For as long as you’ve been submitting tax returns, you’ve no doubt been aware that the ATO have processes in place for making sure the income and expenses you’re reporting are true and correct. But wouldn’t you love to know exactly HOW they go about doing this?
Well, they use a process called benchmarking and they apply specific rules to each business. We’ve lifted the lid on the types of small business benchmarks – performance benchmarks and input benchmarks.
Performance Benchmarks
Performance benchmarks use two separate financial ranges for your specific industry to compare your business to other businesses in the same industry. The two financial ranges used are Income Tax and Activity Statements.
Income Tax Benchmark Ranges – this is pulled from the information you provide in your tax returns, and includes:
- Cost of sales to turnover (excluding labour)
- Total expenses to turnover
- Rent to turnover
- Labour to turnover
- Motor vehicle expenses to turnover
Activity Statement Benchmark Ranges – this is pulled from the information you provide using complete financial year activity statement data, and includes:
- Non-capital purchases to total sales
- GST-free sales to total sales
Meeting the key benchmark range
You should use the key benchmark range when you compare your business’s performance to others in your industry. This is likely to be the most accurate when predicting business turnover.
The key benchmark range is what we use to protect honest businesses. We may also use it to determine how much tax a business should have paid when there are insufficient or no records available.
Input Benchmarks
Input benchmarks show an expected range of income for tradespeople based on the labour and materials they use to undertake domestic projects.
They are developed using information provided to us by industry participants and trade associations.
Input benchmarks may help you to:
- Find your industry’s benchmark range
- Estimate your turnover based on labour and materials used
- Ensure your records accurately reflect your income.
What if I’m outside the benchmark?
Your benchmark might be above or below the range for your business turnover in your industry. There could be a number of reasons why this has happened, including:
- You are only starting up or winding down your business
- Higher costs or lower selling prices than your competitors
- Incorrect entries on your tax return, for example salary and wages to directors or associates.
When we see a business significantly outside the key benchmark range for their industry, it doesn’t necessarily mean you have done anything wrong. But it does indicate something is unusual and may prompt us to contact you for further information.
What does it mean if my business is reporting above a benchmark range?
If your business is reporting above the benchmarks, it means your expenses are high relative to sales. This may indicate that your:
- Wastage is higher – research best practice for your industry
- Goods taken for personal use have been counted as business stock
- Competitors may be able to source inputs at lower cost than you – it might be time to see if you can buy stock or materials at a lower rate
- Volume of sales is too low (for rent and possibly labour) – for example too many staff during off peak times
- Mark-up is lower than your competitors – check average sales prices
- You haven’t recorded all your sales – check till tapes or point-of-sale (POS) reports
- Internal cash controls may need to be examined – ensure cash taken for expenses are recorded as sales.
What does it mean if my business is reporting below a benchmark range?
If your business is reporting below the benchmarks, it means your expenses are low relative to sales.
This may indicate that:
- your expenses may be recorded under the wrong label – you may have incorrectly classified cost of goods sold expenses under another expense account
- some of your expenses may not have been recorded – for example, salary, wages or cash wages
- your mark-up is higher than your competitors
- you are more efficient, for example you have less wastage.
What you need to do
Making sure you report all income and expenses on your reporting software will ensure you don’t fall foul of the ATO. Their systems are becoming smarter and better at detecting businesses that are not declaring all income and expenses.
You can compare your business against the ATO benchmark rules at
https://www.ato.gov.au/Business/Small-business-benchmarks/Compare-your-business-now/
If you have concerns about your business and how it may be benchmarked against other businesses in your industry, our team of supportive and knowledgeable accountants will be happy to discuss this with you. Please don’t hesitate to reach out for any concerns.