ATO Benchmarks: What They Mean For Your Small Business

The Australian Taxation Office (ATO) has recently released an updated set of small business benchmarks based on 2022-23 financial year data. The benchmarks are reviewed annually and broken down into 100 industries and they’re used by the ATO to assess whether a business might be under-reporting taxable income and over-claiming deductions.

What Are ATO Small Business Benchmarks?

The ATO provides Small Business Benchmarks as a tool to help businesses compare their financial performance against industry standards. These benchmarks are derived from data collected from tax returns and activity statements of businesses across various industries. They serve as a guide for businesses to assess their performance and ensure they are meeting their tax obligations.

How Are These Benchmarks Used By The ATO?

The ATO uses these benchmarks to identify businesses that may be avoiding their tax obligations. By comparing a business’s financial ratios to industry standards, the ATO can detect anomalies that may indicate underreporting of income or overstatement of expenses. Businesses that fall significantly outside the benchmark ranges may attract scrutiny and potential audits.

However, they can also be a useful tool for any business to compare your performance, including turnover and expenses against others in your industry. You might be able to identify opportunities to make improvements to your business.

What Industries Are Included?

The benchmarks cover 100 industries and over 2 million small businesses around the country. The industries include:

Accommodation and food
Building and construction trade services
Education, training, recreation and support services
Health care and personal services
Manufacturing
Other services
Professional, scientific and technical services
Retail trade
Transport, postal and warehousing.

What If Your Business Falls Outside the Industry Benchmarks?

You might find that your business falls outside of these benchmarks. If you’re above or below the standards for your industry it doesn’t necessarily mean you’ve done anything wrong however, it’s an indicator that it’s worth reviewing your business plan.

ATO Assistant Commissioner Tony Goding said: “While we never use the benchmarks in isolation, small businesses who fall outside the ATO’s benchmarks are more likely to trigger a closer examination from us to identify if they are making mistakes or deliberately doing the wrong thing.”

Above the Benchmark Range

If your business’s expenses are higher than the industry average, it may suggest that your expenses are high relative to sales. This might show that your:

Wastage is higher – research best practice for your industry
Goods taken for personal use have been counted as business stock
Competitors may be able to source inputs at lower cost than you – it might be time to see if you can buy stock or materials at a lower rate
Rent or labour costs are high considering your volume of sales – for example, having too many staff during off-peak times
Mark-up is lower than your competitors – check average sales prices
You haven’t accurately recorded all your sales – check till tapes or point-of-sale (POS) reports
Internal cash controls may need to be examined – ensure cash taken for expenses is recorded as sales.

Such discrepancies can trigger ATO reviews or audits to ensure compliance.

Below the Benchmark Range

Conversely, if your expenses are significantly lower than the industry average, it might indicate that:

Your expenses are recorded under the wrong label – for example, cost of goods sold under another expense label
Some of your expenses may not have been recorded – for example, salary, wages or cash wages
Your mark-up is higher than your competitors
You are more efficient – for example, you have less wastage.

While being below the benchmark isn’t inherently negative, it’s essential to ensure that all expenses and obligations are accurately reported.

Implications for Your Business

Understanding where your business stands in relation to the ATO Small Business Benchmarks is crucial. Regularly comparing your financial ratios to industry standards can help identify areas for improvement and ensure compliance with tax obligations. It also aids in making informed business decisions and maintaining financial health.

How MGI South Qld Can Assist

At MGI South Qld, we specialise in business performance analysis and helping businesses navigate the complexities of tax compliance and financial performance. Our team can assist you in: