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  • Methodology

    Our benchmarking methodology consists of 10 steps.

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    Step 1: Identify industries to benchmark

    This step determines the industries we will benchmark.

    Small business benchmarks are currently limited to businesses that supply goods and services directly to consumers. Identification of an industry type to benchmark is based on a number of factors, including the size of the industry.

    Industries identified for benchmarking are initially categorised according to their ATO business industry codes. Business industry codes are a unique 5 digit identifier adapted from the 4 digit Australian Bureau of Statistics and Statistics New Zealand code (ANZSIC). The 5-digit business industry codes refine the industry classifications.

    Businesses are allocated to a benchmark industry based on both:

    • ATO business industry codes
    • keywords reported at the main business activity and trading name labels on their tax returns and the business registration (see step 3).

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    Step 2: Identify the starting population of the industry business types

    This step determines the starting population that are in business.

    The starting population for a benchmarked industry is identified 12 months after the statutory due date for lodging the tax return. This allows for most of the tax return and activity statement lodgments to occur, including for those businesses with extended lodgment periods. For example, the starting population for the 2018–19 financial year was identified after 31 October 2020.

    Firstly, the starting population of a benchmarked industry is selected based on businesses that:

    • lodged their income tax return for the year to be benchmarked
    • are registered and have an active ABN
    • report the selected ATO Business industry code on their tax returns or business registrations.

    Secondly, businesses are excluded from the starting population if they:

    • are currently insolvent
    • are deceased
    • are in the not-for-profit, government or large market segments
    • are not companies, partnerships, trusts or individuals
    • have a tax file number (TFN) identified as compromised

    Thirdly, further data is captured and filters applied to:

    • exclude businesses with turnovers of less than $30,000 and more than $15,000,000
    • exclude businesses that have reported multiple business activities on their tax returns
    • exclude those that have been in business for less than one year before the start of the financial year being benchmarked
    • capture the latest returns lodged for the benchmark year, including amendments
    • limit the population to those that have lodged returns within one year from the statutory due date of lodgment.

    Step 3: Industry allocation – grouping businesses into industries

    This step allocates businesses to specific industry sub-groups, based on having a common business model.

    We use keywords in the main business activity and trading name labels on tax returns and business registrations to identify whether a business should be allocated to a benchmark industry sub-group.

    ATO business industry codes may include more than one industry sub-group. For example, the ATO business industry code 32430 – Tiling and Carpeting Services – has three benchmark industry sub-groups:

    • Carpet laying services
    • Tiling services – floor and wall
    • Timber floor sanding

    A benchmark industry can also include multiple ATO Business industry codes where similar sub-groups report within multiple codes. This is in recognition that businesses can have diverse product lines but similar financial performance. For example, the Meat and poultry retailing – fresh benchmark industry consists of:

    • Meat retailing – business industry code 41211
    • Fresh poultry retailing – business industry code 41213.

    Industry allocation keyword process

    The keyword process allocates a business to an industry sub-group based on a three step key word process:

    1: Tax return

    Assign business to an industry sub-group population if they have reported on their tax return the relevant:

    • ATO Business industry code and keyword description at the trading name label
    • keyword description at the main business description label.

    In this step we can also use keywords to exclude businesses that have reported certain descriptions at the trading name label.

    2: Business registration

    Assign business to an industry sub-group population if they have reported the relevant information for all of following:

    • ATO business industry code in their GST business registration
    • keyword description at the trading name label on the tax return
    • keyword description at the main business description label on the GST business registration.

    In this step we can also use keywords to exclude businesses that have reported certain description at the trading name label on their tax return.

    3: Keyword

    The keyword process identifies businesses that may have incorrectly reported their ATO business industry codes and allocates them into an appropriate industry sub-group.

    However, we only apply this to businesses already within an ATO business industry code selected for benchmarking.

    The keyword allocation process is not applied to all of the benchmark industry sub-groups.

    The process can consist of up to four parts:

    • Allocate the businesses to an industry sub-group only when the trading name label from the tax return and the main business description label from the tax return both contain one of the key words.
    • Allocate the business to an industry sub-group only when the trading name label from the tax return and the main business description label from the GST business registration both contain one of the key words.
    • Allocate the business to an industry sub-group only when the main business description label from the tax return and the main business description label from the GST business registration both contain one of the key words.
    • Use keywords from the trading name or the main business descriptions to exclude a particular business from an industry sub-group.

    Step 4: Calculating benchmark ratios

    This step calculates the benchmark ratios using specific labels on the tax returns and activity statements.

    Read How benchmark ratios are calculated for further information.

    Step 5: Calculate the outliers

    This step removes statistical outliers to ensure the benchmarks are based on data representative of the population.

    Outliers are taxpayers whose reported data is significantly different from the majority of the other observations in the population. These outliers are removed because they may have a significant influence of the rest of the sample. The outliers may be:

    • extreme cases
    • mistakes
    • not part of the industry population intended to be benchmarked. For example, the business has misclassified themselves but not changed their name.

    Outliers are identified using Mahalanobis Distances, a statistical measure that examines each ratio in relation to the sample mean and the distribution of all of the other ratios. Those with a high Mahalanobis Distance measure are considered to have a significant influence on the rest of the sample and are excluded as an outlier.

    Step 6: Assign turnover ranges to benchmark industries

    This step assigns the turnover ranges to the industry.

    Benchmark industry populations are segmented into turnover groups to account for the variations in business performance that may occur due to the size, location and turnover of a business.

    The turnover ranges are different for each of the benchmarked industries.

    Three turnover ranges are used for most of the benchmarked industries.

    Generally, the ranges represent low, medium and high turnover ranges.

    Benchmarked industries with smaller populations may be presented with only two turnover ranges.

    Turnover ranges are determined by analysing the distribution of results for each benchmark industry. Industry specific factors, including any clusters and trends in reporting, are included in this analysis. The appearance of any of the clusters or trends may help to determine the turnover ranges, as the selection of the turnover ranges may be influenced by any variability in the distributions of results and by the gradual increase in the average of the key benchmark ratios.

    Step 7: Calculation of the benchmark ranges

    This step assigns the ratio ranges around the average (mean), for example the ratio of total expenses to turnover for each turnover range.

    For every industry benchmarked we calculate the average ratio for each turnover range. However we recognise that business model, location and region affect business performance so we determine a range around the average.

    The range is represented by 30% of population around the average.

    • For example, a benchmarked industry with a regional area ratio of 37% and a metro area ratio of 35% would be captured within the benchmark range of 32% to 40%.

    All benchmark ratios are published as whole numbers. Conventional rounding rules apply.

    Step 8: Statistical assurance

    This step ensures the populations are statistically valid.

    Normality and homogeneity testing

    The statistical validity of the benchmarks is tested by checking that the benchmark populations are normally distributed and homogenous. The selection of the key benchmark ratios and the secondary benchmark ratios for publication is dependent on the outcome of the normality and homogeneous testing.

    Benchmark ratios are only published if they pass this test.

    Key benchmark ratios

    The key benchmark ratio is the benchmark we use to identify businesses which may not be reporting some or all of their income.

    We identify the key benchmark ratios to make it clear to businesses and tax practitioners what benchmark we consider to be the most accurate predictor of business turnover.

    For a benchmark ratio to be selected as a key benchmark ratio, the benchmark industry population must satisfy the following requirements:

    • It is normally distributed and homogenous.
    • 50% or more of the population in the industry is reporting the benchmarked expense.
    • There are 50 or more businesses within the industry.

    If more than two tax return benchmark ratios satisfy the key benchmark ratio test, then we take into account the percentage of the population reporting the expense to select the most accurate predictor of turnover for an industry.

    For example, cost of sales is considered an accurate determinant of sales for retailers because it is a variable cost that generally changes in direct proportion to the increase or decrease in sales.

    Activity statement benchmarks are only published if they satisfy the requirements to be a key benchmark ratio.

    Secondary benchmark ratios

    Secondary ratios are those not identified as a key benchmark ratio. For a benchmark ratio to be selected as a secondary benchmark ratio, the benchmark industry population will satisfy the following requirements:

    • It is normally distributed and homogenous.
    • 25% or more of the population in the industry is reporting the benchmarked expense.

    Not all benchmark ratios apply to every industry as they do not satisfy the two requirements given above. For example, many services entities are unlikely to have significant cost of sales.

    Step 9: Quality assurance testing

    A quality assurance process is conducted on both the benchmark process and the final output.

    All of the benchmark ratios are reviewed prior to publication. This review ensures:

    • there have not been any calculation errors
    • the results are consistent with our expectation of the relevant industry.

    Comparisons with previous year benchmarks are undertaken to ensure consistency on a year to year basis. This comparison identifies if there have been any significant movements in the benchmark ratios from one year to the next.

    However there is an expectation that there would not be significant variations on a yearly basis as the nature of the industries is unlikely to change in a short period.

    Further analysis may be required if significant changes are identified to confirm if there are any factors that may be influencing this movement. For example – a decrease in the average of a key benchmark may be an indicator of a change in the reporting of the industry population.

    We may compare the Small business benchmarks to external information and other published industry benchmarks when developing a new industry benchmark. This is done to gain an understanding of how the benchmarks compare.

    Step 10: Industry names and overviews

    This step gives a common sense name and descriptor for the benchmarks.

    Benchmarks are published by industry name and include an overview of the industry characteristics.

    The main focus of the industry overview is to describe the industry, based on the population captured within the benchmarking process.

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      Last modified: 29 Apr 2021QC 37143