SECTION 29 DEFERRED TAX

[Pages:38]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) Income:

Accrual basis of accounti

ng

Reflect substance over form

Accounting

Use own rules (IFRS) to

determine how to recognise income and expenses

Differences

Tax (SARS)

Use own rules (Income Tax

Act) to determine what

tax is owed

earlier of receipt or accrual Expenses:

when incurred or

paid

According to legal

form

Accounting profit

Taxable 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

Current tax

year Under/over provision

of tax in a prior year

Deferred tax

Arising on temporary differences

DEFERRED TAX

? Theoretically: tax expense per SOCI = 28% of profit

before tax but it is not due toP:ermanent

? Non-taxable items

differences

? Non-deductible items ? Temporary differences

Timing 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

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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

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DEFERRED TAX

Probable that the recovery of the carrying amount

will make future tax payments larger

Probable that the settlement of the carrying amount will make future tax payments smaller

Deferred tax liability

Deferred tax asset

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