Advising clients in "Post Tiger" days
Mark Doyle takes a look at the current business environment and points out why it’s not all doom and gloom.
The Irish business community is feeling the effects of the recession. Asset values have fallen significantly and cash-flow is the overriding concern. It is not all doom and gloom however. This may be the perfect opportunity to step back for a moment and reassess one’s tax position and take advantage of the new landscape.
This article will focus on some key areas faced by our clients such as falling asset values and deteriorating cash-flow as well as recapping issues faced by professional advisors not seen since the pre Tiger days. It is important that accountants identify opportunities for their clients and add much needed value to their business and finances.
Passing Wealth to the Next Generation
The value of assets has plummeted, be it property, business assets or listed investments, now is the time to consider passing such assets to the next generation. All taxes on gifts (CAT, CGT and stamp duty) are based on current market value. Where appropriate, it may be worth advising clients to consider accelerating any gifts they had planned to make to their children in the future. Gifting at a low value now should have minimal tax costs and will allow wealth to accrue to the children from now on. Valuable CAT thresholds will also be preserved for any further gifts or inheritances received in the future.
It is also worth considering crystallising CGT losses on shares at this stage; by locking in CGT losses now, they can effectively create a gross roll up vehicle and
save tax on gains now when cash is tight. Locking in losses is not as straightforward as it seems and advice of a stockbroker should be sought to ensure appropriate commercial exposure is retained. Also consider the following tax provisions:
- Connected persons – do not sell the investment to a connected person if you want to be able to offset the loss against other gains.
- Bed and Breakfast transactions – make sure you do not buy back into shares of the same class in the same company within the next 4 weeks or the loss will not be generally available. Commercial exposure to the shares can usually be maintained by the use of CFDs and other structures.
- Some investments such as Exchange Traded Funds or iShares are traded on a stock exchange but in general they are still funds. Losses on domestic and most other funds are not allowable CGT losses.
It is possible in certain circumstances to circumvent the connected party provisions; this is particularly desirable where one wants to take advantage of the latent tax losses of an asset while still maintaining control of that asset.
Development Land Losses – Individuals & Partnerships
Many accountants will be faced with finalising land dealing accounts for partnerships and individuals and for the first time in many years will be faced by the prospect of losses due to the falling value of land and the stagnating property market. The advisor must then consider how to best utilise those losses.
It is worth noting that taxpayers may elect not to apply the relief in s644A TCA 1997 which applies the 20% tax rate to profits arising on the sale of “residential development land”.
S644A(5) TCA 1997 states the following; “This section shall not apply to profits or gains arising to a person in a year of assessment if that person so elects by notice in writing to the Inspector on or before the specified return date for the chargeable period”
Any losses then arising on residential land may be used to offset total income arising to the taxpayer under s381 TCA 1997.
It is arguable that as s644A TCA 1997 applies only to subject “profits and gains” to the 20% tax rate that no election is required in order to allow any losses to be offset against total income from other sources. This is far from clear-cut.
Even so, it may be best to make the election unless the taxpayer has profits on some residential developments and losses on others in the same year of assessment.
The ability to shelter other income from tax by offsetting losses in this manner is a valuable relief for taxpayers and advisors should be cognisant of this when preparing tax returns for their clients.
Further difficulties arise where partnerships carry on a trade of dealing in land as the limited partnership provisions of s1013 TCA 1997 take effect (note: limited partnership in this context does not only mean a limited liability partnership, in effect almost all partnerships could be caught).
“Limited partner”, in relation to a trade, means –
- a person who is carrying on the trade as a limited partner in a limited partnership registered under the Limited Partnerships Act, 1907; or
- a person who is carrying on the trade as a general partner in a partnership, who is not entitled to take part in the management of the trade and who is entitled to have his liabilities, or his liabilities beyond a certain limit, for debts or obligations, incurred for the purposes of the trade, discharged or reimbursed by some other person; or
- a person who carries on the trade jointly with others and who, under the law of any territory outside the State, is not entitled to take part in the management of the trade and is not liable beyond a certain limit for debts or obligations incurred for the purposes of the trade; or
- a person who carries on a trade as a general partner in a partnership otherwise than as an active partner (in practice this is the most common limited partner as to qualify as an active partner one must work for the greater part of ones time on the day to day management of the trade; not likely with land development trade).
Thus, limited partner is defined in such terms that all partners participating in a limited way, or with limited liability, are included, whether the limitation is achieved by means of a limited partnership registered as such or by some other means. This is particularly applicable to land dealing partnerships as it would be difficult to contend that a person spends the greater part of their day to time involved in such an activity.
The general rule is that relief is only available for losses against profits of the trade which generated the relief; obviously in a loss making year no relief would be due (relief under s381 TCA 1997 is heavily restricted).
It should be noted that terminal loss relief is not restricted under s1013 TCA 1997; if the cessation of the trade or partnership can be engineered correctly losses realised can be carried back against profits of the preceding 3 years. This can represent a significant tax refund in many cases. Specialist advices should be sought to ensure loss relief is maximised as there are a number of hidden traps to avoid.
Cash Flow Saving – Review Basis of VAT Payments
Under the invoice basis of accounting for VAT one must pay over VAT for the VAT period in which the invoice is raised. Under the cash receipts basis, one does not account for VAT until receipt of payment for the goods and services supplied. In a time where there is a longer delay in invoices being paid business may consider changing to a cash receipts basis (subject to application to Revenue
The cash receipts basis applies where:
- Annual turnover does not exceed or is not likely to exceed 1,000,000.
- Supplies of goods or services are at least 90% made to unregistered persons or to persons who are not entitled to claim a full deduction of the tax chargeable on the supply to them.
Change of Accounting Year-end
A change of accounting year-end can be a useful way of reducing the tax burden for sole traders and partnerships of a profitable period by combing such profits with profits of a less successful period (useful in the current environment when profits are dropping). The extension of an accounting period has the effect of averaging profits over a longer period; this diminishes the tax burden of a more profitable period. This technique requires careful management to ensure the desired result is achieved.
Extraction of Investment Assets from a Company
It may be worth considering extracting investment assets from a company into the personal account of the shareholders. There would obviously be a commercial risk attaching to this transaction; the benefit would be that potential future increase in value would accrue to the shareholders and not the company.
Advisors should try and bring positive opportunities to their clients – especially within the current economic environment.
This article first appeared in Accountancy Plus magazine.