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Dear Sir,
What circumstance should consider the tax saving on tax allowable depreciation?
In some NPV question, we should consider the tax saving on tax allowable depreciation by either substract tax first and then add back tax saving on tax allowable depreciation or substract tax allowable depreciation first to get taxable profit and add back after profit after.
But, in Talam, Q1,MJ 2019, this question just ignore the tax allowable depreciation even though the relevant figure were given.
So I would know what circumstances should consider the tax saving on tax allowable depreciation and what circumstance should not.
Thanks.
I am sorry sir, I found the tax allowable depreciation in the working, but it did not add back to cash flows after tax.
Hi Sir, I know why it did not add back the tax allowable depreciation because there is taxable loss in that year. But I still want to ask that if there is a taxable loss in first year, we don’t need to add back the tax allowable depreciation in the following next years whether the loss has been carried out?
As I explain in my free lectures, the current AFM examiner usually does not add back the depreciation. It is because although depreciation itself is not a cash flow, the question says that an amount equivalent to the depreciation is needed to maintain the non-current assets, and this is a cash flow.
Dear Sir,
Referring to the answer for part bi, the tax payable for Year 1 is -1,796( a tax return to the company). Why is this so? I understand that Year 1 was a loss and there was a tax allowable depreciation of 5,250 so I had recognised no tax payable on the loss before tax in Year 1 and a tax claim of 1,050(20%x5250). I did not recognise a tax return of 746.
We always assume (just as we did in Paper FM (was F9)) that the company is already making profits and is therefore already paying tax (and this question specifically says this in the final paragraph before the heading about the Jigu project).
As a result, any ‘loss’ made by a new project simply reduces the existing taxable profit and therefore reduces the current tax payable – i.e. it is a tax saving resulting from the new project and there is no question of loss relief because the company overall is not making a loss.
The only time this is not the case is when the new investment is in another country (which is common in the exam), in which case if this investment makes a loss then there is no tax payable in the foreign country and the loss will be carried forward to reduce the taxable profit in the following year.
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