Deferred tax Investment Property PDF

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Deferred Tax investment property...

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LEARNING UNIT 2 – IAS40 INVESTMENT PROPERTY

Disclaime r The information contained in the summary is to highlight important aspects in applying the principles of the applicable statements. The summary is in no way an indication that only the matters mentioned are important to pass. Students must refer to their study guides and textbooks for an understanding of the learning unit. The summary below is primarily a revision tool to assist students in preparation of the exam. Deferred tax IAS 12 states that an entity’s deferred tax asset / liability that is recognised in its financial statements must reflect the tax consequents that would follow from the manner in which the entity expects to recover / settle the carrying amount of its asset / liabilities. An entity may recover the carrying amount through use or through sale. If the entity recovers the carrying amount principally through sale, deferred tax is calculated at the CGT rate of 80% x 28%. If the entity recovers the carrying amount principally through use, deferred tax is calculated at 28%.

NON-DEPRECIABLE ASSET Only land is non-depreciable Realise only with the sale of the land Provide for deferred tax at 80% X 28% on the fair value adjustment above the base cost

DEPRECIABLE ASSET (No depreciation is written off according to IAS 40, but an asset with a limited expected useful life is still seen as a depreciable asset) Example : an investment property according to the fair value model

Example : an investment property according to the fair value fair value model

Business model is to consume the economic benefits over time (thus through use)

Presumption that recovery of the amount will normally be through sale

Presumption is rebutted

Provide for deferred tax at 80 x 28% on the fair value adjustment above the base cost and at 28% on the recoupment of previous tax allowances (base cost – tax base)

Provide for deferred tax at 28% on the fair value adjustment above base cost

Capital Gains tax (CGT) – general rules

CGT is applicable to assets acquired after 1 October 2001. Proceeds Proceeds above cost is taxed at 80 x 28% (CGT rate) Base cost Proceeds below cost = recoupment of tax allowance at 28% Tax base

Non - depreciable assets Eg land Scenario: Assume land was purchased at a cost of R100 000. Cost model No tax implications - IAS 12.15 Exempt CA Exempt TB Cost

100 000

100 000

-

TD 0

DT dr/(cr) Exempt

Fair value model Tax implications of a fair value adjustment are as follows: Above cost difference

CA above cost is taxed at 80% x 28% (CGT rate)

Base cost = Tax base difference

no tax implications = IAS 12.15 Exempt

Below cost

Scenario: Assume land was purchased at a cost of R100 000. The FV of the land was R120 000 at year end. R120 000 R20 000

CA above cost is taxed at 80% x 28% (CGT rate)

R100 000 R0 R0

Cost Fair value

CA

FV adj

TB

100 000 20 000

20 000

0

120 000

20 000

100 000

no tax implications = IAS 12.15 Exempt

TD

DT dr/(cr) Exempt

20 000

(4 480)

20 000 x 80% x 28% = 4 480

The carrying amount of land will be recovered through a sales transaction. Deferred tax will for this reason be calculated by including the CGT rate of 80%

FAC 3702 / Learning unit 2

 Deferred tax principles Depreciable assets and SARS grants an allowance Eg Manufacturing buildings The tax implications are dependent on the recovery of the carrying amount of the asset. An entity may recover the carrying amount through use or throu gh sale.

PRESUMPTION -Recovery through sale Cost model

Fair value model

Deferred tax at 28%

Deferred tax at 28% on allowance BUT at 80% x 28% on the FV adjustment above cost

Scenario: Year 1: Assume a machine was purchased at a cost of R100 000. The machine is depreciated over 20 years. Beginning of year 2 FV= R125 000. Tax allowance = 10% not apportioned

Cost Dep/T all Dep/T all

CA

RS

TB

100 000 (5 000) 95 000 (5 000) 95 000

0 0 0 0 0

100 000 (10 000) 90 000 (10 000) 80 000

TD

DT dr/ (cr) Cost Dep/T all

5 000

(1 400) Fv adj

10 000

(2 800) Dep/T all

CA

TB

TD

DT dr/(cr)

100 000 0 100 000 25 000 125 000

100 000 (10 000) 90 000 0 90 000

10 000 25 000 35 000

(2 800) (5 600) (8 400)

28% 28%x80%

0

(10 000)

(2 800)

28%

125 000

80 000

45 000

(11 200)

FAC 3702 / Learning unit 2  Fair value model Tax implications of a fair value adjustment are as follows: Fair value = R125 000 difference

R25 000 at 80% x 28% (CGT rate) = R5 600

Base cost = R100 000 difference R20 000 x 28% = R5 600 Tax base = R80 000

DEFERRED TAX NOTE Investment property: Accelerated tax allowances [(Historical Cost - Tax base ) x 28%] Fair value adjustments (25 000 x 28% x 80%) Deferred tax Liability

5 600 5 600

Above base cost portion: A fair value adjustment increases the temporary differences by increasing the carrying amount above the original base cost of the asset. Deferred tax on fair value adjustments will be calculated on this portion by including the CGT rate of 80%

FAC 3702 / Learning unit 2

Presumptionrebuttedmeans that recoveryofthepropertywillbe throughuseandnotthroughsale



Recovery through use – PRESUMPTION REBUTTED

Cost Dep/T all Dep/T all

Cost model

Fair value model

Deferred tax at 28%

Deferred tax at 28% on allowance AND on the FV adjustment above cost

CA

RS

TB

100 000 (5 000) 95 000 (5 000 ) 90 000

0 0 0 0 0

100 000 (10 000) 90 000 (10 000) 80 000

TD

DT dr/(cr) Cost Dep/T all

5 000

(1 400 )

10 000

(2 800)

FV adj Dep/T all

CA

TB

TD

DT dr/(cr)

100 000 0 100 000 25 000 125 000

100 000 (10 000) 90 000 0 90 000

10 000

(2 800 )

30 000

(8 400)

0 125 000

(10 000) 80 000

40 000

(11 200)

28% 28% 28%

FAC 3702 / Learning unit 2 

epreciable assets and SARS does not grant an allowance Eg Office/Admin buildin g The tax implications are dependant on the recovery of the carrying amount of the asset. An entity may recover the carrying amount through use or through sale.

PRESUMPTION Recovery through sale Cost model

Fair value model

No deferred tax – IAS 12.15 Exempt

Deferred tax at 28% x 80% on the FV adjustment above cost

Year 1: ABC purchased an office block. Building cost = R1 020 000. Buildings are depreciated over 20 years. SARS does not allow a tax allowance on the building. Year 2: Assume the fair value adjustment for the year for the buildings it is R100 000.

Cost Dep/T all Dep/T all

CA

RS

TB

1 020 000 (51 000) 969 000 (51 000) 918 000

0 0 0 0 0

1 020 000 0 1 020 000 0 1 020 000

TD

DT dr/(cr)

exempt (51 000) 0 exempt (102 000) 0

CA Cost Dep/T all FV adj Dep/T all

TB

1 020 000 1 020 000 0 0 1 020 000 1 020 000 100 000 0 1 120 000 1 020 000 0

0

1 120 000

1 020 000

TD

DT dr/(cr)

0

0

100 000

(22 400)

(100 000)

(22 400)

28% x 80%

FAC 3702 / Learning unit 2 

Recovery through use – PRESUMPTION REBUTTED

Cost Dep/T all

Dep/T all

Cost model

Fair value model

No deferred tax – IAS 12.15 Exempt

Deferred tax at 28% on the FV adjustment above cost

CA

R S

TB

1 020 000

0

1 020 000

(51 000) 969 000

0 0

0 1 020 000

(51 000) 969 000

0 0

0 1 020 000

TD

DT dr/(cr) exempt

(51 000)

0

(102 000)

exempt 0

Cost Dep/T all

RS Dep/T all

CA

TB

1 020 000

1 020 000

0 1 020 000

0 1 020 000

100 000 1 120 000

0 1 020 000

0

0

1 120 000

1 020 000

TD

DT dr/(cr)

0

0 28 %

100 000

(28 000)

(100 000)

(28 000)

28 %

FAC 3702 / Learning unit 2 ...