Taxation (IAS 12) Lecture Notes

TAXATION - CHAPTER 5 IAS 12

INTRODUCTION

  • The chapter focuses on key aspects of taxation as it relates to accounting standards, particularly IAS 12 (Income Taxes).

OBJECTIVES

  • Obtain a basic understanding of the various taxes:   - VAT (Value Added Tax)   - Employees' tax   - Income tax on companies   - Dividends taxation

  • Understanding the difference between accounting profit and taxable income/profit

  • Understanding the calculation of taxation

  • Understanding temporary differences and non-temporary differences

  • Disclosure of taxation

TYPES OF TAXES LEVIED IN SOUTH AFRICA

  1. Value Added Tax (VAT)
       - Tax on goods and services bought.
       - Levied at 15%.

  2. Employees' Tax
       - Tax levied on employees' salaries, scaled based on income.
       - Detailed information covered in Taxation studies.

  3. Income Tax on Companies
       - Levied on companies' taxable profits.
       - Charged at 28% in South Africa.

  4. Dividends Tax
       - Tax applied on dividends declared.
       - Levied at 20% on the shareholder.

VALUE ADDED TAX (VAT)

  • Applicability: Levied on the supply of goods and services.

  • Coverage: This topic was discussed in the first year; for revision, see examples on pages 219-222.

EMPLOYEES' TAX

  • Incidence: This tax is incurred by the employee.

  • Withholding: Companies withhold employees' tax and remit it to tax authorities.

  • Reference: Detailed treatment of this tax will be in Taxation studies. For examples, refer to pages 223-224.

  • Accounting Treatment: Employees' tax does not comprise the tax expense for the company.

DIVIDENDS TAX

  • Rate: Levied at 20% in South Africa.

  • Impact: This tax applies to dividends declared and is imposed on the shareholder.

  • Previous Coverage: Covered in the first year and further details can be found in examples on pages 225-226.

  • Accounting Treatment: Dividends tax does not form part of the company's tax expense.

INCOME TAXATION

  • Definition: Income tax refers to tax levied on profits.

  • Profit Recognition:
      - If profits result in profit or loss: tax must be recorded in profit or loss (IAS 12:58).
      - If profits are in other comprehensive income (OCI), tax must likewise be in OCI (IAS 12:58 & 12:61A – 12:62).

  • Terminology Used:
      - Income recognised in Profit/Loss (P/L): Referred to as “income tax expense” (IAS 12:5).
      - Income recognised in OCI: Referred to as “tax on OCI”.

MEASUREMENT OF INCOME TAXES

  • Current Tax Definition:
      - Current tax is the amount of income taxes due relative to taxable income/profit for a period (IAS 12:5).

  • Calculation:
      - Formula:
        extCurrentTax=extTaxableIncome/ProfitimesextTaxRatesext{Current Tax} = ext{Taxable Income/Profit} imes ext{Tax Rates}
      - Taxable Profit Definition: This is the figure used to compute the current tax payable to SARS for the year.

  • Comparison of Profit Types:
      - Distinction between accounting profit (IFRS) and taxable profit (ITA) involves identifying temporary and permanent differences.

ENACTED TAX RATES

  • Definition: Enacted tax rates are those already established in law.

  • Application of New Rates: A new tax rate is applied if:
      1. It has been substantively enacted at the reporting date, and
      2. It impacts the measurement of current tax at that date.

  • Local Context: In South Africa, substantive enactment is announced in the budget speech by the Minister of Finance.

ADHERENCE TO TAX RATES

  • Consideration: When calculating current tax, entities must use the tax rate they are expected to pay (IAS 12:46).

  • Effective Date: The effective date of the substantively enacted tax rate needs to be noted.

  • Examples: Refer to examples 7 on pages 229 and 230 for further clarification.

TAXABLE PROFIT VS ACCOUNTING PROFIT

  • Definitions:
      - Accounting profit: Profit or loss for the period before tax expenses are deducted (IAS 12:5), or profit before tax (PBT).
      - Taxable profit: Profit for a period calculated according to taxation authority rules for income taxes (IAS 12:5).
      - The taxable income is generally less than accounting profit due to specific tax deductions.

  • Reason for Differences: Certain costs allowable under IFRS may not be permitted as deductions by the Income Tax Act.

CALCULATION OF TAXABLE INCOME/PROFIT

  • Adjustment Methodology: To convert accounting profit to taxable profit, adjustments are required:
      1. Start with accounting profit (Profit before tax).
      2. Adjust for non-temporary differences.
      3. Adjust for temporary differences.
      4. Arrive at Taxable income/profit

NON-TEMPORARY DIFFERENCES

  • Description:
      - Situations where:
        1. Income is generated but will never incur tax
        2. Expenses incurred are never deductible.

  • Impact on Profit: These create a persistent variance between accounting profit and taxable profit.

  • Examples: Additional specifics are found in pages 232-235.

TEMPORARY DIFFERENCES

  • Explanation:
      - Arise when there is a mismatch in the timing of income and expense recognition between accounting standards and tax authorities.
      - Circumstances:
        - Income may be earned in one period and taxable in another.
        - Expenses incurred in one period may only be deductible in a later period.

  • IFRS vs ITA Considerations:
      - IFRS operates on an accrual basis while the Income Tax Act (ITA) employs a mixture of accrual and cash basis.

  • General Examples (Not exhaustive):
      - Receivables do not present a temporary difference.
      - Income received in advance does create a temporary difference.

TEMPORARY DIFFERENCES: DEPRECIABLE ASSETS

  • Depreciation Accounting: Companies account for depreciation differently compared to SARS, leading to variations.

  • Details:
      - IFRS considers depreciation based on the useful life of assets.
      - SARS assesses wear and tear using a standard rate.
      - These differences impact the calculation of taxable profits.

PAYMENT OF INCOME TAX

  • Provisional Tax Payments:
      - Companies must pay provisional taxes every six months based on estimated taxable profits.

  • Payment Structure: The provisional tax system consists of three main payments:
      1. 1st Provisional Payment: Due after six months, calculated as:
         racextTotalEstimatedProfitsimesextTaxRate2rac{ ext{Total Estimated Profits} imes ext{Tax Rate}}{2}
      2. 2nd Provisional Payment: Due at year-end, calculated as:
         extTotalEstimatedIncomeTax−ext1stProvisionalPaymentext{Total Estimated Income Tax} - ext{1st Provisional Payment}
      3. 3rd Provisional Payment: A final estimate assessed by tax authorities, which could lead to additional payments or a refund.

  • References: See examples on pages 22 to 24.

DISCLOSURE OF TAXATION

STATEMENT OF COMPREHENSIVE INCOME DISCLOSURE

  • Requirement: IAS 1 mandates that taxes on profits be disclosed as a tax expense in the Statement of Comprehensive Income (SOCI).

  • Components: The line item must be supported by a note detailing major components (current and deferred) and a reconciliation of effective versus standard tax rates.

  • Examples: See pages 26-28 for detailed instances.

STATEMENT OF FINANCIAL POSITION DISCLOSURE

  • Mandatory Disclosure: IAS 1 requires that current taxes, whether owing or receivable, be displayed as current assets or liabilities.

  • Types of Taxes to Disclose:
      - VAT
      - Employees' Tax
      - Normal Tax
      - Dividends Tax

  • Separating Items: Each balance must be disclosed separately unless certain conditions are met regarding net basis settlement intentions.

Conclusion: Understanding the complexities surrounding taxation within the frameworks of IAS 12 and local tax legislation is crucial for accurate accounting and compliance.