Part 1 Past Papers

Autumn 2015

QUESTION 1

(a) Leo works for an insurance company on an annual salary of €70,000 and normally works every day at his employer’s premises in Dublin. He is required to attend a client’s premises in Cork for an early morning meeting and stays overnight at a hotel in Cork the night before. He is in Cork for less than 24 hours before he returns to Dublin. Leo keeps a receipt for his accommodation and evening meal at the hotel totalling €160 and provides the receipt to his employer.

State the maximum amount of this expense that Leo’s employer can reimburse to him without the deduction of tax, and give a reason for your answer.

(2 marks)

(b) Margaret is 66-years old and widowed with one child, Niall. Niall is 23-years old and living with his mother as he attends college full-time.

Calculate the maximum amount of income Margaret can receive in the year 2014 while remaining exempt from income tax, and state the section of Taxes Consolidation Act 1997 providing for this exemption.

(2 marks)

(c) Oisin and Patricia were married on 3 September 2014. Oisin’s total income in the year 2014 was €30,000 upon which he paid income tax of €2,700. Patricia’s total income in the year 2014 was €45,000 upon which she paid income tax of €8,300. If they had been married for the whole year, their joint income tax liability would have been €10,400. Calculate the income tax refund receivable by each of them due to the “year of marriage” tax relief.

(3 marks)

(d) Roger is a self-employed electrician and his total profit in 2014 is €40,000. Roger’s wife Saoirse is employed by him as a bookkeeper and general administrator. Her gross salary in the year 2014 was €19,000 per annum, upon which PAYE is operated.

Calculate the PRSI liabilities for each of Roger and Saoirse for the year 2014.

(2 marks)

(e) Terence is 72-years old and his income for the year 2014 consisted of:

Deposit interest from an Irish bank totalling €540 before the deduction of DIRT

Deposit interest from an account in Canada totalling €600 from which no tax was deducted

Income from a private pension of €9,800

Calculate Terence’s USC liability for the year 2014.

(3 marks)

(f) Ursula commenced maternity leave on 1 April 2013. She received €262 per week directly from the Department of Social Protection from 1 April 2013 to 30 September 2013, a period of 26 weeks, and returned to work on 1 October 2013. During her maternity leave, her employer paid her a reduced salary of €738 per week.

Calculate the amount of Ursula’s income that is subject to income tax, PRSI and USC for the period from 1 April 2013 to 30 September 2013. You are not required to calculate the specific liabilities themselves.

(3 marks)

(g) State the section, subsection and paragraph of the Taxes Consolidation Act 1997 in which it is provided that it is a Revenue offence to assist a person in making an incorrect tax return.

(3 marks)

(h) For how long must the books and records relevant to a chargeable person’s income tax liability be retained, assuming they file their income tax return on time every year? State the section of the Taxes Consolidation Act 1997 which stipulates this requirement.

(2 marks)

(i) Victor has three children, William, Yolanda and Zoe, all of whom are in college attending full-time courses which are approved for tax relief purposes. Victor pays for all of their college fees. William’s course tuition fees for the year 2014 are €4,800. Yolanda’s tuition fees for the year are €3,800 and her registration fees are €500 for the year. Zoe’s course tuition fees for the year are €15,000.

Calculate the tax credits that Victor may claim for the year 2014 with respect to the above.

(3 marks)

(j) What form should an employer use to return details of the pay, tax, PRSI and USC details for all of her employees for a tax year? What is the deadline for the submission of this form?

(2 marks)

Total 25 Marks

QUESTION 2

Erica is a sole practitioner solicitor with an accounting year end of 31 October. She had the following Statement of Comprehensive Income for the year ended 31 October 2014:

Notes
Income 257,600
Administrative expenses
Pension 1 9,000
Professional fees 2 14,300
Motor expenses 3 7,900
Subscriptions 4 3,400
Entertainment 5  1,400
Total administrative expenses (36,000)
Profit before taxation 221,600

Erica is jointly assessed to income tax with her husband Fionn, with Erica being the assessable spouse. They have no children, but Erica’s 82-year-old mother Geraldine lives with them. Fionn has no income in his own right and spends a lot of his time looking after Geraldine as she is incapacitated. They also pay an agency €15,000 per annum for a carer to look after Geraldine at the weekends. Geraldine has no income in her own right.

Erica is an artist in her spare time and had decorated her office with her paintings, which were often complimented by her clients. In 2014, one of her clients commissioned her to paint a portrait of him and paid her for this. The clients’ friends and family were impressed by the results and she was commissioned to paint three more paintings in 2014. She received a total of €8,000 in 2014 for her paintings. She has not engaged yet with Revenue in relation to this income.

Erica incurred €250 on visits to her GP in 2014, and a further €800 on dentist fees for Fionn, of which €120 related to a filling and €680 related to a crown.

Notes to accounts

(1) Erica contributed €750 per month into a Revenue-approved Retirement Annuity scheme.

(2) Erica incurred €2,500 on accountant’s fees for the preparation of her accounts and €11,800 in architect’s fees for the design of a potential extension to her office.

(3) The motor expenses figure was broken down as follows:

Motor tax, insurance and petrol €5,400
Depreciation €2,500
€7,900

Erica uses her car entirely for business purposes, preferring to use a bicycle for personal journeys. Her car originally cost her €25,000 in April 2013 and has CO2 emissions of 150 g/km.

(4) Erica paid €2,200 for her Law Society Practising Certificate and €100 per month to Gorta, a Revenue-approved charity.

(5) Erica spent €300 on taking an advertisement out in the programme for the Race Night run by Fionn’s football team and €1,100 on bringing clients out for lunch throughout the year.

REQUIREMENTS

(i) By briefly referring to each of the “Badges of Trade”, give your opinion as to whether or not Erica should be treated as trading as an artist in 2014.

(4 marks)

(ii) Calculate Erica’s assessable Case II income for the year 2014 from her legal practice, including a deduction for any capital allowances to which she is entitled. You should also calculate the tax written down value of any assets upon which capital allowances may be claimed.

(8 marks)

(iii) Calculate Erica’s income tax, PRSI and USC liabilities for the year 2014.

(8 marks)

(iv) State the date upon which Erica’s income tax return for the year 2014 is due for submission, and the date upon which the liabilities calculated above fall due for payment. Assuming Erica had paid preliminary tax of €46,000 for 2014 and this had met her minimum preliminary tax obligations for the year, calculate what additional charges would fall due if Erica submitted her 2014 return and discharged her payments one week after the appropriate deadlines.

(3 marks)

(v) Erica dresses very casually outside of the office, but needs to dress quite formally for meeting clients. Her business suits are therefore bought purely for wearing to the office. Based on this, state whether or not Erica may claim a deduction for the cost of the suits in calculating her assessable Case II income on this basis, and refer to the most relevant case law in your answer.

(2 marks)

Total 25 Marks

QUESTION 3

(a) Fred is 24-years old. He worked part-time until deciding to leave his employment on 30 September 2014 to start his own trade. He commenced his new self-employed trade as a bricklayer on 1 October 2014. He has savings built up to sustain him in case his new trade does not succeed. His accounting year end will be 30 September each year. His profits for his first two years of trading and other income are as follows:

Schedule E income for the nine months ended 30 September 2014 3,000
Case I profit for the year ended 30 September 2015 25,000
Gross deposit interest income for the year ended 30 September 2015 3,000
Case I profit for the year ended 30 September 2016 24,000

Fred’s deposit interest income accrued evenly month to month and was subject to DIRT. He had no other income in 2014 apart from the above.

REQUIREMENTS

(i) State the basis periods for determining Fred’s taxable Case I profits for the tax years 2014, 2015 and 2016.

(2 marks)

(ii) Calculate the income (Case I or otherwise) on which Fred will be assessable to income tax for the years 2014, 2015 and 2016, both initially and after the application of any relief applicable based on the above.

(4 marks)

(iii) Calculate the income (Case I or otherwise) on which Fred will be liable to PRSI and on which Fred will be liable to USC for the year 2014 and outline and give reasons for any exemptions applicable.

(3 marks)

(b) Gina is 72-years old and has been a self-employed music teacher for many years, with an accounting year end of 31 May. She decides to retire on 31 October 2014. Her profits for the period leading up to her retirement are as follows:

Case II profit for the year ended 31 May 2013 23,000
Case II profit for the year ended 31 May 2014 29,000
Case II profit for the period ended 31 October 2014 15,000

Gina was also entitled to a State pension of €230 per week during the above periods.

REQUIREMENTS

(i) State the basis period for determining Gina’s taxable Case II profits for the tax year 2014.

(1 mark)

(ii) Calculate the income (Case II or otherwise) on which Gina will be assessable to income tax for the years 2013 and 2014 after making any adjustments that arise due to her retirement.

(3 marks)

(iii) Calculate the income (Case II or otherwise) on which Gina will be liable to PRSI and on which Gina will be liable to USC for the year 2014 and outline and give reasons for any exemptions applicable.

(4 marks)

(c) Harry is 32-years old and decides in January 2013 to leave his employment with an architect firm to set up his own practice. His gross salary for January 2013 was €3,000 from which €300 was deducted as a contribution to a company pension scheme. He commences to trade on 1 February 2013 and has an accounting year end of 31 January each year. Unfortunately, the venture is not successful and he is forced to cease trading on 30 November 2015. His profits for the period that he traded were as follows:

Case II profit for the year ended 31 January 2014 18,000
Case II profit for the year ended 31 January 2015 14,000
Case II profit for the period ended 30 November 2015 9,000

REQUIREMENTS

(i) State the basis periods for determining Harry’s taxable Case II profits for the tax years 2013, 2014 and 2015 and calculate the income (Case II or otherwise) on which Harry will be assessable to income tax for 2013, 2014 and 2015 before and after an application for relief due to the fact that his business was short-lived. You should show your workings to back up any relief available.

(6 marks)

(ii) Calculate the income (Case II or otherwise) on which Harry will be liable to PRSI and on which Harry will be liable to USC for the year 2013 and outline and give reasons for any exemptions applicable.

(2 marks)

Total 25 Marks

QUESTION 4

(a) Ingrid has a number of tax queries regarding her rental properties which she has referred to you.

House in Dublin

Ingrid purchased a four bedroom house in Dublin on 1 June 2014, and drew down her mortgage for the purchase on the same day. She commenced letting the property on 1 August 2014 at a monthly rent of €2,200. She immediately registered the tenancy with the Private Residential Tenancies Board (“PRTB”) at a cost of €90. Before letting the property out, she had the house painted internally at a cost of €1,000 and purchased new furniture for the house costing €2,500. She also paid an estate agent €150 to advertise the property for rent. The solicitor’s fees on the purchase of the property were €1,800. She paid €17,500 in mortgage interest on her loan for the year 2014.

Office suite in Dublin

Ingrid purchased a newly-built office suite in the centre of Dublin on 1 March 2014 and drew down her loan for the purchase on the same day. Ingrid paid loan interest of €62,000 with respect to this loan in 2014. She let the property under a 15-year lease commencing on 1 June 2014 which provided for an annual rent of €80,000 payable monthly in advance and an upfront premium payable to Ingrid of €120,000. Ingrid received an itemised listing of the costing of various aspects of the office suite, which included a cost of €18,000 on ventilation and heating units for the office.

Apartment in Cork

Ingrid has owned an apartment in Cork for many years and has no loan associated with the property. She had some trouble with the tenants that had been in this apartment but they finally left in December 2013. The apartment was vacant throughout January 2014 as Ingrid needed to have the apartment repainted and professionally cleaned at a cost of €1,900. Ingrid let the property again from 1 February 2014 at a monthly rent of €850. She registered the new tenancy with the PRTB at a cost of €90.

Apartment in Budapest

Ingrid owns an apartment in Budapest upon which she received rental income of €5,000 in 2014. She paid mortgage interest of €4,000 in 2014 on the loan used to purchase this property.

REQUIREMENTS

(i) Calculate Ingrid’s rental profit or loss for income tax purposes for 2014 with respect to each of the above properties.

(14 marks)

(ii) Briefly state why it is important for tax reasons that Ingrid registered the new tenancy of the house in Dublin with the PRTB, and state the section and subsection of the Taxes Consolidation Act 1997 that provides for this.

(3 marks)

(iii) State whether Ingrid is potentially entitled to claim any capital allowances with respect to any of the cost of the purchase of the office suite in Dublin and make brief reference to the most relevant case law to support your answer.

(2 marks)

(iv) State the section and subsection of the Taxes Consolidation Act 1997 that provides the rules for loan interest being deductible for tax purposes from Ingrid’s income from the apartment in Budapest.

(2 marks)

(b) Ingrid and her boyfriend Jay jointly own a house in equal shares that they live in as their only residence. Ingrid’s brother, Ken, stayed with them during 2014 and he insisted that they allow him to pay for his “bed and board”. Ken paid them a total of €2,200 as a contribution towards food and cleaning products etc. and €9,800 for his accommodation. He split the total payments equally, paying €6,000 to Ingrid and €6,000 to Jay.

REQUIREMENT

Calculate Ingrid’s taxable income for income tax purposes for 2014 with respect to the above property, giving reasons for your answer.

(4 marks)

Total 25 Marks

QUESTION 5

Larry is a qualified financial adviser (QFA). He left his job with OldBank plc on 30 April 2014 and commenced his new employment with NewBank plc on 1 June 2014.

His gross salary with NewBank plc is €4,100 per month. Larry provided a P45 from his previous employment showing that his pay in the year 2014, to 30 April, was €14,000 with €2,344 in PAYE deducted and €753 in USC deducted.

In addition to his salary, NewBank plc provides the following to Larry.

NewBank plc pays for his annual QFA subscription fees of €20 per month or €240 annually. Under Central Bank regulations, a person performing Larry’s duties is in fact required to hold a QFA qualification, and NewBank plc have therefore made his continued membership a condition of his employment. NewBank plc commenced paying for this subscription from the first day of his employment.

On his first day on 1 June 2014, Larry purchased a new home with a mortgage for the purchase from his new employer. The loan amount is €170,000 and Larry is entitled to the “staff rate” of interest of 3.5%. The lowest mortgage interest rate that NewBank plc offers to non-employees is 4.5%.

The branch of NewBank plc in which Larry works has a local menswear shop as a customer. The bank has an arrangement with this customer that it will pay for one new suit a year for each of their employees up to a cost of €500. Larry took advantage of this arrangement and ordered a suit worth €500. The shop issued the invoice for €500 to the bank on 25 June 2014, the day that Larry collected his suit. As Larry is happy with the suits he already owns, he advertised his new suit for sale online and received a number of offers to buy it for €310.

REQUIREMENTS

(i) (I) State for each of the above benefits whether they are a taxable benefits-in-kind, taxable perquisites, or neither, giving reasons for your answers. You should outline the difference between a benefit-in-kind and a perquisite in your answer.

(5 marks)

(II) Outline how the taxable benefits-in-kind and perquisites above should be valued for tax purposes.

(4 marks)

(III) State the name of the case most relevant in determining the tax treatment of Larry’s new suit.

(1 mark)

(ii) Calculate Larry’s net pay for the month of June 2014 if his employer received a Notice of Determination of Tax Credits and Standard Rate Cut-Off Point (“SRCOP”) indicating the PAYE should be operated on a cumulative basis with a monthly tax credit of €275 and a monthly SRCOP of €2,733.

(7 marks)

(iii) Calculate Larry’s net pay for the month of June 2014 if his employer received a Notice of Determination of Tax Credits and SCROP indicating the PAYE should be operated on a “week 1/month 1” basis with a monthly tax credit of €275 and a monthly SRCOP of €2,733.

(4 marks)

(iv) Calculate Larry’s net pay for the month of June 2014 if the P45 that he provided to NewBankplc indicated the PAYE should be operated on an emergency basis. You should note that Larry’s PPS number will be on the P45 received by NewBank plc.

(4 marks)

Total 25 Marks

SOLUTION 1

(a) Leo may be reimbursed the full cost incurred for his subsistence costing €160 as the expense is vouched.

(b) Income exemption limit for widowed person over 65: €18,000
Increase for qualifying child: €575
€18,575

The section providing for the above is S.188 TCA 1997

(c) Year of marriage credit: €2,700
€8,300
€11,000
(€10,400)
€600
× 4/12
€200
Oisin’s refund   = €200 × €2,700/€11,000 = €49
Patricia’s refund = €200 × €8,300/€11,000 = €151
(d) Roger’s PRSI  = €40,000 × 4% = €1,600
Saoirse’s PRSI   = Nil as employment by a spouse is exempt from PRSI

(e) Terence’s deposit interest which has been subject to DIRT is exempt from USC.

Terence’s Canadian deposit interest and his Irish pension are within the scope of USC and the total of €10,400 exceeds the exemption threshold. His USC liability is therefore as follows:

€10,036 × 2% = €201
€364 × 4% = €15
€216

Finance Act 2015 increased the USC threshold to €12,012. Note that the USC rates changed in Finance Act 2017.

(f) Payments subject to income tax

Maternity benefit: €262 × 13 weeks = €3,406
Salary from employer: €738 × 26 weeks = €19,188
€22,594

Maternity benefit was exempt from income tax up to 30 June 2013, and therefore only the payments from 1 July to 30 September are taxable. Ursula’s salary for the whole period was taxable.

Payments subject to PRSI

Salary from employer: €738 × 26 weeks = €19,188

Payments from the DSP are not themselves subject to PRSI.

Payments subject to USC

Salary from employer: €738 × 26 weeks = €19,188

Payments from the DSP are not subject to USC, whether they are taxable or not.

(g) Section 1078(2)(b) TCA 1997

(h) Books and records must be retained for a period of 6 years from the completion of the transactions to which they relate, in accordance with S.886 TCA 1997.

(i) William: (€4,800 − €2,750) × 20% = €410
Yolanda: €3,800 × 20% = €760*
Zoe: €7,000 × 20% = €1,400**
Total: €2,570

*€2,750 is deducted only once from the aggregate fees paid for all full-time courses

**€7,000 is upper limit per person per course for relief

(j) Form P35 which should be submitted by 15 February following the tax year in question, or 46 days after the tax year in question.

Note that the amount to be disregarded per year increased to €3,000 for 2015 and subsequent years in line with the legislation introduced by Finance Act 2013.

SOLUTION 2

Part (i)

Note: As students were required to briefly apply the Badges of Trade to Erica’s circumstances, students were not expected to provide as extensive an answer as below. However, this is provided in full for tutorial purposes

The subject matter of the realization: Property such as commodities or manufactured articles which are normally the subject of trading are only exceptionally the subject of investment. It is not unusual for paintings to be either stock-in-trade or investments, so this badge is inconclusive alone.

Length of period of ownership: Generally speaking, property which is meant to be dealt in is realized within a short time after acquisition. Presumably, Erica sold the paintings soon after their completion, indicating a trade under this badge.

The frequency of the number of transactions by the same person: Where a person carries out a number of similar transactions at the same time or carries them out in succession over a period of years, there is a presumption that a trade is carried on in respect of the property. Erica’s multiple sales in a single year would point towards a trade being carried on.

Supplementary work on or in connection with the property realized: If the property is worked on in any way during the period of ownership so as to bring it to a more marketable condition or if any specific steps are taken to attract a purchaser, then there is evidence of trading. By contrast, if nothing at all is done this tends to suggest that a trade is not being carried on in relation to the property. Erica started with blank canvases and paints and produced finished products which could be sold at a premium – this would indicate the existence of a trade under this badge.

The circumstances which were responsible for the realization: It may occur that the disposal is triggered by virtue of an individual’s personal circumstances. This would suggest that a trade is not carried on. Erica did not sell the paintings under duress – the plan was always to sell the paintings that were sold in 2014 – this indicates the existence of a trade under this badge.

Motive: There are cases in which the purpose of the transaction or the sale is clearly evident. Motive is never irrelevant in any of these cases. It can be inferred from the circumstances even if this contradicts the seller’s stated intention. Erica was specifically commissioned to produce these works for consideration, and therefore it seems clear that the motivation for the sale was to generate funds that had been planned since the commissions for the paintings were accepted.

On the balance of the above, it seems clear that Erica should treat the proceeds received from the sale of the paintings in 2014 as income in her hands.

Part (ii)

Erica
Case II income computation
Year ended 31 October 2014
Profit Per Accounts 221,600
Addbacks:
Pension 9,000
Professional fees 11,800
Depreciation 2,500
Subscriptions – charitable donations 1,200
Entertainment – client entertainment  1,100 25,600
247,200
Deduct:
Capital allowances on car 3,000 (3,000)   
Case II Income for y/e 31 October 2014 after capital allowances 244,200

Capital allowances computation re: car:

Cost 2013: €25,000
Restricted to: €24,000
W & T 2013 @ 12.5% (€3,000)
TWDV 1/1/2014 €21,000
W & T 2014: (€3,000)
TWDV 31/12/2014 €18,000

Part (iii)

Erica and Fionn

Income tax computation

Tax year 2014

Schedule D Case II income - solicitor 247,200
Less capital allowances 3,000 244,200
Schedule D Case II income – artist 8,000
252,200
Less carer’s allowance (15,000)
Less donation ( - )
Less pension (9,000)
228,200
Taxed as follows:
€41,800 @ 20% = 8,360
€186,400 @ 41% = 76,424
84,784
Less credits:
Marriage credit (3,300)
Home carer credit (810)
Dependent relative credit (70)
Medical expenses credit ((€250 + €800 − €120) × 20%) (186) (4,366)
Net tax 80,418
PRSI: €247,200 plus €8,000 less €3,000 = €252,200 × 4% = 10,088
USC:
€10,036 @ 2% = 201
€5,980 @ 4% = 239
€236,184 @ 7% = 16,533
€152,200 @ 3% = 4,566 21,539
€112,045

Note changes to Income Tax and USC rates and bands introduced by Finance Act 2017.

Finance Act 2015 introduced the earned income tax credit, this was increased to €1,150 in Finance Act 2017.

Note the changes to the home carer tax credit introduced in Finance Act 2015 and further increased to €1,100 in Finance Act 2016 and €1,200 in Finance Act 2017.

Part (iv)

Erica’s return for the tax year 2014 is due for submission on 31 October 2015.

The above liabilities are also due for payment on 31 October 2015.

If Erica submitted her return one week late, she would be liable to a surcharge of 5% of the net tax, PRSI and USC due above before the deduction of preliminary tax paid, i.e.:

5% × €112,045 = €5,602

If Erica paid the balance due a week after it was due, then she would be liable to interest charges at a daily rate of 0.0219% on the outstanding balance after the deduction of preliminary tax paid or a total of 0.0219% × 7 × (€112,045 − €46,000) = €101.

Part (v)

Erica may not claim a Case II deduction for the cost of buying suit exclusively for work on the basis of the judgment in the case of Mallalieu v Drummond [1986] 57 TC 330.

Note increase in Standard Rate Cut-Off Point to €34,550 in Finance Act 2017.

SOLUTION 3

Fred

Part (a)(i)

Basis period for tax year 2014: 1 October 2014 to 31 December 2014
Basis period for tax year 2015: 1 October 2014 to 30 September 2015
Basis period for tax year 2016: 1 October 2015 to 30 September 2016

Part (a)(ii)

Initial position

Income assessable in year 2014: Case I = €25,000 × 3/12 = €6,250
Case IV = €3,000 × 3/12 = €750
Schedule E = €3,000
€10,000
Income assessable in year 2015: Case I = €25,000
Case IV = €3,000 × 9/12 = €2,250
€27,250
Income assessable in year 2016: Case I = €24,000

Check for second-year excess

Actual profits in year 2015: (€25,000 × 9/12) + (€24,000 × 3/12) = €24,750
Assessed: (€25,000)
Second year excess: €250

Second year excess is deductible from third year assessable profits, so after adjustment, income assessable in year 2016 is €24,000 less €250 = €23,750.

Part (a)(iii)

Income assessable to PRSI in 2014 = €10,000

(Note: Fred’s Schedule E income in 2014 may not have been assessable to Employee’s PRSI but would have been assessable to Employer’s PRSI)

Exempt from USC in 2014 as deposit interest is exempt and his assessable profits plus employment income are below the low income threshold.

Gina

Part (b)(i)

Basis period for tax year 2014: 1 January 2014 to 31 October 2014

Part (b)(ii)

Income assessable in year 2014
Case I: (5/12 × €29,000) + €15,000 = €27,083
Schedule E: €230 × 52 = €11,960
€39,043
Income assessable in year 2013:
Case I (see note): = €26,500
Schedule E: €230 × 52 = €11,960
€38,460

Note:

Originally assessed in 2013: Profits for year ended 31 May 2013 = €23,000

Actual profits for year 2013: (5/12 × €23,000) + (7/12 × €29,000) = €26,500

As actual profits for penultimate year exceed those assessed, the assessment for the year 2013 is revised to the actual profits of €26,500.

Part (b)(iii)

Gina is exempt from PRSI as she is older than 66.

Gina is liable to USC on her assessable profits of €27,083 in 2014.

Payments from DSP are exempt from USC.

Harry

Part (c)(i)

Basis periods before any relief:

Basis period for tax year 2013: 1 February 2013 to 31 December 2013
Basis period for tax year 2014: 1 February 2013 to 31 January 2014
Basis period for tax year 2015: 1 January 2015 to 30 November 2015

Calculate on conventional basis first:

Income assessable in year 2013 – actual:
Case I: (11/12 × €18,000) = €16,500
Schedule E: €3,000 less €300 = €2,700
€19,200
Income assessable in year 2014 – first 12 months:
Case I: = €18,000
Income assessable in year 2015 – actual:
Case I: (1/12 × €14,000) + €9,000 = €10,167
Total assessed: €16,500 + €18,000 + €10,167 = €44,667
Total actual profits: €18,000 + €14,000 + €9,000 = €41,000
As the assessed profits exceed the actual profits, the profits for the penultimate year may be revised to actual. Following this relief:
Income assessable in year 2014 – actual:
Case I: (1/12 × €18,000) + (11/12 × €14,000) = €14,333

Part (c)(ii)

Income assessable to PRSI in 2013: Case I: €16,500 as above
Schedule E: €3,000
€19,500
Income assessable to USC in 2013: Case I: €16,500 as above
Schedule E: €3,000
€19,500

SOLUTION 4

Part (a)(i)

Dublin house
Rent receivable (5 × €2,200) 11,000
Less: Interest (€17,500 × 75% × 5/7) (9,375)
Painting -
Solicitor’s fees -
Estate agent fees (150)
PRTB fee (90)
1,385
Capital allowances: €2,500 × 12.5% × 5/12 = (130)
1,255
Dublin office suite
Rent receivable (€80,000 × 7/12) 46,667
Income element of premium 86,400*
133,067
Less: Interest (€62,000 × 7/10) (43,400)
89,667
*Income element = Premium × (51 – No. of years in lease)/50
= €120,000 × (51 – 15)/50
= €86,400
Cork apartment
Rent receivable (11 × €850) 9,350
Less: PRTB (90)
Repairs (1,900)
7,360
Budapest apartment
Rent receivable 5,000
Less: Interest (€4,000 × 75%) (3,000)
2,000

Part (a)(ii)

If Ingrid did not register the tenancy with PRTB, she would be unable to claim a deduction for the mortgage interest with respect to the above property (S.97(2I) TCA 1997)

Part (a)(iii)

Ingrid may claim capital allowances with respect to the cost of the heating and ventilation system as “plant” in accordance with the judgment in the case of Cole Brothers Limited v Phillips.

Part (a)(iv)

Section 71(4) TCA 1997

Part (b)

Ingrid is taxable on the €6,000 received as it does not qualify for “rent-a-room relief”. This is due to the fact that the total consideration paid exceeds the annual limit of €10,000 for 2014 – the limit is the limit per property rather than per person, and payments for services such as food or laundry are taken into account in determining whether or not the limit has been breached.

The rent a room relief limit was increased to €14,000 with effect from 1 January 2017.

The percentage of mortgage interest deductible against residential rental income was increased by Finance Act 2016 by 5% with effect from 2017 and 5% each year until 2021.

Finance Act 2017 introduced changes where pre-letting expenses of up to €5,000 incurred in the 12 months before the date of the first letting can be taken as a deduction. This is the case where the property has been vacant and unoccupied for a continuous period of 12 months before the date of the first letting.

SOLUTION 5

Part (i)(I)

The payment by his employers of Larry’s professional subscription fee is not taxable at all. This is due to the fact that:

the duties of his employment require him to be QFA qualified

continued membership is an indispensable condition of his employment

The provision of a loan to Larry at a preferential rate is a taxable benefit-in-kind. It is a BIK because it is the provision to Larry by his employer of the use of something from their own resources rather than something in the form of money or convertible into money.

The provision of the free suit by the menswear shop is a taxable perquisite as it is a benefit in the form of money or convertible into money.

Part (i)(II)

The benefit-in-kind in Larry’s hands arising out of the loan is the difference between the rate charged to him on the loan and the “specified rate” set out in the TCA 1997. For loans used to purchase a person’s primary residence, the “specified rate” is 4%, so Larry will be liable to tax on the difference of €170,000 × (4% − 3.5%) = €850 per annum or €71 per month.

As the suit is considered a perquisite, it will be taxable in Larry’s hands based on the market value of same, which can be shown to be €310 according to the offers received by Larry.

Part (i)(III)

Wilkins v Rogerson

Part (ii)

Cumulative Basis

June tax
Gross pay June 4,100
BIK loan: 71
Suit perk: 310
Plus pay to date 14,000
18,481
€16,398 × 20%: 3,280
€2,083 × 41%: 854
4,134
Less cumulative credit: (1,650)
Cumulative net tax: 2,484
Less PAYE paid to date: (2,344)
Tax this period: 140
June PRSI ee
€4,481 × 4% = 179
June USC
Cumulative pay etc. as above 18,481
€5,018 × 2%: 100
€2,990 × 4%: 120
€10,473 × 7%: 733
953
Less USC paid to date: (753)
USC this period: 200
Net pay calculation June:
Gross salary: 4,100
Less tax: (140)
Less PRSI: (179)
Less USC: (200)
Net pay June: 3,581

Note changes to USC rates and bands introduced by Finance Act 2017.

Note the Standard Rate Cut-Off Point was increased to €34,550 in Finance Act 2017.

Part (iii)

Week 1/Month 1 Basis

June tax
Gross pay June 4,100
BIK loan: 71
Suit perk:
4,481
€2,733 × 20%: 547
€1,748 × 41%: 717
1,264
Less credit: (275)
Net tax: 989
June PRSI ee
€4,481 × 4% = 179
June USC
€836 × 2%: 17
€498 × 4%: 20
€3,147 × 7%: 220
USC this period: 257
Net pay calculation June:
Gross salary: 4,100
Less tax: (989)
Less PRSI: (179)
Less USC: (257)
Net pay June: 2,675

Note changes to USC rates and bands introduced by Finance Act 2017.

Part (iv)

Emergency Basis

June tax
Gross pay June 4,100
BIK loan: 71
Suit perk: 310
4,481
€2,733 × 20%: 547
€1,748 × 41%: 717
1,264
Less credit: (138)
Net tax: 1,126
June PRSI ee
€4,481 × 4% = 179
June USC
€4,481 × 7%: 314
Net pay calculation June:
Gross salary: 4,100
Less tax: (1,126)
Less PRSI: (179)
Less USC: (314)
Net pay June: 2,481

Examiner’s Report

Question 1

This was a multi-part question covering a variety of areas.

Areas where students tended to lose marks in this question were as follows:

Part (a): In this part, students were asked to state the amount of travel and subsistence expenses that could be refunded tax-free to an employee based on given circumstances. Some students incorrectly limited the answer to the flat rate Civil Service rates rather than allowing the full vouched amount.
Part (b): In this part, students were asked to state the income exemption limit for a widow with one dependent child. Some students incorrectly gave a figure based on “grossing up” the tax credits to which the widow would be entitled rather than stating the exemption limit set out in Section 188 Taxes Consolidation Act 1997.
Part (c): In this part, students were asked to calculate and allocate the “year of marriage” credit available to a couple. Some students did not limit the credit to the fraction of the year for which the couple were married. A few students spent time on providing a full calculation of the couple’s tax liability under joint assessment, even though this figure was given in the question itself – although the students did not necessarily lose marks for this, this would still have used up valuable exam time.
Part (d): In this part, students were asked to calculate the PRSI liability of a self-employed person and his employee who is also his spouse. This was generally answered very well, although some students missed the PRSI exemption available to Roger’s wife.
Part (e): In this part, students were asked to calculate the USC liability of an individual given their circumstances and some sources of income. Some students incorrectly applied USC to the deposit interest which had been subject to DIRT.
Part (f): In this part, students were asked to identify the income subject to income tax, PRSI and USC for a person receiving maternity benefit from the State and maternity pay from her employer. Some students missed the change in the tax treatment from 1 July 2013 and a number of students focussed on the income tax treatment only, omitting to state the PRSI and USC treatment of the income outlined.
Part (g): In this part, students were asked to provide the detailed statutory reference regarding the Revenue offence of assisting a person in making an incorrect tax return. Some students were unable to provide the correct section.
Part (h): In this part, students were asked to state how long a chargeable person must retain the books and records relevant to their income tax return. Although almost all students correctly identified the 6-year time period, most students omitted to specify that this period commences on the completion of the transactions to which the books and records relate.
Part (i): In this part, students were asked to calculate the tax credit available with respect to the payment of college fees. The most common error was the deduction of €2,750 from each child’s tuition fees, rather than deducting this figure just once from the total. A number of students also failed to limit the allowable fees for any individual course to €7,000.
Part (j): In this part, students were asked to specify the form an employer uses to return details of employee remuneration and payroll deductions to Revenue, and the deadline for submitting this return. Some students incorrectly cited the Form P30 as the answer.

Question 2

This question examined aspects of what constitutes a trade, the calculation of the tax-adjusted profits of a sole practitioner including case law to support certain positions, the calculation of a jointly assessed married couple’s income tax, PRSI and USC liabilities and the application of the pay-and-file compliance rules to a practical situation.

As always, this type of question forms part of the core of the assessment of income tax fundamentals.

The first part of the question required students to use the Badges of Trade to determine whether or not Erica should be treated as carrying on a trade or profession as an artist. The question required students to demonstrate their understanding of the Badges of Trade by applying them to a practical situation. Students were therefore not given marks for simply listing the Badges of Trade without any application to the facts described.

The second part of the question required students to calculate Erica’s tax-adjusted profits from her profession as a solicitor, including the capital allowance position for any relevant assets. Marks were lost in the following areas:

It is absolutely crucial that students approach the tax-adjusted profit computation in the correct format, by starting with the profit per accounts and adjusting for addbacks and deductions. A small number of students who adopted another approach lost significant marks. Having said that, those students who adopted the conventional approach generally identified the correct adjustments and scored very well.

Some students omitted to calculate the capital allowances due or the tax written down value of Erica’s car despite the question specifying these requirements.

The third part of the question required students to calculate Erica’s income tax, PRSI and USC liabilities for the year. The areas where students tended to lose marks were as follows:

Some students assumed that Erica’s income from the sale of paintings was exempt, despite no application having been made to Revenue for an exemption.

A number of students included the relief for the payment to the carer as a tax credit rather than as a deductible allowance.

A smaller number of students made a similar error in reverse, by deducting Erica’s personal tax credits from her income as if they were allowances.

Some students included tax relief for the charitable donation in the income tax computation.

It should be noted that students were generally very comfortable with the calculation of the PRSI and USC liabilities for Erica. In particular, the application of the 3% surcharge on Erica’s self-employed income over €100,000 was generally dealt with quite well.

The fourth part of the question required students to identify the relevant compliance dates for Erica’s 2014 income tax return and tax liability, and the consequences of missing these deadlines:

Some students provided dates in their answers without specifying the appropriate year, and lost marks accordingly.

A number of students seemed confused with respect to the distinction between a surcharge for the late submission of a return, and an interest charge for the late payment of tax. It needs to be stressed that these are two completely separate sanctions imposed due to two completely separate transgressions.

The final part of the question required students to state whether Erica could claim a Case II deduction for the cost of certain clothes, and to support this answer by reference to case law. Although the vast majority of students were correct in denying a deduction, a number could not give the name of the relevant case from which the precedent arose.

Question 3

This question examined the income tax basis of assessment for the profits of a self-employed business under three different scenarios – the commencement of a business, the cessation of a business, and a short-lived business. The question also tested the student’s ability to identify what income should be subject to PRSI and USC.

Areas where students tended to lose marks in this question were as follows:

A number of students seemed very unfamiliar with the various specific rules for determining the taxable profits of a business in a commencement or cessation scenario.

Some students who were familiar with the appropriate rules, however, failed to apportion the deposit interest for Fred between the relevant tax years.

Some students did not specify that the “second year adjustment” should be deducted from the third year’s assessable profits, i.e. those of 2016 in Fred’s case.

A number of students completely omitted to mention Gina’s pension income in their calculations of taxable income.

A small number of students missed the exemption from PRSI for Gina because of her age, and the exemption from USC for her DSP pension.

Strictly speaking, the method for determining whether or not a revision of assessable profits is necessary for a short-lived business is to aggregate the total profits assessed first, and then compare that figure to the total actual profits. Very few students took this approach and seemed to assume that a revision was necessary without carrying out this exercise.

Question 4

This question examined the taxation of various types of rental income.

The first part of the question required students to calculate Ingrid’s rental profit or loss for tax purposes given the details of various types of properties. The areas where students tended to lose marks in this part were as follows:

Failing to limit the rent receivable on the Dublin house to 5 months.

Failing to limit the deduction allowable for the mortgage interest on the Dublin house to 5/7ths of the relevant sum.

Allowing a deduction for the solicitor’s fees for the purchase of the Dublin house

Failing to calculate the capital allowances due with respect to the new furniture in the Dublin house.

Failing to limit the rent receivable on the Dublin office to 7 months

Failing to limit the deduction allowable for the loan interest on the Dublin office to 7/10ths of the total.

Failing to restrict the deduction allowable for the loan interest on the Budapest apartment to 75% of the total.

In the second part, students were asked to state the reason that PRTB registration is important for tax purposes and to provide the relevant statutory reference for this. Although most students correctly identified the fact that a failure to register would result in a mortgage interest deduction being denied to the landlord, the statutory reference proved to be more difficult for students. A number of students provided the statutory reference for tax relief allowed with respect to an individual’s principal private residence, and very few of those who correctly identified the section could also provide the correct subsection.

In the third part, students were asked to identify any possible capital allowances available to Ingrid on the purchase of a commercial property and to support this answer by reference to case law. While many students correctly identified the allowable plant, very few could give the name of the case providing the specific precedent for such a claim.

In the fourth part, students were asked to identify the detailed statutory reference allowing the deductibility of loan interest from foreign rental income. Very few students identified the correct section, with a number of students stating that such a provision is not contained in the legislation at all.

In the final part, students were asked to calculate the potential taxable income arising to Ingrid from the provision of a room and services in her own home to a relative. A number of students deducted the rent-a-room relief limit of €10,000 for 2014 from the total rent received and incorrectly stated that only the balance would be taxable. Some students correctly stated that the rent-a-room relief would not apply in the circumstances, but incorrectly stated that the reason for this was the family relationship between the house owner and tenant – that specific restriction to this relief applies only between parent and child.

Question 5

This question required students to address various aspects of the taxation of Schedule E income including the taxation of employer-provided benefits and the different methods of operating the PAYE system.

The first part of this question required students to identify whether certain stated benefits were BIKs, perquisites or not taxable at all, to outline reasons for these answers. This was generally answered well, but many students calculated the BIK with respect to the preferential loan by reference to a rate of 4.5% rather than the specified rate of 4% given in the legislation. Very few students could give the name of the case giving the specific precedent for the valuation of the perquisite of the new suit.

The second part required students to calculate an employee’s net pay given certain details and the operation of the PAYE system on a cumulative basis. Many students failed to apply the cumulative basis correctly and calculated the tax due for the month of June in isolation without reference to the cumulative credits, cut-off point and PAYE paid. Some students did not include calculations of PRSI and USC at all, despite the question requiring a calculation of Larry’s net pay. Very few students applied the cumulative basis to the USC calculations. Many students incorrectly included the non-cash benefits in the calculation of Larry’s net pay.

The third part required students to calculate the employee’s net pay under the operation of the PAYE system on a “week 1/month 1” basis. Students were generally more successful in answering this part than the previous part dealing with the cumulative basis.

The final part of the question required students to calculate the employee’s net pay under the operation of the PAYE system on an emergency basis. Some students incorrectly applied a 41% tax rate to all of Larry’s income for the month. Some students also used the same personal tax credit for Larry as had been granted for the previous two parts, instead of limiting it to the emergency tax level only. Some students missed the fact that USC is chargeable at a rate of 7% on all income under the emergency tax system.

  Q1 Q2 Q3 Q4 Q5
Highest 20.5 22.5 23.5 23.5 18.5
Lowest 2 2.5 1 1 2
Average 12 14 11 13 10