5 Common IR10 Filing Mistakes Costing NZ Businesses

Running a business is hectic enough without adding complex paperwork to the mix. One key document you must submit to the Inland Revenue (IR) is the Financial Summary (IR10), which accompanies your tax return. It's a snapshot of your business's financial health, but it's easy to make mistakes that can be costly. Here are five of the most common errors and how to avoid them.

1. Mismatched Financial Figures

   The most common and easily avoidable mistake is when the numbers on your IR10 don't match your annual financial statements, like your Profit & Loss statement and Balance Sheet. While it sounds simple, small discrepancies from last-minute adjustments or rounding errors often occur. A mismatch immediately catches IR's attention, acting as a red flag that suggests either carelessness or an attempt to hide something. This can trigger an audit, forcing you to spend valuable time and resources defending a simple error.

   The Cost

   Filing an incorrect return can lead to penalties. If IR investigates, you'll spend valuable time (or pay your accountant) to explain what might have been a minor mistake.

2. Misclassifying Expenses

   This is a significant issue, especially for new business owners who may be overly creative with their expense claims. The IR10 requires you to break down expenses into specific, official categories, and this is where things often go wrong.

   Common areas for mistakes include:

   • Entertainment costs: The rules are strict, and typically only 50% of entertainment expenses are claimable. Claiming 100% is a quick way to get into trouble.
   • Home office claims: You can claim a portion of household expenses, but it must be a reasonable calculation based on the dedicated business space. Guessing a percentage is not sufficient.
   • Personal spending: Mixing personal and business spending is a major red flag for IR. A weekend trip with one work email does not qualify as a business expense.

   The Cost

   If an audit finds you've over-claimed expenses, you'll have to pay the back-taxes owed, plus interest and penalties, which can add up quickly.

3. Errors with Shareholder Salaries and Drawings

   When running a company, you must be careful about how you take money out of the business. You can't simply transfer funds from the business account to your personal one and call it a salary—that's a drawing. For tax purposes, it's best for active shareholders to be paid a regular salary through the PAYE system, reflecting a reasonable wage for the work performed. If you take large, irregular drawings instead, IR may reclassify them as a salary and bill you for unpaid PAYE, or even investigate for Fringe Benefit Tax (FBT) liabilities.

   This mistake often stems from forgetting that you and your company are separate legal entities. All transactions between you and the business must be handled formally.

   The Cost

   You may face back-taxes for unpaid PAYE, along with late fees and interest. You will likely also have to pay for professional help to resolve the issue with IR.

4. Forgetting to Reconcile GST

   Throughout the year, you file regular GST returns. At the end of the financial year, the total sales declared in your annual accounts (and on the IR10) must match the total sales reported across all your GST returns for that year. A significant discrepancy will be flagged by IR's systems. For example, if your IR10 shows an annual income of $150,000, but your GST returns only account for $120,000 in sales, IR will want to know why.

   There might be a valid reason, such as correcting an error on a later return or having GST-exempt sales. However, if you don't have a reconciliation ready to explain the difference, it can look like you've under-reported your income. Always perform a year-end GST reconciliation to ensure your figures align.

   The Cost

   Poor GST reconciliation can trigger a time-consuming audit. If you have underpaid GST, you could face hefty penalties and interest on the outstanding amount.

5. Poor Record-Keeping

   Poor record-keeping is the root cause of most tax-filing issues. If your records consist of faded receipts in a shoebox and a half-finished spreadsheet, you are making it nearly impossible to fill out your IR10 accurately. You risk missing deductions, miscalculating income, and being unable to prove your claims if IR asks for evidence. Good record-keeping isn't just about compliance; it's about having a clear, accurate picture of your business's financial health.

   Using modern accounting software like Xero or MYOB is a great start, as these tools automate many tasks. However, you are still responsible for ensuring the data entered is correct and properly categorized.

   The Cost

   This is the most insidious cost. Beyond potential tax penalties, poor records prevent you from making sound business decisions. You're essentially flying blind and may end up paying your accountant significantly more to sort out the mess at year-end.

Ultimately, investing the time to get your IR10 right—or paying a professional to do it for you—is an investment in your peace of mind and the long-term success of your business. It allows you to focus on what you do best: running your company.