TAXATION
CHAPTER 5
IAS 12
1
OBJECTIVES
Obtain a basic understanding of the various taxes
Understanding the difference between accounting profit
and taxable income/profit
Understanding the calculation of taxation
Understanding of temporary differences and non-
temporary differences
Disclosure of taxation
2
TYPES OF TAXES
There are different types of taxes levied in South Africa.
VAT (value added taxation): This is a tax on goods
bought and is levied at 15.5%.
Employees tax: This is tax levied on employees salaries.
This tax is levied based on a scale of your income. This
will be covered in your Taxation studies.
Income tax on companies: This taxation is levied on the
companies taxable profit and is charged at 28% in South
Africa.
Dividends taxation: Dividends tax is levied on the
shareholder at 20%.
3
VALUE ADDED TAX (VAT)
VAT is levied on the supply of goods and services.
This topic was covered in your first year and will not be
lectured in detail again this year.
For revision, please see examples on page 222 – 225
4
EMPLOYEES TAX
This is a tax that the employee incurs.
The company withholds the employees tax and pays it
over to the tax authorities.
This topic will be covered in your Taxation studies and
will not be lectured in detail.
Please see examples on page 227
Employees tax (PAYE) does not form part of the tax
expense for the company.
5
DIVIDENDS TAX
Dividend tax is levied at 20% in South Africa.
Dividend tax are tax on dividends declared and is levied
on the shareholder.
This topic was covered in your first year and will not be
lectured in detail again this year.
For revision, please see examples on page 227 – 229
Dividend tax does not form part of the tax expense for
the company.
6
INCOME TAXATION
Income tax is a tax levied on profits.
If the profit is in profit or loss, the tax must be
recorded in profit or loss (IAS 12:58). If the profit is in
other comprehensive income, the tax must be in other
comprehensive income (IAS 12:58&12:61A – 12:62).
Income recognised in P/L: Tax is recognised as a tax
expense (in P/L) and is referred to as income tax
expense (IAS 12:5).
Income recognised in OCI: Tax is recognised in OCI
and is referred to as tax on OCI 7
MEASUREMENT OF
INCOME TAXES
Current tax is the amount of income taxes payable in
respect of the taxable income/ profit for a period (IAS
12:5).
How is it calculated?
Current tax = taxable income/ profit * tax rates
Taxable profit is the figure used to determine the
taxation, known as current tax/ current income tax,
payable to SARS for the year.
Accounting profit (IFRS) vs Taxable profit (ITA)
Difference between accounting profit and taxable profit
is: temporary and permanent differences
8
ENACTED TAX RATES
Enacted tax rates -> already in law (in SA => i.t.o ITA).
If new rate proposed, new rate is used if:
i) Substantively enacted existing at reporting date
and
ii) it will affect measurement of current tax at
reporting date.
In SA: new tax rate is substantively enacted -
announced in budget speech by Minister of Finance.
9
ENACTED TAX RATES
When calculating the current tax, entities must use the
tax rate at which they are expected to pay the tax. (IAS
12:46).
The effective date of the substantively enacted tax rate
must thus be considered.
Example 7.
10
TAXABLE PROFIT VS
ACCOUNTING PROFIT
Accounting profit: profit or loss for the period before
deducting the tax expense (IAS 12:5) or PBT.
Taxable profit is the profit for a period, determined in
accordance with the rules establish by the taxation
authorities upon which income taxes are payable (IAS
12:5).
The taxable income the accounting profit.
Reason for difference: IFRS may allow certain costs as
expense which is deducted from income, while the
Income Tax Act does not allow these expenses as a
deduction.
11
TAXABLE PROFIT VS
ACCOUNTING PROFIT
Taxable income/ profit is calculated by adjusting the
accounting profit.
How do we adjust accounting profit to taxable income?
Accounting profit (profit before tax) xxx
Adjust non temporary differences xxx
Adjust temporary differences xxx
Taxable income/profit xxx
12
NON – TEMPORARY
DIFFERENCES
Refers to a situation where:
i) income is earned but will never be taxable
eg dividend income
ii) expense is incurred but will never be deducted
eg. Fines, donations to non pbo’s.
These income and expenses are referred to exempt
income and non-deductible expenses.
As a result of this exempt income and non-deductible
expenses, the accounting profit and taxable
profit/income will never be equal to each other.
Examples:8
13
NON-TEMPORARY
DIFFERENCES
Calculation - your workings
Accounting profit 10 000
Add back expenses not deductible 1 000
Less income not taxable -500
Taxable profit 10 500
Tax rate 28%
Current tax 2 940
Disclosure on SOCI
Profit before taxation 10 000
Income tax expense -2 940
Profit for the period 7 060
14
TEMPORARY
DIFFERENCES
IFRS used the accrual basis of accounting (IAS1:27),
while SARS uses a mixture of the accrual basis and
cash basis.
Differences arise due to timing issues (depreciable
assets)
Income is earned in a particular period, but is taxable in
another period.
Expense is incurred in a particular period, but is
deductible in another period.
So what if earning (income)/incurral (expense) occurred
in the same period as taxing (income)/ deducting
(expense)? 15
TEMPORARY
DIFFERENCES
IFRS: Accrual concept (income = earned), (expense =
incurred), will give rise to accruals
ITA: Gross income (earlier of receipt or accrual)
Receivables: Temporary difference? No
Income received in advance: Temporary difference? Yes
Payable: Temporary difference? No
Prepaid exp: Temporary difference? Yes (Maybe)
Examples 12-17
16
TEMPORARY
DIFFERENCES
Accountant recognises: Tax authority recognises:
Income: Income:
When earned (accrual basis) When received (cash basis) or earned (accrual
basis),
whichever happens first
Expenses: Expenses:
When incurred (accrual basis) When incurred (accrual basis) unless the
expense:
is prepaid in which case, it may be deducted
earlier
relates to a provision, in which case, it may
only be deductible later (when paid)
17
TEMPORARY DIFFERENCES:
DEPRECIABLE ASSETS
IFRS accounts for depreciation on property, plant and
equipment, while SARS takes wear and tear in account.
Depreciation is based on the useful life of assets while
wear and tear is a standard rate.
Depreciation is normally not equal to the wear and tear,
which results in differences. Eg 19
18
Payment of Income tax
Companies must make provisional tax payments every 6
months based on estimated taxable profit. Therefore this
system requires companies to actually make prepayments of
tax during the year
The provisional tax system comprises of three payments:
- 1st Prov payment – after 6 months
Calculated as: (total estimated profits x tax rate) / 2
- 2nd Prov payment – at year-end
Calculated as: (total estimated income tax) – (1st prov
payment)
- 3rd Prov payment - Final estimate which is assessed
by the tax authorities which may lead to extra
payment or not
See examples 23 to 24
19
Payment of Income tax
Tax assessment
Concept of Under provision and
overprovision was covered in FIA132
20
Disclosure
Statement of Comprehensive Income disclosure
• IAS 1 requires that the taxes levied on the entity’s profits should be disclosed as a tax expense
on the face of the statement of comprehensive income.
• This line item in the profit or loss section of the statement of comprehensive income should be
referenced to a supporting note. The supporting note should provided details of the major
components of the tax expense (current and deferred).
• The note should also provide a reconciliation explaining why the effective rate of tax differs from
the standard or applicable rate of tax.
• See examples 31
21
Examples 14 to 26
Disclosure
Statement of Financial Position Disclosure
• IAS 1 requires that the amount of current taxes owing or receivable be shown on the face of the statement of financial position
as current assets or current liabilities.
• The amount owing to (or from) the tax authority may relate to a variety of taxes, for instance:
- VAT
- Employees’ tax
- Normal tax
- Dividends tax
• Each of these balances (asset or liability) must be disclosed separately, unless your entity:
- Is legally allowed to settle these taxes on a net basis and
- either intends to settle the asset or liability on a net basis or intends to settle the liability and realise the asset at the same time.
Examples 14 to 26
22
