Business Tax Tip – Business Record Keeping ATO – Requirements and what to keep and how long

Business record keeping requirements for the ATO (Australian Tax Office) are given on their website and here we summarise the key instructions on essential business record keeping requirements and how long to keep, to be compliant.

At the ATO page - Record Keeping for Small Business it says -

By law your records must:

• explain all transactions
• be in writing (electronic or paper)
• be in English or in a form that can be easily converted
• be kept for five years (some records may need to be kept longer).

If you don't keep the right tax records, you can incur penalties.

How to keep records

You can keep invoicing, payment and other business transaction records electronically or on paper. The principles are the same for each, but keeping electronic records will make some tasks easier.

With the right electronic record-keeping software you can:

o   automatically tally amounts and provide ready-made reports

o   produce invoices, summaries and reports for GST and income tax purposes

o   keep up with the latest tax rates, tax laws and rulings

o   report certain information to us online

o   save on physical storage space

o   back up records in case of flood, fire or theft.

If you intend to use a bookkeeper or accountant, get their advice about the best system for you – choose a system you can understand and operate easily.

At page - Business Records you Need to Keep

You must keep records to help you prepare your business activity statements (BAS) and annual income tax return, and to meet other tax obligations. Below is a list of the records all businesses need to keep.

Income and sales records

Records of all income and sales transactions, including tax invoices, receipt books, cash register tapes and records of cash sales.

Expense or purchase records

Records of all business expenses, including cash purchases. Records could include receipts, tax invoices, cheque book receipts, credit card vouchers and diaries to record small cash expenses. If you bought something for your business, but sometimes use it for private use, you also need to keep records showing how you worked out how much of its use is private.

Year-end records

These include lists of creditors (people you owe money to) or debtors (people that owe you money). It also includes expenses you incur buying, maintaining, repairing and selling business assets or stock. You should keep worksheets to calculate the decreasing value of your assets (also called 'depreciating assets'), stocktake sheets and capital gains tax records.

Bank records

Your banking records can include things like deposit slips, cheque butts or payment records, bank and credit card statements, and loan or lease agreements.

Your business and personal expenses should be kept separate. Separate business bank accounts are mandatory for partnerships, companies and trusts. If you're a sole trader, a separate business bank account can also make your records easier to manage.

Other records you may need to keep

Depending on your tax obligations you may also need to keep other records. Some examples are listed below.

Goods and services tax (GST) records

If you are registered for GST, keep all tax invoices from your suppliers, which will help you claim GST credits. You must keep any other document that records adjustments, a decision or a calculation made for GST purposes. You report GST amounts and claim GST credits for purchases on your business activity statements (BAS).

(For other records you may need to keep, see more on that page)

Interestingly, in the Non-Profit section on records to keep, further down that page, there is a reference about invoices under $75 -

Invoices you receive

A tax invoice of more than $75 (excluding GST) must contain enough information to allow key information to be clearly determined, for example, your supplier’s ABN. Otherwise, you generally need to withhold 46.5% from your payment to the supplier.

If you receive a document from a supplier that is missing key information, you may still be able to treat the document as a tax invoice if the document makes clear that it is intended as a tax invoice and the missing information can be obtained from other documents issued by the supplier.

You cannot claim a GST credit in an activity statement unless you have a tax invoice. If you obtain a tax invoice later, you can claim the GST credit in the activity statement for the tax period in which you obtain the tax invoice.

Tax invoices are not required if the GST-exclusive value of the sale is $75 or less. However, you should have some documentary evidence to support all GST credit claims.

(The only thing is this is under the Non-Profit section)

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Business Financials – What is the difference between Liability and Debt – Debt vs Liability

What is the difference between liability and debt?

Often, people use liability and debt when they mean the same thing in many situations of accounting.

As an example, in the debt-to-equity ratio, (debt usually means the total amount of liabilities or vice-versa. In this case, debt includes short-term such as overdrafts and credit cards plus long-term loans and bonds payable, and normally also includes accrued (yet to be paid) wages and utilities, income taxes due, and other liabilities.

In other words, sometimes debt is means all obligations…all amounts owed…all liabilities.

However, other times, the word debt is used more narrowly to mean only the formal, written financing contracts such as short-term loans payable, long-term loans payable and bonds payable – example, hire-purchase, equipment finance, etc.

So look further, to know WHAT is being used – be clear!

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Cashflow Tip – Business or Personal Expenses claimed – What is the long-term plan? Business lessons

We have seen many different business financial situations, as we work on the business books and trouble-shoot problems in various industries.

Sometimes business owners are told by fellow business owners (and some accountants), to be claiming business expenses as much as you can to reduce profit and pay little tax. That is correct to a point, and the Australian Tax Office (ATO) encourages tax minimisation that is within the law (but not tax avoidance by manipulation or false claims etc).

Assisting with the debt collection and client payments to the correct invoices (one service we provide – or we tailor to what the client needs) I notice quite a few personal transactions like F&Veg and Meats, that they want to claim as staff/office expenses, but aren’t aware that it looks like the accountant is allocating them as Loan Account or Entertainment NON-DEDUCTIBLE (it would be hard to justify as “office or staff” amenities to the ATO so frequently as well! And Entertainment is rarely deductible as a business expense any more).

Additionally, IKEA and paint and Bunnings hardware can be legitimate office Repair and Maintenance, but if purchased while your business is closed / holidays, it could look suspicious.

So be aware that it looks like the accountant / bookkeeper is not going to claim some things for you any way, maybe adjusting at year end (and that is probably safer for you also, in case of ATO audit).

Benefit or hindrance to wealth creation?

Often, there really isn’t much value to try claiming as much as possible as business expenses (from what I have seen other businesses do).

WHY? -

• If there is an ATO audit, personal expenses can be denied and reversed and fines imposed – the ATO website is clear that only business-related expenses are claimable
• Another thing is low profit can inhibit funding if required in the future via bank overdraft or venture capital, or partner investor - Not all will really look into the detail. And if you want/have to sell, you need to show 3 good years of good profit – otherwise who would want to buy it?
• Doing a year-end “Directors bonus” to reduce profit shows a clear easy message to potential bank or financiers. I have done that in earlier years – it clearly says you are profitable, but reduces the profit legitimately, so less company tax needs to be paid, and can be declared after the year end! (If suited to the tax rates for the director compared to the company tax)

It needs to be discussed with the accountant, but even they miss-understand the disadvantage of claiming lots of expenses to reduce profit, and the harm to your future financing and wealth potential.

I have seen that if you want to borrow or expand, it is better to have clean accounts, and take bonus wages if extra profit and the money is there, as wages are fully deductible, and don’t need to be explained or justified as some transactions such as mentioned above, may need to.

And you will also know that a good wage for you and your wife is better when you want to re-finance or borrow for an investment property in the future. The brokers I work with (and even in my own situation recently) have a hard time explaining to lenders the true story – most do not understand business and Profit and Loss (especially “extra expenses” claimed on the business, or even repayment of loan accounts).

Yes you need to improve your home, and you need to do that, but it doesn’t bring in income like an investment property will.

The quicker you access more property or other investments, the earlier you set yourself up for better wealth later, by passive capital growth.

I wish I had that shown to me 10-20 years ago, but no-one did, and I realise only a few see how it can work or how to make it work – owners and accountants alike.

You may be in a good position to be able to get an investment property with your incomes, and your growing business turn-over. But if you load up non-business expenses it gives the bookkeeper more work, and  they may not claim it all anyway, so it wastes their time, it makes extra work for a broker to convince a bank you are very profitable etc in order that they are comfortable to lend to you as a low risk to them (which is what they aim for!)

So consider the bigger picture so you may be able to do more,

It is up to you and when you have the time/interest to look into it.

Just my observations of my own experience and that of other business people.

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