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A Taxing Issue For 2016

27/01/2016 1:12 PM AEDT | Updated 15/07/2016 12:51 PM AEST
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With 2016 shaping up as the year of tax reform -- or an early election -- there's one taxing issue that has inexplicably persistent popular appeal which we can simultaneously acknowledge -- and declare irrelevant for the purposes of any forthcoming green and/or white papers.

Notions that we could use a company's accounting income as the basis for calculating income tax rather than its taxable income are once again being proffered, seemingly on the back of the introduction of new tax reporting rules for corporates and in the lead up to the much-anticipated tax reform white paper.

Supporters of such a move argue that it would cut a swathe through much of the complexity of the tax laws, thus reducing duplication and cutting compliance costs.

Ideas of this type remind me of the often misquoted words of H.L Mencken, the so-called Sage of Baltimore, who in his Divine Afflatus essay wrote "...there is always a well-known solution to every human problem neat, plausible and wrong."

The potential symmetry of aligning tax and accounting income is one of those 'light bulb' ideas that make all the sense in the world on the back of an envelope. While conceptually appealing, careful analysis shows that it generally does not stack up as appropriate and it is not something that could be easily achieved.

This issue was well researched and discussed in 'Different purposes of tax and accounting' -- first published in 2003 by former Commissioner of Taxation, Michael D'Ascenzo and Andrew England, which is still very relevant some dozen or so years after it was first published.

The general thesis of that paper is that "comprehensive alignment seems a dim prospect given basic differences in purpose and policy, and practical realities."

The paper makes the point that tax and accounting systems exist for different reasons. The tax system is about collecting revenue for the community, while the accounting system exists for financial reporting reasons "to help investors to make informed investment decisions".

D'Ascenzo and England concluded that it is uncertain whether such a reform would lead to entities having greater or lesser taxable income in any given year and that "tax revenue outcomes are not clear, as we expect different entities would have different outcomes depending on each business's circumstances".

One of the many major problems of pursuing such a measure is the reality of our business landscape which means most businesses in Australia are not required to prepare statutory financial statements that are based on Australian Accounting Standards issued by the Australian Accounting Standards Board. Many small businesses will, in fact, produce financial information solely for tax compliance purposes.

Such an approach would also potentially represent a major change to how our tax laws operate.

The issues at the heart of our tax reform challenge are generally well known. We need to look at personal, fringe benefits and business taxes, incentives for retirement savings and the rate and base of the goods and services tax. Negative gearing, dividend imputation and incentives for innovation also demand examination. There's no need to re-invent the wheel, so before we add aligning tax and accounting income to the list, policy makers would do well to revisit the issues and views expounded in 'Different purposes of tax and accounting'.

The question really is, has the reporting landscape changed so much that aligning the two is more feasible now than it was over a decade ago? The answer is no.

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