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Would Incurring A Loss For Tax Purposes Lead To The Recognition Of A Tax-Related Asset In The Financial Statements? Why? Answer

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Question: Would Incurring A Loss For Tax Purposes Lead To The Recognition Of A Tax-Related Asset In The Financial Statements?

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  • Undoubtedly tax determination for a large corporate company is complex because of the inherent complexity and risk associated with the business. According to studies, it is found that Australian companies only pay tax on the profit generated from the Australian market and shift their profits to avoid taxes (Brown, 2020). In this regard, it is required to mention that companies in Australia pay 30% of their income as federal tax but small or medium size corporations pay 25% of their income as federal tax (Gov.au, 2023). There is a range of reasons which can help large corporate groups to lower taxable incomes and try to generate more economic profit which includes the risk of loss.
  • On the other hand, different taxation policies for trusts, tax concessions and investment of offshore firms in Australian firms are another reason behind it (Wang et al. 2020). Therefore, it can be said that companies can incur a loss for tax when the total expense is more than the total revenue under the tax reporting rules under specific government jurisdiction.
  • Further, it is found that if the prior identification of liabilities as well as assets affects the transaction of accounting profit or taxable profit companies can incur a loss of tax. Besides, identification of deferred tax assets is more than 50% then the company can have enough taxable profits to cover the temporary deductible difference of deferred tax assets (Midiastuty et al. 2023). This is indicating that loss causes can be recognised as taxable amounts in the financial statement as a tax-related asset if the firm covers the temporary deductible difference. On the other hand, incurring financial losses in any specific fiscal year, companies in Australia can lower taxable income in that particular year (Sierpinska-Sawicz and Sierpinska, 2021).
  • Besides, if the government changes tax rules and accounting rules another scenario can arise when companies would be able to have deferred tax. Moreover, in this particular scenario, the authority would need to recognise companies' income statements before the recognition by tax authorities. However, there is no significant time limit for deferred tax asset recognition. According to the accounting standard AASB 112 it is found that incurring a loss for tax can lead to the recognition of a taxable asset if a transaction is recognised in the same or different period outside the profit and loss statement (Aasb.gov.au, 2023). This is indicating that tax-related assets can be recognised if the authority found any outside transaction which is not mentioned in the income statement.
  • Additionally, the Australian tax law recognised that companies which are operating in Australia can and do incur business loss if such losses carry forward and repossess for tax purposes but it needs to be against the subsequent profit generated by the company (Gov.au, 2023). In contrast, carrying back and recouping against the profit of the previous year in specific circumstances one company can incur business loss but a similar business needs to prove continuity of ownership test which ensures integrity to tax rules (Gov.au, 2023). Therefore, it can be said that there are multiple scenarios in which the authority can recognise tax-related assets in the financial statements which incur the loss of tax purpose.

References:

  • Aasb.gov.au, (2023). "Compiled AASB Standard: Income tax" Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB112_08-15_COMPfeb2018_01-19.pdf[Accessed On: 03.05.2023]
  • Brown, R.J., 2020, September. Voluntary tax disclosures and corporate tax avoidance: Evidence from Australia. In Australian Tax Forum (Vol. 35, No. 3, pp. 391-429).
  • Gov.au, (2023). "Tas and corporate Australia" Available at: https://www.ato.gov.au/general/tax-and-corporate-australia/tax-is-not-simply-30--of-profit/[Accessed On: 03.05.2023]
  • Midiastuty, P.P., Aprila, N., Putra, D.A. and Sari, K.W., 2023, January. Effect of tax planning, deferred tax burden, and deferred tax asset on earnings management. In Proceeding of International Conference on Accounting and Finance (Vol. 1, pp. 56-65).
  • Sierpinska-Sawicz, A. and Sierpinska, M., 2021. Depreciation Capital as a Source of Financing of Mining Companies Activities. Contemporary Economics, 15(4), pp.429-442.
  • Wang, F., Xu, S., Sun, J. and Cullinan, C.P., 2020. Corporate tax avoidance: A literature review and research agenda. Journal of Economic Surveys, 34(4), pp.793-811.
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