Cash Payments in NZ: 7 Tax Mistakes to Avoid

Here are seven key tax mistakes to avoid when handling cash payments in New Zealand.

Mistake 1: Misunderstanding the legality of cash payments

Are cash transactions legal in New Zealand?

The short answer is yes—cash is legal tender, and businesses can make or accept cash payments. You’re entitled to pay for anything in cash and it’s okay to do jobs for cash.

So why do cash payments often get a bad reputation? It’s because of how they are sometimes misused, which leads us to mistake 2.

Mistake 2: Failing to report and declare cash payments

While making or receiving cash payments is not illegal, failing to report them to Inland Revenue (IRD) could constitute tax evasion.

Under the Income Tax Act, all income, whether received in cash or through other means, must be declared for tax purposes. Failure to report cash income can lead to significant penalties, including fines and potential criminal charges. You can go to jail for tax crimes.

Solution

Ensure that all cash payments you receive and make are properly recorded and declared to the IRD. Keeping accurate records will help you stay compliant and avoid penalties.

Mistake 3: Poor record keeping

Even if you declare cash income, poor record-keeping can still put you at risk. Taxpayers must maintain sufficient records to prove their income and expenses for at least seven years after the tax year they relate to. This period can sometimes be extended, especially if you are under audit or investigation.

Common problems with record-keeping:

• Keep past records for at least seven years. The seven-year rule is on a rolling basis, so do not discard all records in your eighth year.
• Bank statements alone are not enough—supporting documentation like receipts and invoices is required.
• Records must be in English or Te Reo Māori. They can be paper or electronic, but they must provide a complete audit trail.

Failing to keep proper records can lead to:

• Inability to claim business expenses due to lack of documentation.
• Reduced insurance payouts if you cannot substantiate claims.
• Penalties for non-compliance during an IRD audit.

Solution

Use a cashbook template and record-keeping checklist (free templates are available online). Or send me a message and I will provide you with one for free.

If you want to step up your game, consider a cloud accounting system, such as Xero.

Mistake 4: Not setting aside cash for tax payments

Not setting aside tax money is a common issue for many businesses.

A simple fix is implementing a structured system to regularly allocate tax funds.

I’ve written a separate article on how to fix this in just 5 minutes—you can read it here.

Mistake 5: Not understanding the risks of using cash

Using cash comes with several risks, including:

• Theft and fraud (e.g., fake notes).
• Increased IRD scrutiny, especially in industries like construction, trades, and property.
• Difficulties in financial reporting, making it harder to track business performance.
• Bank scrutiny on large cash deposits, which can lead to wasted time answering compliance questions.
• Anti-Money Laundering (AML) laws, which require banks to verify the source of large cash deposits, potentially leading to account restrictions or delays.

Did you know? Businesses can legally refuse to accept cash as long as they inform customers beforehand. The only exception is for paying off debts—in which case cash must be accepted.

Solution

Consider using electronic payment methods to reduce the risks associated with cash transactions.

I understand that for some this may require a mindset shift. In the first year of when I moved to New Zealand, I normally used to pay in cash, simply because it was the most convenient option for me. Paying in cash was actually quite common and the norm during the 30 years I lived in the UAE.

Every industry has different risks associated with cash transactions. Take the time to research best practices for your business to avoid compliance pitfalls.

Mistake 6: Ignoring red flags 🚩🚩🚩

A business that insists on cash payments can sometimes be a red flag for tax evasion.

If a business is pushing for cash payments and avoiding invoices, ask yourself why. Could they be hiding income, avoiding GST, or engaging in fraudulent activity?

Example

You hire a tradie to repair your rental property. You pay in cash because it’s cheaper and don’t ask for an invoice.

• If you pay in cash without an invoice, you may not be able to claim the expense on your taxes, as there is no official record of the transaction.
• Warranties might not be valid without a proper invoice.
• If you ever need to file an insurance claim—such as for a fire caused by the repair—you may struggle to prove your case, potentially losing your payout.

While you can report suspicious activity to the IRD, exercise caution before making accusations. Unlike in the U.S., New Zealand does not have a whistleblower reward program for reporting tax evasion.

Mistake 7: Not asking for help

Seeking help is a sign of strength, not weakness. And the good news? You don’t always have to spend money to get help.

Solution

• Voluntary disclosure: If you’ve made an error in your tax return, notifying the IRD proactively can reduce penalties by up to 100%.
• Installment plans: If you’re struggling to pay your tax bill, the IRD offers payment plans to ease the burden.
• IRD seminars & advisory visits: Attend free IRD seminars (available online) or request an advisory visit for tailored tax guidance.

When you proactively address tax issues, the IRD is more likely to work with you, not against you.

If you prefer specific professional guidance, an accountant or tax agent can help ensure you’re on the right track.enue.

My thoughts

Having some cash on hand is still a good idea for emergencies. During times of uncertainty—such as natural disasters or economic crises—cash can be invaluable. For instance, during the COVID lockdown, cash withdrawals from the Reserve Bank surged to over $800 million, five times the usual amount.

However, relying too much on cash can create compliance risks. By declaring income properly, keeping good records, and understanding cash risks, you can ensure your business stays on the right side of the law.

I’ve spent the majority of my career doing financial audits, worked with the Big4 and mid-tier public practices, and also worked as a front-line regulator on audit quality. From my experience as an auditor and regulator, I’ve consistently seen that getting things right the first time is always easier than fixing them later.

No undeclared cash job is ever truly invisible—every transaction leaves a trail. It’s always better to do things right from the start than to face costly consequences later.

That said, if ever you’re unsure, always seek professional advice—staying informed is the best way to stay compliant.ions without over-claiming. Regularly review your home office setup and expenses, including reassessing the business use percentage if your work situation changes.

Your next steps

• Keep proper records and declare all cash income.
• Set aside tax money to avoid financial stress.
• Explore safer payment methods to reduce risks.
• Seek professional guidance if you’re unsure.

How do you handle cash in your business? Have you faced any of these challenges?

Drop a comment below—I’d love to hear your thoughts!

– Baqir Hussain, FCCA

Director, Finex Chartered Certified Accountants