BLM70035 - 鈥業ncome-into-capital鈥� schemes and back loaded leases: Introduction to back-loaded leases: worked example of commercial and tax profits pre FA97/Sch12
Example
皇冠体育app practical effect of the tax treatment before FA97/Sch 12 is clearly seen in an over-simplified Chapter 3 Part 21 CTA 2010 finance lease example. Suppose:
- there is a 3 year finance lease of a real property asset,
- the total rentals due are 拢900,
- the total interest element in those rents is 拢120,
- the total capital element in those rentals is 拢780, and
- the rentals due for each of the three years are, respectively, nil, 拢300 and 拢600.
Commercial accounts treatment
| Year | 1 | 2 | 3 | Totals |
|---|---|---|---|---|
| Rent due for the year | 拢0 | 拢300 | 拢600 | 拢900 |
| Add to (deduct from) rent due | 拢90 | (拢270) | (拢600) | (拢780) |
| Gross earnings - GAAP interest* | 拢90 | 拢30 | 拢0 | 拢120 |
*This is the top line in the table in BLM70030
皇冠体育app total gross commercial earnings are the 鈥榠nterest鈥� element of 拢120:
- 拢90 is earned in Year 1,
- 拢30 is earned in Year 2, and
- there are no commercial earnings in Year 3 in this case.
In practice, rentals are usually payable monthly or quarterly in advance. 皇冠体育app gross commercial earnings would be spread over the three years. 皇冠体育app figures in the example are over-simplified to illustrate the principle.
Depreciation
In finance leasing circles the second line in the account is normally called 鈥榙epreciation鈥�. In this example there are total deductions from the rents due of 拢870 (in Years 2 and 3). 皇冠体育appre is an addition of 拢90 in Year 1. Setting this off against the 拢870 deductions for Years 2 and 3 produces 拢780, which is the capital element in the gross rentals (the 鈥榣oan repayment鈥�).