For some time the ATO has been preparing small business benchmarks to help businesses compare their performance against similar businesses in an industry.
Benchmarks are key financial ratios developed from information provided by businesses on activity statements and tax returns that can help you compare your business performance against similar businesses in an industry.
Benchmarks are published as a range to account for businesses with different annual turnovers, variations across financial years, regions and business models.
Kate is a client of mine and owns a medium sized restaurant in Sydney. She submitted her annual tax return and was contacted by the ATO because her labour costs fell outside the ATO benchmark for restaurants with this income range. Her income was just under $2m and her labour costs were 33%. As you can see from the table the range for a restaurant with an income of up to $2m would have labour costs of between 22% – 29%
The ATO asked to examine her records. Far from being concerned Kate knew that the ratio was what it was/ is what it is.
Kate had the rosters, the menus, all the task lists and food preparation processes available for the ATO to examine and was able to demonstrate that due to the nature of the food, wine and personal service offered by her restaurant this was the staff level she required. The ATO said “Thanks very much, we can see the reason for the variation” and that was the last she heard about it.
There are 3 lessons here:
- Complete and honest record keeping makes answering any questions easier
- Being able to demonstrate your business processes is powerful when being asked questions by authority bodies
- Having your information up to date and accurate takes away the concern (or fear) when faced with questions from authority bodies
The small business benchmarks have now been updated. You can use the benchmarks to compare your performance against similar businesses in your industry. Check for your industry here.
The ATO uses our small business benchmarks to protect honest businesses from unfair competition by comparing what a business is reporting with others in their industry. If a business is far outside the benchmarks the ATO might ask them to explain why.
The ATO has found that some businesses flagged as being outside the benchmark haven’t recorded the correct business industry code on their tax return or the Australian Business Register. Check with your accountant that your business has been registered in the correct business industry code; for more information click here.
Not all industries have been subject of benchmarks and the focus is currently limited to businesses that supply goods and services directly to consumers where cash is often used for payment. To read more click here.