Q3b ICA: Reconciliation to Retained Earnings

The first step involves calculating the Retained Earnings (based on taxable income). The amounts of taxable income are brought through from Workpaper Q3a for each common period of income tax rates (i.e. 28% vs 30% vs 33%).

Also brought through from Workpaper Q3a are the income tax payable amounts, together with the imputation credits that have been attached to dividends paid throughout the history of the company.

Following this, there is a section which caters for losses carried forward from a period which had a certain tax rate applying to a period in which they are utilised, which had a different tax rate applying. This is required, as the tax effect of the losses brought through from the Q3a workpaper differs when utilised in a different income tax rate period, as they are applied against profits subject to income tax at a different tax rate.

This then produces the amount of Retained Earnings based on taxable income amounts. It is from this amount that the income tax component of the Retained Earnings is calculated, based on the income tax rates applying for each period.

A further reconciliation is then performed to reconcile this amount [Retained Earnings based on taxable income] to the Retained Earnings in the financial statements. Adjustments for items that have been made in determining taxable income for all periods are entered here to determine the balance of Retained Earnings. By performing this reconciliation, the amount of the tax component of the Retained Earnings is effectively verified and ensures all amounts of tax paid have been picked up in this balance.

1) Opening Retained Earnings

If there is an initial amount of retained earnings that is not reflected in Q3a, enter year to date retained earnings as per the financial statements. You can populate data from prior year workpapers using the Rollover Data function.

Where not populated and if required, enter the respective retained earning balances in the “Opening retained earnings” cells.

An amount may need to be entered if the Retained Earnings balance consists of amounts prior to 1989. Clicking Show pre 1990 will bring up columns allowing you to input an opening balance of Retained Earnings.

2) Net profit before tax

These amounts are pulled through from Workpaper Q3a, and represent the taxable income (net profit adjusted for tax differences) for each year. They are grouped in the relevant income tax periods to ensure the tax component is calculated correctly.

3) Losses attributed to shareholders/group loss offsets

Where loss offsets have been made or losses attributed to shareholders, these amounts will need to be entered here to ensure the tax component is calculated on the net taxable income amount. This amount is entered as gross amount (and not a net 28% amount or 30%/33% as the case may be). For example, if a loss of $100,000 was transferred to another taxpayer in the prior year, $100,000 would be entered (and not $28,000).

4) Tax on profits

These amounts are brought through from Workpaper Q3a and represent the tax payable on the income received by the company.

5) Net loss

This will arise where the company has additional losses not reflected in Q3a. For example, they had losses transferred in from another taxpayer.

6) Net dividends

The amounts of imputation credits attached to dividends paid are brought through from Workpaper Q3a. Where dividends have been paid out of profits with a different imputation rate (due to the transitional rules applying at that time – see Workpaper Q3a), these will be placed in the correct income tax rate period to ensure the tax component is calculated correctly.

7) Adjustments for losses carried forward from one year to the next where tax rates change

This is used where losses are carried forward from a period, which had a certain tax rate applying to a period in which they are utilised, which had a different tax rate applying. It is only the balance of losses that is carried forward crossing an income tax rate period change that is required to be entered here.

• Losses carried forward to future period – enter the gross balance of losses to be carried forward each year in this row.
• Loss utilised – record the gross amount of loss utilised in the applicable income tax period in which they were utilised.

For example, losses of $100,000 that are available to carry forward as at the end of the 2011 income year would be entered in column H. The amount of these losses that were used in the income years 2012 onwards are then entered in column I. If all of these losses are not used, say for example there were $20,000 of these losses left to carry forward at the end of the prior year income year, then $80,000 would be entered in column I and $20,000 would be entered in column J. Note the amount of losses to carry forward will also need to be entered to reconcile the amount of retained earnings.

8) Adjustments not affecting tax

These lines are used to enter tax adjustments that have been made from accounting income to get to taxable income. As the tax component of the Retained Earnings has been calculated using the taxable income, the tax component will not be impacted by these adjustments. The majority of these fields will populate from prior year workpapers (using the rollover data function) or from A1 or Q3a workpapers. However, check items have pulled through correctly:

• “Non-assessable income”, which are items that have been deducted in the taxable income calculations.
• “Losses arising from excess IC’s converted” are required to be entered here to account for the impact of the gross tax losses generated by the excess IC’s (but are not an accounting loss that affects Retained Earnings).
• Non-deductible expenses”, items that are deducted include items that have been added back in the taxable income calculations.
• An adjustment is required for “ICs attached to dividends when received” when they are converted to a loss. The amount entered here will be the amount of ICs, and not the gross amount of losses they have been converted into.
• ”Loss to carry forward” will be automatically populated from the first part of this worksheet and is required to reconcile the retained earnings for the tax loss carried forward.
• There is also the facility of “Other credit adjustments” and “Other debit adjustments” to separately classify any other adjustments if required.

After this has been done, the accounting Retained Earnings balance should be reconciled. As mentioned above, this is a further check that all income tax has been picked up in the accounts and also the imputation credit account.

Following this, the final reconciliation is to verify this number with the closing imputation credit account balance and itemise the reconciling items.

9) Adjustments for final tax position for the current year

This section provides for adjustments to the tax component of the retained earnings balance (calculated above) to reconcile to the balance of the imputation credit account. Most of the items are brought through from Q3a.

Adjustments to be added back:

• Income tax refunds due – this represents tax to be refunded but not as yet received, therefore will need to be adjusted for as this has not impacted the imputation credit account.
• Unutilised IC’s on dividends received – this represents IC’s that have not been able to be utilised (see corresponding note on Q3a).
• Early balance dates – RWT credits and IC’s received post balance date but pre 31 March – for example, where a January balance date taxpayer has received credits in March. This will need to be adjusted for as it will not be in the tax component of the retained earnings, but will be in the imputation credit balance. See RWT and Imputation credits attached to interest and dividends received.

Adjustments to be deducted

• Income tax payable – this represents income tax that is yet to be paid, and will need to be adjusted for as this has not yet impacted the imputation credit account.
• Provisional tax paid after balance date – to account for provisional tax that does not impact the imputation credit account (but this tax is calculated as part of the tax component of the retained earnings balance).
• Late balance dates – RWT credits and IC’s received post 31 March – for example, where a June balance date taxpayer has received credits in April. This will need to be adjusted for as it will be in the tax component of the retained earnings, but not in the imputation credit balance. See RWT and Imputation credits attached to interest and dividends received.
• Income tax in arrears from prior period – this represents income tax that is yet to be paid, and will need to be adjusted for as this has not yet impacted the imputation credit account.
• Credits forfeited – this represents credits that have been forgone, such as imputation credits lost on a shareholding change.