Tax-effect accounting in Australia : the nature and treatment of the provision for deferred income tax
Tax-effect accounting has been controversy since its origin in allocation has generally been adopted the subject in the 1940s. Tax across the English speaking world, even though underlying basic issues have not been resolved. A review of the literature shows that issues such as: whether income tax is an expense; whether the provision for deferred income tax is a liability and whether the provision for future income tax benefit is an asset have not been resolved because of differing opinions as to what is an expense, liability or an asset. The development of a conceptual framework in Australia, which provides definitions of revenues, expenses, assets and liabilities, has provided an opportunity to reexamine some of the unresolved issues mentioned above. Since the conceptual framework, in SAC 4, defines an expense in terms of whether it increases a liability or reduces an asset the re-examination was directed at ascertaining whether the provision for deferred income tax satisfies the definition and recognition criteria for a liability. The results were inconclusive. However, it was possible to conclude that the provision for deferred income tax does not readily satisfy the criteria in SAC 4. An empirical investigation was then undertaken to ascertain whether selected user groups treat the provision for deferred income tax as a liability. The investigation surveyed investment houses, company secretaries, auditors and the parties to trust deeds. Evidence gathered suggest that investment houses and company secretaries treat the provision for deferred income tax all a liability. Auditors appear to regard the provision for income tax as a deferred credit; not a liability. No evidence was found that the parties to trust deeds treat the provision for deferred income tax In a systematic way. It is concluded that the parties to trust deeds do not consider the nature of the provision for deferred income tax when negotiating borrowing limitation ratio. It is hoped that the finding of this investigation will be highly relevant to any review of the standards on tax-effect accounting in Australia.
Deferred tax, Assets, Accounting, Tax accounting, Australia, Liabilities
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Edith Cowan University, Research Online, Perth, Western Australia