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Australia

IAS 12 deferred tax in Australia: AASB 112 Income Taxes (equivalent to IAS 12, with limited Australian-specific modifications)

Australia applies AASB 112 Income Taxes, which is the Australian equivalent of IAS 12 and is substantively identical to the IASB standard. The corporate tax rate is 30% for most entities, with a reduced base rate of 25% for companies with aggregated turnover below AUD 50M that derive no more than 80% of their assessable income from base rate entity passive income. For deferred tax purposes, IAS 12.47 (AASB 112.47) requires the rate expected to apply when the temporary difference reverses. Companies confident they'll remain base rate entities use 25%; all others use 30%. The distinction matters for groups with both large and small entities, where deferred tax rates differ across subsidiaries. Australia's tax system uses the concept of a "tax base" explicitly in its income tax legislation (the ITAA 1997 uses the term "tax cost base" for CGT assets), which aligns well with IAS 12's framework. However, the Australian tax system also has features not found in many other jurisdictions: the dividend imputation system (franking credits), the capital gains tax (CGT) discount for assets held longer than 12 months (applicable to individuals and trusts but not companies), and the tax consolidation regime that allows wholly-owned groups to be treated as a single entity for tax purposes. Each of these affects the deferred tax calculation in specific ways.

Regulatory context: Australian Securities and Investments Commission (ASIC); Australian Taxation Office (ATO) for tax administration; Australian Accounting Standards Board (AASB)

ASIC has published several regulatory guides and media releases addressing deferred tax. ASIC Report 774 (December 2023) on financial reporting surveillance findings identified deferred tax as a recurring area of concern. Specific findings included: entities recognising deferred tax assets on carried-forward losses without sufficient evidence of probable future taxable profits, inadequate disclosure of the assumptions underlying the recoverability assessment, and failure to apply the correct tax rate when entities expected to transition between base rate and standard rate status. ASIC's focus areas for financial reporting (published annually) consistently include accounting estimates, and deferred tax asset recoverability is explicitly mentioned. ASIC has stated that it will challenge entities that recognise deferred tax assets on losses where the entity has a history of losses and the profit forecast relies on untested assumptions. The AASB issued a specific staff FAQ on the interaction between AASB 112 and the tax consolidation regime, clarifying that temporary differences should be calculated at the individual asset level within the consolidated tax group.

Practical guidance for Australia

Australian practitioners need to address the tax consolidation regime, which is the most distinctive feature of Australian deferred tax. When a wholly-owned group forms a tax consolidated group, the group is treated as a single entity for tax purposes. The tax cost bases of the subsidiary's assets are reset on entry to the group (using the allocable cost amount methodology in Division 705 ITAA 1997), which can create significant temporary differences. A subsidiary acquired for AUD 100M with assets that have IFRS carrying amounts of AUD 80M may have its tax cost bases reset to values that total AUD 95M, creating a different set of temporary differences from those that existed before the consolidation. The tax cost base reset applies to each asset individually, based on the relative market values and the allocable cost amount. This reset is a one-off event on entry to the group, and the resulting temporary differences form the opening deferred tax position for that subsidiary within the group. Practitioners should verify the Division 705 calculation for each acquisition, because errors in the allocable cost amount flow through to every subsequent deferred tax computation. For the franking credit system, deferred tax itself doesn't directly interact with franking, but the payment of tax (current and deferred becoming current) generates franking credits. Entities forecasting future dividend payments should consider whether the deferred tax liability, when it reverses and becomes current tax, will generate franking credits that support future dividend imputation.

Audit expectations

ASIC and the Australian audit oversight body (the Financial Reporting Council's audit inspection programme, now conducted by ASIC) have identified deferred tax as a common deficiency. Auditors should independently recalculate the Division 705 allocable cost amount for each acquisition within the tax consolidated group, because errors in this calculation affect the tax cost bases of all assets acquired. Auditors should also verify the entity's base rate entity status for each reporting period, because a change in status from 25% to 30% (or vice versa) requires re-measurement of all deferred tax balances. For entities with research and development tax incentives (the R&D Tax Incentive under Division 355 ITAA 1997 provides a refundable or non-refundable tax offset), auditors should check whether the incentive is treated under AASB 112 or AASB 120 (Government Grants). The classification affects the deferred tax treatment, and ASIC has noted inconsistency in practice.

Australia-specific considerations

Australia's R&D Tax Incentive is structured as a tax offset rather than a deduction. For entities with turnover below AUD 20M, the offset is refundable at 43.5% (a 18.5% premium above the 25% base rate). For entities with turnover above AUD 20M, the offset is non-refundable at a rate equal to the entity's corporate tax rate plus 8.5% for notional deductions up to AUD 150M. The treatment of the offset as a tax credit (IAS 12) or a government grant (IAS 20) affects the deferred tax computation. If treated as a tax credit, it reduces the current tax liability but doesn't change the temporary difference. If treated as a government grant, it affects the carrying amount of the asset and therefore the temporary difference. Australian thin capitalisation rules (Division 820 ITAA 1997, reformed from 1 July 2023 to introduce a fixed ratio test at 30% of tax EBITDA) limit interest deductions. Denied interest can be carried forward, creating a deferred tax asset. The new rules are more restrictive than the previous safe harbour test, and entities transitioning to the new rules may find that previously deductible interest is now denied, creating new carried-forward amounts and associated deferred tax assets. The Australian CGT regime includes provisions for rollover relief on certain corporate restructurings (Division 615, Division 122, and Division 124 ITAA 1997). Rollover relief defers the tax liability on a capital gain, which creates or extends a temporary difference. The tax base of the asset is preserved at the original cost base despite the accounting carrying amount potentially changing.

Common inspection findings

ASIC found entities recognising deferred tax assets on carried-forward losses where the entity had accumulated losses for five or more years and the profit forecast relied on unsubstantiated revenue growth assumptions.

The Division 705 allocable cost amount calculation was not independently verified by auditors for acquisitions within the tax consolidated group, leading to incorrect tax cost bases and misstated deferred tax.

Entities failed to reassess base rate entity status annually, continuing to use 25% when the entity's aggregated turnover had exceeded the AUD 50M threshold.

R&D Tax Incentive classification (IAS 12 vs IAS 20) was inconsistent across entities in the same industry without adequate justification for the different treatments.

Transition to the new thin capitalisation rules (1 July 2023) created carried-forward denied interest that entities failed to recognise as a deferred tax asset.