Part 2 Past Papers

Autumn 2017

QUESTION 1

This question is compulsory.

Clodagh Phelan, aged 39, was employed as finance director for a US pharmaceutical company based in Dublin. In 2016, she was asked by a competitor company if she would move to Cork and take up the post of chief executive of its new Irish subsidiary. Clodagh’s income for 2016 was as follows:

Employment Income

As an incentive for her to take up the post, in addition to paying her a “signing on” bonus of €30,000, it was agreed that her new employer would pay certain costs associated with her move to Cork. The following costs were paid by Clodagh and reimbursed by her employer:

Cost of moving furniture and personal belongings to Cork €4,500

Auctioneer and legal fees relating to sale of house in Dublin €12,000

Stamp duty on new house bought in Cork €8,000

Legal fees relating to purchase of Cork house €2,000

Rent for two months in Cork while waiting to buy €3,500

Compensation for loss on sale of Dublin house €50,000

Clodagh left her old job on 31 January 2016. She agreed with her former employer that instead of paying her monthly salary of €15,000 for January her employer would make a contribution of the same amount into her PRSA. Clodagh’s gross salary from her new employer, excluding any of the items mentioned above, amounted to €240,000 for 2016.

Rental Income

Clodagh owns a commercial property in Dublin. The property had been let in 2015. The property was vacant for the first two months in 2016 before being let under a 10-year lease for €5,000 a month with an upfront premium of €10,000. Interest incurred by Clodagh on borrowings taken out to acquire this property was €7,500 in 2016. Clodagh spent €8,000 on repairs and painting the property while it was vacant in 2016.

Clodagh also invested in a tax incentive property scheme some years ago. She received a certificate from the promoters of the scheme stating that for 2016 her share of the rental income was €65,000, her share of the interest expense was €66,000 and that she was entitled to capital allowances of €15,000.

Outgoings

In December 2016, Clodagh invested €50,000 in shares in a qualifying Employment and Investment Incentive Scheme (EIIS) company. Her new employer has a pension scheme in place for its employees under which the employer contributes 5% of gross salary for each employee provided the employee also contributes 5% of gross salary. Clodagh agreed to contribute 5% of her salary to the pension scheme. Clodagh also contributed an extra €20,000 to her PRSA in 2016.

Clodagh has been living with her partner, David for the last 10 years. They have one son, aged 8. Clodagh and David married on 1 July in 2016. David is an author. During 2016 his only income was royalties of €45,000 which qualify for relief under Section 195 Taxes Consolidation Act 1997.

REQUIREMENTS

(i) Calculate Clodagh and David’s income tax liability for 2016. (In your answer you are not required to give reasons why the total amount of reliefs which Clodagh is entitled to claim is or is not restricted).

(17 marks)

(ii) Calculate Clodagh and David’s PRSI liability for 2016.

(2 marks)

(iii) Calculate the following:

The amount on which Clodagh and David are liable to USC for 2016.

The amount of Clodagh and David’s income, if any, liable to USC at 11%.

The USC property relief surcharge, if any, payable by Clodagh and David for 2016.

(6 marks)

Total 25 Marks

QUESTION 2

Amelia Price is employed as a chemist by a multinational pharmaceutical company Bipharma UK Ltd (Bipharma UK) whose headquarters are in the UK. Amelia was born in England of English domiciled parents and lived in England all her life until 2011 when she was seconded by Bipharma UK to Ireland to oversee trials of a new drug developed by its Irish subsidiary, Bipharma Ireland.

Amelia is married to Patrick Kelly. Patrick was born in Ireland of Irish domiciled parents. Patrick is a self-employed journalist who travels all over the world reporting from war zones for his work as a war correspondent. When Patrick met Amelia in 2005, he had not lived in Ireland for many years. Now that Amelia is based in Ireland, Patrick is spending more time in Ireland. In 2011 to 2015 he spent on average 90 days in each year in Ireland. In 2016 he was injured during the course of his work and spent 180 days in Ireland recuperating. Because of his injury, Patrick’s income for 2016 was greatly reduced.

Amelia has three main sources of income, her salary from Bipharma UK, rental income from a property in France and income from a portfolio of investments. Amelia has two bank accounts in the UK, one into which her salary is paid, her “salary account” and one into which income and proceeds from the sale of investments are paid, her “investment account”.

UK Salary Account

In 2016 Amelia’s gross salary from Bipharma UK amounted to €120,000 and was paid directly into her salary account. Although Amelia’s main role is overseeing the trials in Ireland, part of her job involves travelling to the UK to report on progress of the trials in Ireland. It has been agreed with the Irish Revenue that 10% of Amelia’s salary is attributable to the work she carries out in the UK. During 2016 Amelia remitted €90,000 from her salary account to Ireland.

UK Investment Account

During 2016, dividend income from non-Irish investments of €5,000 was paid into the UK investment account. In 2016 Amelia sold UK investments which she acquired in 2012 for €20,000 for €26,000. This is the first time Amelia had sold any investments. While on her trips to the UK in 2016 she used funds from the investment account to pay hotel and other expenses amounting to €3,500 but was reimbursed for this cost by Bipharma Ireland when she returned to Ireland with a cheque which she lodged to an Irish bank account. During the year Amelia used €20,000 from the investment account to repay a loan from her father which she used to buy a car in Ireland when she first moved here in 2011. Since moving to Ireland, Amelia has accumulated investment income of €45,000 in the investment account and has not remitted any funds from this account in previous years.

Rental Income

Gross rental income from Amelia’s French property amounted to €28,000 in 2016. Interest of €4,500 was paid in respect of borrowings taken out to acquire the property. Rental income is paid into and rental expenses paid out of a bank account in France. Amelia did not remit any funds from this account to Ireland in 2016. While recuperating in Ireland, Patrick became interested in investing in stocks and shares. He opened an account with a stock broker firm in Ireland and used €10,000 which Amelia gave him from her French bank account while they were on a weekend break in Paris as his initial investment.

REQUIREMENTS

Using legislative references to support your answers:

(i) Set out the basis on which an individual such as Amelia is liable to tax in Ireland and identify the income and gains on which Amelia will be liable to income tax and/or capital gains tax for 2016. Marks will be awarded for setting out why income and/or gains are or are not within the charge to tax in Ireland.

(17 marks)

(ii) Outline whether Patrick will be regarded as resident in Ireland for 2016.

(2 marks)

(iii) Ignoring your answer to (ii), assuming Patrick is not regarded as resident in Ireland or in any other country for 2016 outline, briefly giving reasons for your answer, the extent to which he will be liable to Irish tax on any income or gains which he derives from his investments with a stockbroker firm in Ireland and from his work as a journalist.

(3 marks)

(iv) Ignoring your answers to (ii) & (iii), assuming Patrick is not regarded as resident in Ireland for 2016 and has no income within the charge to Irish tax outline what basis of assessment will apply to Amelia in 2016.

(3 marks)

Total 25 Marks

QUESTION 3

Conor Keenan has a long history in construction and property development. Conor is a director and full-time employee of his own construction company and owns a number of investment properties. You recently met with Conor to discuss his tax affairs and he raised a number of issues as follows:

In 2006 Conor and his brother, Gary, bought a site for cash of €4million on which they intended to construct a small mixed development of houses and apartments. Because of the downturn in the market the development was postponed. Finance to develop the site has now been agreed and construction work is expected to commence before the end of 2016. It is expected that the development will be completed in 2017. Gary spends most of his time overseeing the development work while Conor’s role is limited to providing occasional advice to Gary. The site is now valued at €1million.

While a profit will be earned on the construction of the houses, because of the drop in value of the site there will be an overall loss on the development. Conor is wondering if they were to write down the value of the site to its market value in the accounts for the year ended 31 December 2016 whether Conor and Gary could offset the loss arising against their other income in 2016. This is the only time Conor and Gary have worked as partners in a development. Both Conor and Gary have income, other than deposit interest, in all years.

In November 1992 Conor bought a house for €72,000 (plus stamp duty and legal costs of €6,000) which he has always let out. In 2016 Conor bought the adjoining identical house for €560,000. The houses have large gardens and Conor has applied for planning permission to demolish both houses and construct an apartment complex. Conor has asked whether any immediate tax liability will arise for him because he will be developing a former investment property.

In 2003 Conor lent his two daughters, Aoife and Sarah, €600,000 each which was used by each to acquire a residential investment property that year. Aoife sold her property in 2013 for €320,000 and Sarah sold hers in 2014 for €360,000. Neither repaid any part of the loans given to them. Conor is now considering writing off the loans he gave them. He is aware of the gift tax consequences of writing off the loans and wants to know if there would be any other tax consequences arising from the write-off.

Conor and his wife Joanne bought their home jointly in Dublin on 6 April 1964 for €8,000 incurring costs of €500 in connection with the purchase. When they bought the house they were living in London and let the house until they returned to live permanently in Ireland on 6 April 1984. On 6 April 1974 the house was valued at €10,000. In 2003 they spent €550,000 extending and refurbishing the house. Of this €100,000 was attributable to furnishings and repairs. When Conor’s wife Joanne died in 2013 the house was valued at €1.2million and is now valued at €1.5million. Conor moved out of the house on 6 April 2014 and is considering transferring the house to his daughter Aoife.

REQUIREMENTS

Using legislative references to support your answers:

(i) Outline whether Conor and/or Gary will be entitled to claim relief for income tax, PRSI and/or USC purposes in 2016 or 2017 for any loss arising in the following circumstances:

(I) The cost of the site is written down to its market value in 2016 giving rise to a loss for 2016 and a profit arises on the sale of the completed properties in 2017. Assume the loss in 2016 exceeds the profit in 2017.

(6 marks)

(II) The cost of the site is not written down in 2016 and there is no accounting profit or loss for 2016. The completed properties are sold in 2017and an overall loss arises on the sale of the properties in 2017.

(5 marks)

In your answer if you conclude relief will be available, you should set out how the relief will be given.

(ii) Outline the tax consequences (ignoring VAT) for Conor arising from the decision taken to develop his former residential investment property.

(4 marks)

(iii) Outline the tax consequences (ignoring gift tax) if any for Aoife and Sarah which could arise if in 2016 Conor forgives the loans he gave them.

(4 marks)

(iv) Calculate Conor’s capital gains tax liability, if any, which will arise on the gift of the house to Aoife. Assume the house is gifted to Aoife on 6 April 2016.

(6 marks)

Total 25 Marks

QUESTION 4

Richard Flood is the owner of a small business engaged in the design and manufacture of shop fittings. Richard has received a letter from Revenue asking him to carry out a “self review” of his tax returns for the years 2013 to 2015.

You meet with Richard to review his personal and business tax affairs and the following issues emerge:

Richard employs 20 people. He leases two vans for use in his business. Two employees, who use the vans on a daily basis and spend 75% of their time working away from the factory, bring the vans home at night and at the weekend. Richard assumed that no taxable benefit arose because they were vans.

Richard pays medical insurance for two employees. He tells you that as the notification from the insurance provider said that the amount payable was net of tax at the standard rate he assumed that he was not required to account for any further tax on the payments.

Employees who work away from the factory installing shop fittings are automatically paid a daily lunch allowance of €20 without deduction of tax and without a claim being submitted by the employee. Employees work 8 hours a day. These employees only work away from the factory 75% of the time but the weekly payment of €100 is made to each of them whether they are working away from the factory or not.

Richard’s tax returns for 2013 and 2014 include rental income of €60,000 from the letting of a commercial property and €18,500 from the letting of a residential property. The returns also include capital allowances for each year of €30,000 relating to the commercial property and a rental loss carried forward from 2012 of €160,000 which reduced the net rental income in both years included in his return to nil. Richard explains that the rental loss arose due to Section 23 relief unutilised in previous years relating to the residential property. It transpires that Richard had acquired the commercial property jointly with his wife Mandy in 2012 but had acquired the Section 23 property in his own name in 2007. Income from both properties has been returned as his income.

The Section 23 property was sold in 2015. A loss arose on the sale which was used to offset a gain which arose on the disposal of investments which Richard sold in 2015. Apart from including the loss in the capital gains section of his return there was no amounts included for the property in his return for 2015. Richard and Mandy each have other income of over €100,000 per annum. Mandy is self-employed.

REQUIREMENTS

(i) Outline the circumstances in which no taxable benefit arises in respect of the provision of a van and whether Richard was correct in concluding that no taxable benefit arose in this case. Set out how the taxable benefit arising in respect of the use of a van is calculated.

(4 marks)

(ii) Outline how Richard should have dealt with medical insurance premiums paid for his two employees from a tax perspective.

(2 marks)

(iii) Comment on whether Richard was correct to pay lunch allowances to employees without deduction of tax setting out the conditions to be satisfied in order to pay such allowances tax free.

(6 marks)

(iv) Comment on the extent to which Richard and/or Mandy may have underpaid any income tax, PRSI, USC and capital gains tax, as a result of the manner in which rental income and the sale of the Section 23 property have been dealt with in Richard’s returns. Calculations of liabilities are not required.

(6 marks)

(v) Outline the action which may be taken by Richard in order to minimise any interest and penalties which might arise as a result of underpaid tax identified in the course of his “self review”.

(7 marks)

Total 25 Marks

QUESTION 5

Sheila Flynn, aged 60, is a partner in a firm of chartered engineers. There are two other partners in the firm Adam McNeill, aged 56, and Cathy Barry, aged 47. The partnership was founded by Sheila and Adam in 1992. Cathy joined the partnership in 2003 contributing €200,000 for her share of the goodwill of the partnership. Sheila and Adam each have a 40% interest in the partnership with Cathy having a 20% interest. Partnership accounts are made up annually to 30 June.

The partnership has decided to incorporate the business. The business may be incorporated in one of the following ways:

(1) The partners will incorporate a new company and each partner will sell their interest in the partnership business and assets to the company or

(2) The partners will incorporate a new company and each partner will transfer their interest in the partnership business and assets to the new company in exchange for shares so that the partners would own shares in the new company in the same ratio as their partnership interests i.e. Sheila and Adam would each own 40% and Cathy would own 20% of the new company.

Sheila owns a property which she rents to the partnership for use in its business and which the other partners have agreed will be bought by the new company. The property was acquired by Sheila in 2006 for €2.2million. The property is located in a rural renewal area and Sheila was entitled to claim capital allowances in respect of €2million of the cost. The tax written down value of the building is now €280,000 and the market value is €700,000 (€70,000 of the current market value is attributable to its site). The tax life of the building ends in 2019. Sheila also had a capital gain of €50,000 arising from the disposal of investments in 2016.

Sheila has a son, Eoin, who has been employed by the partnership for the last 5 years. Sheila wants to retire in the next few years and would like to give her shares in the new company to Eoin.

The main asset of the partnership is goodwill currently valued at €1.6million. Apart from goodwill the only other assets of the business are furniture and equipment valued at €50,000 (cost €240,000) and debtors €250,000. The partnership has trade creditors of €300,000.

In 2016 Cathy had a loss of €100,000 on the disposal of an investment property and a gain of €10,000 on the disposal of investments.

REQUIREMENTS

(i) Outline the taxation consequences for Sheila arising from the sale of the property to the new company. In your answer you should calculate her allowable capital loss and any balancing adjustment which arises. You should also set out why any options to defer the payment of tax are or are not available to Sheila.

(5 marks)

(ii) Assuming the partners transfer the assets and liabilities of the business to a company for cash only:

(I) Calculate Sheila’s capital gains tax liability for 2016; and

(II) Calculate Cathy’s capital gains tax liability for 2016.

In your answer, you should briefly set out why any relief from capital gains tax is or is not available to individual partners and why the lower rate of capital gains tax does or does not apply.

(12 marks)

(iii) Outline the capital gains tax consequences for each partner if they transfer the assets to a new company in exchange for the company taking over the liabilities of the business and issuing shares for the balance of the consideration. Under this option partners would own shares in the new company in the same ratio as their partnership interests i.e. Sheila and Adam will own 40% and Cathy will own 20% of the new company. In your answer you should set out the conditions which must be satisfied in order for relief from capital gains tax to apply.

(6 marks)

(iv) Outline any reasons why it is or is not more beneficial for Sheila to transfer her partnership interest to the company in exchange for shares only.

(2 marks)

Total 25 Marks

SOLUTION 1

(i) As Clodagh and David only married in 2016, for 2016 they are both taxed as single persons. As David’s only income was income which qualified for relief under S.195 TCA 1997 and the amount of the income did not exceed €50,000 he is exempt from income tax for 2016.

Income tax payable by Clodagh for 2016

 

 

 

 

Notes

 

 

 

 

Schedule D Case V

 

 

26,700

1

Schedule E

 

 

 

 

Salary from former employment

 

15,000

 

2

Salary from new employer

 

240,000

 

 

Signing on bonus

 

30,000

 

3

Taxable relocation expenses

 

50,000

 

4

 

 

335,000

 

 

Less pension contributions

 

(23,000)

 

5

 

 

 

312,000

 

Total Income

 

 

338,700

 

EIIS investment (€50,000 × 30/40)

 

 

(37,500)

 

Taxable Income

 

 

301,200

 

 

 

 

 

 

Tax

 

 

 

 

33,800

@ 20%

6,760

6

 

267,400

@ 40%

106,960

 

 

301,200

 

113,720

 

 

 

 

 

 

Less Tax Credits:

 

 

 

 

Basic personal tax credit

 

1,650

 

6

Employee tax credit

 

1,650

 

7

 

 

3,300

(3,300)

 

Income Tax Liability

 

 

110,420

 

Year of marriage relief

 

 

(1,725)

8

 

 

 

 

 

Income Tax Payable by Clodagh for 2016

108,695

 

Notes

(1) Case V Income

Commercial Property

Rent €5,000 × 10

50,000

Lease premium (€10,000 × ((51 − 10)/50))

8,200

 

58,200

Interest

(7,500)

Repairs

(8,000)

Rental profit

42,700

 

 

Tax Incentive Property

 

Rent

65,000

Interest

(66,000)

Rental loss

(1,000)

 

 

Net Rental Income for 2016

41,700

Capital allowances

(15,000)

Case V Income

26,700

Changes to standard rate tax bands as of from 1 January 2018

Finance Act 2017 increased the standard rate income tax band for all earners by €750. This means, for example, an increase from €33,800 to €34,550 for single individuals and from €42,800 to €43,550 for married one-earner couples.

(2) Under Section 118B Tax Consolidation Act 1997 where an employee gives up salary to which they are entitled in return for receiving a benefit, other than an “exempt employee benefit” as defined for the purpose of Section 118B, the benefit received is deemed to be taxable emoluments. An exempt employee benefit for the purpose of S.118B are benefits provided under the travel pass scheme with approved transport providers, under certain approved profit sharing schemes and the provision of bicycles and bicycle safety equipment. As Clodagh’s employer’s contribution to her PRSA does not come within the definition of an exempt employee benefit under Section 118B, the payment of the contribution instead of paying her monthly salary for January is treated as taxable pay.

(3) A signing on bonus is remuneration for future services to be provided and is therefore treated as taxable emoluments.

(4) Personal expenses of an employee which are reimbursed by an employer are normally treated as taxable emoluments received by the employee. In practice however Revenue accept that certain relocation expenses may be reimbursed tax free by an employer. These include all of the costs reimbursed by Clodagh’s employer apart from the compensation paid for the loss on the sale of the Dublin house.

(5) The total pension contributions made by Clodagh in 2016 were €240,000 × 5% = €12,000 + €20,000 = €32,000. The maximum amount deductible for income tax purposes is €20% of €115,000 = €23,000

(6) Clodagh is not entitled to the single person child carer credit and increased standard rate tax band as she and David are cohabitants.

(7) The high earner’s restriction does not apply to Clodagh or David as neither claimed specified reliefs in excess of €80,000. (The specified reliefs claimed by Clodagh were capital allowances of €15,000 and artists’ exemption of €45,000 by David. Also David’s adjusted income would not have exceeded the income threshold amount of €125,000.)

(8) Year of marriage relief

 

Income liable to tax at 20% if married for full year

42,800

Income actually liable at 20%

(33,800)

 

9,000

Saving @ 20%

1,800

Additional tax credit if married for full year

1,650

Saving if married for full year

3,450

Saving for 1/2 of year married (1/2 × €3,450)

1,725

(ii) PRSI payable by Clodagh and David

Clodagh

Total Income (as above)

338,700

Plus pension contributions

23,000

Income liable to PRSI

361,700

PRSI @ 4%

14,468

David

Income

45,000

PRSI @ 4%

1,800

(iii) Income on which USC is payable

Clodagh

Total Income (as above)

338,700

Plus capital allowances

15,000

Plus pension contributions

23,000

Income liable to USC

376,700

Clodagh will not be liable to USC at 11% on any of her income as her non-employment income does not exceed €100,000.

Clodagh will be liable to a USC property surcharge of €15,000 @ 5%.

David will be liable to USC on his income of €45,000. He will not be liable to USC at 11% as he does not have non-employment income in excess of €100,000 and will not be liable to the USC property surcharge as he did not avail of any property reliefs.

SOLUTION 2

(i) Amelia’s parents were domiciled in England when she was born and so she would have acquired an English domicile at birth. As she lived in England all her life until she came to work in Ireland on secondment she has not changed her domicile. As an Irish resident individual, she is liable to tax in Ireland on her worldwide income (S.18 TCA 1997) however as she is not domiciled in Ireland, she is liable to tax on foreign income chargeable to tax under Case III only to the extent it is remitted to Ireland (S.71(3) TCA 1997). All foreign income is chargeable to tax under Case III except income from a foreign employment to the extent the income is attributable to duties performed in the State (S.18(2)). As a non-domiciled but Irish resident individual, she is liable to tax in Ireland on gains arising from the disposal of assets situated in the State (S.29(2)) and on gains arising on other assets to the extent that they are remitted to the State.

For 2016 Amelia will be liable to tax in Ireland on the following income:

 

Note

Schedule D Case III

   

Deemed remittance from UK investment account

3,500

1

Deemed remittance from UK investment account

20,000

2

Deemed remittance from French rental account

10,000

3

Schedule E

Salary from Bipharma

108,000

4

Amount of Amelia’s income liable to Irish income tax

141,500

 

Amelia will not be liable to tax on her UK investment gains as she did not remit them to the State.

Notes

(1) Section 71(3) provides that a non-domiciled individual is liable to tax in the State on sums received in the State not only from remittances payable in the State but also on sums received in the State arising from property not brought into the State. As the expenses reimbursed to Amelia in the State are directly attributable to her foreign rental income, she is treated as indirectly remitting some of her rental income to the State.

(2) Section 72 (2) Tax Consolidation Act 1997 provides that where an individual entitled to the remittance basis, uses foreign income to repay a debt loaned to the individual in the State or loaned to the individual outside the State and brought into State, the individual is deemed to have remitted the amount of foreign income used to repay the debt. This would include a situation as in this case where Amelia was given a loan by her father which she used in the State to buy a car and subsequently repaid the loan to her father using foreign rental income. Although Amelia had a gain arising on the sale of foreign investments, as the account from which she repaid the loan contains a mixture of income and gains she is deemed first to remit the income from the account. Income earned and deposited in the account since Amelia has moved to Ireland amounted to €45,000 which is greater than the amount of the loan repaid to her father. The deemed remittance is therefore deemed to come first from unremitted income to date.

(3) Section 71(3B) Tax Consolidation Act 1997 provides that to the extent that foreign income is transferred to a spouse outside the State and is brought into the State by the spouse that this is treated as a deemed remittance of the income by the spouse who transferred the income. Thus the €10,000 which Amelia took from her French rental account which was brought into the State by Patrick is deemed to be a remittance of income by Amelia.

(4) Income from a foreign employment to the extent that the duties are exercised in the State is not regarded as Schedule D Case III income (S.18(2)(f)) and is liable to tax under Schedule E (S.19(1)) as it arises. It has been agreed with the Irish Revenue that only 10% of Amelia’s salary is attributable to duties exercised in the UK and accordingly 90% of her salary, €120,000 × 90% = €108,000. Where income is remitted from an account which consists of salary to which PAYE has been applied and salary to which the remittance basis applies the remittances are deemed to come first from salary to which PAYE had been applied. As the amount remitted is less than the amount already taxable in Ireland, the amount is deemed to be of income already taxed on an arising basis and is ignored.

(ii) In order to be resident in the State an individual must be present in the State for at least 183 years in the current tax year or at least 280 days between the current tax year and the previous tax year (S.819 TCA 1997). For this purpose, a person is regarded as present in the State if they are present at any time during the day. Patrick spent 180 days in Ireland in 2016 and so is not resident in Ireland under the 183 day test. We are told he spent on average 90 days in Ireland in the years 2011 to 2015. Provided Patrick spent less than 100 days in Ireland in 2015 he would neither be resident in Ireland under the 280-day test.

(iii) Assuming Patrick is not resident in Ireland he will only be liable to tax on income from his Davy investments if it is income from Irish shares i.e. property situated in Ireland (S.18(1) TCA 1997). (As he is not ordinarily resident he will however be only liable to tax on his dividends at 20%). As a non-resident, non-ordinarily resident individual, he is only liable to CGT on gains arising on the disposal of shares if the shares are regarded as specified assets i.e. shares which derive their value or the greater part of their value from land or minerals or mineral rights in the State and the shares are not quoted shares. He will not be liable to tax in Ireland on income he earns as a self-employed war correspondent as he does not exercise this trade in Ireland (S.18).

(iv) Revenue view is that a resident individual is not entitled to elect to be jointly assessed with their spouse if their spouse is non-resident. By concession, in cases where one spouse only is resident Revenue will allow a couple to be jointly assessed where the non-resident spouse has no income. In a case such as this where one spouse, Amelia, is resident and the other non-resident spouse, Patrick, has income not all of which is within the charge to Irish tax, Amelia will be assessed as a single person. However, aggregation relief may be claimed by Amelia.

Aggregation relief is calculated by calculating the tax payable by Amelia as a single person then calculating the notional tax that would be due by Amelia and Patrick if they were assessed as a married couple and all of Patrick’s income was liable to Irish tax. This notional tax is allocated pro-rata to Amelia and Patrick’s income and if the tax allocated to Amelia is higher than her actual tax liability her actual tax liability is reduced by the difference.

SOLUTION 3

(i) (I) Land written down in 2016

Section 381A Tax Consolidation Act 1997 provides that a claim may not be made to offset a trading loss against other income under Section 381 Tax Consolidation Act 1997 where the following conditions are satisfied:

(1) The loss arises in a trade of dealing in or developing land

(2) The loss arises from interest which has not been paid or a reduction in the value of land which has not been sold

(3) The claimant is an individual whose income from the trade in question amounts to less than 50% of the claimant’s aggregate income (aggregate income is income for USC purposes) for the year in which the claim is made and for the previous two tax years.

All of these conditions are satisfied by Gary and Conor for 2016 (condition 3 is satisfied because as they had no income from this trade in 2016 or the two previous tax years, the income from this trade has to be less than 50% of their aggregate income) they would not be able to offset any loss arising on the write-down of the land against other income in 2016.

If the land is written down in 2016, there will be a loss carried forward to 2017 under S.382 TCA 1997. This loss may only be offset against the profit arising on the development. A trading loss carried forward can be deducted from trading profits for income tax (Section 382 Tax Consolidation Act 1997) and USC (Section 531AU Tax Consolidation Act 1997) purposes however no deduction is given in calculating profits liable to PRSI. Any excess loss arising on the overall development is an excess loss carried forward and would not be a loss which either could claim under Section 381 Tax Consolidation Act 1997 against other income.

(II) Land not written down in 2016

If the site is not written down in 2016 but is taken into account in calculating the overall loss in 2017, Conor will not be able to make a claim under Section 381 Tax Consolidation Act 1997 to offset the loss against any of his other income as he would be regarded as a limited partner under Section 1013 Tax Consolidation Act 1997 because he is not an “active partner” (i.e. he does not work for the greater part of his time in the trade). Under Section 1013(2)(a) Tax Consolidation Act 1997 a limited partner cannot make not make a claim for relief under Section 381 Tax Consolidation Act 1997 in respect of partnership losses.

As Gary works full-time in managing the trade he would not be regarded as a limited partner and may make a claim under Section 381 Tax Consolidation Act 1997 to offset his share of the loss from the development of the site against his other income. The claim may only be made in the year in which the site is sold because of the provisions of Section 381A Tax Consolidation Act 1997 referred to above.

If Gary makes a claim for relief under Section 381 Tax Consolidation Act 1997, while the loss will be deducted in calculating his liability to income tax it will not be taken into account in calculating his liability to PRSI or USC.

(ii) As Conor has taken a decision to develop his former investment property, a capital asset has been appropriated by him to trading stock. Section 596(1) Tax Consolidation Act 1997 provides that in such circumstances the person is deemed to have sold the asset for its market value giving rise to a chargeable gain or allowable loss. In such case in calculating the trading profits arising from the subsequent sale of the asset the individual is deemed to have acquired the asset for its market value on the date it was appropriated to trading stock. However, under Section 596(3) an individual may, where a chargeable gain would otherwise arise, elect that instead the cost of the asset for the purpose of calculating trading profits shall be the market value of the asset reduced by the chargeable gain which would otherwise have arisen. If Conor makes this election in effect the gain is deferred until the asset is ultimately sold however when the asset is sold the gain will be liable to income tax, PRSI and USC instead of capital gains tax.

(iii) Section 552 Tax Consolidation Act 1997 sets out the costs which may be deducted in calculating the gain or loss arising on the disposal of an asset for CGT purposes. Subsection 1B provides that where expenditure on the acquisition or enhancement of an asset is funded by borrowings which are subsequently released and a loss arises on the sale of the asset the allowable costs are reduced by the lower of the debt released or the loss arising. If the debt is not written off until the tax year following the year in which the asset is sold, no account will be taken of the debt write-down in calculating the loss arising on the sale. However, in the year in which the debt is written down a chargeable gain will be deemed to arise. Subsection 1B only applies to disposals of assets on or after 1 January 2014. As Aoife sold the property in respect of which Conor loaned her money to acquire in 2013 the write-off of the loan by Conor will not give rise to a chargeable gain for her. However, as Sarah did not dispose of her property until 2014 subsection 1B will apply to her. A loss of €240,000 arose on the sale of the property. If Conor writes off the loan of €600,000 given to Sarah she will be deemed to have a chargeable gain of €240,000 in the year in which the loan is written off.

(iv)

 

Market Value

 

1,500,000

 

 

 

Market value 6/4/1974

10,000

 

50% (Conor’s share)

5,000

 

Indexed at 7.528

 

(37,640)

Refurbishment 2003 (50% of €450,000)

 

(225,000)

Inheritance in 2014 (50% of €1.2million)

 

(600,000)

Gain

 

637,360

Portion of gain qualifying for PPR:

 

 

€637,360 × 31/42 (Note) =

 

(470,432)

Taxable Gain

 

166,928

Note

Only the period of ownership from 6 April 1974 is taken into account. Deemed period of ownership is therefore 42. 10 years of this was spent working abroad and this period does not qualify as a deemed period of occupation as the house was not occupied as Conor’s PPR before he worked in the UK. Although he has not lived in the house for the last two years, the last year is counted as a year of occupation therefore Conor is deemed to have occupied the house as his PPR for 31 years.

SOLUTION 4

(i) A taxable benefit arises for an employee in respect of the use of a van unless the following conditions are satisfied:

(i) The van is necessary for the performance of the duties of the employment

(ii) When the employee is not using the van he is required to keep it in the vicinity of his private residence

(iii) Apart from using the van to travel to and from work, the employee is not allowed to use the van for other private purposes

(iv) The employee spends at least 80% of his time engaged on duties away from the premises of the employer

We are not told if employees satisfy condition (iii) however as they do not satisfy condition (iv) a taxable benefit arose for each of the employees arising from the use of the van. The benefit arising is 5% of the original market value of the van i.e. the price of the van when new.

(ii) Where an employer pays medical insurance on behalf of an employee, the gross premium payable should be included as a taxable emolument received by the employee, in calculating the employee’s income tax, PRSI and USC liability. The employee will be entitled to a tax credit of 20% of the premium payable up to a maximum of €1,000 of the premium per adult covered and €500 per child. The tax credit will be included in the employee’s tax credit certificate and is not adjusted for by the employer in calculating the tax due on the gross premium. The employer is required to pay the medical insurance premium to the insurer net of the tax relief due to the employee (i.e. 20% of the premium up to a maximum of €1,000 for each adult covered and €500 for each child) and to pay the amount of the tax withheld to Revenue.

(iii) An employer can only pay subsistence allowances such as lunch allowances to an employee if the following conditions are satisfied:

(i) The allowance is only paid when the employee is working away from his normal place of work

(ii) The rate of allowance paid does not exceed Civil Service rates or alternatively the allowance paid by the employer has been calculated on a basis which just reimburses the employee for any costs incurred. Prior Revenue approval is required to use rates of allowances other than Civil Service rates.

(iii) The following records must be kept by the employer in relation to all expenses paid:

- when the journey was made,

- the reason for the journey

- the distance, starting point and destination

- the reason for the payment (e.g. temporarily away from place of work)

The allowances paid by Richard exceed the Civil Service allowance rates of €14.01 (less than 5 hours away) and €33.61 (5 hours or more away) which may be payable. In addition, the lower daily amount is paid to all employees whether they are working away from the premises or not and no expense claim is made complying with the requirements of (iii). Accordingly, Richard was not entitled to make these payments without deduction of tax.

(iv) Because Mandy’s share of the rental income from the commercial property was returned as Richard’s rental income, this means that Richard has offset his rental loss forward against Mandy’s income. A husband’s Case V loss may not be offset against his wife’s Case V income. Accordingly, although both pay income tax at the marginal rate of 40%, Mandy will have underpaid income tax in 2013 and 2014. Mandy will also have underpaid tax in 2012 assuming the income was returned in the same manner in 2012. Overall there will not have been an underpayment of PRSI or USC Case V losses are ignored in calculating these liabilities so although Mandy will have underpaid PRSI and USC Richard will have overpaid PRSI and USC by the same amount. As Richard’s income exceeded €100,000 he would have been liable to a 5% USC surcharge on the amount of the section 23 relief claimed. As he overclaimed section 23 relief he would also have overpaid the USC surcharge.

Regarding the sale of the section 23 property in 2015, as the property was sold within 10 years of when it was acquired the relief previously claimed is treated as if it were rent received in the year in which the property is sold and, where the section 23 relief was first claimed before 2012, is subject to income tax, PRSI and USC in the same way as normal rental income. (Where the section 23 relief was first claimed on or after 1 January 2012 the clawback is not liable to USC as the relief would not have been allowed in calculating the individual’s liability to USC.) Where the individual has unutilised section 23 relief carried forward in respect of the property the amount treated as taxable rental income is reduced by this amount and it is the net amount which is subject to income tax, PRSI and USC. Accordingly, an amount should have been included by Richard as Case V income in his return for 2015. There is no restriction of the loss arising on the disposal of the section 23 property as the full amount of the relief claimed has been clawed back. Accordingly, Richard will not have underpaid CGT in 2015.

(v) The request to Richard from Revenue for him to carry out a self review is not a notification of an audit. Accordingly, Richard has the option of making an unprompted qualifying disclosure in relation to any underpaid taxes identified as part of his self review. Where an individual makes an incorrect return a penalty of up to 100% of the tax underpaid (a tax geared penalty) is payable. By making a qualifying disclosure the tax geared penalty which is charged is reduced to as low as 10%. In addition to reducing the penalty payable, by making a qualifying disclosure the person will avoid being published in the Revenue’s published list of tax defaulters and Revenue will not initiate an investigation with a view to the prosecution of the taxpayer in relation to the matter disclosed. Making a qualifying disclosure will not reduce the interest payable on underpaid tax. However, by paying the underpaid tax sooner rather than later the amount of interest payable is minimised.

In order for a disclosure to Revenue to be a “qualifying disclosure” the disclosure must be in writing and:

(i) Contain a complete disclosure of all information and give full particulars of all matters that give rise to the penalty. If the behaviour which gave rise to the penalty is deliberate behaviour the disclosure must include all liabilities for all taxes and all periods underpaid as a result of other undisclosed deliberate behaviour.

(ii) Contain a declaration by the person making the disclosure, that to the best of the person’s knowledge, information and belief that all matters contained in the disclosure are correct and complete

(iii) Must be accompanied by a payment of the tax and interest payable

Richard should write to Revenue informing them of his intention to make a qualifying disclosure. Richard will be given 60 days within which the disclosure must be made. During this 60 day period Revenue will not issue a Notification of a Revenue Audit. Thus by notifying Revenue of his intention to make a qualifying disclosure Richard ensures he will not receive a audit notification before he has made his disclosure thus ensuring that his disclosure will be an unprompted rather than a prompted disclosure. The penalties which apply to prompted qualifying disclosures are higher than for an unprompted qualifying disclosure.

SOLUTION 5

(i) A balancing charge will arise for Sheila on the disposal of the property as the tax life of the building does not end until 2019. Sheila cannot elect to transfer the property at tax written down value to the company under S.312 TCA 1997 as she does not control the company.

Balancing charge/allowance

 

 

Proceeds

700,000

Less attributable to site

(70,000)

Net proceeds

630,000

Less TWDV

(280,000)

Balancing charge

350,000

A capital loss will arise on the disposal as follows:

 

Proceeds

700,000

Cost

(2,200,000)

Loss

(1,500,000)

Reduced by capital allowances claimed (Note)

1,370,000

Allowable Loss

(130,000)

Note

Capital allowances claimed

Qualifying cost

2,000,000

Less TWDV

(280,000)

Allowances claimed

1,720,000

Less balancing charge

(350,000)

Net allowances claimed

1,370,000

Additional note to students (not part of suggested solution)

Sheila is not entitled to retirement relief on the disposal of the property to the company as it is an investment asset. By concession Revenue allow retirement relief to be claimed where a gain arises on the disposal of an asset which is used for the purpose of a trade carried on by a partnership and owned by one of the partners, where the disposal is associated with a disposal of the entire partnership interest. In such cases if the partner has not charged rent for the use of the asset the asset can be treated as a chargeable business asset and retirement relief may apply. If the partner has charged market rent retirement relief may be claimed on a fraction of the asset equal to the owner’s fractional entitlement to the partnership profits. This concession is not relevant in this case as a loss arose on the disposal.

(ii) If the partners dispose of the assets of the business to a company for cash a gain will arise on the disposal of goodwill. No allowable loss arises on the disposal of furniture and equipment. Relief for the loss arising has already been given by way of capital allowances. Debtors are not chargeable assets so their disposal is not an event for capital gains tax purposes.

(I) Sheila’s CGT liability for 2016

Gain on disposal of her share of goodwill is 40% of €1,600,000 = €640,000. Sheila is age 60 (i.e. at least 55). Her share of the goodwill is a qualifying asset for retirement relief purposes as it is an asset which she has owned for at least 10 years and which has been used for the last 10 years for the purpose of a trade which she has carried on for the last 10 years. As the proceeds which she will receive for goodwill does not exceed €750,000 she will qualify for retirement relief and will not be liable to capital gains tax on the gain arising.

Sheila will be liable to CGT on the €50,000 gain arising on the disposal of investments. The loss arising on the disposal of the property may not be offset against this gain as the loss arose on the disposal of the property to a connected party. (Sheila will be connected to the new company as she and her partners control the new company.)

Sheila’s CGT liability:

 

Gain

50,000

CGT @ 33%

16,500

 

 

No annual exemption is due in the year in which an individual qualifies for retirement relief.

(II) Cathy’s CGT liability

Cathy does not qualify for retirement relief as they she is less than 55. The gain arising on the disposal of her share of goodwill qualifies for the 20% rate of CGT as the goodwill is as asset of a qualifying business (i.e. a business other than an investment or land dealing or developing business) which she has owned for at least 3 of the last 5 years. Cathy can offset her capital loss carried forward first against her other gain liable at 33%.

Cathy’s CGT liability:

Gain on goodwill:

 

Proceeds 20% of €1.6m

 

320,000

Cost

 

(200,000)

Gain

 

120,000

Gain on investments

10,000

 

Loss on investment property

(100,000)

(90,000)

Net gains

 

30,000

Annual exemption

 

(1,270)

 

 

28,730

CGT @ 20%

 

5,746

(iii) Relief under S.600 TCA 1997 applies where all the assets of a business, or all the assets other than cash, are transferred to a company in exchange for shares and the transfer is carried out for bona fide commercial reasons and not as part of an arrangement to avoid tax. These conditions are satisfied in this case so relief will apply. Where the entire consideration consists of shares in the new company full relief from CGT applies. Although the consideration in this case consists partly of the issue of shares and partly of taking over liabilities of the business, in practice where a business is transferred to a company in exchange for shares only and assets exceed liabilities bona fide trade creditors taken over are not treated as consideration. Thus in this case the transfer will be treated as being in exchange for shares only and relief under S.600 TCA 1997 will apply. Where this relief applies no CGT is payable on the gain arising on the disposal of assets to the company. Instead the transferor’s cost of shares for CGT purposes is reduced by the gain arising. Thus Adam would have no CGT liability for 2016. Sheila’s CGT liability would be as outlined above. Cathy would have an allowable capital loss carried forward of €90,000 which she can use to reduce future capital gains.

(iv) Sheila wants to retire in a few years and give her shares in the new company to her son Eoin. If her partnership interest is transferred to the company now and relief under S.600 TCA 1997 applies, her period as a partner will count as a period for which she has owned her shares and been a full-time working director in calculating whether retirement relief is due on a disposal of her shares. Accordingly she could dispose of her shares in less than 10 years time and any gain arising from the increase in value of the shares over the next few years will qualify for retirement relief as she will be over 55 and will own at least 25% of the new company. If however relief under S.600 TCA 1997 does not apply because the transfer to the company is made for cash, any gain arising on the sale of her shares will not qualify for retirement relief until she has owned the shares for at least 10 years.

Changes to Retirement Relief as of from 2 November 2017

The following changes apply to Retirement relief

Retirement relief will not apply on a transfer of goodwill or on a transfer of shares by an individual to a company whereby the transferor is connected to the company after the transfer, unless they can show that the transfer was done for bona fide commercial reasons and not part of a tax avoidance scheme or arrangements.

Retirement relief will not apply if arrangements are entered into to ensure that the individual and the company are not connected parties after the transfer

Where transfers of any assets occur that form part of a transfer to which s600 TCA 1997 relief applies, any consideration received other than by way of shares or securities in respect of the transfer may no longer obtain the benefit of retirement relief unless the transfer is done for bona fide commercial reasons and not part of a tax avoidance arrangement or scheme.

Where an individual aged 66 or over makes a disposal of shares or securities of a family company to a child/favourite niece/nephew and makes a disposal of shares or securities of the family company to a company controlled by that child/favourite niece/nephew, the consideration in respect of both transfers is aggregated for the purposes of assessing the retirement relief limit of €500,000.

Examiner’s Report

Overall

The areas where students lost marks are set out in detail below however there are a number of general points which are worthwhile noting as follows:

It was noticeable in this paper that students lost marks in areas which might be seen as more associated with Part 1 exams namely the tax treatment of relocation expenses, capital gains tax computations involving a principal private residence and transfers between a husband and wife on death, the circumstances in which lunch allowances may be paid tax free, the calculation of balancing charges and the interaction of capital allowances and capital gains tax losses. Topics which are covered for the Part 1 exams cannot be forgotten when students move on to the next level or where students are exempt from Part 1. While there will not be a full question on topic which is seen as a Part 1 topic at Part 2, Part 1 topics will inevitably form part of the Part 2 exams and cumulatively a lot of marks can be lost at Part 2 if students fail to go over topics which they have covered at Part 1.

It has been noted that students have had difficulty in distinguishing the differences between income calculated for income tax, PRSI and USC purposes. Generally this distinction has been dealt with as part of Question 1 and it was noted this year that students generally were more aware of the differences between the income liable to these three taxes in calculating an individual’s overall tax liabilities. However this year in other questions while students were specifically asked to comment on the income tax, PRSI and USC aspects they tended to just comment on the “tax” consequences and not distinguish between the taxes. Students need to be conscious that particularly where losses and capital allowances are concerned these items will not always be treated the same for income tax, PRSI and USC purposes and so they need to specifically refer to each of these taxes when asked to do so.

In past papers it has been noted that students are generally good at spotting when a question is a “retirement relief” question or a “transfer of a business to a company” question. One of the questions this year dealt with both reliefs. However it would appear that many students simply identified the question as the “transfer of a business to a company question” losing valuable marks in the process. Just as in real life, a question will not always deal with just one relief and students need to be aware that a single transaction can have many different aspects involving different taxes and/or different reliefs and should read the question carefully bearing this in mind.

It was good to note this year that students generally were aware of the basis of assessment in the year of marriage although some ignored the relief which may be available in the year of marriage. It is important that students should continue to be familiar with these basis of assessment, in addition to cases involving a non-resident spouse, as this paper generally requires students to be able to identify the correct basis of assessment.

QUESTION 1

This question dealt with a couple that married in 2016. The husband’s only income was income which qualified for relief under S.195 TCA 1997 (Artists exemption). The wife was an employee who moved to a different part of the country to take up a new job. The wife’s employer paid for certain relocation expenses. In addition the wife had rental income, including from a tax incentive property. The wife’s outgoings included pension contributions and an EII investment.

In part (i) students were required to calculate the couple’s income tax liability for 2016. Generally students answered this part reasonably well. Most students were aware that in the year of marriage a couple are taxed as single persons, although some students lost marks by failing to calculate the year of marriage relief due to the couple. Other areas where students lost marks were as follows:

Treating all relocation expenses paid for by the employer as taxable remuneration;

Treating the full amount of the premium received on the grant of the new lease as taxable rental income;

Only allowing 75% of interest payable in respect of the rented property which was a commercial property;

Not offsetting the capital allowances and/or loss on the tax incentive property against other rental income; and

No restricting the deduction for the pension contributions made to 20% of €115,000.

In part (ii) of the question students were required to calculate the couple’s PRSI liabilities and in part (iii) their USC liabilities. Many students correctly calculated PRSI liabilities on income after capital allowances had been deducted and before pension contributions were deducted, and USC liabilities on income before both these items were deducted some students did lose marks by not treating this items correctly. In addition some students did not calculate PRSI and USC payable on the husband’s income which qualified for exemption from income tax only. Students also lost marks by stating that the USC surcharge was payable in respect of interest expense relating to the tax incentive property and not just on capital allowances or by saying that no surcharge was payable as income from the tax incentive property did not exceed €100,000.

QUESTION 2

This question dealt with a non-domiciled individual employed by a UK company living in Ireland. The individual’s husband was a self employed individual who was domiciled in Ireland but not resident or ordinarily resident.

In part (i) students were required to set out the basis on which an individual such as the wife (i.e. a resident non-domiciled individual) was liable to tax and to identify her income and gains which would be within the charge to tax in Ireland. While students who correctly identified that the individual was taxable on a remittance basis were generally able to identify the constructive remittances which arose, marks were lost because students did not always say why the particular transaction was a constructive remittance and in addition did not always give the relevant statutory references. In addition some students lost marks because they treated remittances as remittances of gains rather than remittances of income.

In part (ii) students were asked to outline whether the husband would be regarded as resident in 2016. While most students correctly outlined the 183 and 280 day rules and concluded the individual would not be resident, some students simply referred to the relevant section saying the conditions of the section were not satisfied. Simply referring to the relevant section is not sufficient to obtain the marks available for a particular question.

In part (iii) students were asked to outline the extent to which the individual would be liable to tax on income and gains from an investment portfolio he had and from his work as a journalist if he were not resident or ordinarily resident in Ireland. In this part some students incorrectly said that as the individual was Irish domiciled he would be liable on his worldwide income and gains. Others said he would be liable to tax in Ireland on his “Irish source income and gains” without explaining what “Irish source” meant or referring to his particular circumstances. In addition some students illustrated confusion between “specified assets” and assets situated in Ireland incorrectly saying that the individual would be liable to tax in Ireland on income from specified assets only and/or on gains from assets situated in Ireland. Some students incorrectly said that as his portfolio was held with an Irish stockbroking firm that all income and gains would be Irish source income and gains liable to tax in Ireland.

In part (iv) students were asked to outline the basis of assessment which would apply to the wife if her husband was non-resident. Here some students lost marks because it was clear they did not understand what “basis of assessment” meant. Also students lost marks by saying joint assessment would apply or if they correctly said single assessment would apply but did not refer to the possibility of aggregation relief.

QUESTION 3

This was the least popular question on the paper.

This question dealt with an individual involved in the construction industry who had a number of property related tax issues.

Part (i) of the question dealt with the first issue which concerned a development which the individual was undertaking in partnership with his brother. The brothers had acquired a site a number of years ago but development was postponed until now. The site had reduced in value and the individual wanted to know what the position regarding loss relief would be if a loss arose this year by writing down the site or if the site was not written down but a loss arose on the development of the site in the following year. Students were required to answer these questions. In order to answer this part correctly students were required to be familiar with the restrictions imposed on claiming loss relief under S.381 by S.381A TCA 1997 and on limited partners. Most students did not refer to S.381A TCA 1997 and to the restrictions imposed on limited partners under S.1013 TCA 1997. Most students did not refer to either of these sections. In addition students lost marks because they did not refer to the treatment of losses for PRSI and USC purposes even though the question made specific reference to both these taxes.

In part (ii) students were asked to outline the tax consequences for the individual arising from a decision to develop a former investment property. By taking this decision the individual had appropriated the asset to trading stock however very few students correctly identified this.

In part (iii) students were required to set out the tax consequences if the individual were to forgive loans he had given to his daughters which they had used to buy properties which they had since sold at a loss. To answer this part correctly students were required to be aware of the provisions of S.552(1B) TCA 1997 which can result in a loan forgiven in such cases giving rise to a capital gain for the loan recipient. Only a small number of students were aware of the provisions of this section.

In part (iv) students were asked to calculate the gain which would arise on a gift of his former residence to his daughter. Students lost marks with some basic errors in their calculations as follows:

Using the actual cost of the property instead of its value on 6 April 1974.

Using incorrect indexation factors.

Calculating the gain as if the individual had taken over his wife’s base cost on her death. instead of acquiring her interest at market value at the date of her death.

Treating expenditure on furnishings as part of the allowable cost of the house.

Not treating the last period of ownership as a deemed period of occupation for PPR relief purposes.

Taking the period of ownership for PPR relief purposes from 1964 instead of 6 April 1974.

Treating the period of time working abroad as a period of occupation for PPR relief purposes even though the individual did not occupy the house as his PPR before he worked abroad.

QUESTION 4

This question dealt with an individual who owned a small business and who had received a letter from Revenue asking him to carry out a self review of a number of tax returns. The individual had a number of issues which may have given rise to tax underpayments.

In part (i) students were asked to outline the circumstances in which an employee could be given a van for his use without a taxable benefit arising. Generally students answered this part quite well and could list the necessary conditions.

In part (ii) of the question students were asked to outline how the individual should have dealt with medical insurance premiums paid for employees. While students correctly stated that the individual should have paid over the tax relief at source to Revenue, students lost marks by not mentioning that the individual should have treated the gross premiums as notional pay for the employees and operated PAYE/PRSI/USC on the notional pay.

In part (iii) students were asked to comment on whether the individual had been correct to pay lunch allowances without deduction of tax. In this part while students generally were aware that the allowances should not have been paid tax free, they lost marks by failing to set out the conditions that must be satisfied in order for such allowances to be paid tax free.

In part (iv) students were asked to comment on the extent to which the individual may have underpaid tax because tax on a property jointly owned with his wife had been incorrectly returned as his income with a section 23 loss carried forward relating to his own property being offset against this income. In this part students lost marks because they did not identify that if the income had been correctly returned the individual was not entitled to offset the section 23 loss against his wife’s rental income. Some students also said section 23 relief could not be offset against rental income from any other properties. In addition students lost marks because they incorrectly said that the loss on the sale of the section 23 property should have been restricted by the relief claimed, even where they correctly identified that a clawback of relief arose, or that it could not be offset against other gains in any event. Also even though the question specifically asked students to comment on the extent to which income tax, PRSI and/or USC had been underpaid, many simply referred to tax being underpaid and did not note that such losses carried forward are not deductible for PRSI and/or USC so that there would have been no underpayment of such taxes.

In part (iv) students were asked to outline the action that could be taken by Richard to minimise any penalties and or interest arising. Generally this part was quite well answered with students correctly saying that he could make a qualifying disclosure to reduce penalties. Some students incorrectly stated that by making a qualifying disclosure interest would also be mitigated. In addition some students incorrectly stated that the disclosure would be a prompted rather than an unprompted disclosure.

QUESTION 5

This question dealt with a partnership of engineers who were considering transferring the business to a company.

In part (i) students were required to outline the taxation consequences for one of the partners who proposed to sell a property which she owned to the new company. The individual had been entitled to claim tax incentive capital allowances in respect of the property and the value of the property had fallen significantly since it was acquired. In this part marks were lost because students were unable to correctly calculate the extent to which the loss was restricted due to the capital allowances claimed. In particular marks were lost for the following errors:

Incorrectly calculating the balancing charge arising, in particular not excluding the value of the site from the proceeds;

Not calculating the balancing charge which would arise;

Restricting the loss arising by the amount of the balancing charge only;

Saying no loss relief at all was available.

In part (ii) students were asked to calculate two of the partners’ capital gains tax liabilities assuming the business was transferred to the company in exchange for cash only. In this part students lost marks by failing to identify that one of the partners would be entitled to retirement relief on the disposal. In addition students lost marks by not identifying that the gain arising to the other partner would qualify for the 20% rate of CGT. Also some students who correctly said that the 20% rate would apply did not set out the reasons why the rate applied. It was also noted that a number of students who did identify the possibility that retirement relief would apply treated the disposal of the partnership business as if it were a disposal of shares in a company calculating the proportion of chargeable business assets to chargeable assets and doing CGT calculations as if the business were a single asset rather than a collection of assets some of which were not chargeable assets (i.e. debtors). Some students lost marks by saying that the 20% rate of tax only applied to disposals of shares in companies. It was also noted that in listing out the conditions which must be satisfied for the 20% rate of CGT to apply some students incorrectly said the vendor was required to have worked full time in the business for 3 of the last 4 years. The latter condition is only required where the lower rate of CGT is being claimed in respect of a disposal of shares.

In part (iii) students were asked to outline the taxation consequences for the partners if the business were transferred to the company in exchange for shares. While most students correctly identified that CGT would be deferred, marks were lost where they did not set out the conditions to be satisfied in order for relief under S.600 TCA 1997 to apply. Also some students said that the base cost of the new shares would be reduced by the CGT on the gain deferred rather than the gain.

Q1

Q2

Q3

Q4

Q5

Highest

24

21

12

19

21

Lowest

2

2

1

1

1

Average

14

11

4

10

10