'Taxes, after all, are dues that we pay for the privileges of membership in an organised society'. Franklin D Roosevelt
Adele and Nalu have set up a business called Beachcrazi that sells surfboards, leisure wear and a range of skate boards. The business has been running for less than a year and is quite profitable. They attended a local business network meeting and heard from a speaker on the importance of keeping good records for tax and business purposes.
Both Adele and Nalu love the selling and marketing side of the business, but are not interested in the paperwork. They hired a business advisor who identifies a number of problems with their record keeping and business practices. These problems are listed below.
The payments are handled poorly. Cheques are often written out with little or nothing being written on the cheque butt. Some bills are paid straight out of the cash register with a slip of paper being left in the till giving details about the payment. All of the invoices for expenses are kept in a desk drawer and filed once a month or when they have time.
They have incomplete records of GST paid out for stock and expenses. Sometimes they sell stock at surf carnivals. This means they have little idea of how much GST they have collected as they only deal in cash.
They have a number of full-time and part-time employees, and they do not realise that they should be paying super on their wages.
They have a poor system of paying employees as they do not give employees a pay slip each week. Adele and Nalu just add up the number of hours the employee works and multiply the figure by their hourly rate.
The couple lives together and pay most of their personal and business expenses from the same bank account or take money from the till. This means they don't have an accurate record of business expenses.
When Adele and Nalu started the business, they were short of money and did not get business stationery or sales documents printed. They usually write in the name of the business and the ABN on the standard invoice book they bought from the newsagent. They sometimes forget to include the ABN on an invoice. This explains why some businesses who owe them money are deducting No ABN withholding from their payment.
Their business advisor recommends that Beachcrazi has a properly set out cash book. Adele and Nalu feel that it is going to take a lot of time and effort for not much benefit. Suggest reasons why it might be a good practice to use a cash book.
The end of the taxation year is approaching and one of the employees asks when his payment summary will be available. They are unsure what a payment summary contains and why they should prepare them.
The business advisor recommends they should keep income tax records as well as their records of income and expenses. They are unsure why they should do this.
Adele and Nalu are not keeping tax invoices or records once they have been paid as they feel that it is unnecessary.
- Read the problems listed above. Identify how their recording system may cause taxation and business problems and consider how the situation might be overcome.
- Set up a list of things that Adele and Nalu will need to do to get on top of their record-keeping problems.
You may find it helpful to refer to 'Managing your small business records' on the Australian Taxation Office website at www.ato.gov.au/recordkeeping