Part 1 Past Papers

Summer 2016

QUESTION 1

(a) On 1 January 2014, Martha rented out a room in her house which she occupies as her principal private residence to her niece for €800 per month. Her niece also pays Martha an additional €100 per month in return for Martha providing her with cooked meals and a laundry service. The arrangement continued for the 2015 calendar year under the same terms.

Martha has asked you if the above income is liable to income tax, PRSI and/or the USC for:

(i) The 2014 tax year; and

(ii) The 2015 tax year.

(3 marks)

(b) Alice had interest income of €1,000 in 2015 in respect of a deposit she holds in a Bank of Ireland account. The bank deducted Deposit Interest Retention Tax (DIRT) at a rate of 41% from her interest. Alice is a widow and is aged 67. The only other income she received in the year was a State pension of €12,000.

Advise Alice as to whether:

(i) She has any income tax/PRSI/USC liability for 2015;

(ii) She is entitled to a refund of the DIRT deducted by Bank of Ireland; and

(iii) There is any action she can take to prevent DIRT being deducted by Bank of Ireland from her interest income in the future.

(5 marks)

(c) Andrew and Mary employ a nurse to take care of their incapacitated mother. They paid the nurse €80,000 in 2015 and split the cost equally between them.

Advise Andrew and Mary:

(i) If they may be entitled to any income tax relief in respect of the payment, specifying the form that the relief would take; and

(ii) If there is any limit on the amount of relief that may be available.

(2 marks)

(d) Brendan Casey commenced to trade on 1 August 2013. He prepared accounts for the year ended 31 July 2014 and had a tax adjusted Case I profit for the period of €20,000. His tax adjusted profits for the accounting year ended 31 July 2015 were €10,000.

Calculate the amount of Case I income assessable to tax for the 2013, 2014 and 2015 tax years.

(5 marks)

(e) Marie moved to London on 10 January 2015 to commence employment with a UK investment bank. Her income for 2015 was as follows:

Employment income from UK investment bank - €80,000

Interest income derived from UK bank deposit - €2,000

Marie is Irish domiciled and lived in Ireland for all of her life before she moved to London on 10 January 2015. Marie spent one week in Ireland in June 2015 for a brief holiday and apart from this, remained in London for the rest of the 2015 year.

You have been asked to advise Marie on:

(i) Her Irish tax residence and ordinary residence status for 2015.

(ii) Whether the above income sources will be subject to Irish income tax in 2015.

(4 marks)

(f) State the section and sub-section of the Taxes Consolidation Act 1997 which provides for an exemption from income tax on employer provided bicycles and list two conditions which must be met in order for a bicycle to be provided tax free to an employee.

(2 marks)

(g) Frank and Simon registered as civil partners on 14 February 2015.

Frank and Simon have asked you to advise how the registration of their civil partnership affects their assessment to income tax in the year of registration of their civil partnership, including any relieving measure available.

(2 marks)

(h) Distinguish between a perquisite and a benefit-in-kind and state how the taxable value of each is calculated for income tax purposes.

(2 marks)

Total 25 Marks

QUESTION 2

(a) Alan Smith carries on a trade of manufacturing and distributing farm gates. Alan is a widower with two adult children, David and Declan. Alan’s wife died in 2012 in a tragic accident.

David works in the business on a part-time basis.

Declan is still in full-time education. He commenced a two-year Masters in Economics programme in Trinity College Dublin during 2015. Declan lives in the family home with Alan. Alan has agreed to provide full financial support to Declan for as long as he remains in full-time education. Alan paid tuition fees of €6,000 for Declan’s course during 2015.

The results of Alan’s business for the accounting year ended 30 November 2015 are as follows:

Notes
Revenue 200,000
Other income (1) 2,000
202,000
Less expenses:
Staff costs (2) 65,000
Electricity and heating 4,000
Rent 20,000
Finance lease interest expense (3) 500
Motor expenses for van (4) 2,000
Sundry expenses (5) 6,000 97,500
Profit before tax 104,500

Notes

(1) Other income is comprised of the recovery of a bad debt. Alan wrote off a debt of €5,000 for the accounting year ended 30 November 2012 as, based on the evidence available at that time, it was considered to be irrecoverable. However, during the year ended 30 November 2015, Alan received a final settlement payment of €2,000 in respect of the debt.

(2) Alan employed David in his business during the year on a part-time basis to take care of certain bookkeeping and administrative matters. Alan is aware that David is saving for a new home and paid him €5,000 more than the market wage for his role. This amount is included in total staff costs.

(3) Alan leases a piece of manufacturing equipment for use in his business by way of finance lease. The interest element of the finance lease payment of €500 is included in expenses. The capital element of the lease repayment was €2,000 for the year ended 30 November 2015 and this was accounted for through the Statement of Financial Position.

(4) Alan has a van which he uses to distribute gates to his customers. Alan does not use the van for his private use. The qualifying cost of the van was €16,000 and the tax written down value of the van as at 1 December 2014 was €8,000.

(5) Sundry expenses include:

€2,000 which was incurred in hosting a customer appreciation night for the customers and staff of Alan’s business; and

€500 related to trade subscriptions.

REQUIREMENTS

(i) Calculate Alan’s Case I taxable income for the accounting year ended 30 November 2015.

Calculate the tax written down value of the van mentioned at (4) above as at 30 November 2015.

(10 marks)

(ii) Calculate Alan’s income tax, PRSI and USC liability for the 2015 tax year. You can assume that Alan does not have any other income in the year.

(10 marks)

(b) Alan is considering retiring. He plans to stop manufacturing farm gates in summer 2016 and will continue to sell any stock which has been made in the ordinary way. Following the sale of all of his stock which he expects to be in early 2017, he will close his business. He will then seek to sell the various pieces of equipment and other capital assets he has for use in his business. Alan is aware that there are particular rules which apply on the cessation of a trade.

REQUIREMENTS

Alan would be grateful if you could:

(i) Advise him of when he should be considered to have ceased to trade.

(2 marks)

(ii) Advise him of the rules which determine the basis period in the year of cessation to trade and if he may be required to review his Case I profits of any preceding tax years.

(3 marks)

Total 25 Marks

QUESTION 3

(a) List two factors which should apply in order for an asset to be considered “plant”, referring to one relevant case and providing two examples of assets which may constitute “plant” in your answer.

(5 marks)

(b) Brian acquired a machine for use in his manufacturing trade for €5,000 during the accounting year ended 31 December 2009 and claimed capital allowances. During the year ended 31 December 2015, Brian sold the machine for €1,800 (which represented market value) to his brother, Barry.

REQUIREMENTS

(i) Calculate the tax written down value of the machine as at 31 December 2014.

(1 mark)

(ii) Calculate the balancing adjustment, if any, required in Brian’s income tax computation for the year ended 31 December 2015 and explain the reason for your answer.

(2 marks)

(c) Niall is a mechanical engineer who commenced a manufacturing trade during 2014. He incurred the following capital expenditure in relation to a factory, an industrial building, in 2015:

Site costs 50,000
Site preparation costs 10,000
Factory construction costs (Note 1) 200,000
Office construction costs 12,000
Lifts 30,000
Heating and air conditioning system 30,000

Note 1:

Niall received a government grant towards the cost of the factory construction costs of €100,000.

REQUIREMENTS

(i) Specify what expenditure qualifies for:

Industrial Buildings Annual Allowances; and

Plant and Machinery Capital Allowances.

(6 marks)

(ii) Calculate the capital allowances which Niall should be entitled to claim in respect of the year ended 31 December 2015 assuming that the relevant conditions are met.

(2 marks)

(d) Ronan is considering acquiring a factory for the purposes of his trade. Ronan would prefer to acquire a second hand factory rather than to build a new one. He has been told that the Industrial Buildings Annual Allowances (IBAA) available to him in respect of a second hand factory may be different to those available to him in respect of a new building. He is also aware that where he buys a new building, the IBAA calculation may differ depending on whether he buys the new building from a builder or a non-builder.

REQUIREMENTS

Advise Ronan on the following:

(i) Where a new industrial building is acquired from a non-builder, how is the qualifying cost of the building determined for IBAA purposes?

(2 marks)

(ii) Ronan is considering acquiring a second hand building from Peter Costello in 2015. Peter built the factory in 2005 and his qualifying cost for IBAA purposes was €300,000. He is proposing to sell the factory to Ronan for €330,000. Assuming that the sale goes through in 2015 and all relevant conditions are met, explain how Ronan’s IBAA should be calculated in respect of the year ended 31 December 2015 and calculate the IBAA for 2015.

(3 marks)

(e) Marie purchased a car for the purposes of her sales trade during the accounting year ended 31 December 2012. The car cost €28,000 and is a Category D vehicle for carbon emissions purposes. Marie claimed capital allowances in respect of the car in the 2012, 2013 and 2014 tax years. In 2015, Marie sold the car to a third party for €18,000.

REQUIREMENT

Calculate any balancing adjustment arising on the disposal of the car by Marie in 2015 and show your workings.

(4 marks)

Total 25 Marks

QUESTION 4

(a) Paul is employed as an agricultural consultant by Agri-Advice Ltd. Paul’s role involves advising farmers in the midlands and West of Ireland in relation to certain agricultural environment schemes and it requires significant travel.

Details of Paul’s employment package for 2015 are as follows:

1. Yearly salary (gross) payable monthly - €40,000

2. Paul’s employer provides a van to Paul. The open market value of the van when it was first registered in 2013 was €30,000. Agri-Advice Ltd bears all of the costs related to the van. Paul uses the van for his personal use as well as for the purposes of his employment.

3. Paul’s employer provides him with a mobile phone which he uses for the purposes of his employment duties. He also very occasionally uses it for personal calls.

4. Agri-Advice Ltd has provided Paul with two loans, as follows:

Home loan: Agri-Advice Ltd provided Paul with a qualifying home loan of €50,000 in 2014 which Paul used to purchase his principal private residence. Paul pays interest at a rate of 5% on this loan. Paul made four capital repayments of €1,000 on 31 March 2015, 30 June 2015, 30 September 2015 and 31 December 2015.

Holiday loan: Agri-Advice Ltd provided Paul with a holiday loan of €15,000 in 2014. Paul pays interest at a rate of 10% on this loan. Paul did not make any capital repayments during 2014 but he repaid €1,000 of the loan on 28 February 2015, €1,000 on 31 July 2015 and €2,000 on 30 November 2015.

Agri-Advice Ltd does not provide loans in the normal course of its business.

5. The Irish Farmers Journal newspaper is provided to Paul at the expense of his employer every Wednesday.

REQUIREMENTS

(i) (I) Set out two conditions that would need to be met in order for Paul’s use of his employer provided van not to give rise to a taxable benefit in kind.

(2 marks)

(II)  Assuming the use of the employer provided van gives rise to a taxable benefit-in-kind for Paul, calculate the taxable benefit that would arise in 2015.

(1 mark)

(ii) Explain whether the remuneration items listed at (3) – (5) above give rise to a taxable benefit for Paul, and if so, calculate the taxable benefit.

(5 marks)

(iii) Agri-Advice Ltd received a notice of determination of tax credits and standard rate cut-off point from the Revenue Commissioners in respect of Paul for the 2015 tax year. It contained the following information:

Monthly tax credits: €275

Monthly standard rate cut-off point: €2,817

The PAYE deducted from Paul’s salary is calculated on the cumulative basis.

Calculate the PAYE due in respect of January and February 2015. (Assume that the use of the employer provided van gives rise to a taxable benefit for Paul).

(6 marks)

(iv) Advise Paul of the income tax consequences that would ensue if his employer wrote off €10,000 of the home loan provided to him during 2015.

(1 mark)

(b) Rosie was made redundant from her job with Medics Ltd on 31 August 2015. Rosie commenced her employment with Medics Ltd on 10 January 2001 and this has been her only employment to date. She does not have any pension entitlements. Medics Ltd had not been in a position to provide pay increases since 2009 and Rosie had been on a gross annual salary of €50,000, payable monthly, and received an annual bonus in May each year of €10,000 since then.

Rosie received the following payments from Medics Ltd on her redundancy:

Statutory redundancy: €17,400

Ex-gratia payment: €40,000

REQUIREMENT

Advise Rosie as to the income tax, USC and PRSI consequences of the two payments listed above.

Marks will be awarded for statutory references. Show all of your workings.

(10 marks)

Total 25 Marks

QUESTION 5

(a) During 2015, Brian decided to invest in a property in his hometown for renting. He took out a loan for this purpose and acquired the property on 1 February 2015. The property consists of a ground floor and a first floor which are both the same size.

Brian entered into a 10-year lease agreement for the ground floor of the property with a commercial tenant on 1 July 2015. The lease provides for a monthly rent of €10,000 and required the tenant to pay an upfront premium of €20,000.

Brian received the upfront premium and the rent for July, August and September 2015 from the tenant on time. However, the tenant ran into temporary financial difficulties and did not pay the rent for October, November and December 2015 until February 2016.

Brian converted the first floor of the building into two apartments. Apartment 1 has been rented to a residential tenant since 1 July 2015 for a monthly rent of €1,000, payable on the last day of each month. Apartment 2 was rented from 1 April 2015 for a monthly rent of €900 but the tenant vacated the apartment after two months. The apartment was then vacant from 1 June 2015 until 1 December 2015 when it was rented out again at a monthly rent of €800 as Brian struggled to find a suitable tenant. Brian is delighted however, that, to date, he has received all of the rental payments in respect of the residential parts of the property on time.

Brian incurred the following expenses in relation to the property throughout 2015:

Cost of structural work to convert first floor into two apartments

20,000

Interest on the loan used to acquire the property (1 February-31 December 2015)

10,000

Solicitor fees for services carried out in May/June 2015 in relation to the negotiation of the lease for the commercial ground floor property

2,500

Registration with the Private Residential Tenancies Board in respect of the two first floor apartments

180

2015 Local Property Tax charge (split equally between the two first floor apartments)

250

Cleaning and painting expenses following vacation of first tenant from Apartment 2

1,000

REQUIREMENT

Calculate Brian’s Schedule D Case V assessable income for 2015. Show your calculations.

(16 marks)

(b) Mary worked as a teacher until 2014. Mary was unhappy in her job and decided to leave her employment and pursue her lifelong dream of becoming a jewellery designer in 2015. Mary carried on a successful jewellery design and manufacturing trade in 2015.

REQUIREMENTS

Mary is aware that she is considered to be a chargeable person for the 2015 tax year. She has asked you to advise her of:

(i) How she should register for income tax.

(1 mark)

(ii) What the rules are for calculating an individual’s preliminary income tax liability, when the preliminary tax payment is due and when the balance of tax payable (if any) is due.

(4 marks)

(iii) What section of the Taxes Consolidation Act 1997 requires a chargeable person to file an income tax return and what date the income tax return is due?

(1 mark)

(iv) Whether there are any exceptions to the rules set out in response to (ii) and (iii) above given that Mary commenced to trade in 2015.

(2 marks)

(v) What surcharge applies to the late filing of an income tax return?

(1 mark)

Total 25 Marks

SOLUTION 1

(a) Martha received rental income of €9,600 plus an additional €1,200 for providing meals and a laundry service, i.e. the total amount of the relevant sums received in each year was €10,800.

Martha’s niece is neither her child nor her employer.

The relevant limit on relevant sums which may be exempt from income tax under Section 216A TCA 1997 was increased from €10,000 to €12,000 in Finance Act 2014.

The total relevant sums of €10,800 are exempt from income tax, PRSI and USC in 2015.

However, the full amount is liable to income tax under Case V, PRSI and USC for the 2014 tax year on the basis that the total relevant sums exceeded the limit which applied for the 2014 tax year of €10,000. No marginal relief exists for rent a room relief.

Finance Act 2016 increased the relevant limit on relevant sums which may be exempt from income tax under Section 216A TCA 1997 was increased to €14,000.

(b) (i) Alice should be exempt from income tax for the 2015 tax year as her total income does not exceed the specified limit of €18,000 for the age exemption from income tax for a widowed individual who is over 65 years under Section 188 TCA 1997.

The USC does not apply to deposit interest that has been subjected to DIRT.

State pensions and other Department of Social Protection payments are not liable to USC.

There is a general exemption from PRSI for individuals aged 66 or over.

(ii) Alice should be entitled to a refund of the DIRT suffered on the basis that it is greater than her income tax liability and she is 65 years or more during the tax year. She should submit a claim using Form 54 and provide copies of her certificates of interest showing the DIRT deducted.

Finance Act 2016 changed the rate of DIRT to 39% for 2017, 37% for 2018, 35% for 2019 and 33% for 2020 and subsequent years.

(iii) Alice should complete Form DE1 and provide it to her bank in order to receive deposit interest gross going forward.

(c) An allowance may be available under Section 467(2) Taxes Consolidation Act 1997. If their mother is totally incapacitated by physical or mental infirmity, the carer’s employers should be entitled to a deduction from total income equal to the amount of the expenses actually borne subject to a maximum of €75,000 for 2015. The relief granted should be apportioned between Andrew and Mary in proportion to the amount borne by each of them in employing the carer, i.e. €75,000 × (40,000 / 80,000).

(d) 2013: actual 5 months €8,333

2014: profits of 12 month period ended in second year €20,000

2015: profits of 12 month period ended in third year €10,000

Review second year. Actual profits 2014 €15,834

Second year excess €4,166

Reduce the profits of third year by second year excess, i.e. €10,000 – €4,166 = €5,834

(e) Section 19(2) Taxes Consolidation Act 1997 – as Marie was not present in Ireland for at least 30 days during 2015, she is non-resident for 2015.

Marie is ordinarily resident as she was resident in Ireland for the three years of assessment prior to 2015.

As Marie is non-resident, but ordinarily resident and domiciled, she is liable to Irish income tax on her worldwide income with the exception of income from a trade or profession no part of which is carried on in Ireland, income from an office or employment all of the duties of which are carried on outside Ireland and other foreign income which is less than €3,810 per annum. As such, neither Marie’s UK employment income nor her UK investment income which is less than €3,810 are subject to income tax in Ireland in 2015.

(f) Section 118(5G) Taxes Consolidation Act 1997

Bicycle and equipment must be new

Must cost less than €1,000

Employee must use the bicycle to cycle to work

Scheme must be available generally to directors and employees of the company

(g) Section 1031E Taxes Consolidation Act – both partners are taxed as single persons in the year of registration.

However, if the aggregate amount of tax paid by them as single persons is greater than the income tax that would have been payable if they were jointly assessed for the period of the tax year that the partnership was registered, they will be entitled to a repayment of the excess but only the portion related to the period of the tax year that the civil partnership is registered.

(h) A perquisite is in the form of money or capable of being converted to money.

The taxable benefit of a perquisite is the market value of the asset or service provided.

BIK is a benefit which the employer provides to the employee or where the employee has free use of something.

The taxable benefit of a BIK is the cost to the employer of providing the benefit.

Finance Act 2017 introduced some changes in relation to the valuation of certain Benefits in Kind. These changes related specifically to electric Cars (nil BIK) and health insurance cover provided to employees by health insurance providers.

SOLUTION 2

PART A

(i)

Profit before tax

104,500

Add back:

Wages not incurred wholly and exclusively for trade purposes

5,000

Finance lease interest expense

500

 

Client entertainment

2,000

Deduct:

Total finance lease expense

2,500

 

Tax adjusted trading profits

109,500

Less: capital allowances (€16,000 × 12.5%)

2,000

 

Taxable Case I income

107,500

Bad debt recovered should be included in taxable income – no adjustment required €500 trade subscriptions are an allowable deductions – no adjustment required

€2,000 motor expenses are an allowable deduction – no adjustment required

TWDV as at 30 November 2015 = Opening TWDV – W&T for 2015 = €8,000 – €2,000 = €6,000.

(ii)

Alan Smyth
Income Tax Computation for 2015 tax year

Schedule D Case I income

107,500

Taxed as follows:

€37,800 @ 20% (widowed with dependent children)

7,560

Balance (€69,700) @ 40%

27,880

 

Total tax

35,440

 

Less non-refundable tax credits:

 

Widowed person qualifying for single person child carer credit

1,650

Single person child carer tax credit

1,650

Widowed parent – spouse died in 2012

2,700

Approved college fees (see Notes)

600

 

Total tax less credits

28,840

 

USC

€12,012 @ 1.5%

180

€5,564 @ 3.5%

195

€52,468 @ 7%

3,673

€37,456 @ 8%

2,996

Surcharge €7,500@ 3%

225

 

PRSI (€107,500 @ 4%)

4,300

 

Total income tax, USC and PRSI

40,409

 

Notes:

Declan should be considered to be a qualifying child as although he was over 18 at the start of the tax year, he is receiving full time instruction at a university, college, school or other educational establishment and is a child of claimant and is maintained by Alan at his own expense for the whole or part of the tax year.

A tax credit is available under Section 473A Taxes Consolidation Act 1997 for qualifying fee paid by Alan on behalf of any other person for an approved course. Qualifying fees include tuition fees. No tax relief is available for the first €3,000 of qualifying fees.

Finance Act 2017 changed the rates of and thresholds for USC.

The earned income credit as introduced by Finance Act 2015 would also be available to Louise. This credit was increased to €1,150 in Finance Act 2017.

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

PART B

(i) Alan should be considered to have ceased to trade on the final disposal of his trading stock. In general, the cessation of stock purchases or of the manufacture of goods does not constitute a cessation of trading if ordinary sales continue.

The subsequent realisation of the capital assets should not serve to delay the date of cessation of the trade.

(ii) Basis of assessment - actual profits for the period from 1 January to the date of cessation.

Alan will need to review his profits of the penultimate accounting period – if the profits of the actual year are greater than those originally assessed, the final assessment should be revised to the actual profits of the penultimate year.

SOLUTION 3

(a)

Factors to qualify as plant - asset must be:

An apparatus used in carrying on a business

Kept for permanent use in the business (not stock in trade)

Functional in the context of a business, i.e. not part of a setting in which the business is carried on and not part of the building.

(Yarmouth v France [1887], J Lyons and Co Ltd v AG [1944], Hinton v Madden & Ireland Ltd)

Examples: moveable partitioning, specialised electric lighting, heating and ventilation systems, lifts, special housing for machinery and equipment, sprinkler systems, office furniture, etc.

(b)

Calculation of TWDV as at 31 December 2014

Qualifying cost

5,000

Less:

Capital allowances 2009 (€5,000 × 12.5%)

625

Capital allowances 2010

625

Capital allowances 2011

625

Capital allowances 2012

625

Capital allowances 2013

625

Capital allowances 2014

625

 

TWDV 31/12/2014

1,250

Brian and Barry are connected persons - as such, €2,000 de minimis relief will not apply.

Sales proceeds

€1,800

TWDV 31/12/2014

€1,250

Balancing charge

€550

(c)

(i)

IBAA Qualifying Costs

Site costs

Not qualifying costs

Site preparations costs

€10,000

Factory construction costs

€200,000

Less grant

(€100,000)

Office construction costs (Note 1)

€12,000

Total

€122,000

Note 1:

Total construction costs = site prep €10,000 + factory construction €200,000 + office construction €12,000 = €222,000

Office construction €12,000 / Total construction €222,000 = 5.4%

On the basis that the office construction costs are less than 10% of the total construction costs, the office construction costs qualify as expenditure for IBAA.

P&M Qualifying Costs

Lifts

€30,000

Heating and air conditioning

€30,000

Total

€60,000

(ii)

IBAA 2015 = €122,000 × 4% = €4,880

P&M W&T 2015 = €60,000 × 12.5% = €7,500

(d)

(i) Where a new industrial building is acquired from a non-builder, the qualifying cost is the lower of the construction costs and the net price paid (i.e. Purchase price × (construction costs/construction costs + site costs)).

(ii) IBAA will be available on a straight line basis over remaining tax life.

Remaining tax life = 25 years – 10 years = 15 years.

Qualifying cost is lower of original qualifying cost of seller and purchase price, i.e. €300,000.

IBAA = €300,000/15 = €20,000

(e)

Category D vehicle – capital allowances available on 50% of the lower of €24,000 or the cost of the car.

Qualifying cost (50% × €24,000)

12,000

Less:

Capital allowances 2012 (€12,000 × 12.5%)

1,500

Capital allowances 2013

1,500

Capital allowances 2014

1,500

 

TWDV 31/12/2014

7,500

Sales proceeds (Restrict as follows: Sales proceeds × (qualifying expenditure/original cost of the car) = €18,000 × (€12,000/€28,000)

7,714

TWDV 31/12/2014

7,500

Balancing charge

214

SOLUTION 4

PART A

(i) (I)

The vehicle must be necessary in the performance of duties

Paul must be required to keep the van at his private residence when not in use

Paul must spend at least 80% of his time away from his work premises

Apart from travel between home and Paul’s workplace, there is no other private use.

Finance Act 2017 introduced provisions that where the van provided was an electric van (as detailed) no taxable emolument would arise in the provision of such a van.

(i) (II) BIK on company van: 5% of OMV = €30,000 × 5% = €1,500.

(ii)

Mobile phone - exempt from BIK charge provided private use is incidental.

Taxable benefit of the employer provided loans:

Home loan – not preferential as Paul is paying more than 4% on the qualifying home loan – no taxable benefit.

Holiday loan – preferential, Paul paid less than 13.5% interest in 2015. The taxable benefit is as follows:

€15,000 × (13.5% − 10%) × 2/12 = €88

(€15,000 − €1,000) × (13.5% − 10%) × 5/12 = €204

(€15,000 − €1,000 − €1,000) × (13.5% − 10%) × 4/12 = €152

(€15,000 − €1,000 − €1,000 - €2,000) × (13.5% − 10%) × 1/12) = €32

Total taxable benefit = €476

Newspaper benefit not taxable as it relates to the employer’s business

(iii)

Working: Gross salary for January and February 2015

January

February

Monthly salary (€40,000 / 12)

€3,333

€3,333

Monthly taxable benefits:

Employer provided van (€1,500 / 12)

€125

€125

Holiday loan (€15,000 × 3.5% × (1 / 12) for Jan and Feb

€44

€44

 

Monthly gross salary

€3,502

€3,502

Month

Gross pay

Cumulative gross pay

Cumulative Standard Rate cut-off point

Cumulative tax @ 20%

Cumulative tax @ 40%

Total Cumulative gross tax

Cumulative tax credit

Total cumulative net tax

Tax this month

Jan

€3,502

€3,502

€2,817

€563

€274

€837

€275

€562

€562

Feb

€3,502

€7,004

€5,634

€1,127

€548

€1,675

€550

€1,125

€563

(iv) Paul would be subject to income tax on the amount of the loan write off taxable benefit, i.e. €10,000.

PART B

Statutory redundancy amount is exempt - Section 203 Taxes Consolidation Act 1997

Number of complete years services: 14 years

Basic exemption (Section 201(1)(a) Taxes Consolidation Act 1997): €10,160 + (€765 × 14) = €20,870

Increased basic exemption (Paragraph 8, Schedule 3 Taxes Consolidation Act 1997)

Informed in the question that Rosie has not had a previous employment so therefore, she would not have previously claimed relief in respect of an ex-gratia redundancy payment. In addition, we are told that Rosie has no pension entitlements and as such, is not entitled to a tax free lump sum under an approved superannuation scheme.

Increased basic exemption = basic €20,870 + €10,000 = €30,870.

Standard Capital Superannuation Benefit (paragraph 6, Schedule 3 Taxes Consolidation Tax 1997)

((Average of the emoluments of the employment for the last 36 months of service to the date of termination × Number of complete years of service in the office or employment) / 15) – PV of any tax free lump sum received or receivable under any approved superannuation scheme.

(Average of the emoluments for last 36 months of service €60,000 × 14 complete years’ service)/15 = €56,000.

Conclusion: Full amount of ex-gratia payment is exempt from income tax under SCSB

No USC and no PRSI liability in connection with the payment.

Note that Finance Act 2017 changed the rates and threshold for Universal Social Charge.

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

SOLUTION 5

(A)

Commercial ground floor

First floor apartment 1

First floor apartment 2

Rental income

€60,000

€6,000

€2,600 (€900 × 2 months) + (€800 × 1 month)

Lease premium

€16,400

Less expenses:

Structural work

Deductible loan interest

€2,727

€1,023

€1,534

Solicitor fee

€2,500

PRTB registration fee

€90

€90

LPT

Cleaning expenses

€1,000

 

Rental surplus / (deficit)

€71,173

€4,887

(€24)

Less deficit on Apartment 2

(€24)

€24

Net Case V Assessment

€71,149

€4,887

0

Total Case V assessment

€76,036

Notes:

The income element of the premium is €20,000 × ((51 – 10)/50) = €16,400. This is taxable under Case V.

Case V is assessed on an arising basis – Brian is taxable on the rental income from July to December in 2015, as well as the income portion of the up-front premium.

(€10,000 × 6 months) + €16,400 = €76,400.

Loan interest: €10,000

Allowable post letting commercial = €10,000 × 50% × (6 / 11 months) = €2,727

Apartment 1 post letting = €10,000 × 25% × (6 / 11 months) × 75% = €1,023

Apartment 2 post initial letting = €10,000 × 25% × (9 / 11 months) × 75% = €1,534

Pre-letting portion not deductible. In-between letting portion deductible.

Finance Act 2016 introduced changes to the amount of loan interest deductible in respect of interest paid on loans used to purchase, repair or refurbish a residential premises.

Finance Act 2017 introduced changes where pre-letting expenses of up to €5,000 increased 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.

PART B

(i) Mary should complete a Form TR1 and return it to the Central Registrations Office

(ii) The amount of her preliminary tax payment must amount to at least one of the following:

90% of the tax payable for the tax year in question

100% of the tax payable for the previous tax year

105% of the tax payable for the pre-preceding tax year provided there is a direct debit arrangement in place.

Preliminary tax must be paid by 31 October in the tax year in question.

The balance of tax due must be paid by 31 October following the end of the tax year

(iii) Section 959I Taxes Consolidation Act 1997

The return must be filed by 31 October following the end of the year of assessment.

(iv) Section 1084(4) Taxes Consolidation Act 1997 – a late filing surcharge will not apply provided that the return for the 2015 tax year is filed by the due date of the second year, i.e. 31 October 2017

A taxpayer can choose the option to pay Preliminary Tax of 100% of the previous year’s liability which in Mary’s case would be nil.

(v) 5% of liability to max €12,695 if the return is filed by 31 December following the due date

10% of liability to max €63,495 if the return is filed after 31 December following the due date.

Examiner’s Report

In general, the paper was answered to a good standard and students demonstrated a good understanding of the Income Tax Fundamentals course.

Students were able to provide relevant legislative references where asked which was positive as the ability to use the Taxes Consolidation Act 1997 is key to success through all stages of the CTA examinations.

As students will note, a significant amount of computational work is required in the Income Tax Fundamentals exam. As such, students should ensure that they practice the computational aspects of the course. It was apparent that students were much more comfortable with the discursive aspects of the exam than with the numerical questions.

Question 1

Question 1 tested a broad range of the topics on the Income Tax Fundamentals course and was, in general, well answered. Specific comments on each part of Question 1 are included below:

Part (a): Many students were not aware that the limit for the amount of relevant sums which may arise to an individual for the purposes of rent-a-room relief increased from €10,000 to €12,000 in Finance Act 2014. Students should always ensure that they are familiar with recent Finance Act changes.

Part (b): Very few students achieved full marks for part (b). Some students struggled with the application of the age exemption from income tax, while some incorrectly noted that State pensions are not subject to income tax. A good proportion of students were aware of the general exemption from PRSI for individuals aged 66 or over but less were familiar with the USC treatment of the deposit interest income which had been subjected to DIRT or the exemption from the USC for State pensions and other Department of Social Protection payments.

Part (c): Students were very familiar with the relief available in respect of employing a person to take care of an incapacitated individual and this part was answered very well.

Part (d): A good number of students achieved full marks for the commencement to trade question in part (d). However, some students did not correctly calculate the second year excess or failed to reduce the third year profits by the second year excess. As set out in previous examiner’s reports, the basis of assessment rules in commencement and cessation situations is a key area which students should ensure they are comfortable with and it was clear that some more work is required for some students in this area.

Part (e): While students seemed very comfortable with applying the residence and ordinary residence rules, they were less comfortable with assessing the scope of the individual’s liability to income tax based on that person’s residence, ordinary residence and domicile status. This is an area with which students must be very familiar.

Part (f): The majority of students succeeded in providing the correct legislative reference in respect of the income tax exemption for employer provided bicycles and listing two relevant conditions, with many students achieving full marks.

Part (g): A surprisingly small number of students were aware that civil partners are assessed as single persons in the year of registration of the civil partnership, though many referred to the relief available in the year of registration whereby an entitlement to repayment of the excess of the aggregate amount of tax paid by the civil partners over the amount of tax that would have been payable if they were jointly assessed for the period of the tax year for which the partnership was registered may arise.

Part (h): Students were very well prepared for this question on perquisites and benefits in kind, with the majority of students correctly articulating the difference and providing appropriate examples.

Question 2

Part (a) of Question 2 required students to prepare a Case I taxable income computation and calculate an individual’s liability to income tax, PRSI and USC for the 2015 tax year. Such computational work is key to the Income Tax Fundamentals course and should be practiced sufficiently by students in preparing for this exam.

Students dealt very well with the excessive wages paid to Alan’s son, the client entertainment and the tax credit available in respect of the college fees. The treatment of the finance lease payments or the recovery of the bad debt which had previously been written off were not answered as well and merit further attention from students.

While many students correctly calculated the Tax Written Down Value of the van, as specifically asked in the question, many neglected to deduct the capital allowances for 2015 in arriving at the taxable Case I income.

The majority of students dealt with the PRSI component of the calculation very well. The USC element of the question was generally answered well though some students neglected to apply the 3% surcharge to the income over €100,000.

Part (b) of the question tested the basis of assessment on cessation rules. Students generally answered this question well although some students were not aware that the review of the penultimate year period to actual is not optional for the taxpayer where the profits for the actual year are greater than those originally assessed.

Question 3

Question 3 was the least popular question with students. The computation of capital allowances is very important and will be very relevant to students hoping to work in the areas of income tax or corporation tax. It is suggested that students should give this important area of the course adequate attention.

Part (a) of the question was generally well dealt with, with most students being familiar with relevant case law in this area.

The calculation of the balancing charge in part (b) of the question was well answered. However, very few students appeared to consider the de minimis relief available where the sales proceeds do not exceed €2,000 or note that it should not apply in the case at hand on the basis that the purchaser and vendor were connected.

Many students answered part (c) well, with a good proportion of students recognising that site costs are not qualifying costs for the purposes of Industrial Buildings Annual Allowances and correctly applying the 10% rule in relation to the office construction costs.

Part (d) of the question was generally quite poorly answered. It was noted that while some students were able to articulate the rules which apply when a second hand building is acquired from a builder few were able to correctly apply the rules to the situation at hand.

Part (e) of the question dealt with capital allowances on a category D motor vehicle and was generally well answered.

Question 4

Part (a)(i) of this question was, in general, well answered with the majority of students correctly listing two conditions that would need to be met in order for the use of the employer provided van not to give rise to a taxable benefit in kind and calculating the taxable benefit in kind in respect of the company van.

Part (a)(ii) required students to consider whether certain remuneration items gave rise to a taxable benefit in kind and to calculate same where applicable. Students dealt well with the employer provided mobile phone and newspaper which related to the employer’s business. Some students struggled with the two loans provided by the employer. Many students failed to note that the home-loan did not give rise to a taxable benefit in kind on the basis that the employee was paying interest in excess of the 4% specified rate on a qualifying home loan. While many students correctly identified that the holiday loan would give to a taxable benefit in kind and were aware that the taxable benefit would be calculated based on the difference between the 13.5% specified rate and the 10% rate payable by the employee in the question, very few students managed to calculate the taxable benefit correctly. This calculation is covered in the student manual and students should be familiar with same.

Many students did not deal well with part (a)(iii) of the question which asked students to calculate the PAYE due in respect of the first two months of the year using the cumulative basis. Students should pay attention to this given that the PAYE system is operated on the cumulative basis in most cases.

Part (a)(iv) was very well dealt with, with the majority of students recognising that a taxable benefit would arise for the employee in the event that the loan was written off.

Part (b) of the question required students to advise on the income tax, USC and PRSI consequences of statutory redundancy and ex-gratia redundancy payments. The treatment of the statutory redundancy payment was well answered. With regard to the ex-gratia payment, students were generally familiar with the concepts of the basic exemption, the increased basic exemption and the standard capital superannuation benefit and the legislative references for same. However, many students did not correctly calculate the various exemption amounts, particularly the standard capital superannuation benefit. In addition, a significant number of students did not correctly count the number of complete years’ service. Students were only penalised once for this error but more care should be taken in future as it is a key component of the calculation of the exemption amounts.

Question 5

Part (a) of this question required students to prepare a Case V computation. It was apparent that a lot of student were aware of the principles of Case V taxation and were able to correctly identify whether a deduction should be available for the various expenditure items listed but did not manage to present the computations in a sensible manner. The importance of practicing computational questions cannot be overemphasised.

The calculation of the portion of the upfront premium which was subject to income tax was performed to a high standard by most students. Some students struggled to correctly calculate the amount of the loan interest which was deductible with some students failing to allow the in-between letting portion of the interest or applying the restriction to 75% of the interest for the residential apartments.

Part (b) of the question tested various areas relating to tax administration. While a good number of students readily picked up the marks that were available for this part, some students struggled with some basic provisions, including the income tax return filing deadline and the preliminary income tax payment rules. Students should be very familiar with the administration of income tax at Part 1 level as this will be required throughout the CTA course and will be assumed basic knowledge.

Q1

Q2

Q3

Q4

Q5

Highest

24

25

25

24

24

Lowest

8

2

3

1

3

Average

17

18

15

14

14