"Mice ate my tax records" just doesn’t cut it!

Keeping accurate contemporaneous records for tax purposes is a fundamental tenet of complying with the tax laws. It’s almost Tax 101.

Generally speaking, even if an expense you incur is tax deductible, if you can’t substantiate it (ie. prove your claim), you’re not entitled to it. The Tax Commissioner regularly expounds on this theme.

I have often reminded SMEs of the need to keep good records. Enough said. But, a recent case before the Administrative Appeals Tribunal (AAT) has reinforced the message and bears keeping in mind. It is a timely reminder and warning for those businesses that might not, shall we say, have good record keeping habits.

In the AAT case, the taxpayer was a partner in a partnership carrying on business in the road transport industry, so uses a lot of diesel fuel. From November 2004 until December 2008, the partnership claimed, and was paid, fuel grants and tax credits under the Energy Grants Scheme and the Fuel Tax Credit Scheme totalling a little over $100,000. During an ATO audit, the taxpayer did not produce any documentary evidence to substantiate his claims. The Commissioner assessed that the grants and credits should be repaid and also imposed penalties.

The Tribunal said the taxpayer had not satisfied the relevant record-keeping requirements of the Energy Grants (Credits) Scheme. The taxpayer claimed he had records to substantiate his claims for on-road credits for the use of fuel in a registered vehicle under the scheme but that many of them had been destroyed. Apparently, he had stored the records in a shed and they were eaten by mice. The records had originally been stored in a spare bedroom in his house, but he had moved them into the shed when one of his children moved back home.

The taxpayer said he also lost a “fuel book” in which he recorded the date, odometer reading, volume of fuel purchased and the location of purchase. After he had appealed to the Tribunal, the taxpayer found some records and the Tax Commissioner accordingly reduced the amount owing.

The AAT however found no reason to allow the taxpayer’s claim further. It said the record-keeping requirements state that if a record required to be retained has been lost or destroyed, and the taxpayer does not have a copy of it, but the Commissioner is satisfied the taxpayer took reasonable precautions to prevent the loss or destruction, then the taxpayer’s entitlement to a grant or benefit would not be affected by failing to retain or produce the original record.

However, the Tribunal said this did not help the taxpayer because its view was that “to store documents in a place where they are vulnerable to destruction by rodents is not to take reasonable precautions to prevent the loss or destruction”. As well, it said the fuel book was not a primary record and therefore was not within the category of records that the taxpayer was required to retain. It pays to know what records the law requires be kept.

The Tax Commissioner had imposed a 25% administrative penalty of the shortfall amount for failure to take reasonable care to comply with a taxation law. The AAT agreed that rate was appropriate and declined to remit it.

This case reminds me of the shoebox full of receipts stories that are often told. Accountants are renowned for stories of clients coming to them with a shoebox full of receipts so the accountant can do their tax return. Shoeboxes obviously present risks to records! And don’t forget that many receipts these days are on paper that fades when stored next to other papers.

It’s certainly likely the business owner bought the diesel fuel so that he was eligible for the grants and tax credits in relation to the use of the fuel by the business. However, when the Tax Office came knocking during an audit, the taxpayer could not provide the required documentary evidence to support his claim. On the surface, this might seem a little harsh, but the law is clear on what records must be kept. The Commissioner is required to administer the law as it stands. It just highlights the importance of (a) knowing what records the law requires; and (b) keeping those records in the form required.

The destruction or loss of records doesn’t automatically mean a claim will be denied. In this day and age, the keeping of records should be taken very seriously. Vermin-proof filing cabinets would be a good start – and keep the back shed for tools and lawnmowers!

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