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Disclaimer

This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.

 

ATO Small Business Benchmarks

Small business benchmarks have been developed by the ATO to provide an average idea of what is happening in businesses operating in different industries by measuring various business costs in relation to turnover. Benchmarks allow businesses to compare their performance with others in the same industry and check their compliance with tax obligations.

The Tax Office uses these industry benchmarks to identify businesses operating outside the benchmark range and then, in conjunction with other compliance indicators, will determine whether these businesses are avoiding their tax obligations.

As these benchmarks are only an average of an industry’s performance there may be a legitimate reason why a business will fall outside their particular benchmark, such as higher rent figures because they are located in a city centre. Other reasons for reporting outside the industry benchmark range could be unreported income or the use of cash sales to make cash purchases and failing to report either transaction.

In this way the Tax Office hopes to make it harder for dishonest operators to get away with not reporting all income and make it fairer for honest businesses. 

There are two types of industry benchmarks that have been developed by the ATO – input and performance. Input benchmarks have been developed in consultation with trade associations, peak industry bodies and tax practitioners to show an expected range of income for tradespeople based on labour and materials used. These benchmarks are for tradespeople that work directly for household consumers. 

Performance benchmarks are based on information that small businesses report to the Tax Office in income tax returns and BAS’. These benchmarks contain up to five ratios to help businesses to compare and check their business performance. The ratios address the cost of goods to turnover; labour to turnover; rent to turnover; GST-free sales to turnover; and motor vehicle expenses to turnover.

Various sectors within the following industries can now refer to these tax office benchmarks:

  • Construction
  • Retail trade
  • Accommodation and food service
  • Transport, postal and warehousing
  • Rental, hiring and real estate services
  • Support and personal services, such as hairdressing & beauty services, pest control and laundry & dry-cleaning services.

Small businesses can use the tables provided on the ATO website to calculate how their business compares to their industry benchmark. However, these benchmarks are not definitive and businesses should consider their own personal circumstances when using them to assess their performance.

The Tax Office uses these benchmarks once tax returns are lodged to identify any compliance issues and any businesses whose amounts vary substantially from their industry averages.

Recently the ATO has released details of their intervention strategies where it believes that a small business may be avoiding their tax obligations. These strategies include:

  • issuing letters advising businesses when they are outside their benchmark;
  • 5800 telephone reviews to assess the risk that not all income is being reported;
  • 300 record keeping reviews with businesses identified by the telephone reviews to improve business’ record keeping practices;
  • at least 50 record keeping audits for businesses that showed unsatisfactory record keeping processes during the review process; and
  • at least 275 audits for businesses identified as high risk, which will include examination of records, observation of business practice and analysis of the taxpayer’s personal expenditure.

 


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