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Hi, I’m afraid I’m having a bad week…. I’m really struggling to understand tax allowable depreciation and their timings. I.e when an asset is bought right at the beginning of a year or right at the end which period is the depreciation and the corresponding tax deduction applied? I’m not sure whether I’m better moving on and then going back to it, but i hate moving on from things until i fully understand them!
Any advice / help would be very much appreciated!
Thanks,
If the tax is payable one year in arrears, then:
If the asset is purchased at the start of the year (time 0), the tax is calculated at the end of the year, and the tax effect is one year later i.e. time 2
If the asset is purchased at the end of the year (time 0), the tax is calculated immediately, and the tax effect is one year later i.e. time 1
The free lecture on this should help you.
sir, tomorrow is my f9 exam. hope to get a reply before tomorrow.
i got these lines from your explanation to a query in P4 tutor page.” There is no such thing as year 0.
0, 1, 2 etc are not years but points in time that are 1 year apart (so that we can discount in whole years).
Time 0 is the start of the first year.
Time 1 is the end of the first year and start of the second year
Time 2 is the end of the second year and start of the third year, and so on.Unless (obviously) told differently, operating flows (revenue, expenses) occur at the ends of years, so the first years revenue is a time 1, the second years revenue is at time 2 and so on.
Capital allowances are always calculated at the end of the accounting period in which the asset was purchased.
If the asset was purchased on the last day of the previous year (time 0), then the capital allowances would be calculated immediately (even though they were only bought on the last day). Therefore if there is no delay in tax then the first tax saving would be at time 0. With a 1 year delay in tax, the first saving will be at time 1″
so sir when the question says that asset was purchased on 31st December 20×4 it means that the asset was purchased on last day of year and hence time 1 or time 0?
as written by you it’s year 0. but you also wrote above that year zero is start of first year and year 1 is end of first year so shouldn’t the purchase of asset be considered at year 1?also, if the question says that tax is paid in the same year and has no delay. so the tax should be on which year???
The date of purchase is regarded as time 0.
The first year of trading will be year ended 31 dec X5 and the operating flows will be at the end of the year which is time 1.
If tax is payable in the same year, then the tax on the time 1 flows is payable at time 1.
All of this is explained in my free lectures on investment appraisal with tax.
sir i have watched your lectures earlier also, and Relevant Cash Flows for DCF Taxation (example 3) video again now. i can’t watch at the moment any other videos as i am left with very less time. i have exam tomorrow and with god’s grace and your kind assistance i have understood almost the whole syllabus but just confused with the timing of tax allowable depreciation. i have finally concluded with this performa. please make changes to the performa if it’s wrong. at the moment i can learn it as a performa only.
if asset purchase-end of year. it is T0
capital allowance calculated at T0
if no delay in tax, relief in T0
year delay in tax, relief in T1if asset purchase-start of year. it is T0
capital allowance calculated at T1
if no delay in tax, relief in T1
year delay in tax, relief in T2please reply. sorry sir for disturbing you so much.
Sir, you are too good. I don’t really have the words to thank you. I got your reply an hour before going out of home for exam. Felt so blessed 🙂 wrote the question at night before sleeping. Afternoon 12pm was my exam, waited till 10 am for your answer and thought you wouldn’t reply but then you did.. You are amazing sir. May God bless you with the Best. I still can’t believe you do all this for free. I really have no words to praise you.
Sir pleasure is all mine 🙂 just saw a message on the screen from opentuition regarding fund. I don’t have anything to do for opentuitiom, as i don’t possess anything that i can give to benefit you to the extent you did to me. I’ll try my level best to do the little i can do. Stay blessed 🙂
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