If you’re running a small business, understanding these benchmarks is essential. This guide explains what ATO benchmarks are, how they work, and how you can use them to improve your business performance while staying compliant.
The Australian Taxation Office (ATO) regularly releases updated small business benchmarks for 100 industries. They help business owners compare their performance against others in their industry, spot areas for improvement, and stay on top of their tax obligations. They’re also one of the tools the ATO uses to identify businesses that may be avoiding their tax obligations.
What are ATO benchmarks and why do they matter?
ATO benchmarks are financial ratios that the Australian Taxation Office uses to compare your small business with others in your industry. They cover 100 industries and reflect the typical cost of sales, turnover, and other performance measures for similar businesses.
They matter because they serve two main purposes. First, they help small businesses assess their financial health and see whether they are performing within industry benchmarks. Second, they help the ATO identify businesses that may be avoiding their tax obligations. If you fall outside the range without a clear reason, you’re more likely to attract the ATO’s attention.
How the ATO uses benchmarks
The ATO uses benchmarks to identify businesses that may be avoiding their tax obligations. They’re one of the tools we use to identify businesses that may be avoiding their tax obligations, particularly when businesses fail to lodge accurate tax returns or under-report income.
The ATO updates them annually and relies on data from tax returns, activity statements, industry participants and trade associations. It allows the ATO to compare your business with others in your industry and identify unusual patterns. If your numbers fall outside the range, it could trigger a closer examination of your tax affairs.
Types of small business benchmarks
There are two main types of small business benchmarks: performance and input.
Performance benchmarks examine key financial ratios, such as the cost of sales to turnover and other relevant ratios.
Input benchmarks estimate turnover based on labour and materials used in your business.
These cover 100 industries, from a pizza shop to a plumbing business. They are designed to cover both cash-based and accrual-based businesses in the same industry.
How to find the benchmark for your industry
The easiest way to find the range for your business turnover is to visit the ATO website or use the ATO app. The benchmarks will show the expected range for your business turnover in your industry.
When you compare your business against these figures, you get an instant business performance check. This can help you determine whether you need to review your business strategy, adjust your pricing, or more closely control business expenses.
What happens if you fall outside the benchmark?
Small businesses that fall outside the range without a valid reason are more likely to trigger a closer examination from the ATO. In practice, that could mean questions about your business income, activity statements, and tax return.
However, falling outside the range doesn’t always mean you’re doing something wrong. Businesses in your industry may have different operating models, cost structures, or turnover patterns. But if you do fall outside the ATO’s benchmarks, be ready to explain why.
Why benchmarks can help small businesses
- They provide a valuable tool for small business owners to check whether they remain within industry range.
- They help the ATO identify businesses that may be avoiding their tax obligations, which in turn helps maintain a level playing field.
- They give you insights into your financial health and business performance compared to similar businesses.
- Used well, benchmarks can help small businesses improve operations, reduce costs, and increase profitability.
Common ATO benchmark ratios
Some common ratios you might see include:
- Cost of sales to turnover
- Labour to turnover
- Rent to turnover
By tracking these, you can compare your business to others in your industry and identify where you might be overspending or underperforming. Staying within the range can help the ATO see that you’re running your business in line with industry norms.
How the benchmarks are calculated
The ATO uses a step-by-step process to make sure the small business benchmarks are reliable and fair. In plain terms, here’s how it works:
1. Identify industries
The ATO uses business industry codes (BICs) and other details to sort businesses into the right industry groups, like cafés, plumbers or retail shops.
2. Select the population
They only include businesses with an active ABN that have lodged a valid tax return.
3. Group by industry sub-categories
Businesses are split further into smaller groups using keywords from their registrations and tax return labels, so comparisons are more accurate.
4. Calculate key ratios
Ratios like cost of sales to turnover or labour to turnover are worked out for each group.
5. Remove outliers
Businesses with unusual figures that could distort the data are trimmed out using statistical tests.
6. Assign turnover ranges
Each group is divided into different turnover bands, so a business making $200,000 isn’t directly compared to one making $2 million.
7. Work out the benchmark ranges
The benchmark range is set around the average, usually covering about 30% of businesses in the middle of the group.
8. Quality checks
Ratios are tested to make sure they have enough data, are consistent, and make sense for the industry.
9. Industry consultation
Industry participants and trade associations may be consulted to confirm the results reflect real-world operations.
This process ensures the benchmarks are based on solid data and reflect how businesses in the same industry normally operate.
Staying within industry benchmarks
When businesses stay within industry benchmarks, they are generally less likely to attract the ATO’s attention. Businesses that operate within the range for their industry turnover show the ATO that they are reporting income and claiming deductions in a way that is consistent with others in their industry.
The ATO expects that businesses that remain within the benchmark range are operating in line with industry practices. Businesses are generally less likely to trigger a closer examination when your figures match expected ranges.
How to use the benchmarks in your business strategy
Don’t use the benchmarks in isolation. Instead, combine them with your own financial reports, market research, and advice from your accountant. Benchmarks can help identify areas where you might get a better deal to reduce costs, improve efficiency, or refine your pricing strategy.
For example, if your cost of sales to turnover is higher than the industry average, you might negotiate with suppliers and find you get a better deal to reduce costs. Or if your rent-to-turnover ratio is higher than average, you might consider moving to a more cost-effective location.
Key points to remember
- The ATO releases updated small business benchmarks for 100 industries each year
- They help small businesses compare their performance and remain within industry benchmarks
- Falling outside the benchmark range could attract the ATO’s attention
- Benchmarks are based on millions of small businesses’ tax returns and activity statements
- Two main types exist: performance benchmarks and input benchmarks
- Use them as one of the tools to improve your financial health and business performance
- ATO benchmarks are a valuable tool for small business owners to stay compliant and competitive
Managing tax debt can be challenging for SMEs, and ATO payment plans may not always be suitable. Moula offers flexible finance options to help businesses refinance their tax debt and improve cash flow. Learn more about small business loans from Moula.
