section 29 deferred tax · • measure deferred tax balances using the balance sheet approach •...

SECTION 29 DEFERRED TAX

SCOPE

• Section 29 covers accounting for income tax

• It requires the recognition of current and future tax

consequences of transactions/events recognised in

financial statements (s29.2)

OBJECTIVE

• Understand why deferred tax is necessary• Understand what is meant by the tax base of an asset

and the tax base of a liability• Understand what is meant by temporary differences• Measure deferred tax balances using the balance sheet

approach• Understand how to account for deferred tax when the

revaluation model is elected for property, plant and equipment

• Understand the need for a tax rate reconciliation• Prepare a tax rate reconciliation• Present and disclose deferred tax in the financial

statement of a company

INTRODUCTION

• Income tax includes both domestic and foreign

taxes as a result of taxable income (s29.1)

Accounting

Use own rules (IFRS) to

determine how to recognise income and

expenses

Tax (SARS)

Use own rules (Income Tax

Act) to determine what

tax is owed

Accrual

basis of

accounti

ng

Reflect

substance

over form

Income:

earlier of

receipt or

accrual

Expenses:

when

incurred or

paid

According

to legal

form

Diffe

ren

ce

s

Accounting

profitTaxable income

THE TAX EXPENSE OF A COMPANY

• Tax expense is defined as the aggregate amount included in

total comprehensive income and equity for the reporting

period in respect of current and deferred tax.

• The tax expense of an entity consists of the following

components:

Current tax

Deferred tax

Current yearUnder/over provision of tax in a prior year

Arising on temporary differences

DEFERRED TAX

• Theoretically: tax expense per SOCI = 28% of profit before tax but it is not due to:• Non-taxable items

• Non-deductible items

• Temporary differences

• Deferred tax – align taxable income with accounting profit in relation to temporary differences

• Tax rate recon – explains what the permanent differences are that causes tax expense per SOCI ≠ 28% of profit before tax

Permanent

differences

Timing differences

DEFERRED TAX

• Deferred tax balance =

• future tax payable or receivable on

• expected future transactions

• that have already been recognised in the financial

statements (as either assets or liabilities)

• Deferred tax liability• If assets (future inflows) > liabilities (future outflows) = expect

future profit = pay tax in future

• Deferred tax asset

• If liabilities (future outflows) > assets (future inflows) =

expect future loss = pay less tax in future

Page 4

DEFERRED TAX

Probable that the recovery of the

carrying amount will make future tax

payments larger

Deferred tax liability

Probable that the settlement of the carrying amount

will make future tax payments smaller

Deferred tax asset

Page 4

DEFERRED TAX

• Example 1: Liability giving rise to future tax

consequences

Waheeda (Pty) Limited has a profit before tax of R200

000 in both 2015 and 2016. Income received in

advance balance at end of 2015 was R50 000 and at

end of 2016 was R0. The company tax rate remained

constant at 28%.

You are required to

A Calculate the current tax of the company for both 2015 and year 2016.

B Explain whether or not deferred tax should be recognised in 2015.

C Explain whether or not we would recognise deferred tax in year 2016.

Page 4

DEFERRED TAX


consequences

Solution

A 2015 2016

Profit before tax (accounting profit) 200 000 200 000

Permanent differences - -

Temporary differences

Less income received in advance opening balance 0 (50 000)

Add income received in advance closing balance 50 000 0

Taxable income 250 000 150 000

Tax rate 28% 28%

Current tax 70 000 42 000

Page 5

DEFERRED TAX


consequences

Solution

B At the end of 2015, the company had a liability of R50 000 for income received in advance.

This amount would not have been included in accounting profit for the year but would be

seen as taxable income so the company would have paid tax on it in 2015. In the following

year, the R50 000 would be included in accounting profit but as it was already taxed in the

previous year it would not be taxed again thus it would be added back in the taxable income

calculation. If this amount had been treated the same from the accounting perspective and

the tax perspective then the company would have a tax expense of R56 000 for both years

but as this is not the case the company has had to pay R70 000 in 2015 but only R42 000 in

2016. The liability balance of R50 000 at the end of 2015 has resulted in the company paying

more tax in 2015 but less in 2016. Thus the company would need to record a deferred tax

asset at the end of the year as the consequences of the settlement of the liability will result

in less tax having to be paid in the future.

C At the end of 2016 the company no longer has a liability for the income received in advance

thus there will be no deferred tax.

Page 5

TAX BASE

• Deferred tax if:

• Tax base of asset = • Is the amount that will be deductible for tax purposes

against any taxable economic benefits that will flow to a company when it recovers the carrying amount of the asset.

• If those economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount (eg investment in shares).

Page 5

TAX BASE

• Example 2: Tax base of prepaid expenses

On 31 December 2015, Waheeda (Pty) Limited paid

R20 000 cash for stationery. The stationery was only

delivered in January 2016.

You are required to

A Determine the carrying amount of the prepaid expenses for 2015 and 2016.

B Determine the tax base of the prepaid expenses for 2015 and 2016.

C Determine if the prepaid expense asset gives rise to deferred tax for 2015 and 2016.

Page 5

TAX BASE

Solution

A At the end of 2015 the company would recognise a prepaid expense asset of R20 000 as the stationery

had been paid for but not delivered. By the end of 2016 the stationery had been delivered thus there

would no longer be a prepaid expense asset.

Carrying amount at end of 2015: R20 000

Carrying amount at end of 2016: R0

B The prepaid expense is an asset for the company at the end of 2015. It relates to stationery of the

company that will be used in the ordinary course of business to generate future income so it will give

rise to future taxable income thus its tax base would be the amount that would be deductible in the

future. For tax purposes, the prepaid expense is allowed as a deduction when it has been paid so it

will reduce taxable income in 2015. Hence in 2016 and any years going forward there will be no

further deductions thus at the end of 2015 and going forward the tax base of the prepaid asset would

be R0.

Tax base at end of 2015: R0


C Deferred tax arises if at the end of the year the carrying amount it different from the tax base.

2015: Carrying amount was R20 000 and the tax base was R0 thus there would be deferred tax.

2016: Carrying amount was R0 and the tax base was R0 thus there would be no deferred tax.

Page 6

TAX BASE

• Example 3: Tax base of depreciable asset

On 1 July 2013 Waheeda (Pty) Limited bought an

machine for R300 000. Its accounting policy is to

depreciate machine over 5 years using the straight

line method. SARS allows a 25% pa wear and tear

deduction each year not apportioned for time. The

company’s financial year end is 31 December.

You are required to

A Determine the carrying amount of the machine for 2015 and 2016.

B Determine the tax base of the machine for 2015 and 2016.

C Determine if the machine gives rise to deferred tax for 2015 and 2016.

Page 6

TAX BASE

Solution

A The machine is an asset for the company.

Carrying amount at end of 2015: (300 000 - 300 000/5*2.5) = R150 000

Carrying amount at end of 2016: (300 000 - 300 000/5*3.5) = R90 000

B The machine is an asset for the company at the end of 2015 and 2016. The machine will be used by

the company in the ordinary course of business to generate future income so it will give rise to future

taxable income thus its tax base would be the amount that would be deductible in the future. For tax

purposes, SARS allows a 25% pa wear and tear deduction not apportioned for time. Thus it will allow

25% in 2013, 25% in 2014, 25% in 2015 and 25% in 2016. At the end of 2015, the future deductions

would be the 25% that SARS will allow in 2016. At the end of 2016, there are no further deductions

that SARS will allow in the future.

Tax base at end of 2015: (300 000 * 0.25) = R75 000

Tax base at end of 2015: (300 000 * 0) = R0


2015: Carrying amount was R150 000 and the tax base was R75 000 thus there would be deferred tax.


Page 6

TAX BASE

• Tax base of a liability =

• The tax base of a liability is its carrying amount less any

amount that will be deductible for tax purposes in respect

of that liability in future periods.

• In the case of revenue that is received in advance, the tax

base of the resulting liability is its carrying amount less any

amount of the revenue that will not be taxable in future

periods.

Page 7

TAX BASE

• Example 4: Tax base of income received in

advance

On 31 December 2015, Waheeda (Pty) Limited

received R16 000 cash in respect of the rent income

for January 2016 from a tenant.

You are required to

A Determine the carrying amount of the income received in advance for 2015 and 2016.

B Determine the tax base of the income received in advance for 2015 and 2016.

C Determine if the income received in advance liability gives rise to deferred tax for 2015

and 2016.

Page 7

TAX BASE

• Example 5: Tax base of income received in

advance

Solution

A At the end of 2015 the company would recognise an income received in advance liability of

R16 000 as the payment of the rent has been received in 2015 but the tenant will only occupy the

space in the next year. By the end of 2016 the tenant would have occupied the space thus there

would no longer be an obligation to deliver a service to the tenant or return the money.



B The income received in advance is a liability for the company at the end of 2015. In the case of

revenue that is received in advance, the tax base of the resulting liability is its carrying amount

less any amount of the revenue that will not be taxable in future periods. For tax purposes, the

income will be taxed the earlier or receipt or accrual thus it will it taxed in 2015 even though it will

only be recognised as income in 2016. As it is taxed in 2015, the R16 000 will not be taxed again in

the future.

Tax base at end of 2015: R16 000 - R16 000 = R0





Page 8

TAX BASE

• Example 5: Tax base of provisions

On 31 December 2015, Waheeda (Pty) Limited

recognised a provision of R50 000 for a future lawsuit.

In January 2016, the case was decided and

Waheeda had to pay R50 000. SARS only allows the

deduction when the amount is paid.

You are required to

A Determine the carrying amount of the provision for 2015 and 2016.

B Determine the tax base of the provision for 2015 and 2016.

C Determine if the provision liability gives rise to deferred tax for 2015 and 2016.

Page 8

TAX BASE

• Example 5: Tax base of provisionsSolution

A At the end of 2015 the company would recognise a provision liability of R50 000 as the company has an

obligation for an uncertain timing or amount at the end of the year for a lawsuit. By the end of 2016

the lawsuit has been resolved and the company has settled the obligation thus no longer has a liability.



B The provision is a liability for the company at the end of 2015. The tax base of a liability is its carrying

amount less any amount that will be deductible for tax purposes in respect of that liability in future

periods. For tax purposes, the amount will be allowed as a deduction but only when it is paid thus the

deduction will only be allowed in 2016.

Tax base at end of 2015: R50 000 – R50 000 = R0





Page 8

TAX BASE

• Tax base of assets/liabilities not recognised

• Tax base but no recognised asset or liability

• Research and development costs• Accounting: recognised immediately as an expense in

profit or loss

• Tax: SARS could allow a deduction in later periods

Page 10

TAX BASE

• Example 8: Tax base of research and development

costs

During 2015, Waheeda (Pty) Limited expensed R25 000

developing a computer software. SARS allows a wear

and tear deduction of 25% pa not apportioned for

time. You are required to

A Determine the carrying amount of the research and development costs for 2015 and

2016.

B Determine the tax base of the research and development costs for 2015 and 2016.

C Determine if the research and development costs gives rise to deferred tax for 2015

and 2016.

Page 10

TAX BASE

Solution

A As the costs of developing the computer software are internally generated, the company would

expense the entire amount in profit or loss for 2015 thus at the end of 2015 the company would not

have recognised an asset.



B The costs of developing the software have not been recognised as an asset but SARS is allowing the

cost as a deduction over a period of 4 years. The costs relates to developing a programme that would

be used by the company in the ordinary course of business to generate future income so it will give

rise to future taxable income thus its tax base would be the amount that would be deductible in the

future. For tax purposes, SARS will allow 25% in 2015, 25% in 2016, 25% in 2017 and 25% in 2018.

Thus at end of 2015, SARS will allow a further 75% and end of 2016, SARS will allow a further 50%.

Tax base at end of 2015: R25 000*0.75 = R18 750

Tax base at end of 2016: R25 000*0.5 = R12 500


2015: Carrying amount was R0 and the tax base was R18 750 thus there would be deferred tax.

2016: Carrying amount was R0 and the tax base was R12 500 thus there would be deferred tax.

Page 10

TEMPORARY DIFFERENCES

• Difference between

Page 11

TEMPORARY DIFFERENCE

• Not all temporary differences give rise to deferred tax

• A deferred tax asset is only recognised if it is probable that taxable profit will be available in the future against which the deductible difference can be offset

• A deferred tax liability is not recognised if it arises from initial recognition of goodwill

• Both deferred tax assets and liabilities are not recognised if it has arisen from

• initial recognition of the transaction that is not a business

combination and

• at the time of the transaction neither accounting profit or

taxable profit were affected

Page 11

TEMPORARY DIFFERENCES

Temporary differences

1. The treatment if income received in advance is different to its

treatment as per IFRS for SMEs

2. The treatment by SARS of prepaid expenses is different to its treatment

per IFRS for SMEs

3. The treatment by SARS of provisions is different to its treatment

according to IFRS for SMEs

4. The allowance granted by SARS on depreciable assets is different to the

depreciation provided by the business

Page 11

MEASUREMENT OF DEFERRED TAX

• Deferred tax assets or liabilities must be measured:

• using the tax rates and tax laws that have been enacted or

substantively enacted by the reporting date

• as to reflect the way in which the company intends to

recover/realise the asset or settle the liability

Page 12

CALCULATION OF DEFERRED TAX

• Use a deferred tax workings table1. Add the column headings: Carrying amount, tax base, temporary

difference and deferred tax2. Add in the row headings: Beginning of year, movement and end of

year3. Make a note if the item you are dealing with is either an asset or liability

as this impacts how you calculate the tax base and your signs 4. Capture your carrying amount and tax base information ensuring that

all debits should be positive and all credits should be negative5. Calculate the temporary differences – do this by taking the tax base

LESS the carrying amount6. Multiply the temporary difference by the applicable tax rate7. Determine if it gives rise to a deferred tax asset or deferred tax liability (if

you have correctly used the table a positive amount would be asset and negative sign would be liability)

Page 12

CALCULATION OF DEFERRED TAX

Solution

Carrying

amount

Opening balance

Tax base Temporary

difference

Deferred

tax

Step 1:

Col

headings

Movement

Closing balance

Step 2:

Row

headings

Step 3:

Asset or

liability

Step 4:

Capture

CA & TB

Step 5:

Calculate

TD

Step 6:

Multiply

TD by TR

Step 7:

DTA or

DTL

Prepaid expense (ASSET)

0

0

0

0

-20 000

-20 000

0

-5 600

-5 600

0

20 000

20 000

TD = Tax base minus carrying amount

DT = TD * tax rate

DTL

Page 14

PRESENTATION OF DEFERRED TAX

• Current and non-current distinction

• Deferred tax assets and liabilities must be disclosed in their

respective non-current section in the statement of financial

position.

• Offsetting

• Current assets and current liabilities, and deferred tax asset

and deferred tax liabilities can be offset against each other

only when:

• The company has a legally enforceable right to do so; and

• It is evident that it intends to settle on a net basis or to realise the

asset and liability simultaneously without undue costs or effort.

Page 25

DISCLOSURE OF DEFERRED TAX

• Disclose separately the major components of tax expense (income) (p 29.39 ):

(a) current tax expense (income);

(b) any adjustments recognised in the period for current tax of prior periods;

(c) the amount of deferred tax expense (income) relating temporary differences;

(h) the amount of tax expense (income) relating to those changes in accounting policies and errors that are included in profit or loss in accordance with Section 10 Accounting Policies, Estimates and Errors, because they cannot be accounted for retrospectively.

Page 25

DISCLOSURE OF DEFERRED TAX

• Disclose the following separately (p29.40)

(a) the aggregate current and deferred tax relating to items that are recognised as items of other comprehensive income.

(b) the aggregate current and deferred tax relating to items that are charged or credited directly to equity.

(c) an explanation of any significant differences between the tax expense (income) and accounting profit multiplied by the applicable tax rate. For example such differences may arise from transactions such as revenue that are exempt from taxation or expenses that are not deductible in determining taxable profit (tax loss).

(e) for each type of temporary difference:

(i) the amount of deferred tax liabilities and deferred tax assets at the end of the reporting period; and

(ii) an analysis of the change in deferred tax liabilities and deferred tax assets during the period.

Page 25

DISCLOSURE OF DEFERRED TAX-MODEL EXAMPLE

A Waheeda (Pty) Limited

Extract from statement of comprehensive income for the year ended 31 December 2015

2015 2014

R R

Profit before tax XXX XXX

Tax expense489 200 308 100

5.5d

Profit after tax XXX XXX

Page 26

Current +

deferred tax

DISCLOSURE OF DEFERRED TAXSolution

Waheeda (Pty) Limited

Extract from the statement of financial position as at 31 December 2015

2015 2014

R R

Assets

Current assets

Current tax asset/liability55 000

4.2n

Liabilities

Current liability

Current tax asset/liability 37 000 4.2n

Non-current liability

Deferred tax 8 260 7 000 4.2o

Page 26

Aggregate of all deferred

tax balances at year end

DISCLOSURE OF DEFERRED TAXSolution

Waheeda (Pty) Limited

Extract from the notes to the financial statements for the year ended 31 December 2015

Note 1: Accounting policies

Note 1.6 Income tax

Income tax represents the sum of current and deferred tax.

Current tax

Current tax for the year is based on the taxable profit for the year. Current tax is calculated using

the tax rates enacted or substantively enacted at the reporting date.

Deferred tax

Deferred tax is recognised on differences between carrying amounts of assets and liabilities in

the financial statements and the corresponding tax bases used in the computation of taxable

profit. Deferred tax is accounted for using the balance sheet method.

8.5

Page 26

DISCLOSURE OF DEFERRED TAXSolution continued

Note 4: Deferred tax

Prepaid

expenses Machine Total

29.40e

Opening balance – 2014 -4 100 0 -4 100

Movement – 2014 -800 -2 100 -2 900

Closing balance – 2014 -4 900 -2 100 -7 000

Movement – 2015 840 -2 100 -1 260

Closing balance – 2015 -4 060 -4 200 -8 260

Page 26

DISCLOSURE OF DEFERRED TAXSolution continued

Note 4: Tax expense

2015 2014

R R

Current tax 487 940 305 200 29.39a

Current period (1 510 500 * 0.28) & (1 215 000 * 0.28) 422 940 340 200

Prior period under/(over) provision 65 000 (35 000) 29.39b

Deferred tax 1 260 2 900 29.39c

Tax as per the statement of comprehensive income 489 200 308 100

Page 26

A tax rate reconciliation will also need to

be accompanied to this disclosure

however this was not covered in this

update

section 29 deferred tax · • measure deferred tax balances using the balance sheet approach •...

Documents