Income Tax

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HIGHLY EXAMINABLE AND INTEGRATED WITH

EXAMINABILIT OTHER TOPICS IN THE SYLLABUS
Y

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TYPE OF REQUIREDS 3

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1. Tax expense note
2. Tax implication (Journal Entries)
3. Discuss tax implications
4. Review including tax implications etc
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Tax Expense Note ( Tax expense, Tax

Focus Areas

Reconciliation, Deferred Tax note)
 Recognition of Deferred Tax in:
 Profit and loss account
 Other Comprehensive Income
 Statement of Changes in Equity
 Business Combination
 Offsetting
 Zimbabwean Aspects

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Type of Taxes
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 Tax levied on both local and foreign income earned

What is by an entity, e.g.:

income Taxes?  Normal corporate tax (24.72%) the Income Tax Act
– (Chapter 23:06)
 Capital gain tax of Capital Gains Act (Chapter
23:01)
 Withholding tax on dividends

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Presentation of
Tax Expense in
P/L

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Quiz 8

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which of the following is true?

1. PBT Taxable Income

2. PBT Taxable Income

2 is correct
The tax dilemma
9

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Substance over form National Tax Legislation vs IFRS

The Tax Dilemma

Timing difference
Unknown future tax consequences (use
(tax losses allowed only when future or sell)
taxable profit will be available)
Tax Expense Calculation Formula 10
$

Profit Before Tax 240,000

Add/Less Permanent Differences (non-taxable income & expenses) xxxxx

Less: Mvt in temporary differences as per the SOFP (100,000)

Taxable Profit 140,000

Current Tax @ 24.72% of 140,000 34,608

Deferred Tax@24,72% of 100,000 24,720

Tax expense (Profit before Tax x 24.72%) 240,000 x 24.72% 59,328

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Definition

 Current tax
 Deferred Tax

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Components of Tax Expense 12

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Income Tax expense may include the following components:
1. Normal corporate tax:
Current tax
 Current Year (Taxable income X Current tax rate)
 Prior Year: Less Over/add under provision
 Foreign tax expense (foreign income X foreign tax rate)
Deferred Tax:
 Current deferred tax ( movement between current closing & opening deferred tax balance through P/L)
 +/-Effect of tax rate change (%change/prior rate X opening balance)
 -Recognised deferred tax asset on assessed & capital losses
 -/+ unrecognised deferred tax asset on prior period assessed loss
2. Capital gains tax:
 Current (CGT on actual disposals of specified assets during the year)
 Deferred (possible future CGT when specified assets are sold in future)
3. Dividend Withholding tax (only on non-exempt dividends)
Current Tax 13

Calculation

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Profit before tax X
+/- Permanent differences:
- Non-taxable items (X)
+Non-deductible items X
Total accrued trade inc X
+/- mvt in temporary diffs
through profit and loss X
Less: Tax Loss c/f (X)
Taxable inc/(acc tax loss) X
Current Tax = Taxable Income X Tax Rate
Permanent Differences: 14

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Non-taxable items in PBT Non-deductible expenses in PBT
 Dividends received  Donations
 Fair value adjustments on non-current  Fines
assets  Impairment of goodwill
 Impairment reversal  Impairment loss
 Interest Income  Share based payment expense
 Gain on disposal  Loss on disposal
 Deferred income recognised  Transaction costs
 Exchange gain/loss  Finance costs
 Gain on bargain purchase
 Gain/loss on loss of control
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Temporary differences are differences between the:

Temporary
►

► (1)carrying amount of an asset or liability in the

differences ►
balance sheet and its
(2)tax base.

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Tax Base of an Asset (IAS 12.7) 16

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TB of an Asset = Amt deductible for
tax purposes in future
Tax Base of a Liability (IAS 12.8) 17

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TB of a liability = CA less Amt deductible
for tax purposes in future
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Tax Base of Revenue Received in Advance
(RRA) (IAS 12.8)

TB of RRA = CA less Amount

NOT taxable in future

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 Temporary Diff (TD) 19

Taxable TD Deductible TD

-Recognise DTL Recognise DTA

-Assets: CA>TB -Assets: CA<TB
-Liabilities: CA<TB -Liabilities: CA>TB
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Attempt Examples in Module 1:

Calculating Example 1 PPE
Deferred Tax Example 2 Trade receivable
Example 3 Dividend Receivable
Example 4 Prepaid Asset

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Recognition of Tax

 Tax is recognised in the statement in which the gain/loss is recognised, as follows:

 In OCI (for gains/Losses recognised directly in OCI)
 In equity (for items recognised directly in SOCIE)
 In goodwill (for items arising as a result of business combination at acquisition date)
 In P&L (for the balance of gains/losses recognised directly in P&L)

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Examples of such items are:

(a) an adjustment to the opening balance of retained
Directly through earnings resulting from either a change in
Equity in accounting policy that is applied retrospectively or
the correction of an error (see IAS 8 Accounting
Statement of Policies, Changes in Accounting Estimates and
Errors); and
Changes in (b) amounts arising on initial recognition of the equity
Equity component of a compound financial instrument (see
paragraph 23).

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 Analyse the mvt in TD as follows:

Movement in Closing TD XXXX

Temporary Less: Opening TD (XXX)

Total mvt in TDs XXX
difference Less: mvt in TDs though OCI (X)

(TD) through mvt in TDs through SOCIE (X)

mvt in TDs through gdwil/IFRS3 (X)
the Profit and mvt in TDs thorugh P&L (bal fig) XX

loss NB: TDs are calculated under deferred tax section and
give rise to deferred tax

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Tax Expense Reconciliation

 Amt Rate
 Profit Before Tax 150,000 24%
 Tax @ std rate (150000*25%) 37,500 (37.5k/150k) 24%
 +/- Reconciling items:
 Less nontaxable dividend (20,000*24%) (4800) (5k/150k) (3.2%)
 Plus nondeductible meal 5,000*24% 1200 (1.25k/150k) 0.8%
 Dividend tax (20%) 4000 (4/150k) 2.67%
 Plus nondeductible bad debt 500*24% 120 (0.14k/150k) 0.08%
 37,020 24.35%


 Reasonability Check: Effective Tax rate X PBT = Tax Expense

 24.35%*150000 = 36 525
 Tax Expense = 33875
 diff 0 rounding-off difference

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Deferred Tax
Note

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tax rate change

Deferred tax assets or liabilities the adjustment is accounted for NB: Tax rate change is effected No impact on current tax
are adjusted when a new tax as a revision to an accounting on the deferred tax balance at
rate is substantively enacted estimate (i.e. it affects current the time of change (usually the
period’s profit) opening balance).

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Example: 19

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Attempt End of
Unit Q.1 -
Chillspot
.
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Assessed
Loss

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 Unused Tax Losses (IAS 12.34-37) 31

The deferred tax asset should be recognised to the extent that it is probable that future taxable profit will be
available against which the unused tax losses and unused tax credits can be utilised (the benefit is a future
reduced current tax).
 1st - recognise in full if and only if future taxable profits will be available to deduct the loss;
 2nd – if no future taxable income, recognise an asset equal to the credit balance of the deferred tax
liability. If it is however uncertain whether there will be future taxable income, the deferred tax account
may not reflect a debit balance, i.e. deferred tax balance is limited to zero
 unrecognised deferred tax asset should be disclosed separately in the notes as required by IAS
12.81(e)

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 Reassessment of unrecognised deferred tax assets 32

 IAS 12.37 At the end of each reporting period, an entity reassesses

unrecognised deferred tax assets. The entity recognises a previously unrecognised
deferred tax asset to the extent that it has become probable that future taxable
profit will allow the deferred tax asset to be recovered.

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Implication of re-assessment of deferred 33

tax assets:

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 The re-measurement and adjustment of the deferred tax asset does not result to
prior year restatements;
 It is a change in accounting estimate (Prospectively accounted for);
 The adjusting difference between current and prior year is recognised as a
deferred tax adjustment in the current year’s statement of P&L;
 This adjustment should be disclosed as tax reconciling item (IAS 12.81(c))
 An entity should write-off the deferred tax asset if future taxable profits is no
longer probable to utilise all or a portion of the deferred tax asset.
 Unrecognised deferred tax assets are not recognised, these should be disclosed in
the notes to the financial statements (IAS 12.81(e))
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Attempt Question – End of
Unit Q.2 Lions Ltd
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Manner of Recovery
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Para 51: measurement of deferred tax

should reflect the tax consequences that
would follow from the manner in which the
entity expects at the reporting date to recover
Expected or settle the CA of its assets or liability.
manner of
recovery • asset will be recovered thru use if it has no residual value
and is not classified as per IFRS 5
• IFRS 5 items are expected to be recovered through sale
• Asset with a residual value will be recovered through use
and sale

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Assets carried at fair value 37

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 IFRSs permit or require certain assets to be carried at fair value or to be revalued,
e.g.:
 IAS 16 Property, Plant and Equipment,
 IAS 38 Intangible Assets,
 IFRS 9 Financial Instruments: Recognition and Measurement, and;
 IAS 40 Investment Property).
 the future recovery of the carrying amount will result in a taxable flow of
economic benefits to the entity and the amount that will be deductible for tax
purposes will differ from the amount of those economic benefits.
 The difference between the carrying amount of a revalued asset and its tax base is
a temporary difference and gives rise to a deferred tax liability or asset.
Assets carried at fair value 38

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 This is true even if:
 (a) the entity does not intend to dispose of the asset. In such cases, the revalued
carrying amount of the asset will be recovered through use and this will generate
taxable income which exceeds the depreciation that will be allowable for tax purposes
in future periods; or
 (b) tax on capital gains is deferred if the proceeds of the disposal of the asset are
invested in similar assets. In such cases, the tax will ultimately become payable on sale
or use of the similar assets.
 IAS 21.51B Income Taxes – Recovery of Revalued Non- 39
Depreciable Assets

 Investment property held at Fair Value per IAS 40 – taxed at CGT Rate – unless
rebutted – [ IAS 12. 51C]
 Investment property held under Cost Model per IAS 16 – Normal tax rate. [ IAS 12.
51C]
 NB: Land whether under IAS 16 or IAS 40 still taxed at CGT rate [ IAS 12. 51B]

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Tree of Life IAS 12.51C 40
Building Held under IAS 40 Building held under IAS 16

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Investment property PPE/Inv Prop- IAS 12.51C
IAS 12.51C

CA to RV (implied Residual Value) – CA to RV (implied Residual Value) – use

use CGT rate Normal tax

RV to Original Cost – use CGT rate Original Cost – RV – use Normal tax rate
(recoupment)

Original Cost – TB – use Normal tax Original Cost – RV – use Normal tax rate
rate (recoupment) (recoupment)
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CAPITAL
GAINS TAX
.

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What is Capital Gains Tax (CGT)?

 Capital Gains Tax (CGT) is:

 a tax
 levied on the capital gain
 arising from the disposal of a specified asset.

 Specified asset means

 immovable property (e.g. land and buildings) and
 any marketable security (e.g. debentures, shares, unit trusts, bonds and stock).

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What is the rate of tax?

1. Marketable Securities
a) Disposal of listed securities – 1% on gross proceeds – effective 1 February 2019
b) Disposal of unlisted securities:
a) before 1 February 2019 – 5% Capital Gains Tax on gross proceeds
b) On or after I February 2019 – 20% Capital Gains tax on the gain (Proceeds less Base Cost
+ inflation adjustment)

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What is the rate of tax?

2. Immovable Property
Disposal of immovable property:
a) before 1 February 2019 – 5% Capital Gains Tax on gross proceeds
b) On or after 1 February 2019 – 20% Capital Gains tax on the gain (Proceeds less Base Cost).
NB: An initial 15% withholding tax is required, which forms a credit against the capital gains tax.

 Allowable deductions, include:

 Cost of acquisition of specified asset which has been sold.
 Cost of additions/alterations/improvements of specified assets
 Annual Inflationary allowance: this is now calculated at 2,5% of the purchase price X no. of years in use.
 Selling expenses.

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Deferred Tax Effect 45

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Capital Gain
PD – Profit on Disposal 30
PD - 60
CG – Capital Gains
Recoupment- 30

Tax Value/CA 30
Components of Tax Expense 46

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Income Tax expense may include the following components:
 Current tax
 Current (Taxable income X Current tax rate)
 Over/under provision
 Foreign tax expense
 Tax on share of profit of associate
 Deferred Tax:
 Current deferred tax
 +/-Effect of tax rate change
 -Recognised deferred tax asset on assessed loss
 +Relating to recovery of deferred tax asset on prior period assessed loss
 Dividend Tax Dr Tax Expense
 Capital Gains Tax (Current + Deferred) Cr ZIMRA –CGT
payable
Cr Deferred CGT
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Dividend Tax

 Paid at the source by the declaring entity on

behalf of the receiver
 The receiver should accrue a tax expense if
the dividend is included taxable
 Local dividend paid/received by a company
to/from a listed company is exempt
 Foreign dividends are taxed at 20%

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.
DEFERRED TAX ARISING FROM A BUSINESS COMBINATION

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 Deferred tax arising from a business 49

combination

In accordance with IFRS 3, an entity recognises any resulting deferred tax assets
(to the extent that they meet the recognition criteria in paragraph 24) or
deferred tax liabilities as identifiable assets and liabilities at the acquisition
date. Consequently, those deferred tax assets and deferred tax liabilities affect the
amount of goodwill or the bargain purchase gain the entity recognises. However,
in accordance with paragraph 15(a), an entity does not recognise deferred tax
liabilities arising from the initial recognition of goodwill.

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Initial recognition of goodwill

 Paragraph 15 prohibits D/T on goodwill.

 TB = CA
 Reason: the deferred tax will reduce the net asset of the subsidiary, which will in
turn increase its goodwill.

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Special Areas of deferred Tax

 Investments in associates, subsidiaries, divisions & JVs – IAS 12. 39-44 (Exempt by withholding tax on dividends)
 Business Combination and Goodwill – IAS 12.15 and 66-68 –(Exempt by 15(a) on Goodwill but allowed on all other
identifiable taxable items at acquisition date 15(b) (i) )
 Share-based payment – IAS 12.68A-68C - (Equity settled SBPs are exempt , where as Cash-settled SBPs are taxable)
 Employee Benefits :
 Contribution plan – taxable deferred tax could arise where amount accrued differs from amt paid.
 Defined Benefit plan – Mvt in liability in the P/L results in D/T effect
 Research and development – R&D could be expensed in P/L, however taxman may not allow till a later date – hence, deferred
tax effect.
 Gvt Grants – Deferred G/G results in deferred tax if the G/G is taxable -IAS 12.33

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Questions ?