How long should you keep your tax records? Can you wave goodbye after you’ve done your tax each year, or should you hang on to them for the long haul?
When it comes to keeping your tax records, and in fact any business records, on file, unfortunately there’s no one-size-fits-all answer. It will depend on the type of document, legal entity you are and the operating activities you undertake in your business.
Rule of Thumb
As a general rule, it’s best to keep the vast majority of your financial documentation for a period of seven years or more. This is for several reasons: Australia has a statute of limitations of seven years which means if you are ever subject to legal action that’s the maximum time that can elapse before someone can take action against you. You may need to retain your documents as proof. Under corporate legislation, a company is required by law to retain copies of their records financial records for at least seven years after the completion of a recorded transaction. This rule covers a wide range of cases, including:
Australian tax laws stipulate that a business must keep financial records for a minimum of five years after the lodgement date of that years returns. For taxpayers who are deemed as having “simple tax affairs” – you may need to only keep receipts and tax documents for two years from lodgement but there are some specific rules around this and we recommend you always check with us first.
A business must retain employee records for at least seven years following their termination. To make this easy, we recommend clients keep employee records in separate files which can be archived separately from tax records. The file should include copies of employment contracts, leave forms, notes on performance, tax file declarations, super choice form, fair work information statement and so on. We have a free downloadable new employee checklist available on our website to help get you started with this.
Australian tax laws stipulate that a business must keep financial records for a minimum of five years after the lodgement date of that years returns.
Legal issues such as personal injury, breach of contract and defamation
If you have a personal injury case records must be kept for a period of three years from the date on which an incident occurred.
The limitation period for a breach of contract or incident involving negligence is a period of six years starting from the date on which the action or omission arose.
And the limitation period for defamation is one year from the date of publication of the defamatory piece.
Every legal case will have specific requirements – if you’re ever party to a legal case you should seek advice from your solicitor about your individual needs. Atticus Business Accountants may be able to put you in touch with a firm in Toowoomba – just ask us.
For depreciable assets like cars, equipment, computers and furniture – you need to keep receipts for these items from five years after it has been last claimed for depreciation. We recommend keeping a separate file for these items and archiving separately from tax records to make sure they are kept for the required period.
Investments like rental properties, shares, land
For assets like rental properties or land we recommend you start up a separate file and keep all your purchase documents – purchase contract, solicitor invoices and letters, finance documents etc. Do the same when the investment is sold – file your sale contact, solicitor’s invoices and letters. Similar to the rules for depreciable assets – you need to keep documentation for these items from five years after it has been sold.
There are a handful of areas that the general rule of thumb does not cover, which include:
These documents should be held on file indefinitely, as some IP rights can span over a number of decades.
If you have a Family Trust your original Trust Deed is a very important document. We recommend that deeds should be kept indefinitely, as some trust deeds have a life span of up to 80 years. This also goes for company documents like your constitution – these should be kept indefinitely.
Any records relating to threats of legal action should be retained at least for the life of the litigation, if not indefinitely.
Filing in Practice
There are a few different practical considerations you should take into account before you decide on a data retention policy, such as:
Some documents may require special storage arrangements before being placed into an archive. Particularly detailed or important documents may need to be stored in a safe. With the rise of identity theft and computer viruses, privacy of personal and financial information is particularly important.
Transferring the vast majority of your filing system to a digital archive is a solution many businesses are using to avoid excess storage costs, but you still need to be careful. In many cases, it’s mandatory that a hard copy of the original document is kept on file – for instance we recommend keeping a hard copy of your Trust Deed. It’s also important to ensure your database has adequate encryption and protection against viruses or hackers to avoid sensitive information being compromised or lost, and this can also add to the cost. And, it’s important to ensure that any digital file can be retrieved and read by the ATO at any time, and it’s never altered from the paper original.
It doesn’t matter whether or not you’re using a physical or digital storage system, all files must be stored correctly so they cannot be accessed and/or changed by someone that doesn’t have the authority to do so.
With so many businesses opting for cloud-based accounting solutions, it’s important to consult with the experts to ensure all of your bases are covered.
Finally, it’s a taxpayer’s responsibility to keep your tax records secure, however there are special provisions in the event that your tax records are destroyed because of things like fire, flood or burglary. You should contact us to discuss this in the event that this ever happens.
If you need help setting up a filing system for your financial records, or have any other questions about what has been discussed, please talk to us today.