Benchmarking – ATO walking the talk

By now, some of you may have received one of the 100,000 cash economy letters that the ATO has started to roll out.

The ATO has a clear message:

• keep demonstrably and verifiably good records and the taxpayer has nothing to fear; and
• failure to keep good records will inevitably result in a default or amended assessment, calculating sales based on the benchmarks.

As far as the ATO is concerned, benchmarking is really about record keeping. Demonstrating good records means no adjustment will be made to reported sales based on the benchmarks.

Inadequate records will result in the use of the benchmarks to establish a reasonable estimate of the taxpayer's sales (i.e., in most cases an increase to sales), potentially resulting in:

• increased taxable income, primary tax, administrative penalties, and GIC, etc;
• increased GST liability including penalties;
• administrative penalties for failing to keep proper records as required by S.262A; and
• prosecution through the Courts.

Various commentators have investigated the ATO's legal position in relation to using benchmarks to increase a taxpayer's assessable income and we are convinced that it would be difficult to argue against the ATO approach in a Court of law.

It has been confirmed with the ATO that benchmarking would not be used at all where the taxpayer has demonstrably good records. This addresses one of our major concerns, i.e., that there would be arbitrary amendments to a taxpayer's assessable income under the benchmarks.

Of course, as to what constitutes demonstrably good records remains somewhat subjective and may lead to disagreements going forward.