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ACC2100:'Financial'Accounting'

(3)$Accounting$for$Income$Tax$$

'

Recommendations'highlighted'in'Treatment'of'Taxation'in'Accounts'D4:'

1.

2.

3.

Income'tax'is'recognised'as'an'expense'rather'than'as'an'appropriation'or'distribution'of'profits'to'the'government'

Accounting' for' income' tax' involves' the' recognition' of' items' in' both' the' statement' of' profit' or' loss' and' other'

comprehensive'income'(e.g.'income'tax'expense)'and'the'statement'of'financial'position'(e.g.'current'tax'liability)'

Income'tax'laws'are'relevant'when'accounting'for'company'income'tax'because'these'laws'determine'the'amount'

of'income'tax'paid'

'

3.1$Income$Tax$in$the$Financial$Statements$

Figures' below' illustrate' the' financial' statement' outcomes' from' accounting' for' current' and' deferred' tax' based' on' the'

requirements'of'AASB'112$'

$

$

'

$

ACC2100:'Financial'Accounting'

The'disclosure'shown'reveals'important'insights'into'accounting'for'income'tax'in'accordance'with'AASB'112'as'follows:'

? Current'tax'due'and'payable'to'the'ATO'is'disclosed'as'a'current'liability'in'the'balance'sheet''

o Current'tax'liability'is'based'on'the'taxable'profit'according'to'tax'laws'otherwise'known'as'taxable'income'

? Deferred'tax'disclosed'in'the'balance'sheet'may'be'in'the'form'of'a'deferred'tax'liability'(non[current'liability)'or'

deferred'tax'asset'(non[current'asset)'

? The'source'of'the'deferred'tax'balances'disclosed'in'the'balance'sheet'are'the'future'tax'consequences'from'

recovering'assets'and'settling'liabilities,'which'are'based'on'the'notion'of'¡®temporary'differences¡¯''

o DTA'is'usually'attributable'to'liabilities'(e.g.'provisions)'

o DTL'is'usually'attributable'to'assets'(e.g.'revalued'or'depreciable'assets)'

$

Summary$

? Current'tax'and'deferred'tax'balances'are'disclosed'in'the'statement'of'financial'position'

? Deferred'tax'balances'are'disclosed'in'the'non[current'section'of'assets'and'liabilities'

? Income'tax'expense'is'recognised'in'the'statement'of'profit'or'loss'and'comprehensive'income'and'is'comprised'of'

both'current'and'deferred'tax'

? Current'or'deferred'tax'recognised'directly'against'equity'instead'of'being'charged'against'profit'must'be'separately'

disclosed'in'the'statement'of'profit'or'loss'and'comprehensive'income'or'in'the'notes'

'

'

3.3.$General$Principles$of$Accounting$for$Income$Tax$

AASB'112'recognises'the'current'and'future'tax'consequences'of'the'following:'

? Transactions'and'events'of'the'current'period'included'in'the'financial'statements'

? The'recovery'of'assets'and'settlement'of'liabilities'based'on'the'carrying'amounts'shown'in'the'balance'sheet'

'

Current$Tax:'Amount'of'income'tax'payable'(recoverable)'in'respect'of'the'taxable'income'(tax'loss)'for'a'period'

? Current'tax'payable'to'the'ATO'='Liability'

? Current'tax'recoverable'from'the'ATO'='Asset'

'

Current' tax' would' be' recoverable' if' the' amount' of' income' tax' already' paid' to' the' ATO' exceeds' the' amount' due' for' the'

period''

'

Accounting'for'current'tax'included'in'the'profit'or'loss'for'the'period:'

$

Recognition$of$position$at$year$end$

Payments$to$ATO$during$the$year$$

Current$Tax$Liability$$

(Payable$to$ATO)$

Current$Tax$Asset$

(Refund$due$from$ATO)$

Income'Tax'Expense''''''XXX'

'''''Current'Tax'Liability'''''''''XXX'

Current'Tax'Asset''''''''''XXX'

'''''Income'Tax'Expense''''''''XXX'

Income'tax'expense''''''XXX'

'''''Cash'''''''''''''''''''''''''''''''''''''XXX'

Income'tax'expense''''''XXX'

'''''Cash'''''''''''''''''''''''''''''''''''''XXX'

'

In'accordance'with'AASB'112,'deferred'tax'is'the'amount'of'income'tax'estimate'to'be'payable'(recoverable)'in'respect'of'

future'tax'consequences'from'the'recovery'of'assets'and'settlement'of'liabilities'in'the'statement'of'financial'position'

? A'deferred'tax'asset'is'the'amount'of'income'tax'recoverable'in'future'period'when'the'CA'of'an'asset'or'liability'is'

recovered'or'settled'

? A'deferred'tax'liability'is'the'amount'of'income'tax'payable'in'future'periods'when'the'CA'of'an'asset'or'liability'is'

recovered'or'settled'

'

Income' tax' expense' is' the' aggregate' amount' included' in' the' determination' of' profit' or' loss' for' the' period' is' respect' of'

current'and'deferred'tax'

'

Accounting'for'deferred'tax'included'in'the'profit'or'loss'for'the'period:'

$

Origination$or$Increase$

Reversal$or$Decrease$$

Deferred$Tax$

Liability$

Deferred$Tax$

Asset$$

'

Income'Tax'Expense''''''XXX'

'''''Deferred'Tax'Liability'''''''''XXX'

Deferred'Tax'Asset''''''''''XXX'

'''''Income'Tax'Expense''''''''XXX'

Deferred'Tax'Liability''''''XXX'

'''''Income'Tax'Expense'''''''''''''''XXX'

Income'tax'expense''''''XXX'

'''''Deferred'Tax'Asset'''''''''''''''''XXX'

ACC2100:'Financial'Accounting'

The' general' principles' of' accounting' for' income' tax' are' demonstrated' next' using' the' disclosures' and' the' three' steps' to'

record'the'tax'balances'are'as'follows:'

1. Entries'to'recognise'current'tax'for'the'period'

'

DR$Income$Tax$Expense$

$

$

CR$Current$Tax$Liability$

(Step'1:'journal'entries'to'recognise'the'current'tax'for'the'year'based'on'taxable'income)'

'

2. Entries'to'recognise'the'deferred'tax'included'in'the'profit'or'loss'for'the'period'

'

DR$Income$Tax$Expense$

DR$Deferred$Tax$Asset$

$

$

CR$Deferred$Tax$Liability$

(Step'2:'journal'entries'to'recognise'the'deferred'tax'included'in'P/L'for'year'¨C'less'comprehensive'income)'

'

3. Entries'to'recognise'the'deferred'tax'included'in'other'comprehensive'income'for'the'period''

'

DR$Tax$on$Revaluation$Increase$(OCI)$

$

$

CR$Deferred$Tax$Liability$$

(Step'3:'journal'entries'to'recognise'the'deferred'tax'included'in'other'comprehensive'income'for'the'year)'

'

3.4.$Taxable$Profit$

'

3.4.1$Differences$Between$Accounting$Profit$and$Taxable$Profit$

Accounting' profit' is' determined' using' the' requirements' in' accounting' standards' for' the' recognition' and' measurement' of'

revenues,'gains,'expenses'and'losses'whereas'taxable'profit'is'determined'using'income'tax'laws'

'

1.$Accrual$Items$

Accounting$Treatment$

Income$Tax$Treatment$

a) Annual$leave$and$ Liability'recognised'and'expense'accrued'in'

Deduction'when'leave'is'paid'to'

long$service$leave$ accordance'with'AASB'119'

employees'

b) Product$

Liability'recognised'and'expense'accrued'in'

Deduction'when'warranty'costs'are'

warranties$

accordance'with'AASB'137'

paid'

c) Development$

Asset'recognised'(sometimes)'and'then'

Deduction'when'paid'

costs$

amortised'under'AASB'138'

d) Insurance$or$

Asset'recognised'when'prepaid'and'charged'to' Tax'Deduction'when'paid'

rental$costs$in$

expense'over'time'

advance$$

e) Purchase$of$

Asset'recognised'and'charged'to'expense'

Commonly'a'deduction'when'paid'

supplies$

when'used'

f) Cash$received$in$

Liability'recognised'for'unearned'revenue'and' Commonly'assessable'income'

advance$of$

then'allocated'to'revenue'as'services'are'

when'cash'is'received'

services$

performed'

g) Interest$

Recognised'when'receivable'or'payable''

Assessable'income'or'deductible'

when'received'or'paid'¨C'interest'

paid'is'a'deduction'irrespective'of'

whether'it'has'been'capitalised'or'

expensed'for'accounting'

''

'

'

'

'

'

'

'

'

'

ACC2100:'Financial'Accounting'

2.$Valuation$Items$

a) Bad$and$Doubtful$

Debts$

b) Impairment$

Losses$(including$

for$goodwill)$

c)

Financial$

Instruments$

d)

Foreign$currency$

receivables$and$

payables$$

'

3.$NonZDeductible$Items$

a) Fines$and$

Penalties$

b) Entertainment$

costs$

c) Intangibles$with$

useful$lives$

d) Interest$on$foreign$

borrowings$$

'

'

4.$Tax$Incentives$

a) Depreciation$of$a$

depreciable$asset$

b)

c)

d)

Research$and$

development$

costs$

Government$

grants$

Tax$losses$$

Accounting$Treatment$

Recognised'in'the'contra'asset,'allowance'for'

doubtful'debts,'and'charged'to'expense'

Recognised'in'the'contra'asset,'accumulated'

impairment'losses'and'charged'to'expense'or,'

if'a'reversal'¨C'to'income'in'accordance'with'

AASB'136'

Some'financial'assets'and'liabilities'

subsequently'measured'at'fair'value'with'

gains'and'losses'recognised'in'the'profit'or'

loss'in'accordance'with'AASB'139'

Subsequently'measured'using'spot'exchange'

rates'with'exchange'gains'and'losses'

recognised'in'the'profit'or'loss'in'accordance'

with'AASB'121'

Income$Tax$Treatment$

Deduction'when'debts'are'written'

off'as'bad'

Not'deductible'

'

Assessable'income'or'deductible'

only'on'the'cash'settlement'of'

receivables'or'payables''

'

Accounting$Treatment$

Recognised'as'an'expense'when'payable'

Income$Tax$Treatment$

Non'Deductible'

Recognised'as'an'expense'when'payable'

Non'Deductible'

Recognised'as'an'expense'based'on'the'

amount'of'the'expenditure'

Recognised'as'an'expense'when'payable'

Amortisation'is'not'deductible'for'

some'intangible'assets'

Interest'on'foreign'debts'is'not'

deductible'if'it'breaches'the'

limits'set'by'¡®thin'capitalisation'

rules¡¯'

Accounting$Treatment$

Recognised'as'an'expense'over'useful'life'

Recognised'as'an'expense'based'on'the'

amount'of'expenditure'

Recognised'as'revenue'(sometimes)'in'

accordance'with'AASB'120'

No'recognition'

Income$Tax$Treatment$

Deduction'often'based'on'

accelerated'rates,'or'higher'

straight'line'rates'

Concessional'deduction'allowed'

equal'to'125%'of'the'expenditure'

Exempt'income'meaning'not'

assessable'income''

Allowed'to'be'carried'forward'and'

offset'against'future'taxable'

income'subject'to'conditions'

'

3.5.$Current$Tax$

'

3.5.1$The$Reconciliation$Approach$$

It' is' necessary' to' determine' the' taxable' profit' of' a' company' for' the' period' in' order' to' prepare' the' entries' required' for'

current'tax'¨C'a'direct'or'indirect'approach'may'be'used'to'determine'taxable'profit'for'the'period'

? The'direct'approach'utilises'complete'information'about'assessable'income'and'deductions'for'the'period'

? The'indirect'approach'reconciles'from'accounting'profit'to'taxable'profit'making'adjustments'for'items'that'have'a'

tax'treatment'that'differs'from'accounting''

'

'

ACC2100:'Financial'Accounting'

The'indirect/reconciliation'approach'with'accounting'profit'as'the'starting'point'is'commonly'used'

'

1.

'

Reconciling$Items$

Revenues'or'gains'that'are'not'equal'to'

assessable'income'

2.

Expenses'or'losses'not'equal'to'

deductions'

3.

Assessable'incomes'that'are'not'equal'

to'revenues'or'gains'

'

Deductions'that'are'not'equal'to'

expenses'or'losses'

'

'

4.

Adjustment$to$Profit$before$Tax$

Subtract'

E.g.'Interest'revenue'not'received'¨C'remove'by'

subtracting'from'accounting'profit'

Add'back'

E.g.'Fines'and'penalties'expense['remove'by'adding'

back'to'accounting'profit'

Add'in'

E.g.'Unearned'revenue'for'work'not'yet'performed'¨C'

include'by'adding'to'accounting'profit'

Subtract'

E.g.'Development'costs'paid'and'recognised'as'an'asset'

¨C'include'by'subtracting'from'accounting'profit''

'

3.5.1$The$Current$Tax$Worksheet$$

$

The'current'tax'worksheet'applies'the'reconciliation'approach'to'determine'the'taxable'profit'for'the'period'¨C'the'worksheet'

reconciles'from'accounting'profit'to'taxable'profit'by'adjusting'for'the'differences'between'tax'and'accounting'treatments'

'

Example:'Calculation'of'current'tax'liability'

'

'

'

Additional' Information:' Allan' owns' to' depreciable' assets,' an' item' of' plant' that' cost' 200,000' and' on' which' 2' years'

depreciation' has' been' charged,' and' furniture' that' had' been' purchased' for' $10,000' and' on' which' 6' years' depreciation' has'

been'charged.'The'ATO'allows'a'depreciation'rate'of'25%'straight'line'on'cost'to'be'used,'and'Allan'Ltd'applies'a'straight'line'

of'10%'on'cost'in'its'accounting'records.'No'employee'has'been'paid'long'service'leave'in'the'current'year.'Corporate'tax'rate'

is'30%'

'

Determine'taxable'income'of'Allan'Ltd'for'30'June'2017'and'prepare'the'journal'entry'for'current'tax'

$

Profit$before$tax$(accounting$profit)$ $

$

$

$

$

$150,000$

$

Add)

$

Entertainment$expenses$

$

$

$

$

$

$10,000$

$

Depreciation$expense$plant$ $

$

$

$

$20,000$

$

Depreciation$expense$furniture$

$

$

$

$

$$$1,000$

$

LongZservice$leave$expense$ $

$

$

$

$$$4,000$ $

$35,000$

Deduct)

$

Tax$Depreciation$¨C$plant$$ $

$

$

$

$

$50,000$ $$$$$$$$$$$$$$($50,000)$

$

$

$

Taxable$Income$ $

$

$

$

$

$

$

$

$135,000$

$

Tax$on$Taxable$Income$@$30%$

$

$

$

$

$

$

$40,500$

$

$

$

Income$Tax$Expense$

$

$

$

DR$$

40,500$

$

Current$Tax$Liability$

$

$

CR$

$

40,500$

(Recognition'of'the'current'tax'liability,'based'on'taxable'income'for'year)'

$

'

$

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