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This document summarizes accounting for company income tax. It discusses the differences between accounting profit and taxable profit due to different rules for accounting and tax purposes. Some key differences highlighted are depreciation, research and development costs, and prepaid expenses. The document also covers calculating the current tax liability, deferred tax liabilities and assets that arise from temporary differences between accounting and tax treatments of transactions. It provides an example calculation of current tax liability and deferred tax balances.
This document summarizes accounting for company income tax. It discusses the differences between accounting profit and taxable profit due to different rules for accounting and tax purposes. Some key differences highlighted are depreciation, research and development costs, and prepaid expenses. The document also covers calculating the current tax liability, deferred tax liabilities and assets that arise from temporary differences between accounting and tax treatments of transactions. It provides an example calculation of current tax liability and deferred tax balances.
This document summarizes accounting for company income tax. It discusses the differences between accounting profit and taxable profit due to different rules for accounting and tax purposes. Some key differences highlighted are depreciation, research and development costs, and prepaid expenses. The document also covers calculating the current tax liability, deferred tax liabilities and assets that arise from temporary differences between accounting and tax treatments of transactions. It provides an example calculation of current tax liability and deferred tax balances.
Prepared by Emma Holmes Accounting income vs tax treatments
Accounting profit does not equal taxable profit Difference caused by different rules used for accounting vs tax purposes
ACCOUNTING TAX Basis of accounting Equations Accruals basis Principally cash basis Revenue Expenses = Accounting profit Taxable income (TI) tax deductions (TD) = Taxable profit AASBs and the Corporations Act are key sources that determine the appropriate accounting treatment of transactions The Income Tax Assessment Act determines the tax treatment of transactions Some exceptions to this Accounting income vs tax treatments ITEM ACCOUNTING TAX Passive revenue received in arrears
Depreciation (accelerated for tax) R&D costs Prepaid expenses
Recognised as revenue, with corresponding asset (receivable) when earned Recognised as TI when cash received
Recognised as expense based on useful life of asset Recognised as TD based on predetermined rates Capitalised and amortised
Recognised as TD when paid Recorded as an asset and expensed as incurred Recognised as TD when paid
Rent, interest, royalties etc Common for assets to be depreciated over a shorter life for tax purposes than for accounting purposes Accounting income vs tax treatments ITEM ACCOUNTING TAX Passive revenue received in advance
Depreciation (accelerated for acctg) Bad/doubtful debts Employee benefits eg annual leave Recorded as liability . Recognised as revenue when earned.
Recognised as TI when cash received
Recognised as expense based on useful life of asset
Recognised as TD based on predetermined rates
Allowance raised and expense recorded when debt considered doubtful
Recognised as a TD when debt physically written off
Liability raised and expense recorded when debt owing to employee
Recognised as TD when payment made to employee
Possible for accounting useful life to be shorter than tax useful life Provisions (eg for warranties) are treated in the same way as employee benefits Accounting for income taxes general principles The tax consequences of transactions that occur for accounting purposes during a period should be recognised as income or expense during the current period, regardless of when the tax effects will occur
This requires identifying the current and future tax consequences of items recognised in the balance sheet
Two separate calculations are performed each year:
1. current tax liability 2. movements in deferred tax balances Calculation of current tax liability Accounting profit/(loss)
- acctg revenue not assessable for tax + acctg expenses not deductible for tax
+/(-) differences between acctg revenue and TI +/(-) differences between acctg expenses and TDs
= Taxable profit
x tax rate % = Current tax liability (CTL)
Calculation of current tax liability - example Profit before tax for ABC Ltd for the year to 30 June 2012 is as follows: Sales 1,000 Interest revenue 40 Government grant 80 COGS (450) Depreciation (50) Goodwill impairment (20) Bad debts (30) Annual leave (10) Other expenses (260) PBT 300 $60 allowed as a tax deduction for plant. Interest has not yet been received. Bad debts of $20 were written off during the year. Payments of $30 were made to employees in relation to annual leave taken during the year. The tax rate is 30%
Required: Calculate the current tax liability of ABC Ltd for 2012
Calculation of current tax - example Accounting profit before tax
Taxable profit Current tax liability (CTL) (30%) 300
Government grant (80) Goodwill impairment 20 Interest not yet received (40) Adjustment for plant depreciation (10) Adjustment for bad debt write-offs 10 Adjustment for annual leave paid (20) 180 54 exempt income not deductible Acctg depn 50 Tax depn (60) Adj req (10) B/debts expense-acctg 30 B/debts w/off- tax (20) Adj req 10 A/L expense- acctg 10 Paid- tax (30) Adj req (20) Recording current tax liability In the previous example the CTL would be recorded as:
Dr Income tax expense (current) 54 Cr Current tax liability 54
Deferred tax liabilities and assets Arise when the period in which revenue and expenses are recognised for accounting is different from the period in which items are recognised for tax
Arise principally due to the accruals vs cash basis of recognising transactions. Differences either result in:
1. The company paying more tax in the future Taxable temporary differences (TTDs) Result in deferred tax liabilities (DTLs)
2. The company paying less tax in the future Deductible temporary differences (DTDs) Result in deferred tax assets (DTAs)
Calculation of deferred tax The existence of temporary differences results in the carrying amounts of an entitys assets and liabilities being different from the amounts that would arise if a balance sheet was prepared for tax authorities
Carrying amount (CA)-
Tax base (TB)- asset and liability balances that would appear in a tax balance sheet.
Temporary differences are calculated as follows:
asset and liability balances (net of accumulated depreciation, allowances etc) based on accounting balance sheet.
CA TB = TTD/(DTD)
Calculating the tax base Calculating the tax base for an asset CA future taxable amounts + future deductible amounts = TB
Calculating the tax base for a liability CA + future taxable amounts - future deductible amounts = TB
Calculating the tax base - examples CA FTA FDA TB Prepayment: $3,000 Interest receivable:$1,000 Plant: cost $10,000, acctg a/depn $4,600, tax a/depn $6,500 Trade receivables: $52,000 Allowance for b/debts: $2,000 Trade payables: $30,000 Annual leave liability: $3,900 3,000 - 3,000 + - = - 1,000 - 1,000 + - = - 5,400 - 5,400 + 3,500 = 3,500 50,000 - - + 2,000 = 52,000 30,000 + - - - = 30,000 3,900 + - - 3,900 = - Calculating the tax base examples Notes to worksheet: Prepayments- deductible when paid for tax purposes- therefore no balance would appear as an asset in the tax balance sheet. Interest receivable- assessable when received- therefore no balance would appear as a receivable asset in the tax balance sheet. Plant- WDV for tax purposes = $10,000 - $6,500 = $3,500. Trade receivables- bad debts not deductible for tax until physically written off- therefore the gross trade receivables amount would appear in the tax balance sheet. Payables- no differences in the treatment of trade payables for tax and accounting purposes- therefore CA = TB. Annual leave liability - deductible when paid for tax purposes- therefore no balance would appear as a liability in the tax balance sheet.
Excluded taxable temporary differences Certain temporary differences are excluded from being recognised.
AASB 112 prohibits temporary differences from being recognised in relation to: Goodwill The initial recognition of assets and liabilities that do not arise from a business combination.
Providing certain recognition criteria are met, deductible temporary differences arising from tax losses can lead to the recognition of DTAs. Recognition of DTLs and DTAs Deferred tax liabilities Deferred tax liabilities must be recognised in full
Deferred tax assets Deferred tax assets relating to temporary differences and tax losses are recognised only if: there are sufficient taxable temporary differences for the entity to use against the deductible temporary differences; OR if it is probable that the entity will have sufficient future taxable profit (against which the tax benefit can be offset)
Deferred tax assets and liabilities Calculating a deferred tax asset (DTA)
DTD x tax rate % = DTA
Calculating a deferred tax liability (DTL)
TTD x tax rate % = DTL
Recording a DTA/DTL
Dr Deferred tax asset Dr/Cr Income tax expense Cr Deferred tax liability
The tax rate % is that which is expected to apply when the asset will be realised or the liability settled BALANCING ITEM Calculation of deferred tax example The balance sheet of ABC Ltd at 30 June 2012 is as follows:
Assets Liabilities Cash 260 Trade payables 296 Trade receivables 300 Loan 485 Allowance for b/debts (30) 270 A/L liability 15 Interest receivable 40 Deferred tax liability 9 Inventory 100 805 Plant 500 Equity Accum depn (300) 200 Share capital 700 Goodwill 800 R/earnings 175 Deferred tax asset 10 875 1,680 Calculation of deferred tax example The balances in the deferred tax asset and liability accounts are the carried forward closing balances from the prior year
Accumulated depreciation of plant for tax purposes is $360
Required:
Complete the deferred tax worksheet on the following page and prepare the journal to record deferred tax movements for the 30 June 2012 year.
1. Items where the CA = TB have been omitted from worksheet (eg cash, payables, loan)
2. AASB 112 does not permit the recognition of a DTL relating to goodwill. The TTD arising is referred to as an excluded temporary difference
3. Negative figures in the adjustment section would denote decreases in the DTA/DTL balances during the year
Calculation of deferred tax example Entry to record deferred tax movement:
Dr Deferred tax asset 3 Dr Income tax expense 18 Cr Deferred tax liability 21
Summary:
Current tax liability (slide 11) Deferred tax movement Total income tax expense
54 18 72 BALANCE Offsetting tax assets and liabilities
Both current and deferred tax assets and liabilities are to be offset against each other and a net figure shown in the balance sheet position for: Current tax Deferred tax Change in tax rates When a new tax rate is enacted, that new rate should be applied:
when calculating current tax liability when calculating adjustments to deferred tax accounts to carried forward deferred tax balances from previous years
Tax Losses Tax losses are created when allowable deductions exceed assessable income
The tax act allows losses to be carried forward and used as a deduction against future taxable income
Tax losses provide future deductions and (subject to recognition criteria) create deferred tax assets
Exempt income cannot contribute to carry forward losses If prima facie tax loss is $(10 000) but there is exempt income of $2 000 the allowable carry forward loss would be $(8 000) Tax Losses Recoupment occurs as soon as the company earns a taxable income
Tax loss recouped is recorded in the determination of taxable income and a journal entry raised to reverse the DTA
If a prior years loss carried forward is being recouped and there is exempt income in the year of recoupment, the exempt income must first be offset against the loss
Disclosure Tax assets & liabilities must be classified as current or non-current on the face of the statement of financial position
Current and deferred tax assets and liabilities can be offset in most cases
Tax expense on the statement of profit or loss and other comprehensive income
Payment of income tax Company income tax is paid under the PAYG (pay as you go) system in quarterly instalments
Companies must lodge quarterly business activity statements (BAS) and pay tax calculated as: Instalment income x instalment rate (supplied annually by the taxation department)
Current tax liability represents the last quarterly payment and any adjustments necessary to reflect the fact that annual taxable income may differ from the sum of the quarterly returns