Many small business owners may not be aware of a tool used by the Australian Taxation Office (ATO) known as benchmarking.
Benchmarking involves developing financial ratios from historical tax return information. The ratios can be used by businesses and the ATO to compare a business’ performance to the rest of their industry.
If a business is reporting amounts above a benchmark for their industry, then the business could warrant closer inspection by the ATO.
ATO Survey on benchmarking
The ATO has recently reported that it completed surveys in relation to benchmarking, which showed that:
- 89% of tax agents were aware of benchmarks;
- 66% of tax agents refer the benchmarks to their clients;
- 76% of tax agents refer to the benchmarks as part of their business practice.
- 90% of businesses in the benchmarked industry fall within a benchmark ratio.
- 76,000 businesses nationally reported income that is significantly below other businesses in their industry.
Benchmarking when completing your business tax returns
When your accountant is completing your business’ tax return, it is important that you discuss the ATO industry benchmarks to ensure:
- That your business is accurately reporting amounts in their tax returns.
- That if your business is reporting amounts outside the benchmarks, you and your accountant can work together to identify the reason why your business is reporting amounts outside the benchmarks.
- That the risk of your business being audited by the ATO is reduced.
Using benchmarks when buying a business
Benchmarks can also assist in relation to the purchase of a business as:
- They can be used to ensure that the amounts reported by a business are in line with industry benchmarks.
- They can assist in determining whether there are unreported or cash transactions in the business.
If you have any questions in relation to benchmarking or how benchmarks can be used when buying a business and conducting due diligence, please do not hesitate to contact me.
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