Ann: Company Update, page-13

No, you are confusing accounting and tax. There are many differences between what ends up in a Company's P&L and what goes on the Tax Return. Some of these are "permanent differences" - items which are never deductible (eg entertainment of a client) or never assessable (eg the Cash Flow Boost the government provided as a Covid-19 support measure before JobKeeper was introduced).

Others are "timing differences" - simply a difference between when an amount is deductible or assessable under tax law vs the period it is recognised in the P&L under Accounting Standards. Timing differences give rise to a difference between the "Income Tax Expense" recognised on profit in the P&L, and the actual tax payable in a Tax Return. There's an entire Accounting Standard - AASB 112 dedicated to this https://www.aasb.gov.au/admin/file/content105/c9/AASB112_08-15_COMPmay19_01-20.pdf

The immediate expensing of plant and equipment is for tax purposes only, not for accounting purposes. Note that the last dot point of the example refers to DDD reporting a profit of $1m but showing a loss of $2m on their tax return.

When preparing its Financial Statements ANO is required to account for Plant & Equipment in accordance with the relevant Accounting Standard AASB 116 https://www.aasb.gov.au/admin/file/content105/c9/AASB116_08-15_COMPmay19_01-20.pdf. This requires capitalisation of plant and subsequent depreciation, writing down the cost of the plant over time (ie the amount that ends up in the P&L as an expense). Many private companies will simply use the ATO rates for depreciation (or complete write off) and have no difference between their accounts and tax, but Public companies are required to apply the Standards. Even without full write off for tax the accounting deprecation rates are often different to tax rates.

Let's take the DDD example but assume a $5m trading profit (to avoid complicating the example with tax losses) and the 30% tax rate (it's easier to deal with). Assume the plant of $3m has a 10 year life (so $300k depreciation p.a.).

1st year: $5m trading profit less $300k depreciation = reported net profit of $4.7m. An Income Tax Expense on that profit at 30% is $1.410m. However the Tax Return shows a Taxable Income of $2m only ($5m less $3m write off) so tax actually payable is $600k. In this case DDD would show a Deferred Tax Liability of $810k (being the difference between the accounting Income Tax Expense and the actual tax liability).

2nd Year: Assume a $6m trading profit, less $300k depreciation = reported profit $5.7m. Income Tax expense at 30% = $1.710m. The Tax Return would show a Taxable Income of $6m - there's no deduction from the trading profit as the plant was fully written off for tax the year before. So actual tax owing is $1.8m. In this case DDD would reduce it's Deferred Tax Liability by the difference, being $90k.

By the 10th year the Deferred Tax Liability would reduce to $Nil as the actual tax liability each year would exceed the accounting Income Tax Expense due to the depreciation being an accounting entry only. By that point $3m would have been expensed through the P&L at $300k p.a. and $3m would have been claimed for tax, so the timing difference would be washed through.

If you look at Note 17 from the ANO 2020 Annual report you will see that they have a raft of timing differences:

ANO - 2020 Deferred Tax.pdf