1. avatar says

    Hey John,
    My question is off-the example! Assume that there is no scrap value, so we have to multiply the balancing charge i.e, figures less no scrap value = figures multiply by corporate tax?

    • Profile photo of John Moffat says

      Yes – the rule stays the same. If there is no scrap value then it is the same as the scrap value being zero (the same as in Paper F6 for ‘special’ items).

      (However, it is a balancing allowance not a balancing charge – there is only a charge if the scrap is more than the tax written down value.)

  2. avatar says

    ok if there is no scrap value = then 0, ok I understand. BUT suppose after getting $750 C.A what will be the next procedure to calculate the C.A for the next year( if we have another year)? Do I have to multiply 30% will $7500?

    • Profile photo of John Moffat says

      The question says that the capital allowances are 25% reducing balance.
      So the first capital allowance is 25% x 10,000 = 2,500. The tax saving is therefore 2500 x 30% = 750.

      The second capital allowance is 25% x (10000 – 2500) = 25% x 7500 (the reducing balance) = 1875 and the saving will be 30% x 1875 = 562.5, and so on.

  3. avatar says

    Sir, Your lectures are excellent I owe you a lot ..
    But with regard to TAX SAVINGS ON DEPRECIATION Pl clarify me with foll.. IF STRAIGHT LINE METHOD is followed with SCRAP VALUE at end is a) = asset value @beginning of last yr b)> asset value c)< asset value [ treatment in the operating & terminal flow heads]
    I would appreciate if you could explain these scenarios with example…

    • Profile photo of John Moffat says

      I am not exactly sure what you mean.
      I will give an example but if you mean something different then ask again :-)

      Suppose that the cost is 100,000, it lasts 4 years, with scrap value of 10,000

      With straight line depreciation for tax purposes, it will mean dep’n of 90,000/4 = 22,500 per year. If tax is 30% then the tax saving will be 30% x 22500 = 6750 per year for 4 years.
      There would be no balancing charge or allowance at the end because the total tax depreciation will be equal to the fall in value.
      (It is unusual for the examiner to have straight line depreciation – it is almost always reducing balance. Also, if it is straight line, then there will almost certainly be no scrap value.)

      • avatar says

        Sir what happens to PROFIT / LOSS on sale of an asset and its TAX implications.

        In the above ex: at end of 4th yr asset value is NIL but sold for 10,000

      • Profile photo of John Moffat says

        At end of 4th year the asset value is not NIL !!

        4 years depreciation at 22500 per year reduces its value to 10,000.
        There is no profit or loss on sale.

        (And profit or loss itself is not what is relevant – it is the balancing charge or allowance that is relevant (from Paper F6). Here, as I explained, there is no balancing charge or allowance.)

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