Record Keeping Made Simple
The simple answer is … keep everything!
The ATO requires that the relevant records exist to support all business transactions. It is a business owner’s responsibility to maintain and store accurate records for all financial transactions. To claim a business deduction for tax return or activity statement purposes, you must have a valid tax invoice for goods and services purchased for the business.
Good record keeping is the backbone of bookkeeping and accounts management. It will assist you to both meet your compliance obligations and provide verification for all your business transactions.
Applying systematic record keeping practices makes it so much easier to run your business, as you will not be wasting time trying to find documents when you need them—whether that’s for yourself, your bookkeeper or your tax agent. Having a practical storage solution makes it easier. This storage solution can be physical or digital, so long as it is secure and easy to use. (That’s not your floor or a plastic bag! Yes, we have seen both of these in use…) For the best security, you should have a local storage system and an external system in case of disaster. For Xero users, there is also the functionality to attach one or more documents to every transaction, making the verification immediate.
What’s the Rule about Expenses Under $82.50?
For any purchases you make (within Australia) for less than $82.50 GST inclusive (or $75 GST exclusive), you are able to claim the expense and the GST credits without a valid tax invoice. However, you still need to provide proof of payment in the form of a till receipt, online receipt or similar.
What is a Valid Tax Invoice?
For expenses within Australia over $82.50, you need a valid tax invoice. Whether you are buying or selling, you need to be aware of the requirements of a valid tax invoice. Many business owners not using current technology get this wrong.
- The seller’s identity—this is the legal identity related to the ABN; trading name may be included if desired but is not required
- The seller’s ABN
- Date of invoice
- Description of items or services sold
- Amount of GST must be listed, either as part of the total price or separately; separate GST listing is required when the invoice relates to mixed supply, e.g.GST-free goods and GST goods
- If the invoice is for more than $1,000 the tax invoice must also show the buyer’s identity or ABN
- The document must clearly show or state that it is intended to be a tax invoice by including the words ‘Tax Invoice’
Paper or Electronic?
The ATO and other government departments allow the records kept to be either paper or digital. The legal requirements for record keeping are the same, regardless of format. You may choose to keep both paper and digital records for added security.
All records must be:
- True and correct
- Unaltered once stored
- In English and legible
- Stored in a secure system, whether physical or digital; external backup storage is recommended
- Easily accessible if required by the ATO
- Held securely for the statutory five to seven years, depending on the type of record
Checklist of Records to Keep
Not all these records will necessarily apply to your business; however, if in doubt, keep it. Business records in general need to be kept for a minimum of five years from the time the tax return is lodged. Therefore if you lodge a tax return three years late, you will need to keep the relevant business records for five years from the time you lodge that return—not just five years from the document or transaction date. If you keep an asset for, say, ten years before selling it, you will need to keep the relevant asset records for five years after the disposal of the asset.
- Bank, credit card, PayPal and other payment gateway statements
- Sales invoices, including credit notes, adjustment notes and customer receipts
- Cheque books
- Bank deposit books
- Cash transaction records, including daily takings, payments to suppliers or staff and customer payments
- Cash register reads
- Supplier bills
- Supplier ABN Lookup extract
- Asset purchase and/or disposal records
- Asset depreciation schedule
- Foreign currency conversions
- Copies of all activity statements and other ATO lodgements, including calculations for fuel tax credits, wine equalisation tax or PAYG instalment income
- Copies of compliance lodgements such as payroll tax, fringe benefits tax and workers compensation declarations
- Contractor agreements
- Private usage calculations
- Business registrations and licenses
- Capital gains tax records
- Inventory stock take
There is a great deal of information that must be kept by employers. Although Fair Work Inspectors may be lenient in issuing infringement notices for employers who have not caught the attention of the Fair Work Ombudsman (FWO) before, the inspectors are within their rights to issue an infringement notice for first time offenders. The FWO takes non-compliance seriously.
Individuals can be fined up to $1,260 per breach and corporations can be fined up to $6,300 per breach. Breaches include failure to keep the required records and failure to include the correct information on a pay slip. (The penalties for more serious contraventions, such as knowingly underpaying workers, are much higher).
Honest errors or administration issues are not the same thing as knowingly seeking to avoid employer obligations. For example, if you have entered a typo in an employee’s pay rate, underpaid them for a period of time, then corrected the error and paid the amount owing, this is not nearly as serious to the FWO as ignoring the specified pay rates in the relevant award.
There are some common record keeping issues that are easily rectified:
- Make sure you record when employees take leave, and process the payment correctly in your software.
- When employees are terminating, keep the calculations of any final pay owed.
- Make sure your pay slips are compliant—if you are using Xero software for your payroll this won’t be a problem.
- Keep records of any cash wages paid to employees and have them sign a receipt of that cash payment.
Checklist of Payroll Records to Keep
Payroll records must be kept for a minimum of seven years after the end of the financial year or termination of the employee.
Although the checklist is long, many of these pieces of information are stored together, so the list looks more intimidating than it really is!
- Personal details of all employees, including full name, date of birth, address, phone number, start date with the business and tax file number
- Proof that you have provided a Fair Work Information statement to all employees
- Applicable modern award or other industrial instrument, including the relevant classification governing pay rates, entitlements, allowances and conditions
- Basis of employment, pay rates, allowances, loadings and any other applicable wage or salary amounts
- Employment contracts
- Individual flexibility arrangements
- Timesheets and rosters
- Superannuation choice form
- Salary sacrifice arrangements for superannuation and other expenses
- Leave entitlement records, including accrual of leave and amount and date of leave taken by employees
- Fringe benefits provided to employees
- Novated lease records
- Salary packaging records and calculations
- Pay slips issued
- Payment summaries issued
- Records of keys, tools, vehicles or equipment provided to employees
- Records of who has access to what business systems and proprietary or corporate information
- Performance management and review documentation
- Annual business closure records
- Termination records for resignation, retirement, illness, dismissal or any other reason; dismissal records must include records of mediation, employee discussions, performance management and documentation of fraud, misconduct or other issues; redundancy must be shown to be valid in accordance with other business records to prove change in business operations
Tips for Making Record Keeping Simple
Keeping records does not have to be arduous once you get into the habit of using a system.
- Get an app on your phone; take photos of receipts while you are on the road and upload them to your accounting software or data extraction software such as Receipt Bank.
- Use a data extraction solution to minimise manual data entry of expenses and supplier bills.
- If you don’t yet use Receipt Bank or similar to manage your accounts payable, and if your software allows it, email or upload tax invoices directly into the software storage and attach to the relevant transaction where possible.
- When paying bills manually from the bank, use a description that will be useful to you later. For example, ‘Inv 456’ tells you nothing about who you have paid, so use the supplier name and invoice number where possible; this will allow you to match documents to the transaction later.
- Organise your records into a practical and sensible system. For example, set up an A-Z folder system for each financial year on your computer and file documents accordingly, just like you would in a physical filing cabinet.
- Go paperless as much as possible. Not only does it cut down on space, but it is quicker and easier to use; if set up correctly it is more secure than a physical locked filing cabinet.