Many business owners want to know whether their results are healthy, whether costs are getting away from them and whether their tax reporting looks unusual to the ATO. ATO small business benchmarks can help answer those questions, provided they are used as a practical comparison tool rather than a verdict on your business.
For a sole trader, company, partnership or trust, benchmarking can highlight issues worth investigating early. It can also support better pricing, cost control, record keeping and BAS processes. Just as importantly, it can help you understand where the ATO may see a mismatch between the way your business performs and the information reported in its tax returns.
What ATO small business benchmarks are
ATO small business benchmarks are financial ratio ranges drawn from information reported by businesses in particular industries. They are designed to compare the relationship between turnover and selected expense categories, rather than simply comparing one business’s dollar amounts with another’s.
The ATO publishes benchmarks across a broad range of small business industries and updates them as more current tax return data becomes available. The figures are grouped by industry and, where relevant, turnover range, so a business can compare itself with others that are intended to be broadly similar.
Common benchmark measures include:
- cost of sales as a percentage of turnover
- total expenses as a percentage of turnover
- labour costs as a percentage of turnover
- rent as a percentage of turnover
- motor vehicle expenses as a percentage of turnover.
The most relevant measure varies by industry. For a retailer or hospitality business, cost of sales may be particularly meaningful. For a service-based business with comparatively low material costs, labour and total expenses may tell a more useful story.
The ATO identifies a key benchmark range for each industry. This is intended to be the most useful ratio for comparing a business’s performance with similar businesses and, in the ATO’s words, is the most accurate range for predicting turnover.
That does not mean every business should sit neatly inside the published range. A benchmark is a starting point for questions, not a substitute for understanding your own business model.
Why benchmarks matter for business performance
The most valuable use of benchmarking is commercial, not merely tax-related. Businesses can use it as a regular financial health check.
If a major expense category is noticeably higher than comparable businesses, it may point to an operational issue. For example, a higher-than-expected cost of sales percentage could reflect supplier pricing, waste, theft, stock control problems, unrecorded owner drawings or pricing that has not kept pace with costs.
Likewise, a lower expense ratio is not automatically good news. It may mean the business is operating efficiently, but it could also mean that expenses have been coded incorrectly, private costs have not been separated properly, staff costs have been omitted or purchases have been recorded in the wrong period.
Benchmarking is most useful when it leads to a closer review of the drivers behind the numbers, such as:
- changes in selling prices, discounts or customer mix
- supplier cost increases and contract terms
- stock shrinkage, spoilage or private use of trading stock
- rostering, overtime, contractor costs and productivity
- rent, utilities, delivery fees and payment processing charges
- marketing spend and its return on investment
- personal expenses or drawings being processed through the business
- incomplete sales records, particularly cash, online platform or EFTPOS income.
A benchmark cannot tell you which of these issues applies. It can, however, identify where management attention is likely to have the greatest impact.
For many small businesses, this is a useful discipline at least annually, with more frequent internal comparisons for industries where margins move quickly. It is generally easier to correct a pricing or stock-control problem while it is still small than to discover it after a difficult EOFY result.
How the ATO uses benchmarks when assessing tax risk
ATO benchmarks are also part of the broader compliance landscape. The ATO has stated that businesses operating within industry benchmark ranges are generally less likely to attract its attention, while a result outside the range may warrant a closer look at the business plan and reporting.
It is important to keep that statement in perspective. Being outside a benchmark range does not prove that a business has underreported income or incorrectly claimed deductions. Plenty of legitimate reasons can explain an unusual result, including:
- a new business or a business in a growth phase
- a temporary downturn in demand
- a major refurbishment or relocation
- unusual weather, supply disruptions or local construction works
- a change in product range or service offering
- an owner choosing to pay above-market wages to retain key staff
- a business trading from a premium location with higher rent
- one-off write-offs, repairs or professional fees
- a genuine change in margins due to competition or customer preferences.
However, an unusual result combined with poor records, unexplained cash transactions or inconsistencies in reported information can increase risk. The ATO uses information from third parties, including financial institutions and government agencies, to identify possible discrepancies in tax reporting.
The ATO has also published examples where it applied an industry benchmark after a business could not provide adequate records and there were indicators that income or employment obligations had not been fully reported.
The practical lesson is simple: a benchmark outside the expected range should prompt a review, not panic. If the result is legitimate, the business should be able to explain it with accurate accounting records and commercial evidence.
Start with the right comparison
A benchmark comparison is only as reliable as the information used. Before treating a result as meaningful, make sure you have selected the best available industry classification and turnover band.
Business industry codes are used in tax reporting to describe a business’s main activity. The ATO notes that these codes can be broad, so the selected code may not perfectly describe every business. Choosing the closest appropriate activity is still important because it affects the category against which the business is compared.
A business owner should also consider whether the benchmark reflects how the business actually operates. Two businesses may appear similar on paper but have very different cost structures. For example:
- A café that prepares food on site may not be directly comparable with one that relies heavily on pre-prepared products.
- A trades business using employees may have a very different labour ratio from one using genuine independent contractors.
- An online retailer may have lower rent but higher freight, fulfilment and digital advertising costs than a shopfront retailer.
- A consultant working alone may have different expenses from a firm with premises, administrative support and junior staff.
Where a benchmark does not feel like a close commercial match, do not force the figures to fit. Instead, use it as one input alongside your own year-on-year results, budget, cash flow, gross margin and management reports.
It can also be helpful to compare results across several periods. A single year may contain unusual events. A trend over time is usually more informative.
A practical way to review your results
Rather than looking at every expense line at once, use a structured process.
Confirm the underlying accounts are complete.
Reconcile bank accounts, loans, merchant facilities, online sales platforms and cash records. Check that sales are recorded in the correct period and that GST coding has been reviewed before BAS lodgment.
Separate business and private transactions.
Review drawings, personal purchases, motor vehicle costs, home expenses and payments made from business accounts. Private use does not necessarily mean an expense is entirely non-deductible, but it needs to be identified and treated correctly.
Check account coding.
Make sure material purchases, wages, contractor payments, rent, repairs, advertising and vehicle costs have been allocated consistently. Incorrect coding can distort a benchmark ratio and make management reports less useful.
Calculate the relevant ratios.
Compare the selected expense category with turnover using the same accounting basis and period. If figures are prepared differently from the benchmark definitions, the result may not be comparable.
Identify the largest variance.
Focus on the one or two categories that differ most from the relevant benchmark or from your own prior-year results. Avoid changing several parts of the business at once without understanding the cause.
Document the explanation.
Keep notes and supporting documents for unusual results, such as new lease terms, supplier price rises, equipment repairs, staff changes or a one-off project. This is useful for management purposes and can assist if questions arise later.
Act on genuine opportunities.
If the review reveals a pricing issue, excessive wastage, an unprofitable service line or weak debtor collection, make a plan with clear responsibilities and review dates.
Accurate and complete records are fundamental to this process. Businesses are required to keep records that record and explain relevant transactions and enable their tax liability to be readily ascertained. The ATO’s published view is that records generally need to be retained for the applicable period, commonly at least five years, although circumstances can require longer retention.
A simple real-world scenario
Consider a small retail business that appears to have a cost of sales ratio well above the relevant benchmark range. The owner initially assumes that this is just the result of rising supplier prices.
A closer review finds several contributing factors. Supplier costs have increased, but the business has not adjusted prices for some product lines. Stocktake records are irregular, damaged stock is not consistently recorded and some items taken for private use have not been accounted for. In addition, a number of sales made through an online platform were delayed in being reconciled to the accounting system.
The benchmark did not establish that anything was wrong. It simply prompted the owner to investigate. The outcome is better stock procedures, more reliable monthly reporting, clearer private-use records and a pricing review that is based on current costs rather than assumptions.
This is the best way to approach benchmarking: use it to ask better questions, then rely on your own records and commercial evidence to reach the answer.
Turning benchmark insights into stronger profits and lower risk
Businesses often view tax compliance and profitability as separate tasks. In practice, good bookkeeping supports both.
When income is reconciled regularly, expenses are coded correctly and private transactions are identified promptly, owners have better information for decisions. They can see whether a price increase is needed, whether labour is sustainable, whether stock levels are excessive and whether cash flow matches reported sales.
Good processes can also reduce the stress of BAS preparation, EOFY accounts and responding to ATO queries. Useful habits include:
- reconciling bank and payment platform transactions regularly
- reviewing sales, gross margin and key expense ratios each month
- keeping source documents for significant or unusual transactions
- recording reasons for major variations from budget or prior periods
- checking that payroll, superannuation, GST and contractor arrangements are being handled correctly
- seeking advice before restructuring, changing ownership, taking funds from a company or making significant asset purchases.
Benchmarks should never be used to manipulate results or make deductions “fit” an expected percentage. Tax outcomes must be based on the actual facts, the law and properly supported records. A business that genuinely falls outside a benchmark range is not required to alter valid figures simply to look average.
The key takeaway
ATO benchmarks are a useful tool for comparing your business with similar operators, identifying potential profit leaks and understanding areas that may attract closer ATO attention. They are not a pass-or-fail test, and they do not replace sound bookkeeping, commercial judgement or tailored tax advice.
The strongest approach is to use benchmark results alongside accurate accounts, regular reconciliations and a clear understanding of what makes your business different. If you would like help reviewing your business performance, record keeping or tax reporting position, can provide advice tailored to your circumstances.
This article is general information only and is not personal financial or tax advice. Tax outcomes depend on your specific circumstances, so speak with a registered tax agent or accountant, such as, before acting on the information.