ATO Releases Updated Small Business Benchmarks

However, it’s important to understand that the ATO also uses these benchmarks to identify businesses that may be making mistakes or failing to meet their tax obligations.

According to the ATO, these benchmarks are used alongside other risk indicators to help select businesses for compliance activities. The first step typically involves comparing information reported in tax returns with key industry performance benchmarks. Your business’s industry classification is determined by the industry codes selected on your tax return, as well as your description of the main business activity and trading name.

The benchmarks cover over two million Australian small businesses across 100 industries, grouped into nine broad categories:

• Accommodation and food
• Building and construction trade services
• Education, training, recreation and support services
• Health care and personal services
• Manufacturing
• Professional, scientific and technical services
• Retail trade
• Transport, postal and warehousing
• Other services

Each category is further divided into subcategories—for example, bakeries, chicken shops, coffee shops, kebab shops, and pubs all fall under the accommodation and food category.

The ATO calculates five benchmark ratios, all expressed as a percentage of turnover (excluding GST):

1. Total expenses to turnover
2. Cost of sales to turnover
3. Labour to turnover
4. Rent expenses to turnover
5. Motor vehicle expenses to turnover

To determine turnover, the ATO generally uses the amount reported at the “Other sales of goods and services” label on the tax return. If that figure isn’t available, it uses the “Total business income” label.

Small businesses can calculate their own ratios using the ATO’s Business performance check tool—available on the ATO website and app—or by manually working out the ratios and comparing them to the benchmarks.

For businesses that fall within the benchmark ranges, the ATO notes that no further action is required. However, businesses with ratios outside the benchmark ranges are encouraged to review their figures and consider potential areas for improvement.

• Above the benchmark: This usually means expenses are high relative to sales. Possible explanations range from benign (e.g., higher wastage, lower sales volume, or reduced mark-up) to concerning (e.g., unrecorded sales or poor internal cash controls).
• Below the benchmark: This may suggest lower expenses relative to sales, which could indicate higher efficiency, higher mark-ups, or, alternatively, that some expenses are not being recorded.

Not all benchmark ratios will apply to every business. It’s up to business owners and managers to determine which benchmarks are relevant and to investigate any anomalies.

The ATO also emphasises that benchmarks are never used in isolation to trigger audits or investigations. They are just one of many tools used to assess compliance.

Importantly, the ATO highlights that businesses deliberately avoiding their tax obligations are contributing to the shadow economy, which places an unfair burden on those doing the right thing. Deliberate shadow economy behaviour is estimated to account for nearly 60% of the gross small business income tax gap, or about $11.2 billion per year in lost tax revenue. Of this, approximately $8.9 billion is attributed to under-reported income and over-claimed deductions.