Edited version of your written advice

Authorisation Number: 1012807970698

Ruling

Subject: Lost business records

Question

Are you able to prepare income tax returns based on extrapolating existing data for those years and published Small Business Benchmarks?

Answer

Yes

This ruling applies for the following periods

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2008

Relevant facts

You operated a business as a sole trader.

Your early business records were destroyed.

You also stored subsequent records and because of the conditions of storage they were unable to be read.

In order to prepare the outstanding tax returns you attempted to retrieve as much information as you could, however there are many information gaps over the various years as well as information that you were unable to retrieve from suppliers as they had changed systems.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 262A

Income Tax Assessment Act 1936 Subsection 262A(1)

Income Tax Assessment Act 1936 Subsection 262A(2)

Income Tax Assessment Act 1936 Paragraph 262A(2)(a)

Income Tax Assessment Act 1936 Paragraph 262A(3)(b)

Reasons for decision

Section 262A of the Income Tax Assessment Act 1936 (ITAA 1936) outlines the keeping of records.

Subsection 262A(1) of the ITAA 1936 states subject to this section, a person carrying on a business must keep records that record and explain all transactions and other acts engaged in by the person that are relevant for any purpose of this Act.

Paragraph 262A(2)(a) of the ITAA 1936 states the records to be kept under subsection (1) include any documents that are relevant for the purpose of ascertaining the person's income and expenditure.

Paragraph 262A(3)(b) of the ITAA 1936 states a person who is required by this section to keep records must keep the records so as to enable the person's liability under this Act to be readily ascertained.

Taxation Ruling TR 96/7 discusses record keeping general principles under section 262A.

TR 96/7 states:

A person must keep the records in such a manner as to enable the person's liability under the Act to be readily ascertained. Generally, a person must keep the records for 5 years after the person prepared or obtained them, or 5 years after the completion of the transaction or acts to which they relate (whichever is the later).

Subsection 262A(1) imposes the primary obligation on persons carrying on a business to keep records that record and explain all transactions engaged in by them that are relevant for any purpose of the Act. We consider that a record will 'explain' transactions engaged in by a person if it contains information which will enable ATO staff with accounting skills to understand the essential features of the transactions.

Subsection 262A(2) makes it clear that the records to be kept under subsection (1) include documents that are relevant for the purpose of ascertaining a person's income and expenditure. The content of the information needed in a record will depend on the circumstances of each case. Our view, generally, is that the minimum information required by ATO staff with accounting skills to understand the essential features of transactions which relate to the person's income and expenditure is the date, amount and character (e.g., sale, purchase, wages, rental, etc.) of the transactions. In some circumstances, an officer also will need other information about the essential features of transactions, e.g., the purpose of transactions and the relationships between parties to transactions, to understand the relevance of the transactions to the person's income and expenditure.

The records that a person must keep under subsection 262A(1) must record every transaction that relates to the person's income and expenditure. However, we consider that to explain the essential features of every transaction, a person does not necessarily have to make a record of each individual transaction. Some records are capable of explaining the essential features of transactions when considered as a group rather than when considered individually. We believe that this is the case where any records of the individual transactions provide no additional information about the essential features of the transactions than does a record of the transactions as a group.

We consider that the word, 'keep', in subsection 262A(1), means both 'make' and 'retain'. So, where a record is created in the normal course of engaging in transactions, the person carrying on the business must retain that record. In addition, where no record is created in the normal course of activities, we consider that the person must make a record of the transactions and then retain it.

Where subsection 262A(1) requires a person to make a record, we consider that this would normally require the person to make a contemporaneous record of the transactions, i.e., a record of the transactions as they occur or, if that is not possible, as soon as practical after the transactions have occurred. What is practicable will depend on the facts of the case, including the nature of the transactions.

Manner of keeping records

Paragraph 262A(3)(a) provides that a person must keep records in writing or so as to enable the records to be readily accessible and convertible into writing. We consider that a record made and retained in an electronic form, e.g., magnetic tape, computer disc, etc., is in a form which is readily accessible and convertible into writing.

Where section 262A requires a person to keep records, paragraph 262A(3)(b) requires that the records be kept in a manner that allows the person's liability under the Act to be readily ascertained. We consider that the person's liability is readily ascertainable if ATO staff with accounting skills can determine the person's liability quickly and easily with minimal assistance from that person. Where staff cannot readily ascertain a person's liability from the records referred to above, we believe that the person needs to make secondary records which enable transactions to be traced and verified through the accounting system of the business from the source of the transactions to the financial accounts. These secondary records, e.g., journals, ledgers and financial accounts, summarise the records that explain the transactions.

Therefore, to enable ATO staff to determine a person's liability quickly and easily, we consider that the person has an ongoing obligation for the term of the statutory period (5 years) to keep:

(i) records which record and explain all transactions; and

(ii) those secondary records that are usual and proper to keep in the business carried on by that person. This includes documents that readily explain the person's financial position on a regular basis throughout the year, e.g., journals, ledgers, etc.

In your case due to a number of different circumstances you have not retained correct records as required above. Section 262A of the ITAA 1936 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 Act. You have not kept records that record and explain all transactions of your business. You have however attempted to gather appropriate records from other entities in order for you to be able to reconstruct your records. You have asked if you would be permitted to use industry benchmark figures to reconstruct your records. The Commissioner will allow you to extrapolate from the information you have on hand to reconstruct as much as possible of the missing information. Once you have done this you are then permitted to use industry benchmark figures to supplement the extrapolated information you have on hand.