Advanced Taxation Republic of Ireland

Sample Paper 1 Questions & Suggested Solutions

 

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NOTES TO USERS ABOUT SAMPLE PAPERS

Sample papers are published by Accounting Technicians Ireland. They are intended to provide guidance to students and their teachers regarding the style and type of question, and their suggested solutions, in our examinations. They are not intended to provide an exhaustive list of all possible questions that may be asked and both students and teachers alike are reminded to consult our published syllabus (see www.AccountingTechniciansIreland.ie) for a comprehensive list of examinable topics. There are often many possible approaches to the solution of questions in professional examinations. It should not be assumed that the approach adopted in these solutions is the only correct approach, particularly with discursive answers. Alternative answers will be marked on their own merits. This publication is copyright 2014 and may not be reproduced without permission of Accounting Technicians Ireland. © Accounting Technicians Ireland, 2014.

 

 

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INSTRUCTIONS TO CANDIDATES

PLEASE READ CAREFULLY

SECTION A  

Answer Question 1, 2, 3 in this section. ALL QUESTIONS ARE COMPULSORY 

 SECTION B  

 Answer any TWO of the four questions in this section 

 

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SECTION A

Answer Question 1, 2, 3 in this section. All questions are compulsory.  QUESTION 1 Compulsory David and Susan Brady have been married for ten years. They have opted for joint assessment and David is the assessable person. David runs his own legal practice; he set this up many years ago. His tax adjusted profits before capital allowances for the last two years were as follows:- Year ended 30th June 2014 € 90,000. Year ended 30th June 2015 €100,000. His capital allowances are:- 2013 ............ €6,000 2014 ............ €8,000 David is 44 years of age and has decided to set up a retirement annuity in 2014. He paid his first premium of €10,000 in May 2014. He inherited a warehouse from his father in September 2014. He let it out on a ten year on lease on 1st November 2014 at a yearly rental income of €24,000 and a premium of €40,000. His only other income was deposit interest from the Allied Irish Bank. He opened the account in May 2014. He received interest of €2,360 net of D.I.R.T. Susan stays at home to look after their three children. She has a part time job and earns €5,000 in 2014. P.A.Y.E deducted was €950. She also received a dividend of €2,560 from an Irish company in November 2014. David and Susan have the following outgoings in 2014.

1. College fees for Susan for an approved part time course €2,200. 2. David paid permanent health insurance of €850.

 

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QUESTION 1 (Cont’d) Requirement (i) Calculate David and Susan’s Income tax liability for 2014. You may assume

joint assessment applies. 15 Marks

(ii) Calculate David’s PRSI, and Universal Social Charge for 2014. 3 Marks

(iii) What is the payment date for David’s preliminary tax for 2014? 1 Mark

(iv) What is the filing date for David’s Form II for 2014? 1 Mark

Total 20 Marks

 

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QUESTION 2 Compulsory Blayney Limited is an Irish resident company. It is a non close company. Its year end is the 30th September each year. The profit and loss account for the year ended 30th September 2014 is set out below:- Notes € € Sales ............................................ 1,200,000 Cost of Sales ................................. 680,550 Gross Profit ................................... 519,450 Other Income ................................ 1 120,000 Less: Expenses Wages & Salaries ........................... 280,480 Directors remuneration .................. 80,000 Depreciation ................................. 10,510 Legal Fees .................................... 2 6,500 Bad Debts ..................................... 3 3,800 Entertainment ............................... 4 5,000 Motor Expenses and Lease Rental ..... 5 17,400 Audit Fee ...................................... 3,625 Insurance ..................................... 4,150 Interest on Late Payment of Corporation Tax 1,510 Telephone, Light, Heat .................... 6,500 419,475 Net Profit ..................................... 219,975 NOTES (1) Other Income € Bank interest received gross 10,000 Gain on sale of warehouse 90,500 Irish dividends received 19,500 ......................................... 120,000 The company sold the warehouse in May 2014 for €350,000. Legal fees on disposal were €3,800. The company purchased this warehouse in March 1998 for €255,700. (2) Legal Fees € Parking fines .................... 450 Defending title to stock ..... 1,200 Disposal of warehouse ....... 3,800 Recovery of Bad Debts ...... 1,050 ......................................... 6,500

 

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QUESTION 2 (Cont’d) (3) The bad debts account is as follows:-

€ Increase in general provision 800 Increase in specific provision 1,100 Bad debts written off 2,550 Bad debts recovered (650) 3,800 (4) The entertainment expenses include €1,580 for the staff Christmas party.

The balance was incurred entertaining customers and potential customers. (5) Motor Expenses and Lease rental Vehicle Cost/Rental Value Emissions Running Expenses Lease Rental Van €26,000 130g/km 3,800 - Car for Managing Director €32,000 175g/km 4,100 5,100 Car for Sales Director €27,500 135g/km 4,400 - 12,300 5,100 All vehicles were acquired in August 2013. (6) Trading Loss The company has an allowable trading loss of €10,000 brought forward from 30th September 2013. (7) Fixed Assets Machinery Car Van € € € TWDV – 1/10/2013 12,750 21,000 22,750 The machine was purchased in August 2012 for €18,000. A grant of €1,000 was received.

 

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QUESTION 2 (Cont’d) Requirement: In respect of the accounting year ended 30th September 2014 for Blayney Limited:- (i) Prepare the adjusted case I trading profits before capital allowances.

10 Marks

(ii) Prepare the capital allowances computation. Show the tax written down value at 30th September 2014.

4 Marks (iii) Prepare the corporation tax liability computation. Show clearly the

appropriate schedule each category of income is assessed under and show the amount for ‘Total Income’ and ‘Total Profits’ as calculated for corporation tax purposes.

6 Marks Total 20 Marks

 

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QUESTION 3 Compulsory (a) State the factors which a trader should take into account in deciding whether to register for V.A.T. 5 Marks (b) Explain the two-thirds rule. 3 Marks (c) Explain briefly the V.A.T. treatment of suppliers making exempt supplies. 2 Marks (d) (i). Aíne Taylor has been carrying on in business for many years. She accounts for V.A.T. on the sales basis. Details of her sales, receipt and payments for the two month period March/April 2014 were as follows:- € Sales exclusive of V.A.T at 23% 300,000 Cash receipts exclusive of V.A.T. at 23% 295,000 Expenses inclusive of V.A.T. at 23% Goods for re-sale 184,500 Entertaining customers 615 Petrol 968 Diesel 1,107 Telephone 492 Expenses inclusive of V.A.T at 13.5% Electricity 681 Compute Aíne’s V.A.T. liability for the two month period March/April 2014. 8 Marks (ii) State the date by which the V.A.T. liability in (i) should have been paid. 2 Marks Total 20 Marks

 

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SECTION B

Answer any TWO of the four questions in this section QUESTION 4 Gary and his wife Sandra are resident and domiciled in Ireland. During 2014 they had the following disposals:-

(i) In June 2014, Gary sold 10,000 shares in Delta Limited for €35,000. Details of Gary’s acquisitions are as follows:- Date of Purchase Number of Shares Cost € 1st March 1999 5,000 8,400 15th September 2002 12,000 25,500

(ii) In August 2014, Sandra sold a painting her husband had given to her in October 2000 for €10,000. The market value of the painting in October 2000 was €4,000. Gary had originally purchased the painting in May 1980 for €800 at a car boot sale.

(iii) Gary inherited from his father 50 acres of farm land in January 1988. Its

market value at that date was €21,000. His father had originally purchased the 50 acres in January 1980 for €5,000. In October 2014, Gary sold 10 acres for €8,000. The market value of the 40 acres remaining is €45,000.

(iv) Gary and Sandra sold a house they owned jointly for €300,000 net of

disposal costs in December 2014. This house was not their principal private residence. They had originally purchased the house in March 1998 for €56,500. Legal costs of acquisition were €4,000. They spent €40,000 on an extension in August 2001. In February 2002, they spent €5,000 on repairing the roof.

Requirement

a) You are required to calculate Gary and Sandra’s capital gains tax for 2014. (You may assume joint assessment applies).

18 Marks

b) State the date(s) by which any capital gains tax is payable. (You are not

required to calculate the tax payable at any given date). 2 Marks

Total 20 Marks

 

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QUESTION 5

a) Sarah Murray commenced as a florist on 1st June 2012. Her tax adjusted profits for her first three years are as follows:- Year ended 31st May 2013 €9,600 Year ended 31st May 2014 €6,000 Year ended 31st May 2015 €12,000 Requirement You are required to calculate Sarah’s Case I Income for her first three tax years exercising any options available to her.

10 Marks

b) John White has been in business for many years. His year end is September

each year. His tax written down value at 1st January 2014 is as follows:- Machinery €11,250 Motor Car €18,000 The machine was purchased in May 2012 for €15,000. The car was

purchased in March 2012 for €30,000. John uses the car 25% for private use. The emissions for this car were 140g/km.

During his year ended 30th September 2014, John had the following

transactions with regard to his fixed assets:- Date Transaction Cost/Sales Proceeds Grant

Received 1/11/2013 Purchase of Machine €10,000 €1,000 10/07/2014 Sale of Car €19,200 - 10/07/2014 Purchase of new car €35,000 - The emissions of the new car purchased on the 10th July 2014 are 165 g/km.

The private use by John White remains at 25%. Requirement

You are required to calculate John White’s capital allowances for 2014. 10 Marks Total 20 Marks

 

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QUESTION 6 The following multiple choice questions consist of TEN parts, each of which is followed by four possible answers. There is only one correct answer. Requirement Indicate the correct answer to each of the following TEN parts. [1] Green Ltd provides Mark with a company car on 1st October 2012. The car cost

Green Ltd €20,000. Its original market value was €26,000. Mark travels 26,500 business kilometres in 2014 and reimburses his employer €1,000 in 2014 for the use of the car. What is Mark’s taxable Benefit – in – Kind for 2014: -

a) €6,000 b) €5,000 c) €6,240 d) €5,240

[2] Mark Byrne ceased business on the 30th June 2014. He made up accounts to

30th June each year. Profits as adjusted for tax purposes were as follows:- Year ended 30th June 2013 €10,000 Year ended 30th June 2014 €12,000 The Schedule D, Case I profit assessed for 2014 is:-

a) €12,000 b) €10,000 c) € 6,000 d) €11,000

[3] The rate of withholding tax a principal contractor is required to deduct from a

sub-contractor who are not registered with the Revenue Commissioners.

a) 20% b) 35% c) 15% d) 41%

[4] Seamus owns his own business. He is registered for V.A.T. He supplies goods

to a registered trader on 18th June 2014. He must issue a V.A.T. invoice to the registered trader by: -

a) 10th July 2014 b) 19th July 2014 c) 15th July 2014 d) 30th June 2014

 

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QUESTION 6 (Cont’d) [5] Wise Limited had an accounting period year ended 31st October 2014. The

company paid a dividend to its shareholders on 18th June 2014. Dividend withholding tax must be paid by Wise Limited by: -

a) 23rd September 2014 b) 31st December 2014 c) 23rd July 2015 d) 14th July 2014

[6] In June 2014 to account for V.A.T. on a cash receipts basis you must supply

90% of your turnover to a non-registered person or your annual turnover must be below: -

a) € 37,500 b) € 75,000 c) €2,000,000 d) €1,250,000

[7] Lorraine borrowed €100,000 from her employer on 1st July 2014. She used the

money to purchase her main residence. Her employer charged her interest of 3.25%. What is Lorraine’s Benefit-in-Kind for 2014: -

a) € 875 b) €1,750 c) € 375 d) € 750

[8] Susan a single person purchased a house for €50,000 on 1st July 2002. On 1st July 2014 she sold the house for €350,000. Susan lived in this house as her principal private residence for the period 1st July 2002 to 30th June 2008. She made no other disposals in 2014. Her capital gains tax for 2014 and her payment date for this gain is: -

a) €40,913 15th December 2014 b) €40,913 31st October 2014 c) €56,859 15th December 2014 d) €40,494 15th December 2014

[9] Joe sold a painting for €10,000 in May 2014. He was given the painting by his

Aunt in July 1999 for €1,000. The market value of the painting in July 1999 was €2,200. Joe’s chargeable capital gain before annual exemption is: -

a) Nil as exempt b) €9,000 c) €8,807 d) €7,375

 

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QUESTION 6 (Cont’d) [10] Acorn Ltd commenced trading on 1st July 2013 and incurred a trade loss of

€10,000 in the year ended 30th June 2014. Acorn Ltd. also had the following income during the year ended 30th June 2014:

Rental Income €6,000 Capital Gain - Adjusted for corporation tax €4,000

Calculate Acorn Limited’s corporation tax for the accounting period 30th June 2014 assuming maximum loss relief was claimed by Acorn Ltd.

a) Nil b) €2,000 c) € 750 d) €1,250 Total 20 Marks

 

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QUESTION 7 (a) List the six badges of trade which were identified by the Royal Commission of Taxation in 1954 and write a brief note on each. 10 Marks (b) Summers Limited is a trading company with an accounting period to the 30th June each year. The company is owned by: Joan Summers 80% Fiona Summers (Joan’s daughter) 20% 100% During the year ended the 30th June 2014 the company had the following information:- € Trading income 50,000 Rental income 15,000 Dividend received from an Irish company 2,000 The company paid a dividend of €8,000 on the 30th September 2014. Required: (1) Calculate the surcharge liability, if any, for Summers Limited for the year ended 30th June 2014. 6 Marks (2) State when the surcharge liability, if any, is due for payment. 2 Marks (3) How can Summers Limited avoid paying the surcharge liability, if

any? 2 Marks Total 20 Marks

 

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Advanced Taxation (Republic of Ireland)

Sample Paper 1 – Suggested Solutions

 

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Solution 1 David and Susan Income Tax Liability 2014 (i) Notes € Schedule D – Case II 1 82,000 Schedule D – Case IV €2,360 x 100 4,000 59 Schedule D – Case V 2 36,800 Schedule E 5,000 Schedule F €2,560 x 100 3,200 80 131,000 Less: Charges Retirement Annuity 3 (10,000) Statutory Income 121,000 Allowances Permanent Health Insurance 4 (850) Taxable Income 120,150 € 50,000 at 20% = €10,000 (Note 5) € 4,000 at 41% = € 1,640 (Note 6) € 66,150 at 41% = €27,122 € 120,150 €38,762

 

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Solution 1 (Cont’d) Less: Tax Credits Married €3,300 P.A.Y.E. (Note 7) €1,000 Carers (Note 8) Nil College Fees (Note 9) € 165 € 4,465 Tax Liability €34,297 Less: Tax Paid P.A.Y.E. Paid € 950 D.I.R.T. €4,000 at 41% €1,640 DWT €3,200 at 20% € 640 € 3,230 €31,067 (ii) David Total Income € Schedule D – Case I 82,000 Schedule D – Case IV 4,000 Schedule D – Case V 36,800 122,800 P.R.S.I and Universal Social Charge

PRSI €122,800 at 4% = €4,912 Universal Social Charge Schedule D – Case I 82,000 Schedule D – Case IV exempt Schedule D – Case V 36,800 118,800 €10,036 at 2% = € 201 € 5,980 at 4% = € 239 €83,984 at 7% = €5,879 €18,800 at 10% = €1,880 €118,800 €8,199

 

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Solution 1 (Cont’d) (iii) The payment date for David’s preliminary tax for 2014 is 31st October 2014. (iv) The filing date for David’s form 11 for 2014 is 31st October 2015. Notes 1. Schedule D – Case II As David is not in commencement or cessation the basis of assessment is current year. 2014 c/y 30th June 2014 €90,000 Less capital allowances € 8,000 Schedule D – Case II €82,000 2. Schedule D – Case V Rent 24,000 x 2/12 = €4,000 Premium €40,000 – (40,000 x 10 – 1) = €32,800 50 Schedule D – Case V €36,800 3. Retirement Annuity Schedule D – Case II €82,000 Maximum tax relief €82,000 x 25% = €20,500 Relief restricted to amount paid €10,000

 

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Solution 1 (Cont’d) 4. Permanent Health Insurance Maximum 10% of Statutory Income €82,000 + €4,000 + €36,800 - €10,000 = €112,800 at 10% = €11,280 Limited to premium paid of €850. 5. The married band for one income is €41,800, this will be increased by Susan’s income of €8,200. This gives a married band of €50,000. 6. The maximum tax that deposit interest is assessed on is 41%. 7. The P.A.Y.E credit is restricted as Susan’s Schedule E income is only €5,000. Therefore, the P.A.Y.E. credit is limited to €5,000 x 20% = €1,000. 8. The carer’s credit does not apply as Susan’s income exceeds €6,700. 9. College fees €2,200 - €1,375 = €825 at 20% = €165.

 

Solution 2 (a)

Blayney Limited Case I Computation

Year ended 30th September 2014

Notes € € Net profit 219,975 Add backs Depreciation 10,510 Interest on late payment of corporation tax 1,510 Legal Fees (1) 4,250 Increase in general provision for bad debts 800 Entertainment (€5,000 – €1,580) 3,420 Motor expenses and lease rental (2) 3,188 23,678

243,653 Deductions Other income 120,000 Case I excluding capital allowances 123,653 NOTES (1) Legal Fees € Parking Fines 450 Disposal of warehouse 3,800 4,250

(2) Motor expenses and lease rental. There is no addback for expenses only lease rental for cars. Car for managing director Limit lower of: (i) €24,000 x 50% = €12,000 or (ii) €32,000 x 50% = €16,000 €5,100 x 32,000 - 12,000 = € 3,188 32,000

 

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Solution 2 (Cont’d) (b) Blayney Limited Capital Allowances computation Machinery Car Van € € € TWDV – 1st October 2013 12,750 21,000 22,750 Wear & Tear (Note 1) (2,125) (3,000) (3,250) TWDV – 30th Sept 2014 10,625 18,000 19,500 Note 1 Wear and Tear Machine Cost 18,000 Less: grant 1,000 17,000 at 12 ½ % = €2,125 Car 27,500 Limit 24,000 at 12 ½ % = €3,000 Van 26,000 at 12 ½% = €3,250 €8,375 (c)

Blayney Limited Corporation Tax Computation

Year ended 30th September 2014 Notes € Schedule D Case I €123,653 - €8,375 = 115,278 Less: Trade loss carried forward 10,000 105,278 Schedule D Case III 10,000 Income 115,278 Gain 1 82,310 Profits 197,588 Corporation Tax Case I €105,278 at 12 ½% = €13,160 Case III € 10,000 at 25% = € 2,500 Gain € 82,310 at 12 ½% = €10,289 €25,949

 

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Solution 2 (Cont’d) NOTES € 1. Sales proceeds 350,000 Less Disposal Costs (3,800) Less: acquisition costs 97/98 255,700 x 1.232 (315,022) Capital Gain 31,178 Adjusted for corporation tax €31,178 x 33 = €82,310 12.5 2. Dividends received from other Irish companies is exempt from corporation tax.

 

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Solution 3

(a) Where there is no obligation on a person to register for V.A.T., the issues to be considered are as follows:

(i) The percentage of the customers or potential customers who are registered or likely to be registered for V.A.T.

(ii) Whether the V.A.T element of the purchase/input costs are significant.

(iii) The additional work involved in having to issue V.A.T. invoices and lodging of V.A.T. returns with the revenue.

(iv) The possibility of a V.A.T audit and the danger of penalty/interest exposures if the V.A.T. returns are not correct and/or V.A.T. due for a period is not paid on time.

(b) The rate of V.A.T. applying to a service which is supplied with goods is

dependent on the rule. This is a rule, which provides that a transaction is liable for V.A.T. as a sale of goods at the rate of V.A.T. applicable to the goods supplied, and not at a rate applicable to the service if the value of goods used in providing the service exceeds two  thirds of the consideration charged to the customer.

(c) Where a supply is made of an exempt item it is not regarded as a taxable

supply for V.A.T. purposes and the trader therefore cannot register for VAT or obtain credit in respect of input V.A.T.

 

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Solution 3 (Cont’d) (d)

(i) Aíne Taylor V.A.T. Computation - March/April 2014 V.A.T. on sales € € €300,000 at 23% 69,000 V.A.T. on expenses Goods for resale 184,500 x 23 (34,500) 123

Entertaining customer Not allowed Petrol Not allowed Diesel 1107 x 23 (207) 123 Telephone 492 x 23 (92) 123 Electricity 681 x 13.5 (81) (34,880)

113.5 V.A.T. Due 34,120 (ii) The V.A.T. due must be paid on or before 23rd of May 2014.

 

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Solution 4 (a) (i) Number Cost € 1st March 1999 5,000 8,400 15th September 2002 12,000 25,500

As shares are sold on a FIFO basis, Gary has sold all his holding purchased on 1st March 1999 and 5,000 of the 12,000 shares he purchased on 15th September 2002. Holding purchased 1st March 1999 Sales proceeds € €35,000 x 5,000 = 17,500 10,000 98/99 € 8,400 x 1.212 (10,181) Gain 7,319 Holding purchased 15th September 2002 Sales proceeds €35,000 x 5,000 = 17,500 10,000 2002 €25,500 x 5,000 = €10,625 12,000 €10,625 x 1.049 = 11,146 Gain 6,354

(ii) Sales Proceeds €10,000 80/81 €800 x 3.240 € 2,592 Gain € 7,408 (iii) Sales Proceeds € 8,000 Cost 87/88 €21,000 €21,000 x €8,000 €8,000 + €45,000 €3,170 x 1.583 (€5,018) Gain €2,982

 

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Solution 4 (Cont’d) ( iv) Sales Proceeds €300,000 Cost 97/98 €56,500 Add: acquisition costs € 4,000 €60,500 €60,500 x 1.232 €74,536 Enhancement expenditure 2001 €40,000 x 1.087 €43,480 Gain €181,984 The repairs are not allowed in capital gains tax as they are not capital

expenditure.

Gary and Sandra Capital Gains Tax Computation – 2014

Gary Sandra € €

(i) €7,319 + €6,354 13,673 (ii) 7,408 (iii) 2,982 (iv) 181,984 / 2 90,992 90,992 107,647 98,400 Less: annual exemption (1,270) (1,270) 106,377 97,130 Capital Gains Tax at 33% 35,104 32,053 Total Capital Gains Tax for 2014 €35,104 + €32,053 = €67,157. (b) The tax on the sale of the shares, painting and the land must be paid by

15th December 2014. The tax on the sale of the house must be paid by the 31st January 2015.

 

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Solution 5 (a) Tax year Basis of Assessment Amount 2012 Actual

1st June 2012 to 31st December 2012 €9,600 x 7/12 €5,600

2013 Year ended 31st May 2013 €9,600 2014 C/y 31st May 2014 €6,000 Section 66 TCA 1997 This option is available in the third year.

• Original assessment for year 2 €9,600

• Actual for year 2 – 2013 1st January 2013 to 31st December 2013 €9,600 x 5/12 = €4,000 €6,000 x 7/12 = €3,500 €7,500 Excess €2,100

2014 original assessment €6,000 Less: Section 66 €2,100 Final assessment €3,900 Final Assessments 2012 €5,600 2013 €9,600 2014 €3,900 (as revised)

 

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Solution 5 (Cont’d) (b) John White Capital Allowances Computation – 2014 Machinery Motor Car € € TWDV – 1st January 2014 11,250 18,000 Disposal (18,000) Additions 9,000 12,000 Note 1 20,250 12,000 Wear and Tear (3,000) Note 2 (1,500) TWDV – 31st December 2014 17,250 10,500 Balancing charge / allowance computation Sales Proceeds €19,200 x €24,000 = €15,360 €30,000 TWDV €18,000 Balancing allowance €2,640 Restricted to business use €2,640 x 75% = €1,980 Summary € € Wear and Tear Machinery 3,000 Car €1,500 x 75% 1,125 4,125 Balancing allowance 1,980 Total Capital allowances for 2014 6,105 NOTES 1. As the car’s emissions are 165g/km, the cost of the car (for capital allowances) is restricted to the lower of:-

(i) €35,000 x 50% = €17,500 or

(ii) €24,000 x 50% = €12,000 2. Wear and Tear for Machinery € Opening cost 15,000 Cost of addition less grant 9,000 24,000 Wear and Tear at 12 ½ % = 3,000

 

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Solution 6 (1) – (d) €26,000 x 24% = €6,240 - €1,000 - €5,240 (2) – (c) Actual 1/1/14 to 30/06/14 €12,000 x 6/12 = €6,000 (3) – (b) (4) – (c) (5) – (d) (6) – (c) (7) – (c) €100,000 x (4 % - 3 ¼ %) = €750 €750 x 6/12 = €375 (8) – (d) Sales proceeds €350,000 2002 €50,000 x 1.049 € 52,450 €297,550

Total ownership 1/7/02 to 1/7/14 = 12 years Non occupation 1/7/08 to 1/7/13 = 5 years Last 12 months of ownership is deemed occupation. €297,550 x 5/12 = €123,979 Less: annual exemption € 1,270 €122,709 Tax 33% € 40,494 Sold in July 2014: Payment date 15th December 2014

(9) – (d) Sales proceeds €10,000 99/00 €2,200 x 1.193 € 2,625 Gain € 7,375

 

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Solution 6 (Cont’d) (10) – (c) Acorn Ltd Corporation Tax Computation Schedule D – Case I Nil Schedule D – Case V € 6,000 Income € 6,000 Gain € 4,000 Profits €10,000 Corporation tax €6,000 x 25% = € 1,500 €4,000 x 12 ½ % = € 500 € 2,000 Less: Trade loss €10,000 x 12 ½ % = (€1,250) €750

 

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Solution 7 (a) The six badges of trade as identified by the Royal Commission of Taxation in 1954 were as follows:

1. Subject matter; 2. Frequency of transactions; 3. Length of ownership; 4. Supplementary work and marketing; 5. Circumstances in which the asset is realised; 6. Profit motive.

1. Subject Matter The question as to whether a person is trading or not sometimes can be decided by examining the subject matter of the transaction under review. Assets, such as painting are quite often held as an investment for their intrinsic value. Consequently, a subsequent disposal at a profit may produce a gain of a capital nature rather than a trading profit. On the other hand, a profit arising from the sale of articles such as clothing stock, cosmetics and so forth are more likely classified as a trading profit. 2. Frequency of Transactions A gain arising from a once off transaction could indicate that it is of a capital rather than a trading nature. Whereas, gain/profit arising from the frequent sale of assets would indicate a trading profit. 3. Length of ownership Here, the courts infer that the sale of items shortly after their purchase indicate an adventure in the nature of a trade. 4. Supplementary work and marketing In a case where work is done to convert, or create an asset, rather than simply making it more marketable, the courts will almost certainly ascribe a trading motive. 5. Circumstances in which the asset is realised Where a taxpayer can show that the reason why the asset was sold was in response to an emergency or a sudden opportunity to realise a windfall gain, rather than as part of an organised scheme for making profit, he could go a long way to establishing that the gain was capital rather than trading in nature.

 

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Solution 7 (Cont’d) 6. Profit Motive While the absence of a profit motive does not necessarily mean that a trade was not carried on and indeed there is abundance of case law to prove this point, it is nevertheless a strong indication that trading is carried on. (b) (1) Summers Limited Surcharge calculation year ended 30th June 2014 € Investment income Case V 15,000 Less: Corporation tax (3,750) 11,250 Add: Franked investment income 2,000 13,250 Less: Trading deduction: 13,250 x 7½% = 994 12,256 Less: All distributions made during the period And within 18 months 8,000 4,256 Close company surcharge €4,256 at 20% = €851 (2) The surcharge is paid with the following year’s corporation tax. Thus, for Summers Limited the surcharge is paid with the corporation tax of the year ended 30th June 2015. (3) The surcharge can be avoided if Summers Limited paid a distribution of €4,256 within 18 months of its accounting period the 30th June 2014.