ATO Small Business Benchmarks Explained

Apr 5th, 2019

ATO Benchmarks

The Australian Tax Office (ATO) provides a high-level benchmark tool for business owners to compare their company’s performance to a wider range of similar businesses. There are essentially three purposes behind the ATO Small Business Benchmark Tool. These are:

  1. encourage business owners to perform annual health checks to see if their costs are above or below their peers
  2. enable businesses to assess whether there are any discrepancies that may be flagged for an audit by the ATO, and
  3. to alert the ATO to investigate businesses that fall outside the benchmarking norm.

Financial benchmarking has been a valuable tool for businesses across various industries for decades, as it is an effective way of identifying issues and facilitating sound business decisions. However, although the ATO has access to a large number of records which underpin their benchmark numbers, the benchmarks themselves are limited to only a handful of metrics. These metrics are:

Tax return benchmarks

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

 

Income activity benchmarks

  • non-capital purchases to total sales
  • GST-free sales to total sales.

Due to the small selection of metrics, business owners and advisors who want to assess business performance will need utilise other benchmarking services to conduct a detailed analyses. When assessing performance businesses should review all expenses and investments, Cost Of Goods Sold (COGS), personnel/employee productivity, asset usage, stockturn rate and industry specific performance metrics – just to name a few. The added benefit of other benchmarking services is they will process your data for side-by-side comparisons with like businesses.

Arguably, the core function of the ATO Small Business Benchmark Tool for small businesses is to allow them to assess any discrepancies against the industry standards that may be flagged for an audit by the ATO. To do this, businesses are required to process their own data to determine if they fall outside the industry norm result. If they do, they need to be prepared to explain why this is the case to the ATO.

From the perspective of the ATO, the main purpose of the ATO benchmarks is presumably to alert them that a business may need to be investigated for irregularities.

The ATO states:

When we see a business significantly outside the key benchmark range for their industry, it doesn’t necessarily mean you have done anything wrong. But it does indicate something is unusual and may prompt us to contact you for further information*.

*https://www.ato.gov.au/Business/Small-business-benchmarks/What-it-means-to-be-outside-the-benchmark/

In conclusion, the ATO Benchmark Tool is a useful resource for small businesses particularly in identifying if they might be contacted by the ATO for further information. However, due to the limited scope of metrics available businesses will need to look elsewhere to conduct detailed benchmarking analysis which can be used to build effective growth strategies.

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