ATO Small Business Benchmarks
Are you at risk of being audited by the Australian Tax Office (ATO)? Do you know the ATO compares your trading to other businesses in your industry (using small business benchmarks) to help them decide what tax returns to audit?
This article explains:
How the Australian Taxation Office (ATO) compares your trading to other businesses
What they do with this information
Why you might be failing the tests, even if you aren’t doing anything wrong
How to check your figures
Let’s look at an example:
Say you run an electrical contracting business with a turnover of $800,000. You have some staff, a few vehicles and all the normal business expenses.
The ATO have collected data about businesses similar to yours and have developed a benchmark for electrical contractors. A benchmark is simply an average of what a business in this industry’s expenses usually look like.
The benchmark says that a company like yours usually has motor vehicle expenses between 2-4% of turnover, so in your case, between $16,000 - $32,000.
When you lodge your tax return with the ATO, you declare the industry you trade in, along with specific expenses like, for example, motor vehicle expenses. If you reported expenses of $40,000 for Motor Vehicle Expenses, this is flagged as outside the normal ranges.
How does the ATO use this information?
In short - it helps them decide who to audit. The ATO uses this data, in combination with other data as part of their risk modelling to identify clients who may not have accurate data on their returns. The next step is commonly an audit.
One or more of your benchmarks failing consistently can mean:
You are not declaring all of your income
Private expenses are being claimed as deductions through your businesses (spouse vehicles, private rent etc)
Why you might be failing the tests for no reason:
As with everything in tax, the devil is in the details. Sometimes small mistakes can mean that you fail the benchmarks, even though you are trading honestly. Here are some common mistakes
Your industry code might be wrong! The ATO use the industry code from your tax return to determine what industry you trade in. If you’re a plumber and the code on your tax return says your a bricklayer, you’re probably failing your benchmarks for no reason.
Your vehicle expenses may be declared incorrectly. Perhaps your tax agent has included depreciation and interest with your vehicle expenses (a common mistake). These expenses can often double your motor vehicle expense item which would most certainly mean you fail the benchmark for no reason.
How to check your figures?
The ATO provides detailed instructions at this link (https://www.ato.gov.au/Business/Small-business-benchmarks/Compare-your-business-now/How-to-compare-your-business-performance-manually/) on how to calculate your benchmarks and it’s certainly something you can do manually yourself. If you’d like some help, please get in touch with us.
How do we make this Easy to Manage?
Audit risk management is important to us and our clients. For this reason, we track these benchmarks for our clients each quarter when we prepare a business activity statement.
Each quarter our clients receive a report with their financial statements so they can see quickly and easily if they are trading within normal ranges.
It also gives us the opportunity to address any issues before tax returns are lodged. We often find it’s poor record keeping with is the issue - not actual trading results.