There are severe penalties for misreporting income for tax breaks, subsequently it’s important to keep accurate records of your cash only business.
Why operate as cash only?
Organisations choose to operate as cash only for numerous reasons.
- When a business accepts payment for goods or services by a debit or credit card, it usually incurs costs for processing the payment. To avoid paying bank charges for card payments, companies choose to operate as cash only instead.
- Surprisingly certain communities prefer cash payments or don’t even have debit/credit cards. This is particularly prevalent in low socio-economic zones.
- The market the business operates in may also operate primarily as cash only. For example the Sydney fruit markets.
How to track cash income?
- Log appointments. Beyond writing down transactions, keeping a calendar of services delivered is highly advisable. This will enable you to reconcile incoming payments with the services rendered.
- Categorise and keep detailed receipts. This involves taking record keeping a step further and itemising every purchase with a corresponding description. For instance, instead of $100 at Bunnings, your records should read $100 for timber platforms to rebuild office floorboards.
- Understand what should be recorded. Tax records should include gross earnings from your business, other money received, and expenses you will claim as a deduction. The ATO has an extensive list of what should be included in your tax records. Failure to keep accurate financial records can result in paying more tax or your business may even face penalties from ASIC.
Generally, records need to be kept for a minimum of 5 years. Additionally, the Australian Government provides a Record Keeping Evaluation Tool to help you know how well you’re keeping your business records.
Does my business have to record transactions?
Under the Corporations Act 2001, all companies need to keep accurate and written financial records. This responsibility generally falls to the company’s director.
However, the Australian Taxation Office (ATO) reported in 2018, that over 40% of cash-only small business owners have never investigated electronic payment systems before. For most small businesses, this is an easy and effective way to keep track of your income and expenses for tax purposes. Subsequently you should consider the benefits of electronic payments if you are currently or considering operating a cash only business.
Conclusion
Ultimately, if you are unsure about how to comply with the ATO’s regulations it is advisable to contact a taxation lawyer. However, operating a cash only business is completely legal. This just means you must record all transactions accurately and honestly.
