Part 1 Past Papers

Summer 2017

QUESTION 1

(a) Michael Smith commenced to trade on 1 October 2014. He prepared accounts for the year ended 30 September 2015 and had a tax adjusted Case I profit for the year of €3,000. His tax adjusted profits for the accounting years ended 30 September 2016 and 30 September 2017 were €2,000 and €4,000 respectively.

Calculate the amount of Case I income assessable to tax for the 2014, 2015 and 2016 tax years.

(6 marks)

(b) Clara and Barry were married on 14 May 2016. They have asked you to advise how their marriage affects their assessment to income tax for the 2016 tax year, including any relieving measure available.

(2 marks)

(c) Your client, a self-employed carpenter, asks you for advice on whether he can take an income tax deduction for the cost he incurs each day for his lunch as he works on sites away from his home.

Advise your client as to whether an income tax deduction should be available for the cost of his lunch, referring to relevant case law in your answer.

(2 marks)

(d) Brian’s accounts for his painting business for the year ended 31 December 2016 contained a bad debts expense of €3,500. The breakdown of the expense is as follows:

Increase in general bad debt provision

€4,000

Decrease in specific bad debt provision

(€3,000)

Bad debt written off

€2,500

Advise Brian how he should treat the bad debt expense in preparing his Case I tax adjusted profits computation.

(3 marks)

(e) State what the date of commencement to trade generally is for (i) a manufacturing business and (ii) a retail business.

(2 marks)

(f) Outline what section of the Taxes Consolidation Act 1997 provides relief from capital gains tax on the disposal of a principal private residence. Briefly describe the procedure to be followed where a person has more than one residence and state what happens if the Inspector of Taxes disagrees with the taxpayer on what constitutes his/her principal private residence.

(4 marks)

(g) Irish tax legislation provides for a number of income tax exemptions for entities if the entity is a body of persons or trust established for charitable purposes. List the four categories of “charitable purposes” which were set down in UK case law and are used in Ireland to determine whether an entity qualifies as charitable, referring to the case in your answer.

(3 marks)

(h) Outline when a person will be deemed to be “present in the State” for the purposes of ascertaining whether an individual is resident in Ireland for tax purposes in 2016.

Marks will be awarded for legislative references.

(3 marks)

Total 25 Marks

QUESTION 2

David has carried on a sole trade of manufacturing electronic goods for many years from a three storey premises he and his wife, Kate, own in Gorey, Wexford, Ireland. Kate is a full-time housewife. David and Kate have never made any election as regards their assessment to income tax.

David and Kate have two children, John and Paul, who are aged 15 and 19 respectively. John is studying for his Junior Certificate. Paul is in his second year of a four-year full time Commerce degree course in UCD. David paid tuition fees of €6,500 for Paul’s course in 2016 in addition to the required registration fees.

David and Kate have rented out the third floor of their premises to the local accountant for many years for a total monthly rental of €2,000.

Kate does not have any income other than her share of the monthly rental income.

David’s Case I tax adjusted profits for the year ended 30 June 2015 were €250,000.

The results of David’s business for the 18-month accounting period ended 31 December 2016 are as follows:

Notes

Sales revenue

450,000

Rental income

 18,000

468,000

Less expenses:

Staff costs

130,000

Electricity and heating

(1)

9,000

Sundry expenses

(2)

10,700

Interest expense

(3)

3,600

Depreciation

(4)

20,000

173,300

Profit before tax

294,700

Notes:

(1) This includes the electricity and heating costs which were incurred by David in relation to the third floor of the premises which is rented to the local accountant.

(2) Sundry expenses comprises:

Trade subscriptions

500

Donation to local County Councillor

250

Charity donation

200

Interest on late payment of VAT

1,000

Creation of a general bad debt provision

3,000

Legal fees in relation to the potential acquisition of a new premises. The deal subsequently fell through.

5,000

Staff Christmas party

750

Total

10,700

(3) The interest expense comprises:

Bank interest on overdraft for business current account

3,000

Finance lease interest*

600

Total

3,600

* David acquired new computer equipment under a finance lease in February 2016. David made capital repayments of €2,000 during 2016.

(4) David uses machines in his business which he acquired in April 2014 for €100,000.

REQUIREMENTS

(i) Calculate David’s assessable Case I taxable income for the 2016 tax year.

(11 marks)

(ii) Advise David as to whether he is required to reassess his taxable Case I taxable profits for the 2015 tax year. You should provide calculations in support of your answer.

(2 marks)

(iii) Calculate David and Kate’s income tax, PRSI and USC liability for the 2016 tax year and outline whether the home carer’s tax credit should be available.

(12 marks)

Total 25 Marks

QUESTION 3

(a) (i) Set out the three characteristics of plant which were set out in the case of Yarmouth v France [1887].

(ii) Set out three events which give rise to a balancing allowance or charge in respect of plant and machinery.

Marks will be awarded for legislative references.

(5 marks)

(b) James, a sole trader, carries on a manufacturing trade and has made his accounts up to 30 June each year since he commenced to trade in 2010.

James bought a new machine on 25 June 2015 and put it into use for the purposes of his trade immediately. The machine cost €20,000.

REQUIREMENT

Calculate the tax written down value of the machine as at 30 June 2016.

(2 marks)

(c) Conor has been carrying on a furniture manufacturing trade for many years and makes up his accounts to 31 December each year. His business has gone from strength to strength since the economy began to show signs of recovery. As a result, Conor decided to expand his business and built a new state of the art factory in 2016. He incurred the following capital expenditure in relation to the factory in 2016:

Notes

Site costs

100,000

Site preparation costs

15,000

Factory construction costs

(1)

375,000

Office construction costs

50,000

Lifts

18,000

Heating and air conditioning system

42,000

Furniture polishing machine

(2)

25,000

Note 1:

Conor received a government grant towards the cost of the factory construction costs of €80,000. The total factory construction costs incurred amounted to €375,000, €80,000 of which was funded by the government grant.

Note 2:

In July 2016, Conor bought a new furniture polishing machine. On the same date, Conor sold his existing furniture polishing machine for €10,000. He had acquired the old machine in 2010 for €12,000 and used it in his business until he sold it.

Other information:

Conor began using the new factory on 1 November 2016.

Conor sold his old factory for €200,000 on 30 November 2016. Conor had purchased the old factory second hand from Mark Hackney in 2007 for €330,000. Mark built the factory in 2000 and his qualifying cost for industrial buildings annual allowances purposes was €300,000.

Conor has stated, with particular reference to any balancing charges, that he would like to reduce the amount of tax payable in respect of the year ended 31 December 2016 where possible.

REQUIREMENTS

(i) Calculate the industrial buildings annual allowances, including any balancing adjustments, which Conor should be entitled to claim in respect of the year ended 31 December 2016.

(11 marks)

(ii) Calculate the plant and machinery capital allowances, including any balancing adjustments, which Conor should be entitled to claim in respect of the year ended 31 December 2016.

(7 marks)

Total 25 Marks

QUESTION 4

(a) Marie Smith, a single individual with no children, acquired a two-storey property in Mayo, Ireland on 1 March 2016 using a loan which she drew down from Ulster Bank. The ground floor of the property was in good condition when Marie acquired the property and Marie granted a 5-year lease with effect from 1 March 2016 to a local hairdresser who was starting her own business. The lease provides for a monthly rental of €1,500 and required the tenant to pay an upfront premium of €2,500.

Marie received the up-front premium and the rent for the period from 1 March 2016 to 30 November 2016 during 2016. The rent for December 2016 was received in January 2017.

The first floor of the property had been in use as an office space before Marie acquired the property. However, Marie struggled to secure a tenant and decided to carry out works to the first floor so that it could be used for residential purposes. Marie incurred €5,000 in respect of the structural work which was necessary to convert the first floor. Marie rented the newly converted apartment for a monthly rental of €800 with effect from 1 September 2016. The rents were received one month in advance from the tenants.

Marie decided to make a further property investment and acquired a residential property in Fermanagh, Northern Ireland in May 2016 using savings she had accumulated. Marie found a suitable tenant and a lease agreement was entered into with effect from 1 June 2016 with a monthly rental of €500. The rent for the period from 1 June 2016 to 30 November 2016 was received during 2016. The rent for December was received in January 2017.

Marie incurred the following expenses in relation to the properties in 2016:

Cost of structural work to convert first floor of Mayo property

5,000

Interest on the loan used to acquire the Mayo property for the period from 1 March 2016 – 31 December 2016 (50% for the ground floor/50% for the first floor)

7,000

Solicitor fees for services carried out in relation to the negotiation of the lease for the commercial ground floor of the Mayo property

1,250

Registration with the Private Residential Tenancies Board in respect of the first floor of the Mayo property

90

2016 local property tax charge in respect of the first floor of the Mayo property

125

Cleaning and painting expenses on the Fermanagh property prior to letting

750

REQUIREMENT

Calculate Marie’s income tax, PRSI and USC liability for 2016. You can assume that Marie did not have any other income.

(15 marks)

(b) David was born in the UK in 1996. His mother was Irish domiciled and his father UK domiciled. David’s mother moved to the UK in 1994 when she married David’s father.

David’s parents divorced in 2005 and David moved to Switzerland with his mother. David has not seen his father since. David’s mother intends to live and work in Switzerland for a number of years but has not made any decision about where she will retire to in the future. She regularly returns to Ireland to visit family and retains a house in Cork, Ireland for her use.

David moved to the UK in 2014 to attend university and regularly returns to Switzerland to visit his mother.

REQUIREMENT

Advise David of his domicile status, referring to the facts set out above.

(4 marks)

(c) Louisa, a Dutch domiciled individual, moved to Ireland on 1 January 2013 for work purposes. Louisa lived and worked on a full-time basis in Ireland until the end of May 2016. Louisa then moved back to the Netherlands and has not returned to Ireland since.

REQUIREMENT

Advise Louisa on what sources of income she should be subject to Irish income tax in respect of:

(i) the 2016 year of assessment, and

(ii) the 2017 year of assessment (assuming no change of law).

Your answer should state Louisa’s residence and ordinary residence position in 2016 and 2017.

(6 marks)

Total 25 Marks

QUESTION 5

(a) Paul has set up a new consultancy business and has hired a number of employees. Paul has asked for your advice in relation to the following queries listed in (i) – (iii).

(i) Paul agreed to provide a company car to one of his senior employees given the amount of business travel required of the employee.

Paul purchased a brand new Volkswagen Passat car for €30,000 on 1 May 2016. The car will be available for the employee’s personal use though Paul estimates that such usage will be relatively moderate. Paul estimates that the employee will, in total, travel 20,000km in the car from 1 May 2016 to 31 December 2016. The employee agreed to make a contribution of €1,000 in 2016 towards the running costs of the car.

REQUIREMENTS

(I) Calculate the taxable benefit-in-kind for the employee in respect of the car provided to him by Paul.

(II) Set out what is considered to be business travel versus private travel so that there is no confusion over what the taxable benefit is. In particular, address the implications of the employee travelling to customer sites directly from the employee’s home and travelling between customer sites.

(10 marks)

(ii) One of Paul’s employees, Angela, has asked him to provide her with a loan of €100,000 at an interest rate of 5% to help her fund the purchase of her first home. Paul is nervous about this as he is not in the business of advancing loans. He is also aware that another one of his employees, Frank, is planning on applying for a car loan of €25,000 and he is worried that Frank may also ask Paul to advance a loan to him at a rate of 5% if he agrees to advance a loan to Angela.

REQUIREMENT

Advise Paul of any tax implications for him, as an employer, of advancing the above loans to Angela and Frank. Include a calculation of any taxable benefit-in-kind for his employees in your answer.

Marks will be awarded for legislative references.

(4 marks)

(iii) Paul is aware that he will be required to reimburse his employees for certain subsistence expenses from time to time. He has heard that there is significant record keeping requirements. Paul would like to minimise the records which he is required to keep.

REQUIREMENTS

Advise Paul of the following:

(I) What allowable subsistence expenses may be reimbursed to employees by Paul without giving rise to a taxable benefit-in-kind.

(II) What record keeping requirements apply in respect of each basis of reimbursement of subsistence expenses referred to in your answer to (i) above.

(III) Which basis of reimbursement might best suit Paul in terms of developing an internal reimbursement of subsistence expenses policy which is compliant with Revenue guidance in this area.

(6 marks)

(b) Martin has worked as a dentist in his own practice for over 40 years and is considering retiring. He is struggling to find a buyer for his remote rural practice and is considering the possibility that he may have to close the practice and make his employees redundant. Martin is aware that he may be required to pay statutory redundancy and additional amounts which some employees are entitled to receive under their contracts of employment.

One of his employee’s, Margaret, has worked as Martin’s receptionist throughout the time he has operated his practice and recently celebrated her 40-year work anniversary. This role was Margaret’s first and only job. Margaret’s last increase in salary was five years ago and her salary has remained at €35,000 since. Margaret is not entitled to any tax-free pension lump sum on retirement.

REQUIREMENT

Advise Martin on whether he would have any obligation to operate PAYE, PRSI and USC on the payment of statutory redundancy of €48,000 and an ex-gratia payment of €70,000 to Margaret if he closes his practice.

(5 marks)

Total 25 Marks

SOLUTION 1

(a) 2014: actual 3 months €750

2015: profits of 12-month period ended in second year €3,000

2016: profits of 12 month period ended in third year €2,000

Review second year. Actual profits 2015 €2,750

Second year excess €250

Reduce the profits of third year by second year excess, i.e. €2,000 – €250 5 €1,750

(b) Clara and Barry are taxed as single persons in the year of registration.

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 couple were married, they will be entitled to a repayment of the excess but only the portion related to the period of the tax year that the couple were married.

(c) No deduction should be available for the cost of the lunches.

Caillebotte (HMIT) v Quinn [1975]

(d) Add back increase in general bad debt provision of €4,000

Tax the decrease in the specific bad debt provision – no adjustment should be required

Allow a deduction for the bad debt written off

(e) (i) The date of commencement to trade of a manufacturing business is generally the date on which the manufacturing process starts with the intention of producing goods for resale at the end of that process.

(ii) The date of commencement to trade of a retail business is generally the date on which the doors are first open for business.

(f) Section 604 TCA 1997

The person must notify the Inspector of Taxes of his choice of which residence is his main residence within 2 years of the beginning of the period for which the election is to apply. If the Inspector disagrees, he will decide what residence qualifies and notify the tax payer. The taxpayer has a right of appeal.

(g) The relief of poverty

The advancement of education

The advancement of religion

Other purposes beneficial to the community not falling within the other three categories

Special Purpose Commissioners v Pemsel [1891]

(h) An individual shall be deemed to be present in the State for a day if the individual is present in the State at any time during that day.

Section 819(4)(b) TCA 1997

SOLUTION 2

(i)

Profit before tax

294,700

Add back:

Depreciation

20,000

Finance lease interest expense

600

Political donation

250

Disallowable charity donation

200

Interest on late payment of VAT

1,000

Increase in general provision

3,000

Capital expense – legal fees

5,000

Electricity and heating not incurred for trade purposes

3,000

 

Deduct:

Total finance lease expense

(2,600)

Rental income

(18,000)

 

Tax adjusted trading profits for 18 month period

307,150

 

Adjusted Case I profit in basis period (Note 1)

204,767

Less: Case I capital allowances (€100,000 * 12.5%)

12,500

Taxable Case I profits

192,267

Note 1: 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 - €307,150 * (12/18) 5 €204,767.

(ii) David must review the position of the 2015 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.

2015 profits originally assessed: €250,000 for 12 month accounting period ending in 2015

2015 profits based on new accounting period end, i.e. 31 December 2015 5 (€307,150 * (6/18)) + (€250,000 * (6/12) = €227,383.

As the profits under the new accounting date are less than those originally assessed, no revision occurs.

(iii) Case V computation for each of David and Kate:

Rental income receivable in 2016

€12,000

Less:

Electricity and heating 2016 (€3,000 * (12/18)) * 50% each:

€1,000

Case V assessable income each

€11,000

David and Kate
Income Tax Computation for 2016 tax year

Schedule D Case I income - David

192,267

Schedule D Case V - David

11,000

Schedule D Case V - Kate

11,000

Taxable income

214,267

 

Taxed as follows:

(€42,800 + €11,000) @ 20% (married couple – two incomes)

10,760

Balance (€160,467) @ 40%

64,187

 

Total income tax

74,947

 

Less tax credits:

 

Married person

3,300

Approved college fees

700

Earned income tax credit

550

 

Total income tax less credits

70,397

 

USC - David

€12,012 @ 1%

120

€6,656 @ 3%

200

€51,376 @ 5.5%

2,826

€133,223 @ 8%

10,658

Surcharge €103,267 @ 3%

3,098

 

USC – Kate (below €13k exemption level)

0

 

PRSI - David (€203,267 @ 4%)

8,131

PRSI – Kate (€11,000 @ 4%)

440

 

Total income tax, USC and PRSI

95,870

The home carer’s tax credit is not available as Kate’s income exceeds the €7,200 limit for full relief and the €9,200 relief for marginal relief

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. This credit was increased to €1,150 in Finance Act 2017.

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

SOLUTION 3

(a) (i) Asset must be apparatus used for the purposes of carrying on the business and permanently employed as such by the business.

(ii) The plant or machinery ceases to belong to the trader.

The plant or machinery ceases to be used.

The trade is permanently discontinued.

Reference to Section 288 TCA 1997.

(b) Cost: €20,000

W&T 2015: €20,000 * 12.5% = €2,500

W&T 2016: €20,000 * 12.5% = €2,500

TWDV as at 30 June 2016: €15,000

(c) (i) IBAA on new factory:

IBAA Qualifying Costs

Site costs

Not qualifying costs

Site preparations costs

€15,000

Factory construction costs

€375,000

Less grant

(€80,000)

Office construction costs (Note 1)

Not qualifying costs

Total

€310,000

Note 1:

Total construction costs = site prep €15,000 + factory construction €375,000 + office construction €50,000 = €440,000

Office construction €50,000/Total construction €440,000 = 11.4%

On the basis that the office construction costs are more than 10% of the total construction costs, the office construction costs do not qualify as expenditure for IBAA.

IBAA 2016 = €310,000 * 4% = €12,400

Balancing adjustment on disposal of old factory:

IBAA would have been available on a straight line basis over remaining tax life.

Remaining tax life = 25 years – 7 years = 18 years.

Qualifying cost would have been the lower of original qualifying cost of seller and purchase price, i.e. €300,000.

IBAA = €300,000/18 = €16,666.67

TWDV = €300,000 – (€16,666.67 * 9) = €150,000

Balancing charge on disposal of old factory = €200,000 - €150,000 = €50,000

Replacement assets relief is not available in respect of balancing charges on industrial buildings.

Balancing charge on old machine:

TWDV = €12,000 – (€1,500 * 6) = €3,000

Balancing charge = €7,000

Claim replacement assets relief under S290 TCA 1997 as Conor wants to reduce his cash tax payable in 2016

Deduct balancing charge from qualifying cost new asset - €25,000 − €7,000 = €18,000

(ii) P&M capital allowances calculation:

P&M Qualifying Costs

Lifts

€18,000

Heating and air conditioning

€42,000

Furniture polishing machine

€18,000

Total

€78,000

P&M W&T 2016 = €78,000 * 12.5% = €9,750

SOLUTION 4

(a)

Mayo Property – Case V rental income

Commercial ground floor

First floor apartment

Rental income

€15,000

€3,200

Lease premium (Note 1)

€2,300

Less expenses:

Structural work

Deductible loan interest (Note 2)

€3,500

€1,050

Solicitor fee

€1,250

PRTB registration fee

€90

LPT

 

Rental surplus/(deficit)

€12,550

€2,060

Total Case V assessment

€14,610

Note 1: The income element of the premium is €2,500 * ((51 – 5)/50) = €2,300. This is taxable under Case V.

Note 2: Loan interest: €7,000

Allowable post letting commercial = €7,000 * 50% = €3,500

Apartment post letting = €7,000 * 50% * (4/10 months) * 75% = €1,050

Fermanagh property – Case III foreign income

Rental income

3,500
(500*7)

Less expenses:

Cleaning and painting expenses

-

 

Case III assessable income

3,500

Income

Schedule D

Case III

3,500

Case V

14,610

 

Taxable income

18,110

Taxed as follows:

€18,110 @ 20%

3,622

 

Total tax

3,622

Less: Non-refundable tax credits

Personal credit

(1,650)

 

PRSI @ 4%

724

USC

€12,012 @ 1%

120

Balance (€6,098) @ 3%

183

Tax liability 2016

2,999

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

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

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 lettingcan 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.

(b)

David was born with a UK domicile of dependence (i.e. his father’s domicile).

David’s domicile of dependence changed to his mother’s domicile when his parents began living apart and he had no home with his father.

David’s mother has not lost her Irish domicile of origin and gained a domicile of choice in the UK or Switzerland as she has not cut her ties with Ireland and does not have a final or deliberate intention to reside in the UK or Switzerland.

Therefore, David should be considered to be Irish domiciled. Given that David has not made it clear that he has moved to the UK with the intention of making a permanent home there, David should not be considered to have lost his Irish domicile of dependence and acquired a UK domicile of choice.

(c) (i) 2016: Louisa is resident under the 280 days look back test ordinarily resident and non-domiciled. Louisa should be subject to Irish income tax on:

Irish source income;

Foreign employment income to the extent it relates to Irish duties, irrespective of where paid, and

Foreign income to the extent it is remitted into Ireland.

(ii) 2017: Louisa is non-resident ordinarily resident and non-domiciled. Louisa should be subject to Irish income tax on:

Irish source income;

Foreign income to the extent it is remitted into Ireland,

with the exception of:

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

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

SOLUTION 5

(a) (i) (I) Annualised mileage: (20,000/8 months) * 12 months 5 30,000

A minimum of 8,047km is deemed to be private travel each year and must be deducted from the total distance travelled in calculating the business travel element.

30,000 – 8,047 = 21,953 business travel.

Cash equivalent is 30%.

€30,000 * 30% * (8/12 months) = €6,000

Less contribution by employee: €1,000

Taxable benefit = €5,000

Finance Act 2017 provides that where the vehicle provided is an “electric vehicle” as defined no taxable emolument arises even where the car is available for personal use of the employee.

(II)

Revenue consider a business journey as one in which an employee travels from their normal place of work to another place of work in the performance of the duties of his/her employment and generally involves a temporary absence from the normal place of work.

Travel between home and work should not be considered to be business travel.

Where an employee proceeds on a business journey directly from home to a temporary place of work (rather than his employer’s office), the business mileage should be calculated by reference to the lesser of:

The distance between home and the temporary place of work; or

The distance between the normal place of work and the temporary place of work.

Where an employee performs duties of employment at more than one location on a daily basis, travel necessarily incurred in travelling between these separate locations should be considered to be business travel.

(ii) Section 122 TCA 1997

As Angela’s loan would be at an interest rate which is in excess of the preferential rate of 4% for qualifying loans, there should be no obligation on Paul to operate PAYE, PRSI or USC.

As Frank’s loan would not be a qualifying loan, the loan would be considered to be preferential on the basis that the rate is less than 13.5%.

€25,000 * (13.5% - 5%) = €2,125 benefit per annum.

Paul would be required to operate PAYE, PRSI and USC on the amount of the BIK.

(iii) Where an employee performs his/her duties of employment while temporarily away from his/her normal place of work, allowable subsistence expenses can be reimbursed on the basis of:

Acceptable flat rate allowances; or

Actual expenses which have been vouched with receipts.

Where expenses are reimbursed by way of flat rate allowances, the employees need not keep a precise record of actual subsistence expenses.

The employer should, however, retain a record for 6 years of the temporary absence including the name and address of the employees and the basis for reimbursement of subsistence.

Where expenses are reimbursed on the basis of vouched receipts, the employer must keep a record of the receipts as wells as details of the travel and subsistence.

Recommend that Paul draft an expenses policy based on flat rate subsistence allowances to minimise record keeping

(b) Statutory redundancy amount is exempt from income tax.

There should be no requirement to operate PAYE, PRSI or USC on the statutory redundancy payment.

A portion of the ex-gratia payment may be exempt from income tax, USC and PRSI.

The tax-free portion of the payment is the higher of the following:

The basis exemption: €10,160 + (€765 * 40) = €40,760

The increased basis exemption: €40,760 + €10,000 = €50,760

The Standard Capital Superannuation Benefit: ((€35,000 * 40)/15) – 0 = €93,000

There should be no requirement to operate PAYE, USC or PRSI on the amount of the ex-gratia payment as it falls below the highest of the above three exemptions

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.

The computational aspects of the paper were answered well. In addition, students demonstrated the ability to provide relevant legislative references where asked. As stated previously, the ability to use the Taxes Consolidation Act 1997 is key to success through all stages of the CTA examinations.

As a minor point, students should ensure that they start each question on a new page.

Question 1

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

Part (a)

Some students achieved full marks for this part which tested the commencement to trade rules. However, some students did not correctly calculate the second-year excess or did not to reduce the third-year profits by the second-year excess. The basis of assessment rules in commencement and cessation situations is a key area which students should ensure they are comfortable with.

Part (b)

The majority of students were aware of the year of marriage relief available. However, many students neglected to set out that the single basis of assessment would apply in the year of marriage. Some students confused single assessment and separate assessment.

Part (c)

This part was well answered by students. Some students did not refer to relevant case law. Students are advised not to neglect the case law relevant to the course. Students may find it useful to familiarise themselves with the relevant case law which is helpfully listed at the bottom of certain sections of the Taxes Consolidation Act 1997 to assist with quoting case law in examinations.

Part (d)

Students did not perform particularly well in this part and some students failed to differentiate between the treatment of general and specific bad debt provisions.

Part (e)

Students generally performed well in this part.

Part (f)

Students demonstrated a good knowledge of the CGT relief available on disposal of a principal private residence and quoted the relevant legislative reference and used the legislation to set out the procedure which applies where a tax payer has more than one residence.

Part (g)

Students who were familiar with the resources available to them in their legislation, were able to score full marks in this part. The four generally accepted categories of charitable purposes, and the relevant case, are set out at the bottom of Section 208 Taxes Consolidation Act 1997.

Part (h)

A couple of students set out when a person should be considered to be resident in the State for tax purposes rather than setting out when a person would be deemed to be “present in the State”.

Question 2

This question required students to prepare a Case I taxable income computation and calculate a married couple’s liability to income tax, PRSI and USC for the 2016 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.

While students dealt well with the various adjustments required in arriving at the taxable trade profits of David, many students struggled to deal with the fact that the accounting period in question was 18 months. Some students did not to consider whether any adjustment was required in respect of the 2015 assessable Case I profit given the change in accounting period.

Very few students apportioned the rental income and associated expenses for a 12-month period. Many students also incorrectly identified the increased standard rate band available to the couple and awarded the maximum standard rate band of €67,600 even though Kate’s income was significantly less than €24,800.

Students dealt very well with the tax credits available to David and Kate, including in respect of college fees. The majority identified the earned income tax credit.

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

Question 3

Part (a) of this question was very well answered by students, and it was noted that students who referred to Section 288 Taxes Consolidation Act 1997 in the exam were able to score well.

While part (b) was answered well by a lot of students, some students did not recognise that two basis periods ended in the period from 25 June 2015 to 30 June 2016 for capital allowances purposes.

Students made very good attempts at part (c) of this question which tested the application of Industrial Buildings Annual Allowances and capital allowances on plant and machinery. This is an area which students often struggle with. The majority of students did very well in setting out what expenditure should qualify for Industrial Buildings Annual Allowances, 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.

However, students struggled in calculating the Industrial Buildings Annual Allowances which would have been available in respect of the old factory building and the balancing adjustment which arose on its disposal. Many students also incorrectly stated that replacement relief under Section 290 Taxes Consolidation Act 1997 would apply to defer the balancing charge.

Students performed well in calculating the capital allowances available in respect of the plant and machinery acquired during the year. Students also did well in calculating the balancing charge arising on the disposal of the old machine and correctly applied replacement asset relief.

Question 4

Part (a) of this question was generally well answered, with students showing a good understanding of the Case V basis of assessment and the deductions available in arriving at Case V taxable profits.

Many students did not recognise that the rental income derived from the Northern Ireland property should be considered to be Case III rather than Case V income.

Students did well in calculating the income tax, PRSI and USC due.

Part (b) tested various issues involving domicile. Students who were familiar with the domicile rules did very well on this question. However, some students did not to recognise that the domicile of David, as a minor, would change to that of his mother following his parents’ divorce given David had his home with his mother and did not have a home with his father.

Part (c) tested the application of the residence and ordinary residence rules. While most students seemed very comfortable with applying the residence and ordinary residence rules, some 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.

Question 5

This was the least popular question with students and was not as well answered as the other questions on the paper.

Very few students calculated the annualised mileage or apportioned the benefit for an eight month period in Part (a). However, many students correctly applied the 30% cash equivalent percentage and deducted the €1,000 contribution made by the employee.

Part (b) was well answered, with the majority of students being familiar with Section 122 Taxes Consolidation Act 1997, and the 4% and 13.5% specified rates. However, although students recognised that the loan to Angela was a qualifying loan and that the specified interest rate applicable to qualifying loans was 4%, some students proceeded to calculate a taxable benefit in kind albeit that the loan to Angela was at a rate which was higher than the specified rate. The calculation of the BIK on the non-qualifying loan to Frank was well answered.

Part (c) of the question was not well answered. Very few students recommended that the policy be drafted based on flat rate subsistence allowances given Paul’s request that the record keeping requirements be minimised.

Part (d) of the question was well answered with many students correctly calculating the basic exemption, increased basic exemption and the standard capital superannuation benefit.

Q1

Q2

Q3

Q4

Q5

Highest

25

25

24

24

19

Lowest

1

2

2

1

3

Average

15

15

15

17

12