Tax Tips :: Business

Tax Tips :: Business

Keeping Good Records

How money flows through a business

As a business, you engage in various activities whereby money flows through your business. Essentially, you have money coming into your business and money going out of your business. These money flows are called transactions. Money will flow into your business from four main sources, and it will flow out of the business for four main reasons – each is essentially the opposite of the other.

Money flowing into your business may be:

income from selling goods or services
money from selling business assets
money you have contributed to the business
money you have borrowed from a bank

Money flowing out of your business may be:

payments for expenses of running the business
payments to buy or replace business assets
payments to you from the business (drawings), for example, for living expenses
money lent to others.

The following diagram shows how money flows through a business.





Sales income Asset sales Owner contributions Finance


My Business


Business expenses Assets purchased Owner drawings Loans by the business

In order to protect all parties, these transactions are supported by documents recording the details of the transactions. There are different types of transaction documents, including tax invoices, wages records, cheque butts and credit card statements. They contain the information you need to record, such as the date of the transaction, the total payment or amount received, and the amount of goods and services tax (GST).

Why keep good business records

There are a number of reasons for keeping good records of your business transactions

Legal requirement

The most important reason for keeping good records is that it’s a legal requirement for you to do so. By law, the Tax Office requires you to keep business records:

for five years after they are prepared, obtained or the transactions completed (whichever occurs later), and
in English, or in a form that tax officers can access and understand in order to determine your tax liability.

You can issue and store records in either paper or electronic form (see below for more details). There are penalties for not maintaining the required records and for not keeping them for five years. Keeping good records will help you avoid these penalties.

Other reasons

Other reasons for keeping good business records are to:

make it easier to complete your activity statements and prepare your annual income tax and fringe benefits tax returns
monitor the health of your business and be able to make sound business decisions, for example, whether you have adequate cash flow
demonstrate your financial position to banks and other lenders, and also to prospective buyers of your business, and
make the best use of your accountant. Rather than paying your accountant to sort through a shoebox of paperwork, give them well- prepared records and pay them instead to help you with your business and financial planning.

Record keeping evaluation tool

We have developed an electronic tool to help you evaluate the record keeping needs of your business. You can use this tool if you are:

thinking about starting a business
in business and responsible for keeping the business records, or
responsible for managing business records of small businesses, for example, you are a tax agent or a bookkeeper.

Superannuation funds, non-profit organisations or government agencies should not use this tool as they have particular record keeping requirements. Based on your information, the tool provides a list of the records your business should keep and a report that indicates how well your business is keeping its records. If appropriate, the report will include suggestions for improvement.

Should you keep electronic or manual records?

You can record the information from your business transaction documents in a cash book, either electronically or manually. Recording your transactions manually can be as simple as using an exercise book but it’s probably a good idea to buy a commercial cash book, available from a newsagent or a stationery shop. To record your transactions electronically, you can use an electronic spreadsheet or a software accounting package. An electronic record keeping package has many advantages. It helps you record your business transactions (including income and expenses, payments to workers, and stock and asset details) and automatically tallies amounts. You can also use it to produce invoices, complete activity statements, and provide summaries and reports for GST and income tax purposes. If your record keeping package meets Tax Office requirements, you may be able to report certain information to the Tax Office electronically. If you do decide to go electronic, make sure:

you choose a software package that meets your business needs and Tax Office requirements, and
you talk to your accountant.

There are a range of commercial packages available, ranging from fairly simple systems to much more complex ones. You might like to try e-Record, the user-friendly electronic record keeping package developed by the Tax Office. It’s free and available in both PC and Macintosh versions.

Electronic record keeping requirements

The Tax Office has certain requirements that must be met if you keep your business records electronically. As with paper records, you must keep electronic records:

for five years after they are prepared, obtained or the transactions completed (whichever occurs later), and
in English, or in a form that tax officers can access and understand in order to determine your tax liability.

You can choose to provide a printed copy of your electronic records and, where necessary, documentation from your computer system if requested by tax officers.

Keeping electronic records secure

You must be able to demonstrate that the records kept on your computer system are secure and accurate. This includes having:

control over access to your computer, for example, through the use of passwords
control over incoming and outgoing information
control over processing of information, and
back-up copies of computer files and programs and the ability to recover records if your computer system fails.

Storing paper records electronically

Whether you use a manual or an electronic system, you may want to store and keep paper records electronically. The Tax Office accepts the imaging of business paper records onto an electronic storage medium, provided the electronic copies are:

a true and clear reproduction of the original paper records
kept for five years, and
capable of being retrieved and read by tax officers at all times.

You don’t have to keep original paper records once they have been imaged onto an electronic storage medium.

Tax Tips :: General

Tax Tips :: General

Why do I have to pay so much tax on my second job?

You can claim the tax free threshold of $18,200 for the first job only. However, your second job is taxed at your marginal rate plus Medicare levy.

Can I now claim for sun protection items?

Yes you can claim for sun protection items if you work outdoors and purchase sunscreen lotion, sunglasses and hats for use at work.

What is a Living Away From Home Allowance?

A living Away From Home allowance is paid by employers when they require an employee to work in area that is different to their normal workplace.

E.g. I work and live in Sydney and within a few months my company requests me to go to Regional NSW to work there for a few months. My company is required to pay me this allowance for living away from home.

This is a not a claim you can make in your tax return or any other means. This is strictly an allowance paid by the employer to the employee that is not subjected to be taxed.

I am five years behind in lodging my tax returns. Will I get into a lot of trouble?

You should lodge your outstanding tax returns as soon as possible and before the Australian Taxation Office takes any action to have you lodge these tax returns. Once they have begun any action it could result in a court conviction. In 2001, the ATO have instituted new rules that state they may charge a penalty of $110 for every 28 days that the return is outstanding. The maximum penalty is $550 even if you are due a refund. In addition, the ATO will charge interest at an outstanding high rate. This interest is referred to as the General Interest Charge.

Can you complete my tax return if I am missing a PAYG Payment Summary (group certificate)?

Yes we can complete using the details from a copy of the PAYG Payment Summary (your employer can provide this), a letter from your employer with the PAYG Payment Summary information or by reviewing your pay slips for that period and completing a Missing PAYG Payment Summary.

Do I need to bring my partner with me to complete my tax return?

It is helpful as they can assist with family details, but you don’t have to. You only need to have your partner’s details if you wish to claim the Family Tax Benefit through your tax return.

I received an additional PAYG Payment Summary (group certificate) after I completed last year’s tax return, can I put it in this year’s?

No – a PAYG Payment Summary from a past year cannot be included with the current year tax return. It can only be included in the return for the year that it relates. You will need to submit an amendment to that year’s return.

My father has died. Do I need to complete a tax return for him?

Yes it is necessary to complete a tax return to date of death if a return has been lodged in past years. This return, marked final, showing all income to date of death.

Do I need to declare my overseas pension?

In most cases overseas pensions are taxable. There a few exceptions to this rule.

How can I reduce my tax bill?

One of the ways you can reduce the tax you pay is by salary sacrificing in return for employment related benefits. The benefit of Salary Sacrificing is that your benefit is purchased with pretax dollars. There are many things that you can Salary Sacrifice, but all are subject to Fringe Benefits tax, except superannuation and minor benefits such as a mobile phone or computer. Motor Vehicles are subject to Fringe Benefits tax, but the amount is reduced if the car is used for work, according to the amount the car is used for work.

The Fringe benefit is paid at the top marginal rate of tax, including Medicare (48.5%) on the grossed up benefit provided. .

Increasing Deductions is another way of reducing your total tax bill. You should carefully review your expenditure and employment requirements to determine if you can make this claim.