The Australian Taxation Office continues to release a range of small business benchmarks to help businesses in meeting their tax obligations. More than 100 benchmarks have now been released. The benchmarks have been developed based on information reported by small businesses on income tax returns and business activity statements and from other sources.
Small businesses should use the benchmarks to compare their performance against industry averages to determine whether or not they are in line with those averages and therefore to reduce the likelihood of an enquiry or audit from the ATO.
The benchmarks provide a snapshot of what, on average, is happening in businesses operating in a particular industry by providing a measure of various business costs in relation to turnover. The ATO uses benchmarks to identify businesses that may be avoiding their tax obligations.
If a business performs outside the normal ranges for its industry, the ATO may see this as an indication that the business is not meeting its tax obligations, particularly in relation to cash transactions. Comparing a business against the benchmarks for its industry is one way the ATO will identify businesses for audits.
Three types of benchmarks
The ATO has developed three types of benchmarks for small businesses:
1. Performance benchmarks – are based on information small businesses report to the ATO on income tax returns and business activity statements. Performance benchmarks contain up to five ratios to help taxpayers compare and check the performance of their business against other businesses in their industry. The ratios are:
- Cost of goods sold to turnover
- Labour to turnover
- Rent to turnover
- GST-free sales to turnover
- Motor vehicle expenses to turnover
2. Input benchmarks – are based on information industry participants and trade associations provide to the ATO. Input benchmarks show an expected range of income for tradespeople based on the labour and materials they use. They apply to taxpayers who work with household (domestic) customers rather than commercial customers.
3. Cash sales – shows the ratio of cash sales to total sales. Benchmarks are published for different turnover ranges and different average sales values. Cash sales benchmarks have been developed using information reported on activity statements for the 2008-09 income year and data provided by banks. The bank data shows the number and value of card sales (credit or debit) made by each business. To calculate the cash sales benchmarks, the total value of card sales is subtracted from total sales reported on activity statements for the same period and then divided by total sales. Total cash sales include all sales by cash, cheque, bank transfer or direct deposit.
The small business benchmarks are grouped into categories based on the business industry codes which are used by taxpayers to describe the activity from which their business derives the highest gross income. Categories include:
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
A Melbourne-based concreter received a tax bill for $115,953 after an audit by the ATO showed he had omitted $142,000 from his tax return. The ATO said the concreter came to its attention because he had been reporting very low levels of income for a number of years. The concreting benchmark helped the ATO to measure the taxpayer’s reported business performance relative to the industry.
During the audit, the concreter said his business was based on smaller suburban work, for which he received very little cash. He said he always issued tax invoices to his customers.
The concreter had declared a taxable income of $18,000 for the year, but had recorded only four concrete
purchases during one of the quarters. In an example of how the ATO uses data from a variety of sources, data it acquired from the concreter’s supplier for that quarter showed 18 concrete purchases some of which were paid for in cash. Further examination by the ATO showed many of his jobs were for cash, they were not recorded in his records, and his customers did not receive tax invoices. In this case, the ATO auditors formed the view that there was significant unreported cash income and expenses.
As they found the taxpayer’s recordkeeping was inadequate, the auditors calculated his income by applying his normal sale price per square metre to his actual purchases of concrete. The audit resulted in tax liabilities of close to $67,000 and additional penalties of nearly $50,000.