Preventing an ATO Audit: Small Business Benchmarking Essentials
You need to start your business right if you want it to be indeed a success. If your company falls short of these benchmarks, an ATO audit might be forthcoming. On the other hand, benchmarks might be valuable to make a competitive comparison between your small business and others in your market. For these reasons, it is always wise to examine your business ratios.
Small company benchmarks measure how enterprises earning $15 million in revenue perform financially in more than 100 categories. Each benchmarking ratio is given a range to compensate for differences in enterprises based on their business models and geographic locations.
Three distinct ranges of turnover for every industry. For example, if your business earns $500,000 annually, your business ratio will range between $300,000 and $600,000.
The ATO then assigns each industry a critical benchmark ratio, like business costs to turnover or total expenses to income. The ATO believes that this ratio is a precise indication of sales costs and expenditures as a percentage of revenue.
ATO Industry or Business Classifications and Benchmarking
The Australian Taxation Office (ATO) establishes your industry benchmark based on your tax return, industry code, and activity description of your business. The ATO determines your business's industry subgroup(s) based on your keywords in the activity description and trade name.
A business can belong to multiple industry subgroups, allowing for the diversification of product lines in some companies. Verify that your tax return's industry code and description accurately represent your kind of business. If not, contact a small business accountant right away.
The ATO has two distinct sorts of benchmarks:
1. Performance Benchmarking
Performance benchmarking compares your business's performance to that of other companies in the industry you are classified with using various ratios. These benchmarks assist the ATO in identifying companies that may be underreporting income.
They monitor the ratio of your income tax by measuring sales costs versus revenue, complete expense reports of your rent versus your turnover. In addition, they also check the statement ratio of your business activities, like purchases outside of your principal, sales without Goods and Services Tax (GST), and annual sales.
2. Input Benchmarking
An input benchmark or sales turnover calculates your business’ income. It compares it against your block-laying industry average, and the ATO will check if your books match your actual income.
Entrepreneurs who purchase their materials to undertake work for their customers are subject to input benchmarks. These income ranges are based on the total cost of labour and materials used.
Benefits of Benchmarks for Small Businesses
Any business owner subjected to an audit will attest that it can be a stressful ordeal that frequently lasts months. By examining small company benchmarks, you can ensure that your tax records reflect your business's income and expenses appropriately.
You can keep track of your business by reviewing your benchmarks frequently throughout the year. The most effective approach to accomplish this is to conduct a review of your financial ratio reports.
Additionally, it's a good idea to speak to professionals about how your firm compares to industry benchmarks. This information should be analysed when we prepare your tax return at the end of the financial year or after each BAS quarter if you are GST (Goods and Services Tax) registered.
If any statistics go beyond the benchmark limits, you can hire a small business accountant to assist you in resolving the issue. Benchmarks for small businesses can be an invaluable resource for entrepreneurs looking to optimise their pricing and costs. Additionally, they can be the most effective method of ensuring that your organisation is audit-proof.
As previously stated, going through an audit can be a challenging experience. Aside from a simple tax consultation, find Gold Coast accountants who can create innovative solutions for your business, focusing on tax reduction, ensuring your business's growth and expansion.
You will also need high-quality, end-to-end accounting and bookkeeping services to assist you in scaling your expanding organisation. Find the best business accountants to partner with who understand small businesses and create tailored solutions for you.
New Wave Accounting offers you the best business accountants in the Gold Coast area, all of whom can help you minimise tax while maximising profits. We have over 600 entrepreneurs who have successfully started, grown and scaled their business using our team’s topnotch accounting and bookkeeping services. Run your business like a well-oiled machine—contact us today!