The ATO is watching
The ATO is constantly monitoring the cash economy to ensure small business owners report all their income. One way they do this is through small business benchmarks.
Small business benchmarks are financial ratios developed by the ATO using information provided by businesses on their business activity statements and tax returns. The ATO use these ratios to compare the performance of your business against other similar businesses in your industry. If your business falls outside the benchmarks then you may be flagged for an audit.
The two types of benchmarks that the ATO monitors
Performance benchmarks contain a number of different ratios that help the Tax Office identify businesses that may not be reporting all their income. As a soloist you can also use these ratios to help compare and check the performance of your business against others in your industry.
Input benchmarks apply to tradespeople who work directly with household customers and are responsible for purchasing their own materials. These benchmarks show an expected range of income based on the labour and materials they use. The benchmarks are developed with the help of trade associations. For example, the National Federation of Bricklayers and Masonry Employers Association helps the Tax Office set the input benchmarks for bricklayers.
Input benchmarks not only help the Tax Office monitor the cash economy, but if you’re a tradesperson, they’ll help you set your prices.
How to audit-proof your business
If you’ve been involved in an audit you’ll know the stress and inconvenience it can create. Audits can drag on for months, sometimes years.
Try audit-proofing your business by implementing some of the following checks and procedures.
- The Tax Office will use the business industry code and business activity description from your tax return to help determine your industry benchmark. When you receive your end of year tax from your accountant, check the industry code on your tax return. If the code and the description does not accurately reflect your business, notify your accountant immediately and get it changed.
- Check your performance benchmarks regularly throughout the year. To do this you’ll need up-to-date bookkeeping and accounting software that prints adequate reports. If you find that your benchmarks are falling outside the recommended range, ask yourself why.
- Lastly, your accountant should be checking your benchmarks when they prepare your tax return. If you’re falling outside the suggested range then they should give you guidance on where you might be going wrong. Make a mental note to discuss small business benchmarks with your accountant at every end of year tax appointment.
As you can see, by being vigilant about benchmarks you can audit-proof your business.
What’s been your experience with business benchmarks or audits?