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Calculation of deferred tax
Excellent summary as always, Steve. The point about distributable profits is an important one - many accountants still seem to think that the balance on the profit and loss account is the amount distributable.
It might be worth saying that generally the deferred tax amount is based on a notional sale of the property at the reporting date.
For companies this will involve comparing the fair value to the indexed cost at that date - because of indexation (which rises inexorably over time) the effective tax rate it produces is going to be less than for other items.
If material, this may need to form part of the tax reconciliation note required by FRS102.29.27(b).
Malcolm
Malcolm Greenbaum
Director, Greenbaum Training and Consultancy Limited
IFRS, US GAAP, UK GAAP, UK tax and VAT
Deferred tax is unrealised
Is the deferred tax taken against the distributable profit and loss reserves?
The deferred tax is an unrealised gain or loss as it relates to an item which is unrealised so does not affect distributable reserves.
Malcolm
Thoughts
It seems that the only get out for the individual accounts of group companies which hold properties used by other group companies is not to charge rent as it will then fail the definition of an investment property.
As an aside, I don't think that creating a separate reserve for these non-distributable revaluation surpluses is an option - FR102 specifically states that revaluation gains go to Profit & Loss Account. I think the answer is simply to include a narrative beneath the Profit & Loss Account Note to state the amount of undistributable reserves included therein.
Still an investment property
It seems that the only get out for the individual accounts of group companies which hold properties used by other group companies is not to charge rent as it will then fail the definition of an investment property.
As an aside, I don't think that creating a separate reserve for these non-distributable revaluation surpluses is an option - FR102 specifically states that revaluation gains go to Profit & Loss Account. I think the answer is simply to include a narrative beneath the Profit & Loss Account Note to state the amount of undistributable reserves included therein.
Terry, I still think it would be an investment property - the definition in FRS 102.16.2 is
"property (land or a building, or part of a building, or both) held by the owner.....to earn rentals or for capital appreciation or both, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes; or
(b) sale in the ordinary course of business."
It is not held for a) or b) above so would still be an investment property.
Malcolm
Not sure
The property is not held for rental income or capital appreciation so fails the first part of the definition. If, as you say, it also fails the second part of the definition, then I think that takes it out of the realm of Section 16 altogether.
The property does, however, meet the definition of property, plant and equipment as it is held "for use in the production of supply of goods or services, for rental to others, or for administrative purposes". It is rented out in the sense that is used by another entity, but not for the purpose of earning rental income (because no rent is actually charged).
I hope that we can reach a consensus on this as there must be thousands of groups, large and small, where the property is held by a different company from the one using it and no rent is charged. If all these companies have to start paying to have valuations done, there will be many unhappy directors!
I see what you mean
Terry, I think you make a very valid point. If no rent is being charged and it cannot be shown that the owner is holding the property for its capital appreciation then it does seem to fail the definition.
One unrelated issue is the possibility of tax transfer pricing issues if no rent is charged, subject to the exemption for small companies.
Malcolm
I take your point about transfer pricing. I am no expert in that field, but I would expect that if a supportable management charge were raised and use of the building were included in its computation, there would not be a problem with transfer pricing. Then the question would be does that invalidate the assertion that no rent is charged? I think not, so long as there is no lease or other similar agreement.
Business Set up cost
Hi,
I work for a co. that sells furniture online and have recently rented an empty space to open up a showroom. We have incurred a hefty sum for the set up cost including the following:
# Property agent fees
# Cost of contract negotiation
# Decoration of the warehouse
# other various
The tentative time of completion of the warehouse is in March'15, that is when we hope to start operating from there.
I have gone through the FRS 102, but it only mentions about investments in properties but does not say anything about set up cost on rented properties.
Would appreciate if we could have a feedback on the above costs, should we capitalize the set up cost or treat them as an operating expense?
Revaluation frequency
Great article - thank you.
I am also wondering though - I have read Section 16 on investment properties and note that the investment property has to be valued at fair value each reporting date. My question is - does it need to be valued by an independent valuer every reporting period. Previously you would have done it every three years. I note in the disclosure section that if the valuation has not been done by an independent valuer you must state so. If the directors considered the market and felt there was a potential impairment or large movement upwards they should probably get a professional value done but if the market is stable I wonder if that is necessary every year. Would there be scope therefore to still only have the valuation done every couple of years with the directors reviewing the position between valuations for the year end and referring back to the professional valuation having been undertaken in the prior year?
Hello All,
i have a question i shall be thankful if anyone helps me.
Mr A buy a house for investment purpose on 01 January 2001 and sold the house on 31 December 2010.
1) He never lives in that house
2) Always rented
My question is on disposal can we treat this house as investment property or residential property when calculating Capital gain tax?
Thank you in advance for your reply