Question

Tip:Australia Tax Law

QUESTION 1

The liabilities of a company joining a tax consolidated group include a liability for tax, a deferred tax liability, a provision for employee leave and a liability relating to securitised receivables. How are these liabilities dealt with in tax cost setting if the company joins the group today?

Answer 1

Tax Liability

The full company tax rate is 30% and the lower company tax rate is 27.5%. From the 2017–2018 income year, your business is eligible for the lower rate if it’s a base rate entity.

A base rate entity is a company that both:

• has an aggregated turnover less than $50 million from 2018–2019 ($25 million for 2017 –2018
• 80% or less of your assessable income is base rate entity passive income (for example interest, dividends or rent

Deferred Tax Liability

Deferred tax liabilities shall be recognised for all taxable temporary differences, subject to some stipulated exceptions. A deferred tax liability shall be recognised when there is a taxable temporary difference between the tax base of an asset or liability and its corresponding carrying amount in the statement of financial position. This arises when the carrying amount of an asset exceeds its tax base. Consequently, the future recovery of the carrying amount will generate taxable profit; e.g: • accumulated depreciation of an asset in the financial statements is less than the cumulative depreciation allowed up to the reporting date for tax purposes, e.g. depreciation of an asset is accelerated for tax purposes; • development costs have been capitalised and will be amortised over future periods in determining accounting profit but deducted in determining taxable profit in the period in which they were incurred. A taxable temporary difference also arises when the carrying amount of a liability is less than its tax base, because the future settlement of its tax base will generate taxable profit (e.g. a loan initially recognised at fair value net of borrowing costs incurred in the loan establishment but the tax deductions for the costs are amortised over the life of the loan).

A deferred tax liability will not be recognised if arising from:

• the initial recognition of goodwill;

• the initial recognition of an asset or liability in a transaction which is not a business combination, and, at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

Provision for Employee Leave

Annual leave and leave loadings are only deductible when actually paid either direct to the employee or to a purchaser of the business when taking over the employees and their associated leave liability.

Securitised Receivables

The securitization of receivables is still being used by a few companies – generally those in the financial sector. Through this process, financial institutions primarily seek to mitigate the risk of their portfolios by adjusting their balance sheets according to the Basel AML index, lowering the doubtful receivables – the so-called write-off – and making them deductible from income tax and social contribution.