Tax record keeping gets some wriggle room

The taxman is giving small business a little latitude in coping with tax record keeping using off-the-shelf software. By TERRY HAYES

By Terry Hayes

Tax record software

The taxman is giving small business a little latitude in coping with tax record keeping using off-the-shelf software.

Keeping records for tax purposes is essential for good tax compliance and peace of mind. But it can be a pain and a cost drain on a business. Nonetheless, it can’t be avoided, and there are plenty of commercial software packages available to do the task.

The tax law requires a person carrying on a business 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 tax legislation.

That seems clear enough. But software packages must enable an SME to accurately satisfy the relevant tax laws.

A ruling released by the tax office (taxation ruling TR 2005/9) sets out its views on what are sufficient electronic records to be retained, and it includes those created by internet electronic commerce.

Paragraph 8 of that ruling says:
To ensure that the electronic records associated with a computer system are being maintained in accordance with the requirements [of the relevant tax law], a person should have an understanding of their computer system. System documents should be retained to explain the basic aspects of the system so the tax office can ascertain that the system is doing what it is claimed to do.

Many SMEs meet their electronic record keeping needs by using commercial off-the-shelf accounting and other record keeping software packages, such as inventory and payroll systems. The software is not designed specifically for a particular business, but is a package that can be used by a variety of businesses.

These packages give the SME a licence to use the software and to make a back-up copy. The software remains the property of the software manufacturer or developer. Businesses using these packages for record keeping will not have access to, nor have detailed knowledge of, the computer program or system by way of a system manual or system documentation, as required by the above tax ruling.

However, the tax office has recognised that taxpayers, including SMEs, using such software packages are generally not able to keep the computer system documentation as it requires.

Therefore, it recently released a practice statement to provide guidance to its staff on what are sufficient electronic records to be retained for the purposes of the tax law where taxpayers use commercial off-the-shelf software packages. This provides a useful guideline for SMEs.

While the practice statement acknowledges that taxpayers using commercial off-the-shelf software packages are generally not able to keep the computer system documentation as set out in paras 8 and 9 of TR 2005/9, it says tax office officers can accept that taxpayers using such packages are maintaining electronic records associated with the software in accordance with the requirements of the relevant tax law where the taxpayer keeps the following:

  • A record of the software name and version.
  • A record is made of the components of the software package that have been installed and the date of installation.
  • A chronological record is kept of all system changes or upgrades.
  • A record is made of the options that have been enabled or disabled.
  • Any manuals or instructions provided with the software package are kept.

The tax office says commercial off-the-shelf software packages in question are software packages that typically have at least three of the following attributes:

  • They are designed to be able to be routinely operated by individuals with limited information technology training. In many cases, maintenance is carried out by individuals with vendor-based product training only.
  • Cost less than $2000.
  • They are software packages not designed for a specific business but rather are for general business use or use by particular industries or types of business.
  • Typically, the starting point for the contractual relationship is the first use of the software whereby the licensee agrees to specific conditions in relation to the use of the software.

So the tax office is giving SMEs a little latitude here in recognition of the realities of using commercial off-the-shelf software packages. They are generally cheaper than custom designed packages and help keep costs down for SMEs.

While SMEs should make themselves aware of what records are required for tax purposes, including the above ruling, they should also be aware that the tax office is not ignorant of what transpires in the “real world”.


Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.


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