INCOME TAX

CLASS EXAMPLE 1 - A LIMITED NOTES FOR THE YEAR ENDED 28 FEBRUARY 2017

1. Income Tax Expense Note

  • Components of Tax Expense:

    • Current Tax: Reflects the income tax owed for the current financial year.

    • Current Year Expense: R30,052

    • Deferred Tax: Represents taxes that are accrued due to temporary differences between accounting and tax treatment.

    • Deferred Tax Expense:

      • Current Year: R1,680

      • Rate Change Adjustment: (R800)

  • Total Tax Expense: R30,932

2. Details of Tax Related Transactions

  • Tax Rate Reduction: In 2017, the standard tax rate was reduced from 30% to 28%.

3. Sale of an Asset Example

  • Transaction Timeline:

    • 28 Feb 2016: Asset Cost = R75,000

    • 28 Feb 2017: Cost Adjusted (CA) = R60,000; Tax Base (TB) = R45,000

    • Selling Price: R88,360

Sale Calculation

  • Accounting Treatment:

    • Selling Price (SP): R88,360

    • Cost (CP): R75,000

    • Capital Gain (CG) = SP - CP = R88,360 - R75,000 = R13,360

    • Capital Gains Tax (CGT): 20% of the capital profit not taxable

    • Taxable Gain = R13,360 x 20% = R2,672

Types of Differences

  • Permanent Differences: Items that will never turn into a tax deduction or taxable revenue.

    • Example: Dividends received not taxable.

  • Temporary Differences: Items that will turn into a tax deduction or taxable revenue in the future.

    • Example: Accelerated depreciation not reflected in current tax.

4. Calculation Summary

  • Non-Capital Profit Related to Sale:

    • Profit Before Tax: Given as R164,000.

    • Non-Deductible/Non-Taxable Items:

    • Capital Profit on Sale of Machinery: (R2,672)

    • Dividends Received: (R54,000)

    • Credit Losses: R4,000

    • Traffic Fines: R2,000

    • Adjusted Profit: R113,328

    • Temporary Differences:

    • Various calculations including depreciation and allowances.

  • Taxable Profit Calculation:

    • Total: R107,328

    • Current Tax: 28% of Taxable Profit = R30,052

5. Deferred Tax Summary

  • Deferred Tax Analysis:

    • Calculation of Deferred Tax Assets/Liabilities:

    • Deferred Tax (DT) Movements:

      • Opening Balance: R40,000 (CA: R12,000)

      • Adjustments Due to Rate Change: (R800)

      • Adjusted Opening Balance: R11,200

    • On Sale of Machinery:

      • CA = R87,500; TB = R50,000

      • Temporary Difference: R37,500; Deferred Tax: R10,500

Allowance for Expected Credit Losses

  • CA: R2,000; Tax Base: (R500)

  • Reported Prepaid Expenses: R10,000 each side in CA and TB

6. Journal Entries for Deferred Tax

  • Deferred Tax Rate Change Journal:

    • Dr (Debit) Deferred Tax: R800

    • Cr (Credit) Income Tax Expense: R800

7. Analysis of Temporary Differences

  • Breakdown of temporary differences impacting Deferred Tax:

    • Accelerated Wear and Tear Allowage: R10,500

    • Allowance for expected credit losses: (R420)

    • Prepaid expenses: R2,800

    • Total Deferred Tax Balance: R12,880

8. Tax Reconciliation Summary

  • Profit Before Tax: R164,000

  • Application of Standard Rate (28%) yields:

    • Expected Tax: R45,920

  • Adjustments Due to Non-Deductible Expenses:

    • Credit Losses Calculation: R4,000 x 28% = R1,120

    • Traffic Fines Calculation: R2,000 x 28% = R560

  • Non-Taxable Income Adjustments:

    • Dividends: R54,000 x 28% = (R15,120)

    • Capital Gain Treatment: (R2,672 x 28%) = (R748)

Final summarize Income Tax Expense: R30,932, integrating all movements from the Deferred Tax table.