ATO Updates Small Business Benchmarks for 2022–2023
Recently, the ATO updated its small business benchmarks to include information from the 2022–2023 income year. The ATO promotes these benchmarks as a tool to help small businesses compare their expenses and turnover with other similar businesses in the same industry. However, it’s important to understand that the ATO also uses these benchmarks to identify businesses that may be making mistakes or avoiding their tax obligations.
According to the ATO, small business benchmarks are used alongside other risk indicators to select businesses for further compliance activities.
How the ATO Uses Small Business Benchmarks
The first step in the ATO’s process involves comparing information reported in business tax returns with key performance benchmarks for the relevant industry.
Industry Classification and Benchmark Selection
The industry your business is classified under depends on several factors, including the industry codes selected, the description of the main business activity on the tax return, and the business trading name.
The benchmarks cover more than two million Australian small businesses across 100 industries. These industries are grouped into nine broad categories:
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Accommodation and food
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Building and construction trade services
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Education, training, recreation and support services
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Health care and personal services
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Manufacturing
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Professional, scientific and technical services
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Retail trade
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Transport, postal and warehousing
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Other services
Each category is further broken down into more specific subcategories. For example, within accommodation and food, separate benchmarks exist for bakeries, chicken shops, coffee shops, kebab shops, pubs, and other business types.
ATO Benchmark Ratios Explained
The ATO calculates five benchmark ratios, all expressed as a percentage of turnover excluding GST.
The Five Key Benchmark Ratios
The benchmark ratios are:
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Total expenses to turnover
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Cost of sales to turnover
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Labour expenses to turnover
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Rent expenses to turnover
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Motor vehicle expenses to turnover
How the ATO Calculates Turnover
To calculate turnover, the ATO generally uses the amount reported at the “Other sales of goods and services” label on the tax return. If this figure is not available, the ATO will use the amount shown at the “Total business income” label.
How Small Businesses Can Use the Benchmarks
Small businesses can use the Business performance check tool available on the ATO website and app to calculate their own ratios and compare them to the relevant benchmarks. Alternatively, businesses can manually calculate the ratios and compare them against the published benchmark ranges.
Businesses Within Benchmark Ranges
For businesses with ratios that fall within the benchmark ranges for their industry, the ATO notes that no further action is required.
Businesses Outside Benchmark Ranges
Businesses with ratios outside the benchmark ranges are encouraged to review their results and consider whether there are factors that could be improved.
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Ratios above the benchmarks generally indicate that expenses are high relative to sales. This may be due to benign reasons such as higher wastage, lower sales volumes, or lower mark-ups, but may also point to issues such as unrecorded sales or poor internal cash controls.
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Ratios below the benchmarks often raise fewer concerns, as they suggest lower expenses relative to sales. However, this may still indicate that some expenses are not being recorded, that mark-ups are higher than average, or that the business is simply more efficient than its peers.
Not all benchmark ratios are relevant to every business, and some may be more meaningful than others depending on the nature of the operations.
Responsibility of Business Owners
It is up to the individuals in control of the business to determine which benchmarks are applicable and to ensure the business falls within an appropriate range. Where results fall outside the benchmarks, further investigation should be undertaken to understand why.
The ATO reminds small businesses that benchmarks are never used in isolation when deciding whether to initiate further action or investigations. A broad range of supporting factors is always considered.
Shadow Economy and Compliance Risks
The ATO has highlighted that small businesses deliberately avoiding their tax obligations are operating in the shadow economy. This behaviour places additional pressure on Australians who are meeting their tax obligations.
Deliberate shadow economy behaviour contributes nearly 60% of the gross small business income tax gap, equating to approximately $11.2 billion per year in missing tax. Of this amount, around $8.9 billion is linked to under-reporting of income and over-claiming of deductions.
