SECTION 29 DEFERRED

TAX
 SCOPE

• Section 29 covers accounting for income tax

• It requires the recognition of current and future tax
consequences of transactions/events recognised in
financial statements (s29.2)
 OBJECTIVE

• Understand why deferred tax is necessary

• Understand what is meant by the tax base of an asset
and the tax base of a liability
• Understand what is meant by temporary differences
• Measure deferred tax balances using the balance sheet
approach
• Understand how to account for deferred tax when the
revaluation model is elected for property, plant and
equipment
• Understand the need for a tax rate reconciliation
• Prepare a tax rate reconciliation
• Present and disclose deferred tax in the financial
statement of a company
 INTRODUCTION

• Income tax includes both domestic and foreign

taxes as a result of taxable income (s29.1) Income:
earlier of
Accrual
basis of Accounting Tax (SARS) receipt or
accrual

Differences
accounti Expenses:
ng Use own rules
Use own rules when
(IFRS) to
(Income Tax incurred or
determine how
Act) to
Reflect to recognise paid
determine what
substance income and
tax is owed According
over form expenses
to legal
form
Accounting
Taxable income
profit
THE TAX EXPENSE OF A COMPANY
• Tax expense is defined as the aggregate amount included in
total comprehensive income and equity for the reporting
period in respect of current and deferred tax.
• The tax expense of an entity consists of the following
components:
Current
Current tax year
Under/over provision
of tax in a prior year

Deferred Arising on
tax temporary
differences
 DEFERRED TAX

• Theoretically: tax expense per SOCI = 28% of profit

before tax but it is not due to:
Permanent
• Non-taxable items differences
• Non-deductible items
Timing differences
• Temporary differences
• Deferred tax – align taxable income with
accounting profit in relation to temporary
differences
• Tax rate recon – explains what the permanent
differences are that causes tax expense per
SOCI ≠ 28% of profit before tax
 Page 4
DEFERRED TAX

• Deferred tax balance =

• future tax payable or receivable on
• expected future transactions
• that have already been recognised in the financial
statements (as either assets or liabilities)
• Deferred tax liability
• If assets (future inflows) > liabilities (future outflows) = expect
future profit = pay tax in future
• Deferred tax asset
• If liabilities (future outflows) > assets (future inflows) =
expect future loss = pay less tax in future
 Page 4
DEFERRED TAX

Probable that the

recovery of the
carrying amount
Deferred
will make future tax tax liability
payments larger

Probable that the

settlement of the
carrying amount
Deferred
will make future tax tax asset
payments smaller
 Page 4
DEFERRED TAX

• Example 1: Liability giving rise to future tax

consequences
Waheeda (Pty) Limited has a profit before tax of R200
000 in both 2015 and 2016. Income received in
advance balance at end of 2015 was R50 000 and at
end of 2016 was R0. The company tax rate remained
constant at 28%.
You are required to
A Calculate the current tax of the company for both 2015 and year 2016.
B Explain whether or not deferred tax should be recognised in 2015.
C Explain whether or not we would recognise deferred tax in year 2016.
 Page 5
DEFERRED TAX

• Example 1: Liability giving rise to future tax

consequences
Solution
A 2015 2016
Profit before tax (accounting profit) 200 000 200 000
Permanent differences - -
Temporary differences
Less income received in advance opening balance 0 (50 000)
Add income received in advance closing balance 50 000 0
Taxable income 250 000 150 000
Tax rate 28% 28%
Current tax 70 000 42 000
 Page 5
DEFERRED TAX

• Example 1: Liability giving rise to future tax

consequences
Solution
B At the end of 2015, the company had a liability of R50 000 for income received in advance.
This amount would not have been included in accounting profit for the year but would be
seen as taxable income so the company would have paid tax on it in 2015. In the following
year, the R50 000 would be included in accounting profit but as it was already taxed in the
previous year it would not be taxed again thus it would be added back in the taxable income
calculation. If this amount had been treated the same from the accounting perspective and
the tax perspective then the company would have a tax expense of R56 000 for both years
but as this is not the case the company has had to pay R70 000 in 2015 but only R42 000 in
2016. The liability balance of R50 000 at the end of 2015 has resulted in the company paying
more tax in 2015 but less in 2016. Thus the company would need to record a deferred tax
asset at the end of the year as the consequences of the settlement of the liability will result
in less tax having to be paid in the future.
C At the end of 2016 the company no longer has a liability for the income received in advance
thus there will be no deferred tax.
 Page 5
TAX BASE

• Deferred tax if:

• Tax base of asset =

• Is the amount that will be deductible for tax purposes
against any taxable economic benefits that will flow to a
company 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 (eg investment in
shares).
 Page 5
TAX BASE

• Example 2: Tax base of prepaid expenses

On 31 December 2015, Waheeda (Pty) Limited paid
R20 000 cash for stationery. The stationery was only
delivered in January 2016.

You are required to

A Determine the carrying amount of the prepaid expenses for 2015 and 2016.
B Determine the tax base of the prepaid expenses for 2015 and 2016.
C Determine if the prepaid expense asset gives rise to deferred tax for 2015 and 2016.
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TAX BASE
Solution

A At the end of 2015 the company would recognise a prepaid expense asset of R20 000 as the stationery
had been paid for but not delivered. By the end of 2016 the stationery had been delivered thus there
would no longer be a prepaid expense asset.
Carrying amount at end of 2015: R20 000
Carrying amount at end of 2016: R0
B The prepaid expense is an asset for the company at the end of 2015. It relates to stationery of the
company that will be used in the ordinary course of business to generate future income so it will give
rise to future taxable income thus its tax base would be the amount that would be deductible in the
future. For tax purposes, the prepaid expense is allowed as a deduction when it has been paid so it
will reduce taxable income in 2015. Hence in 2016 and any years going forward there will be no
further deductions thus at the end of 2015 and going forward the tax base of the prepaid asset would
be R0.
Tax base at end of 2015: R0
Tax base at end of 2016: R0

C Deferred tax arises if at the end of the year the carrying amount it different from the tax base.
2015: Carrying amount was R20 000 and the tax base was R0 thus there would be deferred tax.
2016: Carrying amount was R0 and the tax base was R0 thus there would be no deferred tax.
 Page 6
TAX BASE

• Example 3: Tax base of depreciable asset

On 1 July 2013 Waheeda (Pty) Limited bought an
machine for R300 000. Its accounting policy is to
depreciate machine over 5 years using the straight
line method. SARS allows a 25% pa wear and tear
deduction each year not apportioned for time. The
company’s financial year end is 31 December.

You are required to

A Determine the carrying amount of the machine for 2015 and 2016.
B Determine the tax base of the machine for 2015 and 2016.
C Determine if the machine gives rise to deferred tax for 2015 and 2016.
 Page 6
TAX BASE

Solution
A The machine is an asset for the company.
Carrying amount at end of 2015: (300 000 - 300 000/5*2.5) = R150 000
Carrying amount at end of 2016: (300 000 - 300 000/5*3.5) = R90 000
B The machine is an asset for the company at the end of 2015 and 2016. The machine will be used by
the company in the ordinary course of business to generate future income so it will give rise to future
taxable income thus its tax base would be the amount that would be deductible in the future. For tax
purposes, SARS allows a 25% pa wear and tear deduction not apportioned for time. Thus it will allow
25% in 2013, 25% in 2014, 25% in 2015 and 25% in 2016. At the end of 2015, the future deductions
would be the 25% that SARS will allow in 2016. At the end of 2016, there are no further deductions
that SARS will allow in the future.
Tax base at end of 2015: (300 000 * 0.25) = R75 000
Tax base at end of 2015: (300 000 * 0) = R0

C Deferred tax arises if at the end of the year the carrying amount it different from the tax base.
2015: Carrying amount was R150 000 and the tax base was R75 000 thus there would be deferred tax.
2016: Carrying amount was R90 000 and the tax base was R0 thus there would be deferred tax.
 Page 7
TAX BASE

• Tax base of a liability =

• 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 that 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.
 Page 7
TAX BASE

• Example 4: Tax base of income received in

advance
On 31 December 2015, Waheeda (Pty) Limited
received R16 000 cash in respect of the rent income
for January 2016 from a tenant.

You are required to

A Determine the carrying amount of the income received in advance for 2015 and 2016.
B Determine the tax base of the income received in advance for 2015 and 2016.
C Determine if the income received in advance liability gives rise to deferred tax for 2015
and 2016.
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TAX BASE

Example 5: Tax base of income received in

•Solution
A At the end of 2015 the company would recognise an income received in advance liability of
advance
R16 000 as the payment of the rent has been received in 2015 but the tenant will only occupy the
space in the next year. By the end of 2016 the tenant would have occupied the space thus there
would no longer be an obligation to deliver a service to the tenant or return the money.
Carrying amount at end of 2015: R16 000
Carrying amount at end of 2016: R0
B The income received in advance is a liability for the company at the end of 2015. In the case of
revenue that 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. For tax purposes, the
income will be taxed the earlier or receipt or accrual thus it will it taxed in 2015 even though it will
only be recognised as income in 2016. As it is taxed in 2015, the R16 000 will not be taxed again in
the future.
Tax base at end of 2015: R16 000 - R16 000 = R0
Tax base at end of 2016: R0
C Deferred tax arises if at the end of the year the carrying amount it different from the tax base.
2015: Carrying amount was R16 000 and the tax base was R0 thus there would be deferred tax.
2016: Carrying amount was R0 and the tax base was R0 thus there would be no deferred tax.
 Page 8
TAX BASE

• Example 5: Tax base of provisions

On 31 December 2015, Waheeda (Pty) Limited
recognised a provision of R50 000 for a future lawsuit.
In January 2016, the case was decided and
Waheeda had to pay R50 000. SARS only allows the
deduction when the amount is paid.

You are required to

A Determine the carrying amount of the provision for 2015 and 2016.
B Determine the tax base of the provision for 2015 and 2016.
C Determine if the provision liability gives rise to deferred tax for 2015 and 2016.
 Page 8
TAX BASE

• Example 5: Tax base of provisions

Solution
A At the end of 2015 the company would recognise a provision liability of R50 000 as the company has an
obligation for an uncertain timing or amount at the end of the year for a lawsuit. By the end of 2016
the lawsuit has been resolved and the company has settled the obligation thus no longer has a liability.
Carrying amount at end of 2015: R50 000
Carrying amount at end of 2016: R0
B The provision is a liability for the company at the end of 2015. 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. For tax purposes, the amount will be allowed as a deduction but only when it is paid thus the
deduction will only be allowed in 2016.
Tax base at end of 2015: R50 000 – R50 000 = R0
Tax base at end of 2016: R0
C Deferred tax arises if at the end of the year the carrying amount it different from the tax base.
2015: Carrying amount was R50 000 and the tax base was R0 thus there would be deferred tax.
2016: Carrying amount was R0 and the tax base was R0 thus there would be no deferred tax.
 Page 10
TAX BASE

• Tax base of assets/liabilities not recognised

• Tax base but no recognised asset or liability

• Research and development costs

• Accounting: recognised immediately as an expense in
profit or loss
• Tax: SARS could allow a deduction in later periods
 Page 10
TAX BASE

• Example 8: Tax base of research and development

costs
During 2015, Waheeda (Pty) Limited expensed R25 000
developing a computer software. SARS allows a wear
and tear deduction of 25% pa not apportioned for
time.
You are required to
A Determine the carrying amount of the research and development costs for 2015 and
2016.
B Determine the tax base of the research and development costs for 2015 and 2016.
C Determine if the research and development costs gives rise to deferred tax for 2015
and 2016.
 Page 10
TAX BASE

Solution
A As the costs of developing the computer software are internally generated, the company would
expense the entire amount in profit or loss for 2015 thus at the end of 2015 the company would not
have recognised an asset.
Carrying amount at end of 2015: R0
Carrying amount at end of 2016: R0
B The costs of developing the software have not been recognised as an asset but SARS is allowing the
cost as a deduction over a period of 4 years. The costs relates to developing a programme that would
be used by the company in the ordinary course of business to generate future income so it will give
rise to future taxable income thus its tax base would be the amount that would be deductible in the
future. For tax purposes, SARS will allow 25% in 2015, 25% in 2016, 25% in 2017 and 25% in 2018.
Thus at end of 2015, SARS will allow a further 75% and end of 2016, SARS will allow a further 50%.
Tax base at end of 2015: R25 000*0.75 = R18 750
Tax base at end of 2016: R25 000*0.5 = R12 500
C Deferred tax arises if at the end of the year the carrying amount it different from the tax base.
2015: Carrying amount was R0 and the tax base was R18 750 thus there would be deferred tax.
2016: Carrying amount was R0 and the tax base was R12 500 thus there would be deferred tax.
 Page 11
TEMPORARY DIFFERENCES

• Difference between
 Page 11
TEMPORARY DIFFERENCE

• Not all temporary differences give rise to deferred tax

• A deferred tax asset is only recognised if it is probable
that taxable profit will be available in the future against
which the deductible difference can be offset
• A deferred tax liability is not recognised if it arises from
initial recognition of goodwill
• Both deferred tax assets and liabilities are not recognised
if it has arisen from
• initial recognition of the transaction that is not a business
combination and
• at the time of the transaction neither accounting profit or
taxable profit were affected
 Page 11
TEMPORARY DIFFERENCES

Temporary differences
1. The treatment if income received in advance is different to its
treatment as per IFRS for SMEs
2. The treatment by SARS of prepaid expenses is different to its treatment
per IFRS for SMEs
3. The treatment by SARS of provisions is different to its treatment
according to IFRS for SMEs
4. The allowance granted by SARS on depreciable assets is different to the
depreciation provided by the business
 Page 12
MEASUREMENT OF DEFERRED TAX

• Deferred tax assets or liabilities must be measured:

• using the tax rates and tax laws that have been enacted or
substantively enacted by the reporting date
• as to reflect the way in which the company intends to
recover/realise the asset or settle the liability
 Page 12
CALCULATION OF DEFERRED TAX
• Use a deferred tax workings table
1. Add the column headings: Carrying amount, tax base, temporary
difference and deferred tax
2. Add in the row headings: Beginning of year, movement and end of
year
3. Make a note if the item you are dealing with is either an asset or liability
as this impacts how you calculate the tax base and your signs
4. Capture your carrying amount and tax base information ensuring that
all debits should be positive and all credits should be negative
5. Calculate the temporary differences – do this by taking the tax base
LESS the carrying amount
6. Multiply the temporary difference by the applicable tax rate
7. Determine if it gives rise to a deferred tax asset or deferred tax liability (if
you have correctly used the table a positive amount would be asset
and negative sign would be liability)
 TD = Tax base minus carrying amount
Page 14
CALCULATION OF DEFERRED TAX
DT = TD * tax rate

Solution
Step 1: Step 2: Step 3: Step 4: Step 5: Step 6: Step 7:
Col Row Asset or Capture Calculate Multiply DTA or
headings headings liability CA & TB TD TD by TR DTL

Carrying Tax base Temporary Deferred

Prepaid expense (ASSET) amount difference tax

0 0 0 0
Opening balance

20 000 0 -20 000 -5 600

Movement

Closing balance 20 000 0 -20 000 -5 600 DTL

 Page 25
PRESENTATION OF DEFERRED TAX

• Current and non-current distinction

• Deferred tax assets and liabilities must be disclosed in their
respective non-current section in the statement of financial
position.
• Offsetting
• Current assets and current liabilities, and deferred tax asset
and deferred tax liabilities can be offset against each other
only when:
• The company has a legally enforceable right to do so; and
• It is evident that it intends to settle on a net basis or to realise the
asset and liability simultaneously without undue costs or effort.
 Page 25
DISCLOSURE OF DEFERRED TAX

• Disclose separately the major components of tax

expense (income) (p 29.39 ):
(a) current tax expense (income);
(b) any adjustments recognised in the period for current
tax of prior periods;
(c) the amount of deferred tax expense (income) relating
temporary differences;
(h) the amount of tax expense (income) relating to those
changes in accounting policies and errors that are
included in profit or loss in accordance with Section 10
Accounting Policies, Estimates and Errors, because they
cannot be accounted for retrospectively.
 Page 25
DISCLOSURE OF DEFERRED TAX

• Disclose the following separately (p29.40)

(a) the aggregate current and deferred tax relating to items that
are recognised as items of other comprehensive income.
(b) the aggregate current and deferred tax relating to items that
are charged or credited directly to equity.
(c) an explanation of any significant differences between the tax
expense (income) and accounting profit multiplied by the
applicable tax rate. For example such differences may arise from
transactions such as revenue that are exempt from taxation or
expenses that are not deductible in determining taxable profit
(tax loss).
(e) for each type of temporary difference:
(i) the amount of deferred tax liabilities and deferred tax
assets at the end of the reporting period; and
(ii) an analysis of the change in deferred tax liabilities and
deferred tax assets during the period.
DISCLOSURE OF DEFERRED TAX-MODEL
Page 26

EXAMPLE

A Waheeda (Pty) Limited

Extract from statement of comprehensive income for the year ended 31 December 2015
2015 2014
Current + R R
Profit before tax deferred tax XXX XXX
Tax expense 5.5d
489 200 308 100

Profit after tax XXX XXX

 Page 26
DISCLOSURE OF DEFERRED TAX
Solution
Waheeda (Pty) Limited
Extract from the statement of financial position as at 31 December 2015
2015 2014
R R
Assets
Current assets
Current tax asset/liability 4.2n
55 000

Liabilities
Current liability
Current tax asset/liability 37 000 4.2n
Aggregate of all deferred
Non-current liability
tax balances at year end
Deferred tax 8 260 7 000 4.2o
 Page 26
DISCLOSURE OF DEFERRED TAX
Solution
Waheeda (Pty) Limited
Extract from the notes to the financial statements for the year ended 31 December 2015

Note 1: Accounting policies

Note 1.6 Income tax 8.5
Income tax represents the sum of current and deferred tax.
Current tax
Current tax for the year is based on the taxable profit for the year. Current tax is calculated using
the tax rates enacted or substantively enacted at the reporting date.
Deferred tax
Deferred tax is recognised on differences between carrying amounts of assets and liabilities in
the financial statements and the corresponding tax bases used in the computation of taxable
profit. Deferred tax is accounted for using the balance sheet method.
 Page 26
DISCLOSURE OF DEFERRED TAX
Solution continued
Note 4: Deferred tax
Prepaid 29.40e
expenses Machine Total
Opening balance – 2014 -4 100 0 -4 100
Movement – 2014 -800 -2 100 -2 900
Closing balance – 2014 -4 900 -2 100 -7 000
Movement – 2015 840 -2 100 -1 260
Closing balance – 2015 -4 060 -4 200 -8 260
 Page 26
DISCLOSURE OF DEFERRED TAX
Solution continued
Note 4: Tax expense
2015 2014
R R
Current tax 487 940 305 200 29.39a
Current period (1 510 500 * 0.28) & (1 215 000 * 0.28) 422 940 340 200
Prior period under/(over) provision 65 000 (35 000) 29.39b

Deferred tax 1 260 2 900 29.39c

Tax as per the statement of comprehensive income 489 200 308 100

A tax rate reconciliation will also need to

be accompanied to this disclosure
however this was not covered in this
update