Small businesses whose figures sit well outside industry norms have been put on notice, after the Australian Taxation Office (ATO) released its 2023–24 small business benchmarks on 27 March.
The benchmarks cover 100 industries and draw on tax return and activity statement data from more than 2 million small businesses across the country, spanning sectors from accommodation and food to building and construction, retail trade, health care and transport.
Updated annually, the benchmarks set out typical financial ratios, such as cost of sales to turnover and total expenses to turnover, for businesses of similar size in the same industry. The methodology has been independently verified as statistically valid and is consistent with international methods.
The ATO said businesses can use the data as a health check on their own performance, but it also serves a second purpose. Statistical outliers, those reporting ratios outside the benchmark range for their industry and turnover bracket, are flagged as a potential compliance risk.
“If your expenses fall outside the industry benchmark range, it may indicate errors in your tax return, such as underreported income or overclaimed expenses,” the ATO said in announcing the update.
Outside the range
The ATO stressed the benchmarks are never used in isolation, with data matching and community tip-offs also part of its compliance toolkit. However, an outlier result increases the likelihood of further attention.
“While we never use the benchmarks in isolation, small businesses who fall outside the ATO’s benchmarks are more likely to trigger a closer examination from us to identify if they are making mistakes or deliberately doing the wrong thing,” ATO Assistant Commissioner Tony Goding said.
“Businesses that remain within industry benchmarks are generally less likely to attract the ATO’s attention.”
Goding said the benchmarks work like an annual check-up for a business.
“Think of our benchmarks like a routine test you take with your GP each year. These can help small businesses diagnose their strengths or spot the early warning signs,” he explained.
Billions in missing tax
The compliance focus reflects the scale of the problem. According to ATO figures, deliberate shadow economy behaviour accounts for nearly 60% of the gross small business income tax gap, or around $11.2 billion per year in missing tax. Approximately $8.9 billion of that is linked to underreported income and overclaimed deductions.
“It’s all about levelling the playing field for honest businesses who are being undercut by their dishonest competitors that aren’t paying the tax they’re supposed to,” Goding added.
What to do if your business is outside the range
An outlier result does not automatically mean wrongdoing, and the ATO has set out clear steps for businesses that find themselves beyond the range.
The first is to check the figures. The ATO said common errors include misreported income, unrecorded expenses such as cash wages, and business owners incorrectly including their own wages and superannuation in expense calculations, which should be reported separately on the tax return.
The tax office cited the example of a plumber with an annual turnover of $704,500 whose total expenses to turnover ratio came in at 120%, well above the benchmark range of 75% to 86% for his industry. On checking his records, he found he had mistakenly included his own wages and super, and re-entering the corrected figures brought his business back within the range.
If a genuine mistake is found in a lodged return, the ATO advises correcting it as soon as possible. A voluntary disclosure made before the tax office comes knocking can significantly reduce any penalties that might otherwise apply.
If the figures are accurate, the key is documentation. A business can sit legitimately outside the benchmarks for many reasons, including higher local costs, a different business model, a start-up phase or unusual trading conditions. The ATO expects owners to keep records that explain and support the variation, as these will be the first line of defence if the tax office makes contact.
Businesses unsure of their position are encouraged to review their record keeping practices, particularly around cash sales, and to seek advice from a registered tax professional before making any amendments.
How WWA Can Assist
At Walker Wayland Advantage, we can help businesses navigate the complexities of tax compliance and financial performance. Our team can assist you in:
- Interpreting ATO Small Business Benchmarks relevant to your industry.
- Identifying discrepancies and areas for improvement.
- Implementing strategies to enhance efficiency and compliance.
Contact us today to ensure your business aligns with industry benchmarks and you are not at risk of an ATO audit.
