How do I do deferred tax

We have a worksheet for you, please download it and create your journal entries for current and deferred tax.

Deferred tax usually creates some headaches for our clients, as its not commonly used in SPFR. 

From a process point of view, think of deferred tax as:

1. A way of showing that we expect some future taxable revenues, as well as some future taxable deductions
2. We do a journal every year, which can simply be described as "The balance sheet items X the company tax rate"
   1. EG - $500,000 carried forward taxable losses that we expect to recoup next year (therefore a tax deduction, an economic resource)
   2. 25% tax rate
   3. So we have a deferred tax asset of $125,000
3. Then, if that tax loss balance moves the following year, then we do a journal to show that change
   
   1. The carried forward tax loss balance decreases by $100,000, so we have less of a deduction coming
   2. $100,000 x 25% = $25,000 movement
   3. So we journal $25,000 off the deferred tax asset to show $100,000 as an asset

You need to know the TAX BASE

The carrying amount, is accounting 101, you know what that is, such as the carrying amount of PPE.  

But what happens when the carrying amount and the tax base are different?

For example, what if the carrying amount of machinery is $1,000,000 but in the tax records it is only $500,000. 

That is a $500,000 difference. 

The tax base is something that you need to understand.

Think of a tax base as:

Assets = Paragraph 5 of AASB 112/IAS 12 simply states that the tax base of an asset is the amount attributed to that asset for tax purposes.

Liabilities = Unlike assets that by their nature are expected to generate revenues which in most cases will be taxable in the future, liabilities are outflows of funds and do not generate future taxable amounts.

What do you need to know?

You need to look at the assets and liabilities and find the carrying amounts and the tax bases, and then you need to enter them into the worksheet.

Common accounts that are included in deferred tax are:

1. Fixed assets
2. Prepayments
3. Provisions
4. Revenue received in advance
5. Carried forward tax losses

Here is what the journals do:

Current tax expense = amount of income tax payable for the period recognised in the profit and loss.

Deferred tax expense = movement in deferred tax assets and liabilities for the period recognised in the profit and loss.

Set up the chart of accounts

You will need:

1. Income tax expense account
2. Current income tax liability account
3. Deferred tax asset account
4. Deferred tax liability account

Deferred tax assets and deferred tax liabilities are always classified as non-current assets and liabilities in the statement of financial position, including the portion expected to be reversed within the next 12 months.