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IND EX 5.3.4.1 – Deferred tax on investment property at fair value: clawback of tax depreciation and 0% capital gains tax
Publication date: 06 Feb 2024
gx Applying IFRS for the real estate industry - 2023 edition
Reference to standard: IAS 12 para 51C Reference to standing text: 14.96 - 14.98 Industry: Real Estate |
On 1 January 20X1, entity A in jurisdiction X purchased an investment property for C100. The investment property does not have a freehold land component. The investment property is subsequently measured at fair value.
At 31 December 20X3, the fair value of the investment property is C120. The tax written-down value is C88 (that is, the accumulated tax depreciation is C12).
The tax legislation in jurisdiction X is as follows:
- A tax allowance equal to purchase cost is claimed in annual instalments on an investment property held for use.
- The income tax rate is 30%.
- Cumulative tax depreciation claimed previously will be included in taxable income if the investment property is sold for more than tax written-down value.
- Sale proceeds in excess of original cost are not taxed.
What would the deferred tax liability be in each of the following scenarios?
- Entity A expects to dispose of the investment property within the next year.
- Entity A’s business model is to consume substantially all of the economic benefits of the investment property over time, rather than through sale.
- Entity A has no specific plans to sell the investment property and holds it to earn rental income, although the investment property might be sold in the future.
Analysis
- A. There is a rebuttable presumption that the carrying amount of an investment property measured at fair value will be recovered entirely through sale. This presumption is consistent with management’s expected manner of recovery. Entity A recognises a deferred tax liability as follows:
C | |
|---|---|
At 31 December 20X3
| |
Carrying amount at fair value
| 120
|
Tax base
| (88)
|
Taxable temporary difference
| 32
|
Clawback of tax depreciation below cost (C100-C88 = C12 at 30%)
| 3.60
|
Fair value in excess of cost (C120 = C100 = C20) at 0%
| 0
|
Deferred tax liability
| 3.60
|
- A. There is a rebuttable presumption that the carrying amount of an investment property measured at fair value will be recovered entirely through sale. This presumption is consistent with management’s expected manner of recovery. Entity A recognises a deferred tax liability as follows:
C | |
|---|---|
At 31 December 20X3
| |
Carrying amount at fair value
| 120
|
Tax base
| (88)
|
Taxable temporary difference
| 32
|
Deferred tax liability at 30%
| 9.60
|
- A. There is a rebuttable presumption that the carrying amount of an investment property measured at fair value will be recovered entirely through sale. This presumption is consistent with management’s expected manner of recovery. Entity A recognises a deferred tax liability as follows:
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