XSI

[Mbotha]

When is a company XSI and what are the implications?

For BLAGAB funds, in the case of the minimum profits test biting and min. profit being > I, I is increased so that min. profit = I. This increase in I is treated as XSE (?) but is it referred to as XSI?

 

[Lindsay Smitherman]

A mutual is said to be XSI if BLAGAB I>E.
A proprietary is said to be XSI if BLAGAB I-E exceeds the minimum profit (excluding dividends), i.e. the minimum profits test does not bite.

If the minimum profit test bites in a proprietary BLAGAB fund, then this means that profit (excluding dividends) is greater than I-E. [And this would be deemed to be an XSE company.]

The excess of profit (excluding dividends) over {I-E} is the Excess E (or "XSE"). Effectively, E in that tax year is reduced by this amount of XSE, so that profit becomes equal to I-E. The XSE is carried forward to the following year and used to increase E (and thus hopefully reduce tax payable).

If the amount of XSE is greater than E, then there is an additional consideration - which is what I think you might be asking about? In such a case, E is reduced to zero (and XSE=E is carried forward) but also I needs to be increased in order to get profit = I-E in the current tax year. This increase in I is known as XSI and is carried forward into the next tax year - where it is treated as a deduction from I (i.e. again used to reduce tax).

Hope that is a bit clearer. This is a tricky part of the tax rules!

 

[Devang Lohia]

Hi Lindsay,

Thanks a lot for such a clear and crisp explanation!

Just to confirm, a mutual will be XSI if I>E for BLAGAB business under BLAGAB I-E computation.

But in this case tax will be charged at the policyholder rate on the BLAGAB I-E and nothing would be carried forward to the next financial year?

Whereas in the scenario where (Minimum Profit > I in the Adjusted I-E (including dividend income)) then E is reduced to 0 and I is increased so that the following holds -

Minimum Profit (BLAGAB Trading profit including dividend income) = Original I-E (without dividend income)

And this scenario is both XSE and XSI with XSE being added in next year's BLAGAB I-E and XSI being reduced from the BLAGAB I-E in the next financial year?

Is the above correct?

 

[Lindsay Smitherman]

Hi

Actually, the Core Reading has changed in this respect since I wrote the reply back in April 2017 (it includes more detailed information on how XSE is dealt with in the tax accounts and this part of the CMP has correspondingly been rewritten) so we would now have a slightly different answer to this!

Just to confirm, a mutual will be XSI if I>E for BLAGAB business under BLAGAB I-E computation.

But in this case tax will be charged at the policyholder rate on the BLAGAB I-E and nothing would be carried forward to the next financial year?

Yes - this is correct.

Whereas in the scenario where (Minimum Profit > I in the Adjusted I-E (including dividend income)) then E is reduced to 0 and I is increased so that the following holds -

Minimum Profit (BLAGAB Trading profit including dividend income) = Original I-E (without dividend income)

And this scenario is both XSE and XSI with XSE being added in next year's BLAGAB I-E and XSI being reduced from the BLAGAB I-E in the next financial year?

Bear in mind that the minimum profits test is only relevant to a proprietary company. Also, a company would never be said to be both XSI and XSE. If minimum profit > I-E (ie the minimum profits test bites) then the company is XSE.

Irrespective of whether minimum profit > I or not, the following two things happen when the company is XSE:

• in the current tax calculation, a 'minimum profits charge' (equal to the amount of XSE, ie the excess of minimum profit over I-E) is added to I-E; this means that now we have I-E = minimum profit in this year's tax computation
• in the next year's tax calculation, the same amount is added to E

Because the XSE is being dealt with in the current tax calculation as an explicit addition to I-E (you can see a line for the 'minimum profits charge' in the example tax computation that is now included in the Core Reading), rather than as a deduction from E, we no longer have to worry about situations where we don't have enough E to be able to do this.

So the original question in this thread is no longer anything to be concerned about; the part of the course that used to talk about this possible carry forward of I is no longer there as it is no longer relevant (replaced by the 'minimum profits charge' approach).

Hope that helps.

 

[Calm]

Hi

Actually, the Core Reading has changed in this respect since I wrote the reply back in April 2017 (it includes more detailed information on how XSE is dealt with in the tax accounts and this part of the CMP has correspondingly been rewritten) so we would now have a slightly different answer to this!

I would like to ask, in more general terms, if this means that if you are re-sitting a paper (and therefore using old course notes) then the model answer (then) won't necessarily get you the full marks if the course reading happened to change some points since then?

 

[Lindsay Smitherman]

I would like to ask, in more general terms, if this means that if you are re-sitting a paper (and therefore using old course notes) then the model answer (then) won't necessarily get you the full marks if the course reading happened to change some points since then?

Yes, you are correct. You should be using the most up-to-date Core Reading as that is what the exams & their marking schedules will be based on. This is particularly important for the SA examinations, which will be regularly updated to reflect legislative and regulatory changes. And of course there have been much more significant changes to many of the subjects for the 2019 Syllabus refresh.

So, for example, for the April and September 2019 exams you should be using the 'Core Reading for 2019 Examinations', which is contained in the latest version of the CMP which also refers to the 2019 Examinations on its cover.