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Inland Revenue

Tax Policy

Chapter 1 - Introduction

1.1 The Financial Reporting Act 1993 is currently being rewritten so that most companies will no longer be required to prepare general-purpose financial statements. This paper discusses the consequences of this development from a taxation perspective.

1.2 Cabinet has agreed, as part of a much wider range of financial reporting reforms, that all active companies should continue to prepare financial statements. While most of these companies will soon have no obligation to prepare general-purpose financial statements, they will still be required to prepare financial statements at least to a special-purpose level.

1.3 Inland Revenue, as the biggest user of financial statements in New Zealand, will administer the setting of minimum requirements for these financial statements. Proposals to amend the Tax Administration Act 1994 for this purpose are currently before Parliament.[1] This legislation will set up a framework to allow Orders in Council to mandate who should prepare financial statements and to what degree of detail.

1.4 These financial statements, which can be prepared to any level above the minimum specified by Inland Revenue, will obviously also be available for other purposes and users.

1.5 The discussion in this paper is not limited to companies, although the formal proposals will apply only to companies from years commencing 1 April 2014 onwards. This paper discusses which companies will be required to prepare financial statements and the minimum degree of detail that they will need to provide. Indicative thinking on how this might be extended to non-corporate business taxpayers is also discussed, but formal consultation on this is scheduled for next year.

1.6 Compliance implications are a major consideration. We do not anticipate any material increase in compliance costs for companies affected by these changes. Overall, because of the removal of the general-purpose reporting requirement as part of the wider company financial reporting reforms, it is anticipated that compliance costs will decrease. However, we accept that it is only medium-sized companies that are presently complying with the general-purpose rules which will potentially enjoy this decrease. Other companies that currently prepare financial statements should not be significantly affected.

1.7 Inland Revenue officials are participating in the New Zealand Institute of Chartered Accountants’ SME Working Group which is recommending an accounting framework for special-purpose financial statements for small and medium enterprises (SMEs). It is too early to know exactly how this will integrate with Inland Revenue requirements, but it seems that compliance with that framework will mean Inland Revenue’s minimum requirements are likely to be exceeded.

How to make a submission

1.8 Submissions are invited on:

  • the proposal to exclude non-trading companies that are presently not required to file tax returns from the preparation requirement; and
  • the level of detail that is suggested for the financial statements.

1.9 The Minister of Revenue will be required under the proposed legislation to ensure that adequate consultation has taken place before he makes a recommendation that the Orders in Council be approved.

The proposals in summary

  • Who would be affected:
    • For periods commencing 1 April 2014 and later, all active companies that do not have a statutory obligation to prepare general-purpose financial statements should prepare financial statements to at least a special-purpose level.
  • Minimum suggested requirements:
    • They should be based on double entry cost-based accrual accounting.
    • They should include a balance sheet and profit and loss, and specified supporting notes and/or schedules should also be available.
    • Where reasonably possible, tax values can be used for the determination of income and expenditure, and the preparation of the balance sheet.
    • A statement of accounting policies and changes should be part of the financial statements.
    • They should include, if necessary, a financial statements to taxable income reconciliation.
    • Certain related-party transactions should be scheduled (but only for periods commencing 1 April 2015 and later).
    • While disclosure of the IR 10 key points is proposed, there is scope for judgement on the level of detail beyond this.

1.10 The phasing out of the Financial Reporting Act requirements for companies depends on the introduction of proposals suggested in this paper. This will be arranged so that it is seamless.

1.11 Inland Revenue indicatively suggests that non-corporate businesses should also be required to prepare special-purpose financial statements, perhaps for periods commencing 1 April 2015 and later. However, this is not part of the formal proposals in this paper, but rather, an indication of our current thinking. Comments on this are welcome, but formal consultation will take place next year.

1.12 Submissions on this paper should be made by 20 December 2013 and can be addressed to:

Financial reporting
C/- Deputy Commissioner
Policy and Strategy Division
Inland Revenue Department
P O Box 2198
Wellington 6140

 Or email: [email protected] with “Financial reporting” in the subject line.

 1.13 Submissions may be the subject of a request under the Official Information Act 1982, which may result in their publication. The withholding of particular submissions on the grounds of privacy, or for any other reason, will be determined in accordance with that Act. Those making a submission who consider there is any part of it that should properly be withheld under the Act should clearly indicate this.



1 Clauses 110 and 111 of the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Bill.