ACC2100 · Financial Accounting
Accounting for Income Tax: Current Tax (AASB 112)
Current Tax (Week 5, AASB 112) reconciles accounting profit to taxable profit and computes the tax actually payable for the year. You start from accounting profit and adjust for the items where the tax law and the accounting standards measure things differently — adding back non-deductible expenses and accounting amounts, and deducting tax amounts and exempt revenue — then apply the 30% rate.
This is an MCQ-pool topic (Weeks 3, 4, 5) and the foundation for the 25-mark deferred-tax question. Expect the current-tax worksheet, the permanent-vs-temporary distinction, and the creation and recoupment of tax losses.
What this chapter covers
- 01Accounting profit (accrual) ≠ taxable profit (cash basis for certain items)
- 02Current-tax worksheet: start at accounting profit, add and deduct the differences, reach taxable profit
- 03Add back: non-deductible expenses and accounting expenses; deduct: tax-deductible amounts and accounting revenues that differ
- 04Current Tax Liability = taxable profit × 30%; Dr Income tax expense (current) / Cr Current tax liability
- 05Permanent differences (never reverse): exempt income, goodwill impairment, entertainment, fines and penalties
- 06Temporary differences (reverse over time): revenue in advance, accrued expenses, prepayments, doubtful debts, depreciation rate differences
- 07Tax losses create a deferred tax asset (Dr DTA / Cr Income tax revenue); exempt income is added back first
- 08Loss recoupment in a later profitable year (Dr Income tax expense / Cr DTA / Cr Current tax liability)
Current-tax worksheet from accounting profit to tax payable
- 2 marksAdd back the non-deductible and accounting amounts: + entertainment 9,000 + goodwill impairment 15,000 + accounting depreciation 50,000 + annual leave expense 30,000 = +104,000, giving 420,000 + 104,000 = 524,000.
- 1 markAdd the cash rent received (the taxable amount): + 27,000, giving 524,000 + 27,000 = 551,000.
- 2 marksDeduct the tax amounts: − tax depreciation 65,000 − annual leave paid in cash 22,000 − accounting rent revenue 24,000 = −111,000.
- 2 marksTaxable profit = 551,000 − 111,000 = $440,000. Current tax = 440,000 × 30% = $132,000. Journal: Dr Income tax expense (current) 132,000 / Cr Current tax liability 132,000.
Key terms
- Taxable profit
- The profit figure on which income tax is actually assessed, derived from accounting profit by adjusting for items the tax law treats differently. Current Tax Liability = taxable profit × the tax rate (30% in this unit).
- Permanent difference
- A difference between accounting and taxable profit that never reverses — exempt income (not taxable) and amounts never deductible (goodwill impairment, entertainment, fines and penalties). It affects current tax only, never deferred tax.
- Temporary difference
- A difference that reverses in a later period — e.g. revenue received in advance, accrued expenses, prepayments and depreciation rate differences. It affects current tax now and creates the deferred tax balances dealt with in Week 6.
- Current tax liability
- The tax payable to the ATO on the current period's taxable profit: taxable profit × tax rate. Recorded as Dr Income tax expense (current) / Cr Current tax liability.
- Tax loss
- A negative taxable profit. It generates a deferred tax asset (the future tax saving when recouped): Dr DTA / Cr Income tax revenue. Exempt income must be added back before the recoverable loss is determined.
Accounting for Income Tax: Current Tax (AASB 112) FAQ
What's the difference between a permanent and a temporary difference?
A permanent difference never reverses — the item is recognised by one set of rules and simply ignored by the other forever (exempt income, entertainment, fines, goodwill impairment). A temporary difference reverses over time — the item is recognised by both sets of rules, just in different periods (revenue in advance, accrued leave, prepayments). Permanent differences only affect current tax; temporary differences are what create deferred tax in Week 6.
Which way do I move each item on the worksheet?
Start from accounting profit and, for every item where the tax law differs, add back the accounting amount and deduct the tax amount (or vice versa). For example, add back accounting depreciation and deduct tax depreciation; add back accounting expense for annual leave and deduct the cash actually paid; add cash revenue received and deduct the accrual revenue. The rule is: take out what the books recognised, put in what the tax law recognises.
What happens to a tax loss?
A tax loss creates a deferred tax asset equal to the loss × 30%, on the basis that it will reduce tax in a future profitable year (Dr DTA / Cr Income tax revenue). You must add back any exempt income before computing the recoverable loss, because exempt income can't contribute to a loss. When the company later returns to profit, it recoups the loss and the DTA is used up.
Why is goodwill impairment added back?
Because goodwill impairment is never deductible for tax — it is a permanent difference. So it reduces accounting profit but is added straight back when computing taxable profit, with no deferred-tax consequence. The same treatment applies to entertainment and to fines and penalties.
Exam move
Make the worksheet a reflex. Always lay it out vertically: accounting profit, an +adds block, a −deducts block, then taxable profit × 30%. For every line, ask the same question — what did the accounts recognise versus what does the tax law allow — and move only the difference in the right direction. Keep a memorised list of permanent differences (exempt income, goodwill impairment, entertainment, fines) so you can clear them out without hesitation, leaving the temporary differences to carry forward to deferred tax. Practise the tax-loss pattern separately: add back exempt income first, multiply the recoverable loss by 30% for the DTA, and rehearse the later recoupment entry. This is the cheapest possible preparation for the 25-mark Week 6 question, which assumes Week 5 is automatic.
