The importance of good record keeping
1 September 2011
There are many reasons why business owners should have good record keeping systems and processes in place.
The most important reason is that it is a
legal requirement and there are penalties for not maintaining the required records. Also, most business owners are aware that good records can assist 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, by keeping track of debtors and creditors
- Help you to manage your cash flow
- Demonstrate your financial position to banks and other lenders, and also to prospective buyers of your business
- Show the basis for any amendments you need to make to activity statements or tax returns you have already lodged.
Another important reason for following good record-keeping practices is to ensure your business can withstand scrutiny from the Australian Taxation Office (ATO) in the event of an audit.
In an effort to combat the cash economy, the ATO has been collecting financial information about businesses from tax returns and business activity statements. This data, combined with performance information provided by industry and trade associations, is used by the ATO to benchmark taxpayers’ activities to identify businesses which may not have reported all of their income and to deter further activity in the cash economy.
The benchmarks are used by the ATO to firstly, provide a pointer to a possible future audit and secondly, to determine how much a business should be turning over and comparing that to what has been formally declared.
Currently, the ATO has benchmark ratios for more than 100 industries with turnover thresholds for small, medium and large businesses. For each category a suite of benchmarks, including performance benchmarks (which provide key business ratios for different industries such as costs of goods sold to turnover) and input benchmarks (which show an expected range of income for tradespeople based on labour and materials they use) have been developed.
The ATO acknowledges that the benchmarks are essentially a guide to assess business performance. However, when the results for a business are outside of the benchmark averages, the ATO may issue a letter to the business owner advising them that a ratio for their business is below the benchmark ratio for their industry.
MEETING YOUR OBLIGATIONS
A business may perform outside of the benchmark range for a host of reasons and it doesn’t automatically follow that they are cheating the tax system - it could simply be an indication of a business under financial stress. However, in the event you find you are outside the benchmarks for your industry, you should check if you have correctly recorded and reported income and deductions for your business. To do this you should review your record-keeping practices to ensure you meet your legal requirements.
If after a review of your records and record-keeping practices, you are satisfied that you are meeting your tax obligations, you do not need to do anything. If, on the other hand you have made an error or omitted income, you are urged to complete a form to voluntarily correct the situation.
The ATO’s benchmarking activity has created a whole new game. Good record keeping is critical to reducing the likelihood of the ATO exercising its powers to increase your assessable income.
Should you require assistance with your record-keeping practices, please do not hesitate to contact your local Boyce advisor.