ATO’s New Weapon - Benchmarking

Dated: May 2011

The Australian Taxation Office (ATO) has invested considerable resources on new computer software to enable them to capture and record more information about taxpayers. They are then using data extraction techniques to analyse this information to identify entities that may not be paying the correct amount of tax. Some of the strategies they are already using are:

- Performance benchmarks: Where ratios are used to compare your business with what the ATO considers to be the industry standard. This information is primarily obtained from what is reported in tax returns.

- Cash sales benchmarks: Currently covering 15 specific industries, the ATO is looking at the ratio of cash to total sales. This is based on credit and debit card sales data provided by financial institutions.

- Input benchmarks: This is where the ATO looks at an expected range of income for businesses based on the labour and materials used. The ATO collects this information from industry participants and trade associations.

Entities that appear to be reporting outside the ‘expected norm’ (that is, those who appear markedly different from others operating in the same industry) may be requested to explain why.

The ATO has already commenced sending letters to business operators reporting outside small business benchmarks for their industry or to those who in the ATO’s view have reported insufficient business income to meet their expected living expenses.

Whilst the ATO refine these tools, we anticipate an increase in audit activity over the coming years.