Small business benchmarks Overview

Transcription

1 Page 1 of 10 Small business benchmarks Overview Small business benchmarks update Benchmarks have been updated with data from the 2010 financial year. For details of the changes and improvements refer to Cash economy frequently asked questions. We recommend that you review your small business benchmarks regularly. Benchmarks are updated annually using the latest available income tax data. Small business benchmarks are financial ratios developed to help you compare your performance against similar businesses in your industry. The benchmarks provide guidance on what figures we would normally expect a business in a particular industry to report. We use benchmarks to identify businesses that may be avoiding their tax obligations by not reporting some or all of their income. To do that, we use the benchmark, called the key benchmark ratio, considered to be the most accurate predictor of business turnover for each industry. We may also use that key benchmark to quantify income that has not been reported. We clearly highlight this benchmark for each industry on our website to help businesses and tax practitioners. Benchmarks are published for businesses with different turnover ranges across more than 100 industries. The benchmarks are published as a range, to recognise the variations that occur between businesses. These ranges are representative of returns and activity statements of the industry; for example, they allow for variations between businesses in different regions and with different business circumstances. For some industries motor vehicle expenses may be published as a single percentage figure rather than as a range as the variation in this benchmark is minimal. By publishing benchmarks for small businesses we are making it clear what we expect from businesses in a particular industry. In doing so we are making it fairer for everyone. Businesses reporting outside the benchmarks may attract our attention. There may be reasons for this difference, such as higher costs or lower selling prices than others in the industry, but it may also be an indication that the business is not recording and paying tax on all transactions, especially cash transactions. If you find you are outside the benchmarks for your industry, you should check that you have correctly recorded and reported income and deductions for your business. To do this you should review your record-keeping practices to ensure they meet the legal requirements. For more information about how to meet your legal record-keeping requirements, including what records you need to keep for your daily business transactions, refer to Record keeping for small business. The following types of benchmarks are published for the small business sector: performance benchmarks, provide financial ratios for different industries input benchmarks, show an expected range of income for tradespeople based on the labour and materials they use. How to find your business's benchmarks Small business benchmarks are listed by both business type (A-Z) and business industry categories based on the business industry codes or Australian and New Zealand Standard Industrial Classification (ANZSIC codes). The following are benchmarks by business type (A-Z): A-C D-F G-K

2 Page 2 of 10 L-Q R-Z. The following are benchmarks by business industry categories: accommodation and food services building and construction trade services education, training, recreation and support services health care and personal services manufacturing professional, scientific and technical services retail trade transport, postal and warehousing other services. You can also find the benchmarks by using the search function and searching by either: Definitions When we say: business industry or ANZSIC code business type benchmark type. activity statement, we mean a form that businesses use to report and pay a number of tax obligations, including GST, pay as you go (PAYG) instalments, PAYG withholding and fringe benefits tax. Labels G1 to G11 will be the most relevant to calculating the activity statement ratios. associated parties, we mean people and entities closely associated with you, such as relatives, partners in a partnership, directors of companies or closely connected companies or trusts. benchmark, we mean small business benchmarks, consisting of ratios specific to business industries. business, we mean businesses with a turnover up to $15 million. cost of sales, we mean the cost of anything produced, manufactured, acquired or purchased for either:! manufacture! sale or exchange in deriving the gross proceeds! earnings of the business. default assessment, we mean an original or amended assessment of a taxpayer's income tax or GST obligations that we issue when:! insufficient or unreliable information has been reported on tax returns or activity statements, or! a taxpayer has not lodged a tax return or activity statement. GST-free sales, we mean goods or services not subject to GST and sold without GST in their price, reported at label G3 on your activity statement. labour, we mean salary and wage payments including contractor payments (amounts exclude GST). Labour does not include payments to associated parties - for example, labour provided by a business owner or business partner. non-capital purchases, we mean the purchases reported at label G11 on your activity statement - non-capital purchases include trading stock and normal running expenses such as:! stationery and repairs! equipment rentals! leases. total expenses, we mean the total expenses reported on the income tax return less payments to associated parties (amounts exclude GST). total sales, we mean the total sales reported on your activity statement, amounts include GST - this includes all:! GST-free sales

3 Page 3 of 10! input taxed sales! taxable sales. turnover, we mean the total revenue you receive from providing goods or services each year, excluding GST. Types of benchmarks The types of benchmarks that have been developed for the small business sector are: performance benchmarks input benchmarks. Performance benchmarks Performance benchmarks provide financial ratios for your industry to help you work out: if you fall within or outside the benchmark range for your industry why your business may differ from the benchmark range. Performance benchmarks have been developed using information on income tax returns and activity statements. Performance benchmarks help you to: compare your business performance with others in your industry check you have correctly recorded all of your income, particularly cash income. Performance benchmarks contain several ratios to help you compare and check your own business performance. For each industry we use the key benchmark ratio to identify or quantify omitted income. Income tax benchmark ratios include: cost of sales to turnover total expenses to turnover rent to turnover labour to turnover motor vehicle expenses to turnover. Activity statement ratios provide information on what businesses are reporting on their activity statements. They are developed using a complete financial year's activity statement data from a particular industry. Activity statement ratios include: non-capital purchases to total sales GST-free sales to total sales Key benchmark ratio The key benchmark ratio is the benchmark we use to identify businesses that may not be reporting some or all of their income. We may also use this ratio to quantify income that we have identified as not reported. We identify these to make it clear to businesses and tax practitioners what benchmark we consider to be the most accurate predictor of business turnover. If you operate a mixed business, you may need to check the benchmarks for more than one industry. Input benchmarks Input benchmarks show an expected range of income for tradespeople based on the labour and materials they use. Input benchmarks are developed using information provided to us by industry participants and trade associations. Input benchmarks may help you to:

4 Page 4 of 10 compare your business to your industry's benchmark range check that your records accurately reflect your income estimate your turnover based on the labour and materials used. Input benchmarks apply to tradespeople who undertake domestic projects and are responsible for purchasing their own materials. How benchmarks can help you Benchmarks are a useful tool to help you: compare your business with others in your industry check that you are meeting your tax obligations, including recording all cash transactions work out if you need to adjust your business and record-keeping practices assess if your business is likely to be selected for an audit or review. How we use benchmarks We use benchmarks, amongst other indicators, to identify businesses that may be avoiding their tax obligations by not reporting some or all of their income Information reported in your tax returns or BAS is compared with the key benchmark for your industry, to check if you're reporting outside of the benchmark range for your reported turnover. We do this by identifying the appropriate benchmark for your business based on information including: your business industry code the description of the main business activity on your income tax return the trading name of your business If your business is reporting outside the benchmark, we may ask you to confirm what you have reported in the return or explain why. You may be selected for audit Benchmarks are one of the indicators we use to identify businesses that may be operating in the cash economy for review or audit. For more information about the indicators we use to identify businesses, visit During an audit When a business is selected for an audit, we may use benchmarks to: work out if tax returns and activity statements are accurate and complete help in calculating default assessments to work out income tax or GST obligations if the business records are insufficient or unreliable. During an audit we look at business records and third-party information. We also often ask taxpayers to complete a personal living expense questionnaire to assess if they have reported all cash income. If your business is outside the benchmarks and you are reviewed by us, we take into account the individual circumstances of your business, based on the records maintained. For more information about personal living expenses, refer to Personal living expenses (NAT 72958). Supporting documentation If you are selected for an audit, we will ask you to do the following:

5 Page 5 of 10 Provide evidence of how you have funded your business and personal expenses. Show us that you have accurately kept records explaining all of your business transactions to enable us to work out your tax liability, including all sales records such as! invoices! receipts! cash register journal rolls! point of sales system printouts. Provide details of reconciliations between your sales records and the amount deposited in your business bank account or recorded in a cash book. The reconciliation should show any amounts not deposited to business accounts and any amounts used for drawings, wages and other cash expenses. Provide copies of all bank statements. Provide an explanation, if your business is reporting outside the benchmarks for your industry, as to why, including an explanation of how you work out your sales prices. For more information about what records you need to keep for your daily business transactions, refer to Record keeping for small business. How to calculate and use your benchmarks Small business benchmarks are a guide to help businesses meet their tax obligations by enabling them to compare their performance against similar businesses. What you need Use your accounting software to give you figures for: turnover cost of sales total expenses rent labour sales per employee (if applicable) activity statements for the relevant year. Alternatively, you can use: your income tax return for the relevant year tax invoices for sales and purchases your quote book your work diary statements of purchases from your suppliers bank statements your cheque book a calculator. Check the benchmark specific to your business to find out what benchmarks are relevant to you. Small business benchmarks are listed by industry, and alphabetically by business type. Calculate your benchmarks The basic formula is (benchmark figure turnover) x 100 = benchmark ratio %. Not all the benchmarks apply to every business. Refer to the benchmark specific to your business to determine which one you need to calculate. Example: Cost of sales to turnover ratio To calculate cost of sales to turnover ratio, divide cost of sales by turnover and multiply by 100.

6 Page 6 of 10 (Cost of sales turnover) x 100 = cost of sales/turnover ratio Example calculation - cost of sales to turnover Sample figures Cost of sales Turnover Cost of sales/turnover ratio x = $137,983 $456, % Compare your business performance to a benchmark The following example demonstrates how to: compare your business performance using the benchmarks confirm that you are performing within the benchmark range clarify what it may mean if your business is outside a benchmark range consider making a voluntary disclosure (if necessary). Calculating benchmark ratios Elizabeth operates a coffee shop. Elizabeth's tax return figures Total business income $705,200 Cost of sales $253,300 Salary and wages and superannuation $189,400 Payments to associated parties $50,000 (Elizabeth's wages and superannuation) Rent $85,800 Other expenses $97,000 Coffee shops benchmark The key benchmark ratio for coffee shops is cost of sales to turnover. Annual turnover range Key benchmark ratio $65,000 - $250,000 $250,000 - $600,000 More than $600,000 Cost of sales/turnover 37% - 45% 36% - 43% 33% - 39% Average cost of sales 41% 40% 36% Total expenses/turnover 80% - 89% 85% - 91% 88% - 93% Average total expenses 85% 88% 90% Elizabeth calculates her key benchmark ratios using the following calculation methods.

7 Page 7 of 10 Calculating cost of sales to turnover ratio Using her tax return figures Elizabeth does the following calculations: Turnover $705,200 Cost of sales $253,300 Calculation Cost of sales Turnover Cost of sales/turnover ratio x = $253,300 $705, % Elizabeth's turnover of $705,200 places her business in the highest turnover range for coffee shops. Her cost of sales to turnover ratio is 35.91% which is within the benchmark range of 33%-39% for coffee shops. Calculating total expenses to turnover ratio Using her tax return figures Elizabeth does the following calculations: Turnover Total expenses ($675,500 - $50,000) $705,200 $625,500 (Total expenses is the total expenses reported on the income tax return less payments to associated parties) Calculation Total expenses Turnover Total expenses to turnover ratio x = $625,500 $705, % Elizabeth's turnover of $705,200 places her business in the highest turnover range for coffee shops. Her total expenses to turnover ratio is 88.69% which is within the benchmark range of 88%-93% for coffee shops. Result Based on her calculations, Elizabeth is satisfied that her record keeping and business practices are in good order. Calculating activity statement ratios Sam operates a fresh fish and seafood shop. To calculate these ratios, he gathers all four of his activity statements for the financial year and adds all the figures together to get the annual amounts. Sam's activity statement figures for the financial year Total sales G1 $655,000 Non-capital purchases G11 $510,900 GST on purchases - 1B $9,289 GST-free sales G3 $491,250 GST on sales - 1A $14,886 Total salary and wages W1 $41,681

8 Page 8 of 10 Turnover (excludes GST) $640,114 Fish and seafood retailing - fresh benchmark The activity statement ratios for fresh fish and seafood retailers are non-capital purchases to total sales and GST-free sales to total sales. Key benchmark ratio Annual turnover range $65,000 - $500,000 $500,000 - $1,000,000 More than $1,000,000 Income tax return Cost of sales/turnover 57% - 67% 63% - 70% 65% - 76% Average cost of sales 62% 66% 70% Total expenses/turnover 82% - 90% 88% - 92% 91% - 96% Average total expenses 86% 90% 93% Activity statement Non-capital purchases 66% - 81% 74% - 83% 75% - 85% GST-free sales/total sales 32% - 67% 66% - 83% 63% - 90% Sam calculates his activity statement ratios using the following calculation methods. Calculating non-capital purchases to total sales ratio Using his annual activity statement figures Sam does the following calculations: Total sales G1 Non-capital purchases G11 $655,000 $510,900 Calculation Non-capital purchases Total sales Non-capital purchases/total sales x = $510,900 $655, % Sam's turnover of $640,114 places his business in the medium turnover range for fish and seafood retailing - fresh. His non-capital purchases to total sales ratio is 78%, which is within the benchmark range of 74%-83% for Fish and seafood retailing - fresh. Calculating GST-free sales to total sales ratio Using his activity statement figures Sam does the following calculations: Total sales G1 GST-free sales G3 $655,000 $491,250 Calculation

9 Page 9 of 10 GST-free sales Total sales x = $491,250 $655, % Sam's turnover of $640,114 places his business in the medium turnover range for Fish and seafood retailing - fresh. His GST-free sales to total sales ratio is 75% which is within the benchmark range of 66%-83% for Fish and seafood retailing - fresh. What does it mean to be outside the benchmark? If your business falls outside the benchmarks you may need to explain why. Performing outside the benchmarks could indicate that you need to review your business's performance and record-keeping practices to ensure you are reporting all business income and expenses. Reporting above a benchmark range If your business is reporting above the benchmarks it means your expenses are high relative to sales. This may indicate that: you have not recorded all your sales your mark up is lower than your competitors you have high wastage your competitors may be able to source inputs at lower cost than you your volume of sales is too low (for rent and possibly labour). Reporting below a benchmark range If your business is reporting below the benchmarks it means your expenses are low relative to sales. This may indicate that: your expenses may be recorded under the wrong label some of your expenses may have not been recorded your mark up is higher than your competitors you have less wastage. A range of factors may affect a businesses performance. Benchmarks can help you to identify differences which can assist in determining your competitive position and whether you need to change how you operate. When your business is outside a benchmark If your business is outside the benchmark, we recommend you: review your record-keeping practices consider how your business operates check if you have made a mistake or not reported all your income and expenses in your tax returns or activity statements. If you have made a mistake, you will need to provide the correct information let us know by making a voluntary disclosure. We suggest you review your business performance against the benchmarks regularly. If your business falls outside the benchmark, we may ask you to explain why. For more information about how to meet your legal record-keeping requirements, including what records you need to keep for your daily business transactions, refer to Record keeping for small business.

10 Page 10 of 10 Your registered tax agent or business activity statement (BAS) agent may be able to advise you on business and record-keeping practices. How to correct a mistake If you find that you have made a mistake in your tax affairs, you should contact us to correct these errors on your tax return or activity statement. Where people voluntarily tell us about any errors or omissions, the tax law allows for a reduction in penalties. If they tell us before an audit begins, we may be able to reduce these penalties even further. For more information, refer to Correcting your tax return or activity statement. List of benchmarks The benchmarks are listed by both business type (A-Z) and business industry categories based on the business industry codes. These listings can be found on the Small business benchmarks home page. For more information, refer to Business industry codes. More information For more information about your tax obligations as a small business operator, refer to: Record keeping for small business (NAT 3029) GST for small business (NAT 3014) Tax basics for small business (NAT 1908). Last Modified: Wednesday, 22 February 2012 Our commitment to you We are committed to providing you with accurate, consistent and clear information to help you understand your rights and entitlements and meet your obligations. If you follow our information and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we will take that into account when determining what action, if any, we should take. Some of the information on this website applies to a specific financial year. This is clearly marked. Make sure you have the information for the right year before making decisions based on that information. If you feel that our information does not fully cover your circumstances, or you are unsure how it applies to you, contact us or seek professional advice. Copyright Commonwealth of Australia This work is copyright. You may download, display, print and reproduce this material in unaltered form only (retaining this notice) for your personal, non-commercial use or use within your organisation. Apart from any use as permitted under the Copyright Act 1968, all other rights are reserved. Requests for further authorisation should be directed to the Commonwealth Copyright Administration, Copyright Law Branch, Attorney-General s Department, Robert Garran Offices, National Circuit, BARTON ACT 2600 or posted at