Close Company Surcharge

flapps

Hi all,

quick question on the close company surcharge..

Does an insurance company have to pay the surcharge on deposit interest earned on monies held in a client account?

Can't find the answer anywhere.

Thanks

smcgiff

flapps wrote: »

Hi all,

quick question on the close company surcharge..

Does an insurance company have to pay the surcharge on deposit interest earned on monies held in a client account?

Can't find the answer anywhere.

Thanks

Does the interest earned belong to the client?

Would it not be ...

Dr Client Bank account
Cr Specific Client Account

Both Balance Sheet entries.

Then this would not be showing as an income of the insurance company, so no.

flapps

I'm pretty sure the interest is regarded as income to the company. As the company gets, let's say, 60 days credit from the insurance company so they wouldn't need to pay over the clients monies until that time. hence earning the deposit interest for that period.

smcgiff

flapps wrote: »

I'm pretty sure the interest is regarded as income to the company. As the company gets, let's say, 60 days credit from the insurance company so they wouldn't need to pay over the clients monies until that time. hence earning the deposit interest for that period.

Solicitiors need to pay over and in other cases calculate interest and pass onto their clients (there are some exceptions).

I would have thought something similar would be the case with Insurance companies.

Not quite getting your example above. Are you the insurance company or are you waiting on money from an insurance company?

smcgiff

flapps wrote: »

I'm pretty sure the interest is regarded as income to the company. As the company gets, let's say, 60 days credit from the insurance company so they wouldn't need to pay over the clients monies until that time. hence earning the deposit interest for that period.

If the company is treating this as income then they would be liable to the close company surcharge.

flapps

The example i've seen is for an insurance broker trading as a limited company.

the broker takes clients policy renewal monies and the insurance company renew the policy and all insurance doc's are sent to the client.

But the broker doesn't have to pay over the client's premium to the insurance company until 60 days later as per the credit terms agreed with the insurance company.

Deposit interest is earned on this money held in a 'client account' for these 60 days.

So the balance in the account on the 61st day is only the deposit interest earned.

Does that make sense, does that even happen in the real world?

argh

smcgiff

Ah, first of all it's a broker and not an insurance company.

Probably does happen in the real world. The broker's Schedule D Case 1 income would be brokerage fees. Any deposit interest they claim as income would be, imo, liable to close company surcharge (assuming it is a close company).

Although this money is in the Client account, it's possibly not considered belonging to the client because they have got the benefit of the policy from when it was written - which is what they paid the money for. I'm only guessing, but maybe that's one reason why it doesn't have to be paid to the client as it would have to be if it were a solicitor's client account we were talking about.

If this is a question from a text book is it possible to ask your lecturer.

flapps

smcgiff wrote: »

Ah, first of all it's a broker and not an insurance company.

Sorry, should have made that clear in the first post.

But i'll go with your answer and consider it as liable to the surcharge.

Thanks for the help..

Much appreciated

smcgiff

Let us know how you get on.

barneystinson

Yes, to the extent that the deposit interest is their income, then it will be liable to Close Co Surcharge.

So your question really is, is it their interest? I don't see how it couldn't be.

KingEnda

Hard to get around the surcharge
This example looks like it would not escape

flapps

Just following on from my last question.

Does anyone know if the close company surcharge can be offset by current year losses?

I didn't think so but I've heard conflicting opinions.

Thanks again..

dbran

No. Losses dont effect the surcharge by themselves.

But it is not payable if a dividend could not have been declared due to company law restrictions on distributable profits.

So if the company does indeed have unutilised losses then perhaps it also has negative reserves which will mean no surcharge.

Hope this helps

dbran

flapps

Thanks Dbran..

So you're saying that a company can waive the surcharge if it has negative reserves at the year end and cannot legally distribute funds?

Good to know..

Chuckwalla

Hi all, just want to jump in here with a similar query.

if a close company invests some excess cash in an ETF, what are the tax implications of that? do unrealised gains get hit with the surcharge or does it just apply to dividends & interest income?
how about if the etf pays a dividend but has an option to reinvest it automatically, would the reinvested dividend be subject to tax and / or the surcharge?

any help would be much appreciated.

thanks

smcgiff

Not a tax expert (might want to post in the tax forum), but I believe the surcharge would be on the dividends received (regardless if later reinvested).

barneystinson

smcgiff wrote: »

Not a tax expert (might want to post in the tax forum), but I believe the surcharge would be on the dividends received (regardless if later reinvested).

Yes, that's the case, as the dividend has been "received" within the meaning of the relevant Section(s)

barneystinson

dbran wrote: »

No. Losses dont effect the surcharge by themselves.

But it is not payable if a dividend could not have been declared due to company law restrictions on distributable profits.

So if the company does indeed have unutilised losses then perhaps it also has negative reserves which will mean no surcharge.

Hope this helps

dbran

Current year Losses do affect the surcharge computation AFAIK?

The computation of the amount of Case III, IV and V income liable to surcharge is in the form of A x (B/C) where A is total Income (pretty much everything except franked inv income) AFTER charges and losses, B is Case III, IV and V income. C is is total Income (pretty much everything except franked inv income) BEFORE charges and losses.

So if current year losses reduce A to nil, then the amount of Case III, IV and V income liable to surcharge will also be nil.

The franked investment income will still be liable though...

Legend100

barneystinson wrote: »

Current year Losses do affect the surcharge computation AFAIK?

The computation of the amount of Case III, IV and V income liable to surcharge is in the form of A x (B/C) where A is total Income (pretty much everything except franked inv income) AFTER charges and losses, B is Case III, IV and V income. C is is total Income (pretty much everything except franked inv income) BEFORE charges and losses.

So if current year losses reduce A to nil, then the amount of Case III, IV and V income liable to surcharge will also be nil.

+1 to the above,

current year losses are relevant to the comp, S396(1) forward and S396A backwards are not taken into account

Chuckwalla

Thanks for the divs info, much appreciated