Example of deferred tax on Dividend

Example of deferred tax on Dividend

Divided receivable at the year end	10,000
Dividend will be received in march	10,000
Tax Rate	15%
Tax credit	Received bases

Calculate the deferred tax?

Solution

Steps for solution

1. Determine nature of Temporary difference i.e. taxable or deductible temporary difference

2. Apply the tax rate

Rules for determining the Temporary Difference

1. Carrying amount is greater than Tax Base = taxable temporary difference = Deferred Tax liability

2. Carrying amount is less than Tax Base = deductible temporary difference= Deferred Tax Asset

1. Nature of Difference

year	Carrying Amount	Tax Base	Temporary Difference	Nature of Difference
1	10,000	0	10,000	Taxable Temporary Diff

2. Deferred Tax

year	T.T.D	Rate of Tax	Deferred Tax liability
	10,000	15%	1,500

In above example the tax credit was available on receipt bases; this means the carrying amount would be greater than tax base because tax base is zero (no credit available on accrual bases). According to rule when carrying amount is greater than tax base it would result in taxable temporary difference and give rise to a deferred tax liability.