Are your costs normal for your industry?
You want to know whether your cost base is ordinary for what you do.
Nicholas Clunes, FounderUpdated 1 August 2026 · 14 min read
Almost every owner wants to know whether their numbers are normal, and almost nobody has anything honest to compare against. Industry averages quoted in trade press are usually a survey of whoever answered. Figures from a competitor are one business. What the ATO publishes is different: cost ratios for 100 industries, built from the tax returns those businesses actually lodged.
It is the closest thing to an honest industry average that exists in Australia, it is free, and hardly any owner has ever looked at it. It is also routinely misread, in a way that turns a perfectly ordinary business into an alarming one and back again depending on a single deduction.
What the ATO actually publishes
Two ratios per industry, each as a percentage of turnover excluding GST, each published as a range rather than a single number, and each broken into turnover bands so a small operator is not measured against a large one. The current set is the 2023-24 financial year.
The two ratios
| Ratio | What goes into it |
|---|---|
| Total expenses to turnover | Everything the business spends, including cost of sales, less what is paid to the owner and their associates. |
| Cost of sales to turnover | Stock and direct costs, excluding wages. Published for 53 of the 100 industries, because the rest do not carry stock in a way that makes the comparison useful. |
Total expenses to turnover
- What goes into it
- Everything the business spends, including cost of sales, less what is paid to the owner and their associates.
Cost of sales to turnover
- What goes into it
- Stock and direct costs, excluding wages. Published for 53 of the 100 industries, because the rest do not carry stock in a way that makes the comparison useful.
The turnover bands matter more than people expect. A coffee shop turning over $200,000 is measured against a different range from one turning over $700,000, and the ranges are not simply wider at the top. They move, because the shape of the cost base changes as a business grows.
The range is the middle third, not a pass mark
This is the part that causes the unnecessary alarm. Each published range is built to cover about 30% of an industry around the average. Not most of it. Roughly a third of it.
Which means that by construction, around seven businesses in ten sit outside the range for their own industry while trading completely honestly. The range is the middle third, and being outside it is the ordinary condition rather than the exception.
The one deduction that decides the answer
The ATO works the total expenses ratio after taking out payments to the owner and their associates: wages, superannuation and drawings. Leave those in and the ratio measures something else entirely, because the owner's pay is a decision about how money is taken out rather than a cost of running the business.
It is a single line, and it moves the answer further than anything else on the page.
One coffee shop, read two ways
| How it is worked | Expenses counted | Ratio | Against the published range |
|---|---|---|---|
| Owner's wages left in | $612,000 | 95.6% | Above the 86% to 93% range |
| Owner's wages taken out, as the ATO does | $524,000 | 81.9% | Below the range, by 4.1 points |
Owner's wages left in
- Expenses counted
- $612,000
- Ratio
- 95.6%
- Against the published range
- Above the 86% to 93% range
Owner's wages taken out, as the ATO does
- Expenses counted
- $524,000
- Ratio
- 81.9%
- Against the published range
- Below the range, by 4.1 points
Turnover $640,000, total expenses $612,000, of which $88,000 is paid to the owner. Same business, same year, same figures.
Read one way the business looks expensive to run and slightly worrying. Read the other way it looks unusually lean. The second is the correct reading, and the difference between them is 13.7 points of turnover, or about $88,000, which is exactly the line that was left in.
This is the single most common reason an owner comes away from the published benchmarks with a wrong answer, and it is why a figure quoted without saying whether the deduction was made is not worth much.
Where do you sit
- ATO benchmark checkYour figures against the published range for your industry and turnover band, with the deduction handled the way the ATO does it.
- ATO small business benchmarksThe plain-English definition and where the data comes from.
- Management accountsThe figures this comparison needs, and why the year-end set is not always enough.
What a gap actually means
Once the ratio is worked correctly, the direction and the size of the gap are worth real attention. Neither is a verdict. Both are a question with a fairly short list of possible answers.
The usual explanations
| Where you sit | What it usually turns out to be |
|---|---|
| Cost of sales above the range | Buying badly, discounting harder than you think, waste and theft, or a genuinely different product mix from the industry average. |
| Cost of sales below the range | Real buying power, a premium price point, or stock and wages classified differently from the way the ATO defines them. |
| Total expenses above the range | Rent above market for the site, overstaffing, or costs that belong to the owner sitting in the business. |
| Total expenses below the range | A lean operation, an owner doing work the industry pays someone for, or income not fully recorded. |
Cost of sales above the range
- What it usually turns out to be
- Buying badly, discounting harder than you think, waste and theft, or a genuinely different product mix from the industry average.
Cost of sales below the range
- What it usually turns out to be
- Real buying power, a premium price point, or stock and wages classified differently from the way the ATO defines them.
Total expenses above the range
- What it usually turns out to be
- Rent above market for the site, overstaffing, or costs that belong to the owner sitting in the business.
Total expenses below the range
- What it usually turns out to be
- A lean operation, an owner doing work the industry pays someone for, or income not fully recorded.
That last one is worth stating plainly because it is the reason the ATO publishes the figures at all. A business well below the expense range may be efficient, and it may be reporting less turnover than it earned. The benchmarks cannot tell those apart, and neither can this guide. What they do is raise the question.
The dollars are usually the part that makes it real. The coffee shop above sits 4.1 points below its range, which on $640,000 of turnover is $26,400 a year, every year. That is a different conversation from a percentage.
Who else reads these numbers
Three people, and each does something different with the same gap.
- A buyer, who uses it to test whether the earnings behind an asking price are sustainable. A business whose costs sit well below its industry is either a genuine outperformer or is about to cost the buyer more to run than it cost the vendor.
- A credit team, which reads a large gap as something to be explained rather than as a fault. An explained gap is fine. An unexplained one invites a question about what else in the file has not been reconciled.
- The ATO itself, which uses the benchmarks as one input among several and says plainly that it does not use them in isolation. What it makes of your position is a matter for you and a registered tax agent, not for this guide.
The common thread is that in all three cases, the gap is not the problem. Not being able to account for it is.
The number behind the ratio
- Adjusted EBITDA calculatorWhat the business earns once the owner's own arrangements are normalised out.
- Owner's market salary adjustmentWhy the role gets costed rather than the person, in both exercises.
- Break-even calculatorWhat the cost base means for the revenue the business actually has to do.
What the benchmarks cannot do
- They cannot tell you whether your business is well run. They compare two ratios, and most of what decides a business is in neither.
- They do not cover every industry. Where a trade is absent it is usually because the ATO does not publish a reliable set for it, not because the businesses are unusual.
- They say nothing about your tax position, which belongs with a registered tax agent.
- They are historical. The current set is a full financial year, and a business that has moved premises or changed its model since will not compare cleanly against it.
- They compare you to an average, and no business is trying to be average.
What the file needs
To do this properly on your own numbers, and to be able to hand the answer to anyone who asks, four things.
- Turnover excluding GST, matching the way the benchmarks are stated. Entering a GST-inclusive figure makes every ratio on the page wrong.
- Total expenses including cost of sales, from the same period.
- Payments to you and your associates, separated out: wages, superannuation and drawings.
- Cost of sales on the ATO's definition, which excludes wages. Businesses that put kitchen or workshop labour into cost of sales have to strip it out first or they are comparing against a different definition.
If a gap survives all four being right, it is real, and it is worth the hour it takes to find out which of the explanations above applies to you.
The acronyms, in one place
What the terms mean
| Term | Meaning |
|---|---|
| Benchmark range | The ATO's published band for an industry and turnover range. Covers about 30% of the industry around the average. |
| Turnover band | The size bracket your business falls into. The ranges differ between bands. |
| Payments to associates | Wages, superannuation and drawings paid to the owner and related people. Deducted before the expense ratio is worked. |
| Cost of sales | Stock and direct costs, excluding wages, on the ATO's definition. |
| Gross margin | Turnover less cost of sales, as a percentage. The other side of the same coin. |
| Adjusted EBITDA | Earnings rebuilt with the owner's own arrangements normalised. A different exercise, and often the next one. |
Benchmark range
- Meaning
- The ATO's published band for an industry and turnover range. Covers about 30% of the industry around the average.
Turnover band
- Meaning
- The size bracket your business falls into. The ranges differ between bands.
Payments to associates
- Meaning
- Wages, superannuation and drawings paid to the owner and related people. Deducted before the expense ratio is worked.
Cost of sales
- Meaning
- Stock and direct costs, excluding wages, on the ATO's definition.
Gross margin
- Meaning
- Turnover less cost of sales, as a percentage. The other side of the same coin.
Adjusted EBITDA
- Meaning
- Earnings rebuilt with the owner's own arrangements normalised. A different exercise, and often the next one.
What we can and cannot tell you
Andorra Advisory Group does not arrange credit and is not a credit representative. We build the analysis and the documents. Where a client wants the finance arranged as well, that is a referral to The Lending Lab Pty Ltd, a separate broking business, disclosed in writing at engagement. Our fee is fixed and payable regardless of whether finance is approved or what the analysis concludes.
We are not accountants and not a tax agent, and nothing here is a tax position or a review of yours. What the ATO makes of your figures belongs with a registered tax agent, and legal positions belong with your solicitor. No lender is named here and no policy is quoted.
What we do is the commercial half: reading a gap between your figures and your industry, working out which of the short list of explanations fits, and putting a dollar value on it so you can decide whether it is worth doing anything about.
General information only. Not credit advice, not a credit assessment, and not an offer of finance. Lending decisions rest with the lender and depend on your circumstances and their criteria.
Want a straight read on your deal?
Book a free call with Nick. Bring the numbers you have, and we will tell you the right service level and the fixed fee. No obligation.
Get new articles as they go up.
Nothing here is behind a form, and it never will be. This is only for being told when there is something new. One email per article, no sales sequences, unsubscribe in one click.