ATO small business tax benchmarks and their impact on your business

Small Business Benchmarks in Australia are key financial ratios developed from information provided by businesses on activity statements and tax returns that allows the comparison of your business performance against similar businesses in your industry.

The Australian Taxation Office (ATO) use the benchmarks to identify possible non-reporting of cash transactions by comparing performance ratios against industry averages.

Small Business Benchmarks have been heavily scrutinised since their adoption in 2010. There are often genuine reasons why a business may be operating outside the industry averages but it may also be an indication that the business is not meeting its tax obligations. The small business benchmarks have several uses in practice by the taxpayer and ATO which include:

To provide guidance to business owners on the typical ranges of certain financial ratios
As a tool by the ATO to select higher risk businesses for the purpose of audit.
In cases where the taxpayer cannot provide sufficient tax records, the benchmarks will be used to issue a default tax assessment.

A recent review was conducted by Ali Noroozi, the Inspector-General of Taxation into the way the ATO uses the benchmarks to target the cash economy. It found that since its inception, almost 6,000 tax payers were wrongly accused and only 24% of all benchmark audit cases had adjustments made. Naroozi recommended that the ATO improve its risk identification and audit processes to exclude more compliant taxpayers earlier in the process, saving them time and additional costs. Business owners with inadequate records complained of the increase in compliance costs related to the audits.

Following the review by the Inspector-General of Taxation, the ATO engaged an external actuary to review the statistical methodology used in producing the small business benchmarks. This has provided further transparency as to how the information has been obtained and is used. The report found that overall, the statistical information adopted by the ATO in the production of the Small Business Benchmarks is sound and robust. It found that the published benchmarks are correctly calculated and published. The small business benchmarks methodology and ratio calculation can be found here.

Benchmark Types

There are two types of benchmarks developed by the ATO:

Performance benchmarks – these provide financial ratios for different industries
Input benchmarks – these show an expected range of income for businesses based on the labour and materials they use.

Examples of theses include:

Cost of sales/turnover
Total expenses/turnover
Rent/turnover

Who does the ATO use this on?

The ATO small business benchmarks have been designed to target small businesses (Turnover < $2 million) that deal predominately with cash. A complete list of the industry benchmarks can be found below but are split in the following categories:

Accommodation and food

Building and construction trade services

Education, training, recreation and support services

Health care and personal services

Manufacturing

Other services

Professional, scientific and technical services.

Retail trade

Transport, postal and warehousing

How can benchmarks help your business?

The ATO regards benchmarks as a useful tool to help taxpayers meet their tax obligations by:

obtaining guidance on what the ATO normally expect to see in business reporting,
comparing their business with others in the industry,
working out if their business needs to adjust its record-keeping practices,
assessing whether their business is at risk of an audit.

What happens if your business falls outside the benchmarks?

If with the help of benchmarks you discover that you have made a mistake in your tax return it is recommended that you contact your tax advisor to make a voluntary disclosure to the ATO. This will reduce penalties and interest to a minimum, particularly if this is done before the ATO contact you. If you are unsure whether or not your business falls within the benchmarks you should contact your tax advisor

If you are operating outside the benchmarks and believe your tax affairs are correct, you just have to make sure you have good records to support your tax return. The best defence for such an audit is always good record keeping but it also makes good business sense to make sure the business is able to use correct financial information to make sure it is running efficiently and maximising its performance. If a business can not substantiate their lodgments they must prove the ATO wrong or else the industry set benchmark may be applied.

Azure Group can help your business set up correct accounting procedures and to make sure your business is operating within the correct benchmark. Speak to one of our tax advisors to make sure your business is optimised to operate within the benchmarks and to minimise your risk of audit.

Below are links to the latest Small Business Benchmarks (issued in November 2013):

ATO small business tax benchmarks and their impact on your business

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ATO small business tax benchmarks and their impact on your business

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