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Dear John,
Usually in my working I will deduct the tax allowable depreciation before calculating the tax and add it back afterwards. It will be like something like this : Revenue – VC – FC – TAD = taxable profit. Then, using the taxable profit, I will compute the tax and add TAD back.
However, sometimes the question states that the TAD is equivalent to the amount of investment needed to maintain current operating levels. So, this means TAD=CAPEX.
I do understand that after computing the tax, we don’t need to add back the CAPEX anymore as they cancel each other off. My question is, do we still need to minus the TAD before computing the tax? Because based on the answers of different questions, when TAD=CAPEX, sometimes they minus the TAD before computing tax and sometimes they doesn’t .The current examiner does normally assume that the amount of TAD is equivalent to the amount of investment needed to maintain current operating levels.
Therefore although we always subtract the TAD to calculate the tax, we do not need to add it back (because it cancels against the investment).
You write that sometimes they minus the TAD before computing tax, and sometimes they don’t. The only time you can have seen this, is where they calculate the tax on the profit before TAD but then calculate the tax saving on the TAD separately (which ends up with the same net result).
Sir, in Pursuit Co (June 2011), we don’t have to minus the TAD before computing the tax as it states that the operating profit is after TAD, is that correct? Can we assume that operating profit is always after TAD? By the way, is operating profit the same as EBIT?
Yes – the operating profit in this question is said to be after TAD.
No – you can’t always assume it is after TAD. It will be after depreciation, but depreciation in the accounts might not be the same at the TAD, in which case one needs adding back and the other subtracted before calculating the tax.
Yes – operating profit is EBIT.
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