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Qestion mentions that,” Plant and machinery are expected to be sold for $4 million whe project ceases, after tking any taxation and inflation impact into account.
Hence i conclude that $4 m is sale value after tax on any profits arised from sale.
But this is not the case , the tax allowable depreciation of last year ($1.125m) is reduced by the amount of profit on sale ($ 0.625 m) and hence the tax allowable deprecation is $0.5m.
If the sale vaue of $4m is after tax then why is co. paying tax on “profits on sale”???
please help sir.
The company is not paying any tax on the sale proceeds (as per the question).
They get capital allowances in the normal way, which in the final year is the balancing allowance of 0.50.
If you say that,”Co. is not paying any tax on sale proceeds” why does the question say that sale value of $4m is AFTER TAX?
please help me here sir!
sir even i have a doubt on similar lines. If the question states that realisable value will be taxed separately then we use SLM method for no.of years of project and provide normal TAD on COST of investment in all years and then separately charge our realisable value.
similarly in case of reducing balancing method, we will charge tax separately on reasaliasble value and TAD on WDV absolutely separately.
No balancing/allowance or charge in above 2 cases
But when its stated that after tax value of an asset is X or Y then that means CGT and other irrelevant taxes have been reduced. And normal balancing allowance/chrage applicable.
Questions never say that the realisable value is taxed separately.
If the sale proceeds are said to be after tax then it just means that no other taxes are relevant (which they couldn’t be anyway, since no other taxes are examinable).
The statement does not affect the capital allowances, as I wrote in my previous reply.
Whether the TAD is reducing balance or straight line (and straight line is very rare in the exam – especially with the current examiner), in the year of sale there is a balancing allowance or a balancing charge if the sale proceeds are different from the tax written down value. The whole purpose of the balancing allowance or charge is to make it so that the correct total allowances have been given over the life of the asset (as you should be happy with from Papers FM and TX). In so sense whatsoever is it an extra tax!
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