KeyPlay Business Solutions

ATO Business Benchmarking

ATO Audits: Business Benchmarking

Benchmarking is often used to improve performance. In sport, football clubs compare their marks, handballs and kicks with that of other teams.  Benchmarking is also used by the Australian Tax Office (ATO) to select businesses to audit.

The tax office has been collecting information included on tax returns for years. In addition industry and trade associations provide performance information to the ATO. The main benchmarks used by the ATO are cost of goods sold, and wages as a percentage of turnover.

The ATO has benchmark ratios for more than 100 industries. For each size of business a benchmark ratio range is produced that the ATO uses to detect taxpayers who may not be meeting their tax obligations. The benchmark ratios are used in two ways by the ATO:

• Firstly to target businesses that warrant further investigation in some form, and
• Secondly to determine how much a business should be turning over and comparing that to what has been declared.

When the results for a business are outside of the averages it can be selected for further action by the ATO. In some cases this can take the form of a letter to the business owner advising them that a ratio for their business is below the benchmark ratio for their industry.

From our experience the letter warns the taxpayer that "reporting below the benchmark ratio may be an indication that you have not correctly reported all of your cash transactions". The taxpayer is then given a choice. If they are satisfied that they are meeting their tax obligations they don't have to do anything. If, on the other hand they have made an error or omitted income, the taxpayer is urged to complete a form to voluntarily correct the situation.

By voluntarily amending a tax return the taxpayer is advised that they could receive a reduction in the penalties for having lodged an incorrect return. They are also advised that they should take this action before an audit commences as penalties will be higher in these cases.

Just because a business falls outside of the benchmark ratios does not mean they are automatically cheating the tax system. It could be an indication of a business under financial stress or some other reason.

The lesson to learn from this is that it makes sense to regularly compare your business performance ratios with at least the ratios produced by the ATO. For owners concerned about improving the profitability of their business, more detailed ratios should be used. These can be obtained from industry bodies and companies that offer benchmarking services.

By failing to benchmark the performance of your business against at least the ATO ratios you could become embroiled in an ATO compliance program. As your Accountants we will endeavour to advise you if we feel your figures fall outside the % set by the ATO. Often there is a logical reason. Click here to review the ATO benchmarks.

Of even more importance is a business owner becoming aware that their ratios are below industry averages, and then take steps to improve the situation before the business gets into financial difficulty. See our Key Indicators link in our Small Business Hub.

A good book on the topic is Tax for small business, a survival guide, by Max Newnham is available in bookstores.

Email Jamie (jamie@keyplaybs.com.au)  with any questions in relation to ATO Benchmarking.