Introduction
Corporate accounting is a specialized accounting division that relies on corporate accounts, final report preparation, statement of cash flows, market review and assumptions, and accounts for special occasions such as amalgamation, acquisition and so on. Corporate accounting is also used for determining the amount of income tax. Taxes on wages compensate for numerous social security schemes, including initiatives and utilities. Individual taxes are also referred to as personal income taxes. Corporation, joint ventures, small companies and self-employed persons are subject to corporate income tax. In this report, two famous companies’ annual reports are analysed to find out some core issues related to income tax.
Explaining different accounting and basic tax-related concepts.
Accounting profit:
The residual benefit that exists after specific expenses have been subtracted from the total company's profits in compliance with GAAP is accountingprofit. These costs are including the cost of labour, costs for raw materials, costs for dispersion as well as other manufacturing costs. It's also known as bookkeeping. This would be the net revenue contained in the financial statements based on all GAAP (Lalitha and Rajasekaran, 2014). To order to measure financial income, accountants deduct clear business expenses from the gross profits. Costs which can be measured are costs incurred. Labour expenses are straightforward, as they relate to a fixed sum charged for salaries for a certain period. The calculation includes all costs, except perhaps the deferred revenue, paid amounts. This reflects the worthwhile share of the cash needed to buy manufacturing equipment during the previous year.
Taxable profit: The profit or losseson which tax is deductible is taxable profit. The makeup of the taxable income can vary by taxation jurisdiction, based on the taxing jurisdiction's rules of operation or venue. For example, a state may announce that such qualified organizations, which have a philanthropic status, are not subject to revenue tax on their qualified earnings.
Temporary differences:
The distinction between the handling sum of a property or the debt on the financial statements and its tax basis is a temporary difference. The temporary difference in financial reporting can be 2 types which aredeductible and taxable (Henn, 2013). A temporary deductible gap is a temporary disparity that yields sums to be withheld as net gains or losses are calculated in the future. A temporary taxable discrepancy is a temporary discrepancy that, whether you assess a taxable benefit or disadvantage, may generate taxable sums in future. In all cases, when the value of the loss or debt has been restored or resolved, disputes are solved.
Taxable temporary differences: There are transient variations between pre-tax book earnings and taxable earnings, which gradually change or are withdrawn. In other words, operations to cause temporary differences are acknowledged, but recognized at different periods, both for legal and accounting considerations. Of this function, transient variations are regarded as variations in timing (VanDorn, Allen and Board, 2018). The rental profit is an example of a time differential. Accounting system allows for revenues only when they are earned, but when a firm receives a resale earnings initial payment this should report them on its taxation return on taxable earnings. This revenue would then be reported in the tax return, but maybe not in the ledger revenue. In this time frame, which produces a time gap. At a time when the dividend income is paid, the corporation must report the revenue from the account, not in the tax statement. That will reverse and erase the original discrepancy.
Deductible temporary differences:
A temporary deductible gap is a temporary disparity that yields sums to be withheld as net gains or losses are calculated in the future. The disparity between the carrying value of an asset or the debt on the balance sheet and the tax basis is a contingent gap (Melville, 2018). A deferred tax allowance is remembered for any temporary deductible variations because a taxable benefit that is paid for the deducted variations is expected to be available.
Deferred tax assets:
Assets on the financial statements of a company which may be used in advance for minimizing taxable profits are considered deferred tax properties. The question will arise if a corporation charges or imposes taxes on its financial statements beforehand. Through tax relief, these taxes are ultimately paid back to the company. Overpayment is thus treated as an asset for the client. A tax asset that is deferred is the reverse of a tax liability that may raise the amount in taxes the company owes by a corporation.
Deferred tax liabilities:
Deferred tax payment is a tax which has not been collected yet which is estimated or expected for the present time. The gap is due to the disparity when the tax is collected and then when the tax is billed (Kaplow, 2013). The late tax liability shows that, in future, the company will charge more payroll taxes because of payment, such as a payment selling receivable, which supposedly occurred mostly during the reporting quarter.
Explaining the recognition criteria of deferred tax asset and deferred tax liability.
Deferred tax assets must be recognized by IAS 12. specific requirements. Delayed tax revenues are only known as likely to be retrieved. This portion discusses the recovery of late tax revenues where there are minor taxable discrepancies. The duration of 'lookout time' in which deferred tax assets can be recovered. The acceptance in the annual financial statements of deferred taxes (GONCHAROV and JACOB, 2014). The necessity to recognize a deferred tax liability is 3 layers. Liabilities derived from the earlier recognition of debts of goodwill resulting from the early identification of asset and liability that would not affect whether another financial reporting or taxable revenue in the time of the sale.
Total tax expense of Woolworths Group in the year of 2018 and 2019.
Woolworths Group Limited is a major Australian supermarket group in Australia and New Zealand. It is Australia's second-biggest company in terms of revenue. According to the financial statements of 2018 and 2019, Woolworths has reported income tax expenses with some adjustments. In 2018, its annual tax expense was $699 million (Annual Reports - Woolworths Group, 2020). It had adjusted by deducting $6 million as the tax of the prior period but added $99 million as deferred tax relating to the temporary difference. So finally, Woolworths Group had to pay about $792 million as its annual tax expenses to the Australian government. In 2019, the yearly income tax was $730 million. $11 million are adjusted as the tax of the prior period. But in the year 2019, $51 million tax is deducted as the deferred tax relating to this organisation. After all the adjustment, the final payable tax amount of Woolworths Group in 2019 was $668 million which is less than the previous year. The reasons behind this are the adjustment of deferred tax relating to the origination or reversal of temporary differences.
The comparison of the tax rate and calculated figure of tax in the context of Woolworths Group.
In Australia, most of the companies have paid about 30% tax to the government (Ato.gov.au, 2020). But there are different adjustments for which different companies may have to pay more taxes or have to pay lower tax than other companies. For example, the cigarettes or any other harmful products related organisation have to pay more tax than the producer pf healthy or organic food products. But the base rate entity has the passive income and for those organisations, the annual tax rate is 27.5%. The passive earnings of a base rate entity shall be the organizational allocations and accruals on such distributions, royalty payments and rent, investment gains, earnings for qualification process securities, net taxable income and percentage included with the collaboration or trust beneficiary's taxable income to the extent to which it may be tracked by the amount that otherwise constitutes passive earnings for the base rate entity. Here according to the financial statements of Woolworths Group, its annual tax expenses are $792 million and $688 million respectively in the years of 2018 and 2019 (Woolworths Supermarket - Buy Groceries Online, 2020). These amounts are found out by adjusting two elements which are prior-year tax-related adjustment and deferred tax-related adjustment.
The annual tax rate is the total tax rate charged by a company or person. The effective tax rate usually does not take into consideration national or territory taxes, sales tax, real estate taxes or other kinds of tax that a person may be paying. This tax does not apply to corporate income tax. Calculations of an efficient tax rate are a useful method for evaluating the marginal tax rates of two or more organizations or trying to comprehend whether a high-tax state has a financial benefit or a disadvantage. The base of calculating tax in the context of Woolworths is its income before tax. In the year 2019, the total amount of income before tax was $2353 million. And the amount of tax was $668 which is equal to the 30% tax rate declared by the central authority of Australia. But in the year of 2018, this company had to pay more than 30% tax on its income before tax. In the income statement of the financial year 2018, the tax expense is equal to $718 million. But Woolworths Group had paid to the government at an amount of $792 million. The reason behind that was the adjustment relating to the deferred tax expense. Again, in the year of 2018, Woolworths had income from discontinued operational activities which was another reason for that excess amount of tax payable. There are some other reasons like divergence, even out over time criteria and others for which the actual amount of tax can be different from the actual amount of tax payable.
Identification of deferred tax and liability amounts from the balance sheet of Woolworths Group and reasons for their reporting.
Economic elements on the company's balance sheet are deferred tax asset and liability. The earnings on a tax return differed from income on a financial register because of the delayed-tax assets and liabilities. Some activities are generating delayed tax and liability balance, such as service contracts, unsecured debt options, lease agreements, net operational losses, depreciable assets etc. According to the balance sheet of Woolworths Group, the deferred tax asset is $311 million and $271 million respectively in the year 2019 and 2018. To adjust several factors relating to tax-deferred tax asset and liabilities are reported in the balance sheet of the Woolworths Group. Sources of adjustments for creating deferred tax assets and liabilities are depreciation, service contracts, unsecured bonds and several incomes from discontinued operational activities.
Identification of current tax asset or income tax payable and the reason for differences between income tax expense and income tax payable.
Woolworths Group has reported current tax payable for both of the financial year of 2018 and 2019. In 2018, current tax payable was $110 million and in 2019 the current tax payable was $84 million.
In taxation, two separate terms are income tax expenses and income taxes payable. Revenue tax expenditure can also be used to record revenue tax costs because the principle states that expenditure is to be shown at and not during the paid period. In periods which create an income statement, a corporation which pays its taxes monthly and quarterly will make changes. The sales cost is the estimate by the corporation of how many taxes it charges in a given accounting period. It usually occurs in the next paragraph of the sales statement right before the measurement of the net profit.
Difference between the records of income tax in the income statement and cash flow statement.
There is a significant difference between the income tax reported in the income statement and income tax paid which is reported to cash flow statement in the context of Woolworths Group. Income tax expense which is recorded in 2019 was $668 million. It was calculated from the income before tax at a rate of 30%. But the amount of income tax paid which is reported in the cash flow statement was $744 million. In the context of 2018, the reported amount of tax expense was $718. But the amount of tax paid reported in the cash flow statement was $661 million. When income is identified, there are scheduling differences and objects which may or may not be taxed. Many of the costs were withheld by the Woolworths Company. It employs the accrual income method. Preparers of financial statements can use the projected rate of taxation. These are the possible reasons for differences between the income tax expense from the income statement and income tax paid from the balance sheet (Dieterle, 2014). Again, a particular company may not have to pay the sum up the amount of the total tax expense to the authority. It may get different benefits from the government or it may have to make the proper adjustment. In this way, the income tax expense of income statement becomes different from the income tax paid which is reported to the cash flow statement.
Explaining the concept of temporary differences and permanent differences.
Deferred tax assets or obligations can only be created from temporary differences if the distinctions reverse in the long term and are designed to boost long term economic advantages for the organization by the balancing elements. Discrepancies in terms of deferred taxes and conditional deductibility are categorized into taxable discrepancies. Taxable provisional discrepancies are transient variations that correspond, when the specific balance sheet element is restored or remediated, to a taxable sum in the future. They proceed to a deferral of the level of tax obligation where an asset carry meets its tax base or whether it carrying volume meets its tax base (Beardon, 2012). Deductible transient variations are minor discrepancies that result in additional taxable earnings being reduced or excluded until the applicable balance sheet component is recaptured or settled. This refers to a deferral of tax benefit if an asset's tax base meets the carrying value or if a liability's carrying amount surpasses its tax base.
Permanent variations do not give rise to accrued tax benefits or liabilities. For example, income and expenditure items not authorized by the tax legislation are subject to permanent differences. These lasting variations contribute to a disparity between the income tax rate and an effective tax rate of a corporation. It may be obtained from various transient costs like dividends receivable. In the context of Woolworths Group, the non-current portion of accounts receivable is reported as permanent differences. It gets the reporting treatment like dividends receivable or research and development cost.
Reflective summary of this assignment on taxation in the context of Woolworths Group.
This assignment is prepared based on the information and application of corporate accounting and taxation. I have learnt different factors in corporate accounting by this report. This is an accounting process devoted solely to one business performance. The business manager is primarily interested in the accounting statements of one business in this form of bookkeeping. The accountant reports in particular only on the business that has hired him or her. This behaviour is ordinarily studied to assess the strategic and nonfinancial status of an enterprise, as defined by the corporate accounting definition. Investors are particularly keen to know the financial strength of the company in which they bought stocks (Dagwell, Wines and Lambert, 2015). Therefore, financial accounting is conducted to convey the assets and property of the business to them. There are different parts of corporate accounting and taxation is one of those. Taxation is the levy of arbitrary surcharges on persons or corporations by governments. Duties are taxes in about all of the country around the world, higher earners for public expenditure, even if they represent both these objectives as well. This Article addresses taxation as a whole, its values, aims and consequences, in particular how taxation can be defined as indirectly or directly, the background of tax, the legislation canons and requirements, and the economic consequences, including the practice and influence of taxation. I have come to know different factors of corporate tax in the context of Woolworths Group. There are different new insights which are known by me from this assignment. Especially the identification and application of temporary and permanent differences, reasons for differences between the tax expense recorded and tax expense paid to the government by Woolworths Group. This assignment will help me to know about the largest income sources of the government of Australia which is tax and will also help me to know about the process calculation and presentation of tax in the financial statements.
Conclusion
In summary, the income tax-related factors which are related to corporate accounting has a significant level of complexity. There are different concepts which are analysed in this report based on taxation. Again, for analysing the calculation and presentation of taxation in the financial reports the latest two years of annual reports are collected from ASX regarding Woolworths Group. Different concepts like temporary and permanent differences, reasons for the difference between the calculated tax amount and paid amount of tax and a reflection summary have given in this report.