Good record-keeping is essential for any business. It helps you manage your cash flow, keeps you organised, helps you meet your tax responsibilities and most of all, it lets you know how your business is going.
The four requirements from the ATO are that record-keeping must:
- explain all transactions
- be in writing
- be in English
- be kept for five years (although some records need to be kept longer)
If you’re unsure about the records you need to keep, the ATO has a Record keeping evaluation tool that can help you.
The ATO’s website has extensive information on what you can and can not claim, and when you can claim it. Talk to your accountant about what deductions you can claim from your business, as they will be best placed to provide you with specific advice for your situation.
A few tax tips to remember is that you:
- can not claim deductions for private or domestic expenses, or any costs relating to entertainment or fines. There are specific options available for sole traders and how you can claim business expenses.
- can claim operational expenses, such as wages, advertising, and stationery supplies, in the financial year that you incur them. The ATO has an extensive list of these items, including information specific to small businesses.
- can claim on the depreciation of assets, including motor vehicles, machinery and equipment, furniture and capital assets such as buildings over a longer period of time. Check out the Simplified depreciation rules from the ATO for more information.
- must keep copies of your bank and credit statements. If your bank provides these electronically, you can save them as a PDF for future reference.
- can only claim a percentage of costs for an asset you use for both personal and business purposes, for example, an electronic device that you use for managing business email and banking, but also use it for personal social media or to read books in the evening.
Case study: Alex
Alex is a 22-year-old fully qualified hairdresser and beautician who has been running a salon from the front room of her home for the past eight months. She’s been struggling to make ends meet as she’s had to spend quite a lot of money on equipment and supplies to set up her salon, as well as advertising to get the word out there.
There hasn’t been much time for Alex to organise any of her paperwork in between answering the phone, fulfilling appointments, cleaning the salon and replenishing supplies. She only takes cash for the work she does and has been paying cash for her equipment and supplies, she has no electronic record of her transactions.
Alex struggles with paperwork but she does have an ABN. She hasn’t registered for GST as she doesn’t expect her income to be very high. When the ATO contacts her about lodging her first Instalment Activity Statement, she doesn’t know where to start. A friend puts her onto a local accountant for help.
Alex finds out that she should have been keeping a record of all her business income and keeping receipts for all her purchases so she can deduct them against her income. Otherwise, she has no way to show what her taxable income is so the ATO can work out how much tax she needs to pay.
Alex’s accountant shows her how to fill in a simple Excel spreadsheet at the end of every day, detailing her income and any business expenses. Alex also now knows she needs to get a receipt for all business purchases and keep them as proof that they are business expenses. She can use the spreadsheet to help her to complete her Instalment Activity Statement each quarter, and it tells her how profitable her business is.