Is Your Business Keeping Good Records?

As a business owner, it’s crucial to recognise the significance of meticulous record-keeping. These records provide invaluable insights into your company’s financial health, performance trends, and areas needing improvement. They also facilitate tax compliance, audits, and financial reporting, ensuring transparency and accountability.

Understanding Record Keeping Requirements

By tax law, businesses must maintain records of all transactions related to taxes, superannuation, and registrations. This encompasses documents concerning income, expenses, and any decisions or calculations made for tax and superannuation affairs. It’s important for businesses to grasp which records are necessary and to keep them accurately. Failure to adhere to these regulations can result in legal and financial consequences.

Employment and common law extend the need to keep some records for longer periods.

What is the Law – Document Retention Requirements

In Australia, businesses must adhere to both common law principles and legislative requirements regarding document retention. Common law dictates that corporate documents are the property of the company, but destruction before or during litigation may result in adverse legal consequences.

Legislative requirements vary and include mandates from federal and state laws, such as:

• Privacy (Tax File Number) Rule 2015 Requires companies to securely destroy or de-identify tax file number information that is no longer required by law or for taxation, personal assistance, or superannuation purposes.
• The Criminal Code 1913 (WA) and Crimes Act 1914 (Cth) create similar offences where a person, knowing that any book, document or other thing of any kind is or may be required in evidence in a judicial proceeding, intentionally destroys it or renders it illegible or undecipherable or incapable of identification, with the intent of preventing it from being used in evidence.
• The Income Tax Assessment Act (1936) (Cth) requires retention of income and expenditure records for at least five (5) years.
• The Fair Work Act (2009) (Cth) Requires the retention of employee records for a minimum of Seven (7) years from the end of the financial year in which the document was created. Employers must maintain accurate records for each employee, including general details, pay, hours worked, leave, superannuation contributions, and agreements. Records should be accessible, legible, and in English. Employees have the right to access their records, and Fair Work Inspectors can request them for compliance checks. Failure to keep records or keeping false records can lead to penalties.
  Source: FWO – Record-keeping
• The Corporations Act 2001 (Cth) Imposes various retention requirements, including keeping financial records for at least Seven (7) years, retaining company documents and registers for specific periods, and complying with limitations on legal action.

Businesses must ensure compliance with these laws by implementing proper document retention policies tailored to their specific obligations and circumstances. Failure to adhere to these requirements may result in legal consequences, emphasising the importance of proactive compliance measures.

Source: Document retention and destruction: be aware of legal requirements

What is a Financial Record?

Financial records are important documents that show how a business manages its money. These records include things like:

• Invoices: Papers showing what the company sold and how much it charged.
• Receipts: Papers showing when the company received payments.
• Cheques: Records of payments made by check.
• Books of Prime Entry: Initial records where transactions are first noted.
• Working Papers and Other Financial Documents: Supporting papers used to make financial statements.

These records can be electronic but must be able to be turned into paper if needed. Even if someone else, like a Bookkeeper, keeps the business records, the business owner is still responsible for giving copies to auditors or anyone who has the right to see them. According to Section 286 of the Corporations Act, financial records must be retained for at least seven years after the completion of the transactions they cover. Examples of records that companies should retain include:

• Financial Statements: Including profit and loss statements, balance sheets, depreciation schedules, and taxation returns.
• General Ledgers and Journals: Primary accounting records detailing all financial transactions of the company.
• Cash Records: Records of cash receipts, bank deposits, petty cash transactions, and cheque stubs.
• Bank Statements and Loan Documents: Documents related to the company’s banking activities and any loans it has obtained.
• Sales and Debtor Records: Records of sales transactions and amounts owed to the company by customers.
• Invoices and Statements: Records of invoices issued and received, along with statements of account.
• Minutes of Members or Directors’ Meetings: Documentation of discussions and decisions made during company meetings.
• Registers: Registers of members, options, debenture holders, assets, or any other relevant items.
• Deeds: Legal documents such as deeds of trust, contracts, agreements, and inter-company transactions.

Businesses should also prepare monthly statements to track their financial performance. These statements show, for example, how much money is coming in and going out each month.

Source: ASIC – What books and records should my company keep?

Five Rules for Effective Record Keeping

To effectively meet record keeping requirements, businesses and their Bookkeepers should adhere to five fundamental principles:

1. Comprehensive Coverage: Businesses must retain records related to starting, operating, altering, and closing their operations, ensuring relevance to tax and super affairs. Maintaining clear documentation for expenses relating to business and personal use is essential.
2. Integrity and Security: The integrity of records should be preserved, preventing alterations and ensuring secure storage to prevent damage. Businesses should be prepared to reconstruct original data if their record keeping systems undergo changes.
3. Retention Period: Most records should be retained for a minimum of five years from the time they are prepared, acquired, or completed. Certain records may require longer retention periods based on specific legal stipulations. Businesses should maintain records detailing routine procedures for destroying digital records and be able to furnish them upon request.
4. Accessibility and Format: Businesses must ensure they can readily provide their records upon request. They should maintain information about their record keeping systems to demonstrate compliance with requirements. Records must contain all relevant details to meet tax, super, and employer obligations.

If storing data digitally, they should be prepared to provide encryption keys and access instructions, ensuring data can be extracted and converted into standard formats such as Excel or CSV. If passwords are used for protection, accessibility instructions should be provided. Finally, businesses should organise their data and records with identifiable labels or indexes to facilitate efficient retrieval and review processes.

1. Language: Businesses must ensure that their records are either in English or easily convertible to English.

Source: ATO – Overview of record keeping rules for business

Benefits of Accurate Record Keeping

Maintaining accurate and complete records is crucial for businesses to effectively manage their finances and stay compliant with regulations. It allows them to keep tabs on their financial health, ensuring they know whether they’re making money or facing losses. Good records also empower businesses to make informed decisions and keep track of their financial obligations, such as paying bills on time.

Keeping clear and organised records helps businesses avoid potential penalties from regulatory authorities. By having everything in order, they can easily determine their tax liabilities and demonstrate their financial standing to lenders or potential buyers. Additionally, when it comes to audits, having well-maintained records saves time and effort for both businesses and auditors.

The Role of Your Bookkeeper

The business owner is responsible for understanding record keeping obligations. Even with the assistance of a registered Tax or BAS Agent, the primary accountability remains with the business owner.

However, your bookkeeper is an essential partner in maintaining accurate records and complying with laws. They ensure your data is secure and assist you in understanding regulations. By organising and safeguarding your information, they simplify financial management and enable informed decision making.

Their guidance helps prevent issues by reminding you of regulatory requirements and regularly reviewing your records. With their support, you can navigate complexities confidently, avoiding penalties and legal complications. Trust your bookkeeper to keep your records in order, providing peace of mind and allowing you to focus on growing your business.

ATO Record Keeping Course

The ATO Record Keeping Course provides business owners with essential knowledge and skills to manage their record keeping obligations effectively. This course offers a comprehensive overview of record keeping requirements, emphasising the importance of accurate and organised records for financial management and compliance.

Business owners will learn practical strategies for maintaining clear and detailed records, including documentation of income, expenses, and other financial transactions. The course covers various record keeping methods and tools tailored to suit different business needs and preferences. Additionally, business owners will gain insights into the legal and financial implications of inadequate record keeping practices and learn how to avoid common pitfalls.

By completing this course, business owners will be better equipped to fulfil their record keeping obligations and confidently manage their business finances.

For more information: ATO – Record keeping | Essentials to strengthen your small business

Digital Record Keeping – 2024 View

In the current landscape, leveraging technology is instrumental for businesses to effectively meet tax record keeping requirements. Incorporating tech solutions streamlines processes enhances accuracy and ensures compliance with tax regulations. Cloud-based accounting software allows real time tracking of income and expenses, simplifying record keeping tasks. Automation features further reduce manual input errors and save time, enabling businesses to focus on core operations.

Moreover, they facilitate the creation of summaries and reports for various tax-related purposes, including GST, income tax, fringe benefits tax (FBT), and Taxable Payments Reporting System (TPRS). Additionally, using software ensures compliance with the legal requirements for Single Touch Payroll (STP) reporting.

For businesses utilising cloud storage, whether integrated into their accounting software or provided by a separate service provider, it is imperative to ensure that the storage solution meets the ATO’s record keeping requirements mentioned above.

Businesses should download complete copies of any records stored in the cloud before transitioning to new software providers to prevent potential loss of access to critical information. Consult with the software provider or a professional advisor to understand the specific terms and conditions related to data retention and access after cancellation.

Beyond Technology

Success in record keeping goes beyond technology. It requires a steadfast commitment to compliance and best practices. By prioritising integrity and security, businesses also uphold their reputation, safeguard sensitive information, and foster a culture of accountability and transparency.

Accurate record keeping, with the expertise of Professional Bookkeepers, digital solutions, and accessible small business training, lays the foundation for financial transparency and strategic decision making. This enables small businesses to excel in today’s competitive landscape.