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.