Once upon a time: Why tax invoices matter
When I first meet a founder, we have a conversation that goes something like this:
Me: We need to enter supplier invoices into your accounting system, attaching the tax invoice, when we get them.
Them: Why? Can’t I just pay them? They’re on my bank statement? Why are you making me do all this paperwork!
Me: Very convoluted discussion around documentation requirements, audits, which goes no where
Repeat until I wear them down……..
I get it — the topic is a great big yawn. So I’m going to resort to an ancient communication tactic. Storytelling. Perhaps this story will work next time around.
Once upon a time (in 2014), a lady called Eman claimed $9,000 from a not for profit for handyman services. She used this money to pay for a lovely holiday club membership for her and her husband.
Eman was a good person who’d been named Australian of the Year. Lots of people like Eman and so trusted her when she said she’d paid for a handyman herself and needed to claim it back.
The nasty investigators at ICAC asked her lots of questions about the money she’d spent on the holiday club (and other things). They were making it sound like it was all her fault! What about the bookkeeper who’d obviously made a mistake! Why wouldn’t they listen to her? Why were they asking all of these questions. Eman was very upset.
Like all good fairytales, this needs a happy ending. Unfortunately this story doesn’t follow the standard fairytale format. The ICAC enquiry is ongoing.
Coming back to the real world, this is the document Eman submitted to claim the $9,000.
When I first saw it, my first thought was “how on earth did anyone claim $9,000 based on this?”. No regular staff expense of this size would be approved with a cutoff bank receipt and a handwritten note. For the boss, sometimes the rules get bent.
When the CEO is also the founder & significant owner of the Company, there is lower risk. They’re defrauding themselves. I’ve seen people do it which does seem slightly crazy.
When they’re a CEO of a publically funded not for profit, you can see why people get a little more irate about it.
So what documentation do you need and why? An example is the best way to explain this.
These are the two documents I received for a purchase a few weeks ago.
The document on the left is called a “tax invoice”. The one on the right is called an “Eftpos receipt”.
Why does one transaction need two documents? That’s driven by two different organisations, being the bank and the ATO. One day they may agree on an information format. In the meantime we are stuck with two bits of paper…….sigh!!
Both documents have the name of the vendor, the date and the amount. These are circled below.
For Eman, the eftpos receipt she submitted didn’t have the vendor name on it, it is alleged it had been cut off. The original invoice found by the investigators was also missing.
The tax invoice (on the left) has information not on the eftpos receipt or bank statement. These are circled in orange.
This includes what was purchased, the amount of GST and the ABN of the vendor.
The GST amount and the ABN are necessary to claim back the GST in your BAS. Without this, you’re not meant to claim the GST, which impacts your cashflow.
Many business owners do their BAS based on their bank statement only. That’s fine. If the ATO ever comes to call, you’ve got a problem.
How about things purchased from overseas, like Amazon hosting costs? There is no GST, why do you still need the invoice?
What was purchased answers a more subjective question. Is it a business expense, hence can you claim it as a tax deduction?
In this example, the answer is no. This was a mothers day present, which is a personal expense, not a business expense.
I was talking to someone about this the other day and they said “you could absolutely claim it”.
I could. I choose not to. I look after other people’s money for a living, part of my brand reputation is built on not doing stuff like that. I charge a healthy price for what I do, hence not getting a tax deduction for $50 is part of my business model.
Last year I was the CFO who took Flamingo public (CR8). As part of that we needed 3 years of audited financial statements.
The first of the 3 years was 2013/14, which is when they started. As is often the case, there were no tax invoices going back that far. For year’s 2 and 3, we had all of those due to some very diligent record keeping.
The audit partner would not sign off the audit until we found the documentation for the first year. We did, in the end, in a box in the founders garage.
So this story did have a happy ending. We got our audited financial statements and the Company is now listed.
What’s the moral of the story?
If you’re a small business that’s a sole trader, where you’re not relying on other people’s money, your risk is the ATO. Your call there.
If you have taken other people’s money, the stakes are a lot higher than an ATO audit.
Enter the receipts & invoices into your accounting system. Please! The technology now makes this so much easier. Use it!!!!