Hello, I have a very basic question. When we calculate 'I' part for tax purpose, why are we not considering premium? We just consider investment income and capital gains per Core Reading. Please clarify. Thank you
Similarly, what is the reason for not deducting claims as a part of insurer's expenses? I understand that we surely need to consider claims and premium while calculating profit as we do for non-BLAGAB but technically, these items also affect income and expenses of insurer.
Hi This is because I-E is trying to cover both shareholder and policyholder profit and so the premiums received by insurer are negated by the premiums paid by the policyholder, ie: Shareholder profit = premiums (P) + investment return (I) – expenses (E) – claims (C) = P + I – E – C. Policyholder profit = C-P And so adding the two we get I-E. This is shown on page 3 of Chapter 6 in the course. Hope this helps. Em
Hi @Francis, I've two questions from Tax chapter. Please could you help. 1) Why in 'I-E' basis, 'I' excludes dividend income from equities and unrealized gains on equities and property? 2) Additionally, why this 'I' calculation/definition in 'I-E' basis is different to the 'I' definition in profit calculation: (P-C)+(I-E)-(V1-V0)?
In my opinion, dividend income is already taxed at source when distributed hence if insurer includes it again in I, it will be subject to double taxation so we don't include dividend income from equity. It will be helpful to clarify what exactly dividend income means here also. Is it the dividend received on the equity investments held by the company which doesn't support policyholder liabilities? When we refer to deducting this dividend income for calculating adjusted minimum profit, is it referred as 'shareholder's share of dividends' because we only want to include dividend from equity which supports policyholder liabilities? Hence, remaining dividend on equity would by default be attributable to shareholders in a proprietary company and we would not want to include this due to tax already being deducted at source on distribution when insurance company receives it. Please confirm.
The simple answer is because this is what the tax rules state - at least in the UK! The better answer is: Yes, as indicated in the response above, dividend income from equities is excluded because it has already been taxed at source (dividends are paid from companies' post-tax profits) - so its exclusion here avoids double taxation. Capital gains on equities and property are generally only taxed when they are realised because that is the only point at which the gain is actually known. Taxing unrealised gains on property, for example, would require robust valuations of the property at each tax date (which the tax authorities would have to audit and agree) - which creates more work. And unrealised gains on such assets can easily disappear - and how to deal with unrealised losses? If a company were taxed on a 25% gain in equity values one year, and then the following year the markets corrected and equities fell in value by 25%, the tax authorities would effectively have to pay back the tax they had taken in the previous tax year! So taxing the gains only when they are realised is more practicable.
I think this is largely addressed by the points above? There aren't the same adjustments made to the profit calculation (a) to make it more straightforward (just taking the figure from the accounts) and (b) because there is some offset from the deduction of the change in reserves. For example, unrealised gains on equities backing unit-linked business would be included in the 'I' for the profit calculation, but would also increase the unit reserves (part of V1) - and hence cancel each other out.
No - it means all dividends received by the company from equity holdings, whether or not they support p/h liabilities.
We need to deduct dividend income from minimum profit in order to be able to compare 'like for like' with I-E, since dividends are excluded from I-E. However, we only deduct the shareholders' share of dividend income, because the p/h share would also be part of the V1 deduction (investment earnings would increase the reserves for unit-linked / with-profits business through increasing the unit fund / asset share) and therefore would already have 'disappeared' from the minimum profit calculation through the offset between I and (V1-V0).
