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Hi Peter,
PLs help me with this:
1)Capital allowance (CA) is always the balancing allowance when CA is claimed on a reducing basis?
2)with a lease project, when the first payment is made in the 0 year AND assuming that tax is payable one year after the end of the accounting year in which the transaction occurs ===> taxation will start in the first (1) year or the second (2) year? Any difference if tax is payable in arrears?
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Hi Nice,
(1)You get a full years Capital Allowance in the year of Acquisition BUT no capital Allowance in the year of DISPOSAL. Rather, you receive a Balancing Allowance / Charge in the year od disposal. This is calculated as the Opening WDV (Written Down value)in the year of disposal minus the Disposal Proceeds ….. which balances things out in such a way that the company receives the capital allowances that equate with what the asset actually cost them over the life of the asset(i.e. the net cost or cash flow).
(2) Rules: ALL cash flows are assumed to occur on the last day of a particular year. Also, the first day of a year is assumed to be the same as the last day of the previous year. Thus, (think about what I have said above)… If day 1 (start) is the same as the last day of the preceding year then a capital allowance arising in Time zero is entitled to a full years tax depreciation for that year , which means the tax relief is given in YEAR 1 (assuming taxes are delayed one year). Otherwise, the tax relief will be given in Time zero if the tax relief is availabe as the year the capital allowane is earned earned…. and so on untl the assert is sold or the project ceases. PETER1)As mentioned above,”tax is payable one year after the end of the accounting year in which the transaction occurs” is the same with “tax is payable in arrears”?
2)Past question (AGD Co-Dec 2005) stated that “annual lease rental s will be paid in advance (in Jan of each year of operation) and tax liabilities are paid one year in arrears” ===> why the tax relief is given in YEAR 2?
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I did not read exactly the question you asked. Referring to the capital budgeting questions some years ago, the convention of ACCA has been acquisition of a capital asset now (i.e. year 0), CA assumed to be granted at year 1 (a convention, not mentioned clearly in question), thus CA cash saving realised at year 2.
In some textbooks, the CA cash saving is made at year 1 because they assume that CA is granted immediately at acquisition, i.e. at year 0. It appears that ACCA has not yet made it clear in their recent year papers.
If ACCA keeps on not telling when the CA is granted, you should follow ACCA’s convention but, to play safe, write explicitly the assumption of granting CA at year 1 in your answer.
@nice36 said:
1)As mentioned above,”tax is payable one year after the end of the accounting year in which the transaction occurs” is the same with “tax is payable in arrears”?
2)Past question (AGD Co-Dec 2005) stated that “annual lease rental s will be paid in advance (in Jan of each year of operation) and tax liabilities are paid one year in arrears” ===> why the tax relief is given in YEAR 2?1) yes both r same, meaning tax is paid with a delay of one year, meaning tax of first year wil be paid in 2nd year.
2) tax relief is given in year 2 just bcoz tax of first year is paid in 2nd year.
Small tip, which may help in such situation.
1. always take tax saving from capital allowance in the year in which tax is paid.
it is much better logically, for instance, if u pay tax in 2nd year then how can u get tax relief in first year ? doesn’t make any sense, so both must be in same year but even if u put CA in first year and tax is in 2nd year that is acceptable too by examiner but it is not better.
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