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:
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:
Examples of theses include:
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:
Building and construction trade services
Education, training, recreation and support services
Health care and personal services
Professional, scientific and technical services.
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:
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):
This article is intended to provide general information only, and is not to be regarded as legal or financial advice. The content is based on current facts, circumstances, and assumptions, and its accuracy may be affected by changes in laws, regulations, or market conditions. Accordingly, neither Azure Group Pty Ltd nor any member or employee of Azure Group or associated entities, undertakes responsibility arising in any way whatsoever to any persons in respect of this alert or any error or omissions herein, arising through negligence or otherwise howsoever caused. Readers are advised to consult with qualified professionals for advice specific to their situation before taking any action.