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Importance of record keeping in small business

According to the Australian Taxation Office (ATO), poor record-keeping is a common reason for the failure of small businesses. In addition to being a legal requirement, maintaining accurate records can have numerous financial benefits.

It is common knowledge among small business owners that maintaining records can be a time-consuming task. In busy periods, it is often the first thing that gets pushed aside, leading to difficulties catching up on bookkeeping later on.

For instance, if your records are disorganised, it can be challenging to accurately monitor tax, wages, and superannuation payments. Failure to pay taxes, even if it is a result of an innocent mistake, can result in high penalties. However, if you can show that your tax records are well-organised and maintained, the ATO may be more lenient.

Accurate and up-to-date record keeping in small businesses is important not just for tax deductions but also for potentially reducing quarterly income tax payments. If records show that profits have decreased from the previous year, businesses can use this information to adjust their instalments. Without proper record keeping, this data may not be accessible.

There are several benefits to maintaining a healthy financial status, including:

The ability to effectively manage cash flow;
Make timely stock purchases;
Demonstrate financial stability to lenders or potential buyers;
Accurately calculate and submit superannuation contributions: and
Complete and submit activity statements on time.

Having a professional tax accountant manage your affairs is a wise decision. However, it is not efficient for them to spend time organising a disordered collection of invoices and receipts. Properly maintaining these documents will ultimately save your business time and money.

It is legally required to maintain good business records, including account books, expense and purchase records, income and sales receipts, and any other documents relevant to preparing your tax return. These documents must be kept for at least five years, with some needing to be retained for an even longer period.

There are situations where you may need to keep records for longer than the typical five-year retention period. Examples include:

Records connected to an assessment that's amended

It is important to maintain records for the length of the review period (also known as the amendment period) for any assessment that relies on the information in the records.

During the period of review, changes can be made to the assessment by either you or us.

For example, the period of review for:

an income tax return is generally two years for individuals and small businesses and four years for other taxpayers, from the day after we give you the notice of assessment.
a business activity statement (BAS) is generally four years from the day after the notice of assessment is given.
a fringe benefits tax return is generally three years from your date of lodgment.

Records of information used again in a future return

You must keep records containing information used on a tax return for a minimum of three years, as the IRS has the ability to review tax returns for up to three years after they are filed.

Examples include:

If you claim borrowing costs spread over five years, you must keep records from the previous year’s tax return until the review period for the current one is finished.
If you calculate a business loss in 2012-13 and use it to offset profits in a later tax return, you must keep the records used to calculate the loss until the review period for the later tax return is over.

To learn more about the period of review, time limits for amending tax returns, how to correct a mistake or amend a return, and fringe benefits tax return amendments, visit the ATO website.

Records of depreciating assets

You should keep records of depreciating assets for the duration of ownership, plus an additional five years after disposal. Low-value pools and eligible rollover relief have their own time frames and limitations.

Records of capital gains tax assets

It is recommended to maintain records for CGT assets for the duration of ownership and for an additional five years after disposal.

Petroleum resource rent tax records

The ATO website has information on the required retention period for petroleum resource rent tax (PRRT) records, which must be kept for at least seven years.

If you are unsure about the significance of maintaining records in a small business or need assistance in creating a record management system, consult with an expert.