Chapter 24: Taxation

Question 1

List 6 tax related factors that influenceafter tax investment returns

Answer 1

• Total rate of rax on an investment
• How tax is split between income and capital gains
• Timing of tax payments
• Whether tax deducted at source or has to be paid subsequently
• whether tax deducted at source can be reclaimed
• whether losses or gains can be aggregated between different investments or over different time periods

Question 2

List five further factors that influence after-tax investment returns

Answer 2

• Investor’s financial position
• overall tax system
• particular rules for individual types of assets
• tax efficiency of the vehicle used to hold assets
• investors own status as individual or particular type of institution

Question 3

List

• 3 factors that influence the amount of income tax paid
• four factors that may reduce amount of capital tax paid

Answer 3

• Three factors that influence amount of income tax paid
  
  • Income tax rate
  • income tax allowances
  • differences in taxation of earned and unearned income
• Four factors that may reduce amount of capital tgains tax paid
  
  • Indexation
  • capital gains tax allowances
  • if tax is paid only on realised gtains
  • using derivatives to change exposure

Question 4

List

• Three factors that influence the amount of income tax paid
• four factors that may reduce amount of capital gains tax paid

Answer 4

Three factors that influence amount of income tax paid

• incoe tax rate
• income tax allowances
• differences in taxation of earned and unearned income

Four factors that may redue amount capital gains tax paid

• Indexation
• capital gains tax allowances
• if tax is paid only on realised gains
• using derivatives to change exposure

Question 5

Give two ways in which corporation tax affects the company’s financial operations

Answer 5

• Dividends payable - will refelct relative tax rates on distributed profits
• gearing - will reflect tax treatment of loan interest (which is normally paid out of pre-tax profits) compared to returns to shareholders (normally paid out of post tax profits)

Question 6

List the three types of corporation tax system

Answer 6

• Classical
• Split rate
• Imputation

Question 7

Explain briefly how the classical system of corporation tax operates

Answer 7

• company profits taxed twice - once in hand of company and once in hands of investor
• company pays tax on its profits
• dividends then paid out of post tax profits
• investor taxed on dividends

Question 8

Explain briefly how the split rate system of corporation tax operate

Answer 8

Similar to classical system, except that different tax rates are levied ondistributed profits and retained profits, eg higher rate on retained profits than distributed

Question 9

Exokaub briefy how the imputation system of corporation tax operates

Answer 9

• Company deducts some of tax payable by investors on distributions and pay it directly to government
• this amount set off against total corporation tax bill of company
• tax deducted by company “imputed” to shareholder
• gross investor may be able to reclaim tax paid
• basic rate taxpayer pays no further tax
• Higher rate tax papyer pays additional tax, up to higher rate