Tax deduction for land

An entity that pays tax at 35% acquires land with a fair value of €5 million. Tax deductions of €100,000 per year may be claimed for the land for the next 30 years (i.e. the tax base of the land is €3 million). In accordance with IAS 12, no deferred tax liability is recognised on the taxable temporary difference of €2 million that arises on initial recognition of the land.

In the period in which the land is acquired, the entity claims the first €100,000 annual tax deduction, and the original cost of the land is not depreciated or impaired. The taxable temporary difference at the end of the period is therefore €2.1 million (cost €5.0 million less tax base €2.9 million). Of this, €2 million arose on initial recognition and no deferred tax is recognised on this. However, the remaining €100,000 of the gross temporary difference arose after initial recognition. Accordingly the entity recognises a deferred tax liability of €35,000 (€100,000 @ 35%).

The analysis if the land had been impaired would be rather more complicated. The general issue of the treatment of assets that are tax-deductible, but for less than their cost, is discussed at below.

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