1. Accounting for Income Tax
Chapter 6
Accounting for Income Tax

2. Overview Accounting for Companies is regulated by
Australian Accounting Standards Board (AASBs) and
Income tax legislation for preparation of specific income tax reports.

3. Overview Continued
Income tax legislation and AASB's may treat items differently
Some of these differences will be permanent, such as fines.
Other temporary timing differences result from a simple difference on a yearly basis, with the overall treatment being the same (over a period of years).

4. Overview Continued
If the tax and accounting treatment differ in any year due to temporary differences, the result is that in the future more or less tax will be payable.
This is the deferred tax asset or liability.

5. Accounting Profit and Taxable Income
6.1
Accounting Profit and Taxable Income

6. Permanent Differences
Arise when income/expense items are recognised for accounting but never for tax purposes or vice-versa.

7. Examples Item Accounting Treatment Tax Treatment
Receipt of exempt income
Recognised as income
Not assessable as income
Entertainment expenses
Recognised as an expense
Not allowable deduction unless subject to Fringe Benefits Tax
Penalties and fines
Recognised as an expense when incurred
Not an allowable deduction
Impairment of goodwill
Recognised as an expense in accordance with AASB 136

8. Temporary Differences
Arise when income/expense items are recognised for accounting but are not assessable/deductible for tax until a future time. The opposite can also apply – income/expense is assessable but not for accounting until a future period.

9. Example Item Accounting Treatment Tax Treatment Doubtful debts
Expense recognised by recording
an allowance when a debt is
considered doubtful
Not an allowable deduction until
the debt is deemed bad and
physically written off
Provision for annual leave /
Long service leave
Expense is recognised as the
employee’s entitlement accrues in
accordance with AASB 119
the entitlement is paid to the
employee

10. Reconciliation of Accounting Profit to Taxable Income

11. 6.2
Tax Payable Method

12. Tax Payable Method
The tax payable method may be likened to a cash basis of accounting.

13. Steps in Tax Payable Method
1. Calculate taxable income
2. Calculate tax payable (Taxable Income * Tax%)
3. Recognise the amount payable: Debit Income Tax Expense (Expense) Credit Current Tax Payable (Liability)

14. 6.3
Tax Effect Method

15. Tax Effect Method
Under tax effect accounting the following is recognised in
the Statement of Financial Position:
Current Tax Payable
Deferred Tax Assets
Deferred Tax Liabilities

16. Tax Effect Accounting
Accounting under the two methods differs due to differences between accounting profit and taxable income for a period.
A difference results due to how accounting treats a particular item and its corresponding treatment for tax.

17. Temporary Differences
Temporary differences are
differences between the carrying amount and tax base of an asset or liability.
Temporary difference = Carrying Amount – Tax Base

18. Temporary Difference
Carrying amount is the amount of an asset or liability as recorded in the Statement of Financial Position less depreciation. Tax base is the amount attributable to an asset or liability under the income tax legislation.

19. Temporary Differences
There are two types of temporary differences: Taxable temporary differences and deductible temporary differences

20. Taxable Temporary Differences (TTDs)
Temporary differences that will result in an increase to taxable income in future periods when the carrying amount of the asset or liability is recovered or settled. This means:

21. Deferred Tax Liability (DTL)
The Deferred Tax Liability is calculated as:

22. Deductable Temporary Differences (DTDs)
Temporary differences that will result in a decrease to taxable income in future periods when the asset/liability is settled. The effect of a DTD will be:

23. Steps in Tax Effect Accounting
1. Calculate taxable income. Accounting profit is adjusted for permanent and temporary differences.
2. Calculate current tax payable (Taxable Income * Tax %)
3. Recognise the expense and the liability for the current tax payable

24. Steps in Tax Effect Accounting
4. Record tax expense relating to DTD’s:
5. Record tax expense relating to assessable temporary differences:

25. Steps in Tax Effect Accounting
6. Reserve the effect of timing difference in steps 4 and 5 in future periods when the asset or liability is recovered or settled.

26. Recognising Deferred Tax Assets and Liabilities
6.4
Recognising Deferred Tax Assets and Liabilities

27. Account for Deferred Tax Balances
Under AASB 112 the following steps are necessary to account for deferred tax balances:
Determine the tax base.
Categorise the differences into assessable or deductible temporary.
Calculate deferred tax assets/liabilities arising from temporary differences.

28. Step 1: Calculate the tax base.
The tax base is the amount attributable to each asset or liability for tax purposes.
Calculated by adjusting the accounting carrying amount of the asset or liability for deductions claimable/amounts assessable in the future in respect of that asset or liability.

29. Step 1: Calculate the Tax Base

30. Step 1: Calculate the Tax Base
A difference between carrying amount and tax base indicates that recovery or settlement of the asset or liability will make future tax payments larger or smaller.

31. Step 1: Calculate the Tax Base
The future deductible amounts are the remaining amounts that will be deductible in future years.
The future assessable amounts are the future income streams expected to be derived from use of the asset but not exceeding the accounting carrying amount.

32. Step 2: Determine Taxable or Deductible Temporary (Timing) Differences
Under AASB 112, temporary differences are equal to the difference between the carrying amount of an asset or liability and its tax base.

33. Step 2 Determine Taxable or Deductible Temporary (Timing) Differences

34. Step 3: Calculate and Recognise Temporary Differences
The TTD will result in payment of more tax in the future.

35. Step 3: Calculate and Recognise Temporary Differences
The temporary difference will result in payment of less tax in the future, and represents an asset that will be realised in the future.

36. Step 3: Offsetting Deferred Tax
Under AASB 112, companies can offset deferred tax asset and deferred tax liability balances if there is no legal impediment.

37. Temporary Differences from Tax Losses
6.5
Temporary Differences from Tax Losses

38. Temporary Differences from Tax Losses
When allowable deductions exceed assessable income, a tax loss results.
This tax loss can be carried forward to future income tax years to reduce taxable income in those years.

39. Temporary Differences from Tax Losses
Under AASB 112, a deferred tax asset must be recognised for the carry forward of unused tax losses when it is probable that the company will earn future income to utilise those tax losses.

40. Reversal of Temporary Differences
6.6
Reversal of Temporary Differences

41. Temporary Differences Reversal
Temporary differences result from differences between taxable income and accounting profit.
By definition all temporary differences will reverse.