ACCOUNTING FOR INCOME TAX – Part i

Question 1

Need for a standard on income taxes: tax incurred by company in financial year assessed by…

Answer 1

taxation authority based on taxation assessment rules applicable

Question 2

Need for a standard on income taxes - taxation rules not..

Answer 2

necessarily equivalent to the accounting rules used in the calculation of accounting profit.

Question 3

Need for a standard on income taxes - taxable profit is?

Answer 3

difference between taxable revenues and allowable deductions

Question 4

Need for a standard on income taxes - taxable income differs from

Answer 4

accounting profit

Question 5

Need for a standard on income taxes - accting for income tax must take into account…

Answer 5

differences in how accounting numbers are calculated for income tax purposes and how they are calculated for accounting purposes

Question 6

Need for a standard on income taxes - why is understanding how income tax is accounted for important

Answer 6

for proper interpretation of financial statements

Question 7

Fundamentals of accounting for income tax:

it is governed by?

Answer 7

AASB 112 - requires tax consequences and other events to be accounted for in the same manner and the same period as the transactions themselves.

Question 8

Fundamentals of accounting for income tax:

need to recognise?

Answer 8

both current and future tax consequences of current year transactions

Question 9

Fundamentals of accounting for income tax what two calculations done every year?

Answer 9

1. current tax liability

2. movements in deferred tax balances

Question 10

Fundamentals of accounting for income tax: need to distinguish between two types of income tax effects?

Answer 10

current income tax consequences
(income tax payable = current tax liability)

future income tax consequences
(deferred tax assets or liabilities)

Both are based on differences between pre-tax accounting profit and taxable profit (generally known as taxable income).

Question 11

Fundamentals of accounting for income tax -

AASB 112/IAS12 adopts philosophy that

Answer 11

the tax consequences of transactions that occur during a period should be ‘recognised as income or an expense in the net profit or loss for the period’ irrespective of when those tax effects will occur.

Question 12

Fundamentals of accounting for income tax - pre-tax accounting profit is determined according to?

Answer 12

accounting standards and principles; under accrual accounting

Question 13

Fundamentals of accounting for income tax - pre-tax accounting profit measured with objective of…

Answer 13

providing useful information to investors and creditors

Question 14

what are key sources that determine the appropriate accounting treatment of transactions?

Answer 14

Corporations Act and AASB

Question 15

Fundamentals of accounting for income tax: Taxable Income determined according to

Answer 15

to tax legislation in the country the income is subject to taxation

Question 16

Fundamentals of accounting for income tax : taxable income is under

Answer 16

cash accounting

Question 17

what determines tax treatment of transactions?

Answer 17

Income Tax Assessment Act

Question 18

Differences between accounting profit & taxable profit:

Answer 18

Accounting profit defined:
‘profit or loss for a period before deducting tax expense.’
Taxable profit defined:
‘the profit for a period determined in accordance with the rules established by the taxation authorities, upon which income taxes are payable.’

Question 19

Examples of differences of treatment of items under GAAP (generally accepted accounting principle) and ITAA (income tax assessment act):
Fines and Penalties

Answer 19

GAAP - expense

ITAA - non deductible

Question 20

Examples of differences of treatment of items under GAAP and ITAA: depreciation?

Answer 20

GAAP - expense

ITAA - tax deduction - taxation depreciation rate may differ from accounting depr rate

Question 21

Examples of differences of treatment of items under GAAP and ITAA: interest revenue

Answer 21

GAAP - recognised when receivable

ITAA - taxable on cash receipt

Question 22

Examples of differences of treatment of items under GAAP and ITAA: bad and doubtful debts

Answer 22

GAAP - expense when debt is doubtful

ITAA - tax deduction when debt written off as bad

Question 23

Accounting vs. tax treatment – Common differences

Property Plant and equipment

Answer 23

ACCOUNTING - Depreciation recognised as expense based on useful life of asset

TAX - Tax deduction for depreciation based on rates prescribed by taxation rules (can be higher or lower than for accounting)

Question 24

Accounting vs. tax treatment – Common differences

Development Costs

Answer 24

ACCOUNTING - Can be capitalised (as far as recognition criteria met) and are amortised over useful life

TAX - tax deduction when paid

Question 25

Accounting vs. tax treatment – Common differences

AR

Answer 25

ACCOUNTING - Allowance and expense recognised for any doubtful debt

TAX - Tax deduction only when debt physically written off

Question 26

Accounting vs. tax treatment – Common differences

Receivables (e.g. rent, interest)

Answer 26

ACCOUNTING - Recognised as revenue, with corresponding asset (receivable) when earned

TAX - Taxable income only when cash received

Question 27

Accounting vs. tax treatment – Common differences

Prepayments

Answer 27

ACCOUNTING - Recognised as an asset, then expensed in a later period as benefits received

TAX - Tax deduction when paid

Question 28

Accounting vs. tax treatment – Common differences

Rev Received in Advance

Answer 28

ACCOUNTING - Recognised as liability when received, only as revenue in later periods when earned

TAX - Taxable income when cash received

Question 29

Accounting vs. tax treatment – Common differences
Accrued expenses (e.g. interest/rent payable, other payables, warranties, annual leave,)

Answer 29

ACCOUNTING - Liability/provision and expense recognised when incurred

TAX - Tax deduction when paid (payment reduces accounting liability)

Question 30

Two types of differences Temporary Differences:

Answer 30

Temporary differences reverse over time, i.e. they will increase or decrease taxable income in the future;
therefore, they give rise to deferred taxes;

Question 31

Two types of differences Temporary Differences

taxable temporary differences increase?

Answer 31

increase taxable income in future years

deferred tax liability and asset recognised

Question 32

Two types of differences Temporary Differences

a deferred tax liability is recognised;

Answer 32

deductible temporary differences decrease taxable income in future years

Question 33

Accounting for current tax consequences

process involves which steps?

Answer 33

1. Identify accounting profit for the period — as accounting profit contains the accounting revenues and accounting expenses, it is used as the starting point.
2. Determine the expenses and revenues that are treated differently for accounting and taxation.

Question 34

Accounting for current tax consequences

adjust differences identified by?

Answer 34

adding the accounting expenses and subtracting the tax deductions for each expense

subtracting the accounting revenues and adding the taxable revenues for each revenue

Question 35

Calculation of current tax

Answer 35

Taxable profit x tax rate %

= Current Tax Payable

Question 36

Recognition and payment of tax:

Answer 36

Recognition of current tax:
refer AASB 112/IAS 12 para 12 & 58.

Payment of tax:
determined by legislation
some jurisdictions require payments in advance.