Taxation

Statement of profit or loss and other comprehensive income for the year ended …

Note Current year Comparative

R R
…..
Profit before tax XX XX
Taxation expense 6 (E) (X) (X)
Profit after tax XX XX

Other comprehensive income

Item of other comprehensive income X X
(eg. Revaluation of land)
Taxation 15 (F) (X) (X)
Total comprehensive income XX XX

Statement of financial position as at …

Note Current year Comparative

R R
Non-current asset / liability
Deferred taxation asset / liability 15 XX XX

Current asset / liability

Current taxation refundable / payable XX XX

Notes to the annual financial statements for the year ended …

Note Where does this come from? / How is it

calculated?
6. Taxation expense
Current taxation
Current year provision Your current tax calculation
Prior year under/ (over) provision (A) Actual current tax assessment for prior year vs
what we estimated
If Actual > Estimate = under provision
Actual < Estimate = over provision
Deferred taxation This should agree to your movement recognised
15 in profit or loss in your deferred taxation
reconciliation
Current year movement - temporary Use your balance sheet approach to calculate
differences these movements (difference between OB and
Current year movement – tax loss CB)
Effect of change in tax rate (B) Rate change egs: 16.15, 16.16, 16.19, 16.23
Previously unprovided temporary (D) Unprovided Dr DT egs: 16.11, 16.16, 16.19,
differences 16.23
Taxation expense recognised in profit or loss (E) Total and will agree to your statement of profit
or loss and other comprehensive income
 Rate reconciliation:
Applicable tax rate Current tax rate for the year (TR)
Tax effects of:
Profit before tax PBT x TR
Exempt income Exempt income x TR
Non-deductible expenses Non-deductible expenses x TR
Prior year under/ (over) provision As above (A)
Effect of change in tax rate As above (B)
Unprovided debit deferred taxation Will agree to your note on deferred tax and
your note below (C)
Previously unprovided temporary As above (D)
differences
Income tax expense per the statement of Will agree to the total above (E)
comprehensive income
Effective tax rate (ETR) (E) above / PBT x 100

Unprovided debit deferred taxation – tax loss (C)

The tax losses which are available for the Assessed tax loss amount (i.e. not multiplied by
reduction of future taxable profit are estimated the tax rate)
at
of which The amount that has been provided for
has been taken into the calculation of deferred (see tut eg 16.11 for illustration)
taxation.

15. Deferred taxation asset / liability

The closing balance is constituted by the This entire note can be calculated using the
effects of: balance sheet approach
Capital allowances
Year-end accruals
- Prepaid expenses
- Income received in advance
- Provisions
Financial instruments
Unused taxation losses

Unprovided debit deferred taxation (C)

- List per category as above

Reconciliation of the deferred taxation

balance:
Opening balance
Movement recognised in other (F)
comprehensive income
Movement recognised in profit or loss 6
Closing balance
Current Tax Calculation (Income statement approach)

Current taxation: Tax that is currently incurred (expense in P/L) and payable (amount in SOFP =
remaining balance of the expense after taking into account provisional payments and under/over
provisions) to SARS.

Working to calculate the current tax charge for the year:

Profit before tax

Permanent differences Enters the computation of accounting profit but never enters the
computation of taxable profit or
Enters the computation of taxable profit but never enters the computation
of accounting profit
The first principle is that amounts are included in PBT as either an income
or expense, but tax does not tax the income / allow the expense deduction.
Your income has been added to arrive at PBT so to remove it, we need to
subtract it
Your expense has been subtracted to arrive at PBT so to remove it, we need
to add it.
The second principle your accounting profit was not affected but the item
must be taken into account for tax purposes, so if it is taxable it would be
added and if deductible, subtracted.
Examples (not exhaustive):
• Add back Non-deductible depreciation (admin building)
• Subtract Exempt capital gain
(This can be calculated as the difference between the gain on sale
(proceeds – cost) for accounting and the taxable gain for tax (proceeds
– base cost) x inclusion rate)
• Subtract Exempt dividends (or any other income not taxable)
• Add back Non-deductible fines/penalties (or any other expense not
deductible)
• A 150% deduction being allowed on an expense, an additional 50%
would be deducted from the PBT.
Temporary differences The tax treatment and the accounting treatment differ for the year, but
over time the treatment will eventually be the same. i.e. Amount forms part
of accounting profit in a different reporting period to when included in the
taxable profit calculation
Examples (not exhaustive):
• Items that are measured using the revaluation method whose values
have gone below cost (tax does not use the revaluation method)
Revaluation expense has been subtracted to arrive at profit so will be
added back in the tax computation.
Revaluation income has been added in profit so will be subtracted in
the tax computation.
NB. Items using revaluation method that have been valued above cost
will have that adjustment go through OCI and so will not be adjusted
here as they do not form part of profit before tax.
• Items that are depreciated and get tax allowances, the tax allowance
is what is deductible.
Depreciation has been subtracted in profit and so will be added back
The tax allowance (wear and tear) is deductible and therefore will be
subtracted.
• An impairment is an accounting adjustment. Impairments are
subtracted and impairment reversals added to arrive at profit before
tax and therefore to remove them they need to be added (impairment)
and subtracted (impairment reversal) accordingly as taxation only
gives allowances on items.
• The depreciation and impairment principals are the same for
intangible assets that are amortised for accounting purposes but given
allowances for tax purposes.
• Research costs are expensed for accounting purposes but for tax
purposes might be deductible over a few years. Therefore research
costs will be added back and the tax deduction subtracted.
• Investment property fair value gains/losses are added/subtracted to
arrive at profit before tax. Tax authorities however only give tax
allowances on these properties (unless they are admin buildings on
which no allowances will be given). The gain/loss therefore needs to
be subtracted/added back and the tax allowance taken into account.
• When an item is sold it is disposed of for both accounting and tax.
Accounting recognises a profit/loss based on the difference between
proceeds and the carrying amount and tax recognises a
recoupment/scrapping allowance based on the difference between
proceeds and the tax base. In both instances, only the portion below
cost is part of the temporary difference as proceeds above cost are
subjected to capital gains tax. Accounting loss/non-capital profit is
added/subtracted and tax recoupment/scrapping allowance is
added/subtracted.
• Accounting uses the accrual system to account for both income and
expenses. Tax, however, follows specific rules within the tax
legislation. These create certain differences:
o Prepaid expenses are items that have been paid in advance.
Tax authorities often allow prepaid expenses to be deducted
when paid if certain conditions are met, however, accounting
recognises these only once incurred, so on payment they have
an asset. The opening balance of prepaid expenses is therefore
expensed in the current year but has already been deducted
for tax, so needs to be added back and the closing balance is
not part of the profit before tax but may be deducted and
therefore will have to be subtracted.
o Income received in advance is income that has been received
for the next period. Tax authorities tax income on receipt,
however, accounting recognises this only once earned, so on
receipt they have a liability. The opening balance of income
received in advance is therefore in income in the current year
but has already been taxed, so needs to be subtracted and the
closing balance is not part of the profit before tax but is taxable
and therefore will have to be added.
o Provisions are created in accounting in accordance with IAS 37
(no payment needs to be made) and the entry is to Dr Expense,
Cr Provision and once paid to Dr Provision and Cr Bank. Tax
only allows a deduction once the item has been paid. As a
result, the opening balance of the provision needs to be
subtracted and the closing balance added back.
 • Financial instruments that are measured at fair value through profit or
loss will show their change in fair value in the income statement,
however tax does not recognise these changes and so they need to be
added back (fair value loss) or subtracted (fair value gain).
NB. Financial instruments measured using amortised cost, tax
authorities measure them in the same way so there is no need to
adjust.
Financial instruments measured at fair value through OCI will have
their movement in OCI and therefore are not adjusted here.
• A lessee that leases an item will account for a right-of-use asset on
which depreciation is recognised. A lease liability will also be
recognised on which finance charges would be raised and payments
deducted. SARS only allows a deduction of the lease payments.
Therefore, depreciation and finance charges would need to be added
back as they were subtracted to arrive at profit before tax and the lease
payment will be deducted as this was not included in profit before tax.
Taxable Income Is the total after adjusting your profit before tax to the tax legislation. If this
total is negative it means you have a tax loss that you can then deduct off
future taxable income. This will mean your current tax expense is 0.
A deferred tax asset to the value of the loss x tax rate can be recognised
provided the recover thereof is probable (i.e there is expected to be
sufficient profits to be able to utilise this loss before expiry (NB. In SA the
loss currently does not expire)).
X tax rate = tax expense
Balance Sheet Approach

Deferred tax: an accounting adjustment in relation to temporary differences between accounting (CA)
and taxation authorities (TB). IAS 12 adopts the balance sheet approach of providing for deferred tax.

Carrying amount

The carrying amount will be determined using the applicable accounting standards (see the working
for more detail).

Tax base

The tax base will be determined based on the following principles:

If the item is an asset (IAS 12 para 7):

Where taxable economic benefits will flow to the entity when it recovers the carrying
amount of the asset: the tax base of an asset is the amount that will be deductible for tax
purposes against those future taxable economic benefits (i.e. TB = future deductions)

Where the economic benefits that flow to the entity as it recovers the carrying amount of
the asset will not be taxable: the tax base of the asset is equal to its carrying amount (i.e. TB
= CA)

If the item is a liability (IAS 12 para 8):

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 (i.e. TB = CA – future deductions)

In the case of revenue received in advance, the tax base of the resulting liability is its carrying
amount less any amount of revenue that will not be taxed in future periods (i.e. TB = CA –
non-taxable future revenue)

Temporary difference

Temporary differences are differences between the carrying amount of an asset or liability in the
statement of financial position and its tax base.

• Taxable temporary differences

Temporary differences that will result in taxable amounts in determining taxable profit
(tax loss) of future periods when the carrying amount of the asset or liability is recovered
or settled

Result in a deferred tax liability (i.e. Dr TE; Cr DT)

• Deductible temporary differences

Temporary differences that will result in amounts that are deductible in determining
taxable profit (tax loss) of future periods when the carrying amount of the asset or liability
is recovered or settled

Result in a deferred tax asset (i.e. Dr DT; Cr TE)

Measurement

How will the entity recover / settle the carrying amount of the asset / liability? (IAS 12 para 51)

Sale / Use / Combination of use and sale?

There are some presumptions with respect of recovery:

• IAS 12 para 51B – deferred tax consequences of revaluing non-depreciable PPE (eg. Land),
shall always be measured at the amount that would arise were the item sold
• IAS 12 para 51C – investment property measured using the fair value model: rebuttable
presumption that the carrying amount of the investment property will be recovered from sale
(this can be rebutted)

If the intention is recovery through sale, you need to assume that the carrying amount (i.e. amount
that needs to be recovered) would be taken as ‘proceeds’. Therefore all items above cost (revalued
upwards or fair value upwards) will attract tax at the CGT rate. Anything below cost would be a
recoupment/scrapping allowance and therefore would be at the standard rate.

What about exempt temporary differences?

(IAS 12 para 15; 24): If a deferred tax asset/liability arises from

the initial recognition of goodwill or
the initial recognition of an asset or liability in a transaction which
is not a business combination
at the time of the transaction affects neither accounting profit(loss) nor taxable profit (tax
loss) and
at the time of the transaction does not give rise to equal taxable and deductible temporary
differences.

Example: Admin buildings where tax allowances are not allowed

The carrying amount on acquisition is equal to the cost price but the tax base is equal to zero as there
will be no future tax allowances on item. A taxable temporary difference therefore arises (carrying
amount exceeds tax base), giving rise to a deferred tax liability. Therefore, a deferred tax liability has
arisen due to the initial recognition of the asset. The purchase does not affect accounting profit (as
we Dr Asset, Cr Bank/Liability) and does not affect taxable profit as no taxable income or deductible
expenses arise from the purchase. Therefore, the taxable temporary difference that has arisen from
the purchase will be exempt.

Unrecognised / unprovided deferred tax assets

If recovery of a deferred tax asset is probable then it can be recognised, however, if it is not then it
may only be recognised to the extent that it would be recovered. The remainder of the asset would
therefore be treated as an unprovided deferred tax asset.

Change in tax rate

Where the applicable tax rate has changed (increased or decreased), the opening balance of the
deferred tax must be restated based on the new rate. This ‘rate change adjustment’ must be
processed wherever the initial deferred tax movement was processed – IAS 12 para 60 (see next
section).
Deferred tax movement

The deferred tax movement is equal to the difference between the opening and closing balance.

Where does the movement go?

• Profit or loss

for those items affecting profit/loss before tax (see note 6 above)

• Other comprehensive income

for those items affecting other comprehensive income (such as land and financial instruments
measured at fair value through OCI)

• Equity

for those adjustments that were made directly to equity due to change in accounting policy
or error per IAS 8

For this reason, together with the fact that sometimes the CGT rate is applied and some temporary
differences are exempt (see measurement above), it is not recommended to calculate the deferred
tax movement using the income statement approach but instead apply the balance sheet approach
per IAS 12. Use the working (shown below) to calculate the opening balance and the closing balance
and then divide the movement into what should be recognised in OCI, Equity and profit or loss so that
the correct journal entry / reconciliation can be done.
 Working

CA – carrying amount; TB – tax base; TD – temporary difference; DTA/DTL – deferred tax asset/liability

NB. TD is the difference between carrying amount and tax base. When carrying amount is greater than tax base it results in a taxable temporary difference
which gives rise to a deferred tax liability. So, if TD = CA – TB, your DTL will be positive and your DTA will be negative.

Item (not an
CA TB TD DTA/L Notes:
exhaustive list)
Land (PPE) Per IAS 16 2 approaches: Under approach 2: An exempt If above cost use CGT Any amount above
TB = base cost (as this will be TD = cost on initial recognition rate. IAS 12 para 51B – cost will go to OCI, so
deducted for CGT purposes) (see measurement section non-depreciable always make a note that the
OR above), subsequent measured as though item affects OCI
TB = 0 as no tax allowances on measurement would give rise recovery is through sale.
land. to TD
Admin building Per IAS 16 TB = 0 as no tax allowances on Exempt (see measurement 0
(PPE) building section)
Any other Per IAS 16 TB = future deductions (i.e. CA - TB For any PPE where the
depreciable PPE NB. Revaluation on future tax allowances) CA is less than the TB
with allowances depreciable PPE is not and a DTA arises, you
examinable, so CGT would want to make
principles will not note if it is provided or
apply unrecognised
IP with allowances Per IAS 40 TB = future deductions (i.e. Cost – TB X Std rate
Here it is useful to future tax allowances) Above cost (FV gains) X CGT rate (if the
divide between cost assumption is not
and fair value gain rebutted, Std rate if
(amount above cost) rebutted)
IP with no Per IAS 40 TB = 0 as no tax allowances on An exempt TD = cost on initial FV gains x CGT rate (if the
allowances Here it is useful to building recognition (see measurement assumption is not
divide between cost section above), subsequent rebutted, Std rate if
and fair value gain measurement (FV gains) would rebutted)
(amount above cost) give rise to TD
Prepaid expenses Asset – amount TB = 0 (already deducted) CA - TB X Std rate
prepaid
Income received in Liability – amount TB = 0 (all already taxed, so CA – CA - TB X Std rate
advance received in advance all as it is all non-taxable future CA is less than TB so
revenue) you will want to make
Provisions Per IAS 37 TB = CA – future deductions = 0 CA - TB X Std rate a note if it is provided
as the full carrying amount will or unrecognised
be deducted in future when paid
Financial Per IFRS 9 – amortised TB = CA as tax treats the item the 0 0
instrument – cost same way
amortised cost
Financial Per IFRS 9 – Fair value TB = initial cost CA – TB If intention is to sell, use Any amount above
instrument – FV OVI the CGT rate. If held for cost will go to OCI, so
trade – this is then part make a note that the
of normal trading item affects OCI
Financial Per IFRS 9 – fair value TB = initial cost CA – TB operations so use
instrument – FV P/L standard rate. If held to
collect dividends apply
0% as dividends are not
taxable.
Intangible asset Per IAS 38 TB = future deductions (i.e. CA – TB X Std rate For any IAs where the
future tax allowances) CA is less than the TB
and a DTA arises, you
would want to make
note if it is provided or
unrecognised
Research costs 0 (these are always Tax does not necessarily allow a CA – TB X Std rate
CA is less than TB so
expensed for full deduction when incurred but
you will want to make
accounting) rather writes this off over time
a note if it is provided
TB = future deductions (i.e.
or unrecognised
future tax allowances)
Tax loss 0 (tax loss has no TB = future deductions (i.e. tax CA – TB X Std rate
carrying amount for loss that can be deducted from
accounting) taxable income in future) – this
can be calculated using the
income statement approach
Right-of-use asset Per IFRS 16 TB = 0 as tax does not recognise CA – TB X Std rate
the ROU asset and therefore
there are no future deductions
expected
Lease liability Per IFRS 16 TB = CA – future deductions = CA – TB X Std rate
VAT, if no VAT then 0
The full carrying amount net of
VAT (if VAT vendor) will be
deducted in future when paid.
VAT will not be allowed as a
deduction as it is claimed from
SARS already.
NB. VAT needs to be spread over
the lease term so the TB will be
calculated as:
VAT claimed x unpaid lease
payments / total lease payments