ATO Small Business Benchmarks: What They Mean for Your Business
The ATO has recently updated its small business benchmarks to include data from the 2021–22 income year. While these benchmarks are promoted as a tool to help small businesses compare their performance with others in the same industry, they are also used by the ATO as part of its compliance and risk assessment processes.
According to the ATO, small business benchmarks are used alongside other risk indicators to identify businesses that may warrant further review or compliance activity.
How the ATO Uses Small Business Benchmarks
The ATO’s initial step is to compare information reported in lodged business tax returns against the benchmark ratios for the relevant industry.
Industry Classification
The industry a business is assessed against is determined by:
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The industry codes selected
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The description of the main business activity on the tax return
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The business trading name
The benchmarks are grouped into nine broad industry 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 broad category is further divided into detailed subcategories. For example, within accommodation and food, separate benchmarks exist for bakeries, chicken shops, coffee shops, kebab shops and pubs.
The Five ATO Benchmark Ratios
The ATO calculates five benchmark ratios, all expressed as a percentage of turnover, excluding GST.
Benchmark Ratios Used by the ATO
The five benchmark ratios are:
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Total expenses as a percentage of turnover
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Cost of sales as a percentage of turnover
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Labour expenses as a percentage of turnover
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Rent expenses as a percentage of turnover
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Motor vehicle expenses as a percentage of turnover
How Turnover Is Calculated
To calculate turnover, the ATO generally uses:
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The amount reported at the “Other sales of goods and services” label in the tax return, or
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If that figure is not present, the amount reported at the “Total business income” label
Comparing Your Business to the Benchmarks
Small businesses can compare their own ratios to the ATO benchmarks by:
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Using the Business performance check tool available through the ATO app, or
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Manually calculating the ratios and comparing them with the benchmark ranges for their industry
When Ratios Fall Within the Benchmark Range
If a business’s ratios fall within the benchmark ranges for its industry, the ATO states that no further action is generally required.
When Ratios Fall Outside the Benchmark Range
Where ratios fall outside the benchmark ranges, businesses are encouraged to review their operations and identify factors that may explain the variance or highlight areas for improvement.
Understanding High and Low Benchmark Results
Ratios Above the Benchmark Range
Businesses reporting ratios above the benchmark range typically have higher expenses relative to sales. This may be due to factors such as:
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Higher wastage
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Lower sales volume
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Lower profit margins
In some cases, it may also indicate more concerning issues, such as:
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Sales not being recorded correctly
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Weak internal cash controls
Ratios Below the Benchmark Range
Businesses with ratios below the benchmark range generally raise fewer concerns, as lower expenses relative to sales may indicate:
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Higher profit margins
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Greater efficiency
However, it may also suggest that some expenses are not being recorded correctly.
Applying Benchmarks to Your Business
Not all benchmark ratios are relevant to every business. It is the responsibility of those in control of the business to:
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Determine which benchmarks apply
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Ensure the business falls within appropriate ranges where possible
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Investigate and understand any significant variances
Benchmarks Are Not Used in Isolation
The ATO emphasises that benchmarks are never used on their own when deciding whether to take compliance action. Instead, they form part of a broader assessment that includes a range of additional indicators and supporting information.
Key Takeaway for Small Businesses
Small business benchmarks are a useful self-assessment tool but also serve as a compliance risk indicator for the ATO. Regularly reviewing your business performance against the relevant benchmarks, maintaining accurate records and understanding the reasons behind any variances can help reduce compliance risks and support better business decision-making.
Speak to one of our accountants if you have any questions about the changes in tax for 2023.
