Deferred Tax

Question 1

SARS does not grant allowances

Answer 1

Tax Base = 0

Question 2

Tax expense or Income tax note

Answer 2

Current tax + deferred tax movement

Accounting profit
Permanent differences 
Temporary differences 
=Taxable income
🔺Current tax (TI*28%)
Foreign profit ()
Taxable loss   ()
Recognized (current year TD)
Unrecognized  (taxable loss-recognized)
Tax on foreign profits (foreign rate) +
🔺Deferred tax (movement) PY-CY
🔺Deferred tax assessed loss ()
=Tax expense

Question 3

Tax rate reconciliation

Answer 3

• Share of profit of associate
• Foreign taxes
• Revaluation of PPE
• FV adjustment on investment property
• Deferred tax not recognized on assessed loss

Foreign tax xxx
DT movement xxx
Tax expense YYY

TAX RATE RECON
Accounting profit/ loss at 28%
FV adjustment 20%28%
All permanent diff at 28%
Goodwill impairment 28%
Foreign tax (28%-25%) -
Unrecognized tax at 28% +
Assessed loss not recognized (xxx)
Capital gain @20%*28%

• Always disclose effective tax rate
• why some items in brackets? rebuttable presumption that it will be recovered through sale
• Share of profit of associate is deducted in the tax recon because the amount is included in accounting profit before tax after considering tax consequences

Exclude:

• Dividend expense as recognised in SCE does not affect PBT
• Goodwill as recognised in SFP does not affect P/L at initial recognition

Question 4

Deferred Tax part 2

Answer 4

Trade receivables       CA=TB
Long term loan           CA=TB
Accrued expense        CA=TB
Provision                      TB=0
Goodwill                      Exempt

Other items with TB =0

• FV adjustment
• Dismantling costs
• Provisions (-)
• Restructuring (-)
• Onerous contracts (-)

Question 5

Permanent differences

Answer 5

Impairment on goodwill (CY-PY) diff in goodwill means impairment 
FV Adjustment (CA-PY) *20%

Question 6

Temporary differences

Answer 6

Depreciation (CA) (PY-CY)
Wear and tear (TB) (PY-CY)
FV adjust IP (CA) (PY-CY)*80%

Question 7

Journal entry

1. Current Tax
2. Deferred Tax

Answer 7

1. Dr Income tax
   Cr Current tax
2. Dr Income tax expense
   Cr Deferred tax

Question 8

Taxable Income

Answer 8

Accounting income
Difference between CA & TB
Include wear and tear 
Depreciation 
Foreign income -
Finance income -
Reverse increase in ECLA +
Add finance income for tax +
Deduct FV adjustment -
Add coupon payment +
Lease payment +
Profit on sale - (Proceeds vs CA)
Recoupment +
Capital gain + (*80%)
FV adjustment -
Assessed loss b/f
=Taxable income
=Current tax (TI * 28%)

If made a loss at the end of the year, no current tax

Question 9

General principles

Answer 9

Income tax note
=
Tax reconciliation

• If land is revalued, it will not be exempt

Question 10

Inventory

Answer 10

• Included at mark up will be part of CA

- Not included at mark up is part of TB

Question 11

Income tax note:

Answer 11

Current tax xxx
Deferred tax xxx (movement)
Assess loss Deferred tax (xxx)
=xxxxx

NB: income tax note = Tax recon note

Question 12

Deferred Tax Asset

Answer 12

• DTA shall be recognized for cash flows of unused tax losses and unused tax credits to the extent that it is probable that future taxable profits will be available against which unused tax losses and unused tax credits can be utilized, to extent there are taxable temporary differences
• Raise it on unfavorable lease component at 28%