Keeping tax records should be a simple process: hold onto records that identify your sources of income, know your expenses, determine property value and then prepare your tax returns.
Few of us, however, are that diligent. We throw away vital documents due to space constraints; we fail to see the relevance in certain invoices, or we store them in a shoebox making it impossible for rediscovery.
Keeping records and forgetting about them isn’t such a bad thing if the auditor does come knocking at your door. At least you can turn your place upside down and then spend the required hours sifting through the relevant (and irrelevant) piles of crumpled paper. It’s better than having no records at all.
Here are the top five ways to keep your records in order.
The advantage of keeping your records in order is that your last five years of invoices are easily maintained and accessible. It is important to note that you need five years of records just in case the taxman does come knocking. Good record keeping makes it easier for you to meet your tax obligations, gives you a better understanding of how your business is running and it helps you make the right financial decisions.
Record keeping is also a legal requirement, with poorly kept records resulting in fines. The ATO suggests that individual and businesses allow time each week to ensure their records up-to-date.
Electronic records (using accounting software approved by the ATO) will save you time, hassle and money. While it takes time to install the software, the advantages are numerous and include automatic calculations of earnings and profits. You can also claim the cost of record keeping software as a business tax deduction. It’s a win-win.
If you are not an administrative type (and let’s face it, not many of us are) it may be worth seeking out someone who is. Hire someone internally who can manage the books, keep the invoices in check and your paperwork in order. Make sure this administration guru is someone you trust.
The ATO makes it as easy as possible for you to comply with your tax obligations and can arrange a confidential assistance visit. Visits are conducted by tax officers at your place of business where a tax officer will work through any issues you may have. If you are unsure of what records you need to keep it could be worth spending half a day seeking expert advice. You can also use the ATO’s record keeping evaluation tool. This is a free, interactive software program that will help you understand what your record keeping obligations are. It provides a list of records tailored specifically for your business and reports on how well the business is keeping records, including recommended improvements.
Sometimes it is difficult to remember what you purchased and why. It is important to keep your business and personal records separate so there is no confusion.
Record keeping should be simple, but most of us see it as more of a chore and a burden than something conducted out of necessity that could save you time and money. Change your mindset and then change your habits and you will find that it is easier to stay on top of your paperwork.