Calculation of deferred tax depending on method of realisation of asset
A building, which is fully tax-deductible, originally cost €1 million. At the balance sheet date it is carried at €1,750,000, but tax allowances of €400,000 have been claimed in respect of it. If the building were sold the tax base of the building would be €1.5 million due to inflation-linked increases in its tax base.
Any gain on sale (calculated as sale proceeds less tax base of €1.5 million) would be taxed at 40%. If the asset is consumed in the business, its depreciation will be charged to profits that are taxed at 30%.
If the intention is to retain the asset in the business, it will be recovered out of future income of €1.75 million, on which tax of €345,000 will be paid, calculated as:
|
Gross income |
1,750 |
|
Future tax allowances for asset |
(600) |
|
1,150 |
|
|
Tax at 30% |
345 |
If, however, the intention is to sell the asset, the required deferred tax liability is only €100,000 calculated as:
|
€000 |
|
|
Sales proceeds |
1750 |
|
Tax base |
(1,500) |
|
250 |
|
|
Tax at 40% |
100 |