Deferred tax typically results in a liability being recognised within the statement of financial position. IAS 12 defines a deferred tax liability as the amount of income tax payable in future periods regarding taxable temporary differences. So, in simple terms, deferred tax is the tax that is payable in the future.
Temporary differences are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base (i.e. the amount attributed to that asset or liability for tax purposes).
- Temporary differences may be ‘taxable temporary differences’ or ‘deductible temporary differences’.
- Taxable temporary differences are those on which tax will be charged when the asset (or liability) is recovered (or settled).
- Deductible temporary differences will result in tax deductions or savings in the future when the asset (or liability) is recovered (or settled).
IAS 12 requires that a deferred tax liability be recorded for all taxable temporary differences that exist at the year-end.
The movements in the liability are recorded in the statement of profit or loss as part of the income tax charge. At the same time,the closing figures are reported in the statement of financial position as part of the deferred tax liability.
Depreciable non-current assets are a typical deferred tax example.
Within financial statements, non-current assets with a limited useful life are subject to depreciation. However, within the corresponding tax computations, non-current assets are subject to tax depreciation (sometimes known as ‘capital allowances’) at rates set within the relevant tax legislation. Where at the year-end, the accumulated depreciation and the cumulative tax depreciation claimed are different, the carrying amount of the asset (cost less accumulated depreciation) will then be different to its tax base (cost less accumulated tax depreciation), and hence a temporary difference arises.
Why GCS Malta?
Article by Braden Debono