Is it OK with the ATO?
What is the ATO view of sufficient requirements for electronic record keeping of business transactions?
A business may choose to keep copies of paper records in electronic form.
All business transactions must be supported by the correct records, including any electronic commerce transactions.
Essentially, the record keeping systems involved in a paper-based one and an electronic one are very similar, and the legal requirements of keeping records are the same, regardless of format.
The ATO states that: “When a person carrying on a business chooses to process and keep records in electronic form, the records must be in a form that the Tax Office can access and understand in order to ascertain the person’s taxation liability. For record keeping purposes, electronic records are subject to the same record keeping requirements under the Income Tax Assessment Act 1936 (ITAA 1936) as paper records”.
The ATO accepts this so long as the electronic copies are a true and clear copy of the original paper record. The record must not be manipulated or altered once stored electronically, they must be retained for the statutory five years, and they must be instantly retrievable upon request from the ATO.
The ITAA 1936 provides that any ATO authorised officer has the right to full and free access to view and copy all records, including electronically stored records.
The ITAA 1936 also requires that a person who chooses to store records electronically must have “an understanding of their computer system”. System documents must be accessible to prove to the ATO, (if required), that the computer system in use does do what it is claimed to do. Where storage systems have changed over time, all data stored on previous systems must either remain accessible for the full 5 years, or the data must be migrated or converted to the new system or to a format that is readable by the ATO.
Any changes to an electronic storage system must be documented, including a chronological record, explanations of software and hardware systems used, how the system integrity is maintained. Above all, the user must have knowledge and understanding of archival and back-up systems in place.
ASIC has its own record keeping requirements, in addition to financial record keeping requirements. These records may be kept electronically, but the ASIC requirement is that the records must be convertible into hard copy if required.
Paper or Electronic?
The Electronic Transactions Act 1999 (ETA 1999) contains specific provisions which state that a requirement or permission for a person to provide information, in writing, to sign a document or to retain information for a document can be satisfied by an electronic communication, subject to certain minimum criteria being satisfied. This law facilitates the acceptance of electronic records and provides an alternative way of complying with record keeping obligations – it is the Income Tax laws that impose obligations on a taxpayer to retain certain records.
Where a requirement exists to produce a hard copy of a document, the ETA 1999 allows the requirement to be satisfied by the provision of electronic format documents. However, in some circumstances, the Commissioner of Taxation may specify that where a written record exists, it must be supplied.
Online Accounting Software and Add-On Products
We are now seeing the major software companies offering the option to attach documents to transactions within the software. This is a great development and very convenient. But is it enough to satisfy all of the above factors in the legal requirements of record keeping?
And what about the providers of online data-extraction services for receipts and bills?
You should check with the provider. What is their backup system? Is there an audit trail to show when a document is uploaded and if it has been changed or deleted? If so, does the system retain versions or archive deleted copies so they can be retrieved? What level of security is used? Who can access their system?
We would suggest that to take care of all the requirements you would still need to have your own system of electronic storage independent of the documents attached to accounting transactions within the software.
There are risks associated with keeping all business records electronically.
- Accidental or deliberate destruction of records
- Unauthorised tampering or adjustment or records
- Constant changes and evolution of technology, with the possibility of some systems becoming obsolete within the 5 year record-keeping requirement
- Security of the information
Essential Elements of Electronic Record Keeping
- A true and clear copy of the original paper record or electronically generated records
- No manipulation or alteration of the record once stored electronically
- It must be in English and legible
- The records must be retained for the statutory 5-7 years
- Maintenance of data security and integrity at all times
- System documentation, including hardware and software manuals, as well as internal policy and procedure manuals if required
- All records, including archived copies, easily accessible upon request of ATO officer
- This extends to the provision of all login codes, keys, encryption keys, passwords and so on
- An effective and secure backup system