MPAC604 L2A FINAL Tax

MPAC604
Accounting for tax (Part A)

Rob Vosslamber
[email protected]
Room 515 Meremere
1
"Taxman"
1,2,3,4
Hrmm!
1,2...
1,2,3,4.
Let me tell you how it will be

There's one for you, nineteen for me
Cos I'm the taxman, yeah, I'm the taxman
Should five per cent appear too small

Be thankful I don't take it all
Cos I'm the taxman, yeah I'm the taxman
If you drive a car, I'll tax the street

If you try to sit, I'll tax your seat
If you get too cold I'll tax the heat
If you take a walk, I'll tax your feet
Taxman!
Cos I'm the taxman, yeah I'm the taxman
2
3
Menu
1. Introduction
2. Accy profit vs tax profit
3. Accounting for current year’s taxation (not yet deferred tax!)
4. Permanent vs temporary differences
5. Accounting for deferred taxation
6. Tax base
7. Class exercise
8. Asset revaluations
9. Tax losses
10. Changes in income tax rates
11. Discounting
12. Disclosures
13. Critique
4
Reading:
•Deegan (2020), ch. 18

•NZ IAS 12 Income Taxes
5
In your own time…
In your own revision material
Note re terminology in Deegan:

 ATO = Australian Tax Office, which is the Australian equivalent of
NZ’s IRD).
 AASB 112 = NZ IAS 12
6
1. Introduction
What is tax?
7
What is tax?
8
What is tax?
General definition
“… any non-penal yet compulsory transfer of resources from the private
to the public sector, levied without receipt of a specific benefit of equal
value and on the basis of predetermined criteria, in order to accomplish
some of a nation’s economic and social objectives.”
(Sommerfeld et al., 1991)
9
General definition
“… any:
non-penal
yet compulsory
transfer of resources from the private to the public sector,
levied:
without receipt of a specific benefit of equal value, and
on the basis of predetermined criteria,
in order to accomplish some of a nation’s economic and social
objectives.”
So is tax an expense?
10
11
12
Income tax (usually) represents an expense:
“a decrease in economic benefits during the accounting period in the
form of outflows or depletions of assets or incurrences of liabilities
that result in decreases in equity, other than those relating to
distributions to equity participants.” (NZ Framework, [4.25])
and creates a liability:

“a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity
of resources embodying economic benefits.” (NZ Framework, [4.4])
which is both probable and can be measured reliably (i.e.

meets the recognition criteria).
13
For financial reporting:
Tax is an expense (and associated liability or reduction

in asset)
To be reported and managed like any other expense
Most taxes present no problem (although there may be

timing issues – e.g. FBT)
This lecture focuses on income tax.

14
FBT
SSCWT
RWT
GST
PAYE
etc.
15
Note
NZ Corporate (i.e. company) tax rate is 28%
We will use 30% in all examples for ease of calculation.
16
Income tax payable
Very simple example
A Ltd
Taxable Profit (= Accy Profit) = $100,000
Tax rate is 30%
Provisional tax payments totalling $25,000 made during

the year (i.e. tax payments on account, in advance of
calculation of taxable profit)
What journal entries would A Ltd make?
17
Example 1
Very simple example
Journal entries:
Tax payments:
Dr Provision for Tax (Balance Sheet)
Cr Bank
(to record tax payments to the IRD made during the year)
Tax expense:
Dr Tax expense (Income statement)
Cr Provision for tax (Balance Sheet)
(to record tax on taxable income for the year)
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Example 1
Very simple example
Journal entries:
Tax payments:
Dr Provision for Tax (Balance Sheet) 25,000
Cr Bank 25,000
(to record tax payments to the IRD made during the year)
Tax expense:
Dr Tax expense (Income statement) 30,000
Cr Provision for tax (Balance Sheet) 30,000
(to record tax on taxable income for the year)
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Provision for taxation (Balance Sheet)
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2. Accy vs tax profit
Problem!!!
Net Profit Before Tax (NPBT) and Taxable Profit (TP) may
differ in any particular period.
Why?
21
Difference because rules and objectives of each are different:
Tax:
Rules based on (NZ) income tax law
Objective of taxes is to provide revenue to fund government
services and infrastructure
Accounting:
Rules: Accounting standards and the NZ Framework
Objective is to provide information for decision making
(NZ Framework)
22
Determination of Determination of taxable
accounting profit (loss) profit (loss)
Total income
Revenue
less: Allowable deductions
less: Expenses (prior to tax)
Net Taxable profit (TP)
profit before tax (NPBT)
Based on GAAP (NZ IFRS) Based on taxation law (esp.

Income Tax Act 2007)
23
Simple example
Accy profit differs from tax profit
Accy profit $250,000

Taxable profit$100,000
Tax rate 30%
Current tax expense: $100,000 x 30%

= $30,000
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Net profit before tax 250,000
Tax expense: (100,000 x 30%) 30,000

Net profit after tax: 220,000
Effective tax rate: 30K/250K 12%

Actual tax rate should be: 30%????
25
Why might accounting and tax profit differ?
26
Examples (NZ):
 Different depreciation rates used for tax vs. accy.
 Provisions not deductible for tax purposes until paid, e.g.
warranties, doubtful debts, holiday pay, LSL.
 Capital gains not (usually) taxable (in NZ at least!).
 Entertainment expenses not (fully) deductible.
 Goodwill/Intangibles amortisation non-deductible.
Therefore:
 Tax expense in a company’s financial statements may not
equal corporate tax rate per ITA 2007.
 Timing of tax expense may not match income.
27
But you must read the Income Tax Act (ITA) (and
the statement of accy policies!)
28
Example 2
Company C makes reports a net profit before tax in year 1
of $10,000.
This profit is after making an allowance for doubtful debts
of $2,000.
Bad debt is actually written off in year 2.
For tax purposes, bad debts may only be deducted when
the debt is written off.
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Example 2: Year 1
Year 1 Accy Tax
Accy profit
Add back for tax purposes:
DD provision (non-deductible)
Taxable profit
Tax expense (30%)
NPAT
Tax rate:
30
Example 2: Year 1
Year 1 Accy Tax
Accy profit 10,000 10,000

DD provision (non-deductible) 2,000
Taxable profit 10,000 12,000
Tax expense (30%) *3,000 3,600
NPAT 7,000 6,400
Tax rate: 30% 36%
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Example 2: Year 2
Year 2 Accy Tax
Accy profit
DD provision (reversal)
Taxable profit
Tax expense (30%)
NPAT
Tax rate:
32
Example 2: Year 2
Year 2 Accy Tax
Accy profit 10,000 10,000

DD provision (reversal) (2,000)
Taxable profit 10,000 8,000
Tax expense (30%) *3,000 2,400
NPAT 7,000 7,600
Tax rate: 30% 24%
33
Example 2: summary
Effect:
Total income for both years $20,000
Total tax expense: $6,000
Tax rate: (average for two years) 30%
BUT: Timing and disclosure issue

34
Example 3
E Ltd purchases an asset costing $1,200.
 Cash profit for years 1, 2 and 3 is $1,000 each year.
 Asset is written off over two years for accy purposes.
 Asset is written off over three years for tax purposes.
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Example 3 (cont’d)
Calculating the income (tax and accy)
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So what do we do?
37
3. Accounting for current year’s tax exp.
Taxes payable method
Calculates the amount payable to the tax authorities
The tax expense reported in the income statement is equal to the

provision for taxes payable for a particular period, and timing
differences are not recognised.
Commonly used by SMEs and entities which are not subject to

IFRS.
No difference arises where fin sts are prepared based on tax
rules.
Not acceptable under NZ IAS 12.
But: the calculation needs to be done in any case.
38
Process
1. Start with accy profit.
2. Review all revenue and expense items
and adjust amounts where there is a
difference between the tax and the
accounting rules.
3. Calculate tax on taxable income at
current tax rate.
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Calculating the taxable profit (taxable income) from the accounting profit
(NPBT)

Start with Accounting profit:
+ Accounting expenses not deductible for tax
(eg DD provision, some fines)
+ Accy expenses where the amount differs from deductible amounts
(eg accy depreciation where it differs from tax depreciation; certain
prepayments)
+ Taxable income where the amount differs from accounting revenue
(eg certain capital gains)
- Accy revenue where the amount is not subject to tax
(eg certain capital gains)
- Accy revenue where the amount differs from taxable income
(eg certain property revaluations)
- Deductible amounts where the amount differs from accy expense
(eg where tax depn differs from accy depreciation)
40
Example 4
Tax Ltd reports an accy profit of $120,000 after
making the following entries:
 Depreciation (tax depn is $10,000) $15,000

 Increase in allowance for doubtful debts $5,000
 Entertainment expenses (only 50% deductible) $2,000
 Amortisation of goodwill (non-tax deductible) $3,000
 Capital gain (non-taxable)$2,000
1. What is the taxable profit?

2. Why does it differ from the accy profit?
3. What entry would you make to record the tax expense?
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Calculation of taxable profit
Accy profit
Add back:
Accy depreciation
Allowance for DD (increase)
Non-deductible entertainment
Goodwill amortisation
Deduct:
Tax depreciation
Capital gain
Taxable profit
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Accy profit 120,000
Add back:
Accy depreciation 15,000
Allowance for DD (increase) 5,000
Non-deductible entertainment 1,000
Goodwill amortisation 3,000
24,000
Deduct:
Tax depreciation 10,000
Non-taxable capital gain 2,000
12,000
Taxable profit 132,000
43
Therefore:
Taxable profit $
Tax thereon (30%) $
Journal
Dr Tax expense (P&L)
Cr Provision for tax (B/S)
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Therefore:
Taxable profit $132,000
Tax thereon (30%) $39,600
Journal
Dr Tax expense (P&L) 39,600
Cr Provision for tax (B/S) 39,600
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4. Permanent vs temporary differences
Back to example 4:

Accy profit 120,000
Add back:
Accy depreciation 15,000
Allowance for DD (increase) 5,000
Non-deductible entertainment 1,000
Goodwill amortisation 3,000
24,000
Deduct:
Tax depreciation 10,000
Capital gain 2,000
12,000
Some of these differences will reverse in future years, and some will not.
46
Note: there are two types of difference between Accy profit
(NPBT) and Taxable profit (TP):
Permanent differences: items that are never TP or allowable

deductions, but impact NPBT (or vice versa).
Temporary differences: items that impact NPBT and TP in

different periods.
Note: Permanent differences may also be referred to as non-

temporary differences
47
Permanent differences (examples)
Interest on investments in government bonds (where the investor has a
binding ruling from the Inland Revenue Department that the interest will be
tax free) is revenue for book (i.e. accy) purposes and is never revenue for
tax purposes.
An entity purchases an intangible asset, and amortisation on the asset is a

deduction for accy, but not permitted as a deduction for tax purposes.
An entity makes a capital gain on the disposal of an

asset – capital gains are income for accy purposes,
but generally not taxed in NZ.
An impairment of an asset is treated as an

expense/loss for accounting profit (book purposes),
but is not permitted as an allowable deduction for
tax purposes.
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Permanent differences
e.g. Goodwill amortisation

(assuming this is the only difference between accy profit and taxable income)
Accy Tax
Reported profit (after GW amortisation of 100,000 100,000
$20,000)
Add back GW amortisation (not tax deductible)
Taxable profit
Tax (30%)
NPAT
49
e.g. Goodwill amortisation

(assuming this is the only difference between accy profit and taxable income)
Accy Tax
Reported profit (after GW amortisation of 100,000 100,000
$20,000)
Add back GW amortisation (not tax deductible) - 20,000
Tax (30%) 36,000 36,000
NPAT 64,000
50
Examples
Investment allowances
In some jurisdictions, entities are allowed to deduct from
their taxable income more than 100% of expenditures
incurred for certain development activities undertaken
during the period (e.g. assets, tourism or regional
development, R&D).
As a result of this extra deduction, TP for the period is

lower than NPBT, and the extra deduction is never
recognised as an expense for accounting purposes.
51
e.g. Investment allowance
Company is permitted to deduct 150% of export market

development expenditure (EMDE). During the year is incurs
$20,000 of qualifying EMDE.
So: accy expense is $20,000, but Company may deduct
$30,000 for tax purposes.
Accy Tax
Reported profit (after EMDE paid) 100,000 100,000
Investment allowance
Taxable profit
Tax (30%)
NPAT
52
e.g. Investment allowance
Company is permitted to deduct 150% of export market

development expenditure (EMDE). During the year it incurs
$20,000 of qualifying EMDE.
So: accy expense is $20,000, but Company may deduct
$30,000 for tax purposes.
Accy Tax
Reported profit (after EMDE) 100,000 100,000
Investment allowance - 10,000
Tax (30%) 27,000 27,000
NPAT 73,000
53
Temporary differences
“Differences between the carrying amount of an asset or liability in

the balance sheet and its tax base.” (NZ IAS 12, para 5)
That is:
Differences that arise from a difference in the timing of
recognition of income or expenditure items for tax and accounting
purposes.
Example:
 Assume an entity accrues $1,000 of income for accy purposes in
year 1.
 The income is not taxable until the cash is received.
 The related cash is received in year 2.
 The entity reports a $10,000 (accy) profit in both year 1 and year
2.
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Accy Tax
Year 1
Reported profit 10,000 10,000
Less: accrued income
Taxable income
Tax expense
Year 2
Reversal of accrued income
Taxable income
Tax expense
Both years
Total income for the 2 years
Total tax expense
i.e. 30%
55
Accy Tax
Year 1
Less: accrued income (1,000)
Taxable income 9,000
Tax expense 2,700
Year 2
Reversal of accrued income 1,000
Taxable income 11,000
Tax expense 3,300
Both years
Total income 20,000
Total tax expense 6,000
i.e. 30%
56
Examples of temporary differences
Examples (NZ):
 Income accrued for accy, but not taxable until received
in cash.
 Different depreciation rates used for tax vs accy
 Provisions that are not deductible for tax purposes until
paid (e.g. provision for warranties, doubtful debts,
holiday pay, long service leave, etc)
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58
5. Deferred taxation
59
The rule
“Tax expense (tax income) comprises current tax expense
(current tax income) and deferred tax expense (deferred tax
income).”
(NZ IAS 12, para. 6)
So tax expense is not necessarily the amount paid to the tax authorities!
Assuming the entity is a going concern, then:

 the temporary (but not the permanent) adjustments will
reverse over time.
 the reported tax expense should be related to accounting
profit, not taxable profit.
Note: using the taxes payable method, we would end up with

a mismatch of income and tax expense.
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Inter-period tax allocation
(a.k.a. tax effect accy, a.k.a. deferred tax accounting)
Required by NZ IAS 12 for entities required to comply

with IFRS – i.e. Tiers 1 and 2 FP.
The reported tax expense will therefore comprise:

 Current tax payable (as calculated using the taxes
payable method)
plus/minus
 The movement in deferred tax (due to temporary
differences)
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What is deferred tax ?
Accounting in current period for taxes that are deferred to
later periods (or for tax benefits deferred to later periods)
Ensures that the reported tax expense and balance reflects
the actual (accy) transactions for the period that have a tax
effect.
Concerned about temporary diffs, not permanent diffs.
Achieves:
◦ Recognition of tax expense (or refund) in the period to which it
relates
◦ Recognition of liability for future tax effect in the balance sheet
◦ Does not necessarily result in tax expense equalling the tax rate x
NPBT (due to permanent differences)
62
Back to example 3:
Entity purchases an asset costing $1,200.
Cash profit for years 1, 2 and 3 is $1,000 each year.
Asset written off over two years for accy purposes.
Asset written off over three years for tax purposes.
63
NZ IAS 12 applies the ‘balance sheet’ method
◦ recognition of assets and liabilities in the balance

sheet based on the differences between accounting
and tax values of assets and liabilities.
◦ Focuses on comparing the carrying value of an
entity’s assets and liabilities (determined by
accounting rules) with the tax base for those assets
and liabilities.
64
Terminology
Carrying amount vs. tax base of asset or liability
Carrying amount
◦ is the amount the asset or liability is recorded at in the accounting
records.
Tax base
◦ is the amount attributed to an asset or liability for tax purposes
◦ represents the amount an asset or liability would be recorded at if the
balance sheet were prepared applying taxation rules.
Where carrying amount of an asset or liability is different from

the tax base a ‘temporary difference’ arises.
65
Taxable temporary differences:

◦ Result in an increase in income tax payable, (or
decrease in income tax recoverable), in future periods
when the carrying amount of the asset or liability is
recovered or settled.
Deductible temporary differences:

◦ Result in a decrease in income tax payable, (or an
increase in income tax recoverable), in future periods
when the carrying amount of the asset or liability is
recovered or settled.
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Taxable temporary differences lead to the creation of
deferred tax liabilities
Deductible temporary differences give rise to deferred tax

assets*
* There is a proviso that a deferred tax asset should be

recognised to the extent that it is probable that taxable
profit will be available against which it can be utilised
(see paragraphs 27 and 28)
67
Temporary differences:
Summary
Deferred tax asset Deferred tax liability
Future deductible amounts Future taxable amounts
Deductible temporary difference Taxable temporary difference
(1) Carrying amount (2) Carrying amount

Assets
< tax base > tax base

Liabilities
> tax base < tax base
68
Which tax rate to use?
The basic principle is: “the tax rates that are expected to
apply to the period when the asset is realised or liability is
settled, based on tax rates (and tax laws) that have been
enacted or substantively enacted by the balance sheet date.”
(para. 47)
Note that the measurement of deferred tax assets and

liabilities should reflect the tax consequences that would
follow from the manner in which the enterprise expects, at the
balance sheet date, to recover or settle the carrying amount of
its assets and liabilities.
(para. 51)69
Back to the earlier example
Accy profit $250,000
Tax profit $100,000
Tax rate 30%
Assuming the $150,000 difference in profit is due

to temporary differences, they will reverse over
time. So:
70
Tax expense example – taxable temporary difference
TP is 100,000
NPBT is 250,000
The tax rate is 30 percent
Current tax payable = 30,000 (i.e. 100,000 x 30%)
Tax on accounting profit should be 75,000 (i.e. 250,000 x

30%)
Assume that the $150,000 difference between NPBT and TP

is caused by the carrying amount of an asset exceeding its tax
base – a temporary difference:
71
Assuming the $150,000 difference is due to
a temporary difference, it will reverse over
time. So, initial entry:
Dr Current tax expense (P&L) 30,000

Dr Deferred tax expense(P&L) 45,000
Cr Current tax payable (B/S) 30,000
Cr Deferred tax payable (B/S) 45,000
72
Balance sheet approach
NZ IAS 12 requires a balance sheet approach to
interperiod tax allocation. This requires the calculation of:
The current tax payable
Movements in deferred tax effects relating to assets and
liabilities in the balance sheet
The deferred tax part of the tax expense depends on:

The carrying values of assets and liabilities in the accy
balance sheet
The values (i.e. the tax base) of those same assets and
liabilities as if valued for tax purposes.
73
If there is a difference between the carrying amount and
tax base of an asset or liability, either a deferred tax asset
or deferred tax liability is recognised
Therefore, we need to determine the tax bases of assets

and liabilities.
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6. Tax base
The carrying amount of an asset or liability is the amount
shown in the financial statements for that asset or liability.
“The tax base of an asset or liability is the amount attributed

to that asset or liability for tax purposes.” (para. 5)
The tax base represents the amount that an asset (or liability)
would be recorded at if a balance sheet were prepared applying
tax rules.
Where the carrying amount of an asset or liability is different

from the tax base, a “temporary difference” arises (para 5).
75
“The tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic
benefits that will flow to an entity when it recovers the carrying amount of the asset. If those economic benefits
will not be taxable, the tax base of the asset is equal to its carrying amount.”
So:
Tax base of an asset =
Carrying amount + Future amt deductible for tax – Future taxable econ. benefits
“The tax base of a liability is its carrying amount, less any amount that will be deductible for tax purposes in
respect of that liability in future periods. In the case of revenue which is received in advance, the tax base of the
resulting liability is its carrying amount, less any amount of the revenue that will not be taxable in future periods."
So:
Tax base of a liability =
Carrying amount – Future amt deductible for tax + Future taxable econ. benefits
But:
Tax base for revenue in advance =
Carrying amount – Future non-taxable income
(see also Deegan at 18.4 (p. 733))
76
Example 5a
Coy A purchases an item of plant for
$10,000. Accy depn is SL over 5 years,
Tax depn is SL over 4 years. At the end of
year 1:
Carrying amount: $
Tax base: $
Temporary difference: $
Type:
77
Example 5a
Coy A purchases an item of plant for
$10,000. Accy depn is SL over 5 years,
Tax depn is SL over 4 years. At the end of
year 1:
Carrying amount: $8,000

Tax base: $7,500
Temporary difference: $ 500
Type: DTL
Tax base for assets = Carrying amount of asset + Future amount

deductible for tax purposes - Future taxable econ benefits
=8,000 + 7,500 – 8,000 = 500
78

Assets

Liabilities
See also Table 18.2 (D&S p. 645)
79
Example 5b
Company B reports net accounts receivable of
$190,000, after allowing a provision for doubtful
debts of $10,000. Doubtful debts may only be
written off for tax purposes once they have been
written off the company’s books.
Carrying amount: $
Tax base: $
Type:
80
Example 5b
Company B reports net accounts receivable of $190,000, after
allowing a provision for doubtful debts of $10,000. Doubtful debts
may only be written off for tax purposes once they have been written
off the company’s books.

Tax base: $200,000
Temporary difference: $10,000
Type: DTA

=190,000 + 0 – 190,000 = 10,000
81

Assets

Liabilities
82
Example 5c
Company C lends $50,000 to XYZ Limited.
The loan repayment will have no tax
consequences
Carrying amount: $
Tax base: $
Type:
83
Example 5c
Company C lends $50,000 to XYZ Limited. The loan
repayment will have no tax consequences

Tax base: $50,000
Temporary difference: $Nil
Type: n/a

= 50,000 + 0 - 0 = 10,000
(Set tax base to Carrying amount)
84
Example 5d
Company D accrues dividends receivable at
year end of $1,000. These dividends are
not taxable until received.
Carrying amount: $
Tax base: $
Type:
85
Example 5d
Company D accrues dividends receivable at year end
of $1,000. These dividends are not taxable until
received.

Tax base: $nil
Temporary difference: $1,000 DTL
Tax base for assets = Carrying amount of asset +
Future amount deductible for tax purposes - Future
taxable econ benefits
=1,000 + 0 – 1,000 = 0
86

Assets

Liabilities
87
Example 5e
Coy E has a binding ruling from the IRD that
interest from $100,000 of government bonds
is tax free. At the end of year 1, Coy E
accrues $1,000 of interest receivable.
Carrying amount: $
Tax base: $
Type:
88
Example 5e
Coy E has a binding ruling from the IRD that interest from
$100,000 of government bonds is tax free. At the end of year 1,
Coy E accrues $1,000 of interest receivable.

Tax base: $?????
Temporary difference: $nil
Type: Perm. diff.

=10,000 + 0 – 0 = 10,000
Set tax base to carrying amount
89
Example 5e
This is a permanent difference (i.e. it will
never be taxable income).
So set the tax base to the carrying value.
90
Tax base of a liability
Again: the tax base of a liability is the value that would be
recorded if the financial statements were prepared on a tax
basis.
91
Example 5f
Coy F makes a provision for annual leave of $4,000, not
deductible until paid
Provision for long service leave

Carrying value: $
Tax base: $

Carrying amount – Future amt deductible + Future taxable econ. benefits
92
3. Calculate temporary differences
Provision for long service leave

Carrying value: $4,000
Tax base: intuitively: $nil
4,000 - 4,000 + 0 = 0
93

Assets

Liabilities
94
Example 5g
Coy J has a loan payable of $20,000, no tax
consequences when paid.
Provision for warranty

Carrying value: $
Tax base: $
95
Provision for warranty

Tax base: intuitively: $20,000

20,000 - 00 + 0 = $20,000
Permanent difference!
96
Example 5h
Coy H accrues traffic fines of $700. These
fines are not deductible for tax purposes.
Prepaid Insurance
Carrying value: $
Tax base: intuitively: $
(Tax base for assets = Future amount deductible for tax purposes (A) - Future
taxable amounts(B) + Carrying amount of asset (C))
97
Fine
Carrying value: $700

Tax base: intuitively: $nil

Carrying amount – Future amt deductible + Future taxable econ.
benefits
700 - 0 + 0 = $700
Permanent difference
98
Example 5i
Coy I records sales received in advance of
$15,000, which will be taxed when earned.
Carrying value: $
Tax base: $
(Tax base for assets = Future amount deductible for tax purposes (A) - Future
taxable amounts(B) + Carrying amount of asset (C))
99
Revenue in advance
Tax base: intuitively: $0

Carrying amount – Future amt deductible + Future taxable econ. Benefits
Tax base for revenue in advance

= carrying amount- future non-taxable income
= 15,000 - 15,000 = 0
(see NZ IAS 12, para. 8)
100

Assets

Liabilities
101
Summary
After this lecture you should be able to:

Define and discuss what tax is
Distinguish between accy and tax profit
Be able to account for current year’s tax
Understand key terms, e.g.:
◦ permanent vs temporary differences
◦ tax base
Be able to determine the tax bases of assets
and liabilities
102
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MPAC604 L2A FINAL Tax

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MPAC604

Accounting for tax (Part A)

Let me tell you how it will be

Should five per cent appear too small

If you drive a car, I'll tax the street

•Deegan (2020), ch. 18

Note re terminology in Deegan:

and creates a liability:

which is both probable and can be measured reliably (i.e.

Tax is an expense (and associated liability or reduction

To be reported and managed like any other expense

Most taxes present no problem (although there may be

This lecture focuses on income tax.

We will use 30% in all examples for ease of calculation.

Provisional tax payments totalling $25,000 made during

What journal entries would A Ltd make?

Based on GAAP (NZ IFRS) Based on taxation law (esp.

Accy profit differs from tax profit

Accy profit $250,000

Current tax expense: $100,000 x 30%

Tax expense: (100,000 x 30%) 30,000

Effective tax rate: 30K/250K 12%

Accy profit 10,000 10,000

Year 2 Accy Tax

Year 2 Accy Tax

Accy profit 10,000 10,000

Total income for both years $20,000

Total tax expense: $6,000

Tax rate: (average for two years) 30%

BUT: Timing and disclosure issue

 Cash profit for years 1, 2 and 3 is $1,000 each year.

 Asset is written off over two years for accy purposes.

 Asset is written off over three years for tax purposes.

The tax expense reported in the income statement is equal to the

Commonly used by SMEs and entities which are not subject to

 Depreciation (tax depn is $10,000) $15,000

1. What is the taxable profit?

Tax thereon (30%) $

Tax thereon (30%) $39,600

Calculation of taxable profit

Permanent differences: items that are never TP or allowable

Temporary differences: items that impact NPBT and TP in

Note: Permanent differences may also be referred to as non-

An entity purchases an intangible asset, and amortisation on the asset is a

An entity makes a capital gain on the disposal of an

An impairment of an asset is treated as an

e.g. Goodwill amortisation

e.g. Goodwill amortisation

As a result of this extra deduction, TP for the period is

e.g. Investment allowance

Company is permitted to deduct 150% of export market

e.g. Investment allowance

Company is permitted to deduct 150% of export market

“Differences between the carrying amount of an asset or liability in

Assuming the entity is a going concern, then:

Note: using the taxes payable method, we would end up with

Required by NZ IAS 12 for entities required to comply

The reported tax expense will therefore comprise:

◦ recognition of assets and liabilities in the balance

Where carrying amount of an asset or liability is different from