Tax time can be a challenge for every business, especially when you’d rather be out spending some “me-time” than trapped behind a desk doing paperwork.
Good record keeping is one of the often-neglected but crucial elements of running a successful business, and is indispensable to the very core of your enterprise. Without the right records, your business may:
- miss out on income
- be saddled with an unmanageable cash flow
- risk being fined for late payments or for neglecting regulatory responsibilities, and
- be forced to pay more tax than normally required.
The reason that should compel you most to keep records is that it is a requirement by law. Break the law and you’re in real trouble.
But if you have been doing the right things throughout the year, all the records your business needs will be there, ready to use, and will help make sure you either don’t pay too much or too little tax, and that the refund you’re entitled to is in the bag.
Broadly, there are a few main categories you should keep in mind when it comes to record keeping:
- income and payments you receive
- expenses and outgoings
- employee details
- tax matters, including prior year records, advice from lawyers and accountants and correspondence from the Tax Office
- operational matters, including asset registers, trading stock movement records, rental and lease paperwork and bank records.
And if you’re not sure whether to keep a certain record or not, keep it anyway. Better safe than sorry and you can decide closer to tax time if it’s still worth keeping.
Separate business from personal
For starters, keep the records for your business and personal expenses separate. You’ll need to know what qualifies as legitimate business expenses and what doesn’t. You will probably be better off having a separate bank account for your business, and if using a credit card, get a separate one in the name of the business.
Insist on receipts or invoices for everything possible, and keep these in files along with bank statements. If you’re using vehicles in the business, get on top of the records you need for that, such as kilometres travelled, a logbook and so forth.
Keep all your business records together and in one place. In most cases, you’ll need to keep these for five years, but some for longer (like assets records for capital gains tax matters), so make sure you’re organised. If you need to prove anything or go back to the files for some reason, like if the Tax Office selects you for an audit, you need to be able to find your records easily.
And it’s not all stick and no carrot – your business itself will benefit from a bit of record-keeping discipline. As well as giving the owners and managers a better picture of the health of the business, you will also be better able to demonstrate your financial position to banks, other lenders, potential investors and other funding sources if necessary.
Below is a Tax Office list of business records you need to keep:
1. Income tax and business activity statement (BAS) records
There are several different kinds of records that all businesses must keep – these records help business owners do their BAS and income tax return, which includes claiming goods and services tax (GST) credits and deductions for business expenses. You may also need them for other tax purposes.
Records that all businesses need to keep are:
- income and sales records
- expense or purchase records
- financial year-end records, and
- bank records.
2. Keep track of your income and sales records
Keep records of all sales transactions – including invoices (including tax invoices), receipt books, cash register tapes, and records of cash sales.
3. Keep track of your expense or purchase records
Keep records of all business expenses, such as cash purchases, receipts, invoices (including tax invoices), cheque book receipts, credit card vouchers, and diaries to record small cash expenses.
If you use any business purchases for private purposes, you must have records that show how you worked out the amount of any private use. For instance, if you want to claim a deduction for business phone calls on a phone you use for both business and private calls, you need to be able to show which calls were made for business purposes.
4. GST records and claiming GST credits
If your business is registered for GST, the main GST records you will need are tax invoices from your suppliers.
If you are registered for GST, you can also generally claim a credit for any GST included in the price you pay for things for your business – this is called a GST credit (or input tax credit). You claim GST credits in your BAS.
Remember: if the total value of the purchase, including GST, is more than the current threshold amount, you will need a tax invoice to claim GST credits. You will also need to keep records to support claims for purchases below the threshold. You will also need to keep documents that record any adjustments – for example, a calculation you have made to decide how much you use an asset for business, and how much for private purposes.