ATO Benchmarks – How average is your small business?

The Australian Taxation Office (ATO) has now compiled small business benchmarks across more than 100 industries. The benchmarks are one of the tools used to select businesses operating in the cash economy, for review or audit.

Benchmarks are key financial ratios including:

cost of sales to turnover;
total expenses to turnover;
rent to turnover;
labour to turnover; and
motor vehicle expenses to turnover.

The ATO compares the information your business reports in its income tax return and Business Activity Statements with the relevant industry benchmarks to establish if you are reporting outside of the benchmark range. If you are then you become a likely ATO audit target.

If you are selected for a benchmark audit you will be contacted directly by an ATO officer, regardless of whether you are a client of a tax agent or not. The ATO will contact your tax agent after they have contacted you. In some cases the audit may already have commenced before your tax agent is contacted.

As a tax agent we have many concerns about the way ATO personnel use the benchmarks and their approach to audits and reviews.

The industry benchmarks compiled by the ATO are up to date as at 30 June 2009. Given the state of the economy over the last two years 2009 benchmark figures are unlikely to be an appropriate guide to the performance of your small business in 2011.

Furthermore, the industry benchmark figures are industry averages only. There are relevant reasons why your small business is not average including:

the age or maturity of the business;
its location (capital city or regional town);
multi focal operating several businesses;
the description of your business and the industry code reported to the ATO;
owner operated or under management; or
disruptions including flood, fire and theft (or light rail construction).

Should you be notified by the ATO of a benchmark review or audit our advice is to contact your accountant immediately. Our firm has had some success in having the ATO withdraw their audit notification after providing them with an explanation as to why our clients fall outside the industry average.

In a recent example, a client who had owned a country hotel was informed that he had been selected for a benchmark audit. This was done by way of a formal written ATO notification titled “Confirmation of Audit”.

The criteria for selection was that the cost of goods sold to total sales ratio was significantly outside the industry benchmark for the hotel industry, an indication of cash sales not being reported.

We were able to convince the ATO that our client was not average as the hotel was located in a small country town in a sparsely populated region so that any comparison with industry benchmark figures could not possibly be an appropriate measure of tax compliance. Furthermore, our client had sold the hotel halfway through the income year with stock being sold at cost.

After our explanation the ATO did not proceed with the audit with the result that our client was not subjected to a full audit and its associated costs. Our client was pleased and considered the outcome “a better than average result”.

For more information please contact Baker Affleck Moffrey Chartered Accountants on (07) 5538 3088 or click here and we will contact you.