Journal of the Australasian Tax Teachers Association
THE ALIGNMENT OF TAX AND FINANCIAL ACCOUNTING RULES: THE CASE FOR A NEW SET OF COMMON RULES
ALDRIN DE ZILVA∞
ABSTRACT: It is a well recognised proposition that the existing Australian tax system is unnecessarily complex and inefficient. The alignment of financial accounting income and taxable income has for many years been suggested as a possible solution to some of the problems. This article examines, in the current climate, the merits of aligning the financial accounting rules and tax laws. Specifically, it proposes that although it is not feasible to have the existing tax laws conform to the financial accounting rules nor the existing financial accounting rules to the tax laws, there is considerable conceptual merit in developing a new set of common rules that is used for both tax and financial accounting purposes.
It is a well recognised proposition that the existing Australian tax system is unnecessarily complex and inefficient. The alignment of the ‘financial accounting rules’ and ‘tax laws’has for many years been suggested as a possible solution to some of the problems.Cooper aptly describes the issue as ‘both perennial and pervasive – perhaps even eternal and universal’.
This article examines the potential benefits of the alignment of the financial accounting rules and tax laws and considers the merits and feasibility of requiring: the tax laws conform to the financial accounting rules; the financial accounting rules conform to the tax laws; or the replacement of the existing tax laws and financial accounting rules with a new set of common rules.
In light of current developments, in particular the increasing adoption of accounting concepts by the tax laws and the recent spate of corporate collapses placing considerable pressure on accounting standards, it is suggested that the establishment of a new set of common rules has considerable merit.
II THE PROBLEM WITH THE AUSTRALIAN TAXATION SYSTEM
Under the Income Tax Assessment Act 1922 (Cth) or the Income Tax Assessment Act 1936 (Cth), there was little or no difference between the taxable income and net profit of an enterprise.Between the early 1940s and late 1990s there was a divergence of the financial accounting rules and taxation laws largely stemming from a considerable expansion of the coverage of the Australian income tax law from its initial focus on the narrowly defined concept of ‘ordinary income’ to the inclusion of virtually all realised gains and losses of a non-private nature.
The expansion in the tax laws has been undertaken in a largely unstructured ‘piecemeal’ approach whereby new ‘taxing regimes’ (with their own structure and set of rules) have been ‘tacked on’ to the existing system.This lack of a coherent structure has resulted in the existing Australian tax system being unnecessarily complex and inefficient, and requiring substantial restructuring and simplification. This is widely acknowledged.As noted by John Ralph in his foreword to a discussion paper released during the Federal Government’s Review of Business Taxation (the ‘Ralph Review’):
The Australian tax system can be likened to the leaning tower of Pisa. Adding another storey will not reduce the chance of collapse. It would only make it more certain. Like the leaning tower, the business tax system needs a sound and stable foundation before we can start the task of rebuilding.
One of the principal reasons for the widespread dissatisfaction with the current system is that it is not based on a coherent set of principles. The 1936 Act was developed in an Australian economy very different from today’s. This Act has been added to and patched largely in an ad hoc manner until it is no longer coherent and is not easily comprehended.
If we are to avoid perpetuating this situation we need to establish a sound foundation and a framework of coherent principles capable of adaptation to meet changing needs and policies without sacrificing the integrity of the system. 
It is broadly agreed that a fundamental change to the existing Australian taxation system is required.The issue addressed in this article is whether the alignment of the financial accounting rules and tax laws would provide the solution.
III THE BENEFITS OF ALIGNMENT
Prior to considering the merits of the various approaches to the alignment of the financial accounting rules and tax laws, it is important to first address the possible benefits of alignment. The proponents of aligning the financial accounting rules and tax laws suggest conformity will provide the following benefits:
∞ increased simplicity,
∞ decreased compliance costs,
∞ greater certainty,
∞ greater durability, and
∞ an increased ability to undertake future modifications without damaging the underlying framework on which the system is based. 
Currently, public companies, large proprietary companies, registered schemes and certain other taxpayers that are likely to have significant investor interest are required by lawto prepare their financial accounts in accordance with the Australian accounting standards.
Other taxpayers, although not bound by law, may prepare a set of accounts (whether or not in compliance with the accounting standards) for managerial purposes. Upon completion of the financial and/or managerial accounts, the taxable income/loss is calculated by making relevant adjustments to the accounting profit/loss for the difference in the accounting rules and the tax laws.
It has been suggested that, the need to understand and apply a single set of laws to calculate both financial accounting income and taxable income — as opposed to having to understand and apply the current voluminous set of accounting standards and overlapping tax laws — would simplify the existing convoluted process involved in the preparation of financial accounts and tax returns.
B Compliance Costs
Proponents of aligning the financial accounting rules and tax laws suggest the ability to produce a single set of accounts for financial accounting and tax purposes would reduce compliance costs. Internal accounting costs as well as costs associated with reliance on external specialist tax and financial accounting advisers should be decreased in the long term.
In a survey conducted by Tran,it was revealed that 57 per cent of listed companies supported complete alignment of tax laws with financial accounting rules. They also estimated the cost savings with complete alignment to be approximately 57per cent.
Pope,on the basis of a number of studies conducted in the early 1990s, maintains that the estimated aggregate compliance costs of personal and public companies’ income taxation in Australia are high, both in absolute dollar terms and as a percentage of tax revenue. They are also high by (an admittedly limited) international comparison.Pope suggests compliance costs could be significantly reduced with the introduction of a simpler and clearer system.
Those in favour of the alignment of the tax and financial accounting rules suggest that this would result in increased certainty by simplifying the treatment of certain items, such as prepaid expenses. Currently the tax laws have separate prepayment rules which apply differently to:
∞ Simplified Tax System (‘STS’) taxpayers and non-business individuals,
∞ non-STS and other taxpayers,and
∞ tax shelter arrangements.
In addition, there are transitional rules which limit the available deduction depending on the year in which the expenditure was incurred.Some taxpayers may encounter difficulties in applying the appropriate tax prepayment rules.
By aligning the tax laws and financial accounting rules, it is suggested there would be greater simplicity in areas such as the prepayment rules and therefore greater certainty.
The current income tax system places significant emphasis on the legal form of a transaction in establishing the appropriate characterisation of transactions, such as whether a transaction is on revenue or capital account. It is suggested that an alignment of tax and financial accounting rules would provide a greater ability to adopt more of a ‘substance over form’ approach whereby transactions with the same economic substance receive the same taxation treatment even if the legal form of those transactions differs,.
The historic development of the income tax system has meant that the current tax system largely specifies what income and expenses are included in the tax base.Accordingly, income and expenses that do not fall within these regimes may be excluded by default. The difficulties encountered in dealing with ‘black hole’ expenses are a case in point. Prior to the introduction of section 40-880 of the Income Tax Assessment Act 1997 (Cth) and subject to proposed amendments,these legitimate business expenses could not be claimed as tax deductions because they did not fall within the boundaries of the relevant tax laws.
It is suggested that an alignment of tax laws and financial accounting rules would result in a more durable system that would potentially alleviate these difficulties.
E Future Modifications
It is suggested that an alignment of tax laws and financial accounting rules would more easily facilitate changes to the tax law to introduce new policy initiatives. For example, in order to currently change taxation law, parliamentary or court intervention is required. However accounting standards are controlled by the Australian Accounting Research Foundation (‘AARF’). Despite the rigorous procedures set by AARF, no parliamentary or court intervention is required to change the accounting standards.
IV APPROACHES TO ALIGNMENT
An alignment of the tax laws and financial accounting rules can be achieved by:
(i) requiring the tax laws to conform to the financial accounting rules;
(ii) requiring the financial accounting rules to conform to the tax laws; or
(iii) replacing the existing tax laws and financial accounting rules with a new set of common laws.
Each of these alternatives is discussed below.
A International Perspective
Prior to evaluating the merits of the approaches to alignment in Australia, it is important to consider whether any particular approach has a level of international acceptance which would commend it to Australian use. In this respect, it is interesting to note the diversity that exists in relation to the application of the above methods internationally.
In a 1987 study conducted by the Organisation for Economic Co-operation and Development (‘OECD’)three main types of relationship between accounting rules and tax laws were identified in OECD member countries. First, the OECD identified countries — such as France, Germany, and Italy — where financial statements drawn up according to accounting rules were used to determine the basis of income tax assessment (that is, approach one and three above). Secondly, there were a few countries, including Norway, where accounting practices were dictated by tax laws and book entries contrary to tax laws were not permitted (that is, approach two above). Finally, there were countries, such as the USA, the UK, and the Netherlands, where the accounting rules were independent of the tax laws, that is, where the laws were not really aligned.
This diversity clearly demonstrates that there is no international consensus on the ‘correct’ approach to be followed.
V CONFORMITY OF THE TAX LAWS TO THE FINANCIAL ACCOUNTING RULES
To date, the calls for conformity in Australia have focused on the implications of requiring the tax laws to conform to the financial accounting rules.
A The Previous Attempts
In 1975, the Asprey Committeein its review of taxation reported receiving submissions suggesting tax should be determined on the basis of financial accounting income. Although the alignment of tax and financial accounting was not on the agenda in the major tax reforms which took place in 1985 and 1986, the issue continued to attract considerable attention.For example, an article prepared by Cooper in 1986 noted that ‘almost without exception, commentators and law reform authorities see the conformity of tax to financial accounting as a major goal for tax reform’. Boucher, a former Commissioner of Taxation, suggested that, if appropriate improvements were made to the accounting rules, it may be possible to levy tax on financial accounting income.
Since the late 1990s, the debate on the conformity of tax laws to the financial accounting rules appeared to become partially intertwined with the extensive evaluation of the ‘Tax Value Method’ (‘TVM’). As outlined in Appendix 1, the debate in relation to the merits of adopting the TVM is clearly distinguishable from the debate on the alignment of financial accounting rules and tax laws.
While there was general acknowledgement during the process of evaluation of the TVM that the current income tax law is overly complex and in need of substantial restructuring and simplification, the overwhelming view was that adoption of the TVM was not the means to achieving these ends.The TVM was formally rejected by the Government on 28 August 2002.
Previous calls to align the tax laws with the financial accounting rules have largely failed to gain the support required to enable a genuine exploration of the alternatives.
B Why Have They Failed?
It is generally considered that aligning the tax laws to the financial accounting rules is not feasiblefor the following key reasons:
∞ the perceived difference in the underlying objectives of the two systems;
∞ the wide discretion and choice provided by the financial accounting rules;
∞ the reluctance by the relevant authorities to relinquish power; and
∞ the significant transitional costs.
Although both the tax and financial accounting systems purport to measure income, it has been suggested that the underlying objective of each system is fundamentally different. The primary objectiveof the tax system in Australia is to raise revenue to enable the government to fund its expenditure programs, such as defence and the social welfare system,whereas the objective of general purpose financial reports is to provide information useful to users for making and evaluating decisions about the allocation of scarce resources.
Similarly, it has been pointed out that there is a fundamental difference in the determination of income for accounting and tax.Essential to the determination of accounting income is the ‘matching principle’which requires that in determining the profit for the period, items of expenditure are matched against the revenue for the period. By contrast, the tax law, although approving the use of accrual accounting, disregards the matching principle.For example, capital gains are taxed when they are effectively crystallised as opposed to when they accrue.
Given the different objectives of the systems, it is suggestedthat it is not possible to have the tax laws conform to the financial accounting rules.
The financial accounting rules are such that in numerous instances a firm has several choices of methods to account for its transactions.As Herring points out, in trying to prepare accounts that represent a ‘true and fair view’, there will always be room for honest differences of opinion.Although the same criticism could be levied at the existing tax laws, it is suggested that scope for differences of opinion in applying the relevant accounting standards and principles is significantly greater. It has been suggestedtherefore that an alignment could only be possible subsequent to the tightening of the existing financial accounting rules.
A further difficulty arising from the alignment of the tax laws to the financial accounting rules is the potential loss of tax revenue as a result of firms exploiting any increased flexibility in the tax laws resulting from such a move.
3 Institutional Arrangements
The Asprey Committee rejected the proposals recommending an alignment of the tax laws to the financial accounting rules on the basis that the jurisdiction of the revenue-raising authority could not be relinquished to, in effect, the professional accounting bodies and business organisations which had played (and continued to play) a significant role in the formulation of accounting principles and policy.
An empirical study by Tranfound that the major causes of the gap between accounting profit and taxable income were caused by deliberate government policies and differing objectives of the two systems.As a result he concluded that a complete book-tax alignment would only be possible in the unlikely event that the government is willing to yield its policy- making power in the tax system and the objectives of the two systems can be reconciled.
4 Transitional Costs and Possible Increased Audit Costs
Although the alignment of the tax laws to the financial accounting rules may result in longer term cost savings, as discussed above, there will be a relatively significant initial transitional costs.
In terms of long term costs it is also important to note that the relevant statements produced would obviously have to serve two purposes. As such, audit costs may rise as a result of the increase in the responsibility of the auditor.
5 Other Reasons
It has been suggested that prior attempts to gain sufficient support for tax law conformation to the accounting rules have also failed for the following reasons: 
∞ a radical change to tax policy would be required (for example, under current tax policy not all accounting provisions are recognised for tax purposes) and it is generally more difficult to garner support for radical change;
∞ most taxpayers do not at present need to comply with the accounting standards;
∞ the difficulties with accounting recognition of unrealised profits (for example, equity accounting bringing to account the profits earned by entities over which they have a significant influence);
∞ the inappropriate operation of the concept of materiality in a tax system;
∞ the accounting concept of conservatism requires an earlier recognition of losses under accounting (such as bad debts);
∞ tax concessions available to taxpayers could be removed (or limited), again reducing the attraction of the change; and
∞ the international harmonisation of accounting standards may influence the tax base.
Based on the above factors, D’Ascenzo and England conclude that:
[W]hile there have been significant developments consistent with accounting concepts (e.g. removal of accelerated depreciation), the bottom line is that the practical realities make a comprehensive alignment of tax and accounting difficult, and the potential benefits speculative.
Unfortunately, much of the above mentioned research and commentary does not then proceed to consider alternative approaches to aligning tax laws and financial accounting rules.
VI CONFORMITY OF THE FINANCIAL ACCOUNTING RULES TO THE TAX LAWS
Despite the benefits of alignment outlined (III above), having the accounting rules conform to the existing tax laws in Australia would not be feasible for much the same reasons as those mentioned above (VB above). Perhaps it is for this reason that previous research and commentary has not addressed this approach.
Specifically, the conformity of the financial accounting rules to the tax laws would not be feasible given:
∞ the difference in the underlying objectives of the two systems. Specifically, financial statements prepared on the basis of tax laws would not provide a ‘true and fair’ view of the financial position of the entity for the relevant period and thus would not be useful to the users of the financial statements (see VB1);
∞ the reluctance by the relevant authorities to relinquish power (see VB3);
∞ the significant transitional costs (see VB4);
∞ the necessity for radical change to accounting policy; and
∞ the possibility that compliance with the international harmonisation of accounting standards may be unobtainable.
VII THE ESTABLISHMENT OF A NEW COMMON SYSTEM
Previous calls for alignment have focused on the feasibility of levying tax on the existing financial accounting rules. The research correctly concludes that it is not feasible to levy tax on income calculated in accordance with the existing financial accounting rules in Australia. It is the view of the author that nothing has changed in this respect.
However, there has been little or no work to date done on examining the merits of designing a new common system that would accommodate the objectives of both the financial accounting and tax systems. It is submitted that the recent increasing importation of accounting rules into the tax system and the call for a tightening of the accounting rules as a result of the recent spate of significant corporate collapses (discussed below), provides an ideal window of opportunity for the development of a new uniform system that could be used for both financial accounting and tax.
A Increasing Adoption of Accounting Principles
Although there is no explicit reference to financial accounting in the Australian statutory tax lawsand, generally speaking, accounting principles have had a limited role in the development of judicial tax precedents in Australia,in recent times there has been an increasing tendency to adopt accounting principles in one form or another. For example, the removal of an immediate deduction for prepayments made by certain taxpayers after 1 July 2001,the removal of accelerated tax depreciation and unification of the capital allowance rules with the introduction of the uniform capital allowance system,and the recent introduction of a tax consolidation regime. This approach of having the Parliament import into the tax system the relevant accounting principles was recommended by the Asprey Committee.Narrowing the gap between taxable income and financial income increases the feasibility of completely aligning the two systems.
B Pressure on Accounting Standards
There has been a recent spate of significant corporate collapses in both Australia and overseas, including:
∞ HIH Insurance’s collapse in Australia in March 2001: the country’s largest corporate failure, with debts the liquidators have estimated amounted to AUD 5300 million;
∞ OneTel’s collapse in Australia in May 2001 with debts of more than AUD 600 million; and
∞ Enron, the largest US corporate collapse to date, commencing with Enron’s announcement on 8 November 2001 of a USD 586 million profit reduction in its earnings since 1997.
Such significant corporate collapses have resulted in a critical assessment of corporate governance rules and of the role of the auditor, and a call for the tightening of the accounting rules.A tightening of the financial accounting rules will also increase the feasibility of aligning the financial accounting and tax laws.
C The Benefits of a New Common System
Theoretically, a new common system could deliver the benefits of alignment outlined earlier (III above), namely:
∞ increased simplicity,
∞ decreased long-term compliance costs,
∞ greater certainty,
∞ greater durability, and
∞ an increased ability to undertake future modifications without damaging the underlying framework of the system.
In addition, a new common system could overcome several of the difficulties earlier outlined.
The users of financial statements are interested in the ‘true’ income of the entity (whatever that may be). Similar, the tax system should attempt to tax the ‘true’ income of the taxpayer. Given this, it is suggested that it should be possible to develop a system which satisfies the objectives of both financial users and the tax authorities.
Currently the tax laws do not, as a general proposition, adopt the accounting ‘matching principle’.It has been suggested that this artificially inflates or deflates the income of the relevant business for tax purposes.
One possible explanation for the reluctance of the government to ensure tax laws adopt the matching principle could be the concern that the adoption of the matching principle in the tax laws may result in items such as capital gains being assessed on an accruals basis, which may result in cash flow difficulties for taxpayers in that the tax obligation would need to be satisfied prior to the crystallisation of the gain. A simple solution to this problem would be for taxpayers to be given the right to defer the payment of tax on capital gains until the asset has been disposed of.
In relation to the government using the tax system to implement certain policies (such as encouraging research and development expenditure), it is suggested by the author that these could still be provided by the Government via other means, such as government grants. As noted by Tran:
Alignment of tax laws with [generally accepted accounting practice] means that the government has to use means other than the income tax system to achieve its policy objective.
The use of the of the tax system as a policy tool by the Government clearly increases the complexity of the tax system and should be avoided.
It is therefore suggested that it would be possible to develop a new common system which satisfied the objectives of both financial users and the tax authorities.
The problems alluded to earlier (at VB) in relation the wide discretion and flexibility provided to preparers of financial statements, as well as the current concerns about corporate governance (discussed at VIIB), could both be overcome by developing a new common system which provided a more strict approach to the preparation of financial (and in effect tax) accounts.
3 Protecting the Tax Revenue
A key concern is that any change to the tax laws which result in increased flexibility or discretion may result in a loss to the revenue.
Although on the one hand a decrease in reported earnings would result in a decrease in tax payable and an increase in after-tax cash flow, and therefore should have a positive impact on the market, reporting lower earnings may not be viewed favourably by investors. These competing forces have been extensively researched in the accounting arena with mixed results.The greatest difficulty encountered by these studies has been identifying a reasonably accurate proxy for the confidential ‘true’ taxable income of the sample entities and addressing possible confounding variables.
Whatever the variation in the results of these accounting studies on earnings management, they consistently found that many firms had considerably higher accounting income than projected taxable income as evidenced by the disclosed tax effect accounting entries.
Anecdotal evidence exists to further support this. For example, as reported in the Financial Times,Enron’s pre-tax profits between 1996 and 2000 totalled USD 1.79 billion and it received US Federal tax rebates of USD 381 million. Yet in only one year did it pay federal tax : USD 17 million in 1997. Enron bolstered profits by:
∞ booking income immediately on contracts that would take up to 10 years to complete;
∞ using financial derivatives and other complex transactions;
∞ shifting debts into partnerships it in effect controlled, yet convincing the auditors it was off balance sheet; and
∞ masking poorly performing assets with rapid deal-making. 
The findings of the accounting studies and anecdotal evidence suggest that there should be no loss to the tax revenue as a result of an alignment of accounting and tax laws. To the contrary, conceptually they suggest a possible increase in tax revenues.
4 Other Issues
Several of the other issues earlier highlighted (at VB5) could be overcome by ensuring that:
∞ the new common system is simple enough to ensure all taxpayers comply with it (as is currently the case with Australia’s extremely complex tax system);
∞ the difficulties with areas such as equity accounting, materiality and the conservatism concept are thoroughly examined and addressed; and
∞ the new common rules conform to international standards so as to facilitate and promote the international harmonisation process which, no doubt, is also aimed at determining the ‘true’ income of a business.
D The Difficulties of a New Common System
Although there is considerable theoretical and conceptual logic in the development of a new common system, practically — the ability to implement such a system — will still depend on the institutional factors and transitional costs earlier discussed (at VB3 and VB4).
An alignment of the tax and financial accounting rules will clearly require a relinquishment of rule-making power by either the Government or alternatively by the relevant professional accounting bodies and business organisations which play a significant role in the formulation of accounting principles and policy. This perhaps poses the greatest challenge for alignment in Australia.
In addition, as was seen with the analysis of TVM, with the formulation of a new common system ultimately ‘the devil will lie in the detail’.
The conceptual attractiveness of aligning the financial accounting and tax laws has been well documented, as have the difficulties of trying to levy tax on financial accounting income, however, to date there has been minimal consideration given to the development of a new financial accounting and tax system. It is suggested that with the recent increasing importation of accounting rules into the tax system and call for tighter accounting rules, further consideration should be given to the development of a single financial accounting and tax system.
Distinguishing the TVM
The Review of Business Taxation (‘RBT’) process, established by the Government in 1998, proposed two alternative methods for the calculation of taxable income.Option 1 maintained the concepts of assessable income and deductions but recommended modifications to take account of movements in the tax value of assets and liabilities. Option 2 (the TVM approach) recommended the replacement of the existing system with a system that relied on taking account of the movements in both the receipts and payments (cash flow) and the tax value of assets and liabilities.
The previously proposed TVM is clearly distinguishable from the debate on the alignment of accounting rules and tax laws. The TVM was intended to have a neutral impact on taxation revenue.The objective was to change the legislative framework for determining taxable income without having a material impact on the final taxable income amount.The TVM was simply a different way to calculate taxable income. In accounting parlance, it was an attempt to move from a profit and loss based approach to a cash flow and balance sheet approach, with relevant tax law and tax loss adjustments, and had the objective that it would result in the calculation of an identical or very similar taxable income amount.
It is important to recognise that the alignment of tax to financial accounting income requires the establishment of a different methodology that will, more often than not, result in a materially different taxable income figure. For example, the TVM did not aim to tax unrealised gains, although with an alignment of tax to financial accounting income, such gains may be subject to tax.
Following an extensive evaluation of the TVM, which involved a wide-ranging process of consultation with tax experts, business and the broader community, on 28 August 2002 the Treasurer of the Commonwealth of Australia, the Honourable Peter Costello, announced that the Government had accepted a recommendation by the Board of Taxation not to proceed with the TVM.It was considered that, while the TVM may offer benefits in some areas, it would generate greater complexity and uncertainty in others and would result in substantial transitional costs.
∞ BCom (University of Melbourne) MTax (University of Melbourne) ICA FTIA, Partner, Horwath Australia, and Lecturer, Business Law & Taxation, Monash University.
 The term ‘financial accounting rules’ is used in this article to refer to both the standards of accounting practice (such as the Australian Accounting Standards) as well as the more fundamental principles (such as the Statement of Accounting Concepts). The term ‘tax laws’ refers to the relevant provisions contained in both the Income Tax Assessment Act 1936 (Cth) and Income Tax Assessment Act 1997 (Cth) that are used to calculate taxable income.
 These suggestions have been well documented in reports such as the Commonwealth Government of Australia, Taxation Review Committee Full Report (1975) (‘Asprey Report’) ch 8; the Joint Committee of Public Accounts, Commonwealth Parliament of Australia, Report No. 326 An Assessment of Tax – A Report on an Inquiry into the Australian Taxation Office (1993) para 5.30.
 G S Cooper, ‘Some Observations on Tax Accounting’ (1986) 15 Australian Tax Review 221.
 G L Herring, ‘The Impact of Accounting Principles upon the Determination of Taxable Income’ (Paper presented at the Seventh National Convention of the Taxation Institute of Australia, Hobart, April 1986) 49.
 Board of Taxation, Evaluation of the Tax Value Method: A Report to the Treasurer and Minister for Revenue and Assistant Treasurer (2002) (‘TVM Evaluation’) 3.
 Ibid. See also Commonwealth Government of Australia, Review of Business Taxation – A Strong Foundation: Discussion Paper. Establishing the objectives, principles and processes (1998) iii.
 Board of Taxation, TVM Evaluation, above n 5, iv.
 Commonwealth Government of Australia, Review of Business Taxation – A Strong Foundation: Discussion Paper Establishing the objectives, principles and processes (1998) iii.
 Board of Taxation, TVM Evaluation, above n 5, para 100.
 See T Porcano, D Shull and A Tran, ‘Alignment of Taxable Income with Accounting Profit’ (1993) 10(4) Australian Tax Forum 475, 477, 500 for a discussion of these. It should be noted that Porcano et al conclude that it is not feasible to align the systems: 509.
 Refer Corporations Act 2001 (Cth) ss 292, 296.
 For example, the Asprey Report, above n 2, recognised that company income tax would become a simple tax if it were levied on the already calculated financial accounting income of a company: para 3.21.
 Porcano et al, above n 10, 502.
 Alfred Van-Ho Tran, Relationship of Tax and Financial Accounting Rules — An Empirical Study of the Alignment Issue (D Phil Thesis, Australian National University, Canberra, 1997) (‘1997 Thesis’) 146–91: ch 6 ‘A Survey of Opinions About Alignment’ avail <http://www.rbt.treasury.gov.au/submissions/PlatformForConsultation/html/sub002.htm> 12 August 2005.
 Ibid 171–5.
 Jeff Pope, ‘The Compliance Costs of Taxation in Australia and Tax Simplification: The Issues’ (1993) 18(1) Australian Journal of Management 69.
 Pope undertook a comparison of the compliance costs in the US, Canada and the UK with those in Australia: ibid 76.
 Ibid 81.
 Income Tax Assessment Act 1936 (Cth) s 82KZM.
 Income Tax Assessment Act 1936 (Cth) s 82KZMA to 82KZMD.
 Income Tax Assessment Act 1936 (Cth) s 82KZME.
 Income Tax Assessment Act 1936 (Cth) s 82KZMB. This section was repealed on 22 September 2002, however still applies for income years which include 21 September 2002.
 Board of Taxation, TVM Evaluation, above n 5, 4.
 Commonwealth Treasurer, ‘Government Decides Against The Tax Value Method’ (Media Release No 48, 28 August 2002).
 Organisation for Economic Co-operation and Development Working Group on Accounting Standards, ‘Accounting Standards Harmonisation Report No. 3: The Relationship Between Taxation and Financial Reporting’ (1987).
 Asprey Report, above n 2, ch 8.
 C Westworth, ‘Accounting Standards: A Framework for Tax Assessment’ (1985) 2 Australian Tax Forum 243; Ross W Parsons, ‘Income Taxation: An Institution in Decay?’ (1986) 3 Australian Tax Forum 233.
 Cooper, above n 3.
 Trevor Boucher, ‘The Simplification Debate: Too Simplistic?’ (1991) Taxation in Australia 277, 282.
 Board of Taxation, TVM Evaluation, above n 5, iv.
 Commonwealth Treasurer, above n 24.
> Michael D’Ascenzo and Andrew England, ‘The Tax and Accounting Interface’ (Paper presented at the 15th Annual Conference of the Australasian Tax Teachers Association, University of Wollongong, 31 January 2003) 12–13.
 Porcano et al, above n 10, 478–80.
 Other objectives include economic management, encouraging/discouraging certain activities and political objectives. Refer Porcano et al, above n 10, 478.
 Australian Accounting Research Foundation, Statement of Accounting Concepts SAC 2 (August 1990).
 For a comparison of the accounting standards and tax principles, see R Fayle, ‘Accounting Standards and their Relevance to Taxation Law’ (1990) (Paper presented at the Ninth National Convention of the Taxation Institute of Australia, Adelaide, 1 January 1990).
 See Australian Accounting Research Foundation, Statement of Accounting Concepts SAC 4 – Definition and Recognition Criteria of the Elements of Financial Statements (March 1995).
 Herring, above n 4, 49.
 D’Ascenzo and England, above n 32.
 Porcano et al, above n 10, 501.
 Herring, above n 4, 48.
 Blaike questions the attainability of this objective: A W Blaike ‘The Relevance of Accounting Principles to the Income Tax Assessment Act’ (1981) (Paper presented at the State Convention of the NSW Division of the Taxation Institute of Australia, Sydney, 3 April 1981) 1, 2.
 Porcano et al, above n 10, 484.
 Asprey Report, above n 2, para 8.8. The Asprey Report provided an alternative solution, suggesting that the issue in relation to the relinquishment of power could be overcome by providing the Commissioner of Taxation the power to adopt accounting principles if he felt it was appropriate to do so in the circumstances.
 A V Tran, ‘Causes of the Book-Tax Income Gap’ (1998) 14(3) Australian Tax Forum 253.
 Porcano et al, above n 10, 503.
 D’Ascenzo and England, above n 32.
 Ibid 13.
 See Tran, 1997 Thesis, above n 14.
 Porcano et al, above n 10, 485.
 Blaike, above n 43, para 2.06. Also refer Dean Hanlon and Les Nethercott, ‘Debt Defeasance: An Accounting / Taxation Interface’ (Paper presented at the Australian Tax Teachers Association 14th Annual Conference, Auckland, New Zealand, 17–19 January 2002).
 For a detailed discussion of these amendments, see R H Woellner, S Barkoczy, S Murphy and C Evans, Australian Taxation Law (12th edition, 2002) 941–62.
 Ibid 811–57.
 Asprey Report, above n 2, para 8.8.
 K Walker, ‘HIH: unprofitable for years’ The Australian (Sydney), 13 January 2003, avail (subscribers) <http://www.theaustralian.new.com.au.archives> at 22 November 2005.
 A Wood, ‘OneTel’s Billing Shortfall’ The Courier Mail (Brisbane), 1 August 2002, avail (subscribers) <http://www.newstext.com.au> at 22 November 2005.
 Mark Jickling, ‘The Enron Collapse: An Overview of Financial Issues’ (CRS Report for Congress, 28 March 2002) avail <http://fpc.state.gov/documents/organization/9267.pdf> at 22 November 2005.
 John C Coffee Jr, ‘Understanding Enron: It’s About the Gatekeepers, Stupid’ (Working Paper No 237, Columbia Law School, The Center for Law and Economic Studies, 30 July 2002) avail <http://ssrn.com/abstract_id=325240> at 14 August 2005.
 The ‘matching principle’ has been adopted in certain areas such as interest deductibility and the prepayment rules. For a discussion of the adoption of accounting principles by the courts, see Justice D G Hill, ‘The Interface Between the Tax Law and Accounting Practice as seen by the Courts’ (Paper presented at the 15th Annual Conference of the Australasian Tax Teachers Association, University of Wollongong, 31 January 2003).
 Cooper, above n 3, 239.
 Tran, 1997 Thesis, above n 14, 34.
 Pope, above n 16, 81.
 Calvin H Johnson, ‘Using GAAP instead of Tax Accounting is a Bad Idea’ 1999 Tax Analyst 74–119, avail <http://www.taxorg/readingsintaxpolicy.nsf> at 22 November 2005.
 N Dopuch and M Pincus, ‘Evidence on the Choice of Inventory Accounting Methods: LIFO v FIFO’ (1988) 26 Journal of Accounting Research 28; Myron S Scholes, G Peter Wilson and Mark A Wolfson, ‘Firms’ Responses to Anticipated Reductions in Tax Rates: The Tax Reform Act of 1986 (1992) 30 Journal of Accounting Research (Supplement) 161; S R Matsunaga, T J Shevlin and D Shores, ‘Disqualifying Dispositions of Incentive Stock Options: Tax Benefits versus Financial Reporting Costs’ (1992) 30 Journal of Accounting Research (Supplement) 37.
 A V Tran, ‘The Gap between Accounting Profit and Taxable Income’ (1997) 13 Australian Tax Forum 507, 508.
 Porcano et al, above n 10, 489. See also Tran (1997), ibid, which provides empirical support for the proposition that the extent of the gap between accounting and taxable profit is dependent on the industry classification and size of the firm. These findings contradict the Asprey Report, above n 2, para 8.4, which suggests the divergences between financial accounting and tax usually results in income subject to tax being greater than financial accounting income.
 Andrew Hill, Joshua Chaffin and Stephen Fidler, ‘Enron: Virtual Company, Virtual Profits’ Financial Times (3 February 2002), avail <http://specials.ft.com/enron/FT3648VA9XC.html> at 22 November 2005. This report cites pretax profits of USD 1.79 billion. It should be noted, however, that the US term ‘billion’ here employed refers to thousands of millions while the UK/Australian ‘billion’ refers to millions of millions.
 Porcano et al, above n 10, 500.
 Board of Taxation, TVM Evaluation, above n 5, 15.
 Review of Business Taxation, A Platform for Consultation (22 February 1999) 41–2.
 Board of Taxation, TVM Evaluation, above n 5, 17.
 Ibid. For a further elaboration of the differences and difficulties with the TVM, see Graeme Cooper and Michael Wenzel, ‘An assessment of the Asserted Increase in ‘Certainty’ Arising from the Introduction of the Tax Value Method (TVM)’, 6 June 2002, avail <www.taxboard.gov.au> at 12 August 2005; A O’Connell, ‘Option 2: Will it Change What is Included in Taxable Income’ (2000) 29(2) Australian Tax Review 68.
 See Graeme S Cooper, ‘How Well Does TVM Express the Current Income Tax Base’ (2001) (Paper presented at the NSW Tax Value Method Consultative Conference, Sydney, 23–24 July 2001, for a discussion of how the TVM would have changed a taxpayer’s taxable income.
 Commonwealth Treasurer, above n 24.
 Ibid iv.