What Are Your Compliance Needs For All Your Bookkeeping?
The business owner v/s the Bookkeeper
Even bookkeepers fear this topic and have the utmost respect for compliance. Many small business owners are very fearful when it comes to bookkeeping compliance. This is a legitimate fear. Most businesses will go through thousands, if not millions of transactions. It is very easy to do the wrong thing unknowingly. Or to assume that the fines are not that much to worry about.
We are not a huge bookkeeping firm or tax firm by any means at a national level. However, even in our smallish book of clients, we have observed some distressing fines. For a business owner that never cleared more than $60k in his business, he currently has a personal director’s penalty of $250k for the ATO. Yes, it is depressing when business owners get this wrong.
Common Compliance issues:
There is some good news too. Most of the common issues are entirely avoidable. With very little effort too. Here are the most common ones you will come across & that we have observed among our clients too:
- Not lodging BAS/IAS on time
- Not lodging Tax returns at all
- Wrongfully claiming GST credits
- Falling behind more than one lodgement, creating an unbearable storm of issues
- Entering into ATO payment arrangements and then not sticking to them
Some Common Bookkeeping Compliance mistakes:
- Using the GST collected as money to be spent and not saving it for BAS time
- Recording their transaction badly i.e. then having to re-do all the work as the information is not usable
- Waiting for the last minute i.e. May, then not being able to find an accountant to lodge it on time
- Spending money on everything else, then seeing compliance and professional services as a burden as opposed to what keeps the ATO from closing their doors.
Bookkeeping tips – when it comes to compliance.
You don’t want the attention of the ATO. No matter how well you think you have kept your records. It is not a matter of complying with the audit but rather not getting one in the first place. An audit is not a random thing. The ATO has industry wide data and use an AI that looks at historical trends of mistakes and poor compliance behaviour. They zero in with deadly accuracy on malpractice. That is actually the main reason to stay up to date with them. So, what does that mean?
-You HAVE to stay organised at all times.
-Set up your financial processes correctly from the get go.
-You have to develop a daily routine to address issues, and not wait till tax time
-Ignorance is not bliss here. Address issues as soon as they come up and do not wait for a major one.
-Understand your financial reports and what they mean. Most seem to understand the profit and loss but have no idea how the balance sheet works.
At the end of the day, the onus stays with the business owner to provide substantiation for any documents for any transactions claimed on their returns. During an audit, these transactions are scrutinised and if the bookkeeping lacked seriousness and focus, that is easily felt and validated with large and painful fines.
How do you know you are complying with your bookkeeping?
There is a difference between good bookkeeping and bad work. How can you do the former if you don’t even know the difference. So, let’s find out. There are two sides to this coin, an operation focus versus compliance duties. Both are important.
From a day-to-day operational perspective, you need to :
-Know if your business is under-performing
-Be in control of your expenses (income is a different story!)
-Be able to demonstrate a good track record to banks and lenders
-Be on top of compliance that allows your business to run effectively.
However, the above is beyond the scope of this article. We will be devoting entire posts and articles to that one. Today, we are more concerned with your compliance requirements i.e. the other side of that coin.
The ATO and bookkeeping compliance:
That side is best addressed by looking at the ATO’s requirements for compliance. On this side, you need to:
-Provide evidence of sales and purchases you had in your business. This usually takes the form of receipts, invoices (And for small items, credit card statements can be enough)
-Keep a copy of all invoices, pay runs, salaries and wages.
-Keep an organised folder for all your GST filings
-Keep structures like an asset register preferably. Maintain records of any transactions involving business assets e.g. land, buildings and equipment. That is for all purchases, sales and any other associated costs.
-Keep all records that substantiate the figures on your activity statements, even contributions to employee superannuation, fringe benefit tax returns, leading up to the income tax returns.
Most importantly, all this to be well maintained and organised for a period of 5 years. Even if you did nothing wrong, not having this filing process and system in place is grounds enough for fines.
What is the ATO looking for compliance-wise?
Most of us know that the ATO needs money. Many accountants seem to believe that is because they get a lot of pressure from Treasury when there are holes in the budget. Who knows? Not that we are the ATO’s biggest fans, but in the bigger scheme of things, one thing is certain. Playing ball with them helps you. Big time!
If you agree with that, you will want to get along with the ATO. Like in all relationships, you need to be aware what the other party is sensitive to and observe i.e. you need to be able to put yourself in their shoes.
Similarly to other relationships in your life, there is considerable pain when you are felt to not be doing your bit. Any way you look at this, you need to pay attention to what the ATO pays attention to.
Here are compliance issues the ATO has been known to fuss about:
Uber drivers and AirBnB tax payers are both notorious for this sort of “ATO sensitivity” when it comes to the bookkeeping and account keeping. As usual, people are always trying to get funky deductions that just don’t hold up when audited.
In fact, the ATO issues a warning on their individual portal, advising that their deductions have been flagged and risk an audit! How scary is that!
The AI is super sophisticated and comparing a large number if similar tax payers and flagging the ones that already look unreasonable. In fact, I have had bookkeepers go back and re-jig their submissions after I told them that their clients’ account has been flagged. (We are not just bookkeepers, we also have an in-house tax practice)
People have been using property investments to claim bogus deductions for ages. This is more of an individual issue. However, most of the business owners we know also use their bookkeeper to look after that side of their financials too. Think rental properties in highly desirable holiday destinations and working holiday-makers. Recently, the ATO clamped down on travel deductions. Call us if you need any advice in this area.
Your profession or industry’s particular bookkeeping compliance challenges:
The same AI now has access to years and years of data, segmented across a large variety of industries (And niches within niches). This so granular that the ATO has a fairly specific idea as to what your return is supposed to look like before you even submit. If your return varies slightly from that, it likely raises a flag. A few flags over a period of time is not great. However, if it is more than just a slight variation, you actually get a straight warning about an upcoming audit now!
By the way, all this does not mean you have to be dumb about your taxes. There are legit tax structures that allow for tax minimisation. All we are saying is “Be Smart And Also Follow The Rules.” Yes, you can definitely do both.
Besides, the ATO not only relies on past returns and its immense database to look for outliers. It also has access to 3rd party data too. Beating that system is quite impossible and hazardous for your health.
Motor Vehicles and the usual culprits
Whilst it still does not make sense to lodge these claims without a log book, fools still do that. It takes about 30 minute to put one together, and you only need to do one every 5 years. This gives you tens of thousands of dollars in deductions. It is a no brainer. Only an incompetent (or someone with severe brain damage) would not spend those 30 minutes. If you work out the hourly rate on that, it is similar to working at around $55,000 per hour! Compare that to your current rate.
Watch out for the substantiation for your internet, phone, other travel and training expenses too. You need to be able to show how you put together your expenses for compliance purposes i.e. the documentation need to comply with the ATO’s rules. (there are tens of thousands of pages on this matter on the ATO’s site i.e. way outside the scope of a blog post). Here’s an example:
Example of Bookkeeping compliance mistakes:
Many seem to think that you can make a standard claim of $300 without spending the money. Whilst it is true you don’t need receipts for up to that amount, in total, you have must spent the money and be able to show how you calculated the amount too.
The rules here include:
-You must have spent the money yourself. No one reimbursed you for it.
-The deduction must be directly related to you earning an income. E.g. you can’t claim personal deductions if the related income is coming from your trading trust.
-You need a receipt/record of some sort to prove it all.
The best reason to ensure your bookkeeping is compliant?
After years and years of doing this, we have likely become a bit jaded in this area. A bit cynical if you wish. However, our main concern is now that fines are getting up to 95% of the size of financial issue, plus interest. Furthermore, if it is a repetitive issue, the ATO will go past 5 years to impose the fine. If for no cultural or ethical norm, let the stick guide your behaviour and make your bookkeeper comply with the ATO’s rules. There are also some ASIC compliance matters that bookkeepers look after, but that is for another day.
As usual if you need help with any of this, please contact us here. Maybe you are new or not aware of your bookkeeping compliance requirements. It is an important facet of staying in business. We can help you address it, with great ease, calmly and with lasting peace of mind – for an affordable price.