Businesses that deliberately hide income to avoid paying the right amount of tax or superannuation are part of what the ATO calls the cash and hidden economy.

The ATO uses benchmarks, amongst other indicators, to identify businesses that may be avoiding their tax obligations by not reporting some or all of their income. Benchmarks are financial ratios the ATO has developed to help you compare your performance against similar businesses in your industry. Information reported in your tax returns or activity statements is compared with the key benchmark for your industry.

The ATO does this by identifying the appropriate benchmark for your business based on information including:

  • your business industry code
  • the description of the main business activity on your tax return
  • the trading name of your business

Businesses reporting outside the benchmarks may attract the ATO’s attention – particularly since they have implemented benchmark audit processes. There may be reasons for this difference, such as higher costs or lower selling prices than others in the industry, but it may also be an indication that a business is not recording and paying tax on all its transactions, especially cash transactions.

The following types of benchmarks are published for the small business sector:

  • performance benchmarks – these provide financial ratios for different industries
  • input benchmarks – these show an expected range of income for tradespeople based on the labour and materials they use.

In 2014 the Administrative Appeals Tribunal (“AAT”) was reviewing a case involved a sole trader tiler. The taxpayer was selected for audit for 2010 because the ratio of his “cost of goods sold” to sales reported for that year was said to be 61% which was “significantly outside the benchmark” for his industry of 12-22%. As a result his income tax return was amended increasing his liability by $21,533.95 in addition to increased GST liability by $7,478. Furthermore, the taxpayer was issued with a penalty notice imposing administrative penalties of 50% of the shortfall.

If you have any concerns regarding your benchmarks or are being audited by the ATO, our experienced tax accountants and tax lawyers at The Quinn Group can assist you in providing advice and answering your queries. Call us today on 9223 9166 or submit an online enquiry to find out how we can help you.

Also, have a look at our tips on how to keep both the ATO and your business happy.