The common position adopted by many taxpayers is that keeping records for 5 years is all that is needed to ensure they comply with their obligations under the tax law. However, there are a number of times when this isn’t always the case.

There are 5 broad rules for record keeping and these can be summarised as follows:

1. Keeping all records

Keep all records related to starting, running, changing, and selling or closing your business that are relevant to your tax and super affairs. Where there is a split purpose (eg private usage), ensure you have clear documents to show the business portion.

2. Read-only protection

Ensure that the relevant information in your records are not changed. They must be stored in a way that protects the information from being changed or the record from being damaged as well as enabling taxpayers to access historical data.  The ATO can request that taxpayers demonstrate that appropriate safeguards are in place.

3. Security

Be able to access the records when required to. If you store your data and records digitally (as most businesses do) then ensuring that the relevant security protocols are known (eg encryption system & keys or passwords) as well as ensuring the data can be extracted and converted into a standard format (for example, Excel or CSV).

Interpreting and validating historical data can be a time-consuming process!

In addition to the above, practical considerations need to be reviewed ie changing accounting (or other software) systems.  The ability and speed of accounting software evolution means that moving between platforms is far more frequent thus increasing the risks of not being able to access historical data.  It’s not uncommon to find historical data trapped on a platform that no one in the organisation can now access or knows how to use!

4. Universality

The records must be in English or able to be easily converted to English. Given today’s centralisation of accounting functions or management teams, having documents or accounting systems based in a foreign language is not uncommon.  Taxpayers need to ensure that these documents are easily convertible into English and are encouraged to keep two versions when they are created with one being in English and the other the “home” language.

5. Time Considerations

Storing the documents for the relevant period of time.  Now, this is normally a minimum of 5 years, however, understanding the timing of when the 5 years runs from is important – for example, for Fringe Benefits Tax (FBT) the five years starts from the date you lodge your FBT return meaning in reality it’s really 6 years.

In addition, there are a number of common scenarios when such a methodology will fall short and can result in higher tax liabilities than would otherwise be the case including the sale of a capital asset or recoupment of prior year losses.

In these two scenarios maintaining appropriate records for 5 years from an initial transaction will not meet the requirements and leave you exposed.  The denial of tax losses or part of a cost base of a capital asset is a common ATO strategy and will result in a higher amount of tax payable when taxpayers are not expecting it.

For example, say a property was acquired in 1990 and is now sold, the ATO will expect that the records to support the cost base are available until 4 years after the tax return for the 20-21 year is lodged.  In actual terms this can mean keeping the records from 1990 until 2026 – a 30 year plus time line.

Where there are tax losses (or capital losses) the record keeping requirement can extend until 4 years after the return is lodged in which the losses are recouped.

Accordingly, as part of the relevant tax governance frameworks for taxpayers, we are advocating that consideration is given to creating independent cost base registers for significant assets as well as processes being put in place to support the day to day record keeping requirements.

Should you have any questions as to what documents you need to maintain, how this impacts your tax liabilities and obligations or tax governance processes, please reach out to your ESV engagement partner to learn more about our expertise in this area.