How changing tax rates will impact your deferred tax balance

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11
Jul

How changing tax rates will impact your deferred tax balance

11.07.18

While the Federal Government has deferred the senate vote on their stepped tax plan to August, it is still vital for businesses to anticipate and prepare for changes to the corporate tax rate. Under the Turnbull government’s proposed plan, the corporate tax rate will reduce periodically for all companies to a rate of 25% by 2026-27 having a considerable impact on your business’s deferred tax balance.

Access to the 27.5% is limited to companies who’s turnover falls below the aggregated annual turnover threshold as summarised below:

Year

Aggregated turnover threshold

Corporate entities under the threshold

All other corporate entities

2017-18

$25m

27.5%

30.0%

2018-19

$50m

27.5%

30.0%

2019-20

$50m

27.5%

30.0%

 

Agregated annual turnover is the turnover (i.e. ordinary income) of the entity, its connected entities and its affiliates, so caution needs to be had when determining whether an entity qualifies.

Practically, this means that for 2017/18 a greater number of corporate entities will be taxed at the lower rate, similarly, many entities may first fall into the lower rate in 2018/19 year. Whilst it is a welcome change to have a reduction in tax, there are some practical impacts for companies in respect of their deferred tax balances, specifically in the following areas:

Tax adjustments, timing or temporary differences

Where a company recognises deferred tax balances on differences between accounting and taxable income, the change in tax rate can have a significant impact not only on its tax payable position, but also on its assets and liabilities.

Deductions or taxable income at the rate in the first year will then be assessable or deductible at the rate in year two.  As such, electable timing differences (e.g. stock valuations, depreciation methodologies) can be used to great effect.

This means that for any entities recording deferred tax balances, the closing balances for the year ended 30 June 2018 will need to reflect that the deferred tax balances will only be recouped at the lower rate of tax in the following year.

As a result, an adjustment to these assets or liabilities needs to be reflected as a permanent difference through the company’s income tax expense.

Issues arising for imputation credits

Two major issues arise in respect of imputation of dividends. The first being the rate in which companies have franked their dividends during the year, as some companies may have inadvertently fallen into the lower tax rate during the year (or, similarly may be at the reduced rate from 1 July 2018). This should be rectified by sending a letter or email to shareholders and/or a revised distribution statement to reflect the correct company imputation rate.

Also, the company’s franking account will need to be carefully reviewed to ensure that distributions only reflect imputation credits at the lower rate, with no retrospective recalculation of franking balances as we have seen with changes to company tax rates in the past.

Should you have any questions as to how the company tax rate affects your business, please contact us or speak to your ESV engagement partner on 02 9283 1666