chapter 12 income tax. lecture topics payment of company income tax difference between taxable...

Chapter 12Chapter 12

Income Tax Income Tax Chapter 12Chapter 12

Income Tax Income Tax

Lecture TopicsLecture Topics

• Payment of company income tax• Difference between taxable income and

pre-tax accounting profit• Tax effect accounting requirements• Recording tax under the balance sheet

method• Assessment of the tax-effect and balance

sheet method

Lecture ReferencesLecture References

• Text - Chapter 12• AASB - 1020

Key ConceptsKey Concepts

• Accounting profit• Taxable income• Income tax expense• Income tax payable• Permanent difference• Timing difference

Key ConceptsKey Concepts

• Liability method• Balance sheet method• Deferred tax assets (DTA)• Deferred tax liabilities (DTL)• Temporary differences

Payment of Company Income TaxPayment of Company Income Tax

• Income tax approach to calculating profit– Accounting profit vs taxable income

• Collection of income tax• Calculating income tax

– Income tax installments• Quarterly PAYG installments


GAAP -> Accounting ProfitGAAP -> Accounting Profit

Tax Laws -> Taxable IncomeTax Laws -> Taxable Income

=/


PAYG payments with tax accrued each quarter

Dr Income tax expense xCr Income tax installments payable x

Dr Income tax installments payable xCr Bank x


PAYG payments without accrual

Dr Income tax expense xCr Bank x


• Calculation of income tax for the reporting period– Income tax assessment based on taxable

income, not profit

Dr Income tax expense xCr Income tax installments payable xCr Income tax payable x


• Where installments exceed expected assessment

Dr Income tax expense xCr Income tax installments payable x

Dr Income tax installment refund xCr Income tax payable x

Differences Between Taxable Income Differences Between Taxable Income and Pre-tax Accounting Profitand Pre-tax Accounting Profit

• Employee benefits• Warranty claims• Depreciation• Doubtful debts• Research and development• Royalties• Goodwill


• Permanent differences Differences between taxable income/loss and

pre-tax accounting profit/loss arising from the existence of expense or revenue items that will either never be included in the calculation of taxable income or never brought to account in the profit and loss.


• Permanent differences include:– Non-allowable travel and fringe benefits– Exempt income– Investment allowances


• Timing differences Differences between taxable income and pre-

tax accounting profit arising because the financial period in which some revenue and expense items are included for tax purposes differs to the period in which they are included for accounting purposes.


• Timing differences – Originate in one period and reverse in one or

more later periods.– Include:

• Depreciation • Warranty expenses• Bad vs doubtful debts

Cimino LtdCimino Ltd – Depreciation deductions – Depreciation deductions

Yr Acc. Tax Diff. $ $ $

19X2 7500 10000 -2500

19X3 7500 10000 -2500

19X4 7500 10000 -2500

19X5 7500 nil +7500

Total 30000 30000 nil

Yr Acc. Tax Diff. $ $ $

19X2 7500 10000 -2500

19X3 7500 10000 -2500

19X4 7500 10000 -2500

19X5 7500 nil +7500

Total 30000 30000 nil

Tax– effect Accounting RequirementsTax– effect Accounting Requirements

• Items reported in the financial statements need to show tax consequences

• Different ‘tax-effect’ methods– Liability method -> original AASB 1020– Deferral method– Balance sheet method -> new AASB 1020

Balance Sheet MethodBalance Sheet Method

• Main features– Allocation of income tax based on

assets/liabilities per SAC4– Focuses on ‘valuation’ issue– Considers ‘deferred’ tax assets and liabilities– No permanent differences


• Main features – Temporary not timing differences– Includes: revaluations, investments in

subsidiaries and foreign exchange differences– Deferred tax assets/liabilities recognised when

“more probable than not”


• Based on differences between 2 balance sheets– Actual (accounting based)– Notional (tax based)– Defined tax base important

Differences -> temporary -> deferred tax Asset/Liability


Carrying amounts of assets or liabilities- Tax bases of assets or liabilities= Assessable or deductible temporary

differencesx Tax rates= Deferred tax liabilities or assets

Carrying amounts of assets or liabilities- Tax bases of assets or liabilities= Assessable or deductible temporary

differencesx Tax rates= Deferred tax liabilities or assets


• Deferred tax assets (DTA)– Income taxes recoverable in future reporting

periods in respect of:• Deductible temporary differences, and• The carry forward of unused tax losses

• Deferred tax liabilities (DTL)– Income taxes to be settles in future reporting

periods in respect of assessable temporary differences


Temporary differences The difference between the carrying amount of

an asset or a liability in the statement of financial position and its tax base

Temporary differences The difference between the carrying amount of

an asset or a liability in the statement of financial position and its tax base

Tax base The amount that is attributed to an asset or a

liability for tax purposes

Tax base The amount that is attributed to an asset or a

liability for tax purposes


• Temporary differences– Assessable temporary differences– Deductible temporary differences– Recovery or settlement of an asset or liability– Temporary differences and timing differences– Temporary differences and permanent

differences


Classification of temporary differences

Relationship betweenCarrying amount Tax base Asset Liability

CA – TB is positive Assessable temporary Deductible temporaryCarrying amount> tax base difference difference

CA – TB is negative Deductible temporary Assessable temporary Tax base > carrying amount difference difference

Classification of temporary differences


CA – TB is positive Assessable temporary Deductible temporaryCarrying amount> tax base difference difference

CA – TB is negative Deductible temporary Assessable temporary Tax base > carrying amount difference difference

Temporary differences

Relationship between timing difference, temporary Relationship between timing difference, temporary difference and permanent differencesdifference and permanent differences

Permanent differences

Timingdifferences

Permanent differences that do affect carryingamount or tax base ofassets or liabilities

Permanent differencesthat do not affect carryingamount or tax base ofAssets and liabilities


• Components of income tax expense– Current tax– Taxable amount– Deferred tax


• Recognition of deferred tax assets– Probability that future taxable amounts will be

available against which temporary differences can be utilised

• Recognition of deferred tax liabilities– Assessable temporary differences that reflect

‘future tax consequences’


• Exceptions to the recognition of DTAs and DTLs– Goodwill– Initial recognition of assets and liabilities– Investments in subsidiaries, associates and

joint ventures


Classification of effect of temporary differences and recognition of DTLs and DTAs


CA – TB is positive Assessable temp. diff. Deductible temp. diffCarrying amount> tax base

Deferred Tax Liability Deferred Tax Asset

CA – TB is negative Deductible temp. diff. Assessable temp. diff Tax base > carrying amount

Deferred Tax Asset Deferred Tax Liability

Classification of effect of temporary differences and recognition of DTLs and DTAs


CA – TB is positive Assessable temp. diff. Deductible temp. diffCarrying amount> tax base

Deferred Tax Liability Deferred Tax Asset

CA – TB is negative Deductible temp. diff. Assessable temp. diff Tax base > carrying amount

Deferred Tax Asset Deferred Tax Liability


• Calculating deferred tax items– Worksheets– Carrying amount and tax base


• Comparing tax payable and tax-effect accounting– Tax payable vs tax expense– How sound is tax effect accounting?– Recognition under SAC4

Recording Tax Under the Balance Recording Tax Under the Balance Sheet MethodSheet Method

At reporting date Dr Current tax expense xx Cr Income tax payable xx recognition of income tax payable for the year

Dr Deferred tax expense x Cr Deferred tax liability x tax effect of change in temporary difference due to ...


At reporting date Dr Income tax expense xx Cr Current tax expense

xx Cr Deferred tax expense

x


• Multiple tax-effect items– Accounting procedures depend on whether:

• items are being recognised initially• items were recognised in a previous period• items are capable of being offset• the benefit is likely to be realised in the future


• Impact of a tax loss– Generally carried forward to offset against

future assessable income– Give rise to deferred tax assets– Must be probable they will be realised

• Tax losses and derecognition of DTLs


• Tax loss disclosures– Revenues recognised from the derecognition of

DTA arising from prior period tax losses– The impact of the recognition or recoupment of

tax losses– The amount of deferred tax losses for which no

DTA has been recognised– Nature and evidence of DTAs


• Tax rate to be used and changes to tax rate– Initial recognition

• Capital gains tax– Subsequent recognition


• Reassessment of carrying amount of DTAs and DTLs– Reviewed at each reporting date– Reassess ‘probability’ issues

• Set-off of tax assets and tax liabilities– Refer AASB 1040, 1014 and 1033– Must have ‘legal right of set-off’


• Direct debits/credits to equity– Revaluation of non-current assets

Dr Accumulated depreciation xxCr Assetxxtransfer of accumulated depn. Prior to revaluation


Dr Asset xCr Asset revaluation reserve xupward revaluation of asset

Dr Asset revaluation reserve xCr Deferred tax liability xrecognition of deferred tax liability

Disclosure in Financial ReportsDisclosure in Financial Reports

• Major components of income tax expense• Current and deferred tax not recognised in

net profit• Change in tax rates• Unrecognised tax losses• Details of temporary differences, DTAs and

DTLs• Details of transferred tax losses

Assessment of Tax-effect Accounting Assessment of Tax-effect Accounting and the Balance Sheet Methodand the Balance Sheet Method

• Deferred debits/credits– Conceptual framework

• Direct debits/credits to equity• Is recognition criteria of SAC4 satisfied?• Transferring assets within a group

Assessment of Tax-effect Accounting Assessment of Tax-effect Accounting and the Balance Sheet Methodand the Balance Sheet Method

• Complexity of AASB 1020• Exceptions • Definition of tax base• Reversability of DTLs and DTAs

Where to get more informationWhere to get more information

• Other courses• List books, articles, electronic sources

chapter 12 income tax. lecture topics payment of company income tax difference between taxable...

Documents

tax purposes

calculation of taxable

pretax accounting profitloss

accounting purposes

taxable incomeloss

balance sheet methodassessment

financial period

expense items