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Hello
i dont understand why i am facing difficulty in understanding basic stuff regarding current tax and deferred tax. i am very confused what it means by tax base that we use to determine deferred tax. i have dont f6 and passed with high marks. still i am struggling to understand this chapter in f7.
can you plz explain in simple english with example of what a deferred tax is and what is tax base of an asset and how to determine it.
do we have to learn how to calculate the tax base or will that be given in the exam. plz help
as an example suppose if i have a printer which is my asset and its cost is 10,000 but carrying amount is 8k and it has a 5 year life then how shall i determine its tax base?
plz help
Anas, I repeat, please stop saying “please help” in your posts! If you post a question on “Ask the tutor” I shall help – I do not need you to remind me!
You will not be asked in an F7 exam to calculate the tax base of an asset. Basically, it’s the amount attributable to that asset in the taxman’s mind. It doesn’t matter by how much the company has depreciated an asset – the taxman has his own standard rate of allowances for tax for different classes of asset – essentially 25% of its written down value in the taxman’s records.
A company may be charging depreciation at, say 30% reducing balance but the taxman will only allow as a tax deduction 25%. This leads to a discrepancy between the company’s figure for that asset and the taxman’s figure.
That discrepancy then gives rise to a deferred tax asset or liability.
In F7, your examiner will normally ask this within question 2. He will tell you that the written down value (per the taxman) is $XXX which exceeds the book value of the assets (per the company) He will also tell you the standard rate of taxation.
Multiply the difference between the two values by the tax rate and that will give you the deferred tax balance to carry forward – normally a deferred tax liability.
Put that figure into your tax T account (above the total lines as a debit and below the total lines as a credit) having also entered into this account the current tax brought forward and carried forward, and the deferred tax balance brought forward, and the current year’s taxation charge per the Statement of Income.
Balance off the tax T account and that should give you the tax actually paid. Any one of those figures may be “missing” so you’ll need to find it by putting into the T account all the figures from the question as I have just described and the missing figure (to make the account balance) will fall out.
Practice the mini-exercises at the end of the F7 course notes – there are 5 or 6 examples of past exam questions relating to just that exercise.
OK?
thanks very much for your explanation.
in the exam, do we have to calculate the taxable profit or will it be given? suppose if i have to calculate current tax then do i have to calculate taxable profit myself for this?
also am i right in saying that the taxable profit is equal to the amount the taxman thinks to be considered for tax purposes and current tax is the rate * taxable profit. deferred tax is rate multiply by difference between taxable and accounting profit.
thanks
hi
also can you explain why development cost are not included in tax base? and how to treat research costs?
Anas – you’re WAY TOO DEEP!
You will have to prepare (either in question 1, question 2 or both) a statement of income, the bottom 3 lines of which will show “Profit before tax”, “Tax”, and “Profit after tax”
Now, accept that you will make (at least) one mistake in arriving at profit before tax. You will NOT be expected to calculate the current tax – that’s an F6 exercise. In F7, the examiner will give you the figure for the current tax
Yes, taxable profit is the taxman’s version of the basis for the tax calculation – but it’s not going to happen in F7
I’ve never thought of deferred tax in the way you suggest and, again, it’s not going to happen at F7
Which question are you looking at for your development costs question?
Research costs should be expensed in the year in which they are incurred – again, that’s all you’ll need for F7
OK?
ok thanks Mike.
Another quick question on this
below is an adjustment that came in dec 2012 paper
The balance on current tax of 1100 debit represents the under/over provision of the tax liability for the year ended 30 September
2011. A provision for income tax for the year ended 30 September 2012 of $7·4 million is required. At
30 September 2012, Quincy had taxable temporary differences of $5 million, requiring a provision for deferred
tax. Any deferred tax adjustment should be reported in the income statement. The income tax rate of Quincy is
20%.can you explain what does it mean by under/over provision of the tax liability?
why is it debit balance? does it mean it is a loss?
Anas! Trust me here – you really do not need to know!
Just follow the rules! Put into the T account previously referred to a brought down figure on the debit side of 1,100.
Then carry on with that account in the way that I have described to you
But, since you have asked, the debit balance brought down for current taxation represents an UNDER PROVISION from last year.
But you don’t need to know that
ok thanks Mike
the reason i was asking this is because
in exams we do have to deduct or add the amount in the trail balance from the current tax provision in the year to determine the tax charge in PNL for the year. my confusion is when to deduct and when to add
No confusion! No thinking! No worries! Just open your T account, put in the brought forward figures for current and deferred tax, put in the carried forward figures for current and deferred tax, put in the figure from the statement of income representing this year’s tax charge (or put in the figure representing cash paid) and the balance is cash paid (or this year’s charge for tax in the statement of income)
Why are you so keen to know whether it was an overpayment, underpayment, over provision or under provision? YOU DON’T NEED TO KNOW!
For the sake of giving you full information, I repeat, a debit balance brought forward in the trial balance has arisen because we UNDER-PROVIDED tax last year.
Ok?
Thank you Anas for your questions. Mikes responses has just nailed my understanding of the Tax T Account!
mike
if the question says that the taxable temporary differences for the year ended 30 sep 2004 are 2000$ and tax rate is 25% then we bring this on the left side of our Def Tax t account. however if it says that the DEDUCTABLE temporary differences for the year ended 30 sep 2004 are 2000$ and tax rate is 25% then am i right in saying that we should take this on the right side of t account?
No, it’s the same entry. Most timing differences are deductible. It’s just that the examiner may occasionally include that word
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