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Hi John,
Couple of things on this question,
1) we have 2 ways to do capital allowances either calculate it and then remove the CA from the taxable cash flow determine tax then add it back in or determine the tax saved on the CA and then add that figure onto the cash flows once tax is done.
Of the two ways I like the first method best, now in this question they did it the second way and I have a hard time figuring out how to use the first method in this question, for example Year 1 has cashflow of 122 if we take away the 400 CA it gives a negative figure:
122-400=-278….-278* the tax rate of 30% =83.4 how do you implement this way of dealing with CA in this and similar questions(basically where we deal with negative cash flows due to the CA), also tax is paid in arrears but capital allowance is not in arrears.
2) the residual value of 40 was not taken into consideration in determining the time 5 allowance was this because the asset was not sold? and so it was only considered in time 6 because of tax being paid one year latter?
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John,
a similar case in a more recent question FUBUKI (12/10) in regards to my first question above, in this case again if i remove 0.750 CA from the taxable cash flows of 0.690 it give a negative figure of -0.06. Im sure the ways to deal with either case is the same the only difference is that FUBUKI pays tax in the same year.
Thanks again.
In Fubuki, the capital allowances are not 0.750 – they are 0.650 p.a. (because it is caculated on the cost less the estimate scrap value). Therefore the taxable profit is +’ve, not -‘ve.
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1) In the BPP answers it has a tutorial note for FUBUKI stating that the CA can be 0.75 in the first 3 years and 0.35 in the final year.
So if i calculated it would this be accurate where if we have a negative taxable cash flow we simple add the tax back? as below
0.690-0.750=-0.06+0.015+0.750-0.215=0.49
Tax on -0.06*0.25=0.015
Year 1 has cashflow of 122 if we take away the 400 CA it gives a negative figure
2) In Neptune it will create a negative Cash flow 122-400=-278
3) Why is it in Neptune the tax benefits are not matched with the tax paid, tax is in arrears and the CA benefits is not, shouldn’t they usually be together?
4) the residual value of 40 was not taken into consideration in determining the time 5 allowance was this because the asset was not sold?
1. OK – you could have done that. Because it is in addition to their existing business, then even though the CA’s would be bigger than the profit it would result still result in a tax saving because it would reduce existing profits.
2. It was the previous examiner who set Neptune, and he didn’t seem to understand tax properly 🙂 The CA benefits should have started a year later. He has taken the residual value into account in calculating the balancing charge (he should not have calculated a writing down allowance in the same year, but the two together come to the correct figure anyway).
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