Corporate Tax rates for smaller Australian companies are set to fall over the next few years. How should the changes in tax rates be reflected in financial statements?
The Commonwealth Government continues to reduce the rate of corporate tax in Australia for smaller entities, being those with an aggregated turnover of less than $50m.
- The rate of company tax will be reduced from 27.5% to 26% for the 2020-21 financial year
- There will be a further reduction to 25% for the 2021-22 financial year.
The corporate tax rate for larger entities remains at 30%.
The change to the tax rate will affect 30 June 2020 financial reporting by Australian entities which prepare financial statements in accordance with Australian Accounting Standards, and which qualify for the small company rate.
AASB 112 requires that deferred tax is calculated “based on rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period” (i.e. the balance sheet date). In Australia, “substantively enacted” means that a Bill has been tabled in the Parliament and there has been majority support for the passage of the Bill through both Houses of Parliament. This occurred in October 2018 for the Bill decreasing these tax rates.
Therefore, smaller entity financial statements for 30 June 2020 should include a deferred tax balance calculated using a tax rate of either 26% or 25%, depending on the year in which each timing difference will reverse.
This should be applied on an item by item basis, based on the best available estimate of when each timing difference is likely to reverse. Similarly, deferred tax assets relating to losses should be measured at the tax rate applicable to the period when the profit against which the loss will be used is expected to occur.
Where it is probable that an entity will exceed the $50m turnover threshold, and therefore pass from the small company rate to the standard rate of 30% before any temporary differences are settled or realised, then deferred tax balances should be measured using the 30% rate.
The change in the rate of tax, and its effects, should be disclosed in the financial statements. Paragraph 80 (d) of AASB 112 requires the amount of deferred tax income or expense relating to changes in tax rates or the imposition of new taxes to be disclosed as a separate component of the tax expense.
XYZ Pty Ltd is a small Australian company, with an aggregated turnover of $30m. It has brought forward tax losses available of $10m, giving rise to a deferred tax asset previously recognised at $2.75m, based on an expected rate of 27.5%. At 30 June 2020, it expects the asset to be used against future profits as follows:
- $3m against profits in the year ended 30 June 2021 when the tax rate is 26%
- $5m against profits in the years ended 30 June 2022 and 30 June 2023 when the tax rate is 25%.
- $2m against profits in the year ended 30 June 2024, by which time it expects to be paying the large company rate of 30%
It would recognise a deferred tax asset of $2,630,000, calculated as follows:
- $3m x 26% = $780,000
- $5m x 25% = $1,250,000
- $2m x 30% = $600,000
The effect of this on the income statement is a debit to the tax expense of $120,000, representing the impact of the changes to tax rates. XYZ Pty Ltd discloses this as a separate component of the tax expense in the notes to the financial statements.
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