The Tax Office’s small business benchmarks provide a snapshot of what it sees is happening in an average business operating in a particular industry by using financial ratios. The benchmarks are developed from information provided by businesses on their tax returns and activity statements including the disclosure items. As such, these benchmarks can be a useful tool to help you assess your business’s performance against similar businesses.
Critically however the Tax Office primarily uses benchmarks to identify businesses that may be avoiding their tax obligations, for example, by not fully declaring their total cash income. You could say that by developing benchmarks for small businesses, the Tax Office is drawing a line in the sand, and making it clear what it expects from businesses in their relevant industry, just make sure you have your tax planning strategies to avoid any future problems.
The small business benchmarks have just been updated with the latest available full-year information from data obtained from 2013 business tax returns and activity statements. There are more than 100 industries benchmarked, and you can view each via the A-Z list maintained on this Tax Office web page. The list and benchmarks are being regularly updated as the Tax Office continues to crunch the numbers.
The benchmarks fall within two categories:
1. Performance benchmarks
Performance benchmarks contain several financial ratios to help compare and check your own business performance. The ratios for a particular industry may include:
- cost of goods sold to turnover
- cost of materials to turnover
- labour to turnover
- rent to turnover
- motor vehicle expenses to turnover.
The Tax Office says that businesses reporting outside their benchmarks could attract its attention for a review or audit. Even though there may be good reasons for any disparity, taxpayers who find they are outside the benchmarks for their industry and under ATO scrutiny, should be prepared by checking records and making sure that all your paperwork is in order. If you cannot satisfy the ATO, a default assessment may be issued by the Tax Office requiring a “top up” of tax.
2. Input benchmarks
Input benchmarks show an expected range of income for tradespeople based on the labour and materials they use when undertaking domestic projects. They are developed using information provided by industry participants and trade associations. They can help you to:
- compare your business to your industry’s benchmark range
- check that your records accurately reflect your income
- estimate your turnover based on the labour and materials used to ensure that all income is declared
As many of these benchmarks are calculated based on disclosures from your returns and activity statements, it is important to make sure that you check these with your adviser prior to lodgement.
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