It is a common misconception among small business owners, particularly Tradies, that money withdrawn from the company account can be expensed under the guise of “petty cash”. I know that small business owners are often dipping into their pockets for bits and pieces, but petty cash is not the correct code for these random drawings of round amount of cash (usually from an ATM) from your business bank account. The correct code for withdrawals that do not have supporting documentation to deem them a tax deductible expense is Drawings.
When you think of petty cash you need to picture the locked cash tin. In our office it is an old coffee jar. Petty cash is as asset, not an expense. When the tin or jar is started a withdrawal is made, usually for somewhere between $200- $500, and that cash is placed in the jar. The cash in the jar is known as a float, and the float is an asset.
As you spend this money it should be replaced with a receipt. At any time, the addition of the receipts in the jar and the remaining cash in the jar should equal the petty cash float.
As the float starts to reduce a reconciliation is done so that you can account for all the transactions that the petty cash has been spent on, and another withdrawal is done to top up the petty cash back to the original float amount. The second and subsequent top up withdrawals are coded to the appropriate expense account.
As you can see this is very different to taking money out of the bank and skipping the reconciliation process, coding it straight to a petty cash expense account. There is nothing to show what this money was spent on. There is nothing to justify to the ATO that the expense is tax deductible. In an audit situation the ATO would disallow any deductions you have claimed associated with these drawings.
So what should you do?
It is important that any expenses you are claiming are backed up by an appropriate receipt. Realistically, there is very little need to use cash now. You can have debit cards for you and your staff to use, or you can reimburse your staff for those unexpected expenses while they are on the road. If you must give them cash to make a payment make sure you get a receipt and any change so you can account for the expense properly.
The biggest culprit of this type of behaviour is the business owner themselves. We see Tradies who take out $100-$200 per week as a petty cash expense. That can equate to around $5,000- $10,000 per year. If the ATO were to audit a set of accounts with frequent petty cash expenses, they are not going to allow the deduction without receipts to justify the expense.
There are apps available to help you keep track of your receipts by taking a photo of them. Ask your accountant for suggestions on an app that will integrate with your accounting software. The days of the regular drawing being anything other than what it really is, a drawing, and getting away with it are coming to an end. Don’t be caught out.