Avoid Penalties ATO penalties: Keep Your Business Records Right

Ensuring proper record-keeping isn’t just good business — it’s a legal requirement enforced by the Australian Taxation Office (ATO). Failing to comply can trigger administrative penalties, audits, or even prosecution. Here’s what you need to know to stay on the safe side:

1. Why Keeping Records Matters

Under Section 262A of the ITAA 1936, businesses must keep records that:

• Record and explain all transactions relevant to tax purposes,
• Are in English—or readily convertible to English,
• Allow the ATO to readily ascertain your tax liabilities.

These records generally must be kept for at least five years, starting from when they were prepared, obtained, or when the related transaction was completed—whichever occurs later. Some records, like those related to capital gains or discounts, may require longer retention.

2. What Records Must You Keep?

According to the ATO, essential records include:

• Documents for income and expenses (e.g., invoices, receipts, bank statements),
• Details of calculations or elections you’ve made for tax or superannuation,
• Employee-related information like payroll, timesheets, and super contributions,
• Clear documentation to handle mixed-use items (e.g., business vs personal expenses).

And more: leases, contracts, insurance policies, and business decisions—especially important at key lifecycle stages of your business.

3. Record-Keeping Do’s & Don’ts

Do:

• Keep digital or paper records that are clear, complete, and unaltered.
• Use backup systems and maintain the ability to retrieve and convert your data (Excel, CSV, etc.).
• Regularly reconcile transactions, especially cash and electronic ones.
• Track business-use percentages for mixed-use transactions.
• Conduct internal audits and housekeep at end of financial year.

Don’t:

• Rely solely on estimates or ignore receipts.
• Toss records before the mandatory retention period.
• Rely only on SMS or email as backup.
• Use tools that falsify or suppress sales data.

4. Consequences of Not Keeping Proper Records

Administrative Penalties

Under Section 288-25 of Schedule 1 to the TAA, penalties apply if you fail to keep or retain required records. ATO typically:

• Begins with education and support rather than immediate penalties,
• May issue a “direction to educate”—requiring completion of an online record-keeping course, especially for small businesses or genuine mistakes.

If non-compliance continues, penalties are issued—usually after attempts to educate.

Remissions & Disputes

The Commissioner may remit (reduce or cancel) penalties, depending on your compliance history and circumstances. You can also object to penalty decisions under certain conditions.

Prosecution

In cases of deliberate wrongdoing—such as falsifying, fabricating, or destroying records—the matter can be referred to the Director of Public Prosecutions (DPP). The ATO reserves referral for serious non-compliance where penalties haven’t affected change.

Criminal offences under the TAA include:

• Incorrectly keeping records,
• Reckless record mismanagement,
• Intentionally misleading record-keeping.

Penalties range up to $5,000 fine or 12 months jail for the first offense, and up to $10,000- or two-years’ imprisonment for subsequent offences.

5. What You Can Do to Avoid Penalties

• Implement solid recording systems—digital or manual.
• Back up data and ensure conversion into standard formats.
• Stay consistent with retention periods—minimum five years.
• Use ATO resources, including the record-keeping evaluation tool and small business guidance.
• Seek professional advice if unsure.

In Summary

Proper record-keeping isn’t optional—it’s central to legal compliance. Most businesses won’t face penalties if they make conscious efforts to keep accurate, accessible records. But crossing into negligence—or worse, intent—can lead to serious consequences, from financial penalties to prosecution.

Need help tailoring record-keeping systems to your business? Whether it’s choosing software, organizing workflows, or understanding retention requirements, our office is happy to assist, contact us on (03)9848 5933 or via our website.

Source: ato.gov.au