Abstract

With the changes in time, organisation needs to set up harmonisation in its accounting nd taxation recording framework. Taxes are the revenue receipts received by the government from its citizens which in turn is spent on the welfare and development purposes of citizens. The most commonly imposed taxes by the governments are Direct Taxes and Indirect Taxes Direct taxes are charged based on the income or wealth earned by an individual or entities. The more the earnings, the more are the liability of an individual. While on the other hand, Indirect taxes are charged on the revenue or turnover of the assessee for which the burden of payment is shifted on to other individuals. Accounting for taxation is a crucial part of maintaining books of accounts. It helps in ascertaining the actual liability of the taxpayer and gives a clear picture of the amount payable to the government. Some of the basic concepts which help in a better understanding of the terms with relevant examples are explained in this assignment. Also, the annual report of Aurizon Holding Limited has been analyzed to give a detailed explanation and clarification about the calculations and reporting requirements. 

1. Terms used in Accounting of Taxation

Accounting profit

The Assessees are required to prepare their accounting statements or books based on the Accounting Standards as prescribed by the accounting regulatory bodies of the nation. The profit derived after deducting all the expenses is termed as accounting profit from the total revenues of the assessees.

In the Consolidated statement of income of the Aurizon Holding Limited, the accounting profit is the profit before income taxes that have been calculated by deducting all the expenses and losses from the revenues and other incomes of the company. For the year 2019, it is $681.9 million and for the year 2018, it is $801.3 million. 

Source:- (Aurizon Holding Limited, 2020).

Taxable profit

Taxable profits refer to the income or profits derived by the tax regulatory rules that are calculated by deducting or adding the disallowances and allowances. These types of profits are calculated to determine the actual tax liabilities of the assessees as tax rates are charged on these profits. Taxable profits and accounting profits are different terms because accounting profit is the one that is derived by following the relevant applicable accounting rules and taxable profits are derived by following the relevant applicable taxation rules. (Towery, E. M. (2017)

The actual tax liability of the assessees may only be checked from the tax returns files by them and not the financial statements (Aurizon Holding Limited, 2020).

Temporary Differences

Temporary differences refer to the difference in the items of the financial statements of the assessee and the tax return of assesses that are subject to reversal in any of the coming year(s). In other words, temporary differences are the outcome of some transactions or events that are booked in the financial books of accounts but are not subject to be booked for computation of taxable profit in CY (Current Year) and are subject to reversal in any of the coming financial year(s) (Aurizon Holding Limited, 2020).

In the Consolidated statement of income of the Aurizon Holding Limited, the temporary differences have been aroused due to the recording of impairment losses because these losses are not subject to be booked for computation of taxable profit in CY (Current Year) but are subject to reversal in any of the coming financial year(s).

Taxable Temporary Differences

Taxable Temporary differences refer to temporary differences aroused due to the difference in the items of the financial statements of the assessee and the tax return of assesses that are subject to reversal in any of the coming year(s) and will end up in sum of the taxable amount at the time of reversal. In other words, Taxable temporary differences are the outcome of some transactions or events that are booked in the financial books of accounts but are not subject to be booked for computation of taxable profit in CY (Current Year) and are subject to a reversal which will create a tax liability for the assessee in any of the coming financial year(s) (Aurizon Holding Limited, 2020).

Taxable temporary differences are aroused when the income tax regulatory bodies allow higher depreciation than recorded depreciation. In the coming financial year, this depreciation will get reversed and end up in the creation of tax liability for the assessee.

Deductible Temporary Differences

Deductible Temporary differences refer to temporary differences aroused due to the difference in the items of the financial statements of the assessee and the tax return of assesses that are subject to reversal in any of the coming year(s) and will end up in the reduction of the taxable amount at the time of reversal. In other words, deductible temporary differences are the outcome of some transactions or events that are booked in the financial books of accounts but are not subject to be booked for computation of taxable profit in CY (Current Year) and are subject to a reversal which will reduce the tax liability for the assessee in any of the coming financial year(s).

Deductible temporary differences are aroused when the income tax regulatory bodies disallow any expense like bonuses that are allowed on actual payment. In the coming financial year, this bonus expense will get reversed as will get paid and end up in the reduction of tax liability for the assesse (Aurizon Holding Limited, 2020).  

Deferred Tax Asset

Deferred Tax Assets refer to the assets that are recorded in statements of final accounts due to the presence of temporary differences that will be deductible in the coming financial year(s). Deductible temporary differences are the outcome of some transactions or events that are booked in the financial books of accounts but are not subject to be booked for computation of taxable profit in CY (Current Year) and are subject to a reversal which will reduce the tax liability for the assessee in any of the coming financial year(s). Deferred Tax Assets are booked in the final accounts to avail benefit of taxes in a future year(s). Relevant Accounting Standards prescribed by the regulation authorities state that Deferred tax assets shall only be booked into final accounts after making adequate estimates that the company will earn sufficient income in a future year(s) against the booked amounts of Deferred Taxes. Additionally, the management of the company shall conduct a review at least once at the end of the financial year to determine the value that deferred tax asset could fetch in the future year(s) (Aurizon Holding Limited, 2020).

Assessees shall create deferred tax assets for any expense like bonuses that are allowed on actual payment and will remain disallowed for the year in which it is booked on the accrual basis. In the coming financial year, this bonus expense will get reversed as will get paid and end up in the reduction of tax liability for the assessee.

Deferred Tax Liabilities

Deferred Tax Liabilities refer to the liabilities that are recorded in statements of final accounts due to the presence of temporary differences that will be taxable in the coming financial year(s). Taxable temporary differences are the outcome of some transactions or events that are booked in the financial books of accounts but are not subject to be booked for computation of taxable profit in CY (Current Year) and are subject to a reversal which will create a tax liability for the assessee in any of the coming financial year(s). Deferred Tax Liabilities are booked in the final accounts to show the liability for taxes in the future year(s). These liabilities are created as an outcome of the taxable temporary differences (Aurizon Holding Limited, 2020).

Deferred Tax Liabilities shall be created when the income tax regulatory bodies allow higher depreciation than recorded depreciation. In the coming financial year, this depreciation will get reversed and end up in the creation of tax liability for the assesse (Aurizon Holding Limited, 2020).

2. Creation/Recognition of Deferred Taxes

Deferred Taxes are the outcomes of the temporary differences for the items that are not in common between final accounts and taxation accounts that will be reversed in the future. There are two types of deferred taxes that may be recorded in the final accounts of the assessees. One is Deferred Tax Assets and the other is Deferred Tax Liabilities. These two items are booked by the following criteria (Aurizon Holding Limited, 2020).

Deferred Tax Assets  

Deferred Tax Assets are created when profit before tax or profits recorded in the final accounts of the assessees are less than the taxable profit due to some deductible temporary differences. A lower profit before tax or profits recorded in the final accounts of the assessees results in higher liability of taxes in the current year but simultaneously reduces the liability of taxes for coming or next year(s)(Hamilton, R. (2018). Relevant Accounting Standards prescribed by the regulation authorities state that Deferred tax assets shall only be booked into final accounts after making adequate estimates that the company will earn sufficient income in a future year(s) against the booked amounts of Deferred Taxes. Additionally, the management of the company shall conduct a review at least once at the end of the financial year to determine the value that deferred tax asset could fetch in the future year(s). (Watson, L. (2018))

Deferred Tax Liabilities

Deferred Tax Liabilities are created when profit before tax or profits recorded in the final accounts of the assessees are more than the taxable profit due to some taxable temporary differences. A higher profit before tax or profit recorded in the final accounts of the assessee's results in higher liability of taxes in the current year but simultaneously increases the liability of taxes for coming or next year(s) (Ladas, & Samara, A. D. (2017). Deferred Tax Liabilities are booked in the final accounts to show the liability for taxes in the future year(s). These liabilities are created as an outcome of the taxable temporary differences (Aurizon Holding Limited, 2020).

3. Expenses for Taxation

Aurizon Holding Limited is a company that is listed with ASX and engaged in the business of providing transport solutions across the globe. Upon going the final accounts reported by the company, it has been observed that the tax expenses for 2019 are $208.6 million and for 2018 are 241.2. The taxes for Aurizon Limited have been calculated using a tax rate of 30% for 2019 and 30% for 2018. 

(Source: Annual Report 2019 of Aurizon Holding Limited)

4. How total expenses for taxes are calculated?

Total expense for taxes is commonly calculated by adding Tax expenses for the current year, deferred tax expenses for the current year, and adjusting the tax expenses/benefits belonging to the prior year(s). (Widiatmoko, & Mayangsari, I. (2016).

Aurizon Holding Limited has done the calculation of total expenses for taxes by adding Tax expenses for the current year, deferred tax expenses for the current year, and adjusting the tax expenses/benefits belonging to the prior year(s). The adjustments of tax expenses/benefits include losses of Aurizon Holding Limited from its discontinued operations. Below provided is the table showing all the items that have been added or adjusted in the calculation of total expenses of taxes for Aurizon Limited (Aurizon Holding Limited, 2020).

Source: - (Aurizon Holding Limited, 2020).

Current Tax expenses are calculated on the taxable profits that are derived according to the rules of taxation. The calculation of current tax expenses may be observed from the returns of taxes filed by the companies. Here, the financial annual reports are being considered for Aurizon Limited and not the tax returns (Aurizon Holding Limited, 2020). 

A thought may be developed in minds of analysts that why the tax expense is not computed just by applying the rate of tax over the sum of profit before taxes? In answer to this question, the current tax expenses are calculated by applying the rate of taxes over the taxable profit and this calculation is done in the tax returns and not the financial annual return. In financial annual reports, the current tax expenses calculated in tax returns along with other components form the part of total tax expenses (Aurizon Holding Limited, 2020).

5. Reported Deferred Taxes in final accounts of Aurizon Holding Limited

Deferred Tax Assets are created when profit before tax or profits recorded in the final accounts of the assessees are less than the taxable profit due to some deductible temporary differences. A lower profit before tax or profits recorded in the final accounts of the assessees results in higher liability of taxes in the current year but simultaneously reduces the liability of taxes for coming or next year(s). (Morris, J. L. (2017))

Deferred Tax Liabilities are created when profit before tax or profits recorded in the final accounts of the assessees are more than the taxable profit due to some taxable temporary differences. A higher profit before tax or profit recorded in the final accounts of the assessee’s results in higher liability of taxes in the current year but simultaneously increases the liability of taxes for coming or next year(s). (Morris, J. L. (2017))

Arizona Holding Limited has reported Deferred Tax (Liabilities) in the balance sheet (consolidated) for the year-end on 30^th June 2019. Deferred Tax (Liabilities) for 2019 are $537.4 million and for 2018 are 479.5 million (Aurizon Holding Limited, 2020).

(Source: Annual Report 2019 of Aurizon Holding Limited)

Aurizon Holding limited has set off the amounts of deductible temporary difference from taxable temporary differences and has created deferred tax liabilities for the net temporary differences. The reason for the temporary difference is the difference in the value of assets like noncurrent assets, consumables, spares, financial instruments, etc. between the final accounts and tax base values (Aurizon Holding Limited, 2020). 

6. Reporting of Current Taxes in the Balance sheet 

The amount of taxes calculated as per taxation rules which are yet to be paid to the government as on balance sheet date are required to be reported in the balance sheet on the liabilities side.

Aurizon Holding Limited’s current tax liability that has been reported in the balance sheet is $40.9 million for 2019 and $ 61.2 million (Aurizon Holding Limited, 2020).

The amount representing expenses for income taxes and current tax liabilities are not same as expenses for income taxes are those which are calculated by including expenses for current tax, expenses for deferred tax, etc. and current tax liabilities are those which are calculated by deducting the amount of income taxes paid during the year from the total payable income taxes (Aurizon Holding Limited, 2020).

7. Expenses for taxes in CFS (Cash Flow Statement)

Amounts of tax expenses paid to the government in the reporting year are shown in the CFS (Cash flow statements).

Aurizon Holding Limited’s CFS (Cash flow statement) states that the company has paid $145.3 million in 2019 and $110.1 in 2018 for the expenses toward taxes. 

The amount representing expenses for income taxes in CFS (Cash flow statement) and expenses for taxes in the income statement are not same as expenses for income taxes in CFS (Cash flow statement) are those which are paid during the current year to the government and expenses for taxes in the income statement are those which should be paid by the assessee for the current year.

CFS (Cash flow statement) is responsible to show the movement of the company's cash that has come inside and gone outside from the company (Nguyen & Tran, M. D. (2019)). The income statement is responsible to show the income and expenses on an accrual basis that has been earned and expended by the company (Flynn, S., Moretti & Cavanagh, J. (2016)).

(Source: Annual Report 2019 of Aurizon Holding Limited)

8. How Temporary Differences are different from Permanent Differences?

Temporary Differences

Temporary differences refer to the difference in the items of the financial statements of the assessee and the tax return of assesses that are subject to reversal in any of the coming year(s). In another word, temporary differences are the outcome of some transactions or events that are booked in the financial books of accounts but are not subject to be booked for computation of taxable profit in CY (Current Year) and are subject to reversal in any of the coming financial year(s).

Temporary Differences have two variations, one is deductible and the other is taxable. These variations are responsible for the creation and reversal of deferred taxes Aurizon Holding Limited, (2020

Taxable temporary differences are aroused when the income tax regulatory bodies allow higher depreciation than recorded depreciation. In the coming financial year, this depreciation will get reversed and end up in the creation of tax liability for the assessee.

Permanent Differences

Permanent differences refer to the difference in the items of the financial statements of the assessee and the tax return of assesses that are not subject to reversal in any of the coming year(s). In another word, permanent differences are the outcome of some transactions or events that are booked in the financial books of accounts but are not subject to be booked for computation of taxable profit in CY (Current Year) and are not subject to reversal in any of the coming financial year(s).

Permanent Difference once disallowed in tax return will never get allowed in any of the next year(s). They do not have many variations. No deferred taxes are created or reversed due to these types of differences.

Expenses paid as penalties for not complying the rules of taxation give rise with permanent difference and these expenses will never be allowed to be subtracted from revenues of the company to arrive at taxable income. (Aurizon Holding Limited, 2020).

9. Interesting, surprising and insights of recorded items

Aurizon Holding Limited has accounted for its income taxes by following and abiding the relevant accounting standards or rules. The company has prepared its final accounts on an accrual basis that is capable of showing the transactions affected within the company. The current taxes are shown as per the calculation of tax returns. Deferred tax expenses are recorded as part of total tax expenses for all the temporary differences. Deferred Tax Liabilities are shown by setting off the temporary differences that would have resulted in the creation o Deferred Tax Assets. The current tax liabilities shown in the balance sheet represent the amount that is still pending. 

Conclusion

Accounting for taxation is required by the assessees to know the correct amount of tax payable to governments. It involves the study of different terms and concepts that have been covered in the starting part of the assignment. Tax rates and their application on taxable profit determine the total amount that is required to be paid as tax expenses. Income tax expense includes deferred taxes also along with certain adjustments that have been discussed above. Companies are required to report the actual taxes levied, actual taxes paid, and the amount that is still pending for payment in different statements of final accounts.