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Prepared by Miranda Dyason
Workshop 5:
Accounting for income tax
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Calculate taxable profit, and account for current taxation expense;
Explain that some transactions have both current and future tax consequences;
Account for movements in deferred taxation accounts, and changes in tax rates; and
A
B
C
D
Learning Outcomes
1
E Specify the disclosures required by AASB 112.
Explain differences between accounting treatments and taxation treatments for a
range of transactions;
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Accounting profit v Taxable profit
2
ACCOUNTING TAX
Basis of
accounting
Accruals basis
Principally cash basis (some
exceptions – eg. sales)
Equations 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
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▸ Permanent differences:
• Arise when amounts recognised as part of accounting profit are not
recognised as part of taxable profit (or vice versa).
▸ Temporary differences:
• Arise when the period in which revenues and expenses are
recognised for accounting purposes is different from the period in
which such revenues and expenses are treated as taxable income
and allowable deductions for tax purposes.
Permanent & temporary differences
3
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Review questions:
4
Loftus et al (Chapter 12):
• Comprehension question 1:
What is the main principle of tax-effect accounting as
outlined in AASB 112?
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▸ 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 statement of financial position.
▸ To determine current tax consequences of transactions, we need to determine the entity’s taxable profit for the year, and associated income tax payable.
▸ To determine future tax consequences of transactions, we need to look at the differences between an entity’s Statement of Financial Position (prepared in accordance with the accounting standards) and its tax- based Balance Sheet prepared in accordance with income tax legislation.
The requirements of AASB 112
5
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Review Question –
Current and future tax consequences
6
Loftus et al (Chapter 12):
• Application and analysis exercise 12.6.
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Company A: DR CR
Interest revenue
(passive)
100
Cash
101
Share capital
1
Example:
Consider the following draft trial balances...
7
Company B: DR CR
Interest revenue
(passive)
100
Cash
1
Interest receivable
100
Share capital
1
Company C: DR CR
Interest revenue
(passive)
100
Cash
51
Interest receivable
50
Share capital
1
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Company A: DR CR
Interest revenue
(passive)
100
Income tax
expense
30
Cash
101
Current tax
liability
30
Share capital
1
8
Company B: DR CR
Interest revenue
(passive)
100
Income tax
expense
0
Cash
1
Interest receivable
100
Current tax liability 0
Share capital
1
Company C: DR CR
Interest revenue
(passive)
100
Income tax
expense
15
Cash
51
Interest receivable
50
Current tax liability 15
Share capital
1
If we firstly account for current tax...
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Company A: DR CR
Interest revenue
(passive)
100
Income tax
expense
30
Cash
101
Current tax
liability
30
Share capital
1
9
Company B: DR CR
Interest revenue
(passive)
100
Income tax
expense
30
Cash
1
Interest receivable 100
Current tax liability 0
Deferred tax liab 30
Share capital 1
Company C: DR CR
Interest revenue
(passive)
100
Income tax
expense
30
Cash
51
Interest receivable 50
Current tax liability 15
Deferred tax liab 15
Share capital 1
If we now also account for deferred tax...
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▸ Two calculations are performed each year:
1. Current tax liability; and
2. Movements in deferred tax balances.
Accounting for income tax
10
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1. Accounting for current tax liability
11
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Calculation of taxable income from accounting profit (basic format):
Accounting Profit (Loss):
Add: Accounting expenses that are not tax deductible
Add/(Less): Differences between accounting expenses and tax deductions
Add/(Less): Differences between taxable income and accounting revenue
Less: Accounting revenues that are not taxable
= Taxable profit
Taxable profit x tax rate % = Current Tax Liability
Calculation of current tax
12
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Recording current tax liability:
DR Income tax expense $...
CR Current tax liability $...
(to recognise current tax liability)
Journal entry to record current tax liability
13
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Activity – calculating taxable profit
and current tax liability, and
preparing current tax journals
14
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Activity
Accounting profit before tax for ABC Ltd for 2016 is as follows: $60,000
After debiting the following expenses:
Goodwill impairment (not tax deductible) 5,000
Entertainment (not tax deductible) 3,000
Depreciation of new plant (calculated at 10% p.a.) 2,000
Annual leave expense 1,000
For tax purposes:
Depreciation rate for taxation purposes 20%
Annual leave paid 500
The tax rate is 30%.
Required: Calculate and journalise the current tax liability for 2016.
15
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Solution Profit before tax 60 000
Add/(less):
- Goodwill impairment (non-deductible) 5 000
- Entertainment (non-deductible) 3 000
- Depreciation on plant (accounting) 2 000
- Depreciation on plant (tax) (4 000)
- Annual leave expense (accounting) 1 000
- Annual leave paid (tax) (500)
Taxable Income: 66 500
Current tax liability (30%): 19 950
Journal entry to record current tax liability:
DR Income tax expense $19 950
CR Current tax liability $19 950
(recognise current tax liability) 16
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Review Question –
Calculation of current tax
17
Loftus et al (Chapter 12):
• Application and analysis exercise 12.4.
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2. Accounting for deferred tax
assets and deferred tax liabilities
18
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Discussion question –
deferred tax
19
Share your thoughts on the following statement:
"One of the silliest constructs in the world of accounting happens to
be deferred income taxes. I don't understand why we bother with
deferred tax liabilities and deferred tax assets because they are
neither liabilities nor assets." (Ketz, 2010)
(Source: Leo, K., Hoggett, J., Sweeting, J. (2012). Company Accounting.
(9th edition) (p. 260) Brisbane: John Wiley & Sons.)
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▸ The existence of temporary differences results in the carrying amounts of
an entity’s assets and liabilities being different from the amounts that
would arise if a balance sheet was prepared for tax purposes.
▸ Carrying amount (CA): asset and liability balances (net of accumulated depreciation, allowances etc) in the statement of financial
position.
▸ Tax base (TB): asset and liability balances that would appear in a “tax balance sheet”.
Calculating DTA’s and DTL’s
20
More on this on the next slide
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Calculating the tax base
Calculating the tax base for an asset:
Carrying amount
– future taxable amounts
+ future deductible amounts
= Tax Base
Calculating the tax base for a liability:
Carrying amount
- future deductible amounts
= Tax Base
21
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▸ These temporary differences either result in:
The company paying more tax in the future
• Taxable temporary differences (TTDs)
• Result in deferred tax liabilities (DTLs)
The company paying less tax in the future
• Deductible temporary differences (DTDs)
• Result in deferred tax assets (DTAs)
DTA’s and DTL’s
22
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Example –Interest receivable
23
At 30 June 2016, ABC Ltd had interest receivable of $100.
At 30 June 2016, the carrying amount and tax base for interest
receivable is:
Carrying Tax Temporary
Amount Base Difference
Interest receivable 100 0 $100
This would be a taxable temporary difference,
and would result in a deferred tax liability of $30
(as $30 will be payable to the tax office when the
interest is received).
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QUESTION
Would the following items give rise to taxable temporary differences or
deductible temporary differences?
Provision for annual leave?
Deductible temporary difference
Prepaid insurance? (assuming tax deductible when insurance is paid)
Taxable temporary difference
Accounts payable?
Neither
Plant and equipment that has been depreciated at a lower rate for tax purposes?
Deductible temporary difference
24
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Activity: calculate tax bases &
temporary differences
CA FTA FDA TB TTD DTD
Plant: cost $20,000,
accounting accum. depn
$2,000,
tax accum. depn $5,000
=
Vehicles: cost $30,000,
accounting accum. depn
$7,500,
tax accum. depn $5,000
=
Provision for warranty:
$3,000
=
25
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CA FTA FDA TB TTD DTD
Plant: cost $20,000,
accounting accum. depn
$2,000,
tax accum. depn $5,000
18,000 - 18,000 + 15,000 = 15,000 3,000
Vehicles: cost $30,000,
accounting accum. depn
$7,500,
tax accum. depn $5,000
22,500 - 22,500 + 25,000 = 25,000 2,500
Provision for warranty:
$3,000
3,000 - 3,000 = 0 3,000
26
Activity: calculate tax bases &
temporary differences
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Review Question –
Excluded temporary differences
27
Loftus et al (Chapter 12):
• Comprehension question 9:
Are all temporary differences that exist at the end of
the reporting period recognised as deferred tax assets
or deferred tax liabilities?
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Recognition and measurement of
deferred tax assets and deferred
tax liabilities
28
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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).
Recognition criteria for DTL’s and DTA’s
29
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Calculating a deferred tax asset (DTA):
Deductible temporary difference x tax rate %
= DTA
Calculating a deferred tax liability (DTL):
Taxable temporary difference x tax rate %
= DTL
Note: The “tax rate %” is the rate which is expected to apply when the asset
will be realised or the liability settled.
Measuring DTA’s and DTL’s
30
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Deferred tax worksheet
31
Carrying
Amount
Future Taxable
Amount
Future
Deductible
Amount
Tax Base Taxable
Temporary
Differences
(DTL)
Deductible
Temporary
Differences
(DTA)
$ $ $ $ $ $
Assets
Cash
Receivables
Plant
Goodwill
Liabilities
Bank Overdraft
LSL payable
Temporary differences
Excluded differences
Net temp differences
Deferred tax liability
Deferred tax asset
Beginning balances
Movement during year
Adjustment
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Activity – putting the current and
deferred tax calculations together
32
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Company A: DR CR
Gross profit
(Sales – COGS)
130
Wages 25
Annual leave exp 5
Cash 101
Share capital 1
Activity:
Consider the following draft trial balances...
33
Company B: DR CR
Gross profit
(Sales – COGS)
130
Wages 25
Annual leave exp 5
Cash 106
Provision for
annual leave
5
Share capital 1
Company C: DR CR
Gross profit
(Sales – COGS)
130
Wages 25
Annual leave exp 5
Cash 103.5
Provision for
annual leave
2.5
Share capital 1
Required: Determine the taxable income for each entity, and current tax payable. Determine
deferred tax asset and liability balances. (Assume first year of operation, and 30% tax
rate).
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