By Gilda Brisotto

For years, businesses have been using benchmarking tools to assist them to assess the performance of their business against others in their industry and now the Tax Office are using these business tools as well.

The Australian Tax Office has developed Business Performance Benchmarks for small businesses in more than 100 industries. Feedback from the Tax Office indicates that around 90% of businesses within these industries are reporting within this benchmark range.

The Tax Office says that the benchmarks were developed as part of an on-going strategy to deal with businesses who may be avoiding their tax obligations by not reporting some or all of their income. These benchmarks provide the Tax Office with guidance on what figures they would normally expect a business in a particular industry to report.

The benchmarks were developed with different turnover ranges to recognise the variations that occur between businesses in different regions and with different business circumstances.

By publishing these benchmarks for small businesses they are making it clear what they expect from businesses in a particular industry. The published benchmarks can include:

• Performance benchmarks (provide financial ratios for different industries)

• Cost of goods sold to turnover
• Cost of materials to turnover
• Labour costs to turnover
• Rent to turnover
• Motor vehicle costs to turnover.

• Input benchmarks (show an expected range of income for tradespeople based on the labour and materials that they use).

Businesses that report outside these benchmark ranges may attract further attention. While the Tax Office have acknowledged that there may be reasons why a business might be reporting outside the ranges it says where the shortfall is significant, further checking will generally be undertaken.

When the Tax Office selects a business for review, they will first contact the business requesting that they review their records to ensure that they have accurately accounted for all their income. They will offer an opportunity to make a voluntary disclosure to correct any mistakes or provide valid reasons as to why they may vary from a benchmark.

A business selected for an audit could be asked to provide source documents including:

• Reports from computer software
• Invoices
• Receipts
• Cash register journals and point of sale system printouts
• Bank statements
• Reconciliations between sales journals and bankings of income
• Detailed descriptions as to how sales prices are calculated
• Complete a personal living expenses questionnaire to assess if they have reported all cash income.

There may be good reasons for a discrepancy between a business’ results and the benchmark but a business which finds it is outside the benchmark range for its industry should also ensure that appropriate records and paperwork are available so that the matter can be cleared quickly.

If you would like further information or direction on industry benchmarks for your business, please contact us.

Source of information: ATO