2 November 2009

The small business hit list: is the Tax Office targeting your business?

Last month, the Tax Office released a raft of new benchmarks for small business.  Under the gentle guise of 'helping small business with their tax compliance', the benchmarks are, in reality, one of the key indicators used to identify who is likely to come under Tax Office scrutiny.

The industries benchmarked are high on the 'likely offenders' list for the cash economy and the Tax Office make it clear that "businesses reporting outside of these benchmarks are likely to attract attention." 


The small business benchmarks provide an indication of likely costs relative to turnover for different industries.  Up to five ratios are used:


Cost of goods sold to turnover

(Cost of goods sold ÷ turnover) x 100 = cost of goods ratio (%)

Labour to turnover

(Labour costs ÷ turnover) x 100 = labour/turnover ratio (%)

Rent to turnover

(Rent ÷ turnover) x 100 = rent/turnover ratio (%)

GST-free sales to turnover

(GST-free sales ÷ turnover) x 100 = GST free sales/turnover ratio (%)

Motor vehicle expenses to turnover

(Motor vehicle expenses ÷ turnover) x 100 = motor vehicle expense/turnover ratio (%)


So, for a pub with sales between $250,000 and $750,000, the expected cost of goods sold to turnover ratio is 36%-50%.  In this same example, the expected labour to sales ratio is 15% - 23%.  If the pub falls outside of this benchmark, the Tax Office will take a closer look at their records and determine if an audit is required.


The danger is that if your business falls outside of the benchmark for legitimate reasons, you still need to ensure that you can justify the reasons for the variations.  This will be a common problem where businesses do not neatly fit into an industry definition.


As part of the processes for completing your accounts and tax returns, for the last 4 years we have compared your data to that maintained by the ATO – to identify in advance any areas of possible contention.

The Tax Office 2009 small business benchmark hit list
(note that the ATO has statistics on all industries from prior years, covering gross profit, wages and net profits as a percentage of sales) 


 Accommodation and food services

·       Chicken shops

·       Coffee shops

·       Fish and chips shops

·       Kebab shops

·       Pubs, taverns and bars

·       Restaurants

·       Sandwich shops

·       Sushi takeaways

·       Takeaway food services

·       Takeaway pizza shops

Administrative and support services

·       Building and other industrial cleaning services

·       Pest control services


·       Air conditioning, refrigeration and heating services

·       Bricklaying

·       Blocklaying

·       Concreting services

·       Electrical services

·       Fence construction

·       Painting services

·       Plasterboard installers

·       Plastering and ceiling services

·       Plumbing services

·       Roof guttering installation

·       Roof painting and repair

·       Roofing services - includes roof tiling and metal roofing services

·       Tiling and carpeting services

·       Tiling - floor and wall

·       Timber floor installation

·       Timber floor sanding


·       Bakeries and hot bread shops

·       Cake shops and patisseries

Rental, hiring and real estate services

·       Video and other electronic media rental and hiring

Retail trade

·       Clothing retailing

·       Computer retailing

·       Floor covering retail

·       Florists

·       Footwear retail

·       Fresh fish and seafood retailing

·       Fresh poultry retailing

·       Fruit and vegetable retailing

·       Furniture retail

·       Grocery retailers and general stores

·       Houseware retailing

·       Liquor retailing

·       Meat retailing and butchers

·       Newsagents

·       Tyre retail

Transport, postal and warehousing

·       Courier services

·       Delivery services

·       Furniture removalists

·       Road freight transport services

·       Taxi drivers and operators

·       Towing services


Other services

·       Barber and men's hairdressing

·       Beauty services

·       Hairdressers

·       Laundry and dry-cleaning services

·       Nail salons

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This Newsletter, of necessity, has dealt with matters of a technical nature in general terms only. Clients should contact us for detailed information on any of the items in the Newsletter. No responsibility for loss occasioned to any person acting or refraining from acting in reliance upon any material in this Newsletter can be accepted by any member or employee of the firm.

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