The ATO’s Use Of Benchmarks For Tax Audits

Don’t be fooled. The ATO’s sole purpose for its’ small business benchmarks is to actively pursue businesses that fall outside of their benchmark statistics to help them identify businesses that may be avoiding their tax obligations by not reporting some or all of their income.

Benchmarks are the key financial ratios that can help you compare your business performance against similar businesses in your industry, and the ATO is regularly reviewing which key performance benchmark ratios will be focussed on.

Some of the key performance benchmark ratios the ATO focuses on include:

• Cost of materials to turnover

• Cost of goods sold to turnover

• Rent to turnover

• Labour to turnover

• Motor vehicle expenses to turnover.

Recently the ATO updated its small business benchmarks information to include two new ‘activity statement’ ratios:

• Non-capital purchases to total sales

• GST free sales to total sales.

BUT NOT ALL BUSINESSES ARE THE SAME – WHAT ABOUT NICHE BUSINESSES OR THOSE WITH UNUSUAL TRADING CONDITIONS?

There is no denying that the ATO should not be bundling up all small businesses within a particular industry code without taking into account businesses that operate in niche areas or have unusual trading conditions, especially when it is only through the matching of data against common industry codes that the ATO builds its benchmark information.

However, this is the only way that the ATO can statistically establish ranges for what can be considered ‘normal’ within a certain industry.

Businesses that operate in a niche area or have very different characteristics to those identified under the same code may place them well outside the normal range, and identify them as a strong candidate for an audit by the ATO.

And in particular, businesses that report income that is significantly below the benchmarks for their industry are highly likely to be subject to an audit by the ATO.

THE ULTIMATE PROTECTION AGAINST A BENCHMARK AUDIT…

During an ATO audit the onus is on the business owner to prove the ATO wrong when they apply the benchmarks against the business. It is only when the records of a business are inadequate and that the business owner is unable to produce records to support their variations from the ATO’s industry benchmarks that the ATO’s benchmarks will be applied.

Good quality and detailed record keeping will ensure that business owners have nothing to fear from the ATO’s benchmarks, and the ATO will also take into account the individual circumstances of a business, based on the records the business keeps, for business owners operating in a niche area or those with unusual trading conditions.