How the ATO uses small business benchmarks
Recently, the ATO updated its small business benchmarks to include the 2021-22 income year.
While the ATO promotes these benchmarks as an aid for small businesses to enable them to compare expenses and turnover with other similar small businesses in the same industry, it is important to note that these benchmarks are also used by the ATO in conjunction with other information, to identify businesses that may be avoiding their tax obligations.
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The small business benchmarks
According to the ATO, it uses small business benchmarks along with other risk indicators to select businesses for further compliance activities.
The first step consists of comparing information reported in business tax returns lodged with the key performance benchmarks for the industry.
The industry that your business is in depends on the industry codes selected, as well as the description of the main business activity on the tax return and the business trading name.
The benchmarks themselves are divided into 9 broad categories of:
- accommodation and food;
- building and construction trade services;
- education, training, recreation and support services;
- health care and personal services;
- manufacturing;
- professional, scientific and technical services;
- retail trade;
- transport, postal and warehousing; and
- other services.
These categories are split into additional subcategories; for example, bakeries, chicken shops, coffee shops, kebab shops and pubs all have their own separate subcategory under accommodation and food.
There are 5 tax return benchmark ratios calculated by the ATO and all are expressed as a percentage of turnover (excluding GST). These consist of:
- total expense/turnover
- cost of sales/turnover
- labour/turnover
- rent expenses/turnover
- motor vehicle expenses/turnover.
To calculate the turnover, the ATO generally uses the amount reported at the “Other sales of goods and services” label on the tax return or if that figure is not present, the figure from the “total business income” label.
How can small businesses use the benchmarks?
Small businesses can use the Business performance check tool on the ATO app to work out their own business ratios and then compare them to the benchmarks, or manually calculate the various ratios and compare them to the benchmarks.
For businesses with ratios inside the benchmark ranges for their industry, the ATO notes that nothing else needs to be done.
However, businesses with ratios outside the range of industry benchmarks are encouraged to consider if there are any factors that can be improved.
Generally, businesses reporting ratios above the benchmarks indicate that expenses are high relative to sales which may point to a range of factors ranging from the benign (e.g. higher wastage, lower volume of sales, or lower mark-up), to concerning (e.g. sales not recorded properly, failure of internal cash controls, etc).
Businesses reporting ratios below the benchmarks commonly have fewer issues of concern as they have lower expenses relative to sales which may indicate some expenses not being recorded, having a higher mark-up or just being more efficient.
Not all benchmark ratios will apply to every business. It is up to the business owners in control to work out which benchmarks are applicable and check if the business is within the appropriate range, as well as to investigate instances where the business is not.
The ATO reminds small businesses that benchmarks are never used in isolation in instances where further action or investigations are initiated; a wide range of other data, information and factors are also considered.
Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.