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Common Tax Errors and Reminders

Welcome to Query Of The Week

Every week our technical team receives a variety of client queries. In this segment, we give you access to the most common and relevant topic. Over the past few weeks, this question has come up in various forms. This week we will address “Common Tax Errors and Reminders”

Many of you will have met and worked with the presenter, John Murphy, and in the video below he walks you through this week’s Query Of The Week.

Common Tax Errors and Reminders

If this Query Of The Week was of interest to you, you will also be interested in our Common Tax Errors and Reminders online course.

Full details for this course can be found here.

CPD Allocation 1 Hour
Fee €25 (or 1 CPD Club point)
Presenter John Murphy – OmniPro
Category Taxation

Query Of The Week – Video Transcript

(Please note that this is a direct unedited transcript of the spoken word as recorded on the video) 

Hello and welcome to this week’s Query of the week.

This week’s query is about misconceptions in relation to the treatment of various things. This query was in relation to agriculture relief in Section 89 for the purpose of Capital Acquisition Tax. In order for crops to be considered agriculture property for the purpose of property relief, they must be growing; if they’re not growing, they don’t come within the definition of agriculture property and, therefore, when you’re doing your 80% test, it won’t be allowed. Watch out for this.

Another query in relation to section 89 was about PPR.

So, when you’re looking at the Farmer’s Test and there’s a mortgage on the Principal Private Residence which can be used to reduce the value of said Residence you must be cognisant of the fact that a re-mortgage does not apply and cannot be held against the market value of the Property.

So that’s just another reminder which is useful for practitioners.

Another relevant query concerned entrepreneurial relief.

Let’s say you sold assets and entrepreneurial relief to employees at a 10% rate,
and you’ve gained on 10% of employees but there are also losses to be brought forward. What way does that 10% gain have to be utilised against the losses forward?

The loss forward may have been 33%. So, section 546 deals with what you stated as losses forward. Let’s say, in the example, you have two gains made in the CGT year. One of them was at the 33% rate and one of them at the 10% rate, which one do you use first against your losses?

Section 546 is clear that you use the higher rate first. You use the gain on the tax on the 33% rate against the losses forward and then afterwards you use the gain on entrepreneurial relief.

Obviously, it’s better if you can structure deals so if you are going to gain entrepreneurial relief at 10% you would try to also make a gain at the higher rate so you can get better use of your losses, but of course, it’s not always that simple.

You don’t always have the ability to transact like that, but it’s a nice one to know and so effectively, what it means is that, if you have a CGT loss going forward,
it can be set against entrepreneurial relief, but if you have a gain at the entrepreneurial relief and a gain at 33% rate the losses forward will be utilised against the gain at the higher rate first, which is good.

The final question deals the importance of when in particular circumstances a dividend or distribution from one closely held company to another company is made, there’s an election called Section 434(3A) election where both companies elect to ignore the dividend that’s paid by the company that makes the payment and is ignored for the calculation of the close company surcharges. And the company that receives it is ignored for the calculations of the close company surcharge.

So, in effect, it works very very well where there’s trading, where the lower company is a trading company and it doesn’t have any state or earned income, but to get the benefit of Section 434(3A) election, you actually have to make the election in the corporation tax return for the period that it relates to.

If you don’t make the election, the payment is not ignored and can be used for surcharge purposes

So the important part is to get the timing right. If you’re making the election make sure you tick the box and it has to be done by the return deadline otherwise the election is ignored and effectively for a year, no dividend can be paid.