Chapter 7Disposals of Business Assets and Investments
To teach students the taxation treatment of disposals of business assets and investments.
On completing this chapter, you will be able to:
Capital Taxes Fundamentals Manual
Personal Taxes Manual
■ Chapter 14: Development land
■ Chapter 32: Anti-avoidance
MAIN LEGISLATIVE PROVISIONS
The Taxation of Capital Gains, Finance Act 2016, Irish Tax Institute
■ Chapter 10 Company Chargeable Gains
Corporation Tax, Finance Act 2010, Irish Tax Institute
■ Chapter 10A Companies’ Capital Gains
RELEVANT PAST EXAM QUESTIONS
■ 2015, Summer, Question 5
■ 2015, Autumn, Question 5(a)
■ 2016, Autumn, Question 2(b)
■ 2017, Autumn, Question 2(c)
■ 2018, Summer, Question 2(a)–(d)
7.1.Apply the rules of CGT to gains of a company when disposing of a business asset or investment
7.1.1.Scope of CGT for a company
As already mentioned, under the general charge to corporation tax, Irish tax resident companies are taxable in respect of all income and gains wherever arising (Section 26(1) TCA 1997 and Section 4(1) TCA 1997).
Generally, companies do not pay CGT, except on gains from the disposal of development land. Instead, companies generally pay corporation tax (“CT”) on chargeable gains. However, the TCA provisions relating to CGT still apply to companies (Section 78(7) TCA 1997).
The territorial scope of tax on a company’s chargeable gains is as follows:
A resident company is liable to corporation tax on any chargeable gain it realises except on disposals of development land (Section 21(3) TCA 1997 and Section 649(1) TCA 1997). The Personal Taxes manual has a full discussion on what is meant by development land.
Chargeable gains arising on the disposal of development land by a company are always liable to CGT and not CT, irrespective of the company’s residence (Section 649(1) TCA 1997).
A non-resident company is not within the charge to corporation tax unless it carries on a trade in Ireland through a branch or agency (Section 25(1) TCA 1997). Where such a non-resident company does carry on a trade through a branch or agency in Ireland, it is chargeable to corporation tax on:
1) any trading income arising directly or indirectly through or from the branch or agency together with any income from property or rights used by or held by the branch.
2) chargeable gains on the disposal of assets on which a non-resident company would normally be liable to Irish tax (Section 25(2) TCA 1997).
Section 29(3) TCA 1997 lists the assets that a non-resident company will be liable to Irish tax on in the event of a disposal. These are commonly referred to as “specified assets”. The basic rule that a non-resident is only chargeable on gains on the disposal of specified assets will always apply, no matter whether the disposal is chargeable to CT or CGT.
In summary, a non resident company is chargeable to CT in respect of gains arising on the disposal of specified assets (i.e. Irish land, minerals, assets situated in the State which were/are used for the purposes of a trade carried on in the State, etc.) provided the non-resident company carries on a trade in Ireland through a branch or agency. If the non-resident company is not carrying on a trade in the State through a branch or agency, the company is liable to CGT on any gain arising on the disposal of specified assets. In either case, a non-resident company is liable to CGT on any gain on the disposal of development land (in the same way that an Irish tax resident company is liable to CGT on such disposals).
7.1.2.Calculation of chargeable gains
Unless an asset is not a chargeable asset, any gain on disposal is a chargeable gain (Section 545 TCA 1997). A loss on disposal of an asset is an allowable loss if a gain on the disposal of that asset would have been a chargeable gain (Section 546 TCA 1997).
The preparation of the computation for CT on chargeable gains is largely the same as a CGT computation (Section 78(2) TCA 1997). The following steps should be taken in calculating the chargeable gain:
1. Remember that the accounting profit/loss on the disposal of an asset (for example a building or shares) is not taxable/deductible in the computation of the tax adjusted Case I Income and any accounting profit or loss on disposal must be adjusted for in calculating taxable Case I income.
2. A separate calculation of the capital gain/loss must be computed in accordance with capital gains tax rules.
3. Current period capital losses and unutilised capital losses incurred in previous accounting periods are deducted from any capital gains calculated using CGT rules and arising in the current period (Section 78(2) and Section 31 TCA 1997).
4. The tax payable is calculated using the applicable CGT rate (Section 28(3) TCA 1997) currently 33%.
5. One must then work backwards to calculate the chargeable gain to be included in the company’s corporation tax computation that will give the same corporation tax as that above using the CGT rate (Section 78(3) TCA 1997).
6. A company’s chargeable gains are included in the total profits for the period (Section 78(1) TCA 1997). Therefore, any of the losses, charges or allowances which can be used to shelter total profits can be used to shelter chargeable gains (see Chapter 5).
Allowable losses are calculated in the same manner as chargeable gains (Section 546(2) TCA 1997). The following points are of special relevance to capital losses realised by companies:
1. A company can offset a capital loss against capital gains of the current accounting period (Section 78(2) TCA 1997). Capital losses cannot, however, be offset against the company’s total income.
2. Where the capital loss exceeds the capital gain of the current period, the excess can be carried forward indefinitely to be set off against capital gains subject to corporation tax of future periods (Section 31(b) TCA 1997). Note, only capital losses incurred when the company is within the charge to corporation tax can be carried forward and offset against future capital gains (see Section 78(4) – meaning of “relevant allowable loss”).
3. A loss arising on the disposal of development land by a company is offsetable for corporation tax purposes against chargeable gains on development land subject to CGT and to the extent not relieved against such gains, may be treated as part of a “relevant allowable loss” under Section 78(2) TCA 1997 (Section 653(2) TCA 1997).
4. A gain arising from the disposal of development land is liable to CGT and not CT. This gain can effectively only be offset by a loss arising from the disposal of development land (Section 653 TCA 1997).
Company A acquired a premises in October 1990 for €100,000. This was subsequently sold in June 2018 for €273,000. The accounting profit on disposal shown in the accounts is €173,000. A Ltd prepares accounts to 31st December 2018.
1. Deduct profit on disposal of €173,000 in corporation tax computation of tax adjusted Case I income.
2. Calculate the capital gain on the disposal in the tax year to 31st December 2018.
B Ltd. acquired the freehold interest in a factory in January 1984 for €75,000. It subsequently sold this factory on 20 December 2018 for €350,000. The accounting profit on the disposal of this fixed asset shown in the accounts is €311,000. B Ltd prepares its accounts to 31 December each year. Assess the tax implications of this transaction for B Ltd.
7.1.3.Wasting assets – Restriction of allowable expenditure (Section 560 – Section 561 TCA 1997)
Remember from Capital Gains Tax that a wasting asset is one that has a predictable useful life of 50 years or less. Plant and machinery will always be deemed to be a wasting asset while freehold land is excluded from the definition.
The definition of a wasting asset can be found in Section 560 TCA 1997.
Remember, Section 561 TCA 1997 outlines an exception to the restriction of the allowable base cost of wasting assets. A business asset used solely for trade purposes which qualifies for capital allowances is not subject to the wasting expenditure rule.
You learned about the CGT treatment of wasting assets in Capital Taxes Fundamentals. You should revise this area.
W Ltd. acquired a 3 year right of way in January 2017 for €60,000. The right of way allowed W Ltd access land owned by it using larger vehicles than could access the land using the normal access route. The right of way is a wasting asset with an expected life of 3 years, at the end of which time it will be worthless. If W Ltd subsequently sold this right of way in June 2018, the allowable cost of the right of way would be restricted to €60,000 × 1.5/3 = €30,000.
7.1.4.Development land (Section 648 – Section 653 TCA 1997)
Development land is defined in Section 648 TCA 1997. Essentially, where land is sold and the sales price exceeds the current use value of that land, it is treated as development land.
In your Personal Taxes: Application and Interaction module, you will learn the meaning of development land for CGT purposes, as well as how to calculate the gains or losses arising on the disposal of development land (taking into account losses, indexation relief, etc).
You should study this carefully as the same principles apply to disposals of development land by individuals as by companies. However, remember, the disapplication of the provisions dealing with development land to disposals where the total consideration in a year does not exceed €19,050 is only available to individuals and not to companies (Section 650 TCA 1997).
As mentioned earlier in the chapter, a company is always liable to CGT and not corporation tax on gains arising on the disposal of development land (Section 649(1) TCA 1997). This is an important distinction as this will impact on the payment dates of the company’s tax liability i.e. the CGT payment deadlines will apply for gains on disposals of development land and not the normal corporation tax payment deadlines.
Development land gains are not treated as part of the company’s total profits (Section 649(1)(a) TCA 1997) and therefore any reliefs which can be set off by a company against its total profits (such as non-trade charges under Section 243 TCA 1997 or excess Case V capital allowances under Section 308 TCA 1997) may not be set off against development land gains.
Alpha Ltd acquires a parcel of land in May 1990 for €300,000. At the date of acquisition this land had a current use value of €100,000. Incidental cost of acquisition totalled €9,000.
In December 1994, the company undertook various works to improve the site – this expenditure totalled €50,000.
Alpha Ltd sold the land in July 2018 for €670,000 at which time the current use value of the land was €240,000.
Remember - CGT on development land is not included in the CT computation and is not re-grossed to the CT rate as gains on development land are always liable to CGT (Section 649(1) TCA 1997).
Develop Ltd. purchased a greenfield site in August 1991 for €250,000 at which time the current use value (CUV) was €110,000. Incidental costs of acquiring the site were €10,000.
Site development work at a cost of €40,000 was undertaken in June 1993. The company sold this prime site in July 2018 for €700,000. At that date, the site had a CUV of €300,000. The site did not have either outline or full residential planning permission.
Calculate the CGT liability of Develop Ltd for 2018.
Note that the company has unutilised capital losses of €50,000 which arose on the disposal of a factory (non development).
7.1.5.Chargeable gains examples
The following examples are based on your studies from the Personal Taxes: manual and show the capital gains treatment in particular circumstances from a company point of view.'
Example 7.4 – Section 550 TCA 1997 - Disposal of assets in a series of transactions
Alpha Ltd owns 4 adjoining sites in a greenfield area in Dublin. The market value of each site on an individual basis is €100,000. However, the market value of the 4 sites if sold together is €500,000.
If Alpha Ltd disposes of the 4 sites in 4 distinct and separate transactions over a period to Beta Ltd. which is a 60% subsidiary, then the proceeds of disposal for each transaction will be deemed to be:
Assume the same facts as in Example 7.4 above except that Beta Ltd is a 25% subsidiary of Alpha Ltd. Would the provisions of Section 550 TCA 1997 apply in this case? Why or why not?
Quart Ltd owns three derelict warehouses in a prime industrial area in Sligo. The site covered by the three warehouses is very suitable for development and is valued at €200,000 whereas the value of each warehouse taken separately is only €30,000, total €90,000.
Quart Ltd disposes of these warehouses to Gamma Ltd, its 90% subsidiary in 3 separate transactions.
What anti-avoidance provisions take effect?
Example 7.5 – Section 290 TCA 1997 - Deferral of balancing charges
An asset is sold and the balancing charge arising is €3,000. A similar replacement asset was acquired for €13,000. The new asset was acquired on 30.11.18 and 12.5% Straight Line W & T applies. Basis period for these transactions is 31.12.18.
The balancing charge is restricted to the actual total of capital allowances granted. This figure includes the deferred balancing charge on original asset.
Max balancing charge of €1,250 + €3,000 = €4,250
Example 7.6 – Section 555 TCA 1997 - Capital allowances and capital gains interaction
A Ltd acquired a factory for €150,000 in 2007. Industrial buildings allowances of €60,000 were received prior to disposal for €300,000 in January 2018.
As a gain arises on the disposal, the base cost is not reduced by the capital allowances claimed. However, a balancing charge of €60,000 of allowances already received will arise.
In the above example assume sale proceeds of €100,000 were received.
1. Capital Allowance Computation
Gamma Ltd purchased an industrial building for €110,000 in 2007. Over the years, IBAA of €44,000 were received. The building was sold in 2018 for €70,000.
Calculate the tax implications of the above transaction.
Example 7.7 – Section 565 TCA 1997 – Grants
A Ltd spent €500,000 in 2008 on the acquisition of a new distribution unit. The company received non-refundable grants totalling €75,000 towards the building. The company sold the building in September 2018 for €600,000. Calculate the corporation tax liability of A Ltd.
Re-grossed for inclusion in CT computation €462,000
Example 7.8 – Section 536 TCA 1997 - Insurance and compensation relief
A cottage was acquired in July 1985 for €50,000 by Homely Ltd. It was subsequently partly damaged by a fire in January 1990. Insurance compensation of €30,000 was duly received in March 1990 and was entirely used to restore the cottage. The cottage was sold in September 2018 for €95,000. The €30,000 spent on restoring the cottage was treated as repairs in the company’s corporation tax computation.
Capital Gains Tax treatment:
Re-grossed for inclusion in CT computation €160,354
The €30,000 insurance proceeds was not taxed in the year it was received on the basis that it was a capital sum and was therefore deducted from the profit before tax in determining the Case I tax adjusted profits.
If the €30,000 spent on the cottage was regarded as improvements as opposed to repairs such that it were capital in nature it would not have been a deductible expense in the company’s corporation tax computation and would be treated as enhancement expenditure for the purposes of determining the capital gain.
Dam Ltd. purchased a building in March 1992 for €60,000. It was partly damaged by fire in December 1994. Insurance compensation of €20,000 was received in January 1995 and this was fully re-invested to restore the building. It is agreed that the restoration work undertaken is of a capital nature and not simply repairs.
The building was sold in May 2018 for €100,000. Calculate the corporation tax implications for the company.
Unlucky Ltd. built a modern factory in December 1990 at a cost of €170,000. In September 1994, the factory was completely destroyed by fire. In January 1995, the insurance proceeds of €210,000 relating to the fire were received. The company used these proceeds to build a new factory in December 1995 – the total cost of the new factory being €300,000. In June 2018, the company sold the factory for €450,000.
Ordinarily the company would be deemed to have sold the original factory in 1994/95 for €210,000 and acquired a new factory for €300,000. However, if the company lodges the appropriate claim the following treatment applies;
1. Destruction of factory in 1994/95 – disposal at no gain/no loss. The factory is deemed to have been disposed of for consideration of €170,000 which gives rise to a no gain/no loss. Note that indexation relief cannot be applied to the base cost.
2. The CGT base cost of the replacement factory is reduced by the excess of:
1. compensation received of €210,000 over
2. amount of deemed proceeds in 1994 – 95 of €170,000 i.e. €40,000
The gain arising in 2018 is:
Re-grossed for inclusion in CT computation €311,467
The company is not obliged to claim the relief.
Calculate the aggregate of the gain in 94/95 on the deemed disposal and the actual disposal in 2018 (ignoring in both cases the insurance relief) and see whether the company should claim the relief.
The gain arising on the deemed disposal in 94/95 is:
Re-grossed for inclusion in CT computation €176,616
Total gains of €89,560 would arise on the deemed disposal in 94/95 and the actual disposal in 2018, which is less than the gain of €117,980 which arises where the relief is claimed. However, given the time value of money and given that the rate of CGT in 94/95 was 40% compared with the current rate of 33%, the company is still better off making the claim for relief and deferring the liability until 2018. Students should note that Unlucky Ltd would have had to decide on whether to claim the relief in 94/95 without the benefit of knowing the position in 2018.
Taking the same facts as the previous example for Unlucky Ltd except that the company spent €200,000 in constructing the replacement factory.
Re-grossed for inclusion in CT computation €556,425
Remember that none of the above forms of relief are available for wasting assets.
Firey Ltd. purchased a factory in July 1991 for €150,000. This factory was completely destroyed by fire in June 1994. A month later, insurance proceeds of €180,000 were received. The company used these proceeds to build a new factory, the total cost of which was €220,000. In December 2018, this factory was sold for €400,000.
Quantify the corporation tax implications for the company.
Taking the facts from the previous task above except that Firey Ltd. spent €175,000 in constructing the replacement factory in July’95.
7.2.Explain the possible treatments of interest charged to capital for CGT purposes
7.2.1.Interest is not a deductible expense
See Chapter 2, Section 2.1 for a discussion on the general rule regarding the disallowance of interest against capital gains tax. It is generally allowed against income.
7.2.2.Allowable interest charged to capital (Section 553 TCA 1997)
There is one exception to the general rule noted above. This is set out in Section 553 TCA 1997. This Section concerns the situation where expenditure has been incurred on the construction of any “building, structure or works” and an interest expense on borrowings used for that purpose has also been incurred and the interest has been capitalised to the company’s accounts. The interest expense will be allowable as part of the base cost of the asset on its ultimate disposal for capital gains tax purposes, if not claimed as a deduction against CT in earlier years.
This exception is only available in limited circumstances. The legislation only refers to interest on borrowings used in the “construction” of any building, etc (Section 553(a) TCA 1997). Interest incurred on borrowings used to buy a building already constructed would not qualify. This capitalised interest deduction is only available to a company and not to an individual (Section 553(a) TCA 1997). Also, the company must incur the interest expense and must charge that interest expense to capital in its accounts (Section 553(b) and (c) TCA 1997).
1. The profit on the disposal of the building of €311,000 must be deducted from the profit per the accounts in the Case I tax adjusted profit computation.
2. The capital gain on the disposal in the tax y/e 31st December 2018 is as follows:
3. The CGT on this capital gain is €199,775 × 33% = €65,926
4. The chargeable gain required to give a tax liability of €65,926 using the CT rate of 12.5% is as follows:
Therefore, €527,406 is included as a chargeable gain in B Ltd’s corporation tax computation for the AP ended 31 December 2018.
CGT computation 2018
Note that Develop Ltd cannot offset its excess capital losses against the development land gain as only losses arising on the disposal of development land can be offset against such gains.
The anti-avoidance provisions of Section 550 TCA 1997, which relate to the disposal of assets in a series of transactions, take effect. The proceeds of the disposal to Gamma Ltd in each case are not €30,000 but instead are deemed to be:
As the land is development land, it is not regrossed and capital gains tax is charged.
1994/95: The company re-invested the full insurance proceeds in the building ⇒ no chargeable gain is realised.
Re-grossed for inclusion in CT computation €41,290
1. Destruction of factory 1994/95: disposal at no gain/no loss. The factory is deemed to have been disposed of for consideration of €150,000 thus giving rise to a no gain/no loss.
2. The CGT base cost of the replacement factory is reduced by the excess of:
a) The compensation received - €180,000 over
b) The amount of deemed proceeds in 1994/95 - €150,000 i.e. €30,000
3. Sale of factory 2018
Re-grossed for inclusion in CT computation €399,406
1. Disposal of factory in 1994/95
Re-grossed for inclusion in CT computation €512,382