Can taxable income be estimated

from financial reports of listed

companies in Australia?
Alfred Tran*

Abstract

Taxable income may provide some indication as to the credibility of pretax accounting
profit reported in corporate financial statements, because the two income measures
are based on the same set of economic transactions and events. This article examines
whether it is possible to estimate a firms actual tax liability and taxable income from
income tax disclosures under the current Australian Accounting Standard AASB 112
Income taxes, which applies to financial statements for reporting periods commencing
on or after 1 January 2005. Specifically, this article examines empirically the problems
associated with estimating taxable income from current tax expense a mandatory
disclosure item under AASB 112. Recommendations are also made to improve the
income tax disclosure requirements to facilitate estimation of a firms taxable income.

* Research School of Accounting, The Australian National University.

This article was accepted for publication on 22 May 2015.

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Acknowledgment
The financial support of the ANU College of Business and Economics Internal Grant
Scheme is gratefully acknowledged.

Keywords: taxable income; current tax expense; income tax disclosures.

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1. Introduction
In Australia, as well as in the United States (US), two sets of rules are used to measure
the profit or net income of a large business entity: one for financial reporting
purposes and the other for income tax purposes. The two sets of measurement rules
are different because the objectives of the two systems are different.1 The primary
objective of a tax system is to raise revenue for government programs, although
the government may also use the tax system to exert control over the economy
(fiscal policies), to accomplish social objectives (eg income redistribution), and for
political purposes.2 The objective of general purpose financial reports is to provide
information useful to users of financial reports for making and evaluating decisions
about the allocation of scarce resources.3 Different objectives give rise to different
principles and rules. For instance, employees long service leave entitlements are
recognised as a liability and accrued as an expense each year in financial reporting,
but for the sake of objectivity and certainty in the assessment of tax, they are allowed
as deductions from assessable income only when they are paid. However, given that
both reported beforetax accounting profit and taxable income are based on the
same set of economic transactions and events, in many cases their differences are not
expected to be substantial.

Accounting profit or earnings before tax reported in the financial statements (book
income) of a firm with equity traded on a stock exchange often differs from the taxable
income in its tax return not only because financial reporting rules are different from
tax rules, but also because the firm (or its managers) may have various incentives to
manage book income and taxable income in different directions. Financial reporting
rules require managers of firms to make judgments and estimates in financial reporting
to various stakeholders. Information asymmetry between managers and outside
stakeholders enables managers to make use of private information they have when
they choose accounting procedures and estimates from a feasible set of options under
financial reporting rules with the intent of obtaining some private gains for themselves
or for the equityholders to whom they are accountable. A large body of earnings
management literature investigates managers motivations to over or understate

1 See TM Porcano and AV Tran, Relationship of tax and financial accounting rules in
AngloSaxon countries (1998) 33 The International Journal of Accounting 433; M Hanlon and
T Shevlin, Booktax conformity for corporate income: an introduction to the issues (2005)
NBER Working paper 11067.
2 See, for example, R Krever, Structure and policy of Australian income taxation, in RE Krever
(ed), Australian taxation: principles and practice, Longman Cheshire, Melbourne, 1987, pp 126.
3 Australian Accounting Standards Board, Framework for the preparation and presentation of
financial statements, Melbourne, 2009.

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book income mostly in the US institutional settings.4 In general, managers have more
incentives to aggressively report high book income than incentives to report low book
income in the corporate financial statements. They also may have incentives to engage
in tax planning strategies and to aggressively report low taxable income in corporate
tax returns to the taxation authorities in order to avoid tax.5

In the US, researchers find that the difference between book income and taxable
income has increased over time in the 1990s.6 A few high profile corporate collapses
in the early 2000s in the US (eg Enron, WorldCom) involved apparently profitable
companies paying little or no tax, ie these companies reported substantial accounting
profits in their financial statements but reported little or no taxable income in their
income tax returns. The financial scandals have undermined the credibility of financial
statements, especially the credibility of reported earnings, and have drawn attention
to the sources and magnitudes of booktax income difference.7 Consequently, US
Senator Grassle8 asked the Treasury and the Securities and Exchange Commission
(SEC) whether the tax returns of publicly traded firms could be made public to enable
investors, analysts, and corporate regulators to crosscheck the credibility of earnings
reported in their financial statements. Both the Treasury and the SEC rejected the
idea of public disclosure of full corporate tax returns.9 However, Grassleys suggestion
has generated debates in the US about whether public firms should be required to
disclose corporate tax return information.10

4 See literature reviews by B Lev and JA Ohlson, Marketbased empirical research in accounting:
a review, interpretation, and extension (1982) 20 Journal of Accounting Research (Suppl) 249;
RL Watts and JL Zimmerman, Positive accounting theory: a ten year perspective (1990) 65 The
Accounting Review 131; TD Fields, TZ Lys and L Vincent, Empirical research on accounting
choice (2001) 31 Journal of Accounting and Economics 255.
5 See literature reviews by DA Shackelford and T Shevlin, Empirical tax research in accounting
(2001) 31 Journal of Accounting and Economics 321; M Hanlon and S Heitzman, A review of tax
research (2010) 50 Journal of Accounting and Economics 127.
6 See, for example, GB Manzon and GA Plesko, The relation between financial and tax reporting
measures of income (2002) 55 Tax Law Review 175; L Mills, KJ Newberry and WB Trautman,
Trends in booktax income and balance sheet differences (2002) 96 Tax Notes (August 19)
1109; MA Desai, The divergence between book and tax Income (2003) 17 Tax Policy and the
Economy 169.
7 LF Mills and GA Plesko, Bridging the reporting gap: a proposal for more informative reconciling
of book and tax income (2003) 56 National Tax Journal 865.
8 Senator CE Grassley, Grassley release, letter on public disclosure of corporate tax returns
(2002) 131 Tax Notes Today (July 9) 16; Senator CE Grassley, U.S. Senator Grassley calls for
review of corporate return disclosure requirements (2002) 198 Worldwide Tax Daily (October
11) 30.
9 D Lenter, J Slemrod and D Shackelford, Public disclosure of corporate tax return information:
accounting, economics and legal perspectives (2003) 56 National Tax Journal 803, 804.
10 See, for example, M Hanlon, What can we infer about a firms taxable income from its financial
statements? (2003) 56 National Tax Journal 831; D Lenter, J Slemrod and D Shackelford, Public
disclosure of corporate tax return information: accounting, economics and legal perspectives

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Hanlon11 finds that under the US Statement of Financial Accounting Standard FAS
109 Accounting for income taxes, not much can be inferred about a firms taxable
income from its financial statements and provides three reasons why estimates of a
firms tax liabilities and/or taxable income may be incorrect. First, there are items
that cause the current tax expense to be over or understated relative to the actual
tax liabilities of the firm, such as stock option deduction, taxrelated contingent
liabilities (usually known as tax cushion), and intraperiod tax allocation (eg the
allocation of tax expense between continuing and discontinued operations that
are reported separately). Second, there are problems with the estimation of taxable
income calculated by grossingup the current tax expense due to the presence of tax
credits even when the current tax expense represents a reasonable proxy of the actual
tax liabilities of the firm. The last issue is different consolidation rules for book and
tax purposes that cause an inclusion of different corporations in financial statements
from those in income tax return.

More recently, Lisowsky12 examines the statistical association between the US tax
liability reported on corporate tax return and publicly available taxrelated disclosures
in corporate financial statements during the period 2000 to 2004. He finds a strong
positive relationship between current US tax expense in financial statements and
total tax after credits in corporate tax return in the subsample of firms with positive
beforetax domestic earnings and no net operating loss carried forward. On average
in this subsample, for every dollar of current US tax expense, about $0.70 is reported
to the Internal Revenue Service (IRS) as total tax after credits. He also finds that items
such as the tax benefit of stock options, current year accrual of contingent tax liability
reserve (tax cushion), and consolidation booktax differences are incrementally
informative to current US tax expense in explaining total tax after credits in corporate
tax return.

Lenter et al13 point out that public disclosure of corporate tax return information
may have some undesirable consequences. The disclosure of the entire corporate tax
return could reveal proprietary information that provides a competitive advantage
to firms that are not required to make such disclosures. Furthermore, full disclosure

(2003) 56 National Tax Journal 803, 804; LF Mills and GA Plesko, Bridging the reporting
gap: a proposal for more informative reconciling of book and tax income (2003) 56 National
Tax Journal 865; M Hanlon and T Shevlin, Booktax conformity for corporate income: an
introduction to the issues (2005) NBER Working paper 11067; DA Shackelford, J Slemrod,
JM Sallee, A unifying model of how the tax system and Generally Accepted Accounting
Principles affect corporate behaviour (2007) NBER Working paper no. 12873.
11 M Hanlon, What can we infer about a firms taxable income from its financial statements?
(2003) 56 National Tax Journal 831.
12 P Lisowsky, Inferring U.S. tax liability from financial statement information (2009) 31 Journal
of the American Taxation Association 29.
13 D Lenter, J Slemrod and D Shackelford, Public disclosure of corporate tax return information:
accounting, economics and legal perspectives (2003) 56 National Tax Journal 803, 804.

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will cause companies to dilute the information content of tax returns, hampering tax
enforcement. Therefore, they only support disclosure of bottomline items such as
taxable income either directly or indirectly through disclosures in financial statements.

Unlike the US where confidentiality of income tax returns was not a general rule until
the Tax Reform Act of 1976, Australian tax laws for a long time have required income
tax returns to be kept confidential to protect the privacy of taxpayers and to encourage
tax compliance. In response to the call for improving business tax transparency by
theOrganisation for Economic Cooperation and Development (OECD) to tackle the
issue of tax base erosion and profits shifting (BEPS), the former Labor Government
amended the Taxation Administration Act 1953 (Cth)14 to require the Commissioner
of Taxation to publish the ABN, total income, taxable income and income tax payable
of large corporate tax entities with reported total income of $100m or more effective
from the 201314 income year. However, the Fairfax media15 recently reported the
concerns raised by private business owners who think they may be held to ransom
if the Australian Taxation Office (ATO) publishes the tax information of some 1,600
private and public companies with more than $100m turnover on the data.gov.au
website. It has been suggested that about 700 private companies may be exempted
from these disclosure provisions. So far, the ATO has not made any public disclosures
required by these provisions.

While complete disclosure of corporate tax return information may not be desirable,
substantial benefits can be gained by various stakeholders if publicly owned
corporations are required to disclose their taxable income either directly, or indirectly
through financial statement disclosures related to income taxes, to crosscheck the
credibility of reported accounting profit. Also, given that financial reports arereleased
by large corporate taxpayers a few months before they lodge their corporate tax
returns, taxation authorities can make use of such disclosure to estimate revenue
collections, and to direct their tax audit effort when the corporate tax return is lodged.

Taxable income is arguably more reliable than book income in Australia. First,
accounting rules in general allow more leeway for manipulation than tax rules.
Second, unlike other stakeholders, taxation authorities have access to both tax returns
and financial statements. The larger the booktax income differences, the more likely
a tax audit will be conducted and postaudit adjustments made.16 Therefore, publicly
owned firms, especially the large ones under close scrutiny by the taxation authorities,
may exercise caution to ensure that the taxable income reported in corporate tax return
is correct. Furthermore, unlike the US where the classical system of company taxation

14 Tax Laws Amendment (2013 Measures No. 2) Act 2013.

15 See, for example, www.canberratimes.com.au/business/theeconomy/coalitionto-wind-back
-tax-disclosure-laws-over-kidnap-fears-20150317-1m1a0k.html.
16 L.F. Mills, Booktax differences and Internal Revenue Service adjustments (1998) 36 Journal of
Accounting Research 343.

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is adopted, Australia adopts a dividend imputation system. Under the imputation

system, income tax paid by companies can be passed on to resident equityholders as
tax credits when profits are distributed as dividends. Consequently, corporate tax is
not necessarily a real cost, and publicly owned Australian firms with predominantly
domestic ownership may have less incentives to manipulate taxable income to avoid
tax.17 Therefore, disclosure of taxable income, either directly or indirectly through
income tax disclosures in financial statements, will enable the public and corporate
regulators to crosscheck the credibility of reported book income, discourage aggressive
earnings management, and contribute to better functioning of the capital markets.

Although there are some empirical studies about the booktax income gap in
Australia,18 there has been no study about the extent to which taxable income can
be estimated from financial statements in Australia. This study investigates whether
it is possible to estimate a firms tax liability and taxable income from income tax
disclosures under the current Australian Accounting Standard AASB 112 Income
taxes, which applies to financial reports for accounting periods commencing on or
after 1 January 2005. If the current income tax disclosures are found to be insufficient
to allow estimation of taxable income, additional disclosures will be recommended.

One method of estimating taxable income from financial statements is to grossup the
current portion of the tax expense (current tax expense) by the statutory tax rate (or
a weighted average of Australian and foreign tax rates if the company has significant
foreign source income) under the assumption that current tax expense represents
Australian and foreign (if any) tax liabilities estimated by the firm to be reported in
corporate tax return(s) a few months after the release of financial statements. This
study examines empirically the issues of using current tax expense to estimate taxable
income under the current disclosure regime based on a sample of 604 listed Australian
companies that reported positive pretax book income in 2006, the first year when all
listed Australian companies produced their financial statements in accordance with
the Australian equivalent of International Financial Reporting Standards.

The rest of the article is organised as follows. The next section describes the income
tax disclosures in Australia under current Australian accounting standards. Section
3 discusses the problems associated with estimating taxable income from current
tax expense under the current disclosure regime and recommends improvement
to the income tax disclosure requirements. Section 4 summarises the findings and
recommendations, acknowledges the limitations of the study, and draws conclusion.

17 C. Ikin and A. Tran. Corporate tax strategy in the Australian dividend imputation system
(2013) 28 Australian Tax Forum 523.
18 See, for example, A.V. Tran, The gap between accounting profit and taxable income (1997) 13
Australian Tax Forum 507; A.V. Tran, Causes of the book-tax income gap (1998) 14 Australian
Tax Forum 253; A.V. Tran and Y.H. Yu, Effective tax rates of Corporate Australia and the book
-tax income gap (2008) 23 Australian Tax Forum 233.

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2. Income tax disclosure regime

This section describes the disclosure of income taxrelated information under the
Australian accounting standards and discusses their implications on the estimation
of taxable income.

Australian Accounting Standard AASB 112 Income taxes applies to reporting

periods beginning on or after 1 January 2005. Income taxes include both Australian
income tax and foreign income taxes. Due to differences in accounting rules and
tax rules, transactions and events recognised in the financial statements can have
tax consequences in current year (current tax expense or income) and future years
(deferred tax expense or income). AASB 112 requires recognition of both current
and deferred tax liabilities and assets arising from transactions and events recognised
in current year financial statements. Current tax expense (income) is the amount
of income tax payable (refundable) in respect of taxable income (tax loss) for an
accounting period. Current tax liability is the amount of current tax payable at the
reporting date (normally current tax expense less tax instalments already paid under
the payasyougo system in Australia). Current tax asset is the amount of current tax
recoverable at the reporting date (eg when tax instalments paid exceed current tax
expense).

AASB 112 adopts the balance sheet approach to deferred tax. The balance sheet
approach focuses on the temporary differences between the carrying amounts and
the tax bases of assets and liabilities in the balance sheet. The tax effect of temporary
differences gives rise to deferred tax asset and liability. Change of deferred tax asset
and liability from one reporting date to the next is deferred tax expense or income.

Paragraph 77 of AASB 112 requires that the tax expense (income) related to profit
or loss from ordinary activities be presented in the statement of comprehensive
income.19 Paragraph 79 further requires separate disclosure of major components of
tax expense (usually in a note to the financial statements), including (para 80):

current tax expense (or income);

any adjustments recognised in the period for current tax of prior periods;
deferred tax expense (or income);
deferred tax expense (or income) relating to changes in tax rates or imposition
of new taxes;

19 Accounting Standard AASB 101 Presentation of financial statements requires firms to report in the
statement of comprehensive income (or an income statement and a statement of comprehensive
income separately): (a) profit or loss; and (b) other comprehensive income credited or charged
directly to equity such as changes in revaluation surplus, gains or losses from translating the
financial statements of a foreign operation.

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the amount of the benefit arising from a previously unrecognised tax loss, tax
credit or temporary difference of a prior period that is used to reduce current
taxexpense;
the amount of the benefit arising from a previously unrecognised tax loss, tax
credit or temporary difference of a prior period that is used to reduce deferred
tax expense;
deferred tax expense arising from the writedown, or reversal of a previous
writedown, of a deferred tax asset (due to reviews of the probability that the
firm can generate future assessable income to utilise the benefit of deferred tax
asset); and
the amount of tax expense (income) relating to those changes in accounting
policies and errors that are included in profit or loss in accordance with AASB
108, because they cannot be accounted for retrospectively.

Paragraph 81 of AASB 112 also requires separate disclosure of:

the aggregate current and deferred tax relating to items that are charged or
credited to equity;
a reconciliation of prima facie or theoretical tax expense (ie accounting profit
multiplied by the applicable tax rate(s)) and actual tax expense, which can take
the form of either an amount reconciliation showing the tax effects of permanent
differences, or a rate reconciliation between the applicable statutory tax rate(s)
and the average effective tax rate, or both; and
in respect of discontinued operations, the tax expense20 relating to: (a) the gain
or loss on discontinuance; and (b) the profit or loss from the ordinary activities
of the discontinued operation for the period, together with the corresponding
amounts for each prior period presented.

Paragraph 88 of AASB 112 requires disclosure of taxrelated contingent liabilities and

contingent assets in accordance with AASB 137 Provisions, contingent liabilities and
contingent assets.21 An example given is contingent liabilities and contingent assets
arising from unresolved disputes with the taxation authorities.

20 There appears to be no requirement for separate disclosure of current tax expense and deferred
tax expense relating to discontinued operations, especially relating to the gain or loss on
discontinuance.
21 AASB 137 defines a contingent liability as (a) a possible obligation that arises from past events
and whose existence will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity; or (b) a present obligation
that arises from past events but is not recognised because: (i) it is not probable that an outflow
of resources embodying economic benefits will be required to settle the obligation; or (ii) the
amount of the obligation cannot be measured with sufficient reliability. AASB 137 defines a
contingent asset as a possible asset that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future events not
wholly within the control of the entity.

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Paragraph 35 of AASB 107 Cash flow statements requires disclosure of cash flows
arising from income taxes which are usually classified as cash flows from operating
activities in a cash flow statement. For a firm that only pays Australian income tax,
cash outflows related to income tax in an accounting period usually include the
fourth quarterly instalment and the final balance (upon lodgment of corporate tax
return) for the previous year, and the first three quarterly instalments for the current
year.

A common method of estimating taxable income from financial statements is to

grossup the current tax expense by the applicable statutory tax rate(s). Current
disclosure requirements in AASB112 are not sufficient to allow taxable income to be
estimated. First, AASB 112 does not require separate disclosure of Australian income
tax and foreign income taxes and the applicable statutory tax rates.

Second, although AASB 112 requires firms to disclose separately the current
and deferred portions of their income tax expense relating to profit or loss from
ordinary activities and for items charged or credited directly to equity, it does not
require separate disclosure of current tax and deferred tax in respect of discontinued
operations. In practice, some firms show the major components of tax expense related
to both continuing and discontinued operations together, while others only show the
major components of tax expense related to continuing operations. Therefore, the
total current tax expense related to both continuing and discontinued operations may
not always be disclosed.

Third, financial statements of listed entities are released to the public within three
months after the end of the accounting period, but corporate tax return is not due until
about seven months after the end of the accounting period. The current tax expense
in financial statements may therefore differ from the tax liability eventually reported
in corporate tax returns due to adjustments using later information (trueups).
For instance, firms with a 30 June reporting date must release financial reports by
30 September, but they are not required to lodge tax returns until 15 January of the
following year (or later with extension of lodgment time), which is more than three
months after the financial reports were approved by the Board of Directors. Between
September and January, corporate tax manager may make corrections to the current
and deferred tax expenses estimated by financial accountant, make adjustments in
relation to settlement of tax disputes, and make decisions about utilisation of prior
year tax losses etc. These adjustments may be reported separately, if material, in the
following year as adjustments to current tax expense of prior periods a component
of the tax expense of the following year. Although para 80 of AASB 112 includes
any adjustments recognised in the period for current tax of prior periods as a major
component of tax expense, it does not include any adjustments recognised in the
period for deferred tax of prior periods. Therefore, in practice, some firms disclose
separately adjustments made to prior year current tax and deferred tax, others

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only disclose adjustments made to prior year tax expense without distinguishing
adjustments to prior year current tax from adjustments to prior year deferred tax.

The deficiency of the current income tax disclosure regime and other problems that
may arise in estimating taxable income from current tax expense will be discussed in
the following section.

3. Problems encountered in estimating taxable income

from current tax expense
This section focuses on the specific problems associated with inferring a firms actual
tax liabilities and taxable income from current tax expense. Where applicable, this
study uses the data extracted from the financial reports of 604 listed Australian
companies for the accounting periods ended in 2006 and 2007 in Connect4 to
quantify the extent of the problems. Improvement to the income tax disclosure
requirements is also recommended to enable users of financial statements to estimate
a firms taxable income. Unlike the US where the IRS allows some researchers access
to confidential corporate tax return data for research purposes, Australian researchers
in general have no access to corporate tax return data. Therefore, statistical modelling
of booktax income relation using data from both financial statements and tax returns
is not possible.

3.1 Data source and sample selection

The sample for this study includes firms with equity listed on the Australian Securities
Exchange (ASX). The Connect4 Annual Reports Database (Connect4) is chosen as
the main data source because it provides the full annual reports of most, if not all,
listed firms. Full annual reports are required because data such as current tax expense
used to estimate taxable income can only be found in the income tax notes to the
financial statements and are not available in commercial databases such as Aspect
Financial Analysis. A total of 1,646 annual reports for the financial year ended in
2007 were downloaded from Connect4. The financial reports for 2007 normally also
include comparative figures for 2006.

The initial sample consists of 1,646 firms in the Connect4 2007 Annual Reports
Database. To focus on firms which paid Australian income tax, 91 property trusts are
excluded from the sample, as are 26 foreign firms with registered head office located
overseas. As this study uses the tax information for both 2007 and 2006 disclosed in
2007 financial reports, 33 new firms with only 2007 data are excluded. As current tax
expense for 2006 is reported only if a firm reports a profit before tax for 2006, firms
that report a loss before tax for 2006 (836 firms), or a zero profit before tax for 2006
(11 firms), and firms with zero tax expense for 2006 and 2007 (45 firms) are also

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excluded, leaving a final sample of 604 firms. Table 1 summarises the derivation of
the final sample.

Table 1: Number of firms in the final sample

Sample selection criteria Number of firms

Initial sample from Connect4 2007 Annual Report Database 1,646
Less: Trusts 91
Less: Foreign firms 26
Less: Firms with only 2007 data 33
Less: Firms that reported a loss before tax for 2006 836
Less: Firms that reported a zero profit before tax for 2006 11
Less: Firms that reported a zero tax expense for 2006 and 2007 45
Final sample size 604

A firm is a group of entities under a common control. Relevant data are extracted
from the consolidated financial statements of the firms in the final sample.

Although conceptually, taxable income equals current tax expense divided by

applicable statutory tax rate(s), Hanlon22 finds that in the US context, estimating
taxable income from current tax expense is prone to errors for a number of reasons.
Some of the issues identified by her to cause estimation errors in the US also present
problems in the Australian context.

3.2 Intraperiod tax allocation

The first issue is intraperiod tax allocation. In the US, FAS 109 (paras 35 and 36)
indicate that income tax expense or benefit should be allocated to four categories:

continuing operations;
discontinued operations;
extraordinary items; and
items charged or credited directly to shareholders equity.

This allocation means that current tax expense is not the current tax expense on
all type of earnings of the firm. Rather, it is only the current tax on the continuing
operations of the firm. Items reported separately below continuing operations are
reported net of their respective tax effects. To obtain the total tax liability of the firm,
the current tax expense related to these items would also have to be added to current

22 M Hanlon, What can we infer about a firms taxable income from its financial statements?
(2003) 56 National Tax Journal 831.

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tax expense of continuing operations. However, sometimes, the related tax amounts
are not disclosed and, if they are, often the current and deferred portions, as well as
the US and foreign portions, are not disclosed separately.23

In Australia, the extraordinary items classification has been abolished. AASB 112
requires separate disclosure of tax expense related to discontinued operations and
items charged or credited directly to shareholders equity. Paragraph 81(a) of AASB
112, requires separate disclosure of the aggregate current and deferred tax relating to
items that are charged or credited to equity. However, para 81(h) does not specifically
require a breakdown of tax expense relating to discontinued operations into current
tax and deferred tax. Thus, the problem of intraperiod tax allocation in the US also
applies to Australia.

Table 2: Discontinued operations

Panel A
Number of firms reporting a profit or loss from discontinued
operations in the sample of 604 firms
2007 2006
No. % No. %
Firms reporting a profit or loss from 81 13.4 102 16.9
discontinued operations

Panel B
Profit or loss after tax from discontinued operations expressed
as a percentage of net profit after tax from continuing operations
across the sample of 604 firms
2007 2006
Mean 49.7% 10.5%
5% trimmed mean 0.17% 0.77%
Median 0% 0%
Standard deviation 1,292% 162%
Minimum 31,716% 1,851%
Maximum 581% 2,734%

23 Ibid.

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Panel C
Firms disclosing the major components of tax expense on profit or loss from
both continuing and discontinued operations
Number
Percentage
of firms
Firms reporting a profit or loss from discontinued operations
103 100
in 2007 and/or 2006
Firms disclosing major components of tax expense on profit
60 58
or loss from both continuing and discontinued operations

Table 2 shows the descriptive statistics about discontinued operations based on the
data from the sample of 604 Australian firms. Panel A of Table 2 shows that 13.4%
and 16.9% of firms reported a profit or loss after tax from discontinued operations
for 2007 and 2006, respectively, in their income statements. Panel B of Table 2 shows
that across the whole sample of 604 firms, on average, profit or loss after tax from
discontinued operations is 49.7% and 10.5% of net profit after tax from continuing
operations for 2007 and 2006, respectively, due to presence of extreme values.24 For
example, the minimum for 2007 is 31,716%, because LongReach Group Ltd (LRG)
reported a profit after tax from continuing operations of $56,730, and a loss after
tax from discontinued operations of $17,992,568. This extreme value explains why
the average for 2007 can be nearly 50%. The maximum for 2007 is 581% because
Publishing & Broadcasting Ltd (PBL) reported a profit after tax from continuing
operations of $290,907,000, and a profit after tax from discontinued operations of
$1,689,324,000, which demonstrates why it is important to know the current tax
expense relating to discontinued operations. When the top 5% and bottom 5% of
the ratio profit or loss after tax from discontinued operations to net profit after tax
from continuing operations are excluded, the 5% trimmed mean becomes 0.17%
and 0.77%, respectively, for 2007 and 2006. Panel C shows that, of the 103 firms that
reported a profit or loss from discontinued operations in 2006 and/or 2007, 60 firms
(58%) disclosed the major components (ie current tax expense, deferred tax expense
etc) of income tax expense on profit or loss from both continuing and discontinued
operations together. Thus, intraperiod tax allocation presents a problem in estimating
tax liability only for the 42% of firms that did not include the current tax expense
related to discontinued operations in the breakdown of tax expense.

3.3 Presence of tax credits

Another issue in estimating taxable income is the presence of tax credits. The presence
of tax credits means that current tax expense divided by Australian tax rate is not
necessarily equal to taxable income.

24 Extreme values can arise if net profit after tax from continuing operations (the denominator)
happens to be a small amount.

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In Australia, two main categories of tax credits are imputation credits related to
franked dividends received, and foreign tax credits or foreign income tax offsets for
foreign income taxes paid on income from foreign operations.

If a company received a franked dividend, the imputation credit (or franking

credit as it is called in tax law) will offset the tax on the dividend, so accounting
will treat a franked dividend received as if it is an exempt income and, if material,
the tax effect of exempt income will appear as a permanent difference in the tax
expense reconciliation (or tax rate reconciliation). Tax law treats both the dividend
amount and the imputation credit as assessable income and hence taxable income. If
imputation credits are material and separately disclosed in the prime facie and actual
tax expense reconciliation or tax rate reconciliation, users of financial statements can
estimate taxable income by:

Grossing up the current tax expense by statutory tax rate (ie CTE 30%)

+ Imputation credit 30% (ie the amount of the franked dividend +

imputation credit)

= Grossing up the sum of current tax expense and imputation credit by 30%.

Note that the taxable income is inflated by the amount of imputation credit which
should be excluded when compared with book income to work out any booktax
income difference.

For firms with foreign operations, income is subject to tax at different tax rates in
foreign jurisdictions, so using Australian tax rate to gross up current tax expense will
not yield a correct estimate of taxable income. Information required for a correct
estimate of taxable income includes the proportion of taxable income taxed in each
jurisdiction and the tax rate(s) applicable in each jurisdiction. Consider the following
example. If an Australian firm operates in both Australia (with a tax rate of 30%)
and a foreign country (with a tax rate of 40%), and the pretax profits from Australia
and from the foreign country are both $100 (in Australian dollars). The foreign tax
paid will be $40 ($100 x 40%). When the foreign profits are included in Australian
taxable income25 and taxed at the Australian tax rate of 30% (ie $30 Australian tax), a
foreign tax credit/offset, which is the lower of the foreign tax and the Australian tax,
is available. In this case, the foreign tax credit is $30. In total, the company paid $30

25 In general, both Australian source income and foreign source income of an Australian company
are subject to Australian tax. However, non-portfolio dividends paid by a foreign company to an
Australian company and foreign branch income of an Australian company are non-assessable
non-exempt income under Income Tax Assessment Act 1936, s 23AJ and s 23AH, respectively.
These two exemptions effectively make an Australian companys foreign business income exempt
from Australian income tax, but the need for separate disclosure of Australian income tax and
foreign income taxes remains if one wants to estimate taxable income.

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 584 (2015) 30 AUSTRALIAN TAX FORUM

($60 $30) Australian tax, and $40 foreign tax, ie a total of $70 current tax expense.
When the current tax expense is grossed up by 30%, the result is $233, which is more
than the actual taxable income of $200. The weighted average tax rate (35% in the
example) is needed to work out the correct amount of taxable income.

There is no requirement in AASB 112 to break down the current tax expense into
Australian tax and foreign taxes, so in most cases, the current tax payable to foreign
taxation authorities as well as the foreign tax rate(s) used to gross up the foreign
current tax expense are unknown. Limited information may be available in the
reconciliation of prima facie tax expense and actual tax expense. Paragraph 85 of
AASB 112 provides that:

In explaining the relationship between tax expense (income) and accounting

profit, an entity uses an applicable tax rate that provides the most meaningful
information to the users of its financial report. Often, the most meaningful
rate is the domestic rate of tax in the country in which the entity is domiciled,
aggregating the tax rate applied for national taxes with the rates applied for
any local taxes which are computed on a substantially similar level of taxable
profit (tax loss). However, for an entity operating in several jurisdictions, it may
be more meaningful to aggregate separate reconciliations prepared using the
domestic rate in each individual jurisdiction.

AASB 112 (para 85) provides an example to illustrate two possible ways of
presentation: (1) compute the prima facie tax expense with the domestic tax rate, and
show the effect of higher or lower foreign tax rates as a permanent difference in the
reconciliation; (2) compute the prima facie tax expense with the applicable domestic
and foreign tax rates, and show no permanent difference due to higher or lower
foreign tax rates in the reconciliation. Disclosure of the effect of foreign tax rates as a
permanent difference or a weighted average applicable tax rate may help to work out
the weighted average tax rate used to gross up current tax expense. However, the ideal
situation is that AASB 112 requires separate disclosure of Australian tax and foreign
taxes, and the applicable Australian tax rate and weighted average foreign tax rate.

3.4 Different consolidation and equity accounting rules for financial

reporting and tax purposes

In both Australia and the US, for accounting consolidation purpose, control
normally exists when an entity (parent) owns more than 50% of the voting interest
of another entity (subsidiary). Thus, if the ownership percentage is greater than 50%,
consolidation is required: group book income includes 100% of book income of
the subsidiary, with the portion attributable to noncontrolling interest26 separately
disclosed.

26 Non-controlling interest was also called minority interest or outside equity interest in
previous Australian accounting standards.

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If the ownership percentage is between 20% and 50%, the investor is presumed to have
a significant influence over the investee (associated company) and, in most cases, the
equity method of accounting for investment is required: group book income includes
a share of the associated companys book income after tax.

If the ownership percentage is less than 20%, no significant influence is presumed, so

in most cases, the cost method of accounting for investment is adopted: group book
income only includes dividends received from the investee company.

For tax purpose, in the US, tax consolidation can be elected when ownership, direct or
indirect, of a domestic subsidiary is at least 80% in terms of voting power and value.
Foreign subsidiaries are not included in tax consolidation because the US tax system
does not generally tax foreignsourced income until repatriated as dividends to the
US parent company.

In Australia, for tax purpose, from 1 July 2002, Pt 390 of the Income Tax Assessment
Act 1997 (Cth), allows wholly owned groups of Australian resident companies
(together with eligible trusts and partnerships) to elect consolidation for income tax
purposes. The election is irrevocable. If tax consolidation is elected, a wholly owned
group is treated as a single entity for tax purposes. The former grouping provisions
such as transfers of tax losses, excess foreign tax credits, and CGT group rollover
provisions were removed following introduction of tax consolidation.

If tax consolidation is elected, due to booktax consolidation differences and the

equity method of accounting for investment in associated companies, book income
of an Australian firm may exceed taxable income by:

the book income of domestic subsidiaries with more than 50% but less than 100%
ownership;
the book income of foreign subsidiaries with more than 50% ownership unless
attributed under s 456 of the Income Tax Assessment Act 1936 (Cth) (the
controlled foreign company accrual regime); or
the share of net income after tax of associated companies owned between 20%
and 50% due to the equity method of accounting which has no application in tax
laws.

On the other hand, taxable income may exceed book income by:

dividends received from the above entities, with imputation credit for franked
dividends.

Table 3 shows that based on a sample of 604 firms for 2007, over 91% of firms
elected tax consolidation, only 3% did not so elect. 4% of firms did not have wholly
owned subsidiaries resident in Australia hence tax consolidation was not relevant.
The remaining 1.5% had wholly owned Australian subsidiaries but did not indicate

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 586 (2015) 30 AUSTRALIAN TAX FORUM

whether or not they elected tax consolidation. Thus, nonelection of tax consolidation
does not appear to be a major issue in estimating taxable income.

Table 3: Election of tax consolidation (reporting period ended in 2007)

Tax consolidation Number of firms Percentage

Tax consolidation elected 553 91.5
Tax consolidation not elected 18 3
Did not have wholly owned Australian subsidiaries 24 4
Had wholly owned Australian subsidiaries but did not
9 1.5
indicate whether tax consolidation was elected
Total 604 100

Noncontrolling interests in shareholders equity and in net profit after tax reported
in financial statements can provide an indication of the extent of booktax difference
due to majority ownership consolidation rule for accounting and full ownership
consolidation rule for taxation. In Table 4, panel A shows that about 31% of the 604
firms in the sample reported noncontrolling interests in shareholders equity during
the study period. Panel B shows that across the sample, on average, noncontrolling
interests amount to 1.5% and 1.6% of shareholders equity for 2007 and 2006,
respectively. However, in extreme cases, noncontrolling interests can be as high as
78%, or as low as 147% of shareholders equity for 2007. Panel C shows that on
average, the net profit (loss) after tax attributable to noncontrolling interests is 0.6%
and 2.4% of a firms net profit (loss) after tax for 2007 and 2006, respectively. Again,
there are extreme cases which can be a significant source of booktax difference
that affects estimation of taxable income. Moreover, current disclosure regime does
not allow users of financial statements to estimate the booktax difference caused
by inclusion of foreign subsidiaries in accounting consolidation but not in tax
consolidation.

Table 4: Noncontrolling interests

Panel A
Number of firms reporting noncontrolling interests in shareholders
equity in the sample of 604 firms
2007 2006
No. % No. %
Firms reporting noncontrolling interests
190 31.5 184 30.5
in shareholders equity

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 CAN TAXABLE INCOME BE ESTIMATED FROM FINANCIAL 587
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Panel B
Noncontrolling interests expressed as a percentage of shareholders
equity across the sample of 604 firms
2007 2006
Mean 1.51% 1.63%
5% trimmed mean 0.51% 0.50%
Median 0% 0%
Standard deviation 9.09% 6.22%
Minimum 147% 20%
Maximum 78% 63%

Panel C
Net profit (loss) attributable to noncontrolling interests expressed as a
percentage of net profit after tax across the sample of 604 firms
2007 2006
Mean 0.63% 2.42%
5% trimmed mean 0.15% 0.06%
Median 0% 0%
Standard deviation 27.6% 45.7%
Minimum 586% 1,056%
Maximum 241% 95%

The share of net profits (losses) of associated companies reported in income statement
can provide an indication of the extent booktax difference caused by equity
accounting for investment in associated companies. In Table 5, panel A shows that
about 31% and 29% of the 604 firms in the sample reported a share of net profits
(losses) of associated companies for 2007 and 2006, respectively. Panel B shows that
on average, the share of net profits (losses) of associated companies amounts to 4.3%
and 5.2% of a firms net profit after tax for 2007 and 2006, respectively. However, as the
share of net profits (losses) after tax of associated companies is separately disclosed in
the income statement, users of financial statements can exclude this item from book
income when compare with the estimate of taxable income.

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 588 (2015) 30 AUSTRALIAN TAX FORUM

Table 5: Associate companies

Panel A
Number of firms reporting share of net profits (losses) of
associated companies in the sample of 604 firms
2007 2006
No. % No. %
Firms reporting share of net profits (losses) of associated
186 30.8 173 28.6
companies

Panel B
Share of net profits (losses) of associated companies expressed as a
percentage of net profit after tax across the sample of 604 firms
2007 2006
Mean 4.28% 5.23%
5% trimmed mean 1.65% 1.61%
Median 0% 0%
Standard deviation 23.6% 46.9%
Minimum 268% 459%
Maximum 265% 803%

3.5 Tax cushions

Hanlon27 describes tax cushion as follows:

When a firm takes an aggressive position for tax reporting that it thinks may
not stand up to future IRS scrutiny, the firm can accrue an additional amount of
tax expense on its income statement in order to reflect this liability. This accrual
is... similar to many other types of accruals for expenses incurred currently
but where the cash payment will not occur until a future period. Under FAS
109, this additional reserve, or tax cushion is generally booked to current tax
expense because there is no deferred tax liability or asset to which it is related
and thus it cannot go through the deferred tax expense or benefit. As a result,
the current tax expense as shown on the financial statement will overstate the
underlying current tax liability by the amount of this tax cushion. ...estimating
the overstatement due to the tax cushion is nearly impossible.

From 2007, Financial Interpretation No. 48 Accounting for uncertainty in income taxes
issued by the US Financial Accounting Standards Board requires firms to disclose tax

27 M Hanlon, What can we infer about a firms taxable income from its financial statements?
(2003) 56 National Tax Journal 831.

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 CAN TAXABLE INCOME BE ESTIMATED FROM FINANCIAL 589
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cushions or tax reserves. 28 The requirements were subsequently codified into the US
FASB Accounting Standards Subtopic 74010. In Australia, although from 201112
income year corporate groups with an annual turnover above $250m per annum have
been required to report to the Australian Taxation Office not only their aggressive
tax planning but any legal position adopted in respect of transactions they undertake
which are uncertain (reportable tax positions), such information is not available to
the public. Australian Accounting Standard AASB 112 para 80(b) requires, if material,
separate disclosure of any adjustments recognised in the current period for current
tax of prior periods. While adjustments to current tax of prior periods may include
some tax cushions for prior periods, in no way tax cushions related to current and
prior periods included in current tax expense can be estimated.

3.6 Adjustments to current tax expense after release of financial

statements

Financial statements are released to the public within three months after the end of an
accounting period, but corporate tax return is not due until about seven months after
the reporting date. The current tax expense in financial statements may therefore differ
from the tax liability eventually reported in corporate tax return due to adjustments
using later information (trueups).

Table 6 shows the descriptive statistics of the major components of tax expense
expressed as a fraction of tax expense across the sample of 604 Australian firms based
on the descriptions in para 80 of AASB 112. On average, current tax expense is 95.3%
and 105% of tax expense for 2007 and 2006, respectively. Although based on the mean
and median, current tax expense appears to be the predominant component of tax
expense, the minimum and maximum statistics suggest that in extreme cases, current
tax expense can be up to 140 times (2007) or 46.7 times (2006) of tax expense and
is offset by other components of tax expense. The second largest component of tax
expense is deferred tax expense which, on average, is 5.7% and 12.6% of tax expense
for 2007 and 2006, respectively. Again, the minimum and maximum statistics suggest
that in extreme cases, deferred tax expense can vary between 35.5 times and 139
times of tax expense in 2007. The next two components of tax expense, in the order
of size, are benefit arising from a previously unrecognised tax loss, tax credit or
temporary difference of a prior period that is used to reduce current expense and
deferred tax expense.

28 See J Blouin, C Gleason, L Mills and S Sikes, Pre-empting disclosure? Firms decision prior to
FIN 48 (2010) 85 The Accounting Review 791.

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 590 (2015) 30 AUSTRALIAN TAX FORUM

Table 6: Major components of tax expense expressed as a fraction of tax

expense

Major component
2007 2006
of tax expense
Current tax expense Mean 0.953 Mean 1.05
(income) 5% trimmed mean 0.834 5% trimmed mean 0.878
Median 0.977 Median 0.975
Standard deviation 6.48 Standard deviation 6.38
Minimum 42 Minimum 46.7
Maximum 140 Maximum 134
Adjustments for current Mean 0.008 Mean 0.052
tax (or tax expense) of 5% trimmed mean 0.007 5% trimmed mean 0.014
prior periods Median 0 Median 0
Standard deviation 0.825 Standard deviation 1.32
Minimum 16.3 Minimum 28.1
Maximum 7.5 Maximum 6.26
Deferred tax expense Mean 0.057 Mean 0.126
(income) 5% trimmed mean 0.172 5% trimmed mean 0.15
Median 0.025 Median 0.037
Standard deviation 6.22 Standard deviation 2.41
Minimum 139 Minimum 45.9
Maximum 35.5 Maximum 21.5
Deferred tax expense Mean 0.002 Mean 0.007
(income) relating to 5% trimmed mean 0 5% trimmed mean 0
changes in tax rates or Median 0 Median 0
the imposition of new
Standard deviation 0.048 Standard deviation 0.191
taxes
Minimum 0.19 Minimum 0.92
Maximum 1.02 Maximum 4.36
Benefit arising from a Mean 0.057 Mean 0.05
previously unrecognised 5% trimmed mean 0 5% trimmed mean 0
tax loss, tax credit or Median 0 Median 0
temporary difference
Standard deviation 1.11 Standard deviation 1.38
of a prior period that is
used to reduce current Minimum 1.51 Minimum 23.1
tax expense Maximum 26.1 Maximum 9.57
Benefit arising from a Mean 0.042 Mean 0.087
previously unrecognised 5% trimmed mean 0 5% trimmed mean 0
tax loss, tax credit or Median 0 Median 0
temporary difference
Standard deviation 1.03 Standard deviation 6.59
of a prior period that is
used to reduce deferred Minimum 24.2 Minimum 134
tax expense Maximum 1.41 Maximum 83

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Major component
2007 2006
of tax expense
Deferred tax expense Mean 0.001 Mean 0.001
arising from the 5% trimmed mean 0 5% trimmed mean 0
writedown, or Median 0 Median 0
reversal of a previous
Standard deviation 0.014 Standard deviation 0.015
writedown, of a
deferred tax asset Minimum 0 Minimum 0.03
Maximum 0.35 Maximum 0.36
Tax expense (income) Mean 0 Mean 0
relating to those 5% trimmed mean 0 5% trimmed mean 0
changes in accounting Median 0 Median 0
policies and errors that
Standard deviation 0 Standard deviation 0
are included in profit or
loss in accordance with Minimum 0 Minimum 0
AASB108 Maximum 0 Maximum 0

On average, adjustments for current tax of prior periods amount to 0.8% and 5.2%
of tax expense for 2007 and 2006, respectively. However, the minimum and maximum
statistics suggest that in extreme cases, the adjustments can vary between 7.5 times
(2007) and 28.1 times (2006) of tax expense. Some firms described this item as
adjustments for tax expense of prior periods, so for these firms this item might
actually include adjustments to both current tax and deferred tax of prior periods. The
presence of these adjustments using later information or trueups after the financial
statements are released to the public means that in general, income tax disclosures in
financial statements are not sufficient to estimate taxable income eventually reported
in corporate tax returns.

3.7 Suggestion for additional income tax disclosures

Based on the above discussion, the following additional income tax disclosures are
required to enable users of financial statements to estimate taxable income:

intraperiod tax allocation: separate disclosure of current tax expense related to

continuing operations, discontinued operations, and gains and losses credited or
charged directly to equity;
Australian and foreign components of current tax expense and the applicable tax
rates;
differences due to different accounting and tax consolidation rules and equity
accounting rules;
tax cushions; and
adjustments to current tax expense subsequent to the release of financial
statements.

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 592 (2015) 30 AUSTRALIAN TAX FORUM

Users of financial statements will be able to estimate the taxable income to crosscheck
the pretax book income of a publicly owned firm if Australian accounting standards
require additional disclosure in a note to financial statements of a reconciliation
between its current tax expense and the estimated tax liabilities to be reported in its
Australian and foreign tax returns as depicted in Figure 1.

Figure 1: Reconciliation between current tax expense and estimated tax

liabilities disclosed in financial statements

Australian tax Foreign taxes

(weighted average Total
(30%) tax rate = x%)
Current tax expense on continuing
xxx xxx xxx
operations
Add/less: Current tax expense (income)
xxx xxx xxx
related to discontinued operations
Add/less: Current tax expense (income)
related to items charged or credited xxx xxx xxx
directly to equity
Add/less: Differences due to accounting
and tax consolidation rules and equity xxx xxx xxx
accounting rules
Less: Current year tax cushions xxx xxx xxx
Tax liabilities estimated at the time when
xxx xxx xxx
financial report is approved

In the reconciliation, Australian tax and foreign taxes are shown separately in two
columns with the weighted average foreign tax rate also disclosed. Current tax expense
on continuing operations, discontinued operations and items charged or credited
directly to equity are disclosed separately, as are booktax income differences due
to consolidation and equity accounting rules, and tax cushions. The requirement to
disclose tax cushions will draw the attention of the taxation authorities29 to aggressive
tax positions that may not stand up to close scrutiny and will discourage firms to take
such aggressive tax positions. This will encourage sound tax risk management and
corporate governance.

29 Although from 201112 income year, corporate groups with an annual turnover above $250m
per annum have been required to report reportable tax positions to the Australian Taxation
Office (see Section 3.5), according to the operating revenue data on the Morningstar database,
this requirement only applies to about 240 companies listed on the ASX because the majority
of listed companies have annual turnover below this threshold. The disclosure of tax cushions
proposed in this article applies to all (more than 2,000) listed companies.

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 CAN TAXABLE INCOME BE ESTIMATED FROM FINANCIAL 593
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A second reconciliation described in Figure 2 is recommended to be required by the

ASX Listing Rules (as part of the continuous disclosure) to be announced byfirms
at the time when their Australian tax return is lodged to reveal the effect of the
adjustments made to current tax expense subsequent to the release of financial report,
so that users of financial report can have early access to these adjustments without the
need to wait for the financial report of the following period.

Figure 2: Reconciliation between estimated and actual tax liabilities

released through ASX when Australian tax return is lodged

Foreign taxes
Australian tax
(weighted average Total
(30%)
tax rate = x%)
Tax liabilities estimated at the time when xxx xxx xxx
financial report was approved
Add/Less: Adjustments subsequent to xxx xxx xxx
release of financial report
Tax liabilities reported in tax returns xxx xxx xxx

The additional disclosures in Figures 1 and 2 not only enable users of financial
statements to estimate taxable income, but also help users reconcile the booktax
income differences.

4. Summary and conclusion

The primary research question of this study is: can we estimate taxable income from
income tax disclosures in financial reports of listed companies in Australia? To
answer this question, this article has assessed whether income tax disclosures under
the current Australian accounting standards provide sufficient information to allow
users to estimate the taxable income of publicly owned companies. This article has
also examined empirically the problems associated with estimating taxable income
from current tax expense using a sample of 604 Australian firms that report net profit
after tax for 2006 in their 2007 financial reports, and has recommended additional
income tax disclosures to be required by Australian accounting standards and ASX
Listing Rules to facilitate such estimation.

By providing additional reconciliations of current tax expense and the tax liabilities
eventually reported in corporate tax returns in two stages, separate into Australian tax
and foreign taxes (with weighted average foreign tax rate also disclosed), investors,
analysts, and corporate regulators are able to estimate taxable income to crosscheck
the credibility of reported book income. Taxation authorities also can gain additional
information about booktax income difference and are in a better position to target

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 594 (2015) 30 AUSTRALIAN TAX FORUM

their tax audit effort. The recommended additional income tax disclosures will not
only help discourage aggressive earnings management and improve the functioning
of the capital markets, it will also help promote sound tax risk management and
improve corporate governance.

One major limitation of this study is that the empirical component is only based on
descriptive statistics of financial statement data. Statistical modelling of booktax
income relation is impossible in the absence of taxable income reported in corporate
tax returns as the dependent variable. The IRS in the US has allowed some tax
researchers access to corporate tax return data for research purposes subject to certain
confidentiality undertakings. Perhaps the Australian Taxation Office should consider
allowing tax researchers in Australia similar access to enable more indepth studies of
booktax income differences to be conducted, and models to estimate taxable income
from disclosures in financial statements to be developed.

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