Annual Accounting
7.23. The income tax base, like the comprehensive tax base, relates to a selected period. For the income tax base the period of account is normally one year and is referred to as the year of income.
7.24. Where the income is that of an individual and the rate structure is progressive, any unevenness, or bunching, of the amounts of income derived in different years will result in more tax being payable than would be the case if a longer period of account were adopted. The present law has some provisions directed to overcoming the consequences of bunching. Averaging of income is allowed to primary producers and special provisions having a similar effect apply to authors and inventors. These illustrations of averaging are examined in Chapters 14 and 18. There would be administrative and compliance costs in the wider application of averaging: the wider application of averaging is considered in Chapter 14.
7.25. A strict application of annual accounting would work unfairly where a loss has been suffered for a year. Subject to some limitations, the present law allows a loss in one year to be applied to reduce net income of a later year, though not the net income of an earlier year. The treatment of losses is analysed in Chapters 8 and 16.
7.26. Under a system of annual accounting the timing of an income gain or expense in deriving income will affect the amount of net income. The questions, in the language of the law, are when an income gain is ‘derived’ and when an expense is ‘incurred’. Derivation and incurring, in turn, depend on the method of accounting, cash or accruals, held appropriate to the income. Broadly, cash accounting involves actual receipt and actual payment. Accruals accounting involves entitlement to receive and obligation to pay. There are problems as to what is a sufficient right to receive or a sufficient obligation to pay under the accruals method, for example whether a provision for long-service leave in the accounts of a business is an expense. These matters are considered in Chapter 8.