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Hello john i notice in some questions when an asset is bought the capital allowance is calculated in year 0 (eg 3 chapter 9 it notes) while in others its calculated in year 1(eg cj co DEC 2010). How do i know in which year it should be calculated given tax is paid the same year. I know whenever the asset is purchased is year 0.
There is no such thing as ‘year 0’.
Time 0 is a point in time – it is ‘now’.
The first year starts now (time 0) and ends in 1 years time (time 1).
The second year starts in 1 years time (time 1) and ends in 2 years time (time 2).For operating flows, we assume they occur at ends of years (unless told different), and so first years revenue is at time 1, etc.
For capital allowances, we assume we buy the machine on the first day of the first year (unless told differently) – i.e. time 0.
The first capital allowances are calculated at the end of the year – time 1.
If tax is payable immediately, then the first tax effect is also at time 1.
If tax is one year in arrears, then the first tax effect is one year later – time 2.
If a machine is bought at the end of a year – still time 0 – then the capital allowances are calculated immediately – time 0 and therefore depending on when tax is payable, the tax effect is one year earlier than what I have written above.
(This last situation only usually occurs in the exam in a lease and buy question)
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