Small Business Benchmarks

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The Tax Office has released an expanded range of benchmarks, known as the small business benchmarks. According to the Tax Office, the benchmarks provide small businesses ‘a snapshot of what, on average, is happening in businesses operating in a particular industry by providing a measure of various business costs in relation to turnover’. In addition, the Tax Office says the benchmarks are a useful tool to assist business owners in assessing their business performance.

The benchmarks

Two types of benchmarks for the small business sector have been developed by the Tax Office:

• performance benchmarks, which are based on information small businesses report to the Tax Office on income tax returns and business activity statements (BASs); and
• input benchmarks, which are based on information industry participants and trade associations provide to the Tax Office.

Fifty-eight benchmarks have been released by the Tax Office. The benchmarks are grouped into categories based on the business industry codes. The categories include:

Performance benchmarks

These benchmarks are designed to allow small business owners to compare their business performance with other businesses in the relevant industry. The benchmarks will also assist the owners in checking whether they are complying with their tax obligations, particularly in relation to cash income.

Five ratios are available to help the owners compare and check the performance of their businesses against other businesses in their industry. The ratios are:

• cost of goods sold to turnover — this ratio is calculated as (cost of goods ÷ turnover) x 100;
• labour to turnover — the formula for calculating this ratio is (labour cost ÷ turnover) x 100;
• rent to turnover — the formula for calculating this ratio is (rent ÷ turnover) x 100;
• GST-free sales to turnover — this ratio is calculated as (GST-free sales ÷ turnover) x 100; and
• motor vehicle expenses to turnover — this ratio is calculated as (motor vehicle expenses ÷ turnover) x 100.

(Note the ratios are expressed as a percentage.)

The Tax Office says the ratio ranges will assist business owners to work out whether they fall within or outside the average for their industry. The ratios will also identify how and why their businesses may differ from the industry’s average, says the Tax Office.

Input benchmarks

The Tax Office says these benchmarks show an expected range of income for tradespeople based on the labour and materials they use. The Tax Office also says these benchmarks apply to small businesses that work with domestic customers rather than commercial customers.

The benchmarks as a compliance tool

The Tax Office says that where businesses do not report within the ranges of the benchmarks, it may be an indication that the businesses are not recording and paying tax on all of their transactions, especially cash transactions. The Tax Office also says that comparing a business against benchmarks for its industry is one of the methods it uses to identify businesses for an audit or a review.

According to the Tax Office, when it selects a business for audit or review, it looks at the actual records of the business to assess whether it has reported all of its cash income. In addition, the Tax Office may use benchmarks to:

• work out if the business’s records are accurate and complete; and
• assist in calculating income tax or GST obligations where the business has provided insufficient or unreliable information.

The Tax Office says that businesses falling outside the benchmarks for a particular industry are more likely to attract its attention. However, the Tax Office acknowledges that there is often a reason why a business falls outside a benchmark, for example, the rent paid by the business may be higher than average because it is located in a city centre. In these situations, the Tax Office recommends that the business:

• reviews its recordkeeping;
• considers how its business operates; and
• checks if it has made a mistake on its tax return or not reported all its income. If so, the business should correct the information and advise the Tax Office.

 

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