Small business benchmarking and the ATO

There has been increased ATO audit activity in the small business sector particularly where the ATO has used small business benchmarking.

Benchmarks are financial ratios developed from information provided to the ATO on tax returns and activity statements.

The ATO uses benchmarks to help compare a business against similar businesses in the same industry. It also helps identify businesses that may not be reporting all of their income (particularly where cash transactions occur).

In the absence of a satisfactory explanation, the ATO uses benchmarks to issue assessment notices for income it thinks has not been reported. This means the onus of proof passes to the taxpayer to disprove the ATO assessment.

We have had a number of our colleagues contact us in respect of the application of benchmarks to their clients, concerned about the accuracy or relevancy to their client’s specific circumstances.

There is merit in many cases in the ATO approach and it should assist in identifying the ‘cash economy’. Taxpayers with legitimate concerns of the benchmark applied to their circumstances should contact us.

Benchmarks have been published for businesses in more than 100 industries.