Record-keeping for your business, beyond good practice, boils down to the ATO’s 5-year rule. The rule requires businesses to keep records covering tax, super, and registration related to starting, running, selling, and closing your business. With that litmus test, it sounds like a business would need to keep a record of pretty much everything. But what makes a document a proper record? Not all transactions are the same, and invoices and contracts differ entirely.
Let’s take out the guesswork by learning what a record truly is, and what the ATO expects you to keep.
What a record looks like
According to the ATO, valid records must pass a 6-point test that essentially answers when, what, how much, why, and who — plus GST, if relevant. This information looks like:
- When: Date
- What: Description of the transaction (i.e. sale, lease, employment contract)
- How much: Amount (sale/wage/purchases)
- Why: Purpose of the transaction
- Who: Relationship between parties, where relevant (i.e. supplier vs employee vs connection vs family)
- GST (if applicable)
Additional requirements to the rule of record keeping
The valid record must remain unaltered and protected from damage. A faded receipt in your wallet could be considered damaged, so it’s worth photographing or scanning physical documents and saving digital copies.
It’s also vital to keep clear documentation if an expense has both business and personal use. Some businesses have a clear separation between business and individual, but for sole traders, the line can be blurry, which is why accurate records make the separation clear. The ATO expects you to show the business portion.
It’s also important to have your records readily available, because good record-keeping means producing the document when the ATO asks.
So what does good record-keeping look like for a small business?
Example: Marty’s Receipt
Marty owns a cafe and has been in business for several years. He has a working record of when he started and a habit of copying digital documents and taking photos of receipts.
Does this receipt pass the ATO's test?
Marty's Cafe. Click each part of the invoice to check it against the ATO's six points.
Does this receipt pass the ATO's test?
Marty's Cafe. Tap each part of the invoice to check it off.
Do you really need to keep documents for 5 years?
Yes — and in some cases, longer. In Marty’s example, the receipt was for his espresso machine. Because it’s a depreciating asset, the ATO expect records to be kept beyond the standard 5-year rule. Specifically, this rule requires businesses to keep an asset record for as long as they own it, plus 5 years after they sell it. Unlike claiming expenses at tax time, this retention period starts from when you prepared or obtained the record, or completed the transaction, whichever is later.
The same extended approach applies to capital gains tax (CGT) assets, such as property and shares. For records, keep documentation for the length of ownership plus 5 years after disposal/sale.
Record keeping for your business
The ATO’s record-keeping rules are simple, so don’t overthink it. It’s just another requirement that keeps everything above board. Remember, a valid record must:
- Describe when, what, how much, why, and who (plus GST, if applicable)
- Stay in good condition (and have digital copies)
- Show the difference between business vs personal use
- Be kept for five or more years, depending on the expense
- Be readily available if requested from the ATO
Accounting software can make it easier to stay compliant by safely storing and securing the records you need for the ATO, like receipts.
