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Morning Mike
Please help with this question.
A government wanted to encourage investment in new non-current assets by entities and decided to change tax allowances for non-current assets to give a 100% first year
allowance on all new non-current assets purchased after 1 January 20X5.ED purchased new machinery for $400,000 on 1 October 20X5 and claimed the 100%
first year allowance. For accounting purposes ED depreciated the machinery on the
reducing balance basis at 25% per year. The rate of corporate income tax to be applied to ED’s taxable profits was 22%.Assume ED had no other temporary differences.
Calculate the amount of deferred tax that ED would show in its statement of financial
position at 30 September 20X7.calculation:
Y/E 30TH SEP X6
Asset value= 400k
Depreciation= 255*400k=100k
CV= 400-100=300KTax Base
-100% tax allowance
TB=400-400=0Deferred tax for X6=
(CV-TB)* TAX RATE
300-0=300*22%
= 66,000Y/E 30TH SEP X7
CV= 300K
Depreciation= 300*25%=75
new cv= 300-75=225Tax Base
The question does not mention anything about after year 1… it just mentions the year 1 tax allowance of 100%. so I am confused as how to calculate depreciation to use for x7 onwards? do I assume the same rate as for accounting purposes.?
thanks
‘do I assume the same rate as for accounting purposes.’
Yes! 25% reducing balance
And if the tax base last year was $zero, then this next year it’s still going to be $zero (and will be $zero forever more!)
So at end year 2, carrying value is 225 and tax base is $zero, a difference of $225 which, when multiplied by the corporate income tax rate gives us a deferred tax balance to carry forward of $225 x 22% = $49.50
OK?
Mike- on the topic of deferred tax.. I saw somewhere that “IAS 12 prohibits the recognition of deferred tax on taxable temp differences that arise from the initial recognition of goodwill. Why is this? I cant see the link/ logic?
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