Study unit 10
Income tax and deferred tax
Revision: Types of taxes
On a company’s taxable income, where the income can result from transactions that are:
Recognised in profit/loss (tax expense in P/L)
Recognised in other comprehensive income (tax expense in OCI)
Recognised directly in equity
CURRENT INCOME TAX = TAXABLE PROFIT/LOSS x TAX RATE
Di erence between taxable- & accounting profit
Temporary or Permanent
Converting accounting profits into taxable profits:
Accounting profit (profit before tax) xxx
Adjust for permanent di erences:
Less: exempt income (xxx)
Add: non-deductible expense xxx
Less: Capital profit (xxx) Portion (20%) not taxable
Add: Taxable capital gain xxx
Accounting profit that is taxable (this year/some other year) xxx
Adjust for movement in temporary di erences:
Less: Non-capital profit (xxx)
Add: Depreciation xxx
Less: Wear and tear (capital allowance) (xxx)
Add: Recoupment xxx
Add: Taxable capital gain xxx 80% of accounting profit on sale
Taxable profit xxx
Current tax @27% = Taxable profit x 27%
Journal for tax expense: Dt Tax expense (p/l)
Cr SARS: Current tax (SoFP)
, Accounting profits Taxable profits
= Income earned – expenses incurred = Income that is taxable – expenses deductible
Profit/loss for a period before deducting tax Profit/loss for a period determined in accordance
expense with rules established by taxation authorities upon
Calculated in terms of IFRS which income taxes are payable (recoverable)
Calculated ito local tax authorities
Temporary di erences Permanent di erences
Accounting and tax treatments of something di er The accounting and tax treatments of something will
in a year, but overtime there is essentially no di er in a year and will never disappear over time.
di erences between the two. Di erence in e ective rate and applicable rate –
Can be caused by: disclose di erences in rate recon.
The accrual system: Exempt income and non-deductible expense:
IFRS: Recognise income/expenses when it is Exempt income – income per the accountant that the
earned/incurred. (Income received in advance, income tax authorities will never tax
receivable, prepaid expense, expense payable, provisions) Non-deductible expense – the expenses per the
Tax authorities: Earlier of income received and accountant that tax authorities will never allow as a tax
earned. When expense is incurred except if its deduction.
prepaid (may be deducted earlier) or relates to a
provision (May only be deducted when later, when
paid)
Depreciable assets: Capital profits vs taxable capital gains:
Depreciation vs tax deduction: Accountant and tax IFRS: Capital profits –
authority may expense the asset’s cost at di erent Non-current asset= proceeds on sale-carrying
speeds (20% depreciation vs 10& wear-and-tear) amount. Current assets = proceeds on sale – original
Carrying amount vs tax base: IFRS – Carrying cost.
amount=cost – accumulated depreciation. Tax Tax legislation: Taxable capital gains –
legislation – Tax base = cost – accumulated Proceeds on sale – base cost. 80% of capital gains of a
deductions for tax purposes. company is taxable.
Selling the asset:
@ below original cost: IFRS – Profit/loss on sale = Di erence: exempt portion of capital profit = capital
proceeds – carrying amount. Tax legislation – profit – taxable gain.
Recoupment (scrapping allowance) on sale =
proceeds (limited to original cost) – tax base.
@ Above original cost: Summary below
Implications of a sale above cost in terms of IFRS:
Proceeds Capital profit
Profit on sale (capital & non- (Proceeds – og cost x80% = TCG)
Original cost
capital portion) Non-capital profit
Carrying amount
Implications of sale above cost according to tax legislation:
Proceeds on Companies – 80%, thus 20% portion Is
sale Capital gain of which only certain % is taxable not taxable
Base cost If base cost and original cost is
Original cost di erent, di erence will not be taxed
Recoupment (no scrapping allowance if
Recoupment=proceeds (limited to cost
Tax base proceeds > cost)
– tax base)
Cost – accumulated deductions for tax purposes
Proceeds > base cost = gain
Expenditure incurred to acquire & retain asset
Proceeds < base cost = loss
(incl. acquisition-, improvement- and direct cost)
Income tax and deferred tax
Revision: Types of taxes
On a company’s taxable income, where the income can result from transactions that are:
Recognised in profit/loss (tax expense in P/L)
Recognised in other comprehensive income (tax expense in OCI)
Recognised directly in equity
CURRENT INCOME TAX = TAXABLE PROFIT/LOSS x TAX RATE
Di erence between taxable- & accounting profit
Temporary or Permanent
Converting accounting profits into taxable profits:
Accounting profit (profit before tax) xxx
Adjust for permanent di erences:
Less: exempt income (xxx)
Add: non-deductible expense xxx
Less: Capital profit (xxx) Portion (20%) not taxable
Add: Taxable capital gain xxx
Accounting profit that is taxable (this year/some other year) xxx
Adjust for movement in temporary di erences:
Less: Non-capital profit (xxx)
Add: Depreciation xxx
Less: Wear and tear (capital allowance) (xxx)
Add: Recoupment xxx
Add: Taxable capital gain xxx 80% of accounting profit on sale
Taxable profit xxx
Current tax @27% = Taxable profit x 27%
Journal for tax expense: Dt Tax expense (p/l)
Cr SARS: Current tax (SoFP)
, Accounting profits Taxable profits
= Income earned – expenses incurred = Income that is taxable – expenses deductible
Profit/loss for a period before deducting tax Profit/loss for a period determined in accordance
expense with rules established by taxation authorities upon
Calculated in terms of IFRS which income taxes are payable (recoverable)
Calculated ito local tax authorities
Temporary di erences Permanent di erences
Accounting and tax treatments of something di er The accounting and tax treatments of something will
in a year, but overtime there is essentially no di er in a year and will never disappear over time.
di erences between the two. Di erence in e ective rate and applicable rate –
Can be caused by: disclose di erences in rate recon.
The accrual system: Exempt income and non-deductible expense:
IFRS: Recognise income/expenses when it is Exempt income – income per the accountant that the
earned/incurred. (Income received in advance, income tax authorities will never tax
receivable, prepaid expense, expense payable, provisions) Non-deductible expense – the expenses per the
Tax authorities: Earlier of income received and accountant that tax authorities will never allow as a tax
earned. When expense is incurred except if its deduction.
prepaid (may be deducted earlier) or relates to a
provision (May only be deducted when later, when
paid)
Depreciable assets: Capital profits vs taxable capital gains:
Depreciation vs tax deduction: Accountant and tax IFRS: Capital profits –
authority may expense the asset’s cost at di erent Non-current asset= proceeds on sale-carrying
speeds (20% depreciation vs 10& wear-and-tear) amount. Current assets = proceeds on sale – original
Carrying amount vs tax base: IFRS – Carrying cost.
amount=cost – accumulated depreciation. Tax Tax legislation: Taxable capital gains –
legislation – Tax base = cost – accumulated Proceeds on sale – base cost. 80% of capital gains of a
deductions for tax purposes. company is taxable.
Selling the asset:
@ below original cost: IFRS – Profit/loss on sale = Di erence: exempt portion of capital profit = capital
proceeds – carrying amount. Tax legislation – profit – taxable gain.
Recoupment (scrapping allowance) on sale =
proceeds (limited to original cost) – tax base.
@ Above original cost: Summary below
Implications of a sale above cost in terms of IFRS:
Proceeds Capital profit
Profit on sale (capital & non- (Proceeds – og cost x80% = TCG)
Original cost
capital portion) Non-capital profit
Carrying amount
Implications of sale above cost according to tax legislation:
Proceeds on Companies – 80%, thus 20% portion Is
sale Capital gain of which only certain % is taxable not taxable
Base cost If base cost and original cost is
Original cost di erent, di erence will not be taxed
Recoupment (no scrapping allowance if
Recoupment=proceeds (limited to cost
Tax base proceeds > cost)
– tax base)
Cost – accumulated deductions for tax purposes
Proceeds > base cost = gain
Expenditure incurred to acquire & retain asset
Proceeds < base cost = loss
(incl. acquisition-, improvement- and direct cost)
