04 Jun The Importance of Keeping Records
The ATO’s recent crackdown on tax deduction claims means that good record keeping is more important than ever. Simple up to date records mean that you can claim ALL the tax deductions you’re entitled to so you’ll never pay too much tax!
This guide will provide general advice to help you identify how to keep records to enable a smooth process at tax time.
Keeping good records helps you and your tax adviser:
- to provide written evidence of your income and expenses
- to help you or your tax agent prepare your tax return
- to ensure you are able to claim all your entitlements
- in case we ask you to prove the information you provided in your tax return
- reduce the risk of tax audits and adjustments
- improve communication with us
- resolve issues relating to disputed assessments or adjustments
- avoid exposure to penalties.
Other reasons for keeping good records are to:
- Make best use of your tax adviser – rather than paying them to sort through a shoebox of paperwork, give your tax adviser well-prepared records so they can ensure you get what you are entitled to.
- Minimise the cost of managing your tax affairs.
To put it simply, for an expense to be tax deductible, it needs to satisfy the following:
- have a direct link between the expense and the income that was earned, and
- have sufficient evidence in the form of a tax invoice or receipt to prove the purchase
The ATO will continue to focus on incorrect deductions claimed by individual taxpayers for what are perceived to be work-related expenses. Their extra heightened reviewing of taxpayer’s claims comes after a case involving an individual who prepared their own tax return with understandably limited knowledge of the specific tax law requirements and tried to obtain a valid tax deduction by claiming deductions via their bank statements for expenses incurred.
This means that merely having a bank statement showing the transactions is not a valid form of evidence to claim them as your tax deduction.
It also highlights the importance of proper documentation and record keeping for claiming such expenses. This particular individual thought it would be ok to just submit a bank statement which showed the transactions, which in fact showed no actually proof of what the expense was and how it was related to his work situation. The ATO won this case because the bank statements proved the expense was paid, but it could not prove how it was linked to the individual’s work income.
Incorrect claims that cannot be substantiated with required records lead to having to pay additional tax as well as penalties.
Other factors to consider while keeping your records are
- The date. The date the expense was incurred will usually be listed on a receipt or credit card slip; appointment books, day planners, and similar documents have the dates pre-printed on each page, so entries on the appropriate page automatically date the expense.
- The amount. How much you spent, including tax and tip for meals.
- The place.The nature and place of the entertainment or meal will usually be shown by a receipt, or you can record it in an appointment book.
- The business purpose. Show that the expense was incurred for your business — for example, to obtain future business, encourage existing business relationships, and so on. What you need to show depends on whether the business conversation occurred before, during, or after entertainment or a meal.
- The business relationship.If entertainment or meals are involved, show the business relationship of people at the event — for example, list their names and occupations and any other information needed to establish their business relation to you.
There are various ways to keep a record of your work or business-related transactions but one we highly recommend to all of our clients is the cloud based software platform Receipt Bank and My Prosperity.
These easy to use systems keep all of you invoices and transactions secure in one place as well as detailing dates and times to make workflow easier for you and your accountant. These time saving accounting software programs take the hard work out of collating and recording your transactions. By simply taking a picture of your work-related tax invoice on your phone, your monthly record keeping skills can be easy as clicking a button.
If you would like to hear about our options on keeping proper records of receipts and work related claims without having a shoebox, please feel free to have a quick chat to us.
Together we can work out what best suits your needs and get the right solution to help you grow your business.