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I am dont understand the Capital allowance calculation in working 5.
It should be like this cost of machinery is 80 and it will depreciate on straight line basis for 4 years, so Capital allowance is of 20 each year.
And the saving on it should be 20(Capital allowance) x tax rate, but this do not give same affect, where i am wrong?In Question Chmura(dec-13) the depreciation is also on straight line
Cost of machinery is 1250 and capital allowance is 10% and tax rate is 25%
and what i did is 1250 x 10%=125 X 25%= 31.25. 31.25 i added it match with the solution.The CA’s are 20 a year.
However, they do not give a tax saving each year because the business is making losses initially (so no tax payable) and the losses are carried forward and subtracted from subsequent years profits.
So you need to do as the answer has done and subtract the allowances from the operating profit in order to get the taxable profit. If it results in a loss then there is no tax payable but the loss is subtracted from the following years profit.
I am sorry but i didnt understand.
We can also carry forward the c.a x tax rate i.e actual saving amount, instead of -20 which but this do not give same answer.How can there be a tax saving if they are making losses?
By all means carry forward the operating loss before capital allowances and add on the capital allowances, but the end result will be the same.
OH !
Yes there are no profits. We have to carry forward 20.
But why examiner didnt add 20 after subtracting?
I mean 20 is deducted first ,agreed. But after that it should added 20He has only deducted 20 in the workings for the calculation of the tax.
In the cash flows themselves he has not deducted 20.
In this question the tax shield and subsidies loan is first converted into domestic currency then it is discounted @ 5%(interest rate for $)
A-If i choose the risk free rate i.e 3%, the rate in Gamala(the foreign country where Tramont is interested) then the saving will be converted to $ after applying discounting 3%. Is it correct?
B-What is the explanation i need to write if i use risk free rate for the tax shield?
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