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Chapter 6
Accounting for company
income tax
Prepared by
Emma Holmes
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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 oftransactions
The Income Tax Assessment Act
determines the tax treatment of
transactions
Some exceptions to this
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Accounting income vs tax treatments
ITEM ACCOUNTING TAX
Passiverevenuereceived in
arrears
Depreciation(acceleratedfor tax)
R&D costs
Prepaidexpenses
Recognised as revenue,with corresponding
asset (receivable) when
earned
Recognised as TI whencash received
Recognised as expensebased on useful life ofasset
Recognised as TD basedon predetermined rates
Capitalised and
amortised
Recognised as TD when
paid
Recorded as an assetand expensed asincurred
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
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Accounting income vs tax treatments
ITEM ACCOUNTING TAX
Passive revenuereceived inadvance
Depreciation(accelerated foracctg)
Bad/doubtful debts
Employee benefitseg annual leave
Recorded as liability .Recognised as revenuewhen earned.
Recognised as TI whencash received
Recognised as expensebased on useful life ofasset
Recognised as TD
based on predeterminedrates
Allowance raised andexpense recorded whendebt considered doubtful
Recognised as a TD
when debt physically
written off
Liability raised andexpense recorded when
debt owing to employee
Recognised as TD whenpayment 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
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Accounting for income taxes
general principles
The tax consequences of transactions that occur foraccounting purposes during a period should berecognised as income or expense during the currentperiod, regardless of when the tax effects will occur
This requires identifying the current and future taxconsequences of items recognised in the balancesheet
Two separate calculations are performed each year:
1. current tax liability
2. movements in deferred tax balances
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Calculation of current tax liability -
example
Profit before tax for ABC Ltd forthe year to 30 June 2012 is asfollows:
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 taxdeduction for plant.
Interest has not yet beenreceived.
Bad debts of $20 were writtenoff during the year.
Payments of $30 were madeto employees in relation toannual leave taken during the
year. The tax rate is 30%
Required:
Calculate the current taxliability of ABC Ltd for 2012
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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 10Adjustment 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)
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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
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Deferred tax liabilities and assets
Arise when the period in which revenue andexpenses are recognised for accounting is differentfrom the period in which items are recognised for tax
Arise principally due to the accruals vs cash basis ofrecognising 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)
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Calculation of deferred tax
The existence of temporary differences results in thecarrying amounts of an entitys assets and liabilitiesbeing different from the amounts that would arise if abalance 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 (netof accumulated depreciation, allowances etc) based onaccounting balance sheet.
CATB = TTD/(DTD)
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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
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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 = -
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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 taxbalance sheet.
Interest receivable- assessable when received- thereforeno balance would appear as a receivable asset in the taxbalance 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.
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Excluded taxable temporary
differences
Certain temporary differences are excluded frombeing recognised.
AASB 112 prohibits temporary differences frombeing recognised in relation to:
Goodwill
The initial recognition of assets and liabilities thatdo not arise from a business combination.
Providing certain recognition criteria are met,deductible temporary differences arising from taxlosses can lead to the recognition of DTAs.
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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 differencesand tax losses are recognised only if:
there are sufficient taxable temporary differences for
the entity to use against the deductible temporarydifferences; OR
if it is probable that the entity will have sufficientfuture taxable profit (against which the tax benefitcan be offset)
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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 assetDr/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
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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
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Calculation of deferred tax
example
The balances in the deferred tax asset and liabilityaccounts are the carried forward closing balances fromthe prior year
Accumulated depreciation of plant for tax purposes is$360
Required:
Complete the deferred tax worksheet on the followingpage and prepare the journal to record deferred taxmovements for the 30 June 2012 year.
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Calculation of deferred tax
example
Relevant assets &
liabilities
CA FTA FDA TB TTD DTD
Trade receivables
Interest receivable
Plant
Goodwill
A/L liability
Total temporary differences
Less: excluded differences
Temporary differences
DTL/DTA (@ 30%)
Less: opening balances
Adjustment
270 - 30 300 30
40 40 - - 40
200 200 140 140 60
800 800 - - 800
15 - 15 - 15
900 45
(800) -
100 45
30 13
9 10
21 3
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Calculation of deferred tax
example
Notes to worksheet:
1. Items where the CA = TB have been omitted fromworksheet (eg cash, payables, loan)
2. AASB 112 does not permit the recognition of aDTL relating to goodwill. The TTD arising isreferred to as an excluded temporary difference
3. Negative figures in the adjustment section woulddenote decreases in the DTA/DTL balances duringthe year
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Offsetting tax assets and liabilities
Both current and deferred tax assets and liabilitiesare to be offset against each other and a net figureshown in the balance sheet position for:
Current tax
Deferred tax
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Change in tax rates
When a new tax rate is enacted, that new rateshould be applied:
when calculating current tax liability
when calculating adjustments to deferred taxaccounts
to carried forward deferred tax balances from
previous years
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Tax Losses
Tax losses are created when allowable deductionsexceed 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 torecognition criteria) create deferred tax assets
Exempt income cannot contribute to carry forwardlosses If prima facie tax loss is $(10 000) but there is
exempt income of $2 000 the allowable carryforward loss would be $(8 000)
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Disclosure
Tax assets & liabilities must be classified ascurrent or non-current on the face of the statementof financial position
Current and deferred tax assets and liabilities canbe offset in most cases
Tax expense on the statement of profit or loss andother comprehensive income
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Payment of income tax
Company income tax is paid under the PAYG (pay asyou go) system in quarterly instalments
Companies must lodge quarterly business activitystatements (BAS) and pay tax calculated as:
Instalment income x instalment rate (suppliedannually by the taxation department)
Current tax liability represents the last quarterly paymentand any adjustments necessary to reflect the fact thatannual taxable income may differ from the sum of thequarterly returns
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