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Capital allowances, not a big issue
The problem comes in when I want to calculate tax base, especially when they involve provisions, pension liabilities…it is really confusing me.Anyone to assist me will be appreciated.
Hi Nivcool,
How a deferred tax is created?
What happens is we accountants carry different value from tax accountants and creates a temporary difference.
We carry the assets and liabilities on their carrying values and tax man carries them tax base.
We calculate deferred tax as follows
Carrying value – Tax = Temporary difference x corporation tax % = DT
When we calculate Deferred tax on an asset say a ppe with a carrying value of $10m and a tax base of $7m and CT rate is say 30%.
$10m – $7m = $3m x 30% = $0.9 deferred tax liability.
Now lets talk about a provision
Say company have an environmental provision of $60m CT rate 30% and tax man recognizes environmental costs as the cashflow
now this provision is liability and so
Carrying value of provision : ($60) [negative because it is a liability]
Tax Base : 0
Temporary difference : ($60) x 30% CT rate
DT (ASSET)= (18)Same rule applies for pension liability
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