Shareholder tax I-E calculation (Chapter 7)

[eroche1]

In Chapter 7 of the notes page 5, there is an example that shows the following:
Policyholder BLAGAB I-E tax = tax rate * (BLAGAB I-E Profit - minimum profit)
20%*(200-110)

Directly underneath this there is a question (7.1). The solution for the I-E part of this question is as follows:
BLAGAB Policyholder Tax = tax rate * (BLAGAB I-E profit - shareholder unfranked income)
20%*(520-250)
and BLAGAB Shareholder tax = tax rate * shareholder unfranked income
24%*250

Is the solution to this question correct? To be consistent with the example should it not be as follows:
BLAGAB Policyholder Tax = tax rate * (BLAGAB I-E profit - minimum profit)
20%*(520-300)
BLAGAB Shareholder tax = tax rate * shareholder unfranked income
24%*250

If the original Acted solution is correct then the BLAGAB dividend income of 50 is only taxed at 20%. Why is this this assumed to be all policyholder income?

Thanks

 

[Flamy]

In the bottom paragraph of page 4, it says "for initial simplicity we shall assume in the first example that there is no dividend income". So the first example did not consider dividend income, if it had, I think the formula would have been BLAGAB I-E profit - shareholder unfranked income (same as the second example). Hope this helps.

In Chapter 7 of the notes page 5, there is an example that shows the following:
Policyholder BLAGAB I-E tax = tax rate * (BLAGAB I-E Profit - minimum profit)
20%*(200-110)

Directly underneath this there is a question (7.1). The solution for the I-E part of this question is as follows:
BLAGAB Policyholder Tax = tax rate * (BLAGAB I-E profit - shareholder unfranked income)
20%*(520-250)
and BLAGAB Shareholder tax = tax rate * shareholder unfranked income
24%*250

Is the solution to this question correct? To be consistent with the example should it not be as follows:
BLAGAB Policyholder Tax = tax rate * (BLAGAB I-E profit - minimum profit)
20%*(520-300)
BLAGAB Shareholder tax = tax rate * shareholder unfranked income
24%*250

If the original Acted solution is correct then the BLAGAB dividend income of 50 is only taxed at 20%. Why is this this assumed to be all policyholder income?

Thanks

 

[benny wang]

I asked the exact same question a few month ago, it was really confusing at the time.

on page 11
it says, if the minimum profits test does not bite [which is the case in the question] then:
an amount of I-E eqaul to that part of the minimum profit not derived from dividends is taxed at the corp rate [ie 250]

the balance is taxed at P/H rate

which is exactly what the solution is doing.

hope this helps

 

[Genesiss]

the Q&A do not have enough questions to exercise one's brain on taxation matters

 

[eroche1]

I think I figured out a better way of answering this question than is shown in the notes.

The Minimum profit includes dividends but the i-e figure does not, you therefore need to calculate an adjusted I-E figure to compare to mimimum profit.

For the I-E part of Calc in 7.1
There is Dividends of 50 which means adjusted I-E = 520+50 = 570
Mimimum profit (including dividends) = 300
Therefore Ph Tax is on 570-300 @20% = 270*0.2 = 54
Shareholder Tax is on shareholder unfranked income (300-50) = 250 @24% = 60

We have therefore calculated tax on shareholder profit and ph profit but not on the dividends, for the i-e business.
You need then to add on the OLTB tax

 

[SABeauty]

Tutors - is this approach correct?

 

[Mark Willder]

The Minimum profit includes dividends but the i-e figure does not, you therefore need to calculate an adjusted I-E figure to compare to mimimum profit.

For the I-E part of Calc in 7.1
There is Dividends of 50 which means adjusted I-E = 520+50 = 570
Mimimum profit (including dividends) = 300
Therefore Ph Tax is on 570-300 @20% = 270*0.2 = 54
Shareholder Tax is on shareholder unfranked income (300-50) = 250 @24% = 60

We have therefore calculated tax on shareholder profit and ph profit but not on the dividends, for the i-e business.
You need then to add on the OLTB tax

Tutors - is this approach correct?

Yes this method is correct.

Best wishes

Mark