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Calculating the Tax Base of Assets Scenario 1 (IAS 12, para. 7, example 1) A machine cost $100. Depreciation of $30 has already been expensed for accounting purposes and deducted for tax purposes in the current and prior periods - that is, the accounting treatment and tax treatment are the same. In this scenario, when the entity uses the asset it generates economic benefits in the form of revenue. The revenue generated by using the machine is taxable. Future deductible amounts are calculated as original cost less accumulated tax depreciation deductions ($100-$30=$70). This remaining cost of $70 will be tax deductible in future periods, either as depreciation or through a deduction on disposal. Therefore, as the future economic benefits, in the form of revenue, are taxable, the tax base of the machine is determined as follows. [1] Tax base = Future deductible amount = $70 The carrying amount is calculated as original cost ($100) less accumulated accounting depreciation ($30) = $70. This is the net amount that would be recorded in the financial statements. Therefore, in this scenario, the tax base is equal to the carrying amount of the asset. Scenario 2 An item of plant was purchased two years ago for $100. This plant is being depreciated on a straight-line basis for accounting purposes over a four-year period and on a straight-line basis for tax purposes over a five-year period. There is no residual value for either tax or accounting purposes. The income generated by the plant is included in taxable profit (loss), and tax depreciation is deductible for tax purposes. In this scenario, when the entity uses the asset, it generates economic benefits in the form of revenue. The revenue generated by using the plant is taxable. Future deductible amounts are amounts that were not yet claimed as deductions out of the original cost and they will be calculated as original cost ($100) less accumulated tax depreciation deductions ($100/5 x 2 = $40) = $60. Therefore, as the future economic benefits, in the form of revenue, are taxable, the tax base of the plant is determined as follows. [1] Tax base = Future deductible amount = $60The carrying amount is calculated as original cost ($100) less accumulated accounting depreciation ($100/4 x 2 = $50) = $50. This is the net amount that would be recorded in the financial statements. Therefore, in this scenario, the tax base is not equal to the carrying amount of the asset.QUESTION 4.1 Calculate the tax base for the following assets. (a) An item of inventory was purchased during the year for $250. The cost of the inventory for both accounting and tax purposes is 5250. The tax cost of the inventory will be included in the determination of taxable profit (tax loss) as a deduction when the Inventory is sold. The Income from the sale of inventory is taxable when the inventory is sold. (b) Trade receivables have a carrying amount of $250 with no allowance for doubtful debts. The related revenue has already been included in taxable profit (tax loss).QUESTION 4.2 Calculate the tax base for the following liabilities. (a) Employee benefits have a carrying amount of $100. The employee benefits are deductible on a cash basis (i.e. when paid). (b) A loan payable has a carrying amount of $250. The repayment of the loan will have no tax consequences. (c) Revenue received in advance has a carrying amount of $400. The amount was taxed on a cash basis (i.e. when received). TABLE 4.5 Illustrative worksheet extract Taxable Deductible Carrying temporary temporary amount Tax base difference difference Assets and liabilities S S S S Cash 10 000 10 000 Trade receivables 75 000 1 80 000 $5 000 Inventories 115 000 115 000 Plant and equipment 1 250 000 1 050 000 200 000 = Trade payables 60 000 60 000 Provisions 5000 nil 5000 Borrowings 750 000 750 000 IIQuestion 10: Tax base State the tax base of each of the following liabilities. (a) Current liabilities include accrued expenses with a carrying amount of $1000. The related expense will be deducted for tax purposes on a cash basis. (b) Current liabilities include interest revenue received in advance, with a carrying amount of $10 000. The related interest revenue was taxed on a cash basis. (c) Current liabilities include accrued expenses with a carrying amount of $2000. The related expense has already been deducted for tax purposes. (d) Current liabilities include accrued fines and penalties with a carrying amount of $100. Fines and penalties are not deductible for tax purposes. (e) A loan payable has a carrying amount of $1m. The repayment of the loan will have no tax consequences. (The answer is at the end of the module.)