Query re. Undervalued Assets

Marry91

Hi,

I am currently studying for my FAE's and I'm hoping someone can help me with a query I have re the transfer of assets at undervalue out of a close company to a director.

I have attached the question and related solutions to this thread.

For Lexi Limited, the question is on page 35 and the solution is on page 5

For SMPL, the solution is on page 6.


Basically what I can't understand is:

- In LEXI Limited, the director purchases an asset at undervalue and is charged under Schedule E as BIK the difference between the Market Value and the amount paid.

- In SMPL, the director purchases an asset at undervalue and is charged under Schedule F as a distribution the difference between Market Value and the amount paid.

I know I am missing something, but to me it seems to be the same scenario for both but two different solutions.

Any help would be greatly appreciated!

Heisenburg81

Marry91 wrote: »

Hi,

I am currently studying for my FAE's and I'm hoping someone can help me with a query I have re the transfer of assets at undervalue out of a close company to a director.

I have attached the question and related solutions to this thread.

For Lexi Limited, the question is on page 35 and the solution is on page 5

For SMPL, the solution is on page 6.


Basically what I can't understand is:

- In LEXI Limited, the director purchases an asset at undervalue and is charged under Schedule E as BIK the difference between the Market Value and the amount paid.

- In SMPL, the director purchases an asset at undervalue and is charged under Schedule F as a distribution the difference between Market Value and the amount paid.

I know I am missing something, but to me it seems to be the same scenario for both but two different solutions.

Any help would be greatly appreciated!

Interesting.
From my study I understood that once the companies profits are assessed under Case 1 or 2 then the actual proceeds can be used in computing the gain as opposed to market value, and the Director can be assessed under Schedule E on the deficit in proceeds v market value.
Dont see why the different treatment in the two questions but would like to know!

barneystinson

Heisenburg81 wrote: »

Interesting.
From my study I understood that once the companies profits are assessed under Case 1 or 2 then the actual proceeds can be used in computing the gain as opposed to market value, and the Director can be assessed under Schedule E on the deficit in proceeds v market value.
Dont see why the different treatment in the two questions but would like to know!

I would say the sample solution in SMP Ltd is incorrect. The solution in LEXI awards a point for recognising that because the transfer is to a shareholder who is a director, it falls under Schedule E i.e. it's a benefit provided to an officer of the company.

dbran

Hi

You may consider S130(3) which states that a transfer of an asset to a member of the company at undervalue is a distribution.

So basically if the inspector takes a disliking to you they may decide to use this section and not allow the use of BIK provisions.

I note that in both cases the person is a director as well as a member so both answers should be equally valid. That would be my take on it though

dbran

scheister

I have seen this a few times but never been given an answer to why its BIK sometime and S130 othertimes.

Looking at the 2 questions i can see 2 differences.

In lexi i dont think the person getting the gift has control of the company as it will be split 50/50 afterwards.

Other thing is the size of the undervalue, in lexi its 35k discount while in SMPL its 200k. Could their be a revenue guidence somewhere they looks at size of the discount. But this is me only guessing

Heisenburg81

dbran wrote: »

Hi

You may consider S130(3) which states that a transfer of an asset to a member of the company at undervalue is a distribution.

So basically if the inspector takes a disliking to you they may decide to use this section and not allow the use of BIK provisions.

I note that in both cases the person is a director as well as a member so both answers should be equally valid. That would be my take on it though

dbran

Why detrimental not to have BIK treatment?
Same tax outflow under both methods if close company?
BIK taxed @ marginal rate on shortfall
Distb - taxed @ marginal rate and credit for DWT paid by company @ 20%. Still 40% outflow between PREM and DWT?

barneystinson

Heisenburg81 wrote: »

Why detrimental not to have BIK treatment?
Same tax outflow under both methods if close company?
BIK taxed @ marginal rate on shortfall
Distb - taxed @ marginal rate and credit for DWT paid by company @ 20%. Still 40% outflow between PREM and DWT?

No CT deduction for a distribution, so there's an additional 12.5% - 20% tax cost.