Benchmarks developed by the Tax Office for small businesses are a good tool to detect income but are otherwise susceptible to “heavy-handed” use, according to the inspector-general of taxation.
Inspector-generation of taxation Ali Noroozi has released the terms of reference for his review into the ATO’s controversial practice of benchmarking the performance of small businesses.
The benchmarks were introduced by the Tax Office in 2009 in a bid to catch businesses siphoning away cash to avoid tax.
Now businesses targeted by the ATO will get to fight the system without fear of recrimination, with submissions due by February 3.
The Tax Office sets financial performance ratios for more than 100 industries encompassing more than 900,000 small businesses that earn less than $15 million a year.
Industries range from air-conditioning services to watch and jewellery retailing, while benchmarks include the ratio of cost of sales to turnover.
Those performing outside their industry’s benchmarks are at risk of an ATO review. To date, the ATO has identified about 46,000 businesses suspected of underreporting cash.
Noroozi says while benchmarks are a good way to detect income, they are otherwise susceptible to “heavy-handed” use, hence the decision to let businesses contest the ATO’s actions.
An ATO spokesperson says the Tax Office will “continue to work with tax agent forums and industry representatives in the ongoing improvement of our benchmarking program”.
The spokesperson says the benchmarks, which are updated on an annual basis, have undergone a number of improvements, including updating them with data from the 2009 financial year.
Benchmarks have been published for the following new industries:
- Landscape construction.
- Motor vehicle retail – new and used.
- Panel beating and smash repairers.
- Lawn mowing and garden services.
- Tattooing services.
“Over the next 12 months, we intend to publish benchmarks for a further 30 industries where there is a higher risk of cash economy activity,” the spokesperson says.
If your business is performing outside the benchmarks, the ATO recommends you review your record-keeping practices to ensure they meet the legal requirements.
You should also check you have correctly reported all your income and expenses on your tax returns or activity statements.
“If you have made a mistake, you should contact us. If you inform us of mistakes prior to audit, we can reduce penalties and interest,” the spokesperson says.
“If we contact you because the performance of your business is outside the benchmarks, we will always take into account the individual circumstances of your business.”
“If there is a reason your business is performing outside the benchmarks and your business records confirm this, generally we will take no further action.”