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Understanding and using small business benchmarks

Overview

In order to assist the ATO to track business profits, small business benchmarks have been designed to help business meet their tax obligations by enabling the ATO and businesses to track their performance against the rest of their industry

The ATO have benchmarked the key business ratios for high medium and low turnover businesses for more than 100 industries. By comparing your business to the benchmarks for your industry the ATO can assess your business’s performance.

The ATO also uses benchmarks to identify businesses that may be avoiding their tax obligations by not reporting some or all of their income.

By developing benchmarks for small businesses the ATO are making it clear about what they expect from businesses in an industry. This makes it harder for dishonest operators to get away with not reporting cash income – and makes it fairer for everyone else.

Businesses who are reporting outside these benchmarks may attract the attention of the ATO. There may be good reasons for this disparity, but taxpayers who find they are outside the benchmarks for their industry should determine whether they have correctly recorded and reported their income and deductions.

They ATO have developed two types of benchmarks for the small business (micro-market) sector:

  • Performance Benchmarks, which are based on information small businesses report to the ATO on income tax returns and business activity statements
  • Input Benchmarks which are based on information industry participants and trade associations provide to them.

The small business benchmarks are grouped into categories based on their related business industries. These codes are used by taxpayers to describe the activity from which their business derived the highest gross income or incurred the smallest loss.

Differing Business Categories include:


Benchmark types

Benchmarks provide a snapshot of what, on average, is happening in businesses in a particular industry.

There are two types of benchmarks for small business:

  • performance benchmarks, which are based on information small businesses report to the ATO on their income tax returns and business activity statements
  • input benchmarks, which are based on information industry participants and trade associations provide to them.

The ATO are continuing to develop more benchmarks, so if your industry is not listed yet please check again in the future.

Performance benchmarks

Performance benchmarks assist you to:

  • compare your business performance with others in your industry
  • check your compliance with tax obligations, particularly in relation to cash income.

Performance benchmarks contain up to five ratios to help you compare and check your own business performance. The ratios are:

  • the cost of goods sold to turnover
  • labour to turnover
  • rent to turnover
  • GST-free sales to turnover.
  • Motor vehicle expenses to turnover.

The ATO provide a ratio range for your industry to help you work out:

  • whether you fall within or outside the average for your industry
  • why your business may differ.

If you operate a mixed business you may find more than one benchmark helpful.

Input benchmarks

Input benchmarks may assist you to:

  • compare your records to the industry average
  • check that your records accurately reflect your income
  • estimate your turnover based on the labour and materials used.

Input benchmarks show an expected range of income for tradespeople based on the labour and materials they use. They apply to tradespeople who deal directly with consumers.

How benchmarks can help you

Benchmarks are a useful tool to help you:

  • compare your business with others in your industry to assess your performance
  • check that you are meeting your tax obligations, including recording all cash transactions
  • work out whether you need to adjust your business and record-keeping practices
  • assess whether the ATO are likely to select your business for an audit or review.

When your business is outside a benchmark

The benchmark key business ratios for high, medium and low turnover businesses are an average of your industry’s information. So, in many cases, there is a good reason why a business falls outside the benchmark – for example, the rent may be higher because the business is located in a city centre.

If your business is outside the benchmark, we recommend you:

  • review your record keeping
  • consider how your business operates
  • check if you have made a mistake on your tax return or not reported all your income in your tax returns or activity statements – if so
    • correct the information, and
    • let the ATO know by making a voluntary disclosure.

If your business falls outside the benchmark, the ATO may ask you to explain why.

We may be able to advise you on business and record keeping practices. It is important to review the benchmarks that relate to your business regularly.

How the ATO uses Benchmarks

Benchmark information shows that most small businesses report income and expenses within certain ranges. Where businesses do not report within these ranges there are often good reasons. However it may also be an indication that they are not recording and paying tax on all of their transactions, especially cash transactions.

Comparing a business against benchmarks for its industry is one way the ATO identify businesses for audit or review.

When the ATO select businesses for audit or review, they look at their actual business records to assess whether the business has reported all their cash income. They may also use benchmarks to:

  • work out if the business’s records are accurate and complete
  • assist in calculating assessments to determine income tax or GST obligations where the business has provided insufficient or unreliable information.

Being within the benchmarks for your industry does not mean you will avoid an audit or review as the ATO may identify you by one or more of our other risk indicators.

Other indicators the ATO use to identify a business for audit or review include:

  • information from external sources suggesting inconsistencies with income declared, for example from:
    • other government agencies
    • financial institutions
    • trade suppliers
  • tax returns and activity statements – to identify taxpayers who appear to be spending beyond their means and therefore may not be reporting all their income
  • allegations of tax evasion sourced from the community.

How to correct a mistake

If after comparing your business performance against the benchmarks, you find that you have made a mistake in your tax affairs we recommend you make a voluntary disclosure.

If you make a voluntary disclosure the ATO may reduce penalties and interest, particularly if you make the voluntary disclosure before they tell you they plan to audit you.


What you will need

To use the performance benchmarks to assess your business performance, you will need your income tax return for the relevant year.

To use the input benchmarks to assess your business performance, you will need to find the benchmarks specific to your business, and you may need some or all of the following:

  • tax invoices for sales and purchases
  • your quote book
  • your work diary
  • statements of purchases from your suppliers
  • bank statements
  • your cheque book
  • a calculator.

Categories

Benchmarks are grouped into categories based on business industry codes. These are the industries the ATO has listed:


Building and construction trade services

Education, training, recreation and support services

Food services

Health care and personal services

Manufacturing

Professional, scientific and technical services

Retail trade

Transport, postal and warehousing

Other services







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