Everything you need to know about the ATO small business benchmarks

The ATO has announced an expansion of its benchmarking program for small businesses. Why does this matter? The new set of updated financial benchmarks enables their compliance teams to monitor your business performance compared to other, similar businesses.

If your numbers are outside of the benchmark range compared to others in your industry, this may be a flag for the ATO’s auditors to come and visit you. Contrast that with businesses that remain within industry benchmarks, which are generally less likely to attract the ATO’s attention.

The benchmarks cover 100 industries and over 2 million small businesses around the country. The industries include:

• Accommodation and food
• Building and construction trade services
• Education, training, recreation and support services
• Health care and personal services
• Manufacturing
• Other services
• Professional, scientific and technical services
• Retail trade
• Transport, postal and warehousing.

Performance benchmarks

Performance benchmarks are financial ranges for each industry. They help the ATO to work out how your business compares to other businesses and decide if you need to make any changes.

Performance benchmarks include tax return benchmark ranges from information provided by businesses on their tax returns.

Tax return benchmark ranges include:

• cost of sales to turnover (excluding labour)
• total expenses to turnover
• labour to turnover
• rent to turnover
• motor vehicle expenses to turnover.

In addition, there is a “key” benchmark range whereby the ATO compares a particular business’s performance to others in the same or a similar industry. The ATO uses this to determine how much tax a business should have paid when there are insufficient or no records available. This is the most accurate when predicting business turnover.

For example, a supermarket operator was selected for ATO audit due to several issues identified through the ATO’s risk modelling. When looking at the small business benchmarks, their cost of sales to turnover ratio was 88 per cent. This was high compared to the key benchmark range of 71 per cent to 77 per cent in their industry. During the audit, ATO officers found the business directors had been operating for several years without reconciling their sales and banking records. This resultedunder-reportedrted sales. The business was required to pay over $275,000 in tax and $44,000 in penalties.

What to do next

If your business is reporting inside the benchmark range for your industry (reported on the ATO website), you don’t need to do anything else.

If, on the other hand, your business is reporting above the benchmarks, it means your expenses are high relative to your 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 purchases at lower cost than you, meaning that it could be time to see if you can buy stock or materials at a lower rate
• rent or labour costs are high considering your volume of sales – for example, having too many staff during off-peak times
• mark-up is lower than your competitors – check average sales prices
• sales are not completely recorded – check till tapes or point-of-sale (POS) reports
• internal cash controls may need to be examined – ensure cash taken for expenses is recorded as sales.

If your business is reporting below the benchmarks, it means your expenses are low relative to sales. This may indicate that:

• your expenses are recorded under the wrong label – for example, cost of goods sold under another expense label
• 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.

So, check your business’s performance to the ATO small business benchmarks and, particularly if you are reporting above the benchmarks, speak to your accountant about what this could mean for your business. Because if you aren’t aware of the small business benchmarks, the ATO is and they could be using them to profile your business!

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