Inspector-General of Taxation to review ATO cash-economy benchmarks

The Australian Taxation Office’s use of industry benchmarks to crack down on companies operating in the cash economy will be scrutinised by the Inspector-General of Taxation, after a flood of complaints from SMEs and their advisers.

The ATO has increased the use of industry benchmarks in recent years to target companies it believes are dodging tax by under-reporting cash sales.

The benchmarks are used by the ATO to determine the average proportion of cash sales a business should be making in a certain industry, and then target those businesses which are not reporting as much cash income as others in the same industry.

Businesses targeted include restaurants, coffee shops, takeaway food services, newsagents, hairdressers and pubs.

But the use of the benchmarks has raised the hackles of some SME and advisors, who believe the ATO is being too rigid in the way these benchmarks are applied.

“It has come through loud and clear from a number of submissions,” the Inspector-General of Taxation, Ali Noroozi, told SmartCompany this morning.

Noroozi has announced a review of the cash economy benchmarks as part of his work program for the 2011-12 financial year and says he will be examining three main questions.

Firstly, the Inspector General wants to examine whether the use of benchmarks are appropriate across what can be very different businesses in the same sector.

“For example, should the benchmark for a milk bar in an inner-city suburb be the same as one in an outer suburb, or one in a county area?” Noroozi asks.

Secondly, Noroozi is concerned with suggestions that the ATO is sending out default assessments to SMEs based only on the evidence from the benchmarks. The small business itself is then expected to produce documentation and records to explain why its circumstances may differ from the industry.

“What we are hearing is that the ATO will issue these default assessments and the burden of proof almost falls to the SME,” Noroozi says.

This leads to the third and final question: Is the level of record keeping that the ATO demands appropriate for small and micro businesses?

Noroozi says the documentation required by the ATO is clearly beyond many businesses.

In addition to the review of cash economy benchmarks, Noroozi is part of the way through a wider review of the ATO’s use of audits for SMEs with $100-250 million in revenue, and high-net-worth individuals.

The result of this review is expected by the end of this calendar year.