Taxation - Chapter 6 Course Notes

[revillon]

Tax is an interesting section in SA2, but I am quite curious about some questions. If someone could provide some enlightenment, that would be deeply appreciated!

1) Pg 3 - LRB: Life Reinsurance Business taxation covers reinsurance received by the company, not reinsurance out. Does this mean if the company writes reinsurance business (carrying out reinsurance business), then profits from this business is taxable? If so, then what is the tax treatment? Is it covered in the SA2 syllabus?

2) Pg 5 - BLAGAB taxation: Indexation of I is mentioned as an incenctive as it can be used to reduce gains. Does this mean I real is taxable and it reduces gains because I real = I nominal / (1+inflation rate) and thus I real < I nominal?

3) Pg 8 - BLAGAB taxation: BLAGAB expenses includes postponed acquisition expenses from previous years. Since acquisition expenses are spread over 7 years, shouldn't every year's E only include 1/7 of the tax year's acquisition expenses? Why does it still include the postponed acquisition expenses?

4) Question 6.2: second paragraph of solution 6.2: Some other investors also prefer "capital gain"....should it be prefer "income gain"?

Something on the back of my mind when I was thinking about BLAGAB and PB (OLAB, etc) was why the fomrer uses the I-E approach while the latter computes profit using the change in reserves approach...

Cheers.

 

[Lynn Birchall]

Hi revilon

Hope the studying is still going ok

Some short responses to the points you mention:

1 Yes it is referring to carrying out reinsurance business. No, it's not covered by the SA2 syllabus.

2 Yes. Indexation is usually applied to the amounts of gain (eg a gain of 100 reduced by an inflation index might become a gain of 60) rather than to a rate of return, i, but that doesn't affect the principle.

3 Suppose a company has BLAGAB acquisition expenses of 700 (I like easier numbers!) this tax year, year X. Then 700/7=100 of these will be deducted in this year's BLAGAB assessment. (There will also be 1/7 of the acquisition expenses of each of the preceding 6 years in this assessment.)

Next year's tax assesment will include a further 100 of this 700. It will also include 1/7th of year X+1s BLAGAB acquisition expenses and also still 1/7 of the acquisition expenses of each of the 5 years before X.

All of each year's acquisition expenses are therefore used eventually. It's not that tax relief is only available on 1/7th of the acquisition expenses, it's just that the tax relief on the remaining 6/7ths is postponed.

4 The solution really does mean "capital gain". It's making the point that as there may be many investors who prefer capital gain over income for tax reasons, the overall return on assets that give lots of income/little gain may be higher (as there may then be less demand for these assets). Then, this higher investment return might compensate for the tax disadvantage.

Hope these help
Lynn