Ralph, aged 36, and Danielle, aged 33 are married for many years. The couple are jointly assessed for income tax purposes and have provided you with the following information: Ralph Ralph has been carrying on a business as a sole trader running a hardware shop for many years. He prepares his accounts annually to 31 July. The Statement of Profit or Loss for Ralphs business for the year ended 31 July 2020 is as follows: NOTES Sales 2,395,862 Less Cost of Sales (1,531,248) 864,614 Other income: Irish deposit interest (net of 33% DIRT) 1 1,400 Irish rental income 1 55,000 Irish dividends (gross of 25% DWT) 1 9,000 65,400 930,014 Less Expenses: Salaries and wages 2 267,240 Rent and rates 3 88,550 Motor and travel expenses 4 34,316 Bad and doubtful debts Interest on late payment of taxes 5 2,800 985 Interest on late payment of taxes Repairs and renewals 6 985 Repairs and renewals 6 30,500 Interest Depreciation 7 990 13,125 Depreciation 13,125 Insurance 8 11,850 Sundry expenses 9 11,080 (461,436) Net profit 468,578 Cont./ UCD 2020/2021 Page 4 of 19 Question 1 Cont./ Notes 1 Rental income Ralph had operated his business from a shop premises that he rented from an unconnected party for many years. On 1 September 2019 the business moved to a new shop premises. The market rent payable on the new shop premises was 48,000 per annum. On 1 September 2019 Ralph sub-let the old shop premises to an unconnected party at a rent of 5,000 per month. You have been advised that there will be no increases in the annual rental costs for the foreseeable future. Deposit Interest and Irish Dividends Income from Irish deposit interest and Irish dividends were earned in the period 1 January 2020 and 31 July 2020. This was the only deposit interest and dividends received by Ralph during 2020. 2 Salaries and wages Ralphs salary 94,000 Ralphs PRSI 3,760 Ralphs sister Patricia salary (gross before deduction of PAYE)* 32,000 Other employees salaries 124,500 Other employees PRSI 4,980 Pension contributions paid on behalf of employees 8,000 267,240 * Ralphs sister Patricia, an accountant, works part-time in the business. PAYE is operated on her salary and has been calculated as 3,000. Cont./ UCD 2020/2021 Page 5 of 19 Question 1 Cont./ 3 Rent and rates Rent of old shop premises 42,000 Rent of new shop premises 44,000 Rates on old shop premises 1,220 Rates on new shop premises 1,100 Bin collection from Ralph's home 230 88,550 4 Motor and travel expenses Lease payments on Ralphs car* 9,800 Motor expenses for Ralphs car* 4,366 Parking fines 150 Holiday for employee ` 2,400 Motor expenses for sales rep** 12,900 Write off of employee loan 1,600 Trip to France for trade fair 3,100 34,316 *Ralphs car had an original retail price of 32,000 when first leased on 1 December 2014. The car has CO2 emissions of 138g/km (Category C). Ralph estimates that he uses the car 30% for business purposes and 70% for personal purposes. **Ralph purchased two sales rep motor vehicles on 21 November 2017 and has provided you with the following details: 1. Car 1 Retail price 20,000 Category A 2. Car 2 - Retail price 30,000 Category D Cont./ UCD 2020/2021 Page 6 of 19 Question 1 Cont./ 5. Bad and doubtful debts Bad debts written off as irrecoverable 5,000 Bad debts recovered (3,000) Decrease in specific bad debt provision (2,100) Increase in general bad debt provision 2,900 2,800 6 Repairs and renewals Cash registers* 12,500 Computers ** 8,000 New alarm system for new shop premises (installed July 2020) 10,000 30,500 *Ralph purchased new cash registers for the new shop premises in December 2019 and these were put into use in the business immediately. ** Ralph purchased new computers on 27 July 2020 which were delivered to the shop premises on 2 August 2020. 7 Interest Interest on loan to acquire cash registers 600 Interest on working capital current account 390 990 8 Insurance Property insurance on old shop premises 3,000 Property insurance on new shop premises 1,500 Public liability insurance 4,750 Home insurance for Ralphs house 2,600 11,850 Cont./ UCD 2020/2021 Page 7 of 19 Question 1 Cont./ 9 Sundry expenses Business telephone 1,200 Business light and heat 2,950 Ralphs mobile phone* 850 Staff Christmas party 350 Gifts to corporate customers 900 Accountancy fees 2,900 Donation to registered charity 800 Donation to political party 630 Subscription to trade journal 500 11,080 *Ralph estimates that his phone is used 20% for business purposes. Ralph has also provided you with the following information: Ralph paid the following from his personal bank account: 1. On 1 December 2020 60,000 into his personal pension plan. 2. Preliminary tax of 24,000 for 2020 Danielle (Ralphs wife): On the 1 April 2020 Danielle purchased a residential property in Dublin. Danielle took a loan to fund the purchase and paid 3,000 loan interest in 2020. Danielle has provided you with the following information regarding the property: The property was first let on 1 June 2020 Before letting the property was painted at a cost of 1,400 Gross annual rental income 24,000 was agreed Advertising costs to locate a tenant of 600 were paid in May 2020 Legal fees in connection with signing the lease of 500 were also paid in May 2020 Danielle is registered with the RTB and paid 40 fee General repairs costing 1,000 were paid in September 2020 Danielle agreed to pay a builder 14,000 to extend the kitchen. This payment was made in July 2020. During 2020 the couple paid qualifying medical expenses of 5,200. 1,000 was refunded by their private health insurer. Cont./ UCD 2020/2021 Page 8 of 19 Question 1 Cont./ REQUIREMENTS: Ralph and Danielle have asked you to: Part (a) 30 marks 1) Calculate Ralphs capital allowance claim for 2020 including the TWDV at 31 December 2020. 2) Compute Ralphs Case I taxable profits after capital allowances (calculated in part (1) above) for 2020. 3) Compute Ralph and Danielles total taxable income for 2020. 4) Calculate Ralph and Danielles income tax payable/refundable for 2020. (You can ignore PRSI and USC) 5) On what date should Ralph and Danielle file their 2020 income tax return to avoid surcharge for late filing of a return. Part (b) 10 marks Briefly explain to Ralph and Danielle your calculations and/or adjustments for the following: (Bullet point answers are acceptable) 1. Lease payments of Ralphs car 2. Danielles Case V rental expenses claim 3. Ralphs pension relief claim Cont./