What documents should a business keep?
All businesses are governed by strict rules for retention of financial records for taxation purposes. There are many different rules (and you need to speak to your accountant), but the most common period is 5 years. One common mistake is failing to retain documents that trace the history of acquiring and improving an asset for CGT purposes. Selling a holiday home is not all profit, what about all the money you spent on it over the years, but how are you going to prove that? These records may need to be kept for many years.
Some businesses also have particular legal requirements or codes of conduct that determine how long they have to keep other documents. (A lawyer must keep Trust Account records for longer).
Beyond this, before destroying any document a business should assess whether it could be required for any possible future litigation and whether its destruction could lead a court to “draw an adverse inference” (to infer that they were not innocently destroyed but instead were deliberately destroyed to hide something).
Any destruction of records will ‘look better’ should a business become involved in litigation, if it results from a consistent policy rather than ad hoc decisions.
Some businesses are more liable to face litigation than others. A business should consider the relevant statutory limitation period. If you are a manufacturer, establish the life expectancy of a product, determining how late a personal injury could occur, then add the appropriate limitation period (3 years in SA), with a couple of additional years for unforeseeable events. Keep documents for that length of time. Statutory limitation periods are only a guide. Some documents should be held longer. For instance, the Australian Standard on document retention recommends that documents of simple contracts should be kept for at least seven years from the date the contract terminates. Only if no notice for breach of contract is served within the seven years should records be destroyed. If there is a dispute, records should be retained for a further seven years beyond settlement, or longer if a judgment is necessary to settle the dispute. Similarly, documents about the design, development, or materials in goods manufactured for sale, should be retained.