Close company surcharge

Heisenburg81

Folks,

I have seen differing calculations on the below so I would appreciate some clarity if possible;

When calculating the distributable estate and investment income, is Franked Investment Income brought in before or after the CT charge @ 25% - I know FII is exempt from C Tax but Section 440 would seem to imply that it should be brought in before the deemed CT, whereas in lectures it is brought into the surcharge calculation after the CT charge.

Large potential impact if big sums involved.

So, is it;

Case V income
Plus FII
CT @ 25% or

Case V income
CT @25%
Plus FII

dogsears

After

Heisenburg81

dogsears wrote: »

After

Revenue guidance brings it in before in their worked examples. Also states;
"Estate and investment income is the sum of franked investment income, estate and investment income (case v and case 111 etc) less non trade charges and investment expenses" FII though exempt from CTax is included in the 25% tax deducted.
Doesnt make sense as it is fully distributable as not subject to tax...

dogsears

Heisenburg81 wrote: »

Revenue guidance brings it in before in their worked examples. Also states;
"Estate and investment income is the sum of franked investment income, estate and investment income (case v and case 111 etc) less non trade charges and investment expenses" FII though exempt from CTax is included in the 25% tax deducted.
Doesnt make sense as it is fully distributable as not subject to tax...

OK so look at the (a) in the definition of distributable income at Section 434(1) - the income as computed in Subsection 4, increased by the amount of the company's franked investment income..

then subsection (4) (paraphrased) - income is exclusive of franked investment income, after various adjustments and after deducting tax as it would be based on those adjustments.

So basically you calculate the income, make the adjustments, deduct the tax that would apply to the adjusted income then add the FII to the total.

Heisenburg81

dogsears wrote: »

OK so look at the (a) in the definition of distributable income at Section 434(1) - the income as computed in Subsection 4, increased by the amount of the company's franked investment income..

then subsection (4) (paraphrased) - income is exclusive of franked investment income, after various adjustments and after deducting tax as it would be based on those adjustments.

So basically you calculate the income, make the adjustments, deduct the tax that would apply to the adjusted income then add the FII to the total.

Google this and view the PDF;
Surcharge on certain undistributed income of close companies - TaxFind

This is revenue guidance. In it the example clearly shows the FII is brought in before the tax.

dogsears

Heisenburg81 wrote: »

Google this and view the PDF;
Surcharge on certain undistributed income of close companies - TaxFind

This is revenue guidance. In it the example clearly shows the FII is brought in before the tax.

OK well guidance is not legislation and there are instances of it being wrong. The legislation is clear and I suggest you go by that. If you're doing exams go by whatever is in your notes.

However I wouldn't like to totally disregard the guidance even though it appears to conflict with the legislation so will look into it and if I can add anything I'll come back here and say so.

dogsears

OK, so I've had a look and it seems I was looking at an old version of the legislation which has subsequently been amended (indeed amended some time ago - note to self, don't look up legislation on the internet - some results are just as initially enacted and omit any amendments) - the current legislation now basically says what's in the guidance and the example given seems to have been prepared so as to illustrate the Revenue approach to that amended legislation. Therefore, with apologies, I think the right answer is as per the guidance, and you should maybe bring the issue to the attention of whoever is giving the lectures.

It does seem counter-intuitive to reduce the surchargeable amount by tax calculated on an amount that includes FII because FII is not taxable. However the amended legislation requires a fictional amount of tax to be computed and the guidance makes it clear that the Revenue are aware of and acknowledge that the fictional amount of tax to be computed includes an amount re FII. In which case so be it.

Heisenburg81

dogsears wrote: »

OK, so I've had a look and it seems I was looking at an old version of the legislation which has subsequently been amended (indeed amended some time ago - note to self, don't look up legislation on the internet - some results are just as initially enacted and omit any amendments) - the current legislation now basically says what's in the guidance and the example given seems to have been prepared so as to illustrate the Revenue approach to that amended legislation. Therefore, with apologies, I think the right answer is as per the guidance, and you should maybe bring the issue to the attention of whoever is giving the lectures.

It does seem counter-intuitive to reduce the surchargeable amount by tax calculated on an amount that includes FII because FII is not taxable. However the amended legislation requires a fictional amount of tax to be computed and the guidance makes it clear that the Revenue are aware of and acknowledge that the fictional amount of tax to be computed includes an amount re FII. In which case so be it.

I have come across four areas now where incorrect lecture advice has been given in different areas.
I will e mail. Am I within my rights to ask all students be given clarifications before exams?
Ill be seen as a troublemaker!
Bringing FII in before the nominal tax charge helps the company involved - maybe designed to compensate for irrecoverable taxes where also receiving foreign dividends?