Small business benchmarking and the ATO

20/10/2014

Small business sector is seeing an increase of being audited by the ATO and the selection process is particularly based on small business benchmarking method.

Benchmarks are in fact financial ratios that the ATO compute using the information given via both tax returns and activity statements. Please refer to some examples of ATO benchmarks below:

Example of ATO benchmarks – coffee shop business

Key benchmark ratio Annual turnover range
$65k-$250k $250k-$600k More than $600k
Income tax return
Cost of sales/
turnover
36%-43% 35%-41% 33%-38%
Average cost of sales 39% 38% 35%
Total expenses/
turnover
79%-88% 84%-91% 87%-93%
Average total expenses 83% 88% 90%
Activity statement
Non-capital purchases/
total sales
56%-71% 53%-66% 50%-59%

 

Basically, by using benchmarks, the ATO can compare a business to another business in a similar industry. This helps them spot any irregularities, like when a business’ information seemed different than other similar businesses (e.g. identify a business that may be reporting less income, especially business with high cash transactions)

Should the ATO not get a satisfactory explanation from the taxpayer for irregular information, it can issue assessment notices for income that might be unreported, based on existing benchmarks. With that, it is the taxpayer’s duty to disprove the ATO assessment.

The ATO have currently published benchmarks for businesses in more than 100 industries.

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