COMMON QUESTIONS ABOUT YOUR FINANCIAL STATEMENTS

Questions about your financial statements usually start the first time you see them. Brackets, retained earnings and shareholder loan accounts look odd until someone explains them. These are real questions our clients have asked us over the years, and we add new ones as they come up. This guide gives plain answers, three worked examples and a checklist to run through before you sign.

30-Second Read

• Brackets mean a negative figure. A surplus of ($10,000) is a loss.
• A loss only becomes a refund if it flows through to you. A look-through company (LTC) passes its income and expenses to its owners. An ordinary company keeps its own losses.
• Rental property losses are ring-fenced. They can’t reduce your salary. They carry forward against future rental income.
• Shareholder loan accounts show what the company owes each shareholder for the money they put in. An overdrawn account should carry interest at IRD’s prescribed rate.
• The income tax expense note doesn’t say what you owe. Your tax return does. Your taxable profit can also differ from your surplus.
• Every company must hold an annual meeting within six months of its balance date. You do not have to meet in person.
• Keep your financial statements and tax records for seven years.

What Is in a Set of Financial Statements?

Financial statements summarise what your entity earned, spent, owns and owes over the year. They show the profit or loss of the business. We then take that figure into your tax return. The tax to pay or refund appears there, not in the statements.

The pages our clients ask about most are:

• the surplus or deficit before taxation
• retained earnings
• the shareholder loan accounts
• the notes, including income tax expense
• the directors’ report
• the annual meeting (AGM) report on the last page

Our guide to understanding financial statements walks through the layout. Read it first if the pages feel unfamiliar. Then come back here for the specifics.

Your entity type matters throughout this article. An LTC is taxed differently from an ordinary company. IRD’s LTC guide (IR879) says the LTC itself isn’t liable for income tax. Its owners include their share of its income and deductions in their own returns. An ordinary company pays tax itself, at 28% for most companies. If you are unsure which one you own, see what a look-through company is.

Brackets: Does ($10,000) Mean a Loss?

Yes. Brackets mean a negative figure. A “surplus before taxation” of ($10,000) is a deficit, or a loss. Your entity spent more than it earned over the year.

A loss isn’t a sign that something went wrong. It can happen when costs such as interest, rates and insurance are higher than the rent. What matters is what the loss does for your tax, and that depends on who owns it.

How Does a Loss Turn Into a Tax Refund?

Not every loss produces a refund. The answer depends on the type of entity.

• An LTC passes its losses to its owners. IR879 says owners can deduct an LTC’s loss against their other income. The old loss limitation rule no longer applies to most LTCs.
• An ordinary company keeps its own loss. It carries the loss forward against its own future profits. IRD’s shareholder continuity test says a company may do this if at least 49% of its voting shares don’t change hands. The loss doesn’t flow to you.

Worked Example 1: Elise’s Design Studio Loss

Elise earns a $100,000 salary. She also owns 100% of an LTC that runs a small design studio. The studio’s financial statements show a surplus before taxation of ($10,000). The studio isn’t a rental business, so the loss flows to Elise.

Elise pays $22,877.50 of tax on her salary. IRD’s individual tax rates show how that adds up:

• 10.5% on the first $15,600 is $1,638.00
• 17.5% on the next $37,900 is $6,632.50
• 30% on the next $24,600 is $7,380.00
• 33% on the remaining $21,900 is $7,227.00

We deduct the $10,000 loss from her income. Her taxable income falls to $90,000. Tax on $90,000 comes to $19,577.50. The difference is $3,300, which is her refund. That equals $10,000 × 33%, because the loss comes off the top of her income.

This example ignores ACC levies and any other income.

Rental Losses Are Different: Ring-Fencing

Residential rental losses don’t work this way, whether you hold the property as a sole trader, in a partnership or through an LTC. The ring-fencing rules stop a rental loss from reducing your salary or business income. IRD’s rental income guide (IR264) says excess deductions carry forward to offset future residential rental income. Our guide to ring-fencing of property losses explains the rules in full.

Worked Example 2: Hamish’s Rental Loss

Hamish earns a $100,000 salary. His LTC owns a residential rental. Interest, rates, insurance and repairs add up to more than the rent, so the rental makes a $10,000 loss. The ring-fencing rules apply. Hamish can’t deduct the $10,000 from his salary. His tax on the salary stays at $22,877.50, and he gets no refund. The $10,000 carries forward. It offsets rental profit in a later year.

Offsetting One Rental Against Another

The ring-fencing rules work against residential rental income, not only the same property. If you own several rentals, a loss on one can offset a profit on another in some circumstances. Our guide to offsetting LTC profits and losses against other rentals covers when that works.

Why Does My Taxable Profit Differ From My Surplus?

Your financial statements and your tax return follow different rules. Tax can let you claim some costs sooner than the statements record them. Depreciation is the usual example. The tax rules can allow a cost to be claimed at a different time or rate from the statements. IRD’s depreciation guide explains how the claim works.

Investment Boost is another example. IRD says that from 22 May 2025, businesses can claim 20% of the cost of eligible new assets as an expense up front. See IRD’s Investment Boost page for what qualifies.

Ring-fencing adds a second difference. Your statements can show a rental loss, but the ring-fencing rules stop that loss from reducing your salary. So your taxable profit can be higher or lower than your surplus in any year. Ask us if the gap is bigger than you expect.

Why Does Retained Earnings Show One Year but Not the Next?

Retained earnings are profits the entity keeps from earlier years. Sometimes a figure shows at one balance date and nothing shows at the next. That is normal, and it isn’t an error. The reason is timing. At your balance date, that year’s earnings had not yet been retained. They become retained the following day, once the year officially closes. It is a quirk of how the figure is calculated.

So read the retained earnings line alongside the surplus line. The two together show the full picture of what the entity has earned.

What Are the Shareholder Loan Accounts?

Each shareholder loan account shows how much the company owes that shareholder for money they put in. When the statements show two different figures, each one reflects that shareholder’s actual contributions. The figures don’t have to match the shareholding.

Worked Example 3: Sione and Ruth’s Deposit

Sione and Ruth each own half of the shares in a company. Sione pays $60,000 towards the deposit on a rental property, and Ruth pays $40,000. The statements show shareholder loan accounts of $60,000 for Sione and $40,000 for Ruth. The company owes each of them the amount they put in. Their shareholdings are equal. Their loan accounts are not. Reading the two figures as “what each of us contributed” is correct.

What If a Loan Account Is Overdrawn?

A shareholder who takes out more than they put in can turn the balance negative. That is an overdrawn account, and it matters for tax.

Suppose your company isn’t an LTC and you also work for it as an employee. IRD treats an overdrawn shareholder current account as a loan. IRD’s FBT guide (IR 409) says FBT is payable on the difference between interest at the prescribed (or market) rate and the interest the company actually charges. Ask us before you draw money out of the company.

LTCs have a similar rule. An overdrawn current account in an LTC must also carry interest at the low-interest loan rates IRD sets from time to time for FBT. IRD publishes the current prescribed interest rates. If the LTC has enough equity, it can pay a non-taxable dividend, which can bring the overdrawn account back to zero. IR879 says LTC dividends aren’t taxable. That isn’t always possible, particularly if the property has always run at a tax loss.

What Is the “Income Tax Expense” Note?

The note is a standard explanation of how income tax is accounted for within the statements. It is not a statement of what you owe or what IRD owes you. Many clients read it as a bill or a refund. It is neither.

The real tax outcome appears in your tax return. We take the profit or loss from your financial statements and include it there. Who pays the tax depends on the entity:

• An LTC pays no income tax itself. Its owners include their share of the profit in their own returns and pay tax at their own rates.
• An ordinary company pays tax itself at the company rate of 28%.

If the note puzzles you, tell us which line you are looking at. We can point you to the matching figure in your tax return. Our guide to what happens with your tax returns shows the steps.

Do We Need to Sign the Directors’ Report?

Yes. Print it, sign it and return it to us. An e-signature works too. Section 211 of the Companies Act requires the annual report to be signed on behalf of the board by two directors, or by the sole director if the company has only one. Please don’t leave it until the last minute. We can’t file your tax return until your financial statements are signed. If there are no financial statements, we can’t file until you sign the tax return.

Do We Have to Hold an AGM?

You don’t have to go out to a restaurant, but you do have a legal obligation. Every company must hold an annual meeting of shareholders once in each calendar year. The Companies Office says the meeting must be no later than six months after your balance date. It must also be no later than 15 months after the previous annual meeting. With a 31 March balance date, that means by 30 September. A new company has up to 18 months to hold its first one.

Most closely held companies don’t meet in person. The Companies Act lets directors and shareholders pass a written resolution by post or email instead. The Companies Office confirms a written resolution has the same effect as a properly held meeting. So you can skip the restaurant. You still need to action the AGM report. It is essentially your financial statements. Print it, sign it and return it.

If you do meet in person, keep the receipts, and don’t forget your parking receipts. Parking, and a taxi or rideshare to and from the meeting, are legitimate costs of holding it. We feel that a restaurant receipt is a good independent confirmation of the fact that you held a meeting. Keep your receipt. 

Your annual return is a separate job. Schedule 4 of the Companies Act says the return reports the date of your last annual meeting, or the date of the resolution that replaced it. Check your annual return filing month in the Companies Register.

How Long Should I Keep My Financial Statements?

Keep them for seven years, along with the records behind them. IRD’s rental income guide, IR264, says to keep tax records for seven years. That includes bank statements, invoices, loan statements and your signed financial statements. Our guide to what records you need to keep for a rental property lists what else to hold.

Checklist: Before You Sign Your Financial Statements

• ✅ Check your name, your ownership percentage and the balance date
• ✅ Confirm the bank balance matches your bank statement at balance date
• ✅ Compare rental income with your property manager’s annual statement
• ✅ Check the loan balance and interest against your lender’s statements
• ✅ Check each shareholder loan account against what each owner contributed, and whether any is overdrawn
• ✅ Look at the surplus line. Brackets mean a loss
• ✅ Work out whether your entity is an LTC or an ordinary company, because it decides who pays the tax
• ✅ Sign the directors’ report, and sign and return the AGM report
• ✅ Keep a copy with your records for seven years
• ✅ Ask us about any figure you can’t explain

Summary

Your financial statements show the profit or loss of your entity. Brackets mean a loss. Whether that loss becomes a refund depends on the entity. An LTC passes it to its owners, an ordinary company keeps it, and rental losses are ring-fenced either way. Shareholder loan accounts show what the company owes each shareholder. Overdrawn accounts should carry interest at IRD’s prescribed rate, and can create an FBT cost in an ordinary company.

The income tax expense note doesn’t tell you what you owe. Your tax return does. Your taxable profit can also differ from your surplus, because tax can let you claim some costs, such as depreciation, at a different time. You must hold an annual meeting within six months of balance date, or pass a written resolution instead. Sign what we send you, and keep your records for seven years.

Still Have a Question About Your Financial Statements?

If your question isn’t answered here, it may be one we haven’t added yet. Don’t guess at a figure or sign something you don’t understand. Contact EpsomTax.com or call us on +64 9-973-0706 and ask directly. Real client questions are how this page grows. Your fixed fee covers your financial statements, your tax return and reasonable advice queries through the year, so reasonable questions about your statements are already covered. If a question needs a specialist second opinion, we tell you upfront.

If you want to walk through your statements line by line, book a time with us before you sign.

This article is general information, not personal tax advice.

Other Questions You Might Have

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• Annual Tax Questionnaire
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• What’s the Process for My Tax Returns?
• Common Questions About Your Tax Returns
• Understanding Financial Statements
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