With the aid of technology and extensive data mining the ATO is now able to compare the performance of your business with other similar businesses in your industry.
Each year, you disclose information to the ATO regarding your business’ performance, information regarding your industry sector, your balance sheet and what is paid to employees in your business tax return.
Comparing apples with apples
The ATO has recently launched a new business benchmarking programme that takes the information from your tax return and compares it with other businesses in your industry. The aim of this exercise is to find businesses operating outside normal parameters, particularly those that may not be disclosing income i.e. working in the ‘cash economy’.
Business tax returns are currently processed under a self assessment regime. That is, the information you lodge on your tax return will be accepted on face value. A small number of taxpayers will have their affairs audited by the ATO as a check on the correctness and completeness of the information returned. The benchmarking programme enables the ATO to target this audit activity on those businesses identified as high risk, that is businesses operating outside normal benchmarks and expected parameters.
For example, a fish & chip shop business with a turnover of $400,000 would be expected to have a gross margin in the range of 43% to 51% and be paying rent of 6 – 12% of turnover. Under the benchmarking programme, the ATO are able to run reports showing the gross margin of all fish & chip shops for a particular period. We would expect that a tolerance will be made for normal variances, then a number of shops with the lowest gross margin to be selected for further action. Shops that have unusual circumstances will be eliminated from further investigation, such as start-ups and business closures and of course businesses in natural disaster areas.
The cash economy letter
The remaining businesses identified for further investigation by the benchmarking programme, will then be sent a preliminary ATO ‘cash economy’ letter. The ATO expects to send this standard letter out to 110,000 businesses throughout Australia across many industry sectors.
Initially, the ‘cash economy’ letter will give all taxpayers an opportunity to make voluntary disclosures of unpaid tax or information that was incorrectly supplied to the ATO. The unpaid tax element also includes GST that may not have been disclosed. If voluntary disclosures are made, the taxpayer will need to pay the unpaid tax. It is also likely that they will also be charged interest on the outstanding amount.
The ATO have stated that penalties will be reduced for voluntary disclosures and that no audit of the voluntarily disclosed amounts will occur.
If the taxpayer sees no reason to make a voluntary disclose of unpaid tax, they may elect to write to the ATO to explain their particular circumstances. This may include things like unusual events, proprietors operating more than one business (e.g. combined fish & chips and movie hire), accounting policies or other matters that may cause the reported numbers to be outside of the expected norms. One common mistake by many taxpayers is using the wrong industry code to describe their business, for example using ‘take away food’ instead of ‘fish & chip shop’.
If no disclosures are made, the ATO may choose to follow up the letter with an investigation. It may take the form of a questionnaire, a desk audit or a record keeping review.
As the ATO is concentrating on undisclosed cash receipts, inadequate record keeping will be targeted and penalties applied. For retailers, ‘adequate records’ is interpreted as reconciliation of daily register totals. For other businesses, demonstration of adequate invoicing and banking procedures is required.
To view your industry benchmarks, visit the Business Benchmarks page on the ATO website.