Records detail the taxation and superannuation-related transactions undertaken by your business. Generally, the management and retention of records is essential to operate transparently and effectively. This is because effective record-keeping assists in preparing Business Activity Statements (BAS) at tax time. In addition, retaining records is legally required in some cases.
What records must you keep?
The records all Australian businesses must keep are (ATO);
- Income and sales records – includes tax invoices, receipt books, cash register receipts, end of day total receipts
- Purchase records – order invoices, vouchers
- Year-end records – debtors, creditors, depreciating asset worksheet, stocktake, capital gains tax records
- Bank records – deposits, withdrawals, loans, business expenses
Overall, these records must be up-to-date and accurate. To assist in accurate record-keeping, many banks offer separate business accounts. In effect, the use of these accounts separates personal and business transactions. This is good practice for sole traders who may mix business and personal spending.
Some other records you may be required to keep include;
- Employee records
- GST Records – essential if you are registered for GST
- Fuel tax records – must prove fuel use was for business purpose
What Employee Records do I need to keep?
If you have employees, there are additional records that you must keep. This is because these records are important for taxation and superannuation purposes. You must keep a record of;
- Employee information – pay, leave, working hours
- Work-related expenses – Includes what you reimburse employees when they claim for expenses
- Workers compensation insurance (if applicable)
- Pay as you go (PAYG) tax instalments
- Superannuation contributions
It is illegal to incorrectly report these records to avoid paying tax. Employers have an obligation to accurately report information about all staff. This obligation exists, even in circumstances where employees are paid cash. For example, businesses that pay employees cash but do not retain information about those employees may be breaching the law.
Generally, businesses are able to retain records electronically or manually. However, the ATO has indicated a preference for electronic records. This is because electronic records are easier to compile, reference, and store. Above all, electronic records are more efficient than manually compiled records. If storing records electronically, businesses must ensure they are backed up, easily accessible, and controllable. Online tools such as Xero or Quickbooks provide valuable assistance with compliance here. Businesses may benefit from Lawpath’s partner offers to assist their record-keeping practices.
ATO’s Five Record-Keeping Rules apply to most records that must be kept. These are;
- Keep all tax or super-related records concerning opening, operating and closing/selling your business
- Records cannot be fraudulent
- Businesses need to retain records for 5 years. For some records, this period may be longer. Generally, this relates to assets owned by the business such as CGT assets and depreciating assets. For more specific information, visit the ATO website.
- Businesses must provide records to the ATO on request
- Must be in English or convertible to English
Above all, these rules look to ensure accurate and complete record-keeping practices are taking place. To assist businesses, the ATO provides a Record-keeping evaluation tool. This is beneficial because it provides a measure to determine how well they are complying with the five rules.
Penalties for non-compliance
Businesses have an obligation to meet ATO record-keeping requirements. In other words, Non-compliance with ATO requirements may lead to a financial penalty. As a result, businesses may be liable for anywhere between 5 penalty units ($1050) to 20 penalty units ($4200) when failing to meet reporting obligations. In deciding whether to impose penalty, the ATO takes into account certain conditions. These conditions include the business’ circumstances and their previous compliance with the law.
- Generally, the law requires businesses to keep a wide range of records for taxation and superannuation purposes
- Businesses must comply with the ATO’s 5 Record-keeping Rules.
- Retaining the right records will assist your business in tax time
- Most importantly, to ensure compliance with the law, consult a taxation lawyer