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Hi Tutor,
Regarding tax credits, there are some examples in the BPP ACCA book which really confuses me and unless it is due to typos, I don’t understand why the book does not explain these subtle differences.
Example :
1. Moria was born in 1960. In 2014/15 she receives net dividends of $54000. She has no other income.
In the book, everything was fine till the step where they calculated tax deducted at source : “50000*10%=5000.” and not 10%*(54000*100/90=60,000)= 6000 as that was where the tax deduction arose. I just need to understand why they multiplied 10% with 50,000 instead of 60,000.
2. Jim was born in 1966. He does not work. In 2014/2015, he receives net bank interest of $38 732.
Gross bank interest = 38,732*100/80=$48,415.
Again, in the step where they computed “Tax deducted at source they computed $50,415*20%= 10,083” instead of “48,415*20%”
I do not have the BPP material. but I am surprised that no explanation is given regarding the first example and equally surprised that they bothered to question this issue at all.
It is of course unlikely that a taxpayer will have only dividend income and be a higher rate taxpayer but this example tests the following rule:The maximum tax credit that can be set against the tax liability is restricted to 10% of Taxable Income!
Hence the total income would be 60.000 (as you show above) but with the deduction of the PA the Taxable Income is 50,000, so using the rule the max tax credit is 10% x 50,000 = 5,000
In relation to your second example from what you have told me I can see no reason why the tax credit is based on 50,415 and not 48,415 as you suggest – other than an updating error from the previous year’s text …… or a typo!
Hope that helpsSir, in example one the deduction was 6000 initially then why do we deduct 5000 from tax liability? The receipt of net dividends was 54000 so the difference between gross and net is 6000. Even after deducting the personal allowance, Moira has already paid 6000 as tax.
Hi Tutor, ok thanks a lot! That explanation about the 10% of tax liability really clarified it.
Sir, could you please explain this rule in the first example? and also if we are using this rule then what happens to 1000 which was deducted earlier?
Read the answer already given above about the maximum tax credit permitted and remember that NO tax has already been paid on dividends – it is a NOTIONAL tax credit!
If the tax credit is notional, and does this mean that no amount at all has been deducted from the dividend payable. Even though it might seem that the 10% calculated is an amount that has been deducted before payment? And if that’s the case then why do we gross the amount?
Have you worked through the OT notes with the lectures as if you had there would be no reason for some of these questions. Get the basic knowledge first from the notes and lectures!
Yes Sir. I have gone through the lectures but the concept of notional tax is slightly unclear:
This tax isn’t paid to anyone and thus if the tax credit is more than the tax liability then no amount is repayed. But what is couldn’t understand is that if the amount has not been deducted the why do we gross 100/90?
Could you please help me with this?
Thanks
You are getting distracted by small issues which will not allow you to then proceed through your studies and pass this paper.
Firstly tax is made up of a series of government made rules and regulations where there is not always a “why” there is simply an “is” – that “is” the rule and therefore learn it and repeat in exam!
The notional tax credit goes back a very long time to when companies had to make an advance payment of corporation tax whenever they paid a dividend – now long gone but the tax credit system remained. In fact under the most recent legislation (not relevant for your exam this has now been abolished).
You have to follow a very simple process in answering an exam question – gross up the dividends received in the tax year by 100/90, tax at the relevant rate for dividends and if tax payable is required deduct this 10% notional tax credit on the dividends before deducting any other tax credits! Just do that and you will score the marks!I am sorry sir, I didn’t mean to upset you.
Its just that I asked my professor the same question and he told me that it was a typo.
I just wanted to confirm the answer.
Thank you 🙂
Hi Hemraj don’t worry you have not upset me but I am trying, for your own good, to impress upon you the fact that from your questions you are getting distracted from learning what you really need to know to pass this exam and then asking very remote and unlikely – “but what if” questions which will serve you no purpose in your goal of passing this exam, like a taxpayer being provided with a company car and then paying for business mileage or someone in job related accommodation paying rent for that. I am therefore trying to stress to you the importance of learning what you need to know so that you may focus on what is important and therefore pass this exam.
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