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Taxable vs Accounting: Setting the record straight
Differences in Tax and Accounting
Posted 23 January 2012 under
There is a widely believed myth that all expenses and incomes of a business can lower taxes. The Taxable vs Accounting deductibility argument is one which will forever rage on. The question is: what is the difference?
Many countries around the world stick to a particular set of accounting standards released by the International Accounting Standards Board (IASB), while those same countries have their own individual tax laws. This leads to a difference between what’s allowable for tax purposes and what’s allowable for accounting purposes.
In order to account for this, many years ago the IASB introduced a standard dealing directly with what is known as 'Deferred Tax'. Deferred Tax accounts for some of the differences between Tax Law and Accounting Law. Of course there are some differences which cannot be dealt with from the Tax Law side, and in South Africa the South African Revenue Service (SARS) makes allowances for this.
In your annual tax return, be it for an individual (ITR12) or for a company (IT14), this difference is questioned. On your ITR12 under 'Local Income', there are separate questions for Accounting Profit and Taxable Profit. The return requires you to enter in your accounting expenses and then asks a series of questions relating to Taxable Deductions. This is done by requiring you to add back certain allowances and then deducting other taxable allowances/deductions which do not form part of accounting norms. To the untrained eye this part of the form seems confusing if you are unaware of the difference. That's why we think it is important that you understand what the difference is.
When you are next completing your tax return and looking at this section, remember to read each section very carefully and that TaxTim is structured to help you with confusing issues just like this one. www.taxtim.com