Retention of business records by electronic means (Dec 03) (WITHDRAWN)

Introduction

1. This Standard Practice Statement (SPS) provides guidelines on the retention of business records where those records are stored in electronic form, on microfiche or on microfilm. The SPS also provides guidelines on the information and assistance required when Inland Revenue requests information and requires access to business records and supporting background materials.

Application

2. This SPS applies from 21 November 2003 which is the date the Electronic Transactions Act 2002 (ETA) and the Electronic Transactions Regulations 2003 (No. 288) generally came into force.
   
   
3. The SPS replaces the previous Inland Revenue publications issued on record retention in Tax Information Bulletins Volume 1 No. 6 (issued December 1989), Volume 3 No. 1 (issued July 1991) and Volume 3 No. 9 (issued July 1992).

Summary

4. Business records may be kept in either paper-based or electronic form. Where records are held in electronic form, it is important they are kept in a manner that allows Inland Revenue to readily ascertain the amount of tax payable.
   
   
5. If information is transferred from source-paper and other non-electronic records into electronic form or microfilm for record retention purposes, the electronic or microfilm record, when reproduced in printed form must be identical in format and in all other respects to the original record. The addition of information such as index referencing is acceptable. The additional information must not obscure the image of the original record and must be distinguishable as additions to the original record.
   
   
6. If business records are originally in electronic form, persons should be able to demonstrate that their electronic records systems are secure from both unauthorised access and data alterations. Electronic copies must be readily accessible and capable of being retrieved and produced as a legible hard copy or supplied to Inland Revenue in electronic form upon request.

Background

7. The Tax Administration Act 1994 (TAA) requires persons who carry on business or other income earning activities to keep in New Zealand sufficient records in English to enable the Commissioner to readily ascertain the amounts of tax payable by that person.
   
   
8. Previously, the majority of business records were kept in paper form and the Commissioner allowed such records to be transferred to microfiche or microfilm in limited circumstances.
   
   
9. Technological advances have seen records now being transferred to electronic form or in some cases originating in electronic form. The ETA provides a framework to support those persons who want to conduct their businesses electronically. These persons will also have the option to use technology to store information from source-paper documents or other non-electronic records. The ETA also removes the requirement to retain the source-paper or non-electronic records where persons who use technology to store business records can ensure the integrity of the information transferred from source-paper or other non-electronic records.
   
   
10. It is an offence against the TAA if a person does not keep books or records required to be kept by a tax law or does not provide information when requested by an authorised Inland Revenue officer.

Legislation

Electronic Transactions Act 2002

25. LEGAL REQUIREMENT TO RETAIN DOCUMENT OR INFORMATION THAT IS IN PAPER OR OTHER NON-ELECTRONIC FORM -
    
    1. A legal requirement to retain information that is in paper or other non-electronic form is met by retaining an electronic form of the information if:
       
       1. the electronic form provides a reliable means of assuring the maintenance of the integrity of the information; and
       2. the information is readily accessible so as to be usable for subsequent reference.
    2. Subsection (1) applies to information that is a public record within the meaning of the Archives Act 1957 only if the Chief Archivist has approved the retention of that information in electronic form.
    3. To avoid doubt, if information is retained in electronic form in accordance with subsection (1), the paper or other non-electronic form of that information need not be retained.
       
26. LEGAL REQUIREMENT TO RETAIN INFORMATION THAT IS IN ELECTRONIC FORM -
    
    Subject to section 27, a legal requirement to retain information that is in electronic form is met by retaining the information:-
    
    1. in paper or other non-electronic form if the form provides a reliable means of assuring the maintenance of the integrity of the information; or
    2. in electronic form if -
       1. the electronic form provides a reliable means of assuring the maintenance of the integrity of the information; and
       2. the information is readily accessible so as to be usable for subsequent reference.
27. EXTRA CONDITIONS FOR ELECTRONIC COMMUNICATIONS -
    
    In addition to the conditions specified in section 26, if a person is required to retain information that is contained in an electronic communication,
    
    1. the person must also retain such information obtained by that person as enables the identification of
       1. the origin of the electronic communication; and
       2. the destination of the electronic communication; and
       3. the time when the electronic communication was sent and the time when it was received; and
          
    2. the information referred to in paragraph (a) must be readily accessible so as to be usable for subsequent reference.

Tax Administration Act 1994

22. KEEPING OF BUSINESS RECORDS -

1. Without limiting the generality of subsection (7), the records required to be kept and retained under subsection (2) in respect of any business carried on during any income year by any person, shall contain: - ...
   
   
   2. record of all entries from day to day of all sums of money received and expended by the person (in relation to that business) and the matters in respect of which the receipt and expenditure takes place; and
      
   3. Where that business involves dealing in goods:
      
      1. A record of all goods purchased, and of all goods sold in the carrying on of that business (except those sold in the course of cash retail trading customarily conducted in a business of the kind of which that business is one) showing the goods, and the sellers and buyers or, as the case may be, the agents of the sellers and buyers in sufficient detail to enable the goods, and the sellers and buyers, and those agents, to be readily identified by the Commissioner; and all invoices relating to the goods; and...
         
   4. Where that business involves the provision of services, records of the services provided and all invoices relating to them; and
      
   5. The charts and codes of accounts, the accounting instruction manuals, and the system and programme documentation which describes the accounting system used in each income year in the carrying on of that business.
      
   6. ... shall keep in New Zealand sufficient records in the English language to enable the ascertainment readily by the Commissioner, or any officer authorised by the Commissioner in that behalf, ...
      
   12. ... shall retain in New Zealand all such records for a period of at least 7 years after the end of the income year to which they relate...

5. The Commissioner may, by notice in writing given before the expiry of the 7-year retention period specified in subsection (2), require a taxpayer to retain all or any of the records specified in that subsection for a further period not exceeding 3 years following the expiry of the 7-year period...

7. In this section, records includes:
   
   1. Books of account (whether contained in a manual, mechanical, or electronic format) recording receipts or payments or income or expenditure:
      
   2. Vouchers, bank statements, invoices, receipts, and such other documents as are necessary to verify the entries in the books of account referred to in paragraph (a):

Goods and Services Tax Act 1985

Section 75 of the GST Act has similar requirements to section 22 of the TAA.

Electronic Transactions Regulations 2003

SCHEDULE 1, CLAUSE 4

Conditions for legal requirements to retain records under Inland Revenue Acts

1. A legal requirement under the Inland Revenue Acts to retain a record that is initially in paper or other non-electronic form may be met by retaining an electronic form of the record, only if -
   
   1. the record is readily able to be produced in paper form; and
      
   2. that paper form is a duplicate image of the original paper or other non-electronic form.
      
2. For the purposes of subclause (1) , it does not matter that annotations, indexing references, or other additional information are included in the record retained in electronic form, provided that they:
   
   1. do not obscure any of the original information contained in the record; and
      
   2. are distinguishable as additions to the original record.
      
3. A legal requirement under the Inland Revenue Acts to retain a record that is generated in electronic form and is provided to another person in paper or other non-electronic form (for example, an invoice generated electronically and printed for sending to a customer) may be met by retaining the record in its electronic form only.
   
4. Despite subclause (1) , if a record is received from a person in both paper or other non-electronic form and in electronic form (for example, a bank statement sent by a bank in paper form, and also provided in electronic form), a legal requirement to retain the record may be met by retaining the record in its electronic form only.
   
5. In this clause, Inland Revenue Acts has the same meaning as in section 3(1) of the Tax Administration Act 1994.

Standard Practice

11. Regardless of how business records are retained there must be sufficient detail to ensure a complete audit trail that allows tracing the retained records to and from accounting records and to tax returns.
    
    
12. Section 25 of the ETA provides the option of using technology to store source paper documents by electronic means. Section 26 of the ETA sets the standard for retaining information in electronic form. The Commissioner considers that the information will be readily ascertainable and meet the requirements of the ETA if the following practice is followed:

Retention of records on microfilm/microfiche

13. Paper records microfilmed must be copied completely and accurately.
    
    
14. The microfilmed records, when reproduced in printed form, must be identical in format and in all other respects to the original records. The addition of information such as indexing references is acceptable. The additional information must not obscure the view of the original record information and must be distinguishable as additions to the original record.
    
    
15. The quality of the microfilmed records must be sufficient to ensure they are readily accessible and capable of being retrieved on legible hard copies (printouts) if required.
    
    
16. Paper records microfilmed in accordance with the requirements detailed below may be destroyed after transfer to microfilm.

Retention of records in electronic form - originally in paper form.

17. Paper records transferred to electronic form must be copied completely and accurately - for example: the use of imaging to provide information in a format identical in all respects to the source-paper document. The addition of information such as index referencing is acceptable. The additional information must not obscure the view of the original record information and must be distinguishable as additions to the original record.
    
    
18. The electronic copy must be readily accessible and capable of being retrieved on legible hard copy (printouts) or supplied in electronic form (on electronic media and unencrypted in a form able to be read by Inland Revenue staff) if required.
    
    
19. Source-paper documents or other non-electronic records from which the complete information is transferred and stored in electronic form, in accordance with the requirements of the ETA and the Electronic Transactions Regulations 2003 (No. 288), may be destroyed after transfer to the electronic form.

Retention of records in electronic form - originally in electronic form.

20. Internal controls must be adequate to ensure that all business transactions executed electronically, including those executed through the Internet, are completely and accurately captured.
    
    
21. Persons should be able to demonstrate that their electronic records systems are secure from both unauthorised access and data alterations. This usually involves developing and documenting a security program that establishes:
    
    • controls to ensure that only authorised personnel have access to electronic records;
      
    • provide for backup and recovery of records;
      
    • ensure that personnel are trained to safeguard sensitive or classified electronic records; and
      
    • minimise the risk of unauthorised alteration, addition or erasure.
    
    
22. The charts and codes of accounts, the accounting instruction manuals, and the system and programme documentation which describes the accounting system used must be retained and produced if required, to an Inland Revenue officer.
    
    
23. Encryption
    The electronic copy must be readily accessible and capable of being retrieved and produced as legible hard copy (printouts) or supplied in electronic form (on electronic media and unencrypted in a form able to be read by Inland Revenue officers) if required.
    
    
24. The Commissioner may approve the use of symbols and abbreviations to facilitate the electronic transfer of tax invoices, credit notes or debit notes. Requests for approval should be made in writing to Inland Revenue.
    
    
25. Those who engage in the electronic transfer of tax invoices, credit notes or debit notes must retain electronic records that in combination with any other records, e.g. the underlying contracts, price lists, price changes, product code descriptions, have an adequate level of detail to meet the requirements of the Goods and Services Tax Act 1985 (GST Act). For example, if a hard copy invoice is requested, the printout must contain all information as required under section 24 of the GST Act.
    
    
26. Internet
    Persons who do business via the Internet are required to keep business records of all internet transactions for tax purposes.
    
    
27. E-mails
    Some e-mails may be classified as business records required to be kept for tax purposes. Where e-mails are business records, section 27 of the ETA requires the origin, destination and time of electronic communications to be retained and accessible so as to be usable for subsequent references.

Additional Requirements

28. The following additional requirements are also necessary where business records are retained in electronic form.
    
    
29. Backup
    Backup and recovery procedures must be sufficient to guarantee the availability of electronic records for the required record retention period.
    
    
30. Hardware/Software Changes
    In the event of hardware/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.
    
    
31. Storage Offshore
    The Commissioner may approve the storage of records offshore. Approval is subject to the records being readily available in New Zealand on request, in English, and at no cost to Inland Revenue in obtaining the information. Each case will be considered on individual merit, having regard to the person's compliance history and whether storage overseas is likely to impede Inland Revenue compliance activities.
    
    
32. Providing accounting information in electronic format to Inland Revenue
    Inland Revenue's Computer Tax Audit Unit and Electronic Data Coordinators specialise in downloading electronically stored information. The preferred media for receiving electronic information is on CD, DVD or floppy disk. However, other media may be accepted such as 8mm tape cartridge, Zip drives, 4mm DAT tapes. An alternative method is transfer of data between personal computers. Other mutually agreeable transfer methods may be negotiated as required.
    
    
33. When possible, electronic information supplied to Inland Revenue should be in a fixed record length format, in EBCDIC or ASCII or delimited. Tapes should be created without software compression. The electronic information should be copied to media, not a proprietary back up. Documentation should be supplied with the media showing the record layout, record length, (block size if supplied on tape) and number of records.
    
    
34. Assistance to Inland Revenue officers
    Adequate viewing and printing facilities should be made available free of charge to Inland Revenue officers. If requested, persons must locate selected records that have been stored and print any items selected, free of charge to Inland Revenue officers.
    
    
35. Persons must be available to explain the operation of their computer system to Inland Revenue officers. This is the case whether the system is owned and operated by the person or out-sourced to a third party.
    
    
36. There must be sufficient detail to ensure a complete audit trail that allows tracing the retained records to and from accounting records through to tax returns.
    
    
37. Retention period
    The electronic or microfilmed records must be retained for the full retention period required by the TAA and the GST Act, currently 7 years unless extended to 10 years by Inland Revenue for specific case situations.

This Standard Practice Statement is signed by me on 10 December 2003.

Margaret Cotton
National Manager
Technical Standards