Tax Part 3

Quick reference

• 00:05 Can't quite seem to finish off the tax theory book.
• 00:07 Quite frankly,
• 00:08 if you think about it, we're looking through tax in less than 15 minutes.
• 00:11 That's pretty impressive.
• 00:13 Let me return to the example I was looking at last time, where I actually explained
• 00:18 that a control account set up like an interest payable account may not work.
• 00:23 You get this misbalance, and you're wondering what on earth is going on.
• 00:28 I explained some of this might be down to deferred tax.
• 00:31 We talked about tax losses being one particular concept of deferred taxes.
• 00:35 It's tax that you might get back in the future.
• 00:37 We also got depreciation as a common cause of deferred tax and
• 00:41 I looked at aboth accounting and tax depreciation here.
• 00:45 And compared the differences between them to get the TTD the taxable timing
• 00:49 difference.
• 00:49 So you're seeing here one, for instance, the depreciation under accounting is 25
• 00:54 but under tax is 50 is a benefit of 25 because my profits will be lower for
• 00:59 tax purposes so I will pay less tax.
• 01:02 But how I show it in the balance sheet is to multiply that TTD
• 01:05 by the prevailing tax rate at the time of the balance sheet, which let's say is 30%.
• 01:10 Would therefore be $7.50.
• 01:13 And that would be showing me that I have actually had a benefit here.
• 01:19 Now it's good news now, but it's bad news later.
• 01:23 And this brings up the idea of deferred tax.
• 01:26 So I want to explain deferred tax using, wait for it, big drum roll please.
• 01:31 The Liam theory of smiley faces.
• 01:35 Let's have a box, put some stuff in it.
• 01:39 So now and in the future I've got my deferred tax liability,
• 01:42 DTL and my deferred tax asset, DTA.
• 01:46 Now, what I've got here, is this a deferred tax asset or
• 01:50 a deferred tax liability?
• 01:52 Well, the key word here is deferred.
• 01:55 That means look at the future.
• 01:57 Are we gonna be worse off in the future or better off in the future?
• 02:01 And clearly,
• 02:02 we're going to end up having to pay $3.75 worse in years three and four.
• 02:08 So it's good news now, we're $7.50 up now.
• 02:11 Bad news later, NPV positive, today positive cost of capital, but
• 02:16 it gives rise to a deferred tax liability.
• 02:18 So smiley faces at the ready.
• 02:21 Now I'm happy, but in the future I'm gonna be sad.
• 02:27 So this is a deferred tax liability.
• 02:30 This is where you have an accelerated capital allowance.
• 02:32 Now consider that to a tax loss where now, I've made a whopping big loss.
• 02:38 I'm very sad.
• 02:40 Assuming the company still goes, if I make a profit in the future,
• 02:43 I will be able to offset my loss against future profits,
• 02:46 which will mean I pay less tax in the future.
• 02:49 And that will make me happy.
• 02:51 So this is the idea of deferred tax assets and losses.
• 02:57 Okay, having done that, then you see I've moved the closing tax payable down a bit.
• 03:01 I've got to put some more stuff in here.
• 03:04 And what have I got to put in?
• 03:05 I've got to put in a movement to deferred tax assets and
• 03:08 a movement in deferred tax liabilities.
• 03:10 Now these things go on the balance sheet and
• 03:13 everything between the beginning and the end of a control account is a movement.
• 03:18 So I have to say movement in DTA, a movement in DTL.
• 03:20 And I've gotta be careful when working with balance sheet numbers.
• 03:24 More on that in the actual exercise.
• 03:26 Now if this 37 is directly attributable to just one of these, which is it?
• 03:32 It should be, the number should be 10 plus 20 minus 10 is 20.
• 03:35 It's actually 37.
• 03:36 So I'm 17 worse off.
• 03:38 And now its the future.
• 03:39 So it won't be a DTA, it'll actually be a DTL that's come home to roost.
• 03:44 So it will be a deferred tax liability moving into the tax liability section.
• 03:49 And that's what's going on.
• 03:51 So to summarize, deferred tax assets come from tax losses created and
• 03:56 used, and they can be multiplied by the current tax rate and
• 03:59 put on the balance sheet if an auditor will let you.
• 04:03 In an actual financial model,
• 04:04 you can do what you like because it's not a statutory account.
• 04:07 Unless you've got what are called Sarbanes-Oxley requirements where certain
• 04:11 legislative authorities around the world are actually relying on your spreadsheets.
• 04:16 But otherwise it's okay.
• 04:19 Another example can be from depreciation.
• 04:22 Where actually the tax depreciation is slower than the accounting depreciation.
• 04:26 So the opposite of what I've got, that would mean bad news now, good news later.
• 04:30 And again that will be a deferred tax asset.
• 04:33 Whereas deferred tax liability is simply going to be the other way around,
• 04:37 which is what I showed you.
• 04:39 And that is the most common cause of an actual deferred tax liability.
• 04:44 Because tax authorities want to incentivize you to actually build more and
• 04:50 more stuff, build more jobs.
• 04:51 You spend lots of CAPX, and go out, make money for the country, and
• 04:56 they can tax everybody.
• 04:58 So ends the part of political speech.
• 05:01 Taxation control account looks a bit different from the others,
• 05:04 it's actually got six lines.
• 05:06 We've got the opening tax payable, we have the tax expense or
• 05:10 credit after the permit adjustments.
• 05:11 We've got the tax paid, and then we have movements and deferred tax assets and
• 05:15 deferred tax liabilities to give us our closing tax payable.
• 05:18 That means we've got six lines which means we have five calculations to do.
• 05:23 So it's quite meaty what we've got to do in this area.
• 05:26 So if you're sitting comfortably, let's get going.

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