Week 8 Everything Flashcards
The profit or loss determined according to AASB accounting standards is known as the
“accounting profit before income taxes”.
The profit or loss determined according to AASB accounting standards is known as the “accounting profit before income taxes”.
Is this the profit on which the company has to
pay taxes?
NO
The taxes are to be paid on the income that is determined in accordance with Australian income tax legislation (ATO rules)
The “Taxable income”
Difference between accounting profit and taxable income
“Taxable income” differs from “Accounting profit (before taxes)”, because taxable income is determined in accordance with Australian income tax legislation (ATO rules) and accounting profit is determined according to AASB rules
Being calculated according to different rules means that
Some revenues and expenses recognised for accounting purposes are not recognised for tax purposes or vice versa.
Accounting profit =
Accounting revenues - Accounting expenses
Taxable profit =
Taxable revenues - Deductible expenses
Examples of differences between accounting and tax rules
2/4/19
Calculation of Taxable profit
The most convenient way is derive the taxable income from the accounting income
Calculation of Taxable profit
Step 1
In the case of Jen Ltd, some revenues (not recognised in accounting profit) are to be considered as part of Taxable profit (according to ATO rules).
Calculation of Taxable profit
Step 2
The accounting revenue is subtracted from the accounting profit and replaced by the taxable revenue determined according to tax rules; the accounting expense is added back from the accounting profit and replaced by the deductible expense determined according to tax rules.
Summary for calculation of taxable profit
Accounting profit before taxes (from company’s accounting)
- Accounting revenues (according to AASB standards)
+ Taxable revenues (according to tax rules)
+ Accounting expenses (according to AASB standards)
- Deductible expenses (according to tax rules)
= Taxable income
Once Taxable profit is calculated, the tax due to Australian
Taxation Office can be calculated as:
Taxable profit x Tax rate = Tax payable
Tax PAYABLE
The DEBT for taxes to be paid to ATO and recorded as liability. Tax payable differs from the tax relating to Accounting profit (before tax), which is the accounting expense for taxes (To be recorded as EXPENSE in
STATEMENT OF PROFIT OR LOSS)
To determine Tax EXPENSE for accounting purposes we need to apply the
“balance sheet” method of tax effect accounting (AASB112)
Balance sheet approach to accounting for taxation
To explain the difference between tax payable and tax expense, the “balance sheet” method (AASB112) is applied. This method is based on the differences between accounting and tax values of assets and liabilities. It compares the carrying amount of assets and liabilities (determined by accounting rules) with the tax base for those assets and liabilities (determined by tax rules). Effectively involves comparing the balance sheet derived using accounting rules with the balance sheet that would be derived from taxation rules