1. Chapter 12 Income Tax

2. Lecture 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

3. Lecture References
Text - Chapter 12
AASB

4. Key Concepts Accounting profit Taxable income Income tax expense
Income tax payable
Permanent difference
Timing difference

5. Key Concepts Liability method Balance sheet method
Deferred tax assets (DTA)
Deferred tax liabilities (DTL)
Temporary differences

6. Payment 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

7. Payment of Company Income Tax
GAAP -> Accounting Profit = /
Tax Laws -> Taxable Income

8. Payment of Company Income Tax
PAYG payments with tax accrued each quarter
Dr Income tax expense x
Cr Income tax installments payable x
Dr Income tax installments payable x
Cr Bank x

9. Payment of Company Income Tax
PAYG payments without accrual
Dr Income tax expense x
Cr Bank x

10. Payment of Company Income Tax
Calculation of income tax for the reporting period
Income tax assessment based on taxable income, not profit
Dr Income tax expense x
Cr Income tax installments payable x
Cr Income tax payable x

11. Payment of Company Income Tax
Where installments exceed expected assessment
Dr Income tax expense x
Cr Income tax installments payable x
Dr Income tax installment refund x
Cr Income tax payable x

12. Differences Between Taxable Income and Pre-tax Accounting Profit
Employee benefits
Warranty claims
Depreciation
Doubtful debts
Research and development
Royalties
Goodwill

13. Differences Between Taxable Income and Pre-tax Accounting Profit
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.

14. Differences Between Taxable Income and Pre-tax Accounting Profit
Permanent differences include:
Non-allowable travel and fringe benefits
Exempt income
Investment allowances

15. Differences Between Taxable Income and Pre-tax Accounting Profit
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.

16. Differences Between Taxable Income and Pre-tax Accounting Profit
Timing differences
Originate in one period and reverse in one or more later periods.
Include:
Depreciation
Warranty expenses
Bad vs doubtful debts

17. Cimino Ltd – Depreciation deductions
Yr Acc. Tax Diff.
$ $ $
19X
19X
19X
19X nil
Total nil

18. Tax– 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

19. Balance 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

20. Balance Sheet Method 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”

21. Balance Sheet Method Based on differences between 2 balance sheets
Actual (accounting based)
Notional (tax based)
Defined tax base important
Differences -> temporary
-> deferred tax Asset/Liability

22. Balance Sheet Method Carrying amounts of assets or liabilities
- Tax bases of assets or liabilities
= Assessable or deductible temporary differences
x Tax rates
= Deferred tax liabilities or assets

23. Balance Sheet Method 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

24. Balance Sheet Method Temporary differences Tax base
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

25. Balance Sheet Method 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

26. Balance Sheet Method Classification of temporary differences
Relationship between
Carrying amount
Tax base Asset Liability
CA – TB is positive Assessable temporary Deductible temporary
Carrying amount> tax base difference difference
CA – TB is negative Deductible temporary Assessable temporary
Tax base > carrying amount difference difference

27. Relationship between timing difference, temporary difference and permanent differences
that do not affect carrying
amount or tax base of
Assets and liabilities
Temporary
differences
Timing
differences
Permanent differences
that do affect carrying
amount or tax base of
assets or liabilities

28. Balance Sheet Method Components of income tax expense Current tax
Taxable amount
Deferred tax

29. Balance Sheet Method 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’

30. Balance Sheet Method Exceptions to the recognition of DTAs and DTLs
Goodwill
Initial recognition of assets and liabilities
Investments in subsidiaries, associates and joint ventures

31. Balance Sheet Method
Classification of effect of temporary differences and recognition of DTLs and DTAs
Relationship between
Carrying amount
Tax base Asset Liability
CA – TB is positive Assessable temp. diff. Deductible temp. diff
Carrying 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

32. Balance Sheet Method Calculating deferred tax items Worksheets
Carrying amount and tax base

33. Balance Sheet Method Comparing tax payable and tax-effect accounting
Tax payable vs tax expense
How sound is tax effect accounting?
Recognition under SAC4

34. Recording Tax Under the Balance Sheet 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 ...

35. Recording Tax Under the Balance Sheet Method
At reporting date
Dr Income tax expense xx
Cr Current tax expense xx
Cr Deferred tax expense x

36. Recording Tax Under the Balance Sheet Method
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

37. Recording Tax Under the Balance Sheet Method
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

38. Recording Tax Under the Balance Sheet Method
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

39. Recording Tax Under the Balance Sheet Method
Tax rate to be used and changes to tax rate
Initial recognition
Capital gains tax
Subsequent recognition

40. Recording Tax Under the Balance Sheet Method
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’

41. Recording Tax Under the Balance Sheet Method
Direct debits/credits to equity
Revaluation of non-current assets
Dr Accumulated depreciation xx
Cr Asset xx
transfer of accumulated depn. Prior to revaluation

42. Recording Tax Under the Balance Sheet Method
Dr Asset x
Cr Asset revaluation reserve x
upward revaluation of asset
Dr Asset revaluation reserve x
Cr Deferred tax liability x
recognition of deferred tax liability

43. Disclosure 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

44. Assessment of Tax-effect Accounting and 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

45. Assessment of Tax-effect Accounting and the Balance Sheet Method
Complexity of AASB 1020
Exceptions
Definition of tax base
Reversability of DTLs and DTAs

46. Where to get more information
Other courses
List books, articles, electronic sources