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Question:
On 30 September 2009, Gamma borrowed $20 million from a non-group company. The financial liability is not designated as fair value through profit and loss. Gamma incurred costs of $1 million in connection with the borrowing and this qualified for tax relief in the year ended 30 September 2009.
Compute the deferred tax.Can I ask is this a deferred tax liability? If yes, what is the tax base and the carrying amount.
I think the carrying amount is $20 – $1m = $19m
But I have no idea with the tax base.Can anyone please help? Thanks.
The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.
for an asset,
CV-tax base=+ve, it is deferred tax liability,
-ve , it is deferred tax asset
for a liability,
CV-tax base=+ve , it is deferred tax asset.
-ve , it is deferred tax liability.if u remember, CV – tax base =+ve of a liability, it is deferred tax liability. other conditions can be derived from it.
here, the financial liability is recorded at amortisation cost. so, it is 19m. not 20m. and also, issue cost is not charged to IS. but this issue cost is qualified for tax relief. hence, temporary difference arise.
taxable profit= profit before tax -1m.
so, it is a deferred tax liability.
but, i am not sure of tax base of this liability. let sir mike answer it.
since CV of this liability is cost of liability+finance cost-cash paid(contractual amt).
what could be tax base?you make a good point.
I also agree that the carrying amount is $19m. So, in order to create the ‘$1 million’ taxable temporary difference, i assume that the tax base must be $20m.
However, why tax base is larger than carrying amount? I feel very puzzled with this question.
I understand that it is a deferred tax liability because we ‘deduct’ first, so in the future no deduction is allowed anymore. so it is essentially a deferred tax liability.
i really hope no such question will appear in F7 exam.
jm84, you asked why tax base is larger than carrying amount?
In all honesty, you don’t have time to get into the logics behind it when you’ve papers in a few days. .. It’ll definitely come in the paper as a tax adjustment so you need to be prepared for it. For the sake of solving the adjustment all you need to know is how a deferred tax liability/ deferred tax asset arises and thats all.@acca13 said:
jm84, you asked why tax base is larger than carrying amount?
In all honesty, you don’t have time to get into the logics behind it when you’ve papers in a few days. .. It’ll definitely come in the paper as a tax adjustment so you need to be prepared for it. For the sake of solving the adjustment all you need to know is how a deferred tax liability/ deferred tax asset arises and thats all.Yup, but I prefer to learn things by understanding the behind concepts. I am able to differentiate between DTL and DTA. Anyway thank you for you suggestion.
As you mentioned in the question itself that issue cost is eligible for tax relief. so it would shown as deduction while calculating income for the current year.
As such there wont be any deferred tax on this issue cost. So dont worry about this.
Deffered tax will be – ZERO
Current tax will be reduced by = 1m x tax rateHope it helps.
Raj
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