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I still can’t seem to understand the timing of tax allowable depreciation benefit. When a question doesn’t say anything about timing of purchase of asset we assume the asset was bought on the start of account period and hence we claim tax allowable depreciation at T1 and relief occurs at T2. I do think I understand this concept but then going through some questions, I have come across questions which hasn’t specifically mentioned anything about the timing of asset being purchased on last day of accounting period but still the tax relief occurs at T1 ( a year earlier )
My question is how do we know if an asset is bought at the end of acc period of T0 so that tax relief occurs at T1 ??Can anybody please be kind enough to clarify this ? Thankyou.
We usually assume that the asset is bought at the start of an accounting period unless obviously the question says differently.
Also, what you have written is correct assuming that there is a one year delay in the payment of tax. Sometimes the question says that tax is payable immediately.If you have come across past exam questions that appear to to differently, then let me know the name and which exam date, and I will explain why 🙂
I have written the relevant information of the question below. Can you tell me on what basis the tax benefit occurred at T1 instead of T2. Thankyou so much !!
Victory Co. is considering the purchase of new equipment which would enable the company to expand its operations. The equipment will cost $1.3 million have a 3 year life at the end of which will have a scrap value of $600000.
The equipment will mean Victory further requires factory space at an annual rental of $80,000, payable in advance, with the first payment being made on the day equipment is purchased.
If Victory Co. buys the new equipment it can claim tax allowable depreciation on the investment on a 25 % reducing balance basis. The Company pays taxation it the year in which it relates at annual rate of 30%. Victory uses cost of capital 10%.The question has followed the normal tax rules.
The machine is bought on first day of the first year, which is time 0.
The first capital allowances will be calculated on the last day of the first year, which is time 1.
The question says that they pay tax in the year in which it relates (so no delay in paying the tax – it is paid immediately), so the first tax saving from CA’s occurs at time 1 also.(Had there been a 1 year delay in paying tax, then the first tax saving from CA’s would be one year after it had been calculated which would be time 2.)
I do suggest that you watch my free lectures on investment appraisal with tax where I go through all the various tax rules.
(Our free lectures are a complete course for Paper F9 and cover everything needed to be able to pass the exam well.)
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