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Tax Office Audit Update: Benchmarking Re-visited Posted on October 9, 2018
With the ATO are aiming to audit all businesses over a 3 year period, it is important to know what areas the ATO may focus on and the tools they may utilise to review your financial and taxation data.
One such tool that the ATO may use is benchmarking. These benchmarks are key financial ratios developed to help small business compare their own performance against similar businesses within an industry.
It is a guide for what is expected within your industry as “normal figures”. These benchmarks are an invaluable tool to the ATO, in particular for industries which are/can be largely cash based.
The ATO maintains benchmarking for over 100 industries, based on various levels of turnover within those industries. Different ratios are more important than others, depending upon the industry you operate within.
For example, if you are in the pub/tavern and bars industry, the main benchmark for this industry is cost of sales to turnover ratio. If your turnover is under $750,000pa, then the expected cost of sales to turnover ratio the ATO would expect to see is 45-55%. If you operate within the carpentry industry, the main benchmark is the total expenses to turnover ratio. With a turnover of between $110,000 and $400,000pa, the total expenses to turnover would be expected to be around 58-74%.
As you can see, it is not just a simple task of reviewing the amount of sales you may have reported. Benchmarking looks at a number of different factors surrounding your income levels.
If your benchmarks fall outside these ATO industry benchmarks, the ATO is more likely to take a closer look at your company financial data. It is an excellent way for the ATO to look at “cash” style industries and determine if there is the possibility of “undeclared income”.
Even if you look beyond the benchmarks as an audit tool of the ATO, they are an excellent way to see how your business is going against others within your industry and to assess what areas you may need to focus your attention towards. You may wish to develop your own benchmarks or KPIs (Key Performance Indicators).