How Long Should You Keep Tax Records For?

It’s a common misconception that throwing out those piles of receipts and invoices is permissible once tax season is over. On the contrary – keeping accurate tax records is not only a good idea, but also a legal requirement.

If the Australian Taxation Office (ATO) ever questions your tax affairs, it’s up to you to prove the correct amount of tax you owe – it’s not the ATO’s job to do so.

As such, the ATO prescribes a minimum period for which businesses and individual taxpayers must keep their tax records.

Here’s what you need to know regarding the ongoing retention of the records you need for a tax deduction.

How Long Must Businesses Keep Tax Records For?

According to the ATO, you must keep your tax records for at least five years after the date of the last tax return to which the records relate.

The ATO requires businesses to keep tax records for several reasons:

To verify tax returns: The ATO needs accurate records to verify the information provided in tax returns, including the amount of income earned, expenses claimed, and taxes owed.
To monitor compliance: Keeping accurate tax records helps the ATO monitor compliance with tax laws and regulations and identify any potential fraud or tax evasion.
To determine tax liability: The ATO uses tax records to determine the correct amount of tax owed by a business and to enforce payment.
To support audits and investigations: In the event of an audit or investigation, the ATO will use tax records to gather information and verify compliance with tax laws.
To assess tax refunds: The ATO uses tax records to assess the eligibility of businesses for tax refunds and to determine the amount of any refund owed.

As you can see, these record-keeping requirements allow the ATO to ensure you’re paying the correct amount of tax and complying with tax laws.

Circumstances Where You Must Keep Tax Records For More than 5 Years

While the general rule is to keep financial records for at least five years, the ATO requires you to save some records for even longer, including documents surrounding:

Depreciable Assets

You’ll need to keep records for depreciable business asset purchases for five years from the date of your last depreciation claim.

For example, let’s say you fit out your new office with a few workstations. Unfortunately, you can’t claim the full cost of these workstations in the year you purchased them, so you’ll have to depreciate them over several years. According to the ATO, the useful life for workstations (including desks and partitions) is 20 years.

So, your accountant will submit a depreciation claim as part of your tax return every year for 20 years, provided that you remain the owner. From a record-keeping perspective, this would mean that you’ll retain the purchase records and the depreciation records for five years following that last depreciation claim.

Essentially, you’ll need to hold onto those records for 25 years.

Carried Forward Tax Losses

If you elect to carry forward tax losses, you must keep records of them from the start until five years after you make your last claim.

You may be interested in reading How Tax Losses Carried Forward Can Help You Minimise Tax.

Employee Records

The ATO requires you to retain all employee records relating to their tax and superannuation obligations for at least five years after the termination of the employment relationship. It’s worth noting, however, that the Fair Work Commission wants you to keep records for at least seven years.

Capital Gains Tax Assets

If your business acquires a capital asset such as an investment property or shares, you must keep records relating to its costs base for five years after selling it and reporting the capital gain or loss. The cost base includes the following:

Purchase price
Costs involved in acquiring the asset
Expenses involved in holding the asset

In Dispute with the ATO

If there is a dispute between you and the ATO regarding your business’s financial position, you must maintain all the records relating to the dispute for five years after resolution.

Will Your Business Be Penalised if You Don’t Maintain Accurate Records After Submitting a Tax Return?

Yes. The ATO prescribes certain penalties if your business doesn’t comply with the record-keeping period. They will consider your business’s compliance history, the severity of the breach or any other circumstances related to the violation when determining what financial penalty to impose.

Best Practices For Record-Keeping

The ATO allows business owners to choose between maintaining paper records or electronic records – although they have expressed their preference for electronic records.

Digital storage offers numerous benefits, from eliminating paperwork to providing quick and easy access to your records – no more searching for lost physical records, and tax practitioners will have an easier time preparing your business tax return.

Plus, an electronic audit trail makes it easier to track your records and detect discrepancies.

There are various online reporting tools, such as Xero, MYOB and Quickbooks, that you can use to streamline document management, catch errors before they become costly mistakes, and even help reduce manual labour costs.

Key Takeaways

Keeping accurate and up-to-date business records is a critical component of compliance for businesses in Australia. You need to understand the minimum retention periods set by the ATO. And whether you choose to keep your tax records manually or digitally, the key is to have a system in place that works for your business and ensures you are always ready to meet your tax obligations.

For further assistance with tax record-keeping, consider reaching out to a professional accounting firm such as Box Advisory Services. Our team of experts can help you understand your obligations, set up an efficient record-keeping system, and ensure that you are always in compliance with the ATO.