The Inspector-General of Taxation will scrutinise the ATO’s use of industry benchmarks used to crack down on companies operating in the cash economy, following a wave of complaints from small businesses.
The ATO has increased the use of industry benchmarks in recent years to target companies it believes are dodging tax by under-reporting cash sales.
The benchmarks are used by the ATO to determine the average proportion of cash sales a business should be making in a certain industry, and then target those businesses which are not reporting as much cash income as others in the same industry.
Businesses targeted include restaurants, coffee shops, takeaway food services, newsagents, hairdressers and pubs.
But businesses have complained the benchmarks are ill-fitting and too rigid. For example, a city restaurant operates differently to its country equivalent, yet they fall into the same category.
Inspector-General of Taxation, Ali Noroozi, said earlier this month he would review small business benchmarks.
He says nearly every submission received, in consulting on a new work program, raised the issue of benchmarking.
“What the taxpayer or their representatives have been alleging is that the record-keeping required to discharge the onus is far too restrictive,” Noroozi says.
Noroozi has announced a review of the cash economy benchmarks as part of his work program for the 2011-12 financial year and says he will be examining three main questions.
Firstly, he wants to examine whether the use of benchmarks are appropriate across what can be very different businesses in the same sector.
Secondly, Noroozi is concerned with suggestions that the ATO is sending out default assessments to SMEs based only on the evidence from the benchmarks.
The small business itself is then expected to produce documentation and records to explain why its circumstances may differ from the industry.
“What we are hearing is that the ATO will issue these default assessments and the burden of proof almost falls to the SME,” Noroozi says.
The third question is whether the level of record-keeping that the ATO demands is appropriate for small and micro businesses.
Noroozi says the documentation required by the ATO is clearly beyond many small businesses.