Part 1 Past Papers

INCOME TAX FUNDAMENTALS

These papers are relevant for the Personal & Business Taxes Fundamentals module. The Personal & Business Taxes Fundamentals 2018 exam papers are available on Blackboard.

Summer 2015

QUESTION 1

(a) Carla started a new job on 1 April 2014. As she had never worked in Ireland before, she did not have a Form P45 from her previous employer. Although she supplied her new employer with her PPS number on 1 April 2014, her employer did not receive a Notice of Determination of Tax Credits and Standard Rate Cut-Off Point until 1 June 2014. Carla’s gross salary for April and May was €2,500 per month.

Calculate the PAYE and USC deductible from Carla’s salary for April and May based on the above.

(3 marks)

(b) Donncha was made redundant on 31 October 2014 and received only a statutory redundancy payment of €11,000.

Calculate the tax payable on this payment and state the statutory reference which provides for the income tax treatment of statutory redundancy payments.

(2 marks)

(c) Ellen pays for medical insurance for herself and her two children, Fiona and Gerard. Fiona is 13-years old and Gerard is 22-years old and in full-time employment. The gross premiums for each member of the family for the policy renewed on 1 February 2014 are as follows:

Ellen 1,200
Fiona 580
Gerard 400

Calculate the tax relief to be granted at source on the above premiums for the year 2014.

(2 marks)

(d) Hank is anxious that some of his personal financial details are not disclosed to his wife Irene and is considering electing for single assessment or separate assessment for income tax purposes.

State the deadlines for Hank to elect for single assessment or separate assessment for the year 2014 and state the sections and subsections of the Taxes Consolidation Act 1997 that set these deadlines.

(4 marks)

(e) James earns a gross salary of €340 per week from his employment working in a clothes shop. His employer offers him some extra hours so that his gross salary will increase to €380 per week.

Calculate the weekly Employer’s and Employee’s PRSI liability on James’ current salary and the weekly Employer’s and Employee’s PRSI liability that will arise if he takes the extra hours and increased weekly income.

(2 marks)

(f) Kathleen is 67-years old and does not have a medical card. Her income in the year 2014 was a State pension of €11,796 received from the Department of Social Protection and a private pension of €9,500.

Calculate Kathleen’s USC liability for the year 2014, giving reasons for any exemptions that may apply.

(3 marks)

(g) What is the PRSI Class for PRSI contributions made with respect to:

Self-employed income; and

Employment income (in most private sector employments)

(2 marks)

(h) Andreas is a German resident who has never been to Ireland. He owns shares in an Irish resident company, Bruno Ltd, which pays a dividend to its shareholders in 2014. The gross dividend to which Andreas is entitled is €1,000.

Calculate the dividend withholding tax, if any, that Bruno Ltd should deduct from the dividend payable to Andreas and the correct procedure for applying this rate.

(2 marks)

(i) State the Part of the Taxes Consolidation Act 1997 which provides the new rules for self-assessment for income tax purposes from the tax year 2013 onwards.

(2 marks)

(j) Briefly explain the difference between a “perquisite” and a “benefit-in-kind” and how each is valued for the purposes of calculating an employee’s tax liability.

(3 marks)

Total 25 Marks

QUESTION 2

Antonia is a self-employed accountant working as a sole trader with an accounting year end of 31 December. She had the following Statement of Comprehensive Income for the year ended 31 December 2014:

Notes
Income 1 197,800
Administrative expenses
Salaries (including Employer’s PRSI) 2 55,375
Interest 3 1,600
Motor expenses 4 8,200
Insurance 5 9,940
Bad and doubtful debts 6 1,340
Total administrative expenses (76,455)
Profit before taxation 121,345

Antonia has a daughter, Bernice, who is 19-years old and attending a full-time undergraduate course at university. Antonia paid for Bernice’s college fees for the year 2014 totalling €3,500, of which €3,000 was tuition fees and €500 registration fees.

Antonia incurred the following medical expenses in 2014:

Speech therapist for Bernice 400
New glasses for Antonia 800
Laser eye surgery for Antonia 1,100
2,300

Antonia recovered €900 of the cost of the laser eye surgery under her health insurance policy.

Antonia and Colin, Bernice’s father, were never married and have not been in a relationship for several years. Bernice stays in Antonia’s house for four or five days a week but spends most weekends at Colin’s house. Antonia and Colin have been growing closer recently and they are considering giving their relationship another chance and moving in together.

Notes to accounts

(1) Included in the income figure is €500 that Antonia received from selling a laptop. She had never claimed any capital allowances on the laptop.

(2) The salaries figure in the accounts refers to Antonia’s only employee – her sister, Dee, who provides secretarial services to Antonia on a part-time basis. According to various recruitment websites, Antonia could hire a secretary at a total cost of €19,800 (including Employer’s PRSI) to perform the same duties as Dee performs. However, Antonia is happy to pay Dee generously as she knows that Dee struggles financially. PAYE, PRSI and USC are all operated appropriately on Dee’s salary.

(3) Antonia paid €300 in interest on the late payment of PAYE/PRSI and €1,300 in interest on a working capital loan.

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

Motor tax, insurance and petrol €6,700
Finance lease interest €1,500
€8,200

Antonia uses her car entirely for business purposes, with no personal use at all. The retail price of the car was €22,000 in 2014 and the carbon emissions were 130 g/km. Antonia’s total payments under the finance lease on her car in 2014 were €9,400.

(5) Antonia’s professional indemnity policy premium was €8,600 for the year and she also paid a health insurance premium of €1,340.

(6) Antonia wrote off bad debts of €335 during the year and thinks that it is prudent to anticipate further write-offs. She therefore included a general bad debt provision in her accounts for the first time. She based this provision on three times the debts written off in 2014, which amounted to €1,005.

REQUIREMENTS

(i) State whether or not an adjustment is required to the deduction claimed for Dee’s salary in calculating Antonia’s assessable Case I income. Support your answer by reference to the most appropriate statutory reference and case law.

(4 marks)

(ii) Calculate Antonia’s assessable Case I income for the year 2014.

(7 marks)

(iii) Calculate Antonia’s income tax, PSRI and USC liabilities on her income for the year 2014. You are not required to calculate the Employer’s PRSI she must pay with respect to Dee.

(11 marks)

(iv) Outline briefly the possible effect that moving in with Colin will have on the personal tax credits to which Antonia is entitled, and state the relevant section and subsection of Taxes Consolidation Act 1997 under which this effect arises.

(3 marks)

Total 25 Marks

QUESTION 3

Outlined below are the personal circumstances and sources of income for a number of individuals.

REQUIREMENTS

In each case:

(i) State whether or not each individual is tax resident in Ireland for the year 2014 based on the information provided alone, giving reasons for your answer.

(ii) State whether or not each individual is ordinarily resident in Ireland for the year 2014, giving reasons for your answer.

(iii) Identify the basis on which income will be subject to Irish income tax for the tax year 2014 for each individual and identify the specific amount taxable in Ireland as well, giving reasons for your answer.

You are not required to consider the effects of any Double Taxation Agreements in your answers.

(a) Emma is Irish domiciled but left Ireland in the 1990s to live in the UK. She did not return to Ireland at all until 2011 when she spent 42 days in Ireland. In 2012, she spent 210 days in Ireland, in 2013 she spent 300 days in Ireland and in 2014 she spent 240 days in Ireland. Her only income in 2014 was rental income from the UK of €40,000 of which €15,000 was remitted to Ireland during the year.

(4 marks)

(b) Felipe is domiciled in Argentina but has travelled back and forth between Argentina and Ireland extensively over the last few years. He spent 290 days in Ireland in 2011, 300 days in Ireland in 2012, 200 days in Ireland in 2013 and 95 days in Ireland in 2014. His employer based in Argentina paid him a salary of €100,000 into his bank account in Argentina in 2014. €40,000 of this salary related to Felipe’s employment duties in Ireland. None of the €100,000 was remitted to Ireland in 2014. Felipe also earned €3,000 in interest income from money held on deposit in an Irish bank.

(5 marks)

(c) Gordon’s family background is somewhat mixed, and it is not clear where his domicile is. He did not leave Ireland at all in the years 2008 to 2013, but in 2014 he decided to quit his job in Ireland to emigrate to Australia. He left on 27 January 2014 and did not return at all during the year 2014. Gordon was paid a salary of €2,000 for January from his Irish employment and he was also paid a dividend of €4,100 from a family company on 26 January. He earned a salary of €60,000 from a new employment in Australia for the year 2014. All of the duties of his new employment were carried on in Australia. He also earned €4,000 in deposit interest from an Australian bank and sent €1,500 of this by electronic transfer back to his brother in Ireland in 2014.

(I) Answer the questions above on the assumption that Gordon is Irish domiciled; and

(II) Answer the questions above on the assumption that Gordon is not Irish domiciled.

(8 marks)

(d) Horatio was born in England and as far back as his parents can remember, his ancestors have lived and worked in England and been British subjects with British passports. Horatio moved to Ireland for a few years to gain experience as a doctor. He spent 340 days in Ireland in 2011, 350 days in Ireland in 2012 and 360 days in Ireland in 2013. He returned to his home city of London on 2 January 2014 and did not return to Ireland during the year 2014. He earned a profit of €65,000 in 2014 from his new practice in London – this was earned entirely for work carried out in the UK. He remitted €18,000 of this to Ireland in 2014 to pay for various outstanding expenses and bills.

(4 marks)

(e) Ignatius is domiciled in Ireland but emigrated to the US in the 1980s and has only been back to Ireland for a couple of weeks a year at most since then. In 2014, he earns a salary from his US employment of €120,000 and remits €10,000 to his extended family in Ireland. He owns an investment property in Galway that earns him a profit of €7,500 in 2014.

(4 marks)

Total 25 Marks

QUESTION 4

(a) Jack is a personal fitness trainer who runs a small gym as a sole trader. His accounting year end is 31 July and he has been in business for several years. Jack owns a number of assets upon which he has claimed capital allowances.

REQUIREMENTS

(i) State the basis period for Jack’s capital allowance claims for the tax year 2014 based on the above.

(1 mark)

(ii) If Jack changed his accounting year end to 31 March from 2015 onwards:

(I) State what the basis period for Jack’s capital allowance claims would be for the tax year 2015; and

(II) State the basis period in which capital allowances would be first claimed on equipment purchased on 1 June 2014 and used immediately.

(You may assume that any change in Jack’s accounting year end in 2015 would not require the revision of any previous year’s profits)

(2 marks)

(iii) If Jack changed his accounting year end to 31 October from 2015 onwards:

(I) State what the basis period for Jack’s capital allowance claims would be for the tax year 2015; and

(II) State the basis period in which capital allowances would be first claimed on equipment purchased on 1 September 2014 and used immediately.

(You may assume that any change in Jack’s accounting year end in 2015 would not require the revision of any previous year’s profits)

(2 marks)

(b) The existing fitness equipment in Jack’s gym had a tax written down value of €22,200 on 1 January 2014. This equipment had originally cost him €59,200 in total a number of years ago.

REQUIREMENTS

Calculate Jack’s capital allowance claim with respect to the above and the tax written down value at the end of 2014 or briefly note the reason that no capital allowances are available.

(3 marks)

(c) Jack expanded the changing facilities in the gym during the year ended 31 July 2014. The cost was as follows:

Additional shower fittings and shower trays 12,000
Additional lockers for changing room 1,500
Tiling for walls of changing room 1,800
15,300

The tiling was finished and the lockers were installed and in use on 31 July 2014. However, due to a plumbing problem, the new showers could not be used until mid-August 2014.

REQUIREMENTS

Assuming Jack’s accounting year end remained 31 July for the year 2014, calculate Jack’s capital allowance claim with respect to the above and the tax written down value at the end of 2014 or briefly note the reason that no capital allowances are available.

(7 marks)

(d) Jack sometimes travels to schools, colleges and businesses to provide fitness classes and presentations to promote his business. He estimates that approximately 20% of his use of his car is for business purposes. He had a BMW that originally cost him €60,000 in December 2012 and had a CO2 emissions level of 160 g/km. He sold the car for €55,000 in February 2014 and immediately purchased an Audi with a CO2 emissions level of 130 g/km for €50,000.

REQUIREMENTS

Calculate Jack’s capital allowance claim and/or balancing adjustments with respect to the above in 2014 and the tax written down value at the end of 2014. You should assume that Jack wants to defer as much as possible the effect of any balancing charge arising.

(10 marks)

Total 25 Marks

QUESTION 5

Karl and Linda are a jointly-assessed married couple with the following details for the year 2014:

Karl works full-time as the marketing director of MF Ltd, a manufacturing company in which he holds 18% of the shares. Karl’s salary for the year 2014 was €125,000 from which he had PAYE deducted of €40,822 and USC deducted of €8,069. His PRSI deductions from his salary were paid under Class A.

Karl is heavily involved in welcoming and entertaining foreign delegations of potential clients to Ireland. MF Ltd paid Karl a sum of €9,000 in 2014 as a reasonable estimate of the expenses he incurred in entertaining clients.

Karl has a sum of money on deposit in an Irish bank and earned €2,050 in deposit interest in 2014 before the deduction of DIRT.

Karl pays a premium of €200 per month for a Permanent Health Insurance policy.

Linda’s 95-year old widowed mother, Margaret, lives with Karl and Linda. Karl pays a net amount of €3,000 per annum to Margaret under a deed of covenant. In addition to this income, Margaret receives a State pension of €11,976 per annum.

Linda owns 5% of Never Say Never Ltd, a company in which she is also a director. Linda’s salary for the year 2014 was €21,000 from which she had PAYE deducted of €900 and USC deducted of €800. Her PRSI deductions from her salary were paid under Class A. Linda also gives Speech and Drama classes at weekends on a self-employed basis. Her profit from this business in 2014 was €5,700.

Karl and Linda spent €25,000 in 2014 on a new type of IVF fertility treatment which is available only in the UK. They spent an additional €2,500 on flights and accommodation for themselves on their trips to London for the various procedures involved, and €400 on flights and accommodation for Linda’s sister Naoise, who accompanied them both on one trip for moral support.

REQUIREMENTS

(i) Calculate the net joint income tax liability of Karl and Linda for the year 2014, giving reasons for any exemptions that may apply.

(12 marks)

(ii) Calculate the net individual PRSI and USC liabilities for both Karl and Linda for the year 2014.

(6 marks)

(iii) Calculate the income tax, PRSI and USC liabilities for Margaret for the year 2014, giving reasons for any exemptions that may apply.

(5 marks)

(iv) Karl is very protective of his reputation due to his marketing role and wants to know about Revenue’s power to publish the names of tax defaulters. State the section and the subsection of the Taxes Consolidation Act 1997 that allows Revenue to publish such names.

(2 marks)

Total 25 Marks

SOLUTION 1

(a) April PAYE

€2,500 × 20% = €500
Less credit (€138)
€363
April USC
€2,500 × 7% = €175
May PAYE
€2,500 × 20% = €500
Less credit ( - )
€500
May USC
€2,500 × 7% = €175

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

(b) Statutory redundancy payments are exempt from income tax under Section 203 TCA 1997.

(c) Tax relief is restricted to the first €1,000 for adults and the first €500 per child. The tax relief is therefore granted as follows:

Ellen: €1,000 × 20% = €200
Fiona: €500 × 20% = €100
Gerard: €400 × 20% = €80

Finance Act 2015 amended the tax relief available for medical insurance premiums for young adults from 1 May 2015.

(d) An election for assessment as single persons must be made before 31 December 2014 (S.1018(4) TCA 1997)

An election for separate assessment must be made before 1 April 2014 (S.1023(3) TCA 1997)

(e) Current salary:

PRSIee = Nil as weekly pay below €352
PRSIer = €340 × 8.5% = €28.90 per week
Proposed salary:
PRSIee = €380 × 4% = €15.20 per week
PRSIer = €380 × 10.75% = €40.85 per week

Finance Act 2015 introduced a tapered PRSI credit for weekly earnings between €352.01 and €424.

(f) Kathleen’s State pension is exempt from USC as payments from DSP are exempt from USC.

Kathleen’s private pension is exempt from USC as her total income within the scope of USC is below the minimum threshold of €10,036.

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

(g) Self-employed income: Class S

Employment income: Class A

(h) Bruno Ltd may pay the dividend without deducting any DWT if they are provided with the appropriate declaration from Andreas regarding his non-residence.

(i) Part 41A

(j) A perquisite is a benefit in the form of money or which is capable of converting into money. The amount subject to income tax in an employee’s hands with respect to the perquisite is the market value of the asset or service provided.

A benefit-in-kind is a benefit provided by an employer or where the employee has the free use of something belonging to the employer, e.g. a company car. The taxable benefit of a benefit-in-kind is the cost to the employer of providing the benefit.

SOLUTION 2

(i)

Antonia may only claim a deduction from her Case I profits for expenses incurred wholly and exclusively incurred for the purposes of her profession. This is in accordance with main rule for such deductions set out in S.81(2)(a) TCA 1997.

The case of Copeman v William Flood & Sons Limited [1940] 24 TC 53 established that only the proportion (if any) of the remuneration paid to family members that was genuinely wholly and exclusively for the purposes of the trade are allowable deductions.

Part (ii)

Antonia
Case II income computation
Year ended 31 December 2014
Profit Per Accounts 121,345
Addback:
Excess wages paid to Dee 35,575
Interest on late payment of tax 300
Finance lease interest 1,500
Health insurance 1,340
General bad debt provision increase  1,005 39,720
Deduct:
Finance lease repayments* 10,255
Proceeds from sale of laptop    500 (10,755)
Case II Income for y/e 31 December 2014 150,310

*Allowable finance lease repayments = €24,000/€22,000 × €9,400

= €10,255

(iii)

Antonia

Income tax computation

Tax year 2014

Antonia:
Schedule D Case II income 150,310
150,310
Taxed as follows:
€36,800 @ 20% = 7,360
€113,510 @ 41% = 46,539
53,899
Less credits:
Single person credit (1,650)
Single person child carer credit (1,650)
College fees credit ((€3,500 − €500 − €2,750) × 20%) (50)
Medical expenses credit ((€2,300 − €800 − €900) × 20%) (120) (3,470)
Net tax 50,429
PRSI: €150,310 × 4% = €6,012
USC:
€10,036 @ 2% = 201
€5,980 @ 4% = 239
€134,294 @ 7% = 9,401
€50,310 @ 3% = 1,509 11,350

Note changes USC rates and bands introduced by Finance Act 2017. Finance Act 2017 also increased the Standard Rate Cut-Off Point to €34,550.

Finance Act 2015 introduced the Earned Income Tax credit which was increased in Finance Act 2017 to €1,150.

(iv)

Antonia may lose the ability to claim the Single Person Child Carer credit if she moves in with Colin, on the basis of the terms of S.462B(1) TCA 1997.

SOLUTION 3

(a) (i)

Emma is resident in Ireland in the year 2014 as she spent more than 183 days in Ireland in 2014.

(ii)

In the year 2011, Emma was not resident in Ireland. In the years 2012 and 2013, Emma was resident in Ireland. Emma is therefore not ordinarily resident in Ireland in 2014 as she has not yet been resident in Ireland for three full tax years preceding the year 2014.

(iii)

Emma is liable to Irish income tax on her worldwide income on an arising basis in 2014 and therefore the full €40k of UK rental income is liable to Irish income tax.

(b) (i)

Felipe is resident in Ireland in the year 2014 as he spent more than 280 days in Ireland between the years 2013 and 2014.

(ii)

In the years 2011, 2012 and 2013 Felipe was Irish resident and therefore he will be Irish ordinary resident in the year 2014.

(iii)

Felipe is subject to tax on Irish sourced income and foreign income to the extent is remitted to Ireland in 2014. He is liable to Irish tax on the €40k of his foreign employment income referable to his Irish duties, and on his €3k in Irish interest income.

(c) (i)

Gordon is not resident in Ireland in 2014 as he did not spend at least 30 days in Ireland.

(ii)

Gordon is ordinary resident in Ireland in the year 2014 as it is clear that he was resident in Ireland for the years 2011, 2012 and 2013.

(iii) (I)

If he is Irish domiciled, Gordon is liable to Irish income tax on his worldwide income in 2014 with the exception of income from a trade, profession, employment or office entirely outside Ireland or foreign investment income provided it does not exceed €3,810. He will therefore be liable to Irish tax on his Irish salary of €2,000, his Irish dividend of €4,100 and his Australian deposit interest of €4,000

(II)

If he is not Irish domiciled, Gordon is liable to Irish income tax on his Irish sourced income and foreign income to the extent it is remitted to Ireland. He will therefore be liable to Irish tax on his Irish salary of €2,000,his Irish dividend of €4,100 and the €1,500 of Australian deposit interest remitted to Ireland.

(d) (i)

Horatio is not resident in Ireland for the year 2014 as he did not spend at least 30 days in Ireland in the year.

(ii)

Horatio is ordinary resident in Ireland for the year 2014 as he was resident in Ireland for the years 2011, 2012 and 2013.

(iii)

Based on the details provided, Horatio is not domiciled in Ireland.

Horatio is therefore subject to Irish income tax on the remittance basis in 2014, with the exception of income from a trade, profession, employment or office entirely outside Ireland or foreign investment income provided it does not exceed €3,810

He will therefore not be liable to Irish tax on his UK professional income in 2014 as this was earned entirely outside Ireland, regardless of the fact that some was remitted to Ireland in 2014.

(e) (i)

Based on the information provided, Ignatius is not resident in Ireland for the year 2014 as he has neither spent 183 days in Ireland in the year 2014 nor has he spent 280 days in Ireland in aggregate between the years 2013 and 2014.

(ii)

Based on the information provided, Ignatius is not ordinary resident in Ireland for the year 2014 as he was not resident in Ireland for the years 2011, 2012 and 2013.

(iii)

Ignatius is liable to Irish income tax on his Irish-sourced income only in the year 2014. He will therefore be liable to Irish tax only on his Irish rental income of €7,500.

SOLUTION 4

(a) (i)

Jack’s basis period for capital allowances for the tax year 2014 is the same as the basis period for calculating his assessable Case I profits, i.e. the year ended 31 July 2014.

(ii) (I)

If Jack changed his accounting year end to 31 March for the year 2015, then his assessable profits for the tax year 2015 would be based on the year ended 31 March 2015. The basis period for capital allowances would therefore be the year ended 31 March 2015.

(ii) (II)

1 June 2014 falls within the overlap of the basis periods for the years 2014 and 2015, and therefore the allowances are allocated to the earlier basis period, i.e. the year ended 31 July 2014.

(iii) (I)

If Jack changed his accounting year end to 31 October for the year 2015, then his assessable profits for the tax year 2015 would be based on the year ended 31 October 2015. The basis period for capital allowances would therefore be the year ended 31 October 2015.

(iii) (II)

1 September 2014 falls within the gap between the basis periods for the years 2014 and 2015, and therefore the allowances are allocated to the later basis period, i.e. the year ended 31 October 2015.

(b) Original Cost: €59,200
TWDV 1/1/14: €22,200
W & T 2014 @ 12.5%: (€7,400)
TWDV 31/12/14: €14,800

(c) No capital allowances are available with respect to the shower fittings for the year 2014 as the asset was not in use for the purposes of the trade at the end of the basis period.

No capital allowances are available with respect to the tiling as this work does not qualify as “plant”, being part of the setting in which the trade is carried on rather than apparatus that performs a function.

Original cost of lockers: €1,500
W & T 2014 @ 12.5%: (€188)
TWDV 31/12/14: €1,313
(d) Calculation of TWDV of BMW:
Original cost BMW basis period for 2013: €60,000
Restricted to: €12,000
W & T 2013 @ 12.5%: (€1,500)
TWDV 31/12/13: €10,500
Restriction of sales proceeds:
= €55,000 × €12,000/€60,000
= €11,000
Balancing adjustment:
TWDV 31/12/13: €10,500
Less sales proceeds: (€11,000)
Balancing charge: €500
Calculation of allowances on Audi:
Original cost: €50,000
Restricted to: €24,000
Deduct balancing charge above: (€500)
€23,500
W & T 2014 @ 12.5%: (€2,938)
TWDV 31/12/14: €20,563

SOLUTION 5

(i)

Karl & Linda

Income tax computation

Tax year 2014

Karl – Schedule E (salary) 125,000
Karl – Schedule D Case IV 2,050
Karl – Schedule E (expenses) 9,000
136,050
Linda – Schedule E 21,000
Linda – Schedule D Case II 5,700
26,700
162,750
Less PHI payment: (2,400)
Less covenant payment: (3,750)
156,600
Taxed as follows:
€41,800 @ 20% = 8,360
€23,800 @ 20% = 4,760
€91,000 @ 41% = 37,310
50,430
Tax payable on covenant:
€3,750 @ 20% = 750
Less credits:
Married person credit (3,300)
PAYE credit × 1 (1,650)
Home Carer Credit ( - )
Medical expenses credit ((€25,000 + €2,500) × 20%) (5,500)
PAYE paid – Karl (40,822)
PAYE paid – Linda (900)
DIRT credit (841) (53,013)
Net tax repayable (1,833)

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

The earned income tax credit was introduced by Finance Act 2015 and increased to €950 by Finance Act 2016 and to €1,150 in Finance Act 2017.

The Home Carer Credit was increased to €1,100 in Finance Act 2016 and to €1,200 in Finance Act 2017.

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

(ii)

PRSI - Karl: €125,000 × 4% = €5,000
€9,000 × 4% = €360
€2,050 × 4% = €82
€5,442
PRSI – Linda: €21,000 × 4% = €840
Minimum self-emp = €500*
€1,340

* Linda’s reckonable income of €5,700 × 4% = €228 which is less than the minimum payable of €500

USC - Karl:
€10,036 @ 2% = 201
€5,980 @ 4% = 239
€117,984 @ 7% = 8,259 8,699
Less USC paid: (8,069)
Net USC due: 629
USC - Linda:
€10,036 @ 2% = 201
€5,980 @ 4% = 239
€10,684 @ 7% = 748 1,188
Less USC paid: (800)
Net USC due: 388

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

(iii)

Income tax – Margaret:
Pension €11,976
Covenant income €3,750
€15,726

Margaret is exempt from income tax as she is below the low income exemption threshold. Margaret is therefore entitled to a tax refund of €750 paid on the covenant

PRSI – Margaret:

Exempt as over 66 years old

USC – Margaret:

DSP pension is exempt, and covenant payment is below low income threshold for USC – she is therefore exempt from USC

(iv)

Section 1086(2) TCA 1997 allows Revenueww to publish the names of tax defaulters.

Examiner’s Report

Overall Results

The overall pass rate and average mark was slightly lower than some recent years, but the majority of students showed that remarks in previous examiner’s reports had been taken on board, with improvements in many areas specifically highlighted in those reports.

Specific comments are set out below in respect of each question.

Question 1

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

Areas where students tended to lose marks were as follows:

Part (a): Students were asked to calculate the PAYE and USC deductible from a person’s salary under Emergency Tax conditions. Some students lost marks as they allowed Carla the lower USC bands rather than charging USC at the higher rate of 7% only.
Part (b): Students were asked to calculate the tax payable on a statutory redundancy payment and provide the relevant legislative reference for this treatment. Some students incorrectly quoted the statutory reference for ex-gratia termination payments rather than statutory redundancy payments.
Part (c): Students were asked to calculate the tax relief to be granted at source on the payment of medical insurance premiums given some specific circumstances. Some students did not impose the relevant ceilings on the relief, and many incorrectly denied Gerard any relief at all.
Part (d): Students were asked to outline the appropriate deadlines and statutory references for a married couple electing for separate or single assessment to income tax. This was generally answered well, although some students struggled with the specific statutory references.
Part (e): Students were asked to calculate the employer’s and employee’s PRSI for an individual based on two levels of salary. This was answered very well.
Part (f): Students were asked to calculate the USC liability for a individual given her circumstances. Although most students realised that the State pension would be exempt, some students lost marks for incorrectly charging USC on Kathleen’s private pension, despite it being below the exemption limits.
Part (g): Students were asked to state the PRSI classes attributable to different types of income. This was generally answered very well.
Part (h): Students were asked to calculate the DWT applicable to a dividend paid to a non-resident and outline the correct procedures for applying this rate. A large number of students did not identify the possible exemption from DWT for a non-resident, although most of those who did identify the exemption also identified the need for a declaration from Andreas.
Part (i): Students were asked to identify the Part of the TCA 1997 dealing with the new self-assessment rules from 2013 onwards. A large number of students provided the reference for the old self-assessment rules rather than the new rules.
Part (j): Students were asked to explain the difference between a BIK and a perquisite and how each is valued. Generally speaking, students could define a perquisite better than a BIK and could explain the definitions better than the valuation methods. Many students lost marks because they did not identify that BIKs are valued based on the cost to the employer.

Question 2

This question examined the calculation of the tax-adjusted profits of a sole practitioner and the calculation of a single parent’s income tax, PRSI and USC liabilities.

This type of question forms part of the core of the assessment of income tax fundamentals and therefore it was positive to note the improvement in the proportion of students attempting this question and the average mark achieved. Areas where students tended to lose marks in this question were as follows:

The first part of the question required students to state whether an adjustment was required for a salary paid to Antonia’s sister in excess of the market rate. Most students correctly stated that an adjustment was required, but fewer identified the correct section and subsection applicable, with fewer still correctly identifying the most appropriate case law.

The second part of the question required students to calculate Antonia’s tax-adjusted profits for the year. Once again, the format and approach to the tax-adjusted profit computation was an improvement on recent years. Although the add backs and deductions were generally identified very well by students, very few students dealt with the finance lease interest and repayments correctly.

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

Some students deducted the relief for college fees and medical expenses from the taxable income rather than allowing as a tax credit.

Many students did not provide for the increased Standard Rate Cut-off Point for single parents.

Although most students correctly identified that the 3% surcharge/10% rate of USC should apply, a number of students struggled with the precise application of this.

The final part of the question required students to outline the effects on her tax credits of Antonia changing her personal circumstances and to identify the correct section and subsection of the TCA 1997 governing such a change. The areas where students lost marks in this part were as follows:

Some students gave the legislative reference for the now-obsolete single parent tax credit, rather than the new single child carer credit.

A number of students incorrectly thought that unmarried co-habiting couples could claim the same income tax benefits as married couples.

Question 3

This question examined the students’ practical understanding of the various tax residence rules by providing the circumstances and sources of income of a variety of individuals, and asking students to identify the residence and ordinary residence status of each individual and the income subject to Irish tax in each case.

As with other questions examining residence in recent years, the high pass rate and average mark above indicates that the majority of students are comfortable with the fundamental concepts related to residence and domicile and their application in practice. Areas where students tended to lose marks in this question were as follows:

Although there was an improvement on recent years, some students used shorthand references to important concepts without explaining what they mean. It is not enough to simply state the “183-day rule” or the “280-day rule” or “remittance basis” without any reference to precisely what these terms mean.

Some students incorrectly seemed to think that the €3,810 investment income limit applicable to Gordon if domiciled referred to the limit on what income could be remitted to Ireland, rather than the income arising in the first place.

Many students incorrectly stated that Horatio would be liable to Irish income tax on the income remitted to Ireland, regardless of the fact that the source of the income was a trade carried on entirely abroad.

Some students incorrectly stated that Ignatius would be liable to Irish income tax on the income remitted to Ireland.

Question 4

This question examined various aspects of the calculation of capital allowances arising on plant and machinery in a practical context.

The first part of the question required students to identify the basis period for Jack’s capital allowance claims based on a variety of different circumstances. This part was answered poorly by many students who either identified the incorrect accounting period end or otherwise failed to identify the correct length for the basis period in question.

In the second part, students were asked to perform a simple wear and tear calculation on plant and machinery given some straightforward circumstances. This was generally answered very well.

In the third part, students were asked to state whether or not capital allowances would be available with respect to certain expenditure based on the type of expenditure and when the assets in question were first used. The majority of students correctly identified that no allowances would be available for the shower fittings due to the timing of the first use and most students also identified the tiling expense as part of the setting for the trade rather than a functional apparatus.

In the final part, students were asked to calculate the capital allowances and any balancing adjustments arising on the change of Jack’s car based on the given circumstances. Most students picked up some marks here, but the areas where students lost marks were as follows:

Incorrect restriction of the cost of Jack’s BMW

Incorrectly applying the personal use restriction in calculating the TWDV

Incorrect restriction of the sales proceeds on the BMW

Not deducting the balancing charge from the adjusted cost of the Audi

Question 5

This question required students to calculate the income tax, PRSI and USC liabilities of a married couple and an elderly relative, and to identify and explain certain exemptions and administrative issues.

The first part of this question required students to calculate the joint income tax liability of Karl and Linda, a married couple.

The areas where students lost marks in the first part of the question were as follows:

Some students unnecessarily grossed up the deposit interest figure provided.

Many students deducted the expenses figure of €9,000 from Karl’s taxable income rather than including it as additional taxable income on top of his salary.

Many students failed to claim a deduction for the covenant payments, and almost no students included the tax arising on the covenant in the tax computation.

Many students limited the increase in the SRCOP to Linda’s PAYE income only rather than the full maximum €23,800.

Some students incorrectly included a PAYE credit for Karl despite the fact he was a proprietary director.

The second part required students to calculate the PRSI and USC payable for Karl and Linda. Most students correctly applied the 4% rate to Karl’s income and Linda’s employment income, and applied the correct USC bands and rates to each. However, very few students correctly identified that Linda should also be liable to the minimum self-employed PRSI contribution of €500.

The third part required students to calculate the income tax, PRSI and USC liability of Linda’s mother, Margaret. Some students incorrectly charged Margaret income tax even though her income was below the low income exemption limit. Most students correctly identified the exemption from PRSI and the correct reason for same. Most students also identified the exemption from USC for Margaret’s State pension, and the reason for this, although some students either incorrectly charged USC on the covenant income or did not adequately explain why it should be exempt – students should note that where the question specifically asks for reasons to be provided for any exemptions that may apply, then marks will be lost if they do not clearly provide such reasons in their answers.

The final part of the question required students to state the section and subsection of the TCA 1997 dealing with the publication of the names of tax defaulters. This was generally answered very well.

  Q1 Q2 Q3 Q4 Q5
Highest 23 22.5 25 24 12.5
Lowest 1.5 1 3 1 1.5
Average 14 14 17 15 14

Autumn 2015

QUESTION 1

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

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

(2 marks)

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

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

(2 marks)

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

(3 marks)

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

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

(2 marks)

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

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

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

Income from a private pension of €9,800

Calculate Terence’s USC liability for the year 2014.

(3 marks)

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

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

(3 marks)

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

(3 marks)

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

(2 marks)

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

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

(3 marks)

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

(2 marks)

Total 25 Marks

QUESTION 2

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

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

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

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

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

Notes to accounts

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

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

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

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

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

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

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

REQUIREMENTS

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

(4 marks)

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

(8 marks)

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

(8 marks)

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

(3 marks)

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

(2 marks)

Total 25 Marks

QUESTION 3

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

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

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

REQUIREMENTS

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

(2 marks)

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

(4 marks)

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

(3 marks)

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

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

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

REQUIREMENTS

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

(1 mark)

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

(3 marks)

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

(4 marks)

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

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

REQUIREMENTS

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

(6 marks)

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

(2 marks)

Total 25 Marks

QUESTION 4

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

House in Dublin

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

Office suite in Dublin

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

Apartment in Cork

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

Apartment in Budapest

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

REQUIREMENTS

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

(14 marks)

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

(3 marks)

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

(2 marks)

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

(2 marks)

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

REQUIREMENT

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

(4 marks)

Total 25 Marks

QUESTION 5

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

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

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

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

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

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

REQUIREMENTS

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

(5 marks)

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

(4 marks)

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

(1 mark)

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

(7 marks)

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

(4 marks)

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

(4 marks)

Total 25 Marks

SOLUTION 1

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

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

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

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

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

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

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

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

(f) Payments subject to income tax

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

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

Payments subject to PRSI

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

Payments from the DSP are not themselves subject to PRSI.

Payments subject to USC

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

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

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

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

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

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

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

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

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

SOLUTION 2

Part (i)

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

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

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

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

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

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

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

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

Part (ii)

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

Capital allowances computation re: car:

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

Part (iii)

Erica and Fionn

Income tax computation

Tax year 2014

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

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

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

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

Part (iv)

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

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

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

5% × €112,045 = €5,602

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

Part (v)

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

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

SOLUTION 3

Fred

Part (a)(i)

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

Part (a)(ii)

Initial position

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

Check for second-year excess

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

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

Part (a)(iii)

Income assessable to PRSI in 2014 = €10,000

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

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

Gina

Part (b)(i)

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

Part (b)(ii)

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

Note:

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

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

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

Part (b)(iii)

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

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

Payments from DSP are exempt from USC.

Harry

Part (c)(i)

Basis periods before any relief:

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

Calculate on conventional basis first:

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

Part (c)(ii)

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

SOLUTION 4

Part (a)(i)

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

Part (a)(ii)

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

Part (a)(iii)

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

Part (a)(iv)

Section 71(4) TCA 1997

Part (b)

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

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

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

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

SOLUTION 5

Part (i)(I)

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

the duties of his employment require him to be QFA qualified

continued membership is an indispensable condition of his employment

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

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

Part (i)(II)

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

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

Part (i)(III)

Wilkins v Rogerson

Part (ii)

Cumulative Basis

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

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

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

Part (iii)

Week 1/Month 1 Basis

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

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

Part (iv)

Emergency Basis

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

Examiner’s Report

Question 1

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

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

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

Question 2

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Question 3

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

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

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

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

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

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

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

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

Question 4

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

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

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

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

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

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

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

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

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

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

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

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

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

Question 5

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

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

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

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

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

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

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

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

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

Autumn 2017

QUESTION 1

(a) Set out the meaning of the term “perquisite” referring to the UK case which provides guidance on the meaning of the term.

(2 marks)

(b) Outline the section of the Taxes Consolidation Act 1997 which provides for an exemption from income tax and USC on vouched expenses for travel and subsistence for a non-resident, non-executive director of a company which are incurred for the purposes of attendance at a relevant meeting in his or her capacity as a non-executive director.

(1 mark)

(c) Maria received rental income of €7,200 from a property she owns in Germany in the 2016 tax year. She incurred an insurance expense in respect of the property of €450 for the year. Maria also incurred a capital expense of €4,000 during 2015 on new furniture for the property.

Advise Marie what her taxable rental income is, setting out clearly what Case of Schedule D the income is taxable under and the basis for taking any deductions for expenses incurred.

(4 marks)

(d) Martin Smith received a notice of determination of tax credits and standard rate cut-off point from Revenue in respect of Michelle, a new employee who commenced work on 1 January 2016. It contained the following information:

Monthly tax credits: €275

Monthly standard rate cut off point: €2,817

Martin pays Michelle a gross annual salary of €60,000. Calculate the PAYE due in respect of January and February 2016 assuming that the cumulative basis applies.

(4 marks)

(e) Mark owns a two-bedroom house in Kildare. He rented a room in this house to his good friend Joe throughout the 2016 year of assessment for €400 a month. Mark keeps the other room in the house for his own use as he is occasionally required to work at his company’s site in Kildare. Mark spends most of his time in a house which he owns in Dublin which he inherited from his grandmother.

Advise Mark on the income tax, USC and PRSI treatment of Mark’s rental income, including whether any relieving measure is available.

(4 marks)

(f) Outline what sources of income an individual who is non-Irish resident but is ordinarily resident and domiciled in Ireland should be subject to Irish income tax on.

Marks will be awarded for legislative references.

(3 marks)

(g) Mark, a chargeable person for tax purposes, received interest from Bank of Ireland during 2016 from which DIRT was deducted. Set out what Case of Schedule D the interest should be subject to tax under and advise Mark of whether such interest is generally subject to USC and PRSI.

(3 marks)

(h) State what body a taxpayer can lodge an appeal with if he/she disagrees with an income tax assessment raised by Revenue, the time limit for making such an appeal and whether it is possible for the taxpayer to make any further appeal if he/she is not satisfied with the decision of that body.

(4 marks)

Total 25 Marks

QUESTION 2

Ellen O’Hanlon has owned and operated a bakery and café since 2010. Ellen’s results for the year ended 30 September 2016 are as follows:

Notes

Sales income

936,000

Gain on disposal of slow cooker

1

100

Less expenses:

936,100

Staff costs

220,000

Stock

450,000

Rent and rates

40,000

Electricity and heating

18,000

Refurbishment expenditure

2

23,500

Miscellaneous expenses

3

4,800

Depreciation

 2,600

758,900

Profit before tax

177,200

Note 1- Disposal of slow cooker

Ellen disposed of an industrial sized slow cooker on 30 June 2016 for €900. Ellen had acquired a machine for €5,000 on 1 May 2012 and claimed capital allowances.

Note 2- Refurbishment expenditure

Ellen carried out a significant refurbishment of her bakery and café during 2016. A breakdown of her expenditure is as follows:

Painting the café

1,500

Repair of industrial oven

500

New tables and chairs for the café

6,000

New electrical wiring of kitchen

8,500

Air-conditioning in café

7,000

Total

23,500

Note 3- Miscellaneous expenses

Complimentary dinners for loyal customers

1,500

Subscription for cookery magazine

150

Christmas party night for staff

600

Parking fines

200

Sponsorship of local baking competition

100

Accounting and tax compliance fees

2,250

Total

4,800

Additional information:

Ellen has one daughter, Susan. Susan is 16 years old and attends the local school. Ellen had Susan when she was very young and Susan’s father is not involved in her upbringing. Ellen never married.

Ellen’s mother has been in a nursing home for a number of years as she requires qualified nursing care 24 hours a day. That care is available on site in the nursing home. Ellen paid €6,000 of fees to the nursing home in 2016.

Ellen incurred €120 on GP expenses for herself and €180 on GP expenses for Susan during 2016. Ellen also incurred a €500 dental treatment expense as she required a number of fillings during the year.

REQUIREMENTS

(i) Calculate Ellen’s Case I taxable income for the accounting year ended 30 September 2016.

(11 marks)

(ii) Calculate Ellen’s income tax, PRSI and USC liability for the 2016 tax year.

(11 marks)

(iii) Ellen’s sister, Frances, has asked Ellen if she will employ her daughter, Rebecca, who has just completed her chef training course. Frances has hinted to Ellen that she expects that Ellen will pay Rebecca more than the other chefs which Ellen has on the payroll on the basis that Rebecca is Ellen’s niece. Advise Ellen if there is anything she should consider in relation to the deductibility of Rebecca’s salary, referring to relevant case law in your answer.

(3 marks)

Total 25 Marks

QUESTION 3

Donal Morris is a US citizen, domiciled in New York who was employed as a chemical engineer in a pharmaceuticals company in Cork up to 30 September 2016.

Donal moved from the US to Cork on 1 May 2012 to take up employment with the company. Donal has spent the last number of years working on a new drug to treat cancer. Donal was progressing well within the company and enjoying a very competitive salary and benefits. However, the new cancer drug failed in its third round of testing in June 2016. The failure was a major blow to the company and caused a significant reduction in the company’s share price. Donal was made redundant on 30 September 2016 and did not work from that date until he found a new job in 2017.

Details of Donal’s income and employment benefits for 2016 are set out below:

Gross annual salary €65,000. Donal was paid monthly up to 30 September 2016.

Donal’s employer paid his monthly mobile phone bill of €50 per month up to 30 September 2016. Although Donal very occasionally used the phone for personal calls, it was mostly used to take calls with his colleagues in the US who work for the parent company of his employer to discuss the drug testing progress.

Donal received Chemical Engineers monthly magazine each month in work. His monthly subscription of €20 was paid for by his employer.

Donal was residing in an apartment owned by his employer company on a rent-free basis from when he arrived in 2012 up to 30 September 2016. The market value of the apartment in 2016 was €200,000.

Donal owns a property in the US. He has rented the property out while he has been in Ireland. He received €6,000 of rental income during 2016 directly into a US bank account. Donal is using that money to build up a nest egg for when he eventually returns to the US.

Donal received a €200 One4All voucher from his employer in May 2016.

Donal received net interest income from his AIB deposit account of €400 during 2016.

Donal received dividend income from his US stock portfolio. The income was received into Donal’s US bank account. Donal did not withdraw any of the money.

Donal received the following payments from his employer on his redundancy on 30 September 2016:

Statutory redundancy: €5,400

Ex-gratia payment: €32,500

Donal has no pension entitlements and has not been in receipt of a redundancy payment previously. Donal’s emoluments of his employment have been static since 2013.

REQUIREMENTS

(i) Calculate Donal’s income tax, USC and PRSI liability for 2016.

(20 marks)

(ii) Donal’s friend advised that he may be entitled to request a refund of some of the payroll taxes which were deducted by his employer from Revenue following his redundancy on 30 September 2016. Although Donal does not think he should be entitled to a tax refund, he has asked you to set out a brief overview of the process involved in requesting such a refund from Revenue.

(3 marks)

(iii) Donal is considering asking his tenant in the US to pay the US rental income directly to his Irish bank account until he finds a new job. Advise Donal of whether this would impact on the Irish income tax treatment of the US rental income.

(2 marks)

Total 25 Marks

QUESTION 4

(a) Ciara had been making candles and candle holders in her spare time for a number a years. Ciara found that she had a natural gift and really enjoyed the time she spent on her craft.

On 1 February 2014, Ciara decided to leave her job and concentrate her efforts on making her products for distribution. Ciara purchased a machine for use in her business on 1 March 2014 for €3,000 and ordered her raw materials on the same date. Ciara’s materials arrived and she began to manufacture goods on 1 April 2014. Ciara began distribution of her goods to wholesalers on 1 August 2014. Ciara employed two individuals to work with her in 2016.

Ciara made up accounts from the date of her commencement to trade for tax purposes up to 31 January 2015 and each subsequent 12 months ending 31 January.

Her Case I tax adjusted profits for each period were as follows:

Period ended 31 January 2015

€10,000

Year ended 31 January 2016

€15,000

Year ended 31 January 2017

€20,000

REQUIREMENTS

(i) Referring to case law, state the date Ciara would be considered to have commenced to trade.

(2 marks)

(ii) Calculate the amount of Ciara’s Case I income assessable to tax for the 2014, 2015 and 2016 tax years.

(5 marks)

(iii) As an employer, Ciara has certain obligations with regard to operating payroll taxes:

(I) Set out what Ciara’s duties in respect of the operation of the PAYE system are during the tax year.

(II) List three documents which Ciara could verify the PPS number of new employees against such that she would be regarded by Revenue as having taken reasonable steps to verify that a PPS number provided by a new employee is valid.

(5 marks)

(b) Richard is moving to Ireland from San Francisco to take up employment with EAC Ltd, a technology company. EAC Ltd has informed Richard that they will reimburse certain relocation expenses for him. In particular, they have stated that it is company policy to only reimburse relocation expenses which can be paid tax-free to the employee.

REQUIREMENTS

(i) Provide Richard with five examples of the types of expenses he can expect to have reimbursed tax free assuming EAC Ltd’s policy complies with Revenue guidance on the tax free reimbursement of certain relocation expenses.

(ii) Advise Richard on whether Revenue allows for the tax-free reimbursement of costs of temporary accommodation. Comment on whether his employer may reimburse the interest expense associated with borrowing to build a new home to Richard tax free.

(6 marks)

(c) Michael and Séan registered their marriage on 29 February 2016. Michael and Séan are both employed in the marketing profession and earned salaries of €45,000 and €22,000 respectively in 2016.

REQUIREMENT

Calculate Michael and Séan’s final income tax liability for 2016 based on the information provided above. You are not required to calculate USC or PRSI charges.

Marks will be awarded for legislative references.

(7 marks)

Total 25 Marks

QUESTION 5

(a) Brian Smith, a chargeable person, had an income tax liability, before interest or penalties, of €60,000 for the 2015 year of assessment. Brian paid preliminary tax of €40,000 on 31 October 2015. Brian had estimated this liability as his final liability for 2014 was €45,000 and he had mistakenly anticipated that he would have a less profitable year in 2015.

Brian filed his 2015 tax return on 28 February 2017 and paid any outstanding amounts on this date.

REQUIREMENTS

(i) Advise Brian as to when he should have filed his 2015 income tax return, and what the consequences of filing it on 28 February 2017 are, providing relevant legislative references.

(ii) Set out the three ways in which a chargeable person may meet his/her preliminary income tax obligations.

(iii) Advise Brian as to whether he has met his preliminary tax obligations for 2015, and if not, what additional liabilities arise, providing relevant legislative references and a calculation of any additional liability arising.

(12 marks)

(b) Maria Smith worked as a self-employed hairdresser in Ireland for the last ten years and prepared her accounts up to 30 November each year. Maria owns her own home in Westmeath. She purchased the home in January 2012 and occupied it as her only residence from that date. Maria does not have any family remaining in Ireland following the passing of her parents in recent years.

Maria decided to cease her hairdressing trade on 29 February 2016. Her profits for the three months up to cessation were €6,000. Maria’s profits for the year ended 30 November 2015 were €20,000. Maria moved to Australia in March 2016. She travelled around Australia for almost a year before taking up employment in a hairdressing salon in Sydney in March 2017.

Maria rented out her house from 1 March 2016 to a local family for a monthly rental of €500. Prior to renting the house out, Maria hired a cleaner and painter and incurred an expense of €700 in respect of cleaning and painting the house.

Maria does not see herself returning to Ireland and would consider selling her home.

REQUIREMENTS

Advise Maria on:

(i) The Irish income tax treatment of the rental income and Irish trading income which she was in receipt of in 2016 and calculate whether she is required to make any adjustment to her 2015 Case I assessable profits. You should comment on Maria’s tax residence and ordinary residence position.

(5 marks)

(ii) Assuming that Maria remains Irish domiciled and continues to rent her Irish house to the local family, the Irish income tax treatment of her rental income and Australian employment income in 2017.

(2 marks)

(iii) Whether she may be entitled to any relief from Irish capital gains tax if she sells her house in Westmeath in January 2017, and if so, whether any restriction would apply as a result of the time she has spent in Australia.

(3 marks)

(iv) The factors that would be relevant in determining whether Maria had lost her Irish domicile of origin and acquired an Australian domicile of choice.

(3 marks)

Total 25 Marks

SOLUTION 1

(a) A perquisite is generally something that is provided by an employer which is in the form of money or which is capable of converting into money.

Tennant v Smith (Surveyor of Taxes) [1890 – 1898]

(b) Section 195B TCA 1997.

(c) Maria is taxable on her foreign rental income received under Schedule D Case III.

A deduction for expenses or capital allowances not specifically provided for in TCA. However, it is generally accepted practice to take deductions/capital allowances that would be allowed if the income was taxable under Case V.

This concession was confirmed in the Revenue publication “Guide to the Irish Tax Implications of Foreign Property Ownership”.

Maria’s taxable foreign rental income is:

Rental income

€7,200

Less: Insurance

(€450)

Capital allowances

(€500)

Taxable Case III income

€6,250

(d)

Month

Gross pay

Cumulative gross pay

Cum. Standard Rate cut-off point

Cum. tax @ 20%

Cum. tax @ 40%

Total Cumulative gross tax

Cum. tax credit

Total cumulative net tax

Tax this month

Jan

€5,000

€5,000

€2,817

€563

€873

€1,436

€275

€1,161

€1,161

Feb

€5,000

€10,000

€5,634

€1,127

€1,746

€2,873

€550

€2,323

€1,162

(e) Mark is liable to income tax, USC and PRSI on the rental income. He does not qualify for rent a room relief on the basis that his house in Kildare is not a qualifying residence as he did not occupy it as his sole or main residence during the year of assessment.

(f) 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;

Other foreign income which is less than €3,810 per annum.

Section 821 TCA 1997

(g) Schedule D Case IV

No USC where DIRT is deducted

Gross interest is subject to PRSI

(h) Tax Appeals Commission

Appeal must be lodged within 30 days from the date of the Notice of Assessment

Appeal to the High Court if dissatisfied with the findings of the Tax Appeals Commission on a point of law only.

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

SOLUTION 2

(i)

Profit before tax

177,200

Add back:

Depreciation

2,600

New tables and chairs (capital)

6,000

New electrical wiring of kitchen (capital)

8,500

Air-conditioning (capital)

7,000

Parking fines

200

Complimentary dinners for customers

1,500

Deduct:

Gain on disposal of slow cooker

(100)

 

Tax adjusted trading profits

202,900

 

Less: Case I capital allowances (working 1)

3,225

Taxable Case I profits

199,675

Working 1: capital allowances

Disposal of slow cooker:

Sales Proceeds: €900

TWDV: €2,500

Balancing allowance: €1,600

2016 additions:

New tables and chairs - €6,000

New electrical wiring – not P&M

Air-conditioning - €7,000

W&T: €13,000 * 12.5% = €1,625

(ii)

Ellen O’Hanlon
Income Tax Computation for 2016 tax year

Schedule D Case I income

199,675

Less: Nursing home expense

6,000

Taxable income

193,675

Taxed as follows:

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

7,560

Balance (€155,875) @ 40%

62,350

Total income tax

69,910

Less tax credits:

 

Single person

1,650

Single parent tax credit

1,650

Medical expenses

60

Earned income tax credit

550

Total income tax less credits

66,000

USC

€12,012 @ 1%

120

€6,656 @ 3%

200

€51,376 @ 5.5%

2,826

€129,631 @ 8%

10,370

Surcharge €99,675 @ 3%

2,990

PRSI (€199,675 @ 4%)

7,987

Total income tax, USC and PRSI

90,493

(iii) – Only the proportion of the wages which equal the market wage can be said to be incurred wholly and exclusively for the purposes of the trade.

The excess would have to be added back.

Copeman v William Flood & Sons, Ltd [1940]

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

Note the Standard Rate Cut-Off Point increased to €38,550 in Finance Act 2017 for a single parent.

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

SOLUTION 3

(i) Donal Morris

Income Tax Computation for the tax year 2016

Income

Note

Schedule D

Case III

US dividend income

-

1

US rental income

-

1

Case IV

Irish interest income

678

2

Schedule E

Employment income

48,750

3

One4All voucher - exempt

-

4

Employer provided accommodation

12,000

5

Statutory redundancy

-

6

Ex-gratia redundancy

9,280

7

Taxable income

70,708

Taxed as follows:

€33,800 @ 20%

6,760

€678 @ 41%

278

€36,230 @ 40%

14,492

Total tax

21,530

Less: Non-refundable tax credits

Personal credit

(1,650)

PAYE credit

(1,650)

DIRT

(278)

17,952

PRSI @ 4% ((70,708 – 9,280) * 4%)

2,457

USC

€12,012 @ 1%

120

€6,656 @ 3%

200

€51,362 @ 5.5%

2,825

Tax liability 2016

23,554

Notes:

1. US dividend/rental income was not remitted and is not taxable in 2016.

2. The net amount of Irish interest income was €400. Gross amount = €678. This amount is subject to tax at 41%. No USC as DIRT has been deducted. PRSI is chargeable as Donal is a chargeable person. DIRT credit = €278

3. €65,000 * (9/12) = €48,750

4. Exempt from income tax, USC and PRSI

5. Benefit = €200,000 * 8% * (9/12) = €12,000

6. Statutory redundancy amount is exempt from income tax, PRSI and USC.

7. Ex-gratia redundancy – workings:

Number of complete years services: 4 years

Basic exemption: €10,160 + (€765 * 4) = €13,220

Increased basic exemption: Informed in the question that Donal has not previously claimed relief in respect of an ex-gratia redundancy payment and that he 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 €13,220 + €10,000 = €23,220.

Standard Capital Superannuation Benefit:

(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 emoluments for last 36 months:

2013: 1 Oct – 31 Dec: (€65,000 + (€12,000/9) *12)) * (3/12) = €20,250

2014: €65,000 + (€12,000/9) *12) = €81,000

2015 year: €65,000 + (€12,000/9) *12) = €81,000

2016 to 30 Sep: €48,750 + €12,000 = €60,750

Average for last 36 months: €81,000

(Average of the emoluments for last 36 months of service €81,000 * 4 complete years’ service)/15 = €21,600.

Conclusion: Increased basic exemption provides for highest exempt amount of €23,220.

Remaining €9,280 is subject to income tax, USC and PRSI.

(ii) – Donal may claim a tax refund using Form P50.

Form P50 should be completed and sent to local Revenue office together with Parts 2 and 3 of Form P45.

Donal should have waited a minimum of four weeks from the date he became unemployed before applying for a tax refund.

(iii) If the income is paid to Donal’s Irish bank account, it will be considered to be remitted to Ireland and will be subject to Irish income tax.

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

Note the Standard Rate Cut-Off Point increased to €34,550 in Finance Act 2017 for a single person.

Finance Act 2016 introduced reductions in the rate of DIRT to 39% in 2017 and reducing 2% each year until 2020 when the rate of DIRT is to be 33%.

SOLUTION 4

(a) (i) 1 April 2014 (i.e. date of commencement of manufacturing)

The Birmingham & District Cattle By-Products Co Ltd v CIR [1919]

(ii) 2014: Actual 9 months €9,000

2015: Actual basis as trade commenced less than 12 months before 31 January 2015 (the accounting date ending in 2015).

Actual profits in 2015: €14,750

2016: profits of 12 month period ended in third year €15,000

Review second year. No second year excess as was computed on actual basis so no adjustment required to third year profits

(iii) (I) – Deduct PAYE, PRSI and USC on payments made to employees

Submit Form P30 and payments of tax, employee and employer PRSI and USC to Collector General within 14 days of the end of each month (or quarter if permitted to file on quarterly basis)

Prepare Forms P45 for employees who leave the employment during the year

Keep a register of employees and notify the Revenue of details of new employees or change of address

(III) Any three of:

Notice in respect of a previous employment

Form P45

Social Welfare Services Card/letter from Department of Social Protection

A notice of assessment to income tax or CGT

Form P21 Balancing Statement

Form P60

Correspondence from Revenue which quotes PPS number

Payslip from previous employer which shows PPS number

(b) (i) 1. Auctioneer and solicitor’s fees and stamp duty arising from moving house.

2. Removal of furniture and effects.

3. Storage charges.

4. Insurance of furniture and effects in transit or in storage.

5. Cleaning stored furniture.

6. Temporary accommodation.

7. Travelling expenses on removal.

(ii) Temporary subsistence allowance while looking for accommodation at the new location may be paid tax free subject to a maximum of 10 nights at the appropriate Revenue approved subsistence rate.

The vouched rent of temporary accommodation for a period not exceeding three months.

Any reimbursement of the capital cost of acquiring or building a house or any bridging loan interest or loans to finance such expenditure would be subject to income tax.

(c)

Michael

Sean

Joint

Schedule E

45,000

22,000

67,000

Taxed as follows:

€33,800 @ 20%

6,760

4,400

Balance @ 40%

4,480

-

€64,800 @ 20%

12,960

Balance €2,200 @ 40%

880

Total tax

11,240

4,400

13,840

Less tax credits

Single/Married

1,650

1,650

3,300

PAYE

1,650

1,650

3,300

Tax liability

7,940

1,100

7,240

Less year of marriage relief (Working 1)

1,317

183

Tax liability after year of marriage relief

6,623

917

Working 1:

Tax liability if jointly assessed: €7,240

Total tax liability if assessed on single basis: €9,040

Additional tax payable under single assessment: €1,800

Relief due: €1,800 * (10/12 months) = €1,500

Split as follows:

Michael: €1,500 * (7,940/9,040) = €1,317

Sean: €1,500 * (1,100/9,040) = €183

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

SOLUTION 5

(a) (i) Brian should have filed his 2015 income tax return by 31 October 2016.

As Brian filed his return after 31 December 2016, he should be liable to a surcharge penalty of 10% of his final liability, subject to a maximum of €63,485.

Surcharge = €60,000 * 10% = €6,000

Reference: Section 1084(2) TCA 199

(ii) 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.

(iii) Brian should have paid preliminary tax of at least €45,000 (i.e. 100% of 2014) in respect of the 2015 year of assessment. (90% of current year would have been €54,000.) Brian has not met his 2015 preliminary tax obligations.

Interest will apply on the amount of the underpayment from 31 October 2015 to 28 February 2017 – 486 days

2015 liability: €60,000

Surcharge: €6,000

Less: preliminary tax payment: €40,000

Amount due: €26,000

Interest: €26,000 * 0.0219% * 486 days = €2,767

Total payment of outstanding liability on 27 February 2017: €28,767

Reference: Section 1080 TCA 1997

(b) (i) Maria was Irish resident, Irish ordinarily resident and Irish domiciled in 2016.

Maria is subject to Irish income tax on her rental income under Schedule D Case V and on her actual trading income under Schedule D Case I.

Maria should not be entitled to a deduction for the cleaning and painting expenses she incurred in 2016 in arriving at her taxable rental income on the basis that they were pre-letting expenses.

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.

Maria is required to amend her income tax assessment for 2015 to an actual basis on the basis that the profits assessable under the actual basis are higher than the profits of the 12 month period ending in 2015.

Working: Actual 2015 = (€20,000 * (11/12)) + (€6,000 * (1/3) = €20,333

Originally assessed: €20,000

Adjustment required: Increase assessable Case I profits for 2015 by €333.

(ii) Maria will be non-Irish resident but Irish ordinarily resident and domiciled in 2017.

Rental income will be subject to Irish income tax, as above.

Her Australian employment income will not be subject to Irish income tax on the basis that all of the duties are carried on outside of Ireland.

(iii) Maria may be entitled to benefit from the CGT relief for the disposal of a principal private residence available under Section 604 TCA 1997.

Her period of absence in Australia will not qualify as a period of deemed occupation where she performed duties of employment outside the State as she will not have lived in the house after the period of absence.

However, given that her absence occurred during the last 12 months of ownership, she will be deemed to have occupied the house and she should be entitled to full relief.

(iv) Does she intend to sever her ties with Ireland?

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

Does she have accommodation in a permanent state of readiness for her occupation in Ireland? Sale of house could be a very relevant factor.

What are her business, personal, social or other connections with Ireland? No family ties is relevant.

What are her intentions for the future?

Has Marie purchased a grave?

Has she made any statement of intent regarding her domicile? (or any other correct factor)

Examiner’s Report

The paper was answered to a satisfactory standard and students demonstrated an adequate understanding of the Income Tax Fundamentals course.

As a general point, students should ensure that they read each question carefully and answer all elements of the question. By way of example, some students did not refer to the PRSI and USC treatment of income in some questions despite the fact that it was specifically asked in the question. Students should be aware that marks are awarded for all elements of the question asked.

While some students successfully provided legislative references where requested, many students ignored any requirements in the paper to provide legislative references and missed out on valuable marks. The ability to use and reference the Taxes Consolidation Act 1997 is key at Part 1 and all stages of the Chartered Tax Adviser (CTA) exams.

Question 1

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

Part (a): Students demonstrated a very good understanding of the meaning of perquisite. Very few students referred to case law in their answers. As stated above, students should ensure that they read the question carefully and answer all elements. Case law cannot be ignored as part of preparation for the Income Tax Fundamentals exam.

Part (b): A significant proportion of students did not correctly provide the legislative reference for the recently introduced exemption from income tax and USC on vouched expenses for travel and subsistence for a non-resident, non-executive director of a company which are incurred for the purposes of attendance at a relevant meeting in his/her capacity as a non-executive director.

Part (c): The majority of students correctly identified that Maria’s foreign rental income was taxable under Schedule D Case III. Although many students were aware of the deductions that Maria was entitled to take in arriving at her taxable Case III income, very few set out the concessionary basis of that entitlement.

Part (d): Students demonstrated a very good understanding of the cumulative basis of calculation of PAYE.

Part (e): The majority of students correctly identified that Mark should not be entitled to rent-a-room relief. Students neglected to go on to advise Mark of the income tax, PRSI and USC treatment of his rental income, as asked in the question.

Part (f): Students performed very well in setting out the sources of income an individual who is non-Irish resident but ordinarily tax resident and domiciled in Ireland should be subject to Irish income tax on.

Part (g): This question was not very well answered. Many students incorrectly stated that interest which has been subject to DIRT is taxable under Case III rather than Case IV. In addition, many students mixed up the USC and PRSI treatment.

Part (h): Students performed very well in this question which tested a recent legislative change on appeals.

Question 2

Question 2 required students to prepare a Case I taxable income computation and calculate a single parent’s liability to income tax, PRSI and USC for the 2016 tax year. This question was attempted by the majority of students and was the best answered question on the paper.

Students dealt very well with the adjustments which were required to be made in arriving at Ellen’s tax adjusted trading profits. While many students correctly recognised that the expenditure on the tables and chairs and air-conditioning was capital in nature and needed to be added back, a much smaller number recognised that capital allowances could be claimed in respect of the expenditure.

Students dealt very well with the tax credits available to Ellen, including the new earned income tax credit and the single parent tax credit. A number of students incorrectly gave a credit rather than an allowance for the nursing home expense.

Part (ii) of the question was well answered by students. Students recognised that only the proportion of the wages which equal the market wage should be a deductible expense for tax purposes. However, very few students provided the case law reference which was requested in the question.

Question 3

Question 3 was the least popular question on the paper but was well answered by those students who attempted it.

Part (i) required students to calculate an Irish resident, ordinarily resident but non-domiciled individual’s liability to income tax, USC and PRSI. Students dealt very well with the application of the remittance basis of taxation, the treatment of statutory redundancy and benefits in kind. Students did not perform well in calculating the exempt portion of Donal’s ex-gratia termination payment. In addition, many students did not correctly gross up the interest which Donal received net of DIRT. Few students recognised that the gross interest income should have been taxed at a rate of 41% and should not have been subject to USC. This is an area which students should ensure they are familiar.

Part (ii) tested students’ knowledge of claiming a tax refund using Form P50 and was not well answered.

Part (iii) further tested the application of the remittance basis of taxation and was very well answered.

Question 4

Question 4 was the least well answered question on the paper.

Part (a) tested the commencement to trade rules. Most students correctly identified Ciara’s commencement to trade date. Many students did not provide the case law reference which was requested.

Students did not perform very well in the computational aspect of the question. The most common error was that students did not recognise that there was no 12-month accounting period ending in 2015 and that the actual basis applied. Students should ensure they sufficiently practice and are familiar with the commencement and cessation to trade rules.

Part (b) of the question tested the tax treatment of reimbursement of relocation expenses and was well answered by students.

Part (c) of the question tested the application of the year of marriage relief. It was clear that students were familiar with how the relief operated but many did not correctly calculate the relief. Computational questions are a very important part of the Income Tax Fundamentals course.

Question 5

Question 5 was quite well answered by students.

Part (a) of the question tested students’ knowledge of the income tax payment deadlines and the application of interest and penalties in the case of late payments and filings.

Students demonstrated their knowledge of the preliminary tax payment rules. Many students recognised that Brian did not meet his preliminary tax payment obligations and that interest on late payment would apply, as well as a penalty in respect of the late filing of his 2015 income tax return, but only a very small number of students calculated the additional liability arising as requested in the question.

Part (b) tested the basis of taxation rules, the residence, ordinary residence and domicile rules and principle private residence relief and was generally well answered.

Q1

Q2

Q3

Q4

Q5

Highest

21.5

24.5

23

23

21

Lowest

5

0.5

5.5

4.5

5.5

Average

14

15

14

13

14