TAXATION AUSTRALIAN TAXATION OFFICE SMALL BUSINESS BENCHMARKS CONTENTS Page 1. Australian Taation Office Small Business Benchmarks - Introduction... 2 2. Types Of Benchmarks... 2 3. How The ATO Uses Benchmarks... 3 4. How To Calculate The Ratios For Performance Benchmarks... 3 5. Input Benchmark Guide... 3 6. Business Industry Categories... 4 7. Businesses Within The ATO Benchmark... 5 8. When The Business Is Outside The Benchmark... 6 9. Summary... 7 10. Professional Advice... 7 Page 1
TAXATION AUSTRALIAN TAXATION OFFICE SMALL BUSINESS BENCHMARKS 1. Australian Taation Office Small Business Benchmarks - Introduction The Australian Taation Office (ATO) released the Benchmarking Tables for individual businesses, which was compiled over a period of several years from data received by the ATO including: Business Activity Statements; Income Ta Return; Information gleaned from taation audits; and Information supplied by some industry participation The ATO has stated that these benchmarks provide a snapshot of what, on average, is happening in businesses operating in a particular industry by providing a measure of various business costs in relation to turnover in regional areas and capital cities. These tools have two purposes: To provide tapayers with a useful, independent tool to assess their business performance. To help the ATO and ta agents to identify business that may be avoiding their ta obligations The ATO has advised that businesses that reports outside the benchmarks may attract additional audit and review activities. However, where there is a good reason for the disparity, the tapayer will need to provide proof and reasoning behind this variance. If adequate reasoning is provided, no further activity will occur for that tapayer. 2. Types Of Benchmarks There are two types of benchmarks for the small business sector: Performance benchmarks are based on information small businesses report to the ATO on income ta returns and Business Activity Statements. Small businesses and their advisers can use the benchmarks to compare with other business in the industry. The ATO uses these benchmarks to check compliance with ta obligations, with a focus on relation to cash income. The performance benchmarks can comprise up to five ratios for comparison, based upon a business' turnover: - Cost of goods sold to turnover - Labour to turnover - Rent to turnover - GST free sales to turnover - Motor vehicle epenses to turnover Page 2
Input benchmarks are based on information some industry participants and trade associations provide to the ATO. They allow for the comparison of a business with an industry average. It also allows the ATO to estimate your turnover, based on the labour and materials used. This benchmark shows an epected range of income for trades people, based on the labour and materials they use and focuses directly on trades people who deal directly with consumers. 3. How The ATO Uses Benchmarks The ATO uses software which identifies businesses that report outside certain ranges for benchmarking purposes and specifically focuses on cash transactions. The ATO now use benchmarks to work out if a business maintains accurate and complete records as well as assisting them in calculating assessments to determine Income Ta and Goods and Services Ta (GST) obligations where insufficient or unreliable information is provided. The ATO will also engage the following sources to provide information with regards to a review or audit for benchmarking: Other government agencies Financial institutions Trade suppliers Income Ta Returns and Business Activity Statements Allegations of ta evasion sourced from the community 4. How To Calculate The Ratios For Performance Benchmarks Cost of goods sold to turnover: Labour to Turnover: Rent to Turnover: GST Free sales to Turnover: Motor vehicle epenses to turnover: Costs of Goods Sold 100 Labour Costs 100 Rent 100 GST Free Sales 100 Motor Vehicle Epenses 100 5. Input Benchmark Guide Input benchmarking is only available for certain trades within each industry. The sole focus of the process is to determine how much product and labour is required to perform a service. The ATO will then often contact some, or all, of the suppliers of the small business for copies of invoices and details of amount of product supplied. They will then work backwards to determine the amount of work likely performed and the amount of income that theoretically generated. For eample: Assume we are a small business painter who no longer works in the business but has three full time painting staff, inadequate records and the ATO is conducting a review of this small business. Page 3
The ATO will firstly review all records and, during the interview, obtain all relevant information including: details of all suppliers of product; whether painting is charged on a square metre or hourly basis; and if the majority of work is new work or re-painting work. The ATO will then contact all of the suppliers (as well as any other suppliers within an area) for details of any transactions with the small business painter during a specified period. This will often provide the ATO with details on the amount of litres of paint purchased. The ATO will then use the input benchmark guide, which was created in consultation with Master Painters Australia Ltd, to represent the industry norm. A typical scenario using the painting benchmark: The ATO will assume that 10 12 square metres of area are painted per litre of paint and an average painter is able to apply 8 10 litres of paint per day. They will then estimate that paint costs about 30% of the price charged to the consumer and that the painter will charge between $10 - $22 per square metre or $25 $50 per hour. The ATO will then assume that, if your 3 staff were painting full time, to come up with the following calculation: 3 (staff) 9 (litres) 11 (square metres) $16 = $4,752 (daily income) Paint costs should theoretically be around 30%. $4,752 30% = $1,425 The information are then etrapolated over several months, and compared against your financial records, income ta return and BAS - after adjustments for periods with lack of work, employee holidays and personal leave. Where a variance arises between these calculations and the small business records, the business will need to provide an eplanation to justify the variance otherwise the ATO is able to amend Business Activity Statements and Income Ta Records to increase income ta debts and GST debts in accordance with the varied income amount. 6. Business Industry Categories The ATO has published benchmarks on the following industry types. Within each industry type is a range of trades covered by these small business benchmarks. Each of these is readily available on the ATO website for review. They are too comprehensive to cover in this paper, but include the following: Accommodation and Food Services Building and Construction Trade Services Education, Training, Recreation and Support Services Healthcare and Personal Services Manufacturing Other Services Professional, Scientific and Technical Services Retail Trade Transport, Postal and Warehouses For further information, visit the Australian Taation Office website at http://www.ato.gov.au/businesses/pathway.asp?pc=001/003/102. Page 4
7. Businesses Within The ATO Benchmark The ATO has benchmarks for a wide range of business types as listed below. These are issued in 2012 unless stated otherwise: Alarm Installation Services Fire and Security Electrical and Electronic Product Retail Newsagent Architectural Services Electrical Services Painting Services Automotive Electrical Services Bakeries and Hot Bread Shops Entertainment and Media Retail Fence Construction Panel Beating and Smash Repairs Pest Control Services Barber and Men s Hairdressing Beauty Services Fish and Chips Shops Fish and Seafood Retail Fresh Pets and Pet Supplies Retail Pharmacy Block Laying Services Floor Covering Retail Physiotherapy Services Book Retail Florists Picture Framing Retail Bricklaying Services Footwear Retail Pizza Shops Takeaway Building and other industrial Fresh Motor Vehicle Parts and Batteries Retail Plastering and Ceiling Services Dental Specialists Fruit and Vegetable Retail Plumbing Services Cabinetmakers Fuel Retail Printing Carpentry Services Furniture Removalists Printing Support Services Carpet Laying Services Furniture Retail Pubs, Taverns and Bars Catering Services Garden Supplies Retail Restaurants Cement Rendering Chicken Shops Child Care Services Gift Stores Glazing Services Grocery Retail and Convenient Stores Road Freight Transport Services Roofing Services Including Roof Tinting, Guttering and Metal Roofing Sports and Physical Recreation Instruction Cleaning Services Cleaning Services Carpet, Rug and Furniture Upholstery Health and Fitness Centres Health Food Retail Sports, Camping and Fishing Retail Stationery Goods Retail Clothing Retail Homewares Retail Takeaway Food Services Computer Retailing Ice Cream Retail Tattooing Services Page 5
Concreting Services Kebab Shops Tai Drivers and Operators Confectionery Retail Landscape Construction Tiling Services Floor and Wall Courier Services Laundry and Dry Cleaning Services Timber Floor Sanding Craft Shops Lawn Mower Retail Tobacco Retail Delicatessen Lawn Mowing and Garden Services Towing Services Delivery Services Machinery and Equipment Repairs and Maintenance Toy and Game Retail Dental Surgeons Manchester and Other Tetile Goods Retail Discount and Variety Stores Meat and Poultry Retail Tyre Retail Tutoring and Coaching Domestic Appliance Repairs and Maintenance Driving Schools and Instructors Motor Vehicle Retail New and Used Musical Instruments Retail Veterinary Services Video and Other Electronic Media Rental and Hiring The following business types are listed more than once due to alphabetical arrangement for searching purposes: Air-conditioning, Refrigeration and Heating Services Bottle Shops and Liquor Retail Café Shops and Patisseries Chiropractic and Osteopathic Services Watch and Jewellery Retail For further information, visit the Australian Taation Office website at http://www.ato.gov.au/businesses/pathway.asp?pc=001/003/102. 8. When The Business Is Outside The Benchmark When your business is outside a benchmark, you must consider the fact that these benchmarks are averages. However, it would be prudent to conduct the following as stressed by the ATO: Review your record keeping. Consider how your business operates in regards to pricing and quality of production. Review your financial records and income ta return to ensure all information are reported correctly and at the correct labels in the income ta return. If an error is found: Correct the information; Then make a voluntary disclosure to the ATO. Of course, some businesses will fall outside the benchmarks. In this case, the recommendation is that the business is able to provide reasoning in regards to why it falls outside the benchmark and keep a record of this reasoning in the situation of an ATO review or audit. The ATO has already utilized these tools to prosecute tapayers and have successfully won the Page 6
case against a Melbourne-based concreter who ended up with a ta bill of $115,953 after an audit revealed he omitted $142,000 from his ta return. The tapayer came to the ATO s attention because he had been reporting very low levels of income over a period of years. However, further investigation with suppliers revealed that they had large purchases of concrete for the year that was not recorded in the books of accounts. Using the benchmark concreting tables, they were able to determine the approimate level of income the tapayer deemed to have earned. 9. Summary Ultimately, these are analytical tools to assist the ATO in their attempts to locate businesses, which operate outside the legal parameters within the Australian Taation System. They are specifically focusing on cash transaction and those businesses that do not declare all their income and reduce the integrity of the taation system. 10. Professional Advice If you have any questions relative to the comments in this paper, please contact us. If you would like us to conduct a benchmark review (using the Australian Taation Office benchmarks) of your business, please contact us. Page 7
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