You may often wonder why the ATO decide to review or audit your business. One of the reasons may be that your business has a specific financial item which ‘stands out’ from the remainder of similar businesses in Australia. The ATO have Small Business benchmarks and Industry benchmarks which they use to compare your business to others in the same industry, location and other particular business circumstances. While this data is useful for the ATO, it can also be useful for your business.
Small Business benchmarking is based on a data set of over 1.5 million small businesses in Australia and cover at least 100 industries and are analysed annually. The key information that the ATO derive this data set from is certain business activity labels specified on your income tax return, and before 1 July 2017 from business activity statements (BAS). The most recent benchmarks are based on the 2017/18 financial year.
The ATO use performance and input benchmarks. Performance benchmarks from tax returns are:
- cost of sales to turnover (excluding labour)
- total expenses to turnover
- rent to turnover
- labour to turnover
- motor vehicle expenses to turnover
Obviously turnover is a consistent factor in these ratios and this is one of the key items that the ATO wish to analyse to identify whether they believe you are declaring all your income. There are numerous legitimate situations which will easily change these benchmark ratios, such as a business starting or ceasing, increased expenditure in particular years due to ATO tax incentives etc.
Input benchmarks are generated from information regarding materials and labour provided by trade and industry associations to determine whether tradespeople are showing the expected range of income based on these costs.
While the above is a reason to think the ATO will just use the above to review or audit your business, the information can also be used to determine whether your business is performing above or below industry standards. As part of Hoffman Kelly business advisory work, we will utilise the ATO’s benchmarking data for relevant businesses to analyse whether our client’s business is potentially under or over performing. In addition to ATO data, we leverage proprietary knowledge and professionally available data sets to undertake more up to date and detailed benchmarking analysis’ for clients to assess performance and identify where they are excelling, and areas that may need slight improvement.
In summary, while the ATO collate and analyse all this information for their own purposes to ensure that taxpayers appear to be providing correct information, there can be benefits in knowing how your own business is performing amongst this data. If you wish to know more, please contact us here at Hoffman Kelly.
