In this topic 6 sections
No sale does not mean no deferred tax
A revaluation can increase an asset's carrying amount without increasing its tax base. The entity still expects to recover that amount through use or sale. If recovery creates a taxable difference, deferred tax can be required even though there is no current taxable disposal and no intention to sell immediately.
Cedar Works owns a depreciable asset with CA $160,000 and TB $130,000. At 30%, the existing DTL is $9,000. A revaluation increases CA to $220,000, while the tax base remains $130,000. The new DTL is $27,000, so the revaluation adds $18,000 of deferred tax.
Assume the $60,000 revaluation gain is wholly in OCI, with no reversal of an earlier profit-or-loss decrease. Record Dr asset $60,000; Cr revaluation surplus through OCI $60,000. Then Dr OCI tax $18,000; Cr DTL $18,000. Net OCI is $42,000. Do not send the $18,000 to profit or loss merely because the account is named deferred tax liability.
Trace the item, not just the current journal date
Tax follows the recognition location of the related transaction, including where the related event occurred in a different period. Profit-or-loss items normally take their tax to profit or loss; OCI items take their tax to OCI; direct-equity items take their tax directly to equity. Business-combination tax is addressed in acquisition accounting.
A revaluation that reverses a previous decrease recognised in profit or loss may be partly allocated there. Do not apply the “all revaluations to OCI” shortcut without checking the asset's history and IAS 16. Later changes in the tax rate or recoverability also need allocation based on the underlying items.
The revaluation and recovery sheets separate the pre-existing DTL from the revaluation increment and show the subsequent depreciation effects.
Follow the revalued asset into the next year
For Cedar, assume a remaining five-year useful life, no residual value and recovery through use. The revalued accounting depreciation is $44,000 a year. Assume tax depreciation is $26,000. At the end of the next year, CA is $176,000 and TB is $104,000; DTL is $21,600. The $5,400 reduction from $27,000 is a deferred tax credit associated with depreciation in profit or loss under these assumptions.
Without the revaluation, annual accounting depreciation would have been $32,000. Extra depreciation is $12,000; its 30% tax effect is $3,600. If the entity elects the permitted transfer of realised surplus to retained earnings, the annual transfer is $8,400 after tax. This transfer is within equity and is not recycling OCI into profit or loss.
Use the complete movement schedule: do not equate the whole $5,400 DTL reversal with the $3,600 tax effect of extra depreciation. The asset also had a pre-revaluation $9,000 DTL, which is reversing as its original accounting and tax amounts run down.
Recovery through use, sale or both
The expected manner of recovery can change the tax base, tax rate or both. If an asset with CA $84,000 has remaining use deductions of $56,000 at 30%, the use-based DTL is $8,400. Under an alternative assumed sale regime with deductible cost $70,000 and a 20% tax on the sale difference, the sale-based DTL is $2,800. These are distinct fact patterns, not a choice of whichever tax is lower.
If recovery involves both use and sale, separate the portions and apply the relevant tax consequences without deducting the same tax base twice. For example, an expressly assumed $30,000 taxable recovery through use at 30% plus $18,000 taxable recovery through sale at 20% gives deferred tax of $12,600. The proportions must come from the expected recovery and tax rules, not an arbitrary allocation of the carrying amount.
Non-depreciable assets and special presumptions
For a non-depreciable asset measured under the IAS 16 revaluation model, IAS 12 requires measurement reflecting recovery through sale. Suppose revalued land has CA $180,000, deductible sale cost $120,000 and an assumed 25% tax on the gain. The DTL is $15,000. “Land is not depreciated” does not mean “land has no deferred tax.”
IAS 12 has a separate rebuttable sale presumption for investment property measured at fair value under IAS 40. Rebuttal requires the specified conditions for a depreciable property held in a business model consuming substantially all economic benefits over time. This is additional standard guidance; do not treat it as the same rule as non-depreciable revalued land.
Indexation, exempt portions and different rates for recaptured deductions or capital gains require the specific case's tax rules. Explain the route of recovery first, then calculate. No current Australian tax concession is assumed in these original illustrations.
Sources and further reading
Concept sources: CPA Australia, Financial Reporting study guide, sixth edition (October 2022), Module 4, sections 4.7–4.8, printed pages 194–199. Original Cedar Works case and recovery comparisons. The IAS 40 sale-presumption note is supplementary standard guidance.
Concept sources: AASB 112, June 2021 compilation, corresponding IAS 12 paragraphs 20, 51–51D, 58, 61A–64; AASB 116, December 2021 compilation, corresponding IAS 16 paragraphs 39–41.