The Tax Office publishes small business benchmarks using data collated from income tax returns lodged by more than 100 different types of businesses. These have been updated recently with data from the 2008/09 financial year.

These benchmarks are used by the Tax Office to identify businesses that may be understating income or overstating expenses.

Two different types of benchmarks are collated:

- Performance benchmarks which provide key financial ratios for different businesses; and

- Input benchmarks which show an expected range of income for tradespeople based on the labour and materials they use.

‍Performance benchmarks

‍These compare business performance with others in that particular area and are utilised by the Tax Office to check that income and expenses have been correctly recorded. There is a particular emphasis on checking whether cash income has been correctly reported. The benchmarks are all expressed as a percentage to total sales or turnover.They are:

- Cost of sales to turnover;

- Total expenses to turnover;

- Rent to turnover;

- Labour to turnover; and

- Motor vehicle expenses to turnover.

‍Input benchmarks

‍These are intended to show an expected range of income for tradespeople based on the labour and materials they used. They have been developed using information provided in income tax returns and also by trade associations. They are intended to be used to:

- Compare your individual business with the industry range;

- Check that the return accurately reflects your income; and

- Estimate your correct income based on labour and materials used.

These benchmarks apply to tradespeople who undertake domestic projects and are responsible for purchasing their own materials.

‍What happens if your figures fall outside the benchmarks?

‍Firstly, you will probably receive a letter from the Tax Office asking you to confirm the figures reported in your return. You may be asked for an explanation as to why the figures fall outside the benchmarks.

Secondly, the benchmarks are used to identify businesses which may be operating in the cash economy or may otherwise be appropriately selected for review or audit.

If selected for an audit, the Tax Office may use the benchmarks to:

- Determine whether your tax returns and activity statements are correct; and

- Help in calculating a default assessment if your records are insufficient or unreliable.

During an audit you may be asked to complete a personal living expense questionnaire to assess whether you have reported all cash income.I

f selected for an audit, you will be required to provide the following:

- Evidence of how your business and personal expenses have been funded;

- Records of all business transactions including invoices, receipts, cash register journal rolls and point of sales system printouts;

- Reconciliations between sales records and bank deposits together with details of expenditure from unbanked income;

- Copies of all bank statements; and

- An explanation as to the reason why you are reporting outside the benchmarks for your particular business.

‍What actions should you take?

‍Importantly, compare your business results with the relevant benchmarks. If your figures are outside the benchmarks make sure you have adequate records to satisfy any Tax Office query and can explain the reason why your business is outside the norm.

To find out whether there are benchmarks for your business visit www.ato.gov.au and type small business benchmarks in the search box.