2. Accounting for Income Tax

Question 1

What is the difference between accounting treatment and tax treatment?

Answer 1

The tax treatment often follows the cash flow whereas the accounting treatment is determined in accordance with accounting standards and the principles of accrual accounting.

Question 2

What is the tax treatment for depreciation of a depreciable asset?

Answer 2

Deduction often based on accelerated rates, or higher straight-line rates

Question 3

What is the tax treatment for Bad and doubtful debts

Answer 3

Deduction when written off as bad

Question 4

What is the tax treatment for Employee benefits such as long-service leave, sick leave

Answer 4

Deduction when such leave is taken by employees

Question 5

What is the tax treatment for Rental costs

Answer 5

Commonly a deduction when paid

Question 6

What is the tax treatment for Rental income?

Answer 6

Commonly taxable when received in cash

Question 7

What is the tax treatment for interest?

Answer 7

Taxable or deductible when received or paid; interest paid is a deduction irrespective of whether it has been capitalised or expensed for accounting

Question 8

What is the tax treatment for fines and penalties?

Answer 8

Not deductible

Question 9

What is the tax treatment for goodwill?

Answer 9

Goodwill write-downs not deductible

Question 10

What is the tax treatment for Entertainment costs?

Answer 10

Not deductible

Question 11

What is the tax treatment for Development costs?

Answer 11

Deduction when paid

Question 12

What is the tax treatment for Foreign currency receivables and payables?

Answer 12

Tax calculated on related revenue or expense at initial establishment of the receivable or payable

Question 13

What is the tax treatment for Tax losses?

Answer 13

Allowed to be offset against future taxable income

Question 14

What is the tax treatment for Insurance costs?

Answer 14

Commonly a tax deduction when paid

Question 15

What is the tax treatment for Purchases of supplies?

Answer 15

Commonly a deduction when paid

Question 16

What is the tax treatment for Instalment sales?

Answer 16

Portion of total profit is taxable as each instalment is received

Question 17

What is the tax treatment for Product warranties?

Answer 17

Deduction when warranty costs are incurred

Question 18

Does a company have to account for future or current events?

Answer 18

Accounting standard AASB 112 requires a company to account for both the current and the future tax consequences of its economic events.

Question 19

What are the current tax consequences?

Answer 19

The current tax consequences result in there cognition of a current tax liability (asset) based on the company’s taxable income calculated in accordance with income tax legislation.

Question 20

What are the future tax consequences?

Answer 20

The future tax consequences of accounting transactions result in the recognition of deferred tax liabilities (assets).

Question 21

How is the income tax expense recognised in accounting records?

Answer 21

Is a result of movements in both current and deferred tax liabilities (assets).

Question 22

What is the current tax liability based on?

Answer 22

The company’s taxable income for the current period deter- mined in accordance with income tax legislation.

Question 23

How can the taxable income be found for the current period?

Answer 23

By adjusting accounting profit for the current tax consequences of the company’s transactions.

Question 24

How is the current tax liability calculated?

Answer 24

By multiplying taxable income by the current tax rate.

Question 25

How is the tax base determined?

Answer 25

By deducting from the carrying amount any future taxable amount and adding any future deductible amount.

Question 26

What happens if there is a difference between future taxable amount and future deductible amount?

Answer 26

If the future taxable amount is greater than the future deductible amount, there is a taxable temporary difference resulting in the recognition of a deferred tax liability. If the future deductible amount is greater than the future taxable amount, there is a deductible temporary difference resulting in the recognition of a deferred tax asset.

Question 27

What is the tax base for liabilities?

Answer 27

The tax base of most liabilities is found by deducting any future deductible amount from the carrying amount. If a deductible amount exists, then the tax base is usually zero, and there is a deductible temporary difference resulting in the recognition of a deferred tax asset.

Question 28

What happens with taxable and deductible temporary differences?

Answer 28

Certain taxable and deductible temporary differences are excluded by the standard from being recognised as deferred tax liabilities and assets. The major circumstance where taxable temporary differences are excluded is with goodwill.

Question 29

What are deductible temporary differences?

Answer 29

Deductible temporary differences arise from tax losses and can lead to the recognition of deferred tax assets, since tax losses provide the entity with tax deductions in the future against future taxable income.

Question 30

What is the standard for deferred tax liabilities?

Answer 30

AASB 112 requires the recognition of all deferred tax liabilities (apart from those which are excluded) on the grounds that both the probability test and the faithfully representative measurement test are always satisfied.

Question 31

What is the probability test?

Answer 31

The probability test is not always satisfied with deferred tax assets, and deferred tax assets can be recognised only to the extent that it is probable that the entity will have enough taxable income in the same period as the reversal of the deductible temporary differences.

Question 32

How are deferred tax assets recognised from tax losses?

Answer 32

Recognition of deferred tax assets from tax losses is subject to the existence of strong evidence that the tax losses can be claimed in the future.

Question 33

What must happen at the end of each period to deferred tax assets?

Answer 33

At the end of each period, all deferred tax assets, both recognised and unrecognised, must be reassessed to determine whether they now satisfy recognition tests.

Question 34

How are deferred tax assets and liabilities calculated?

Answer 34

The calculation of deferred tax assets and liabilities arising from future tax consequences is best done on a worksheet, which permits calculation of the tax-based balance sheet, the taxable and deductible temporary differences, the closing balances of the deferred tax assets and liabilities, and the adjustments necessary to those balances in the current year after deducting the beginning balances and any movements in those balances during the year.

Question 35

How are the deferred tax asset an liability offset?

Answer 35

They are usually offset in Australia to disclose one amount for deferred tax in the statement of financial position.

Question 36

What is a deferred tax asset?

Answer 36

The amount of income tax recoverable in future reporting periods in respect of deductible temporary differences and the carryforward of unused tax losses

Question 37

What is a deferred tax liability?

Answer 37

The amount of income tax to be settled in future reporting periods in respect of taxable temporary differences

Question 38

What is a deductible temporary difference?

Answer 38

A temporary difference that results in a decrease (increase) in income tax payable (recoverable) in future reporting periods when the carrying amount of the asset or liability is recovered or settled

Question 39

Do deferred tax assets and liabilities have to be adjusted?

Answer 39

Deferred tax assets and liabilities must be adjusted for any announcement of a change in tax rate if that new rate will apply when the assets and liabilities are realised.

Question 40

What does a tax loss result in?

Answer 40

The existence of a tax loss results in the recognition of a deferred tax asset, provided that recognition criteria are satisfied.

Question 41

What makes up the size of a tax loss?

Answer 41

The size of the tax loss for the period depends on the existence of exempt income, which reduces the tax loss.

Question 42

How is a tax loss recouped?

Answer 42

On recoupment of a tax loss in a future year, exempt income must also reduce the tax benefit to be recovered from the tax loss.

Question 43

Does a company have to disclose many aspects in relation to current and deferred tax, and tax losses.

Answer 43

Yes

Question 44

Where do the disclosures appear?

Answer 44

Some disclosures must appear in the financial statements and much detail is also required in
explanatory notes.

Question 45

How do companies pay income tax?

Answer 45

Many companies pay income tax by cash instalments (e.g. quarterly) and these instalments are determined under a pay-as-you-go system.

Question 46

How does an under provision or over provision work?

Answer 46

An underprovision or overprovision for tax is adjusted against current and/or deferred tax balances, depending on the nature or cause of the underprovision or over provision