First, the legal requirements.   The Tax Act (and GST) require a business to keep records that explain all business transactions.   These need to be kept for at least five years and can be kept manually or electronically.   The Companies Act also requires companies to keep 'proper accounting records'.

Second, the Tax Act has an interesting twist.   If the tax office does not believe the tax return it may issue an assessment based on its belief, and the taxpayer must then prove the assessment is wrong.   That's hard without the essential documents.

Finally, you need records to understand the key drivers of the business, see how it can be improved, if you want to sell the business, and to ensure you have the information to work on the business, not just in it.

Records you must keep

It seems trite to talk of some of these now we have computers, but these are the basic records that the computer system relies on to obtain the information to process:

- Income and sales

Records of cash and credit sales and barter transactions-invoices, cash register tapes, cash sales, receipt books

- Purchases and expenses

Supplier invoices, receipts, credit card vouchers, petty cash dockets, cheque butts

- Bank records

Bank statements for all accounts and loans

- Asset purchases

Plant, equipment, vehicles, property – the invoice for purchase and any contract for finance

- Contracts and agreements

Copies of all contracts, agreements, franchises, etc.

- Year end records

List of creditors, debtors and stock at 30 June

- Minor deductible items

Sometimes a receipt is not available – record the details in a diary or logbook (for travel away, parking, tolls)

- Employee records

Records of wages and allowances, hours worked, superannuation guarantee obligations, TFN declarations, pay slips/statements

- Contractor records

Compliant Tax Invoice from contractor (ensure an ABN is quoted or you must withhold 46% from their payment), contracts and quotes.   Many businesses engage 'contractors', but awards and personal services definitions consider individuals may not be contractors but employees, which means the business can be liable for award rates of pay, penalties, deducting tax, paying superannuation, holiday pay, etc.   The ATO intends to do more checks on these claims.

- Motor vehicle records

All cars require a logbook to be kept for at least three months every five years, and annual odometer readings.

Record keeping tips

- Set up a good filing system

File things so you can find them when required.   Get into a routine and file often.

- Fill in payment records

Write enough information on cheque butts or EFT so the purpose of payment is clear (who to, what for, the invoice number, the amount) and ensure your writing is clear and easy to understand.

- Cross reference transactions

When you pay, write the invoice number on the cheque, and the cheque number or date of payment on the invoice.

- Reconcile accounts to bank statements

This is helpful to find errors or omissions, in the records or the entry details.   Bank accounts must reconcile.

- Cash register tapes

Provided you keep Z-totals which have been reconciled to sales and bankings, the tapes can be discarded after a month, otherwise they need to be kept for five years.

- While the accountant, and the ATO, will look at the computer reports, which is a pretty good overview of the reliability of the system and processes, there will be a testing of the records to determine accuracy.   If the ATO does an audit of a BAS quarter, it will request the GST Detail Report (from GST Reports), select some supplier invoices to match to ABN records and payments, check they have been paid on the bank statements, ask for employee TFN's,   payments to employee super funds, the motor vehicle log book, invoices for purchased vehicles or plant, the monthly bank reconciliation and bank statements.

That's the basic data.   My next Blog will be on the books/systems to record the transactions.