Filing Your IR10: A Guide to What IRD Wants to See

When tax time arrives, and you've sorted through your receipts and invoices, you'll face the IR10. This form is the financial summary that accompanies your main tax return. While it can feel like busywork, it's an opportunity to tell your business's story clearly and accurately.

The IR10 isn't just a collection of numbers; it's your business in a nutshell. Getting the story right is key for a smooth tax season. This isn't about hiding information, but about presenting your finances in a logical way that makes sense and doesn't raise unnecessary alarms.

Why Accuracy Matters Most

Above all, the IRD is focused on accuracy. This may seem obvious, but it is the bedrock of a solid tax return. The numbers on your IR10 summary must match the figures in your detailed financial statements, such as your Profit and Loss statement and Balance Sheet.

For example, if your IR10 states sales totalled $150,000, but your detailed accounts show $152,000, that’s a red flag. Even small discrepancies can suggest sloppy record-keeping, which may lead to further scrutiny. The IRD's systems are adept at cross-checking data and will compare your IR10 figures against other information they hold.

• GST Returns: The total income reported on your IR10 should roughly match the total sales you reported on your GST returns throughout the year. A significant difference will require an explanation.
• Payroll Information: If you have employees, the wages you claim as an expense must match the information you filed with PAYE.
• Last Year's Comparison: A large, unexplained change in income or expenses compared to the previous year can also attract attention.

A Story Told Through Expenses

Your expense claims tell the IRD a lot about how you run your business. The fundamental rule is that expenses must be incurred while generating your assessable income. The IRD looks closely at these claims to ensure they are legitimate business costs and not personal spending in disguise.

Here are some common areas they scrutinize:

1. Home Office Expenses

   Claiming a portion of your household running costs is acceptable if you work from home, but the IRD expects a reasonable calculation. You should determine the percentage of your home's floor space used for your office and apply that percentage to costs like rent, mortgage interest, rates, and electricity. Claiming 50% of your home's costs when you only use a desk in a corner of a room will not look credible.

2. Car Expenses

   This is a classic area of focus, especially if you use a personal vehicle for work. You can use the IRD's mileage rate or claim actual costs, but you must be able to prove the business portion of your travel. If you claim actual costs, a logbook maintained for at least three months is essential to establish a pattern of use. Without a logbook, your claim is a guess, and the IRD does not approve of guesswork.

3. Entertainment Expenses

   The rules for entertainment are specific. Most business entertainment, like taking a client to lunch, is only 50% deductible. In contrast, office expenses like morning tea for staff can be 100% deductible. The IRD will assess whether your claims are reasonable for the size and nature of your business. For instance, a solo consultant claiming tens of thousands of dollars in entertainment would likely raise a red flag.

Income, Profits, and Industry Benchmarks

Of course, it's not all about expenses. You must declare all your income, whether from invoices, cash sales, or government subsidies. With modern bank reporting and data matching, it is increasingly difficult to under-report income.

One of the more sophisticated checks the IRD performs is comparing your Gross Profit (GP) margin against benchmarks for your industry. They have data on what a typical business in your sector looks like. For example, if the average café has a GP margin of 65-75% and yours is only 30%, it could suggest that you are not declaring all your sales or that your cost of goods is unusually high. A low margin doesn't automatically mean you're in trouble, but you should be prepared to explain why your business is different.

Balance Sheet Snapshot

The second part of the IR10 focuses on your balance sheet, which provides a snapshot of your company's financial health by showing what you own (Assets) and what you owe (Liabilities and Equity).

The IRD will look closely at a few key areas:

• Shareholder Current Account: If you have withdrawn more money from your company than you have put in, this can look like untaxed income. An overdrawn (negative) balance may result in the company charging you interest or treating the amount as a taxable dividend.
• Assets and Depreciation: Are you buying, selling, and depreciating your fixed assets correctly? For example, a newly purchased vehicle should appear as an asset addition on your balance sheet.
• The Balancing Act: At its most basic, your balance sheet must balance. Total Assets must equal the sum of Total Liabilities and Equity. If the numbers don't add up, the form is incorrect and will be rejected.

In the end, think of the IR10 as a professional summary. It should be clear, logical, and backed by good records. If you approach it with clarity and honesty, you are doing everything right and can file with confidence.