ATO data: Company expenses and tax deductions

When analysing selected expenses and income items for companies in the concurrent tax years of 2019-20 and 2020-21, as reported by the Australian Taxation Office, it is difficult to ignore the often enormous disparity between the median and average figures on both lists.

While that yawning gap is unsurprising in terms of income – at the top end of the corporate world are a small number of very big earners that drag the average significantly higher than the median – more interesting is the fact that the same occurs with expenses.

When there are so many small businesses in Australia – a grand total of 2,520,419, or 97.3% of total businesses, according to the Australian Small Business and Family Enterprise Ombudsman – it is noteworthy that the small group of 4,895 large businesses can skew the expenses gap so severely.

Also of interest are the areas of expense in which the difference is not as great, or where the amount as a percentage of total expenses varies wildly between average and mean.

Interpreting the expense data

The figures in the ATO data tell a story about business and reporting, says Shepherd.

“The motor vehicle expenses only increasing four-fold from median to average tells me that a lot of companies of all sizes have vehicles,” Shepherd says. “If a lot of companies have a vehicle running through them, it brings the median up.

“If the asset is one that a lot of companies don’t have, then the median will be closer to zero [than the average]. Look at interest expenses, for example. From the numbers, you’d say a lot of these companies have very little debt. The median $3,000 of interest is not much.”

“Whereas the $161,000 of interest as an average is driven by bigger companies that have major assets that are likely linked to depreciation. They borrow to pay for those big assets.”

It’s not surprising, therefore, that interest rate expenses and depreciation expenses both rise by significant multiples between median and average, Shepherd explains. Large companies that borrow to buy major assets will also, naturally, claim depreciation on those assets.

Not all businesses sell products

Another large multiple comes with the cost-of-sales expenses, multiplying from a median of $151,506 to an average of over $4 million.

Different companies will have different ways of calculating their cost of sales. And many organisations, particularly at the smaller end of town, may claim no cost of sales.

“In the average large company, BHP for example, their cost of sales will be the sum of all of their operations,” Shepherd says.

He lists assets and equipment in the BHP example, such as trucks, as “a massive cost”.

“But if you just sell a service [...] something that sells the services of its people, do you declare their salaries as cost of sales?”

It’s worth developing a keen familiarity with such margins, whether a business sells products or services, Shepherd says, because leaders who are aware of the costs are far better equipped to ensure the business gets its pricing right.

Specific expenses as a fraction of all expenses

Further insight can be gained from comparing specific amounts as a percentage of total expenses.

For example, the median motor vehicle cost, at $8,086, is around 9% of the median total expenses, at $97,870.

But the average motor vehicle costs – $30,718 – is closer to 1% of average total expenses, at $2,905,979.

On the graphic below, click or hover to see more detail about each expense category.

Once again, Shepherd says, this is because larger companies have bigger fish to fry, in terms of assets, interest, depreciation and other expenses. For smaller companies, however, motor vehicles are often one of the business’s most expensive assets, and therefore one of its biggest expenses.

There could be lessons for smaller businesses in the ATO figures, he says, including the value of borrowing for growth, the power of depreciation and the potential tax effectiveness of outsourcing work to contractors.

The Institute of Public Accountants’ upcoming events include sessions focused on individual taxes, company taxes, motor vehicles, nor-for-profits and more. See the IPA’s upcoming tax-focused CPD events.