Taxpayer slammed by ‘benchmarking’ audit
Editor: In a recent case, the AAT has affirmed the ATO’s ability to use industry benchmarks to amend taxpayers’ returns where their record keeping is found to be insufficient and lacking.
Facts of the Case
The taxpayer carried on a florist business in a suburb of Perth and her 2008 income tax return reported a cost of goods sold (COGS) of $259,982 and “Total business income” of $313,971.
In September 2010, the ATO advised that the COGS for the florist business represented 83% of her reported business income, which was outside the ATO’s COGS industry benchmark percentage range of between 44% and 54%.
In the same letter, the ATO requested that she provide it with evidence that she was correctly recording and reporting her business income for the florist, including various specific records, and an explanation as to why her business was reporting outside the benchmarks for her industry.
The taxpayer provided deposit slips and bank statements for the period, but was only able to supply:
- cash register roll receipts for the period 9 May 2008 to 17 May 2008; and
- a spreadsheet summary of cash register rolls for the period 5 April 2008 to 30 June 2008.
The ATO advised the taxpayer that, as she had forwarded only partial ‘Z summaries’ of her till tapes and failed to reconcile her cash takings, it had applied the COGS benchmarks for the florist industry, increasing the income of the florist business by more than 50%.
This resulted in a shortfall of income tax of $57,389 and a shortfall of GST of $16,745. The ATO also applied penalties of 50% on top of these shortfalls.
The Decision by the AAT
Very little further evidence was provided to the hearing and neither the taxpayer nor any other witnesses appeared.
Based on the evidence before it, the AAT decided that, in the circumstances, it was open to the ATO to apply the COGS small industry benchmark range (of 44% to 54%) for the florist industry and increase the income of the florist business for the 2008 year therefore, increasing the taxpayer’s income tax and GST liabilities in respect of that year.
Editor: The ATO provides specific guidance about the types of records they expect to see from businesses that use cash registers (i.e., they accept that the rolls of tape may be discarded after one month provided that the person has reconciled the “Z-totals” with actual cash sales and bankings for that period).