What are tax records?
A tax record includes any information or document about sales, income, and expenses, assets and liabilities. You use your tax records to complete your tax returns and finalise your tax liability. Records can be either paper-based or you can use a simple accounting software package. The IRD accepts paper records or electronic records, or a combination of both.
NZ law and tax records
Under New Zealand Tax law anyone carrying on a business must keep proper records to “enable the Tax Commissioner to ascertain the correct tax liability they have”. You have to be able to explain all transactions in your business. This includes recording sufficient information for the IRD to ascertain your correct taxable profit and confirm your deductible expenses.
The IRD requires you to keep all records in the English language and those records must be clear enough to enable them to work not only the correct taxable income of your business but also the correct taxable income of you as business owner. Your business records must be retained for at least 7 years, from the date when your tax returns are lodged.
In some cases the IRD can go back 10 years if they so require.
Your records must be kept safe in an area or storage place where they can be referred to easily. While this is usually a nuisance to most business owners it is much better keeping records handy rather than trying to reconstruct what happened many years before should the IRD require verification of any matter.
If you are making any claims for tax purposes these records will enable you to verify your payments and income so records such as receipts and copies of invoices etc will come in handy. One of the main reasons therefore for keeping good business records is to comply with the requirements of law.
Accurate tax records essential
One of the main reason a small business fails is due to poor record keeping. If you don’t keep accurate and up-to-date records of the financial transactions of your business you will not only be breaking the law by not complying with regulations, but you will also disadvantage yourself because you will fail to have an accurate picture of how your business is progressing. Good records will allow you to monitor your business operations from day to day, and take any action necessary to correct problems that arise.
Objectives of your tax records system
Regardless of the system that you finally develop, it is important for you to ensure that your record keeping system is:
- Accurate – Make sure that the data collected is accurate.
- Simple – Keep it as simple as possible so everyone can follow it.
- Quick – It should enable you to obtain the information you require quickly if necessary.
- Organised – Make sure it is clearly defined so it is easy to answer the questions of who, what, when, why and where.
- Clear Trail – Make sure your system allows for a clear trail of transactions from the source documents right throughout the rest of your accounting system to final reports.
Always remember that the best recording system will be the simplest. It is the one that allows you to extract the information you need quickly and easily if you ever need it in a hurry.
Good records for tax verification and processing
Good records are important for your business because they:
- make filling in your tax returns easier and quicker
- make it quicker for your tax agent or accountant to do your books – and that will save you money.
- give you the information you need to manage your business and help it grow
- make it easier to get a loan.
Make sure you keep full records so your tax position can be easily determined. Your business records include banking information, proof of income and expenses, cash books and wage books. You can also get free advice from a Business Tax Information Officer or a Maori Community Officer via the IRD if you need assistance with your record keeping.
What does IRD require each year?
With the end of the tax year fast approaching, you might be starting to prepare your tax returns. If you’ve kept good records it’ll be a breeze, whether you do the return yourself or get a tax agent to do it for you. If you haven’t made a good job of record keeping it might be difficult putting all the paperwork together. You could also miss out on claiming some expenses. The best time for setting up a good record-keeping system is – now.
Basic IRD requirements for tax records
Keeping good business and tax records “pays dividends”. There are legal reasons for keeping accurate records, as well as good business reasons, such as supporting the expenses you’ve claimed against your business income.
A tax record includes any information or document about:
Records can be paper-based or you can use a bookkeeping software package. IRD accepts paper records, electronic records or a combination of both. Your tax records should makes it easy for you to keep track of your income and expenses and assist you with budgeting and management decisions. Here are some hints for effective tax record keeping:
- Keep all your records throughout the year. Everything is important
- Retain all your records (including those in electronic form) for at least 7 tax years.
- Electronic records are OK, but back up your information on a regular basis.
- Keep receipts for all transactions, even those under $50.
- Keep records of cash and non-cash sales and expenses.
- Keep copies of any records that might fade like EFTPOS receipts.
- Staple small receipts to an A4 sheet to avoid losing them.
- All records must be in English – unless you have approval from IRD to use a different language.
- If you haven’t already opened bank accounts for your business and other bank accounts where you deposit funds for your tax and GST payments, do it now.
- If you store your records off-shore (including cloud computing), make sure either you or your cloud service provider has Inland Revenue approval
- Keep records of any other types of income or expenses, like dividends or rental income.
- Try to pay for anything that could be a claimable business expense through your business account, so you’ve got a paper (and electronic) trail.
Avoid the following mistakes
- Not holding on to all the records you need to keep. (If you’re audited and don’t have the proof of things you’ve claimed, you can face big penalties or legal action).
- Not keeping your records for long enough (by law you have to keep everything for at least 7 years in case you tax affairs are audited or IRD has queries)
Records when starting and running a business
Your records must be sufficient to allow you to calculate your income and business expenses, and confirm your accounts. You must keep these records for 7 years. They must be in the English language unless approval has been granted by IRD to keep your records in another language.
Your records are likely to include:
- cheque books and deposit books
- invoices and receipts that you have issued and received
- a cashbook
- a petty cashbook
- vehicle use logbooks
- bank statements and other bank records
- a Wage book and other wage records for all employees
- asset registers and depreciation schedules
- worksheets for tax calculations.
Benefits of keeping accurate tax records
When keeping accurate records, you benefit by:
- gaining better control of your business (e.g., they help you to keep track of your income)
- being better placed to get finance from the bank or a better selling price for your business
- saving your accountant’s time (and thus saving your money)
- having quicker audits when your business is audited
The final outcome of an investigation is a tax assessment issued by the IRD, showing what in their opinion your correct tax liability is. This should be fully discussed with your advisers and if you don’t agree then you can object to the assessment in the manner provided by law.
Using electronic records for tax
You are required to keep sufficient records to make complete and correct tax returns. You also need to be able to demonstrate in response to our enquiries that this is the case. The precise nature and extent of the records to be kept will depend on the type and size of your business and the systems you operate. Note: All records must be retained in New Zealand – unless, after written application, authorisation is given by the Commissioner of Inland Revenue to hold them outside New Zealand.
Do I need to keep special records of sales and purchases made electronically?
All records relating to the trading activities of the business must be retained to enable the correct gross income, allowable deductions and tax positions to be confirmed. This includes records of sales and purchases made electronically.
Do I have to retain electronic records on hard copy also?
No. As long as all information contained in the original transactions can be recovered and re-presented.
How long do I have to keep records?
Generally business records must be kept for at least 7 years, after the end of the year to which they relate. This includes electronic records. Payroll records for employee wages and costs must also be retained for a minimum of 7 years.
Can I use encryption to safeguard my records?
Yes, but you must make sure that you can recover the original information in an unencrypted form so that you can make a complete and correct tax return.
You also need to be able to demonstrate in response to IRD enquiries that this is the case, and if IRD need to check your records they should be unencrypted.
What if I change my computer or software?
If you make hardware or software changes:
- facilities for retrieving electronic records that have been stored on the former system must be retained, or
- the electronic records must be converted to a compatible system and both sets of files retained complete with documentation showing the method of transfer and controls in place to ensure the transfer was complete and accurate
Is there a particular commercial software package I should use?
No. You are free to use whatever package suits your business so long as it can produce information from which you can make a complete and correct tax return.
Banking records and drawings
For clear banking records it helps to have a separate bank account just for your business dealings. All business transactions should go through this account. You might also consider opening a savings account for your future tax payments.
Keep all the following banking records:
- Cheque books – record the full details on the cheque butt as you write out each cheque.
- Deposit books – record the full details. Many businesses use large deposit books, which are available from your bank.
- Bank statements from both your business and private accounts. Arranging with your bank to issue your statement on the last day of each month may help you in preparing your GST returns and in reconciling your bank statements with your cashbook.
You must keep these records for 7 years from the year that they were created.
If you are storing records on a computer and/or using electronic banking services, you must continue to keep all relevant paper records (eg, bank statements). Also take care to keep adequate back-up copies of your important electronic records (additional disk copies or print-outs).
Clearly identify any money you withdraw from your business account for personal use. Label it as “personal drawings”. Clearly identify any money you introduce to the business from your own personal funds.
Full summary of records and their purpose
- Petty cashbooks
- List of people who owing your business money
- List of people that you owe money to
- Credit card sales
- Debit and credit card notes
- Invoices for purchases
- Receipts for credit card purchases
- Cheque and deposit books
- Bank and credit card statements
- Interest statements
Asset and Liabilities register
- Depreciation schedule and calculations
- List of assets & liabilities
- Balance sheets
- Profit and loss statements
- Equity accounts
Shareholder Loan account
- Sale and purchase agreements
- Lease agreements
- Credit agreements
- Dividend records
- Tax return calculations
- Vehicle logbook calculations
- Home office calculations
- Employment agreements
- Wage book for PAYE and ACC
- Student loans
- Child support deduction
- Stocktakes done regularly
- Stock records manual system
- Stock cards, regular inventories computer system
- Record of stock movement
- Link to POS (point of sale) if possible
- Tax invoices and other invoices
- Till tapes and reconciliations
- Day book
- Any benefits and entertainment expenses
- Free or discounted goods and services
Use of home premises
- home costs generally
- maintenance costs