Part 1 Past Papers

Autumn 2016

QUESTION 1

(a) Explain when an individual can benefit from the remittance basis detailing:

What residence, ordinary residence and domicile status an individual must have to qualify for the remittance basis of taxation; and

What sources of income can be subject to the remittance basis.

(3 marks)

(b) Give an example of one situation in which a notice might be issued to an employer in respect of an employee on a Week One/Month One basis and explain how the Week One/Month One basis operates.

(2 marks)

(c) State the section and sub-section of the Taxes Consolidation Act 1997 which defines “trade” and list the Badges of Trade which the UK Royal Commission recommended be taken into account in determining whether or not a trade is being carried on.

(4 marks)

(d) The UK case of Yarmouth v France [1887] established three important characteristics of plant. List the three characteristics and provide one example of an asset which may be considered to be plant.

(4 marks)

(e) What Case of Schedule D is a trade which is carried on partly within Ireland and partly outside Ireland taxable under?

(1 mark)

(f) List two categories of persons who may be exempt from Dividend Withholding Tax (DWT) and state what section and sub-section of Taxes Consolidation Act 1997 provides for each exemption listed.

(3 marks)

(g) Distinguish briefly between an office and an employment, referring to any one relevant case in your answer.

(2 marks)

(h) Specify what section of Taxes Consolidation Act 1997 provides for a deduction for premiums paid in respect of Permanent Health Insurance where certain conditions are met.

Advise also as to whether there is any limit to the relief and whether the relief extends to USC and/or PRSI.

(2 marks)

(i) (i) Set out the three ways in which a chargeable person may meet his/her preliminary income tax obligations, including any specific payment arrangements which must be in place to avail of any of the means of meeting the obligation.

(ii) State whether the preliminary tax payment should include PRSI and/or USC.

(iii) State when the balance of any tax due must be paid.

(4 marks)

Total 25 Marks

QUESTION 2

(a) List three broad principles which have emerged from case law which are useful in determining whether a receipt is capital or revenue in nature. There is no requirement to refer to specific case law in your answer.

(3 marks)

(b) Louise Farrelly, a single individual with no children, is very passionate about fashion and set up her own shop selling jewellery, shoes and other accessories on 1 September 2013.

Louise has been very successful since she commenced to trade on 1 September 2013. She had tax adjusted profits of €80,000 for the accounting year ended 31 August 2014.

Louise had the following income and expenses in the year ended 31 August 2015:

Notes

Sales income

170,000

Less expenses:

Staff costs

40,000

Stock

40,000

Rent and rates

13,000

Electricity and heating

3,000

Security expenses

1

5,000

Miscellaneous expenses

2

9,000

Provision for repairs

3

2,500

112,500

Profit before tax

57,500

Note 1

Louise incurred an expense of €5,000 in 2015 in relation to the acquisition of a CCTV system for her shop. The system was in use in the shop from 1 July 2015.

Note 2

Miscellaneous expenses are comprised of:

Dinner for loyal customers to celebrate launch night for a new product line 2,000
Subscriptions for fashion magazines 100
Christmas party night for staff 300
Clothing for Louise 5,000
Subscription to golf club 1,000
Parking fines 100
Accounting fees 500
9,000

Note 3

Louise created two provisions for repairs during 2015, as follows:

Louise has contracted a decorator to carry out certain minor repair and painting works in February 2016 for an agreed price of €1,750.

Louise decided to make an additional provision of €750 for further repair works as she suspects that she will need to have some further paint work carried out in the coming two years.

Additional information:

Louise and her three brothers employed a person to take care of their permanently incapacitated father during 2015. The carer was paid €80,000 to take care of their father as around the clock care was required. The cost was split equally between the four siblings.

REQUIREMENTS

(i) Louise feels that she is obliged to dress very fashionably when she is working in the shop and spent €5,000 on a number of dresses from her favourite fashion designer in 2015 (this amount is included in miscellaneous expenses above).

Advise Louise as to whether this amount is deductible in arriving at her Case I tax adjusted profits for 2015, referring to relevant case law in your answer.

(2 marks)

(ii) Calculate Louise’s Case I taxable income for the accounting year ended 31 August 2015.

(11 marks)

(iii) Calculate Louise’s income tax, PRSI and USC liability for the 2015 tax year. You can assume that Louise does not have any income in the year other than the trading income detailed above.

(9 marks)

Total 25 Marks

QUESTION 3

(a) John and Ava registered their marriage on 1 August 2015. John is employed as a carpenter and earned a salary of €23,000 in 2015. Ava is an engineer and earned a salary of €85,000 in 2015.

REQUIREMENT

Calculate both John and Ava’s final income tax liability for 2015 based on the information provided above.

You are not required to calculate USC or PRSI charges.

(7 marks)

(b) Terry Smith died on 1 May 2015. He was aged 66 at the time of his death. He had been married to his wife, Mary Smith, for ten years and they were jointly assessed for tax purposes with Terry as the assessable spouse. Terry and Mary did not have any children. Mary is aged 62.

Terry was self-employed and carried on a carpentry trade. Terry had been trading for many years and made up accounts to 30 September each year. Terry’s trading results for the year ended 30 September 2014 and for the period up to his death were as follows:

Notes

Year ended 30 September 2014

Period ended 30 April 2015

Gross revenue

165,000

95,000

Less expenses:

Materials and stock

(50,000)

(30,000)

Rent of premises

(22,000)

(13,000)

Other trade expenses

1

(5,000)

(3,000)

Profit before tax

2

88,000

49,000

Notes:

(1) Other trade expenses does not include any amounts which are capital in nature or which were not incurred wholly and exclusively for the purpose of Terry’s trade.

(2) You can assume that all revenue and expenses was earned/accrued evenly throughout the period in question.

Mary works as a nurse and earned gross wages of €2,500 for each month of 2015.

REQUIREMENTS

(i) Calculate Terry and Mary’s income tax liability for the 2015 tax year based on the facts provided above and advise as to whether an adjustment will be required in respect of the couple’s income tax assessment for the 2014 tax year.

You are not required to calculate USC or PRSI charges.

(12 marks)

(ii) Explain how your answer to (i) above would have differed if Mary Smith had been the assessable spouse. You are not required to perform any further calculations.

(2 marks)

(c) (i) State the sections of Taxes Consolidation Act 1997 which provide for joint assessment for married couples and for civil partners.

(1 mark)

(ii) Under what conditions can divorced couples/former civil partners opt for joint assessment for income tax purposes?

(3 marks)

Total 25 Marks

QUESTION 4

Marie-Claire is a French domiciled and single individual who has lived in Ireland since 2002. She studied accountancy in Ireland and now works in ABC Accounting Firm. Marie-Claire had the following income in 2015:

Notes

Interest income from a UK Barclays Bank deposit account

1

2,000

Dividend income from a French resident company

2

1,000

Net dividend income from shares held in CRH Plc

3

3,000

Net interest income from Bank of Ireland deposit account

4

1,475

Rental income

5

8,000

Employment income

6

80,000

Notes:

(1) Marie-Claire did not withdraw any of the interest income from the UK deposit account during 2015.

(2) Marie-Claire transferred €600 of the French dividend income to her Irish current account in December 2015 to buy Christmas presents for her family. Marie-Claire did not suffer French withholding tax on the dividend income.

(3) CRH Plc is an Irish tax resident company. The income listed is net of Dividend Withholding Tax (DWT).

(4) The interest income listed is net of Deposit Interest Retention Tax (DIRT).

(5) Marie-Claire rents out a room in the apartment which she owns and occupies as her principal private residence to a student for a monthly rental of €600. She also received an additional amount of €800 in 2015 in respect of the provision of food and laundry services to the student.

(6) The employment income of €80,000 includes a gross VHI health insurance premium of €1,500 which ABC Accounting Firm pays for Marie-Claire.

Additional information:

In August 2015, Marie-Claire was sent on an international tax course in Madrid by her employer. ABC Accounting Firm has a policy of providing flat rate allowances with respect to overseas business trips. Marie-Claire incurred expenses related to her subsistence in Madrid and she retained the receipts. Marie-Claire received a flat rate allowance of €500 with respect to the trip in line with the current civil service subsistence rates.

Marie-Claire regularly incurs expenses for taxis hired for the purposes of travelling to client meetings with ABC Accounting Firm. Marie-Claire submits the receipts for the taxi expenses to her employer and is reimbursed. Marie-Claire received a total of €700 in vouched taxi expense payments from her employer in 2015.

Marie-Claire incurred €500 in doctor and GP referred physiotherapy expenses for herself during 2015. She was reimbursed €200 of this amount by VHI under her health insurance policy. She also incurred an expense of €100 in respect of routine dental treatment – this amount was not reimbursed under an insurance policy.

ABC Accounting Firm deducted PAYE, PRSI and USC totaling €29,784 from Marie-Claire’s salary in 2015.

REQUIREMENTS

(i) Advise Marie-Claire as to:

(I) Whether her employer would be obliged to retain the receipts related to her subsistence in Madrid;

(II) What type of record her employer should keep in relation to the trip; and

(III) How long her employer should retain the record for.

(3 marks)

(ii) Calculate Marie-Claire’s liability to income tax, PRSI and USC for the 2015 tax year.

(17 marks)

(iii) A friend of Marie-Claire’s has recently received correspondence from the Revenue Commissioners in relation to her domicile status. Given that Marie-Claire believes that she is French domiciled, she is particularly interested in this area and has asked you to inform her of:

(I) Three factors which would be relevant in determining if she had acquired an Irish domicile of choice and where the burden of proof in proving a domicile change lies.

(4 marks)

(II) Whether she would be able to appeal a decision of the Revenue Commissioners if they were to assert that she had acquired an Irish domicile of choice, including any time limits that may apply.

(1 mark)

Total 25 Marks

QUESTION 5

(a) Marvin Brady replaced a number of assets which he has for use in his business during his accounting year ended 31 December 2015. Details are as follows:

Machine: Marvin replaced a machine which he purchased for use in his business for €50,000 during his accounting year ended 31 December 2010. Marvin claimed capital allowances on this machine since 2010. He sold the machine for €25,000 on 1 September 2015 and replaced it with a newer model costing €70,000 which he immediately started using in his business.

Car: Marvin bought a new car on 1 January 2014 for €30,000. The car is Category E for carbon emissions purposes. Marvin traded in the car on 1 July 2015 for a new car costing €35,000. He received €25,000 trade in value for his old car. Marvin uses his car for business and this accounts for 80% of the use of the car.

REQUIREMENTS

(i) Outline two of the conditions which must be met for a person to claim capital allowances with respect to plant and machinery for a particular period.

(2 marks)

(ii) Advise Marvin as to whether any balancing adjustment arises on the disposal of (a) the machine and (b) the car in 2015.

(5 marks)

(iii) What options are available to Marvin with respect to claiming capital allowances on the new machine acquired in 2015? Marks will be awarded for statutory references.

(2 marks)

(b) Alan bought a new industrial building from a builder for €350,000. The cost of construction was €250,000 and the cost of the site was €70,000.

REQUIREMENTS

(i) Calculate the amount of Alan’s qualifying expenditure for the purposes of claiming Industrial Buildings Capital Allowances.

(2 marks)

(ii) Advise as to whether the amount of the qualifying expenditure would be different if the building was not purchased from a builder.

(1 mark)

(c) Mary has been trading for several years and has always prepared her accounts up to 30 June. Mary decided to change her accounting year end to 31 December and as such, did not prepare accounts for the year ended 30 June 2015 but rather prepared accounts for the period from 1 July 2014 to 31 December 2015. The accounts showed a profit for the 18 month period of €50,000.

Mary will now continue to prepare her accounts for each subsequent year ending 31 December. The previous set of accounts which Mary prepared were for the accounting year ended 30 June 2014 – these accounts showed a profit for that year of €40,000.

REQUIREMENT

Advise Mary of what her assessable profits will be for the 2015 tax year and whether she will be required to revise her assessable profits for the 2014 tax year as a result of the change in accounting period.

(5 marks)

(d) Deirdre Ryan owns a house which she rents out. It was let out for a number of years to the same tenant for a monthly rental of €2,500 until 28 February 2015.

When the tenant left the property, Deirdre took the opportunity to carry out some renovations on the house. In total, Deirdre spent €20,000 on the renovations, as follows:

Painting of the entire house 3,000
Structural alterations 6,500
Cleaning 500
Furniture 10,000

Deirdre then rented the house to new tenants from 1 May 2015 for a monthly rental of €2,750. The December rent was outstanding as at 31 December 2015.

The other expenses which Deirdre incurred in 2015 in relation to the property were as follows:

Interest on the loan used to acquire the investment property 1,600
Insurance for 2015 year 1,000
Local Property Tax 675
PRTB registration fee for new tenancy 90

REQUIREMENT

Calculate Deirdre’s Case V assessable income for 2015 based on the information provided above.

(8 marks)

Total 25 Marks

SOLUTION 1

(a) An individual who is resident in Ireland and / or ordinarily resident in Ireland but not Irish domiciled is taxable on the remittance basis.

An individual taxable on the remittance basis who is Irish tax resident but not domiciled is subject to Irish tax on:

Irish income

Foreign employment income to the extent it relates to Irish duties

Foreign income to the extent it is remitted into Ireland.

OR

An individual taxable on the remittance basis who is non-Irish tax resident but ordinarily resident and not domiciled is liable to Irish income tax on:

Irish source income and foreign income to the extent it is remitted to Ireland, excluding:

Income from a trade, profession, employment all of the duties of which are exercised outside the State; and

Other foreign income, provided that it does not exceed €3,810.

OR

For each example of income that can be subject to tax on the remittance basis, foreign dividend income, foreign interest income, etc.

(b)PAYE and USC are not operated on a cumulative basis and each pay period is looked at in isolation. Pay accumulated from the beginning of the tax year has no bearing on the calculation.

Such a notice is normally issued where there is:

A specific request by an employee who does not wish to disclose the amount of his earnings in his previous employment to his new employer

A discovery of an over-allowance in the certificate for the current year which, if corrected by the issue of an amended certificate on a cumulative basis, would result in excessive deductions for the balance of the year (e.g. a pay rise situation)

A lack of information about prior employment or earnings in the current year as a result of which a certificate on a cumulative basis cannot be issued

Certain cases of non-tax residency.

(c) Section 3(1) Taxes Consolidation Act 1997

Badges of trade:

The subject matter of the realisation

Length of period of ownership

Frequency of transactions by the same person

Supplementary work on or in connection with the property realised

Circumstances which were responsible for the realisation

Motive.

(d) Asset must be:

apparatus,

used for the purposes of carrying on the business,

permanently employed as such by the business

for a correct example of plant.

(e) Schedule D Case I

(f) Section 172D(3)(a) Taxes Consolidation Act 1997 – non-resident or non-ordinarily resident individual who is resident in an EU / DTA state other than Ireland

S172C(2)(da) Taxes Consolidation Act 1997 – permanently incapacitated individuals

S172C(2)(e) Taxes Consolidation Act 1997 - Qualifying charities

Or any other correct person and reference

(g) Office is a permanent position which has existence independent of specific individual.

Great Western Railway Company v Bater

(h) Section 471 Taxes Consolidation Act 1997

Limit 10% of individual’s total income for that tax year

No relief from USC

No relief from PRSI

(i) 90% of tax payable for tax year in question

100% of tax payable for the previous tax year

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

PT includes PRSI and USC

The balance of tax is due by 31 October following the end of the tax year.

SOLUTION 2

PART A

(i) Capital

Payments related to assets which form part of the permanent structure of a business

Payments for the sale of fixed assets

Payments as compensation for the destruction of the individual’s profit making apparatus

Payments for restrictive covenants

Receipts in respect of fixed capital

Revenue

Receipts in respect of circulating capital

Payments in lieu of trading receipts

Payments of a recurring nature are more likely to be treated as revenue receipts

PART B

(i) Louise needs to wear clothing in any event and as such the dresses are not wholly and exclusively for the purposes of her trade

Case: Mallalieu v Drummond [1986]

(ii)

Profit before tax

57,500

Add back:

Customer entertainment (launch night)

2,000

Clothing for Louise

5,000

Capital expenditure (CCTV system)

5,000

Subscription to golf club

1,000

General provision for repairs

750

Parking fines

100

 

 

Tax adjusted trading profits

71,350

Less: capital allowances (€5,000 × 12.5%)

625

 

 

Taxable Case I income

70,725

 

 

Allow deduction for staff costs

Allow deduction for stock

Allow deduction for rent and rates

Allow deduction for electricity and heating

Allow deduction for staff Christmas party

Allow deduction for fashion magazine subscriptions as trade related

Allow deduction for specific provision for painting and repairs

Allow deduction for accounting fees

(iii)

Louise Farrelly
Income Tax Computation

Schedule D Case I (Working 1)

67,633

Less: Personal allowance (Working 2)

(18,750)

Taxable Income

48,883

 

 

Taxed as follows:

€33,800 @ 20%

6,760

Balance @ 40%

6,033

 

Total tax

12,793

 

Less non-refundable tax credits

Personal tax credit

(1,650)

 

Total tax less credits

11,143

 

PRSI @ 4%

2,705

USC

€12,012 @ 1.5%

180

€5,564 @ 3.5%

195

€50,057 @ 7%

3,504

 

Total income tax, USC and PRSI

17,727

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.

Working 1:

Review Year 2 2014:

Assessed for 12-month period ending in tax year: €80,000

Actual 2014: (€80,000 × 8 / 12) + (€70,725 × 4 / 12) = €76,908

Second year excess: €3,092

Taxable Case 1 2015: €70,725

Less: Second year excess: €3,092

Assessable Case I income 2015: €67,633

Working 2:

Personal allowance available for employing a carer to take care of a totally incapacitated relative.

Max amount that can be relieved is €75,000

Relief must be apportioned between Louise and her three brothers:

€80,000 / 4 = €20,000 paid by Louise

Amount of allowance available = €20,000 × (€75,000 / €80,000) = €18,750

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

SOLUTION 3

PART A

John

Ava

Joint

Schedule E

23,000

85,000

108,000

Taxed as follows:

€23,000 @ 20%

4,600

2

€33,800 @ 20%

2

6,760

Balance @ 40%

2

20,480

 

€42,800 @ 20%

8,560

€23,000 @ 20%

4,600

Balance €42,200 @ 40%

16,880

 

Total tax

4,600

27,240

30,040

 

Less tax credits

Single / Married

1,650

1,650

3,300

PAYE

1,650

1,650

3,300

 

Tax liability

1,300

23,940

23,440

Less year of marriage relief (Working 1)

39

711

Tax liability after year of marriage relief

1,261

23229

Working 1:

Tax liability if jointly assessed: €23,440

Total tax liability if assessed on single basis: €25,240

Additional tax payable under single assessment: €1,800

Relief due: €1,800 × (5 / 12 months) = €750

Split as follows:

John: €750 × (1,300 / 25,240) = €39

Ava: €750 × (23,940 / 25,240) = €711

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

PART B

(i)

Terry Smith
Income Tax Computation 2015

Schedule D Case I

Terry Smith (Working 1)

28,000

Schedule E

 

Mary Smith (€2,500 × 4 months)

10,000

Total

38,000

Taxed as follows:

€38,000 @ 20%

7,600

Less credits:

Married

3,300

PAYE

1,650

Age tax credit

490

 

Tax liability

2,160

 

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

Working 1:

Case I assessable profits in year of death – actual for period from 1 January 2015 to 30 April 2015:

€49,000 × (4 months / 7 months) = €28,000

All expenses are deductible for Case I purposes.

Working 2:

2014 original assessed based on results for year ended 30 September 2014. All expenses are deductible for Case I purposes. Case I assessment would have been €88,000.

Actual for 2014:

(€88,000 × (9 / 12 months)) + (€49,000 × (3 / 7 months)) = €87,000

Actual assessment for 2014 would have been lower than original assessment. Therefore, no adjustment in required in respect of 2014.

Mary Smith
Income Tax Computation 2015

Schedule E (€2,500 × 8 months)

20,000

Taxed as follows:

€20,000 @ 20%

4,000

Less non-refundable credits:

Widowed credit (year of bereavement)

3,300

PAYE

1,650

 

Tax liability

0

(ii) If Mary was the assessable spouse:

She would have been assessed on her and Terry’s joint income up to the date of his death and on her own income until the end of the tax year.

She would not have been entitled to the widowed person’s tax credit in the year of bereavement as she would have been getting the full married credit for the year.

PART C

(i) Married couples: Section 1017 / 1018 TCA 1997

Civil partners: Section 1031C TCA 1997

(ii) Both parties must be tax resident in Ireland

Both parties must remain unmarried / not have entered into another civil partnership

The divorce / dissolution must have been granted under Section 5 of the Family Law (Divorce) Act 1996 or must be recognised as valid in Ireland if under foreign law.

SOLUTION 4

(i)

(I) No, as the expenses are reimbursed by way of a flat rate allowance, Marie-Claire is not required to keep a precise record of actual subsistence expenses for tax purposes.

(II) For the vouched expenses, Marie-Claire would be expected to provide her employer with a record showing her name and address, date of the trip, reason for the trip etc.

(III) ABC Accounting firm should keep this record for 6 years.

(ii) Marie-Claire

Income Tax Computation for the tax year 2015

Income

Note

Schedule D

Case III

UK interest income

1

French dividend income

600

2

Case IV

Irish interest income

2,500

3

Case V

4

Schedule F

Dividend income CRH plc

3,750

5

Schedule E

Employment income

80,000

6

Reimbursement of vouched expenses

7

Receipt of flat rate allowance

__________

7

Gross income

86,850

Less:

Charges

Taxable income

86,850

Taxed as follows:

€33,800 @ 20%

6,760

€2,500 @ 41%

1,025

€50,550 @ 40%

20,220

 

Total tax

28,005

Less: Non-refundable tax credits

Personal credit

(1,650)

PAYE credit

(1,650)

Health expenses

(60)

8

DIRT

(1,025)

Medical insurance premium

(200)

6

23,420

PRSI @ 4%

3,474

USC

€12,012 @ 1.5%

180

€5,564 @ 3.5%

195

€52,468 @ 7%

3,673

€14,306 @ 8%

1,144

Tax liability 2015

32,086

Less: Refundable tax credits

PAYE paid

(29,784)

DWT deducted

(750)

5

Tax due

1,552

Notes:

1. UK interest income was not remitted and is not taxable in 2015.

2. Only the €600 of the French dividend income which is remitted to Ireland is subject to Irish tax in 2015.

3. The net amount of Irish interest income was €1,475. Gross amount = €2,500. This amount is subject to tax at 41%. No USC as DIRT has been deducted. PRSI is chargeable as Marie-Claire is a chargeable person. DIRT credit = €1,025

4. Exempt from income tax under Section 216A Taxes Consolidation Act 1997. Includes sums for cleaning and meal provision. Total relevant sums are under exemption threshold of €12,000.

5. Gross dividend = €3,000 /.8 = €3,750. DWT = €750

6. Marie-Claire is taxable on the gross VHI premium benefit of €1,500. Tax credit is available at 20% up to €1,000. Marie-Claire’s employer would have paid €1,300 to VHI and €200 to the Revenue. Marie-Claire is allowed a credit for the €200 tax paid by her employer.

7. The reimbursement of vouched expenses for work and the receipt of a flat rate allowance based on civil service approved rates are not subject to income tax.

8. Section 469 Taxes Consolidation Act 1997 - entitled to tax credit at 20% of the amount that is not reimbursed. €300 × 20% = €60

Routine dental treatment is not a qualifying health expense.

Finance Act 2016 increased the “rent-a-room” threshold to €14,000.

Finance Act 2016 and Finance Act 2017 changed the rates of Universal Social Charge.

Finance Act 2016 reduced the rate of DIRT to 39%.

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

(iii)

(I) – Does she intend to sever her ties with France?

Has she moved to Ireland with the intention of staying here?

Does she have accommodation in a permanent state of readiness for her occupation in France?

What are her business, personal, social or other connections with France?

What are her intentions for the future?

Has Marie-Claire purchased a grave?

Has she made any statement of intent regarding her domicile?

(II) Burden of proof lies with the person who claims the domicile has changed.

(III) Yes, she can appeal the decision of the Revenue Commissioners, the period for giving notice of intention to appeal is 2 months.

SOLUTION 5

PART A

(i)

The claimant must carry on a trade, profession or rental business or be an employee

Must bear burden of wear and tear

Must have incurred capital expenditure on the plant or machinery

Plant or machinery must be in use for the purpose of the trade, employment or rental business at the end of the basis period

Plant or machinery must be wholly and exclusively used for the purposes of the trade, employment or rental business

(ii)

Machine

W&T 2010

€6,250

W&T 2011

€6,250

W&T 2012

€6,250

W&T 2013

€6,250

W&T 2014

€6,250

 

Total W&T claimed

€31,250

TWDV 1 January 2015

€18,750

Balancing charge if replacement relief not claimed:

Sales Proceeds €25,000 - TWDV €18,750 = €6,250.

Car

Balancing adjustment – 2014 car

Marvin was entitled to claim capital allowances on 50% of lower of the cost of the car or €24,000, i.e. €12,000 in this instance. However, allowance would have to be restricted to 80% as 20% of use of car was private.

Disposal proceeds - €25,000 trade in allowance.

Restrict as follows: €25,000 × (€12,000 / €30,000) = €10,000

TWDV: €12,000 – (€12,000 × 12.5%) = €10,500

Balancing allowance €500

Restrict balancing allowance to 80% as car was only used for 80% business purposes - €500 × 80% = €400

(iii) Marvin can claim capital allowances on the total cost of €70,000 (i.e. €8,750 per annum).

Alternatively, he can elect to defer the balancing charge calculated at (i) above and claim capital allowances on a reduced amount, being the qualifying cost of €70,000 less the deferred balancing charge of €6,250 (i.e. €7,969 per annum).

PART B

(i) The qualifying expenditure for the purposes of Alan’s IBAA claim is the “net price paid”:

€350,000 × (€250,000 / (€250,000 + €70,000)) = €273,438

(ii) If the building was acquired from a non-builder, the qualifying cost would be €250,000 – i.e. the lower of the construction costs and the net price paid of €273,438.

PART C

Where the accounting period is for longer than 12 months, the profits to be assessed are the profits of the 12-month period ending on the accounting date - €50,000 × (12 / 18) = €33,333.

Mary must review the position of the 2014 tax year by calculating the profits of the previous year on the same basis of the new accounting period end and if those profits exceed those originally assessed, the profits of the previous year must be revised.

2014 profits originally assessed: €40,000 for 12-month accounting period ending in 2014

2014 profits based on new accounting period end, i.e. 31 December 2014 = (€50,000 × (6 / 18)) + (€40,000 × (6/ 12) = €36,667.

If the profits under the new accounting date are less than those originally assessed, no change arises. As such, Mary does not need to revise the assessable tax for the 2014 tax year.

PART D

Rental income

27,000
(€2,500 × 2) + (€2,750 × 8)

Less expenses:

Painting

3,000

Deductible loan interest (75% × €1,600)

1,200

PRTB registration fee

90

Cleaning expenses

500

Structural alterations

-

Furniture

-

LPT

-

Insurance

1,000

21,210

Less: capital allowances (€10,000 @ 12.5%)

1,250

 

Case V assessable income

19,960

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.

Examiner’s Report

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. Students should be well equipped to prepare income tax computations.

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 demonstrated a good knowledge of the remittance basis of taxation. However, some students stated in error that Irish domiciled individuals may benefit from the remittance basis of taxation. Students should ensure that they are very comfortable with assessing the scope of an individual’s liability to income tax in Ireland depending on the resident, ordinary residence and domicile status of the individual.

Part (b): The majority of students were familiar with the Week One / Month One basis and secured full marks on this question.

Part (c): Students were very familiar with the Badges of Trade and this part was answered very well.

Part (d): Few students succeeded in listing all three of the important characteristics of plant which were established in the case of Yarmouth v France [1887]. Many students omitted to give an example of an asset which may be considered plant. It is very important that students carefully read the question and answer all aspects.

Part (e): A good majority of students correctly stated that a trade which is carried on partly within Ireland and partly outside Ireland is taxable under Schedule D Case I. However, a number of students incorrectly stated that the part of the trade which is carried on outside Ireland should be taxable under Schedule D Case III.

Part (f): The majority of students were able to provide relevant legislative references and succeeded in obtaining full marks for this part which was very positive as the ability to use the Taxes Consolidation Act 1997 is key to success through all stages of the Chartered Tax Adviser (CTA) examinations.

Part (g): Students were well prepared to answer this part, to distinguish between an office and an employment and were able to refer to relevant case law.

Part (h): The question in relation to relief for premiums paid in respect of Permanent Health Insurance was well answered, though some students were not familiar with the fact that the relief does not extend to PRSI or the USC.

Part (i): Students generally answered this question in relation to preliminary tax payments very well. However, as was the case with Part (h), students were not comfortable with the PRSI and USC elements of the questions. Students should not neglect PRSI and USC when preparing for the Income Tax Fundamentals exam.

Question 2

In general, students performed quite well in Question 2.

Part (a) required students to list three broad principles which have emerged from case law which are useful in determining whether a receipt is capital or revenue in nature and was, in general, very well answered.

Part (b) 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.

A small number of students did not know how to prepare a Case I taxable profit calculation. Instead of beginning with the Profit before Tax figure and adding back expenses which are not deductible for tax purposes and taking a deduction for any non-taxable income, some students began with the sales income figure. Students should be very familiar with the preparation of a tax computation and should ensure that they practice many tax computational questions in preparing for the Income Tax Fundamentals exam.

Students dealt very well with the general and specific provisions for repairs and the non-deductible client entertainment, clothing and golf club subscriptions. However, a number of students failed to disallow a tax deduction for the capital expenditure which was incurred on the acquisition of a CCTV system and to claim capital allowances in respect of the expenditure. Even where students recognised that the expenditure was capital some did not include a claim for capital allowances in arriving at Louise’s Case I taxable profit for the period. As a general comment, the area of capital allowances merits further attention from students.

Very few students recognised that as Louise was in her third year of trading, she was entitled to review her second year profits on an actual basis and reduce her Case I profits for the 2015 tax year by the excess. Students should ensure that sufficient attention is paid to this area.

The majority of students dealt with the PRSI and USC component of the calculation well.

Question 3

Question 3 was the least popular question with students and was poorly answered.

Part (a) tested the relief for married couples in the year of marriage. While many students recognised that there was a relief available and that it is only available for the proportion of the year for which the couple were married, few students succeeded in correctly calculating the relief available.

Part (b) tested the assessment of Case I profits in the year of death. Few students remembered to carry out a review of the preceding period on an actual basis. Students were generally able to distinguish between the treatment which applied where the assessable spouse died versus where the non-assessable spouse died. Very few students included the age tax credit in calculating Terry Smith’s income tax liability for the year. Students should use the Rates and Tables which are available to them in the exam for maximum benefit.

Part (c) required students to provide legislative references and use their legislation to set out the conditions under which divorced couples/former civil partners can opt for joint assessment and was answered very well.

Question 4

Question 4 was answered to a good standard by some students.

Part (i) of this question was, in general, well answered by the majority of students.

Part (ii) of the question required students to calculate Marie-Claire’s liability to income tax, PRSI and USC for the 2015 tax year, applying the remittance basis of taxation. Students were generally able to apply remittance basis of taxation.

Very few students applied the 41% tax rate to Marie-Claire’s Irish deposit interest or to exempt the interest which had been subjected to DIRT from the USC. In addition, many students did not allow a credit for the DIRT suffered.

Some students were not familiar with the layout of an income tax computation. Some students took a deduction before tax for tax credits rather than crediting them against tax.

Part (iii) of the question tested students’ knowledge of domicile and the factors that would apply in determining if Marie-Claire had lost her French domicile of origin and acquired an Irish domicile of choice and was very well answered.

Question 5

Part (a) of the question asked students to compute the balancing adjustment arising on the disposal of a machine and a car. Students dealt well with the balancing charge which arose on the disposal of the machine and most students identified the possibility of using Section 290 Taxes Consolidation Act 1997 to defer the balancing charge arising. Very few students correctly calculated the balancing allowance which arose on the sale of the car which was used 80% for business purposes. Students did not identify the correct restricted cost of the car for capital allowances purposes on acquisition and did not restrict the balancing allowance arising to 80% in recognition of the fact that the car was used 80% for business purposes.

Part (b) of Question 5 required students to calculate the amount of qualifying expenditure on a building for the purposes of Industrial Buildings Annual Allowances and was answered very well. The vast majority of students correctly calculated the “net price paid” for the building.

Part (c) of Question 5 tested students’ knowledge of the change in accounting period rules and was, in general, well dealt with by students.

Part (d) of this question required students to prepare a Case V computation. It was apparent that a lot of students 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. However, few students did not recognise that capital allowances would be available in respect of the capital expenditure incurred by Deirdre on furniture during the tax year.

Q1

Q2

Q3

Q4

Q5

Highest

24

24

21

23

23

Lowest

7

2

2

4

5

Average

16

15

9

13

14