A Business Guide To DOCUMENT RETENTION

A Business Guide To DOCUMENT RETENTION

An unavoidable by-product of business today is an accumulating volume of documents and electronics records. A first step in controlling this burden is to understand how long business records need to be kept.

There are minimum statutory periods for which certain categories of records must be retained. Beyond these statutory requirements however there are also both positive and negative considerations that you should bear in mind.

Firstly, on the positive side, businesses should ensure that documents, which may be necessary to provide title to assets, are safely kept indefinitely. This includes documents relating to physical assets (contracts, title deeds and the like) and also intangible assets such as intellectual property (copyright assignment or license agreements, for example).

Secondly, businesses should ensure that if there is any chance that litigation is in the offing, documents relevant tot hat litigation are not destroyed.

Talk of document retention policies has grown in the past few years. That discussion has largely been in the context of the claim that some companies have sought to design such policies to ensure that potentially damaging documents are not retained where there is a reasonable prospect of those documents being relevant to anticipated litigation. The focus of such policies has arguably been on document destruction rather than retention and document retention strategies in this context have had pretty bad press.

There are guides available to creating such a policy but underlying all such policies are the mandatory minimum document retention periods and the overriding requirement to retain documents which may be required for litigation.

Legal requirements

How long is it legally required to retain and store documents and records of a business? The answer depends on the circumstances and the type of documents involved.

Beyond the statutory requirements, additional document retention obligations may be imposed by contracts to which you are a party, legislation relating to your particular industry, or rules set by your professional body.

Bear in mind too that generally electronic records are now considered to be “documents” such that the same legal requirements regarding retention apply to those records as to any hard copies.

Finally, in considering retention of records, remember also that records containing “personal” information should be kept secure and in accordance with any privacy obligations which may apply.

Corporate records

Companies must retain complete registers of members, charges, options etc. and all minute books of meetings of members and directors for a minimum of five years from the date of the last entry.

Financial records
The Corporations Law requirements companies to retain general accounting records for a minimum of seven years after completion of the transactions to which they relate (explaining the transactions and financial position of the company, to enable true and fair accounts to be prepared). Records are required to be retained for seven years after the last day of the accounting period to which the record relates. Where there may be doubt about the start of the retention period the safest course is to retain accounting records for seven years from the later date.

Taxation records
The Income tax Assessment Act (ITAA) requires tax payers to retain records for five years after the date on which they were prepared or obtained, or the date of completion of the transactions or acts to which they relate, whichever is the later. There is however scope for the retention period to be extended where the period in which the Commissioner may amend an assessment has been extended.

Other retention obligations relate to specific parts of the ITAA. For example, record-keeping obligations with respect to Capital Gains Tax are onerous, with records required to be kept over the life of asset, as well as for five years after the date of asset disposal. Given that a lack of records to substantiate claims in relation to the costs’ base of an asset may increase any Capital Gains Tax ultimately payable on disposal of the asset, there’s obviously a good reason to ensure those records are kept and are available.

Records relating to payroll tax must be retained for five years after completion of the transactions to which they relate and this period increases to seven years in relation to Fringe Benefits Tax. Bear in mind that taxpayers may bear the onus of proving matters such as claims or deductions in the event of an audit or dispute with the Commissioner. A lack of documents may prevent or hinder proof of such a claim or deduction.

Failure by a taxpayer company to retain required records may also be an offence incurring penalties. Furthermore, any person who is concerned in or takes part in the management of the corporation (whether or not an officer), is taken to have personally committed the offence and may be personally liable.

Employees

The period of retention will depend on the nature of the records. State industrial legislation, such as the Industrial Relations Act 1991 NSW, imposes extensive record-keeping obligations on employers. For example, an employer carrying on a business to which an award or enterprise agreement applies must keep time sheets and pay sheets for at least six years.

Workers Compensation records must be kept indefinitely, in respect of the register of injuries, and for seven years in respect of the records of remunerations paid. In New South Wales, the Annual Holidays Act requires records to be kept for six years from the date of the last entry in the register. The same period is prescribed in relation to Long Service Leave.

Litigation time limitations

Limitation legislation is designed to protect defendants against actions about which they are unlikely to have records or recollection and so will be disadvantaged in properly defending themselves. In theory, after the expiry of a relevant limitation period, litigation would not be expected and hence there should be no need to retain documents in anticipation of such litigation. In practice, legislated limitation periods are rarely unconditional or absolute and hence should not be adopted as a determinant of when documents can be disposed of.

The Limitation Act 1969 (NSW) provides that court proceedings may not be commenced after the expiry of a stated number of years from the date on which the “cause of action” accrued. Similar statutes exist in all states and territories.

Statutory causes of action, such as misleading and deceptive conduct under the Trade Practices Act (TPA) for example, may have their own limitation periods to which the Limitation Act does not apply. The limitation period for misleading conduct claims under the TPA may depend on when the cause of action accrued but for actions accruing after 2001 the limitation period is now generally six years from when the cause of action accrued.

The Limitation Act is also inapplicable where matters have been specifically excluded from its reach. There is no limitation period for proceedings brought by the crown to recover any tax or in relation to any criminal prosecution, for example. Equitable claims (breach of trust or fiduciary duties, for example) may also not be limited by the Limitation Act.

In relation to specific claims, the basic limitation period in relation to contract is six years, or where the agreement is the subject of a deed, to 12 years. The limitation periods relating to tortuous actions, such as negligence and particularly personal injury, are however complex and depend on the nature of the injury or claim brought. In NSW, for example, claims relating to injuries arising from motor accidents should be brought within six months (but may be able to be extended where a satisfactory explanation is provided). At the other end of the spectrum, dust diseases’ claims have no limitation period.

There is provision too for most limitation periods to be extended in various circumstances or in respect of certain defendants, minors for example. All of these periods should therefore be treated only as indicative of the time in which claims may be expected. Relevant documents should be retained indefinitely where there has been any dispute or there is any potential for a claim, irrespective of the fact that proceedings may not have been commenced within the relevant limitation period.

Documents relevant to legal proceedings
All documents potentially relevant to any litigation which has been commenced, or it is anticipated may be commenced, must be retained.

A person who destroys documents which are known to be relevant to court proceedings, which are already on foot, is likely to be liable for contempt of court or attempting to pervert the course of justice, both of which are serious criminal offences. The Courts have extended this approach to destruction of documents where proceedings are anticipated but have not yet been commenced.

Victorian legislation has also been enacted which extends the common law and makes any person or company criminally liable where documents are destroyed which are reasonably likely to be required as evidence in existing proceedings or proceedings that may be commenced in the future.

Liability for these offences may arise not just where there is conduct which directly results in destruction of relevant documents but also where a company has a policy which has the result that relevant documents are destroyed or there is some implied permission or authority granted to destroy the documents.

As well as penalties, including possible imprisonment, any party to legislation found to have engaged in destruction of documents known to be relevant may be liable for orders against it in the proceedings including for costs.

A basic understanding of how long records need to be kept, coupled with a document management and retention policy tailored to your business, is a first step in a methodical solution to challenge which is not otherwise going to go away.

Source: My Business Magazine May 2007