Deferred tax arises when income or expenses are recognised in the financial statements in a different period from when they are recognised for tax purposes. It is recorded as a deferred tax asset or deferred tax liability on the balance sheet, representing tax that will be paid or saved in a future period.
What it means
Common causes are differing depreciation rates (accounting depreciation versus SARS wear-and-tear allowances), provisions raised for accounting but not yet tax-deductible, and unused assessed losses. The deferred tax balance reverses as the underlying timing difference unwinds.
Where it fits in
Deferred tax sits in the tax section of the financial statements, alongside current tax - the amount actually payable to SARS for the period. It does not affect cash flow directly, it is an accounting adjustment reconciling accounting profit to tax charged.
Key rules
- Arises from timing differences between accounting and tax treatment, not permanent differences.
- Recognised as a deferred tax asset (future tax saving) or deferred tax liability (future tax cost).
- Reverses as the underlying timing difference unwinds.
- Distinct from current tax, which is the amount payable to SARS for the period.
