Will your business be audited?
The ATO is very upfront when it comes to their compliance activity. Every year they publish small business benchmarks that outline what a typical business ‘looks like’ in different industries. The ATO is more likely to look into businesses who falls outside of their benchmarks.
Falling outside of the benchmarks might not indicate a tax related problem. It might mean that your business has a different business model to the norm or is performing poorly relative to others in the industry. If your business does fall outside of the benchmark however, it is important to ensure that the reasons why can be clearly articulated (preferably documented) and the reason for those differences is not tax evasion. If there is no proof as to why the business is outside of the benchmarks, the ATO is likely to simply apply the benchmark ratio and issue a revised tax assessment.
The ATO looks at the following:
- cost of sales to turnover (excluding labor)
- total expenses to turnover
- rent to turnover
- labor to turnover
- motor vehicle expenses to turnover
- non-capital purchases to total sales, and
- GST-free sales to total sales.
For example, for a veterinary practice with a turnover between $300,001 and $800,000, the ATO expects a turnover ration between 25% and 29% (averaging at 27%), with an average total expense of 78%. The cost of labor to turnover ratio is between 21% and 29% and rent is between 5% and 8%.
The benchmarks are also a useful tool for anyone wanting to understand what is typical in their industry and how they perform against the average. It might also indicate opportunities for improvement and where the business is falling behind its competitors.