Tan Eng Juan and Tan Kai Guan, two Associate Professors from NTU wrote a very interesting article on “Accounting for Deferred Tax on Investment Property in Sep/Oct2009 Student Accountant.
Their paper argued that we should NOT provide for deferred tax on investment property if the gain on disposal of those properties is NOT taxable. If gain on disposal is a badge of trade ie. such gains are thus taxable, then deferred tax should be accounted for.
Their supporting arguments in favour of their position:-
a) FRS12 said deferred tax should only be accounted for if and only if “it is probable that recovery or settlement of that carrying amount will make future tax payments larger (smaller) …” ==> In the absence of capital gains tax in Singapore and if the profit/loss on disposal has no tax implication, then why are we wasting time accounting for deferred tax?
b) If fair value adjustment to asset values have no tax implications on disposal, then why are we accounting for deferred tax? We should NOT account for deferred tax for reason that the fair value adjustments are reflected in P&L and thus affect the current profitability and thus tax expense.
c) Even if higher fair value is due expected higher rental for its properties, there is still NO basis to account for deferred tax on the higher fair value. Why?
As the higher rental income for each future period would be subject to income tax and thus higher tax expense for that future period, there is thus no basis to subject changes in fair value to deferred tax.
If both these professors are correct, what are the implications for entities that had been accounting for deferred tax all these years on non-taxable gains even if they were to be realised in the future?