A Study of the Accounting and Auditing Consequences from the Introduction of Notional Taxation on Property Gains

Jeppe Ødegaard & Anne Louize Ranum Randrup

Student thesis: Master thesis

Abstract

In October 2020, the Danish Government entered into a political agreement which will introduce a revision of the part of the Danish tax legislation that defines taxations of property gains. From 1st of January 2023, property gains will be transferred from capital gains taxation to notional gains taxation. The real-estate industry has been at the center of the political agreement due its consequences for the industry and especially for small companies. The underlying reason for the political agreement is that the government is of the opinion that their Danish tax legislation has a loophole because the legislation allows real-estate groups to sell properties as subsidiary shares, which means that profit is tax free. Ministry of Taxation has indicated that they expect that the property groups should make a valuation similar to the way that the pension companies do it today, their valuations are made by using the fair value method. This method considers a wide range of requirements and, for some of the companies, it would be an advantage if they could apply the same fiscal and accounting principles. Amongst real-estate industry, bank, and accounting firm stakeholders, expectations are that the introduction of the new rules will have consequences that will affect accounting and auditing. Furthermore, one of the consequences of this new legislation will be reduced liquidity for the industry, this will lead to a decrease in property values, property improvements and, in addition, investments in the industry by external investors will decrease. The thesis is divided into three phases. The first phase takes a closer look into the political agreement, amongst other things discussing, which parties will be affected, and detailing the most important aspects. This will pave the way for an understanding a further analysis of the issues presented in this thesis. The second phase will be about the theory behind the recognition of investment properties, including a relevant analysis of which consequences the new rules will have for accounting. Also, in this phase, we will review the theory of ISA 540, which defines how to audit accounting estimates of fair value. This will make it possible to analyze what the consequences of the rules of taxation will be with regards to the auditing of investment properties. Third and last phase will include an analysis of what other economic consequences these rules will entail. This analysis is based on the accounting and auditing issues identified. We have gathered both qualitative and quantitative data. For the purpose of creating a nuanced and detailed picture of the problem formulation, we have included five semi-structured interviews with a property administrator, a tax expert, the industry association, a bank and the Ministry of Taxation. Furthermore, a questionnaire survey has been conducted amongst state-authorized auditors. The thesis concludes that the real-estate industry will face difficult conditions with weakened legal position, increased presentations costs with regards to financial statements as well as a worsened liquidity due to a requirement to pay taxes upfront. On the other hand, it can be concluded that, in all probability, it will be difficult for the real-estate companies to postpone the tax indefinitely and, therefore, that the purpose of the political agreement will be achieved. It is the authors’ beliefs that the consequences for the real-estate industry does not offset the elimination of the tax loophole.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2021
Number of pages138