How long to keep business records

The ATO says businesses are legally required to keep records of the transactions relating to their tax and registration affairs, from starting the business to selling or closing it. That covers the documents behind the business's income and expenses.

Most of those records must be kept for 5 years. The period generally starts from when you prepared or obtained the record, or from when you completed the transaction or act it relates to, whichever is later.

Section 286 of the Corporations Act 2001 requires every company to keep written financial records that correctly record and explain its transactions, financial position and performance, and that would let true and fair financial statements be prepared and audited. The records must be kept for 7 years after the transactions they cover are completed.

The Act's definition of financial records includes:

• invoices, receipts, cheques, vouchers and orders for the payment of money
• documents of prime entry, such as journals
• working papers and other documents that explain how the financial statements were made up and what adjustments were made in preparing them.

business.gov.au gives the same 7-year period for company records, and notes that some employee records must also be kept for 7 years.

The ATO says the 5-year period starts on a different date for some kinds of records, and that some records must be kept for longer than 5 years. One example is a record used in an assessment that can still be reviewed after the 5 years have passed.

The ATO also recommends checking the record-keeping rules of every organisation you deal with, because they can ask for longer periods. If you are not sure which rule applies to a record, keep it until you have checked with your accountant or the organisation concerned.

business.gov.au lists the records a business needs to keep, including:

• records of all income and sales transactions
• records of all business expenses, including cash purchases
• end-of-year records, including lists of creditors (people you owe money to) and debtors (people who owe you money)
• records of expenses related to your assets or stock
• bank records
• employee and contractor records.

The ATO says each record should generally show the date, the amount and a description of the transaction, its purpose and, where it matters, the relationship between the parties to it.

business.gov.au gives 5 years for most business records, and 7 years for company records and some employee records. The table sets those periods against the kinds of record it lists. Where a row says 5 years, the count starts as set out in the general rule above.

Two things the table can't show:

• A record that fits two rows is kept for the longer period. A company's supplier invoices are expense records and also part of its financial records under the Corporations Act, so they are kept for 7 years. Because business.gov.au gives 7 years for company records, ask your accountant which of a company's other records, such as its bank statements, that period covers.
• Each period belongs to a single record, not to the folder or box it is stored in. A year's bills hold records with different dates, so label the batch with the latest date on which a record in it was made or a transaction in it was completed, and count from there.

The list isn't complete for every business. business.gov.au says other records you must keep can depend on your business structure, so a company or a trust may hold records that a sole trader never needs.

You can keep paper or digital records, and the ATO recommends digital where possible. The ATO accepts a scanned or photographed copy of a paper record if it is a true and clear reproduction of the original, and business.gov.au says you then don't need to keep the paper version unless a particular law or rule says you must.

Digital records need to be on a computer or device you have access to, including all the passwords, that is backed up, and where you control the information. The ATO also expects to be able to extract your data into a standard format such as a spreadsheet or CSV file, and asks that stored records be labelled or indexed so they can be found.

Whichever you choose, records must be in English or easy to convert to English.

An email can be a business record when it documents a transaction, such as an invoice sent as an attachment or a supplier confirming a price in writing. Its keeping period is the same as for paper, so save these emails, or their attachments, with the rest of the month's records instead of leaving them in an inbox that may later be cleaned out or closed.

Records held inside accounting software or another online service need the same thought. Find out what happens to your data if the subscription ends, and before you cancel or switch, export the transactions, reports and attached documents into files the business controls. Transactions that arrive in the software through a bank feed are a copy of what the bank holds, so download and keep the bank's own statements as well.

The record-keeping rules also say you need to be able to rebuild your original data if your record-keeping system changes over time. When you move to a new system:

• keep a full export of the old system, and whatever is needed to open it, until every record in it has passed its keeping period
• check that the export opens and shows the detail behind each figure, not only the totals
• note in the description of your record-keeping system when the change happened and where the old records now sit.

Old devices count too. Before a computer, phone or drive that holds records is sold, replaced or thrown away, copy the records off it and make sure the copies open.

Records must be stored in a way that protects them from being changed or damaged. Back up digital records and, where you can, keep a copy somewhere secure away from the business, such as cloud storage.

The ATO also asks businesses to keep information about how their record-keeping system works, including any routine they follow for destroying digital records, so it can see that the system meets the rules.

Destroy a record only once its full keeping period has passed and no other rule needs it for longer. Before anything is shredded or deleted:

1. Work out the period from the later of when the record was made or received and when the transaction it relates to was completed, not from when the box was packed or the folder was closed.
2. Check it isn't a company financial record, or one of the employee records that business.gov.au says must be kept for 7 years.
3. Check whether any organisation you deal with, such as a lender or a body that funds the business, has asked for a longer period.
4. Make a note of what is being destroyed and when, as part of the routine described under storing records safely.

In the register, the sole trader's supplier bills run to August because one June bill wasn't paid until then, so the whole batch is dated from that payment. The company's rows run for 7 years because invoices are among the financial records the Corporations Act covers.

When the time comes, shred paper records rather than putting them out with the recycling, because invoices and statements carry account numbers, addresses and other private details. Delete digital records from every place they are held, including backups and shared folders, so no stray copy outlives the rest.

Closing or selling a business doesn't end the keeping period. The duty to keep records covers the business's whole life, including its sale or closure, and each record's period still runs its full length after trading stops.

Before the business closes:

• Download every bank statement and a full export of the books before the bank account is closed or the software is cancelled, because online access may end when they do.
• Keep the records of the final months, and of selling equipment, stock or the business itself, for 5 years from those last transactions, or 7 years for a company's financial records.
• Decide who will look after the records and where, and keep the passwords or keys needed to open them for the whole period.
• Write down where everything is, so the records can still be found if you are asked for them years later.

If you sell, keep your own copy of the records from your time as owner and of the sale itself. Up-to-date records also help show the business's financial position to prospective buyers. Agree in writing which records, or copies, go to the buyer, and ask your accountant what you need to keep before anything is handed over.

The same thinking applies when a business changes shape rather than closing, for example when a sole trader's business moves into a new company. Records of starting, running and changing a business all have to be kept, so the records from before the change still run their full period, and the new business starts its own from day one.

You need to be able to show the ATO your records if it asks for them. business.gov.au notes that if the ATO finds an error in your records, you may have to pay financial penalties or complete a record-keeping course.

Records are a legal requirement, but they are also what lets you run the business from facts rather than memory. Accurate and complete records help you:

• keep an eye on cash flow, so bills can be paid on time
• keep track of the money you owe and the money owed to you
• see how healthy the business is, and whether it is running at a profit or a loss
• make business decisions on solid figures
• show the business's financial position to banks and other lenders, other businesses and prospective buyers.

Older records earn their place as well. Setting this year's months beside the same months in earlier years shows seasonal patterns and longer trends that a single year can't.

They matter most when the business needs something from someone else. If you apply for a business loan, for example, business.gov.au says a lender may ask for financial reports, including cash flow statements, along with forecasts and your business plan. Records that are complete and easy to find make those documents quicker to put together.