ATO’s Small Business Benchmarks
Note: Clients may be aware that there are now in excess of 100 industries that have been ‘benchmarked’ by the ATO, with more on the way.
The benchmarks have been developed by the ATO to provide a guide on the range of figures it would normally expect a small, medium or large business in a particular industry to report, including the expected ratio of income vs. expenses.
Basically, the benchmarks are all about catching businesses that are in the cash economy and ‘skimming’ cash takings, paying ‘cash-in-hand’ wages, operating off-the-books and not recording or reporting all sales and purchases.
But in a recent document entitled ‘Record keeping and cash transactions’, the ATO points out that benchmarks are really all about record keeping.
What this means is that, if your business doesn’t have the records to back up its reported income and expenses, and if it doesn’t fit the benchmark profile, the ATO will amend the tax assessment to match the benchmark.
How do benchmarks work in practice?
Take, for example, a pizza takeaway shop. The ATO’s benchmarks say that, for an average size pizza shop turning over between $150,000 and $600,000, its average cost of sales should be 40%.
So if a pizza shop was returning gross sales of $200,000 with cost of sales of $120,000 (60%)rather than the expected 40%, the ATO might be expected to contact the business and advise that it was outside the benchmarks.
If the business did not have the records to prove why it was outside the benchmarks, the ATO could be expected to apply them (e.g., by adjusting gross sales upwards to $300,000, so that the business’s cost of sales of $120,000 would match the benchmark of 40% of sales).
Note: Since benchmarking is all about either fitting within the benchmarks or having the record keeping systems to prove why your business sits outside the average, please call our office if you would like us to review your systems or discuss how benchmarking might apply to you.