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Hi tutor
While calculating the capital allowances, say project life is 5 yrs and residual value is at the end of yr 5 tax allowable depreciation is 25% on reducing balance basisFor capital allowances, sometimes in book solutions they first calculated 25% in yr5 and then taken residual value while in some solutions they didn’t take 25% in yr 5 but just residual value in yr5 in calculations
In which situation these approaches are applicable ?And what is the impact it residual value is written as after-tax?
What is the impact of the following on the capital allowances calculations if question says that company has sufficient other profits to absorb any capital allowances derived from this project
Plz guide me
ThanksBest is to calculate 25% each year, but in the year of sale do not calculate 25% but instead calculate the balancing allowance or balancing charge. (Although if you do calculate the 25%, then the balancing allowance/charge will be different, but the total of the two will still be the same.)
If you are told that the residual value is after tax, then you would assume that it already takes account of the balancing allowance/charge. However, do (as always) write down your assumption.
The relevant of your last sentence is that if in one year the capital allowances (tax allowable depreciation) were greater than the profit, then this would result in a loss (and give rise to loss relief – i.e. no tax in that year, but the loss subtracted from the following years profit before calculating tax).
However, if they have lots of profits elsewhere, then a loss from this project means that overall profits fall and so there is a tax saving to the company (no loss, and no loss relief).Ok thank you so much, I understood the first question but still confused in the last one.
Company has enough other profits to absorb capital allowances from this project, it means that if there is loss, in say yr 4 then we can carry forward or same yr whatever the policy of company is. if nothing written like above, then what will we do?No – if they have enough profits elsewhere, then there will be no loss to the company. The ‘loss’ on this project will simply reduce the overall profits and therefore save tax.
So just as a ‘profit’ from the project of $100 would result in an extra tax payment of $30 (if that is 30%) – therefore a cash outflow of $30; if there is a ‘loss’ from this project of $100 then this would result in a tax saving of $30 for the company – therefore a cash inflow of $30.
Hello,
Could you please clarify regarding tax carried forward/tax savings. If there is a taxable loss, and nothing is stated about “enough profit from other sources to cover losses”, should I calculate tax for loosing year as a saving, or put it as nil and then carry losses forward for subsequent years tax calculation?Thank you,
The wording of the question will usually make the position clear, but if not then you should state your assumption (as always in P4 – the answer always depends on the assumptions you make). If your assumptions are sensible then you will get the marks.
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