Small business benchmarks are financial ratios developed from information provided to the Australian Taxation Office by businesses on their tax returns and activity statements. Benchmarks help compare a business’s performance against similar businesses in a similar industry.
The ATO use benchmarks and other risk indicators to identify businesses that may be avoiding their tax obligations by not reporting some or all of their income. If a business does not have evidence to support their return they may also use the benchmarks to determine income that has not been reported. For each industry they highlight the benchmark that is to be used to predict income or turnover.
Benchmarks are published for businesses with different turnover ranges across more than 100 industries. They are generally published as a range, to recognise the variations that occur between businesses due to factors such as location and the businesses circumstances.
Businesses reporting outside the benchmarks may attract ATO attention. There may be reasons for this difference, such as higher costs or lower selling prices than others in the industry, but it may also be an indication that a business is not recording and paying tax on all its transactions, especially cash transactions.
The ATO use the benchmarks as a risk assessment tool to identify businesses that report significantly below the industry average, for further compliance work or audit activity. They may also be used by the ATO to make audit adjustments where taxpayer’s records are inadequate. The ATO state that records must be kept in such a manner as to enable the person’s liability under the tax law to be readily ascertained. These decisions demonstrate that any dispute regarding the benchmarks, ultimately focuses on the adequacy of the taxpayers records
If you find you are outside the benchmarks for your industry, check that you have correctly recorded and reported income and deductions for your business. To do this you should review your record-keeping practices to ensure they meet the legal requirements.
And as always, contact our office to discuss possible implications and responses to any ATO direction.