The Tax Office’s business performance benchmarks provide a snapshot of an average business by providing a measure of costs and income (expressed as a range) that the Tax Office would normally expect a business to report when operating in a particular industry.

So far, benchmarks have been developed for small businesses in more than 100 industries. Feedback from the Tax Office indicates that around 90% of operators in benchmarked industries report within the benchmark range, which it says indicates that the vast majority of businesses are competing on a level playing field with their peers.

The Tax Office says its benchmarks were developed as part of an on-going strategy to deal with businesses that are not declaring all their income, and that they are used as an aid to help identify businesses that may be avoiding their tax obligations. By developing its benchmarks, the Tax Office has effectively drawn a line in the sand, making it clear what it expects from an average business in a particular industry. The fact that a business reports outside of its benchmarked range can serve as a red flag to the Tax Office that perhaps not all income is being reported, not all tax obligations are being met, or that a certain level of cash transactions are taking place.

While the Tax Office accepts that a proportion of businesses reporting income below the benchmark range may simply be under-performing for a variety of reasons, it says that where the shortfall is significant further checking will generally be undertaken. This can be via matching data against other known transactions, reports from other institutions or government bodies, or through direct enquiries to the business.

A business identified as reporting outside of benchmarks and contacted by the Tax Office will typically first be encouraged to review their records to ensure they have accurately reported all income — especially cash transactions — and given the option of making a voluntary disclosure to correct mistakes. Results from a ‘letter program’ carried out over a recent reporting season showed that the majority of businesses contacted by the Tax Office report more tax afterwards, make a voluntary disclosure, or self-amend. A small number of businesses provided valid reasons for a variance from a benchmark, often connected with incorrect business industry codes.

The other side to the benchmark coin however is that if a business finds it is reporting significantly more net income than its industry peers, this can serve as an alert that the business may not be claiming all relevant deductions, and that further enquiries in this area could yield favourable results. So keeping an eye on the benchmark reporting standards for an industry can also serve the purposes of a business owner, not just the Tax Office’s stated goal of being vigilant on tax compliance and cracking down on the cash economy.

Performance benchmarks contain several ratios to help compare and check business results, and may include:

•    cost of goods sold to turnover

•    cost of materials to turnover

•    labour to turnover

•    rent to turnover

•    motor vehicle expenses to turnover.

There may be good reasons for disparity between reported results and the benchmark, but taxpayers who find they are outside the benchmarks for their industry should also ensure that appropriate records and paperwork is on hand. Should the Tax Office make enquiries, simply having the right evidence to explain expenses and income will generally be all that is required.

Input benchmarks

Input benchmarks apply to tradespeople who undertake domestic projects, and show an expected range of income based on the labour and materials used. The benchmarks were developed using information provided by industry participants and trade associations. They can assist businesses to:

• compare operations to the general industry’s benchmark range
• check that records accurately reflect the business’s income
• estimate a level of turnover based on labour and material costs.

Should you require further information or direction on industry benchmarks for your business, please contact this office.