Tax madness time: maybe not so mad this time?
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Tax madness time: maybe not so mad this time?
It’s March! With March always comes the “what now?” after the budget speech, which was presented on 24 February this year by our current Minister of Finance, Tito Mboweni.
In light of the announced reduction to the corporate tax rates to 27% for years of assessment commencing 1 April 2022, I thought it was a good time to remind you of the requirements in accounting for these changes in accordance with the applicable accounting standards.
According to both IFRS and IFRS for SMEs, tax and deferred tax is measured using the tax rates and tax laws that are enacted or substantively enacted by the end of the entity’s reporting period.
Current tax is measured at the amount expected to be paid or recovered (IAS 12.46) (IFRS for SME 29.6). Deferred tax must be measured at the tax rates that are expected to apply to the period in which the underlying asset or liability is realised or settled (IAS 12.46) (IFRS for SME 29.27).
So, with the tax rate only changing for years of assessment beginning 1 April 2022, will this have an impact on the 2021 financial statements? The key question to then ask is: when is a change in tax rates considered to be substantively enacted?
1. When the Minister announces it?
2. On the effective date of the announcement? 3. When it is approved by Parliament? or
4. When it is signed by the President?
In South Africa, historically when the Minister announces a rate change to an existing tax it is applied without any further changes. Due to this high degree of certainty changes in tax rates, the decrease in the corporate tax rate is therefore considered to be substantively enacted from the time it is announced.
A change in a tax law or a tax rate linked to a change in tax law, would only be considered substantively enacted when they have been approved by Parliament and signed by the President. An example of this would be the proposed change limiting the use of assessed losses. This is considered a proposed change to the tax law.
The changes to the rates and laws should be applied to the period to which they relate. For example, the Minister annually announces a change in tax rate
at the budget speech but it is only effective from 1 April... usually that same year; this year he made it only effective in 2022. The impact depends on your year-end as to what numbers are affected.
Let’s work through a simple example of companies with three different year-ends.
- Company A with a 31st January 2021 year-end
- Company B with a 28th February 2021 year-end
- Company C with a 30th June 2021 year-end.
The Minister of Finance makes his announcement on 24th of February 2021 which includes a change in corporate tax down to 27%, effective for years commencing 1 April 2022.
This is a change to a tax rate for a law that already exists, therefore we consider it substantively enacted as at 24th of February 2021. The IFRS for SMEs includes the wording in its measurement paragraphs mentioned above “An entity shall regard tax rates as substantively enacted when the remaining steps in the enactment process have not affected the outcome in the past and are unlikely to do so.”
The effect on the 2021 year-ends would be recorded as follows:
Year-end 2021 | Company A | Company B | Company C |
Current tax rate: | 28% | 28% | 28% |
Opening deferred tax rate: | 28% | 28% | 28% |
Adjustment included in deferred tax reconciliation: Effect of Deferred tax rate change on opening balance: Effect of Deferred tax rate change on closing balance: | (1%) | (1%) | |
Closing deferred tax rate: | 28% | 27% | 27% |
Other comments: | Subsequent event note: Effect on deferred tax due to the rate change | Note that the effect on deferred tax will be adjusted for those deferred tax benefits or deductions expected to be obtained or incurred during the period to the effective date, i.e. in the 2021 and 2022 financial years. | |
Because the effective date is for years of assessment beginning on or after 1 April 2022, the 2022 and 2023 financial year is also provided:
Year-end 2022 | Company A | Company B | Company C |
Current tax rate: | 28% | 28% | 28% |
Opening deferred tax rate: | 28% | 27% | 27% |
Adjustment included in deferred tax reconciliation: Effect of Deferred tax rate change on opening balance: Effect of Deferred tax rate change on closing balance: | (1%) | ||
Closing deferred tax rate: | 27% | 27% | 27% |
Other comments: | Note that the effective deferred tax rate will not be 27% as it will be adjusted for those deferred tax benefits or deductions expected to be obtained or incurred during the period to the effective date. | ||
Year-end 2023 | Company A | Company B | Company C |
Current tax rate: | 28% | 28% | 27% |
Opening deferred tax rate: | 28% | 27% | 27% |
Adjustment included in deferred tax reconciliation: Effect of Deferred tax rate change on opening balance: | |||
Closing deferred tax rate: | 27% | 27% | 27% |
Other comments: | Company C’s year of assessment started after 1 April 2022, their current tax will therefore be 27%, while Company A and Company B will only qualify for the 27% in the next year. | ||
Because there is so much confusion about this in South Africa, the Financial Reporting Standards Council issued Financial Reporting Guide 1 to explain exactly this. Please refer to this should you need any guidance.
With these impacts plus the proposed reduction in what corporates may claim against their assessed losses, one has to consider whether this will really be a tax relief...?
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