Estimating Taxable Income From Financial Statements - A Study Of Spark Infrastructure's Annual Report

About Spark Infrastructure

Question:

Discuss About The Taxable Income Be Estimated From Financial?

Spark Infrastructure is the fund for specialist infrastructure and the main objective of the company is investing in the regulated utility infrastructure within Australia as well as in overseas. The products and services of the company includes the gas and electricity transmission and distribution, sewerage assets, regulated water that offers stable cash flows and comparatively low risks and it facilitates payment to the investors along with the  potential long-term growth. The vision of the company is to offer long-term, stable and attractive returns complied with the market expectations and risk profile (Spark Infrastructure 2018). Further, it seeks to establish the diversified portfolio with regard to regulated utility infrastructure assets and continuing to be in the lead position under the Australian infrastructure investment fund. Further, the values upon which the company is maintaining its growth are fairness, honesty, maximising the value of the security holder and maintenance of the high standards for corporate governance.

From the annual report of the company for the year ended 30^th June 2016, it has been recognized that the equity of the company has the following items –

Issued capital – issued capital is the number of shares capital that is issued to the shareholders. The issued capital is the authorised capital of the company and the unused part is known as unissued capital. Further it is face value of shares that is issued to the shareholders. The share premium and issued share capital represent the invested capital of the shareholders (Dhaliwal et al. 2016). The issued capital is also known as the subscribed share capital or subscribed capital. The share capital value changes with the issuance of new shares to new or existing shareholders. Further, the company has the option of redeeming or purchasing the shares that will result into the changes in the value of subscribed capital.

Reserves – reserves in the balance sheet is used to refer the shareholder’s equity and it is generated through various sources. While the reserves are created through shareholder’s contribution, they are in the form of legal reserve fund or share premium (Bodie, Kane and Marcus 2014). Reserve may include all the items except the share capital that is listed under equity section of the company’s financial statement. However, the reserves are of 2 types – revenue reserve and capital reserve.

Retained earnings – it is percentage of the net earnings that is not distributed as dividends and retained by company for reinvesting in the core business or paying-off the debt. The retained earnings is recorded as shareholder’s equity under the balance sheet (Hutchens and Rego 2013). The retained earnings are reported at the closing of each accounting period as accumulated amount of the company’s prior earning after deducting the amount of dividend. However, the retained earnings of the company can be negative or positive.

Equity Items in Spark Infrastructure's Annual Report

(Refer page 41 of annual statement for the year ended 30^th June 2016)

• Issued capital – the issued capital of the company has been changed to $ 11,99,119 from $ 13,03,404 as the company distributed capital amounting to $ 104,285.
• Reserves – reserves has been changed to $(18,231) to $(17,404) due to comprehensive loss amounting to $ 1,817 and recognition of the share based payments amounting to $ 990.
• Retained earnings – the amount of retained earnings has been changed to $ 956,396 from $ 870,355 as the company earned $ 86,041 on account of comprehensive income.

(Refer page 42 of annual statement for the year ended 30^th June 2016)

The tax expenses of the company for the year ended 30^th June 2016 on net income of $ 107,234 thousand was $ 26,151 thousand. The rate of income tax applied on the company for the year ended 30^th June 2017 was at the rate of 30% (Ato.gov.au 2018).

The tax rate times for the company does not match with the tax expenses if 30% tax is applied on the net income of the company that is $ 107,234 thousand. If 30% is applied on the net income, it comes to $ 32,170 (Tran 2015). However, the tax expense under the income statement of the company is stated as $ 26,151.  The difference were due to the non-deductible expenses amounting to $ 180, impact of the prior period adjustments amounting to $ 7,081 and effective tax on the operating result of trusts amounting to $ 882.

The amount of deferred tax liabilities (DTL) of the company for the year ended 30^th June 2016 amounted to $ 261,167. The deferred tax liabilities are identified on account of taxable temporary differences that are generated on account of investments in the associates except where the company is able to control reversal of temporary difference and it is expected that temporary differences that will not be reversed in the near future (Laux 2013). Deferred tax liabilities are computed at the rate of tax that is projected for applying in the year, while the liability are realised on the basis of the tax rates. DTL are offset while they are related to the income taxes applied by the same authority for taxation and the group that is intended for settling the current tax liabilities on the net basis (Mullinova and Simonyants 2016).

Current tax is measured by referencing the income tax payable amount or recoverable amount with regard to the tax loss or taxable profit for the accounting year. It is computed through using the tax laws and tax rates that is the substantively enacted or enacted at the reporting date. For the prior period or current period the current tax is identified as the liability or as the asset to the extent of the refundable or unpaid amount. Current tax is recognised as the income or expenses under the profit and loss statement except where it is associated with the debited or credited items that is directly debited or credited to equity. The current tax of the company for the year ended 30^th June 2016 amounted to $ 104,409 thousand. Out of the total amount of current tax, the amount of current tax with regard to the current year was $ 241 thousand whereas, the amount of adjustments that was recognized with regard to the income tax for the prior years were amounted to $  104,409.

Understanding Tax Expenses of Spark Infrastructure

Income tax expenses are the amount that the company owes with regard to taxes on the basis of accounting rules for standard business. The entity records the expenses based on the income statement. On the other hand, income tax payable is actual amount that the entity owes with regard to taxes on the basis of the tax code (Thomas and Zhang 2014). The amount related to income tax payable is recorded as the liability under the balance sheet until the actual tax is paid by the company. The amount of income tax payable is recorded under the income statement of the company as expenses. It is the amount that the company owes as taxes on the basis of tax code. It is appeared under the balance sheet as liability until the company pays off the tax. As per the accounting rules that is followed by the company while reporting the financial results of the company are generally varies with the rules that they shall follow while preparing the income taxes (Hanlon, Navissi and Soepriyanto 2014). Owing to this, the income tax amount that the company figures as ‘to be paid’ on the basis of the reported profit will not be same as the actual tax bill. This variance reveals the financial statement of the company as the variance among the income tax payable and income tax expenses.

As per the financial statement of the company for the year ended 30^th June 2016, the company did not have any amount as income tax under the cash flow statement of the company (Pawsey 2016). On the other hand, the tax expenses of the company for the year 30^th June 2016 was amounted to $ 26,151 thousand. However, the expense for income tax under the income statement generally varies with the income tax expenses mentioned in the cash flow statement. The main reason for this is that the tax expenses accounted for by the company under the income tax payable records the amount after accounting for various expenses like, operating expenses, administrative expenses, selling expenses, financing charges and various other expenses, if any (Gitman, Juchau and Flanagan 2015). The income left after meeting all these expenses are taxed at the rate of 30% as per the Australian tax code. On the other hand, the income tax recorded under the cash flow statement is the taxes applicable on the operating activities of the company.

The Concept of Deferred Tax Liabilities and Assets

Confusing and difficult fact – while going through the annual report of the company for the year ended 30^th June 2016 was that the concept of deferred tax liabilities and deferred tax assets. The deferred tax liabilities are identified on account of taxable temporary differences that are generated on account of investments in the associates except where the company is able to control reversal of temporary difference and it is expected that temporary differences that will not be reversed in the near future. However, there are many controversies regarding the ability to control reversal of temporary difference. There are no specified indication that based on which it can be expected that the company will be able to control the reversal of temporary differences. Further, the deferred tax liabilities or assets are computed at the rate of tax that is projected for applying in the year, while the liability are realised on the basis of the tax rates. Therefore, if the DTL or DTA is accounted for in one period and it is reversed in another period then there will be difference in the applicable tax rate at which it is accounted and at which it is reversed.

New insights – the new insights gained with regard to the income tax treatment by Spark infrastructure is that all the revenues of the company are disclosed at top of the income statement. All the expenses are then deducted from the revenues of the company to get the operating income. From the operating income, the finance costs of the company are deducted to obtain the amount of taxable income. On the taxable income the tax is deducted at the prescribed rate to get the net income after tax. The income tax expenses are recorded as the deduction under the income statement as income tax expense. One more insight gained is that the expense amount owing to the accrual accounting rules that varies with the rules needed for filing the returns on tax. In other words, the expenses associated with the income tax are matched with the revenues that generate the expenses irrespective of the amount of tax paid or returned.

Therefore, it is concluded from the above discussion that the company follows the requirement of Australian Tax Office (ATO) for applying the tax rate and treating the tax on various aspects. Further, the company disclosed proper justification and details regarding all the tax treatments through notes to the financial statements. The tax matters of the company are reviewed as the part of audits. Further, the company records the assets, expenses and revenues after deducting the applicable goods and services tax (GST). Moreover, the current tax is measured by referencing the income tax payable amount or recoverable amount with regard to the tax loss or taxable profit for the accounting year. It is computed through using the tax laws and tax rates that is the substantively enacted or enacted at the reporting date. Therefore, the company follows all the requirements of ATO while treating various taxes under the financial statement.

Reference

Ato.gov.au., 2018. Home page. [online] Available at: https://www.ato.gov.au/ [Accessed 22 Jan. 2018].

Bodie, Z., Kane, A. and Marcus, A.J., 2014. Investments, 10e. McGraw-Hill Education.

Dhaliwal, D., Judd, J.S., Serfling, M. and Shaikh, S., 2016. Customer concentration risk and the cost of equity capital. Journal of Accounting and Economics, 61(1), pp.23-48.

Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.

Hanlon, D., Navissi, F. and Soepriyanto, G., 2014. The value relevance of deferred tax attributed to asset revaluations. Journal of Contemporary Accounting & Economics, 10(2), pp.87-99.

Hutchens, M. and Rego, S., 2013. Tax risk and the cost of equity capital. Available at SSRN9.

Laux, R.C., 2013. The association between deferred tax assets and liabilities and future tax payments. The Accounting Review, 88(4), pp.1357-1383.

Mullinova, S. and Simonyants, N., 2016. Reflection of a deferred tax liability in the credit union reporting according to IFRS (IAS) 12 “Income taxes”. Modern European Researches, (1), pp.83-88.

Pawsey, N., 2016. Project: Review of IFRS adoption in Australia.

Spark Infrastructure., 2018. Spark Infrastructure. [online] Available at: https://www.sparkinfrastructure.com/ [Accessed 22 Jan. 2018].

Thomas, J. and Zhang, F., 2014. Valuation of tax expense. Review of Accounting Studies, 19(4), pp.1436-1467.

Tran, A., 2015. Can taxable income be estimated from financial reports of listed companies in Australia?. Browser Download This Paper.