Cascading reduction in tax rates to complicate financial reporting

Following the Senate deal on Friday the 31st March 2017, a gradual reduction in the company tax rate will apply as follows:

  • Companies with turnover under $10m will pay tax at 27.5% from the 2016-17 financial year;
  • Companies with turnover under $25m will pay tax at 27.5% from the 2017-18 financial year;
  • Companies with turnover under $50m will pay tax at 27.5% from the 2018-19 financial year;
  • Companies with turnover under $50m will pay tax at 27% from the 2024-25 financial year;
  • Companies with turnover under $50m will pay tax at 26% from the 2025-26 financial year;
  • Companies with turnover under $50m will pay tax at 25% from the 2026-27 financial year;

This is likely to complicate financial reporting for the measurement of deferred tax assets and liabilities. Deferred tax assets and liabilities are required to be measured at the tax rates that are expected to apply when the asset is realised or the liability is settled and the tax rate which should be used is based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. 

A detailed schedule of when deferred tax assets and liabilities are likely to be settled is not normally performed nor required by the accounting standards when tax rates are constant but this changes when the tax rates are reducing in a gradual manner. 

For instance, a company with say $1m in losses (which meet the recognition requirements for a deferred tax asset) will need to assess when these losses are likely to be realised and apply the correct tax rate as outlined above.  A deferred tax asset for these losses would be $275,000 at the 27.5% tax rate and drop to $250,000 if the 25% rate were to apply.  This may result in a material change in the asset for financial reporting and audit purposes.

Since this change in the tax rates for companies with turnover under $50m has been enacted entities will need to account for the impact of this change in 30 June 2017 reports.  A detailed schedule of when deferred tax assets and liabilities are likely to be settled should commence immediately as well notifying potential stakeholders of the impact of this change.

The Government is still planning to reduce the company tax rate to 25% for all companies by the 2026-27 financial year, at Moore Stephens we will keep you updated with the progress and impact of any changes in future bulletins.