SA2-07: Taxation (2) Practice question 2

[yuli2513]

Hi,

I do not fully understand the answer to Q2.

Here the corporation tax is calculated as (BLAGAB profit + Non-BLAGAB profit) * corporation tax rate = (250 + 260) * 25%.
However, although the Non-BLAGAB profit should be taxed based on the trading profit, the BLAGAB part should be taxed on 'I - E' basis. The BLAGAB I - E is given as 520. I do not fully understand why the BLAGAB profit of 250 is used instead here.

And on policyholder tax, it is calculated as (BLAGAB I - E - BLAGAB profit) * policyholder tax rate = (520 - 250) * 20% according to the answer given. Apparently there is no tax to policyholder for the Non-BLAGAB profit, but I do not know why. In addition, I also do not understand why it is calculated as (BLAGAB I - E - BLAGAB profit) for the amount the tax is applicable for policyholder.

Could someone help?

 

[Lindsay Smitherman]

This is all explained through that chapter. It's a proprietary company so:
Non-BLAGAB: taxed on profit, at the corporation tax rate.
BLAGAB: taxed on I-E total taxable amount, but with the minimum profits test applying - including being used to split the taxable amount into shareholder share and policyholder share. The minimum profit (ie the shareholder share) is taxed at the corporation tax rate, then any excess of I-E over that amount (ie the policyholder share) is taxed at the policyholder tax rate.

 

[yuli2513]

This is all explained through that chapter. It's a proprietary company so:
Non-BLAGAB: taxed on profit, at the corporation tax rate.
BLAGAB: taxed on I-E total taxable amount, but with the minimum profits test applying - including being used to split the taxable amount into shareholder share and policyholder share. The minimum profit (ie the shareholder share) is taxed at the corporation tax rate, then any excess of I-E over that amount (ie the policyholder share) is taxed at the policyholder tax rate.

Thank you Lindsay.