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Hi John
This is probably a common stumbling block for some and for now I am in the confused camp!
In example 3 on page 57 you said that the tax saving when leasing is at time 2 because we pay the first lease payment immediately (time 0) , its calculated at the end of the year (time 1) and we get it a year later when we pay the tax (time 2). This makes sense to me.
With the capital allowances, We buy the machine on the last day of the year (still considered time 0) and it’s calculated immediately (time 0) and we get saving on the the capital allowances one year later (time 1). This also makes sense.
However in the examples in the previous chapter (example 33 p48 ) we didn’t calculate the capital allowances until the end of the first year (time 1), even though we bought it in the first year – this seems at odds with the rule explained in chapter 9..and we didn’t get the saving until a year later ( time 2) the same timing as when we started to pay tax.
Would you be able to explain the subtle difference, I know you are correct but I can’t see it!
Cheers
Hugh
We always assume (unless told otherwise) that the purchase of the machine takes place on the first day of the year. Therefore the first allowance is calculated at the end of the year (time 1) and the tax affect is either at time 1 (if there is no delay in tax) or at time 2 (if there is a 1 year delay in tax).
The only time you are likely to be told that the machine is bought on the last day of a year is in lease buy questions (because the only real problem is sorting out the tax timing).
I don’t really get it (yet) but I think if I go by the rule last day of a tax year (specifically should be a lease or buy) = next year, ie time 1 and 1st day of a tax year = time 2 I should be ok when in both cases there is aa one year delay in tax ? Plan is I will do enough sample questions to see this rule stands strong
Cheers
Hugh
I don’t know if you have watched the lecture on investment appraisal with tax, but in that lecture I do explain the timing assumptions.
I did and rewatched it, you did explain it, I just am having trouble with it. Will do a good bit of practice and am sure it will click, cheers.
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