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IAI Actuarial Core Principles · Business Finance · Personal and corporate taxation

Which statement best describes a deferred tax liability arising from capital allowances that exceed accounting depreciation?

When capital allowances run ahead of accounting depreciation, current tax is lower than the accounting tax charge, and the difference reverses in later years, increasing tax then. This timing difference creates a deferred tax liability, unlike permanent differences such as disallowed fines.

  1. ATax paid now is lower than the accounting tax charge, so tax is expected to become payable in later periods when the timing difference reversesCorrect
  2. BTax paid now is higher than the accounting charge, creating a refund in future
  3. CThe difference is permanent and never reverses
  4. DIt arises because fines are not deductible for tax
  5. It arises only when the company makes a loss

Explanation

Faster tax allowances reduce current taxable profit and tax payable, but the asset's accounting depreciation later exceeds allowances, so taxable profit rises later. This is a timing difference giving a deferred tax liability. Permanent differences like fines do not create deferred tax.

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