Direct Taxation

Question 1

What is direct tax and some examples

Answer 1

Tax imposed directly on person or company required to pay

eg. income tax, corporatie income tax, capital gains tax

Question 2

What is coporate income tax and how is it calculated

Answer 2

Tax on business profits/ company tax

• Taxable Profits X Tax rate %

Question 3

What income and expenses included in the accounting profit are not allowed for tax pourposes

Answer 3

• Income from government grants (-)
• Depreciation and amortisation expenses (+)
• Entertaining expenses (+)
• Expenses relation to donations to political parties (+)
• Expenses relating to taxes paid to other public bodies (+)

Question 4

How is taxable profit performa set out

Answer 4

Profit before tax
Depreciation expense (+)
Amortisation expense (+)
Accounting loss on disposal (+)
Entertaining expense (as per tax rule) (+)
Balancing charge (+)

(Non taxable income eg. grant) (-)
(Accounting gain on disposal) (-)
(Balancing allowance)(-)
(Tax depreciation) (-)

= Taxable profit

Question 5

What is Balancing Charge

Answer 5

When NCA is disposed for less than cost

But the fall in cost is less than tax depreciation then a balancing charge will be applied

Balancing charge is added onto the taxable profit of entity

Question 6

What is balancing allowance

Answer 6

When NCA is disposed at less than cost
When fall in cost is greater than tax depreciation given then balancing allowance is given on disposal

• Balancing allowance is deducted from the taxable profit of the entity so the business is fully compensated

Question 7

What is tax depreciation

Answer 7

Given by the tax authority
It shows the fall in the value of assets
- also known as tax allowances or capital allowances

Question 8

Why is accounting depreciation not accepted by tax authorities

Answer 8

Depreciaiton is not certain and has subjective elemetns so have to be added back on

-instead we have the tax depreciation

Question 9

How to work out tax depreciation

Answer 9

Value of coollow rules given in question

Written down value : value b/f after taking away tax depreciation

Question 10

When will there be a capital gain

Answer 10

If NCA is sold or disposed of higher than the cost

Question 11

What happens will nca is disposed at less than cost

Answer 11

-No capital gain
- If Fall in value of asset > tax depreciation given a balancing allowance will be given
Balancing allowance will be deducted from taxable profit so less tax is payed

Question 12

How is balancing allowance calculated

Answer 12

Cost- Tax depreciation

Question 13

What happens when NCA is disposed of more than cost

Answer 13

A capital gain arises = Difference between sales proceeds and the asset’s cost

• Balancing charge equal to the tax depreciation will also be levied as there was no fall in value

Question 14

How is capital gain accounted for

Answer 14

Not included in the taxable profits calculations as capital gains are taxed separately

Question 15

What is indexation allowance

Answer 15

When NCA cost is adjusted for inflation

• Adjustments for indexation allowance cannot create or increase a capital loss

Question 16

What is rollover relief

Answer 16

Where full proceeds from the sale of the assets are reinvested in a replacement asset the tax due on the capital gain is deferrred

Question 17

What are two types of tax losses

Answer 17

Trade Loss
Capital Loss

Question 18

When does trading losses occur

Answer 18

Arise when adjustments to profit proforma gives a taxable loss rather than a taxable profit

Question 19

How can trading losses be used

Answer 19

Group relief
Carry back
Current year
- against income and gains

Carry forward - against trading profits

Question 20

When do capital loss arise

Answer 20

When NCA is sold for less than it’s cost - this loss can be offset against other capital gains

Question 21

What is group relief

Answer 21

Reduce taxable profits and tax due of another company within the group

Question 22

When there is a trading loss how much si taxable

Answer 22

Nothing

Question 23

How does corporate tax and personal income tax interact

Answer 23

• When companies pay dividend
• Profits have been taxed but then dividend will be taxed as well

Question 24

What are possible systems of corporate and personal tax interactions

Answer 24

Classical system
Imputation system
Partial Imputation system
Split rate system

Question 25

What is classical system

Answer 25

-Classical System: companies and individuals are treated separately and profits are taxed twice

Question 26

What is imputation system

Answer 26

• Imputation system: Credit given to individual for the tax paid by the company

Question 27

What is partial imputation system

Answer 27

Some credit but not the full amount is given to the indivudal for the tax paid by the company

Question 28

What is split rate system

Answer 28

Profits distributed as dividend by company are taxed at a lower rate than profits as retained earnings

(then individual might have to pay depending on whether imputation or classical system applies)

Question 29

How to work out tax paid under imputation system

Answer 29

Work out 100% of what person paid
Tax paid by company = difference between what person paid and 100%
Find full taxable amount
Tax amount - tax credit payed by company