This week's question: "What happens if you don’t keep all your documents for 7 years? And the best way to store them for that long?"
If you are an individual, the ATO requires you to keep tax records for 5 years.
If you are a Company, the ATO still only requires you to keep records for 5 years, but ASIC requires the company records to be held for 7 years.
The main reason you would need to keep records longer than this is if you have purhcaed an asset, and it may be subject to capital gains tax at some point down the track. You will need these records regardless of how long ago it was.
The good thing, is that you don’t need to hold onto the paper records for that time. Since 1999, the ATO have allowed electronic storage of receipts. They also acknowledge that receipts don’t necessarily even need to be retained. If you pay for things with your debit or credit card, the bank statement with these transactions is sufficient to claim as a tax-deduction.
A simple way to retain evidence of cash purchases is to take a photo of the receipt and then store electronically.
There are a couple of ways you can store these electronic receipts.
- Create a Google Drive, Dropbox or similar account and create a folder for each financial year. You can then save any receipts off email, photos on your phone, or scans straight into this folder. Share the relevant folder with your Accountant when you lodge your return.
- Use an App like xero. We use and recommend xero as it’s a great way for businesses and individuals to track their income and expenses. With xero you have the ability to attach a copy of a receipt to the actual bank transaction, giving you easy access to this information whenever needed. You can also make notes or comments on the transaction, and then simply give access to all of this to your Accountant to lodge your return.
This is obviously great for tax-deduction purposes, but also really useful for warranty details as well!
- Use a free app like the myDeductions Tool in the ATO app. This also allows you to keep track of all your expenses and keep copies of receipts to easily send to your Accountant when you’re ready.
So what if you don’t keep the records for 5 years?
If you are audited by the ATO, they are going to want to see proof of any tax-deductions that have been claimed. If you have misplaced the receipt, hopefully you paid for the deduction by debit or credit card, so you have a bank statement as proof.
If there is no way that you can prove the purchase, the ATO will not allow the deduction. They will amend your tax return for that year, and any extra tax that resulted because of the deductions not allowed will have to be paid – potentially with interest.
We do have the benefit of technology in this day and age, making it very easy to keep track of purchases which is great. It is also much easier to keep track of these expenses as they occur, and save them into some sort of electronic storage or app, so that you aren’t waiting to the end of the year and then trying to track everything down!