Requirement by law
It is necessary that you have a record keeping system in your business as it is required by law. The ATO necessitates the keeping of business records:
- for five years after they are prepared, obtained or the transactions completed (whichever occurs later); and
- in English, or in a form that the ATO can access and understand in order to determine your tax liability.
As stated on the ATO website, you should “keep records for a longer period if you use information from those records in a later tax return (for example, claiming a loss carried forward from a business activity in an earlier year).
The records should be kept until the end of any period of review for that later return. Records relating to assets for capital gains tax purposes may also need to be kept for a longer period.
If you already have an established record keeping system, it would be easier to update your records daily. Issuance and storage of your records may be done in either electronic or in paper form. If you have any questions, you may ask advice from your accountant.
According to the ATO, there are penalties for not maintaining your business records for five years. Therefore, you should keep your records to avoid unnecessary penalties and expenses.
Other reasons to keep your business records
These are some other reasons which are cited on the ATO website:
- Accomplishing your business activity statements and making ready of your annual income tax and fringe benefits tax returns is easier.
- Instead of paying your accountant or tax adviser for bookkeeping or financial statements’ preparation, you may provide them with well-organised records and pay them instead for growth and tax planning advice.
- Regular review of how your business is doing helps you in making good business decisions as you will be able to see cash inflows and outflows.
- Well-kept records will demonstrate the basis for any amendments you need to make to activity statements or tax returns you have already submitted.
- Your financial position will be shown to creditors and potential buyers of your business through good business records.
- Choose on using either the electronic or paper form or both for you record-keeping and decide on your record keeping system.
- Read the Record Keeping for Small Businesses guide available on the ATO’s website.
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James HuyVuong is a CPA and the owner of Your Accounting Partners. Partnering with businesses from start to scale thru to sale.