Current and deferred tax

Current tax is the income tax payable on this year's taxable profit — profit measured by the tax rules, not by IFRS (IAS 12.5). Accounting profit and taxable profit differ for two kinds of reason:

• Permanent differences never reverse. A fine that the law will never allow as a deduction, or income the law exempts, changes this year's tax and no other year's. No deferred tax arises.
• Temporary differences reverse over time. If tax depreciation runs faster than accounting depreciation, taxable profit is lower now and higher later: the deduction has been brought forward, not created.

Deferred tax recognises the future tax effect of temporary differences, using the balance sheet approach (IAS 12.15–24). For each asset and liability compare its carrying amount with its tax base (the amount the tax rules attribute to it):

• Asset carrying amount above tax base (or liability below) → taxable temporary difference → deferred tax liability: more tax will be paid when the asset is recovered.
• Asset carrying amount below tax base (or liability above, e.g. a provision deductible only when paid) → deductible temporary difference → deferred tax asset, recognised only to the extent that taxable profit will probably be available to use it (IAS 12.24).

Measure deferred tax at the rates expected to apply when the difference reverses, based on rates enacted or substantively enacted at the reporting date (IAS 12.47). Deferred tax is not discounted (IAS 12.53).

Tax expense = current tax + the movement in deferred tax recognised in profit or loss. When there are only temporary differences, tax expense ends up equal to accounting profit × rate; permanent differences are what make the effective rate differ — which is the subject of the tax reconciliation lesson.