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Analysing Annual Financial Statements: Tax Pitfalls and Opportunities
- 14 September 2023
- Individuals Tax
- Johan Heydenrych
The modern tax practitioner is not only faced with complex tax rules that change at a dramatic pace, but they are also faced with complex accounting rules where the “substance” of transactions takes precedence over its legal form.
Despite the fact that the starting point of any income tax computation is Net Income Before Tax (NIBT”), tax practitioners often believe that they do not require solid accounting skills when providing tax advice to clients.
At the same time, despite the fact that normal tax, VAT and PAYE invariably have a material impact on the AFS, accountants often believe that they are not required to have a solid understanding of tax rules when preparing or auditing AFS.
The result of the “limitation of skills” of the tax advisor and the accountant is that significant tax risk arises where an overlapping of accounting and tax skills is required to ensure accurate tax returns and complete and reliable AFS.
The following are examples where the tax treatment is dependent on the accounting treatment:
- Section 11(j) and 11(jA) doubtful debt allowances.
- Application of section 24I(10A) to foreign exchange losses.
- Reportable arrangements where accounting is based on the substance of the transaction.
The following are examples where the accounting treatment is significantly different from the tax rules, mainly due to the substance of the agreement not necessarily aligning with the form thereof.
- IFRS 16 treatment of leases.
- Date of disposal and acquisition of assets where the effective date for accounting may differ from the date applicable for Capital Gains Tax and the date of the legal agreements.
- Accounting for derivatives.
- Recognition rules of revenue in terms of IFRS 15.
- Recognition of rehabilitation assets and liabilities.
- Tenant installation allowances and underlying costs.
The situation is exacerbated due to inconsistency in definitions of basic terms such as leases, finance leases, operating rentals and instalment credit agreements for purposes of IFRS, VAT and Income Tax.
Furthermore, the published AFS contains a wealth of information that may assist the tax practitioner to provide muti-disciplinary value-added advice to their clients. Statements in these reports may lead to unplanned tax risks for the company due to financial accountants having inadequate basic tax skills. Unfortunately, many tax practitioners ignore valuable information contained in the director’s report, chairman’s report and auditors report.
To assist Tax Practitioners and Financial Accountants to improve the level of advice provided to clients and employer, the Tax Faculty is pleased to announce a 2-hour webinar focused on the analysis of Annual Financial Statements (“AFS”). This analysis will assist the tax practitioner ass well as the financial accountant to identify tax pitfalls and opportunities.
The webinar will be hosted on 12 October 2023 at 15:00 and is presented by Johan Heydenrych (Director: Tax Services at Kreston South Africa). Johan has 32 years’ experience in analysing AFS for purposes of identifying tax risks and opportunities. The webinar is case study based which will underpin important concepts on a practical basis.