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Summary Financial Reporting 2 (ACC2012W) - Accounting for taxes
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- University Of Cape Town (UCT)
Summary for taxes in Accounting
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ACCOUNTING FOR TAXESINTRODUCTION
Why is it important for us to have an understanding of tax when it comes to financial
reporting? IAS1:82(d) states that an entity should include a line item that presents the tax
expense for the period in the Statement of Comprehensive Income.
TYPES OF TAXES
South African taxes can be separated into two different categories: Direct and indirect
taxes.
Direct taxes are levied on persons (juristic or natural).
Examples of direct taxes would be normal tax which is a tax levied on the income of a
person and capital gains tax is a tax levied on the capital appreciation of the assets held
by a person.
Indirect taxes are taxes levied on transactions.
Examples of indirect taxes would be dividends tax which is a tax levied on the payment
of dividends, transfer duty is a tax on the transfer of fixed property and Value Added Tax
is a tax on the supply of taxable goods or services as defined by the VAT Act.
COMPANY EXPENSE (P/L) COLLECTED ON BEHALF OF SARS
SA normal tax Dividends tax
Capital Gains tax Transfer duty
VAT
CORPORATE INCOME TAX
We are told in IAS 12:80a, 80b and 80c, read together with IAS 12:5 that tax expense is
made up of current tax, the adjustments recognised in the period for current tax of prior
periods and deferred tax.
CURRENT TAX
Current tax is defined in IAS 12:5 as “the amount of income taxes payable (recoverable)
in respect of the taxable profit (tax loss) for a period.” This is to say that if the company
makes a taxable profit and thus has taxable income, the current tax expense will be the
tax payable in relation to that taxable income. Conversely, the company could also have a
tax income whereby the company may be owed money by SARS and thus have an income
in their hands.
Current tax is the same as the tax payable you calculate in accordance with the tax rules
provided in the Income Tax Act. Once you work through the taxable income framework,
, and come to a taxable income, you multiply the taxable income by the tax rate and get
your tax payable which is equal to your current tax expense.
DR Tax Expense (P/L) X
CR SARS (L) X
When you eventually pay the tax you owe to SARS, you would:
DR SARS (L) X
CR Bank (A) X
DEFERRED TAX
At a high level, deferred tax is essentially an accounting fiction used to account for the
future tax effects of the realisation of assets and settlement of liabilities.
INTERACTION WITH SARS
At the end of each year of assessment, companies submit an income tax return for the
specific reporting year (which is the same as their year of assessment). In the income tax
return, companies will evidence their calculation of their taxable income and the
consequent calculation of their tax payable. SARS then reviews this return and issues a tax
assessment stating whether they agree or disagree with the tax payable calculated by the
company.
If SARS disagrees with the income tax return and finds that the company innocently
miscalculated their tax payable, the tax assessment will tell the company to settle any
amounts they still owe SARS within a certain time period. The company would then settle
their tax payable in accordance to what is stated in the tax assessment issued by SARS.
If SARS finds that the miscalculation of tax payable was as a result of fraudulent activity,
SARS can charge the company with a fine and if the company does not settle the amount
owing to SARS within the time period stipulated, SARS can charge interest. It is important
to note that with this fine, it will be a separate line item on the SOCI, as it is not a tax
expense.
SARS allows companies to submit their completed tax returns within
12 months after the financial year end of a company.
PROVISIONAL TAX
WHAT IS PROVISIONAL TAX?
Provisional tax is NOT a separate tax from income tax. It is the PRE-PAYMENT of
income tax.
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