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Sir really confused about tax workings in question they have given that any tax losses are carried forward and written off against future profits from the investment does this mean that no tax is payable in year 1 and i have to deduct Year 1 loss of (7000) from the year 2 profits of 12500 which gives 5500 *30% is 1650 so this amount of tax will be deducted from year 2
As year 3 cash flows are 13225 so tax amount of 13225* 30% ie 3968 will be deducted from year 4 as taxes are payable in a years time delay and for year 4 tax of 13834* 30% 4150 will be deducted from.year 5I have calculated tax savings on capital allowance depreciation so will add them AS tax savings after taking account of tax payable, working capital investment, working capital recovery, scrap value and den tax savings @ CAPITAL ALLOWANCE please help me out with this
You should remember from Paper TX (was Paper F6) that is is not the amount of tax that is deducted. We calculate the taxable profit, and if this is a loss then there is no tax payable but the amount of the loss is subtracted from the next years taxable profit when calculating the tax payable.
So can u guide the way i have done is right like i have carried forward losses of (7000) against year 2 taxable profits ie 12500 and then calculated tax payable on remaining amount which is being payable next year
But the tax loss is not 7,000 because of the tax allowable depreciation (the capital allowances). They increase the loss for tax purposes to 14,650.
See workings 1 of the examiners answer.
The way i have been taught is just adding the tax savings on capital allowances after applying tax on taxable profits and not taking the approach of deducting TAD from profits and then adding them back after applying tax on profits like after taxable profits apply tax …den working capital investment..W Capital recovery and then tax savings …..is this also acceptable
No it is not acceptable for this question (it gives a different answer!!!)
That method was fine for Paper FM (was F9) but it is not acceptable in AFM when the question specifically states that tax losses are to be carried forward.
So i can use it in questions where tax losses are not being carried forward because that approach is giving me right answers for other questions but for this question i am getting different answer
Yes – if losses are not carried forward then it is OK. We assume that the company is already making taxable profits elsewhere and that therefore a ‘loss’ for a particular project simply reduces the existing profits and therefore saves tax (as I explain in full in both my FM and AFM lectures).
However more often the AFM examiner has new investments in foreign countries and, of course, in that case losses can only be carried forward against future profits.
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