MODULE 4 Income Tax Margaret M Sheridan 4 & 5 February 2011 www.charteredaccountants.ie

EDUCATING SUPPORTING REPRESENTING

Residence • Sec 819 TCA 1997 • Present for 183 days, or • 280 aggregate days • Ignore 30 days or <

Residence • What is a day?

• Presence at any time during the day • Cinderella rule gone from 1 st January 2009 • Revenue e Brief N0 3/2009 – in transit and unavoidable circumstances

Residence - Example • Andrew Cameron commutes from the UK to work in Ireland • He arrives in Ireland on Monday mornings and leaves on Friday mornings • During 2010 he works here for 38 weeks • Is he resident in Ireland in 2010?

Residence Example • Andrew is resident for 2010 • 5 days a week x 38 = 190 days • If he left on Thursday evenings?

– 152 days* = not resident * Aggregation rule if repeated over 2 or more years = resident

Election to be Resident • Section 819(3) TCA 1997 – Elect?

Election No Election

Personal Credits and Reliefs Avoid or delay becoming ordinarily resident Worldwide Income and Gains taxable Taxable on Irish source income only Split Year, Remittance Basis and DTA access Not taxable on gains and non employment income pre arrival

Spilt Year Treatment • Section 822 TCA 1997 • Applies to employment income only • An election to be resident may be needed to avail of SYT • Applies to year of arrival and departure

Split Year Treatment • Is election for residence needed?

• If election needed, check benefit of SYR • Will foreign income or gains be taxable?

Resident in year of arrival?

SYT applies Employment Income?

Not Resident?

Consider electing to be resident Foreign non emp income?

Foreign gains?

No SYT

Ordinary Residence • Section 820 TCA 1997 • Acquired if resident for 3 consecutive years • Worldwide Income Charge • Continues until non resident for 3 years

Ordinary Residence Example • Irish resident leaves Ireland 1 January 2010 • Employment in USA for 2 years • Returns to Ireland 2012 • Remains ordinarily resident for 2010, 2011 and 2012

Ordinary Residence Example • Individual left Ireland on 1 January 2010 • Does not return before 2014

2010 Ord Res

2011 2012 2013 Ord Res Ord Res Not Ord Res

Domicile • Country of birth and parents’ domicile?

• Has a domicile of choice been acquired?

• Long term intentions?

• Case law and legal advice?

Domicile Case Law • Intention to return to country of origin • Form and content of will • Domicile of origin must be abandoned • Family, social and property ties

Res

Yes Effect of Residence and Domicile

Ord Res

Yes

Dom

Yes

Income Liable

Worldwide

Legislation

S 18 TCA 1997 Yes Yes No Yes No No Yes Yes Yes Irish income + Irish Emp Income Foreign Remittances Sec 71(3) and Sec 18(2)(f) TCA 1997 Worldwide Sec 18 TCA 1997 Worldwide-exceptions Sec 821 TCA 1997 No No No Irish Sec 18 TCA 1997

Resident Ord Res and Domiciled • Which sources of Mark Kenny’s income are liable to Irish income tax?

• Salary • US and UK Dividends • French Rents • All above sources – worldwide income

Resident, Ord Res, Not Dom • Are any of Orla Kenny’s income sources not liable to Irish income tax?

• Irish Salary all duties performed in Ireland • US and UK Dividends remitted to Ireland • French Rents held in French account • French rents not liable as not remitted

Not Resident, Ord Res, Dom • Irish income taxed in full • Foreign income is taxable – except for – Trade or Profession carried on abroad – Office or Employment no duties in Ireland* – Other Foreign income <= €3,810 – *incidental duties allowed up to 30 days

Not Resident, Ord Res, Dom • Who is likely to be within this category?

• John Shields, Irish resident moves to USA • US Salary €100,000 * and US dividends €4,500 • John is liable to Irish tax on €4,500 *No duties in Ireland

Remittance Basis • Section 71(3) TCA 1997 • Non domiciled individuals • Income v Capital • Anti avoidance Sec 72 – loans

Pre Arrival Earnings • Income earned prior to becoming resident • Must be clearly identified • Avoid a “mixed” account Scottish Prov Case • Can be remitted tax free

Remittances Example • What advice would you give Ana?

• She has savings from her job of €10,000 • She moves to Ireland in February 2011 • She want to bring €3,000 into Ireland

Remittances Solution • Keep savings in a separate account • Do not lodge any income into that a/c • Earnings saved pre 2010 can be remitted • No Irish income tax if no mixed a/c • Note €3,000 could be remitted in 20 10 i.e. year of non residence

Remittance Basis & Employment

Foreign Contract – duties in Ireland:

• Sec 18(2)(f) / 985C,D,E,F, TCA 1997 • Duties in Ireland = Irish source income • Remittance basis does not apply • PAYE obligations for employer/Irish entity

Remittance Basis

Special Assignment Relief Programme (SARP):

• Limited remittance basis for employments • Non domiciled individuals - SARP • Section 825B TCA 1997 • Where conditions met – claim refund

Remittance Basis

SARP - relief:

• Greater of: – Remittances and – €100,000 + 50% excess over €100,000 • Example on next slide

SARP • John Gilmore resident in US • Seconded to Ireland to work • US salary 2010 is €300,000 (subjected to Irish PAYE of €120,000) • Remittances to Ireland €50,000

SARP?

• John taxable on higher of – €50,000 + €120,000 = €170,000 – €100,000 + (€200,000 x 50%) = €200,000 • SARP should be claimed since he has been taxed on €300,000

Domicile Levy • Section 531AB TCA 1997 • Annual Domicile levy of €200,000 • Applies to certain Irish domiciled individuals

Domicile Levy • Irish Domiciled?

• Irish Citizen?

• Irish property mv > €5m?

• Worldwide income > €1m?

• Irish income tax < €200,000?

• Yes • Yes • Yes • Yes • Yes

Categories of Income • Income sources are divided into categories • Trade/Profession; Rental; Employment; Investment income • Each category comes under a Schedule • Basis of Assessment for each category

Schedule D Sec 18 TCA 1997 • Cases I and II • Case III • Case IV • Case V • Trades and professions • Investments/foreign source income • Broad category, DIRT interest, taxed income, other • Rental

Income Schedules • Schedule E • Sec 19 TCA 1997 • Schedule F • Sec 20 TCA 1997 • Irish offices and employments • Directors’ Fees • Salaries, Wages, BIKs, Pensions • Distributions from Irish companies

Income and Expenses • Accounts • Basis of Assessment • Commencement and Cessation • Expenditure • Expenditure prohibited? • Earnings Basis • AP ending in tax year • Special Rules • Wholly and Exclusively • Ex: Entertainment and Depreciation

Schedules D Cases I and II • Case I Trade • Case II Profession • Self Employed - Income Tax

Schedules D Cases I and II • What is a trade?

• Sec 3(1) TCA 1997 – very broad • Case Law • The Six Badges of Trade

6 Badges of Trade • Subject Matter • Length owned • Frequency of transactions • Supplementary Work • Circumstances • Motive • Manufactured items, Commodoties, Property • Held for a short time?

• Similar and frequent?

• Advertising, office?

• Any special ones?

• Never irrelevant

Trading?

• Jay Sugar is a self employed painter.

• He invests some money in shares • He buys and sells shares • Is he carrying on a trade or liable to cgt?

Jay Sugar • Apply Badges of trade to his activities • Regular buying and selling?

• Is only one Badge met?

• Revenue Guidance – “whole picture”

Professions • Reviewed by Courts includes Tax Consultants • Artists, Architects, Accountants • Engineers, Lawyers, Musicians, Estate Agents • Insurance Brokers, Doctors, Dentists

Basis of Assessment • Schedule D Cases I and II • Chapter 3 of Part 4 TCA 1997 • Period of Account • Computational Rules Chapters 6 and 7 Part 4 TCA 1997

Amount Chargeable • 3 Key Stages 1. Taxable Profit/Loss for Period of Account 2. Allocate Profit/Loss to Year of Assessment 3. Calculate Capital Allowances for Year of Assessment

Section 65 TCA 1997

General Rule

No Accounts ending in Tax Year Accounting Period > or < 12 months

Basis Period = 12 months ending in the Tax Year

Taxable on Profits of the Year of Assessment Taxable on Profits of 12 months ending in the Tax Year Two or more accounts ending in Tax Year Taxable on profits of 12 months to later accounts

Section 65 TCA 1997

Accounts Year End 31st March 2010

AP y/e 31 st Oct 2010 AP 16 mths 31 st Jan 2011 AP 18 mths 30 th Sep 2010 AP y/e 30 th April 2010 AP 6 mths 31/10/2010

2010 – Accounts Y/e 31 st March 2010

2010 – Accounts 31/10/2010 2011 – 12mths 31/12/2010 2010 – 12 mths to 30/9/2010 2010 – 12 mths to 31/10/2010

Sec 66 TCA 1997 • Commencement • Year 1 • Taxable Profits = – Profits from commencement to 31 st Dec

Sec 66 TCA 1997 • 2 nd Year • 3 rd Year • Sec 65 Rules • AP Y/E in Tax Year • 2 nd Year Excess Relief • Sec 66(3) • Claim by 31 st after 3 rd Year Oct • Profits in 3 rd year reduced if profits taxed in 2 nd year> actual profits

Example • Trade commences 1 st May 2010 • Taxable Profits are: – AP ending 30 th April 2011 – AP ending 30 th April 2012 €25,000 €20,000

2010

2011 Commencement

1/5/2010 31/12/2010 €25,000 x 8/12

Y/E 30/4/2011

€16,666

€25,000 2012 Subject to 2 nd Year Excess Claim Y/E 30/4/2012 €20,000

Second Year Excess

Profits Assessed 2011

Actual Profit € 25,000 x 4/12 = €8,333 €20,000 x 8/12 = €13,333 Excess

€25,000

€21,666 €3,333 Revised 2012 €20,000-€3,333 €16,667

Cessation of Trading • When does a trade cease?

• Disposal of trading stock?

• Sale of capital assets?

• Gordon and Blair Ltd v The Inland Revenue Commissioners (40TC 358)

Cessation Rules • Revision of penultimate year to actual • Timing of cessation to avoid underpayment • Is AP different to Tax Year?

• Avoid underpayment and interest

Change of Accounting Date • Refer to rules in Sec 65(3) TCA 1997 • Review p/y profits using new AP • Are p/y profits greater after revision?

• Revise p/y if “yes” – additional liability

Sch D Cases I and II • Tax charged on full amount of profits/gains • Section 81(2) TCA 1997 • Capital v Revenue • Wholly and Exclusively Test

Expenses Disallowed • Section 81(2) TCA 1997 • Not wholly and exclusively incurred • Capital expenditure • General Provisions eg bad debt or stock

Items not deductible • Sec 1080(3) 1997 – interest on overdue tax • (Sec 865A(4)(b) TCA 1997 – interest on overpaid tax not taxable) • Sec 840 TCA 1997 Entertainment

Capital v Revenue • Sec 81(2)(f) TCA 1997 • Walker v Joint Credit Card Co STC 427 • Hibernian Insurance Co v MacUiis (2000) v ITR 495 • Accounting treatment

Capital or Rev e nue?

• Costs of promoting legislation to gain tax reliefs for staff • Revenue McGarry v Limerick Gas • Legal costs to protect title to land and builidings • Revenue • Southern v Borax • Cost of forming a new holding co • Capital Kealy v O’Mara

Wholly and Exclusively • Sec 81(2) TCA 1997 • Apportionment where dual purpose eg car • Purposes of the trade test • Bentleys, Stokes and Lawless v Beeson • Strong and Co of Romsey Ltd v Woodifie l d

Capital Allowances • Tax Depreciation • Wear and Tear Allowance • Plant and Machinery • Industrial Buildings

Capital Allowances • Sec 284(1) TCA 1997 • Expenditure for the purposes of the trade or profession • Used wholly and exclusively • In use at the end of the basis period

Capital Allowances • Sec 284(2)(ad) TCA 1997 – Rate 12.5% • Plant and machinery straight line • Sec 306 TCA 1997 – commencements and cessations • Sec 288 TCA 1997 – Balancing charges and allowances

Calculate CA and BC/BA • Tax Year 2010 • Plant Cost €20,000 • Machinery Sold for € 2 ,500 – bought for € 5 ,000. Wear and tear claimed to 2009 € 3,125 • CA @12.5% = €2,500 • Proceeds € 2 ,500 TWDV €1, 875 • BC € 625

Motor Vehicles • Sec 373 TCA 1997 – passenger vehicles • CA Qualifying Cost restricted • Pre 30 th June 2008 €24,000 limit • Sec 380L TCA 1997 new greener rules • Proceeds restricted for BC

CA for Cars CO2 Emissions

Category A Category B/C Category D/E Category F/G

0-120 g/km 121-155g/km 156-190g/km 191g/km €24,000 €24,000 Lesser of 50% Retail price or 50% €24,000 No Capital Allowances

Leasing Restriction • Sec 380M TCA 1997 • LC x Capital Limit* Lease Price * €24,000 subject to CO2 emissions

Pro Forma Computation

Profit per Accounts Add Back Depreciation Entertainment Private use of Car Deduct Rental Income Investment Income Adjusted Profit Capital Allowances Taxable Profits x x x x x x x x x x X x x

Loss Relief • Sec 381(3) - Current Year Losses • Sec 392 TCA – Augment Loss with CA • Sec 38 2 TCA – Carry forward of losses • Sec 388 TCA – Terminal Losses

Losses • Calculated in same way as adjusted profit • In practice, based on loss for AP ending in tax year • Commencement rules as for profits • Time limit Sec 381(6) – within 2 years

Current Year Losses • Order of set off Sec 381(3) against other income in year of loss 1. Against earned income 2. Against unearned income 3. Against earned income of spouse 4. Against unearned income of spouse

Capital Allowances and Losses • Sec 392 TCA • Losses can be created or increased • CA

for the year of assessment

– not CA carried forward • Offset CA against BC first

CA and Losses Example • Taxable Profits 2010 • Capital Allowances • Sec 381 Loss • Spouse Salary 2010 €5,000 ( €7,000) ( €2,000) €30,000 • Claim Sec 381 Loss by 31/12/2012

Terminal Loss Relief • Sec 388 - 390 TCA 1997 • Permanent discontinuance of trade/profession • Loss can be set off against profits of previous 3 years of assessment

Schedule D Case 111 • Section 18(2) TCA 1997 • Interest, annuities, annual payments • Foreign securities eg deposit int and divs • Foreign possessions eg rent, trading or employment income • Where no Irish tax deducted at source

Case III • Are deductions or Losses allowable?

• Yes: – Foreign tax where credit not allowed – Allowable expenses for foreign rental income – Losses allowed for foreign trade by concession

Case III Loss • Foreign Trade Loss (€15,000) • Foreign Rents €5,000 • Foreign Trade Losses carried forward • Foreign Rents taxable of €5,000

Sch D Case IV • Sec 74 TCA 1997 • “Catch all” Case • Post Cessation Receipts • Income under deduction of tax – Irish encashment tax eg US divs – Irish Deposit Interest

Case IV Deposit Interest • Sec 74 TCA 1997 taxed on an arising basis • Interest taxed in year it is credited to account • DIRT @25% = full income tax liability • EU Deposits Sec 267M TCA -Case III

Sch D Case V • Chapter 8 Part 4 TCA 1997 • Section 97 TCA 1997 • Rental income from Irish property • Taxed on rental income receivable – relief for rents not paid

Case V Deductions

Allowable:

• Rates/Rents • Maintenance/Repairs • Goods and Services • Interest - Residential 75% and PRTB paid • Management Fees • Advertising etc between le tt ings

Not Allowable:

• Capital Expenditure • Pre-letting expenses except for IT 70, legal and auctioneers

Case V Losses • Sec 384 TCA 1997 • Carry forward against future Case V

Non Resident Landlord • Sec 18(1)(a)(iii) TCA 1997 • Sec 1041 TCA 1997 • Landlord chargeable • Tenant liable to deduct standard rate tax • Sec 1034 – appoint a resident agent

Rent a Room Relief • Sec 216A TCA 1997 • Tax Free rent if rent <= €10,000 pa • No deductions for expenses • Qualify Residence = principal residence • No effect on mortgage interest relief

Rent a Room Relief • Jo Clegg lets a room in her home in 2010: – Rental income per month €400, plus – Meals and Laundry per month €200 • Relief applies as total rent is €7,200 • If total rent > €10,000 full amount is taxable as per “normal” Case V rules

Schedule E • Part 5 TCA 1997 -Sec 112 TCA 1997 • Employment and public offices • Salaries, fees, benefits, pensions • PAYE Chap 4 Part 42

Employed v Self Employed • Revenue looking at this area • Locum GPs and Pharmacists • Building Industry • Covered in detail in Stage 3

Employed or Self Employed?

• Case Law – tax, social security and employment law • Employment Status Group updated 2007 • No simple “checklist solution” • Consideration of all facts

Likely to be an Employee • Under the control of another • Supplies labour only • Cannot sub-contract • No financial risk taken

Schedule E • Emoluments • Perquisites Sec 112 TCA 1997 • Taxable Amount • Share Schemes • Anything assessable under Sch E • Convertible into money/money’s worth • Higher of cost to ER or realisable value to EE • Sec 128 TCA 1997

Schedule E • Benefits in Kind • Specific valuation rules • Sec 118 TCA 1997 • Schedule E • Liable to PAYE • Sec 121, 121A and 122 TCA 1997 • Accommodation, entertainment, other services • Co cars, vans and pref loans

Termination Payments • Schedule E • Sec 123 TCA ,Sec 201and Sch 3 TCA 1997 • Reliefs where payment not taxable under Sec 112 • No contractual entitlement – pay in lieu?

Termination Payments • Basic Exemption • Increased Exemption • Standard Capital Superannuation Benefit • Exemptions – Death, injury or disability – Foreign service payments

PAYE • Chapter 4 Part 42 TCA 1997 • Employer accountable for PAYE, PRSI, Income and Health Levies • PAYE not applied to – Certain employer shares (Self assessment) – Share options (RTSO applies) – ER PRSA contribution (Self Assessment)

Can deductions be Claimed?

• Sch E deductions • Wholly, exclusively and necessarily incurred • In the performance of the duties • Sec 117 and Sec 114 TCA 1997

Schedule F • Section 20 TCA 1997 • Irish Dividends and distributions • Distributions Sec 130 TCA 1997 • Scrip dividends taxable under Sch F

Dividend Withholding Tax • Sec 172A TCA 1997 imposes DWT • Secs172C and 172D TCA 1997 exempt – Divs to Irish companies or pension funds – Non Irish EU/DTA residents – ESOTs (Employee Share Ownership Trusts)

Sch F Example • John receives the • Sch F 2010 following from CRH plc in 2010 on his shareholding of 1,000 • Tullow Ord Shares • CRH • Gross • Shares in lieu 12 Ord • Equiv gross div €200 • Gross Div from 1,000 ord Tullow Oil €220 €200 €220 €420 Tax @41% = €172.20

DWT @ 20% = €84.00

€88.20

Exemptions - Patent Income • Part 17 TCA 1997 – all exemptions subject to High Earner’s Restriction • Patents Income Sec 234 max €5m pa • Royalties paid by user to inventor/licence • Connected persons – manufacturing and arm’s length

Exemptions – Patent Divs • Sec 141 TCA 1997 – Qualifying Patents • Eligible Shares • Unconnected parties – fully exempt • Connected persons – R&D spend unless radical innovation, bona fide, not tax avoidance

Exemptions - Artists • Sec 195 TCA 1997 • Writers, composers, sculptors, artists • Original and Creative Work • Exemption must be claimed • Guidelines – Arts Council and Minister • Resident or ord res in Ireland and not elsewhere

Other Exemptions • Section 216 TCA 216 – Lottery Wins • Sec 43(1) Government Securities owned by individuals not ordinarily resident • Reminder – High Earner’s Restriction applies to sources listed in Schedule 25C TCA 1997

Calculation of Income Tax • Income Tax Rates • Reliefs and Deductions • Personal tax credits

Income Tax Rates

Sec 15 TCA 1997 2010 Rate Bands and Rates

Single

Rate Band

€36,000 One Parent Families €40,400 Married Couples one earner Married Couple two earners All taxpayers €45,400 €72,800 Amounts > SRB

Rate

20% 20% 20% 20% 41%

Joint Assessment – Rate Bands • SRB can be transferred • Increase lower of €27,400 or amt of lower income • Max joint increased SRB €72,800 • Ex Hus €60,000 Wife €10,000 • 2010 Rate Bands • €60,000 • €10,000 • €70,000 Wife earns €20,000 SRB?

Max €72,800

Tax Rates and DIRT • 2010 rate of DIRT is 25% • This is the full income tax due • Additional rate band @ 25% included • Credit given for DIRT

Tax Reliefs and Credits Relief v Credit Reduction in liability Relief Credit @ Marginal Rate 41% @ Standard Rate 20%

Deductions • Section 458 TCA - Part 1 of Table • Pension contributions • Charitable Donations • Film/BES

Pension Contributions • Revenue Approved Schemes/RAC/PRSA • Deductible from relevant income • Employment income inc BIKs • Net relevant earnings e.g

. Case I/II profits less losses and CA

Pension Contributions • 2010 Earnings Cap €150,000

Age % Earnings

Up to 30 30 -39 40 -439 50 -54 55 -59 60 + 15% 20% 25% 30% 35% 40%

Pension Contributions Example • Self employed • Age 56 • Case 11 €250,000 • CA €5,000 • RAC € 60 ,000 • Tax Relief?

• Age = 35% • Earning Cap applies • €150,000 x 35% = €52,500 • Tax Relief €52,500 x 41% = €21,525 • C/fwd €7,500 to 2011

Charitable Donations • Sec 848A(7) TCA 1997 • Self Assessed individuals • Donations of €250 or more (per charity) • Tax Relief at marginal rate • Tax Relief for PAYE taxpayer claimed by charity

BES Relief • Sec 489 TCA 1997 • Purchase of shares in Qualifying BES • Max relief €150,000 pa up to 2013 • Carry forward unused relief to 2013

Film Relief • Sec 481 TCA 1997 • Max deduction €50,000 pa • Film 3 cert • Allowed as a relief

Service Charges • Section 477 TCA 1997 • Credit @ 20% for previous year charge • Maximum claim €400 @ 20% • Paid Bin charges €240 in 2009 Tax Credit 2010: €240 @ 20% = €48

Tax Credits • Sec 458 TCA 1997 -Part 2 Table • Tax Credits cannot be refunded • Example • Earnings • Tax @ 20% = • Credits (Married+PAYE) • Tax Liability/Refund €25,000 €5,000 €5,490 NIL

Personal Tax Credits 2010 • Single • Married • Widowed year of bereavement • Widowed with children • Widowed other • Single Parent • €1,830 • €3,660 • €3,660 • €3,660 • €2,430 • €3,660

Personal Tax Credits 2010 • Employee Tax Credit • Age Tax Credit • Home Carer Credit* • Tax Credits at Source * Jointly Assessed where income< €,5080 • Sec 472 €1,830 • Sec 464 €325/€650 • Sec 466A €900 • Sec 470 Med Insce • Sec 244 PPR Interest

High Earner Restrictions • Simple aim – 30% min rate of tax for high earners • Complex conditions and calculations • List of specified restricted reliefs Sch 25B • Revenue Guidance Document

Restricted Specified Reliefs • BES/Film Relief • Donations to Charities/approved bodies • Capital Allowances for Urban/Rural Renewal/Park and Ride/Student Acc etc • Hotel/holiday cottages/nursing homes/hospitals/childcare facilities

Restricted Specified Reliefs • Trading Losses from CA schemes • Patent Royalty and dividend income • Interest Relief for purchasing shares etc • Stallions/Greyhound /woodlands/mining • Artists Exemption

High Earner Restriction • Applies where 3 criteria met 1.

“Adjusted Income” > €125,000* 2. Spec Reliefs for year => €80,000 3. Spec Reliefs for year > 20% of Adjusted Income * Threshold Amount = €125,000

High Earners Restriction • Recalculated Income • T + (S-Y) • T = Taxable Income before restriction • S = Specified Reliefs for

year

• Y = Greater of €80,000 or 20% Adjusted Income

High Earners Restriction • Taxable income 2010 €100,000 • Section 23 type Relief for 2010 €200,000 • Adj Inc = €300,000 • Spec Rel > €80,000 • €300k * 20% = €60k • 3 Criteria apply T = €100,000 S = €200,000 Y = €80,000 • T+(S-Y) = €220,000 2010 Relief €80,000 Carry forward €120,000 Amt C/F = Spec Relief

PRSI and Levies • PRSI • Health Contribution • Income Levy • Full study at Stage 3

PRSI Employees • Reckonable Earnings • Emoluments inc BIKs – Sch E • Deduction for Pension and PHI

PRSI – Exclusions • < 16 years of age • 66+ years of age • Employment by spouse • Payments from Department of Social Protection eg State Pension, Benefits • Private Pensions

PRSI Rates 2010

Employee Employe e PRSI Employer Rate Health Contribution Income Levy

Up to €75,036 €75,037 to €174,980 4% 0% > €174,980 0% 10.75% 10.75% 10.75% 4% 5% 5% 2% 4% 6%

PRSI Rates 2010

Self Employed Income PRSI Rate

Up to €75,036 €75,037 to €174,980 > €174,980 3% 3% 3%

Health Contribution Income Levy

4% 2% 5% 4% 5% 6%

PRSI Self Employed • Self employed trading, professional income • Investment income • Proprietary and non Executive Directors] • Class S1

Health Levy • Applies to employed and self employed • Reckonable Emoluments, earnings and income • Income definition not equal to PRSI • Exemptions for Artists, patent royalties etc

Health Levy • Exempt categories of income • Social Welfare Benefits • Maintenance payments • Income < €26,000 • Medical Card Holders • Over 70s

Income Levy • Sec 531A to 531N TCA 1997 • Income < €15,028 exempt • Income < €20/40,000 over 65 years • Full medical card holders

Income Levy • Exempt Income • DIRT /EU and Credit Union Interest • Social Welfare Payments • Statutory Redundancy and exempt termination payments • Revenue FAQs

Methods of Assessment • Sec 1017 TCA – Joint Assessment • Automatic for married couples • Opt out under Sec 1080 TCA 1997 • Chargeable spouse • Rate Bands transferrable

Single Assessment • Sec 1016 – election by married couple • Each spouse treated as single • Not advantageous financially • No sharing of unused credits/rate bands

Single Asessment • Aoife’s liability • David’s liability • Total single asst • Total joint asst • Saving under j/a • €1,340 • €9,196 • 10,536 • €8,646 • €1.890

Separate Assessment • Sec 1023 TCA 1997 • Claim before 1 st April • Benefits of joint assessment • Each spouse dealt with separately

Pro Forma Computation 1

Case I/II

Case III Case IV Case V Sch E Sch F Total Income Pension Contributions (Marg rate) Charitable Donations (Marg Rate) Taxable Income

X

X X X X X X (X) (X) X

Pro Forma Computation 2

€Y @ 20% X

€Z @ 41% X Tax Liability LESS NON REFUNDABLE CREDITS: •Reliefs @ standard rate e.g. non TRS medical insurance •Personal;Employee;Age Tax Liability X (X) (X) X LESS REFUNDABLE TAX CREDITS: •Tax Paid DIRT; DWT, PAYE Tax Payable (X) X

Self Assessment • Part 41 TCA 1997 • Chargeable persons Sec 950 • Pay and File Deadlines • Interest, Surcharge, Penalties, Revenue Audits

Chargeable Person?

• Company Director fully PAYE 20% s/h?

• Rental Income Losses?

• Owner of foreign bank account?

• Employee exercising share options?

• Yes • Yes • Yes • Yes

Tax Returns • Sec 951 TCA 1997 • Chargeable person • Filing deadline 31 st October • Extension to mid November for ROS pay and filers

Tax Payment • Sec 958 TCA 1997 • Preliminary Tax due 31 st October • 100% p/y or 90% current year or 105% pre-preceding year • BES/Film Relief excluded • Extension to mid November for ROS pay and filers

Self Assessment Example John’s situation October 2010 • 2009 Tax liability €15,000 • 2009 Preliminary tax paid €14,000 • 2010 Estimate of tax €12,000 What do you advise John?

Self Assessment Solution

2009 Tax Return File by 31/10 /2010

2009 Balance Due 2010 Preliminary Tax Pay €1,000 by 31/10 /2010 Pay €12,000 by 31/10 /2010

Tax Returns • Form 11 – self assessment • Form 12 – Employees, non prop dirs • Both on www.revenue.ie

• Filing using ROS had advantages – Extension to mid Nov for pay & file ; faster refunds/assessments

Notice of Assessment • Sec 954 and 955 TCA 1997 • 4 year time limit where full disclosure • Review notice of assessment immediately • 30 days to appeal

Interest and Penalties • Sec 1080 TCA 1997 • Interest if late payment or PT insufficient • Rate from 1/7/2009 0.0219% per day • Runs from due date of tax

Margin of Error • Sec 958(3A) TCA 1997 • Innocent Errors – full disclosure made • 5% margin of total tax – max error €3,175 • Pay by 31 st Dec in following year

Late Filing Surcharge • Sec 1084 TCA 1997 • No credit for PAYE for proprietary directors • Surcharge considered part of income tax for year

Surcharge

Return filed < 2 months late 5% Surcharge Max €12.695

Return filed > 2 months late 10% Surcharge Max 63,458

Risk Management Issues • Maintain a client database • Use a standard Client Tax Return Checklist – updated annualy • Check PT payment is sufficient • Advise client in time to avoid late payment

Risk Management • Use a systematic approach for all clients • Review computations • Identify high risk cases • Checklists are only a tool

Accounting for Income Tax • Unincorporated Business • Use same approach as for corporate entities • Completeness Check – wide scope • Discuss with client • Check with prior years

Sole Trader Accounts • May be based on incomplete records • Income tax is not an expense of trade • Dealt with in Capital Account

Capital Account • Shows owner’s net investment • Balances net assets of the business • Drawings, capital introduced etc can be shown as notes to balance sheet

Capital Account • Tax Payments made by sole trader 16/11/2010 PT €10,000 16/11/2010 09 bal of tax €2.500

Dr Capital A/c €10,000 Cr Bank €10,000 Dr Capital A/c €2,500 Cr Bank €2,500 • What are postings for accounts?

These are part of drawings for 2010

Withholding Taxes • DIRT, PSWT, RCT, DWT and others • Tax treated as belonging to individual and not business • Withholding taxes credited to capital account • For partnerships, WHT shared in p/ship profit sharing ratio

Professional & Ethical Skills • Module 2 professional approach • Income Tax = high risk • Tax compliance and consulting • Research should be rigorous • Excellent communication skills require • Review competency issues

Module Round Up • Residence, ordinary residence and domicle • Calculate income liable to Irish tax • Remittance basis

Module Round Up • Income sources and categories • Schedule D, Cases I/II, Case III, Case IV, Case V • Schedule F

Module Round Up • Preliminary Tax calculation • Advising client on the correct amount to pay • Paying and filing on time • Completion of Income Tax Return • Accounting for tax issues

Module Round Up • Risk Management issues • Communication Skills • Professional Obligations • Ethical Values