afford to gift the shares to Pierce, there would be CGT and CAT implications. The best option is for Hammer and Nails Ltd to buyback George’s shares. This will leave Pierce with a controlling interest as he will own 15,000 shares compared with David Curtis’s 5,000. The company can afford to do this without borrowing or disposing of assets sine it has cash of 2m. The conditions are as follows: 1.
The shareholder and the company are resident in the State. Both George and Hammers and Nails Ltd. are resident in the State
2.
The shares are in a trading company and have been held for 5 years. Hammers and Nails Ltd. is a trading company and George has held the shares since 1994.
3.
The redemption is to benefit the trade of the company. George has been in ill-health and it will benefit the companies trade to have it managed by a younger more dynamic person
4.
There is a substantial reduction in the vendor’s percentage of overall shares post redemption George will hold no shares post redemption
5.
The shareholder, post redemption, is no longer connected with company. George has no connection with the company post redemption.
Since the value of the company has decreased by 1.725 m, there is no increase in value accruing to the remaining shareholders •
• • • •
When an individual disposes of these shares, retirement relief may be due. To qualify, an individual must: 1. Be 55 years or more 2. Hold shares for ten years in a family company 3. Be a director for 10 years (5 years full time) A family company is a trading company where the disponer holds at least 25% of the shares or holds 10% of the shares but with other family members controls 75% of the company. For disposal to 3rd parties the relief will only apply in respect of the consideration attributable to chargeable business assets of the company is 750,000 or less. Where the disposal is to a child or favoured niece/nephew there is no consideration limit. Even though Pierce will have a controlling interest in the company post redemption, the disposal of the shares is to the company and not to Pierce.
George CGT
Proceeds Cost Gain Exempt
3,450,000 X 15,000/30,000 500,000 X 1.309
CGT
@25%
1,725,000 654,5000 1,070,500 1,270 1,069,230 267,307
Retirement relief is not due as the disposal value is greater than 750,000.The proceeds do not fall to be apportioned as the chargeable assets are the same value as chargeable business assets. Marginal relief is not due as (1,725,000 – 750,000) X 50% = 487,500 George could consider gifting 750,000 worth of shares to his son Pierce and avail of retirement relief on that amount. This would be effective fro a tax perspective since though pierce would be liable to CAT, a combination of Business relief and the relevant threshold would eliminate his liability. Crucially, however, George stated that he needed the market value of his shares and couldn’t afford to gift them to Pierce. This would not deliver the required business result for George. Page 15
