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:​

• Interpreting ATO Small Business Benchmarks relevant to your industry.
• Identifying discrepancies and areas for improvement.
• Implementing strategies to enhance efficiency and compliance.​

Contact us today to ensure your business aligns with industry benchmarks and maintains robust financial health.

As the end of tax year approaches, the Australian Taxation Office (ATO) has announced its 3 key areas of focus for Tax Time 2023. Landlords, those working from home and capital gains tax (CGT) will all be the subject of an ATO crackdown when it comes to tax returns this year. According to ATO Assistant Commissioner Tim Loh, the areas being targeted are due to the high number of common mistakes being made in these areas. With access to the financial information of 1.7 million rental property investors from 17 of the countries largest banks and mortgage lenders, the ATO will be able to use new data matching techniques to crosscheck claims made by landlords in 2023.

The ATO Targets For Tax Time 2023

Rental property deductions

As landlords (and homeowners) feel the pinch from mortgage interest rate hikes, many have been trying to push the boundaries with their claimed deductions. While there are a number of legitimate deductions available on rental properties, it’s vital that you stay within the law and understand what is acceptable and what’s not. As many as 9 out 10 rental property investors made mistakes on their annual tax returns and incorrectly claimed expenses.

The ATO is particularly focused on interest expenses and ensuring owners understand how to correctly apportion loan interest expenses where part of the loan was used for private purposes (or the loan was refinanced with some private purpose).

“You can only claim interest on a loan used to purchase a rental property to earn rental income – don’t forget, if your loan also includes a private expense, such as for a new car or a trip to Bali, you can only claim an interest deduction for the portion relating to producing your rental income,” Mr Loh said.

Work-related expenses

From March 1st taxpayers claiming working from home expenses are required to provide more detailed documentation and calculations. This means you can’t do a copy-paste from last year’s annual return. Previously you could choose from a number of different methods to calculate how much you could claim when working from home. However, as the working landscape changes and more people are working back in the office more frequently, the methods of calculation have changed and there are limits on what you can claim.

The ATO crackdown is particularly focused on ensuring taxpayers understand the changes to the working from home methods and are able to back up their claims.

“Keeping good records will give you flexibility to choose the right method that suits your circumstances and gives you the best deduction this tax time,” Mr Loh said.

Capital gains tax

Do you rent your home out for example on AirBnb or Stayz? Then you may need to pay capital gains tax (CGT). CGT is generally incurred when you dispose of assets such as shares, crypto, managed investments or properties.

The ATO wants to make sure that taxpayers have considered all their assets when calculating capital gains tax as well as apportionment of the main residence exemption if taxpayers have used their property to earn income.

It’s important that you have kept records of the income-producing period and the portion of the property used to produce income to calculate your capital gain.

“Generally, your main residence is exempt from CGT, however if you have used your home to produce income, such as renting out all or part of it through the sharing economy, for example Airbnb or Stayz, or running a business from home, then CGT may apply,” Mr Loh said.

Avoid an ATO Crackdown

By announcing it’s focus areas in advance, the ATO aims to promote fairness, transparency and greater compliance with tax laws through increasing awareness of the issues and providing guidance on how to avoid them.

Outside of these 3 main areas of focus, it has also been reported that income earned from the ‘gig economy’ or side hustles would attract greater scrutiny. This includes ride-share drivers and even social media influencers.

“If you’re running bootcamp sessions in addition to your nine-to-five job, well this is a side hustle and you need to declare this income to the ATO. If you’re an online content creator earning money or receiving gifts, you’re also likely to be running a business and there are tax obligations you need to comply with.” Mr Loh said.

A hobby crosses over to a business when there is an intention to earn a profit and the activity is planned and organised to achieve that goal.

The best way to avoid the issues highlighted as a focus in this ATO crackdown is to work with experienced tax accountants. Please contact the team at MGI if you need any assistance.

The ATO has issued PCG (Practical Compliance Guideline) 2023/1 in relation to deductions for working from home related expenses. The PCG is applicable from 1 July 2022.

Prior to 1 July 2022, a client had the choice of using either the shortcut method, fixed-rate method or actual expenses incurred for working from home expenses. From 1 July 2022, a client can continue to claim actual expenses or a ‘revised fixed-rate method’ at 67 cents. Broadly, in order to claim the revised rate, the following criteria must be satisfied:

• Working-from-home requirement
• Incurring deductible additional running expenses
• Keeping and retaining additional records

The work has to be substantive and directly related to income-producing activities. The PCG states that “minimal tasks, such as occasionally checking emails or taking phone calls while at home will not qualify”.

The PCG will only apply to ‘additional running expenses’ defined as energy expenses, internet expenses, mobile and home phone expenses and stationery and computer consumables.

In relation to the record keeping criterion, clients will need to keep:

• records showing total number of hours spent working-from-home during the year; and
• one document (such as an invoice, bill or credit card statement) for each type of additional running expense that was incurred in the income year.

The full record keeping requirement commenced from 1 March 2023.

The PCG clarifies that a record of the total number of hours worked can take any form, provided it is kept contemporaneously. Examples include timesheets, rosters, logs of time spent accessing employer systems or online business systems, time-tracking apps, or a diary or other documents kept contemporaneously. Alternatively, we’ve put together a working from home diary template to help you record your hours for the July 2023 – June 2024 period.

In many instances, clients may choose to claim actual costs incurred over the revised fixed rate method if this results in a higher claim.

If you have any queries in relation to tax compliance and claiming working from home expenses, please contact the team at MGI for assistance.

If you haven’t yet applied for a Director ID Number (DIN) now is the time to do it or risk a civil penalty of up to $1.1 million.

The Australian Taxation Office (ATO) has started the process of chasing some 500,000 company directors who have not yet registered. Despite the official deadline of 30 November 2022, the ATO has said that penalties won’t apply to anyone who registered for their Director ID before 14 December 2022.

It is estimated that there are 2.5 million directors in Australia and only 2 million have so far registered, according to a statement made by the ATO to InnovationAus.

The system was launched by the ATO and Australian Business Registry Services (ABRS) in 2021 and is designed to help prevent illegal ‘phoenixing’. Phoenixing is the process by which a new company is established to continue the operations of a business that has been liquidated to avoid paying debts, employees and creditors.

What is a Director ID?

The Director ID is a 15-digit director identification number that is unique to each individual director who has verified their identity with the Australian Business Registry Services (ABRS).

If the director changes companies, stops being a director, changes their name or moves interstate or overseas, the unique identifier will remain with them forever.

Every director is required to apply for a DIN under the Corporations Act 2001 and you will need to have a myGovID to apply for the director ID,

MGI first alerted our clients of the need to apply for the Director ID back in October 2021 and provided a further reminder of how to apply for a Director ID in September 2022.

If you have yet to apply for a DIN, we urge you to start the process now as the ATO has indicated that it will take a light touch with directors who are merely lagging behind.

“The ATO has now commenced contacting directors who have not met their obligations to apply for a director ID. In the first instance, directors will be provided with guidance on how to apply.”

The ABRS has now also published a video guiding company directors through the process.

How to apply

The fastest way to apply for a DIN is by using the myGovID app to log in to ABRS online and verify your identity with information the ABRS has on record. You can check if your business is registered as a company with the Australian Securities and Investments Commission at ASIC Connect. Details of how to apply can be found here on the ABRS website.

Once you have received your DIN please forward this to our team to insert into our Corporate Secretarial software.

If you have any questions, please contact the team at MGI on

asic@mgisq.com.au

Queensland Minimum Financial Requirements (MFR) Licensing Changes In The Building and Construction Industry

The new Minimum Financial Requirements (MFR) Regulation for QBCC licensees came into effect on 1 January 2019.  Under the new the building and construction contracts regulations, all QBCC licensees who hold a contractor grade licence will be required to meet annual financial reporting obligations. The changes are being implemented in two phases.

Phase 1

The new regulation:

• Reintroduces annual reporting for all licensees
• Changes how category 4–7 licensees report decreases in Net Tangible Assets (NTA)
• Clarifies how assets are to be treated.

Existing category 4–7 licensees are to provide their most recent financial statements to the QBCC by 31 March 2019, while all other licenses have until 31 December 2019 to report.

The requirement for category 4–7 licensees to report a 20 per cent decrease in NTA will take effect from a licensee’s first annual reporting day. This is to ensure that category 4–7 licensees are not immediately in breach.

The QBCC will allocate an ongoing annual reporting day for licensees.

Phase 2

The remainder of the reforms will be implemented as part of Phase 2, commencing 1 April 2019. Key reforms include:

• Providing for a more robust assessment of capacity to pay debts (‘balanced scorecard’ approach) for category 4–7 licensees
• Requiring SC1 and SC2 licensees to declare their current ratio
• Enabling the QBCC to seek independent verification of financial information
• Specifying that any material changes in MFR reports require updated financial information
• Requiring more detailed information about a covenanter’s financial position
• Clarifying how related entity loans are assessed
• Increasing the maximum revenue threshold for self-certifying licensees from $600,000 to $800,000.

How are assets calculated

Personal recreational vehicles, such as dirt bikes and golf carts, can no longer be used to meet minimum asset thresholds.

Money held in a project bank account can be included as an asset of a licensee as follows –

• Head contractors and subcontractors will be able to include any amount in the general trust account in which they have a beneficial interest
• Subcontractors will be able to include retention amounts and disputed funds that relate to them

If a licensee is relying on a Deed of Covenant and Assurance and/or related entity loans to help them meet the financial requirements, detailed financial information will need to be provided to the QBCC to substantiate.

The QBCC website has further information in respect of accounting requirements for:

• Leases
• Revenue from construction contracts
• Construction work in progress
• Line of credit facilities
• Cryptocurrencies
• Failure to meet requirements

Penalties for not complying with the Minimum Financial Requirements have been included in regulation. Under the Act, the QBCC can place conditions on a licence, or take steps to suspend or cancel a licence.

Penalties also apply for providing false or misleading information or refusing to supply financial information at the request of the QBCC.

Changes to the QBCC Act

To support the new MFR framework, the QBCC Act will be amended to include executive officer liability, escalating penalties for failing to meet requirements and new penalties for failing to provide financial information. These changes will ensure that the QBCC can effectively manage the new building and construction contracts regulations.

How We Can Help

MGI South Queensland specialises in accounting, auditing and taxation in the construction industry. If you would like to find out more about how the current building and construction contracts regulations affect your business, contact us today on 07 3002 4800 today and let us shout you a coffee to discuss your requirements.