FAE September 2012

shery

I hope Elvis. I really hope!!

R0N BURGUNDY

You won't know until you get your result back to be honest.

I think if everyone answered it fairly sh1te, then just making an attempt at it hopefully will get you over the line. But that didn't happen for audit elective last year so maybe the pass rate will fall to a stupidly low level

mrduffy

The sh1t has now hit the fan literally speaking after audit elective I am praying I pass core !

PatACA

u will smash it !!

ferike1

Pat. You are so helpful!

Eiriu

shery wrote: »

While I am sure most of you are up-to-neck with all the FAE talk and post exam stress, I am just wondering how much do you guys think is enough to get an RC in tax indicator of core exam.

I suppose there is some debate as to how many indicators were there. Some believe there were 2 (1 in the second sim and 1 in the thirs sim ref PAYE/PRSI error) while some suggest that indicator in sim 2 was the only main tax indicator. Irrespective, would anyone know or comment on how much is 'enough' to get you through the RC door? I suppose the mere spotting of an indicator gets you to an NC stage but how much detail would 'RC' warrant?

For instance, would an overall analysis of share vs asset sale (pros and cons) without getting too much into calculations, mention of participation exemption (I know there has been debate around whether this would apply), double tax charge for asset sale, possible clawback of CT/CGT if they were historically loss sharing/CGT group, recommendation of getting a specialist advise and giving your recommendation (whatever it may be) be enough to get you to RC?

There would nt be a double cgt charge for asset sale, if asset sold and company liquidated then cgt will only apply once. I said that company could pay dividend tax free to parent. But in hindsight that was silly as it did not have distributable profits . But I suppose it would of had enough profits to distribute from after making gain of 4 m on sale of property.

I missed the section 40 thing here.

Double cgt really only applies to individuals though when they own property in a company

shery

Eiriu wrote: »

There would nt be a double cgt charge for asset sale, if asset sold and company liquidated then cgt will only apply once. I said that company could pay dividend tax free to parent. But in hindsight that was silly as it did not have distributable profits . But I suppose it would of had enough profits to distribute from after making gain of 4 m on sale of property.

I missed the section 40 thing here.

Double cgt really only applies to individuals though when they own property in a company

Yea, you are right. God help me in tax. Seriously!!

What is the section 40 thing?

Did many people spot PAYE/PRSI indicator in Sim 3?

Pawwed Rig

Eiriu wrote: »

There would nt be a double cgt charge for asset sale, if asset sold and company liquidated then cgt will only apply once.

Not true. Look at the core book page 72 halfway down the page

Eiriu

shery wrote: »

Eiriu wrote: »

There would nt be a double cgt charge for asset sale, if asset sold and company liquidated then cgt will only apply once. I said that company could pay dividend tax free to parent. But in hindsight that was silly as it did not have distributable profits . But I suppose it would of had enough profits to distribute from after making gain of 4 m on sale of property.

I missed the section 40 thing here.

Double cgt really only applies to individuals though when they own property in a company

Yea, you are right. God help me in tax. Seriously!!

What is the section 40 thing?

Did many people spot PAYE/PRSI indicator in Sim 3?

I would nt say the double tax charge is a big deal because in all likelihood if all assets were sold and company liquidated there would not have been any money left after all creditors were paid therefore no distribution would have come into it.

With tax us just need to mention cgt, stamp duty vat, participation exemption and warranties due diligence with share sale


The sec 40 thing was that the company,s net assets were less than called up share capital. Therfore egm would need to be called.

I've heard of lots of people missing that paye/prsi indicator.

Another thing some people said that they would have recommended asset rather than share sale, how did they come to that conclusion - I thought it was clear that asset sale would leave you with no money and lots of unhappy employees and creditors.

Pawwed Rig

There is some confusion as to whether the participation exemption applied in this case as many decided that the shares derive their value from the building therefore CGT is payable. It was ambiguous enough though so I went with the participation exemption

section 40 Securities of International Bank for Reconstruction and Development???

Eiriu

Pawwed Rig wrote: »

Eiriu wrote: »

There would nt be a double cgt charge for asset sale, if asset sold and company liquidated then cgt will only apply once.

Not true. Look at the core book page 72 halfway down the page

I in the situation given there would have been no money left in company for distribution so it did nt apply. even after selling building for 21m it was unlikely that you could discharge all mandalays liabilities.

Did most people agree that an asset sale would not allow you to discharge all the liabilities. Given 50% discount for stock and equipment due to fire sale- which is realistic. I don t see where the double cgt charge applied in context of that case?

Pawwed Rig

In this case where there is no distributable proceeds then of course when you make a loss you cannot be charged CGT but there is a double charge on liquidation where the assets are sold generally (just to clear up any confusion).

I would have thought the sale of shares was the obvious way to go also

Eiriu

i've a feeling that mentioning anything in relation to section 40 was not meant to be the main focus of this question. The directors knew that there was a problem with the company and had decided to sell it. Therefore it is likely that the EGM might have already taken place. The purpose of sec 40 is to let the directors shareholders know that the company is in trouble. But they already knew that mandalay was not performing as expected and had therefore decided to sell it/dispose of assets

Sec 40 would have no application on the impending asset or share sale.

And if the foreign company saw the value of the company being just from the building then why would they make an offer for the company, not just the building on its own- that should put an end to the participation exemption argument. The foreign company obviously saw the company's value as deriving from its trade. If they wanted the building then why would they make an offer for the company.

The participation rule is usually disallowed for asset holding companies usually, not trading companies.

Pawwed Rig

Eiriu wrote: »

And if the foreign company saw the value of the company being just from the building then why would they make an offer for the company, not just the building on its own- that should put an end to the participation exemption argument. The foreign company obviously saw the company's value as deriving from its trade. If they wanted the building then why would they make an offer for the company.

That was my thuinking on it too although unfortunately I did not state on the exam that it was why I was going with participation exemption.

What is Section 40? According to the TCA it is "section 40 Securities of International Bank for Reconstruction and Development"

Eiriu

Pawwed Rig wrote: »

Eiriu wrote: »

And if the foreign company saw the value of the company being just from the building then why would they make an offer for the company, not just the building on its own- that should put an end to the participation exemption argument. The foreign company obviously saw the company's value as deriving from its trade. If they wanted the building then why would they make an offer for the company.

That was my thuinking on it too although unfortunately I did not state on the exam that it was why I was going with participation exemption.

What is Section 40? According to the TCA it is "section 40 Securities of International Bank for Reconstruction and Development"

Section 40 of companies acts 1963-2003 not tax consolidation act is a proviso designed to protect shareholders whereby if the net assets drop to below half the called up share capital the directors need to call an EGM. It's not tax legislation. But since the main shareholders were the holding company and they knew the company was in trouble then one guesses its not that relevant.

I just mention it because on the evening of the 5th one or two people on this thread mentioned it as being part of the question.

The participation exemption is obvious enough- it was a trading company- the business must "wholly or mainly" consist of a trade, if more than 50 % of assets used for trade it's a trading company. It was a health spa not treasury holdings.

I don't think there was a need to state that.

The value of the shares did not come from the property on its own because the company would have been left with a liability if everything liquidated. Hence the shares were worthless without the trade. They did nt derive their value from land.

Pawwed Rig

Eiriu wrote: »

Section 40 of companies acts 1963-2003 not tax consolidation act is a proviso designed to protect shareholders whereby if the net assets drop to below half the called up share capital the directors need to call an EGM. It's not tax legislation. But since the main shareholders were the holding company and they knew the company was in trouble then one guesses its not that relevant.

Ahh that makes more sense. I would be very doubtful we needed to include that as it was not examinable per our Audit lecturer

Eiriu

Pawwed Rig wrote: »

Eiriu wrote: »

Section 40 of companies acts 1963-2003 not tax consolidation act is a proviso designed to protect shareholders whereby if the net assets drop to below half the called up share capital the directors need to call an EGM. It's not tax legislation. But since the main shareholders were the holding company and they knew the company was in trouble then one guesses its not that relevant.

Ahh that makes more sense. I would be very doubtful we needed to include that as it was not examinable per our Audit lecturer

That's a relief so!

Also not relevant but useful info- the participation exemption prevents a double cgt charge on liquidation of subsidiary. Just looked that up cause I'm a loser !

Pawwed Rig

Yeah the CGT is avoided through Participation exemption.

And I hate you for getting me to open my books again so soon:D

Check out Appendix 2 to Sim 3 in the core paper.
Do you think 29 February 2011 was an intentional error??;)

Thomas the Tax Agent

Eiriu wrote: »

The participation exemption is obvious enough- it was a trading company- the business must "wholly or mainly" consist of a trade, if more than 50 % of assets used for trade it's a trading company. It was a health spa not treasury holdings.

I don't think there was a need to state that.

The value of the shares did not come from the property on its own because the company would have been left with a liability if everything liquidated. Hence the shares were worthless without the trade. They did nt derive their value from land.

With all due respect, there's no "trading company test" or requirement for the business to "wholly or mainly consist of a trade" in Section 626B.

Section 626B would not apply to the disposal. The answer is there in black and white in the Section:

"The treatment of a gain, as not being a chargeable gain, provided by this section...shall not apply...to a disposal of shares deriving their value OR THE GREATER PART OF THEIR VALUE DIRECTLY OR INDIRECTLY FROM ASSETS SPECIFIED IN PARAGRAPHS (A) AND (B) OF SUBSECTION (3) OF SECTION 29..."

So if the company's shares derive the greater part of their value from "specified assets" (e.g. land or buildings in Ireland), then the participation exemption cannot apply.

I'm looking at the company's balance sheet right now. There are a few minor assets worth a total of €800k and a building worth €21m. We're told that the trade is loss making and has been for years (that's why they want out). There's an offer of €700k on the table for the shares. If the shares are worth €700k, what is the greater part of their value derived from? A specified asset obviously. Therefore the holding company exemption doesn't apply. The fact the building may or may not be in use for business purposes is irrelevant. Sure if that was the criteria, companies could shelter capital gains on property by just running a trade from the property and claiming 626B relief.

Eiriu

Pawwed Rig wrote: »

Yeah the CGT is avoided through Participation exemption.

And I hate you for getting me to open my books again so soon:D

Check out Appendix 2 to Sim 3 in the core paper.
Do you think 29 February 2011 was an intentional error??;)

Yes, it was just the one CGT charge think it was 750,000 on asset sale - I hope that does nt mean that there was no cgt whatsoever on asset sale?

Don't have my papers with me- what did that relate to?

Eiriu

Thomas the Tax Agent wrote: »

Eiriu wrote: »

The participation exemption is obvious enough- it was a trading company- the business must "wholly or mainly" consist of a trade, if more than 50 % of assets used for trade it's a trading company. It was a health spa not treasury holdings.

I don't think there was a need to state that.

The value of the shares did not come from the property on its own because the company would have been left with a liability if everything liquidated. Hence the shares were worthless without the trade. They did nt derive their value from land.

With all due respect, there's no "trading company test" or requirement for the business to "wholly or mainly consist of a trade" in Section 626B.

Section 626B would not apply to the disposal. The answer is there in black and white in the Section:

"The treatment of a gain, as not being a chargeable gain, provided by this section...shall not apply...to a disposal of shares deriving their value OR THE GREATER PART OF THEIR VALUE DIRECTLY OR INDIRECTLY FROM ASSETS SPECIFIED IN PARAGRAPHS (A) AND (B) OF SUBSECTION (3) OF SECTION 29..."

So if the company's shares derive the greater part of their value from "specified assets" (e.g. land or buildings in Ireland), then the participation exemption cannot apply.

I'm looking at the company's balance sheet right now. There are a few minor assets worth a total of €800k and a building worth €21m. We're told that the trade is loss making and has been for years (that's why they want out). There's an offer of €700k on the table for the shares. If the shares are worth €700k, what is the greater part of their value derived from? A specified asset obviously. Therefore the holding company exemption doesn't apply. The fact the building may or may not be in use for business purposes is irrelevant. Sure if that was the criteria, companies could shelter capital gains on property by just running a trade from the property and claiming 626B relief.

But if there was no trade the shares were worthless due to company being insolvent- why would foreign company offer to buy company if it would be cheaper to buy building?


Also look at this description here

It refers to wholly and exclusively for a trade

http://www.dilloneustace.ie/download/1/Holding Companies in Ireland.pdf


There was a massive loan of 18 m which happens to be the amount the company paid for the building. It was nt a free asset owned by company. The company if liquidated would have been in net liability position. Ie if you were an asset stripper you would pay 0 for the shares. The company did not essentially own this building.

So therefore how can you say that these shares derived their value from land in the state. Without the trade the shares were worthless- even with their building.

aca101

Eiriu wrote: »

The participation exemption is obvious enough- it was a trading company- the business must "wholly or mainly" consist of a trade, if more than 50 % of assets used for trade it's a trading company. It was a health spa not treasury holdings.

I don't think there was a need to state that.

The value of the shares did not come from the property on its own because the company would have been left with a liability if everything liquidated. Hence the shares were worthless without the trade. They did nt derive their value from land.

I think you're right on that...that's the approach I took as well anyway. Either way I think it was a really sneaky one from the examiner. Even in working in a tax practice that's not the kind of issue that is cut and dried and would definitely be open to scrutiny by Revenue. Clearly it was an attempt to trick students...I doubt they'd mark someone down to NC though for interpreting it the wrong way.

Thomas the Tax Agent

The building is worth €21m and there's €17.8m of long term debt on the balance sheet (i.e. positive equity of €3.2m).

The offer for the company's shares was €700k.

Pretty clear that the greater part of the value of the shares is derived from the building in my view.

Even if you include the uncrystallised CGT liability of €750k (25% of €21m less €18m), there's equity of circa €2.5m in the building.

If a company has €800k of miscellaneous assets, a building worth €21m, long term debt of €17.8m and current liabilities of €1.83m and the company's shares are worth €700k, it's difficult to argue that the shares do not derive the greater part of their value from the building.

Eiriu

http://www.accountancyireland.ie/Documents/digital/2008/February/pageflip.html pages 67-69

http://www.charteredaccountants.ie/taxsource/1997/en/act/pub/0039/nfg/sec0626B-nfg.html

read these articles and ask yourself again whether the participation exemption applies.


I just remember the company being in a net liability position if it liquidated the company. Were there employee termination costs mentioned on the paper as well or something?

It also said that the building had no development potential. It derived its value from being used in a trade.

If the purchasing company saw the value in this company as being in its assets then they to would have to pay these employee termination costs ect if they tried to realize this value. Hence it would also lose money. It would never buy the company if it just wanted the asset. It saw the future value as deriving from this trade;.


If the participation exemption does not apply I would be very surprised. The article above mentions the participation example as not applying to property development companies.


Thomas if the greater part of the companies value derived from the Building, then why would the purchasing company offer to buy the company with all the risk that entails, when it would leave them with less money on liquidation than buying the building alone?

Look I could be wrong but this is just how I see it. The difficulty of the exams was a lot higher this year than previous years.

ferike1

Look from what I see on these forums this is quite a contentious issue and there seems to be equal justification for the participation exemption to apply and not apply.

I can only delight in the mess the institute have painted themselves in with that question as either could be argued. Wonder how they would mark it.

Thomas the Tax Agent

There is no "oh the building is being used for a trade? Go ahead and claim the holding company exemption" rule.

The company derives its €700k value from bricks and mortar. Take away the €21m asset and the company has no value.

95% of its assets are specified assets. The fact that they're used for the purposes of a trade is irrelevant.

The legislation explicitly says with no caveats that if the majority of the company's value derives from a building, the participation exemption doesn't apply.

shery

I doubt much was said in the survey about tax indicator. It was certainly one of the trickiest on the paper and given there were hardly any other tax indicators, this could be a costly one. Is there a way this could be flagged to the board/CASSI or institute at this point?

hooch-85

Any idea when the CASSI report will be out?

shery

hooch-85 wrote: »

Any idea when the CASSI report will be out?

No clue!

Eiriu

Thomas the Tax Agent wrote: »

There is no "oh the building is being used for a trade? Go ahead and claim the holding company exemption" rule.

The company derives its €700k value from bricks and mortar. Take away the €21m asset and the company has no value.

95% of its assets are specified assets. The fact that they're used for the purposes of a trade is irrelevant.

The legislation explicitly says with no caveats that if the majority of the company's value derives from a building, the participation exemption doesn't apply.

But if one takes away the trade the company has no value?


The legislation specifically refers to the value of the shares- what does this derive from?

Also the legislation specifically refers to land- are land and buildings viewed as the same thing - because the land was worthless without the building.


Company - trade +building = -300,000 when you consider employee termination costs and other costs on liquidation. share value therefore 0.

Company +trade -building =0

Company + trade+building = 700,000 the company offered money for the company not the building.

The shares are worthless without either building or trade. If shares are worthless without trade then how can one argue that the majority of their value comes from building.


Judges are allowed interpret legislation in equitable fashion so who knows what way it might be viewed in court.

I think it's interesting that institute said- no development potential.

Given the nature of Mandalay it would hardly be viewed by revenue commissioners as a scheme to avoid cgt by the group by holding its property assets in a separate company. Which I think is the spirit of the legislation. No of employees years trading ect.

But Thomas if you've more experience in this field please let me know, I could be arguing with an expert.

I still think it would be possible to get RC or maybe C in the question by calculating the Cgt and mentioning the other standard stuff on asset/share sale even if wrong about participation exemption. The share sale still was the way to go.

I would love to hear the institutes views on this.