The ATO publishes annual small business benchmarks for more than 100 industries, covering cost of sales ratios, labour to turnover ratios, rent to turnover ratios, and other key performance metrics. These benchmarks are derived from tax return and BAS data across thousands of businesses in each industry.
When a business's figures fall significantly outside the benchmarks for their industry — particularly when the cost ratios suggest high margins that might indicate cash income not being declared — the ATO uses this as a risk indicator for review.
Understanding how benchmarks work helps bookkeepers identify the same red flags and either explain legitimate variations or flag potential compliance issues to the accountant.
How the ATO Uses Benchmarks
The ATO's benchmarks are published on their website and regularly updated. For each industry, they typically provide:
- Cost of sales / turnover ratio: The proportion of revenue spent on goods, materials, and direct costs
- Labour / turnover ratio: The proportion of revenue spent on wages and payroll costs
- Rent / turnover ratio: The proportion of revenue spent on premises
The ATO uses automated risk scoring to compare each business's declared figures against the applicable benchmarks. A business whose gross profit margin is substantially higher than the industry benchmark may be under-declaring revenue (particularly cash income). A business whose labour ratio is substantially lower than the benchmark may not be declaring all its payroll or may be misclassifying employees as contractors.
When a business's figures fall outside the benchmark ranges, this raises the ATO's risk score for that business and may trigger:
- An ATO questionnaire asking the business to explain the variation
- A record review (activity statement review)
- In significant cases, a compliance audit
Reading the Benchmarks
The ATO's published benchmarks for each industry show a range — typically expressed as upper and lower bounds — not a single point. A business within the range for its industry is generally low risk from a benchmark perspective. A business significantly below the lower bound or above the upper bound attracts attention.
Example (illustrative): The ATO benchmark for a small café might show:
- Cost of sales / turnover: 30–40%
- Rent / turnover: 10–15%
- Labour / turnover: 30–40%
A café that reports a 20% cost of sales ratio (suggesting they're buying very little food relative to their revenue) looks anomalous — either the cash register receipts are correct and the cost of sales is being miscoded, or the revenue is being underreported.
| Ratio | Small cafe benchmark range | Anomaly signal |
|---|---|---|
| Cost of sales / turnover | 30-40% | 20% suggests under-reported revenue or miscoding |
| Rent / turnover | 10-15% | Above range may mean above-market rent |
| Labour / turnover | 30-40% | Too low may signal off-books wages |
How Bookkeepers Can Use Benchmarks Proactively
Most accounting software can generate ratios from a trial balance. At year-end or when preparing BAS figures, run the key ratios for your client and compare them to the ATO's industry benchmarks.
If a client's ratios are materially outside the benchmark range, there are two possibilities:
- There's a legitimate explanation (the business has unusually high margins due to a premium product, or low labour because the owner does all the work themselves)
- There's a recording error or compliance issue that needs to be addressed
For legitimate variations, document the explanation. A client with a 20% cost of sales ratio because they sell exclusively premium handmade goods at high margins should have that context noted in the records. If the ATO ever asks, the explanation is readily available.
For potential errors, investigate before finalising the year-end accounts. A cost of sales ratio that looks too low may indicate that purchases are being coded incorrectly — either to non-deductible accounts or miscoded as capital expenses. A labour ratio that looks too low may indicate that cash wages are being paid off the books.
Industries with High Benchmark Scrutiny
The ATO pays particular attention to cash-intensive industries where income can be harder to trace:
- Cafes and restaurants: High cash transactions, variable labour costs, perishable stock
- Hairdressers and beauty salons: High cash and EFTPOS mix, variable product costs
- Building and construction: Mix of cash-in-hand labour and invoiced work
- Motor vehicle workshops: Parts and labour mix, significant cash transactions
- Retail: Cash register income that may not reconcile with bank deposits
For clients in these industries, the benchmark ratios are not just an academic exercise — they're a real-time indicator of ATO risk. Running the ratios quarterly and addressing anomalies as they arise is significantly better than discovering them at year-end when the BAS or tax return is about to be lodged.
What to Do If Ratios Look Anomalous
Step 1: Check the coding. Before assuming there's a compliance issue, verify that all costs are being correctly coded. A cost of sales ratio that looks too low might simply mean purchases are being coded to an overhead account rather than cost of goods sold.
Step 2: Check for missing income. If the cost of sales ratio looks right but the gross margin looks high, check whether all income channels are being captured. A client with a tap-and-go machine, Afterpay, and occasional cash sales may be missing one channel in the accounting software.
Step 3: Document the explanation. If the ratios are genuinely outside the benchmark for a legitimate business reason, document it clearly. "This client operates a premium wholesale food business with margins above retail norms because [specific reason]."
Step 4: Escalate compliance concerns. If the investigation suggests that income may not be fully declared — particularly cash income — escalate to the accountant. This is not a bookkeeping fix; it requires qualified tax advice on the appropriate path forward, including whether voluntary disclosure to the ATO is appropriate.
Benchmarks as a Business Health Tool
Beyond the compliance angle, benchmarks are useful as a business performance tool. A client whose labour ratio is significantly higher than the industry benchmark may be overstaffed or have productivity issues. A client whose rent ratio is above benchmark may be paying above-market rent. Presenting this analysis as part of a periodic management reporting package adds value beyond basic bookkeeping compliance and positions the bookkeeper as a business advisor, not just a data entry operator.
The ATO's benchmarks are freely available on the ATO website, updated annually. Building them into your year-end review process costs little time and adds meaningful value to both compliance management and business advisory conversations.