Example of deferred tax on share based payment

Example of deferred tax on share based payment

Options Granted	400
Applicable  Rate of Tax	15%
Tax Deduction allowed	Share actually issued
Grant Date fair value	$20
Vesting period	3 years
Face value	$12

Calculate the deferred tax?

Solution

Steps for Solution

1. Determine the carrying amount

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

3. 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

Tip of solving the example

Share is to be issued in future therefore the tax base is nil in this example. Carrying amount will be calculated according to formula (option expected to vest)( fair value) (timing factor).

1. Determine the carrying amount

(400)(20)(1/3)= 2,267

2. Nature of Difference

year	Carrying Amount	Tax Base	Temporary Difference	Nature of Difference
1	2,267	0	2,267	T.T.D*

Taxable Temporary Difference

3. Deferred Tax

year	T.T.D	Rate of Tax	Deferred Tax Liability
	2,667	15%	340

In above it is first we determine the carrying amount of share options to be vested in future and then nature of temporary difference was found i.e. Taxable temporary difference and at the end the applicable tax was applied to calculate the deferred tax liability.