The AASB is set to issue Interpretation 23: Uncertainty over Income Tax Treatments.  The new Interpretation is applicable for periods beginning on or after 1 January 2019.

Interpretation 23 provides new guidance on the application of AASB 112 Income Taxes in situations where there is uncertainty over the appropriate income tax treatment of a transaction or class of transactions, and about whether a treatment will be accepted by a tax authority.

Interpretation 23 applies to income taxes within the scope of AASB 112 only, which are those based on profits, such as, company tax.  Taxes that are not based on profits (for example GST or mining royalties) are outside the scope of this Interpretation.  Interpretation 23 should be applied consistently to the recognition of both current and deferred taxes.


  • Where there is uncertainty over a tax treatment, or group of tax treatments, the entity must make an assessment of whether it is likely that the proposed tax treatment to be included in the entity’s tax return would be accepted by the appropriate authority (usually the Australian Taxation Office).
  • In determining the likelihood of acceptance of any particular treatment, the entity should assume that the tax authority will perform an examination of all amounts that it has the right to examine, and that this examination will have full access to, and knowledge of, all books, records and other relevant information.  In other words, financial statements cannot be prepared on an assumption that the tax authority may fail to detect an inappropriate tax treatment.
  • Where it is considered probable that the proposed tax treatment will be accepted by the tax authority, the financial statements should be prepared upon this basis.
  • Where it is considered not probable that the proposed tax treatment will be accepted by the tax authority, the entity must choose one of two methods, based on which is considered to give a better prediction of the resolution of the matter:
    • make an estimate of the most likely outcome in terms of tax treatment, and recognise the current and deferred tax payable based on that estimate
    • make an estimate of the expected value of the tax treatment.  This may apply, for example, where there is a range of potential outcomes.  The entity would assess the likelihood of each of them, and calculating a probability-weighted average value based on this assessment
  • These estimates must be reassessed and updated for each financial reporting period, based on whether there has been any change to the relevant facts and circumstances 
  • The Interpretation does not include any explicit new disclosure requirements.  However, it reconfirms and emphasises that uncertain tax positions, and their treatment, may need to be disclosed as a result of the requirements of AASB 101 Presentation of Financial Statements,  which requires disclosure of key estimates and judgments, and of areas of estimation uncertainty within the financial statements. 
  • AASB 112 Income Taxes requires disclosure of tax-related contingencies or contingent assets, which are likely to exist where there is an uncertain tax position.


On 1 July 2019, Company X Pty Ltd enters into a transaction where it provides services to a customer through an associated group company located outside Australia.  For the services received from the group company, it recognises a cost of sales of $60,000, based on an agreed transfer price.  From existing tax law and practice, it is unclear whether the transfer price will be acceptable to the tax authorities.  The corporate tax rate is 30%.

Company X Pty Ltd intends to treat the amount of $60,000 as deductible for tax purposes, and files its tax return to 30 June 2020 on that basis.  However, it believes that, on inspection, the tax authority is not likely to accept that treatment, and that the most likely outcome is that the tax authority would rule that the amount deductible is only $20,000.

In its financial statements for the year ended 30 June 2020, Company X Pty Ltd would therefore record a current tax payable greater than the amount included in its tax return by $12,000 (being the $40,000 difference in transfer price at a rate of 30%).  If the amount was significant to its financial statements, it would also have to include disclosure of the matter as a key estimates disclosed in the notes to the financial statements.


Interpretation 23 is intended to reduce the current diversity in practice in this area.  While Interpretation 23 provides clarity on how to approach uncertain tax positions, it also requires directors to make estimates and judgments about the likelihood if acceptance of any uncertain tax treatment.  In some instances, it may result in a greater tax liability being recognised than previously.

The disclosures required arising from Interpretation 23 are likely to be sensitive in nature, and may be of challenging for some boards.  We expect there to be concern among directors about exposing their company to greater risk of investigation by highlighting to tax authorities areas where the company considers that there is uncertainty about a tax treatment.

The Interpretation can be seen as part of a wider focus on tax transparency and on entities’ obligations.  It is written with an intention that entities will be transparent about their tax position, both with their shareholders, and with the tax authorities.

Further Information

For further information about Interpretation 23, please contact Ralph Martin, or your own RSM adviser.