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Hi John,
Normally in project appraisal questions, the investment in depreciable assets are in Year 0 (now) and the tax allowable depreciation will be shown starting in Y1 cash flows.
Then in some questions, like this Omnikit one, the machinery is bought in Y1 (which should be understood as end of Y1). Then shouldn’t the first tax allowable depreciation to be shown in Y2 (the first allowance will be from end of Y1 to end of Y2)? The answer for this question shows the depre allowance being considered in Y1 while the balance of this asset at the beginning of Y0 is 0.
Thank you.
The machinery is bought at the end of the first year – time 1. The capital allowances are calculated at the end of the year – time 1, and would reduce the profit at time 1 resulting normally in a tax saving at time 2 (since tax is 1 year in arrears).
However, since there is no taxable profit at time 1, the allowances will be carried forward and reduce the profit at time 2, resulting in the first tax saving being at time 3. This is exactly what the examiners answer has done.Hi John,
Thank you for quick response. Please let me clarify further as below
1. Capital allowance is provided in full for the year regardless of whether the asset is bought at begin or end of year. Is that correct?
2. The question also mentioned that allowances are in arrears. Should this mean that the allowances should be deferred to the next period?Thank you
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