With the end of the financial year, now is the time for many people to start afresh and get their businesses in order. As part of completing an end of year return, it is timely to consider your record keeping obligations under Australia's tax laws.
This article explains in basic terms what records you need to keep and provides some practical suggestions on fulfilling your requirements.
As a general rule, you must keep a record of all "transactions" (that is, the movement of any money in or out of your business). These movements (either money coming in or out) of money may be broken down into four categories:
- Income from sales or services (money in) vs expenses for operating the business (money out);
- Sales of business assets (money in) vs purchase or replacement of business assets (money out);
- Your investments into the business (money in) vs payments to you from the business (known as “drawings”) (money out); and
- Loans to the business (money in) vs loans from the business (money out).
These categories correspond roughly with basic accounting classification of transactions into five accounts (that is, income, expenses, assets, liabilities and owner's equity). These accounts in turn form the basis of the profit and loss statement and balance sheet for the business.
The law requires you to keep business records showing these transactions for five years from the latest date when:
- The record was recorded;
- You received the record (for example, your businesses credit card statement); or
- The transaction was completed.
This time requirement can be extended if, for example, you continue to carry forward a loss or in relation to some capital gains events. While there is no single accepted way of showing a transaction, the following documents would be acceptable as substantiating a transaction:
- Sales or Expenses – Tax / sales invoices, debtor and creditor ledgers, cheque butts and bank or credit card statements are most useful here, although specialised PAYG withholding statements and other documentation is required if your business has employees and pays superannuation;
- Business Assets – Apart from contracts, invoices and schedules your bank statements are useful to show how money has actually been transacted;
- Personal Investments and Drawings – Bank statements and you own business accounting records should be the first point of call; and
- Loans – Loan documentation from the lender and statements showing payments made (and received).
Methods for Keeping Records
From the above list, it could seem a bit overwhelming to consider how you might manually keep all of these records. For this reason, many businesses use software accounting programs to automate a large proportion of this reporting. While the law does not oblige you do keep a paper copy of business records, it is important to ensure that you back up any electronic records that you produce. Speaking to a taxation advisor or an accountant can be very useful to getting general information on record keeping, although consulting a lawyer may be necessary for complex taxation questions.
The Australian Tax Office also publishes a useful summary of small business record keeping obligations under "Record Keeping for Small Business (NAT 3029)", which is available here.