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  • How we use benchmarks

    We use benchmarks and other risk 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 activity statements is compared with the key performance benchmark for your industry, based on:

    • your business industry code
    • the description of the main business activity on your tax return
    • the trading name of your business.

    Find out about:

    Identifying businesses outside of the benchmarks

    The benchmarks are never used in isolation when we choose to look into a business's tax records.

    Example: Identifying a business outside the benchmark

    A supermarket operator was selected for audit due to a number of identified issues through our risk modelling. When looking at the small business benchmarks, their cost of sales to turnover ratio was in the high range at 88%.

    The key benchmark 'cost of sales to turnover' for grocery retailing and convenience stores for the applicable year was 72% to 77% for their turnover range.

    During the audit we found the business directors had been operating for several years and weren’t reconciling sales and banking. They submitted a voluntary disclosure, which would usually mean reducing administrative penalties and interest charges. However, the amount disclosed didn't match up with our findings based on the information available, so wasn't accepted.

    Considering the length of time the owners had been in business and their level of experience (they were also co-directors of another company), it was reasonable to expect they would have correct record keeping.

    They were required to pay over $275,000 in tax and $44,000 in penalties.

    End of example

    Default assessments

    If we contact you, we'll ask you to provide records as evidence to confirm what you've reported in your return.

    We'll only issue a default assessment when you're not able to provide accurate records or evidence for us to verify your business’s reported income, or if you refuse to lodge your tax returns after a number of requests.

    If you don't have evidence to support your return, we can use the benchmarks to determine income that has been omitted. For each industry, we will tell you the key benchmark that we will use to predict income or turnover.

    Example: Applying a benchmark ratio where there's a lack of records

    We identified a computer retail business that was outside of the small business benchmarks along with other risks identified, using our data analysis modelling.

    The ‘cost of sales to turnover’ benchmark for a business in the computer retailing industry with a turnover of $200,001 to $600,000 per annum was 46% to 60% for the year being looked at. This business was reporting at 88% to 96% over a 3-year period. When asked, the business owner couldn’t explain why they were reporting so far outside the benchmarks and had few reliable business records to substantiate amounts lodged.

    As the business didn’t have evidence of their sales, purchases and other records, we decided to apply the benchmark ratio in line with our findings. This resulted in the business having to pay just under $110,000 in tax and more than $27,000 in penalties.

    End of example

     

    Example: Benchmarks used to calculate default assessments

    We looked into a retail butcher's shop after discovering their income was significantly outside the benchmark range for the industry.

    When we reviewed their business records, it was clear the appropriate records weren't kept as required by law, including:

    • failure to keep cash register rolls or point-of-sale system printouts
    • failure to show evidence of regular till reconciliations to support daily sales records
    • inaccurate and incomplete sales records relating to business income, such as missing sales records for significant trade periods.

    The owners were unable to explain how the income reported in their business tax returns was calculated as they didn't have records to support it.

    We used the benchmarks to recalculate their business income and adjusted the business tax return and the owners' personal returns, based on the recalculated income. Amended tax assessments were issued to the business and both owners individually.

    The business owners had to pay tax based on the higher income calculated in the amended assessments. In addition, penalties for failing to take reasonable care to meet their legal requirement to maintain accurate records were also calculated on the tax shortfall.

    End of example

    You may be selected for a review or audit

    Benchmarks are one of the indicators we use to identify businesses that may be operating in the cash economy for review or audit.

    See also:

    Last modified: 21 Feb 2018QC 47943