Direct Taxation Flashcards
What is direct tax and some examples
Tax imposed directly on person or company required to pay
eg. income tax, corporatie income tax, capital gains tax
What is coporate income tax and how is it calculated
Tax on business profits/ company tax
- Taxable Profits X Tax rate %
What income and expenses included in the accounting profit are not allowed for tax pourposes
- Income from government grants (-)
- Depreciation and amortisation expenses (+)
- Entertaining expenses (+)
- Expenses relation to donations to political parties (+)
- Expenses relating to taxes paid to other public bodies (+)
How is taxable profit performa set out
Profit before tax
Depreciation expense (+)
Amortisation expense (+)
Accounting loss on disposal (+)
Entertaining expense (as per tax rule) (+)
Balancing charge (+)
(Non taxable income eg. grant) (-)
(Accounting gain on disposal) (-)
(Balancing allowance)(-)
(Tax depreciation) (-)
= Taxable profit
What is Balancing Charge
When NCA is disposed for less than cost
But the fall in cost is less than tax depreciation then a balancing charge will be applied
Balancing charge is added onto the taxable profit of entity
What is balancing allowance
When NCA is disposed at less than cost
When fall in cost is greater than tax depreciation given then balancing allowance is given on disposal
- Balancing allowance is deducted from the taxable profit of the entity so the business is fully compensated
What is tax depreciation
Given by the tax authority
It shows the fall in the value of assets
- also known as tax allowances or capital allowances
Why is accounting depreciation not accepted by tax authorities
Depreciaiton is not certain and has subjective elemetns so have to be added back on
-instead we have the tax depreciation
How to work out tax depreciation
Value of coollow rules given in question
Written down value : value b/f after taking away tax depreciation
When will there be a capital gain
If NCA is sold or disposed of higher than the cost
What happens will nca is disposed at less than cost
-No capital gain
- If Fall in value of asset > tax depreciation given a balancing allowance will be given
Balancing allowance will be deducted from taxable profit so less tax is payed
How is balancing allowance calculated
Cost- Tax depreciation
What happens when NCA is disposed of more than cost
A capital gain arises = Difference between sales proceeds and the asset’s cost
- Balancing charge equal to the tax depreciation will also be levied as there was no fall in value
How is capital gain accounted for
Not included in the taxable profits calculations as capital gains are taxed separately
What is indexation allowance
When NCA cost is adjusted for inflation
- Adjustments for indexation allowance cannot create or increase a capital loss
What is rollover relief
Where full proceeds from the sale of the assets are reinvested in a replacement asset the tax due on the capital gain is deferrred
What are two types of tax losses
Trade Loss
Capital Loss
When does trading losses occur
Arise when adjustments to profit proforma gives a taxable loss rather than a taxable profit
How can trading losses be used
Group relief
Carry back
Current year
- against income and gains
Carry forward - against trading profits
When do capital loss arise
When NCA is sold for less than it’s cost - this loss can be offset against other capital gains
What is group relief
Reduce taxable profits and tax due of another company within the group
When there is a trading loss how much si taxable
Nothing
How does corporate tax and personal income tax interact
- When companies pay dividend
- Profits have been taxed but then dividend will be taxed as well
What are possible systems of corporate and personal tax interactions
Classical system
Imputation system
Partial Imputation system
Split rate system
