Download Accounting profit vs taxable profit

Chapter 4
Accounting for income tax
Prepared by
Emma Holmes
Accounting profit vs taxable profit
ACCOUNTING
Basis of
accounting
Equations
Accruals basis
•
Principally cash basis
Some exceptions to this
Revenue – Expenses Taxable income (TI) – tax
deductions (TD) =
= Accounting profit
Taxable profit
AASBs and the
Corporations Act are key
sources that determine
the appropriate
accounting treatment of
transactions
•
TAX
The Income Tax Assessment Act
determines the tax treatment of
transactions
Accounting profit does not equal taxable profit
Difference caused by different “rules” used for accounting
vs tax purposes
Taxable temporary differences (TTDs)
ITEM
Passive
revenue
received in
arrears
ACCOUNTING
TAX
Recognised as revenue, Recognised as TI when
with corresponding
cash received
asset (receivable) when
earned
Rent, interest, royalties etc
Depreciation Recognised as
(accelerated expense based on
useful life of asset
for tax)
Recognised as TD
based on
predetermined rates
Common for assets to be depreciated over a shorter life for tax purposes than for accounting purposes
R&D costs
Prepaid
expenses
Capitalised and
amortised
Recorded as an asset
and expensed as
incurred
Recognised as TD when
paid
Recognised as TD when
paid
1
Deductible temporary differences (DTDs)
ITEM
Passive
revenue
received in
advance
ACCOUNTING
Recorded as liability .
Recognised as
revenue when earned.
TAX
Recognised as TI
when cash received
Depreciation Recognised as expense Recognised as TD
(accelerated based on useful life of based on
asset
for acctg)
predetermined rates
Possible for accounting useful life to be shorter than tax useful life
Bad/doubtful Allowance raised and
expense recorded
debts
when debt considered
doubtful
Liability raised and
Employee
benefits – eg expense recorded when
annual leave debt owing to staff
Recognised as a TD
when debt physically
written off
Recognised as TD
when payment made to
staff
Provisions (eg for warranties) are treated in the same way as employee benefits
Accounting for income taxes
•
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
What have been some of the key differences
between the old standard and the new
AASB112?
Ruth Picker
Managing Partner
Ernst & Young Melbourne
2
Calculation of current tax
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 - example
Profit before tax for ABC Ltd
for the year to 30 June 2008 is
as follows:
Sales
40
Government grant
80
COGS
(50)
Goodwill impairment
(20)
Bad debts
(30)
PBT
•
•
(450)
Depreciation
Other expenses
•
1,000
Interest revenue
Annual leave
•
•
(10)
(260)
•
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 2008
Calculation of current tax - example
Accounting profit before tax
300
Government grant exempt income
Goodwill impairment not deductible
(80)
20
Interest not yet received
Adjustment for plant depreciation
Adjustment for bad debt write-offs
Adjustment for annual leave paid
(40)
(10)
10
(20)
Taxable profit
180
Current tax liability (CTL) (30%)
Acctg depn 50
Tax depn
(60)
Adj req
(10)
B/debts expense-acctg 30
B/debts w/off- tax
(20)
Adj req
10
54
A/L expense- acctg 10
Paid- tax
(30)
Adj req
(20)
3
Recording CTL
In our previous example the CTL would be
recorded as:
Dr Income tax expense (current)
Cr
Current tax liability
54
54
Temporary differences
•
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)
Temporary differences
• Certain temporary difference 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.
4
What are the key practical issues that
accountants face when applying the
standard?
Ruth Picker
Managing Partner
Ernst & Young Melbourne
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)
Calculation of deferred tax
•
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 authorities
•
Carrying amount (CA)- asset and liability balances (net of
accumulated depreciation, allowances etc) based on
accounting balance sheet.
•
Tax base (TB)- asset and liability balances that would
appear in a “tax balance sheet”.
•
Temporary differences are calculated as follows:
CA – TB = TTD/(DTD)
5
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
3,000 - 3,000 +
-
=
-
Interest receivable:$1,000
1,000 - 1,000 +
-
=
-
Plant: cost $10,000,
acctg a/depn $4,600,
tax a/depn $6,500
5,400 - 5,400 + 3,500 = 3,500
Trade receivables: $52,000
Allowance for b/debts:
$2,000
50,000 -
-
Trade payables: $30,000
30,000 +
-
Annual leave liability:
$3,900
3,900 +
+ 2,000 = 52,000
-
-
-
= 30,000
3,900 =
-
Calculating the tax base – examples
Notes to worksheet:
Prepayments- deductible when paid for tax purposestherefore 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.
• Trade 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.
•
6
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
The tax rate %
is that
which is
expected to
apply when
the asset
will be
realised or the
liability
settled
Recording a DTA/DTL
Dr Deferred tax asset
Dr/Cr
Income tax expense
Cr Deferred tax liability
BALANCING ITEM
Calculation of deferred tax
example
The balance sheet of ABC Ltd at 30 June 2008 is as follows:
Assets
Liabilities
Cash
260
Trade payables
296
Loan
485
270
A/L liability
15
Interest receivable
40
Deferred tax liability
Inventory
100
Trade receivables
300
Allowance for b/debts
(30)
Plant
500
Accum dep’n
(300)
9
805
Equity
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 2008 year.
7
Calculation of deferred tax
example
Relevant assets &
liabilities
CA
FTA
FDA
Trade receivables
Plant
270
40
200
40
200
30
140
Goodwill
800
800
-
Interest receivable
A/L liability
TB
TTD
300
140
40
60
-
800
DTD
30
15
15
Total temporary differences
15
900
Less: excluded differences (800)
Temporary differences 100
45
-
DTL/DTA (@ 30%)
30
45
13
Less: opening balances
9
21
10
3
Adjustment
Calculation of deferred tax
example
Notes to worksheet:
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
Dr
Deferred tax asset
Income tax expense
Cr
Deferred tax liability
3
18
BALANCE
21
Summary:
Current tax liability (slide 11)
Deferred tax movement
Total income tax expense
54
18
72
8
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)
9
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 year’s 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
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
10
11