Analysis Of Equity And Tax Expenses In The Annual Report Of Sigma Healthcare Limited

Major items under Equity

In the balance sheet of the companies, three major items can be seen and one of them is Equity. The same concept is applicable for Sigma Healthcare Limited. After observing the 2016-17 annual report of Sigma Healthcare, it can be observed that there are four major items under equity in the balance sheet; they are Contributed Equity, Reserves, Accumulated Losses and Non-controlling Interests (investorcentre.sigmahealthcare.com.au, 2017). Companies use equity shares in order to raise capital for their business. Issued capital is calculated by multiplying the number of shares of outstanding stocks by the share par values. The annual report of Sigma Healthcare shows the decline in the contributed equity in 2017 as compare to 2016; that is $ 1,226,904,000 in 2017 and $ 1,238,394,000 in 2016 (investorcentre.sigmahealthcare.com.au, 2017). In Sigma Healthcare, two major items under contributed capital are ordinary shares and treasury shares. The next item is Reserves. Reserve is an important part in equity as reserves is the extra amount paid besides the basic share capital. According to 2016-17 annual report of Sigma Healthcare, the amount of reserves has decreased in 2017 as compared to 2016; that is $ 10,552,000 in 2017 and $ 10,648,000 in 2016 (investorcentre.sigmahealthcare.com.au, 2017). The major items under these reserves are fair value reserve, foreign currency translation reserve, option/performance right reserves and employee share reserve. The next major item under equity is Accumulated Losses. Accumulated losses are another name of negative retained earnings. Accumulated losses arise in case the company pays more dividends and generate net losses over the lifetime of the business. In 2017, Sigma Healthcare has increased their accumulated losses than 2016; that is $ 700,693,000 in 2017 and $ 696,890,000 in 2016 (investorcentre.sigmahealthcare.com.au, 2017). It needs to be mentioned that decrease in accumulated losses is a positive aspect for Sigma Healthcare. The last item under equity is Non-controlling Interest. Non-controlling interest refers to a part of equity ownership in subsidiary companies that is not attributable to the parent company (Brigham & Houston, 2012). Increase in non-controlling interest can be seen in 2017 as compared to 2016; that is $ 1,824,000 in 2017 and $ 1,502,000 in 2016 (investorcentre.sigmahealthcare.com.au, 2017). Increase in non-controlling interest can be seen in Sigma Healthcare due to the company’s acquisition of NostraData Pty Ltd.         

Different type of expense can be seen in Sigma Healthcare like selling expenses, administrative expenses, general expenses and others. Apart from these, Tax Expenses is considered as one major expense for the company (Burman & Phaup, 2012). At the same time, tax expense is a major liability for Sigma Healthcare to the federal state and municipal government of Australia. Sigma Healthcare does the calculation of tax expenses by multiplying the business tax by the income of the company after the factorization of some items like tax assets, tax liabilities and non-deductable items. According to the annual report of 2016-17, Sigma Healthcare has $ 76,669,000 in 2017 and $ 76.801,000 in 2016 as profit before income tax (investorcentre.sigmahealthcare.com.au, 2017). According to Australian Taxation Law, the tax rate for Sigma Healthcare is 30% on profit before tax. After the analysis of 2016-17 annual report of Sigma Healthcare, it can be seen that that there is a decrease in the total tax expense of the company in the year 2017 from 2016; that is $ 23,163,000 in 2017 and $ 26,386,000 in 2016 (investorcentre.sigmahealthcare.com.au, 2017). It needs to be mentioned that the main reason for the decrease in tax expenses of Sigma Healthcare is the decrease in profit before income tax. Due to the decrease in the profit, it is necessary for the company to pay less amount of tax. It is the responsibility of the company to pay the whole amount of tax expenses within time.  

Tax Expenses of Sigma Healthcare

The above discussion shows that Sigma Healthcare had $ 76,669,000 in 2017 and $ 76.801,000 in 2016 as profit before income tax. In addition, the analysis of the 2016-17 annual report of Sigma Healthcare states that the company has a tax rate of 30% on their profit in both the financial years of 2017 and 2016 as per the regulation of Australian Taxation Law (investorcentre.sigmahealthcare.com.au, 2017). It can be seen that the company has same tax rate in both 2017 and 2016. According to 30% tax rate, in 2017 and 2016, the tax expenses of Sigma Healthcare should be $ 23,000,700 ($76,669,000*30%) and $ 23,040,300 ($76,801,000*30%) respectively. However, the reported tax expenses of the company are $ 23,163,000 and $ 26,386,000 in 2017 and 2016 respectively (investorcentre.sigmahealthcare.com.au, 2017). Hence, it can be observed that there is a difference between the original and reported tax expenses in the presence of same tax rate. There are some factors causing this difference that are either included or excluded in the tax expenses of the company. They are discussed below:

The first factors is the presence of different rate of corporate tax. In the annual report of Sigma Healthcare, the presence of different income tax rate can be seen. In general, the company is supposed to charge 30% as their tax rate and the initial calculation has been done on it. However, the actual tax rate was 30.9%. In addition, in some areas, the presence of 34.4% tax rate can also be seen. These tax rates are responsible for the difference tax expenses to some extent (Tyson, 2014). After that, the effects of non-deductible items can be held responsible for the difference in tax expenses. In this section, it can be seen some items have been deducted from the profit that were not deductable items. For this reason, they have been added back with the tax exposes. After that, it was needed for Sigma Healthcare to deduct the amount of recoupment of capital losses from the tax expenses. For this reason, $ 199,000 and $ 338,000 have been deducted from the calculated tax expenses of 2017 and 2016 respectively. The last item is the over payment of income tax of previous. It is required for Sigma Healthcare to adjust this amount from the calculated tax expenses. Due to this, $ 91,000 has been deducted from the tax expenses of 2017 and $ 2,000 has been deducted from the tax expenses of 2016 (investorcentre.sigmahealthcare.com.au, 2017). For the above-discussed factors, difference can be seen in the calculated and reported tax income of the company.     

Factors Contributing to Differences in Tax Expenses

In the taxation operation of the companies, Deferred Tax Assets and Deferred Tax Liabilities are considered as major parts. The development of deferred tax assets can be seen in case the companies pay extra amount of tax on their assets. The extra amount of tax is considered as asset for the company (Laux, 2013). In the situation of deferred tax liabilities, difference can be seen in profit and tax varying value of the company (Harrington, Smith & Trippeer, 2012). From the annual report of Sigma Healthcare of 2016-17, it can be seen that the company has reported both deferred tax assets and deferred tax liabilities in their financial statements. According to the annual report of 2016-17, there has been an increase in deferred tax assets in 2017 as compared to 2016; that is $ 17,575,000 in 2017 and $ 13,358,000 in 2016 (investorcentre.sigmahealthcare.com.au, 2017). On the other hand, decrease can also been seen in deferred tax liabilities of Sigma Healthcare in 2017 as compared to 2016; that is $ 2,899,000 in 2017 and $ 3,988,000 in 2016. There are some reasons for both the deferred tax assets and liabilities. Deferred tax assets in trade receivables, property, plant, equipment and inventories can be recognized in income. Deferred tax assets related to accruals and employee benefits are developed from various acquisitions. Intangible assets related deferred tax assets have been developed from equities. However, in case of deferred tax liabilities, it may be happened that that company had to pay less amount of tax due to the temporary difference in the profit of the company. For this aspect, it is required for Sigma Healthcare to pay take the rest amount of tax as liability and to pay them in the next year.   

In the process of company taxation, current tax assets and current tax liabilities are considered as major aspects to the companies. From the annual report of Sigma Healthcare, it can be seen that the company has reported about their current tax liabilities in the statement of financial position. The annual report of Sigma Healthcare for 2016-17 indicates a decrease in the current tax liability; that is $ 28,180,000 in 2017 and $ 28,264,000 in 2016 (investorcentre.sigmahealthcare.com.au, 2017). It needs to be mentioned that the company has not reported about any kind of current tax assets in their financial statements. Now, it can be seen that the company has differences in the amounts of current tax payable and current tax expenses. However, for payable, some factors are either included or not included. Some of these factors are non-deductable expenses, expenses paid in advances and other factors (Harrington, Smith & Trippeer, 2012). Due to the presence of all of these expenses, the amount of current tax payable either shows more or less than the actual amount of income tax expenses. Thus, it is the responsibility of Sigma Healthcare to include or exclude these factors carefully to get the actual income tax expenses.   

Deferred Tax Assets and Deferred Tax Liabilities

In the financial statements of Sigma Healthcare, it can be observed that the company has mentioned about their income tax expenses in two major places; they are in the income statement and in the statement of cash flows. The analysis of these two statements shows that set the amounts of income tax expenses in cash flows is different from the income tax expenses in the income statement (Piketty & Saez, 2013). In the income statements, the amount of income tax expenses for 2017 and 2016 are $ 23,163,000 and $ 26,386,000 respectively. In the statement of cash flows, the amounts of income tax expenses for 2017 and 2016 are $ 41,241,000 and $ 28,469,000 respectively (investorcentre.sigmahealthcare.com.au, 2017). Thus, it can be observed that there is a clear difference in the values of income tax expenses and some specific reasons contribute to this difference. In the income statement, Sigma Healthcare has shows the whole amount of income tax expenses on their profit after tax after charging tax at the rate of 30%. However, the situation is different in case of the statement of cash flow as items are treated differently under cash flow statement. It indicates the company makes certain changes in the values of current assets and current liabilities. In Sigma Healthcare, the payment of income tax is taken as current liabilities (Piketty & Saez, 2012). It can be spotted that the amount of income tax expenses in cash flow statement has increased in 2017 as compared to 2016. It indicates that the company has done many adjustments with the income tax expenses in 2017 and 2016 before recording them under the statement of cash flow statement (investorcentre.sigmahealthcare.com.au, 2017). For all these reasons, there has been a difference in the values of income tax in cash flow statement as compared to income statement.   

The analysis and observation of the financial statements of Sigma Healthcare states that there is not anything surprising and confusing in their treatment of tax and equity. The main reason is that the company has provided proper clarification and justification regarding them in the notes of financial statements. However, the analysis shows some interesting facts about the company’s tax treatment. The most interesting aspect is the company’s explanation about the difference in the amounts of tax expenses. Sigma Healthcare has shown each item that has created difference in the tax values. Along with the explanation, the company has also shown the detailed calculation. The difference in the income tax expenses in the statement of cash flow and income statement can be considered as another major interesting factor of the company. All these aspect require in-depth knowledge about taxation to understand them. After observing all these factors, one can gain good knowledge about the treatment of tax by the companies

References

Annual Report 2016-17. (2018). Investorcentre.sigmahealthcare.com.au. Retrieved 5 January 2018, from https://investorcentre.sigmahealthcare.com.au/static-files/689da698-74b8-493e-bece-bdffc492e268

Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management. Cengage Learning.

Burman, L. E., & Phaup, M. (2012). Tax expenditures, the size and efficiency of government, and implications for budget reform. Tax Policy and the Economy, 26(1), 93-124.

Harrington, C., Smith, W., & Trippeer, D. (2012). Deferred tax assets and liabilities: tax benefits, obligations and corporate debt policy. Journal of Finance and Accountancy, 11, 1.

Laux, R. C. (2013). The association between deferred tax assets and liabilities and future tax payments. The Accounting Review, 88(4), 1357-1383.

Piketty, T., & Saez, E. (2012). A theory of optimal capital taxation (No. w17989). National Bureau of Economic Research.

Piketty, T., & Saez, E. (2013). A theory of optimal inheritance taxation. Econometrica, 81(5), 1851-1886.

Tyson, J. (2014). Reforming Tax Expenditures in Italy: What, Why, and How? (No. 14-17). International Monetary Fund.