Skip to main content
Inland Revenue

Tax Policy

Chapter 2 - Alignment of tax legislation and accounting practices

2.1 Although accounting and tax systems share substantial fields of interest and are intricately linked, tax legislation in New Zealand has not relied on accounting principles to calculate income and expenditure for taxation purposes generally. This approach follows largely from the recommendation of the Consultative Committee on the Taxation of Income from Capital[2] in that:

“…(c) the Act should provide greater statutory detail on problem areas of tax accounting without attempting to provide a complete code for the calculation of income. Essentially, the extent of statutory detail is a matter of degree, however, the Committee believes that the quantum of taxable income should be determined by Parliament as far as is practically possible;

(d) the tax system should not rely on undefined principles of commercial accountancy practice as a primary basis for the calculation of income, however such practice should be a reference point for the Commissioner and the Courts in the interpretation and application of the Act.”

2.2 The possible alignment of tax legislation and accounting practices was considered when detailed rules were developed for taxation purposes. To date, this alignment has occurred in a number of circumstances. Accounting standards have been explicitly incorporated into the tax legislation for trading stock and research and development expenditure. Tax legislation also relies on GAAP for revenue recognition and refers in many instances to “generally accepted accounting practice”, commercial practice or acceptable commercial practice.

2.3 Although New Zealand reporting practices have generally been harmonised with international accounting standards, the adoption of IFRS may be a significant change for some New Zealand businesses. In particular, the emphasis on fair value accounting for financial assets is a significant shift from the historical cost approach adopted by financial institutions for their loans. IFRS also introduces hedge accounting rules into New Zealand financial reporting practices.

2.4 We think it is inappropriate to consider a comprehensive alignment of tax legislation with accounting standards at this time. Nevertheless, the paper later examines areas where tax legislation is currently aligned with specific accounting standards or generally accepted accounting practice, and considers other possibilities for alignment such as the use of fair values and hedge accounting rules.

Unintended consequences arising from IFRS

2.5 The adoption of IFRS may result in significant changes to the financial statement positions of the reporting firms. These changes may have flow-on consequences for taxation purposes. The areas where tax legislation and accounting practice are directly or indirectly aligned will need to be monitored to ensure that the alignment envisaged in the tax legislation continues to be appropriate under IFRS. Further legislative changes may be necessary to deal with any consequences arising from the adoption of IFRS that were not intended by the legislation.

Compliance issues

2.6 The adoption of IFRS means significant changes to the accounting practices of some taxpayers and may have some tax compliance implications. When taxpayers rely on accounting profits as a starting point for their tax calculation, for example, the adjustments that they will have to make to arrive at the appropriate tax calculation may be significantly different under IFRS.

2.7 The tax compliance implications of the adoption of IFRS are still being worked through by New Zealand businesses and tax practitioners. Appropriate administrative responses to the compliance issues in some areas will be considered by the Inland Revenue as these implications become better understood.


2 Consultation Committee on the Taxation of Income from Capital, Tax Accounting Issues, (Wellington, February 1991), para 1.4.