Good record-keeping practices go a long way in assisting with claims in the event of a dispute with the ATO. Cases before the courts and tribunals have demonstrated that the onus of proving a tax claim falls on the business taxpayer. A key requirement is to be able to present the relevant documentation to substantiate a claim.
It’s important to ensure that records can be understood by more than one person. Another consideration is to document how records are kept (ie paper records or electronically), what records are maintained, where they are located, and how back-up records are managed.
Experienced business owners may also want to revisit their processes, as a “set and forget” approach could be detrimental.
Case study
The outcome of the following decision by the Administrative Appeals Tribunal (AAT) in Re Trustee for the Grewal Property Trust and FCT [2013] AATA 788 highlights the need for business owners to consider their record-keeping practices.
The case involved a motel business that had been mostly unsuccessful before the AAT in a dispute with the ATO concerning claims for input tax credits. Following a tax audit, the Tax Commissioner refused the taxpayer’s input tax credit claims of around $88,500 for the quarterly tax periods from 1 January 2007 to September 2010. This was on the basis that there was a lack of documentation to substantiate the claims. The Commissioner had sought documentation from the taxpayer on various occasions, including sampling documentation for the June 2010 quarter.
However, the representative of the motel business was unable to produce all of the relevant documentation. He argued that a substantial amount of the records sought were lost due to flooding of the motel office in December 2008 and that he had been unable to respond to requests for information as he was overseas.
Based on information provided before the proceedings, the Commissioner accepted that the taxpayer was entitled to some $16,000 of the original claim. The AAT found this acceptable in the circumstances, and it also affirmed the Commissioner’s stance on the balance of the claim. The AAT also rejected the taxpayer’s additional input tax credit claim of around $28,000, saying the taxpayer had been given “every opportunity to produce documentation or other evidence to support his claims for imputation credits”. It further noted that the taxpayer was unable to produce documents or other evidence that demonstrated that the credits that the Commissioner had allowed were insufficient.
Lost or destroyed records
There may be times when records are accidentally lost or destroyed – for example, if a home is burgled, flooded or burnt.
In these instances, the ATO said it can allow taxpayers to claim a deduction for certain expenses if either of the following apply:
- The taxpayer has a complete copy of a lost or destroyed document.
- The ATO is satisfied that the taxpayer took reasonable precautions to prevent the loss or destruction and, if the document was written evidence, it is not reasonably possible to obtain a substitute document.
Please contact us if you need help in reconstructing lost or destroyed records.
Top 10 tips for good record-keeping
The following are some good record-keeping tips:
- Get organised and stay organised.
- Decide what record-keeping system works best for you. Some people may prefer to keep paper records, while others find an electronic software package more efficient.
- Set up a good filing system. If you don’t record your transactions frequently, it’s important to have a system for filing the information that needs to be entered. A good filing system will help you follow up overdue debts and know when your accounts are due to be paid. This will help you manage your cash flow.
- Make sure your records can be understood by anyone, not just one person. Document how you keep your records, what your various records contain, where they are kept, and where you keep your back-up records.
- Obtain the required documentation from suppliers and customers at the time of a transaction and record details as soon as possible – don’t leave it until later. You need records and documentation to support your claims for tax deductions.
- Make sure your records contain enough information. For example, ensure that tax invoices contain all the required information. You may also want to consider cross-referencing records. You can also add notes to the records to remind yourself of any special circumstances.
- Get into the habit of entering transactions into your cash books or software program regularly to keep your files up to date. You may choose to do this daily, weekly or monthly – but remember, the longer you leave it, the more difficult it is to catch up. Never leave record-keeping until the end of the year.
- Make sure you enter transactions accurately into your cash books – mistakes can be costly.
- Don’t mix up personal and business paperwork. For example, don’t use business bank accounts and credit cards for personal transactions, and vice versa.
- Ask for help before things get out of control. You may want to consider contacting us for advice.
