Autumn Examinations 2008/ 2009 Exam Code(s) 3BC1,4BC2,4BC3,4BC4,4BC5,1EM1,1OA1 Exam(s) 3rd BComm,4th BComm International, Erasmus, Visiting Module Code(s) AY308 Module(s) Taxation I Paper No. 1 of 1 Repeat Paper Yes External Examiner(s) Professor B. O’Dwyer Internal Examiner(s) Professor S. Collins, Dr. E. Mulligan
Answer Question 1 in Section A
and TWO questions from Section B
Duration 2 ½ Hours No. of Pages 7 Department(s) Accountancy and Finance Course Co-ordinator(s) Emer Mulligan Requirements: MCQ Handout Statistical/ Log Tables Cambridge Tables Graph Paper Log Graph Paper Other Materials Table of rates of taxation included
COMPULSORY Question 1 Part (a) (i) Discuss the role of taxation in the economy. You should make specific reference to this role in different economic climates i.e. growth and recessionary climates. (ii) Briefly compare and contrast direct and indirect forms of taxation.
(15 Marks) Part (b) John Ahearne is a single Irish citizen who is an employee of IrishCo Ltd. John was made redundant on November 1, 2008. On being made redundant, John received the following from the company: € Statutory redundancy 7,000 Payment in lieu of notice 20,000 Company computer & printer 1,500 Compensation payment 35,000 Previously earned holiday pay 3,000 Additional information relating to John: Company lump-sum payment received under a revenue-approved pension scheme 8,000 Annual 12-month taxable BIK 2,000 John’s average annual taxable cash salary over last 36 months (he has worked for IrishCo Ltd 21 years and 8 months) 42,000 Required: Calculate John’s 2008 taxable income based on the above information, showing all calculations clearly.
(15 Marks) Total: 30 Marks
SECTION B OVER THE PAGE
YOU ARE REQUIRED TO ATTEMPT ANY TWO QUESTIONS FROM THIS SECTION
(a) Michael Reynolds is single and has been self-employed for many years. He makes up annual accounts to 31 December. His profit and loss account for the year ended 31 December 2008 is as follows:
Fees charged 205,000 Other income and gains (Note 1) 26,200 231,200 Salaries (Note 2) 65,000 Repairs and renewals (Note 3) 7,000 Advertising 2,500 Depreciation (Note 4) 6,200 Travel and entertainment (Note 5) 6,500 Telephone (Note 6) 2,200 Subscriptions (Note 7) 850 Bad debts (Note 8) 7,220 Legal and Professional Fees (Note 9) 31,500 Financial costs (Note 10) 6,950 Postage and Stationary 4,200 Miscellaneous (Note 11) 6,200
146,320 Net Profit 84,880 Note 1: This is made up as follows:
Rental income from house in South of France 8,000 Rental income from house in Ireland 12,000 Irish Deposit interest (net) 3,500 Dividends from Irish company (net) 1,500 Gain on sale of shares in French company 1,200
26,200 Note 2: Salary to self 39,850 Salary to brother-in-law 24,370 VHI for self 780
Note 3: This includes €1,000 which is the cost of a computer in use in the business at year end.
Note 4: The depreciation charge relates to Michael’s BMW and fixtures and
fittings. The fixtures and fittings were purchased in May 2006 at a cost of €38,000. Michael bought his BMW in January 2006 for €48,000 (original market value) and has agreed 50% business usage with the Inspector of Taxes.
Question 2 continued over the page………..
………..Question 2 continued from previous page Note 5: €
Staff entertainment 1,200 Supplier entertainment 1,400 Motor running expenses-BMW 3,900 6,500 Note 6: This figure does not include Michael’s home telephone charges, which amounted to €1,200 in 2008. He estimates that approximately 40% of the home telephone charges are for his business. Note 7: This was made up of a €300 subscription to an ‘eligible charity’ and €550 to a trade association.
€ Note 8: Bad debts
Opening provision: -general (7,000) -specific (3,200) -bad debts written off 3,260
Closing provision: -general 10,000 -specific 4,160
Profit and loss account 7,220 Note 9: Legal: Pursuit of bad debts 4,220 Renewal of lease on business premises 900
Renewal of patent licence 2,500 Dispute with brother regarding inheritance 10,500
Tax and professional advice connected with sale of shares 6,000 Annual Accountancy fees 7,380
31,500 Note 10: Interest on bank overdraft 2,300 Interest on working capital term loan 3,800 Miscellaneous bank charges 850 6,950 Note 11: This includes insurance on the business premises amounting to €1,500 and a covenant of €1,200 (gross) paid to Michael’s daughter, aged 20 who is attending NUIG. Required: Compute Michael’s taxable income for 2008.
Question 2 continued over the page…..
………Question 2 continued from previous page (b) Write an explanatory note on the meaning of ‘plant’ for the purposes of capital allowances, using relevant case law as appropriate. The note should include a discussion on two relevant cases where items were held to be plant and two relevant cases where items were held not to be plant. (10 Marks) (c) Explain what is meant by an ‘accounting period’ for corporation tax purposes and state when an accounting period begins and when an accounting period ends.
(5 Marks) Total: 35 Marks
Question 3 (a) It may sometimes be difficult to determine whether an individual is providing services under a contract of service (employed) or under a contract for services (self- employed). Required: Discuss both forms of contract and their tax implications. Your discussion should include reference to relevant case law and the main factors to be taken into account in determining whether an individual is providing services under a contract of service or under a contract for services.
(17 Marks) (b) Mark O’Donnellan commenced trading on 1 September 2007 and makes up his accounts to 30 September each year. In the year ended 31 August 2008, he purchased the following assets, which were put to use immediately: Van €5,000 acquired on 1 September 2007 Office furniture €1,600 acquired on 30 November 2007 Computer €540 acquired on 28 February 2008 Machinery €6,200 acquired on 31 August 2008 Required: Calculate the capital allowances which Mark would be entitled to claim for the first three years of commencement.
Question 3 continued over the page………
……..Question 3 continued from previous page (c) Calculate the 2008 taxable benefit for each of the following employees of Connect Ltd: i. Martha is employed as an operations manager. On her appointment on 1 March
2008 she was given a company car. The car was bought new by the company for €46,000 net of a 10% discount. Martha’s total business mileage in the car up to 31 December 2008 was 13,000 miles. The company pays for all motor expenses, but Martha contributes €40 per month to the company in consideration for the cost of providing the car.
ii. John, who is the financial director with the company for the last 5 years, is provided with an apartment by the company. The company pays the rent on the apartment of €1,000 per month. John pays the company €300 per month in respect of this rent. In addition, the company pays for cleaning the apartment which amounts to €1,800 per annum.
iii. Sheila, a sales executive, received an interest-free loan of €60,000 from Connect Ltd. on 1 January 2008. She used this money to finance an extension to her home. She repaid €20,000 of the loan on 1 June 2008.
(10 Marks) Total: 35 Marks
Question 4 (a) The Royal Commission on Taxation of Profits and Income, which reported in 1954, claimed to identify a number of ‘badges of trade’, i.e. factors which were likely to have a greater or lesser significance when deciding whether or not a transaction was in the nature of trade. Identify and explain the meaning of these ‘badges of trade’, making specific reference to case law.
(13 Marks) (b) Extended Ltd. has prepared accounts for 20 months ended 31 December 2008. Results are as follows:
€ Case 1 1,200,000 Case III 1/08/07 75,000 Case III 31/10/08 50,000 The company sold shares in April 2008. The chargeable gain arising on this sale amounts to €32,000. The company has plant and machinery, all of which was acquired in March 2006 at a cost of €600,000. Required: Calculate the corporation tax liabilities for Extended Ltd. for the periods covered by the above accounts. (12 Marks)
(c) (i)What factors determine liability to corporation tax in Ireland?
(ii)Outline the extent to which a non-resident company is liable to Irish corporation tax.
(10 Marks) Total: 35 Marks
END OF EXAMINATION QUESTIONS
Table of Tax Rates etc Income Tax Rates Standard rate 20% Marginal rate 41% Corporation Tax Rates Trading Income 12.5% Investment Income 25% Capital Gains Tax Rate Standard rate 20% Motor Vehicles Restricted Values 01/01/01 to 31/12/01 inclusive €21,586 01/01/02 to 31/12/05 €22,000 01/01/06 to 31/12/06 €23,000 01/01/07 to 30/0608 €24,000 01/07/08 onwards based on category of car in accordance with carbon emissions level as follows: Categories A, B & C €24,000 Categories D & E 50% of lower of cost and €24,000 Categories F & G No allowances Rates of Wear & Tear Plant and Machinery 01/01/01 to 03.12.02 20% straight line 04/12/02 onwards 12.5% straight line Motor Cars 01/01/01 to 03/12/02 20% straight line 04/12/02 onwards 12.5% straight line Company Cars-Business Mileage Relief Annual Business Mileage Thresholds
Cash Equivalent (% of OMV)
15,000 or less 30% 15,001 to 20,000 24% 20,001 to 25,000 18% 25,001 to 30,000 12% 30,001 and over 6%