How long should your business keep financial records

Once your business lodges a BAS or tax return (or any other document disclosing a tax liability), the owners/managers have effectively “self-assessed” their tax position. This means the information provided to the ATO is initially accepted as true and correct at the time of lodgement. This system places the entire onus on you to ensure the information is correct. Because of this onus, all documents, data, software records and other evidence that support the information lodged must be kept in case the ATO wants to view it. You don’t have to keep those records forever as the ATO has stipulated time limits. There are different time limits for differing pieces of information submitted but generally, business information must be kept five years from the date tax return was lodged. If you purchase an item that is subject to capital gains tax upon its eventual sale, the five-year time frame for keeping purchase and sale documentation starts after the sale (that means you need to keep purchase documentation indefinitely where you continue to own the item).

For the period between initial submission of the tax return up to the expiration of the five year time limit, the ATO will review the information you have lodged in some shape or form; whether it be examined by a person, analysis by the ATO’s powerful computer systems or validation with information submitted by third parties (banks, super funds, employers, land titles office, motor vehicle registration authorities in each state and even insurance companies). Should an anomaly arise during this process, the ATO will conduct further work through telephone enquiries, written correspondence, a limited scope investigation or a full audit. The ATO does have extraordinary powers in this regard so sticking your head in the sand is not really an option. At the extreme end of the spectrum, and obviously a process reserved for particularly recalcitrant and dodgy businesses, the ATO does have the power to enter and remain on any land, premises or place and have full and free access to books, documents, goods or other property and can make copies of your documents.

On the lesser end of the scale of activities the ATO can conduct, it’s still conceivable you would get a sinking feeling in your stomach when you receive a communication from the ATO advising they want to look into a matter and requesting information. These situations arise even though the tax affairs of the business are squeaky clean. This is because, amongst other things, the ATO’s computer systems analyse data and look for situations considered outside “average” parameters. By definition, averages are formulated by data that is above and below the average. As such, just because your information falls on either side, it doesn’t mean it’s incorrect.

Should some type of investigation or audit happen, naturally you will want help from your accountant/tax agent to defend and protect your position and ultimately resolve the issue. This can be an expensive exercise and, no doubt, an unbudgeted expense for the business.

Clients of our firm have the option of covering their business, self-managed super fund and themselves with “Audit Shield” insurance. If needed, the policy covers our professional fees (including legal fees if required) associated with any official audit, enquiry, investigation or review instigated by the ATO or some other federal, state and territory-based agency.

The best advice any business owner/manager could receive is to focus on making the business great and profitable. During the process, keep very good financial systems and records and keep your finger on the business’ financial pulse while mitigating the risk of unexpected expenses… that’s what insurance is for.

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