Business Records and Substantiation

Generally taxes are all about income, deductions and substantiation. One of the areas where taxpayers are substantially at risk is record keeping and substantiation for claims made for deductions. Under section 262A of the Income Tax Assessment Act 1936 (the Act) a person carrying on a business is required to keep records that record and explain all transactions and other acts engaged in by the person that are relevant for any purpose of the Act. The records to be kept include any documents relevant for the purpose of ascertaining the person's income and expenditure and any documents which contain particulars of any election, choice, estimate, determination or calculation made by the person under this Act and in the case of an estimate, determination or calculation, particulars showing the basis on which and method by which the estimate, determination or calculation was made.

A taxpayer who is required to maintain or keep records must; maintain records written in English; keep records so as to enable that person's liability to be readily ascertained; and meet other requirements under the Income Tax Assessment Act 1997. As we are constantly reminded by the Tax Office the taxpayer must keep records for a minimum of five years after the person prepared or obtained them or five years after completion of a transaction or the acts to which they relate whichever is the latter. It is important to note that a defendant bears an evidential burden in relation to some matters under this Act and which are also dealt with in the Commonwealth Criminal Code 1995.

Essentially the content of what is recorded will depend upon individual circumstances but it needs to be adequate to ensure that any ATO officer with the necessary accounting skills who is examining it will understand it. The record-keeping obligations in this area means the taxpayer must record every transaction that relates to a person's income and expenditure but that does not mean that person has to make a record of each individual transaction. There are specific requirements covering cash registers, receipt books, credit cards and other source documentation such as tax invoices.

Obviously there are situations where there are no source records and it would be clearly impracticable for a person to record every individual transaction as this would seriously impair the normal conduct of business particularly where it involves high volume low value cash transactions. Where this occurs the ATO will accept summary records which satisfies the taxpayer's obligations provided they are reconciled with daily bankings which reflect cash takings used for other purposes, e.g. drawings, expenses and matters of that sort.

This whole area is about record keeping and the word "keep" means to make and retain. Records are generally created in the normal course of business and business operators are expected to retain them. Sometimes due to the nature of business records they are not produced immediately but a contemporaneous record is required to satisfy business operators' substantiation requirements. Where fraud or evasion is involved the Tax Office will want to go back to the source records which means that they can go back to the date of the non-complying conduct whenever that was. Obviously in a self assessment environment records are required to be retained by the taxpayer so that they can be examined by the Commissioner if required. To put it simply, how do you explain how a transaction occurred and what it involved unless you retain the appropriate records?

Where an entity fails to keep and retain records in the manner required by taxation law an administrative penalty may apply, usually in the form of a hefty fine. Where the penalty is not paid by the due date the entity will be liable to pay GIC on the outstanding amount. Fairness is central to the system and each case must be treated on its merits. Record keeping penalties may be remitted and each entity will be treated according to its circumstances. Ongoing delays and an inability to do the right thing often leads the Commissioner to refer matters to the Commonwealth DPP for prosecution.

There are also other record keeping obligations not covered here. To keep and maintain business records is essential if you wish to rely upon transactions and seek deductions. The absence of records is problematical and so is the destruction of them, particularly where fraud or deception is involved.

There are three separate offences for incorrectly keeping records:

- incorrectly keeping records;

- recklessly incorrectly keeping records; and

- incorrectly keeping records with the intention of deceiving or misleading.

Referral to the CDPP only occurs where the matter involves serious non-compliance including falsifying records, fraud or evasion or where other penalties have failed to improve the entity's record keeping behaviour. Record keeping offences often accompany serious tax evasion where the practice adopted by non-complying taxpayers is to destroy, destroy, destroy. Whether you are an individual or entity and records are central to the issues confounding you do not hesitate to contact LAC Lawyers for competent professional advice and assistance.