One of the key measures introduced in the Federal Government’s Budget 2016 is the gradual reduction on company tax rates from 30% (28.5% for small businesses) to 25% by 2027 as follows:
|
Income year |
Applicable turnover threshold less than |
Company tax rate (%) |
|---|---|---|
|
2015-16 |
$2 million |
28.5 |
|
2016-17 |
$10 million |
27.5 |
|
2017-18 |
$25 million |
27.5 |
|
2018-19 |
$50 million |
27.5 |
|
2019-20 |
$100 million |
27.5 |
|
2020-21 |
$250 million |
27.5 |
|
2021-22 |
$500 million |
27.5 |
|
2022-23 |
$1 billion |
27.5 |
|
2023-24 |
All companies |
27.5 |
|
2024-25 |
All companies |
27 |
|
2025-26 |
All companies |
26 |
|
2026-27 |
All companies |
25 |
These changes will not impact the measurement of current tax liabilities and deferred tax assets and liabilities at 30 June 2016 because AASB 112 Income Taxes requires that current and deferred tax assets and liabilities be measured using tax rates that have been enacted or substantively enacted by the end of the reporting period.
Legislation to reduce company tax rates will not be enacted (received Royal Assent) or substantively enacted (passed through both Houses of Parliament) at 30 June 2016 because of the election taking place 2 July 2016.
If these changes pass through both Houses before your financial statements are authorised for issue (substantive enactment), then if material, you will need to disclose the impact on the measurement of your deferred tax assets and liabilities. AASB 112 Income Taxes, paragraph 88, specifically requires these disclosures.
If these changes do not pass through both Houses before your financial statements are authorised for issue, you are not required to disclose subsequent event details in your financial statements. However, if material you may choose to do so by giving a status update of the progress of the legislation at the time your financial statements are authorised for issue and the likely impact on deferred tax balances recorded at 30 June 2016 if such changes do occur.
A reduction in corporate tax rates will only impact the measurement of current tax liabilities in the year in which the new rate becomes effective.
However, once tax rates have been enacted or substantively enacted, deferred tax assets and liabilities must be measured at tax rates that are expected to apply to the period when the asset is realised or the liability is settled. This means that deferred tax on temporary differences must be recalculated using the new rate where assessable or deductible temporary differences are expected to be settled or realised at the new rate.
ABC Limited has revenue of $20 million and $5 million of tax losses it expects to recover as follows:
Per the table above, ABC Limited will incur a 30% tax rate for the years ending 30 June 2016 and 30 June 2017, and 27.5% for the year ending 30 June 2018.
Assume that the tax rates per the table above are substantively enacted between 1 July 2016 and prior to the 30 June 2016 financial statements being authorised for issue.
At 30 June 2016, the deferred tax asset attributable to tax losses is $1.5 million (30% of $5 million).
The deferred tax asset attributable to tax losses will be recalculated as follows if disclosing this as a non-adjusting post balance date event:
| Tax loss |
Date recoverable |
Tax rate |
Total |
|---|---|---|---|
|
$2 million |
30 June 2017 |
30% |
$600,000 |
|
$3 million |
20 June 2018 |
27.5% |
$825,000 |
|
Deferred tax asset |
$1,425,000 |
||
This will result in a reduction of the deferred tax asset of $75,000 ($1.5 million less $1.425 million). This reduction of $75,000 will impact your income tax expense and will be a reconciling item in your effective tax rate note to the financial statements in the 2017 year.
The example above illustrates a simple scenario where it is easy to identify the financial year in which tax losses will be recouped, and therefore the applicable tax rate for calculating the deferred tax asset. However, it is not clear yet how some more complex deferred tax balances like deprecation would be dealt with at this stage. In practice, this staged implementation to reducing company tax rates may cause headaches if you are trying to determine what tax rates to use for the recovery of deductible temporary differences, or the settlement of deferred tax liabilities, particularly where recovery or settlement occurs over multiple reporting periods.
DEF Pty Limited has 2,000 assets on its fixed asset register. Most of these assets have different rates for tax depreciation and accounting depreciation and have useful lives varying from three to 20 years. Assets are replaced on a rolling basis.
Following the requirements of AASB 112, paragraph 47, deferred tax assets and liabilities must be calculated using the tax rates that are expected to apply when the asset is realised or liability settled. We can see that in practice, this could result in a significant amount of system changes and record keeping to get the right answer.
Theoretically, for each asset, we would need to split down the temporary differences into the years that we expect to recover the deductible temporary difference or settle the deferred tax liability, and then use the appropriate tax rate from the table above.
Entities will need to determine how to apply these requirements in practice so that amounts recorded are not materially misstated.