Recently, the ATO updated its small business benchmarks to include information from the 2022–2023 income year. The ATO promotes these benchmarks as an aid for small businesses to enable them to compare expenses and turnover with other similar small businesses in the same industry – although, it’s important to note that the ATO also uses the benchmarks to identify businesses that may be making mistakes or avoiding their tax obligations. According to the ATO, it uses small business benchmarks along with other risk indicators to select businesses for further compliance activities.
The first step consists of comparing information reported in business tax returns lodged with the key performance benchmarks for the industry. The industry that your business is in depends on the industry codes selected, as well as the description of the main business activity on the tax return and the business trading name. The benchmarks themselves cover over two million Australian small businesses in 100 industries, and are divided into nine broad categories: accommodation and food; building and construction trade services; education, training, recreation and support services; health care and personal services; manufacturing; professional, scientific and technical services; retail trade; transport, postal and warehousing; and other services. These categories split into additional subcategories; for example, bakeries, chicken shops, coffee shops, kebab shops and pubs all have their own separate subcategory under accommodation and food.
The five tax return benchmark ratios calculated by the ATO are all expressed as a percentage of turnover (excluding GST). These consist of total expense/turnover, cost of sales/turnover, labour/turnover, rent expenses/turnover, and motor vehicle expenses/turnover. To calculate the turnover, the ATO generally uses the amount reported at the “Other sales of goods and services” label on the tax return or, if that figure isn’t present, the figure from the “Total business income” label.
Small businesses can use the Business performance check tool on the ATO website and app to work out their own personal ratios and then compare them to the benchmarks, or manually calculate the various ratios and compare to the benchmarks. For businesses with ratios inside the benchmark ranges for their industry, the ATO notes that nothing else needs to be done. However, businesses with ratios outside of benchmarks are encouraged to look to see if there are any factors that can be improved. Generally, businesses reporting ratios above the benchmarks indicate that expenses are high relative to sales which may point to a range of factors ranging from the benign (eg higher wastage, lower volume of sales, or lower mark-up), to concerning (eg sales not recorded properly, failure of internal cash controls, etc). Businesses reporting ratios below the benchmarks commonly have fewer issues of concern as they have lower expenses relative to sales which may indicate some expenses not being recorded, having a higher mark-up or just being more efficient. Not all benchmark ratios will apply to every business.
It’s up to the individuals in control to work out which benchmarks are applicable and check that the business is within the appropriate range, as well as investigate instances where it is not. The ATO reminds small businesses that benchmarks are never used in isolation in instances where further action of investigations are initiated – a wide range of other supporting factors are also considered. However, the ATO notes that small businesses avoiding their tax obligations are participating in the shadow economy, which puts pressure on Australians who are doing the right thing. Deliberate shadow economy behaviours contribute nearly 60% of the gross small business income tax gap, or around $11.2 billion per annum in missing tax. Approximately $8.9 billion of this is associated with under-reporting of income and over-claiming of deductions.
