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John Moffat.
John Moffat.-
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Anonymous
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Sir, I read your answer in one post that u said Capital Allowance occur in the same Time as Taxation is paid in NPV questions.
[Question # 1]
Like if Tax is in arrears then so does Tax Saving on Capital Allowances will be (at Time 2) otherwise they both occur at Time 1).BUT in Lease & Buy question (in the lecture & notes) you have put first Capital Allowance at Time 1 because u said that the machine was bought at Time 0 so the Capital Allowance will be calculated at year-end whereas the Taxation simply occur at Time 2 (i.e. arrears)
So why there are two standards? I am totally confused here!
[Question # 2]
Taxation and Tax Saving on Capital Allowances are both calculated at the year-end by the Authorities (which means they both occur at the same Time despite of when the machine was purchased).
John Moffat
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There are not two standards.
In my lecture example the question says that the machine is bought on the last day of a financial year (time 0). The capital allowances are calculated at the end of the financial year and are therefore calculated at time 0. Tax is payable one year after the end of the financial year, and one year after time 0 is time 1.
(Had the machine been bought 1 day later, it would still be time 0 (we are never worried about 1 day when discounting) but would be the start of a financial year. The capital allowances would be calculated at the end of the financial year which would be time 1, and the tax effect would be one year later which would be time 2.)
This is exactly the sort of ‘trick’ the examiner likes, because he wants to check that people understand the timing of cash flows properly.
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