The Tax Office small business benchmark hit list.

 In October, the Tax Office introduced 50 new benchmarks for small businesses, with another 100 due for introduction before June 2010. Accompanying documentation from the Tax Office states that these benchmarks are to “help small businesses with their tax compliance.” In reality, the benchmarks will be used by the Tax Office to assess which businesses may need to be investigated.

According to the Tax Office, “Small businesses can use the new benchmarks to compare their performance against industry averages to ensure they are on the right path with their tax obligations, particularly in relation to cash income, with the opportunity to adjust things if required.”

The Tax Office will also use the benchmarks to determine “identify possible non-reporting of cash transactions”, by checking how your business measures up against the benchmark.

So, what’s involved with the benchmarks? The small business benchmarks provide an indication of likely costs relative to turnover for different industries, and are based on up to five ratios:

So, for a pub with sales between $250,000 and $750,000, the expected cost of goods sold to turnover ratio is 36%-50%.  In this same example, the expected labour to sales ratio is 15% - 23%.  If the pub falls outside of this benchmark, the Tax Office will take a closer look at their records and determine if an audit is required.

The danger is that if your business falls outside the benchmark for legitimate reasons, you need to ensure you can justify the reason for the variations. This may be a common problem where businesses do not neatly fit into an industry definition.

If you want to know more about reducing your tax risks, contact us today.

The Tax Office small business benchmark hit list

Crackdown on the “hobby businesses” of the rich

Many successful businesses have humble beginnings. Beginnings coming from the spare bedroom or office, they’re often a personal interest of the creator, and are able to survive because the creator has another source of income, such as a full-time job, or another unrelated business.

My favourite example, Veuve Clicquot evolved out of a passion for and a belief in the potential of champagne. The family at the time were textile manufacturers. Prior to creating one of the best champagnes in the world however, were many years of trials and failures, creating business losses.

Until recently, taxpayers were able to offset losses incurred in their hobby business against other tax liabilities if one of four tests were passed:

Last month, the Government moved to prevent individuals with an adjusted taxable income above $250,000 from offsetting tax losses incurred in the hobby business (non-commercial losses), unless they can prove to the Tax Office that the business is a genuine commercial activity.

The change was announced in the 2009/2010 Federal Budget as part of the Government’s integrity measures. Last month, legislation was introduced into Parliament. The changes will apply from 1 July 2009.

The Government recently described the change as a crackdown on a “$700 million hobby farm tax loophole” but the changes apply to any type of business that fits the characteristics. The examples in the explanatory memoranda to the legislation include party planners, vineyards, and a business which bred and sold cattle.

Genuine business activities are typically those that have an expectation of becoming commercially viable in the near future. If you are seeking the Commissioner’s discretion in order to be able to deduct the losses, you will need to provide the details of the business, the nature of the losses, the reason for failing the tests, and provide objective and independent evidence that even though the business is producing a loss, it will pass one of the four tests within a period of time that is considered commercially viable for the industry itself.

So, while my adored champagne house would pass the non-commercial losses tests, even it may have struggled in the first few years to prove it was a commercial operation, not just a passion.

If you are uncertain about your position, want to start up a business, or simply want to review your options, talk to us today.

Quote of the month

 “The true sign of intelligence is not knowledge but imagination.”

Albert Einstein