Capital Allowance

If tax is paid one year in arrears, then all of the tax flows will be one year later. It will help you to watch the free lectures on investment appraisal with tax in the Paper F9 section of the website (because this is revision of F9). In the lectures I explain in full about how to deal with the timings (and why).

I watched that lecture, up to some extent i got clarity, the example was very very easy compare to p4 quesion. I dont understand why the TAX saving on capital allowance(C.A) in Burung co and Neptue is treated in a same way i.e taken to year 1, i mean to say that in Burung co it is given that tax is paid in the same year and in Neptune the tax is paid after a year. According to me TAX saving on C.A in Neptune should be taken in year 2. Also the total number of tax saving is 6 in Nepune, where as project run for 5 years., how is this?

The tax in Neptune is no more difficult that in the example I go through for Paper F9. It was the previous examiner who set Neptune and he did many things rather strangely (which is the reason he is no longer the examiner :-) and it was clear from several of his answers that he didn't really understand tax rules properly. (BPP have simply reprinted the examiners answer) On the wording of the question, the first tax saving on the allowances should really all be at time 2. (It really comes down to assumptions, as does so much in P4 questions (which is why almost always question 1 in the exam specifically asks you to state your assumptions). If you had taken the first saving at time 2 you would still have got full marks. Had the machine been purchased on 30 June X8, then his answer would have been correct - the first saving would have been at time 1 and there would be 6 calculations. However since it was purchased on 1 July X8, the first saving should have been at time 2 and there should be 5 calculations. (The other stupid thing the examiner did, which does not affect the answer but is silly, is that in the final year he had a writing down allowance and a balancing charge. In fact, he should not have had a writing down allowance but should simply have subtracted the proceeds from the written down value and had a balancing allowance. However the net result would be exactly the same, and I guess you had already realised that.)

Thank YOU :)

You are welcome :-)

Hello john, another question please. Where you are given capital allowance on a reducing balance of 25% per annum, on a capex of $400,000 and residual value of $300,000 for 5yrs, Tax rate @40%.What will the balancing allowance or charge be for yr 5. Thank you.

It depends on the exact date of purchase, but normally it would be a balancing charge of 173,438. I really don't know why you are asking me this - have you watched our lectures? If it is from a specific question then presumably you already have an answer and it is better you say which question it is and what your problem is.

I have, sorry about that. Got confused at some point. Seen my mistake. Thanks a lot.??

good day.pls i got confused with the application of tax savings allowance and capital allowance when calculating npv or apv.some instances, they apply tax savings in the calculation while in order, capital allowance is used.can you pls throw more lights here.thanks

There are two ways (which both give the same answer - it doesn't matter which you do in the exam). Method 1: Calculate the operating cash flow, then calculate the tax on that (ignoring CA's), and then add the tax saving on the CA's. Method 2: Calculate the operating cash flow, subtract the CA's (to get the taxable profit), calculate the tax on that, then add back the CA's because they are not a cash flow. I do suggest that you watch the free lectures (and the F9 lectures on investment appraisal with tax, because in these lectures I do explain both ways - this is revision of F9).

thank you very much. the gray area has been cleared by you.God bless you.

You are very welcome :-)

I did the tax allowable depreciation for Neptune in this way Y1 : 50% x 800 = 400 Y2 : (800-400) x 40% = 160 Y3 : (800-400-160) x 40% = 96 Y4 : (800-400-160-96) x 40% = 57.6 Y5 : (800-400-160-96-57.6) = 46.4 (balancing allowance) First i subtracted it from operating cash flow and added it back to post-tax operating cash flow, which leads me to a totally different answer from the answer sheet.. My question is on the Y5 and Y6 capital allowance saving on the answer sheet, where did the figures come from?

This question was set by the previous examiner and he often got very confused about tax (which is one of the reasons why he is no longer the examiner :-) ) What he has done is continued to calculate the TAD for Y5 at 40% (so TAD of 40% x 86.4 = 34.56, so tax saving of 30% x 34.56 = 10.37), and then calculated the balance charge in Y6 as (800 - 400 - 160 - 96 - 57.6 - 34.56 - 40) = 11.84, and so tax saving of 11.84 x 30% = 3.55. (he has shown it as another 40% TAD and a balancing allowance both in the same year, which is silly but does give the same net result). Your figures are more correct, although strictly (because of the 1 year delay in tax) they should have been from Y2 to Y6 rather than Y1 to Y5. However you would still have got full marks for this part of the answer.

Got it!! Thank you so much!

You are welcome :-)