Chapter 23 - Taxation

Question 1

Factors (relating to tax) affecting investment decision

Answer 1

• Total rate of tax on an investment
• How the tax is split between different components of the investment return
• The timing of tax payments
• Whether tax is deducted at source or has to be paid subsequently
• The extent to which tax can be reclaimed
• The extent to which gains/losses can be aggregated

Question 2

Capital gains tax

Answer 2

Tax based on the increase in the value of an asset.

It is usually payable on disposal of an asset

In some jurisdictions this is based on the real value of the asset (i.e. value adjusted for inflation)

Question 3

Bed and breakfasting

Answer 3

The sale and subsequent repurchase of an asset to crystallize a gain in order to take advantage of an annual tax-free allowance

Question 4

Issues with taxing on total return

Answer 4

An investor might be liable to pay tax without any income to pay it

Question 5

Stamp duty

Answer 5

Tax on the purchase of assets

Question 6

Main tax systems of corporation tax (3)

Answer 6

• Classical
• Split-rate
• Imputation

Question 7

Classical tax system

Answer 7

Company profits are taxed twice (i.e. on its profits and then any dividends declared to investors are taxed again)

Question 8

Split-rate tax system

Answer 8

Different tax rates are applied to distributed and retained profits

Often used when income and capital gains are taxed at different rates

Question 9

Imputation tax system

Answer 9

Under this system the company has to deduct some of the tax payable by investors on distributions and pay its directly to the government.

The tax deducted is “imputed” to the shareholder who may be able to reclaim it (or if they are subject to a higher rate, pay some more tax)