ATO Benchmarking Reviewed


It was reported recently that tens of thousands of small businesses targeted by the ATO for no more than making unusually low profits will be able to fight the system without fear of recrimination.

Inspector-general of taxation Ali Noroozi has now reviewed the ATO benchmarking used to identify taxpayers who may be under-reporting income. The risk assessment tool was introduced in 2009 by the ATO and compares the financial performance of similar businesses across 100 industries encompassing more than 900,000 small businesses that earn less than $15 million a year, and is based on a ratio of cost of sales to turnover with businesses falling outside the benchmark risking investigation. The tool was initially introduced to target the cash economy – with businesses suspected of under-reporting cash earnings being the target. It has come under fire from small business groups as an unfair method of finding businesses that may be cheating the system by funnelling cash to avoid paying tax.

The industries covered range from air-conditioning services to watch and jewellery retailing, and benchmarks have been published for landscape construction, motor vehicle retail – new and used, panel beating and smash repairers, lawn mowing and garden services, tattooing services, and pharmacy, with a further 30 industries expected to be benchmarked over the next 12 months.

Mr Noroozi said many taxpayers were frustrated by the benchmarking process, which often targets small businesses for not making enough money. Typically the business or their tax agent receives a letter or phone call from the ATO saying they’ve fallen outside the benchmark and asking them to provide substance to the return they’ve lodged. They may then receive an amended or default income tax assessment based on the benchmarks.

But as we know, many things can cause a business to fall outside the benchmark including sickness, a change in the business – particularly for solopreneurs who are used to making money one minute and nothing the next – or the business who had a niche market that was booming but then interest in the product faded as something new or better came along.

Now, following Mr Noroozi’s review, businesses who have been targeted by the ATO will get to fight the system without fear of recrimination, with submissions due by February 3.

The ATO recommends reviewing record-keeping practices to ensure they meet legal requirements with a spokesperson saying if you’ve made a mistake contact the ATO immediately. If the ATO contacts you because the performance of your business falls outside the benchmarks, but your records can substantiate your reasons why, generally no further action will be taken.



©Lyn Prowse-Bishop,



Sydney Morning Herald

Start Up Smart

Australian Financial Review

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