Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Omnikit (6/97) Capital Allowance timing tax one year in arrears
 This topic has 13 replies, 2 voices, and was last updated 10 months ago by John Moffat.

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August 16, 2016 at 5:51 pm #333660stafano
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Hi John,
When i deal with capital allowance i remove the amount from the profits before computing the tax, this seems very straight forward when tax is paid in the same year.
Now if Tax is paid in arrears, so year 1 tax is paid in year 2 we will still calculate capital allowances the same way….remove the capital allowance from the Year 1 profits and determine the tax which will be paid in year 2. I know capital allowance is determined the year after the non current asset is bought so if we buy now we determine capital allowance for Year 1,
So what im confused about is capital allowance in areas is this even possible? say we bought a machine now(time 0) and normally capital allowance will be time 1 but would a question ever ask you to do capital allowance in arrears which means no allowance for time 1 and we start from time 2? Or is it always the case capital allowance is the year after regardless of tax being paid in arrears or in the same year?
In the Omnikit question it states “Taxation is payable, and allowances are available one year in arrears” from that it seems allowances should have started from year 3 not year 2 as done in the question.
August 17, 2016 at 6:09 am #333716John MoffatKeymaster Topics: 57
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The first capital allowances are calculated for the year in which the expenditure was incurred (whatever date within the year it was). If there is a one year delay in tax, then the tax benefit occurs one year later.
The wording of Omnikit is unclear and therefore the tax effect depends on your assumptions (and you should always state your assumptions).
It is assumed that the expenditure occurs at the end of the first year, and therefore there are allowances for the first year – they would normally reduce the taxable profit of the first year and therefore affect the tax at time 2.
However since in this question there is no profit in the first year, then effectively there is a loss carried forward and the benefit does not occur until time 3.August 17, 2016 at 5:05 pm #333805stafano Topics: 43
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1) In the omnikit question the machine is bought in Year 1, so the capital allowance is removed from Year 2 and since tax is paid one year later the tax on the year 2 profits will be paid in year 3?
2) if say the machine was bought Now (time 0) and we would normally determine the capital allowance for year 1 and then pay year one tax in year 2(if tax is paid a year later)
Im not sure if BPP changed the question but in this question they have a table which shows the machine was bought in Year 1.
Finally can you clarify that capital allowances are always the first year after it is bought, so if the machine is bought at time 0 we remove the capital allowance from year 1 flows to determine the tax which can be paid either in year 1 or one year later depending on what the question states.
August 18, 2016 at 6:09 am #333867John MoffatKeymaster Topics: 57
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Whether the asset is bought on the first day of the first year (time 0) or the last day of the first year (time 1), then the capital allowances will reduce the profit for the first year, and the tax effect will therefore be at time 2 (with a one year delay in tax).
As I wrote before, the answer assumes that the payment in year 1 was at the end of the first year – time 1.
The tax effect would therefore have been at time 2, were it not for the fact that they made no profit in the first year. Therefore there was no tax payable at time 2 and no tax could be saved on the capital allowances – therefore there is a loss to be carried forward and the first tax effect ends up being a year later at time 3.
August 18, 2016 at 2:38 pm #333973stafano Topics: 43
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Ahh ok I understand.
So for instance if a machine is bought time 0 we determine the capital allowance for time 1 to match the tax being paid. if the Tax is paid 1 year later we would pay the tax in time 2 and the capital allowance will also be in time 2 based on time 1.
When you said “Whether the asset is bought on the first day of the first year (time 0) or the last day of the first year (time 1), then the capital allowances will reduce the profit for the first year, and the tax effect will therefore be at time 2 (with a one year delay in tax)”
This is where my confusion occurred I thought because we bought the machine in time 1 we start capital allowances from time 2 just like if we bought a machine in time 0 we start CA in time 1 but regardless if we pay tax in year 1 we need to consider CA from year 1
August 19, 2016 at 7:07 am #334026John MoffatKeymaster Topics: 57
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I am please you are now clear 🙂
August 19, 2016 at 2:45 pm #334084stafano Topics: 43
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Hi John,
Just one last thing please let me know if Im doing the two assumptions correct.
Assumption 2 seems to be the one the omnikit question is using, since we have no profits in years one we take the CA benefits of 640 and add it to the 480 T3 benefits.
Assumption 1: Machine Bought end of Year 1 so Time 1 and Tax is paid one year later
T1 6400
1600 Tax Benefit T3640
T2 4800
1200 Tax Benefit T4480
3600Assumption 2: Machine Bought start of Year 1 so Time 0 and Tax is paid one year later
T0 6400
1600 Tax Benefit T2640
T1 4800
1200 Tax Benefit T3480
3600August 19, 2016 at 3:24 pm #334095John MoffatKeymaster Topics: 57
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What you have written is correct 🙂
August 21, 2016 at 1:27 pm #334000stafano Topics: 43
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Hi John I know this exam is all about assumptions so if i used either of the below assumptions would it work out?
Tax 40% CA 25%
Assumption 1:
If machine Bought end of year 1 so T1 Tax paid one year later
T1 6400
1600 640 T3 Tax Benefit
T2 4800
1200 480 T4 Tax Benefit
T3 3600Assumption 2:
If machine Bought start of year 1 so T0 Tax paid one year later
T0 6400
1600 640 T2 Tax Benefit
T1 4800
1200 480 T3 Tax Benefit
T2 3600Now since we have no profits in year 1 the T2 tax benefits would be added to the T3 tax benefits?
So wouldn’t assumption 2 be the assumption that this question was answered with?
Thanks in advance John I know I must be a pain, it just seems to be these older questions that give me the most problems.
August 22, 2016 at 5:40 am #334432John MoffatKeymaster Topics: 57
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It makes no difference to the capital allowances whether the machine was bought at the beginning or end of the first year. The first capital allowances are calculate at the end of the accounting year in which the machine was bought, regardless of when within the year they were bought.
So the first computation would be at the end of the first year – time 1 – and they would reduce the profits for the first year for tax purposes. If this results in a taxable loss then the loss reduced the profits for the second year (and the tax itself is one year later at time 3).August 25, 2016 at 1:21 am #335014stafano Topics: 43
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Ahh ok, so the capital allowance for time 1 would create a tax benefit for time 3 to match the tax paid in time 3 which is based on the profits of time 2?
SO wouldn’t the time 2 Capital allowance create a tax benefit for time 4? would this just be a different assumption to use to answer this question rather then the one the examiner used?
August 25, 2016 at 7:52 am #335078John MoffatKeymaster Topics: 57
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No – the tax benefit is 1 year later. Here it is only deferred to time 3 because there was a taxable loss in the first year.
November 30, 2021 at 8:49 pm #642147nk16 Topics: 68
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Where can I get the Acca answer solution for this Omnikit …
If u have plz send meDecember 1, 2021 at 8:00 am #642177John MoffatKeymaster Topics: 57
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I only keep copies of exam questions for the last 15 years.
This question is from over 20 years ago – the examiner has changed twice since then, and, of course, there have been syllabus changes since then. It might be in your Revision Kit, although this is unlikely, otherwise you might find it using Google search.

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