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hi mike
i was unable to follow the lecture for income tax as i felt it went to fast and I have not done tax befoe
i cant understand what exaclty is deferred tax and why do we have it in our accountsalso, why is that for an asset, if the carrying amount is greater than the tax base, it is a taxable deferred liability? what is the logic for it being a liability as suppose of the carrying amount is 100 and tax base is 50, the difference is 50 and we have overcharged so it should be cr tax expense and dr deferred tax liability, which is wrong but why?
pls help me
thanks
“what exactly is deferred tax?”
Deferred tax arises where the entity has a different view of the future tax position than the taxman … and the taxman’s view is the important one!
Over time all assets, as they are used up, are allowable as deductions from profits and thus reductions of tax
But where an entity may be charging 20% straight line depreciation, the taxman is allowing 25% reducing balance capital allowances
So after the first year, the entity will claim as depreciation $20, the taxman will allow $25
We still think that we have $80 more that we can claim against the profits but the taxman is only going to allow us $75
And that means that, over time, we are going to have a claim for depreciation but the taxman says “Oh no, you’ve had 100% already allowed against your previous years’ profits, so you’re not having any more”
And that gives us the liability for tax where taxman has given us more than we have claimed as depreciation
Thus, where carrying value exceeds tax written down value, that gives rise to a deferred tax liability
If it makes it better, consider it this way … we claim only $20 but the taxman lets us have $25. So we have had an extra $5 from the taxman and we therefore owe it until such time as we claim our annual $20 but taxman only allows us 25% of the reduced balance
Year 1 depreciation 20 capital allowance 25. 80:75
Year 2 depreciation 20 capital allowance 18.75. 60:56.25
Year 3 depreciation 20 capital allowance 14.0625 40:42.1875so, in year 3, the claim for depreciation is higher than the amount that taxman is going to allow us
Year 1 we have a deferred tax liability of “tax rate x $5”
Year 2 we have a deferred tax liability of “tax rate x $3.75”
Year 3 we have a deferred tax asset of “tax rate x $2.1875”Exam questions will (99 times out of 100) give you the situation where there is a deferred tax liability both brought forward from last year and carried forward into next year
Is that better?
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