Will Your Business be Audited?

March 2018

Are you likely to be a target for an ATO audit?

The Australian Tax Office is very upfront when it comes to their compliance activity, publishing small business benchmarks every year that outline what a typical business 'looks like' in different industries. If your business falls outside those benchmarks, then it's possible that the ATO is likely to take a closer look at why that is.

What the ATO looks for

Falling outside of the benchmarks might not indicate a tax-related problem. It might mean that your business has a different business model to the norm or is performing poorly relative to others in the industry.

If your business does fall outside of the benchmark, however, it is important to ensure that the reasons why can be clearly articulated (preferably documented) and the reason for those differences is not tax evasion. 

If there is no proof as to why the business is outside of the benchmarks, the ATO is likely to simply apply the benchmark ratio and issue a revised tax assessment. They will look at:

  • cost of sales to turnover (excluding labour)
  • total expenses to turnover
  • rent to turnover
  • labour to turnover
  • motor vehicle expenses to turnover
  • non-capital purchases to total sales, and
  • GST-free sales to total sales.

 For example, for a veterinary practice with a turnover between $300,001 and $800,000, the cost of sales to turnover ratio is expected to be between 25% and 29% (averaging at 27%), and average total expenses are 78%. The cost of labour to turnover ratio is between 21% and 29% and rent is between 5% and 8%.

The benchmarks are also a useful tool for anyone wanting to understand what is typical in their industry and how they perform against the average. It might also indicate opportunities for improvement and where the business is falling behind its competitors.

For more information, contact Bates Cosgrave on 02 9957 4033.

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This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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