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 |
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