Income Taxes (IAS 12)

Question 1

Taxation

Answer 1

Taxation is paid by individuals and entities and is a contribution to the government for the maintenance of the infrastructure of the country and social services, which are there for there for the benefit of all.
-These taxes are the main source of government income and are also important instruments for sustaining the national economic policy.

Question 2

Different types levied in South Africa

Answer 2

• Normal income tax (levied based on income)
• Value added tax(14%)
• Capital gains Tax- levied on the transfer in ownership of assets after 1 October 20X1. Companies and close corporations must include 66.4% of its Capital Gains in their taxable income (33.4%= thus exempt)
• Estate duty (20%) –based on transfer of wealth based on the value of deceased’s assets and depending on certain conditions.
• Donations tax- Transfer of wealth from one person to the other (20%) with certain exemptions.

Question 3

Income tax payers:

Answer 3

• Individuals (sliding scale )
• Companies (28%)
• Close Corporations (28%)
• Trusts

Question 4

Accounting income vs Taxable income

Answer 4

accounting income: Profit for the year based on IFRS standards

While Tax is calculated in accordance with Tax Act.

Question 5

Profit before tax (Accounting Profit)

Answer 5

This is the profit or loss for a specific period as shown in the Statement of Profit or Loss and other comprehensive income and is calculated in terms of the IFRStandards before deducting the expense.

Question 6

Taxable Income/ Profit

Answer 6

The taxable income/profit for a period is calculated in terms of the Income Tax Act, and the amount on which tax, at the applicable tax rate was calculated.

Question 7

Current Tax

Answer 7

This is the

• income tax payable (on profits ) or recoverable (on losses) after adjusting the accounting profit for the reporting period wit items that are treated differently for tax purposes.
• Current tax is payable on taxable income at the applicable company tax rate 28%

Question 8

Tax year/ Year of assessment:

Answer 8

Income tax is calculated on the taxable income received during a year of asses,eat/ O the case of most entities or individuals, other than companies and close corporations, the year of assessment is the year ending on the list day of February.

Question 9

Provisional Tax Payments journal entry

Answer 9

Dr Current tax Payable/SARS (SFP)
     Cr Bank (SFP)

Question 10

Income Tax Expense Journal Entry

Answer 10

Dr Income tax Expense
Cr Current Tax Payable/SARS
(Calculated on taxable income)

Question 11

Recognition of Final Tax Payment (Journal Entry)

Answer 11

Dr Current Tax Payable(SFP)
     Finance Costs (P/L)
     Other Expenses (penalties) (P/L)
          Cr Bank (SFP)

Question 12

Homework

Answer 12

10.1-10.7

Question 13

Calculation of Taxable income

Answer 13

Gross Income
Less: Exempt income
=Income
Less: Allowable deductions 
Add: Taxable capital gains
=TAXABLE INCOME (for the year of assessment)

Question 14

Gross Income

Answer 14

s1 Income Tax Act:
In relation to any year or period of assessment and the case of any RESIDENT company:
1. the total amount
2. in cash or otherwise
3. received by or accrued to or in favour of such a company
4. excluding receipts and accruals of a capital nature.

Question 15

Gross Income: the total amount

Answer 15

• Means that a company can only be taxed if the amount received is quantifiable.
• A company can also not be taxed on notional(not existing in reality) amounts, e.g. interest it would have received if the money were deposited into a bank account earning interest at a rate of 8% -15% instead of leaving it in a box under a bed.

Question 16

Gross income: in cash or otherwise

Answer 16

• The mere fact that a company received assets as payment for services rendered and not cash, does not imply that the company is not taxable on such a receipt.
• As long as the amount has an ascertainable money value, the taxpayer will be taxed on it.
• The amount, which is received or accrued in a form other than money, should be valued on the date of receipt, e.g. by determining the market value on the date of acquisition.

Question 17

Gross income: received by or accrued to or in favour of such company

Answer 17

• Company is taxed on the amounts received or receivable.
• An amount is included in gross income on either the date of receipt or the date of accrual- whichever comes first.
• For tax purposes no equivalent to Received in Advance: Company is taxed on income actually received or receivable irrespective of the accounting period to which it relates!

Question 18

Gross income: Excluding recipes or accruals of a capital nature.

Answer 18

Capital not included.

- But may attract Capital Gains Tax

Question 19

Capital Gains Tax

Answer 19

• CGT is applicable to assets disposed of buy a taxpayer on/after 1 October 2001
• Taxable Capital gain on the sale of an asset is included in taxable income for year of assessment in which it was disposed.
• Individuals: 33.3%
• Companies: 66.6%
• Not separate Tax forms part of normal tax.

Question 20

Special Inclusions:

Answer 20

• Dividends received

* Recoupment of Tax deductions/ allowances previously granted.

Question 21

Exempt income:

Answer 21

Only 1 we need to know

=All South African dividends received by or accrued to any company are exempt income.

Question 22

Income=

Answer 22

Income= Gross Income-Exempt Income

Question 23

Allowable Deductions

Answer 23

1. General deductions

2. Specific deductions

Question 24

General deductions formula

Answer 24

1. 1 Expenditure and losses
2. 2 Actually incurred
3. 3 During the year of assessment
4. 4 In the production of income
5. 5 not of a capital nature.

Question 25

General deductions formula: 1.1 Expenditure and Losses

Answer 25

• Cash outflows & Liabilities

* Can be settled in csh or otherwise as long as it has an ascertainable monetary value.

Question 26

General deductions formula: 1.2 Actually incurred

Answer 26

• expenditure must have actually been incurred (in order to be deductible)
• Not necessary to have actually paid the expense–As long as an unconditional liability exists (e.g. creditors)

Question 27

1.2 Actually incurred: Prepaid expenses

Answer 27

• No equivalent for tax purposes
• As a company can deduct expenditure actually incurred irrespective of the ACCOUNTING period to which it relates.

Tests and exams?–Assume all prepaid expenses are tax deductible.

Question 28

1.2 Actually incurred: Provisions

Answer 28

• Accounting provisions for expenditure not yet actually incurred
• Not tax deductible
  e. g. a provision for possible guarantee claims and a provision for leave pay.

Question 29

General deductions formula: 1.3 During the year of assessment

Answer 29

-Expenditure claimed as deduction, must be claimed in the year in which it incurred.

Question 30

General deductions formula: 1.4 In the production of income

Answer 30

• Expenditure in itself does not produce income.
• It is actions which produce income and expenditure is merely a consequence of such actions.
• it can therefore be said that the expenditure attendant upon such actions is expenditure incurred in the production of income.

Question 31

General deductions formula: 1.5 Not of a capital nature

Answer 31

Capital expenditure is not allowed as deduction in the calculation of taxable gain.
examples:
*Non-current assets acquired by the company
*Share issue costs
*Trademarks or goodwill purchased.

Question 32

General deductions: 1.6 S23 Prohibitions:

Answer 32

S23 specifies certain types of expenditure not allowed as deductions determining taxable income and include:

• Any tax, duty, levy, interest or penalty imposed under the Income Tax Act.
• Expenditure incurred in the production of exempt income.

Question 33

Special deductions

Answer 33

• Bad debts (credit losses)
• Allowance for credit losses (doubtful debts)
• Repairs
• Wear and Tear
• Special wear and tear allowance
• Building allowance

Question 34

Special deductions: Bad Debts (credit losses)(s11i)

Answer 34

In respect of amounts that
*Which are due to the company; and
*which during the year became bad(credit loss); and
*which have been included in the taxpayer’s income in the current or previous year of assessment.
NB: ALL three conditions must be fulfilled in order for a debt to qualify for deduction.

Question 35

Special deductions: Allowance for credit losses (doubtful debts) (s11j)

Answer 35

• A company is allowed to deduct 25% of the total amount of its list of doubtful debts (allowance for credit losses).
• This amount is deducted in the year in which the debts are considered doubtful and added back in the following year.
• The commissioner accepts debts as doubtful if a detailed list of doubtful debts is provided.

Question 36

Special deductions: Repairs (s11d)

Answer 36

S11(d): The following deduction is allowed:

• Expenditure actually incurred
• During the year of assessment
• For the repair of property, machinery, implements and utensils used for the purpose of trade.

Question 37

Special deductions: Wear and tear (s11(e))

Answer 37

• similar to depreciation
  Calculation of wear tear: Wear & tear is proportionately reduced if the asset was acquired during the year.

-The allowance is calculated on the cash price of the asset
-Wear and tear may be claimed on the straight line method
- Assets with an original cost of less than R7000 may be written off in the year of acquisition.
(write off period will normally be given in test)

Question 38

Special deductions: Special wear and tear allowance (s 12(C)):

Answer 38

When new or unused machinery or plant used by a taxpayer for the first time directly in a process of manufacture (or similar purposes) the wear and tear allowances are calculated in terms of s12C and not 11(e)

*Note: the percentage of the wear and tear allowance will be given to you in the question.
The allowance/ deception is NOT APPORTIONED on a time basis.

Question 39

Special deductions: Building allowances (10% s13(1))

Answer 39

• The income Tax allows owners of industrial buildings (ito s 13(1), to annually write off “wear and tear” similar to other assets=
• This write off is called a building allowance and is calculated on costs.
• 10%

Question 40

Tax Base of asset vs The Carrying Amount of an Asset:

Answer 40

Just as depreciation charges determines the carrying amount of assets, so does the write-off of wear and tear result in the tax base for relevant assets.
* Note that the tax base is assigned to assets to ensure that the correct annual wear and tear is written off for tax purposes and that the depreciation and wear and tear rates do not necessarily agree.
Thus:
CA= Cost- Acc depreciation
TB (Tax base)= Cost- Acc

Question 41

Profit or loss/ on disposal of asset vs Recoupment/ Scrapping allowance

Answer 41

Income tax Act determines that this profit or loss on disposal of an asset is called a recoupment or a scrapping allowance for tax purposes.

Question 42

Profit vs recoupment:

Answer 42

• Profit on disposal= Recoupment (Tax)
• Limited to the original cost of the asset an ONLY the
• Wear & tear previously allowed is recouped.
• -The part of the profit exceeding the original purchase price is treated as a capital profit/gain and taxed in accordance with capital gains tax(CGT) rules and rates.
• The recoupment as well as the appropriate portion of the capital gain is included in the taxable income of the company.

Question 43

Recoupment: when calculating taxable income

Answer 43

Profit before tax
Less Exempt income
*Capital Profit (33.4%) (Reconciliation)

Temporary differences: (Effects deferred tax)
Add: Depreciation 
Less: Wear and tear
Less: Profit on sale 
Add: Recoupment on sale
= Taxable income

Question 44

Loss vs Scrapping Allowance

Answer 44

• If an asset is sold for less than CA or TB - income tax Act allows for a scrapping a;prance similar to the loss for accounting purposes.
• This scrapping allowance is deducted in calculating Taxable Income
• will reduce taxable income (Contrast to recoupment of wear and tear)

Question 45

The use of Accounting Profit as the starting point for determine taxable income

Answer 45

-One can use accounting profit and compare to Tax regulations in Income tax Act
-Non-deductible expenses: Expenses included in the accounting profit are NOT deductible as per the cereal deduction formula (s11(a)) and specific deductions sections (S11(b) to S19) of the Income Tax Act.
List of items would necessarily require adjustment if the account profit (profit before tax) is used as starting point:

• Portion of a capital nature (66,6% for companies)
• Local and other income which is exempt for tax purposes (e.g. dividend received)
• Expenditure not deductible for tax purposes (e.g. donations, fines by Government)
• Income and expenditure accounted for in different financial period for accounting purpose than for tax purposes (e.g. income received in advance, provisions and allowances
• Special allowances that are authorised by the Income Tax Act- which are not accounted for as accounting income or expenditure e.g. building allowance.

Question 46

Treated the same in accounting and tax:

Answer 46

• Trading inventories
• foreign exchange gains and losses &
• specific types of interest paid and received.

Question 47

Assessed Loss vs Tax Loss

Answer 47

• Accounting loss: Current expenses > the income for the year
• Tax Loss (a.k.a. “Assessed loss): Deductible expenses & Tax Allowances > income for the year.

Question 48

Deferred Taxation:

Answer 48

• At year end CA of an Asset must be compared with tax base (applying Income Tax Act)
• If the amount differed= differed tax asset or deferred tax lability arises.
• If the differed tax asset- or liability at the end of the year differs from the opening balance, it must be adjusted. This adjustment will result in a
  
  • deferred tax income or
  • deferred tax expense

Will be given:

• Deferred tax expense will increase the income tax expense and
• The deferred tax income would decrease the income tax expense.