Reinvestment of Cashflow: Tax treatment

ixus

What is the tax treatment in the following example?

A company uses its cashflow for the year to purchase an asset within that year. E.g. 100k to purchase another business, a commercial property etc.

Is the cashflow taxable?

barneystinson

Cash flow is irrelevant, profit is taxed.

Specifically the net profit, as adjusted for the purpose of arriving at a taxable profit.

Assuming for the sake of simplicity that in your example cash flow = profit, then buying a capital asset or investing in the capital of another business would not affect the profit, as they are simply balance sheet transactions converting one type of asset (cash) into another (plant, shares etc...).

Silverbling

barneystinson wrote: »

Cash flow is irrelevant, profit is taxed.

Specifically the net profit, as adjusted for the purpose of arriving at a taxable profit.

Assuming for the sake of simplicity that in your example cash flow = profit, then buying a capital asset or investing in the capital of another business would not affect the profit, as they are simply balance sheet transactions converting one type of asset (cash) into another (plant, shares etc...).

That is the most straight forward answer in simple terms that is understandable thank you, sorry to go slightly off tangent but would buying stock be the same premise, if you need that stock to trade?

ixus

Thanks barney.

barneystinson

Silverbling wrote: »

That is the most straight forward answer in simple terms that is understandable thank you, sorry to go slightly off tangent but would buying stock be the same premise, if you need that stock to trade?

Same answer again, as stock is also an asset in the balance sheet.

(Although it would also increase both your purchases figure and your closing stock figure, by equivalent amounts and therefore have a nil effect on profit.)