Transcript www.charteredaccountants.ie

CHARTERED TAX
CONSULTANT
STAGE 2 MODULE 3
Income Tax
Ken O’Brien
20th & 21st Jan
www.charteredaccountants.ie
EDUCATING
SUPPORTING
REPRESENTING
Domicile Levy
• Irish Domiciled?
• Irish Citizen?
• Irish property mv >
€5m?
• Worldwide income >
€1m?
• Irish income tax <
€200,000?
• NB – Credit available for
income tax suffered
• 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
Other Income Schedules
• Schedule E
• Sec 19 TCA 1997
• Irish offices and
employments
• Directors’ Fees
• Salaries, Wages,
BIKs, Pensions
• Schedule F
• Sec 20 TCA 1997
• Distributions from
Irish companies
Schedule D Case 111
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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
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Sec 74 TCA 1997
“Catch all” Case
Post Cessation Receipts
Income under deduction of tax
– Irish encashment tax eg US divs
– Irish Deposit Interest - DIRT
Case IV Deposit Interest
• Sec 74 TCA 1997 taxed on an arising
basis
• Interest taxed in year it is credited to
account
• DIRT @27% = full income tax liability
• EU Deposits Sec 267M TCA -Case III
Sch D Case V
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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
Not Allowable:
Allowable:
• Capital Expenditure
• Rates/Rents
• Maintenance/Repairs • Pre-letting expenses
except for IT 70, legal
• Goods and Services
and auctioneers
• Interest - Residential
75% and PRTB paid
• Management Fees
• Advertising etc
between lettings
• Negotiating a Lease
Case V Losses
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Sec 384 TCA 1997
Carry forward against future Case V
FA 2010 “clarification” re order of set off
Current year Capital Allowances must be
used in priority to Case V losses forward
• No longer possible to maximise currentyear capital allowances against non Case
V income
Case V Losses-Order of Set Off
• 2011 Case V profit
• Rental losses fwd
• Capital Allowances
€50,000
€75,000
€31,750
Nursing Home
• Salary
€40,000
Case V Losses-Order of Set Off
Case V
Case V Losses fwd
Taxable Rental Income
Case V CA
Case V Losses fwd
Taxable Rental Income
Salary
CA
Taxable Salary
Case V Losses fwd
Pre FA 2010
€50,000
(€75,000)
€0
€0
€40,000
(€31,750)
€8,250
€25,000
Post FA 2010
€50,000
€0
€50,000
(€31,750)
(€18,250)
€0
€40,000
€0
€40,000
€56,750
Rent a Room Relief
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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 2011:
– 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
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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
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Revenue looking closely at this area
Locum GPs and Pharmacists
Building Industry
Impact on PRSI
Covered in detail in Stage 3
Employed or Self Employed?
• Case Law – tax, social security and
employment law
• Employment Status Group updated 2010
• No simple “checklist solution”
• Consideration of all facts
Employed or Self Employed?
• Cooke J in Market Investigation case
• Has a person engaged himself to perform the
services “as a person in business on his own
account”
• “Yes”  Contract for Service = Self Employed
• “No”  Contract of Service = Employed
Likely to be an Employee
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Under the control of another
Supplies labour only
Works a set number of hours per week
Cannot sub-contract
Fixed Rate of payment
No financial risk taken
Receives expense payments to cover
subsistence
Schedule E
• Taxable Amount
• Anything assessable
under Sch E
• Convertible into
money/money’s worth
• Higher of cost to ER
or realisable value to
EE
• Share Schemes
• Sec 128A-E TCA 1997
• Emoluments
• Perquisites Sec 112
TCA 1997
Schedule E
• Benefits in Kind
• Specific valuation
rules
• Sec 118 TCA 1997
• Sec 121, 121A and
122 TCA 1997
• Schedule E
• Liable to PAYE
• 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
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Basic Exemption
Increased Exemption
Standard Capital Superannuation Benefit
Exemptions
– Death, injury or disability
– Foreign service payments
Lifetime Limit
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Sec 201(8) TCA 1997
Inserted by FA 2011
Lifetime tax free limit of €200,000
Limit does not apply to exempt payment
on account of death or disability
PAYE
• Chapter 4 Part 42 TCA 1997
• Employer accountable for PAYE, PRSI,
USC
• PAYE not applied to
– 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
Professional Body Fees
• Revenue eBrief 19/11
• Employer not obliged to deduct
PAYE/PRSI/USC where:
– Employee/director entitled to deduction under
Sec 114 TCA 1997
• FA 2011 removed exemption from BIK
– Sec 118(5E) TCA 1997
• Applies to fees paid or reimbursed by
employer
Approved Pension Schemes
• Part 30 Chapter 1 TCA 1997
• Employee exempted from charge to tax
• Employer pension contribution to a
Revenue-approved pension scheme
• Deductions for employee contributions,
subject to limits
Schedule F
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Section 20 TCA 1997
Irish Dividends and distributions
Distributions Sec 130 TCA 1997
Scrip dividends taxable under Sch F
Married couples – shareholding in joint
names
• Apportion income 50:50
• Standard Rate Band and Home Carer Credit
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)
– Declaration – Schedule 2A TCA 1997
Sch F Example
• John receives the
following from CRH
plc in 2011 on his
shareholding of 1,000
Ord Shares
• Shares in lieu 12 Ord
• Equiv gross div €200
• Gross Div from 1,000
ord Tullow Oil €220
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Sch F 2011
CRH
Tullow
Gross
€200
€220
€420
Tax @41% = €172.20
DWT @ 20% = €84.00
€88.20
Income Tax Exemptions
• Part 17 TCA 1997
• Exemptions are subject to “High Earner
Restrictions”
• Effective Rate of at least 30%
Artists Exemption
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Sec 195 TCA 1997
FA 2011 limit of €40,000 from 1st January 2011
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 resident
• Sec 141/234 TCA 1997 Patent
Exemptions abolished
• Exemption does not apply to dividends
paid or income from a qualifying patent on
or after 24th November 2010
Calculation of Income Tax
• Income Tax Rates
• Reliefs and Deductions
• Personal tax credits
Income Tax Rates
Sec 15 TCA 1997
2011 Rate Bands
and Rates
Single
Rate Band
Rate
€32,800
20%
One Parent Families
€36,800
20%
Married Couples one €41,800
earner
Married Couple two
€65,600
earners
All taxpayers
Amounts > SRB
20%
20%
41%
Joint Assessment – Rate Bands
• SRB can be
transferred
• Increase by lower of
€23,800 or amt of
lower income
• Max joint increased
SRB €65,600
• Ex Hus €60,000
Wife €10,000
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2011 Rate Bands
€60,000
€10,000
€70,000 > Max
Max €65,600
SRB
Tax Rates and DIRT
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2011 rate of DIRT is 27%
This is the full income tax due
Additional rate band @ 27% included
Credit given for DIRT
Tax Reliefs and Credits
Relief v Credit
Reduction in liability
Relief
@ Marginal Rate
41%
@ Standard Rate
20%
Credit
Claiming Credits and Deductions
• Sec 458 TCA 1997
• Individual to make a claim
• Submit a Return of total income unless
– Operation of PAYE
– Repayment of tax deducted under PAYE
• Self employed person with PAYE income
must submit a Tax Return
Deductions
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Section 458 TCA - Part 1 of Table
Pension contributions
Charitable Donations
Film/BES
EIIS
Pension Contributions
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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
• Sec 787 TCA 1997 – maximum
deductions
• 2011 Cap of €115,000
Pension Contributions
• 2011Earnings Cap €115,000
Age
% Earnings
Up to 30
30 -39
40 -49
50 -54
55 -59
60 +
15%
20%
25%
30%
35%
40%
Pension Contributions Example
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Self employed
Age 56
Case 11 €250,000
CA
€5,000
RAC
€60,000
Tax Relief 2011?
• Age = 35%
• Earning Cap applies
• €115,000 x 35%
=€40,250
• Tax Relief
€40,250 x 41% =
€16,502
• C/fwd €19,750 to
2011
Charitable Donations
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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
• Sec 848A(9) TCA 1997
BES Relief
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Sec 489 TCA 1997
Purchase of shares in Qualifying BES
Max relief €150,000 pa up to 2013
Carry forward unused relief to 2013
Relief at marginal tax rate
5 Year holding period for shares
EIIS Relief
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Employment and Investment Incentive Scheme
Sec 489-492 TCA 1997 up to 2013
Ministerial Commencement Order
Wider range of qualifying companies than BES
Relief at maximum rate of 30% at outset
11% additional relief at end if employment
targets met or R&D increased
• 3 Year holding period v 5 Year for BES
Film Relief
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Sec 481 TCA 1997
Max deduction €50,000 pa
Film 3 cert
Allowed as a relief
Medical Expenses
• Sec 469 TCA 1997
• Standard Rate relief from 2009
• Nursing Home expenses at Marginal Rate
– Doctor and hospital fees
– Drugs and medicines
– Non routine dental and optical
Service Charges
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Section 477 TCA 1997
Credit @ 20% for previous year charge
Maximum claim €400 @ 20%
Paid Bin charges €240 in 2010
Tax Credit 2011: €240 @ 20% = €48
• Relief abolished from 2012
Tax Credits
• Sec 458 TCA 1997 -Part 2 Table
• Tax Credits cannot be refunded
Example
• Earnings
€20,000
• Tax @ 20% =
€4,000
• Credits (Married+PAYE) €4,950
• Tax Liability/Refund
NIL
Personal Tax Credits 2011
• Single
• Married
• Widowed year of
bereavement
• Widowed with
children
• Widowed other
• Single Parent
• €1,650
• €3,300
• €3,300
• €3,300
• €2,190
• €3,300
Personal Tax Credits 2011
• Employee Tax Credit
• Age Tax Credit
• Home Carer Credit*
• Sec 472 €1,650
• Sec 464 €245/€490
• Sec 466A €810
• Tax Credits at Source • Sec 470 Med Insce
*Jointly Assessed where
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Sec
244
PPR
Interest
income<€,5080
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
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Trading Losses from CA schemes
Patent Royalty and dividend income
Interest Relief for purchasing shares etc
Stallions/Greyhound /woodlands/mining
Relief for restoration of Significant
Heritage Buildings and Gardens
• Artists Exemption
• Amounts of Restricted Reliefs carried fwd
Reliefs not Restricted
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Normal business expenses
Personal tax credits and exemptions
Pension contributions
Medical Expenses
CA on plant and machinery
Trading Losses
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
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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 2011
€100,000
• Section 23 type
Relief for 2011
€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
2011 Relief €80,000
Carry forward €120,000
Amt C/F = Spec Relief
PRSI and Universal Social Charge
• PRSI
• USC
• Full study at Stage 3
PRSI Employees
• Reckonable Earnings
• Emoluments inc BIKs – Sch E
• Deduction for employee pension
contributions and PHI abolished from
2011
PRSI – Exclusions
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< 16 years of age
66+ years of age
Employment by spouse
Payments from Department of Social
Protection eg State Pension, Benefits
• Private Pensions
Employee PRSI Rates 2011
Employee Income
Employee PRSI
Rate
ALL
4%
First €127 per week
exempt
Employer Rate
10.75%*
•Lower Employer PRSI rate of 8.5% where earnings < €365
per week
•Rate reduces to 4.25% from 1st July 2011
PRSI Rates 2011
Self Employed Income
PRSI
Rate
ALL
4%
PRSI Employed – Investment Income
• Individual with Reckonable Earnings
• No PRSI on investment income
• Unless individual has income under Sch D
Case 1 / 11 – trading / professional
income or proprietary / non-executive
director’s income
• NB – Class S PRSI will apply from 2013
PRSI Self Employed
• Self employed trading, professional
income
• Investment income
• Proprietary and non Executive Directors
Class S1
USC
• Sections 531AL-AAD TCA 1997
• Replaces Health Contribution and
Income Levy
• Payable on Relevant Emoluments and
Relevant Income – Sec 531AM TCA
1997
USC
• Relevant Emoluments
– All income subject to PAYE
– No deduction for personal pension
contributions
• Relevant Income
– All non PAYE Income
– Investment income and self employment
income
USC
Deductions allowed
• Trading and professional losses forward
• Capital Allowances – excluding
accelerated CAs
USC Exemptions
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Income < €4,004
DIRT deposit interest
Tax Free Termination Payments
Statutory Redundancy
First €375,000 of taxable pension lumpsum payments > €200,000 (> €575,000
liable to USC)
• Department of Social Protection payments
USC Rates 2011
Aggregate
Income
First €10,036
Under 70 Under 70
No
Medical
Medical Card
Card
2%
2%
Over 70
No
Medical
Card
2%
Over 70
Medical
Card
2%
Next €5,980
4%
4%
4%
4%
Remainder
7%
4%
4%
4%
“Relevant
Income” >
€100,000
10%
7%
7%
7%
Methods of Assessment
• Sec 1017/1031C TCA – Joint Assessment
• Automatic for married couples/Civil
Partners
• Opt out under Sec 1080 /1031D TCA
1997
• Chargeable spouse/civil partner
• Rate Bands transferrable
CPCROC Act 2010
• Finance Act (No 3) 2011
• Civil Partnership and Certain Rights and
Obligations of Cohabitants Act 2010
• Legal relationship for same sex couples
who register the partnership
• Provides property, financial and other
rights similar to married couples, for civil
partners
Finance Act (No 3) 2011
• Inserts new Part 44A TCA 1997
• Same tax treatment for civil partners as
for married couples
• Registered civil partnership
• Revenue FAQ on CPCROC Act 2010
• Cohabitants (not married or in civil
partnership) continue to be taxed as
single persons
Single Assessment
• Sec 1016/1031B TCA 97 – election by
married couple/civil partners
• Each spouse/civil partner treated as
single
• Not advantageous financially
• No sharing of unused credits/rate bands
Single Assessment
• Aoife’s liability
• David’s liability
• Total single asst
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€900
• €10,312
• €11,212
• Total joint asst
• Saving under j/a
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€9,322
€1,890
Separate Assessment
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Sec 1023/1031H TCA 1997
Claim before 1st April
Benefits of joint assessment
Each spouse dealt with separately
High Income Earner Restriction
• Sec 485F TCA 1997
• Jointly or separately assessed couples
• High Earner Restriction applied separately
to each spouse/civil partner
• Recalculated income of spouse/civil
partner added to taxable income of the
other
High Income Earner Restriction
2011
2011
2011
Pat
Alice
Joint
Adjusted Income
€270,000
€210,000
Specified Reliefs
(€80,000)
€0
Taxable Income
€65,600 @ 20%
€334,300 @ 41%
€190,000
€210,000
Total Tax before credits
€400,000
€13,120
€137,104
€150,224
Pro Forma Computation 1
Case I/II
X
Case III
X
Case IV
X
Case V
X
Sch E
X
Sch F
X
Total Income
X
Pension Contributions (Marg
rate)
Charitable Donations (Marg
Rate)
Taxable Income
(X)
(X)
X
Pro Forma Computation 2
€Y @ 20%
X
€Z @ 41%
X
Tax Liability
X
LESS NON REFUNDABLE CREDITS:
•Reliefs @ standard rate
e.g. non TRS
medical insurance
(X)
•Personal; Employee; Age Credits
Tax Liability
(X)
X
LESS REFUNDABLE TAX CREDITS:
•Tax Paid DIRT; DWT, PAYE
(X)
Tax Payable
X
CHARTERED TAX
CONSULTANT
STAGE 2 MODULE 3
Income Tax
Ken O’Brien
www.charteredaccountants.ie
EDUCATING
SUPPORTING
REPRESENTING
Schedules D Cases I and II
• Case I Trade
• Case II Profession
• Self Employed - Income Tax
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
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What is a trade?
Sec 3(1) TCA 1997 – very broad
Case Law
The Six Badges of Trade
6 Badges of Trade
• Subject Matter
• Manufactured items,
Commodities, Property
• Held for a short time?
• Similar and frequent?
• Length owned
• Frequency of
transactions
• Supplementary Work • Advertising, office?
• Circumstances
• Any special ones?
• Motive
• Never irrelevant
Trading?
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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
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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
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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
Basis Period = 12 months
ending in the Tax Year
No Accounts ending in Tax
Year
Taxable on Profits of the Year
of Assessment
Accounting Period > or < 12
months
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 2011 – Accounts Y/e 31st March
2011
2011
AP y/e 31st Oct 2011
AP 16 mths 31st Jan 2012
2011 – Accounts 31/10/2011
2012 – 12 mths 31/12/2011
AP 18 mths 30th Sep 2011
2011 – 12 mths to 30/9/2011
AP y/e 30th April 2011
AP 6 mths 31/10/2011
2011 – 12 mths to 31/10/2011
Sec 66 TCA 1997
• Commencement
• Year 1
• Taxable Profits =
– Profits from commencement to 31st Dec
Sec 66 TCA 1997
• 2nd Year
• 3rd Year
• Sec 65 Rules
• AP Y/E in Tax Year
• 2nd Year Excess
Relief
• Sec 66(3)
• Claim by 31st Oct
after 3rd Year
• Profits in 3rd year
reduced if profits
taxed in 2nd year>
actual profits
Example
• Trade commences 1st May 2011
• Taxable Profits are:
– AP ending 30th April 2012
– AP ending 30th April 2013
€25,000
€20,000
Commencement
2011
1/5/201131/12/2011
€25,000 x 8/12
€16,666
2012
Y/E 30/4/2012
€25,000
2013
Y/E 30/4/2013
€20,000
Subject to 2nd Year
Excess Claim
Second Year Excess
Profits Assessed 2012
Actual Profit
€25,000 x 4/12 = €8,333
€25,000
€21,666
€20,000 x 8/12 = €13,333
Excess
Revised 2013
€20,000-€3,333
€3,333
€16,667
Cessation of Trading
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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
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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
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Section 81(2) TCA 1997
Not wholly and exclusively incurred
Capital expenditure
General Provisions eg bad debt or stock
Depreciation charge per accounts
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
Wholly and Exclusively
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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
Woodifield
Capital v Revenue
• Sec 81(2)(f) TCA 1997
• Walker v Joint Credit Card Co STC 427
• Hibernian Insurance Co v MacUimis
(2000) ITR 495
• Accounting treatment
Capital or Revenue?
• Costs of promoting
legislation to gain tax
reliefs for staff
• Legal costs to protect
title to land and
buildings
• Cost of forming a
new holding co
• Revenue
McGarry v Limerick Gas
• Revenue
• Southern v Borax
• Capital
Kealy v O’Mara
Capital v Revenue Expenditure
• Capital Expenditure
– Expenditure incurred on the
acquisition/construction/alteration of premises
• Revenue Expenditure
– Wear & Tear on property and plant (repairs
/maintenance)
• Sec 81(2)(f) TCA 1997 disallows capital
expenditure for CT purposes
• Regent Oil Company v Strick
Capital Allowances
• CA = “Tax Depreciation”
• Plant and Machinery (Includes Fixtures
and Fittings
• Industrial Buildings
• Initial Allowance
• Annual Allowance
• Accelerated Allowances
• Balancing Allowances/Balancing Charge
Plant & Machinery v Ind Buildings?
• Legislation
• Case Law
• Revenue Practice
Plant & Machinery v Ind Buildings?
• Key Question
• Does the item form part of the
premises within which the trade is
carried on? or
• Is it an item with which the trade is
carried on i.e. used in the conduct of
the trade?
Case Law
Shove v Lingfield Park
IRC v Anchor International
All weather race track ≠ Plant
Synthetic grass turf for indoor
pitches = Plant
Attwood v Anduff Car Wash
Drive In and wash hall of car wash
facility ≠ Plant
Canopies of petrol station = Plant
O’Culachain v McMullan Bros
Ltd
Dunnes Stores v McCronin
Suspended ceiling held part of setting ≠
Plant
Jarold v John Good & Sons
Moveable partitioning = Plant
IRC v Scottish & Newcastle
Breweries
Creation of ambience = Plant
Electric light fittings, wall plaques,
tapestries, murals and prints in hotel
Items treated as P&M
• Revenue generally regard the following as
P&M
– Central Heating
– Lifts (excluding lift shafts)
– Security and Fire Alarms
– Heating
– Ventilation
– Sprinkler Systems
– Shelving
– Internal Communication Systems
Capital Allowances
• Sec 284(1) TCA 1997
1. Incurred Capital Expenditure
2. for the purposes of the trade or
profession
3. Asset belongs to claimant
4. Asset is used wholly and exclusively
5. In use at the end of the basis period
6. Burden of Wear and Tear
Sec 284 TCA 1997
• P&M in use at end of AP
• Full year’s CA even where asset in use
only for the last day of AP
• Basis Periods
• Sec 248(2)(b) TCA 1997
• CA restricted where Basis Period < 12
Months
Basis Period
• Basis period is fundamental for Cas
• Identify correct Basis Period for
– Assets Purchased
– Asset Disposals
– Periods of ownership in between
• Sec 306 TCA 1997
– Basis period for a year of assessment
– Period in which final profits for a tax year are
computed under Case 1 of Sch D
Basis Period
• Sole trader makes up accounts to 30th
June 2011
• Plant purchased on 1st July 2010
• Basis period for CA is 30th June 2011
• Basis periods overlapping or with a gap
• CA must be attributed to a Basis Period
Basis Period
• Sec 306(2)(b)(ii) TCA 1997
• Sale of plant during an interval is deemed
to happen in the second Basis Period
• Interval for two successive years of
assessments and a permanent
discontinuance of trade occurs in later
year  Interval treated as part of first
period only
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
• Sec 288 TCA 97 – option to transfer at tax
wdv
Calculate CA and BC/BA
• Tax Year 2010
• Plant Cost €20,000
• CA @12.5% =
€2,500
• Machinery Sold for
€2,500 – bought for
€5,000. Wear and
tear claimed to 2009
€3,125
• Proceeds €2,500
TWDV
€1,875
• BC
€625
Balancing Allowance/Charge
• Sec 288 TCA 1997
• When does a BA/BC arise?
– Disposal of Asset
– Trade use permanently ceases
– Trade ceases
• Adjusts for difference between proceeds
and TWDV of asset
Balancing Charge Example
• Asset Purchased in February 20X3 for €100,000
included in financial statements to 31 December 20X3.
• Asset Disposed of June 20X6 for Proceeds of €70,000
€
Cost
100,000
Wear & Tear 20X3
(12,500)
Wear & Tear 20X4
(12,500)
Wear & Tear 20X5
(12,500)
T.W.D.V 1 Jan 20X6
62,500
Sales Proceeds
70,000
Balancing Charge (Profit)
7,500
Clawback of Capital allowances
Balancing Allowance Example
• Asset Purchased in February 20X3 for €100,000
included in financial statements to 31 December 20X3.
• Asset Disposed of June 20X6 for Proceeds of €50,000
€
Cost
100,000
Wear & Tear 20X3
(12,500)
Wear & Tear 20X4
(12,500)
Wear & Tear 20X5
(12,500)
T.W.D.V 1 Jan 20X6
62,500
Sales Proceeds
50,000
Balancing Allowance (Loss)
12,500
Additional CA granted
Transfers @ TWDV
•
•
•
•
Sec 288 TCA 1997
Option to transfer assets @ TWDV
No BA or BC on disposal
Subsequent owner takes over asset at
TWDV
Transfers @ TWDV
• Sale or transfer of P&M
• Purchaser uses it for trade purposes
• Seller and purchaser make an election in
writing
• Both are connected
• Option to transfer at lower of MV or TWDV
• Option not available for transfer to a
company by a non company eg sole trader
incorporating
Fixtures & Fittings
•
•
•
•
•
•
Sec 284 TCA 1997
Sch D Case V Rental Income
Wear & Tear on capital expenditure
Furniture, Kitchen Appliances, etc
Wholly & Exclusively – expenditure
Furnished house let on bf commercial
terms
• Writing down allowance over 8 years
@12.5% straight line
Motor Vehicles
• Sec 373-376 TCA 1997 – passenger
vehicles
• CA Qualifying Cost restricted
• Pre 30th June 2008 - €24,000 limit
• Sec 380L TCA 1997 new greener rules
• Proceeds restricted for BC
• Sec 286 TCA 97 – Taxis and short term
hire
Motor Vehicles
• CA on passenger motor vehicles
• 12.5% Straight Line since 4th Dec 2002
• Sec 373 TCA 1997
– Cars purchased before 1st July 2008
– Maximum amount €24,000 = “Specified
Amount”
CA on Cars from 1st July 2008
Part 11C TCA 1997 – Sec 380K-380P
Vehicle
•
Category
A
B/C
D/E
F/G
Emission
Level
0-120 g/km
Maximum Amount
€24,000 (Specified
Amount)
121-155
€24,000 (Specified
g/km
Amount)
156-190g/km Lower of 50% of Retail
Price or 50% SA
>190g/km
No CAs
Taxis and Short Term Hire
• No Specified Amount applies
• CA of 40%
• Reducing Balance
Cars - BA and BC
• Proceeds on sale/Deemed proceeds on
disposal
• Restricted where CAs were restricted
Example
• Sale Proceeds = €10,000
• Car Cost €30,000
• Specified Amount €24,000
• Restricted SP = €10,000 x €24,000/€30,000
Deemed CAs
•
•
•
•
Sec 287 TCA 1997
CAs deemed to have been claimed
Applies even where no CAs claimed
Notional Wear & Tear
Election for BC
• Sec 290 TCA 1997
• Election to reduce cost of replacement
asset by amount of BC
• CA calculated on Cost of new asset - BC
• BC crystallises on disposal of replacement
asset
Gifts and Sales < MV
• Sale, insurance, salvage or compensation
received used to compute BA/BC
• Sec 289 TCA – substitute OMV
• Applies to gifts
• Election under 289(6) TCA 97 for TWDV
Industrial Buildings
• Sec 268 TCA 1997
• Industrial Buildings or Structures
• Property based tax incentive schemes
Industrial Buildings
•
•
•
•
•
•
•
•
Located in the State
Manufacturing facilities
Nursing Homes
Hospitals
Sports Injuries Clinics
Hotels
Holiday Camps
Airport Buildings
Industrial Buildings
• Exclude site cost, associated professional
fees and Stamp Duty
• Where trader builds an industrial building
– professional fee allowable
• Refurbishment expenditure qualifies
• Reconstruction, repair, provision of water,
sewage, heating
10% Rule
• Costs related to offices, showrooms, retail
shops and dwelling houses excluded
• Sec 268(8) TCA 97 – 10% rule
• Where costs of construction of non
qualifying area ≤ 10% of total costs
• Entire construction cost qualifies
IBAA
• Industrial Buildings Annual Allowance
• Must hold “relevant interest” at end of
basis or accounting period
• Sec 269 TCA 1997 – legal interest,
freehold or leasehold
• Held by person who incurred expenditure
Rates of IBAA
• From 1st April 1992 – 4% pa net of grants
• From 4th December 2002 – Hotels @4%
• Transitional provisions – 15% for 6 years
and 10% in Year 7
• IB life of 25 years from date first used
• Hotels
– 25 years for expenditure from 4/12/2002
– 7 years for expenditure 26/1/1994-4/12/2002
– 10-50 years in other cases
Calculating IBAA
• Sec 279 TCA 1997 – special rules
• IBAAs normally given to person
– who incurred the construction expenditure or
– who holds the relevant interest in relation to
that expenditure
IBAA – First Sale
• Sale of IB before it is used or
• Sale of IB within 2 years after it
commences to be used
• Purchaser deemed to have incurred
capital expenditure on construction on
date purchase price is paid
• Amount of deemed expenditure –
distinguish between Non Builder and
Builder
Expenditure by Non-Builder
• Building constructed by non-builder
• Purchaser deemed to have incurred
expenditure on date of purchase on lower
of
– Actual construction costs or
– Net price paid by taxpayer
Expenditure by Builder
•
•
•
•
Building sold by a builder
Purchaser claims IBAA on net price paid
Includes builder’s profit
Where > 1 sale before building used or
within 1 year after it commences to be
used
– Deemed expenditure = lower of net price paid
on first sale and net price paid on last sale
Net Price Paid
•
•
•
•
B x C/(C+D)
B = Purchase Price
C = Construction Costs
D = Site Cost
Example Sale by Builder
•
•
•
•
•
•
Purchase price = €1m
Construction costs = €500k
Site Cost = €350k
Purchased new and unused
B x C/(C+D) =
€1,000,000 x
€500,000/(€500,000+€350,000) = €588,235
• IBAA claimed on €588,235
Example Sale by non Builder
•
•
•
•
•
•
Purchase price = €1m
Construction costs = €500k
Site Cost = €350k
Lower of
Actual Construction Cost = €500,000 or
€1,000,000 x
€500,000/(€500,000+€350,000) = €588,235
• IBAA claimed on €500,000
Sale of Industrial Building
• Sec 274 TCA 1997
• Sale within tax life of IB
– Balancing Charge or Balancing Allowance
• Sale outside tax life of IB
– No Balancing Charge or Balancing Allowance
Balancing Charge/Allowance
• Sec 274 TCA 1997
• Balancing Charge/Allowance
– Relevant Interest in IB is sold
– Relevant Interest, being leasehold, ends
– Building is demolished or destroyed or ceases
altogether to be used
– Consideration other than rent is paid for a
lesser interest created our of the relevant
interest
Balancing Charge/Allowance
• Sec 274 TCA 1997
Balancing Allowance
Balancing Charge
•Amount of residue of
expenditure > Sale, Salvage
or Compensation
•Residue of Expenditure =
Unused Capital Allowances
•Amount of residue of
expenditure < Sale, Salvage
or Compensation
•BC cannot exceed CA
actually made
•Residue of Expenditure =
Unused Capital Allowances
Motor Leasing Expenses
• Sec 380MTCA 1997
• LC x Capital Limit*
Lease Price
• €24,000 subject to CO2 emissions
• Same categories as for CA on cars
Pro Forma Computation
Profit before tax per Accounts
Add Back
x
Depreciation
x
Entertainment
x
Private use of Car
x
Balancing Charge
x
x
Deduct
Rental Income
x
Investment Income
Adjusted Profit
Capital Allowances
x
Taxable Profits
x
x
X
x
x
Loss Relief
•
•
•
•
Sec 381(3) - Current Year Losses
Sec 392 TCA – Augment Loss with CA
Sec 382 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 2011
Capital Allowances
Sec 381 Loss
Spouse Salary 2011
€5,000
(€7,000)
(€2,000)
€30,000
• Claim Sec 381 Loss by 31/12/2013
Terminal Loss Relief
• Sec 385 - 390 TCA 1997
• Permanent discontinuance of
trade/profession
• Loss can be set off against profits of
previous 3 years of assessment
Self Assessment
•
•
•
•
•
•
Part 41 TCA 1997
Chargeable persons Sec 950
Register on form TR1
Pay and File Deadlines
Interest, Surcharge, Penalties
Revenue Audits
Chargeable Person?
• Company Director not
fully PAYE or15% s/h?
• Rental Income Losses?
• Owner of foreign bank
account/offshore fund?
• Employee exercising
share options?
• Yes
• Yes
• Yes
• Yes
PAYE Taxpayers
• Gross non- PAYE income <€50,000
• Net assessable non-PAYE income <
€3,174
• TB 62
• If non-PAYE income is coded
self
assessment does not apply
Directors
• SP IT/1/93
• Directors liable to file Tax Returns under
self assessment
• Exclusions for
– Directors of shelf companies
– Directors of dormant companies
– Temporary directorships prior to
commencement of trading
Non Proprietary Directors
•
•
•
•
Not otherwise chargeable persons
All income subject to PAYE
>15% control of ordinary share capital
Spouses/Civil Partners brought within self
assessment where joint assessment
applies
Tax Returns
• Sec 951 TCA 1997 – obligation to file
• Filing deadline 31st October
– Extension (non stat) to mid November for ROS
• Chargeable person must file Tax Return
– unless Revenue confirm in writing that he is not
obliged to file
• Sec 1084(4) TCA 1997
– first year of setting up trade or profession
– Filing date is 31st October two years later
Tax Payment
• Sec 958 TCA 1997
• Preliminary Tax due 31st October
• 100% p/y or 90% current year or 105% prepreceding year
• BES/Film Relief excluded
• Extension to mid November for ROS pay
and filers
• PT 2011 – include USC if based on 100%
2010
Self Assessment Example
John’s situation October 2011
• 2010 Tax liability*
€15,000
• 2010 Preliminary tax paid €14,000
• 2011 Estimate of tax**
€12,000
What do you advise John?
* Includes Levies €4,000
** Based on 2011 and includes USC
Self Assessment Solution
2010 Tax Return
File by 31/10/2011
2010 Balance Due
Pay €1,000 by
31/10/2011
2011 Preliminary
Tax
Pay €12,000 by
31/10/2011
Tax Returns
•
•
•
•
Form 11 – self assessment
Form 12 – Employees, non prop dirs
Both on www.revenue.ie
Filing using ROS has advantages
– Extension to mid Nov for pay & file; faster
refunds/assessments
Mandatory e-Filing
•
•
•
•
Phased in since 2009
Compulsory electronic payment and filing
Section 917EA TCA 1997
Exclusions if taxpayer does not have
capacity to e file and pay – Revenue
approval
• Insufficient access to internet
• Prevented by reason of age or physical
infirmity
Mandatory e-Filing
• Phase 1
1st January 2009 – LCD cases
• Phase 2
Companies with
– turnover> €7.3m
– > 50 employees
– All public bodies
Mandatory e-Filing
• Phase 3A
From 1st June 2011- Self Employed
individuals:
– filing Form 46G
– subject to High Earner Restrictions
– Acquiring or benefitting from Foreign Life
Policies; Offshore Funds or products
– Claiming certain residential property based
incentives and IBAAs
Mandatory e-Filing
• Phase 3A
From 1st June 2011
All
– Companies
– Trusts
– Partnerships
– Collective Investment Undertakings (CIUs)
– European Economic Interest
Groupings(EEIGs)
Mandatory e-Filing
• Phase 3B
From 1st October 2011
Employers with > 10 Employees
Mandatory e-Filing
•
•
•
•
Penalties for non-compliance
Sec 917EA TCA 1997 – penalty €1,520
Section 1084 TCA 1997 surcharge
Specified taxpayer could be liable to
– Penalty for not filing online
– Penalty for not paying PT online
– Surcharge for not filing
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
• Rates
– From 1/4/1998 to 31/3/2005 0.0322% per day
– From 1/4/2005 to 30/6/2009 0.0273% per day
– 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 31st 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 annually
• 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
Take objective view of both old and new
clients
Tax Calculations and Returns
• Late filing
• Late filing for single or separate
assessments
• Late payment
• PT underpaid
• Incorrect assessment not addressed
within 30 days
Key Technical Issues
1. Tax Residency Status of client
2. Client and spouse/civil partner
– Residence, Ordinary Residence, Domicile
3. Is the client a chargeable person?
4. Method of assessment joint; single;
separate
5. Sources of Income and Expenditure and
records
Key Technical Issues
6. Claim for credits, reliefs and deductions
–
Prior 4 years?
7. Changes in status since previous year's
Return?
–
Marital; Accounting Year End; trading
activities?
8. PRSI and USC properly calculated?
9. Correct taxes paid on time ?
Tips to Minimise Risks
Preliminary Tax
Tax Return Filing
ROS Advantages
Notice of Assessments
•Exclude BES and Film
Relief in 100% P/Y
calculation
•PT based on joint
liability for married
couples/civil partners
•If 100% p/y, 90% of
current year or 105%
pre-preceding year tests
not met
balance
of tax due 31st October
in tax year and interest
will be due
•Mandatory filing
may apply
•Mid-November pay
and file extension
•Certainty on notice
of assessment
contents
•Automatic receipts
•Payment not
debited until mid-Nov
if filed early
•Refunds tend to
issue earlier
•Check PAYE Tax Credit
Certs to ensure PT
calculations correct and
no unforeseen
underpayments
•PAYE Anytime tab
•Review NOA on receipt
to ensure 30 time limit
for appeal not missed
•Establish reason for
under/overpayment
Professional & Ethical Skills
•
•
•
•
•
•
Module 2 professional approach
Income Tax/USC/PRSI= high risk 55%
Tax compliance and consulting
Research should be rigorous
Excellent communication skills require
Review competency issues
Research and Risk Management
Engagement
Payments
Prior Year
Review
Other
•Does the EL
cover the
work?
•Fees agreed?
•Permitted
service?
•ROS
authorisations
signed?
•Previous Year PT
sufficient?
•Reconciliation of
under/overpayment
carried out?
•New clients –
copies of P/Y
Tax Returns
and
computations?
•Is file up to
date?
•Check P/Y
income tax
compliance for
background to
consultancy
work
•Good checklists
•Reliable systems
of control for tax
compliance
•Research
planning
•Third party
assistance
•Other taxes
•Analysis of errors
to learn from
Communication Skills
•
•
•
•
•
Adapt standard letters for client
Form of communication?
Regular meetings with clients
Revenue submissions – RM policies
Written communications – language and
conclusions
• Communications based on current tax law
and Revenue practice
Professional Obligations
• Ethical Values
• New engagement – professional
clearance
• Rules for Professional Appointment
• Competency Issues
• Obtain ex client permission to discuss
affairs with new agent
Module Round Up
• Residence, ordinary residence and
domicile
• 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
• Capital Allowances
• Schedule F
• Schedule E
• Employed v Self Employed
Module Round Up
•
•
•
•
•
Calculation of Income Tax liability
Personal credits and deductions
PRSI and USC
Joint, Single and Separate Assessment
High Earner Restriction
Module Round Up
• Self Assessment System
• Preliminary Tax calculation
• Advising client on the correct amount to
pay
• Paying and filing on time
• Completion of Income Tax Return
• Mandatory eFiling
Module Round Up
•
•
•
•
Risk Management issues
Communication Skills
Professional Obligations
Ethical Values