More Tax Office audits with New Small Business Benchmarks

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The Tax Office has released a whole host of "Small business benchmarks" in October – 38 in all. The ATO says they provide a snapshot of what, on average, is happening in businesses operating in a particular industry by comparing various business costs to sales.

For example, depending on the size of the business, they compare costs, such as labour, cost of goods sold and rent, to sales.

Where a business's costs as a percentage of sales fall outside the benchmarks, it may find itself looking down the barrel a tax audit.

Selected Industries

There were 38 benchmarks issued for businesses operating in the following industries:

1. Manufacturing;
2. Construction;
3. Retail trade;
4. Accommodation and food services;
5. Transport, postal and warehousing;
6. Rental, hiring and real estate services;
7. Administrative and support services (such as pest control); and
8. Other services (such as barbers, hairdressers and nail salons).

Case study

The Tax Office has provided an example of how the benchmarks have been applied where a Melbourne-based concreter received a tax bill for $115,953 after an audit showed he had omitted $142,000 from his tax return.
The taxpayer came to the ATO's attention because he had been reporting very low levels of income for a number of years. The concreting benchmark helped the Tax Office to understand the taxpayer’s business relative to the rest of the industry.

During the audit, the taxpayer said his business was based on smaller suburban work, for which he received very little cash. He said he always issued tax invoices to his customers.

He had declared a taxable income of $18,000 for the year. He recorded only four concrete purchases during one of the quarters.

Third party data acquired from his supplier for that quarter showed eighteen concrete purchases, some of which were paid for in cash. Further examination showed:

1. many of his jobs were for cash;
2. they were not recorded in his records; and
3. his customers did not receive tax invoices.

As the taxpayer’s record keeping was inadequate, the auditors calculated his income by applying his normal sale price per square metre to his actual purchases of concrete.

The audit resulted in tax liabilities of $67,000 and additional penalties of nearly $50,000.

Clients wishing to know if benchmarks have been issued for their type of business should contact our office.

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