Tax Record Keeping – In An Electronic Environment

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Within a rapidly changing digital world and with an increasing number of businesses moving towards paperless offices, we are often asked whether tax records can be stored electronically and how long they should be stored for.

Electronic storage has obvious benefits, including ease of accessibility and storage efficiency. However, you should be aware of specific legislative requirements given the consequences of non-compliance for a company and its officers.

Below is a summary of some of the key record-keeping obligations of a company for taxation purposes and how this inter-plays with an electronic storage system.

We note that the records your business keeps should be considered in the context of your business operations and with regard to all the relevant commercial and statutory requirements specific to your business.

Income Tax Laws and the ATO

  • Income tax laws require businesses to maintain tax records that explain transactions undertaken by them.
  • Under the law, documentation can be maintained either in paper form or by means of electronic storage.
  • As a general rule, tax records should be retained until five years after the later of:
    • The date on which the records were prepared or obtained; or
    • the completion of the act or transaction to which the records relate.
  • It is important to note however that the events that mark the beginning or end of the retention period can vary according to particular laws. For example, capital purchases records will generally be required to be kept from the date of purchase until five years after the capital gains tax event (such as a disposal) has occurred and this period may be extended further if the disposal results in a capital loss.
  • Notwithstanding the above, records that support claims made in income tax returns may need to be kept for additional time, as outlined below.

Income tax returns and other ATO statements

  • There is no legislative requirement to keep copies of signed income tax returns or activity statements, provided taxpayers retain copies of the records used to prepare these documents for five years after either:
    • the due date; or
    • date of lodgement (whichever is the later).
  • This five year period also applies to taxpayer declarations relating to returns and documents lodged by a tax agent on the taxpayer’s behalf.
  • If the period in which the Commissioner may amend a tax return assessment is extended, records relating to transactions disclosed in that tax return are required to be retained until the end of the extended assessment period.
  • Income tax laws require that written records must be kept in the English language, or so as to be readily accessible and convertible to English.

The above records may be kept electronically as scanned documents provided that the electronic copy is a true and clear reproduction of the original and is in a form that the ATO can access and understand in order to ascertain a taxpayer’s tax liability.

Tax governance

We recommend that taxpayers prepare detailed records and supporting documents at the time they either enter into a transaction or adopt a tax position in order to manage tax risk.

Although five years is generally the period for retention for tax purposes, other legislation may require longer periods.

Company law

The Corporations Act outlines reporting requirements for financial records as well as for registers and meeting minutes books as outlined below.

Financial records

  • The Corporations Act requires that companies keep financial records for seven years from the date after the transactions covered by the records are completed.
  • These records must correctly explain the entity’s transactions and financial position and performance, and must enable true and fair financial statements to be prepared and audited.
  • Financial records include working papers that are needed to explain the methods by which financial statements are prepared and adjustments to financial statements are made.
  • The Corporations Act specifically allows for financial records to be kept in electronic form, provided they are convertible into hard copy and a hard copy is capable of being made available to a person entitled to inspect the records within a reasonable time.

Registers

  • Registers are required to be maintained for the duration of a company’s registration plus five years after the date on which the last entry was made.
  • Minute books of the Directors and Shareholder meetings are required to be maintained for the duration of a company’s registration.
  • These records can be prepared and stored electronically provided they can be reproduced at any time in a written form.
  • For this reason we believe it is prudent to retain minutes and resolutions in written form.
  • Companies are required to take reasonable precautions to protect records against damage and tampering.

Industrial law

  • All employers are legally required to keep time and wages records to provide support that employees have been paid correctly and have received their full entitlements.
  • Under West Australian state law, time and wages records must be kept for at least seven years after they are made, for both current and past employees.
  • Records relating to long service leave must be kept during the period of employment and for seven years from the date employment ends.
  • Employment records may be kept electronically provided they are readily accessible and are convertible into a legible form in the English language.

There are other record-keeping requirements that may apply to companies in relation to their employees, for example workers compensation legislation and industry codes to which the company is a party, may also impose specific record retention requirements.

SMSF law

If you have your own SMSF, over and above the general 5 year rule relating to tax records, SMSF’s need to keep the following records for a minimum of 10 years:

  • minutes of trustee meetings and resolutions
  • records of all changes of trustees
  • trustee declarations recognising the obligations and responsibilities for any trustee, or director of a corporate trustee
  • members’ written consent to be appointed as trustees
  • copies of all reports given to members
  • documented decisions about storage of collectables and personal-use assets.

Electronic record keeping

The Electronic Transactions Act 1999 (ETA 1999) contains specific provisions which state that a requirement or permission under a law of the Commonwealth for a person to provide information, in writing, to sign a document or to retain information or a document can be satisfied by an electronic communication, subject to certain minimum criteria being satisfied.

Where information is kept in electronic form, the electronic form used must be:

  • readily accessible so as to be useable for subsequent reference; and
  • a reliable means of assuring the maintenance of the integrity of the information contained in the electronic form.

Both the ETA and the ATO emphasise that the integrity of information is maintained only where the information remains complete and unaltered. Therefore, it is important to ensure that electronic record keeping systems contain sufficient security to ensure that the record cannot be altered or manipulated.

The ATO’s guidelines on the controls and features that electronic record keeping system should have in order to meet the record keeping requirements under the tax law are set out in Taxation Ruling 2005/9.

Further to these guidelines national and international standards exist for electronic records against which companies may assess their electronic record keeping systems, including AS/NZS ISO/IEC 17799:2006 which provides best practice recommendations for information security management.

Actions

  • Best practice is to ensure your business maintains reliable record keeping processes. The ATO will accept documents to be stored electronically so long as when printed or reproduced they are a reliable representation of the original.
  • We recommend that businesses consider implementing the above electronic standards as part of their tax record retention policies and systems to ensure that they are able to rely on their electronic records if and when the need arises.
  • Ensure appropriate back-up copies of computer files and programs are occurring and there is an ability to recover records if your computer system fails.
  • Ensure there are adequate controls to safeguard the security and integrity of the records, such as passwords or restrictions to access as appropriate.
  • Note that the above summarises the record keeping for tax. Any legal documents like contracts, leases, trust deeds, documents that need witnesses still require the original written version to be maintained.

If you would like us to conduct a health check of your record keeping for taxation purposes and sign off your electronic tax records or CGT asset registers please contact us.
This article was authored by Michelle Saunders and Robyn Dyson.