This article explains tax effect accounting for SMSF, provides a tax reconciliation template and an example of deferred tax calculation.
Accounting for SMSF income tax transactions (tax effect accounting for SMSF) may have two separate effects:
- Current tax consequences which give rise to a current tax liability for income tax payable to the ATO
- Future tax consequences which give rise to deferred tax assets or deferred tax liabilities
AASB 112 adopts a tax-effect method which is based on the assumption that the income tax expense in financial statements is not equal simply to the current tax liability, but is also a function of the entity’s deferred tax liabilities and deferred tax assets.
Reconcile accounting profit/(loss) to current tax liability
To assist accounting practices to reconcile accounting profit to current tax liability in compliance with AASB 112, we prepared the template below. The current tax liability calculated on the SMSF annual return is then matched with this result to ensure the current tax liability reported to the ATO is accurate.
| Accounting profit/(loss) before income tax |
Plus: All non-deductible expenses in the income statement
|
Plus: Any assessable amounts not included in the income statement
|
Less: All non-assessable revenue in the income statement
|
Less: Any deductible amounts not included in the income statement
|
| Equals: Taxable income |
| Multiplied: By 15% |
| Equals: Net tax payable |
| Less: Imputation credits Less: TFN credits Less: Instalments Less: Foreign tax credits |
| Equals: Current tax liability |
Deferred tax
Deferred tax for SMSFs arises mostly from revaluation of assets in accumulation phase. There is no future tax for assets in pension phase.
Since the accounting and tax depreciations are usually calculated the same way for SMSFs, no timing difference is recognised on depreciation. However, timing difference can arise from capital work deductions.
Also permanent differences exist for assets held for more than 12 months, those temporary differences are reduced by a third.
Example:
| Revaluation/Tax Deferred Amount | Permanent Difference | Amount | |
| $ | $ | $ | |
| Revaluations | |||
| ANZ | 1,200 | (400) | 800 |
| Div 43 deduction | |||
| 47 Angel Ave | 2,000 | 2,000 |
Tax deferred liability 2,800*15%= $420
In the above example, assume AZN shares have a cost base of $600, and at the balance sheet date are valued at $1,800, since the shares have been revalued up by $1,200, suppose the asset is to be sold at this revalued price, taking into consideration of 1/3 CGT discount, there will be $120 tax payable.
Div 43 amount is deductible for tax purposes, however the deduction increases the cost base of the property, which results in more future tax payable. If the property is held for more than 12 months, permanent differences should be recognised too.
Accounting theory for deferred tax calculation
Future tax consequences arise from differences between an entity’s balance sheet prepared under accounting standards and its tax-based balance sheet prepared in accordance with the tax legislation. Such differences are referred to as ‘temporary differences’.
Differences between the carrying amount and tax base of an asset or liability give rise to temporary differences:
carrying amount – tax base = temporary difference
Taxable temporary differences (TTDs) * tax rate% = deferred tax liability
Deductible temporary differences (DTDs) * tax rate% = deferred tax asset
TTDs result from increases in taxable income in future reporting period (i.e. the payment of more tax in the future). They arise where the effect of a particular transaction on the current year is that taxable income will be less than the accounting profit before tax.
DTDs result from decreases in taxable income in a future reporting period (i.e. the payment of less tax in the future). They arise where the effect of a particular transaction on the current year is that the taxable income will be more than the accounting profit before tax.