School of Accounting and Commercial Law – Te Kura Kaute, Ture Tauhokohoko: Centre for Accounting, Governance and Taxation Research

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See the Centre for Accounting, Governance and Taxation Research website for more information about the Centre or the School of Accounting & Commercial Law website for their degrees, people, courses, contact details, news and events, and research.

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Open Access
Structural Flaws of Income as a Base for Taxation
(Te Herenga Waka—Victoria University of Wellington, 2001) Prebble, John
Fifteen years ago Ross Parsons published his Wilfred Fullagar Lecture in the Australian Tax Forum. His subject was “Income Taxation–an Institution in Decay”. His lecture was influential. Scholars cite it regularly. This evening I shall consider Parsons’s thesis and evaluate it from several points of view: factually, historically, philosophically, and as a prophecy that society would abandon income taxation. Parsons’s fundamental position was that, “The analytical fabric of the income tax … had congenital and … incurable defects, born as it was of a union of institutions which had no common policies”. The institutions to which he referred were first the income tax itself, and secondly the concept of income. In Parsons’s opinion, income tax adopted the concept of income from the law of trusts, which, he explained, is based on principles that are different from and irrelevant to the policies and imperatives of income tax law. Parsons chose the Simons definition as the appropriate benchmark against which to test the judicial concept of income that has developed in Australian and United Kingdom law. Essentially, Simons said that the tax base should embrace all economic gains, but that it should embrace only economic gains. Parsons explained that the Australian tax base fails on both counts. There are several fundamental problems with the judicial concept of income, that is, the concept of income that the courts employ for tax purposes. First, the judicial concept sees income as a flow, rather than as a gain. Secondly, as a consequence, it taxes some apparent flows that do not entail gains. Thirdly, it omits gains that we call capital gains. Australia attempted to remedy that shortcoming by bolting a capital gains tax onto the income tax in 1986. Fourthly, it relies on legal transactions rather than on underlying economic movements. I shall return several times to this fourth point during this lecture. Ross Parsons would agree with me that the shortcomings that I have just listed are not stand-alone defects of income taxation but symptoms of the analytical shortcomings of the concept of income. I shall continue from here in a moment, after considering some history.
Open Access
Users of Local Government Annual Reports: an Exploratory Study
(Te Herenga Waka—Victoria University of Wellington, 2001) Mack, Janet; Ryan, Christine; Dunstan, Keitha
The nature of financial reporting in the public sector in Australia has undergone substantial change in the last twenty years. One result has been the promulgation of public sector accounting standards based on the private sector conceptual framework for general purpose financial reports. A central key to this framework is the existence of users and their needs. This framework emphasises the provision of information for users for the purpose of decision making. Critics of the framework as it applies to the public sector claim that it lacks empirical substantiation and ignores the complexity and diversity of public sector institutions. This paper examines and analyses the annual report distribution lists for local government authorities within Queensland and provides empirical evidence on distribution patterns. The study finds that there are user groups which fall outside the categories identified by the conceptual framework. Further, there is a wide variety in the dissemination lists of local government authorities and cross sectional differences in the distribution patterns for urban and rural local government authorities. The results of this research raise important questions for public sector accounting regulators regarding the appropriateness of assuming that there exists a homogeneous set of users for all public sector entity types.
Open Access
Capital Gains and the Capital Asset Pricing Model
(Te Herenga Waka—Victoria University of Wellington, 2001) Lally, Martin; van Zijl, Tony
This paper shows that, in the presence of differential taxation of ordinary income and capital gains, use of the Officer (1994) version of the Capital Asset Pricing Model can result in significant misestimation of the cost of equity capital. In particular, with a high dividend yield, the cost of equity may be underestimated by four percentage points. Underestimation is of particular significance in the context of setting output prices for regulated utility firms.
Open Access
The Value of Public Sector Annual Reports and Annual Reporting Awards as a Signal of Management Performance
(Te Herenga Waka—Victoria University of Wellington, 2001) Ryan, Christine; Dunstan, Keitha; Brown, Jennet
Australian public sector reforms have emphasised the accountability of agencies for the performance of management. Despite considerable diversity in public sector organisations, annual reports have been promoted as an appropriate tool to discharge the accountability of all government agencies. However, there remains an absence of consistent empirical evidence as to the value of the annual report for reporting on management performance. Further, debates about the role of public sector annual reports often become intertwined with notions of the quality of reports. Prior research has investigated the incentives of agencies to enter annual reporting awards as a means of signalling the quality of management. However, the research ignores the possibility that the value of annual reports to discharge performance accountability and the value of entry into an annual reporting award may vary depending on the type of public sector agency and on the relationships between stakeholders. This study focuses on the Queensland public sector and the Queensland Annual Reporting Award (QARA) and uses a series of case studies to examine the value of the annual report as a means of discharging accountabilities. The results reveal a cross sectional variation in the perceived value of the annual report in discharging accountabilities. In some cases it was thought that alternative forms of communication provided a more suitable means to discharge the accountability demands of stakeholders. Further, while annual reporting awards provide a mechanism to supply a credible signal of quality, it will only be used in those situations where the participants identify direct benefits of entry.
Open Access
Income Taxation the New Zealand Minor Beneficiary Regime
(Te Herenga Waka—Victoria University of Wellington, 2001) Prebble, John
This working paper comprises a chapter of a book on the taxation of trusts that is scheduled to be published by Brooker’s, Wellington, New Zealand, in 2002, together with fragments from two other chapters. The draft chapter, section 3 of this paper, was written as a result of the passage of the Taxation (Beneficiary Income of Minors, Services-Related Payments and Remedial Matters) Act 2001, in particular the parts of that Act that relate to beneficiary income of minors. Section 2 of the paper discusses the meaning of “settlor” in the Income Tax Act. The terms “settlor” and “settlement” are of pivotal importance in the architecture of the minor beneficiary regime. Section 4 backgrounds the relationship between the trust regime in the Income Tax Act and the company tax imputation system and explains how the Act integrates imputation credits and the minor beneficiary regime. Because the paper is to become a chapter from a proposed book on the taxation of trusts in general it omits certain cross-references that will in due course appear in the book. Thus, for example, the paper does not attempt to explain some of its more abstruse references rules that apply to trusts with international connections.
Open Access
Fictions of Income Tax
(Te Herenga Waka—Victoria University of Wellington, 2002) Prebble, John
Income tax law generally taxes the results of legal transactions rather than their underlying economic effect. The courts often tell us that tax law does not tax on the basis of economic equivalence. But the problem is deeper. In order to make income tax work at all, the law must make a number of assumptions that are not in fact correct, assumptions as to both the factual and the legal nature of the taxpayer’s income. The effect of these assumptions is that the base that the law taxes becomes removed from the facts of the case.
Open Access
Practical Problems from Publication of the Commisioner's Interpretation Guidelines
(Te Herenga Waka—Victoria University of Wellington, 2002) Prebble, John
The New Zealand Commissioner of Inland Revenue issues several kinds of statements that are in effect legal opinions. This article relates to certain public statements formerly known as “policy statements” and now called “interpretation guidelines”. The change of name occurred in 1995, when the department was reorganised and two new divisions were formed: Policy Advice and Adjudications and Rulings. “Policy statements” became the responsibility of Adjudications and Rulings. The new name of “interpretation guidelines” was chosen to avoid misleading people into thinking that such statements emanate from the Policy Advice Division. As a preliminary matter, it is helpful to distinguish interpretation guidelines from other forms of opinions or statements that the Commissioner issues. There are two primary groups of such statements: binding rulings and standard practice statements.
Open Access
Trans-Tasman Triangular Taxation Relief: Part One
(Te Herenga Waka—Victoria University of Wellington, 2002) Dunbar, David
In March 2002 the finance ministers of New Zealand and Australia released a joint discussion document on trans-Tasman triangular taxation. The proposals represented are a significant step towards addressing one of the major taxation barriers to trans-Tasman investment. The discussion document invited interested parties to present submissions by 3 May 2002. This article examines: the origins of triangular taxation, the merits of the New Zealand and Australian government’s joint proposal (called “The Pro rata Approach to Triangular Taxation”), an alternative solution, and ad hoc solutions. From the perspective of trans-Tasman individual shareholders, the pro rata proposal is an improvement compared to the current position, but it is not the optimal solution. From their perspective the most tax effective option is what is known as the “full streaming” solution. However both governments are concerned about the fiscal risks of the streaming alternative and the fact that it might signal a greater acceptance of streaming which is not the case.
Open Access
Trans-Tasman Triangular Taxation Relief: Part Two
(Te Herenga Waka—Victoria University of Wellington, 2003) Dunbar, David
In March 2002, the New Zealand and Australian governments released a joint discussion document, Trans-Tasman Triangular Tax. The joint media statement noted that: Clearly, triangular tax reform requires a bilateral approach that preserves the Australian and New Zealand tax bases and is acceptable to business and government in both countries… The mechanism under consideration is one that allocates both Australian franking credits and New Zealand imputation credits to shareholders in proportion to their ownership of a company. This mechanism is known as the “pro rata allocation” model, and its adoption was confirmed in February 2003. The discussion document noted that the following alternative methods to relieve triangular taxation had been considered by both governments, but were rejected: apportionment, mutual recognition (including pro rata revenue sharing), streaming. The Ministers invited interested parties to comment on the workability of the pro rata revenue sharing proposal, and said that their advice would be taken into account in deciding whether or not to proceed with this proposal. This working paper examines the strengths and weaknesses of the pro rata allocation mechanism and contrasts that solution with the streaming alternative. From the perspective of a New Zealand individual shareholder, the analysis will demonstrate the significant additional taxation advantages associated with streaming. Accordingly it is possible that the latest initiative may not produce a feasible solution. Trans-Tasman companies may continue to devise tax-driven strategies that provide their individual shareholders with an after-tax rate of return which is comparable with what they would have received under the streaming model. Also examined, will be a range of debt, equity, and profit repatriation strategies which are currently used to solve triangular taxation. These include floating special purpose subsidiaries, the use of hybrid instruments, and techniques to minimise Australian capital gains tax. The pro rata allocation model is unlikely to lead to any significant decrease in Trans-Tasman tax-driven investment.
Open Access
The Case for the Use of International Financial Reporting Standards in New Zealand: a Briefing Paper Prepared on Behalf of the New Zealand Securities Commission
(Te Herenga Waka—Victoria University of Wellington, 2003) Dunstan, Keitha
The objective of this paper is to examine the issues pertinent to the consideration of the proposal made by the Accounting Standards Review Board (ASRB) that New Zealand adopt the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). The purpose of this examination is to provide input to the New Zealand Securities Commission (the Commission) to assist them in their deliberations on making recommendations on the future development of the financial reporting infrastructure for New Zealand’s securities markets. Similar to securities regulators across the world, the Commission has an interest in promoting a strong securities market where the financial reporting framework and its supportive infrastructure results in high quality, transparent and comparable financial reports. There are four identifiable components of the infrastructure that drive the quality of financial reporting in New Zealand. 1) Financial reporting standards; 2) Corporate governance; 3) External audit; 4) Enforcement. The scope of this paper is limited to an assessment of the first of these components financial reporting standards; with an emphasis on an analysis of the consequences of any decision to adopt IFRS in New Zealand. The paper provides a framework for assessing the viability of the IASB reporting framework as an acceptable standard-setting regime for New Zealand that is based on: 1) The quality of IFRS standards; 2) The quality of the IASB standard-setting process; 3) The extent of international acceptance of IFRS.
Open Access
Competing Discourses in Social and Environmental Accounting: an Overview of the Conceptual Landscape
(Te Herenga Waka—Victoria University of Wellington, 2004) Brown, Judy; Fraser, Michael
In recent years there has been a marked resurgence of interest in the areas of corporate social responsibility (CSR) and social and environmental accounting (SEA) among business, Governments, public policymakers, investors, unions, environmentalists and others. While at one level there appears to be widespread agreement that CSR and SEA are worthy topics of attention, different groups have very different understandings of these fields. This article provides a meta-analysis of these differences by comparing three broad approaches to SEA: the business case, stakeholder-accountability and critical theory approaches. It also responds to concerns a number of commentators have expressed regarding the current dominance of 'business case' discourses. While not seeking to impose on readers a 'correct' way of viewing SEA and CSR, exposure to competing perspectives is viewed as one way of challenging us to think more reflectively about the frames available to us and their implications for the social realities we construct, embed or seek to change.
Open Access
A Historical Review of the CFC & FIF Regimes: Part One 1987 to 1 December 2003
(Te Herenga Waka—Victoria University of Wellington, 2004) Dunbar, David
The CFC & FIF regimes were originally enacted to prevent New Zealand taxpayers using tax havens to avoid or defer their New Zealand tax obligations. However both regimes contain a number of provisions that have not been adopted by any of the major OECD countries or any of NZ major trading partners. For example, the CFC regime does not contain an active income exemption and the FIF regime often taxes unrealised capital gains. Those features have lead to widespread criticism and a range of taxpayer responses to ameliorate the negative impact the current rules have on legitimate off shore trade and investment decisions. Part one of this article examines: the tax planning opportunities which both regimes were designed to curtail, the behavioural responses of taxpayers to the perceived harshness of the current law, and the McLeod Committee recommendations, which were designed to achieve a more appropriate balance between taxpayers, legitimate commercial offshore investment decisions and the ongoing threat posed by tax havens.
Open Access
Hegemony, Stakeholder Salience and the Construction of Accountability in the Charity Sector
(Te Herenga Waka—Victoria University of Wellington, 2005) Cordery, Carolyn Joy; Baskerville, Rachel F
This research reviews the manner in which accountability may be better constructed in the Charities Sector with detailed stakeholder analysis. This combines the adoption of Hayes’ (1996) four types of accountability by charities with a hegemonic application of the Mitchell, Agle, and Wood (1997) model of stakeholder salience. In applying these tools to a particular transgression event, it is demonstrated that the lower salience of beneficiaries of a charitable activity in crisis is due to their lack of coercive power through a lack of knowledge. This study illustrates the dynamic, myriad and heterogeneous nature of stakeholders in the not-for-profit sector.
Open Access
From Social Policy to Economic Policy: Taxation Incentives for Retirement Income Savings in New Zealand (1910 - 2005)
(Te Herenga Waka—Victoria University of Wellington, 2005) Marriott, Lisa; Fowler, Carolyn
New Zealand has seen a change in policy direction from the provision of taxation incentives for retirement income savings from 1910 through to 1988, to removal of all incentives from 1988 through to 2004. In 1910 the focus was primarily on decreasing state dependency, while simultaneously assisting individuals to be selfreliant. By 1988 the focus had moved to increasing efficiency and removing inequities that were present in the incumbent scheme. In 2004 and 2005 the New Zealand Government demonstrated that they are no longer opposed to providing ‘incentives’ to encourage retirement income savings, with the implementation of schemes targeted at the individual level and the workbased level. The indication is that taxation incentives to encourage retirement savings are more likely to be witnessed in a welfarist political environment. Conversely if the political environment has a stronger neoliberal focus, the support for taxation incentives is likely to reduce.
Open Access
Charity Financial Reporting Regulation: a Comparison of the United Kingdom and Her Former Colony, New Zealand
(Te Herenga Waka—Victoria University of Wellington, 2005) Cordery, Carolyn Joy; Baskerville-Morley, Rachel F
Charities are becoming more highly regulated worldwide and yet they are subject to diverse, country-specific, financial reporting standards. New Zealand is a jurisdiction that has treated all sectors alike in its approach to the financial regulation of charities, whilst the United Kingdom has, for some time, separated the regulation of charities from other entities. This paper provides a comparison of the histories of the evolution of regulation for charity reporting in the United Kingdom and New Zealand. The current process of international harmonization in both jurisdictions is premised on the principle that accounting conceptual frameworks should not be jurisdiction-specific, but charities have proved to be an exception. We suggest in this study that this exception is attributed to different drivers resulting in regulatory distinctions in two otherwise similar jurisdictions. Without persisting in the maintenance of sector neutrality, the inevitable divergence increases the load on preparers, attesters, and users and may lead to lower levels of accountability and transparency.
Open Access
Analysis of Change in Present Value Measurements
(Te Herenga Waka—Victoria University of Wellington, 2005) Bradshaw, John; Khanna, Bhagwan; Roush, Melvin; van Zijl, Tony
In recent years, the leading standard setters for financial reporting have shown an increasing preference for fair value measurement. However, present value is often the only acceptable method of estimating fair value and therefore the actual result of the swing to fair value is likely to be increased use of present value in financial reporting. This paper addresses the issue of interpretation of a change in present value between successive reporting dates and shows that the change can be analyzed by use of the familiar variance analysis framework widely used in management accounting.
Open Access
Agency Theory and Trust Ownership of Shares
(Te Herenga Waka—Victoria University of Wellington, 2005) Emanuel, David; van Zijl, Tony
The problems of agency theory related to security valuation are normally discussed in the context of “owner-managers” and “outside shareholders”, and/or equity-holders and debt-holders. In this paper we discuss agency problems that emerge when there is only one shareholder (and no debt), but where the shareholder is a trust with separate income and capital beneficiaries. Trust ownership of this sort is not uncommon. The agency problems emerge as the two classes of beneficiaries have claims on cash flows that occur at different times, with income beneficiaries having claims until “capital” is transferred to the capital beneficiaries. The agency problems that are discussed are dividends, risk shifting, capital structure, cost capitalization, and investment policy. In all cases agency problems arise, and in some respects the agency problems are more pervasive than in the more “orthodox” settings.
Open Access
Cost Contribution Arrangements: China and International Best Practice
(Te Herenga Waka—Victoria University of Wellington, 2005) Holmes, Kevin; Holmes, Carin
This paper addresses the tax treatment in China of a cost contribution arrangement (CCA) in the light of the treatments in a selection of other countries, with the objective of ascertaining whether the law and practice in China conforms to international best practice. The paper arises out of concerns aired by a group of representatives, each from a multinational enterprise (MNE), which operates in China, about the prevailing Chinese law and State Administration of Taxation (SAT) practice with respect to CCAs. These concerns were raised at the International Research Seminar: Joint Research Project on Taxation held in Beijing by the Chinese International Taxation Research Institute and the International Bureau of Fiscal Documentation on 2930 June 2005. The paper is intended primarily to provide an overview of various country practices in relation to CCAs as a basis for further discussion about the state of the relevant law and practice in China.
Open Access
Double Tax Agreements and the Arm's Length Principle: the Safe Harbour Ratio in New Zealand's Thin Capitalisation Rules
(Te Herenga Waka—Victoria University of Wellington, 2005) Smith, Andrew M C; Dunmore, Paul V
The opportunities for international tax avoidance through the shifting of profits between jurisdictions is increasing as the world’s economy becomes more integrated. While transfer pricing has been the primary method for multinationals to shift profits, thin capitalisation arrangements have been seen by some multinationals as an alternative as transfer pricing practices have become subject to greater scrutiny by revenue authorities. As a result many OECD members have over the last decade introduced specific rules to deal with thin capitalisation arrangements. New Zealand introduced thin capitalisation rules (along with revised transfer pricing rules) in 1995. At the time of their introduction there was no consideration of any kind as to the relationship between these new thin capitalisation rules and New Zealand’s existing DTA obligations. This omission is notable given that existing DTA obligations could override the new thin capitalisation rules or instead the new rules could potentially override existing DTA obligations. The objective of this article is to review New Zealand’s thin capitalisation rules enacted in 1995 to determine whether they can be considered consistent with the arm’s length principle found in New Zealand’s DTAs.
Open Access
Judicial Techniques for Controlling the New Zealand General Anti-Avoidance Rule: a Case of Old Wine in New Bottles, from Challenge Corporation to Peterson
(Te Herenga Waka—Victoria University of Wellington, 2005) Dunbar, David
The judgment of the Privy Council in the recent Peterson case highlights the difficulty of deciding whether a general anti-avoidance rule should apply to set aside for tax purposes a passive investment structure which sought to take advantage of a number of unrelated provisions in the Income Tax Act 2004 (ITA). The taxpayer invested in a film known as Lie of the Land which was a commercial failure. The film was never released yet the tax system not only underwrote the taxpayer's investment, but it also enabled him to make a cash profit from what could be fairly described as a financial disaster. The financial success or failure of the investment (post tax) turned on whether the courts were prepared to allow the Commissioner of Inland Revenue (CIR) to apply the general anti avoidance rule to cancel the cash profit made by the taxpayer. That case is the motivation for this working paper.