Deferred tax treatment of assets with multiple future tax consequences

Deferred tax reflects the future tax consequences that will arise when the economic benefits associated with assets are realised or of outflows when liabilities are settled.  The IFRS Interpretations Committee (‘IFRIC’) recently considered how to determine the deferred tax implications when there will be multiple future tax implications when the carrying amount of an asset is realised. This article briefly reviews the agenda decision and its relevance in South Africa.


The specific facts that the IFRIC considered involved a license acquired in a business combination. The entity expected to recover the carrying amount of the license through use (i.e. by generating income, which would be taxed, from using the license in its business, rather than by selling the license). It was not entitled to any tax deductions against its income for the cost of the license. When the license expires the entity would be entitled to a capital gain deduction equal to its original cost. In the particular jurisdiction, capital gain deductions cannot be offset against income and may be subject to a different tax rate.

The IFRIC considered whether the deferred tax should reflect:

  • A single temporary difference in respect of the license, in which case the tax base will be equal to the capital gain deduction (no initial temporary difference and over time changing to a deductible temporary difference), or
  • One temporary difference for the taxable benefits from the license and another for the future capital gain deduction.

Agenda decision

The responses that the IFRIC received indicated that a variety of different views existed on how the tax base should be determined in this case.  This suggested that the tax base is not apparent. The fundamental principles that underpin the concept of deferred tax should be applied to determine the accounting treatment. 

The fundamental principle is:

“an entity shall, with certain limited exceptions, recognise a deferred tax liablity (asset) whenever recovery or settlement of the carrying amount of an asset or liability would make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences”

The IFRIC concluded that it is inconsistent with this fundamental principle to offset amounts that cannot be offset in terms of the tax legislation against each other for deferred tax purposes. In addition, neither the probability that the capital gain deduction can be utilised nor the fact that different may apply will be taken into account if the approach of single temporary difference is followed. Instead, the entity should determine the temporary differences in respect of the asset in a way that reflects the distinct tax implications that will arise. It must identify the portion of the carrying amount of the asset that will be recovered and taxed under each tax regime and compare this with the deductions under the same tax regime. It must recognise separate temporary differences for the distinct tax consequences.

In a South African context

The scenario that the IFRIC considered is possible, and should arise from time to time, under the provisions of the Income Tax Act in South Africa. This will be the case when an entity incurs capital expenditure, which is not deductible against income, in respect of an asset that has a limited duration. Examples of such expenditure include leasehold improvements that are not deductible in terms of section 11(g) of the Income Tax Act as well as costs incurred in respect of intangible assets that do not qualify for any tax allowances (like the fact pattern considered by the IFRIC).  The expiration or termination of these assets could trigger a disposal, without any consideration, for capital gains tax purposes and result in a capital loss. Such a capital loss cannot be offset against income, but only against capital gains. This must be reflected separately in the deferred tax balance. 



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