New ATO small business benchmarks for cash sales

The cash economy has been a major focus of the ATO for years – and a major focus for tax administrations in other countries as well. Australia is not alone here.

In its latest moves, the ATO has just released a new category of small business benchmarks which focus on cash sales within a business. They are part of a suite of benchmarks used by the ATO to identify and deter activities in the cash economy.

This year, the ATO plans to contact about 100,000 businesses that operate in cash industries.

The cash sales benchmarks are in addition to other benchmarks used by the ATO such as performance benchmarks (which provide key business ratios for different industries) and input benchmarks (which show an expected range of income for tradespeople based on the labour and materials they use).

Using these benchmarks, the ATO can determine the average proportion of cash sales a business should be making and which businesses are not reporting as much cash income as others in the same industry. They also provide a pointer to a possible future audit by the ATO. Businesses whose performance falls significantly outside one or more of the benchmarks are more likely to be selected for a review or audit.

Cash sales benchmarks have been developed by the ATO using information reported on activity statements and data provided to the ATO by banks (see below for details of a new ATO bank data-matching project). The bank data shows the number and value of card sales (credit or debit) made by each business.

To calculate the cash sales benchmarks, the total value of card sales is subtracted from total sales reported on activity statements for the same period and then divided by total sales. Total cash sales include all sales by cash, cheque, bank transfer or direct deposit.

The cash sales benchmarks have initially been developed for 15 industries (no doubt more will follow):

• restaurants
• coffee shops
• takeaway food services
• newsagents
• hairdressers
• beauty services
• clothing retailing
• florists
• pubs, taverns and bars
• grocery retailing and general stores
• fruit and vegetable retailing
• meat retailing and butchers
• fuel retailing
• hardware and building supplies
• garden supplies retailing

As noted above, the cash sales benchmarks are based on data matching undertaken with banks to identify credit and debit card sales, as well as information provided by small businesses to the ATO on activity statements. In this regard, the ATO has expanded its data-matching program to obtain information from banks about the total credit and debit card sales of small businesses for the 2009-10 financial year. The banks involved are:

• Commonwealth Bank of Australia;
• Westpac Banking Corporation;
• Australia and New Zealand Banking Group Limited;
• National Australia Bank Limited;
• Bendigo and Adelaide Bank Limited;
• Bank of Queensland Limited;
• BWA Merchant Services Pty Ltd.

The ATO will use the bank data to:

• establish benchmark ratios for cash sales to total sales for particular industry sectors;
• identify businesses that are potentially skimming some or all of their cash takings or in other ways not reporting all their income;
• identify businesses that are operating underground and not participating in the tax system;
• identify businesses that are reporting sales outside the benchmark ratio of cash sales to total sales for their industry segment.

The ATO said records relating to approximately 200,000 entities will be matched in the data-matching exercise.

The ATO says that, by developing benchmarks for small businesses, it is making it clear what it expects from businesses in an industry. The message could hardly be clearer.

The benchmarks are essentially a guide, and the ATO acknowledges that there may be good reasons for a business reporting outside the benchmarks, but it considers that the differences may also indicate that the business is not recording and paying tax on all transactions, especially cash transactions.

And in all of this, good record keeping is paramount. If a business can quickly and easily demonstrate why it is outside the benchmarks, it can save a lot of time and cost in dealing with the ATO.

Doubtless the ATO will develop further benchmarks in the future.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions .

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