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Tax Office Benchmarking: What the tax office looks for when it selects businesses to audit Posted on October 9, 2018
Benchmarking is also used by the Australian Tax Office (ATO) to select businesses to audit. This month we look at some of the things the ATO looks for.
The ATO has been collecting information included on tax returns and business activity statements for years.
In addition, industry and trade associations provide performance information to the ATO. The main benchmarks used by the ATO are cost of goods sold, wages, motor vehicle costs and rent paid as a percentage of turnover.
The ATO has benchmark ratios for more than 100 industries broken down into three sizes. These are small businesses with turnover of between $75,000 and $500,000, medium with turnover of $500,000 to $2,000,000, and large businesses with a turnover of more than $2,000,000.
For each size of business a benchmark ratio range is produced that the ATO uses to detect taxpayers who may not be meeting their tax obligations. The benchmark ratios are used in two ways by the ATO; firstly to target businesses that warrant further investigation in some form, and secondly to determine how much a business should be turning over and comparing that to what has been declared.
When the results for a business are outside the averages, it can be selected for further action by the ATO. In some cases this can take the form of a letter to the business owner advising them that a ratio for their business is below the benchmark ratio for their industry.
The letter warns the taxpayer that “reporting below the benchmark ratio may be an indication that you have not correctly reported all of your cash transactions”. The taxpayer is then given a choice. If they are satisfied that they are meeting their tax obligations they don’t have to do anything. If, on the other hand they have made an error or omitted income, the taxpayer is urged to complete a form to voluntarily correct the situation.
By voluntarily amending a tax return the taxpayer is advised that they could receive a reduction in the penalties for having lodged an incorrect return. They are also advised that they should take this action before an audit commences as penalties will be higher in these cases.
Just because a business falls outside of the benchmark ratios does not mean they are automatically cheating the tax system. It could be an indication of a business under financial stress.
The lesson to learn from this is that, it makes sense to regularly compare your business performance ratios with at least the ratios produced by the ATO.
For owners concerned about improving the profitability of their business, more detailed ratios should be used.
These can be obtained from industry bodies and companies that offer benchmarking services. If you would like to know more about these ratios let us know here by dropping us an email and we can point you in the right direction.