IAS 12

Income taxes
Gripping Gaap
Chapter 5 & 6
Various types of tax

VAT SARS is the recipient of all

this various taxes
Employee tax - we need to keep each
various type of tax separate
Income tax in the g/l due to the
different nature of each
Dividend tax
- and each type of tax is
paid into a separate account
at SARS
Current
liability -
creditor
Various types of tax
Vat (15%)

Registered VAT vendor • Transactions in general ledger

recorded without VAT
• Input and output VAT recorder
in separate VAT control
account
• VAT control is a current
liability/asset
• Paid over to SARS every 2nd
month
Non- registered Vat vendor • Transaction in general ledger
includes VAT
• No VAT control acc or payment
to SARS
Employe tax
Tax on individual employees In general ledger
income
1. Employer has responsibility to Dt Salaries with gross amount
calculate tax on individual Ct Bank – nett salary to
employees income employee
2. Deduct it from employees’ Ct Bank – SARS – PAYE
salary
And
3. Pay this tax over to SARS
(PAYE) This PAYE is allocated in a
separate account and classified
as a current liability
Dividend tax
Tax paid on the dividend declared by entity
- the recipient of this dividend must pay the dividend
tax
- entity declaring dividend must withhold the tax on
dividend and pay net dividend over to shareholder
We will however be focusing
on income tax
Tax payable on the profits that an entity
make
What is required of you as student

 The disclosure of the income tax expense in the

financial statements of a company according to IAS 12.

To be able to do the above you must know the following:

1. the building blocks that comprises the income tax

amount
2. how do you calculate this amounts

3. Where the amounts are disclosed in the financials

What does the income tax
expense comprises of

Current taxation – tax payable on taxable

profits
Deferred taxation – accounting adjustment
due to adherence to accrual basis
 Statement of profit and loss
R
1.Current taxation Profit before tax 100 000
Income tax expense (28 000)
Profit after tax 72 000
2.Deferred taxtion
 What must you do , to be able to disclose
these amounts
Calculate current taxation, record via
journal entries and recording of current
taxation payments ( chapter 5)
Dt Current tax (p/l)
Ct Receiver of revenue (SoFP) current liability

Calculate deferred taxation, recording via

journal entries (chapter 6)
Dt Deferred tax (p/l)
Ct Deferred tax (SoFP) non-current liability
 Taxation
expense
A.Current taxation B. Deferred taxation
Chapter 5 Chapter 6

A.1 Calculation format ion for B.1 Background

A.2 Recording B.2 Word definitions
A.3 adjustments B.3 Calculations
A.4 Assed Tax loss 3.1 Income statement method
A.5 Payments of current tax 3.2 Balance sheet method
A.6 Rate reconciliation B.4 Disclosure
A.7 Disclosure
Where disclosed in the Financials
Statements
A. Separate line item in SoP/L – income tax
expense (IAS1.82)
B. Separate line item/ or net in SOCI
C. Equity

B. Statement of Financial Position – 2 places

1. Non- current liabilities: deferred taxation
2. Current liabilities- current taxation

C. Notes to the financial statements

Current Income Tax = Tax on taxable profits(loss)

• Taxable profits calculate according to tax law

• Accounting profit calculate according to accounting
standards –
Income – earned
Expense – incurred
• Taxable profit
Income taxable
Expenses deductible

Accounting profit adjusted taxable profit

A.1 Determining taxable income
Steps: R
Calculation of tax payable
Accounting profit (Profit before tax) xxxx
SoP/L
Add/ (less) permanent differences xxx
Add/ (less) movement in temporary xxx
differences
Taxable profit – current Xxxx
Current tax =
Less: Assessed loss Xxx
taxable profit x
28%
Taxable profit APPLICABLE
Xxxx
TAX RATE
Current tax @ 28% xxx
A.2 Recording
Dr. Tax expense (SoP/L) xxx
Cr. Current tax payable (SoFP)
xxx
(current liability)
 A.3 Adjustments

Temporary differences
Permanent differences p 218
p213 • Income received in
• Non-taxable income advance
(exempt) • Expenses prepaid
• Non-deductible • Depreciable assets
expenses • Assed tax loss
• Capital gain • Rate change
 A.3.1 Permanent differences
Calculation of tax payable R
Accounting profit (Profit before tax)

Add/ (less) permanent differences

• Dividend income -
• Fines +
• Donations +
• Take out Acc capital profit on sale of asset -
• Put in receiver capital profit on sale of
asset(taxable capital gain)

Add/ (less) movement in temporary differences

Taxable income - current

Less: Assessed loss

Taxable income
Class example 1
A plant was sold for R 120 000. The carrying amount
was R 80 000 on the date of sale. It had originally cost
R110 000. The tax base was R90 000

Required:
a. Calculate the profit on sale. Separate the profit into
capital profit and non-capital profit.
b. Calculate the capital gain and taxable capital gain.
c. Calculate the portion of the capital profit that is
exempt.
Sale of depreciable asset

Accounting treatment:
Accounting
Carrying amount (CA) 80 000
Proceeds 120 000
= Profit on sale 40 000
Normal (CA – Cost) 30 000
Capital (Cost – Proceeds) 10 000
Sale of depreciable asset
Receiver of revenue treatment:
Receiver

Tax base of asset(TB) 90 000

Proceeds 120 000

= Profit on sale 30 000

Recoupment (TB – Base cost/original cost price) 20 000

Capital gain (Base cost/Original cost – proceeds) 10 000

Sale of depreciable asset
Receiver of revenue treatment:
Receiver

= Profit on sale 30 000

Recoupment (TB – Base cost/original cost price) 20 000

Capital gain (Base cost/Original cost – proceeds) 10 000

 Recoupment is 100% taxable

 Of the capital gain 80% is taxable (R8 000) and

20% (R 2 000) is exempt from tax (free, no tax)
and that is a permanent difference
 A.3.1 Permanent differences
Calculation of tax payable R
Accounting profit (Profit before tax)

Add/ (less) permanent differences

• Dividend income -
• Fines +
• Donations +
• Take out Acc capital profit on sale of asset - -10 000
• Put in receiver capital profit on sale of +8 000
asset(taxable capital gain)

Add/ (less) movement in temporary differences

Taxable income - current

Less: Assessed loss

Taxable income
A3.2 Temporary differences

Income and expenses that are

included in different periods for
accounting purposes than tax
purposes
Temporary differences
Accounting  accrual basis
Taxation: income recognised  earlier of:
◦ Receipt; and
◦ Earned
Taxation: expenses  recognised on date
incurred, unless prepaid in which case it
may or may not be recognised at the date
of payment
Depreciating assets
Tax losses
 Temporary differences
Calculation of tax payable R
Accounting profit (Profit before tax)
Add/ (less) permanent differences

Add/ (less) movement in temporary differences

• Income received in advance (current/prior)
• Expenses prepaid (current/prior)
• Sale of asset –
 Take out accounting profit/loss
 Put in Sars recoupment/loss
• Provisions – current
• Provisions – prior
• Depreciation/Amortisation
• Wear and tear
Taxable income – current
Less: Assessed loss – prior year
Taxable income
Class example 2 – Income received in
advance
 Received R12,000 rent on 31st December 20x1
for the rent of a building in January 20x2:
◦ There are no temporary differences, no exempt
income and no non-deductible expenses other
than those evident from the information
◦ No dividends were declared in either year
◦ Profit before tax, correct calculated, was
R120,000 for both 20x1 and 20x2
Required:
1. Calculate taxable profits and current tax for 20x1 and
20x2
Class example 2 – Income received in
advance
Solution:
Ex 11 in GG, p. 220
Income receivable
 Self study: Ex 12 in GG, p. 220
 Why no temporary difference?
 Class example 3 – Expenses
prepaid
 Paid rent of R22,000 in December 2001 for the rental of its
factory for the entire year of 2002.
 SARS allowed the prepayment to be deducted in 2001.
 Profit before tax was R100,000 for both 2001 and 2002
(before taking any of the above into account

Required:
1. Calculate taxable profits and current tax for 2001 and
2002
 Class example 3 – Expenses
prepaid
Solution:
Ex 13 in GG, p. 221
Expense payable
 Self study: Ex 14 in GG, p. 222
 Why no temporary difference?
Class example 4 – Provision for leave pay
A Ltd estimated that the value of leave pay owing to
its staff at 31 Dec 2001 is R150,000. This leave pay
was paid to its staff in 2002. Profit before tax was
R500,000 for 2001 and R300,000 for 2002 before
taking account any journal entries. SARS only allow
provisions to be deducted when paid.
Required:
1. Calculate taxable profits and current tax for 2001
and 2002
Class example 4 – Provision for leave pay
Solution:
Ex 15 in GG, p. 222
Temporary differences caused by depreciable
assets
• Accounting  Depreciate asset at a rate
that reflects an entity's estimation of the
asset's useful life (required by IFRS). This
expense is called depreciation
• Tax  "Depreciates" asset at standard rates
as set out in tax legislation. This deduction
("expense") is called capital allowance or
wear and tear or depreciation for tax
purposes
Temporary differences: word definitions

Accounting Tax (SARS)

Depreciation Wear and tear/capital
allowances/
depreciation for tax
purposes
Carrying amount = Tax base = Original cost
Original cost – – accumulated capital
accumulated depreciation allowances
Profit/loss on sale of
non-current asset =
Proceeds – Carrying
amount
Temporary differences: word definitions

Accounting Tax (SARS)

Non-capital profit/loss Recoupment/Scrapping
on sale of non-current allowance = Proceeds
asset = Proceeds (limited (limited to original cost) –
to original cost) - tax base
Carrying amount
Class example 5 – Depreciation vs.
Capital allowance/Wear and tear
 Cost of Vehicle purchased 1 January 2001:
R150,000
 Depreciation to nil residual value: 2 years
straight-line
 Wear and tear rate: 3 years straight-line
 Normal income tax rate: 30%
 Profit before tax (after deducting
depreciation): R100,000 pa for 2001, 2002,
2003
Required:
Calculate taxable profits and current tax for
2001, 2002 and 2003
 FORMAT ex 5
Calculation of tax payable R
Accounting profit (Profit before tax)

Add/(less) permanent differences

Add/(less) movement in temporary differences

•Add back depreciation

•Less wear and tear

Taxable profit – current year

Less: Assessed loss
Taxable income x
Class example 5 – Depreciation vs.
Capital allowance/Wear and tear
Solution:
Ex 16 in GG, p.230
Class example 6 – Sale of a
depreciable asset at a profit
 Cost of Vehicle purchased 1 January 2001: R150,000
 Depreciation to nil residual value: 3 years straight-line
 Wear and tear rate: 4 years straight-line
 Normal income tax rate: 30%
 Profit before tax (after deducting depreciation, but
before accounting for profit/loss on sale): R100,000 pa
for 2001, 2002
 Company sell vehicle 1 Dec 2002 for R110,000

Required:
1. Calculate the profit or loss on sale in 2002
2. Calculate the recoupment or scrapping allowance on
sale in 2002
3. Calculate taxable profits and current tax for 2001,
2002
 FORMAT ex 6
Calculation of tax payable R
Accounting profit (Profit before tax)

Add/(less) permanent differences

Add/(less) movement in temporary differences

•Add back depreciation +

•Less wear and tear -
•Less profit on sale –
•Add receiver of revenue -recoupment

Taxable profit –current

Less: Assessed Loss
Taxable income
Class example 6 – Sale of a
depreciable asset at a profit
Solution:
Ex 18 in GG, p. 226
Class example 7 – Sale of a depreciable
asset at a capital profit
 Cost of Vehicle purchased 1 January 2001: R150,000
 Depreciation to nil residual value: 2 years straight-line
 Wear and tear rate: 3 years straight-line
 Normal income tax rate: 30%, CGT inclusion 80%
 Profit before tax (after deducting depreciation, but
before accounting for profit/loss on sale): R100,000 pa
for 2001, 2002
 Base cost of asset – R150 000
 Company sell vehicle 1 January 2002 for R200,000

Required:
1. Calculate the accounting profit or loss on sale in 2002:
show the capital and non-capital portions
2. Calculate the amounts required by SARS - recoupment
or scrapping allowance . Taxable capital gain
Accounting
Receiver of Revenue
Sales Price R 200 000
Sales Price R200 000
Cost Price R 150 000
base cost given R150 000

Capital Gain = R 50 000

Capital Gain = R 50 000
@ 80%
= R40 000
Permanent differences

Temporary differences

Carrying amount R 75 000

Cost Price R 150 000
Receiver Tax Base R100 000
Non-capital profit R 75 000
Cost Price R150 000
Total Acc profit p/l = R125 00
Recoupment = R 50 000
(SP –Carrying amount)
(CP-Receiver Carrying amount)
 FORMAT ex 7
Calculation of tax payable R R
Accounting profit (Profit before tax)

Add/(less) movement
+75 000
•Add back depreciation + -50 000
•Less wear and tear -
•Less profit on sale – -125 000
•Add receiver of revenue –recoupment +50 000
•Add receiver of revenue – taxable CG +40 000

Taxable profit –current

Less: Assessed Loss
Taxable income
 FORMAT ex 7
Calculation of tax payable R R R
Accounting profit (Profit before tax)

Add/(less) permanent differences -50 000

• Less accounting capital profit +40 000
• Add Receiver taxable portion of capital
gains
Add/(less) movement in temporary
differences
+75 000
•Add back depreciation + -50 000
•Less wear and tear - -75 000
•Less profit on sale – +50 000
•Add receiver of revenue -recoupment

Taxable profit –current

Less: Assessed Loss
Taxable income
Class example 7 – Sale of a depreciable
asset at a capital profit
Required:
Ex 19 in GG, p. 228
A.4 Tax loss (also known as
assessed loss)
What do we do if the taxable income
is negative (thus, if there is a tax
loss/assessed loss)?:
◦ Carried forward to the following year of
assessment
◦ Set-off against taxable profits
◦ Will reduce tax payable in that future
year
Example 8 - Tax loss (also known
as assessed loss)

Ex 20 in GG, p.230
A.5 Normal tax: provisional payments and
estimates
Actual profits is only finalised at the
end of the year.
SARS require companies to make 2
provisional payments during the year.
Reduce cashflow shortages of the
government during the year
1st Provisional payment
 Within 6 months after the beginning of the
financial year.
 Example: Year-end is 28th February
◦ Therefore: 1st Provisional payment = 31st August
◦ 1st Prov payment = (total estimate tax profit x tax
rate)/2
 What would the journal be?
◦ Dr. Current tax payable(SoFP) xxx
◦ Cr. Bank
xxx
2nd Provisional payment
 Last day of the financial year.
 Example: Year-end is 28th February
◦ 2nd Provisional payment = 28 February
◦ 2nd Prov payment = Total estimated normal tax
– 1st prov payment
 What would the journal be?
◦ Dr. Current tax payable(SoFP) xxx
◦ Cr. Bank xxx
Final estimate of current
taxation
 Final estimate while preparing F/S
 Finalestimate seldom agrees with 1st and 2nd
prov. Payments
 Result: Either a balance owing to or by SARS
 This shown as a current tax asset or liability
 What would the journal be?
◦ Dt. Income tax expense: normal tax xxx
◦ Cr. Current tax payable(SoFP) xxx
Class example 9– Prov payments and tax estimates
 Company pays R60,000
1st prov payment on 30
June 2001
 Company pays R40,000
2nd prov payment on 31
Dec 2001
 Finalising financial
statements, estimate
taxable profits for 2001
to be R400,000
 Normal income tax rate
30%
 Year-end: 31 Dec 2001
Required:
1. Calculate the current
normal tax expense
2001 and balance owing
or receivable in 2001
2. Show the ledger
accounts
3. Show the normal tax
expense and the current
normal tax payable in
the financial statements
for the year ended 31
Dec 2001
Class example 9 – Prov payments and tax estimates

Solution:

Ex 23 in GG, p. 237
 A.6 Tax rate reconciliation
(IAS 12)

Applicable tax Effective tax rate

rate

Rate of tax
(determined by Tax expense in
tax legislation) on SoCI as a % of
taxable profits accounting profit
(profit before tax)
Why a tax rate reconciliation?
Permanent differences are the reason that the effective tax rate
is not necessarily equal to the statutory tax rate of 28%.

 Examples of reconciling items:

 Dividends received or other exempt income.
 Fines paid and other non-deductible expenses.
 20% of capital gains (only 80% is taxed, the rest is exempt):
 Changes in tax rate:
 Unrecognised deductible temporary differences
 Previous year’s unrecognised deductible temporary differences
now utilised:
 Calculation of income tax expense:

Profit before tax 500

000
Permanent differences (50 000)
 Deduct: dividends received (non-taxable) (80 000)
 Add: fines paid (non-deductible) 30 000

Taxable profit 450 000

X 28% tax rate 126 000

Tax rate reconciliation (in rates):
Please note: You may choose to present the reconciliation in amounts or
rates, unless the question specifically require one of the two methods.

Statutory tax rate 28,0%

Non-taxable income (80 000/500 000 X 28%) (4,48%)
Non-deductible expenses
Income tax at statutory rate (500(30 000/500 000 140
000 X 28%) X 000 1,68%
Non-taxable income (80 000 X 28%) (22 400)
28%) Non-deductible expenses (30 000 X 28%) 8 400
Income tax expense (in SoCI) 126 000
Effective tax rate (126 000/500 000) 25,2%

Tax rate reconciliation (in amounts):

Income tax at statutory rate (500 000 X 28%) 140 000

Non-taxable income (80 000 X 28%) (22 400)

Non-deductible expenses (30 000 X 28%) 8 400

Income tax expense (in SoCI) 126 000

A.7 Disclosure

See Gripping Gaap p241-246 for

excamples
Statement of Comprehensive Income
Statement of Financial Position
Notes to the Financial Statements
 Summary: Taxable income
Calculation of tax payable R
Accounting profit (Profit before tax) xxxx
Add/ (less) permanent differences xxx
• Dividend income (xx)
• Fines xx
• Donations xx
• Capital profit (xx)
Add/ (less) movement in temporary differences Xxx
• Depreciation/Amortisation xx
• Wear and tear (xx)
• Income received in advance xx
• Expenses prepaid (xx)
• Loss on sale of assets xx
• Provisions – current Xx
• Provisions – prior (xx)
Taxable income - current xxxx
Less: Assessed loss – prior year (xxx)
Taxable income xxxx
OUTCOMES
distinguish between the main types of
tax;√ and
calculate tax √
Homework
GAAP Graded questions: 2018 ed

For Wednesday:5.10 & 5.11 & 5.12