The authority found police were justified in relying upon an absence of criminal intent to reach their decision not to prosecute, Sir David said.
"The police decision not to prosecute was based squarely on an opinion provided by the Solicitor-General.
"Police were quite entitled to rely upon this advice, and indeed, having received the opinion it would have been surprising if they had proceeded on any other basis."
The authority also found the engagement of Ms McDonald did not create any conflict of interest and was justified.
The authority also found the additional 56 potentially unlawful interceptions by the GCSB identified in the Kitteridge Report all related to metadata rather than the content of communications.
Since the law was unclear as to whether interceptions of metadata were unlawful, the decision by police not to investigate the additional interceptions was also justified, Sir David said.
Police: The matter is now closed
In their response today, police said the IPCA report dismissed all three aspects of the complaint made by Dr Norman.
"The IPCA report finds no evidence of any misconduct or neglect of duty by police regarding its investigation," Assistant Commissioner Malcolm Burgess said in a statement.
"The report confirms that police were entitled to rely on legal advice provided by the Solicitor-General in reaching a decision that there had been no criminal intent on the part of GCSB staff in intercepting the communications and that there was no conflict of interest in Police appointing Kristy McDonald QC to oversee the matter.
"It also finds that because the law was unclear relating to the interception of metadata, Police were justified in not investigating the additional interceptions."
Mr Burgess said police now considered the matter closed.
Labour calls for security services review
Labour called for a wider review of the country's security agencies.
"The problem with this ruling is that there is still no accountability for these unlawful activities against New Zealanders. The fault for this lies with John Key who is the minister responsible," Labour's associate security and intelligence spokesman Grant Robertson said.
"However, IPCA chair Sir David Carruthers stressed it was 'not the role of the authority to investigate the activities of the GCSB' or to 'determine the accuracy of the legal advice provided to the police by the Solicitor-General'.
"This is symptomatic of wider concerns about our security and intelligence agencies," Mr Robertson said.
"There is no proper governance from the Prime Minister who is in charge of our spy agencies. He has been asleep at the wheel while unlawful actions took place around him. On top of this, the Parliamentary Intelligence and Security Committee is toothless."
Greens: IPCA didn't look at crux of complaint
The Green Party said New Zealanders who were illegally spied on would probably never get their justice.
"The IPCA did not look at the issue which formed the crux of the complaint, which is, did the police rely on the wrong interpretation of the law when deciding not to prosecute," said Greens co-leader Russel Norman.
"The IPCA, in part of their report, concluded the matter was not for the police but for the courts. How can someone go to court on the issue when a person doesn't even know if they have been spied on or not? The whole process is a Catch-22," he said.
"The report gives a green light for illegal spying because the system has set itself up to be impenetrable to inquiries for justice.
The Greens reiterates their call for an open and independent inquiry and an overhaul of the country's intelligence agencies.
Case is bigger than IPCA report - Harre
Internet Party leader Laila Harre said the Dotcom case had gone a long way past holding a few state servants to account.
"The scale of the case is beyond is the normal review and oversight processes. We want a royal commission of inquiry with the full powers needed to scrutinise the illegal spying and accountability for it. That scrutiny must extend to the Prime Minister as the minister responsible.
"We will not get to the truth, or to justice for the 88 New Zealanders at the heart of today's report, through a piecemeal approach," she said.
