Class Example 1BalanceMe Ltd is a company that provides trucking and other related services to thecommunity in Kagiso, South of Johannesburg. BalanceMe has a 31 December yearend.BalanceMe has the following property, plant and equipment on 31 December 2020(excluding any costs to dismantle).Cost Carrying Amount Tax BaseLand 50 000 75 000 50 000Machinery 40 000 20 000 16 000The machinery is depreciated on a straight line basis at 25% per annum. Themachinery qualifies for a section 12C deduction at a rate 40/20/20/20The entity classifies the land as investment property, measured at fair value. The fairvalue of the land at 31 December 2021 amounted R80 000.The entity is required to dismantle the machine at the end of the useful life. Theestimated costs of dismantling were estimated to be R100 000 at the end of thatuseful life. Assume a pre-tax rate of 10% is applicable and that the effect ofdiscounting is material. SARS will only allow a deduction for the dismantling costsonce they are paidThe accounting profit before tax for BalanceMe on 31 December 2021 was R15 000.BalanceMe received local dividends of R3 500, correctly included in profit before taxand also paid a dividend of R5 000.The income tax rate 27% remained unchanged for all financial years.Required:a) Calculate the deferred tax balance, using the asset and liability method, as at 31December 2020b) Calculate the current and deferred income tax expense for the year ending 31December 2021c) Calculate the deferred tax balance, using the asset and liability method, as it 31December 2021d) How would the above be different if the land was classified as property, plant andequipment measured in terms of the revaluation model?
Question
Class Example 1BalanceMe Ltd is a company that provides trucking and other related services to thecommunity in Kagiso, South of Johannesburg. BalanceMe has a 31 December yearend.BalanceMe has the following property, plant and equipment on 31 December 2020(excluding any costs to dismantle).Cost Carrying Amount Tax BaseLand 50 000 75 000 50 000Machinery 40 000 20 000 16 000The machinery is depreciated on a straight line basis at 25% per annum. Themachinery qualifies for a section 12C deduction at a rate 40/20/20/20The entity classifies the land as investment property, measured at fair value. The fairvalue of the land at 31 December 2021 amounted R80 000.The entity is required to dismantle the machine at the end of the useful life. Theestimated costs of dismantling were estimated to be R100 000 at the end of thatuseful life. Assume a pre-tax rate of 10% is applicable and that the effect ofdiscounting is material. SARS will only allow a deduction for the dismantling costsonce they are paidThe accounting profit before tax for BalanceMe on 31 December 2021 was R15 000.BalanceMe received local dividends of R3 500, correctly included in profit before taxand also paid a dividend of R5 000.The income tax rate 27% remained unchanged for all financial years.Required:a) Calculate the deferred tax balance, using the asset and liability method, as at 31December 2020b) Calculate the current and deferred income tax expense for the year ending 31December 2021c) Calculate the deferred tax balance, using the asset and liability method, as it 31December 2021d) How would the above be different if the land was classified as property, plant andequipment measured in terms of the revaluation model?
Solution
a) The deferred tax balance as at 31 December 2020 can be calculated as follows:
For Land: Tax base = 50,000 Carrying amount = 75,000 Temporary difference = 50,000 - 75,000 = -25,000 Deferred tax = -25,000 * 27% = -6,750
For Machinery: Tax base = 16,000 Carrying amount = 20,000 Temporary difference = 16,000 - 20,000 = -4,000 Deferred tax = -4,000 * 27% = -1,080
Total deferred tax balance = -6,750 - 1,080 = -7,830
b) The current and deferred income tax expense for the year ending 31 December 2021 can be calculated as follows:
Current tax expense = Accounting profit before tax * Tax rate = 15,000 * 27% = 4,050
Deferred tax expense = Change in deferred tax balance = Deferred tax balance at the end of 2021 - Deferred tax balance at the end of 2020. We don't have the deferred tax balance at the end of 2021, so we can't calculate the deferred tax expense.
c) The deferred tax balance as at 31 December 2021 can be calculated as follows:
For Land: Fair value = 80,000 Tax base = 50,000 Temporary difference = 80,000 - 50,000 = 30,000 Deferred tax = 30,000 * 27% = 8,100
For Machinery: Carrying amount = 20,000 - (25% * 20,000) = 15,000 Tax base = 16,000 - (40% * 16,000) = 9,600 Temporary difference = 15,000 - 9,600 = 5,400 Deferred tax = 5,400 * 27% = 1,458
Total deferred tax balance = 8,100 + 1,458 = 9,558
d) If the land was classified as property, plant and equipment measured in terms of the revaluation model, the carrying amount would be its revalued amount. The deferred tax would then be calculated based on the temporary difference between the revalued amount and the tax base. This could result in a different deferred tax balance.
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