ACCA Advanced Taxation (ATX) Practice Exam

How do you gross up discretionary trust dividends for income tax computation?

1. Amount received x 100/80

2. Amount received x 100/55

3. Amount received x 100/75

4. Amount received x 100/90

The correct answer is: Amount received x 100/55

To gross up discretionary trust dividends for income tax computation, it is essential to understand the rules that apply to the taxation of dividends and how they are treated for tax purposes. In the case of dividends, particularly from discretionary trusts, there are specific tax rates and considerations involved in determining the gross amount of income that should be reported. When a discretionary trust pays out dividends, these dividends may come with different treatment regarding tax credits and allowances. The correct gross-up factor reflects the effective rate of tax that is taken into account. In this context, if the tax treatment gives an effective tax credit of 45% on the dividends, the gross-up factor would be calculated on the basis that the amount received is a net figure post-tax. The formula for grossing up utilizes the logic of completing the calculation to reflect the pre-tax amount. Using the gross-up factor of 100/55 indicates that the amount received was 55% of the original due to taxation, thus allowing for the calculation to arrive at the total pre-tax amount that reflects the total income position properly before taxes were deducted. In summary, grossing up discretionary trust dividends using the factor of 100/55 accurately accommodates the deductions and provides the amount that should be reported for income tax computations,