When is the date of disposal of an asset for CGT purposes?

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When is the date of disposal of an asset for CGT purposes?

The recent Court of Appeal decision in Sean Flaherty v. The Revenue Commissioners has significant implications for tax advisors, particularly regarding the interpretation of the “date of disposal” for Capital Gains Tax (CGT) purposes. This case highlights the importance of understanding contract conditions and their impact on the date of the disposal of an asset for CGT purposes.

 

Case Background:

Sean Flaherty, a fisherman from Rossaveal, County Galway, disputed the “date of disposal” of his fishing vessel, Glór na dTonn, with the Revenue Commissioners. Flaherty argued that the disposal occurred after January 1, 2016, making him eligible for Entrepreneurial Relief from CGT. The Revenue Commissioners contended that the disposal occurred on October 21, 2015, making the relief unavailable.

The key dates in question were:

  • Contract Date: October 21, 2015
  • First Payment: December 17, 2015
  • Bill of Sale: December 21, 2015
  • Fishing Licence Issued: January 11, 2016
  • Second Payment: January 19, 2016
  • Final Payment: February 10, 2016

 

Legal Arguments:

  • Flaherty claimed that the contract was conditional, and the disposal date should be after January 1, 2016.
  • The Revenue Commissioners argued that the contract was unconditional, and the disposal date was October 21, 2015.

 

Tax Appeal commission and High Court judgements:

The Tax Appeal Commission found that the contract in question was an unconditional contract and the date of disposal for CGT purposes was 2015, the consequence of this was that Entrepreneurial Relief was unavailable to Flaherty. This Tax Appeal Commission determination was appealed by Flaherty to The High Court which found in favour of the Revenue Commissioners. Flaherty appealed this decision, arguing errors in contract interpretation and the application of the business efficacy test.

 

Court of Appeal Judgment:

Following an extensive discussion on conditional contracts, The Court of Appeal upheld The High Court’s decision, confirming that the contract was unconditional and the “date of disposal” was October 21, 2015.

Taking a tax appeal

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Taking a Tax Appeal

Navigating the tax appeal process in Ireland can seem daunting, but understanding the steps involved can make it more manageable.

1. Understanding the Grounds for Appeal

Before initiating an appeal, it’s crucial to understand what decisions can be appealed. Generally, only tax assessments or decisions made by the Revenue Commissioners can be appealed but not other matters such as the conduct of Revenue officials.

2. Submitting a Notice of Appeal

The appeals process is started by submitting a Notice of Appeal to the Tax Appeals Commission. This form can be completed online or in paper form. Along with the Notice of Appeal there should be included a copy of the Notice of Assessment or the decision letter from Revenue that is the subject of the appeal.

3. Timeframe for Submission

There is limited time to submit an appeal. Typically, the Notice of Appeal must be filed within 30 days from the date on the Notice of Assessment or decision letter albeit extensions can be available in certain circumstances.

4. Meeting Conditions for a Valid Appeal

Certain conditions must be met for an appeal to be considered valid, an appeal can only be made where the law gives a right of appeal. The Tax Appeals Commission only deals with tax assessments and final decision letters issued by Revenue. Typically, when there is a right of appeal the notice of a tax assessment or final decision letter from Revenue will make this clear.

5. Revenue’s Response

Once an appeal is submitted, the Tax Appeals Commission will forward a copy to Revenue. Revenue has 30 days to object to the acceptance of an appeal, stating their reasons in writing. If Revenue objects, the appellant will be notified and given 14 days to respond to their objections.

6. Acceptance of the Appeal

The Tax Appeals Commission will decide whether to accept or reject an appeal based on the information provided and any objections from Revenue. If an appeal is accepted, the Commission will proceed with the appeal process. When an appeal is accepted the Appeal Commissioner will likely direct the submission of Statement of Case which includes various details (e.g. the facts of the case, what statutory provisions are being relied upon etc).

7. The Hearing Process

If an appeal is accepted, a hearing will be scheduled. The hearing is an opportunity for the appellant to present their case and for Revenue to respond. An appellant may represent themselves or they may engage an agent to represent them.

8. Decision and Further Appeals

After the hearing, the Tax Appeals Commission will issue a decision. If either party (the appellant or Revenue) are not satisfied with the decision, they have the option to appeal to a higher court, depending on the grounds of dissatisfaction.

Conclusion

Taking a tax appeal in Ireland involves several steps, from submitting a Notice of Appeal to potentially attending a hearing. Understanding these steps can help you navigate the process more effectively and ensure that your appeal is handled fairly.

Contact one of our team for assistance.

Mark Doyle – mark@circulo.ie

Amanda Comyn – amanda@circulo.ie

Gearalt O’Neill – gearalt@circulo.ie

Minority discounting for share transfers

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In an interesting decision (198TACD2024), the Tax Appeals Commission has ruled in favour of a taxpayer quashing an assessment to capital gains tax (CGT) in the amount €2,220,625. The case revolved around the gift of shares in a company and the application of a minority discount in the valuation of the shareholdings.

Case Background

The appellant had gifted a 100% shareholding between a number of beneficiaries and applied a 30% minority discount to the shareholding value in calculating CGT. The gifts were completed at the same time but documented separately under a number of deeds. Revenue issued an amended assessment, arguing that no minority discount was applicable, resulting in a higher CGT liability.

Evidence and Submissions

Revenue argued that, on the basis of prudent lotting, the appellant should be treated for tax purposes as disposing of a 100% shareholding to one purchaser (i.e. that no minority discount should apply). The appellant argued that each shareholding that was gifted should be valued separately with a 30% minority discount applying.

Commissioner’s Analysis

The Commissioner examined the relevant legal principles and case law, concluding in favour of the appellant that each disposal (i.e. each gift) must be considered separately for CGT purposes. The principle of “prudent lotting” was deemed not applicable to CGT and had no legislative basis, which was the crucial point in the Commissioner’s determination.

This case highlights the complexities of CGT assessments and the critical role of accurate shareholding valuations in determining tax liabilities.

Tax implications of share buybacks

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Broadly, a company share buyback offers a mechanism whereby a shareholder can dispose of their shares in a company to the company itself for consideration, however, a company share buyback can generate unanticipated tax costs.

Where a company buys back its shares for a price above the subscription price for the share any amount in excess of the subscription price can be treated as a distribution by the company subject to income tax at marginal rates in the hands of the shareholder. Provided certain conditions are satisfied a shareholder may avail of capital gains tax treatment on the buyback rather than income tax, this is commonly referred to as share buyback relief. This relief can be useful where a shareholder would be otherwise unwilling to dispose of their shares in the company due to the prospect of a significant income tax charge on a share buyback.

Main conditions for share buyback relief

Broadly, the main conditions for share buyback relief to apply are as follows:

  1. The company buying back its shares must be wholly or mainly a trading company or the holding company of a trading company.
  2. The buyback cannot form part of a scheme to avoid income tax on distributions (dividends).
  3. The exiting shareholder must be both tax resident and ordinarily tax resident in Ireland in the tax year in which the share buyback takes place.
  4. The exiting shareholder must have owned the shares for a period of at least five years ending on the date of disposal (this ownership test can be modified in certain circumstances).
  5. The share buyback must be wholly or mainly be undertaken to benefit the company’s trade.
  6. The exiting shareholder’s remaining shareholding (if any) in the company post buyback must be substantially reduced. It is important to note that shareholdings held by certain associates aggregate for the purposes of this test.
  7. The exiting shareholder must no longer be connected with the company post buyback, again it is important to note that shareholdings held by certain associates aggregate for the purposes of this test.

Trade Benefit Test

As noted above, in order to qualify for capital gains tax treatment, the buyback must be wholly or mainly undertaken to benefit the company’s trade. Revenue outlined in Tax Briefing 25 that they will normally regard a buyback as benefiting the trade where:

  • The purpose is to ensure that an unwilling shareholder who wishes to end his/her association with the company does not sell the shares to someone who might not be acceptable to the other shareholders.
  • There is a disagreement between the shareholders over the management of the company and that disagreement is having or is expected to have an adverse effect on the company’s trade and where the effect of the transaction is to remove the dissenting shareholder.

Examples of this would include:

  • A controlling shareholder who is retiring as a director and wishes to make way for new management.
  • An outside shareholder who has provided equity finance and wishes to withdraw that finance.
  • A legatee of a deceased shareholder, where she/he does not wish to hold shares in the company.
  • Personal representatives of a deceased shareholder where they wish to realise the value of the shares.

Conclusion

Share buybacks are commonly used in practice as a means of facilitating a disgruntled shareholder to exit a company for consideration and also as a means of facilitating inter-generational succession planning. To discuss share buybacks with us please contact either Mark Doyle (mark@circulo.ie) or Amanda Comyn (Amanda@circulo.ie).

Business Asset Relief and Excess Cash

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In this article, Mark Doyle and Gearalt O’Neill discuss the impact of cash balances on a claim for CAT Business Asset Relief.

Read more

Private company valuation for tax purposes in Ireland

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Introduction

The valuation of private companies for tax purposes holds significant importance within the Irish tax system. It plays a crucial role in accurately assessing the tax liability of shareholders in many different circumstances. Valuations undertaken for tax purposes must be guided by the relevant legislation for each tax head and often the valuation adopted for one tax head (e.g. CGT) may be different to the valuation adopted for second tax head (e.g. stamp duty). Where shares in a company are valued incorrectly, Revenue may impose penalties and interest on any under declared tax liabilities.

Capital Gains Tax (CGT)

The relevant legislation for determining the valuation of shares for Irish CGT purposes is section 548 TCA 1997. Shares are to be valued at “market value” which means the price those shares may reasonably be expected to fetch on a sale in the open market. In valuing those shares no reduction in value is to be made on the assumption that selling all of the shares at the one time would result in a lower price being fetched. Where the shares to be valued are not quoted on a stock exchange at the time at which their market value is to be determined it is to be assumed that there is available to any prospective purchaser of the shares all of the information which a prudent purchaser of those shares might reasonably require if such purchaser was proposing to purchase the shares from a willing vendor by private treaty at an arms length.

Capital Acquisitions Tax (CAT)

The relevant legislation for valuing shares for CAT purposes is section 26 CATCA 2003. Shares are to be valued at “market value” which is to be taken to be the price which such shares would fetch if sold in the open market on the date on which the share is to be valued in such manner and subject to such conditions as might reasonably be calculated to obtain for the vendor the best price for the shares. As with valuation for CGT purposes, no reduction in value is to be taken for any assumed decrease in value if all of the shares were sold at the same time, also any prospective purchaser is assumed to have all of the relevant information available to them pertaining to the shares and the company. However, section 27 CATCA 2003 contains specific provisions in relation to the valuation of shares in private companies for CAT purposes which will often create significant divergence between the valuation adopted for CAT and for other taxes. Broadly speaking, section 27 prevents the application of minority discounting to any group of shares that is under family control.

Stamp Duty

The relevant legislation for valuing shares for stamp duty purposes is contained in section 19 SDCA 1999. Shares for stamp duty purposes are valued in the same fashion that they are valued for CAT purposes, however the provisions of section 27 CATCA 2003 do not apply to determine the value of shares for the purposes of stamp duty (i.e. minority discounting does apply for stamp duty purposes).

Conclusion

By recognizing the significance of company valuation, shareholders of private companies in Ireland can effectively manage their tax obligations. Circulo have significant experience in valuing shares in private companies for all tax purposes. For further information please contact mark@circulo.ie or amanda@circulo.ie.