Topic 3

Accounting for company

income tax
Current Tax Consequences
Chapter 6

Learning objectives
1. Explain how taxable profit differs from
accounting profit
2. Prepare a current tax worksheet
reconciling accounting profit to taxable
profit and record the journal entries for
current tax

Accounting for income

taxes general principles
AASB 112 requires companies to account for
the current and future tax consequences
of:
Current transactions and events
The recovery and settlement of assets and
liabilities

Current tax consequences = current tax

liability/asset
Future tax consequences = deferred tax
liability/asset
Income tax expense for period is comprised
of:
Current tax liability

Difference between
Accounting and Income
Tax Treatments

Accounting profit
= accounting income less expenses
Based on accrual accounting
Prepared according to requirements of
accounting standards
Taxable income
= assessable income less allowable deductions
Generally based on cash accounting
Prepared according to requirements of Income
Tax Assessment Act

Differences between
Accounting and Income
Tax Treatments

Assessable income accounting income

Accounting income not received is not taxable
Some income is exempt from tax eg
government grants
Allowable deductions accounting
expenses
Accounting and tax depreciation rates may
differ
Some expenses are not deductible eg
entertainment costs
Some expenses are not deductible until a
future period eg long service leave expense

Accounting income vs tax

treatments
ACCOUNTING
Basis of
accounting
Equations

Accruals basis

TAX
Principally cash basis
Some
Someexceptions
exceptionsto
tothis
this

Revenue
Expenses
= Accounting
AASBs
and
AASBs
andthe
the
profit
Corporations Act are

Corporations Act are

key
keysources
sourcesthat
that
determine
the
determine the
appropriate
appropriate
accounting
accountingtreatment
treatment
of
of
transactions
transactions

Taxable income (TI)

tax deductions (TD) =
Taxable profit
The
TheIncome
IncomeTax
TaxAssessment
Assessment
Act
Act
determines
determinesthe
thetax
tax
treatment
of
transactions
treatment of transactions

Accounting profit does not equal taxable profit

Difference caused by different rules used for

accounting vs tax

Accounting income vs tax

treatments
ITEM
Employee
benefits eg
annual leave

ACCOUNTING
Liability recognised and
expense accrued when debt
owed to employees

TAX
Recognised as TD
when leave is paid to
employees

Provisions
Provisions(e.g
(e.g. .for
forwarranties)
warranties)are
aretreated
treatedin
inthe
thesame
sameway
way
as
employee
benefits
as employee benefits

Prepaid
expenses

Recorded as an asset when pre- Recognised as TD

paid and expensed as incurred
when paid

Insurance,
Insurance,rent,
rent,interest,
interest,royalties
royaltiesetc
etc
paid
in
advance
received paid
in Liability
in advancerecognised for

Cash
advance of
services

Bad/doubtful
debts

unearned revenue and then

allocated to revenue as
services are performed
Allowance raised as contra
asset and expense recorded
when debt considered doubtful

Recognised as TI
when cash received

Recognised as a TD
when debts are
written off as bad

Accounting income vs tax

treatments
ITEM

ACCOUNTING

Fines and penalties

and entertainment
costs

Recognised as an expense
when payable

TAX
Not deductible

Depreciation of a
Recognised as expense
Recognised as TD
depreciable
asset
based
on useful life
ofa asset
based
on purposes
Common
for
assets
to
be
depreciated
over
shorter
life
for
tax
Common for assets to be depreciated over a shorter life for tax purposes
predetermined rates
than for accounting purposes
than for accounting purposes

R&D costs (expense)

Recognised as an expense
Concessional
based on the amount of the deduction allowed
expenditure
equal to 125% of the
expenditure

Development costs
(intangible asset)

Capitalised (asset) and

amortised

Tax losses

No recognition
Subject
Subjectto
toconditions
conditionse.g.
e.g.Reduced
Reducedby
by
exempt
income
exempt income

Recognised as TD
when paid
Carried forward and
offset against future
TI

Taxation vs Accounting
Treatments
These differences can have:

Current tax consequences

Eg non-deductible expense means taxable

income is greater than accounting profit
Therefore current tax payments will be
higher

Future tax consequences

Eg an expense which not deductible now but

will be in future periods
Therefore, future tax payments will be
lower

Determination of taxable income

$60 depreciation allowed as
a tax deduction for plant
Rent
expenses
include
accrued rent of $10
Depreciation on buildings is
non-deductible
Interest revenue has not yet
been received
Doubtful
debts
not
deductible until written off
Tax rate is 30%

10

Current Tax Liability

Calculated by adjusting accounting profit
(or loss) to allow for differing treatments of
revenue and expense items recorded
during the year
* This is done by adding back accounting
expense and
subtracting the tax deduction or subtracting
accounting
revenue and adding the assessable amount

Taxable income x tax rate = Current tax liability

Income tax expense

Dr
Current tax liability

XX
Cr

XX

** Determination of Taxable Income11

(see Textbook p. 248-251 Illustrative example

Tax Losses
A tax loss arises when a companys tax
deductions exceed its taxable income
The Income Tax Assessment Act (ITAA)
allows for tax losses to be carried forward
as a deduction against future taxable
income
i.e. as a deferred tax asset (DTA)
Deferred tax asset
Dr
Income tax income CrXX

XX
12

Tax Losses
The amount of loss to be carried
forward is dependant on
Existence of exempt income
Satisfaction of recognition criteria

Exempt income cannot contribute to

carry forward losses

13

Tax Losses
Recognition criteria
A deferred tax asset resulting from a tax
loss can only be recognised if it is probable
that future taxable profits will be available
against which the unused tax loss can be
used
If recognition criteria are not met then DTAs
cannot be recognised and any existing DTA
balance which fails the test (applied each
reporting date) must be written off
14

Tax Losses
Recoupment of tax losses 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
Income tax expense Dr
Deferred tax asset Cr

XX
XX
15

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 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

Tutorial Week 4
Chapter 6
RQ 2, 3, 17
PQ 6.2, 6.3 (part A only ), 6.13 (part
A&B only), 6.14 (part A only)
In-Class Participation
All students are expected to have attempted all tutorial problems before attending
the tutorial. Specifically, the question(s) that has been bolded.