Good record keeping isn't just about staying organised — it's a specific legal requirement, and the ATO can disallow claims or apply penalties if your records don't hold up under review. Here's how long you actually need to keep things, and what counts as adequate.
How long does the ATO require businesses to keep records?
The default rule is five years — either from when you prepared or obtained the record, or from when the transaction or acts it relates to were completed, whichever comes later. Some categories run longer than this. Records relating to a capital gains tax asset, for example, need to be kept for five years after you dispose of the asset, which for a long-held investment property could mean keeping purchase documentation for decades.
What business records need to be kept?
The core categories are tax invoices and receipts, bank and credit card statements, payroll and superannuation records, records supporting BAS lodgements, contracts and agreements, and documentation for any asset purchases used to claim depreciation. If you're registered for GST, your records specifically need to substantiate the GST component of each transaction — a bank statement showing a payment isn't enough on its own without the underlying tax invoice.
What about records for a home office or vehicle claims?
Where you're claiming a deduction based on a method that requires a logbook or diary — vehicle use, home office hours — the underlying logbook or diary itself needs to be kept for the same five-year period as any other substantiating record, not just the final calculated claim.
How long should payroll records be kept?
Payroll is where the rules diverge from the general five-year ATO standard. Under the Fair Work Act, employee records — pay slips, hours worked, leave balances, and superannuation contribution records — must be retained for seven years. Businesses sometimes assume the ATO's five-year rule covers everything, but payroll needs the longer retention period to stay compliant with employment law as well as tax law.
Can business records be kept digitally?
Yes, and for most businesses this is now the default. The ATO accepts digital records provided they're a true and clear reproduction of the original, are in English (or readily convertible), and can be produced if requested. This is where tools like Xero and HubDoc earn their keep — scanning and storing receipts digitally as they come in avoids the classic shoebox-of-paper problem and satisfies the ATO's requirements at the same time.
What happens if I don't keep adequate records?
If you can't substantiate a deduction or GST credit during an ATO review or audit, it can simply be disallowed — the burden of proof sits with the business, not the ATO, to show a claim was legitimate. On top of any resulting tax adjustment and interest, the ATO can apply separate penalties purely for failing to meet record-keeping obligations, even where the underlying claims themselves turn out to be reasonable.
What's a practical record-keeping routine for a small business?
Capture receipts and invoices as they happen rather than batching them for BAS time, reconcile bank feeds weekly, and store everything in cloud accounting software with automatic backups rather than relying on a single laptop or folder. A quarterly check that everything for the period is filed and reconciled makes both BAS lodgement and, eventually, an ATO review far less stressful.
The Metier Group helps Perth businesses set up record-keeping systems that hold up to scrutiny as part of our bookkeeping services. Contact us if your current system needs a tidy-up.